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April 22, 2019, 2:11 p.m. EDT

10-Q: LUBYS INC

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and footnotes for the quarter ended March 13, 2019 included in Item 1 of Part I of this Quarterly Report on Form 10 (this "Form 10-Q"), and the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 29, 2018.

The following presents an analysis of the results and financial condition of our continuing operations. Except where indicated otherwise, the results of discontinued operations are excluded from this discussion

The following table sets forth selected operating data as a percentage of total sales (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of income.

Percentages may not total due to rounding.







                                                    Quarter Ended           Two Quarters Ended
                                               March 13,      March 14,      March 13,       March 14,
                                                 2019            2018           2019           2018
                                              (12 weeks)      (12 weeks)     (28 weeks)     (28 weeks)
        Restaurant sales                           87.8  %        90.9  %       88.2  %         91.6  %
        Culinary contract services                 10.1  %         7.2  %        9.6  %          6.5  %
        Franchise revenue                           1.9  %         1.7  %        2.1  %          1.7  %
        Vending revenue                             0.1  %         0.2  %        0.1  %          0.2  %
        TOTAL SALES                               100.0  %       100.0  %      100.0  %        100.0  %
        STORE COSTS AND EXPENSES:
        (As a percentage of restaurant
        sales)
        Cost of food                               27.8  %        28.5  %       27.6  %         28.5  %
        Payroll and related costs                  37.8  %        38.3  %       37.9  %         37.2  %
        Other operating expenses                   17.5  %        19.3  %       17.8  %         18.9  %
        Occupancy costs                             6.4  %         6.3  %        6.4  %          6.1  %
        Vending revenue                            (0.1 )%        (0.2 )%       (0.1 )%         (0.2 )%
        Store level profit                         10.7  %         7.7  %       10.4  %          9.4  %
        COMPANY COSTS AND EXPENSES:
        (As a percentage of total sales)
        Opening costs                               0.0  %         0.4  %        0.0  %          0.2  %
        Depreciation and amortization               4.3  %         4.9  %        4.6  %          4.8  %
        Selling, general and administrative
        expenses                                   12.1  %        11.2  %       11.4  %         10.6  %
        Net loss (gain) on disposition of
        property and equipment                    (17.0 )%        (0.2 )%       (7.0 )%          0.0  %
        Culinary Contract Services Costs
        (As a percentage of Culinary
        Contract Services sales)
        Cost of culinary contract services         89.0  %        96.4  %       91.2  %         94.0  %
        Culinary segment profit                    11.0  %         3.6  %        8.8  %          6.0  %
        Franchise Operations Costs
        (As a percentage of Franchise
        revenue)
        Cost of franchise operations               17.4  %        26.3  %       14.2  %         26.0  %
        Franchise segment profit                   82.6  %        73.7  %       85.8  %         74.0  %
        (As a percentage of total sales)
        INCOME (LOSS) FROM OPERATIONS              11.0  %        (9.5 )%        1.4  %         (6.5 )%
        Interest income                             0.0  %         0.0  %        0.0  %          0.0  %
        Interest expense                           (2.1 )%        (0.7 )%       (1.8 )%         (0.6 )%
        Other income, net                           0.1  %         0.2  %        0.0  %          0.2  %
        Income (loss) before income taxes
        and discontinued operations                 9.0  %        (9.9 )%       (0.4 )%         (7.0 )%
        Provision for income taxes                  0.1  %         4.1  %        0.1  %          1.7  %
        Income (loss) from continuing
        operations                                  8.9  %       (14.0 )%       (0.5 )%         (8.7 )%
        Loss from discontinued operations,
        net of income taxes                        (0.0 )%        (0.1 )%        0.0  %         (0.1 )%
        NET INCOME (LOSS)                           8.9  %       (14.1 )%       (0.5 )%         (8.8 )%
        


Although store level profit, defined as restaurant sales less cost of food, payroll and related costs, other operating expenses, and occupancy costs is a non-GAAP measure, we believe its presentation is useful because it explicitly shows the results of our most significant reportable segment. The following table reconciles between store level profit, a non-GAAP measure, to loss from continuing operations, a GAAP measure:







