Luby Case questions

1

Luby’s: Where do they go from here?1

In 2015, Luby’s Inc. had completed a decade of dramatic change. The changes really

began in 2000, when Luby’s stock price had fallen from $33.00 per share in 1986 to $4.00 per

share. At that time, Texas restaurateurs Christopher and Harris Pappas announced that they had

purchased six percent of Luby’s stock and were considering additional investments. The

brothers had a long history of success in the casual dining segment of the restaurant industry.

They owned Pappas Restaurants, Inc., a privately held firm with 60 restaurants operating in the

casual dining segment under the names Pappas Seafood House, Pappasito’s Cantina,

Pappadeaux, Pappas Bar-B-Que, and Pappas Brothers Steak House. The Pappas brothers joined

Luby’s as CEO/President and COO in March of 2001 and by mid-2001, both the officers and

directors of the firm had changed substantially. Cost cutting and other operational changes to the

firm helped raised the stock price, but profits remained low.

While Harris focused on the Pappas Restaurants, Inc. business, Christopher took over as

President and CEO of Luby’s. The brothers recognized that Luby’s faced a number of

challenges. As CEO Chris Pappas stated when they invested in the firm, “The road to improved

financial performance will not be easy, but Harris Pappas and I are investing significant effort

and resources in Luby’s in a concerted effort to reach this objective” (Ruggless, 2001, p. 11).

The firm continued to focus exclusively on its cafeterias until 2007, when they brought

the firm’s made-from-scratch food to institutional cafeterias (hospitals, schools, etc.) expanding

into the culinary services business, but profitability remained elusive. The stock dropped below

$4.00 again in 2009 when the firm reported a net loss of $26.4 million—more than 10% of total

sales. More drastic change appeared to be necessary.

1 This case was created by the author as a teaching tool. It is not meant to demonstrate either effective or ineffective management.

The material used in this case was collected from publicly available documents filed by the company and other sources. Any

errors in the material are the fault of the author and not of the company.

2

The next year brought a more change, when the firm acquired gourmet hamburger chain

Fuddruckers, Inc. for $63.1 million in cash following the bankruptcy of Fuddruckers’ parent

company. The acquisition added 56 Fuddruckers locations, three KooKooRoo Chicken Bistro

locations, and Luby’s become the franchisor for an additional 130 Fuddruckers franchise

locations. The firm followed this diversification in 2012, with the acquisition of all 23

Cheeseburger in Paradise locations for $10.3 million in cash. Whether those changes will

resolve the profitability issue, though, remained to be seen. Table 1 summarizes some of the

changes to Luby’s over the last dozen years.

Table 1: Changes in Luby’s (2002-2014)

Category 2014 2002

Number of Cafeterias 96 193

Fuddruckers (Company-operated) 71 0

Fuddruckers (Franchises) 110 0

Culinary Contract Service Locations 21 0

Cheeseburger in Paradise 8 0

KooKooRoo Chicken Bistro 2 (closed after fiscal year-end) 0

Number of States 36 10

Owned Locations 92 124

Leased Locations 82 69

Number of Employees 8490 11,000

Store Managers ( including Sr., Assoc., and Asst. Managers) 739 600

Executive/Administrative Staff 142 200

The Industry

Luby’s competed primarily in the Family Dining and Casual Dining sectors of the

Restaurant industry (SIC 5812, NAICS 722212). Luby’s closest competitors in the cafeteria

business were Furr’s cafeterias and Piccadilly cafeterias, but they also viewed other “family

dining” restaurants to be close competitors. The addition of Fuddruckers and Cheeseburger in

Paradise expanded the scope of the firm’s competitors to include firms like Ruby Tuesday and

Red Robin Gourmet Burgers.

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The restaurant industry had four major segments: Quick Service (McDonald’s, Long

John Silver), Casual Dining (Applebees, Outback Steakhouse), Family Dining (Luby’s, Ryan’s,

Cracker Barrel), and Specialty Dining (Starbucks, Krispy Kreme), with cafeterias included in the

family dining segment. No single firm had a significant share of industry sales. The Family

Dining segment was further subdivided between Full service and Limited service formats. Full

service restaurants offered table service and price meals by the dish, often preparing the meals to

order. Buffet concept restaurants (Limited service) were self-service and usually all-you-can-eat

with a single price for all. Cafeterias combined self-service with pricing by the dish. Both

cafeterias and buffets generally used batch preparation rather than single meal preparation.

