Tag Archives: Luby’s

FOLLOW THE MONEY with ROGER LIPTON – article published in prestigious RESTAURANT FINANCE MONITOR – 1/15/22

RESTAURANT FINANCE MONITOR – 1/15/22 ISSUE – Follow the Money with Roger Lipton – Roger’s monthly column

Inflation is in fact the real concern, but not necessarily the kind the journalists are talking about. The headlines are all about supply channel distortions that lead to a rise in commodity prices and the increase in minimum wage that drives labor costs up. Those are ripples in the inflationary sea compared to the tidal wave that is lurking offshore. It just so happens that the dangers we are about to describe hang over us just as the economy is already cooling. Open Table data shows indoor dining during Christmas week was down 33% from 2019 and Jeffries’ economist just cut their Q1 Real GDP Growth estimate from 6.6% to 1.5%.  Here’s the problem. A large part of the “recovery” in the economy has been generated by consumers taking their savings rate back to 6-7% from over 30% at the beginning of the pandemic and the wealth effect due to home values and stock market indexes near record highs. Even with household wealth (on paper) at record levels, consumers’ sentiment is the lowest in at least 13 years, the lowest in 40 years by some measures. The “wealth”, however, is largely a mirage. Over half the return in the S&P 500 since April has come from five stocks, the concentration higher than 1969 or 1999, before those bubbles deflated. A number of prominent bubbles have already deflated, including the SPAC universe, and Bitcoin is down 33%. Stock in the Robinhood trading platform is down 50%, amplified by the declines of over 50% from the highs in Game Stop and AMC. All of this is to say that tens of trillions of dollars printed by central banks around the world has had a predictable effect. Until recently it did not impact food prices but asset inflation drove the wealth effect that has kept the music playing for over ten years. We doubt that our Federal Reserve leading worldwide central banks, and the conspiring political class, will have the political will to take the punch bowl very far away. The attempt to do so, however, could be very unpleasant.

Restaurant stocks, on the other hand, have corrected materially from their much higher valuations in the Spring of 2021. Especially since many well-run chains have discovered new profit centers by way of servicing off-premise diners, and could even produce record high profit margins once the pandemic dust finally settles, the fundamentals at the current valuations justify a fresh look. For example, five well established restaurant chains, starting at the top of the alphabet, BJRI, BLMN, CAKE, CBRL and CHUY, on January 5th are down an average of 28% from their highs last May. While it is true that QSR chains are actually up 10-15% over the last two years, that is distorted by the extraordinary performance of Domino’s, Papa John’s, Wingstop and Chipotle, all major beneficiaries of the pandemic. Absent those, the rest of QSR is down as well.  The five IPOs of ’21, DNUT, SG, FWRG, PTLO and BROS are down a similar 29% from their post IPO highs. The two rapidly growing service companies, TOST and OLO, are both down over 50% from highs, more extreme declines no doubt due to the fact that, promising as they are, neither is yet profitable. At this point investment in “best of breed” companies is one way to go, with names like Darden, Cheesecake and Texas Roadhouse in full service, McDonald’s and Starbucks in QSR. Priced much lower, at 6-7x near term EBITDA are mature chains such as Bloomin’ Brands, Brinker and Ark Restaurants in full service. Well established franchising companies, here to stay (and grow), in spite of recent disruptions, are companies such as Ruth’s Chris, Jack in the Box and Restaurant Brands, now trading at near term EBITDA multiples in the low teens. All these valuations are 25-40% lower than just seven to eight months ago.

Over one hundred percent has been made in less than a year in a restaurant stock that has been publicly held for almost forty years, namely Luby’s (LUB). Some of us remember when Luby’s “wrote the book” in the cafeteria business, with highly paid store managers leading a great operating culture. As late as 1999 LUB was paying $.80 per share in dividends. After a $49M loss in ’01, including a $30M write-down, the Pappas brothers, highly regarded Houston based restauranteurs, bought effective control (9% of the Company for $10M). Importantly, at that time the Company owned the land and building under 125 of their 219 restaurants. LUB has lost money in 12 of the twenty years of Pappas ownership. In the course of it, Fudruckker’s was bought in 2010 for $63M in cash, with 59 company operated stores (22 with land and building) and 129 franchised restaurants. In 2012 LUB bought Cheeseburger in Paradise for $10.3M in cash, with 23 full-service restaurants in 14 states. At the end of 2020 the Company consisted of 61 Luby’s (42 with land & building), 24 company operated Fudruckker’s (9 with land and building), 71 Fudruckker’s franchised locations, zero Cheeseburger’s. In late 2018, with the stock at $1.50, an activist investor initiated a proxy contest against 36% Pappas owners, which precipitated a Board decision in May ’19 to “consider strategic alternatives”, resulting in a September ‘20 decision to liquidate LUB with an estimated $3.50 per share value. So far $2.00 per share has been paid out, with an estimated additional $3.00 per share to come. This result illustrated, as this column suggested back in September, that the dirt can be worth more than the operations. It also didn’t hurt that both the Pappas brothers were over 70, likely an incentive to monetize their long-term holding in Luby’s.

