Luby's Inc. CEO CHRISTOPHER JAMES PAPPAS bought 40200 shares on 6-19-2008 at $6.49
Luby's, Inc. (formerly, Luby's Cafeterias, Inc.) was founded in 1947 in San Antonio, Texas. The company was originally incorporated in Texas in 1959, with nine cafeterias in various locations, under the name Cafeterias, Inc. It became a publicly held corporation in 1973, then changed its name in 1981 to Lubyâ€™s Cafeterias, Inc. and joined the New York Stock Exchange in 1982. Lubyâ€™s was reincorporated in Delaware on December 31, 1991 and was restructured into a holding company on February 1, 1997, at which time all of the operating assets were transferred to Luby's Restaurants Limited Partnership, a Texas limited partnership composed of two wholly owned, indirect corporate subsidiaries. All restaurant operations are conducted by the partnership. In this report, unless otherwise specified, â€śLubyâ€™s,â€ť â€śwe,â€ť â€śour,â€ť â€śus,â€ť and â€śour companyâ€ť refer to the partnership and the consolidated corporate subsidiaries of Luby's, Inc.
As of November 1, 2007, we operated 128 restaurants located throughout Texas and four other states, as set forth in the table below. These establishments are located in close proximity to retail centers, business developments and residential areas. Of the 128 restaurants, 94 are located on property that we own and 34 are on leased premises.
We provide our customers with quality home-style food, value pricing, and outstanding customer service. Our cafeteria restaurants feature a unique concept format in todayâ€™s family and casual dining segment of restaurant companies. The cafeteria food delivery system allows customers to select freshly prepared items from the serving line, including entrĂ©es, vegetables, salads, desserts, breads and beverages before transporting their selected items on serving trays to a table or booth of their choice in the dining area. Daily, each restaurant offers 20 to 22 entrĂ©es, 12 to 14 vegetable dishes, 12 to 16 salads, and 16 to 20 varieties of desserts. Food is prepared in small quantities throughout serving hours, and frequent quality checks are conducted.
Our product offerings, convenient cafeteria delivery system and value pricing appeal to a broad range of customers, including those customers that focus on healthy choices, quality, variety and affordability. We have had particular success among families with children, shoppers, travelers, seniors, and business people looking for a quick, home-style meal at a reasonable price.
Our restaurants are generally open for lunch and dinner seven days a week and all of our restaurants sell food-to-go orders, which accounted for 13.2% of restaurant sales in fiscal year 2007. Twenty-eight of our restaurants serve breakfast on the weekends, accounting for 0.2% of restaurant sales in fiscal year 2007. Those locations offer a wide array of popular breakfast foods served buffet-style. We also provide culinary contract services for organizations that offer on-site food service, such as healthcare facilities. For more information, please read â€śCulinary Contract Servicesâ€ť below.
Food is prepared fresh daily at our restaurants. Menus are reviewed periodically and new offerings and seasonal food preferences are regularly incorporated.
Each restaurant is operated as a separate unit under the control of a general manager who has responsibility for day-to-day operations, including food production and personnel employment and supervision. Our philosophy is to grant authority to restaurant managers to direct the daily operations of their stores and, in turn, to compensate them on the basis of their performance. We believe this strategy is a significant factor contributing to the profitability of our restaurants.
Each general manager is supervised by an area leader. Each area leader is responsible for approximately eight units, depending on location.
Quality control teams also help maintain uniform standards of food preparation. The teams visit each restaurant as necessary and work with the staff to confirm adherence to our recipes, train personnel in new techniques, and implement systems and procedures used universally throughout our company.
During fiscal 2007, we spent approximately 1.8% of restaurant sales on traditional marketing venues, including television and radio advertisements in English and Spanish, newsprint, point-of-purchase, sponsorships and local-store marketing.
We operate from a centralized purchasing arrangement to obtain the economic benefit of bulk purchasing and lower prices for most of our menu offerings. The arrangement involves a competitively selected prime vendor for each of our three major purchasing regions.
During the fiscal year ended August 29, 2007, we closed one restaurant upon the expiration of its lease.
New Prototype Restaurant
In fiscal 2007, we introduced our new cafeteria style prototype design, with the opening of our first new store in over seven years, located in Cypress, Texas, a suburb north of Houston. This new prototype capitalizes on our core fundamentals of serving great food made from scratch and a convenient delivery system. The new restaurant is on pace to generate an annual unit volume, or AUV, in excess of $3.25 million, an increase of 30% as compared to our current AUV of $2.5 million. We anticipate building 45 to 50 of these new stores over the next five years.
The new prototype elevates the cafeteria experience with an upscale design and open floor plan. The restaurantâ€™s exterior incorporates limestone, wood and stucco to create the appeal of the Texas Hill Country. A vaulted entrance guides customers through the center of the dining room to the serving line. An open-view kitchen provides enhanced visibility and ambiance, while oversized windows surrounding the dining room provide an abundance of natural light. This next generation cafeteria offers a more contemporary look and feel with classic features that include granite surfaces, exposed wood ceilings, terrazzo floors and cherry wood walls. The restaurant also features a covered seating area on the outdoor patio.
The new prototype provides enhanced food presentation with a granite serving line, new chilled salad display case and comfortable, attractive booths and furniture. The restaurant includes a dining counter with flat screen televisions and bar-style seating to accommodate single diners. The dining counter also serves as a dessert and specialty coffee bar, offering fresh brewed coffees, cappuccinos, espressos, iced coffees and specialty teas as well as milk shakes and ice cream. The food to-go area has been improved allowing for curbside pickup, with a side entrance and direct access to the dining room and bar area.