Cafeteria chains had taken a beating, largely from increased competition with casual

dining and buffet concept restaurants, but were also being squeezed by rising utility and food

costs. Most chains have brought in CEOs from the casual dining sector, as well as attempting

new concepts and horizontal integration, but with limited success. Furr’s Restaurant Group, of

Richardson, TX, filed for chapter 11 bankruptcy in January of 2003 and again in 2014, when its

assets were sold to creditors. Furr’s still operates cafeterias under the Furr’s and Bishop’s

names. Piccadilly, headquartered in Baton Rouge, LA, purchased Morrison’s Restaurants (a

rival cafeteria chain) in 1998 for $46 million, bringing it to over 200 units. Piccadilly also filed

for bankruptcy in 2012 and was sold to creditors in 2014 though it still operates 60 locations.

The main customers for cafeterias tend to be at or near retirement age, brand loyal, and price-

sensitive. As stock analyst Preston Silvey noted, “It’s a generational concept, viewed in the

younger people’s eyes as a place their parents or grandparents went. For them to survive, they

have to develop some concepts to bring in the younger crowd” (Ruggless, 2001).

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The outlook for restaurants as a whole is more positive than for cafeterias. Per capita

spending on meals away from home has increased with each generation. In 1955, 25 percent of

meals were eaten away from home. By 1996, that percentage had risen to 44 percent. U.S.

restaurant revenues, which in 1970 totaled $42.8 billion in current U.S. dollars, had risen to

$683.4 billion by 2014. These trends among U. S. consumers are attributed to faster-paced

lifestyles, an increase in the percentage of women working outside the home, and a rise in the

number of single-parent households. Table 2 presents sales and growth forecasts for the industry

by format.

Table 2: Projected Food and Drink Sales, 2014, by Type of Outlet

Type of Outlet Sales (percent of Total) Growth Rate

Full Service Restaurants 49.2 2.6%

Limited Service Restaurants 39.0 4.4%

Buffets and Cafeterias 0.7 2.5%

Social Caterers 1.3 4.6%

Snack and nonalcoholic beverage bars

5 5.0%

Bars and Taverns 4 3.4%

Total Eating and Drinking Places 100 3.6% Source: National Restaurant Association Forecast (www.restaurant.org)

The National Restaurant Association’s Restaurant Trends Study, 2013, found locally

sourced food, gluten-free items, and healthful kids’ meals to be the top menu trends for both full

and limited service restaurants. The top challenges noted by restaurant managers in the survey

were healthcare reform, government regulation, the economy, and recruiting and retaining

employees. The restaurant business is notorious for high employee turnover and is extremely

labor intensive, with sales per full time employee running at less than $73,000 per year—notably

lower than for most industries.

The industry is also highly fragmented. With more than 990,000 competitors in the U.S.,

more than 90 percent employ less than 50 employees and seven out of every 10 firms in the

restaurant industry are single-unit independents with less than 20 employees. Sales per unit in

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full service restaurants average $874,000 per year—slightly higher than the $777,000 average for

a limited table service restaurant. Table 3 presents industry averages for the Restaurant industry.

Table 3: Industry Financial Information

Full Service Restaurants (NAICS 722210) N = 2,587

Limited Table Service Restaurants (NAICS 722211) N = 187

Inc. Stmt. Data % of Sales $/Seat % of Sales $/Seat

Total Sales 100% $5295 100% $8,456

Cost of Food 33.3 $1,776 32.5 $2,397

Payroll & Benefits 33.9 $1,758 27.5 $1,964

Direct Operating Exp. 5.7 $307 4.8 $317

Marketing 1.9% $90 3.3 $248

Utilities 3.2 $175 2.9 $236

Gen. & Admin. Exp. 3.0 $156 2.6 $171

Occupancy Expense (Rent, Ins. & Taxes)

