Chuy's Holdings Inc (CHUY) 2012 Q2 法說會逐字稿

Good day. Welcome to the Chuy's Holdings Inc. second-quarter 2012 conference call. Joining us on the call today will be stood Steve Hislop, Chief Executive Officer and President of Chuy's Holdings Inc., and Jon Howie, Chief Financial Officer. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jon Howie, Chief Financial Officer. You may now begin.

Thank you, operator, and good afternoon everyone. By now, everyone should have access to our second-quarter 2012 earnings release. It can also be found at www.Chuy's.com in our Investor Relations section.

Before we begin our review of formal remarks, I need to remind everyone that part of our discussions today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings for a more detailed discussion of risks that could impact our future operating results and financial conditions. We also plan on filing our 10-Q for the second quarter of 2012 on August 30, 2012 and would encourage you to review that document at your earliest convenience.

Also, during today's call, we will discuss non-GAAP measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and the reconciliation to comparable GAAP measures is available in our earnings release.

With that out of the way, I'd like to turn the call over to Steve.

Thank you Jon. Good afternoon everybody, and welcome to our first quarterly conference call for Chuy's Holdings. We'd like to cover several topics on this call. I'm going to begin with an overview of Chuy's. Jon will then review our second-quarter financial results and provide guidance for 2012. Then I will wrap up the call with some comments on our growth trends before turning the call over for Q&A.

For those of you who may be new to our Company, Chuy's is a full-service restaurant concept offering a distinct menu of authentic, freshly prepared Mexican and Tex-Mex-inspired food. From our founding in Austin, Texas in 1982, Chuy's has grown to 237 restaurants as of today driven by the addition of 29 new restaurants during our last 52 months, basically 4.5 years.

Despite our growth, we have not strayed from the original ideas and roots of our founders. Our menu, which has changed very little during our 30-year history, is based on recipes, ingredients, cooking techniques and food pairings that originated from the friends and families of our cofounders. Our core offerings include fajitas, tacos, burritos, combo platters, and daily specials complemented by a variety of appetizers, soups and salads and are founded on a commitment to made-from-scratch items using only the highest quality and the freshest ingredients we can find. To this day, we do not have any freezers in our prototype restaurants. Every day, we roast and hand-pull whole chickens, hand roll fresh tortillas, squeeze fresh lime juice, prepare fresh guacamole from whole avocados. We also make all 9 to 11 of our homemade sauces daily using high-quality ingredients. In fact, every summer, a group of our kitchen managers travel to Hatch, New Mexico to hand select batches of chilies for our Signature hatch green chile sauce. Our sauce is a very important aspect of our menu as they provide additional variety and broad customization possibilities, giving our guests the opportunity to personalize each order, which in turn drives frequency. We believe our commitment to made-from-scratch, freshly prepared cooking is not only evidenced in our menus but it also fosters a sense of pride among our employees because we believe it shows up in our superior personalized service and ultimately the loyalty of our guests.

We also have a distinctive selection of specialty cocktails, including our Signature margarita, made with fresh hand squeezed lime juice, or made-to-order Texas martinis served with our special jalapeno-stuffed olives. Our alcoholic beverage mix averages about 20% of revenue.

Our commitment to quality goes hand-in-hand with our commitment to value. Only three of our approximately 49 menu items are currently priced over $10, which we believe has allowed Chuy's to maintain a solid business momentum during the last few years despite a challenging macroeconomic environment.

And while our craveable food is at the core of our concept and has differentiated Chuy's from our competitors, our restaurants offer an upbeat, eclectic and irreverent feel, resulting in a fun and energetic dining experience. Most of our restaurants feature outdoor patios and our flexible seating arrangement allows us to cater to families and parties of all sizes, including larger groups, which we believe is a key differentiator from our other casual dining operators.

