While some of Luby’s turnaround initiatives gain footing, recent results aren’t enough to stabilize the company, chief executive officer Chris Pappas said Monday.
Pappas called the multi-concept operator’s first-quarter “not acceptable,” during a conference call. The company swung a net loss of $8.3 million compared to negative $7.5 million in the year-ago period.
About 12 months ago, Luby’s, which also operates Fuddruckers and one Cheeseburger in Paradise location, as well as a contract management division, began outlining significant changes, including management refreshment, guest traffic goals, and a significant reduction in G&A expenses. By September, Luby’s formed a board special committee to strategically review the business, a process that, as is often the case, could result in a sale, merger or refinancing process, or none of the above.
READ MORE: A look at where the turnaround began for Luby's
Pappas did not comment on the review Monday, only to say six independent directors have engaged financial advisers “to assist with this evaluation.” Luby’s added three independent directors (three also retired) in the past year, as well as a new independent chairman.
Notably, the company did report better traffic trends in Q1. Luby’s saw guest counts improve 2 percent, year-over-year, while Fuddruckers appreciated a 2.7 percent bump. The increase led to same-store sales growth as well, with comps lifting 1.7 percent and 0.1 percent, respectively. That against declines of 3 and 11.2 percent in Q1 2019.
However, at the restaurant level, commodity and labor cost increases offset much of the gains, Pappas said. The cost of food commodities “rose dramatically,” contributing to food cost increases of about 1.2 percent of restaurant sales. Labor costs “have gone up at the highest pace we have seen in years,” he added.
Luby’s is working to transition portions of its accounting, payroll, operational reporting, and other back-office functions to a multi-unit restaurant outsourcing firm in hopes of realizing further cost savings. In Q1, though, the figure increased $148,000 compared to last year.
That included a jump of about $700,000 in marketing and advertising spend, “reflecting our increased investment for various digital media advertising, increased advertising support leading into Thanksgiving, and other efforts to reach our guests in an effective manner,” Pappas said. Luby’s reduced its marketing efforts this time last year as it fine-tuned a go-forward approach.
The brand also decreased capital expenditures to $700,000 in Q1 compared to $1.1 million last year.
Luby’s ended the quarter with net debt of about $38.6 million
Pappas said the company is managing its debt levels through asset sales, with a focus on improving cash flow. It used about $2.1 million in cash from operating activities this past quarter. Of that, roughly $2 million went to restructuring expenses and “other changes in working capital.” It spent another $700,000 to maintain restaurants.
Essentially, the company had net cash flow of about $3 million in Q1 while borrowing the same amount.
“We continue to focus on initiatives that we began last year,” Pappas said, “including this restaurant focus on delivering a compelling, everyday value proposition to guess at both Luby's and Fuddruckers with less discounting, but clarifying each brand's value offerings in the marketplace, we intend to drive guest traffic and sales.”
Total sales declined across Luby’s base, with revenue dropping 7.5 percent to $95.1 million. The company credited the slip to fewer restaurants. Luby’s includes units open for six complete consecutive quarters in its comp. That left it with 72 Luby’s versus 78 last year; 34 Fuddruckers compared to 54; six combo locations; and one Cheeseburger in Paradise from two stores.
Overall, Luby’s namesake had 78 restaurants as of December 18, closing one unit in Q1. Fuddruckers shuttered four to drop to 40.