Culinary Contract Services
We provide food services for healthcare facilities through our culinary contract services business. We believe this business is a natural extension of our skill set and provides an opportunity to extend our brand. This business continues to gain traction and we have grown from one account in the beginning of 2007 to eight accounts at fiscal year end. These accounts consist of six contracts with long-term acute facilities, which tend to be smaller facilities, and two accounts at larger facilities, which include the Baylor College of Medicine and a Houston-area hospital which we are renovating into a new retail cafeteria.
As of November 1, 2007, we had a workforce of 7,500 employees consisting of 6,861 non-management restaurant workers, 346 restaurant managers and 293 clerical, facility services, administrative and executive employees. Employee relations are considered to be good. We have never had a strike or work stoppage, and we are not subject to collective bargaining agreements.
JUDITH B. CRAVEN, M.D., M.P.H., 62, is the retired President of the United Way of the Texas Gulf Coast (from 1992 until 1998). She is licensed to practice medicine and has a distinguished career in public health. She served as Dean of the School of Allied Health Sciences of the University of Texas Health Science Center at Houston from 1983 until 1992 and Vice President of Multicultural Affairs for the University of Texas Health Science Center from 1987 until 1992. She also served as Director of Public Health for the City of Houston from 1980 until 1983, which included responsibility for the regulation of all foodservice establishments in the City. Dr. Craven has been an independent director of the Company since January 1998 and is Vice Chair of the Board of Directors, Chair of the Personnel and Administrative Policy Committee, Vice-Chair of the Executive Compensation Committee and the Executive Committee, and a member of the Nominating and Corporate Governance Committee. She is also a director of Belo Corp.; SYSCO Corporation; Sun America Fund; Valic Corp.; and the Houston Convention Center Hotel Board of Directors. She is a former member of the Board of Regents of the University of Texas at Austin.
ARTHUR ROJAS EMERSON, 62, has been Chairman and Chief Executive Officer of GRE Creative Communications, a full-service, bilingual marketing and public relations firm, which includes Hispanic-targeted marketing, since June 2000. Mr. Emersonâ€™s experience includes conducting foodservice television marketing campaigns. From 1994 until 2000, he was Vice President and General Manager of the Texas stations of the Telemundo television network. He served as Chairman of the San Antonio Hispanic Chamber of Commerce in 1994. In 1995, he served as Chairman of CPS Energy. He served as Chairman of the San Antonio Port Authority from 2001-2007. He served on the Board of the San Antonio Branch of the Dallas Federal Reserve Board from 1998 to 2004. He served as Chairman of the Greater San Antonio Chamber of Commerce in 1999. Mr. Emerson has been an independent director of the Company since January 1998 and is a member of the Finance and Audit Committee. He is currently Chairman of the Texas Aerospace Committee. Mr. Emerson is also currently a director of USAA Federal Savings Bank, Chairman of its Credit Committee, where he serves on its Finance and Audit Committee, and is former Chairman of its Trust Committee.
FRANK MARKANTONIS, 59, is an attorney with over thirty years of legal experience representing clients in the restaurant industry, with a concentration in real estate development, litigation defense, insurance procurement and coverage, immigration and employment law. For the last fifteen years he has served as General Counsel of Pappas Restaurants, Inc. He is a graduate of the University of Texas at Austin (1970) and the University of Houston Law Center (1973). Mr. Markantonis is admitted to practice in the following jurisdictions and before the following courts: The United States Supreme Court, District of Columbia Court of Appeals, United States Court of Appeals for the Fifth Circuit, The United States District Court for the Southern District of Texas, and the State of Texas. Mr. Markantonis is a member of the State Bar of Texas, District of Columbia Bar, and is a Fellow in the Houston Bar Association. He has been a director of the Company since January 2002 and is a member of the Personnel and Administrative Policy Committee.
GASPER MIR, III, 61, is a Certified Public Accountant and is principal owner of the public accounting and professional services firm Mirâ€˘Fox & Rodriguez, P.C., which he founded in 1988. His work there has included financial audit and accounting services for clients in the retail industry. He is currently on a leave of absence from that firm and will return at the beginning of calendar year 2008. Mr. Mir currently serves as Executive General Manager of Strategic Partnerships for the Houston Independent School District continuing until the end of calendar year 2007. From 1969 until 1987, he worked at KPMG, an international accounting and professional services firm, serving as a partner of the firm from 1978 until 1987. Mr. Mir has been a director of the Company since January 2002 and is Chairman of the Board of Directors, Chairman of the Executive Committee and the Nominating and Corporate Governance Committee, and a member of the Finance and Audit Committee. As Chairman, he presides over all Board meetings, as well as executive sessions and meetings of the independent directors, and he acts as an intermediary between the Board and Lubyâ€™s Management. Mr. Mir is also a director of the Memorial Hermann Hospital System; the Greater Houston Community Foundation; the Sam Houston Council of Boy Scouts; the Advisory Board of the University of Houston-Downtown School of Business; and the Houston Region Advisory Board of JPMorgan Chase Bank of Texas.
JILL GRIFFIN, 53, is an internationally-recognize d expert on customer loyalty. Her best-selling book, Customer Loyalty: How To Earn It, How To Keep It, has been published in six languages and was named to Harvard Business Schoolâ€™s â€śWorking Knowledgeâ€ť list. She is a principal of the Griffin Group, founded by her in 1988, which specializes in customer loyalty research, customer relationship program development, and management training. Ms. Griffin has been an independent director of the Company since January 2003 and is Vice-Chair of the Personnel and Administrative Policy Committee and a member of the Executive Compensation Committee. From 1985 to 1987, she was national director of sales and marketing at AmeriSuites Hotels. From 1979 to 1985, Ms. Griffin served as senior brand manager for RJR's largest brand. Ms. Griffin is a Magna Cum Laude graduate and Distinguished Alumna recipient of the University of South Carolina Moore School of Business from which she holds her Master of Business Administration. She has also served on the marketing faculty at the University of Texas McCombs School of Business, where she serves as a guest lecturer.
