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 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 


FORM 10-Q 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 16, 2015

or

 ☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period From to  

Commission file number: 001-08308 


Luby’s, Inc.

(Exact name of registrant as specified in its charter)


 

Delaware

74-1335253

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

  

  

13111 Northwest Freeway, Suite 600

Houston, Texas

77040

(Address of principal executive offices)

(Zip Code)

 

(713) 329-6800

(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒ 

 

As of January 20, 2016 there were 28,825,754 shares of the registrant’s common stock outstanding. 

  

 
1

 

 

Luby’s, Inc.

Form 10-Q

Quarter ended December 16, 2015

Table of Contents

 

 

Page

 

 

Part I—Financial Information

  

 

 

Item 1 Financial Statements

3

  

  

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

  

  

Item 3 Quantitative and Qualitative Disclosures About Market Risk

37

  

  

Item 4 Controls and Procedures

37

 

 

Part II—Other Information

  

 

 

Item 1 Legal Proceedings

38

 

 

Item 1A Risk Factors

38

 

 

Item 6 Exhibits

38

 

 

Signatures

39

 

Additional Information

 

We file reports with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The public may read and copy any materials we file with the SEC at its Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information that we file electronically. Our website address is http://www.lubysinc.com. Please note that our website address is provided as an inactive textual reference only. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this report. 

 

 
2

 

 

Part I—FINANCIAL INFORMATION

 

Item1. Financial Statements

 

Luby’s, Inc.

Consolidated Balance Sheets

(In thousands, except share data)

 

   

December 16,

2015

   

August 26,

2015

 
   

(Unaudited)

         

ASSETS

               

Current Assets:

               

Cash and cash equivalents

  $ 1,581     $ 1,501  

Trade accounts and other receivables, net

    4,949       5,175  

Food and supply inventories

    4,948       4,483  

Prepaid expenses

    2,881       3,402  

Assets related to discontinued operations

    3       10  

Deferred income taxes

    577       577  

Total current assets

    14,939       15,148  

Property held for sale

    3,058       4,536  

Assets related to discontinued operations

    3,672       3,671  

Property and equipment, net

    199,754       200,202  

Intangible assets, net

    22,089       22,570  

Goodwill

    1,643       1,643  

Deferred income taxes

    13,844       12,917  

Other assets

    3,613       3,571  

Total assets

  $ 262,612     $ 264,258  

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

Current Liabilities:

               

Accounts payable

  $ 18,912     $ 20,173  

Liabilities related to discontinued operations

    438       408  

Accrued expenses and other liabilities

    27,448       23,967  

Total current liabilities

    46,798       44,548  

Credit facility debt

    35,000       37,500  

Liabilities related to discontinued operations

    17       182  

Other liabilities

    7,429       7,369  

Total liabilities

    89,244       89,599  

Commitments and Contingencies

               

SHAREHOLDERS’ EQUITY

               

Common stock, $0.32 par value; 100,000,000 shares authorized; shares issued were 29,325,754 and 29,134,603, respectively; shares outstanding were 28,825,754 and 28,634,603, respectively

    9,384       9,323  

Paid-in capital

    29,465       29,006  

Retained earnings

    139,294       141,105  

Less cost of treasury stock, 500,000 shares

    (4,775

)

    (4,775

)

Total shareholders’ equity

    173,368       174,659  

Total liabilities and shareholders’ equity

  $ 262,612     $ 264,258  

  

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 
3

 

 

Luby’s, Inc.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

 

   

Quarter Ended

 
   

December 16,

2015

   

November 19,
2014

 
 

(16 weeks)

(12 weeks)

SALES:

               

Restaurant sales

  $ 113,546     $ 80,557  

Culinary contract services

    4,915       4,598  

Franchise revenue

    2,125       1,581  

Vending revenue

    158       125  

TOTAL SALES

    120,744       86,861  

COSTS AND EXPENSES:

               

Cost of food

    32,434       23,484  

Payroll and related costs

    39,424       28,686  

Other operating expenses

    18,421       14,219  

Occupancy costs

    6,642       4,942  

Opening costs

    397       925  

Cost of culinary contract services

    4,422       4,099  

Cost of franchise operations

    612       384  

Depreciation and amortization

    7,014       5,068  

Selling, general and administrative expenses

    13,243       9,151  

Net (gain) loss on disposition of property and equipment

    (279

)

    290  

Total costs and expenses

    122,330       91,248  

LOSS FROM OPERATIONS

    (1,586

)

    (4,387

)

Interest income

    1       1  

Interest expense

    (696

)

    (456

)

Other income (expense), net

    (118

)

    180  

Loss before income taxes and discontinued operations

    (2,399

)

    (4,662

)

Benefit for income taxes

    (660

)

    (1,782

)

Loss from continuing operations

    (1,739

)

    (2,880

)

Loss from discontinued operations, net of income taxes

    (72

)

    (139

)

NET LOSS

  (1,811

)

  $ (3,019

)

Loss per share from continuing operations:

               

Basic

  $ (0.06

)

  $ (0.10

)

Assuming dilution

  $ (0.06

)

  $ (0.10

)

Loss per share from discontinued operations:

               

Basic

  $ (0.00

)

  $ (0.01

)

Assuming dilution

  $ (0.00

)

  $ (0.01

)

Net loss per share:

               

Basic

  $ (0.06

)

  $ (0.11

)

Assuming dilution

  $ (0.06

)

  $ (0.11

)

Weighted average shares outstanding:

               

Basic

    29,133       28,890  

Assuming dilution

    29,133       28,890  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 
4

 

 

Luby’s, Inc.

Consolidated Statement of Shareholders’ Equity (unaudited)

(In thousands)

 

   

Common Stock

                   

Total

 
   

Issued

   

Treasury

   

Paid-In

   

Retained

   

Shareholders’

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Earnings

   

Equity

 

BALANCE AT AUGUST 26, 2015

    29,135     $ 9,323       (500

)

  $ (4,775

)

  $ 29,006     $ 141,105     $ 174,659  

Net loss

                                  (1,811

)

    (1,811

)

Share-based compensation expense

    169       54                   391             445  

Common stock issued under employee benefit plans

    22       7                   68             75  

BALANCE AT DECEMBER 16, 2015

    29,326     $ 9,384       (500

)

  $ (4,775

)

  $ 29,465     $ 139,294     $ 173,368  

 

The accompanying notes are an integral part of these Consolidated Financial Statements. 

