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EX-21 - EXHIBIT 21 - LUBYS INClub_82918xex21.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ____________________________________
FORM 10-K 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended August 29, 2018 
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 Number)
 
13111 Northwest Freeway, Suite 600
Houston, Texas 77040
(Address of principal executive offices, including zip code)
 
(713) 329-6800
(Registrant’s telephone number, including area code) 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on which registered 
Common Stock ($0.32 par value per share)
 
New York Stock Exchange
Common Stock Purchase Rights
 
New York Stock Exchange

 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ☐    No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  x
 
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  x     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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  ☐
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
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. (Check one):
Large accelerated filer  ☐
Accelerated filer  x
Non-accelerated filer  ☐
Smaller reporting company   x
 
Emerging growth company   ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  x
 
The aggregate market value of the shares of common stock of the registrant held by nonaffiliates of the registrant as of March 15, 2017, was approximately $53,432,298 (based upon the assumption that directors and executive officers are the only affiliates).
 
As of November 7, 2018, there were 29,550,002 shares of the registrant’s common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE

 Portions of the following document are incorporated by reference into the designated parts of this Form 10-K:
 Definitive Proxy Statement relating to 2019 annual meeting of shareholders (in Part III)

1




Luby’s, Inc.
Form 10-K
Year ended August 29, 2018
Table of Contents
 
Page
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  

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Additional Information 
 
We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. 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 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 the 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.
 
Compliance with New York Stock Exchange Requirements
 
We submitted to the New York Stock Exchange (“NYSE”) the CEO certification required by Section 303A.12(a) of the NYSE’s Listed Company Manual with respect to our fiscal year ended August 30, 2017. We expect to submit the CEO certification with respect to our fiscal year ended August 29, 2018 to the NYSE within 30 days after our annual meeting of shareholders. We are filing as an exhibit to this Form 10-K the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002.


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FORWARD-LOOKING STATEMENTS
 
This Annual Report on (this "Form 10-K”) contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this Form 10-K, other than statements of historical facts, are “forward-looking statements” for purposes of these provisions, including any statements regarding:

future operating results;
future capital expenditures, including expected reductions in capital expenditures;
future debt, including liquidity and the sources and availability of funds related to debt;
plans for our new prototype restaurants;
plans for expansion of our business;
scheduled openings of new units;
closing existing units;
effectiveness of management’s disposal plans;
future sales of assets and the gains or losses that may be recognized as a result of any such sales; and
continued compliance with the terms of our 2016 Credit Agreement.

In some cases, investors can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “outlook,” “may” “should,” “will,” and “would” or similar words. Forward-looking statements are based on certain assumptions and analyses made by management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors we believe are relevant. Although management believes that our assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of our control. The following factors, as well as the factors set forth in Item 1A of this Form 10-K and any other cautionary language in this Form 10-K, provide examples of risks, uncertainties, and events that may cause our financial and operational results to differ materially from the expectations described in our forward-looking statements:
 
general business and economic conditions;
the impact of competition;
our operating initiatives, changes in promotional, couponing and advertising strategies, and the success of management’s business plans;
fluctuations in the costs of commodities, including beef, poultry, seafood, dairy, cheese, oils and produce;
ability to raise menu prices and customers acceptance of changes in menu items;
increases in utility costs, including the costs of natural gas and other energy supplies;
changes in the availability and cost of labor, including the ability to attract qualified managers and team members;
the seasonality of the business;
collectability of accounts receivable;
changes in governmental regulations, including changes in minimum wages and healthcare benefit regulation;
the effects of inflation and changes in our customers’ disposable income, spending trends and habits;
the ability to realize property values;
the availability and cost of credit;
weather conditions in the regions in which our restaurants operate;
costs relating to legal proceedings;
impact of adoption of new accounting standards;
effects of actual or threatened future terrorist attacks in the United States;
unfavorable publicity relating to operations, including publicity concerning food quality, illness or other health concerns or labor relations; and
the continued service of key management personnel.

Each forward-looking statement speaks only as of the date of this Form 10-K, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should be aware that the occurrence of the events described above and elsewhere in this Form 10-K could have material adverse effect on our business, results of operations, cash flows, and financial condition.


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PART I
 
Item 1. Business
 
Overview
 
Luby’s, Inc. 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® and Luby’s Culinary Contract Services. We also operate another brand named Cheeseburger in Paradise.
 
In this Form 10-K, unless otherwise specified, “Luby’s,” “we,” “our,” “us” and “Company” refer to Luby’s, Inc., Luby's Fuddruckers Restaurants, LLC, a Texas Limited Liability Company ("LFR") and the consolidated subsidiaries of Luby’s, Inc. References to “Luby’s Cafeteria” refer specifically to the Luby’s Cafeteria brand restaurant.
 
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 annual report on Form 10-K or incorporated into any of our other filings with the SEC.
 
As of November 7, 2018, we operated 142 restaurants located throughout the United States, as set forth in the table below. These establishments are located in close proximity to retail centers, business developments and residential areas. Of the 142 restaurants, 77 are located on property that we own and 65 are located on property that we lease. Six locations consist of a side-by-side Luby’s Cafeteria and Fuddruckers restaurant, to which we refer herein as a “Combo location”. 
 
Total
Texas:
 
Houston Metro
47

San Antonio Metro
16

Rio Grande Valley
12

Dallas/Fort Worth Metro
12

Austin
9

Other Texas Markets
16

California
10

Arizona
4

Illinois
3

Georgia
3

Mississippi
2

Other States
8

Total
142

  
As of November 7, 2018, we operated 30 locations through our Culinary Contract Services (“CCS”).

 
Total
Texas:
 
Houston Metro
22

San Antonio Metro
2

Rio Grande Valley
3

Dallas/Fort Worth Metro
2

Greensboro, NC
1

Total
30



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As of November 7, 2018, we had 41 franchisees operating 104 Fuddruckers restaurants in locations as set forth in the table below. Our largest six franchisees own five to 12 restaurants each. Fourteen franchise owners each own two to four restaurants. The twenty-one remaining franchise owners each own one restaurant.
 
 
Fuddruckers
Franchises
Texas:
 
Dallas/Fort Worth Metro
8

Other Texas Markets
10

California
7

Connecticut
1

Delaware
1

Florida
10

Georgia
3

Iowa
1

Louisiana
3

Maryland
1

Massachusetts
4

Michigan
4

Missouri
3

Montana
4

Nebraska
1

Nevada
3

New Jersey
2

New Mexico
4

North Carolina
1

North Dakota
1

Oklahoma
1

Oregon
1

Pennsylvania
5

South Carolina
8

South Dakota
1

Tennessee
2

Virginia
3

International:
 
Canada
2

Colombia
2

Mexico
3

Panama
3

Puerto Rico
1

Total
104

 
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 November 7, 2018, this licensee operates 33 restaurants that are licensed to use the Fuddruckers proprietary marks in Saudi Arabia, Egypt, United Arab Emirates, Qatar, Jordan, Bahrain, and Kuwait. The Company does not receive revenue or royalties from these restaurants.

For additional information regarding our restaurant locations, please read “Properties” in Item 2 of Part I of this report.
 

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Luby’s, Inc. (formerly, Luby’s Cafeterias, Inc.) was founded in 1947 in San Antonio, Texas. The Company was originally incorporated in Texas in 1959, with nine cafeterias in various locations, under the name Cafeterias, Inc. It became a publicly held corporation in 1973, and became listed on the NYSE in 1982.

Luby’s, Inc. was reincorporated in Delaware on December 31, 1991 and was restructured into a holding company on February 1, 1997, at which time all of the operating assets were transferred to Luby’s Restaurants Limited Partnership, a Texas limited partnership composed of two wholly owned, indirect subsidiaries. On July 9, 2010, Luby’s Restaurants Limited Partnership was converted into LFR. All restaurant operations are conducted by LFR.
 
On July 26, 2010, we, through our subsidiary, LFR, completed the acquisition of substantially all of the assets of Fuddruckers, Inc., Magic Brands, LLC and certain of their affiliates (collectively, “Fuddruckers”) for approximately $63.1 million in cash. LFR also assumed certain of Fuddruckers’ obligations, real estate leases and contracts. Upon the completion of the acquisition, LFR became the owner and operator of 56 Fuddruckers locations and three Koo Koo Roo Chicken Bistro locations with franchisees operating an additional 130 Fuddruckers locations.
 
On December 6, 2012, we completed the acquisition of all of the Membership Units of Paradise Restaurant Group, LLC and certain of their affiliates, collectively known as Cheeseburger in Paradise, for approximately $10.3 million in cash plus customary working capital adjustments. We assumed certain of Cheeseburger in Paradise obligations, real estate leases and contracts and became the owners of 23 full service Cheeseburger in Paradise restaurants located in 14 states.
 
On August 27, 2014, the Company completed an internal restructuring of certain affiliates of the Luby’s Cafeteria business, whereby these companies were merged with and into LFR, as the successor. The principal purpose of these events was to simplify the Luby’s corporate structure. Following these events, the Company’s restaurant operations continue to be conducted by LFR and Paradise Cheeseburger, LLC. Our operating restaurant locations remain unchanged by these events.
 
Luby’s Cafeteria Operations
 
At Luby’s Cafeterias, our mission is to serve our guests convenient, great tasting meals in a friendly environment that makes everyone feel welcome and at home. We do things The Luby’s Way, which means we cook in small batches from scratch using real food, real ingredients prepared fresh daily, and our employees and our company get involved and support the fabric of our local communities. We buy local produce as much as possible. We promise to breathe life into the experience of dining out and make every meal meaningful. We were founded in San Antonio, Texas in 1947.
 
Our cafeteria food delivery model allows customers to select freshly-prepared items from our serving line including entrées, vegetables, salads, desserts, breads and beverages before transporting their selected items on serving trays to a table or booth of their choice in the dining area. Each restaurant offers 15 to 22 entrées, 12 to 14 vegetable dishes, 8 to 10 salads, and 10 to 12 varieties of desserts daily.
 
Luby’s Cafeteria’s product offerings are home-style made-from-scratch favorites priced to appeal to a broad range of customers, including those customers that focus on fast wholesome choices, quality, variety, and affordability. We have had particular success among families with children, shoppers, travelers, seniors, and business people looking for a quick, freshly prepared meal at a fair price. All of our restaurants sell food-to-go orders which comprise approximately 13% of our Luby's Cafeteria restaurant sales.
 
Menus are reviewed periodically and new offerings and seasonal food preferences are regularly incorporated. Each restaurant is operated as a separate unit under the control of a general manager who has responsibility for day-to-day operations, including food production and personnel employment and supervision. Restaurants generally have a staff led by a general manager, an associate manager and assistant managers. We grant authority to our restaurant managers to direct the daily operations of their stores and, in turn, we compensate them on the basis of their performance. Each general manager is supervised by an area leader. Each area leader is responsible for approximately 7 to 10 units, depending on the area supervised.
  
In fiscal 2018, we closed four Luby's Cafeterias. The number of Luby’s Cafeterias was 84 at fiscal year-end 2018.

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Fuddruckers
 
At Fuddruckers, our mission is to serve the World’s Greatest Hamburgers® using only 100% fresh, never frozen, all American premium beef, buns baked daily in our kitchens, and the freshest, highest quality ingredients on our “you top it” produce bar. With a focus on excellent food, attentive guest service and an inviting atmosphere, we are committed to making every guest happy, one burger at a time! Fuddruckers restaurants feature casual, welcoming dining areas where Americana-themed décor is featured. Fuddruckers was founded in San Antonio, Texas in 1980.
 
While Fuddruckers’ signature burgers and fries account for the majority of its restaurant sales, its menu also includes exotic burgers, such as buffalo and elk, chicken breast sandwiches, hot dogs, a variety of salads, chicken tenders, hand breaded onion rings, soft drinks, handmade milkshakes, and bakery items. A variety of over 100 carbonated soft drinks including our own unique Sweet Cherry Cream Soda, which is exclusively offered at Fuddruckers restaurants, along with other varieties such as Powerade®, and flavored waters are offered through Coke Freestyle® self-service dispensers. Additionally, beer and wine are served and, generally, account for less than 2% of restaurant sales. Food-to-go sales comprise approximately 8% of Fuddruckers restaurant sales.
 
Restaurants generally have one general manager with two or three assistant managers and a number of full-time and part-time associates working in overlapping shifts. Since Fuddruckers generally utilizes a self-service concept, similar to fast casual, it typically does not employ waiters or waitresses. Fuddruckers restaurant operations are currently divided into a total of ten geographic areas, each supervised by an area leader. On average, each area leader supervises five to nine restaurants.
 
In fiscal 2018, we closed 11 Company-owned Fuddruckers restaurants. The number of Fuddruckers restaurants was 60 at fiscal year-end 2018.
  