CHRISTOPHER J. PAPPAS, 60, has been President and Chief Executive Officer and a director of the Company since March 2001. Mr. Pappas is a member of the Executive Committee. He also has been Chief Executive Officer of Pappas Restaurants, Inc. since 1980. Mr. Pappas graduated from the University of Texas with a Bachelor of Science in Mechanical Engineering. He sits on the advisory board of Amegy Bank N.A. (formerly Southwest Bank of Texas N.A.), and previously served as a director on its board. Mr. Pappas is also a director of the National Restaurant Association; the University of Houston Conrad Hilton School of Hotel and Restaurant Management Dean's Advisory Board; the Greater Houston Partnership Board; and the Sam Houston Council of Boy Scouts of America Board.
JIM W. WOLIVER, 70, spent his career in cafeteria and foodservice management. Mr. Woliver worked alongside the founders of the Company, including Robert Luby, and gained a vast knowledge of the Companyâ€™s operations. Mr. Woliver started with the Company as a management trainee in 1964. He served as restaurant General Manager from 1973 to 1983, Area Vice President from 1983 to 1988, Vice President of Operations from 1988 to 1994, and Senior Vice President of Operations from 1994 until his retirement in 1997. Mr. Woliver is an independent director, has served on the Board since January 2001 and is a member of the Personnel and Administrative Policy Committee and the Executive Compensation Committee.
MANAGEMENT DISCUSSION FROM LATEST 10K
We generate revenues primarily by providing quality home-style food to customers at our 128 restaurants located throughout Texas and four other states. These establishments are located in close proximity to retail centers, business developments and residential areas. We also provide culinary contract services for organizations that offer on-site food service, such as health care facilities. In August 2007, we introduced our new cafeteria-style prototype design, with the opening of our first new store in over seven years. The new restaurant is on pace to generate an annual unit volume, or AUV, in excess of $3.25 million, an increase of 30% as compared to our current average AUV of $2.5 million.
Our fiscal year ends on the last Wednesday in August. As such, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. Each of the first three quarters of each fiscal year consists of three four-week periods, while the fourth quarter normally consists of four four-week periods. Both fiscal 2007 and 2006 were 52-week years, while fiscal 2005 was a 53-week year for us, with the extra week occurring in the fourth quarter. Comparability between quarters may be affected by the varying lengths of the quarters, as well as the seasonality associated with the restaurant business.
The restaurant business is highly competitive with respect to food quality, concept, location, price, and service, all of which may have an effect on same-store sales. Our same-store sales calculation measures the relative performance of a certain group of restaurants. To qualify for inclusion in this group, a store must have been in operation for 18 consecutive accounting periods. Although management believes this approach leads to more effective year-over-year comparisons, neither the time frame nor the exact practice may be similar to those used by other restaurant companies.
Same-store sales decreased 1.5% for fiscal year 2007. Same-store sales increased 4.6% and 6.3% for fiscal years 2006 and 2005, respectively. Our calculation of same-store sales remove the additional week of sales in fiscal 2005 and compare sales year-over-year for periods that include approximately the same calendar dates. This approach was also applied to same-store sales for fiscal quarters, adjusting for the additional week in fiscal fourth quarter 2005. The following table shows the same-store sales change for comparative historical quarters:
Hurricane Rita impacted a number of our markets during the first quarter of fiscal 2006 as we were forced to temporarily close many stores due to mandatory evacuations and subsequent power outages. We experienced a store closure impact of 236 store days of operations due to Hurricane Rita. One unit in Port Arthur, Texas suffered permanent damage and the lease has been terminated. All other restaurants impacted by the storm suffered minimal damage and were reopened soon after the storm passed. The store closure impact on our results of operations was offset by increased traffic at certain units and catering events relating to the hurricane relief effort.
Minimum Wage Increase Impact
The new federal minimum wage increase took effect on July 24, 2007. As a percentage of total employees, those previously earning below the first increase in the minimum wage to $5.85 represented less than 5 percent of our total workforce. While this percentage is relatively small, we expect to experience a â€ścompressionâ€ť due to the minimum wage increase, meaning that wages earned by employees within a certain range of the new minimum wage would be adjusted over time as the new minimum wage increases are phased in throughout the next three years. To the extent prevailing market conditions allow, we intend to adjust menu prices to maintain profit margins.
Our business plan, as approved in fiscal year 2003 and completed in fiscal year 2006, called for the closure of more than 50 locations. In accordance with the plan, the entire fiscal activity of the applicable stores closed after the inception of the plan has been classified as discontinued operations. Results related to these same locations have also been classified as discontinued operations for all periods presented.
RESULTS OF OPERATIONS
Fiscal 2007 (52 weeks) compared to Fiscal 2006 (52 weeks)
Total sales decreased approximately $4.3 million, or 1.3%, in fiscal 2007 compared to fiscal 2006. Restaurant sales decreased $6.3 million, offset by $2.0 million of culinary contract services revenue recognized in fiscal 2007. The $6.3 million decline in restaurant sales included a $1.5 million reduction in sales related to closed operations. On a same-store basis, sales decreased approximately $4.9 million, or 1.5%, due primarily to declines in guest traffic partially offset by higher menu prices and more favorable menu mix.
Food costs decreased approximately $0.7 million, or 0.8%, in fiscal 2007 compared to fiscal 2006 due to the lower sales volume offset by higher commodity prices for beef, seafood, poultry and oils. Our promotion of combination meals has provided favorable cost structures. As a percentage of restaurant sales, food costs increased 0.3%, from 26.6% in fiscal 2006 to 26.9% in fiscal 2007.
Payroll and related costs decreased approximately $3.8 million, or 3.4%, in fiscal 2007 compared to fiscal 2006. As a percentage of restaurant sales, these costs decreased 0.6%, from 34.6% in fiscal 2006 to 34.0% in fiscal 2007, due to reduced restaurant sales and continued focus on labor productivity.