 

 
5

 

 

Luby’s, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

   

Quarter Ended

 
   

December 16,

2015

   

November 19,
2014

 
 

(16 weeks)

(12 weeks)

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (1,811

)

  $ (3,019

)

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Net (gain) loss on disposition of property and equipment

    (279

)

    290  

Depreciation and amortization

    7,021       5,073  

Amortization of debt issuance cost

    148       36  

Non-cash compensation expense

    75        

Share-based compensation expense

    445       322  

Other non-cash compensation expense

    74        

Deferred tax benefit

    (927

)

    (2,028

)

Cash provided by operating activities before changes in operating assets and liabilities

    4,746       674  

Changes in operating assets and liabilities:

               

Decrease (Increase) in trade accounts and other receivables

    226       (690

)

Increase in food and supply inventories

    (968

)

    (1,998

)

Decrease in prepaid expenses and other assets

    364       1,118  

Increase (Decrease) in accounts payable, accrued expenses and other liabilities

    1,975       (3,431

)

Net cash provided by (used in) operating activities

    6,343       (4,327

)

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Proceeds from disposal of assets and property held for sale

    1,916       692  

Decrease in notes receivable

    17        

Purchases of property and equipment

    (5,729

)

    (3,589

)

Net cash used in investing activities

    (3,796

)

    (2,897

)

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Credit facility borrowings

    27,000       25,800  

Credit facility repayments

    (29,500

)

    (19,500

)

Debt issuance costs

    (42

)

    (50

)

Proceeds received on the exercise of employee stock options

    75        

Net cash provided by (used in) financing activities

    (2,467

)

    6,250  

Net increase (decrease) in cash and cash equivalents

    80       (974

)

Cash and cash equivalents at beginning of period

    1,501       2,788  

Cash and cash equivalents at end of period

  $ 1,581     $ 1,814  

Cash paid for:

               

Income taxes

  $     $  

Interest

    520       451  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 
6

 

 

Luby’s, Inc.

Notes to Consolidated Financial Statements (unaudited)

 

 

Note 1. Basis of Presentation

 

The accompanying unaudited Consolidated Financial Statements of Luby’s, Inc. (the “Company” or “Luby’s”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements that are prepared for the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended December 16, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2016.

 

The Consolidated Balance Sheet dated August 26, 2015, included in this Quarterly Report on Form 10-Q (this “Form 10-Q”), has been derived from the audited Consolidated Financial Statements as of that date. However, this Form 10-Q does not include all of the information and footnotes required by GAAP for an annual filing of complete financial statements. Therefore, these financial statements should be read in conjunction with the audited Consolidated Financial Statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 26, 2015.

 

Note 2. 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; fiscal year 2016 will be such a year. Each of the first three quarters of each fiscal year, prior to fiscal year 2016, consisted of three four-week periods, while the fourth quarter normally consisted of four four-week periods.

  

Beginning in fiscal 2016, we changed our fiscal quarter ending dates with the first fiscal quarter end extended by one accounting period and the fiscal fourth quarter being reduced by one accounting period. The purpose of this change is in part to minimize the Thanksgiving calendar shift by extending the first fiscal quarter until after Thanksgiving. With this change in fiscal quarter ending dates, our first quarter is 16 weeks, and the remaining three quarters will typically be 12 weeks in length. The fourth fiscal quarter will be 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. Fiscal 2016 is such a year where the fourth quarter will have 13 weeks, resulting in a 53 week fiscal year. Comparability between quarters may be affected by varying lengths of the quarters, as well as the seasonality associated with the restaurant business. 

 

Note 3. Reportable Segments

 

The Company has three reportable segments: Company-owned restaurants, franchise operations and culinary contract services (“CCS”).

 

Company-owned restaurants

 

Company-owned restaurants consists of several brands which are aggregated into one reportable segment because the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, the nature of the regulatory environment and store level profit margin are similar. The chief operating decision maker analyzes Company-owned restaurants at store level profit which is revenue less cost of food, payroll and related costs, other operating expenses and occupancy costs. The primary brands are Luby’s Cafeterias, Fuddruckers and Cheeseburger in Paradise, with a non-core restaurant location operating under the brand name Bob Luby’s Seafood. All company-owned restaurants are casual dining restaurants. Each restaurant is an operating segment because operating results and cash flow can be determined for each restaurant.

 

The total number of Company-owned restaurants was 179 at December 16, 2015 and 177 at August 26, 2015.

 

 
7

 

 

Culinary Contract Services

 

CCS, branded as Luby’s Culinary Contract Services, consists of a business line servicing healthcare, higher education and corporate dining clients. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service and retail dining. CCS has contracts with long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, behavioral hospitals and business and industry clients. CCS has the unique ability to deliver quality services that include facility design and procurement as well as nutrition and branded food services to our clients. The costs of CCS on the Consolidated Statements of Operations include all food, payroll and related costs and other operating expenses related to CCS sales.

 

The total number of CCS contracts was 28 at December 16, 2015 and 23 at August 26, 2015.  

 

Franchise Operations

 

We offer franchises for only the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Initial franchise agreements have a term of 20 years. Franchise agreements typically grant franchisees an exclusive territorial license to operate a single restaurant within a specified area, usually a four-mile radius surrounding the franchised restaurant.

 

Franchisees bear all direct costs involved in the development, construction and operation of their restaurants. In exchange for a franchise fee, the Company provides franchise assistance in the following areas: site selection, prototypical architectural plans, interior and exterior design and layout, training, marketing and sales techniques, assistance by a Fuddruckers “opening team” at the time a franchised restaurant opens, and operations and accounting guidelines set forth in various policies and procedures manuals.

 

All franchisees are required to operate their restaurants in accordance with Fuddruckers’ standards and specifications, including controls over menu items, food quality and preparation. The Company requires the successful completion of its training program by a minimum of three managers for each franchised restaurant. In addition, franchised restaurants are evaluated regularly by the Company for compliance with franchise agreements, including standards and specifications through the use of periodic, unannounced, on-site inspections and standard evaluation reports.

