All right, that's not the usual analogy, but "diamond" doesn't rhyme.
Small restaurateur Luby's (NYSE: LUB ) reported higher-than-expected earnings June 8. Its $0.25 in net profits per share landed some $0.09 ahead of consensus estimates. That sounds great, until you read that the entire $0.09-per-share difference stemmed from a non-cash recognition of income tax benefits. That's perfectly allowed under GAAP, and management feels that the company is stable enough to realize such a benefit.
Revenue came in right in line with expectations, too, at $78 million. According to the conference call, increased customer traffic was the main source of the increase in sales. This is in contrast to similar chain restaurants, such as Bob Evans Farms (Nasdaq: BOBE ) and CBRL Group (Nasdaq: CBRL ) , where increased menu prices have primarily driven revenue growth. Management commented that it may have some pricing power to use in the future.
In addition, Luby's has enjoyed 10 consecutive quarters of same-store sales growth, an unusual distinction among restaurant chains at the moment. This success could stem partly from Luby's clever promotions, such as fish during Lent; its emphasis on value and convenience; or even its sponsorship of the Houston Astros where kids five to 12 years old can get a chance to call out "Play ball!" behind the plate at home games. How cool is that?
Now that the restaurant business is stabilized, management is attempting to grow the business in other ways, including providing food services at hospitals and other health-care facilities in competition with Aramark (NYSE: RMK ) . This isn't as substantial a change in focus as you might think; Luby's began as a cafeteria, and it still retains its roots as such. Things are going slowly, though, since potential customers may be reluctant to switch providers. Luby's could have a tough time breaking into this business.
So with decent earnings and revenue, a nice string of same-store sales increases, and the prospect of a new business line, is the company worth nibbling on as an investment? Perhaps.
Adjusted EBITDA was down 7% for the quarter, as general and administrative (G&A) expenses increased much faster than revenues -- 23.5% versus 3.4% -- year over year. As a percent of sales, G&A expenses increased from 5.9% to 7.1% in the same time frame. The hike came from increased stock option and staff expenses. Keep an eye on this going forward; when sales growth is slow, costs need to be controlled.
I think Luby's could be a ruby in the rough, but only if it can generate growth from its newest initiative and keep its costs under control.
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Fool contributor Jim Mueller does not own shares of any company mentioned. The Fool is all about investors writing for investors.
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