Each of our restaurants, while maintaining certain distinguishable, artistic and whimsical fun elements such as our handcarved, hand-painted wooden fish imported from Mexico, our own nacho car are designed with varied layouts help by our history of successfully converting existing restaurant spaces to create what we believe is an unchained look and feel that gives each of our restaurants their own identity and creates a sense of local ownership among our guests. This is reflected in our motto, "If you've seen one Chuy's, you've seen one Chuy's." Overall, the combination of our food quality, service, and unique restaurant environment has driven strong operating performance.

I would like to now turn the call over to our CFO, Jon Howie.

Thanks Steve. Before I get to our second-quarter results, I'd like to touch briefly on our recent IPO. On July 27, subsequent to the end of our second quarter, we completed Initial Public Offering of the common stock by issuing approximately 6.7 million primary shares, including approximately 875,000 shares sold to our underwriters as part of the allotment option. We realize proceeds of approximately $79.4 million, net of related offering costs, which we use to repay a majority of our outstanding borrowings under our credit facility down to a balance of approximately $5 million.

Attached to our press release is a reconciliation of our GAAP results to our pro forma financial results. In connection with the idea, we simplified our capital structure by eliminating all preferred stock and reducing our long-term debt. Our pro forma results include adjustments to reflect our current post-IPO capital structure, including our basic and diluted share count as if the IPO occurred at the beginning of fiscal 2011, as well as other certain nonrecurring or one-time adjustments. We believe that our pro forma results provide a useful view of our business, given our new capital and post-IPO cost structure.

Now, let's review the results for our second quarter ended June 24, 2012. Revenue increased 32% to 43.5% from $33 million in the same period last year. The increase was driven primarily by $10.1 million in incremental revenue provided by an additional 113 operating weeks from the eight new restaurants opened during and subsequent to the second quarter of 2011. There were 440 operating weeks during the second quarter of 2012, an increase of 34.6% compared to 327 operating weeks in last year's second quarter.

Also contributing to our revenue growth during the second quarter was a 1.9% increase in comparable restaurant sales, which included a 1.6% increase in average check and a 0.3% increase in traffic. Effective pricing during the quarter was approximately 1.5%. There were 21 restaurants included in our comparable store base during the second quarter of 2012 which included three new restaurants that were added to the comparable store base at the beginning of the quarter. The comparable store base in the second quarter of 2011 had only 15 restaurants.

We consider a restaurant to be comparable in the first full quarter following 18 months of operation. I would like to note that many of our restaurants opened up have volumes greater than their individual basic run rate. In the case of our strongest openings, this honeymoon period may last longer than the 18 months we allow before a restaurant enters the comparable store base. Given the small number of restaurants currently in our comparable store base, the timing and strength of our new unit openings may have a meaningful effect on comparable restaurant sales in some quarters in the near term.

Looking at expense by line item, cost of sales were $11.6 million during the second quarter. As a percent of revenue, cost of sales declined approximately 130 basis points to 26.7% compared to 28% in 2011. The improvement reflects decreases in produce costs and to a lesser degree dairy costs. For the third and fourth quarter, we expect cost of sales as a percent of revenues to trend back towards the 27.2% to the 27.7% range due to inflation we are seeing in chicken and produce as compared to the first and second quarter.

Labor costs were $13.7 million during the quarter and as a percentage of revenue increased approximately 60 basis points to 31.6% compared to 31% last year -- last year's second quarter. This increase was largely attributable to increased training and staffing levels in our new restaurants, partially offset by improved labor efficiency in our established restaurants.

Restaurant operating costs were $6.1 million during the second quarter of 2012 and 13.9% of revenues, an improvement of approximately 50 basis points compared to 14.4% in the same quarter last year. The margin improvement was largely due to lower liquor taxes as a result of opening more locations outside of Texas, which charges a higher liquor tax than other jurisdictions, as well as lower credit card fees.

Occupancy costs were $2.5 million during the quarter as a percent of revenue. Occupancy costs increased approximate 30 basis points to 5.8% from 5.5% last year, primarily attributable to increased rent for additional parking in certain of our high-volume locations as well as higher rent expense as a percent of sales for certain noncomparable restaurants.