 

The number of franchised restaurants was 110 at December 16, 2015 and 106 at August 26, 2015.  

 

Licensee

 

In November 1997, a prior owner of the Fuddruckers – World’s Greatest Hamburgers ® brand granted to a licensee the exclusive right to use the Fuddruckers proprietary marks, trade dress and system to develop Fuddruckers restaurants in a territory consisting of certain countries in Africa, the Middle East and parts of Asia. As of January 2016, this licensee operated 35 restaurants that are licensed to use the Fuddruckers Proprietary Marks in Saudi Arabia, Egypt, Lebanon, United Arab Emirates, Qatar, Jordan, Bahrain, Kuwait, Morocco and Malaysia. The Company does not receive revenue or royalties from these restaurants.

 

 
8

 

 

The table below shows segment financial information. The table also lists total assets for each reportable segment. Corporate assets include cash and cash equivalents, property and equipment, assets related to discontinued operations, property held for sale, deferred tax assets and prepaid expenses.

 

   

Quarter Ended

 
   

December 16,

2015

   

November 19,
2014

 
 

(16 weeks)

(12 weeks)

 

(In thousands)

Sales:

               

Company-owned restaurants (1)

  $ 113,704     $ 80,682  

Culinary contract services

    4,915       4,598  

Franchise operations

    2,125       1,581  

Total

    120,744       86,861  

Segment level profit:

               

Company-owned restaurants

  $ 16,783     $ 9,351  

Culinary contract services

    493       499  

Franchise operations

    1,513       1,197  

Total

    18,789       11,047  

Depreciation and amortization:

               

Company-owned restaurants

  $ 5,809     $ 4,384  

Culinary contract services

    37       69  

Franchise operations

    256       177  

Corporate

    912       438  

Total

    7,014       5,068  

Capital expenditures:

               

Company-owned restaurants

  $ 5,494     $ 3,169  

Culinary contract services

           

Franchise operations

           

Corporate

    235       420  

Total

    5,729       3,589  
                 

Loss before income taxes and discontinued operations:

               

Segment level profit

  $ 18,789     $ 11,047  

Opening costs

    (397

)

    (925

)

Depreciation and amortization

    (7,014

)

    (5,068

)

Selling, general and administrative expenses

    (13,243

)

    (9,151

)

Net gain (loss) on disposition of property and equipment

    279       (290

)

Interest income

    1       1  

Interest expense

    (696

)

    (456

)

Other expense (income), net

    (118

)

    180  

Loss before income taxes and discontinued operations

  $ (2,399

)

  $ (4,662

)

 

   

December 16,

2015

   

August 26,

2015

 

Total assets:

               

Company-owned restaurants(2)

  $ 217,834     $ 218,492  

Culinary contract services

    2,229       1,644  

Franchise operations(3)

    12,555       13,034  

Corporate

    29,994       31,088  

Total

  $ 262,612     $ 264,258  

 

(1)

Includes vending revenue of $158 thousand and $125 thousand for the quarters ended December 16, 2015 and November 19, 2014, respectively.

(2)

Company-owned restaurants segment includes $10.4 million of Fuddruckers trade name, Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles.

(3)

Franchise operations segment includes approximately $12.0 million in royalty intangibles.

 

 

 
9

 

 

Note 4. Fair Value Measurements

 

GAAP establishes a framework for using fair value to measure assets and liabilities. Fair value measurements guidance applies whenever other statements require or permit asset or liabilities to be measured at fair value.

 

GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers include:

 

 

Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

  

Level 2: Defined as pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.

 

  

Level 3: Defined as pricing inputs that are unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

Non-recurring fair value measurements related to impaired property and equipment consisted of the following:

 

           

Fair Value
Measurement Using

         
   

Quarter

Ended
December 16, 2015

   

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

   

Significant
Other
Observable
Inputs
(Level 2)

   

Significant
Unobservable
Inputs
(Level 3)

   

Total
Impairments

 
           

(In thousands)

                 

Continuing Operations

                                       

Property and equipment related to company-owned restaurants

  $ 5,282     $     $     $ 5,282     $  

Discontinued Operations

                                       

Property and equipment related to company-owned restaurants

  $ 103     $     $     $ 103     $  

   

 
10

 

 

           

Fair Value
Measurement Using

         
   

Quarter

Ended
November 19,
2014

   

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

   

Significant
Other
Observable
Inputs
(Level 2)

   

Significant
Unobservable
Inputs
(Level 3)

   

Total
Impairments

 
           

(In thousands)

                 

Continuing Operations

                                       

Property and equipment related to company-owned restaurants

  $ 6,446     $     $     $ 6,446     $  

Discontinued Operations

                                       

Property and equipment related to company-owned restaurants

  $ 1,144     $     $     $ 1,144     $  

 

Note 5. Income Taxes 

 

No cash payments of estimated federal income taxes were made during the quarter ended December 16, 2015. 

 

Deferred tax assets and liabilities are recorded based on differences between the financial reporting basis and the tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are recognized to the extent future taxable income is expected to be sufficient to utilize those assets prior to their expiration.

 

Management believes that adequate provisions for income taxes have been reflected in the financial statements and is not aware of any significant exposure items that have not been reflected in the financial statements. Amounts considered probable of settlement within one year have been included in the accrued expenses and other liabilities in the accompanying Consolidated Balance Sheet.

