This paper continues the examination of Luby’s, with emphasis on the company’s current status, its finances, strengths and weaknesses, and potential future. (19.5 pages; 5 sources; MLA citation style)
IIntroduction
Luby’s is a chain of cafeterias and other types of restaurants with its headquarters in San Antonio. It enjoys a significant presence in Texas, with nearly 200 properties in that state; it has other establishments in other Southern and Southeastern states as well.
It has been prosperous for a number of years, but has lately begun to experience significant difficulties and a substantial decline in revenue accompanied by a loss of market share.
This paper explores the company’s current status, its financial situation, and its strengths and weaknesses. It also features an external environmental analysis and describes Luby’s strategies for the future.
IICurrent Status
Luby’s actually dates back to the early part of the 20th Century, but the organization in which we are interested took shape in 1948 in San Antonio, when the first cafeteria opened. It was Luby’s idea to serve good food at reasonable prices, using the cafeteria concept. (Luby’s, PG).
(A cafeteria can obviously serve many more people more quickly than a sit-down restaurant.)
Luby’s located their cafeterias close to businesses, residential areas and retail centers, opening them for lunch and dinner only. The food was well-prepared but not exotic; what we might call “good plain cooking.” Luby’s put an emphasis on using fresh ingredients and making many of their dishes from scratch:
The Term Paper on Luby’s Cafeterias, Part I
This paper discusses specific issues with regard to Luby's, a restaurant chain with headquarters in San Antonio, Texas. (10+ pages; 4 sources; MLA citation style)IIntroductionLuby's is a chain of food service outlets (mostly cafeterias) that began in Texas in 1947 and now serves not only that state, but has a presence in ten other states in the south and southeast. This paper explores some of the ...
“Each Luby’s Cafeteria prepares substantially all of he food served, including breads and pastries. … Company policy allows each manager to buy the ingredients for his or her cafeteria from vendors of his or her choosing … Managers supervise the preparation of … entrees … vegetable dishes … salads … and desserts … and decide on each day’s menu which generally differs from cafeteria to cafeteria.” (Menger, p. C307).
Although the company uses a standard set of recipes, the fact that managers buy locally and “tailor” the recipes to regional tastes means that each cafeteria is a good “match” for its local customers. At its height, Luby’s operated over 220 locations, mostly cafeterias; according to the 2003 Third Quarter Report, this number has now dropped to 161 locations, of which two are seafood restaurants, one is a steak buffet, 26 are “all you can eat” concepts, and 132 are traditional cafeterias. (PG).
This is a significant drop; Luby’s has closed many of its locations, though in some cases it has “retooled” them and reopened the same location with a different concept.
As profits began to decline, Luby’s began to explore ways of recapturing its market share and in so doing, articulated new goals.
IIIFinancial Situation
Luby’s, like many other companies, is experiencing a decline in profits due to a sluggish economy that appears to be perpetually mired in recession. The Annual Reports give an overview of the company’s trends. The 2002 Annual Report, which is the latest complete document, is available on line; so are individual reports for the first three quarters of FY2003. We’ll use these documents and others on the Net to begin our analysis of these three indicators: the Return on Equity; the Return on Total Assets; and the Return on Sales.
The Return on Equity is defined as:
“ROE. A measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year’s after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage. It is used as a general indication of the company’s efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. Investors usually look for companies with returns on equity that are high and growing.” (Investorwords.com, PG).
The Essay on Shares and Joint Stock Companies in the New Economic Model
Introduction Good morning, dear colleagues. I’m glad to see everyone here. Thank you for your coming. Let me start by introducing myself. My name is Elena Torlopova. I’m a freshman of the State University of the Ministry of Finance of the Russian Federation. I study at the department of the international economic relations. My aim for today’s presentation is to give you information about Shares ...
Some of the terms used here may need further definition, specifically “earnings”, “preferred stock”, “common stock”, “book value” and “profit”. “Earnings” is defined as “revenues minus cost of sales, operating expenses and taxes, over a given period of time.” (Investorwords.com, PG).
(All these definitions are from the same place: Investorwords.com, a financial website. And of course the terms “revenues,” “cost of sales”, “operating expenses” and “taxes” are all further defined. However, it’s pointless to get into a long list of definitions and sub-definitions and sub-sub-definitions, so I’ll stop here. The only one that seems a bit puzzling is “cost of sales”—after all, sales generate money. But in this context, it means that we have to take the cost of raw materials into account, a considerable expense for a restaurant chain.)