                                                Quarter Ended                     Two Quarters Ended
                                         March 13,         March 14,         March 13,          March 14,
                                           2019              2018               2019              2018
                                        (12 weeks)        (12 weeks)         (28 weeks)        (28 weeks)
                                               (In thousands)                       (In thousands)
        Store level profit            $       7,007     $       5,743     $       16,233     $      16,826
        Plus:
        Sales from culinary contract
        services                              7,543             5,889             17,039            12,774
        Sales from franchise
        operations                            1,421             1,401              3,644             3,288
        Less:
        Opening costs                            11               331                 44               406
        Cost of culinary contract
        services                              6,717             5,677             15,532            12,009
        Cost of franchise operations            247               369                519               856
        Depreciation and amortization         3,222             3,998              8,126             9,351
        Selling, general and
        administrative expenses               9,017             9,188             20,240            20,712
        Provision for asset
        impairments and restaurant
        closings                              1,195             1,407              2,422             2,252
        Net loss (gain) on
        disposition of property and
        equipment                           (12,651 )            (204 )          (12,501 )              18
        Interest income                         (19 )              (5 )              (19 )             (11 )
        Interest expense                      1,554               545              3,269             1,194
        Other income, net                       (55 )            (194 )              (86 )            (309 )
        Provision for income taxes               93             3,382                213             3,373
        Income (loss) from continuing
        operations                    $       6,640     $     (11,461 )   $         (843 )   $     (16,963 )
        


The following table shows our restaurant unit count as of August 29, 2018 and March 13, 2019.







        Restaurant Counts:
                                 August 29,    FY19 YTD Q2     FY19 YTD Q2    March 13,
                                    2018         Openings       Closings         2019
        Luby's Cafeterias                84              -           (3 )            81
        Fuddruckers Restaurants          60              -           (6 )            54
        Cheeseburger in Paradise          2              -           (1 )             1
        Total                           146              -          (10 )           136
        


Overview

Luby's, Inc. ("Luby's", the "Company", "we", "us", or "our") is a multi-branded company operating in the restaurant industry and in the contract food services industry. Our primary brands include Luby's Cafeteria, Fuddruckers - World's Greatest Hamburgers(R), Luby's Culinary Contract Services and Cheeseburger in Paradise.

Our Company's vision is that our guests, employees and shareholders stay loyal to our restaurant brands and value them as a significant part of their lives. We want our company's performance to make it a leader in our industry.

We are headquartered in Houston, Texas. Our corporate headquarters is located at 13111 Northwest Freeway, Suite 600, Houston, Texas 77040, and our telephone number at that address is (713) 329-6800. Our website is www.lubysinc.com . The information on our website is not, and shall not be deemed to be, a part of this Form 10-Q or incorporated by reference into any of our other filings with the SEC.

As of March 13, 2019, we owned and operated 136 restaurants, of which 81 are traditional cafeterias, 54 are gourmet hamburger restaurants, and one is a casual dining restaurant and bar. These establishments are located in close proximity to retail centers, business developments and residential areas mostly throughout the United States. Included in the 136 restaurants that we own and operate are 12 restaurants located at six property locations where we operate a side-by-side Luby's Cafeteria and Fuddruckers on the same property. We refer to these locations as "Combo locations."

As of March 13, 2019, we operated 33 Culinary Contract Services locations. We operated 24 of these locations in the Houston, Texas area, three in the Texas Lower Rio Grande Valley, two in Dallas, Texas, and two in San Antonio, Texas and one in northwest Texas. Outside of Texas we operated one location in North Carolina. Luby's Culinary Contract Services currently provides food service management to hospitals, corporate dining facilities, sports stadiums, and a senior care facility.

As of March 13, 2019, we had 41 franchisees operating 102 Fuddruckers restaurants. Our largest five franchise owners own five to twelve restaurants each. Fifteen franchise owners each own two to four restaurants. The 21 remaining franchise owners each own one restaurant.

Accounting Periods

The Company's fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically includes three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year. Comparability between quarters may be affected by the varying lengths of the quarters, as well as the seasonality associated with the restaurant business.