7.0 $366 7.5 $532

Balance Sheet Data % of Assets % of Assets

Cash 12.4 13.2

Accounts Recvble .9 2.6

Inventory 3.3 6.0

Other Current Assets 2.6 3.3

Fixed Assets 57.0 54.8

Intangibles 14.2 9.8

Other L. T. Assets 9.6 10.3

Current Liabilities 36.1 40.0

L.T. Debt 45.6 37.9

Other L. T. Liabilities 8.5 10.4

Net Worth 9.9 11.7

Selected Fin. Ratios

Current .6 1.4

Quick .4 .4

Fixed Assets/Worth 16.2 3.9

Debt/Worth 26.7 5.6

NS/Fixed Assets 5.5 6.5

NS/Total Assets 3.0 3.2 Sources: National Restaurant Association Industry Operations Report Risk Management Associates Key Financial Ratios

The Company

Luby’s can trace its roots to a San Antonio, TX cafeteria which originally opened in

1947. The company went public in 1973, with shares listed on the New York Stock Exchange

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(symbol LUB). In 1987 the firm had opened its 100 th

location and hit the 200 mark 10 years

later. By 2014, the firm was operating four separate business units as detailed below.

Restaurant Operations

From its headquarters in Houston, TX, Luby’s operated restaurants under several brand

names as discussed below. In November of 2014, Luby’s operated 174 restaurants at 169

property locations, of which 92 were located on property owned by the firm and 82 on leased

premises. Five of the operating locations were Combo locations but considered two restaurants

(Luby’s and Fuddruckers side-by-side). Two operating locations were primarily Luby’s

Cafeterias, but also served Fuddruckers hamburgers. One operating location was a Bob Luby’s

Seafood Grill. 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 between 180 and 220. See Table 4 below for a list of locations in

November of 2014.

Table 4: Company owned and operated locations

State Locations

Texas

Houston Metro 54

San Antonio Metro 18

Rio Grande Valley 13

Dallas/Fort Worth Metro 14

Austin 11

Other Texas Markets 17

California 9

Illinois 6

Arizona 5

Maryland 5

Virginia 3

Georgia 3

Oklahoma 3

Other States 13

Total 174

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Luby’s Cafeteria

Following the acquisitions, the Luby’s brand still accounted for 63% of the firm’s total

revenues. In its 96 cafeteria locations (92 in Texas, 2 in Oklahoma, 1 in Arkansas and 1 in

Louisiana), the firm emphasized made-from-scratch food from a serving line including 15 to 22

entrées, 12 to 14 vegetable dishes, 8 to 10 salads, and 10 to 12 varieties of desserts daily. Each

dish was available a-la-carte or as part of several combination meals like the popular LuAnn

Platter.

Scratch preparation was integral to the Luby’s vision—the firm even made its own

mayonnaise. Luby’s recipes have been featured in a number of publications and the firm

received several awards for its 60 th

anniversary recipe book in 2008. Most cafeterias were open

for lunch and dinner seven days a week and for breakfast on the weekend. All locations sold

food-to-go orders, which accounted for 13.0% of restaurant sales in fiscal year 2013 and 2014.

Luby’s staff regularly reviewed menus and introduced new and seasonal food

preferences. Each restaurant was operated as a separate unit under a general manager who has

responsibility for day-to-day operations, including food production and personnel selection and

supervision. In addition to the general manager, each location had one associate manager and

one to two assistant managers who oversaw the restaurant’s full-time and part-time associates

working in overlapping shifts.

An area leader supervised each general manager. Each area leader was responsible for

approximately 7 to 10 units, depending on location. Quality control teams visited each location

to work with staff on maintaining consistency in the firm’s recipes, train personnel in new

techniques, and implement new procedures within the company.

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In fiscal year 2013, the company opened a new Luby’s cafeteria and a new Fuddruckers

on the same property with a common wall but separate kitchens and dining areas. In 2014, four

more of these combination locations were added. These Combo locations shared a general

manager.

Fuddruckers

Most of the remaining sales came from the Fuddruckers brand. Luby’s owned and

operated 71 Fuddruckers restaurants three of which were converted from Cheeseburger in

Paradise locations in 2014. Boasting that they serve the “World’s Greatest Hamburgers,”

Fuddruckers locations featured an open kitchen where guests could see burgers freshly prepared

from scratch all day.

Fuddruckers served “fresh, never frozen, 100% USDA All-American premium-cut beef”

with no fillers or artificial ingredients added. Fuddruckers sesame-topped buns were baked from

scratch all day in each restaurant’s bakery. As in the cafeterias, guests at Fuddruckers ordered

and paid as they enter the restaurant. They then take the cooked-to-order burger to Fuddruckers’

Build Your Own® produce bar where they added their choice of fresh veggies and signature

Fuddruckers condiments.

