| LUBYS INC Item 1A Risk Factors An investment in our common stock involves a high degree of risk |
| Investors should consider carefully the risks and uncertainties described below, and all other information included in this Annual Report on Form 10-K, before deciding whether to purchase our common stock |
| Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business, financial condition or results of operations |
| The occurrence of any of the following risks could harm our business, financial condition and results of operations |
| The trading price of our common stock could decline due to any of these risks and uncertainties, and investors may lose part or all of their investment |
| We face intense competition, and if we are unable to compete effectively, our business and financial performance will be adversely affected |
| The restaurant industry is intensely competitive and is affected by changes in customer tastes and dietary habits and by national, regional and local economic conditions and demographic trends |
| New menu items, concepts, and trends are constantly emerging |
| We compete on quality, variety, value, service, concept, price, and location with well-established national and regional chains, as well as with locally owned and operated restaurants |
| We face significant competition from family-style restaurants, fast-casual restaurants, and buffets as well as fast food restaurants |
| In addition, we also face growing competition as a result of the trend toward convergence in grocery, deli, and restaurant services, particularly in the supermarket industry, which offers “convenient meals” in the form of improved entrees and side dishes from the deli section |
| Many of our competitors have significantly greater financial resources than we do |
| We also compete with other restaurants and retail establishments for restaurant sites and personnel |
| We anticipate that intense competition will continue |
| If we are unable to compete effectively, our business, financial condition, and results of operations would be materially adversely affected |
| Changes in customer preferences for cafeteria-style dining could adversely affect our financial performance |
| Changing customer preferences, tastes and dietary habits can adversely impact our business and financial performance |
| We offer a large variety of entrees, side dishes and desserts and our continued success depends, in part, on the popularity of our cuisine and cafeteria-style dining |
| A change away from this cuisine or dining style could have a material adverse effect on our results of operations |
| We face the risk of adverse publicity and litigation, the cost of which could have a material adverse effect on our business and financial performance |
| We may from time to time be the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns |
| Publicity resulting from these allegations may materially adversely affect us, regardless of whether the allegations are valid or whether we are liable |
| In addition, we are subject to employee claims alleging injuries, wage and hour violations, discrimination, harassment or wrongful termination |
| In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace, employment and similar matters |
| A number of these lawsuits have resulted in the payment of substantial damages by the defendants |
| Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our financial performance |
| A judgment significantly in excess of our insurance coverage, if any, for any claims could materially adversely affect our financial condition or results of operations |
| 5 _________________________________________________________________ Unfavorable publicity relating to one or more of our restaurants or to the restaurant industry in general may taint public perception of the Lubyapstas brand |
| Multi-unit restaurant businesses can be adversely affected by publicity resulting from poor food quality, illness or other health concerns or operating issues stemming from one or a limited number of restaurants |
| Our planned expansion may not be successful |
| We have begun development of two new cafeteria restaurants in Texas, which we currently expect to open in 2007 |
| Our ability to open and profitably operate restaurants is subject to various risks such as the identification and availability of suitable and economically viable locations, the negotiation of acceptable lease or purchase terms for new locations, the need to obtain all required governmental permits (including zoning approvals) on a timely basis, the need to comply with other regulatory requirements, the availability of necessary contractors and subcontractors, the availability of construction materials and labor, the ability to meet construction schedules and budgets, the ability to manage union activities such as picketing or hand billing which could delay construction, increases in labor and building materials costs, the availability of financing at acceptable rates and terms, changes in weather or other acts of God that could result in construction delays and adversely affect the results of one or more restaurants for an indeterminate amount of time, our ability to hire and train qualified management personnel and general economic and business conditions |
| At each potential location, we compete with other restaurants and retail businesses for desirable development sites, construction contractors, management personnel, hourly employees and other resources |
| If we are unable to successfully manage these risks, we could face increased costs and lower than anticipated revenues and earnings in future periods |
| Our business is affected by local, state and federal regulations |
| The restaurant industry is subject to extensive federal, state and local laws and regulations |
| The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements |
| We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards, building codes and liquor licenses, federal and state laws governing our relationships with employees (including the Fair Labor Standards Act and applicable minimum wage requirements, overtime, unemployment tax rates, family leave, tip credits, working conditions, safety standards and citizenship requirements), federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the Americans With Disabilities Act of 1990 |
| In addition, we are subject to a variety of federal, state and local laws and regulations relating to the use, storage, discharge, emission, and disposal of hazardous materials |