Cheeseburger in Paradise
 
Cheeseburger in Paradise is known for its inviting beach-party atmosphere, its big, juicy burgers, salads, coastal fare, and other tasty and unique items. Cheeseburger in Paradise is a full-service island-themed restaurant and bar developed in collaboration with legendary entertainer Jimmy Buffet based on one of his most popular songs. The restaurants also feature a unique tropical-themed island bar with many televisions and tasty “boat drinks.” As of our fiscal year-end 2018, we operated two of the original Cheeseburger in Paradise locations.

Culinary Contract Services
 
Our CCS segment consists of a business line servicing long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, retail grocery stores, behavioral hospitals, sports stadiums, senior living facilities, government, and business and industry clients. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service, and retail dining. Our mission is to re-define the contract food industry by providing tasty and healthy menus with customized solutions for healthcare, senior living, business and industry and higher education facilities. We seek to provide the quality of a restaurant dining experience in an institutional setting. At fiscal year-end 2018, we had contracts with 11 long-term acute care hospitals, seven acute care hospitals, three business and industry clients, three sport stadiums, one governmental facility, one medical office building, one senior living facility, and one freestanding coffee venue located inside an office building. We have the unique ability to deliver quality services that include facility design and procurement as well as nutrition and branded food services to our clients.

Franchising
 
Fuddruckers offers franchises in markets where it deems expansion to be advantageous to the development of the Fuddruckers concept and system of restaurants. A standard franchise agreement generally has an initial 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. Luby’s management will continue developing its relationships with our franchisees over the coming years and beyond.
 
Franchisees bear all direct costs involved in the development, construction and operation of their restaurants. In exchange for a franchise fee, we provide 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.
 

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All franchisees are required to operate their restaurants in accordance with Fuddruckers standards and specifications, including controls over menu items, food quality and preparation. We require the successful completion of our training program by a minimum of three managers for each franchised restaurant. In addition, franchised restaurants are evaluated regularly for compliance with franchise agreements, including standards and specifications through the use of periodic, unannounced on-site inspections, and standards evaluation reports.
 
The number of franchised restaurants was 105 at fiscal year-end 2018 and 113 at fiscal year-end 2017.
 
For additional information regarding our business segments, please read Notes 1 and 4 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K.

Strategic Focus

Our strategic focus is to generate consistent and sustainable same-store sales growth and improved store level profit. We want our company’s performance to make it a leader wherever it operates and in its sector of our industry. We strive to provide attractive returns on shareholder capital. From an operating standpoint, we support this strategic focus through the following:

1.
Consistently successful execution: Every day, with every guest, at every restaurant we operate.

2.
Growing our human capital: Our team members are the most critical factor in ensuring our Company’s success. Our relentless focus as a company must be inspiring and developing our team members to delight our guests.

3.
Raising awareness of our brand: Our restaurants provide guests in our local communities with memories of family, friends, childhood, a great date, a memorable birthday, or a significant accomplishment. The most reliable ways to grow and sustain our business is to perpetuate word of mouth and remain involved in the community. We must share our story with our guests in our restaurants. This allows new guests to learn our brand story and also reaffirms it with legacy and loyal guests. Loyal guests spread and preach the word about our brand. Our most loyal guests typically agree to be in our E-club so we can communicate with them and reward them.

4.
Improving restaurant appearances: We recognize the importance of remodeling our legacy restaurants to remain relevant and appealing to keep loyal guests coming back and draw in new guests.

5.
Effective cost management:  We evaluate each area of our business to assess that we are spending and investing at appropriate levels. This includes restaurant operating costs and corporate overhead costs. Within our restaurants, we seek opportunities with our food and supplies purchasing, menu offerings, labor productivity, and contracts with restaurant service providers to maintain an appropriate restaurant level cost structure. Within our corporate overhead, we seek opportunities to leverage technology and efficient work processes to maintain a stream-lined corporate overhead.

We remain focused on the key drivers of our businesses to achieve operational excellence of our brands and to efficiently manage costs to grow profitability and enhance shareholder value.

Intellectual Property
 
Luby’s, Inc. owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information, including the Luby’s and Fuddruckers logos, trade names and trademarks, which are of material importance to our business. Depending on the jurisdiction, trademarks, and service marks generally are valid as long as they are used and/or registered. Patents, copyrights, and licenses are of varying durations. The success of our business depends on the continued ability to use existing trademarks, service marks, and other components of our brands in order to increase brand awareness and further develop branded products. We take prudent actions to protect our intellectual property.
 
Employees
 
As of November 7, 2018, we had an active workforce of 6,589 employees consisting of restaurant management employees, non-management restaurant employees, CCS management employees, CCS non-management employees, and office and facility service employees. Employee relations are considered to be good. We have never had a strike or work stoppage, and we are not subject to collective bargaining agreements.

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Item 1A. Risk Factors
 
An investment in our common stock involves a high degree of risk. Investors should consider carefully the risks and uncertainties described below, and all other information included in this Form 10-K, before deciding whether to invest in our common stock. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business, financial condition or results of operations. The occurrence of any of the following risks could harm our business, financial condition, and results of operations. The trading price of our common stock could decline due to any of these risks and uncertainties, and investors may lose part or all of their investment.

Our operating losses and working capital and liquidity deficiency raise substantial doubt about our ability to continue as a going concern.

The Company sustained a net loss of approximately $33.6 million in fiscal 2018. Cash flow from operations has declined to a use of cash of approximately $8.5 million in fiscal 2018. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations and its ability to obtain alternative financing to refund and repay the current debt owed under it's Credit Agreement. The above conditions raise substantial doubt about the Company’s ability to continue as a going concern.

Our ability to service our debt obligations is primarily dependent upon our future financial performance.
 
As of August 29, 2018, we had shareholders’ equity of approximately $113 million compared to approximately:

$39.5 million of short-term debt comprised of $19.5 million Term Loan and $20.0 million Revolver;
$53.0 million of minimum operating and capital lease commitments; and
$1.3 million of standby letters of credit.
 
Our ability to meet our debt service obligations depends on our ability to generate positive cash flows from operations and proceeds from assets held for sale.

If we are unable to service our debt obligations, we may have to:

delay spending on maintenance projects and other capital projects, including new restaurant development;
sell assets;
restructure or refinance our debt; or
sell equity securities.
 
 Our debt, and the covenants contained in the instruments governing our debt, could:

result in a reduction of our credit rating, which would make it more difficult for us to obtain additional financing on acceptable terms;
require us to dedicate a substantial portion of our cash flows from operating activities to the repayment of our debt and the interest associated with our debt;
limit our operating flexibility due to financial and other restrictive covenants, including restrictions on capital investments, debt levels, incurring additional debt and creating liens on our properties;
place us at a competitive disadvantage compared with our competitors that have relatively less debt;
expose us to interest rate risk because certain of our borrowings are at variable rates of interest; and
make us more vulnerable to downturns in our business.
 
If we are unable to service our debt obligations, we may not be able to sell equity securities, sell additional assets, or restructure or refinance our debt. Our ability to generate sufficient cash flow from operating activities to pay the principal of and interest on our indebtedness is subject to market conditions and other factors which are beyond our control.

Non-performance under the debt covenants in our revolving credit facility could adversely affect our ability to respond to changes in our business.
 
As of June 6, 2018, the Company was not in compliance with certain of its Credit Agreement financial covenants. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations and obtain alternative financing to refinance or otherwise repay our current Credit Agreement. While the

10



Company has obtained a Waiver of the default from the lenders under the Credit Agreement until December 31, 2018, announced a limited asset sales plan intended to help reduce the Company’s outstanding debt and engaged a third-party financial adviser to assist with refinancing such outstanding debt, there is no guarantee that we will be able to comply with the terms of the Waiver or with the financial covenants under the Credit Agreement once the Waiver expires. Our failure to comply with the financial covenants under the Credit Agreement once the Waiver has expired or to receive a new waiver from the lenders under the Credit Agreement could result in an event of default, which would have a material adverse effect on our financial condition and could cause us to seek bankruptcy protection, be unable to pay our debts when they become due or otherwise become insolvent because, among other things, our lenders: may declare any outstanding principal and the interest accrued thereon under the Credit Agreement to be due and payable, and we may not have sufficient cash to repay that indebtedness; may foreclose against the assets securing our borrowings; and will be under no obligation to extend further credit to us. For a more detailed discussion of our credit agreement please review the footnotes to our financial statements located in Part II, Item 8 of this Form 10-K.
The impact of inflation may adversely affect our results of operations.

The impact of inflation on food, labor and other aspects of our business can adversely affect our results of operations. Commodity inflation in food, beverages, and utilities can also impact our financial performance. Although we attempt to offset the effects of inflation through periodic menu price increases, cost controls, and incremental improvement in operating margins, we may not be able to completely eliminate such effects, which could adversely affect our results of operations.

We face the risk of adverse publicity and litigation, which could have a material adverse effect on our business and financial performance.
 
We may from, time to time, be the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Unfavorable publicity relating to one or more of our restaurants or to the restaurant industry in general may taint public perception of the Luby’s Cafeteria and Fuddruckers brands. Multi-unit restaurant businesses can be adversely affected by publicity resulting from poor food quality, illness, or other health concerns or operating issues stemming from one or a limited number of restaurants. Publicity resulting from these allegations may materially adversely affect our business and financial performance, regardless of whether the allegations are valid or whether we are liable. In addition, we are subject to employee claims alleging injuries, wage and hour violations, discrimination, harassment or wrongful termination. In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace, employment, and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend, and may divert time and money away from our operations and hurt our financial performance. A judgment significantly in excess of our insurance coverage, if any, for any claims could materially adversely affect our financial condition or results of operations.

We are subject to risks related to the provision of employee healthcare benefits, worker’s compensation and employee injury claims.
 
Effective January 1, 2018, we maintain a self-insured health benefit plan which provides medical and prescription drug benefits to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop-loss limits. We record expenses under the plan based on estimates of the costs of expected claims, administrative costs and stop-loss insurance premiums. Self-insurance costs are accrued based upon the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on information on historical claims experience provided by our third party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims expense may differ from estimated loss provisions based on historical experience. In the event our cost estimates differ from actual costs, we could incur additional unplanned costs, which could adversely impact our financial condition.
 
Workers’ compensation coverage is provided through “self-insurance” by LFR. We record expenses under the plan based on estimates of the costs of expected claims, administrative costs, stop-loss insurance premiums, and expected trends. These estimates are then adjusted each year to reflect actual costs incurred. Actual costs under these plans are subject to variability that is dependent upon demographics and the actual costs of claims made. In the event our cost estimates differ from actual costs, we could incur additional unplanned costs, which could adversely impact our financial condition.
 

11



In March 2010, comprehensive healthcare reform legislation under the Patient Protection and Affordable Care Act (the "Affordable Care Act") and Healthcare Education and Affordability Reconciliation Act was passed and signed into law. Among other things, the healthcare reform legislation includes mandated coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and healthcare benefits. Although requirements were phased in over a period of time, the most impactful provisions began in the third quarter of fiscal 2015.

Due to the breadth and complexity of the healthcare reform legislation, the lack of implementing regulations in some cases, and interpretive guidance, and the phased-in nature of the implementation, it is difficult to predict the overall impact of the healthcare reform legislation on our business and the businesses of our franchisees over the coming years. Possible adverse effects of the healthcare reform legislation include reduced revenues, increased costs and exposure to expanded liability and requirements for us to revise the ways in which we conduct business or risk of loss of business. It is also possible that healthcare plans offered by other companies with which we compete for employees will make us less attractive to our current or potential employees. And in any event, implementing the requirements of the Affordable Care Act has imposed some additional administrative costs on us, and those costs may increase over time. In addition, our results of operations, financial position and cash flows could be materially adversely affected. Our franchisees face the potential of similar adverse effects, and many of them are small business owners who may have significant difficulty absorbing the increased costs.  
 
We face intense competition, and if we are unable to compete effectively or if customer preferences change, our business, financial condition and results of operations may be adversely affected.
 
The restaurant industry is intensely competitive and is affected by changes in customer tastes and dietary habits and by national, regional and local economic conditions and demographic trends. New menu items, concepts, and trends are constantly emerging. Our Luby’s Cafeteria brand offer a large variety of entrées, side dishes and desserts and our continued success depends, in part, on the popularity of our cuisine and cafeteria-style dining. A change away from this cuisine or dining style could have a material adverse effect on our results of operations. Our Fuddruckers brand offers grilled-to-order burgers that feature always fresh and never frozen, 100% premium-cut beef with no fillers or additives and sesame-topped buns baked from scratch on-site throughout the day. While burgers are the signature, the engaging menu offers variety for many tastes with an array of sandwiches, and salads. Changing customer preferences, tastes and dietary habits can adversely affect our business and financial performance. We compete on quality, variety, value, service, concept, price, and location with well-established national and regional chains, as well as with locally owned and operated restaurants. We face significant competition from family-style restaurants, fast-casual restaurants, and buffets as well as fast food restaurants. In addition, we also face growing competition as a result of the trend toward convergence in grocery, delicatessen, and restaurant services, particularly in the supermarket industry, which offers “convenient meals” in the form of improved entrées and side dishes from the delicatessen section. Many of our competitors have significantly greater financial resources than we do. We also compete with other restaurants and retail establishments for restaurant sites and personnel. We anticipate that intense competition will continue. If we are unable to compete effectively, our business, financial condition, and results of operations may be adversely affected.
 