Other operating expenses decreased approximately by $0.6 million, or 0.9%, for fiscal 2007 compared to fiscal 2006. As a percentage of restaurant sales, these costs increased 0.2% and were driven by lower utility and advertising costs, offset by a $1.1 million insurance recovery associated with a business claim related to Hurricane Rita, which we recorded as a reduction to operating expense in the fourth quarter of fiscal 2006.
Depreciation and amortization expense increased by approximately $0.3 million, or 2.0%, in fiscal 2007 compared to fiscal 2006 due to increased capital expenditures in fiscal 2007.
General and administrative expenses decreased by approximately $0.5 million, or 2.4%, in fiscal 2007 compared to fiscal 2006. As a percentage of total sales, general and administrative expenses decreased to 6.8% in fiscal 2007 compared to 6.9% in fiscal 2006, primarily due to lower bonus expense and professional consulting fees, partially offset by increased share-based compensation expense.
The provision for asset impairments and restaurant closings decreased by approximately $0.3 million in fiscal 2007 compared to fiscal 2006 primarily due to asset impairment and lease settlement costs recognized in 2006 offset by a 2007 lease settlement related to a closed location.
The net loss (gain) on disposition of property and equipment decreased by approximately $0.7 million in fiscal 2007 compared to fiscal 2006. This decrease is primarily due to the retirement of obsolete equipment that was identified during our fiscal 2006 review of restaurant equipment at all of our restaurants and at our Houston Service Center.
Interest income increased approximately $0.8 million due to higher cash and short term investment balances. Interest expense decreased $0.1 million.
Other income, net, decreased by approximately $0.3 million in fiscal 2007 compared to fiscal 2006, due primarily to a decrease in prepaid state sales tax discounts resulting from lower sales in fiscal 2007.
The income tax provision for fiscal 2007 was $6.3 million compared to recognition of an income tax benefit of $4.5 million in 2006. All of our net operating losses have been fully utilized and the provision for income taxes in 2007 is reflective of the tax effect of the pre-tax income for the year. Our income tax benefit in fiscal 2006 primarily represents the recognition of tax benefits for net operating losses not recognized in previous years due to uncertainty regarding our ability to realize them.
The net loss from discontinued operations decreased by approximately $1.1 million in fiscal 2007 compared to fiscal 2006, principally due to lease settlement and asset impairment costs associated with discontinued operation in 2006.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
RESULTS OF OPERATIONS
For the Third Quarter and Year-to-Date Fiscal 2008 versus the Third Quarter and Year-to-Date Fiscal 2007
Total sales decreased approximately $1.6 million, or 2.1%, in the third quarter of fiscal year 2008 compared to the third quarter of fiscal year 2007. Restaurant sales declined approximately $3.1 million, due primarily to declines in guest traffic partially offset by higher menu prices and more favorable menu mix. This decline in restaurant sales was offset by an increase of $1.5 million relating to the execution of several new culinary service contracts. Same store sales (which includes 121 stores) decreased by approximately $2.4 million, or 3.3%.
Total sales decreased approximately $1.5 million, or 0.7%, in the first three quarters of fiscal year 2008 compared with the same three quarters of fiscal year 2007. Restaurant sales declined approximately $6.2 million, due primarily to declines in guest traffic partially offset by higher menu prices and more favorable menu mix. This decline in restaurant sales was offset by an increase of approximately $4.8 million relating to the execution of several new culinary service contracts. Same store sales decreased by approximately $6.0 million, or 2.8%.
Cost of Food
Food costs decreased approximately $0.2 million, or 1.2%, in the third quarter of fiscal year 2008 compared with the same quarter of fiscal year 2007. Food costs as a percentage of restaurant sales increased 0.8%, to 27.4%, in the third quarter of fiscal year 2008 from 26.6% in the third quarter of fiscal year 2007. Food commodity costs increased in most categories with oils and cheese having the greatest impact on food costs, partially offset by lower produce prices in the third quarter of fiscal year 2008 compared to third quarter of fiscal year 2007.
Food costs were relatively flat in the first three quarters of fiscal 2008 compared with the same three quarters of fiscal 2007. Food costs as a percentage of sales increased 0.8% to 27.7% in the first three quarters of fiscal year 2008 from 26.9% in the first three quarters of fiscal year 2007. Food commodity costs increased as a percentage of restaurant sales in most categories with poultry, seafood, oils and grains having the greatest impact on food costs in the first three quarters of fiscal year 2008 compared with the first three quarters of fiscal year 2007.
Payroll and Related Costs
Payroll and related costs decreased $0.1 million in the third quarter of fiscal year 2008 compared with the same quarter of fiscal year 2007. Payroll and related costs as a percentage of restaurant sales increased 1.3% to 34. 8%, in the third quarter of fiscal year 2008 from 33.5% in the third quarter of fiscal year 2007, primarily due to the lower sales level.
Payroll and related costs decreased approximately $0.7 million, or 1.0%, in the first three quarters of fiscal year 2008 compared with the same three quarters of fiscal year 2007. Payroll and related costs as a percentage of sales increased 0.7% to 34.5% in the first three quarters of fiscal year 2008 from 33.8% in the first three quarters of fiscal year 2007, primarily due to higher store management and training costs, partially offset by lower workersâ€™ compensation expense, including the effects of reduced actuarial estimates of potential losses resulting from favorable claims experience.
