|Shares Out. (in M):||29||P/E||4,98||4.14|
|Market Cap (in $M):||141||P/FCF||4.98||4.14|
|Net Debt (in $M):||47||EBIT||49||58|
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Luby's should double in 2 years. For $189MM, you are purchasing Lubys, a company that owns and operates 175 restaurants, a franchise royalty business that generates $7.5million in annual income, a contract catering business that generates $2.4MM in annual profit. In total, the holding company is spewing $68MM of EBITDA which requires a total of maintenance capex of about $9MM. That is 3.2 times after free cash flow, where cash flow is defined as EBITDA minus CAPEX. And you still own the land and building for at least 93 properties where the restaurants are located plus excess land and land set aside for future development. My sum of the parts analysis without including the real estate equates to $461 million Enterprise Value.
1. 1. WHAT CAUSED THE STOCK PRICE TO COME DOWN THIS CHEAP?
a. Restaurants continued to face macro head winds from rising food prices, rising minimum wages, health insurance costs and lack of consumer confidence.
b. Lubys’ underperforming locations -- Some Luby's restaurants and Cheeseburgers in Paradise have underperformed in the past year.
c. Lubys’ expansion in 2014 has negatively affected profitability.
2. 2. WHY WILL BUSINESS START IMPROVING FROM HERE?
a. Lubys has just come off 2014, a year of its biggest new restaurant expansion since the 1990s, and the foundation is set for its growth.
b. Declining oil prices is a positive macro factor causing people to increase their frequency of casual dining.
c. Discontinued operations and closure of unprofitable units.
d. Conversion of several Cheeseburgers in Paradise restaurants into Fuddruckers brand will will take some time to cycle through, but will enhance financial performance in long-term.
e. Slowed expansion to focus on profitability. Lubys has clearly state that for 2015, they will moderate expansion and focus on turning their units profitable.
g. Quarter 1 showed revenue growth.
i. “In regard to quarter one we are pleased to report total revenue growth this quarter in each of our business segments; Company-owned Restaurants, Culinary Contract Services, and Franchise Operations. We also achieved same-store sales increases at our Luby’s Cafeterias, Fuddruckers and combination Luby’s-Fuddruckers side-by-side restaurants. As a reminder our first quarter has historically been a seasonally weaker quarter with lower guest traffic in the period after the start of school but before the Thanksgiving holiday.” -- Latest Earnings Call
h. Franchise segment still profitable and generates $7 to $8mm annual royalty income.
i. Culinary Contract Services generates $2.5mm annual profit.
j. Same Store sales growth - Same store sales achieved 2 percent growth. The overall numbers do not show growth because Luby's closed 17 locations.
k. Combo Unit – Their new innovation (see below), the Combo Unit which puts Lubys side by side Fuddruckers, is generating encouraging results. In the first quarter their five combination locations contributed 6.3% to their total restaurant sales. These locations in the aggregate are meeting their sales expectations and represent a strategic growth driver for the company.
3. 3. HISTORY
a. 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 New York Stock Exchange in 1982.
b. 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.
c. Luby’s shares traded as high as $25 in the late 1990s, but margins shrank and the debt load caught up with them.By the early 2000s, the company was faced with $125mm of long term debt, declining earnings and a stock price under $1.
d. In March 2001, successful restaurateurs Chris and Harris Pappas swooped in with $10mm of convertible debt financing and assumed the roles of CEO and COO of Luby’s.The Pappas brothers toiled for two years with little success. They tried some special promotions with some new all-you-can eat concepts and they also revamped the menu with more updated and upscale food offerings. By 2003, the debt problem was critical and Luby’s embarked on a major effort to reduce debt by closing underperforming stores and selling real estate. Luby’s closed about 50 underperforming stores in 2003 and another 21 sites in the following three years.
e. In late 2003, Luby’s embarked on an aggressive advertising campaign, “Luby’s Tastes Like Texas, Feels like Home.”The ad campaign started paying off in early FY 2004 when same-store sales turned positive and stayed very strong for three straight years. It took a long time for the Pappas brothers to strike gold, but everything seemed to come together after the restructuring in 2003. The ad campaign brought new customers in (and old customers back) to try the new food offerings. The biggest change in the menu was the addition of targeted “value meals” with one entrée, two sides and a choice of bread.
f. On July 9, 2010, Luby’s Restaurants Limited Partnership was converted into Luby’s Fuddruckers Restaurants, LLC, a Texas limited liability company (“LFR”). All restaurant operations are conducted by LFR.
g. 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 (“Koo Koo Roo”) locations with franchisees operating an additional 130 Fuddruckers locations.
h. 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.
i. 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 restaurants operations continue to be conducted by LFR and Paradise Cheeseburger, LLC. Our operating restaurant locations remain unchanged by these events.
j. Fast forward to 2015, Luby’s, Inc. is now a multi-branded company operating in the restaurant industry and in the contract food services industry. Our primary brands include Luby’s Cafeteria, Fuddruckers - World’s Greatest Hamburgers ®, Luby’s Culinary Contract Services, Cheeseburger in Paradise. Our other brands include are Bob Luby’s Seafood, Luby’s, Etc. and Koo Koo Roo Chicken Bistro.