Our growth plan may not be successful.
 
Depending on future economic conditions, we may not be able to open new restaurants in current or future fiscal years. Our ability to open and profitably operate new restaurants is subject to various risks such as the identification and availability of suitable and economically viable locations, the negotiation of acceptable terms for the purchase or lease of new locations, the need to obtain all required governmental permits (including zoning approvals) on a timely basis, the need to comply with other regulatory requirements, the availability of necessary contractors and subcontractors, the availability of construction materials and labor, the ability to meet construction schedules and budgets, the ability to manage union activities such as picketing or hand billing which could delay construction, increases in labor and building materials costs, the availability of financing at acceptable rates and terms, changes in weather or other acts of God that could result in construction delays and adversely affect the results of one or more restaurants for an indeterminate amount of time, our ability to hire and train qualified management personnel and general economic and business conditions. At each potential location, we compete with other restaurants and retail businesses for desirable development sites, construction contractors, management personnel, hourly employees and other resources.
 

12



If we are unable to successfully manage these risks, we could face increased costs and lower than anticipated revenues and earnings in future periods. We may be evaluating acquisitions or engaging in acquisition negotiations at any given time. We cannot be sure that we will be able to continue to identify acquisition candidates on commercially reasonable terms or at all. If we make additional acquisitions, we also cannot be sure that any benefits anticipated from the acquisition will actually be realized. Likewise, we cannot be sure that we will be able to obtain necessary financing for acquisitions. Such financing could be restricted by the terms of our debt agreements or it could be more expensive than our current debt. The amount of such debt financing for acquisitions could be significant and the terms of such debt instruments could be more restrictive than our current covenants. In addition, a prolonged economic downturn would adversely affect our ability to open new stores or upgrade existing units and we may not be able to maintain the existing number of restaurants in future fiscal years. We may not be able to renew existing leases and various other risks could cause a decline in the number of restaurants in future fiscal years, which could adversely affect our results of operations.

Regional events can adversely affect our financial performance.
 
Many of our restaurants and franchises are located in Texas, California and in the northern United States. Our results of operations may be adversely affected by economic conditions in Texas, California or the northern United States or the occurrence of an event of terrorism or natural disaster in any of the communities in which we operate. Also, given our geographic concentration, negative publicity relating to our restaurants could have a pronounced adverse effect on our overall revenues. Although we generally maintain property and casualty insurance to protect against property damage caused by casualties and natural disasters, inclement weather, flooding, hurricanes, and other acts of God, these events can adversely impact our sales by discouraging potential customers from going out to eat or by rendering a restaurant or CCS location inoperable for a significant amount of time.
 
An increase in the minimum wage and regulatory mandates could adversely affect our financial performance.
 
From time to time, the U.S. Congress and state legislatures have increased and will consider increases in the minimum wage. The restaurant industry is intensely competitive, and if the minimum wage is increased, we may not be able to transfer all of the resulting increases in operating costs to our customers in the form of price increases. In addition, because our business is labor intensive, shortages in the labor pool or other inflationary pressure could increase labor costs that could adversely affect our results of operations.
 
We may be required to recognize additional impairment charges.
 
We assess our long-lived assets in accordance with generally accepted accounting principles in the United States (“GAAP”) and determine when they are impaired. Based on market conditions and operating results, we may be required to record additional impairment charges, which would reduce expected earnings for the periods in which they are recorded.
 
We may be harmed by security risks we face in connection with our electronic processing and transmission of confidential customer and employee information.
 
We accept electronic payment cards for payment in our restaurants. During fiscal 2018, approximately 73% of our restaurant sales were attributable to credit and debit card transactions, and credit and debit card usage could continue to increase. A number of retailers have experienced actual or potential security breaches in which credit and debit card information may have been stolen, including a number of highly publicized incidents with well-known retailers in recent years. In addition, we have previously been the victim of a cyber attack by hackers who deployed a version of the SamSam ransomware that encrypted electronic files, locking us out of many of our point-of-sale and other systems. These hackers requested a “ransom” payment in exchange for restoring access to these encrypted files. Such attacks, while they did not provide the hackers with access to confidential customer and employee information, did adversely affect our profits due to our temporary inability to operate our restaurants and increased costs associated further protecting and restoring our computer systems. While we have taken preventative measures, no assurances can be provided that we will not be the subject of cyber attacks again in the future.
 
We may in the future become subject to additional claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings in the future relating to these types of incidents. Proceedings related to theft of credit or debit card information may be brought by payment card providers, banks and credit unions that issue cards, cardholders (either individually or as part of a class action lawsuit) and federal and state regulators. Any such proceedings could distract our management from running our business and cause us to incur significant unplanned losses and expenses. Consumer perception of our brand could also be negatively affected by these events, which could further adversely affect our results and prospects.


13



We also are required to collect and maintain personal information about our employees, and we collect information about customers as part of some of our marketing programs as well. The collection and use of such information is regulated at the federal and state levels, and the regulatory environment related to information security and privacy is increasingly demanding. At the same time, we are relying increasingly on cloud computing and other technologies that result in third parties holding significant amounts of customer or employee information on our behalf. If the security and information systems of ours or of outsourced third party providers we use to store or process such information are compromised or if we, or such third parties, otherwise fail to comply with these laws and regulations, we could face litigation and the imposition of penalties that could adversely affect our financial performance. Our reputation as a brand or as an employer could also be adversely affected from these types of security breaches or regulatory violations, which could impair our sales or ability to attract and keep qualified employees.
 
Labor shortages or increases in labor costs could adversely affect our business and results of operations and the pace of new restaurant openings.
 
Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including regional managers, restaurant general managers and chefs, in a manner consistent with our standards and expectations. Qualified individuals that we need to fill these positions are in short supply and competition for these employees is intense. If we are unable to recruit and retain sufficient qualified individuals, our operations and reputation could be adversely affected. Additionally, competition for qualified employees could require us to pay higher wages, which could result in higher labor costs. Any increase in labor costs could adversely affect our results of operations.
  
If we are unable to anticipate and react to changes in food, utility and other costs, our results of operations could be materially adversely affected.
 
Many of the food and beverage products we purchase are affected by commodity pricing, and as such, are subject to price volatility caused by production problems, shortages, weather or other factors outside of our control. Our profitability depends, in part, on our successfully anticipating and reacting to changes in the prices of commodities. Therefore, we enter into purchase commitments with suppliers when we believe that it is advantageous for us to do so. If commodity prices were to increase, we may be forced to absorb the additional costs rather than transfer these increases to our customers in the form of menu price increases. Our success also depends, in part, on our ability to absorb increases in utility costs. Our operating results are affected by fluctuations in the price of utilities. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a material adverse effect on our results of operations.
 
Our business is subject to extensive federal, state and local laws and regulations.
 
The restaurant industry is subject to extensive federal, state and local laws and regulations. We are also subject to licensing and regulation by state and local authorities relating to health, healthcare, employee medical plans, sanitation, safety and fire standards, building codes and liquor licenses, federal and state laws governing our relationships with employees (including the Fair Labor Standards Act and applicable minimum wage requirements, overtime, unemployment tax rates, family leave, tip credits, working conditions, safety standards, healthcare and citizenship requirements), federal and state laws which prohibit discrimination, potential healthcare benefits legislative mandates, and other laws regulating the design and operation of facilities, such as the Americans With Disabilities Act of 1990.
  
As a publicly traded corporation, we are subject to various rules and regulations as mandated by the SEC and the NYSE. Failure to timely comply with these rules and regulations could result in penalties and negative publicity.
 
We are subject to federal regulation and certain state laws which govern the offer and sale of franchises. Many state franchise laws contain provisions that supersede the terms of franchise agreements, including provisions concerning the termination or non-renewal of a franchise. Some state franchise laws require that certain materials be registered before franchises can be offered or sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect us and the franchisees.

14



 
Termination of franchise agreements may disrupt restaurant performance.
 
Our franchise agreements are subject to termination by us in the event of default by the franchisee after applicable cure periods. Upon the expiration of the initial term of a franchise agreement, the franchisee generally has an option to renew the franchise agreement for an additional term. There is no assurance that franchisees will meet the criteria for renewal or will desire or be able to renew their franchise agreements. If not renewed, a franchise agreement, and payments required there under, will terminate. We may be unable to find a new franchisee to replace a non-renewing franchisee. Furthermore, while we will be entitled to terminate franchise agreements following a default that is not cured within the applicable grace period, if any, the disruption to the performance of the restaurants could adversely affect our business and revenues.

Franchisees may breach the terms of their franchise agreements in a manner that adversely affects the reputation of our brands.
 
Franchisees are required to conform to specified product quality standards and other requirements pursuant to their franchise agreements in order to protect our brands and to optimize restaurant performance. However, franchisees may receive through the supply chain or produce sub-standard food or beverage products, which may adversely impact the reputation of our brands. Franchisees may also breach the standards set forth in their respective franchise agreements. Any negative actions could have a corresponding material adverse effect on our business and revenues.
 
Our planned CCS expansion may not be successful.
 
Successful expansion of our CCS operations depends on our ability to obtain new clients as well as retain and renew our existing client contracts. Our ability to do so generally depends on a variety of factors, including the quality, price and responsiveness of our services, as well as our ability to market these services effectively and differentiate ourselves from our competitors. We may not be able to renew existing client contracts at the same or higher rates or our current clients may turn to competitors, cease operations, or elect to self-operate or terminate contracts with us. The failure to renew a significant number of our existing contracts could have a material adverse effect on our business and results of operations.
 
Failure to collect account receivables could adversely affect our results of operations.
 
A portion of our accounts receivable is concentrated in our CCS operations among several customers. In addition, our franchises generate significant accounts receivables. Failure to collect from several of these accounts receivable could adversely affect our results of operations.
  
If we lose the services of any of our key management personnel, our business could suffer.
 
The success of our business is highly dependent upon our key management personnel, particularly Christopher J. Pappas, our President and Chief Executive Officer, and Benjamin T. Coutee, our Chief Operating Officer. The loss of the services of any key management personnel could have a material adverse effect upon our business.
 
Our business is subject to seasonal fluctuations, and, as a result, our results of operations for any given quarter may not be indicative of the results that may be achieved for the full fiscal year.
 
Our business is subject to seasonal fluctuations. Historically, our highest earnings have occurred in the third quarter of the fiscal year, as our revenues in most of our restaurants have typically been higher during the third quarter of the fiscal year. Similarly, our results of operations for any single quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year.
 
Economic factors affecting financial institutions could affect our access to capital.
 
We refinanced our 2013 Credit Facility on November 8, 2016 to a new senior secured credit agreement. The 2016 Credit Agreement, as amended, matures May 1, 2019. We may not be able to amend or renew the new facility with terms and conditions favorable to our operating needs.

15



We may not be able to adequately protect our intellectual property, which could harm the value of our brands and adversely affect our business.
 
Our ability to successfully implement our business plan depends in part on our ability to further build brand recognition using our trademarks, service marks, trade dress and other proprietary intellectual property, including our name and logos, and the unique ambience of our restaurants. If our efforts to protect our intellectual property are inadequate, or if any third party misappropriates or infringes on our intellectual property, either in print or on the internet, the value of our brands may be harmed, which could have a material adverse effect on our business and might prevent our brands from achieving or maintaining market acceptance. We may also encounter claims from prior users of similar intellectual property in areas where we operate or intend to conduct operations. This could harm our image, brand or competitive position and cause us to incur significant penalties and costs. 
 
Item 1B. Unresolved Staff Comments
 
None.
 
Item 2. Properties
 
As of November 7, 2018, we operated 142 restaurants at 136 property locations. Six of the operating locations are Combo locations and are considered two restaurants. Luby’s Cafeterias have seating capacity for 250 to 300 customers at each location while Fuddruckers locations generally seat 125 to 200 customers and Cheeseburger in Paradise locations generally seat 180 to 220.
 
We own the underlying land and buildings on which 59 of our Luby’s Cafeteria and 18 of our Fuddruckers restaurants are located. Two of these restaurant properties contain excess building space or an extra building on the property which have 7 tenants unaffiliated with Luby’s, Inc.
 