While Fuddruckers’ signature burger accounts for approximately 47.0% of Fuddruckers

restaurant sales, the menu also included exotic burgers such as buffalo, steak sandwiches,

chicken breast sandwiches, hot dogs, a variety of salads, fish sandwiches, wedge-cut French

fries, onion rings, soft drinks, handmade milkshakes, and bakery items. Beer and wine were

served but account for less than 2% of restaurant sales. Fuddruckers’ decor had a casual,

Americana theme.

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Each Fuddruckers was staffed by a general manager, two or three assistant managers, and

25 to 45 other associates, including full-time and part-time associates working in overlapping

shifts. With Fuddruckers’ self-service concept, the restaurants do not employ waitstaff.

Fuddruckers restaurant operations were divided into three geographic regions, each

supervised by an area vice president. The three regions were further divided into a total of eight

areas, each supervised by an area leader who oversaw 7 to 8 restaurants.

Franchising

In addition to the company-owned locations, Luby’s had 51 franchisees operating another

110 Fuddruckers restaurants in locations across the U.S. and in several other countries, four of

which were added in 2014. Eighteen franchise owners each owned from two to twelve

restaurants. The thirty-three remaining franchise owners owned one restaurant each. The

Fuddruckers acquisition came with 130 franchise locations, some of which were later closed or

purchased as company-owned restaurants, but Luby’s continues to seek new franchising

opportunities. Table Five details those locations.

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. Franchisees pay an initial franchise fee and annual royalty payments (based on

franchise location profits). In return, Fuddruckers provided franchise assistance for: 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

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policies and procedures manuals. Franchisees were responsible for all direct costs for the

development, construction and operation of their restaurants.

Table 5: Fuddruckers Franchise Locations

State/Country Franchises

Texas

Houston Metro 1

Dallas/Fort Worth Metro 10

Other Texas Markets 13

California 8

Florida 7

Georgia 3

Idaho 1

Louisiana 3

Maryland 2

Massachusetts 5

Michigan 5

Missouri 3

Montana 5

Nebraska 1

Nevada 2

New Jersey 2

New Mexico 3

North Carolina 2

Oregon 1

Pennsylvania 4

South Carolina 7

South Dakota 2

Tennessee 3

Virginia 3

Wisconsin 2

Other States 2

Canada 1

Chile 1

Dominican Republic 1

Italy 2

Mexico 1

Panama 1

Puerto Rico 5

Total 110

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All franchisees were required to operate their restaurants in accordance with Fuddruckers

standards and specifications, including controls over menu items, food quality and preparation.

At least three managers per restaurant must successfully complete the firm’s training program.

Franchised restaurants were evaluated regularly for compliance with franchise agreements and

company standards during periodic, unannounced, on-site inspections and standards evaluation

reports.

Cheeseburger in Paradise

Developed in collaboration with singer Jimmy Buffet and based on one of his most

popular songs, Cheeseburger in Paradise was a casual, full-service restaurant and bar with a

tropical theme. The acquisition was a disappointment. Only eight of the purchased 23

Cheeseburger in Paradise locations still operated under that name at the end of 2014. Other

locations were closed or converted to the Fuddruckers format. The remaining locations were

located in high traffic areas near successful malls and tourist attractions.

Culinary Contract Services

In November 2014, Luby’s operated culinary contract services at 25 locations; 18 in the

Houston, Texas area, three in Louisiana, two in Austin, Texas, and one each in Florida and

Oklahoma. Luby’s Culinary Contract Services provided food service management to healthcare,

educational, and corporate dining facilities.

The healthcare accounts were full service and typically included in-room delivery,

catering, vending, coffee service, and retail dining. In fiscal year 2014, the firm had servicing

contracts for 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 buildings, and one freestanding coffee

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shop located inside an office building. Luby’s managers believed they had a unique ability to

deliver culinary services including facility design and procurement as well as nutrition and

branded food services to business clients.