Same-Store Sales

The restaurant business is highly competitive with respect to food quality, concept, location, price, and service, all of which may have an effect on same-store sales. Our same-store sales calculation measures the relative performance of a certain group of restaurants. A restaurant's sales results are included in the same-store sales calculation in the quarter after a store has been open for six consecutive fiscal quarters. Stores that close on a permanent basis (or on a temporary basis for remodeling) are removed from the group in the quarter when operations cease at the restaurant, but remain in the same-store group for previously reported quarters. Although management believes this approach leads to more effective year-over-year comparisons, neither the time frame nor the exact practice may be similar to those used by other restaurant companies.







        RESULTS OF OPERATIONS
        Quarter Ended March 13, 2019 Compared to Quarter Ended March 14, 2018
        Comparability between quarters is affected by the varying lengths of the
        quarters and quarters ending at different points in the calendar year when
        seasonal patterns for sales are different. Both the quarter ended March 13, 2019
        and the quarter ended March 14, 2018 consisted of 12 weeks.
        Sales
                                     Quarter        Quarter
                                      Ended          Ended
                                    March 13,      March 14,              Increase/
        ($000s)                        2019           2018               (Decrease)
                                    (12 weeks)     (12 weeks)      (12 weeks vs 12 weeks)
        Restaurant sales           $    65,369    $    74,352    $     (8,983 )     (12.1 )%
        Culinary contract services       7,543          5,889           1,654        28.1  %
        Franchise revenue                1,421          1,401              20         1.4  %
        Vending revenue                     90            151             (61 )     (40.4 )%
        TOTAL SALES                $    74,423    $    81,793    $     (7,370 )      (9.0 )%
                                          Two Quarters       Two Quarters
                                             Ended              Ended
                                           March 13,          March 14,                  Increase/
        ($000s)                               2019               2018                    (Decrease)
                                           (28 weeks)         (28 weeks)           (28 weeks vs 28 weeks)
        Restaurant sales                $      156,468     $      178,934     $     (22,466 )         (12.6 )%
        Culinary contract services              17,039             12,774             4,265            33.4  %
        Franchise revenue                        3,644              3,288               356            10.8  %
        Vending revenue                            190                294              (104 )         (35.4 )%
        TOTAL SALES                     $      177,341     $      195,290     $     (17,949 )          (9.2 )%
        


The Company has three reportable segments: Company-owned restaurants, franchise operations, and culinary contract services.







        Company-Owned Restaurants
        Restaurant Sales
                                   Quarter        Quarter
        ($000s)                     Ended          Ended
        Restaurant Brand          March 13,      March 14,         Increase/(Decrease)
                                     2019           2018          $ Amount       % Change
                                  (12 weeks)     (12 weeks)      (12 weeks vs 12 weeks)
        Luby's Cafeterias        $   44,366     $    47,261    $      (2,895 )     (6.1 )%
        Fuddruckers                  16,156          19,941           (3,785 )    (19.0 )%
        Combo locations               4,355           4,685             (330 )     (7.0 )%
        Cheeseburger in Paradise        592           2,465           (1,873 )    (76.0 )%
        Other Revenue                  (100 )             -             (100 )
        Total Restaurant Sales   $   65,369     $    74,352    $      (8,983 )    (12.1 )%
        


The approximate $2.9 million sales decrease in stand-alone Luby's Cafeteria restaurants was the result of the closure of seven locations over the prior year and a 2.2% decrease in Luby's same-store sales in the quarter ended March 13, 2019 compared to the quarter ended March 14, 2018. The 2.2% decrease in Luby's Cafeteria same-store sales was the result of a 4.0% decrease in guest traffic, partially offset by a 1.9% increase in average spend per guest. The approximate $3.8 million sales decrease at stand-alone Fuddruckers restaurants was the result of 14 restaurant closings and a 5.3% decrease in same-store sales in the quarter ended March 13, 2019 compared to the quarter ended March 14, 2018. The 5.3% decrease in same-store sales was the result of a 9.3% decrease in guest traffic, partially offset by a 4.4% increase in average spend per guest. All six Combo locations are included in our same-store grouping and sales at this group of restaurants decreased 7.0% in the quarter ended March 13, 2019 compared to the quarter ended March 14, 2018. The approximate $1.9 million decrease in Cheeseburger in Paradise restaurants sales in the quarter ended March 13, 2019 compared to the quarter ended March 14, 2018 was primarily the result of seven store closures. Other revenue in the quarter ended March 13, 2019 reflects a $0.1 million net reduction in revenue due to amortization of the discounts on gift cards sold to third parties, partially offset by recognizing revenue associated with gift card breakage.