Roger Lipton



Luby’s, Inc. (LUB) – The Long and Winding Road

Ever since Chris and Harris Pappas became involved in Luby’s in 2001, investors have hoped for either a turnaround in the operations of the company, the sale of the buildings and land that the company owned, a merger with their restaurant company or a combination of these.   After almost 20 years, on June 3rd of 2020, Luby’s announced it would finally pursue the sale of all its operations and assets and distribute the net proceeds to stockholders. The final distribution payment is expected to be paid in June of this year.

The following is a summary of the series of events that led to liquidation of the public company and the lessons to be learned.

Back in the Day

Luby’s, Inc. (LUB) has been publicly held for almost 40 years. Some of us remember when Luby’s traded as “best of breed”, writing the book in terms of operating culture within the cafeteria segment of the restaurant industry. Profitability became less consistent at the end of the 1990s  but the company was still paying an $0.80 per share dividend as late as 1999. By ’01, however, the company reported a $49M loss (including a $30M write-down). In the same year, Chris and Harris Pappas invested in Luby’s via a $10M convertible note that converted into 2M shares at a price of $5.00 per share (9% of the company).  Chris Pappas was named President and CEO, while Harris Pappas was named COO of the company. The company at that time operated 219 Luby’s restaurants, under 125 of which the land and building were owned.

Time Flies When You are Having Fun

 The Pappas brothers are highly respected Houston-based restauranteurs that operate a group of restaurants such as Pappadeaux Seafood Kitchens and Pappasito’s Cantinas. However, since taking over the company, Luby’s lost money in 12 of the 20 years the Pappas brothers have been in charge. In addition to the typical challenges of managing over 200 cafeterias, it didn’t help that the company also made two unsuccessful acquisitions. In 2010, the company acquired the Fuddruckers chain for $63M in cash, at which time  Fuddruckers operated 59 restaurants (of which 22 owned land and building). There were also 129 franchised restaurants. On December 6, 2012, Luby’s acquired the Cheeseburger in Paradise chain for approximately $10.3 million in cash, at the time operating 23 full-service restaurants within 14 states.

As the table below shows, the Luby’s brand had been shrinking ever since the Pappas brothers took over. After four years of growth, the Fuddruckers brand also began to shrink. However, the company still owned the buildings and land under a significant number of Luby’s and Fuddruckers restaurants. The poor operating results were obscuring the value in the company’s real estate.

Large Shareholders Become Impatient

In November of 2018, 9.8% long term shareholder, Jeff Gramm, co-founder of Bandera Partners, initiated a proxy contest by nominating four potential board members including himself, his father (former Senator Phil Gramm) and two others. At the time the stock was trading for approximately $1.50 per share, down from a peak of $25. Since the Pappas brothers owned 36% of the stock by then, the proxy fight was doomed to fail from the start. However, after 20 years of waiting for management to turn the company around, some large shareholders, including Bandera and another 9% long term shareholder, Hodges Capital, were trying to unlock the value in the company’s real estate.

Comments from Gramm’s proxy letter to management:

“At the same time, I have a fiduciary responsibility to the investors in my fund, and I’m writing today to tell you that what’s happening at Luby’s is simply not working. The Fuddruckers and Luby’s restaurant concepts do not generate a sufficient return on capital to justify the investments management is making, under your direction and supervision, into the business. The strategy of plowing cash flows back into restaurants works with good concepts like Pappadeaux and Pappasito’s, but it has been a failure at Luby’s.  Capital expenditures since fiscal 2008 have totaled $235 million dollars, about six times the company’s current market capitalization. The return on this investment has been dismal, and to pay down the debt you have accumulated in the process, Luby’s is liquidating the most valuable asset shareholders own, the company’s real estate.

 “Luby’s owned real estate portfolio is tremendously valuable. Its appraised value (net of debt) is over $4.00 per share of Common Stock, as compared to its current stock price around $1.40. It is brutally painful to watch the Company chisel away at its real estate portfolio to fund low-return investments into the business. Since fiscal 2008, Luby’s has sold $88 million of assets. This capital, more than double the current market capitalization, is gone and forever lost to shareholders.   Given the futility of recent investments into Luby’s and Fuddruckers, has the Board considered a capital allocation strategy that preserves the real estate value and returns capital to the owners of the company, the shareholders?”