Properties

Luby’s owned the underlying land and buildings on which 71 of the Luby’s Cafeterias

and 22 Fuddruckers restaurants were located. Five of these restaurant properties contained excess

building space or an extra building on the property which had ten tenants unaffiliated with

Luby’s, Inc. In addition to the owned locations, 25 Luby’s Cafeteria restaurants, 48 Fuddruckers

restaurants, and 8 Cheeseburger in Paradise restaurants were operated on leased property. Most

of the leases were fixed-dollar rentals, but required the firm to pay additional amounts related to

property taxes, hazard insurance, and maintenance of common areas.

Table 6: Property and Equipment, Intangible Assets and Goodwill (net of impairment and accumulated depreciation )

August 27, 2014

August 28, 2013

Estimated Useful Lives

(years)

(In thousands)

Land

$ 69,767

$ 62,191

—

Restaurant equipment and furnishings

131,932 116,664 3 to 15

Buildings 181,535 172,342 20 to 33

Leasehold and leasehold improvements

40,835 39,108

Office furniture and equipment 7,537 7,444 3 to 10

Construction in progress 10,313 7,814 —

441,919 405,563

Less accumulated depreciation and amortization

(228,427) (215,066)

Property and equipment, net $ 213,492 $ 190,497

Intangible assets, net $ 24,014 $ 25,517 21

Goodwill $ 1,681 $ 2,169

The firm also retained three owned properties and seven leased properties to develop for

future use as well as one owned non-operating property held for resale and valued at $1.0

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million. The firm owned four other properties. One location was used as a bakeshop supporting

the baked products for operating restaurants. One location was leased to third party tenants

utilizing the entire building and two were leased to Fuddruckers franchisees.

Marketing

Luby’s historically relied on word-of-mouth marketing. Prior to 1991, the firm averaged

less than 0.5% of sales for its marketing budget. During the 1990s, the firm toyed with a more

aggressive advertising strategy--gradually increasing its marketing budget to a high in 1999 of

about 2.5% of sales. More recently, the firm has spent approximately 1.1% of restaurant sales on

marketing, across radio and television advertising, billboards, direct mailings, movie theater

advertising, and social media. Total advertising expense (included in other operating expenses)

was $4.6 million, $3.9 million, and $2.4 million in fiscal 2014, 2013, and 2012, respectively.

The firm’s market research indicated several major customer groups frequent Luby’s

cafeterias: families with small children, seniors, shoppers, travelers, and business people. These

groups appreciated the opportunity to select a more balanced meal than those offered by most

quick service and casual dining establishments. The firm would like to emphasize more targeted

marketing to families but seniors were still a significantly higher percentage of the customer base

for Luby’s than for non-cafeteria competitors. Younger generations still tended to view Luby’s

as the place their grandparents (or great grandparents) eat. By contrast, the Cheeseburger in

Paradise customer was younger, while the customers for Fuddruckers included a wider range of

ages.

Purchasing and Distribution

Purchasing had the most radical change in recent years. Prior to 1998, local cafeteria

managers conducted almost all their own buying. In 1999, the firm centralized purchasing to

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obtain quantity discounts. For each of its three major purchasing regions, the firm contracted

with a competitively selected prime supplier. Centralizing purchasing and distribution was

intended to allow Luby’s to reduce costs through volume buying and by minimizing suppliers’

distribution costs. In keeping with its commitment to fresh, made-from-scratch food, the firm

purchased locally sourced ingredients whenever practical.

Human Resources

Luby’s enjoyed generally good labor relations. None of the firm’s employees were

unionized and many employees had been with Luby’s for years—a rarity in an industry

characterized by high employee turnover. Hourly employees earned between $7.81 and $13.00

an hour depending on length of service. In dramatic contrast to other firms in the restaurant

industry, substantially all of the employees received group life, health and disability insurance, a

two-week paid vacation (three weeks following five years of service), free meals, and optional

dental, vision, and prescription drug coverage. All were covered by insurance and retirement

plans. The voluntary 401(k) plan voluntary was available for any employee over the age of 21

with at least one year of continuous employment with the company. The firm matched 25

percent of each employee’s contributions to a maximum of four percent of salary, which cost the

firm just over $500,000 in 2014.

