Luby’s (NYSE:LUB)

Elevator Pitch

At the beginning of June 2020, Luby’s announced that post its strategic review, the Board had decided to sell off its operating divisions and assets and distribute the net proceeds to shareholders.

Upon first glance, Luby’s does not look like an attractive investment proposition, however, it has a substantial Real Estate Portfolio that was recently appraised for ~US$210m as well as a high margin franchise operation that could be worth US$40m. After adjusting the value of the Real Estate portfolio based on the County tax appraised values and local comps, I believe once all debts and lease obligations are repaid, the sales process could generate enough proceeds to pay shareholders up to US$2.50 per share, representing potential upside of >60%.

Finally, the shareholder base gives me increased confidence that we should be treated fairly, with the management team owning over 30% and Jeff Gramm’s Bandera Partners owning another 10%.

 

Valuation

Segment

Valuation (US$m)

Notes

Real Estate:

$150m

70% of last appraisal, approx. $180 per square foot

Franchise Business:

$40m

8X EBITDA

Other:

$10m

Some remaining profitable sites

Total:

$200m

 

 

 

 

Total liabilities:

$115m

 

NAV:

$85m

 

 

 

 

Shares:

30.5m

 

NAV per share:

$2.80

 

 

 

 

Current price:

$1.50

 

Upside:

85%

 

 

 

 

Expected cash burn:

$20m

Based on estimates below

Adj. NAV per share:

$2.15

 

Expected Return:

40%

 

 

Key Risks & Concerns

I have a number of concerns with this investment, so if anybody reading this has experience with the company, management or any insight at all, I’d be very appreciative of it. Until I can get further comfort around the below, this will only be a small position.

 

  • Real Estate Value
    • The portfolio is predominantly their own restaurants. With all the stress on the industry due to COVID-19, there is likely to be an increased supply of properties for sale in this space, and a lack of demand from budding restaurateurs to start new businesses. Therefore, the prices they are able to achieve could be much lower than my estimate.
    • I looked at the locations for many of their owned properties, and they seem to be well located, creating the possibility for them to be repurposed – but this requires further investment from the new owner, and therefore, a lower purchase price.

 

  • Cash Burn
    • As of early June, 31 of their Luby’s Cafeteria’s and 8 of their Fuddruckers were operating – generating weekly sales of approximately 75% of the pre-pandemic levels
    • This represents 40% of their Luby’s locations and 29% of their Fuddruckers. They said 59 franchisees were operating, which is about 60% of the total in operating as at Nov-19.
    • If we apply these percentages to the quarter ending March 20 sales numbers we get the following: 

Revenue Segment

March 2020 Quarterly Sales

% Open

Current Quarterly Run-Rate

Luby’s Cafeteria

$48m

40%

$14m

Fuddruckers owned

$12m

29%

$3m

Fuddruckers franchise

$1m

60%

$1m

Total sales:

$61m

 

$18m

 

    • On the cost side, I will assume variable costs remain variable (cost of food etc.). They made the comment that 50% of General & Admin staff were placed on furlough, and remaining staff had their salaries reduced by 50%. Therefore, I get the following cost base:

Cost Segment

March 2020 Quarterly Figure

Adjustment

Current Quarterly Run-Rate

Cost of Food

$17m

Remains @ 28% of sales

$5m

Payroll

$24m

50%  furloughed and remaining halved

$6m

Other OPEX

$10m

Assume 30% reduction

$7m

Occupancy

$4m

Assume flat

$4m

SG&A

$7m

Assume 30% reduction

$5m

Interest

$1.5m

Assume flat

$1.5m

Total:

$60m

 

$28.5m

 

Therefore, they are potentially burning $10m per quarter. However, given the insider ownership, if they are burning this much cash, I think it’s likely they will seek to put the business into hibernation mode as quickly as possible to prevent further value erosion.

If we assume a “worst case scenario” would be this level of cash burn for 4 quarters, my estimated NAV would reduce by $40m and equate to roughly $1.45 (around the current share price).