Other Operating Expenses
Other operating expenses primarily include restaurant related expenses for utilities, repairs and maintenance, advertising, insurance, supplies, services and occupancy costs. Other operating expenses increased by approximately $1.2 million, or 7.6%, in the third quarter of fiscal year 2008 compared with the same quarter of fiscal year 2007. As a percentage of restaurant sales, other operating expenses increased to 23.5% in the third quarter fiscal year 2008 from 21.0% in the same quarter last year. Other operating expenses increased primarily due to 1) an approximate $0.6 million increase in repairs and maintenance expenses as we focused efforts on improving the appearance and functionality of our cafeterias for our guests and employees; and 2) an approximate $0.8 million increase in utility expense resulting from higher utility rates.
Other operating expenses decreased by approximately $0.6 million, or 1.2%, in the first three quarters of fiscal year 2008 compared with the same three quarters of fiscal year 2007. Other operating expenses decreased primarily due to 1) a reduction of approximately $0.4 million in utility costs due to lower contracted rates; and 2) a reduction of approximately $2.1 million in marketing and advertising costs as we chose to focus our marketing efforts on specific geographical markets and utilized a mix of lower cost marketing mediums. This decrease was partially offset by higher repairs and maintenance expense of approximately $1.6 million as we increased our efforts to further improve the appearance and functionality of our restaurants. As a percentage of sales, other operating expenses increased 0.4% to 22.5% in the first three quarters of fiscal year 2008 from 22.1% in the first three quarters of fiscal year 2007.
Opening costs were approximately $0.2 million in the third quarter of fiscal year 2008. These costs reflect the labor, supplies, occupancy, and other costs necessary to support the unit through its opening period.
Cost of Culinary Contract Services
Cost of culinary contract services increased by approximately $1.2 million in the third quarter of fiscal year 2008 compared to the same quarter of the prior fiscal year. This increase was related to the food, labor and other operating expenses associated with the increase in revenue for this line of business.
Cost of culinary contract services increased by approximately $4.1 million in the first three quarters of fiscal year 2008 compared to the same three quarters of fiscal year 2007. The increase was related to the food, labor and other operating expenses associated with the increase in revenue for this line of business.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $0.4 million, or 10.6%, in third quarter of fiscal year 2008 compared with the third quarter of fiscal year 2007. The increase was due to higher depreciation resulting from new restaurant openings and existing unit upgrades and remodels.
Depreciation and amortization increased by approximately $1.2 million in the first three quarters of fiscal year 2008 compared to the same three quarters of fiscal year 2007. The increase was due to depreciation resulting from new restaurant and culinary contract services locations, existing unit upgrades and remodels, replacement of restaurant equipment and technology upgrades.
General and Administrative Expenses
General and administrative expenses include corporate salaries and benefits related costs, including restaurant area leaders, share-based compensation, professional fees, travel and recruiting expenses and other office expenses. General and administrative expenses increased by approximately $0.4 million, or 7.3%, in the third quarter of fiscal year 2008 compared to the same quarter last year. As a percentage of total sales, general and administrative expenses increased to 7.7% in the third quarter of fiscal year 2008, from 7.0% last year. The increase was primarily due to an approximate $0.4 million increase in corporate salary expense related to staffing costs to support the culinary contract services business and other departments to support our strategic growth plan.
General and administrative expenses increased by approximately $3.2 million, or 21.0%, for the first three quarters of fiscal year 2008 compared with the same quarters of the prior fiscal year. The increase is primarily due to 1) an increase of approximately $1.3 million in professional service fees, which included the cost relating to the solicitation of proxies in connection with our 2008 annual meeting of shareholders in the second quarter of fiscal year 2008; 2) an increase of approximately $1.2 million related to higher corporate salary and benefits expense, which included staffing costs supporting our culinary services initiative to provide services at healthcare facilities as well as staffing to support our strategic growth plan; and 3) other general and administrative costs, including recruiting expenses, travel expenses, office supplies, and group insurance costs. As a percentage of total sales, general and administrative expenses increased to 8.4% in the first three quarters of fiscal year 2008, from 6.9% in the first three quarters of fiscal year 2007.
There were no impairments reflected in the third quarter of fiscal year 2008. The provision for asset impairments, net, decreased by approximately $15,000 in the third quarter of fiscal year 2008 compared with the third quarter of fiscal year 2007.
The provision for (reversal of) asset impairments increased by approximately $0.5 million in the first three quarters of fiscal year 2008 compared with the same three quarters of fiscal year 2007. This increase was due to the write-down of selected underperforming units to net realizable value based on an estimate of net sales proceeds, partially offset by a reversal of a previously recognized impairment related to one ground lease unit which is expected to be reopened in fiscal year 2008. This unit was also reclassified in the first quarter of fiscal year 2008 from property held for sale to property and equipment, net.
The net loss on disposition of property and equipment in the third quarter of fiscal year 2008 increased approximately $57,000. The loss is related to replacement of nonrepairable assets and replacement of capitalized costs as part of our ongoing remodel activity.
The net loss on disposition of property and equipment decreased by approximately $0.3 million in the first three quarters of fiscal year 2008 compared with the first three quarters of fiscal year 2007. This decrease is primarily related to a gain on the sale of one unit offset by the losses associated with the disposal of restaurant equipment due in part to increased remodel activity.
In the third quarter of fiscal year 2008, interest income decreased by approximately $50,000 due to lower prevailing interest rates in money markets; while interest expense decreased by approximately $0.1 million as a result of the term of our 2007 Revolving Credit Facility.
Interest income for the first three quarters of fiscal year 2008 increased by approximately $0.2 million due to increases in cash and cash equivalents available for investment in interest-bearing instruments, while interest expense for the first three quarters of fiscal year 2008 decreased by approximately $0.4 million as a result of the term of our 2007 Revolving Credit Facility.
Interest Related to Income Taxes
Interest related to income taxes includes the reversal of previously recognized interest expense associated with the settled tax audit contingencies and the interest portion of an income tax refund. The refund and related interest were received subsequent to the end of the second quarter. For the three quarters ended May 7, 2008, interest related to income taxes was $1.3 million. For additional information, see Note 4, â€śIncome Taxesâ€ť, to our Consolidated Financial Statements included in Item 1 of Part I of this report.