 

Note 6. Property and Equipment, Intangible Assets and Goodwill

 

The costs, net of impairment, and accumulated depreciation of property and equipment at December 16, 2015 and August 26, 2015, together with the related estimated useful lives used in computing depreciation and amortization, were as follows:

 

December 16,

2015

 

August 26,
201
5 

 

Estimated
Useful Lives

(years)

 

(In thousands)

 

 

 

 

 

Land

$

63,339

 

$

63,298

 

 

 

 

Restaurant equipment and furnishings

 

89,587

 

 

85,679

 

 

3

to

15

Buildings

 

160,705

 

 

159,391

 

 

20

to

33

Leasehold and leasehold improvements

 

29,739

 

 

29,229

 

Lesser of lease term or estimated useful life

Office furniture and equipment

 

3,727

 

 

3,559

 

 

3

to

10

Construction in progress

 

972

 

 

810

 

 

 

 

 

 

348,069

 

 

341,966

 

 

 

 

 

Less accumulated depreciation and amortization

 

(148,315

)

 

(141,764

)

 

 

 

 

Property and equipment, net

$

199,754

 

$

200,202

 

 

 

 

 

Intangible assets, net

$

22,089

 

$

22,570

 

 

 

21

 

Goodwill

$

1,643

 

$

1,643

 

 

 

 

 

 
11

 

 

Intangible assets, net, consist of the Fuddruckers trade name and franchise agreements and will be amortized. The Company believes the Fuddruckers brand name has an expected accounting life of 21 years from the date of acquisition based on the expected use of its assets and the restaurant environment in which it is being used. The trade name represents a respected brand with customer loyalty and the Company intends to cultivate and protect the use of the trade name. The franchise agreements, after considering renewal periods, have an estimated accounting life of 21 years from the date of acquisition and will be amortized over this period of time.

 

Intangible assets, net, also includes the license agreement and trade name related to Cheeseburger in Paradise and the value of the acquired licenses and permits allowing the sales of beverages with alcohol. These assets have an expected accounting life of 15 years from the date of acquisition December 6, 2012.

 

The aggregate amortization expense related to intangible assets subject to amortization was $0.5 million for the quarter ended December 16, 2015 and $0.3 million for the quarter ended November 19, 2014. The aggregate amortization expense related to intangible assets subject to amortization is expected to be $1.4 million in each of the next five successive years.

 

The following table presents intangible assets as of December 16, 2015 and August 26, 2015:

 

   

December 16, 2015

   

August 26, 2015

 
   

(In thousands)

   

(In thousands)

 
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Net

Carrying

Amount

   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Net

Carrying

Amount

 

Intangible Assets Subject to Amortization:

                                               
                                                 

Fuddruckers trade name and franchise agreements

  $ 29,607     $ (7,633

)

  $ 21,974     $ 29,607     $ (7,166

)

  $ 22,441  
                                                 

Cheeseburger in Paradise trade name and license agreements

  $ 416     $ (301

)

  $ 115     $ 416     $ (287

)

  $ 129  
                                                 

Intangible assets, net

  $ 30,023     $ (7,934

)

  $ 22,089     $ 30,023     $ (7,453

)

  $ 22,570  

 

The Company recorded, in fiscal 2010, an intangible asset for goodwill in the amount of approximately $0.2 million related to the acquisition of substantially all of the assets of Fuddruckers. The Company also recorded, in fiscal 2013, an intangible asset for goodwill in the amount of approximately $2.0 million related to the acquisition of Cheeseburger in Paradise. Goodwill is considered to have an indefinite useful life and is not amortized. Management performs its formal annual assessment as of the second quarter each fiscal year. The individual restaurant level is the level at which goodwill is assessed for impairment under ASC 350. In accordance with our understanding of ASC 350, we have allocated the goodwill value to each reporting unit in proportion to each location’s fair value at the date of acquisition. The result of these assessments were impairment of goodwill of $38 thousand and $0.5 million in fiscal years 2015 and 2014, respectively. The Company will formally perform additional assessments on an interim basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists. As of January 20, 2016, of the 23 locations that were acquired, eight locations remain operating as Cheeseburger in Paradise restaurants, eight locations were closed and converted to Fuddruckers restaurants, two locations where the option to extend the lease was not exercised, two locations subleased to franchisees and three closed and held for future use.

 

Goodwill, net of accumulated impairments of approximately $0.6 million, was approximately $1.6 million as of December 16, 2016 and as of August 26, 2015, and relates to our Company-owned restaurants reportable segments.

 

Note 7. Impairment of Long-Lived Assets, Discontinued Operations and Property Held for Sale

 

Impairment of Long-Lived Assets and Store Closings

 

The Company periodically evaluates long-lived assets held for use and held for sale whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. The Company analyzes historical cash flows of operating locations and compares results of poorer performing locations to more profitable locations. The Company also analyzes lease terms, condition of the assets and related need for capital expenditures or repairs, as well as construction activity and the economic and market conditions in the surrounding area.

  

 
12

 

 

For assets held for use, the Company estimates future cash flows using assumptions based on possible outcomes of the areas analyzed. If the undiscounted future cash flows are less than the carrying value of the location’s assets, the Company records an impairment loss based on an estimate of discounted cash flows. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgments. Assumptions and estimates used include operating results, changes in working capital, discount rate, growth rate, anticipated net proceeds from disposition of the property and, if applicable, lease terms. The span of time for which future cash flows are estimated is often lengthy, increasing the sensitivity to assumptions made. The time span could be 20 to 25 years for newer properties, but only 5 to 10 years for older properties. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. The Company considers the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows.

 

The Company recognized the following impairment charges to income from operations:

 

   

Quarter Ended

 
   

December 16,
201
5

   

November 19,
201
4

 
 

(16 weeks)

(12 weeks)

 

(In thousands, except per share data)

Provision for asset impairments

  $     $  

Net (gain) loss on disposition of property and equipment

    (279

)

    290  
                 
    $ (279

)

  $ 290  

Effect on EPS:

               

Basic

  $ 0.01     $ (0.01

)

Assuming dilution

  $ 0.01     $ (0.01

)

 

There was no impairment charge for the quarters ended December 16, 2015 and November 19, 2014.  

 

The net gain for the quarter ended December 16, 2015 is primarily attributable to the sale of one property location.

 

The net loss for the quarter ended November 19, 2014 includes losses on the sale of equipment and other normal asset retirement activity.

 

Discontinued Operations 

 

On March 21, 2014, the Board of Directors of the Company approved a plan focused on improving cash flow from the acquired Cheeseburger in Paradise leasehold locations. On March 24, 2014, the Company announced a plan focused on improving cash flow from the acquired Cheeseburger in Paradise leasehold locations. This underperforming Cheeseburger in Paradise leasehold disposal plan called for five or more units to be closed by the end of fiscal 2014 and disposed of within 12 months. As of December 16, 2015, one location was reclassified to continuing operations and was reopened as a Fuddruckers restaurant. Three locations remain closed for disposal and classified as discontinued operations as of December 16, 2015.

