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Luby’s to sell most of its Fuddruckers restaurants to franchisees

January 28, 2019

Luby’s plans to offload most of its company-owned Fuddruckers hamburger restaurants to franchisees as it looks to improve its struggling core cafeteria business and pay down debt in the wake of a contentious proxy fight.

The Houston company on Monday announced it would retain its Fuddruckers restaurants locally, but planned on selling its corporate-owned locations around the country to franchisees. The moves would allow Luby’s to shed less-profitable locations while still collecting royalty fees from franchisees.

The announcement came as Luby’s reported a net loss of nearly $7.5 million (25 cents a share) during the first quarter of fiscal 2019, ended Dec. 19. That was a wider loss than the $5.5 million (19 cents) it lost in the year-earlier period. The company posted $102.9 million in sales during the quarter, down 9.3 percent from the same period last year. Same-store sales across the chain’s three restaurant brands -- Luby’s Cafeteria, Fuddruckers and Cheeseburger in Paradise -- fell by 5.5 percent.

“We know we have a lot of work to do,” CEO Chris Pappas said in a conference call with analysts and shareholders.

Luby’s, founded in San Antonio in 1947, has struggled to attract diners in recent years amid changing tastes and the growing popularity of fast-casual restaurants that appeal to younger patrons. The company, which moved to Houston in 2004, operates 140 restaurants nationally -- including 82 Luby’s Cafeterias, 57 Fuddruckers and one Cheeseburger in Paradise -- and oversees another 103 Fuddruckers franchise locations.

By refranchising the company-owned Fuddruckers locations, Luby’s will be able to offload its lowest-performing restaurants. First-quarter same-store sales at Fuddruckers fell 11.2 percent year-over-year, compared to a 3 percent decline at Luby’s Cafeterias in the same time period.

Refranchising complements Luby’s longtime strategy of cutting overhead costs and selling off real estate to fund restaurant operations and pay down debt. After shuttering 22 underperforming restaurants in fiscal 2018, the company closed another six locations during the first quarter. Real estate sales so far have generated $26.8 million, about 60 percent of its $45 million goal.

Luby’s reported $60 million in debt at the end of the first quarter after entering into a refinancing credit agreement with MSD Partners, a New York- and London-based investment adviser affiliated with Michael Dell.

Company management last week fended off an effort by activist investor Bandera Partners to oust Pappas and his brother Harris brothers, its largest shareholders, from the company’s board. Bandera, concerned with Luby’s strategy of selling off its real estate to fund unprofitable restaurants, launched a proxy fight in December. The effort failed on Friday when shareholders elected Luby’s slate of board candidates.

Pappas on Monday said he was pleased with the election results and promised to work “tirelessly” to maintain shareholder confidence. With the proxy fight over, Luby’s plans to spend more on digital marketing, training managers and staff to “delight customers” and use mobile ordering and delivery services to attract new diners.

“The business of operating these mature businesses in a highly competitive marketplace is tough,” Pappas said. “But we believe we have experienced and dedicated people to operate our company to the highest standards and manage the business to return to profitability and ultimately growth.”

paul.takahashi@chron.com

twitter.com/paultakahashi

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