Luby’s had long emphasized in-house training. New managers attended a several-month-

long program before moving to a restaurant as an Assistant Manager where training continued in

all aspects of the food service business. Once promoted to Associate Manager, they were

eligible for profit sharing based on store sales and profitability. For Senior Managers, profit

sharing can more than double their salaries. The majority of the firm’s senior managers had been

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with the firm for 10 or more years. Low turnover was of particular interest since management

tenure in the restaurant industry was strongly tied to store performance.

Technology and Support Services

The firm leased a service facility in Houston, TX from the Pappas brothers. The facility

had 21,000 square feet of warehouse space plus 5,644 square feet of office space. From this

facility, the firm dispatched repair and service teams to restaurants having equipment problems.

The facility also fabricated proprietary equipment for its restaurants. These systems had higher

performance and longer life than comparable products generally available on the market.

The firm also maintained an active social media presence and several websites which

provided restaurant locations, daily menus, and other information about the firm. The websites

offered customers the option of ordering Luby’s-to-go meals by phone, fax, or online. A similar

Fuddruckers application was in development. The information system at Luby’s also allowed

the firm to move much of its training online.

Conclusion

Despite the changes Luby’s had made, the stock had underperformed all comparison

groups including the S&P SmallCap 600 Index and an industry peer group consisting of Bob

Evans Farms, Inc., CBRL Group, Inc., Denny’s Corporation, Frisch Restaurant Group, Red

Robin Gourmet Burgers and Ruby Tuesday Inc. These companies were multi-unit family and

casual dining restaurant operators in the mid-price range (Table 7).

Table 7: Comparison of stock price

2008 2009 2010 2011 2012 2013

Luby’s, Inc. 100.00 61.33 69.07 64.15 88.96 102.21

S&P 500 Index—Total Return 100.00 78.89 82.76 98.08 116.03 137.51

S&P 500 Restaurant Index 100.00 98.65 128.73 173.19 188.78 225.69

Peer Group Index Only 100.00 102.59 114.98 132.66 167.20 238.64

Peer Group Index + Luby’s Inc. 100.00 99.80 111.76 127.71 161.55 228.71

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Other measures of performance had been similarly disappointing. Same store sales

company-wide were flat in 2014, but differed across brands. While same store sales declined

3.5% at the Fuddruckers restaurants, they were offset by increases at Luby’s locations and at the

single Combo location which had been open more than two years. Total revenues were up,

mostly from the Luby’s, CCS, and Combo locations. Despite the sales increase, the firm again

reported a net loss of $1.6 million for 2014. While some segments of the company reported

profits, they were more than offset by a $2.4 million loss from the Cheeseburger in Paradise

brand and expenses related to a dozen store openings.

While the firm has been discounted by many analysts, CEO Christopher Pappas began

aggressively buying the company’s stock in early 2015. In January, he purchased 43,254 shares

for $203,884.79 and followed those purchases with an additional $386,836.00 investment,

acquiring another 78,381 shares during the first week of February. Those purchases raised his

total ownership to 3,586,124 shares valued at approximately $18,181,648.68. Whether that

investment was a wise one depends on the firm’s strategy in the coming years.

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References

Brewer, Jim (Feb 9th, 2015). Luby's CEO Purchases $115,737.96 in Stock (LUB). WKRB

News.

Fuddruckers website, (www.Fuddruckers.com).

Koo Koo Roo website, (www.kookooroo.com).

Luby’s, Inc. SEC filing forms 10-K (1998-2014)

Luby’s company website, (www.Lubys.com).

Luby’s Culinary Services website, (www.Lubyscs.com).

National Restaurant Association, Restaurant Spending, July, 2002, available at

www.restaurant.org

National Restaurant Association, Restaurant Industry Forecast, 2014, available at

www.restaurant.org

National Restaurant Association, Industry at a glance, 2014, available at www.restaurant.org

National Restaurant Association, Restaurant Trend Study, 2013, available at www.restaurant.org

Risk Management Associates (2014). Annual Statement Studies and Key Financial Ratios.

Ruggless, Ron (2001). Luby’s woes likely to continue, but management is optimistic. Nation’s

Restaurant News July 9, 2001.

Ruggless, Ron (2001). Struggling cafeteria chains draft casual dining vets in recovery bids.

Nation’s Restaurant News January 20, 2001.

Ruggless, Ron (2003). Cafeterias face plate full of pressures. Nation’s Restaurant News

January 20, 2003.