 

  • Debt
    • The company has a meaningful debt load at ~$50m gross
    • The more concerning part is the creditor is not a normal bank, but a shrewd credit investor – MSD Partners (Michael Dell’s family office)
      • This makes covenants more important, as they are less likely to be lenient then a normal bank
    • Maturity: December 2023
      • But they have a $10m amortisation amount due in Dec-20
    • Covenants
      • Liquidity of at least $3m at the end of each quarter
      • Asset Coverage ratio of at least 2.5:1.0
      • Asset Coverage Ratio = Value of Mortgaged Properties / Term Loan + Revolver
    • Any proceeds from Asset disposals must first go toward retiring the outstanding debt
    • The Credit Agreement can be found here https://www.sec.gov/Archives/edgar/data/16099/000119312518349903/d636171dex101.htm

 

  • Timing
    • As this is somewhat of a melting ice cube, the longer it takes for them to sell the assets off, the lower the asset value that will be available for distribution to shareholders
    • However, as I said before, given the alignment with management, they are highly incentivised to move as quickly as possible

 

History & Background

Luby’s operates two fast casual dining chains:

  • Luby’s Cafeteria: founded in 1947 in San Antonio, serves great tasting, home-style meals, at an excellent price point in a Cafeteria format
    • 78 locations, mostly in Texas
  • Fuddruckers: founded in 1980, serves premium burgers in a lively atmosphere
    • 139 location (41 company owned)

 

The company has been publicly traded since 1982 and originally was a great performer. However, in the early 2000’s the company was struggling under too much debt and declining same-store-sales.

In 2001, Chris and Harris Pappas, a pair of extremely successful restaurant entrepreneurs, stepped in to help save the company through a $10m convertible note. They also took on the roles of CEO and COO. A major restructuring occurred over the next 2 years, involving assets sales etc. to get the debt to a manageable level. They initially had great success, with sales bottoming in 2003 before returning to growth and the balance sheet being back to a net cash position by 2006.

Then the GFC hit, and sales declined by 23% from 2007 to 2010. They managed to keep the business cash flow positive throughout this period, and in 2010 they paid $61m to acquire Fuddruckers out of Bankruptcy. This took them from a net cash position to net debt.

The company looked to be doing well, but in 2012 margins started coming under pressure as they pushed on with expansion. Since then, same-store-sales have turned negative, the company took on more debt and things have spiralled – culminating in what is now essentially a liquidation.

 

Real Estate Portfolio

Property Appraisal from 2019 Annual Report

 

Number of Properties

Appraised Value

Luby’s Cafeteria’s:

52

$153.7m

Fuddruckers Restaurants:

9

$18.4m

Combos:

5

$21.9m

Leased to Fuddruckers Franchisees:

3

$6.1m

Non-operating held for sale:

4

$10.3m

Bake shop:

1

$1.1m

Total:

75

$211.5m

 

To “sense check” these numbers, I looked up a selection of the Luby’s locations via the local county appraiser:

Luby’s Cafeterias

City

Address

Building SqFt

Land SqFt

Assessors Value

Dallas

13455 MIDWAY RD, DALLAS, TX 75244

11,402

90,910

$2,103,320

El Paso

1188 HAWKINS BLVD, EL PASO, TX 79925 

10,062

96,000

$1,645,286

Ft Worth

1200 BRIDGEWOOD DR, FT WORTH, TX 76112

11,696

101,458

$1,209,974

Ft Worth

3801 NORTHEAST LOOP 820, FT WORTH, TX 76137

11,268

96,573

$1,385,964

Houston

730 WEST FM 1960, HOUSTON, TX 77090

17,545

n/a

$2,589,917

Houston

11595 FUQUA, HOUSTON, TX 77034

11,215

50,517

$1,761,486

Houston

5335 GULF FREEWAY, HOUSTON, TX 77023 

10,273

n/a

$2,802,847

Houston

22422 TOMBALL PKWY, HOUSTON, TX 77070

9,799

n/a

$2,786,789

Houston

19668 NORTHWEST FREEWAY, HOUSTON, TX 77065

10,890

n/a

$4,333,061

Houston

11250 NORTHWEST FREEWAY, HOUSTON, TX 77092

10,260

n/a

$1,635,327

Houston

12405 EAST FREEWAY, HOUSTON, TX 77015

12,678

n/a

$2,194,119

Houston

1600 NASA RD ONE, HOUSTON, TX 77058

10,571

n/a

$2,038,948

Houston

7933 VETERANS MEMORIAL DR, HOUSTON, TX 77088

10,839

n/a

$2,283,128

Mission

701 EAST EXPRESSWAY 83, MISSION, TX 78572

10,280

88,960

$1,355,950

San Antonio

18206 BLANCO RD, SAN ANTONIO, TX 78258

9,902

95,375

$3,223,490

San Antonio

9251 FLOYD CURL DR, SAN ANTONIO, TX 78240

9,990

98,899

$1,634,630

San Antonio

4541 FREDERICKSBURG RD, SAN ANTONIO, TX 78201

10,125

73,500

$1,390,159

San Antonio

911 NORTH MAIN AVE, SAN ANTONIO, TX 78212

21,263

129,547

$5,926,840

San Antonio

944 SOUTHEAST MILITARY DR, SAN ANTONIO, TX 78214

9,445

112,951

$2,162,440

San Antonio

13400 SAN PEDRO AVE, SAN ANTONIO, TX 78216

11,450

65,209

$2,156,870

San Antonio

11811 WEST LOOP 1604 NORTH, SAN ANTONIO, TX 78254

8,833

87,991

$3,020,930

San Antonio

5307 WALZEM RD, SAN ANTONIO, TX 78218

16,889

158,515

$3,863,780

 

So the average Luby’s Cafeteria site is ~10,500 square feet, with amble on-site parking, a low “land utilisation” level and an average appraised value of ~$210 per square foot.

If we compare this to the appraised value in the annual report we get:

  • Appraised value: $154m
  • Number of properties: 52
  • Estimated square feet per property: 10,500
  • Implied total square feet: 546,000
  • Appraised value per square foot: $282

So the appraised value is ~30% higher than the tax values on average – which doesn’t seem unreasonable.

 

The final check is to look at what similar properties are currently for sale in their markets:

City

Address

Price

SqFt

P/SqFt

Dallas

5002 Columbia Ave

  $727,000

   2,450

       $297

Dallas

1719 N Fitzhugh Ave

  $975,000

   4,217

       $231

Dallas

436 Southerwestern Blvd

  $975,000

   1,308

       $745

Dallas

410 W Elmore Ave

  $649,000

   2,000

       $325

Dallas

3910 W Camp Wisdom Rd

$2,950,000

 48,490

        $61

Dallas

3132 W Miller Rd

$1,800,000

   9,141

       $197

Dallas

2904 S Ervay St

  $550,000

   3,204

       $172

Dallas

1001 Robbie Mince Way

$1,640,000

   8,061

       $203

Dallas

2600 Forest Ln

$2,900,000

 25,600

       $113

 

 

 

 

 

El Paso

1201 Myrtle Ave

  $420,000

   2,205

       $190

El Paso

6190 Doniphan Dr

  $720,000

   3,600

       $200

El Paso

9567 Dyer St

$1,654,000

   7,711

       $214

El Paso

1387 George Dieter Dr

$2,750,000

 16,900

       $163

El Paso

6930 Alameda Ave

$1,650,000

 16,000

       $103

 

 

 

 

 