 

As a result of the first quarter fiscal year 2010 adoption of the Company’s Cash Flow Improvement and Capital Redeployment Plan, the Company reclassified 24 Luby’s Cafeterias to discontinued operations. As of December 16, 2015, one location remains held for sale.

 

 
13

 

 

The following table sets forth the assets and liabilities for all discontinued operations:

 

   

December 16,

2015

   

August 26,

2015

 
 

(In thousands)

Prepaid expenses

    3       10  

Assets related to discontinued operations—current

  $ 3     $ 10  

Property and equipment

    1,874       1,873  

Other assets

    1,798       1,798  

Assets related to discontinued operations—non-current

  $ 3,672     $ 3,671  

Deferred income taxes

  $ 343     $ 343  

Accrued expenses and other liabilities

    95       65  

Liabilities related to discontinued operations—current

  $ 438     $ 408  

Other liabilities

  $ 17     $ 182  

Liabilities related to discontinued operations—non-current

  $ 17     $ 182  


As of December 16, 2015, under both closure plans, the Company had four properties classified as discontinued operations assets and the asset carrying value of the owned properties was $1.9 million and is included in assets related to discontinued operations. The asset carrying values of the ground leases were previously impaired to zero.

 

The Company is actively marketing all but one of these properties for sale. This property has been sublet to an existing franchisee. The Company’s results of discontinued operations will be affected by the disposal of properties related to discontinued operations to the extent proceeds from the sales exceed or are less than net book value.

 

The following table sets forth the sales and pretax losses reported from discontinued operations:

 

   

Quarter Ended

 
   

December 16,

2015

   

November 19,

2014

 
 

(16 weeks)

(12 weeks)

 

(In thousands, except discontinued locations)

Sales

  $     $  
                 

Pretax loss

    (118

)

    (245

)

Income tax benefit from discontinued operations

    46       106  

Loss from discontinued operations

  $ (72

)

  $ (139

)

Discontinued locations closed during the period

           

 

 
14

 

 

The following table summarizes discontinued operations for the first quarters of fiscal 2016 and 2015:

 

   

Quarter Ended

 
   

December 16,

2015

   

November 19,

2014

 
 

(16 weeks)

(12 weeks)

 

(In thousands, except per share data)

                 

Discontinued operating loss

  $ (118

)

  $ (245

)

Impairments

           

Net gains (losses)

           

Pretax loss

  $ (118

)

    (245

)

Income tax benefit from discontinued operations

    46       106  

Loss from discontinued operations

  $ (72

)

  $ (139

)

Effect on EPS from discontinued operations—basic

  $ (0.00

)

  $ (0.00

)

  

Impairment charges included above relate to properties closed and designated for immediate disposal. The assets of these individual operating units have been written down to their net realizable values. In turn, the related properties have either been sold or are being actively marketed for sale. Dispositions are expected to be completed within one to three years. Within discontinued operations, the Company also recorded the related fiscal year-to-date net operating results, employee terminations and carrying costs of the closed units.

 

Property Held for Sale

 

The Company periodically reviews long-lived assets against its plans to retain or ultimately dispose of properties. If the Company decides to dispose of a property, it will be moved to property held for sale and actively marketed. The Company analyzes market conditions each reporting period and records additional impairments due to declines in market values of like assets. The fair value of the property is determined by observable inputs such as appraisals and prices of comparable properties in active markets for assets like the Company’s. Gains are not recognized until the properties are sold.

 

Property held for sale includes unimproved land, closed restaurant properties and related equipment for locations not classified as discontinued operations. The specific assets are valued at the lower of net depreciable value or net realizable value.

 

At December 16, 2015, the Company had three owned properties recorded at approximately $3.1 million in property held for sale.

 

At August 26, 2015, the Company had four owned properties recorded at approximately $4.5 million in property held for sale.

 

The Company is actively marketing the locations currently classified as property held for sale

 

Note 8. Commitments and Contingencies

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements, except for operating leases. 

 

Pending Claims

 

From time to time, the Company is subject to various private lawsuits, administrative proceedings and claims that arise in the ordinary course of its business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to issues common to the restaurant industry. The Company currently believes that the final disposition of these types of lawsuits, proceedings and claims will not have a material adverse effect on the Company’s financial position, results of operations or liquidity. It is possible, however, that the Company’s future results of operations for a particular fiscal quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings or claims.

 

 
15

 

 

Construction Activity

 

From time to time, the Company enters into non-cancelable contracts for the construction of its new restaurants. This construction activity exposes the Company to the risks inherent in new construction, including but not limited to rising material prices, labor shortages, delays in getting required permits and inspections, adverse weather conditions, and injuries sustained by workers and contract termination expenses. The Company had three non-cancelable contracts as of December 16, 2015.

 

 

Note 9. Related Parties

 

Affiliate Services

 

Christopher J. Pappas, the Company’s Chief Executive Officer, and Harris J. Pappas, director and former Chief Operating Officer of the Company, own two restaurant entities (the “Pappas entities”) that from time to time may provide services to the Company and its subsidiaries, as detailed in the Amended and Restated Master Sales Agreement effective November 8, 2013 among the Company and the Pappas entities.

 

Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities may provide specialized (customized) equipment fabrication and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables. There were no costs incurred under the Amended and Restated Master Sales Agreement of custom-fabricated and refurbished equipment in the quarters ended December 16, 2015 and November 19, 2014. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of the Board of Directors of the Company (the “Board”).

 

Operating Leases

 

In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a 50% limited partnership interest and a 50% general partnership interest in the limited partnership. A third party company manages the center. One of the Company’s restaurants has rented approximately 7% of the space in that center since July 1969. No changes were made to the Company’s lease terms as a result of the transfer of ownership of the center to the new partnership.