Siskos, Catherine (2002). Shareholders Unite!, Kiplinger’s Personal Finance, available at

www.kiplinger.com

U. S. Census Bureau, 1997 Economic Census: Accommodation and Food Services,

(www.census.gov).

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LUBY’S, INC. Consolidated Statements of

Operations (USD $)

In Thousands, except Per Share data, unless

otherwise specified

12 Months Ended

Aug. 27, 2014 Aug. 28, 2013 Aug. 29, 2012

SALES:

Restaurant sales $ 368,267 $ 360,001 $ 324,536

Culinary contract services 18,555 16,693 17,711

Franchise revenue 7,027 6,937 7,232

Vending revenue 532 565 618

TOTAL SALES 394,381 384,196 350,097

COSTS AND EXPENSES:

Cost of food 106,284 103,070 90,416

Payroll and related costs 127,792 123,864 112,279

Other operating expenses 68,820 64,918 54,007

Occupancy costs 21,060 21,012 18,097

Opening costs 2,164 783 395

Cost of culinary contract services 16,177 14,874 16,545

Depreciation and amortization 20,062 18,376 17,894

General and administrative expenses 35,038 32,217 30,808

Provision for asset impairments, net 2,498 615 451

Net loss (gain) on disposition of property and equipment (2,357) (1,723) 278

Total costs and expenses 397,538 378,006 341,170

INCOME FROM OPERATIONS (3,157) 6,190 8,927

Interest expense (1,247) (920) (942)

Other income, net 1,131 1,052 1,067

Income (loss) before income taxes and discontinued

operations (3,273) 6,322 9,052

Provision (benefit) for income taxes, net (1,660) 1,775 1,654

Income (loss) from continuing operations (1,613) 4,547 7,398

Income (loss) from discontinued operations, net of

income taxes (1,834) (1,386) (645)

NET INCOME (LOSS) $ (3,447) $ 3,161 $ 6,753

Income (loss) per share from continuing operations:

Basic (in Dollars per share) $ (0.06) $ 0.16 $ 0.26

Assuming dilution (in Dollars per share) $ (0.06) $ 0.16 $ 0.26

Income (loss) per share from discontinued

operations:

Basic (in Dollars per share) $ (0.06) $ (0.05) $ (0.02)

Assuming dilution (in Dollars per share) $ (0.06) $ (0.05) $ (0.02)

Net income (loss) per share:

Basic (in Dollars per share) $ (0.12) $ 0.11 $ 0.24

Assuming dilution (in Dollars per share) $ (0.12) $ 0.11 $ 0.24

Weighted-average shares outstanding:

Basic (in Shares) 28,812 28,618 28,351

Assuming dilution (in Shares) 28,812 28,866 28,429

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Luby’s, Inc.

Consolidated Balance Sheets

(USD $) In Thousands, unless otherwise specified

Aug. 27, 2014 Aug. 28, 2013

Current Assets:

Cash and cash equivalents $ 2,788 $ 1,528

Trade accounts and other receivables, net 4,112 4,083

Food and supply inventories 5,556 4,908

Prepaid expenses 2,815 3,267

Assets related to discontinued operations 52 196

Deferred income taxes 587 1,635

Total current assets 15,910 15,617

Property held for sale 991 449

Assets related to discontinued operations 4,204 4,218

Property and equipment, net 213,492 190,497

Intangible assets, net 24,014 25,517

Goodwill 1,681 2,169

Deferred income taxes 11,294 7,923

Other assets 3,849 4,255

Total assets 275,435 250,645

Current Liabilities:

Accounts payable 26,269 23,655

Liabilities related to discontinued operations 590 527

Accrued expenses and other liabilities 23,107 21,817

Total current liabilities 49,966 45,999

Credit facility debt 42,000 19,200

Liabilities related to discontinued operations 278 448

Other liabilities 8,167 7,865

Total liabilities 100,411 73,512

SHAREHOLDERS’ EQUITY

Common stock, $0.32 par value; 100,000,000 shares authorized; Shares

issued were 28,949,523 and 28,804,344, respectively; Shares

outstanding were 28,449,523 and 28,304,344, respectively

9,264 9,217

Paid-in capital 27,356 26,065

Retained earnings 143,179 146,626

Less cost of treasury stock, 500,000 shares (4,775) (4,775)