“Preferred stock” is stock that is paid before common stock, and which takes precedence over common stock in case of liquidation (i.e., these shareholders will be paid off first if the company fails).
“Common stock” is stock that provides the stockholder with equity ownership of the corporation, but which will be paid off only after bondholders, other creditors, and preferred stockholders have been satisfied. “Book value” is “a company’s common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangibles such as goodwill.” (Investorwords.com, PG).
Finally, “profit” is basically the gain that’s left after everything is paid off.
Unfortunately, it seems to me that the Luby’s balance sheets don’t spell out the categories I need to discuss this more precisely, but I’m not an accountant. I haven’t found a column labeled “reinvested earnings,” for example; or something called “additional earnings.” I haven’t found any place that breaks out the stock value, either. (That doesn’t mean it’s not there; it simply means I don’t recognize it.) What I do see, however, is a company that is failing, and that seems to be going downhill with increasing speed. I’ll discuss that further below, after providing definitions for the other terms under discussion.The Return on Total Assets is defined as: “ROTA. A measure of how effectively a company uses its assets. Calculated by (income before interest and tax) / (fixed assets + current assets).” (Investorwords.com, PG).
The Term Paper on Ecommerce Companies And Stock Valuations
... stock prices. Additionally, the paper will attempt to propose solutions and reasons for the current market trends relative to eCommerce companies. ... competitors, structural assets or better business models, and monopolies or sustainable competitive advantage . Based on that definition, first mover ... back into a price or P/S (Price to Sales) ratio. Two other popular models used in valuation attempts ...
The Return on Sales is defined as: “ROS. A measure of a company’s profitability, equal to a fiscal year’s pre-tax income divided by total sales.” (Investorwords.com, PG).
The “current ratio” is a company’s current assets divided by its current liabilities; it’s an indication of how well a company can meet short-term liabilities. The “quick ratio” is “quick assets” divided by current liabilities, and is a measure of a company’s liquidity. “Quick assets” are further defined as cash or other assets that can be easily and quickly converted to cash. (Investorwords.com, PG).
Finally, I’ve tried to find a workable definition for the term “Debt Fraction,” but haven’t been able to do so. Investowords.com doesn’t have it, and a search of numerous databases shows the phrase being used again and again, but nowhere is it actually defined (one of the things about the net that’s so annoying!) I would assume that the debt fraction has something to do with the ratio of assets to liabilities, but I cannot be sure without a definition of the term.
Returning to the latest report, which is for the 3rd Quarter of FY2003, we can see (even if I cannot find the precise figures) a general decline that is becoming severe.
One paragraph refers to the fact that Luby’s has changed their accounting period:
“Beginning with the 2002 fiscal year, the Company changed its accounting intervals from 12 calendar months to 13 four-week periods. To properly accommodate this change, the first period in fiscal 2002 began September 1, 2001,and covered 26 days; subsequent periods covered 28 days. The first, second, third, and fourth quarters of fiscal year 2002 included 82, 84, 84, and 112 days, respectively. Fiscal year 2003 and most years going forward will be 364 days in length, comparatively, with the first, second, and third quarters covering 84 days each, and the last quarter covering 112.” (3Q3FY2003, p. 7).
The Term Paper on Fourth Quarter Percent Year Microsoft
As our mission clearly states, Student Affairs strives to be an integral part of the education of students at Florida International University. Comprised of 19 major departments and units, the Division is involved in practically all aspects of a student's total education, both within and outside the classroom. More than 300 employees on both the University Park and Biscayne Bay Campus serve in ...
This changes suggests that Luby’s is seeking a way to make it appear that they are doing better than they are, by giving one quarter each year in which they have more time to generate revenue, and for which they can report higher figures. (This is sheer speculation, but as they give no reason for making the change, I find it interesting to try to figure out why they did it.)
Far more damaging than their change in procedures, however, are the statements they make connected with their debt. This suggests that they are in serious trouble, and may not come out of it. The Third Quarter, FY2003 statement reads in part:
“At August 28, 2003, the Company had a credit-facility balance of $118.4 million with the bank group (a syndicate of four banks).
In accordance with provisions of that credit facility, the Company paid the outstanding balance down by $12.3 million … from proceeds received from the sale of real and personal property.” (3QFY2003, p. 9).
The sale of real property refers to the closing of underperforming locations, but the sale of personal property suggests that company officers may be selling their possessions (refinancing their homes, selling expensive autos, etc.) to keep the company afloat. (Again this is speculation, but Investwords.com defines “personal property” as “property, other than real estate, owned by an individual.” (PG).
They have to be selling personal possessions.)