Other Income, net
Other income, net, consisted primarily of the following components: net rental property income and expenses, with respect to property for which we are the landlord; prepaid sales tax discounts earned through our participation in state tax prepayment programs, and de-recognition of gift certificate liability resulting from the expiration of state statute of limitations on gift certificate amounts.
Other income, net, increased approximately $0.1 million in the first three quarters of fiscal year 2008 compared to the first three quarters of fiscal year 2007.
The income tax provision for the third quarter of fiscal year 2008 decreased $1.6 million compared with the third quarter of fiscal year 2007 due to 1) lower pre-tax income recognized for the period and 2) larger-than-expected employment-related tax credits available to us.
The income tax provision for the first three quarters of fiscal year 2008 reflects the tax effect of the pre-tax income recognized for the period offset by the income tax benefit reflecting the reversal of tax accruals for contingencies that did not materialize following the completion of tax audits. The fiscal year 2008 provision also reflects the benefit of the difference between estimated and actual tax credits on our federal income tax return filed shortly after the end of the third quarter. The income tax provision for the first three quarters of fiscal year 2007 reflects the tax effect of the pre-tax income recognized for the period.
The loss from discontinued operations decreased $79,000 and $52,000 in the third quarter and the first three quarters of fiscal year 2008, respectively, compared with the same periods of fiscal year 2007.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents and Short-Term Investments
General. Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and our revolving credit facility.
Our cash requirements consist principally of:
capital expenditures for new restaurant construction, restaurant renovations and upgrades of our management information systems; and
Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with other financing alternatives in place or available, will be sufficient to meet our capital expenditures and working capital requirements.
As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories, and our vendors grant trade credit for purchases such as food and supplies. We also continually invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets.
Cash and cash equivalents and short-term investments decreased $9.2 million to $16.9 million at May 7, 2008 from $26.1 million at the beginning of the fiscal year. This decrease is primarily due to the change in classification of $9.1 million fair value of auction rate securities from short-term investments to long-term investments. See Note 3, â€śInvestments,â€ť to our Consolidated Financial Statements included in Item 1 of Part I of this report. We generally reinvest available cash flows from operations to develop new restaurants or enhance existing restaurants.
Thank you, Stephanie and welcome, everyone, to Luby's third quarter fiscal â€™08 conference call. This call is being webcast and you can access the audio replay on our website at lubys.com.
Before we continue, I would like to remind you that the statements in this discussion, including statements made during the question-and-answer session regarding Luby's future financial and operating results, plans for expansion of the companyâ€™s business, including expected financial performance of the companyâ€™s prototype restaurant and future openings of new or replacement restaurants are forward-looking statements. Forward-looking statements involve risks and uncertainties, including but not limited to general business conditions, the impact of competition, the success of operating initiatives, changes in the cost and supply of food and labor, and the seasonality of the companyâ€™s business, taxes, inflation, governmental regulations, and the availability of credit, as well as those risks and uncertainties disclosed in the companyâ€™s periodic reports on Form 10-K and Form 10-Q.
With that said, I would now like to turn the call over to Luby's President and CEO, Chris Pappas. Chris.
Christopher J. Pappas
Thank you and welcome to our third quarter conference call. During my opening remarks, I will review the quarter and comment on current restaurant operating environment before I turn the call over to Scott Gray, our CFO, to review our financial results in more detail. I will then discuss initiatives taking place at Luby's to enhance our store level execution and improve our operations and facilities. I will also provide an update on our culinary contract services business and our new store development before opening the call to your questions.
Let me begin by saying that I believe we are currently experiencing one of the toughest times our industry has faced in many years. Our financial results reflect these challenges and while we are not satisfied with our third quarter results, we do believe that our team is doing a good job in this tough market environment. Luby's is profitable, debt free, and generating cash flow, which we are investing back into our business to grow new units, expand our culinary services business, and refresh and remodel our existing units.
The restaurant industry remains under pressure from a number of economic factors which include higher gasoline prices, rising commodity costs, and in general negative economic news that we see every day on the news.
The continued rise in gasoline prices is having an impact on how our consumers eat out and at what frequency, as evidenced by the declines in same-store sales and the consumer confidence index. While our restaurant sales declined during the third quarter, our team managed food and labor costs well in a difficult environment. We remain confident that our long-term strategic plan to improve our food, labor, and service and grow the Luby's brand with new stores and culinary contract services will enhance shareholder value.
As we have discussed before, Luby's value proposition to provide great cook from scratch offerings served in convenient, fast casual environment and priced below casual dining restaurants should allow us to weather this macroeconomic storm. Our belief is that once the economic weather clears, Luby's should be well positioned to perform better than many of the industry averages.
In many ways, the key of our business is to remain focused on perpetually improving our ability to deliver great food, service, and value to our customers on a daily basis. So while we are excited about our growth plans, we know that the key to our long-term success is to drive sales and profitability in our existing stores, as well as to grow our business with new restaurants and new culinary contract accounts.
In tough times, organizations tighten up their focus on blocking and tackling and thatâ€™s exactly what weâ€™re doing at Luby's.
I would now like to turn the call over to CFO Scott Gray to review our financial results.
K. Scott Gray
Thank you, Chris and good afternoon, everyone. I now would like to take you through our financial results for the third quarter fiscal 2008, starting with our income statement. Income from continuing operations in the third quarter was $1 million, or $0.03 per diluted share, compared to $3.9 million or $0.14 per diluted share in the third quarter last year. Third quarter 2008 income from continuing operations was reduced by approximately $0.01 per diluted share by the after tax impact of store opening costs and asset charges.
