On June 8, restaurant chain Luby's (NYSE:LUB) will announce earnings for the third quarter of fiscal 2006. Luby's primarily operates in Texas, with a couple of locations in each of several surrounding states. The stock dropped after last quarter's miss, despite a positive review by the analyst following the company. Read on to see if that might happen again.

What analysts say:

  • Buy, sell, or waffle? The lone analyst offering an opinion on Luby's says it's a buy. He reiterated that opinion after last quarter's miss, saying that the price dip was a "good buying opportunity" for long-term investors.
  • Revenues. Two analysts predict a consensus level of $78.5 million, a very modest 1.9% increase in sales from the year-ago quarter.
  • Earnings. The consensus figure calls for $0.16 EPS, 33% lower than a year ago.

What management says:
In announcing fiscal 2006's second-quarter results, Chris Pappas, president and chief executive officer, said, "The second quarter marked our ninth consecutive quarter of same-store sales growth. We are pleased with our sales and net income increases over a strong comparable quarter last year, despite a challenging expense environment."

Those challenges included increased costs for commodities such as seafood, fresh produce, and utilities. Nine consecutive quarters of same-store sales increases aren't bad, especially for a restaurant chain, and especially considering that competitors such as Bob Evans Farms (NASDAQ:BOBE), CBRL Group (NASDAQ:CBRL), and Denny's (NASDAQ:DENN) have been having difficulties. IHOP (NYSE:IHP), however, reported strong same-store sales in its first quarter ending March 31. We'll see which group Luby's belongs to when it reports.

What management does:
Three years ago, the company decided to close and sell underperforming restaurants, using the proceeds to pay down its outstanding debt of $124 million. During the most recent quarter, it announced that this plan had essentially been completed, with only six locations yet to be sold, and the debt completely repaid. Seeing management follow through with an announced plan is a point in this company's favor.

Gross margins have held rock-steady, while operating margins have been climbing. Net margins have been a bit bumpy, though, due to gains, impairments, and discontinued operational income and losses from the aforementioned restaurant sales. Sales growth has also been good, though the last 12 months showed a bit of a decline.

Margins %*

11/04

2/05

5/05

8/05

11/05

2/06

Gross**

73.3

73.3

73.4

73.2

73.4

73.4

Operating

2.7

3.8

4.4

6.2

7.0

6.9

Net

0.1

2.6

3.6

1.1

2.1

2.2

Sales Growth %***

1.7

2.7

6.5

14.1

6.9

5.7

* Trailing-12-month data for quarter ending in month indicated.
** Based on gross profit defined as sales less cost of food.
*** Year-over-year comparison for quarter ending in month indicated.
All data from relevant company 10-K and 10-Q filings.

One Fool says:
I find it refreshing that an analyst would reiterate his buy rating, even though the company badly missed his earnings estimate last quarter. His long-term viewpoint is especially Foolish, recognizing a drop in stock price as a potential buying opportunity. The price basically hovered around $12 per stub for a while after that miss, subsequently drifting further down to its current $10 level. If the company meets or beats its lowered expectations, the stock price could begin to climb again.

In addition, I liked Luby's follow-through on its plan to sell underperforming locations and eliminate debt. I've learned from reading quarterly and annual statements to look for such pronouncements, then see if management has followed through with them. Leaders who meet their goals tend to be more conservative, and thus better stewards of our companies.

Luby's has been public since 1973 and listed on the New York Stock Exchange since 1982. It has seen and weathered all kinds of different environments. We'll see tomorrow how the company fares in this one.

Competitors:

  • Denny's
  • CBRL Group
  • Bob Evans
  • IHOP

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Fool contributor Jim Mueller does not own shares in any company mentioned.