Unfortunately, despite paying $12 million, the company was still deeply in debt, and then they were notified that the credit facility was raising the interest rate. Despite the increase, Luby’s is current on all the interest payments due at this time. (3QFY2003, p. 9).
Things appear to have gotten worse, however. In the second quarter of FY2003, Luby’s took out an $80 million loan with the intention of using it to pay down the debt to the credit facility:
“The bank group of the credit facility amended its agreement with the Company to require that all the funds provided by the prospective lender be used to pay down the current senior debt. Subsequently, the Company did not finalize an agreement with the third-party lender because of unacceptable changes in the structure of the proposed loan. Consequently, the Company was in default under the existing credit facility as of January 31, 2003, not as a result of noncompliance with financial performance covenants, but because the replacement financing could not be finalized.” (3QFY2003, p. 9).
The Essay on What Factors Determine/influence The Food Choice People Make?
Food, which is the only energy source for human, is essential in peoples’ life. It has many different kinds which gives people different kinds of nutrition. Go through the thousands of years of evolution, diet have become not only an important part of peoples’ life but also a culture. People who are living all over the world have different food choices. The three important factors that influence ...
No matter the reason for the default, the end result is that Luby’s defaulted on this loan. The final outcome was that in May 2003, the company pledged 76.1% of its total assets, including owned real estate, equipment, fixtures, etc, as collateral against the default. (3QFY2003, p. 9).
“Although the current lenders have reserved all rights and remedies they have in connection with the … default – including the right to demand immediate repayment … or … to pursue foreclosure on the assets pledged … they have not announced any intention to take such action.” (3QFY2003, p. 10).
Whether the lenders will continue to restrain themselves or eventually come after Luby’s for immediate payment remains to be seen.
IVTen Company Strengths
Even with the limited amount of material available, it’s easy to see the company’s strengths. 1) They are an instantly recognizable name in Texas, where they do most of their business. 2) They are known as a “family owned” company, a time honored concept. 3) They are also known to be “family oriented.” Thus, they have generated a great deal of goodwill, an intangible asset that is nevertheless vital to a company’s success.
In addition, 4) they provide good food at reasonable prices, and 5) they feature the same menu in all the stores, a plus for families with children who frequently refuse to try anything new. In short, Luby’s is a “what you see is what you get” operation that provides good value for the money. They built a solid corporation doing what they do best: cooking plain, nutritious food and serving it hot and fresh in clean, pleasant cafeterias.
In addition to pleasing their customers, they also please their employees by 6) giving their managers complete discretion over their own cafeteria. 7) The manager can “tailor” his or her menu to suit regional preferences, which in turn 8) promotes growth of the individual outlet. 9) If the manager does well and the location prospers, he or she will advance to the next management level, with the accompanying pay increase, bonuses and benefits. 10) The company has treated its employees fairly, with the result that Luby’s is not unionized, nor have they ever had a work stoppage or slowdown. (Menger, p. C307).
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The Great Italian Food Company (GIFC) is a family owned business. Papa Joe, owner of the restaurants was the decision maker and determined the future for the company. Papa Joe’s children are grown adults and one day, they will assume the responsibility of running the restaurant but each child have their own personal ideas for the future of the business. First, all the children needs to come up ...
VTen Company Weaknesses
It’s a little more difficult to identify weaknesses, since the company tends to want to disguise them. Let’s see what we can find that’s gone (or is going) wrong.
The greatest weakness in operations would have to be something that I saw mentioned briefly (I believe in the 2002 Annual Report): 1) that Luby’s misjudged the market. The cafeteria concept has a limited appeal, and public taste is fickle. Patrons who once enjoyed the lines have grown tired of the “college dorm” or “mess hall” atmosphere and now want someplace that they can sit down and enjoy being served. Luby’s didn’t see this one coming.
Next, 2) they may have expanded too quickly; or 3) too far; or 4) without doing proper market research. They had (at the time of Menger’s writing) 167 outlets in Texas; but only one in Kansas. There were also only two in Louisiana, two in Mississippi, and three in Missouri and New Mexico. This minimal penetration into the markets surrounding Texas suggests one of the three alternatives listed above.
It may even be that they expanded quickly, found a core consumer group waiting for them, and couldn’t build fast enough to suit the new potential customers.
There are several other weaknesses worth noting, mostly in the financial end. The most glaring is 5) the huge debt load. With over three-quarters of the company’s assets pledged as collateral, they’re virtual hostages of their lenders. Another weakness is 6) their poor planning: reading Menger’s article makes it seem like they give no thought to opening and closing the cafeterias. It reads as though they do things on a trial basis. If it flies, fine, if it doesn’t, close it.