While the proxy contest failed, it did force management and the Board to take steps that led to the eventual liquidation of the company. What follows are a list of events that took place after the proxy contest, according to the Board proposal for liquidation.

  • In March of 2019, the company began analyzing cost reduction measures using an outside third party.
  • In May of 2019, the company began considering strategic alternatives including the sale of Fuddruckers operated restaurants and real estate assets.
  • In August 2019, the company adds two new independent directors.
  • In September 2019, the company creates a Special Committee to look into possibilities such as:
    • Continuing as an existing operation
    • Selling the company as a whole
    • Selling individual assets including the real estate in separate transactions, followed by the distribution of net proceeds to stockholders
    • Selling the restaurant operations while retaining the real estate and converting to a REIT
  • By December 2019 the company had contacted 15 investment banks, received 6 proposals, and selected Duff and Phelps to serve as financial advisor.
  • In January 2020, a deal to sell Fuddrucker’s falls through.
  • From February to May 2020 Covid-19 impacts operations, but sale process continues.
A Plan

On June 3 ’20, the company issued a press release saying they would pursue the sale of its operating divisions and assets, including real estate, intending to distribute the proceeds (net of debt and other obligations) to shareholders. Interestingly Duff & Phelps estimated the potential liquidation proceeds, net to stockholders from $127M to $172M or $4.15 to $5.62 per share. (Turning out to be a good estimate.) However, the press release issued on September 4, ’20, in the middle of the pandemic announcing the plan of liquidation, estimated the net proceeds to shareholders would be $92M to $123M or $3.00 to $4.00 per share, presumably due to the impact of Covid-19.

The Payoff

 The table below shows the prices of the LUB common stock from 11/18 at the time of the proxy contest until the current time. It is clear that even if an investor waited until the liquidation plan was officially approved on September 17th, 2020, the returns were substantial. There was also ample time for an investor to acquire shares substantially below $2.00.

On November 17th, 2020, shareholders approved the liquidation plan. The stock closed at $2.92 per share on that day. Because the company owned land and buildings and operated two different concepts, including one with a significant franchisee base, the company chose to pursue the sale of each concept and the land separately to maximize the value to shareholders.

The first transaction occurred on March 17th, 2021 when the company sold 8 company owned stores (including the land) to Black Titan Holdings, a large Fuddruckers franchisee. This was followed by the sale on June 17th, 2021 of the Fuddruckers franchise business to Black Titan Holdings as well. This business had 92 locations and was sold for $18.5M. This was a hard earned result, since the company had contacted over 150 entities during the eight-month sales process.

Four days later the company announced an agreement to sell the Luby’s cafeteria business (32 locations) to Calvin Gin for $28.7M. It is important to note that the sale did not include the real estate that Luby’s owned under 25 of those locations.  The company’s advisors had contacted over 235 entities while conducting the sale of Luby’s.

Finally on September 20th, 2021, the company announced that STORE Capital was acquiring 26 real estate properties for $88M. The company had sold nine properties in FY20 for $23.7M and an additional eleven properties in FY21 for $32.1M.

According to SEC filings, the increase in value from the $3.50 per share to $5.00 per share in total distributions was almost equally divided between the improving cash flows of the underlying stores and higher realizations of proceeds from the sale of the real estate. However, it is clear that the real estate was significantly more valuable than the store operations.

The Takeaways

(1) Shareholders without very long term patience did not benefit from the ultimate liquidation of the Luby assets. However, those that held on were able to recoup part of their investment. Later stage investors, along with Bandera and Hodge, that arguably instigated a change in management’s willingness to monetize the corporate assets, were able to make substantial profits.

(2) No matter how much of a discount there is between the public and private market value, there has to be a willingness of the controlling shareholders to realize it. Management controlled over 36% of the shares at the time of the proxy contest. Chris Pappas had been earning salaries of $400K-$500K for years and was receiving total compensation of between $700K-$1M before 2018. Harris Pappas also earned a $400K salary for years as COO.

(3) The Pappas brothers are both over the age of 70, which could have provided motivation to finally liquidate the company assets.

(4) Owning, rather than leasing, the land and the buildings can provide shareholders with non-operational value creation, if and when management is willing to monetize the underlying property. The lower current “cash on cash” operational return on investment is offset, especially during inflationary times by long term appreciation of the underlying real estate. A lower current cash breakeven point should also not be underestimated as a source of comfort.

Roger Lipton