Total shareholders’ equity 175,024 177,133

Total liabilities and shareholders’ equity $ 275,435 $ 250,645

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FIVE-YEAR SUMMARY OF OPERATIONS

Fiscal Year Ended

August 28,

2013

August 29,

2012

August 31,

2011

August 25,

2010

August 26,

2009

(364 days)

(364 days)

(371 days)

(364 days)

(364 days)

(In thousands except per share data)

Sales

Restaurant sales $ 366,155 $ 324,536 $ 325,383 $ 230,342 $ 245,799

Culinary contract services 16,693 17,711 15,619 13,728 12,970

Franchise revenue 6,937 7,232 7,092 645 –

Vending revenue 565 618 654 44 –

Total sales 390,350 350,097 348,748 244,759 258,769

Income (loss) from continuing

operations 4,222 7,613 2,800 (494 ) (14,032 )

Income (loss) from discontinued

operations (a)

(937 ) (759 ) 165 (2,399 ) (12,386 )

Net income (loss) $ 3,285 $ 6,854 $ 2,965 $ (2,893 ) $ (26,418 )

Weighted-average shares

outstanding:

Basic 28,618 28,351 28,237 28,129 28,084

Assuming dilution 28,866 28,429 28,297 28,129 28,084

Total assets $ 250,305 $ 231,017 $ 228,020 $ 242,342 $ 199,406

Total debt $ 19,200 $ 13,000 $ 21,500 $ 41,500 $ –

Number of restaurants at fiscal year

end 180 154 156 154 119

Number of franchised restaurants at

fiscal year end 116 125 122 130 –

Number of Culinary Contract

Services contracts at fiscal year

end 21 18 22 18 15

Costs and Expenses

(As a percentage of restaurant

sales)

Cost of food 28.7 % 27.9 % 28.9 % 27.6 % 27.6 %

Payroll and related costs 34.5 % 33.9 % 34.8 % 36.0 % 36.3 %

Other operating expenses 18.1 % 16.7 % 17.5 % 17.6 % 19.0 %

Occupancy costs 5.9 % 5.4 % 5.6 % 4.0 % 3.4 %

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Segment Data Years Ended

August 27,

2014

August 28,

2013

August 29,

2012

(In thousands) Sales:

Company-owned restaurants $ 368,799 $ 360,566 $ 325,154

Culinary contract services 18,555 16,693 17,711

Franchising 7,027 6,937 7,232

Total $ 394,381 $ 384,196 $ 350,097

Segment level profit:

Company-owned restaurants $ 44,843 $ 47,702 $ 50,355

Culinary contract services 2,378 1,819 1,166

Franchising 7,027 6,937 7,232

Total $ 54,248 $ 56,458 $ 58,753

Depreciation and amortization:

Company-owned restaurants $ 17,357 $ 16,417 $ 15,990

Culinary contract services 409 440 471

Franchising 767 767 767

Corporate 1,529 752 666

Total $ 20,062 $ 18,376 $ 17,894

Total assets:

Company-owned restaurants $ 220,793 $ 203,850 $ 182,162

Culinary contract services 2,724 3,547 3,774

Franchising 13,906 14,674 15,352

Corporate 38,012 28,574 29,601

Total $ 275,435 $ 250,645 $ 230,889

Capital expenditures:

Company-owned restaurants $ 43,075 $ 30,741 $ 19,077

Culinary contract services 64 95 292

Franchising — — —

Corporate 3,045 503 6,476

Total $ 46,184 $ 31,339 $ 25,845

Income (loss) before income taxes and discontinued operations:

Segment level profit $ 54,248 $ 56,458 $ 58,753

Opening costs (2,164 ) (783 ) (395 )

Depreciation and amortization (20,062 ) (18,376 ) (17,894 )

General and administrative expenses (35,038 ) (32,217 ) (30,808 )

Provision for asset impairments, net (2,498 ) (615 ) (451 )

Net gain (loss) on disposition of property and equipment 2,357 1,723 (278 )

Interest income 6 9 9

Interest expense (1,247 ) (920 ) (942 )

Other income, net 1,125 1,043 1,058

Total $ (3,273 ) $ 6,322 $ 9,052

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Figure 1

Luby’s Locations

(Source: Luby’s Web Page http://www.lubys.com)