General and administrative expenses decreased $0.4 million to $2.1 million in the second quarter of 2012 from $2.5 million in 2011. The second quarter of 2011 included a one-time bonus totaling $1 million paid to members of management in conjunction with the successful refinancing of the Company's credit facility. On a pro forma basis, G&A expenses were $2.5 million compared to $1.8 million in the year-ago period and increased 30 basis points as a percent of revenues to 5.7% driven by additional employees as we strengthen our infrastructure for growth. Our pro forma adjustments to G&A include annual incremental public costs of approximately $1.4 million. Again, this is an annual number. A reconciliation of these adjustments and other adjustments are included in our earnings release.

Restaurant preopening costs were $1.2 million during the quarter, up slightly when compared to $1 million last year. This primarily was the result of our fifth restaurant in 2012 opening two days after the second quarter ended, which moved most of its preopening expense to the second quarter. We expect total preopening for the year to approximate $3.6 million, which is slightly more than we originally anticipated as a result of a minor shift of costs from 2013 to 2012, but mostly an increase in training expense associated with training the second preopening team for the Southeast market and increased PR and marketing spend in new markets for brand awareness. We believe this additional investment in preopening will benefit us with continued strong openings in new markets and more centralized and cost-effective training.

Depreciation and amortization expense increased approximately $0.5 million to $1.5 million due to an increase in equipment and leasehold improvements as a result of additional restaurant openings. As a percent of revenue depreciation and amortization expense in the second quarter increased 30 basis points to 3.5% as compared to 3.2% in 2011.

On a GAAP basis, interest expense increased to $1.8 million from $1 million in 2011 due to greater outstanding borrowings under our credit facility in 2012 as compared to 2011, offset by a reduction in the average effective interest rate from 10.4% to 8.5% under our credit facility during the second quarter of 2012 versus the comparable period in 2011. On a pro forma basis, interest expense totaled approximately $170,000 in the second quarter of 2012 and 2011.

As mentioned previously, we realized a net proceed of approximately $79.4 million from our recent IPO. We used those proceeds to pay down most of our outstanding borrowings on our credit facility. As a result, the total outstanding debt under our credit facility after payment was approximately $5 million. Based on our current growth plans, we believe our expected cash flows from operations, available borrowings under our facility and expected tenant improvement allowances will be sufficient to fund our capital expenditure needs for at least the next 12 months or more.

Our GAAP financial results reflect our capital structure prior to our IPO. A component of our pre-IPO capital structure was participating convertible preferred stock. For each historical period presented, our GAAP results include undistributed earnings allocated to participating interest. In connection with the IPO, these preferred shares were converted into common shares.

With that background, I'll provide the following. Net income in the second quarter was $1.7 million compared to $0.7 million in 2011. Net income available to common stockholders in the second quarter of 2012 was $31,000 or $0.15 per share on a diluted basis, compared to $8000 or $0.04 a share per diluted share for 2011. Weighted average diluted shares outstanding were 9,538,000 for the second quarter of 2012 and 10,840,000 for 2011. Please also note that historical weighted average shares outstanding do not reflect the impact of our IPO transaction or the full impact of our stock repurchase during the second quarter.

Pro forma net income for the second quarter of 2012 increased 39.9% to $2.7 million from $2 million in 2011. Diluted earnings per share increased 41.7% to $0.17 per share from $0.12 per share in 2011. We have used diluted weighted average share count of 15.6 million shares for the second quarter of 2012 and 15.5 million shares for 2011 for our pro forma earnings per share calculations which reflect estimated IPO share count.

With respect to our 2012 outlook, we are providing the following annual guidance. We'd remind you that 2012 is a 53-week year, and our guidance, unless stated otherwise, includes an extra week, which will occur in our fourth quarter. For 2012, our revenue expectations include a comparable store sales increase for the second half of the year ranging from 1% to 1.5%. Our comparable sales expectations are on an apples-to-apples basis, and excludes this extra 53rd week in our fourth quarter.