Total sales in the quarter decreased 2.1% to 74.6 compared to $76.2 million in the same quarter last year. Restaurant sales were $72.8 million, a decrease of 4.1% compared to last year. Approximately 0.8% of the decline relates to the net effect of sales from closed stores in the prior year, partially offset by new store sales in the current year.
On a same-store sale basis, which includes 121 units, our same-store sales declined 3.3% in the third quarter compared to the same quarter last year. Same-store sales in the third quarter last year were down 1.9%. Year-to-date, same-store sales have declined 2.8%.
To put our sales results into perspective, prior to the recent quarters of same-store sales decline, Luby's had 12 consecutive quarters of same-store sales growth that averaged 4.6%. Since that time, we have experienced six consecutive quarters of same-store sales declines that have averaged 2.6% decline.
The decline in restaurant sales has been partially offset by an increase of $1.5 million from our culinary contract service business during the same period.
Going forward in the fourth quarter, assuming that current same-store sales trend is consistent and removing closed stores revenue and including new store revenue, we expect restaurant sales in the fourth quarter to decline in the range of 2% to 3% off of last yearâ€™s quarter.
Store level profit, which we define as restaurant sales minus cost of food, payroll related costs, and other operating expenses, were $10.3 million, or 14.3% as a percentage of restaurant sales compared to $14.3 million, or 18.9% last year. This decline is primarily due to the decline in customer traffic and reduced sales volume and higher cost. Year-to-date, store level profit was 15.4%, down 170 basis points from 17.1 during the same period last year.
For the three quarter period year over year, restaurant sales declined $6.2 million.
I will now step through our expense lines for the third quarter and provide some guidance going forward for the fourth quarter. Food costs decreased approximately $200,000, or $0.2 million, or 1.2% in the third quarter of fiscal 2008 compared to the same quarter last year, due to lower sales. Food costs as a percentage of restaurant sales increased to 27.4% in the third quarter fiscal 2008 from 26.6% in the third quarter last year.
Food commodity costs increased in the most -- in most categories, with oils and cheese having the greatest impact on food costs, partially offset by lower produce prices.
Assuming commodity prices remain at current levels, we expect food cost as a percentage of restaurant sales to trend 75 to 100 basis points higher in the fourth quarter compared to last year.
Payroll related costs were relatively flat in the third quarter of fiscal 2008 compared to the same quarter last year. Payroll related costs as a percentage of restaurant sales increased to 34.8 in the third quarter fiscal 2008 from 33.5 in the third quarter of last year, primarily due to lower sales.
Claim reserve costs were 40 basis points unfavorable in the quarter compared to last year.
Assuming the sales trend I mentioned earlier for the fourth quarter, and due to higher wage rates, payroll related costs are expected to increase 100 to 150 basis points over the fourth quarter of last year.
Other operating expenses primarily include restaurant related expenses for utilities, repairs and maintenance, advertising, insurance, supplies, services, occupancy costs. Other operating expenses increased by approximately $1.2 million, or 7.4% in the third quarter of fiscal 2008, compared to the same quarter last year.
As a percentage of restaurant sales, other operating expenses increased 250 basis points, primarily due to $0.6 million increase in repairs and maintenance expense focusing, which was a result of focus on improving the appearance and functionality of the cafeterias for our guests and employees over the quarter and $0.8 million increase in utility expense, resulting from higher utility rates and more favorable costs in the prior year.
Going forward, assuming -- and given that our third quarter operating expense being up well over mid-7% over last year, and then also factoring in the forward curve for natural gas prices, which the current year is expected -- the current quarter, fourth quarter is expected to be in the mid-12s versus $6 per MCF for natural gas, we see operating expense could be as much as 12% higher than the prior yearâ€™s fourth quarter.
Operating costs were approximately $0.2 million in the third quarter of fiscal 2008 and reflects the labor, supplies, occupancy, and other costs necessary to support the unit through its opening period.
Our cost of culinary contract service line increased by approximately $1.2 million in the third quarter of fiscal 2008 compared to the same quarter last year. This increase was related to food, labor, and other operating expenses associated with the increase in revenue for this line of business.
Depreciation and amortization expense increased approximately $0.4 million, or 10.6% in the third quarter of fiscal 2008 compared to the same quarter last year, due to higher depreciation resulting from new restaurant openings and existing restaurant upgrades and remodels.
General and administrative expenses include corporate salaries and benefits related costs, including restaurant area leaders, share-based compensation, professional fees, travel and recruiting expenses and other office expenses. General and administrative expenses increased by approximately $0.4 million, or 7.3% in the third quarter of fiscal 2008, compared to the same quarter last year.
As a percentage of total sales, general and administrative expenses increased to 7.7% in the third quarter of fiscal 2008 from 7% last year. The increase was primarily due to approximately $0.4 million increase to corporate salaries expense related to staffing costs to support the culinary contract service business and other departments to support the companyâ€™s strategic growth plan. We expect general and administrative expenses as a percentage of sales in the fourth quarter to be in the range of 7.5% to 8%.
Moving now on to the balance sheet, I would like to provide an update on our short-term and long-term investments. We began the quarter with $17.6 million in short-term investments comprised of auction-rate municipal bond securities. During the quarter, we successfully converted $3 million to cash at par and subsequent to the quarter, we successfully sold $5.1 million at par.
As of May 7, 2008, the par value of these investments are classified as follows: $5.1 million in short-term and $9.5 million of long-term investments. Given the continuing liquidity issues surrounding the auction-rate securities markets, we have classified $9.5 million as long-term and have recorded a $0.4 million temporary reduction in value based on evaluation due to liquidity. The reduction in value is charged against shareholdersâ€™ equity on the balance sheet.
The balance in long-term investments of 9.1 reflects the fair value -- the 9.5 less the temporary reduction.
