Simple Arithmetic! And Some Commentary
October 20, 2009

Luby's is in need of cash in a big way. If you look at the most recent balance sheet (Aug '09) you can see they have current (generally 30 days or less) liabilities or bills they owe of about $27,000,000 that is correct, $27 Million. Luby's owes about $27,000,000 to vendors, suppliers of food, payroll, etc. That all needs to be paid in less than a year but a lot is due in 30 to 60 days.

But their Cash or ability to pay the current monthly bills is only about $800,000 plus add accounts receivable of another $1,500,000 so say $2,3000,000 in liquidity on a good day.

It does not take a rocket scientist or a CPA to do this math. You owe $27,000,000 but you only have $2,300,000 in the bank to pay.
Hmmmmm I would be worried if I were Sysco or another vendor. This equation is upside down right now and going in the wrong direction. The big question is has Luby's acted quickly enough or not, only time will tell.

So what to do?

1. Sell the stores that are debt free. Good Move on the part of Luby's management here. Management is looking at the "highest and best use" for the debt free property. Generate some cash flow to pay off your current liabilities. They had to do this in order to avoid the creditors putting them into forced bankruptcy. Wait for the economy to turn around and get the good stores to generate free cash flow.

2. Sell more stock to raise cash to pay the current creditors. A bit riskier, but plausible. This would be a "negative" signal to the stock market. The stock will dilute a bit and the value of the existing shareholders will go down in the short run.

3. Get a mortgage banker or large bank to put some debt on the company and provide cash to pay those creditors. Again, this would be a "negative" signal and the stock would go down in the short run, but it may be a life line for the viability of this company to continue. They could take the cash and pay off some bills and hopefully re-invest it in a manner that generates more cash.

4. Develop a "contingency plan". Attack the problem with a plan to:
a. increase sales, it appears they are doing this, but they need to come up with some better ideas. Perhaps offer a dining club, loyalty program, coupon campaign. Look for some outside consultant help. Don't be afraid to ask for help, even though these guys running it are experts. We all get caught up in our own way of doing things. They need some fresh eyes to help solve the sales problem. What they are doing is not working or not enough.
b. Reduce costs - Eliminate health insurance or significantly pass on the cost to employees, eliminate any 401k matching, eliminate free employee meals, ask workers to take a 20% pay cut in the short term, eliminate non-essential administrative/secretarial positions, they are a luxury. Farm out the Human Resources function.
Reduce the corporate staff in direct proportion to the reduction in the number of stores that will be closed. They can not keep the same corporate staff level and be considered serious about cutting costs.
c. Improve processes - Hire outside service to interview customers i.e. likes dislikes find out why they go to Luby's. Examine tipping issue.

I think they have smart people working for them, just not convinced the "cafeteria" concept will see the light of day.