In addition to the owned locations, 23 Luby’s Cafeteria restaurants, 41 Fuddruckers restaurants, and 1 Cheeseburger in Paradise restaurants are held under 64 leases. One of the 64 leases includes two restaurants at one Combo location: one Luby's Cafeteria and one Fuddruckers restaurant. The majority of the leases are fixed-dollar rentals, which require us to pay additional amounts related to property taxes, hazard insurance, and maintenance of common areas. Of the 64 restaurant leases, the current terms of thirteen expire in less than one year, 35 expire between one and five years, and 16 expire thereafter. Additionally, 47 leases can be extended beyond their current terms at our option.
 
As of November 7, 2018, we had four owned non-operating properties with a carrying value of approximately $3.9 million and 11 operating properties with a carrying value of approximately $15.6 million related to continuing operations recorded in property held for sale. In addition, we had one owned property with a carrying value of approximately $1.8 million included in assets related to discontinued operations.
 
We currently have one owned other-use property which is used as a central bakery supporting our operating restaurants.
 
We also have four leased locations that have three third party tenants and three Fuddruckers franchisees.
 
Our corporate office lease of approximately 26,000 square feet of office space runs through December 2021.
 
We also lease approximately 60,000 square feet of warehouse space for in-house repair, fabrication and storage in Houston, Texas. In addition, we lease approximately 630 square feet of office space in Farmers Branch, Texas and an executive suite in North Andover, MA where we have additional legal personnel.
 
We maintain general liability insurance and property damage insurance on all properties in amounts which management believes provide adequate coverage.


16



Item 3. Legal Proceedings
 
From time to time, we are subject to various private lawsuits, administrative proceedings and claims that arise in the ordinary course of our 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. We currently believe that the final disposition of these types of lawsuits, proceedings, and claims will not have a material adverse effect on our financial position, results of operations, or liquidity. It is possible, however, that our 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.
 
Item 4. Mine Safety Disclosures
 
Not applicable.



17



PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Stock Prices
 
Our common stock is traded on the NYSE under the symbol “LUB.” The following table sets forth, for the last two fiscal years, the high and low sales prices on the NYSE as reported in the consolidated transaction reporting system.
 
Fiscal Quarter Ended
 
High
 
Low
December 21, 2016
 
4.50

 
4.03

March 15, 2017
 
4.33

 
3.30

June 7, 2017
 
3.41

 
2.46

August 30, 2017
 
3.12

 
2.63

December 20, 2017
 
2.87

 
2.36

March 14, 2018
 
3.20

 
2.60

June 6, 2018
 
3.06

 
2.35

August 29, 2018
 
2.89

 
2.00

 
As of November 7, 2018, there were 1,975 holders of record of our common stock. On November 7, 2018, the closing price of our common stock on the NYSE was $1.41.
 

18




Equity Compensation Plans
 
Securities authorized under our equity compensation plans as of August 29, 2018, were as follows:
 
 
 
(a)
 
(b)
 
(c)
Plan Category
 
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
 
Weighted-
Average
Exercise Price of
Outstanding
Options,
Warrants and
Rights
 
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans Excluding
Securities
Reflected in
Column (a)
Equity compensation plans previously approved by security holders
 
1,066,103

 
$
4.53

 
1,612,652

Equity compensation plans not previously approved by security holders (1)
 
17,801

 
0

 
0

Total
 
1,083,904

 
$
4.47

 
1,612,652

(1)  Represents the Luby’s, Inc. Nonemployee Director Phantom Stock Plan.
 
See Note 16, “Share-Based Compensation,” to our Consolidated Financial Statements included in Item 8 of Part II of this report.
 
The following graph compares the cumulative total stockholder return on our common stock for the five fiscal years ended August 29, 2018, with the cumulative total return on the S&P SmallCap 600 Index and an industry peer group index. The peer group index consists of Bob Evans Farms, Inc., CBRL Group, Inc., Darden Restaurants, Inc., Denny’s Corporation, Diversified Restaurant Holdings, Inc., and Red Robin Gourmet Burgers. These companies are multi-unit family and casual dining restaurant operators in the mid-price range.

The cumulative total shareholder return computations set forth in the performance graph assume an investment of $100 on August 29, 2013, and the reinvestment of all dividends. The returns of each company in the peer group index have been weighed according to that company’s stock market capitalization.

19



chart-f17e7d5cdc8e5abf837a15.jpg

 
 
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
Luby’s, Inc.
 
100.00

 
74.76

 
64.28

 
62.07

 
36.41

 
28.14

S&P 500 Index—Total Return
 
100.00

 
124.89

 
123.66

 
141.50

 
163.53

 
197.61

S&P 500 Restaurant Index
 
100.00

 
109.12

 
127.67

 
141.05

 
169.16

 
181.31

Peer Group Index Only
 
100.00

 
102.87

 
148.01

 
149.08

 
192.47

 
245.57

Peer Group Index + Luby’s, Inc.
 
100.00

 
102.39

 
146.51

 
147.52

 
189.49

 
241.33



20



Item  6. Selected Financial Data
 
FIVE-YEAR SUMMARY OF OPERATIONS
 
 
 
Fiscal Year Ended
 
 
August 29, 2018
 
August 30, 2017
 
August 31, 2016
 
August 26, 2015
 
August 27, 2014
 
 
(364 days)
 
(364 days)
 
(371 days)
 
(364 days)
 
(364 days)
 
 
(In thousands, except per share data)
Sales
 
 
 
 
 
 
 
 
 
 
Restaurant sales
 
$
332,518

 
$
350,818

 
$
378,111

 
$
370,192

 
$
369,808

Culinary contract services
 
25,782

 
17,943

 
16,695

 
16,401

 
18,555

Franchise revenue
 
6,365

 
6,723

 
7,250

 
6,961

 
7,027

Vending revenue
 
531

 
547

 
583

 
531

 
532

Total sales
 
365,196

 
376,031

 
402,639

 
394,085

 
395,922

Provision for asset impairments and restaurant closings
 
8,917

 
10,567

 
1,442

 
636

 
2,717

Loss from continuing operations
 
(32,954
)
 
(22,796
)
 
(10,256
)
 
(1,616
)
 
(2,011
)
Loss from discontinued operations
 
(614
)
 
(466
)
 
(90
)
 
(458
)
 
(1,436
)
Net Loss
 
$
(33,568
)
 
$
(23,262
)
 
$
(10,346
)
 
$
(2,074
)
 
$
(3,447
)
Loss per share from continuing operations:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(1.10
)
 
$
(0.77
)
 
$
(0.35
)
 
$
(0.05
)
 
$
(0.06
)
Assuming dilution
 
$
(1.10
)
 
$
(0.77
)
 
$
(0.35
)
 
$
(0.05
)
 
$
(0.06
)
Loss per share from discontinued operation:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.02
)
 
$
(0.02
)
 
$
(0.00
)
 
$
(0.02
)
 
$
(0.06
)
Assuming dilution
 
$
(0.02
)
 
$
(0.02
)
 
$
(0.00
)
 
$
(0.02
)
 
$
(0.06
)
Loss per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(1.12
)
 
$
(0.79
)
 
$
(0.35
)
 
$
(0.07
)
 
$
(0.12
)
Assuming dilution
 
$
(1.12
)
 
$
(0.79
)
 
$
(0.35
)
 
$
(0.07
)
 
$
(0.12
)
Weighted-average shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
29,901

 
29,476

 
29,226

 
28,974

 
28,812

Assuming dilution
 
29,901

 
29,476

 
29,226

 
28,974

 
28,812

Total assets
 
$
199,989

 
$
226,457

 
$
252,225

 
$
264,258

 
$
275,435

Total debt
 
$
39,506

 
$
30,985

 
$
37,000

 
$
37,500

 
$
42,000

Number of restaurants at fiscal year end
 
146

 
167

 
175

 
177

 
174

Number of franchised restaurants at fiscal year end
 
105

 
113

 
113

 
106

 
110

Number of Culinary Contract Services contracts at fiscal year end
 
28

 
25

 
24

 
23

 
25

Costs and Expenses
 
 
 
 
 
 
 
 
 
 
(As a percentage of restaurant sales)
 
 
 
 
 
 
 
 
 
 
Cost of food
 
28.3
%
 
28.1
%
 
28.3
%
 
28.9
%
 
28.9
%
Payroll and related costs
 
37.4
%
 
35.9
%
 
35.2
%
 
34.5
%
 
34.3
%
Other operating expenses
 
18.7
%
 
17.7
%
 
16.1
%
 
17.1
%
 
16.8
%
Occupancy costs
 
6.1
%
 
6.2
%
 
5.9
%
 
5.7
%
 
6.0
%


21



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Management’s discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and footnotes for the fiscal years ended August 29, 2018 (“fiscal 2018”), August 30, 2017, (“fiscal 2017”), and August 31, 2016 (“fiscal 2016”) included in Part II, Item 8 of this Form 10-K.

The table on the following page 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 Operations. Percentages may not add due to rounding.
 

22



 
 
Fiscal Year Ended
 
 
August 29,
2018
 
August 30,
2017
 
August 31,
2016
 
 
(52 weeks)
 
(52 weeks)
 
(53 weeks)
Restaurant sales
 
91.1
 %
 
93.3
 %
 
93.9
 %
Culinary contract services
 
7.1
 %
 
4.8
 %
 
4.1
 %
Franchise revenue
 
1.7
 %
 
1.8
 %
 
1.8
 %
Vending revenue
 
0.1
 %
 
0.1
 %
 
0.1
 %
TOTAL SALES
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
 
 
 
 
 
 
STORE COSTS AND EXPENSES:
 
 
 
 
 
 
(As a percentage of restaurant sales)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of food
 
28.3
 %
 
28.1
 %
 
28.3
 %
Payroll and related costs
 
37.4
 %
 
35.9
 %
 
35.2
 %
Other operating expenses
 
18.7
 %
 
17.7
 %
 
16.1
 %
Occupancy costs
 
6.1
 %
 
6.2
 %
 
5.9
 %
Vending revenue
 
(0.2
)%
 
(0.2
)%
 
(0.2
)%
Store level profit
 
9.5
 %
 
12.2
 %
 
14.7
 %
 
 
 
 
 
 
 
COMPANY COSTS AND EXPENSES (as a percentage of total sales)
 
 
 
 
 
 
 
 
 
 
 
 
 
Opening costs
 
0.2
 %
 
0.1
 %
 
0.2
 %
Depreciation and amortization
 
4.8
 %
 
5.4
 %
 
5.4
 %
Selling, general and administrative expenses
 
10.6
 %
 
10.1
 %
 
10.5
 %
Provision for asset impairments and restaurant closings
 
2.7
 %
 
3.0
 %
 
0.4
 %
Net Gain on disposition of property and equipment
 
(1.6
)%
 
(0.5
)%
 
(0.2
)%
 
 
 
 
 
 
 
Culinary Contract Services Costs (as a percentage of Culinary contract services sales)
 
 
 
 
 
 
 
 
 
 
 
Cost of culinary contract services
 
93.7
 %
 
87.9
 %
 
89.6
 %
Culinary income
 
6.3
 %
 
12.1
 %
 
10.4
 %
 
 
 
 
 
 
 
Franchise Operations Costs (as a percentage of Franchise revenue)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of franchise operations
 
24.0
 %
 
25.8
 %
 
25.9
 %
Franchise income
 
76.0
 %
 
74.2
 %
 
74.1
 %
 
 
 
 
 
 
 
(As a percentage of total sales)
 
 
 
 
 
 
LOSS FROM OPERATIONS
 
(6.1
)%
 
(4.6
)%
 
(0.8
)%
Interest income
 
0.0
 %
 
0.0
 %
 
0.0
 %
Interest expense
 
(0.9
)%
 
(0.6
)%
 
(0.6
)%
Other income (expense), net
 
0.1
 %
 
(0.1
)%
 
0.0
 %
Loss before income taxes and discontinued operations
 
(6.9
)%
 
(5.3
)%
 
(1.4
)%
Provision for income taxes
 
2.1
 %
 
0.6
 %
 
1.2
 %
Loss from continuing operations
 
(9.0
)%
 
(5.9
)%
 
(2.6
)%
Loss from discontinued operations, net of income taxes
 
(0.2
)%
 
(0.1
)%
 
0.0
 %
NET LOSS
 
(9.2
)%
 
(6.0
)%
 
(2.6
)%


23



Although store level profit, defined as restaurant sales plus vending revenue 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:
 
 
 
Fiscal Year Ended
 
 
August 29, 2018
 
August 30, 2017
 
August 31, 2016
 
 
(52 weeks)
 
(52 weeks)
 
(53 weeks)
 
 
(In thousands)
Store level profit
 
$
31,648

 
$
42,943

 
$
55,419

 
 
 
 
 
 
 
Plus:
 
 
 
 
 
 
Sales from culinary contract services
 
25,782

 
17,943

 
16,695

Sales from franchise operations
 
6,365

 
6,723

 
7,250

 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
Opening costs
 
554

 
492

 
787

Cost of culinary contract services
 
24,161

 
15,774

 
14,955

Cost of franchise operations
 
1,528

 
1,733

 
1,877

Depreciation and amortization
 
17,453

 
20,438

 
21,889

Selling, general and administrative expenses(1)
 
38,725

 
37,878

 
42,422

Provision for asset impairments and restaurant closings
 
8,917

 
10,567

 
1,442

Net Gain on disposition of property and equipment
 
(5,357
)
 
(1,804
)
 
(684
)
Interest income
 
(12
)
 
(8
)
 
(4
)
Interest expense
 
3,348

 
2,443

 
2,247

Other income (expense), net
 
(298
)
 
454

 
(186
)
Provision for income taxes
 
7,730

 
2,438

 
4,875

Loss from continuing operations
 
$
(32,954
)
 
$
(22,796
)
 
$
(10,256
)
(1) Marketing and advertising expense included in Selling, general and administrative expenses was $3.5 million$5.1 million, and $5.6 million in fiscal 2018, 2017, and 2016, respectively
 
The following table shows our restaurant unit count as of August 29, 2018 and August 30, 2017.
 
