Texans’ tastes changed. Luby’s didn’t.

Texans’ tastes changed. Luby’s didn’t.
Chris and Harris Pappas began amassing stock in Luby’s Inc. in October 2000 in an ambitious bid to wrest control of the iconic Texas cafeteria chain famous for its Southern comfort foods such as fried fish, broccoli rice casserole and liver and onions. The Pappas brothers had no experience running cafeterias or leading a public…

Chris and Harris Pappas began amassing stock in Luby’s Inc. in October 2000 in an ambitious bid to wrest control of the iconic Texas cafeteria chain famous for its Southern comfort foods such as fried fish, broccoli rice casserole and liver and onions.

The Pappas brothers had no experience running cafeterias or leading a public company, but they were seasoned restaurateurs boasting a proven track record of success with popular Houston restaurants including Pappasito’s Cantina, Pappadeaux Seafood Kitchen and Pappas Bar-B-Q. They thought they could turn around a tired cafeteria concept and make it pay.

The Pappases took the helm of the company in 2001. A couple of years later, they moved Luby’s to Houston from San Antonio and came up with a plan to streamline operations while focusing on what endeared Luby’s to generations of Texans.

On HoustonChronicle.com: Losing Luby’s would be ‘heart-wrenching’ for longtime diners

“We are confident that with this new business plan, Luby’s will be in a stronger position to focus on our core Texas markets and continue to provide our customers with delicious, home-style food, value pricing and outstanding customer service,” CEO Chris Pappas said in 2003.

Nearly two decades later, the Pappas family is letting go of the company’s reins, putting Luby’s up for sale in an economic downturn driven by the global coronavirus pandemic. Luby’s on Wednesday said it would sell its restaurant businesses and assets, including its real estate, to pay off $35 million of debt and distribute the rest of the proceeds to stockholders long disappointed by the company’s financial performance.

The future of the 73-year-old cafeteria chain, which survived recessions and a 1991 mass shooting at its Killeen location, now hangs in the balance.

“Chris and Harris looked at Luby’s and thought, ‘We’re good operators, we can turn this thing around,’” said David Littwitz, a Houston restaurant broker and consultant. “You could be the best businessperson in the world, but the cafeteria concept is unfortunately a part of Americana that’s past. There was nothing that the Pappas family could do to update that concept enough to make it work.”

Casual, affordable

Luby’s was the brainchild of Bob Luby and Charles Johnston, who opened their first cafeteria in a basement near The Alamo in 1947. Cafeterias, born shortly after Ford popularized the assembly line in the late 19th century, offered America’s growing middle class a casual but nice restaurant the whole family could enjoy at an affordable cost.

The cafeteria chain grew steadily, becoming the go-to restaurant for many Texas families after Sunday church services. But after a decade of expansion in the 1990s in which Luby’s doubled its footprint to more than 200 locations in 11 states, the company found itself floundering.

On HoustonChronicle.com: Luby’s to sell off its restaurant business and assets

Luby’s sales began to fall as consumers shifted toward a healthier diet. The first fast-casual restaurants, such as Panera Bread and Chipotle, got their start around then and started their meteoric rise in popularity.

Under the Pappases, Luby’s closed underperforming restaurants, tinkered with the menu and redesigned some locations, even turning some cafeterias into all-you-can-eat buffets. In 2010, it bought Fuddrucker’s for $61 million and three years later acquired Cheeseburger in Paradise for $11 million in moves intended to diversify the business. It also launched a culinary services division catering to office and hospital cafeterias.

But Luby’s continued to struggle to draw diners amid changing consumer tastes and growing competition from fast casual restaurants.

Marion Adams, of Missouri City, talks about what she loves most about the Luby's at 9797 S. Post Oak, Thursday, June 4, 2020, in Houston.

On Wednesday, it reported a loss of $3.8 million for the quarter ended March 11, down from earnings of $6.6 million the same period last year. The chain reported second-quarter revenue of $68.6 million, down 7.8 percent from the $74.4 million revenue a year ago. Same store sales were up 1.7 percent during the second quarter.

Luby’s stock fell to 56 cents a share in April, during the depths of the pandemic. Its shares were trading at $1.61 per share on Friday morning, down nearly 14 percent from the day before.

The coronavirus pandemic, which forced Luby’s to close three-quarters of its restaurants for three months, compounded the company’s financial woes and highlighted its challenges.

“The average Luby’s customer is older, and they’re the ones most worried about the virus,” Littwitz said. “And the younger customers aren’t going to cafeterias. The last cafeteria they’ve been to was the one in their college dorm. It’s a double whammy.”

Limited options

Luby’s began exploring a possible sale in September, several months after facing a contentious proxy fight from an activist investor, Bandera Partners of New York, which pushed for changes in leadership and the company direction in the face of lagging sales.

Jeff Gramm, a Bandera co-founder and son of former Texas Sen. Phil Gramm, in a public letter to shareholders criticized Luby’s strategy of selling real estate to fund its ailing cafeteria business, saying it was “simply not working.” Luby’s, which owns most of its real estate, has sold dozens of restaurants over the years, selling its most valuable asset to pay down debt and keep the cafeteria business afloat.

“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 Nov. 2018 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, which on Friday had a market value of $39.4 million, said its remaining 74 properties were appraised at $211 million last year, according to its annual report filed with the Securities and Exchange Commission.

Question of survival

Gerald Bodzy, Luby’s chairman, said in an interview that the company believes it can get the biggest return for its shareholders by selling the business and assets separately, but would entertain an offer for the entire business.

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The company hired Duff & Phelps Securities of New York to help sell Luby’s Cafeteria and Culinary Contract Services, and Brookwood Associates of Atlanta to help sell Fuddruckers.

“We’re in the seventh consecutive year of losses,” Bodzy said. “Shareholders are looking for a different approach than what we’ve taken the last six-plus years. We hope to find better capitalized operators to take these great brands on.”

Exterior of Luby's at 9797 S. Post Oak, Thursday, June 4, 2020, in Houston.

A Luby’s spokesman did not return requests for comment from the Pappas brothers.

Littwitz said it’s unlikely the Pappases would want to take a big chunk of their net worth and double down on Luby’s as they near retirement age.

“Chris and Harris Pappas felt they could turn the Titanic around all the way until the ship started listing and they realized it was going to sink,” Littwitz said. “The iceberg for them was COVID, but the ship started leaking earlier.”



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