4. 4. MANAGEMENT
a. Chris and Harris Pappas are considered somewhat legendary operators in the restaurant industry. They have built successful track records launching their own casual dining concepts (Mexican, Greek, Cajun and more) as well as running franchised QSR restaurants and even high-end steakhouses.
b. Read about their Pappas Restaurants in http://en.wikipedia.org/wiki/Pappas_Restaurants
5. 5. DESCRIPTION OF BRANDS (from the 10-K)
a. Luby’s Cafeteria Operations
i. 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 to order 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.
ii. 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.
iii. Luby’s Cafeteria’s product offerings are Americana-themed home-style classic 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.
1. 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 of one general manager, one associate manager and one to two assistant managers including wait staff. 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. We believe this strategy is a significant factor contributing to the profitability of our restaurants. Each general manager is supervised by an area leader. Each area leader is responsible for approximately 7 to 10 units, depending on location.
i. At Fuddruckers, our mission is to serve the world’s greatest hamburger, 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. We were founded in San Antonio, Texas in 1980.
ii. While Fuddruckers’ signature burger and fries accounts for the majority of its restaurant sales, its menu also includes exotic burgers, such as buffalo and elk, steak sandwiches, various grilled and breaded chicken breast sandwiches, hot dogs, a variety of salads, chicken tenders, fish sandwiches, hand breaded onion rings, soft drinks, handmade milkshakes, and bakery items. Beer and wine are served and, generally, account for less than 2% of restaurant sales.
iii. Restaurants generally have a total staff of one general manager, two or three assistant managers and 25 to 45 other associates, including 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 three geographic regions, each supervised by an area vice president. The three regions are divided into a total of eight areas, each supervised by an area leader. On average, each area leader supervises 5-10 restaurants.
c. Cheeseburgers in Paradise
i. We operate 8 Cheeseburger in Paradise Full Service restaurants. 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 ten years ago 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.”
d. Bob Luby’s Seafood (They only have 1 restaurant. Bob Luby was founder of Luby's)
e. Koo Koo Roo Chicken Bistro (They only have 3 restaurants which came with the acquisition of Fuddrucker's)
6. 6. HOW LUBYS MAKES MONEY
a. Company Owned Restaurants- Company-owned restaurants consists of several brands which are aggregated into one reportable segment because the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, the nature of the regulatory environment and store level profit margin are similar. The chief operating decision maker analyzes Company-owned restaurants at store level profit which is revenue less cost of food, payroll and related costs, other operating expenses and occupancy costs. The primary brands are Luby’s Cafeterias, Fuddruckers and Cheeseburger in Paradise, with a couple of non-core restaurant locations under other brand names (i.e., Koo Koo Roo Chicken Bistro and Bob Luby’s Seafood). All company-owned restaurants are casual dining restaurants. Each restaurant is an operating segment because operating results and cash flow can be determined for each restaurant. The total number of Company-owned restaurants was 175 at November 19, 2014.
i. As of November 19, 2014, we own and operate a total 175 restaurants located in close proximity to retail centers, business developments and residential areas mostly throughout the United States. The breakdown are as follows: 89 stand-alone Luby’s Cafeteria locations , 67 stand-alone Fuddruckers gourmet hamburger restaurants, Combo locations that consists of 5 Luby’s Cafeteria side by side 5 Fuddruckers gourmet hamburger restaurants, 8 casual dining restaurants and bars and 1 Bob Luby’s Seafood
b. Franchising - We offer franchises for only the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Initial franchise agreements have a term of 20 years. Franchise agreements typically grant franchisees an exclusive territorial license to operate a single restaurant within a specified area, usually a four-mile radius surrounding the franchised restaurant. Franchisees bear all direct costs involved in the development, construction and operation of their restaurants. In exchange for a franchise fee, the Company provides franchise assistance in the following areas: site selection, prototypical architectural plans, interior and exterior design and layout, training, marketing and sales techniques, assistance by a Fuddruckers “opening team” at the time a franchised restaurant opens, and operations and accounting guidelines set forth in various policies and procedures manuals. All franchisees are required to operate their restaurants in accordance with Fuddruckers’ standards and specifications, including controls over menu items, food quality and preparation. The Company requires the successful completion of its training program by a minimum of three managers for each franchised restaurant. In addition, franchised restaurants are evaluated regularly by the Company for compliance with franchise agreements, including standards and specifications through the use of periodic, unannounced, on-site inspections and standard evaluation reports.
i. As of November 19, 2014, we had 50 franchisees operating 110 Fuddruckers restaurants in locations. Our largest five franchise owners own five to twelve restaurants each. Fourteen franchise owners each own two to four restaurants. The 31 remaining franchise owners each own one restaurant.