                                                                 Two Quarters
                                         Two Quarters Ended         Ended
        Restaurant Brand                     March 13,            March 14,             Increase/(Decrease)
        ($000s)                                 2019                 2018            $ Amount         % Change
                                             (28 weeks)           (28 weeks)          (28 weeks vs 28 weeks)
        Luby's Cafeterias               $         107,153      $      114,689     $      (7,536 )         (6.6 )%
        Fuddruckers                                37,689              46,854            (9,165 )        (19.6 )%
        Combo locations                            10,319              11,398            (1,079 )         (9.5 )%
        Cheeseburger in Paradise                    1,550               5,993            (4,443 )        (74.1 )%
        Other Revenue                                (243 )                                (243 )
        Total Restaurant Sales          $         156,468      $      178,934     $     (22,466 )        (12.6 )%
        


The approximate $7.5 million sales decrease in stand-alone Luby's Cafeteria restaurants was the result of a 2.6% decrease in same-store sales and the closure of seven locations (accounting for approximately $4.5 million of this sales decline) compared to the two quarters ended March 14, 2018. The 2.6% decrease in Luby's Cafeteria same-store sales was the result of a 7.8% decrease in guest traffic partially offset by a 5.6% increase in average spend per guest. The approximate $9.2 million sales decrease at stand-alone Fuddruckers restaurants was the result of 17 restaurant closures (accounting for approximately $6.5 million of this sales decline) and a same-store sales decrease of 8.8%. Fuddruckers same-store sales decrease of 8.8% was the result of a 13.9% decrease in guest traffic offset by a 6.0% increase in average spend per guest. The approximate $1.1 million decrease in sales at our Combo locations was due to a 9.5% decrease in same-store sales. The approximate $4.4 million decrease in Cheeseburger in Paradise restaurants sales in the quarter ended March 13, 2019 compared to the quarter ended March 14, 2018 was primarily the result of seven store closures. Other revenue in the quarter ended March 14, 2018 reflects a $0.1 million net reduction of revenue due to amortization of the contract liability associated with discounts on gift cards sold to third parties, partially offset by recognizing revenue associated with gift card breakage. Other revenue in the two quarters ended March 13, 2019 reflects an approximate $0.2 million net reduction in revenue due to amortization of the discounts on gift cards sold to third parties, partially offset by recognizing revenue associated with gift card breakage.







        Cost of Food
                                              Quarter        Quarter
                                               Ended          Ended
                                             March 13,      March 14,              Increase/
        ($000s)                                 2019           2018               (Decrease)
                                             (12 weeks)     (12 weeks)      (12 weeks vs 12 weeks)
        Cost of food                        $   18,144     $   21,181     $     (3,037 )     (14.3 )%
        As a percentage of restaurant sales       27.8 %         28.5 %                       (0.7 )%
        


Cost of food decreased approximately $3.0 million, or 14.3%, in the quarter ended March 13, 2019 compared to the quarter ended March 14, 2018 with lower guest traffic levels and operations at 27 fewer locations. As a percentage of restaurant sales,

cost of food decreased 0.7% to 27.8% in the quarter ended March 13, 2019 compared to 28.5% in the quarter ended March 14, 2018 due in part to higher menu pricing and changes in the mix of menu offerings as well as further focus on efficient operations, including minimizing waste.