Our development plan for 2012 calls for eight new Chuy's restaurants, of which six have already opened. We are scheduled open our seventh restaurant in Lubbock, Texas in September and our eighth restaurant in Florence, Kentucky in November. G&A expenses on a pro forma basis are expected to be approximately $9.5 million. Preopening expenses are expected to be approximately $3.6 million for the year, and our capital expenditures, net of tenant improvement allowances, are projected to run between $16.7 million and $18.8 million.

Our effective tax rate for the full year is expected to be between 29% and 31%. Pro forma diluted earnings per share is expected to range between $0.54 and $0.56 per diluted share. On a diluted share base, between $16.6 million and $16.7 million. Included in our EPS expectation is a positive $0.02 to $0.03 per diluted share impact from the extra week in the fourth quarter, as previously mentioned.

And now I will turn the call back to Steve to discuss our growth strategy and some final points.

Thank you Jon. As we look ahead, our EPS growth will be largely driven by new unit growth and the efficiencies of that growth over the next five years. We believe the broad appeal of Chuy's concept, our historical unit economics and flexible real estate strategy, combined with our modest store base, present us with a large runway of opportunity for continued expansion.

Our brand strategy of having and unchain look and feel allow our restaurants to establish their own identity and provide us with a flexible real estate model. Our site selection process is focused on conversions of existing restaurants which we refer to as hermit crabs, as well as new ground-up prototypes in select locations.

Keep in mind that on average we serve approximate 7500 customers per location per week, or 400,000 customers per location per year, making Chuy's a highly desirable tenant for real estate developers. As Jon noted, we have added six restaurants so far this year, including two in the third quarter versus our plan of eight new units for 2012. Over the next five years, including those open in 2012, we expect to open 50 to 55 new units which translate into approximately 20% unit growth over the long term.

Given our recent development history, we are confident that we can execute our plan. As I noted to a number of people during our road show, when I joined the Company five years ago, we had eight restaurants. Now we are in eight states.

In preparation for our new restaurant development plan, we have invested in our infrastructure, including both corporate and restaurant level supervisory personnel, minimizing the need for significant additional investment to support our growth plan in the foreseeable future. Therefore, we believe that, as a restaurant base grows, our G&A costs will increase at a slower growth rate than our revenue.

Lastly, we expect to continue to generate modest annual comparable restaurant sales growth by constantly providing an attractive price-value proposition for our customers driven by freshly prepared, high-quality food with excellent service and upbeat atmosphere.

However, as Jon noted, the timing and strength of our new unit openings may have an effect on our comparable restaurant sales in certain quarters when these users enter our comparable store base, sales base, given the small number of restaurants currently in the base. Though we expect that our core menu will remain unchanged, we will continue to explore potential additions as well as limited-time drink offerings and will continue to promote our brand and drive traffic through ongoing local marketing efforts and charity events such as Chuy's Hot to Trot 5K, and the Chuy's Children Giving to Children parade. We will also continue investing significantly in ongoing training of our employees as our training initiatives will enhance customer satisfaction, minimize wait times, and help us serve our customers more efficiently during peak periods, which we believe is particularly important in our restaurants that operate near capacity.

Taken together, our new unit development, our same-store sales growth, and infrastructure leverage provide us with a targeted long-term EPS growth model of approximately 25%.

Before we go to question-and-answer portion of our call, I would like to take a moment to thank all of our Chuy's employees. Our successful results are a testament to their hard work and dedication to earn the dollar every single day. Without them, we would not be here today. And with that said, we thank you for your interest in our Company and would be very happy to answer any questions you might have. Operator, please open the line for questions.

(Operator Instructions). David Tarantino, Robert W. Baird.

Good afternoon, and congratulations on a good quarter. I wanted to start with a question on what you are seeing on new store productivity or new unit productivity among the locations that you opened and the second quarter, and maybe if you can comment on how they are trending relative to your target for (inaudible)

We are excited about our openings. They are definitely hitting on our target or a little bit about. So we are real excited about our growth and opening of our new units. Like I said, they are a little bit of our projections at this point and I am liking how they are moving.

Great. And I've got maybe a follow-up on the new stores. I think you mentioned you are making some investments on the preopening side to support the new store openings (inaudible). Could you maybe elaborate on what types of investments you are making in training, and how that might help going forward?