c. Culinary Contract Services - Our Culinary Contract Services (“CCS”) segment consists of a business line servicing healthcare, higher education and corporate dining clients. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service and retail dining. Our mission is to re-define the contract food industry by providing tasty and healthy menus with customized solutions for health care, senior living, business and industry and higher education facilities. We seek to provide the quality of a restaurant dining experience in an institutional setting. As of November 4, 2014, we had contracts with 13 long-term acute care hospitals, one acute care medical center, one ambulatory surgical center, one behavioral hospital, two business and industry clients, three higher education institutions, one Children’s Hospital, two Medical office building 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. We anticipate allocating capital expenditures as needed to further develop our CCS business in fiscal year 2015. CCS, branded as Luby’s Culinary Contract Services, consists of a business line servicing healthcare, higher education and corporate dining clients. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service and retail dining. CCS has contracts with long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, behavioral hospitals, business and industry clients, and higher education institutions. CCS has the unique ability to deliver quality services that include facility design and procurement as well as nutrition and branded food services to our clients. The costs of CCS on the Consolidated Statements of Operations include all food, payroll and related costs and other operating expenses related to CCS sales.
i. As of November 19, 2014, we operated 26 Culinary Contract Services locations; 18 in the Houston, Texas area, 3 in Louisiana, 2 in Austin, Texas, 1 in Florida, 1 in North Carolina and 1 in Oklahoma. Luby’s Culinary Contract Services provides food service management to healthcare, educational and corporate dining facilities.
7. 7. INNOVATION AND NEW PRODUCTS
a. In fiscal year 2014, we opened four new Fuddruckers and new Luby’s Cafeteria on the same property with a common wall but separate kitchens and dining areas and converted three Cheeseburger in Paradise restaurants to Fuddruckers restaurants, resulting in a fiscal 2014 year-end count of 71 Fuddruckers restaurants.
b. In 2014 we opened one prototype ground-up new construction Fuddruckers Restaurant in Houston, Texas.
c. We anticipate using and further modifying both of these prototype designs as we execute our strategy to build new restaurants in markets where we believe we can achieve superior restaurant cash flows.
d. New Luby’s Restaurants - In 2007 we developed and opened an updated prototype ground-up new construction Luby's Cafeteria. Since then we have rebuilt three locations and newly developed four locations according to this prototype.
e. In 2012 we opened a prototype ground-up new construction Combination Luby’s and Fuddruckers Restaurant unit featuring a Luby’s Cafeteria and a Fuddruckers Restaurant on the same property with a common wall but separate kitchens and dining areas (“Combo Unit”). Since 2012, we have built four more Combo Units.
8. 8. VALUATION
a. For $189MM, you are purchasing a company that owns and operates 175 restaurants, a franchise royalty business that generates $7.5million in annual income, a contract catering business that generates $2.4MM in annual profit. In total, the holding company is spewing $68MM of EBITDA which requires a total of maintenance capex of about $9MM. That is 3.2 times after free cash flow, where cash flow is defined as EBITDA minus CAPEX. And you still own the land and building for at least 93 properties where the restaurants are located plus excess land and land set aside for future development.
b. It is priced at 0.94 x of tangible book value
c. It owns a lot of real estate that are understated in the balance sheet.
i. From the 10-K: "We own the underlying land and buildings on which 71 of our Luby’s Cafeteria and 22 Fuddruckers restaurants are located. Five of these restaurant properties contain excess building space or an extra building on the property which have ten tenants unaffiliated with Luby’s, Inc. As of November 4, 2014, we had three owned properties and seven leased properties we plan to develop for future use. As of November 4, 2014, we had one owned and one leased non-operating properties with a carrying value of approximately $1.0 million in property held for sale. In addition, we had three owned and four leased properties with a carrying value of $3.4 million that are included in assets related to discontinued operations. Ground leases have a carrying value of zero.We currently have four owned other-use properties; one is used as a bake shop that supports the baked products for operating restaurants. One location is currently leased to third party tenants utilizing the entire building and two are leased to Fuddruckers franchisees. In addition to the four owned other-use properties, we have approximately 31,000 square feet of corporate office space, under lease through 2016. The space is located on the Northwest Freeway in Houston, Texas in close proximity to many of our Houston restaurant locations.”
d. Sum of the Parts valuation:
Franchise Royalty Segment is worth 10 times $7.5 annual royalty income = $75 million
Culinary Catering Segment is worth 10 times profit = $25 million
The company owned restaurants are worth 8 times free cash flow, defined as EBITDA less maintenance capex = $408 million
Real Estate not included in the Sum of the Parts.
9. 9. INSIDER BUYING
a. On Jan 27-29, 2015, CEO Chris Pappas bought $180K worth of Lubys shares.
b. Chris mentioned this iin the latest call and followed through with his own buying of shares -- "Finally, let me just say as a shareholder and a large shareholder I am not pleased with our current share value. However I continue to have confidence in our strategy and path towards long-term shareholder value.”
Achieves improved cash flow this year and market gives it a 6 times EBITDA multiple.
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