Luby’s Shutdown Expected?

by Trefis Team
Rate   |   votes   |   Share

Luby’s stock (NYSE: LUB) was at less than a dollar since 2nd half of March 2020 and has recovered slightly to around $1.85 after the company announced it will pursue the sale of its operating divisions and assets. The company will consider a variety of transactions, including selling off its operating divisions and real estate or selling the company in its entirety. It has three operating divisions, which are Luby’s Cafeteria, Fuddruckers, and Culinary Contract Services. Net proceeds will be used to first to repay debt and other obligations, with the remainder being distributed to shareholders.

But could investors have foreseen Luby’s shutdown around the end of March when it was amply clear that the coronavirus outbreak will materially affect its business? Trefis analyzes Why Luby’s Was Forced To Sell? with a focus on Luby’s liquidity reserves and highlights how a simple forecast of cash flows under adverse economic conditions, like the one presented by the pandemic, could have warned investors about a possible impending bankruptcy.

We find that Luby’s would have run out of cash by the end of the year under two different but likely adverse scenarios, despite its proposed measures to cut costs and save cash if it wasn’t able to raise more capital.

Luby’s Business Took A Beating, And The Outlook Remains Bad

Luby’s revenues have seen a material impact over recent months on account of lockdowns across the country. Focus on essentials,and a reduction in meeting friends and colleagues for dinners and drinks, has reduced the demand. Even with the slow reopening of the economy as lockdowns are beginning to lift, social distancing measures may continue for months, which will impact the number of people willing to go to a restaurant. The social distancing measures will force restaurants to reduce seating, too.

To see how Luby’s cash balances would be affected, we consider two potential scenarios:

  • Scenario 1: This scenario captures a recession that persists through Q4 2020 (FY ends in August). Under this situation, we estimate that Luby’s revenues for full-year 2020 would potentially have fallen 30% from the figure of $323 million in 2019 to $226 million in 2020.
  • Scenario 2: If the outbreak gets worse, Luby’s restaurants will see less demand, until the situation improves in late Q1/early Q2 2021. This could potentially mean a 40% reduction in Luby’s revenues from $323 million in 2019 to $194 million in 2020.

This Was Bound To Have A Marked Impact On Luby’s Cash Flows

  • Even under the milder scenario forecast, we find that Luby’s cash flows would have been insufficient to cover its debt obligations due to a steep reduction in revenues and a hit to profitability. After all, elevated fixed costs, coupled with lower revenues, would have hurt the company’s bottom line significantly.
  • In fact, we estimate that Free cash flow from operations (FCFO) would be around -$9.2 million in 2020. Also, with expected capital expenditures of $2 million for the year, FCFO-CapEx would be -$11.2 million in 2020.
  • Taking all these factors together, we estimate that Luby’s would have ended the year with a cash balance of -$7.5 million.

Conclusion

Luby’s had a rocky road since the last couple of years as its operations were actually burning cash. The problems compounded in an extremely difficult business environment, as the company could not secure any additional credit.

In this situation some companies file for bankruptcy proceedings and as seen before, a few companies do survive and, in fact, emerge stronger from bankruptcy.

 U.S. Covid-19 Cases continue to trend higher, and any hope of economic conditions improving will begin with the number of new cases being reined in. Our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a complete macro picture of historic crashes with how the market has reacted so far due to the Great Lockdown.

While Luby’s has decided to shut shop, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

 

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!