Another weakness, paradoxically, is also a strength: 7) the standardized menu. While it may be that children like knowing they can always find something they like, adults would be bored, and quickly. They have also tried concepts that haven’t worked well for them, and have ended up costing a great deal; specifically 8) their seafood restaurants. They aren’t known for seafood, and their attempts to penetrate a market dominated by concerns such as Red Lobster hasn’t worked well.
Finally, two other potential problems lie in the management structure. For one thing, 9) the Luby family is no longer involved; and 10) the corporate officers are all related to one another, and also run other similar food service concerns. This might represent a potential conflict of interest.
VIExternal Environmental Analysis
Let’s look now at the future as it appears it may take shape with regard to the economy, competition, and societal trends.
The economy is horrible and appears to be getting worse. The tax cuts called for by this president (I’m not a fan) and rubber-stamped by Congress are supposed to stimulate the economy. The tax cut that was passed last year (also known as the Bush Giveaway to the Rich) did nothing to either 1) help those who need help most or; 2) get the economy moving. The reason for this is simple: most of the money went to the top 10% of Americans, who in turn invested it for themselves. They didn’t spend it—they have enough money to be able to save such windfalls, and that’s what they did. The amount of money returned to the middle and lower classes was laughable, and the economy is still stuck.
Bush the Second has just rammed through another tax cut, which is structured exactly the same way as the first, and which will have the same effect: it will enrich the wealthy, leave the middle class and poor shaking their heads and the economy stalled. In order for this economy to move, several things have to happen.
Money has to get down to the people who go and spend it on food, new clothes, occasional movies, schoolbooks, and maybe a visit to Luby’s. As long as the money remains at the top, the recession will continue. (I’m oversimplifying to make a point, but the fact remains that tax cuts are not effective economic stimuli unless those monies go where they will be spent. These rebates to the rich have no effect.)
Money has to flow into the economy so that people can purchase goods and services, and yet we see a continual downturn, with increasing job loss, unilateral attacks on other nations we have to finance, and tax cuts that balloon the deficit. Unless Bush suddenly puts together an economic stimulus package that makes sense (such as tax credits for working families, substantial rebates directly to low and middle income taxpayers, and a policy that makes it easy for small businesses and individuals to get loans) the economy will remain stuck. Frankly, I don’t see this recession ending any time in the near future; it could even slide into a true depression if there are many more jobs lost. Luby’s must find a way to operate in a bleak environment, in which some consumers will eat out much less often, and some will give up eating out completely. This will be very difficult for them as they already feature low-priced meals and cannot remain profitable if they cut prices further.
With regard to competition, we must remember that the food service industry is highly competitive and one of the most uncertain of all industries, and Luby’s is going head to head with some very sophisticated enterprises, such as Red Lobster and Olive Garden. Though both are chains, they have a very high quality “feel” to them, which makes them seem a far cry from a cafeteria line. They serve more complex and highly-flavored food (I had lunch at Red Lobster last week) than it’s possible to serve in a cafeteria line. In addition, they have liquor licenses, so that they can serve beer, wine, or exotic drinks along with their meals, which makes them very attractive. And finally, they provide booth service, interesting décor, and the relaxing atmosphere that is created when a server brings food to the table. If Luby’s wants to compete with sit-down restaurants, it must prove attractive enough to woo patrons away from such establishments.
Luby’s also competes against other cafeteria chains such as Furr’s. Here they simply must do what they do, but do it better and more inexpensively.
Luby’s recognizes both these challenges, and is working on developing new concepts including sit-down seafood restaurants, Breakfast Buffets, and all-you-can-eat presentations within their traditional cafeterias, in order to increase their market share.
Social trends in dining seem to be moving towards parents and children spending more time together. This has had a dual result: either parents want to eat at home by bringing in a good take-away meal; or they want to go to a restaurant with their children. Luby’s has responded to both exigencies, first by introducing a take-out section to some of their locations, and second by redesigning their menus to offer more choices for children than ever.
The restaurant business is very unstable and its impossible to predict what concept will work and what will fail. However, it seems reasonable to assume that Luby’s will have a very difficult time coming back from three years of steady losses, since they have to compete with both other cafeterias, and sit-down restaurants that serve truly excellent food and provide liquor service as well.
VStrategies for the Future
What is Luby’s doing to save themselves? Quite a bit. We’ll try to find four qualitative goals, and four quantitative goals, and describe how the organization is approaching each of them.