Restaurant Counts: 
 
 
Fiscal 2018 Year Begin
 
Fiscal 2018 Openings
 
Fiscal 2018 Closings
 
Fiscal 2018 Year End
Luby’s Cafeterias(1)
 
88

 

 
(4
)
 
84

Fuddruckers Restaurants(1)
 
71

 

 
(11
)
 
60

Cheeseburger in Paradise
 
8

 

 
(6
)
 
2

Total
 
167

 

 
(21
)
 
146

  
 (1) Includes 6 restaurants that are part of Combo locations



24



Overview
 
Description of the business
 
We generate revenues primarily by providing quality food to customers at our 84 Luby’s branded restaurants located mostly in Texas, 60 Fuddruckers restaurants located throughout the United States, 2 Cheeseburger in Paradise restaurants located in New Jersey and Nebraska, and 105 Fuddruckers franchises located primarily in the United States. In addition to our restaurant business model, we also provide culinary contract services for organizations that offer on-site food service, such as healthcare facilities, colleges and universities, sports stadiums, businesses and institutions, as well as sales through retail grocery outlets.
 
Business Strategy
 
In fiscal 2018, we continued our focus on enhancing the guest experience at each of our restaurant brands, executing our growth plan for our Culinary Contract Services segment, and supporting our Fuddruckers franchise network for future growth. In the latter part of the fiscal year, in light of continued sales weakness at our Fuddruckers brand and further profitability declines at each restaurant brand, it became necessary to address short-term liquidity. Management's short-term action plan included accelerating the closure of underperforming restaurant locations, selling owned property at certain locations, and taking other steps in order to re-finance our debt load and provide financial liquidity. All steps taken in accordance with the short-term action plan are with the aim of re-establishing a solid foundation with a portfolio of restaurants and business segments that can successfully restore future profitability.

At our Company-owned restaurants, we focused on menu innovation and variety across the weeks and the seasons. We furthered our efforts in attracting and retaining the most talented individuals to serve and engage with our guests in both restaurant management roles and front-line hourly restaurant team member roles. We have an experienced culinary team that vigorously pursues culinary innovation enhancements. Our marketing initiatives centered around developing a more personal and direct connection with our guests, deploying technology where it makes most sense. Over the last year, we have transitioned much of our advertising and messaging away from traditional medium such as television advertising toward digital media as we transition to the next phase of our loyalty and recognition programs. We continue to make these investments as part of our long-term strategy to increase our brand awareness and motivate new and more frequent guest visits. As we continued to evaluate our portfolio of restaurant locations, we closed 21 restaurants so that resources could be focused on the locations that exhibit the most promise for enhanced profitability. Over the long term, our strategy is to continue to refine our restaurant protoype design and build new restaurants in markets where we believe we can achieve superior restaurant cash flows.

In fiscal 2018, our Fuddruckers franchise business segment continued supporting our loyal franchisees and we continued to pursue opportunities to re-franchise company-owned Fuddruckers locations as part of our strategy to grow franchise revenues. Our Culinary Contract Services segment continues its focus on expanding the number of locations that we serve and developing business partnerships for the long-term, while servicing our existing agreements with our customized and high-level of client service. We are working to ensure that we have the right corporate headcount and overhead to support each of our business segments while balancing our corporate overhead costs: on this front, we made significant strides in reducing overhead costs, including reduced headcount, corporate travel expense, and associated other overhead costs.


25



Financial and Operation Highlights for Fiscal 2018
 
Financial Performance

Total company sales decreased approximately $10.8 million, or 2.9%, in fiscal 2018 compared to fiscal 2017, consisting primarily of an approximate $18.3 million decrease in restaurant sales, an approximate $7.8 million increase in Culinary contract services sales, an approximate $0.4 million decrease in franchise revenue, and a less than $0.1 million decrease in vending revenue. The decrease in restaurant sales included an approximate $4.0 million decrease in sales at stand-alone Luby's Cafeterias, an approximate $10.5 million decrease in sales at stand-alone Fuddruckers restaurants, an approximate $0.4 million decrease at sales from our Combo locations, and an approximate $3.4 million decrease in sales from Cheeseburger in Paradise restaurants.

Total segment profit decreased approximately $12.0 million to approximately $38.1 million in fiscal 2018 compared to approximately $50.1 million in fiscal 2017. The approximate $12.0 million decrease in total segment profit resulted from a decrease of approximately $11.3 million in Company-owned restaurant segment profit, an approximate $0.2 million decrease in franchise segment profit and an approximate $0.5 million decrease in Culinary contract services segment profit. The approximate $11.3 million decrease in Company-owned restaurant segment profit resulted from restaurant sales and vending income decreasing approximately $18.3 million with the cost of food, payroll and related costs, other operating expenses, and occupancy costs decreasing approximately $7.0 million.

Loss before income taxes and discontinued operations included non-cash charges for asset impairments and restaurant closings of approximately $8.9 million and approximately $10.6 million in fiscal 2018 and fiscal 2017, respectively. Net loss included non-tax charges for deferred tax asset valuation allowance increases of approximately $8.4 million and $9.5 million in fiscal 2018 and fiscal 2017, respectively.

The loss from continuing operations was approximately $33.0 million in fiscal 2018 compared to a loss of approximately $22.8 million in fiscal 2017.

 
 Operational Endeavors and Milestones

Core restaurant brands. In fiscal 2018, we continued to promote our "made–from–scratch" cooking with many locally-sourced “from the farm” ingredients at our Luby’s Cafeterias with our “The Luby’s Way” slogan. “The Luby’s Way” signifies that we are dedicated to serving our guests only the best hand-crafted recipes, prepared fresh each day in our kitchens. We support local farmers and use only the freshest produce and highest quality ingredients. We have introduced new seasonal menu offerings throughout the year that showcase our 70-year history of "made-from-scratch" cooking expertise. Our guests were presented with new offerings at each section of the cafeteria line: fresh colorful vegetable presentations, expanded and refreshed cold sides, and new recipes and presentations for carved turkey, roast beef, salmon, and chicken. We introduce and rotate new menu offerings throughout the year to remain relevant to both our existing customer base and attract new customers. From a marketing and promotion standpoint, we initiated steps to gain an even better understanding of our guests and laid the groundwork for leveraging technology to improve and personalize the guest experience. We will be using these insights to refine our brand positioning strategies going forward. Our decline in Company-owned restaurant segment profitability primarily occurred during the second and third quarters, due to changes in product offerings and discounts, increased investment in our labor, and operating expenses. We moved away from certain discounting and promotional offers we had been using in the past. While transitioning to this approach of less discounting, it had the intended effect of increasing our average spend per guest. The offsetting decreases in guest traffic resulted in a net decrease in same-store sales.

At Fuddruckers, we continue to evolve the World’s Greatest Hamburgers®, with new specialty burger combinations and toppings. In fiscal 2018, we continued to focus on speed of service and the ordering experience. We also began testing a simplified menu at Company–owned locations designed to enhance quality and execution for our guests. We furthered our use of technology to reach our guests utilizing new digital media campaigns and targeted advertising to guests' mobile devices. We continued to measure guest satisfaction through surveys and other guest interactions that helped us identify areas of excellence and areas for improvement. We are confident the focus on great food and enhanced service will in the long run lead to increased guest frequency and loyalty.


26



Franchise Network. As of August 29, 2018, we supported a franchise network of 105 Fuddruckers franchise locations with an additional 44 locations under development agreements. For fiscal 2018, our franchisees opened four new Fuddruckers restaurants. Three of the opened locations were in the United States (Florida and Pennsylvania) and one in Mexico. For fiscal 2018, there were 12 Fuddruckers franchise locations that closed as franchise-operated restaurants. Our franchise network generated approximately $6.4 million in revenue in fiscal 2018.

Culinary Contract Services. Our Culinary Contract Services segment generated approximately $25.8 million in revenue during fiscal 2018 compared to approximately $17.9 million in revenue during fiscal 2017. The approximate $7.8 million increase in revenue was primarily due to a net increase in the number of locations in operation and higher sales volume locations replacing lower sales volume locations. We view this area as a long-term growth business that generally requires less capital investment and produces favorable percentage returns on invested capital.

Cheeseburger in Paradise. Despite previous efforts to revitalize the Cheeseburger in Paradise brand and improve financial results, we determined that the best course of action was to cease operations at most of our Cheeseburger in Paradise restaurants. As part of our all overall plan to close under-performing restaurants that do not meet our profitability targets on a sustained basis, we elected to reduce Cheeseburger in Paradise to two locations at our fiscal year-end 2018. Subsequent to the end of fiscal year 2018, we elected to close one of those Cheeseburger in Paradise locations. As of November 7, 2018, we operate one Cheeseburger in Paradise location.

Capital Spending. Purchases of property and equipment were approximately $13.2 million in fiscal 2018, up from approximately $12.5 million in fiscal 2017. These capital investments were funded through a combination of cash from operations, sale of property, and utilization of our revolving credit facility. Capital investments in fiscal 2018 included (1) approximately $1.1 million on information technology infrastructure maintenance and upgrade projects; (2) approximately $2.1 million on the rebuilding and refurbishing and updating of restaurants, mostly related to restorations after hurricane and flood damage incurred in August 2017; and (3) approximately $10.0 million for recurring capital expenditures. Our debt balance at the end of fiscal 2018 was approximately $39.5 million. We remain committed to maintaining the attractiveness of all of our restaurant locations where we anticipate operating over the long term. In fiscal 2019, we anticipate making capital investments of up to $8.0 million for recurring maintenance of all of our restaurant properties and for point of sale hardware associated with our technology infrastructure.

Our long-term plan continues to focus on expanding each of our core brands, including the Fuddruckers franchise network, as well as growing our culinary contract service business. We are also committed to reducing our debt balances and making capital investments with suitable return characteristics. We plan to use cash generated from operations, combined with our borrowing capacity, when necessary, in order to seize these capital investment opportunities. As we improve and elevate our operating standards, we believe that we are well-positioned to enhance shareholder value over the long term.
 
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. 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 is such a year that contained 53 weeks, accounting for 371 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 2016, the first quarter consisted of four four-week periods, while the last three quarters normally consist of three four-week periods. However, fiscal 2016 is a fiscal year consisting of 53 weeks, accounting for 371 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 store is included in this group of restaurants after it has been open for six complete consecutive quarters. Stores that close on a permanent basis (or on a temporary basis for remodeling) are removed from the group in the fiscal quarter when operations cease at the restaurant, but remain in the same-store group for previously reported fiscal 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. Same-store sales at our restaurant units decreased 0.5% for fiscal 2018, decreased 3.4% for fiscal 2017, and increased 0.7% for fiscal 2016.