Yes, absolutely. During the quarter, we made the decision to really start cross-training for a second opening team out of our Southeast markets. Specifically, we've opened all our restaurants from a market -- of our heritage markets, for lack of a better term, which was Texas market. As we move into the Southwest, now that we have 14 stores outside of Texas, we've developed and started to start a second opening team that down the road will help us in travel and how to administer those costs in the future. And that's where we've actually spent a little bit more money on doubling up our training so we can have two separate games as we continue to open in the Southeast.

We've also spent a couple extra dollars on pre-store PR, making sure the customers as we are entering new markets understand what Chuy's is, understand the defining differences of us, and also really introducing the local store management into those markets also. Those are the two increases of investments in our preopening. The preopening as far as the cross-training for the second opening team will be done pretty much at the beginning of the first quarter of 2013 where we will have two very high-performing, two complete different opening teams.

Great, sounds great. Maybe if I could squeeze one more in, just on the second half comps outlook, I think you mentioned 1% to 1.5% which is a little lower than what you had been running in the first half. The first is why would that slow down from the first half? Then second, maybe if you can comment on what you are seeing so far in the third quarter, since we're about two-thirds of the way through.

We've seen our trends really kind of continue. What we did see was a tiny bit of a slowdown during the Olympics, to be honest with you. We also had a little bit of a different match up on back-to-school. But we're seeing very similar trends. It's just being a cautious moving forward with our back-to-school, not knowing really what's going on, where all our schools in all our markets went back over the last two weeks. But again, through the first and second quarter, we've seen trends that are continuing and we've seen that through the first couple of periods of the third quarter, but, again, we are going into the unknown of how everybody is going to deal with back-to-school this year in all our markets.

Okay, thank you very much.

Will Slabaugh, Stephens.

Thanks guys. Nice quarter. You guys obviously performed well throughout the period, but just given the uncertainty in the industry, curious how you trended throughout the quarter and wondering if there are any sort of movements in consumer sentiment, consumer trends that are worth noting.

Honestly, no. Again, as I mentioned to you, we had the one little blip and it didn't cause us obviously to go negative, which are the Olympics. But overall, we've been pretty excited and pretty consistent with our trends throughout the year so far.

Great. Then also curious if you could give us an idea of what the gap in sales performance, same-store sales performance, might between your real outperformers versus some of those that may be at the lower end, and what you would attribute that to, if it would simply be some of the newer stores coming off the bigger unit volumes, or if there is some sort of geographic disparity in there or what that may look like?

Actually, I mean, there's some that -- the ones that are low -- this is Jon. Some of the lower ones are really attributable to certain specific situations, whether it's traffic-related or competition that's moved in. Overall, we don't want to get into specific discussion about different stores, but we are not seeing, as far as to answer your question from a geographical standpoint, we are really not seeing a difference in comps from one geographic location to the other.

Great. Thanks guys.

Chris O'Cull, KeyBanc.

Thanks. Good afternoon guys. Jon, I apologize if I missed this in your presentation, but can you tell us what the commodity inflation was during the quarter?

Actually, it was, for the quarter, it was modest inflation for the quarter. And what we've seen in the last half of the quarter was complacent starting in the chicken and the produce. So we are seeing that continued into the third quarter, and so that's why we are giving the guidance up to the 27.2% to 27.7% for the third and fourth quarter.

What does that imply for commodity inflation? Because I was a little surprised with I guess relatively flat commodity prices and 1.5% pricing that the cost of sales had improved so much.

I mean it's flat from -- I should say it increased slightly from the first quarter. It's obviously down from last year, and the biggest driver in that is produce.

And the produce last year, Chris, we had obviously all the freezes that really affected all companies the first six months of the year last year, and also the Mexico -- the Mexican embargo online. And that's the big decrease in produce this year compared to a year ago.

Okay. That's helpful. What percentage of the basket has prices that are agreed upon for the remaining quarters of this year? And what commodity items are at risk?

