(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 June 5, 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 Three Quarters Ended
June 5, June 6, June 5, June 6,
2019 2018 2019 2018
(12 weeks) (12 weeks) (40 weeks) (40 weeks)
Restaurant sales 87.8 % 90.5 % 88.1 % 91.3 %
Culinary contract services 10.1 % 7.7 % 9.8 % 6.9 %
Franchise revenue 2.0 % 1.7 % 2.0 % 1.7 %
Vending revenue 0.1 % 0.1 % 0.1 % 0.1 %
TOTAL SALES 100.0 % 100.0 % 100.0 % 100.0 %
STORE COSTS AND EXPENSES:
(As a percentage of restaurant
sales)
Cost of food 28.2 % 28.6 % 27.8 % 28.5 %
Payroll and related costs 38.1 % 37.8 % 37.9 % 37.4 %
Other operating expenses 17.5 % 19.3 % 17.7 % 19.0 %
Occupancy costs 6.1 % 5.9 % 6.3 % 6.1 %
Vending revenue (0.2 )% (0.2 )% (0.1 )% (0.2 )%
Store level profit 10.2 % 8.5 % 10.3 % 9.1 %
COMPANY COSTS AND EXPENSES:
(As a percentage of total sales)
Opening costs 0.0 % 0.1 % 0.0 % 0.2 %
Depreciation and amortization 3.9 % 4.7 % 4.4 % 4.8 %
Selling, general and administrative
expenses 12.6 % 9.9 % 11.8 % 10.4 %
Net loss (gain) on disposition of
property and equipment (0.6 )% 0.2 % (5.1 )% 0.1 %
Culinary Contract Services Costs
(As a percentage of Culinary
Contract Services sales)
Cost of culinary contract services 89.7 % 91.9 % 90.7 % 93.3 %
Culinary segment profit 10.3 % 8.1 % 9.3 % 6.7 %
Franchise Operations Costs
(As a percentage of Franchise
revenue)
Cost of franchise operations 22.3 % 23.6 % 16.6 % 25.3 %
Franchise segment profit 77.7 % 76.4 % 83.4 % 74.7 %
(As a percentage of total sales)
LOSS FROM OPERATIONS (5.3 )% (10.4 )% (0.6 )% (7.7 )%
Interest income 0.0 % 0.0 % 0.0 % 0.0 %
Interest expense (1.8 )% (1.2 )% (1.8 )% (0.8 )%
Other income, net 0.1 % 0.0 % 0.1 % 0.1 %
Loss before income taxes and
discontinued operations (6.9 )% (11.6 )% (2.3 )% (8.4 )%
Provision for income taxes 0.2 % 4.8 % 0.1 % 2.7 %
Loss from continuing operations (7.1 )% (16.4 )% (2.4 )% (11.1 )%
Loss from discontinued operations,
net of income taxes (0.0 )% (0.6 )% 0.0 % (0.2 )%
NET LOSS (7.1 )% (17.0 )% (2.4 )% (11.3 )%
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 Three Quarters Ended
June 5, June 6, June 5, June 6,
2019 2018 2019 2018
(12 weeks) (12 weeks) (40 weeks) (40 weeks)
(In thousands) (In thousands)
Store level profit $ 6,706 $ 6,642 $ 22,938 $ 23,469
Plus:
Sales from culinary contract
services 7,571 6,639 24,610 19,413
Sales from franchise
operations 1,482 1,444 5,126 4,732
Less:
Opening costs 6 85 49 490
Cost of culinary contract
services 6,791 6,104 22,324 18,113
Cost of franchise operations 330 341 849 1,198
Depreciation and amortization 2,927 4,050 11,052 13,402
Selling, general and
administrative expenses 9,426 8,507 29,666 29,219
Provision for asset
impairments and restaurant
closings 675 4,464 3,097 6,716
Net loss (gain) on
disposition of property and
equipment (434 ) 154 (12,935 ) 172
Interest income (11 ) (1 ) (30 ) (12 )
Interest expense 1,324 1,042 4,593 2,235
Other income, net (112 ) (9 ) (198 ) (317 )
Provision for income taxes 132 4,121 346 7,494
Loss from continuing
operations $ (5,295 ) $ (14,133 ) $ (6,139 ) $ (31,096 )
The following table shows our restaurant unit count as of August 29, 2018 and June 5, 2019.
Restaurant Counts:
August 29, FY19 YTD Q3 FY19 YTD Q3 June 5,
2018 Openings Closings 2019
Luby's Cafeterias 84 - (4 ) 80
Fuddruckers Restaurants 60 - (11 ) 49
Cheeseburger in Paradise 2 - (1 ) 1
Total 146 - (16 ) 130
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 June 5, 2019, we owned and operated 130 restaurants, of which 80 are traditional cafeterias, 49 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 130 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 June 5, 2019, we operated 32 Culinary Contract Services locations. We operated 22 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 and one in Kansas. Luby's Culinary Contract Services currently provides food service management to hospitals, corporate dining facilities, sports stadiums, and a senior care facility.