27



 
The following table shows the same-store sales change for comparative historical quarters:
 
 
 
Fiscal 2018
 
Fiscal 2017
 
Fiscal 2016
Increase (Decrease)
 
Q4

 
Q3

 
Q2

 
Q1

 
Q4

 
Q3

 
Q2

 
Q1

 
Q4

 
Q3

 
Q2

 
Q1

Same-store sales
 
1.2
%
 
(0.9
)%
 
(3.7
)%
 
0.8
%
 
(5.2
)%
 
(2.7
)%
 
(3.8
)%
 
(2.3
)%
 
(0.5
)%
 
(0.6
)%
 
2.2
%
 
1.4
%

RESULTS OF OPERATIONS 
 
Fiscal 2018 (52 weeks) compared to Fiscal 2017 (52 weeks) and Fiscal 2016 (53 weeks)
 
Sales 
 
Fiscal Year 2018 Ended
 
Fiscal Year 2017 Ended
 
Fiscal 2018 vs Fiscal 2017
 
Fiscal Year 2016 Ended
 
Fiscal 2017 vs Fiscal 2016
($000s)
August 29, 2018
 
August 30, 2017
 
Higher/(Lower)
 
August 31, 2016
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
 
(53 weeks)
 
(52 vs 53 weeks)
Restaurant sales
$
332,518

 
$
350,818

 
(5.2
)%
 
$
378,111

 
(7.2
)%
Culinary contract services
25,782

 
17,943

 
43.7
 %
 
16,695

 
7.5
 %
Franchise revenue
6,365

 
6,723

 
(5.3
)%
 
7,250

 
(7.3
)%
Vending revenue
531

 
547

 
(2.9
)%
 
583

 
(6.2
)%
TOTAL SALES
$
365,196

 
$
376,031

 
(2.9
)%
 
$
402,639

 
(6.6
)%
 
Total company sales decreased approximately $10.8 million, or 2.9%, in fiscal 2018 compared to fiscal 2017, consisting primarily of an approximate $18.3 million decrease in restaurant sales, an approximate $7.8 million increase in Culinary contract services sales, an approximate $0.4 million decrease in franchise revenue, and less than a $0.1 million decrease in vending revenue.

Total company sales decreased approximately $26.6 million, or 6.6%, in fiscal 2017 compared to fiscal 2016, consisting primarily of an approximate $27.3 million decrease in restaurant sales, an approximate $0.5 million decrease in franchise revenue, an approximate $1.2 million increase in Culinary contract service sales, and a less than $0.1 million decrease in vending revenue. Fiscal 2016 contained one additional week of operations during which approximately $6.7 million in restaurant sales were generated and approximately $7.1 million in total sales were generated.
 
The Company operates with three reportable operating segments: Company-owned Restaurants, Franchise Operations, and Culinary Contract Services.
 
Company-Owned Restaurants
 
Restaurant Sales 
Restaurant Brand
Fiscal Year 2018 Ended
 
Fiscal Year 2017 Ended
 
Fiscal 2018 vs Fiscal 2017
 
Fiscal Year 2016 Ended
 
Fiscal 2017 vs Fiscal 2016
 
August 29, 2018
 
August 30, 2017
 
Higher/(Lower)
 
August 31, 2016
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
 
(53 weeks)
 
(52 vs 53 weeks)
Luby’s Cafeterias
$
210,972

 
$
214,976

 
(1.9
)%
 
$
229,880

 
(6.5
)%
Fuddruckers Restaurants
87,618

 
98,115

 
(10.7
)%
 
106,456

 
(7.8
)%
Combo locations
20,886

 
21,304

 
(2.0
)%
 
23,107

 
(7.8
)%
Cheeseburger in Paradise
13,042

 
16,423

 
(20.6
)%
 
18,668

 
(12.0
)%
Restaurant Sales
$
332,518

 
$
350,818

 
(5.2
)%
 
$
378,111

 
(7.2
)%
 

28



Total restaurant sales decreased approximately $18.3 million in fiscal 2018 compared to fiscal 2017. The decrease in restaurant sales included an approximate $4.0 million decrease in sales at stand-alone Luby’s Cafeterias, an approximate $10.5 million decrease in sales at stand-alone Fuddruckers restaurants, an approximate $0.4 million decrease in sales from Combo locations, and an approximate $3.4 million decrease at sales from our Cheeseburger in Paradise restaurants.

The approximate $4.0 million decrease in sales at stand-alone Luby’s reflects the reduction of eight operating restaurants, partially offset by a 1.5% increase in same-store stand-alone Luby's Cafeteria sales. The 1.5% increase in same-store sales includes a 7.8% increase in average spend per guest partially offset by a 5.8% decrease in guest traffic.

The approximate $10.5 million decrease in sales at stand-alone Fuddruckers restaurants reflects a net reduction of 15 operating restaurants and a 3.6% decrease in same-store stand-alone Fuddruckers sales. The 3.6% decrease in same-store sales includes a 8.2% decrease in guest traffic partially offset by a 5.0% increase in average spend per guest.

The approximate $0.4 million decrease in sales from Combo locations reflects a 2.0% decrease in sales at the six locations in operation throughout fiscal 2018 and fiscal 2017.

The approximate $3.4 million decrease in sales from our Cheeseburger in Paradise reflects a 11.0% decrease in same-store sales (seven locations in the first three fiscal quarters of fiscal 2018 and two stores in the fourth quarter of fiscal 2018). The closure of six stores reduced sales by approximately $2.1 million whereby five of the six closures took place near the end of fiscal 2018.

Total restaurant sales decreased approximately $27.3 million in fiscal 2017 compared to fiscal 2016. The decrease in restaurant sales included an approximate $14.9 million decrease in sales at stand-alone Luby’s Cafeterias, an approximate $8.4 million decrease in sales at stand-alone Fuddruckers restaurants, an approximate $1.8 million decrease in sales from Combo locations, and an approximate $2.2 million decrease at sales from our Cheeseburger in Paradise restaurants. The approximate $27.3 million decrease in total restaurant sales reflects comparison to fiscal 2016 which included one additional week of operations. Fiscal 2017 was comprised of a typical 52 weeks compared to fiscal 2016 which was comprised of 53 weeks. The additional week of operations in fiscal 2016 generated approximately $6.7 million in restaurant sales.

The approximate $14.9 million decrease in sales at stand-alone Luby’s Cafeterias reflects that fiscal 2016 included one additional week of operations which generated approximately $4.1 million in sales in fiscal 2016, a 3.3% decrease in same-store stand-alone Luby's Cafeteria sales, and a reduction of six operating restaurants. The 3.3% decrease in same-store sales includes a 5.6% decrease in guest traffic partially offset by a 2.3% increase in average spend per guest.

The approximate $8.4 million decrease in sales at stand-alone Fuddruckers restaurants includes approximately $1.9 million in sales generated in the additional week in fiscal 2016, a 1.8% decrease in same-store stand-alone Fuddruckers sales, and a net reduction of six operating restaurants. The 1.8% decrease in same-store sales includes a 4.6% decrease in guest traffic partially offset by a 2.8% increase in average spend per guest.

The approximate $1.8 million decrease in sales from Combo locations includes approximately $0.4 million in sales generated in the additional week in fiscal 2016 and a 5.3% decrease in sales at the six locations in operation throughout fiscal 2016 and fiscal 2017.

The approximate $2.2 million decrease in sales from our Cheeseburger in Paradise restaurants includes approximately $0.3 million in sales generated in the additional week in fiscal 2016 and a 10.5% decrease in sales at the eight locations in operation throughout fiscal 2016 and fiscal 2017.


29



Cost of Food 
 
Fiscal Year 2018 Ended
 
Fiscal Year 2017 Ended
 
Fiscal 2018 vs Fiscal 2017
 
Fiscal Year 2016 Ended
 
Fiscal 2017 vs Fiscal 2016
($000s)
August 29, 2018
 
August 30, 2017
 
Higher/(Lower)
 
August 31, 2016
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
 
(53 weeks)
 
(52 vs 53 weeks)
Cost of food
$
94,238

 
$
98,714

 
(4.5
)%
 
$
106,980

 
(7.7
)%
As a percentage of restaurant sales
28.3
%
 
28.1
%
 
0.2
 %
 
28.3
%
 
(0.2
)%
 
Cost of food, which is comprised of the cost associated with the sale of food and beverage products that are consumed while dining in our restaurants, as take-out, and as catering. Cost of food decreased approximately $4.5 million, or 4.5%, in fiscal 2018 compared to fiscal 2017. Cost of food is variable and generally fluctuates with sales volume. As a percentage of restaurant sales, food costs increased 0.2% to 28.3% in fiscal 2018 compared to 28.1% in fiscal 2017. The Cost of food as percentage of sales was impacted by several offsetting factors: (1) higher food commodity costs driven in large part by higher freight charges and (2) changes in product offerings (for a portion of the fiscal year) with generally higher food ingredient costs, partially offset by (3) higher menu pricing.
 
Cost of food decreased approximately $8.3 million, or 7.7%, in fiscal 2017 compared to fiscal 2016. Cost of food is variable and generally fluctuates with sales volume. As a percentage of restaurant sales, food costs decreased 0.2%% to 28.1%% in fiscal 2017 compared to 28.3% in fiscal 2016. The Cost of food as percentage of sales decreased with lower average food commodity costs, higher realized average menu prices, and continued careful food cost controls. At our Luby’s Cafeterias we experienced an approximate 1% decrease in the cost of our basket of food commodity purchases, occurring as a result of decreases in the cost in our primary commodities of beef and poultry as well as in our other commodities of eggs and oils and shortenings partially offset by increases in the cost of seafood, dairy and butter, and fresh produce. At our Fuddruckers, the cost of our basket of food commodity purchases was stable, with modest increases in the cost of beef, cheese and dairy, and produce offset by decreases in the cost of poultry, pork, and dough used in the production of buns.


 
Payroll and Related Costs 
 
Fiscal Year 2018 Ended
 
Fiscal Year 2017 Ended
 
Fiscal 2018 vs Fiscal 2017
 
Fiscal Year 2016 Ended
 
Fiscal 2017 vs Fiscal 2016
($000s)
August 29, 2018
 
August 30, 2017
 
Higher/(Lower)
 
August 31, 2016
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
 
(53 weeks)
 
(52 vs 53 weeks)
Payroll and related costs
$
124,478

 
$
125,997

 
(1.2
)%
 
$
132,960

 
(5.2
)%
As a percentage of restaurant sales
37.4
%
 
35.9
%
 
1.5
 %
 
35.2
%
 
0.7
 %
 
Payroll and related costs includes restaurant-level hourly wages, including overtime pay, and pay while training, as well as management salaries and incentive payments. Payroll and related costs also include the payroll taxes, workers’ compensation expense, group health insurance costs, and 401(k) matching expense for all restaurant-level hourly and management employees. Payroll and related costs decreased approximately $1.5 million, or 1.2%, in fiscal 2018 compared to fiscal 2017 due in part to (1) operating 29 fewer restaurants (net reduction of eight restaurants in fiscal 2017 and reduction of 21 restaurants in fiscal 2018); partially offset by (2) an approximate $1.0 million increase in workers' compensation expense; and (3) higher average wage rates reflective of market pressures. Payroll and related costs as a percentage of restaurant sales increased 1.5% due to (1) the fixed cost component of labor costs with lower same-store sales levels; (2) higher average hourly wage rates reflective of market pressures; and (3) an approximate $1.0 million increase in workers' compensation expense.
 

30



Payroll and related costs decreased approximately $7.0 million, or 5.2%, in fiscal 2017 compared to fiscal 2016 due in part to (1) operating ten fewer restaurants; (2) an additional week of operations in fiscal 2016; (3) an approximate $0.7 million decrease in workers' compensation expense; partially offset by (4) higher average wage rates. Payroll and related costs as a percentage of restaurant sales increased 0.7% due to (1) the fixed cost component of labor costs (mainly management labor) with lower same-store sales levels; (2) higher average hourly wage rates reflective of market pressures; (3) higher average restaurant management compensation; partially offset by (4) lower workers' compensation insurance expense.

 
Other Operating Expenses 
 
Fiscal Year 2018 Ended
 
Fiscal Year 2017 Ended
 
Fiscal 2018 vs Fiscal 2017
 
Fiscal Year 2016 Ended
 
Fiscal 2017 vs Fiscal 2016
($000s)
August 29, 2018
 
August 30, 2017
 
Higher/(Lower)
 
August 31, 2016
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
 
(53 weeks)
 
(52 vs 53 weeks)
Other operating expenses
$
62,286

 
$
61,924

 
0.6
%
 
$
60,961

 
1.6
%
As a percentage of restaurant sales
18.7
%
 
17.7
%
 
1.0
%
 
16.1
%
 
1.6
%
 
Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, and services. Other operating expenses increased approximately $0.4 million, or 0.6%, in fiscal 2018 compared to fiscal 2017. As a percentage of restaurant sales, Other operating expenses increased 1.0% to 18.7% in fiscal 2018 compared to 17.7% in fiscal 2017. The 1.0% increase in Other operating expenses as a percentage of restaurant sales was due to (1) a 0.5% increase in restaurant supplies related to efforts within fiscal 2018 to refresh, restock, and upgrade kitchen and dining room supplies in order to enhance the guest experience as well as increased food-to-go packaging costs with the growth in food-to-go sales through third party delivery services; (2) a 0.3% increase in repairs and maintenance expense; (3) a 0.2% increase in utilities expense on higher electricity utility rates; and (4) 0.2% increase in other expenses primarily related to post-hurricane Harvey related costs as well as increased reserves for doubtful accounts.