 

On November 22, 2006, the Company executed a new lease agreement with respect to this shopping center. Effective upon the Company’s relocation and occupancy into the new space in July 2008, the new lease agreement provides for a primary term of approximately 12 years with two subsequent five-year options and gives the landlord an option to buy out the tenant on or after the calendar year 2015 by paying the then unamortized cost of improvements to the tenant. The Company is currently obligated to pay rent of $22.00 per square foot plus maintenance, taxes, and insurance during the remaining primary term of the lease. Thereafter, the lease provides for increases in rent at set intervals. The Company made payments of $103,000 and $68,000 in the quarters ended December 16, 2015 and November 19, 2014, respectively. The new lease agreement was approved by the Finance and Audit Committee.

 

In the third quarter of fiscal year 2014, on March 12, 2014, the Company executed a new lease agreement which one of the Company’s Houston Fuddruckers location was purchased from a prior landlord by Pappas Restaurants, Inc., a 100% undivided interest. No changes were made to our lease terms as a result of the transfer of ownership. The lease provides for a primary term of approximately six years with two subsequent five-year options. Pursuant to the new ground lease agreement, the Company is currently obligated to pay $27.56 per square foot plus maintenance, taxes, and insurance from March 12, 2014 until November 30, 2016. Thereafter, the new ground lease agreement provides for increases in rent at set intervals. The Company made payments of $40,000 and $27,000 in the quarters ended December 16, 2015 and November 19, 2014, respectively

 

 
16

 

 

   

Quarter Ended

 
   

December 16,

2015

   

November 19,
2014

 
 

(16 weeks)

(12 weeks)

 

(In thousands, except percentages)

AFFILIATED COSTS INCURRED:

               

General and administrative expenses—professional and other costs

  $     $  

Capital expenditures

           

Other operating expenses, occupancy costs and opening costs, including property leases

    143       95  

Total

  $ 143     $ 95  

RELATIVE TOTAL COMPANY COSTS:

               

Selling, general and administrative expenses

  $ 13,243     $ 9,151  

Capital expenditures

    5,729       3,589  

Other operating expenses, occupancy costs and opening costs

    25,460       20,086  

Total

  $ 44,432     $ 32,826  

AFFILIATED COSTS INCURRED AS A PERCENTAGE OF RELATIVE TOTAL COMPANY COSTS

    0.32

%

    0.29

%

 

Board of Directors

 

Christopher J. Pappas is a member of the Advisory Board of Amegy Bank, National Association, which is a lender and syndication agent under the Company’s 2013 Revolving Credit Facility.

 

Key Management Personnel

 

The Company entered into a new employment agreement with Christopher Pappas on January 24, 2014. The employment agreement was amended on December 1, 2014, to extend the termination date thereof to August 31, 2016, unless earlier terminated. Mr. Pappas continues to devote his primary time and business efforts to the Company while maintaining his role at Pappas Restaurants, Inc.

 

Peter Tropoli, a director of the Company and the Company’s Chief Operating Officer, and formerly the Company’s Senior Vice President, Administration, General Counsel and Secretary, is an attorney and stepson of Frank Markantonis, who is a director of the Company.

 

Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas, who is a director of the Company.

 

Note 10. Share-Based Compensation

 

We have two active share based stock plans, the Employee Stock Plan and the Nonemployee Director Stock Plan. Both plans authorize the granting of stock options, restricted stock and other types of awards consistent with the purpose of the plans.

 

Of the 1.1 million shares approved for issuance under the Nonemployee Director Stock Plan, 0.9 million options, restricted stock units and restricted stock awards were granted, and 0.1 million options were cancelled or expired and added back into the plan, since the plan’s inception. Approximately 0.3 million shares remain available for future issuance as of December 16, 2015. Compensation cost for share-based payment arrangements under the Nonemployee Director Stock Plan, recognized in selling, general and administrative expenses for the quarters ended December 16, 2015 and November 19, 2014 were approximately $197,000 and $167,000, respectively.

 

 
17

 

 

Of the 2.6 million shares approved for issuance under the Employee Stock Plan, 5.7 million options and restricted stock units were granted, and 3.4 million options and restricted stock units were cancelled or expired and added back into the plan, since the plan’s inception. Approximately 0.3 million shares remain available for future issuance as of December 16, 2015. Compensation cost for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses for the quarters ended December 16, 2015 and November 19, 2014, were approximately $455,000 and $154,000, respectively. Included in the fiscal quarter ended December 16, 2015 share based compensation cost is approximately $252,000, which represents accelerated share-based compensation expense as a result of the cancellation of 312,663 stock options.

 

In 2015, the Company approved a Total Shareholder Return, (TSR), Performance Based Incentive Plan which provides for a right to receive an unspecified number of shares of common stock under the Employee Stock Plan based on the total shareholder return ranking compared to a selection of peer companies over a three-year cycle. The award value varies from 0% to 200% of a base amount, as a result of the Company’s TSR performance in comparison to its peers over the measurement period. The number of shares at the end of the three-year period will be determined as the award value divided by the closing stock price on the last day of each fiscal year accordingly. Since the plan provides for an undeterminable number of shares, the plan is accounted for as a liability based plan. As of December 16, 2015, the estimated fair value of the performance shares liability at the end of fiscal 2017 and fiscal 2018, were $0.5 million for both years. The estimated liability has been determined based on a Monte Carlo simulation model. Based on this estimate, management accrues expense ratably over the three-year service periods. A valuation estimate of the future liability associated with each fiscal year's performance award plan will be performed periodically with adjustments made to the outstanding liability at each reporting period, as appropriate. As of December 16, 2015, the Company has recorded $74,000 in non-cash compensation expense in selling, general and administrative expenses related to its TSR Performance Based Incentive Plans.

 

Stock Options

 

Stock options granted under either the Employee Stock Plan or the Nonemployee Director Stock Plan have exercise prices equal to the market price of the Company’s common stock at the date of the grant.

 

Option awards under the Nonemployee Director Stock Plan generally vest 100% on the first anniversary of the grant date and expire ten years from the grant date. No options were granted under the Nonemployee Director Stock Plan in the quarter ended December 16, 2015. No options to purchase shares remain outstanding under this plan as of December 16, 2015.