                                             Two Quarters Ended     Two Quarters Ended
                                                 March 13,              March 14,                    Increase/
        ($000s)                                     2019                   2018                      (Decrease)
                                                 (28 weeks)             (28 weeks)             (28 weeks vs 28 weeks)
        Cost of food                        $           43,226     $           50,936     $     (7,710 )          (15.1 )%
        As a percentage of restaurant sales               27.6 %                 28.5 %                            (0.9 )%
        


Cost of food decreased approximately $7.7 million, or 15.1%, for the two quarters ended March 13, 2019 compared to the two quarters ended March 14, 2018 with lower guest traffic levels and operations at 31 fewer locations. As a percentage of restaurant sales, cost of food decreased 0.9% to 27.6% in the two quarters ended March 13, 2019 compared to 28.5% in the two quarters ended March 14, 2018 due in part to higher menu pricing and changes in the mix of menu offerings as well as further focus on efficient operations, including minimizing waste.







        Payroll and Related Costs
                                              Quarter        Quarter
                                               Ended          Ended
                                             March 13,      March 14,              Increase/
        ($000s)                                 2019           2018               (Decrease)
                                             (12 weeks)     (12 weeks)      (12 weeks vs 12 weeks)
        Payroll and related costs           $   24,730     $   28,512     $     (3,782 )     (13.3 )%
        As a percentage of restaurant sales       37.8 %         38.3 %                       (0.5 )%
        


Payroll and related costs decreased approximately $3.8 million in the quarter ended March 13, 2019 compared to the quarter ended March 14, 2018. The decrease reflects operating 27 fewer restaurants (reducing cost by approximately $3.4 million) and inclusion of a $0.6 million reduction to workers' compensation liability estimates, partially offset by higher average wage rates. As a percentage of restaurant sales, payroll and related costs decreased 0.5% to 37.8% in the quarter ended March 13, 2019 compared to 38.3% in the quarter ended March 14, 2018 due to (1) a $0.6 million reduction to workers' compensation liability estimates (or 0.9% as a percent of restaurant sales); partially offset by (2) the fixed cost component of labor costs (especially salaried restaurant managers) with declines in same-store sales; and (3) an environment of rising hourly wage rates. Excluding the impact of the $0.6 million reduction to workers' compensation expense, payroll and related costs were 38.7% as a percent of restaurant sales.







                                             Two Quarters Ended     Two Quarters Ended
                                                 March 13,              March 14,                    Increase/
        ($000s)                                     2019                   2018                      (Decrease)
                                                 (28 weeks)             (28 weeks)             (28 weeks vs 28 weeks)
        Payroll and related costs           $           59,244     $           66,640     $     (7,396 )          (11.1 )%
        As a percentage of restaurant sales               37.9 %                 37.2 %                             0.7  %
        


Payroll and related costs decreased approximately $7.4 million in the two quarters ended March 13, 2019 compared to the two quarters ended March 14, 2018 due to operating 31 fewer restaurants (reducing cost by approximately $6.7 million), lower associate hours scheduled and deployed on the decreased level of guest traffic, reduced overtime hours deployed, partially offset by higher average hourly wage rates. The two quarters ended March 13, 2019 also includes an approximate $0.6 million reduction in workers' compensation liability estimates. As a percentage of restaurant sales, payroll and related costs increased

0.7%, to 37.9% in the two quarters ended March 13, 2019 compared to 37.2% in the two quarters ended March 14, 2018 due to (1) the fixed cost component of labor costs (especially salaried restaurant managers) with declines in same-store sales; and (2) an environment of rising hourly wage rates; partially offset by







        Other Operating Expenses
                                              Quarter        Quarter
                                               Ended          Ended
                                             March 13,      March 14,              Increase/
        ($000s)                                 2019           2018               (Decrease)
                                             (12 weeks)     (12 weeks)      (12 weeks vs 12 weeks)
        Other operating expenses            $   11,412     $   14,360     $     (2,948 )     (20.5 )%
        As a percentage of restaurant sales       17.5 %         19.3 %                       (1.8 )%
        


Other operating expenses include restaurant-related expenses for utilities, repairs and maintenance, local store advertising, property and liability insurance losses above insurance deductibles, services and supplies. Other operating expenses decreased approximately $2.9 million, or 20.5%, in the quarter ended March 13, 2019 compared to the quarter ended March 14, 2018, due primarily to (1) an approximate $1.0 million decrease in restaurant supplies;

Apr 22, 2019

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