Houston

8045 N Sam Houston Pky W

$3,400,000

   9,047

       $376

Houston

14297 Stuebner Airline Rd

$1,599,000

 14,950

       $107

Houston

22210 Loop 494

  $498,750

   2,160

       $231

Houston

234 E 39th st

  $175,000

   2,064

        $85

Houston

816 Montana St

  $350,000

   2,000

       $175

Houston

718 E Tidwell Rd

$1,200,000

   8,820

       $136

Houston

16485 Imperial Valley Dr

  $900,000

   2,953

       $305

Houston

519 Shepherd Dr

$1,800,000

   2,628

       $685

 

 

 

 

 

Mcallen

2111 S 2nd St

  $875,000

   1,796

       $487

Mcallen

4325 N Cage Blvd

$1,195,000

   4,845

       $247

Mcallen

901 S Jackson Rd

$1,750,000

   3,767

       $465

 

 

 

 

 

San Antonio

11221 Perrin Beitel Rd

$1,200,000

   6,930

       $173

San Antonio

9035 Huebner Rd

$1,100,000

   5,494

       $200

San Antonio

12030 Bandera Rd

  $350,000

   1,565

       $224

San Antonio

250 Enrique M Barrera Pkwy

  $450,000

   2,318

       $194

San Antonio

801 W Russell Pl

  $375,000

   3,432

       $109

San Antonio

4615 W Commerce St

  $499,999

   3,140

       $159

San Antonio

13719 W Interstate 10

$5,840,000

   4,910

      $1,189

San Antonio

2010 N Loop 1604 E

$1,850,000

   6,688

       $277

San Antonio

2618 Fredericksburg Rd

  $639,000

   6,468

        $99

San Antonio

10127 Coachlight St

  $750,000

   3,423

       $219

San Antonio

7003 Bandera Rd

  $895,000

   1,058

       $846

The overall average and median are $283 and $202.

 

City

Average

Median

Max

Min

Dallas

260.44

203.45

745.41

60.84

El Paso

174.16

190.48

214.50

103.13

Houston

262.40

202.95

684.93

84.79

Mcallen

399.47

464.56

487.19

246.65

San Antonio

335.41

200.22

1,189

98.79

Based on this data, a price of $200 per square foot seems like a reasonable guess, which is pretty close to the tax assessed value average. This implies a ~30% discount to the appraised values in the 2019 Annual Report, and forms the basis for my estimate in my NAV calculation.

 

Fuddruckers

While the number of franchised stores has declined somewhat in recent years, from 110 in 2014 to 102 last year, the average sales per store has steadily increased – which shows that the underlying franchisee’s may be doing ok.

The EBITDA from franchised operations, which should be a good estimate of pre-tax free cash flow, has consistently been around $5m p.a. since 2013. An 8X multiple of this seems about right to be, which is where I get my $40m valuation.

 

Conclusion

Luby’s isn’t a no brainer, and as such I’ve only made a very small bet thus far. However, it does seem to present a decent margin of safety, with a lot needed to go wrong (big hair cut to RE appraisal + material cash burn) for it to result in a permanent loss of capital. So I think it could be worth a punt.

As mentioned earlier, I’d really welcome views as I’m not overly familiar with the industry, geography or brands in this situation.

 

 

Disclaimer

All ideas, opinions, views, forecasts, comments, suggestions, or stock picks included in this blog are for informational, entertainment or educational purposes only and should not be considered investment advice.

I do my best to ensure all information provided is accurate, but do not gurantee it and I will make mistakes from time to time.

Please do your own research and do not rely on any facts, figures or opinions in this blog.

2 thoughts on “Luby’s (NYSE:LUB)

  1. Curious what you used for your R/E comps research? It’s a clean set of comps. When trying to fair value R/E, I’ve found that finding appropriate listings is often difficult (maybe helped in this case since the type of property is so standardized vs. something more niche/one-off).

    Just pulled off Loopnet or some other site, or something more creative?

    Like

    1. Yep just from LoopNet – I only selected properties that sounded/looked similar (i.e. retail/restaurants without tenants).

      What gave me some comfort is that the three methods (appraisal, tax assesment and comps) all pointed to a similar range

      Like

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