Luby’s looks to grow Fuddruckers

A Heard on the Call report following 3Q earnings

As Luby’s Inc. approaches the one-year anniversary of its Fuddruckers acquisition, the company is planning a new, smaller prototype of the burger concept. It is also creating a Fudds Express unit to use in Luby’s cafeterias and possibly contract-services locations as well as the first drive-thru location.

In a call with securities analysts Thursday, Chris Pappas, Luby’s Inc.’s president and chief executive, said two new burger units will be opened by the end of the company’s fiscal year in August: a 3,500-square-foot location to open in downtown Houston next week and a Fudds Express set for a cafeteria location in a few weeks. The company is looking at 2,500-square-foot versions of Fuddruckers and testing new items such as appetizers, salads and chicken sandwiches.

Luby’s has 56 company-owned Fuddruckers and 127 franchised units, and Pappas said the Fudds Express, “is an exciting way to leverage our two brands.”

Company executives highlighted their plans after releasing third-quarter financial results for the quarter ended May 4 after the market closed Wednesday.

Luby’s reported net income of $1.7 million, or 6 cents per share, compared with earnings of $730,000, or 3 cents per share. Third-quarter revenue totaled $78.1 million, an increase of $24.1 million over the previous year’s quarter.

Same-store sales rose 3.5 percent at the 96 Luby's Cafeterias restaurants. An increase in customer traffic generated the sales increase, which was partially offset by a 1-percent decline in customer check average, the company reported.

Pappas said Luby’s will test its first Fuddruckers drive-thru, though details and a timetable were not given. In 2012, the company plans to open between three and five new corporate Fuddruckers locations in existing markets, primarily in Texas, and five to 10 new franchise locations next year.

Among other details discussed in the analyst call:

Luby’s traffic: Traffic at the 96 Luby’s cafeteria units was up 4.4 percent in the quarter, Pappas said.

“We were able to attract more customers to our locations as our customers continued to react favorably to our promotions, especially our ‘All You Can Eat’ weekend breakfast program, which is now offered at 65 of our locations, as well as our kid’s program,” he said. The children’s program offers a kid’s entrée, two sides, bread, drink and gelatin for $2.99, which appeals to “budget-conscious families,” he said.

Luby’s pricing: “We are determined to support our brand value image by keeping our menu prices at or below our fast-casual and casual-dining competitors,” Pappas said.

The average check, at under $10 for Luby’s is on par with the prior year, Pappas said, but said Luby’s has taken “modest price increases on a handful of menu items near the end of the second quarter.”

Commodity prices: Pappas said with patrons facing higher gasoline prices, he doubted Luby’s could offset rising food inflation with further menu-price increases in the short term. He said food inflation “continues to generate headwinds for our margins. Our food costs were 28.2 percent of restaurant sales in this year’s third quarter compared to 27.4 percent last year.”

Commodity prices were up about 5 percent at the Luby’s units and about 10 percent at the Fuddrucker’s, compared to September 2010, shortly after Luby’s completed its acquisition of the burger chain. Higher prices were seen in beef, seafood, produce, oils and shortenings, he said.

Cafeteria promotions: As the chain moves toward summer, it will offer local-market offerings such as $2 fried fish and chicken-fried steak on Tuesdays and Thursdays, Pappas said.

Culinary contract services: Revenue from the division that provides contract foodservice for hospitals, medical centers and universities rose 9.1 percent to $3.6 million over the previous-year period.

Luby’s debt: “Since we closed the Fuddruckers' transaction, we have paid down over $20 million of debt, or almost 40 percent of the $51.3 million we borrowed to complete the acquisition,” Pappas said in a statement. “We are currently in discussion with our banks to establish a new credit facility.”

Besides the Luby’s Cafeterias and Fuddruckers locations, Luby’s Inc. also owns three Koo Koo Roo restaurants in southern California, which it acquired in the Fuddruckers deal.

Contact Ron Ruggless at [email protected] [3].
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