Qualitative goals, as the name implies, are concerned with quality; quantitative goals with quantity. In the first category, the single point that comes immediately to mind is the food itself. It must be of the highest quality—this is a restaurant, after all, and restaurants exist to serve meals to their customers. Three other qualitative goals are attracting new customers, improving service, and maintaining attractive pricing.
With regard to the food, Luby’s has pledged to maintain their quality: “Our highest priority was to insure Luby’s food today not only lives up to our loyal customers’ memories and expectations but also attracts new customers.” (Luby’s 2002 Annual Report, PG).
Clearly Luby’s has not lost sight of their basic goal: to serve good food.
In order to attract new customers, Luby’s has begun to experiment with different concepts in various markets. I’ve discussed these above, but to recap: Luby’s is introducing all-you-can-eat buffets (some as a special meal within the cafeteria setting); seafood restaurants; steak houses; and breakfast buffets. All the new concepts seem to have been embraced enthusiastically by patrons in the areas where they opened. Now it will be up to Luby’s to decide whether or not to continue to invest in these new concepts; to allow them to remain open in the areas where they are testing; or to go back to their original concept.
In order to improve service, Luby’s is restructuring and expanding its management program, to increase both oversight and accountability. This will make it easy for high level managers to recognize and promote deserving individuals, which will in turn increase the chance for promotion for everyone, with the final result that service in the restaurant will improve. (Happy employees work best.) In addition, Luby’s is developing new training programs for managers, believing that learning never truly ends.
In order to meet the fourth goal of keeping prices as low as possible, Luby’s has to attract as many new and returning customers as it can. In order to do so, they have begun to use exterior marquees describing their food promotions, and in-store menu boards that “emphasize entrée value combinations and facilitate guest ordering.” (2002 Annual Report, p. 3).
Luby’s four quantitative goals might include restructuring the operation, reducing the debt load, increasing sales and developing a new business plan. These goals are closely tied to the others, but are slightly different.
Restructuring the operation would mean a formal commitment to open and operate those new concepts that appeal to consumers, such as the seafood restaurants. At present, Luby’s is “testing” the market acceptance level for such “revamped” Luby’s concerns; if they prove popular, Luby’s should put them into operation immediately.
Reducing the debt load means that Luby’s will have to continue to find ways to meet its payments to creditors in the face of the lingering recession. In part to meet the need of servicing the loan, Luby’s is preparing to close approximately 50 of its underperforming locations.
It has also committed to increasing sales, which means of course attracting new and returning customers as outlined above. And finally, with the assistance of its creditors, Luby’s has worked out a new business plan that is designed to return the company to health: “Management actively communicated with the bank group while developing a new two-year business plan focused on returning the Company to profitability.” (3QFY2003, PG).
In addition, Luby’s has hired financial advisory firms to assist it in its attempt to recover the ground it has lost. Not only are the firms offering their expertise in day-to-day operations, they are also helping Luby’s “in exploring additional financing options that add value to the new business plan.” (3QFY2003, PG).
In sum, Luby’s stands thus as of the Third Quarter, FY 2003:
“… the Company is focused on day-to-day operations and the implementation of its new strategic plan. Initially, cash resources may be reduced under the new plan, especially relative to lease settlements and termination costs. The Company intends to use the funds from its fiscal 2002 federal income tax refund of $13.4 million to support cost requirements associated with the plan. The credit agreement includes a provision for the issuance of letters of credit in the amount of $1.2 million. There is no room to borrow additional funds under the current debt agreement.” (3QFY2003, PG).
VIConclusion
An old and honored name in the community, Luby’s has suffered severe losses, thanks mainly to the economic downturn of the past two years. Coupled with a development policy that seems to rely on too little research, and a customer base that wants a more sophisticated meal served in nicer surroundings, the recession has hurt Luby’s badly. Whether they come back remains to be seen.
VIIReferences
“2002 Annual Report.” Luby’s [Web site]. 25 Nov 2002. Accessed: 19 Jun 2003. http://www.lubys.com/financials/2002ar.pdf
“2003 3rd Quarter FY2003 Report.” Luby’s [Web site]. 7 May 2003. Accessed: 19 Jun 2003. http://www.lubys.com/financials/Q3FY2003.pdf
Investorwords.com [Web site]. 1997-2003. Accessed: 21 Jun 2003. http://www.investorwords.com/
Luby’s [Web site]. Undated. Accessed: 18 Jun 2003. http://www.lubys.com/index.asp
Menger, Richard. “Luby’s Cafeterias: Will Changing the Recipe Improve Performance?” EFAX document; pages C304-C310.