Moving now to property held for sale, property held for sale is valued at the lower of net depreciable value or net realizable value. As of May 7, 2008, we had five owned properties and two ground leases recorded at $5.4 million and property held for sale, which are actively marketed in their respective locations. There are no -- there was no activity or change in the carrying value of these properties during the quarter.
As of the beginning of the fiscal year at August 29, 2007, we had one owned property and three ground leases recorded at $0.7 million in property held for sale.
Rolling it forward in the first quarter of fiscal 2008, one of the ground lease properties was reclassified from property held for sale to property and equipment. We have plans to reopen the location using our new prototype design.
In the second quarter of fiscal 2008, six restaurants were closed, five were owned and one was an operating lease. Of the five owned properties, one of the five owned properties was sold leaving a net of four to be classified as property held for sale. Property held for sale consists of already closed properties.
Regarding our capital expenditures during the quarter, capital expenditures were $10.1 million during the third quarter, which included $2.4 million to upgrade our restaurant facilities, including dining room updates and restaurant remodels and new construction of $6.1 million. We expect our capital expenditures for fiscal 2008 to be between $38 million to $40 million.
As Chris mentioned, the economic conditions are challenging. This type of operational environment will continue to challenge us to better manage our operating margins. We are focused on improving shareholder value through culinary contract services growth and focus on existing store level profitability and new store development.
I will now turn the call back over to Chris.
Christopher J. Pappas
Thanks, Scott. As I mentioned earlier, our teamâ€™s focus in the field is on executing on our policies and procedures designed to help us deliver great food quality, excellent customer service, and consistency throughout our restaurants. I would now like to discuss a few initiatives underway at Luby's to combat declining restaurant sales and to protect our restaurant level margins in a tough sales environment.
As I reported to you last quarter, the installation of our kitchen software program was completed last quarter. This system allows us to view recipes on kitchen monitors in the kitchen area, eliminating the need for our recipe binders in the kitchen. This technology displays the recipe in great detail, including pictures of the item and improves our recipe consistency company wide. This system enables our corporate shifts to push new recipes or recipe changes directly down to all our stores.
Now that this system is fully rolled out to all our units, weâ€™re seeing additional uses and benefits to the technology, such as improved controls for product waste and inventory. The software system can also serve as a venue for teaching other restaurant policies and procedures to our crew.
As every restaurant company is currently doing, our operations and labor team are also working to improve our -- any labor scheduling that we can. Information is power and we are putting more real-time information in our managementâ€™s hands so they can deploy crew members better.
Based on some insights we are gaining from our new store operations, we have an initiative and to improve labor deployment and overtime utilization. While itâ€™s too early to quantify these savings, we continue to exhaust efforts to improve our efficiency and utilize technology in every aspect of our business.
As I mentioned before, blocking and tackling in the restaurant business are essential. Operational excellence really comes from commitment and consistency to literally hundreds of tasks daily, weekly, and monthly. We currently have an initiative in place that is focused on how our kitchens are organized. We continue to be pleased with the layout of our new prototype kitchens and are taking some of the things weâ€™ve learned there to help us organize other kitchens in our system.
Again, we remain focused on constantly finding ways to improve our efficiency for our crew and our company.
During the quarter, we also continued our capital improvement projects with upgrades and remodel projects at 18 of our restaurants. Fifteen restaurants received new tables and chairs and five received our new booth package. Overall, we have completed phases of work at 41 restaurants, including 11 full remodels and 20 new restrooms year-to-date in fiscal 2008, and nearly 70% of our restaurants now have new furniture.
Our plans are to complete an additional 20 to 26 remodel projects in the fourth quarter and install new furniture at another 11 units, including six with new booth packages.
Turning to the competitive landscape, we believe our brand remains well-positioned, residing below casual dining and ticket price and only slightly above quick-service prices. From a quality standpoint, we would argue that our made-from-scratch food and wide variety make us a much better value than our competitors. We believe our cafeteria format, wide variety of quality offerings, and reasonable pricing present a value to the market.
From a sales and marketing perspective, we continue to manage our costs closely. Weâ€™ve raised our menu prices to offset costs in certain areas but we are very careful to keep our pricing a value for our customers. We believe that value allows us to stay below the price of casual dining and in some cases well below their prices on certain items. We continue to concentrate our marketing dollars on point of purchase and in-store marketing, as well as radio advertising.
Moving now to our culinary contract services business, where we provide food service at healthcare facilities, we are pleased to report continued growth in this area of our business. As we mentioned in our press release, we expect to initiate two to three more contracts during the calendar year 2008.
Since starting this piece of our business about two years ago, weâ€™ve made great progress in hiring the team we need to execute this business, and we are gaining traction in the marketplace. We are now able to compete for larger accounts and believe that our reputation and brand equity are growing in this area. We view this business as a vehicle to really franchise the brand with three clear advantages -- the cost of capital is much less than building a new store, the contracts tend to be multiple year commitments, our audience is receptive and captive -- said another way, we are not competing with every brand on the street as we are with our restaurants. And number four, probably most important, healthcare CEOs want the added value to their facilities, patients, employees, and visitors that a recognizable street brand, Luby's, brings them over non-street brand providers that they are accustomed to.
Now I would like to discuss our new store development. Our two new prototype restaurants continue to perform well and remain on pace to generate annual revenues in excess of $3.25 million a year, an increase of over 30% compared to the restaurant system average revenue of $2.5 million.
We remain committed to our strategic growth plan to build and operate new Luby's cafeteria style restaurants and will open a new location in a northern suburb of Houston in July. We will also open one relocation restaurant in the galleria area of Houston in July that utilizes our new prototype design.
In addition to these two new construction stores, we have three additional projects underway and depending on the pace of construction, we plan to open two to three of these new stores in calendar 2008 year-end. We are actively searching or new site locations in a number of markets. Hopefully one advantage to the current economic environment may come on the real estate side as prices will likely soften and may present new location opportunities for Luby's.