As of June 5, 2019, we had 42 franchisees operating 107 Fuddruckers restaurants. Our largest six franchise owners own five to twelve restaurants each. Fourteen franchise owners each own two to four restaurants. The 22 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 June 5, 2019 Compared to Quarter Ended June 6, 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 June 5, 2019
and the quarter ended June 6, 2018 consisted of 12 weeks.
Sales
Quarter Quarter
Ended Ended
June 5, June 6, Increase/
($000s) 2019 2018 (Decrease)
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)
Restaurant sales $ 65,611 $ 77,803 $ (12,192 ) (15.7 )%
Culinary contract services 7,571 6,639 932 14.0 %
Franchise revenue 1,482 1,444 38 2.6 %
Vending revenue 102 118 (16 ) (13.6 )%
TOTAL SALES $ 74,766 $ 86,004 $ (11,238 ) (13.1 )%
Three Quarters Three Quarters
Ended Ended
June 5, June 6, Increase/
($000s) 2019 2018 (Decrease)
(40 weeks) (40 weeks) (40 weeks vs 40 weeks)
Restaurant sales $ 222,079 $ 256,737 $ (34,658 ) (13.5 )%
Culinary contract services 24,610 19,413 5,197 26.8 %
Franchise revenue 5,126 4,732 394 8.3 %
Vending revenue 292 412 (120 ) (29.1 )%
TOTAL SALES $ 252,107 $ 281,294 $ (29,187 ) (10.4 )%
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 June 5, June 6, Increase/(Decrease)
2019 2018 $ Amount % Change
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)
Luby's Cafeterias $ 45,062 $ 49,067 $ (4,005 ) (8.2 )%
Fuddruckers 15,312 20,622 (5,310 ) (25.7 )%
Combo locations 4,591 4,821 (230 ) (4.8 )%
Cheeseburger in Paradise 778 3,293 (2,515 ) (76.4 )%
Other Revenue (132 ) - (132 )
Total Restaurant Sales $ 65,611 $ 77,803 $ (12,192 ) (15.7 )%
The approximate $4.0 million sales decrease in stand-alone Luby's Cafeteria restaurants was the result of the closure of six locations (accounting for approximately $2.5 million of this sales decline) and a 3.1% decrease in Luby's Cafeteria same-store sales in the quarter ended June 5, 2019 compared to the quarter ended June 6, 2018. The 3.1% decrease in Luby's Cafeteria same-store sales was the result of a 1.2% decrease in guest traffic and a 2.0% decrease in average spend per guest. The approximate $5.3 million sales decrease at stand-alone Fuddruckers restaurants was the result of 13 restaurant closings and five restaurant transfers to a franchise owner's operations (accounting for approximately $4.3 million of this sales decline combined) and a 6.1% decrease in same-store sales in the quarter ended June 5, 2019 compared to the quarter ended June 6, 2018. The 6.1% decrease in same-store sales was the result of a 8.7% decrease in guest traffic, partially offset by a 2.8% 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 4.8% in the quarter ended June 5, 2019 compared to the quarter ended June 6, 2018. The approximate $2.5 million decrease in Cheeseburger in Paradise restaurants sales in the quarter ended June 5, 2019 compared to the quarter ended June 6, 2018 was primarily the result of six store closures. Other revenue in the quarter ended June 5, 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.
Three Quarters Three Quarters
Ended Ended
Restaurant Brand June 5, June 6, Increase/(Decrease)
($000s) 2019 2018 $ Amount % Change
(40 weeks) (40 weeks) (40 weeks vs 40 weeks)
Luby's Cafeterias $ 152,214 $ 163,757 $ (11,543 ) (7.0 )%
Fuddruckers 53,001 67,476 (14,475 ) (21.5 )%
Combo locations 14,911 16,219 (1,308 ) (8.1 )%
Cheeseburger in Paradise 2,328 9,285 (6,957 ) (74.9 )%
Other Revenue (375 ) (375 )
Total Restaurant Sales $ 222,079 $ 256,737 $ (34,658 ) (13.5 )%
The approximate $11.5 million sales decrease in stand-alone Luby's Cafeteria restaurants was the result of a 2.8% decrease in same-store sales and the closure of eight locations (accounting for approximately $7.2 million of this sales decline) compared to the three quarters ended June 6, 2018. The 2.8% decrease in Luby's Cafeteria same-store sales was the result of a 5.9% decrease in guest traffic partially offset by a 3.3% increase in average spend per guest. The approximate $14.5 million sales decrease at stand-alone Fuddruckers restaurants was the result of 17 restaurant closures and five restaurant transfers to a franchise owner's operations (accounting for approximately $11.2 million of this sales decline combined) and a same-store sales decrease of 8.0%. Fuddruckers same-store sales decrease of 8.0% was the result of a 12.4% decrease in guest traffic partially offset by a 5.0% increase in average spend per guest. The approximate $1.3 million decrease in sales at our Combo locations was due to an 8.1% decrease in same-store sales. The approximate $7.0 million decrease in Cheeseburger in Paradise restaurants sales in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018 was primarily the result of seven store closures. Other revenue in the three quarters ended June 5, 2019 reflects an approximate 0.4 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
June 5, June 6, Increase/
($000s) 2019 2018 (Decrease)
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)
Cost of food $ 18,478 $ 22,255 $ (3,777 ) (17.0 )%
As a percentage of restaurant sales 28.2 % 28.6 % (0.4 )%
Cost of food decreased approximately $3.8 million, or 17.0%, in the quarter ended June 5, 2019 compared to the quarter ended June 6, 2018 with lower guest traffic levels and operations at 30 fewer locations. As a percentage of restaurant sales, cost of food
decreased 0.4% to 28.2% in the quarter ended June 5, 2019 compared to 28.6% in the quarter ended June 6, 2018 due in part to higher average menu pricing at Fuddruckers and changes in the mix of menu offerings as well as further focus on efficient operations, including minimizing waste.