 

Options granted under the Employee Stock Plan generally vest 50% on the first anniversary date of the grant date, 25% on the second anniversary of the grant date and 25% on the third anniversary of the grant date, with all options expiring ten years from the grant date. All options granted in fiscal quarter ended December 16, 2015 were granted under the Employee Stock Plan. Options to purchase 1,210,089 shares at option prices of $3.44 to $11.10 per share remain outstanding as of December 16, 2015.

 

A summary of the Company’s stock option activity for the quarter ended December 16, 2015 is presented in the following table:

 

   

Shares

Under

Fixed

Options

   

Weighted-

Average

Exercise

Price

   

Weighted-

Average

Remaining

Contractual

Term

   

Aggregate

Intrinsic

Value

 
         

(Per share)

(Years)

(In thousands)

Outstanding at August 26, 2015

    1,288,099     $ 4.76       6.5     $ 350  

Granted

    279,944       4.89              

Exercised

    (19,750

)

    3.44              

Cancelled

    (312,663

)

    4.98              

Forfeited/Expired

    (25,541

)

    4.34              

Outstanding at December 16, 2015

    1,210,089     $ 4.76       7.3     $ 138  

Exercisable at December 16, 2015

    415,951     $ 4.93       3.5     $ 138  

  

 
18

 

 

The intrinsic value for stock options is defined as the difference between the current market value, or closing price on December 16, 2015, and the grant price on the measurement dates in the table above. 

 

Restricted Stock Units

 

Grants of restricted stock units consist of the Company’s common stock and generally vest after three years. All restricted stock units are cliff-vested. Restricted stock units are valued at the closing market price of the Company’s common stock at the date of grant.

 

A summary of the Company’s restricted stock unit activity during the quarter ended December 16, 2015 is presented in the following table:

 

   

Restricted

Stock

Units

   

Weighted

Average

Fair Value

   

Weighted-

Average

Remaining

Contractual

Term

 
         

(Per share)

(In years)

Unvested at August 26, 2015

    409,417     $ 5.98       1.6  

Granted

    166,619       4.89        

Vested

    (197,482

)

    5.95        

Forfeited

    (4,202

)

    5.95        

Unvested at December 16, 2015

    374,352     $ 5.51       2.4  

 

At December 16, 2015, there was approximately $2.5 million of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 2.4 years.

 

Restricted Stock Awards

 

Under the Nonemployee Director Stock Plan, directors are granted restricted stock in lieu of cash payments, for all or a portion of their compensation as directors. The number of shares granted is valued at the closing market price of the Company’s stock at the date of the grant. Restricted stock awards vest when granted because they are granted in lieu of a cash payment. However, directors are restricted from selling their shares until after the third anniversary of the date of the grant. Directors may receive a 20% premium of additional restricted stock by opting to receive stock in lieu of cash. 

 

Note 11. Earnings Per Share

 

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding and unvested restricted stock for the reporting period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options determined using the treasury stock method. Stock options excluded from the computation of net income per share for the quarter ended December 16, 2015 include approximately 1,050,089 shares with exercise prices exceeding market prices and approximately 88,000 shares whose inclusion would also be anti-dilutive. 

 

 
19

 

 

The components of basic and diluted net income per share are as follows:

 

   

Quarter Ended

 
   

December 16,

2015

   

November 19,
2014

 
 

(16 weeks)

(12 weeks)

 

(In thousands, expect per share data)

Numerator:

               

Loss from continuing operations

  $ (1,739

)

  $ (2,880

)

Loss from discontinued operations

    (72

)

    (139

)

Net loss

  $ (1,811

)

  $ (3,019

)

Denominator:

               

Denominator for basic earnings per share—weighted-average shares

    29,133       28,890  

Effect of potentially dilutive securities:

               

Employee and non-employee stock options

           

Denominator for earnings per share assuming dilution

    29,133       28,890  

Loss per share from continuing operations:

               

Basic

  $ (0.06

)

  $ (0.10

)

Assuming dilution

  $ (0.06

)

  $ (0.10

)

Loss per share from discontinued operations:

               

Basic

  $ (0.00

)

  $ (0.01

)

Assuming dilution

  $ (0.00

)

  $ (0.01

)

Net loss per share:

               

Basic

  $ (0.06

)

  $ (0.11

)

Assuming dilution

  $ (0.06

)

  $ (0.11

)

   

 

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 December 16, 2015 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 26, 2015.

 

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.

 

 
20

 

 

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

 

Percentages may not add due to rounding.

 

   

Quarter Ended

 
   

December 16,

2015

   

November 19,
2014

 
 

(16 weeks)

(12 weeks)

                 
                 

Restaurant sales

    94.0

%

    92.7

%

Culinary contract services

    4.1

%

    5.3

%

Franchise revenue

    1.8

%

    1.8

%

Vending revenue

    0.1

%

    0.1

%

TOTAL SALES

    100.0

%

    100.0

%

                 

STORE COSTS AND EXPENSES:

               

(As a percentage of restaurant sales)

               
                 

Cost of food

    28.6

%

    29.2

%

Payroll and related costs

    34.7

%

    35.6

%

Other operating expenses

    16.2

%

    17.7

%

Occupancy costs

    5.8

%

    6.1

%

Store level profit margin

    14.8

%

    11.6

%

                 

COMPANY COSTS AND EXPENSES:

               

(As a percentage of total sales)

               
                 

Opening costs

    0.3

%

    1.1

%

Depreciation and amortization

    5.8

%

    5.8

%

Selling, general and administrative expenses

    11.0

%

    10.5

%

Net (gain) loss on disposition of property and equipment

    (0.2

)%

    0.3

%

                 

Culinary Contract Services Costs

               

(As a percentage of Culinary Contract Services sales)

               
                 

Cost of culinary contract services

    90.0

%

    89.1

%

Culinary income

    10.0

%

    10.9

%

                 

Franchise Operations Costs

               

(As a percentage of Franchise Operations)

               
                 

Cost of franchise operations

    28.8

%

    24.3

%

Franchise income

    71.2

%

    75.7

%

                 

(As a percentage of total sales)

               