We had approximately 15% to 17% of the commodity baskets locked in for the rest of the year. The items that are at risk obviously are produce. We buy those locally. And that's hard to lock in prices there. In chicken, we buy that based upon the [underberry] price.

Okay. Great. Thanks guys.

Our beef is all locked in for the rest of the year.

Thank you Chris.

(Operator Instructions). Andy Barish, Jefferies.

Was there some impact, as you talk about some of the high-volume openings kind of rolling into the comp base, was there some impact in the 2Q and are you kind of thinking that may continue here in the 3Q a little bit?

Yes, and I should've brought that up when David asked that question as well. And that's quite honestly we are not, for the 1% to 1.5%, if we are looking at the trend of our kind of original store base, if you will, that we are starting the year with, that has been trending right at that high 2s, low 3 levels. But it's the roll in of the new stores being in that longer store base that's really causing the headwind that we are being a little more conservative on that 1% to 1.5% going forward. So if you were to look at the second quarter, we came in with a 1.9%. But if you were to strip out the three stores that rolled into the store base during the quarter, you're looking at comp sales of 3%.

Thanks, that's helpful. And then I know it's maybe a little bit early, but can you give us a sense of what you're thinking about, or maybe you're already in test in a couple of stores on menu price for next year, just given the specter that commodities will be more broadly higher than they are kind of right now?

This is Steve. At the end of the day over the last five years, we've averaged about 1.5% price increase on average, and that's what we are looking towards as of now with the intel that we have. Again, why we are able to do that is how linear our food basket is, as I explained during our road show and with all of you guys. It's a very linear basket. What really makes it linear for us is how many salads we sell in our concept.

So as we look out, we are still looking at a probably as of now about a 1.5% that we'd looking at probably next year to be consistent with what we've always done, and we feel that is sufficient. Again, we're probably a little early. You'll probably start hearing all the big jumps or some of the estimates starting in October, as you know. And usually, you can discount those by almost 50% from the first ones you hear at the beginning of October, but we're just starting that process. But again, overall, I feel very comfortable with what we have done over the last five years, which is around 1.5%.

Thanks. And finally, I know you guys are running the Green Chile Fest, had a chance to try some of those items recently. Is there anything -- and they were fantastic, by the way. But anything different about timing or price points this year? I know everything is under $10 as usual. But are you going to try to run it a little bit longer, or anything different about that promo, given it's really the only promo you guys do during the year?

No, we are actually matching a perfectly, which is a little bit of a difference -- that's a key for us is running the actual time. We are not going to run and differently because what it is is a commodity, and we can buy so many fresh. That's how we do that. So luckily, we matched up exactly. Sometimes it can move week-to-week, but not this year compared to last year. So we'll run it three weeks and we've ordered enough to last us through three weeks, and so it will be the same. And we're really, really excited. We're lucky when we do this because really in the Texas market that actually delays a little of the back-to-school drop that you usually have; it usually delays it two to three weeks for us. So we are very, very excited about how the customers have accepted and have gotten excited about their product.

Thank you.

Bryan Elliott, Raymond James.

Good afternoon. Just a couple of clarifications. I missed the traffic and average ticket. You gave us pricing. I don't know if you gave us traffic and check.

Yes. The traffic was 0.3% up, and the average check was 1.6%.

Okay, so we got a little -- a very slight mix. Okay. And also, I think Chris asked the question on embedded inflation in the 27.2% to 27. -- whatever this, 27.7% or 27.5%, I can't see it right now at the moment, COGS guidance for the second half of the year, are we accelerating into the mid-single digits quickly, or I could do the math but I didn't have time.

Yes, that's a fair point. It's probably you're right into the 4% to 5% range.

Okay, I guess -- okay, very good. I believe that's all I've got. Thanks.

And there are no further questions in queue. At this time, I would like to turn the call back over to management for any additional or closing remarks.

Everybody, thank you. Jon and I appreciate your interest in Chuy's. We will always be available to answer any and all questions. Thanks again and have a good evening.

Thank you. That does conclude our conference. You may now disconnect.