A New York hedge fund is preparing to launch a proxy fight to take control of Luby's board of directors, which if successful would change the course of the struggling chain led for nearly two decades by a member of Houston's Pappas restaurant family.
Bandera Partners, which owns 8.9 percent of Luby’s outstanding shares, on Tuesday sent a public letter to the locally based chain, outlining concerns about the company’s direction and nominating five candidates to “improve the board with fresh, independent faces.” Members of the nine-member board are elected to a one-year term every year at Luby’s annual shareholders meeting, which is expected to take place in early 2019.
“I’m writing today to tell you that what’s happening at Luby’s is simply not working,” Jeff Gramm, Bandera’s co-founder and portfolio manager, said in the letter. “I believe this is the outside shareholders’ last chance to salvage their investment in the company, and I feel a responsibility to take on this difficult battle on their behalf, rather than subject myself and other Luby’s shareholders to another year of value destruction.”
Bandera’s proposed new board members are Gramm; his father and former Sen. Phil Gramm of Texas; Stacy Hock, chairwoman of Texans for Education Opportunity; Savneet Singh, a partner at New York asset management firm CoVenture; and Brian Wright, the CEO of Massachusetts-based Bertucci’s Italian Restaurants.
Gramm, in his letter, criticized Luby’s “bloated corporate expenses” and disagreed with the company’s strategy of closing restaurants and selling company-owned property to reinvest in the business and pay down $39.3 million of debt. Luby’s closed 21 locations this year and laid off some of its corporate staff to chip away at its debt.
Luby’s is liquidating shareholders’ most valuable asset: Luby’s real estate, Gramm said. The chain operates 146 company-owned restaurants under the Luby’s Cafeteria, Fuddruckers Restaurants and Cheeseburger in Paradise brands. The company this month reported nearly $200 million in assets, much of it in real estate.
“It is brutally painful to watch the company chisel away at its real estate portfolio to fund low-return investments into the business,” Gramm said in the letter. “Since fiscal 2008, Luby’s has sold $88 million of assets. This capital, more than double the current market capitalization, is gone and forever lost to shareholders.”
Luby’s, in a statement, said it will review Bandera’s letter and consider the hedge fund’s candidates. The board will make a formal recommendation later, the company said. Chris Pappas and his brother Harris Pappas, founders of Houston-based Pappas Restaurants, became majority shareholders of Luby's in 2001. Chris Pappas is CEO and president.
“We are always open to good ideas regardless of their source and will carefully review and consider Bandera’s candidates as we would any other potential directors to assess their ability to add value to the board for the benefit of all shareholders,” Peter Tropoli, Luby’s general counsel, said in a statement.
Luby’s, founded in San Antonio in 1947 and known for its comfort foods such as the LuAnn Platter, has struggled to retain diners in recent years amid growing competition from new fast-casual concepts, such as Shake Shack, which offer trendy foods and limited service that appeals to younger diners looking to share their dining experience on social media. Luby’s this year issued a statement of going concern, calling into question whether it can stay in business.
The company, in its latest annual financial report, said it posted $365.2 million in sales over the year, down 3.7 percent from the previous year. Same-store sales fell a half percent.
Luby’s reported a loss of $33.6 million this fiscal year, and its stock has lost two-thirds of its value since January. Shares ended the trading day Wednesday at $1.53, down from its peak of around $25 in 1993. The company has a stock market value of around $45.2 million.
“The market is no longer excited about a cafeteria concept,” said David Littwitz, a restaurant broker with Houston-based Littwitz Investments. “The younger customer hasn’t given a thought to Luby’s for a long time.”
Bandera, which has a stake in Famous Dave’s BBQ and has invested in Popeyes Louisiana Kitchen and Fiesta Restaurant Group, has owned Luby’s stock for more than a decade. The hedge fund has issued a number of public letters to company boards, including one sent this year to Boardwalk Pipeline Partners in Houston. Jeff Gramm is the author of “Dear Chairman,” a book on activist investors, and is on the board of Morgan’s Foods with James Pappas, an activist investor and son of Luby’s CEO Chris Pappas.
Another shareholder, Dallas-based investment firm Hodges Capital Management, has owned Luby’s stock for 35 years and said it would back Bandera’s efforts to change the board and the company’s direction.
Source: Houston Chronicle