LOSS FROM OPERATIONS

    (1.3

)%

    (5.1

)%

Interest income

    0.0

%

    0.0

%

Interest expense

    0.6

%

    (0.5

)%

Other income (expense), net

    (0.1

)%

    0.2

%

Loss before income taxes and discontinued operations

    2.0 %     (5.4

)%

Benefit for income taxes

    (0.5

)%

    (2.1

)%

Loss from continuing operations

    (1.4

)%

    (3.3

)%

Loss from discontinued operations, net of income taxes

    (0.1

)%

    (0.2

)%

NET LOSS

    (1.5

)%

    (3.5

)%

 

 
21

 

 

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

 
   

December 16,

2015

   

November 19,
2014

 
 

(16 weeks)

(12 weeks)

 

(In Thousands)

                 

Store level profit

  $ 16,783     $ 9,351  
                 

Plus:

               

Sales from culinary contract services

    4,915       4,598  

Sales from franchise revenue

    2,125       1,581  
                 

Less:

               

Opening costs

    397       925  

Cost of culinary contract services

    4,422       4,099  

Cost of franchise operations

    612       384  

Depreciation and amortization

    7,014       5,068  

Selling, general and administrative expenses

    13,243       9,151  

Net (gain) loss on disposition of property and equipment

    (279

)

    290  

Interest income

    (1

)

    (1

)

Interest expense

    696       456  

Other income, net

    118       (180

)

Benefit for income taxes

    (660

)

    (1,782

)

Loss from continuing operations

  $ (1,739

)

  $ (2,880

)

 

 

The following table shows our restaurant unit count as of August 26, 2015 and December 16, 2015.

 

Restaurant Counts:

 

   

August 26,

2015

   

FY16 Q1

Openings

   

FY16 Q1

Closings

   

December 16,

2015

 

Luby’s Cafeterias

    93                   93  

Fuddruckers Restaurants

    75       2             77  

Cheeseburger in Paradise

    8                   8  

Other restaurants1

    1                   1  

Total

    177       2             179  

 

(1) Other restaurants include one Bob Luby’s Seafood.

 

 
22

 

 

Overview

 

Luby’s, Inc. (“Luby’s” or “Company”) 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 ®, 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 Quarterly Report on Form 10-Q or incorporated by reference into any of our other filings with the SEC.

 

As of December 16, 2015, we owned and operated 179 restaurants, of which 93 are traditional cafeterias, 77 are gourmet hamburger restaurants, eight are casual dining restaurants and bars, and one primarily serves seafood. These establishments are located in close proximity to retail centers, business developments and residential areas mostly throughout the United States. Included in the 179 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 December 16, 2015, we operated 28 Culinary Contract Services locations; 17 in the Houston, Texas area, three in Louisiana, two in Austin, Texas, and one in each of North Carolina, Florida, Georgia, Oklahoma, Missouri, and Massachusetts. Luby’s Culinary Contract Services provides food service management to healthcare, educational and corporate dining facilities.

 

As of December 16, 2015, we had 51 franchisees operating 110 Fuddruckers restaurants. Our largest five franchise owners own five to eleven restaurants each. Fifteen franchise owners each own two to four restaurants. The 31 remaining franchise owners each own one restaurant.

 

Accounting Periods

 

Our 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. In fiscal year 2015, and prior, each of the first three quarters of each fiscal year consisted of three four-week periods, while the fourth quarter normally consisted of four four-week periods. Beginning in fiscal year 2016, the first quarter consisted of four four-week periods, while the last three quarters will normally consist of three four-week periods. However, fiscal year 2016 is a fiscal year consisting of 53 weeks, accounting for 371 days in the aggregate. As such, the fourth quarter of fiscal year 2016 will contain one five-week period, resulting in a 13-week fourth quarter, or 91 days in the aggregate. 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. Our Company-owned Fuddruckers restaurants were included in this measurement beginning with the third quarter fiscal 2012. The Cheeseburger in Paradise stores that were acquired in December 2012 were included in the same-store metric beginning the first quarter fiscal 2015. Stores that close on a permanent basis 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. 

 

 
23

 

 

RESULTS OF OPERATIONS

 

Quarter Ended December 16, 2015 Compared to Quarter Ended November 19, 2014

 

Comparability between quarters is affected by the varying lengths of the quarters.  The quarter ended December 16, 2015 consisted of 16 weeks whereas the quarter ended November 19, 2014 consisted of 12 weeks.   For comparison to the 16-week quarter ended December 16, 2015, certain tables and comments, in this management discussion and analysis, also present a comparable 16-week period ended December 14, 2014.

 

Sales

 

   

Quarter Ended

   

Quarter Ended

   

Comparable Period Ended

   

Q1FY2016

vs Comparable

Period

 

($000s)

 

December 16,

2015

   

November 19,

2014

   

December 14,

2014

   

Increase/

(Decrease)

 
   

(16 weeks)

   

(12 weeks)

   

(16 weeks)

   

(16 vs 16 weeks)

 
                                 

Restaurant sales

  $ 113,546     $ 80,557     $ 111,233       2.1

%

Culinary contract services

    4,915       4,598       5,908       (16.8

)%

Franchise revenue

    2,125       1,581       2,136       (0.5

)%

Vending revenue

    158       125       161       (2.1

)%

Total sales

  $ 120,744     $ 86,861     $ 119,438       1.1

%

 

Total sales increased approximately $1.3 million, or 1.1%, in the quarter ended December 16, 2015 compared to the comparable 16-week period ended December 14, 2014, consisting primarily of a $2.3 million increase in restaurant sales, a $1.0 million decrease in Culinary Contract Services sales. The other components of total sales are franchise revenue and vending revenue, which decreased $11 thousand and $3 thousand, respectively, in the quarter ended December 16, 2015 compared to the 16-week period ended December 14, 2014.

 

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

 

Company-Owned Restaurants

 

Restaurant Sales

 

   

Quarter

Ended

   

Quarter

Ended

   

Comparable

Period Ended

   

Q1FY2016 vs

Comparable Period

 

Restaurant Brand

 

December 16,

   

November 19,

   

December 14,

    Increase/(Decrease)  
($000s)