Other operating expenses increased approximately $1.0 million, or 1.6%, in fiscal 2017 compared to fiscal 2016. As a percentage of restaurant sales, Other operating expenses increased 1.6% to 17.7% in fiscal 2017 compared to 16.1% in fiscal 2016. The 1.6% increase in Other operating expenses as a percentage of restaurant sales was due to (1) a 0.6% increase in restaurant services including higher computer network connectivity, point of sale software, food-to-go delivery charges to third parties, increased store security costs, and higher fees associated with armored car services; (2) a 0.6% increase in repairs and maintenance costs; (3) a 0.3% increase in utilities costs due to higher average utility rates; and (4) a 0.1% increase in restaurant supplies expense with typical inflationary cost increases on lower same-store sales volumes.


Occupancy Costs
 
 
Fiscal Year 2018 Ended
 
Fiscal Year 2017 Ended
 
Fiscal 2018 vs Fiscal 2017
 
Fiscal Year 2016 Ended
 
Fiscal 2017 vs Fiscal 2016
($000s)
August 29, 2018
 
August 30, 2017
 
Higher/(Lower)
 
August 31, 2016
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
 
(53 weeks)
 
(52 vs 53 weeks)
Occupancy costs
$
20,399

 
$
21,787

 
(6.4
)%
 
$
22,374

 
(2.6
)%
As a percentage of restaurant sales
6.1
%
 
6.2
%
 
(0.1
)%
 
5.9
%
 
0.3
 %
 
Occupancy costs include property lease expense, property taxes, and common area maintenance charges, property insurance, and permits and licenses. Occupancy costs decreased $1.4 million in fiscal 2018 compared to fiscal 2017 due to primarily operating 29 fewer restaurants (net reduction of eight restaurants in fiscal 2017 and reduction of 21 restaurants in fiscal 2018). Of the net reduction of 29 restaurants, 19 were properties that we leased.
 

31



Occupancy costs decreased $0.6 million in fiscal 2017 compared to fiscal 2016 due to primarily operating seven fewer leased restaurant locations (one of which is now sub-leased to a Fuddruckers franchise operator) and one additional week of operations in fiscal 2016. The occupancy costs of closed locations previously operated as Cheeseburger in Paradise, but selected for conversion to Fuddruckers restaurants in fiscal 2017 or beyond were classified as pre-opening cost and reflected in our Opening costs expense line.



 Franchise Operations Segment Profit
 
 
Fiscal Year 2018 Ended
 
Fiscal Year 2017 Ended
 
Fiscal 2018 vs Fiscal 2017
 
Fiscal Year 2016 Ended
 
Fiscal 2017 vs Fiscal 2016
($000s)
August 29, 2018
 
August 30, 2017
 
Higher/(Lower)
 
August 31, 2016
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
 
(53 weeks)
 
(52 vs 53 weeks)
Franchise revenue
$
6,365

 
$
6,723

 
(5.3
)%
 
$
7,250

 
(7.3
)%
Cost of franchise operations
1,528

 
1,733

 
(11.8
)%
 
1,877

 
(7.7
)%
Franchise profit
$
4,837

 
$
4,990

 
(3.1
)%
 
$
5,373

 
(7.1
)%
Franchise profit as percent of Franchise revenue
76.0
%
 
74.2
%
 
1.8
 %
 
74.1
%
 
0.1
 %
 
We offer franchises for the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Franchise revenue includes (1) franchise royalties and (2) franchise and area development agreement fees. Franchise revenue decreased approximately $0.4 million, or 5.3%, in fiscal 2018 compared to fiscal 2017 which included an approximate $0.2 million decrease in franchise royalties and an approximate $0.2 million decrease in franchise fees. The approximate $0.2 million decrease in franchise royalties was due primarily to a net decrease of eight franchise locations in operation and a 1.4% decrease in domestic franchise same-store sales. The approximate $0.2 million decrease in franchise fees was due to fewer openings and lower fees earned associated with franchisees not fully achieving timetables for store openings under development agreements. Cost of franchise operations decreased approximately $0.2 million, or 11.8%, in fiscal 2018 compared to fiscal 2017, primarily as a result of decreased overhead cost to support franchise operations and the opening of fewer franchise locations. Franchisees opened four locations in fiscal 2018 (two in Florida, one in Pennsylvania, and one in Mexico). Franchise profit, defined as Franchise revenue less Cost of franchise operations, decreased approximately $0.2 million in fiscal 2018 compared to fiscal 2017. During fiscal 2018, we opened the four franchise locations enumerated above and there were 12 franchise units that closed on a permanent basis. We ended fiscal 2018 with 105 Fuddruckers franchise restaurants.

Franchise revenue decreased approximately $0.5 million in fiscal 2017 compared to fiscal 2016 which included an approximate $0.6 million decrease in franchise royalties, partially offset by an approximate $0.1 million increase in franchise fees. Cost of franchise operations decreased approximately $0.1 million, or 7.7%%, in fiscal 2017 compared to fiscal 2016, primarily as a result of decreased overhead cost to support franchise operations and the opening of fewer franchise locations. Franchisees opened four international locations (one in Panama; one in Colombia; one in the Dominican Republic; and one in Canada) in fiscal 2017. Franchise profit, defined as Franchise revenue less Cost of franchise operations, decreased approximately $0.4 million in fiscal 2017 compared to fiscal 2016. During fiscal 2017, we opened the eight franchise locations enumerated above and there were also eight franchise units that closed on a permanent basis. We ended fiscal 2017 with 113 Fuddruckers franchise restaurants.



Culinary Contract Services Segment Profit
 
Culinary Contract Services is a business line servicing healthcare, corporate dining clients, government buildings, sports stadiums, and sales through retail grocery outlets. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service and retail dining. Retail grocery outlet sales are through H-E-B stores, a Texas-born retailer, where we sell family-sized versions of Luby's Famous Macaroni & Cheese (two varieties) and Luby's famous Fried Fish in the freezer section.


32



This Culinary Contract Services business segment varied between 22 and 28 client locations in fiscal 2018 and between 23 and 25 client locations in fiscal 2017. In fiscal 2018 and fiscal 2017, we continued concentrating on clients able to enter into agreements where all operating costs are reimbursed to us and we generally charge a fixed fee. These agreements typically present lower financial risk to the company.  
 
 
Fiscal Year 2018 Ended
 
Fiscal Year 2017 Ended
 
Fiscal 2018 vs Fiscal 2017
 
Fiscal Year 2016 Ended
 
Fiscal 2017 vs Fiscal 2016
($000s)
August 29, 2018
 
August 30, 2017
 
Higher/(Lower)
 
August 31, 2016
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
 
(53 weeks)
 
(52 vs 53 weeks)
Culinary contract services
$
25,782

 
$
17,943

 
43.7
 %
 
$
16,695

 
7.5
%
Cost of culinary contract services
24,161

 
15,774

 
53.2
 %
 
14,955

 
5.5
%
Culinary contract profit
$
1,621

 
$
2,169

 
(25.3
)%
 
$
1,740

 
24.7
%
Culinary contract profit as percent of Culinary contract services sales
6.3
%
 
12.1
%
 
(5.8
)%
 
10.4
%
 
1.7
%
 
Culinary contract services revenue increased $7.8 million, or 43.7%, in fiscal 2018 compared to fiscal 2017. The $7.8 million increase in revenue was primarily due to (1) 15 new locations opening since the beginning of fiscal 2017 contributing a total of $10.4 million in increased sales; and (2) an increase of $0.5 million at locations that were in operation throughout fiscal 2017 and fiscal 2018; partially offset by (3) the closure of nine locations which reduced sales by $3.1 million. Cost of culinary contract services includes the food, payroll and related costs, other direct operating expenses associated with generating culinary contract sales, and the direct overhead costs (primarily salary and related costs) associated with the management of this business segment. Cost of culinary contract services increased approximately $8.4 million, or 53.2%, in fiscal 2018 compared to fiscal 2017 due primarily to a net increase in culinary contract sales volume and an increase in corporate overhead supporting the Culinary Contract Services business segment. Profit in our Culinary Contract Services business segment (defined as Culinary contract cervices revenue less Cost of culinary contract services) decreased in dollar terms by approximately $0.5 million and decreased as a percent of Culinary contract services revenue to 6.3% in fiscal 2018 from 12.1% in fiscal 2017.
 
Culinary contract services revenue increased $1.2 million, or 7.5%, in fiscal 2017 compared to fiscal 2016. The $1.2 million, increase in revenue was primarily due to (1) twelve new locations opening since the beginning of fiscal 2016 contributing a total of $6.2 million in sales; partially offset by (2) the closure of nine locations which reduced sales by $4.6 million; and (3) a reduction of $0.4 million in sales from locations that were in operation throughout fiscal 2016 and fiscal 2017. Cost of culinary contract services includes the food, payroll and related costs, other direct operating expenses associated with generating culinary contract sales, and the direct overhead costs (primarily salary and related costs) associated with the management of this business segment. Cost of culinary contract services increased approximately $0.8 million, or 5.5%, in fiscal 2017 compared to fiscal 2016 due primarily to a net increase in culinary contract sales volume, partially offset by an additional week of operations in fiscal 2016. Profit in our Culinary Contract Services business segment (defined as Culinary contract cervices revenue less Cost of culinary contract services) increased in dollar terms by approximately $0.4 million and increased as a percent of Culinary contract services revenue to 12.1% in fiscal 2017 from 10.4% in fiscal 2016.


Opening Costs
 
Opening costs includes labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were approximately $0.6 million in fiscal 2018 compared to approximately $0.5 million in fiscal 2017 and approximately $0.8 million in fiscal 2016.

Opening costs of $0.6 million in fiscal 2018 included the re-opening costs associated with one Fuddruckers location that was damaged during Hurricane Harvey and subsequently restored and re-opened for business in fiscal 2018 as well as the carrying costs for one location where we previously operated a Cheeseburger in Paradise restaurant and one location that we lease for a potential future Fuddruckers opening.


33



Opening costs of $0.5 million in fiscal 2017 included the costs of opening one Fuddruckers location and the carrying costs (mainly rent, property taxes, and utilities) for two locations that were selected for possible conversion from Cheeseburger in Paradise restaurants to Fuddruckers restaurants.

Opening costs of $0.8 million in fiscal 2016 included the costs of opening three Fuddruckers locations and the carrying costs (mainly rent, property taxes, and utilities) for two locations that were selected for possible conversion from Cheeseburger in Paradise restaurants to Fuddruckers restaurants.


Depreciation and Amortization
 
 
Fiscal Year 2018 Ended
 
Fiscal Year 2017 Ended
 
Fiscal 2018 vs Fiscal 2017
 
Fiscal Year 2016 Ended
 
Fiscal 2017 vs Fiscal 2016
($000s)
August 29, 2018
 
August 30, 2017
 
Higher/(Lower)
 
August 31, 2016
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
 
(53 weeks)
 
(52 vs 53 weeks)
Depreciation and amortization
$
17,453

 
$
20,438

 
(14.6
)%
 
$
21,889

 
(6.6
)%
As a percentage of total sales
4.8
%
 
5.4
%
 
(0.6
)%
 
5.4
%
 
0.0
 %
 
Depreciation and amortization expense decreased $3.0 million in fiscal 2018 compared to fiscal 2017 due primarily to certain assets reaching the end of their depreciable lives and the removal of certain assets upon sale.
 
Depreciation and amortization expense decreased $1.5 million in fiscal 2017 compared to fiscal 2016 due primarily to certain existing assets reaching the end of their depreciable lives.