| The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations could increase our compliance and other costs of doing business and therefore, have an adverse effect on our results of operations |
| Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability |
| Labor shortages or increases in labor costs could harm our business |
| Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including regional managers, restaurant general managers and chefs, in a manner consistent with our standards and expectations |
| Qualified individuals that we need to fill these positions are in short supply and competition for these employees is intense |
| If we are unable to recruit and retain sufficient qualified individuals, our operations and reputation could be adversely affected |
| Additionally, competition for qualified employees could require us to pay higher wages, which could result in higher labor costs |
| If our labor costs increase, our results of operations will be negatively affected |
| An increase in the minimum wage could adversely affect our financial performance |
| From time to time, the US Congress considers an increase in the federal minimum wage |
| The restaurant industry is intensely competitive, and if the federal minimum wage is increased, we may not be able to transfer all of the resulting increases in operating costs to our customers in the form of price increases |
| In addition, since our business is labor-intensive, shortages in the labor pool or other inflationary pressure could increase labor costs, which could harm our financial performance |
| 6 _________________________________________________________________ If we are unable to anticipate and react to changes in food, utility and other costs, our results of operations could be materially adversely affected |
| Many of the food and beverage products we purchase are affected by commodity pricing, and as such, are subject to price volatility caused by production problems, shortages, weather or other factors outside of our control |
| Our profitability depends, in part, on our successfully anticipating and reacting to changes in the prices of commodities |
| Therefore, we enter into purchase commitments with suppliers when we believe that it is advantageous for us to do so |
| Should there be an adverse change in commodity prices, we may be forced to absorb the additional costs rather than transfer the resulting increases in commodity prices to our customers in the form of price increases |
| Our success also depends, in part, on our ability to absorb increases in utility costs |
| Our operating results are affected by fluctuations in the price of utilities |
| Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a significant adverse effect on our results of operations |
| Because our restaurants are concentrated in Texas, regional events can adversely affect our financial performance |
| Approximately 95prca of our restaurants were located in Texas as of November 3, 2006 |
| Our remaining restaurants are located in Arizona, Arkansas, Louisiana, and Oklahoma |
| This concentration could adversely affect our financial performance in a number of ways |
| For example, our results of operations may be adversely affected by economic conditions in Texas or the Southern United States or the occurrence of an event of terrorism or natural disaster in any of the communities in which we operate |
| Also, given our geographic concentration, adverse publicity relating to our restaurants could have a more pronounced adverse effect on our overall revenues than might be the case if our restaurants were more broadly dispersed |
| Inclement weather can adversely affect our financial performance |
| Many of our restaurants are located in the Texas Gulf Coast region |
| Although we generally maintain property and casualty insurance to protect against property damage caused by casualties and natural disasters, inclement weather, flooding, hurricanes and other acts of God can adversely impact our sales in several ways |
| For example, poor weather typically discourages potential customers from going out to eat |
| In addition, a restaurant that is damaged by a natural disaster can be inoperable for a significant amount of time |
| If we lose the services of any of our key management personnel, our business could suffer |
| The success of our business is highly dependent upon our key management personnel, particularly Christopher J Pappas, President and Chief Executive Officer, and Harris J Pappas, Chief Operating Officer |
| The loss of the services of any key management personnel could have a materially adverse effect upon our business |
| Our business is subject to seasonal fluctuations, and, as a result, our results of operations for any given quarter may not be indicative of the results that may be achieved for the full fiscal year |
| Our business is subject to seasonal fluctuations |
| Historically, our highest earnings have occurred in the third quarter of the fiscal year, as our revenues in most of our restaurants have typically been higher during the third quarter of the fiscal year |
| Similarly, our results of operations for any single quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year |
| General economic factors may adversely affect our results of operations |
| National, regional and local economic conditions, such as recessionary economic cycles, a protracted economic slowdown or a worsening economy, could adversely affect disposable consumer income and consumer confidence |
| Unfavorable changes in these factors or in other business and economic conditions affecting our customers could reduce customer traffic in some or all of our restaurants, impose practical limits on our pricing and increase our costs, any of which could lower our profit margins and have a material adverse affect on our results of operations |
| Inflation can negatively affect our financial performance |
| The impact of inflation on food, labor and other aspects of our business can negatively affect our results of operations |
| Commodity inflation in food, beverages and utilities can also impact our financial performance |
| Although we attempt to offset inflation through periodic menu price increases, cost controls and incremental improvement in operating margins, we may not be able to completely do so which could negatively affect our results of operations |