Three Quarters Ended Three Quarters Ended
June 5, June 6, Increase/
($000s) 2019 2018 (Decrease)
(40 weeks) (40 weeks) (40 weeks vs 40 weeks)
Cost of food $ 61,707 $ 73,190 $ (11,483 ) (15.7 )%
As a percentage of restaurant sales 27.8 % 28.5 % (0.7 )%
Cost of food decreased approximately $11.5 million, or 15.7%, for the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018 with lower guest traffic levels and operations at 37 fewer locations. As a percentage of restaurant sales, cost of food decreased 0.7% to 27.8% in the three quarters ended June 5, 2019 compared to 28.5% in the three quarters ended June 6, 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
June 5, June 6, Increase/
($000s) 2019 2018 (Decrease)
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)
Payroll and related costs $ 25,015 $ 29,392 $ (4,377 ) (14.9 )%
As a percentage of restaurant sales 38.1 % 37.8 % 0.3 %
Payroll and related costs decreased approximately $4.4 million in the quarter ended June 5, 2019 compared to the quarter ended June 6, 2018. The decrease reflects operating 30 fewer restaurants (reducing cost by approximately $4.0 million) and a reduction in hourly labor costs with fewer hours deployed on reduced guest traffic counts. As a percentage of restaurant sales, payroll and related costs increased 0.3% to 38.1% in the quarter ended June 5, 2019 compared to 37.8% in the quarter ended June 6, 2018 due primarily to the fixed cost component of labor costs (especially salaried restaurant managers) with declines in same-store sales.
Three Quarters Ended Three Quarters Ended
June 5, June 6, Increase/
($000s) 2019 2018 (Decrease)
(40 weeks) (40 weeks) (40 weeks vs 40 weeks)
Payroll and related costs $ 84,258 $ 96,032 $ (11,774 ) (12.3 )%
As a percentage of restaurant sales 37.9 % 37.4 % 0.5 %
Payroll and related costs decreased approximately $11.8 million in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018 due to operating 37 fewer restaurants (reducing cost by approximately $11.0 million), lower associate hours scheduled and deployed on the decreased level of guest traffic, and an approximate $0.7 million reduction in workers' compensation liability estimates, partially offset by higher average hourly wage rates, and increased restaurant management headcount expenses, including increases in group health insurance costs. As a percentage of restaurant sales, payroll and related costs increased 0.5%, to 37.9% in the three quarters ended June 5, 2019 compared to 37.4% in the three quarters ended June 6, 2018 due to
Other Operating Expenses
Quarter Quarter
Ended Ended
June 5, June 6, Increase/
($000s) 2019 2018 (Decrease)
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)
Other operating expenses $ 11,491 $ 15,023 $ (3,532 ) (23.5 )%
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 $3.5 million, or 23.5%, in the quarter ended June 5, 2019 compared to the quarter ended June 6, 2018. Of the approximate $3.5 million decrease in total other operating expenses, approximately $2.6 million is attributed to store closures and approximately $0.9 million is attributed to stores that continue to operate. The $0.9 million reduction in other operating expenses at stores that continue to operate is attributable to (1) an approximate $0.6 million reduction in restaurant supplies expense; and (2) an approximate $0.5 million reduction in repairs and maintenance expense; partially offset by (3) an approximate $0.2 million increase in restaurant services expenses. As a percentage of restaurant sales, other operating expenses decreased 1.8%, to 17.5%, in the quarter ended June 5, 2019, compared to 19.3% in the quarter ended June 6, 2018 due primarily to (1) reductions in restaurant supplies expenses at continually operated stores; (2) reductions in repairs and maintenance at continually operated stores and to a lesser extent at closed stores; and (3) closures of underperforming locations that on average had higher operating expenses relative to their sales volumes; partially offset by (4) higher restaurant services expense.
Three Quarters Ended Three Quarters Ended
June 5, June 6, Increase/
($000s) 2019 2018 (Decrease)
. . .
Jul 15, 2019
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