Selling, General and Administrative Expenses
 
 
Fiscal Year 2018 Ended
 
Fiscal Year 2017 Ended
 
Fiscal 2018 vs Fiscal 2017
 
Fiscal Year 2016 Ended
 
Fiscal 2017 vs Fiscal 2016
($000s)
August 29, 2018
 
August 30, 2017
 
Higher/(Lower)
 
August 31, 2016
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
 
(53 weeks)
 
(52 vs 53 weeks)
General and administrative expenses
$
35,201

 
$
32,746

 
7.5
 %
 
$
36,808

 
(11.0
)%
Marketing and advertising expenses
3,524

 
5,132

 
(31.3
)%
 
5,614

 
(8.6
)%
Selling, general and administrative expenses
$
38,725

 
$
37,878

 
2.2
 %
 
$
42,422

 
(10.7
)%
As percent of total sales
10.6
%
 
10.1
%
 
0.5
 %
 
10.5
%
 
(0.4
)%
 
Selling, general and administrative expenses include corporate salaries and benefits-related costs, including restaurant area leaders and regional directors, share-based compensation, professional fees, travel and recruiting expenses and other office expenses. Selling, general and administrative expenses increased by approximately $0.8 million, or 2.2%, in fiscal 2018 compared to fiscal 2017. The approximate $0.8 million increase in Selling, general and administrative expenses include (1) an approximate $1.9 million increase in outside professional service fees which includes increased information technology consulting to supplement our in-house information technology staff and increased spending for marketing consulting, and outside legal fees; (2) an approximate $0.8 million increase in salaries and benefits expense mostly related to one-time employee separation costs as we reduced our restaurant count and corporate overhead staffing levels; partially offset by (3) an approximate $1.6 million reduction in marketing and advertising expenses due to re-directing marketing investment away from more costly broad channels, such as television advertising, toward more focused and economical channels for our brands, such as digital media; and (4) an approximate $0.3 million reduction in corporate travel expense, corporate occupancy costs, bank charges, and other various corporate overhead costs. As a percentage of total sales, Selling, general and administrative expenses increased to 10.6% in fiscal 2018 compared to 10.1% in fiscal 2017 primarily due to net increases in the expenses enumerated above.

34




Selling, general and administrative expenses decreased by approximately $4.5 million, or 10.7%, in fiscal 2017 compared to fiscal 2016. Decreases in Selling, general and administrative expenses include (1) an approximate $3.5 million decrease in salaries, benefits, and other compensation expenses due to reduced headcount, significantly reduced bonus and incentive expense (including an adjustment to the estimated fair value of performance awards under an incentive compensation plan), and to a lesser extent, one less operating week in fiscal 2017 compared to fiscal 2016; (2) an approximate $0.7 million decrease in corporate employee travel costs; and (3) an approximate $0.5 million reduction in marketing and advertising costs, partially offset by (4) an approximate $0.1 million increase in corporate supplies expense and other overhead expenses, net of a reduction in outside professional service fees As a percentage of total sales, Selling, general and administrative expenses decreased to 10.1% in fiscal 2017 compared to 10.5% in fiscal 2016 primarily due to net decreases in the expenses enumerated above.

Provision for Asset Impairments and Restaurant Closings

The provision for asset impairment and restaurant closings of approximately $8.9 million in fiscal 2018 is primarily related to assets impaired at 21 property locations, goodwill at three property locations, ten properties held for sale written down to their fair value, and a reserve for 15 restaurant closings of approximately $1.3 million.

The asset impairment of approximately $10.6 million in fiscal 2017 is primarily related to assets impaired at 17 property locations, goodwill at six property locations, five properties held for sale written down to their fair value, and a reserve for 10 restaurant closings of approximately $0.5 million.
 
The asset impairment of approximately $1.4 million in fiscal 2016 reflects (1) a $1.2 million impairment for one owned Fuddruckers location and three leased Fuddruckers locations; (2) a $0.2 million charge for restaurant closings related to three Fuddruckers locations and one Luby's Cafeteria location; and (3) a $38 thousand impairment of Goodwill. The $0.2 million charge for restaurant closings includes the total amount of rent and other direct costs for the remaining period of time the properties will be unoccupied plus the value of the amount by which the rent we pay to the landlord exceeds any rent paid to us by a tenant under a sublease over the remaining period of the lease terms.

Net Gain on Disposition of Property and Equipment
 
The approximate $5.4 million net gain on disposition of property and equipment in fiscal 2018 is primarily related to the gain on the sale of 10 properties of approximately $4.9 million and approximately $1.3 million of insurance proceeds received for property and equipment damaged by Hurricane Harvey, partially offset by lease termination costs at eight restaurant location closures and routine asset retirements. 

The disposition of property and equipment in fiscal 2017 resulted in a net gain of approximately $1.8 million, which included (1) the gain on the sale of three properties where we operated a cafeteria up until the time of the sale offset by (2) normal asset retirement activity at operating locations and costs associated with disposal of assets at one leased property we operated up until the time of lease termination.

The disposition of property and equipment in fiscal 2016 resulted in a net gain of approximately $0.7 million, which included (1) the gain on the sale of one property where we operated a cafeteria up until the time of the sale offset by (2) normal asset retirement activity.
 
Interest Income
 
Interest income was $12 thousand in fiscal 2018 compared to $8 thousand in fiscal 2017, and compared to $4 thousand in fiscal 2016.
 
Interest Expense

Interest expense in fiscal 2018 increased approximately $0.9 million compared to fiscal 2017 on higher average debt balances and higher average interest rates inherent in our amended credit agreement and acceleration of deferred financing fees related to shortening the maturity in our amended credit agreement in the quarter ended June 6, 2018 exceeding the acceleration of deferred financing fees related to the extinguishment of debt in the quarter ended March 15, 2017. Interest expense in fiscal 2017 increased approximately $0.2 million compared to fiscal 2016 on marginally higher average debt balances and higher average interest rates.


35



 
Other Income (Expense), Net
 
Other income (expense), net, consisted primarily of the following components: net rental property income and expenses relating to property for which we are the landlord; prepaid sales tax discounts; oil and gas royalty income; and dining card sales discounts. 
 
Other income (expense), net, was income of approximately $0.3 million in fiscal 2018 compared to expense of approximately $0.5 million in fiscal 2017 and income of approximately $0.2 million in fiscal 2016. Other income (expense), net, increased approximately $0.8 million in fiscal 2018 compared to fiscal 2017 primarily related to (1) an increase in the fair value of our interest rate swap; and (2) higher net rental income; partially offset by (3) greater gift card related expense and comparison to a fiscal 2017 reduction in our gift card liability. Other income (expense), net, decreased approximately $0.6 million in fiscal 2017 compared to fiscal 2016 primarily related to (1) recording a net reduction in the fair value of our interest rate swap agreement; (2) lower rental net income; and (3) a decrease in sales tax discounts as we did not participate in state tax prepayment programs to the full extent in fiscal 2017.
 
Taxes
 
The income tax provision related to continuing operations for fiscal 2018 was approximately $7.7 million compared to an income tax provision of approximately $2.4 million for fiscal 2017 and an income tax provision of approximately $4.9 million for fiscal 2016. The income tax provision in fiscal 2018, reflects the impact of U.S. tax reform that is commonly referred to as Tax Cuts and Jobs Act (the "Tax Act"), of $3.2 million in deferred income taxes, and additional $4.1 million of deferred income tax provision including a valuation allowance increase and $0.4 million of current state income taxes. The income tax provision in fiscal 2017 reflects recording a deferred tax asset valuation allowance of $9.5 million partially offset by recording a tax benefit related to the pre-tax loss for the year adjusted for state income taxes and general business tax credits. The income tax provision in fiscal 2016 reflects recording a deferred tax asset valuation allowance of $6.9 million partially offset by recording a tax benefit related to the pre-tax loss for the year adjusted for state income taxes, and general business and foreign tax credits.

The effective tax rate ("ETR") from continuing operations was a negative 30.6%, a negative 12.0%, and a negative 90.4% for fiscal 2018, 2017, and 2016, respectively. The Tax Act lowered the federal statutory tax rate from 35% to 21% effective January 1, 2018. In accordance with the application of IRC Section 15, the Company's federal statutory tax rate for fiscal 2018 was 25%, representing a blended tax rate for the current fiscal year. The ETR for the year ended August 29, 2018 differs from the blended federal statutory rate of 25%, due to the change in valuation allowance, the impact upon enactment of the Tax Act, the federal job credits, state income taxes, and other discrete items. The ETR for the year ended August 30, 2017 and the year ended August 31, 2016 differs from the federal statutory rate of 34% due to the change in valuation allowance, federal jobs credits, state income taxes and other discrete items.

Discontinued Operations
 
 
 
Fiscal Year Ended
($000s) 
 
August 29, 2018
 
August 30, 2017
 
August 31, 2016
 
 
(52 weeks)
 
(52 weeks)
 
(53 weeks)
Discontinued operating losses
 
$
(21
)
 
$
(28
)
 
$
(161
)
Impairments
 
(59
)
 

 

Gains
 

 

 
25

Pretax loss
 
$
(80
)
 
$
(28
)
 
$
(136
)
Income tax benefit (expense) from discontinued operations
 
(534
)
 
(438
)
 
46

Loss from discontinued operations, net of income taxes
 
$
(614
)
 
$
(466
)
 
$
(90
)
  

36



The loss from discontinued operations, net of income taxes was approximately $0.6 million in fiscal 2018 compared to a loss of approximately $0.5 million in fiscal 2017 and a loss of approximately $0.1 million in fiscal 2016. The loss of approximately $0.6 million in fiscal 2018 included (1) less than $0.1 million in “carrying costs” (typically rent, property taxes, utilities, and maintenance) associated with assets that were related to discontinued operations; (2) less than $0.1 million impairment charges for certain assets related to discontinued operations; and (3) an approximate $0.5 million income tax provision related to increasing the deferred tax asset valuation allowance associated with discontinued operations. The loss of $0.5 million in fiscal 2017 included (1) less than $0.1 million in “carrying costs” associated with assets that were related to discontinued operations and (2) an approximate $0.4 million income tax provision related to increasing the deferred tax asset valuation allowance associated with discontinued operations. The loss of approximately $0.1 million in fiscal 2016 included (1) approximately $0.2 million in carrying costs associated with assets that were related to discontinued operations; partially offset by (2) a less than $0.1 million gain on sale of assets that were related to discontinued operations; and (3) a less than $0.1 million income tax benefit related to discontinued operations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash and Cash Equivalents
 
General. Our primary sources of short-term and long-term liquidity are cash flows from operations and our revolving credit facility.
 
Cash and cash equivalents increased approximately $2.6 million as of the end of fiscal 2018 compared to the end of fiscal 2017. Cash provided by investing activities of approximately $3.0 million and cash provided by financing activities of approximately $8.1 million was offset by cash used in operating activities of approximately $8.5 million.

Cash used in operating activities of approximately $8.5 million in fiscal 2018 was a decrease of approximately $18.1 million from a source of cash of approximately $9.6 million in fiscal 2017. Net cash provided by investing activities, in fiscal 2018, was approximately $3.0 million representing an approximate $6.2 million increase from net cash used in investing activities of approximately $3.2 million in fiscal 2017. Cash flows from financing activities was a source of cash, in fiscal 2018, of approximately $8.1 million and an increase of approximately $14.7 million from the use of cash of approximately $6.6 million in fiscal 2017. Our total outstanding debt increased to approximately $39.5 million at the end of fiscal 2018 from approximately $31.0 million at the end of fiscal 2017 primarily due to the use of cash and decline in cash provided by operating activities before changes in operating assets and liabilities of approximately $12.3 million partially offset by proceeds from property sales. We plan to continue the level of capital expenditures necessary to keep our restaurants attractive and operating efficiently.
 
Cash and cash equivalents decreased approximately $0.2 million as of the end of fiscal 2017 compared to the end of fiscal 2016. Cash provided by operating activities of approximately $9.6 million was offset by cash used in investing activities of approximately $3.2 million and cash used in financing activities of approximately $6.6 million.

Cash flow from operations was unfavorably impacted by decreased restaurant sales and increased other operating expenses in fiscal 2017 compared to fiscal 2016 but favorably impacted by decreased cost of food, payroll and related costs, and occupancy costs. We decreased our net borrowings from our 2016 Credit facility in fiscal 2017 compared to fiscal 2016 primarily due to decreases in our capital expenditures and proceeds on the sale of properties.
 
Our cash requirements for fiscal 2018 consisted principally of:

capital expenditures for recurring maintenance of our restaurant property and equipment, restaurant renovations and upgrades, new construction, and information technology;
payments to reduce our debt; and
working capital primarily for our Company-owned restaurants and obligations under our CCS agreements.
 
Based upon our level of past and projected capital requirements, we expect that proceeds from the sale of assets and cash flows from operations, combined with other financing alternatives in place or available, will be sufficient to meet our capital expenditures and working capital requirements during the next twelve months.
 
As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories and our vendors grant trade credit for purchases such as food and supplies. However, higher levels of accounts receivable are typical in our CCS business segment and Franchise Operations business segment. We also invest in our business through the addition of new restaurant units and refurbishment of existing restaurant units, which are reflected as long-term assets.

37



 
The following table summarizes our cash flows from operating, investing and financing activities: 
 
 
Fiscal Year Ended
 
 
August 29, 2018
 
August 30, 2017
 
August 31, 2016
 
 
(52 weeks)
 
(52 weeks)
 
(53 weeks)
 
 
(In thousands)
Total cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
(8,453
)
 
$
9,640

 
$
13,859

Investing activities
 
3,014

 
(3,216
)
 
(13,442
)
Financing activities
 
8,065

 
(6,667
)
 
(579
)
Increase (Decrease) in cash and cash equivalents