Chuy's Holdings Inc (CHUY) 2013 Q2 法說會逐字稿

Welcome to the Chuy's Holdings, Inc. second quarter 2013 Earnings Conference Call. At this time all participants have been placed in a listen-only mode and the lines will be open for your questions following the presentation. Please note that this conference is being recorded on today, August 6, 2013. On the call today we have Steve Hislop, Chief Executive Officer, and President of the Company, and Jon Howie, VP and CFO. And now, I would like to turn the conference over to Mr. Jon Howie. Please go ahead, sir.

Thank you, Operator and good afternoon. By now everyone should have access to our second quarter 2013 earnings release. Itcan also broad band found at www.chuys.com in the investor section.

Before we again 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 place on 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 the risks that could impact our future operating results and financial condition. 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 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, and thank you all for joining us today on the call. We're very pleased to report another strong quarter of operations. On a pro forma basis we earned $0.22 per diluted share for the second quarter of 2013. An increase of almost 30% compared to the prior year.

Our results were led by a 23% increase in revenue growth which was again driven by strong new unit performance and a solid contribution from our comparable sales base. Our results continue to reflect the quality of our made from scratch food prepared fresh every day, our commitment to value and most importantly the hard work and dedication our employees take each day providing our guests with a fun and energetic dining experience.

These attributes combined have resulted in our strong business momentum. On the development front, we opened three restaurants during the second quarter Richmond, VA, Little Rock, AK, and Charlotte, NC.

Subsequent to the end of the second quarter an additional Chuy's restaurant was opened in Greenville, SC. As a result, we've opened six new restaurants year-to-date and are well on track to meet our goal of eight to nine new units for the year. As I noted, we remain pleased with the performance of our new units.

Our operators, as well as our development, training and marketing teams continue to do a fantastic job of instilling the Chuy's culture in all our newer units. The early results of the units we opened in the second quarter reflect this especially when you consider that each of these units represent the first Chuy's location in their respective states.

Our EPS growth over the next few years will be largely driven by new unit growth. We believe the broad appeal of the Chuy's concept, our strong unit economics, and our flexible real estate strategy with a focus on conversions of existing restaurants, but also with effective use of our prototype building for ground up construction, present us with a large run way of opportunity for continued expansion.

With that I would like to turn the call over to our CFO, Jon Howie, to review the details of our second quarter. Jon?

Thanks, Steve. For our second quarter ended June 30th, 2013 revenue increased 22.7% to $53.4 million from $43.5 million in last year's second quarter. The increase was driven primarily by $10.1 million incremental revenue provided by and additional 112 operating weeks from the 12 new restaurants opened during and subsequent to the second quarter of 2012.

Total operating weeks in the second quarter of 2013 increased 25.3% to 554 weeks from 442 weeks in the comparable quarter last year. Comparable restaurant sales increased 2.1% for the 13 week period ended June 30th, 2013 compared to the 13 week period ended July 1st of 2012. Driven by a 1.9% in increase in average check and a .2% in increase in traffic.

I would like to point out that this is and apples-to-apples calendar comparison, which is a slightly different base period than using the last year's 13 week fiscal second quarter-ending on June 24th of 2012. On a strict fiscal quarter basis comparable sales for the same restaurant increased 2.4%.

There were 29 restaurants included in the comparable store base during the second quarter of 2013 which included two new restaurants added to the comparable store base at the beginning of this quarter. The comparable store base in the second quarter of 2012 had 21 restaurants.

We consider a restaurant to be comparable in the first full quarter following its 18th month of operation. I would like to remind everyone that many of our restaurants open at volumes greater than their eventual normalized run-rate.

In the case of our strongest opening this honeymoon period may last longer than the 18 months we allow before a restaurants 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 create a headwind in our comparable restaurant sales percentage in some quarters in the near-term.

Switching over to expenses I will touch on some key line items. Cost of sales as a percentage of revenue increased approximately 70 basis points in the second quarter to 27.4%.

The increase resulted primarily from higher chicken and produce costs, and to a lesser degree, higher dairy costs. While our cost of sales have trended a little lower than expected in the first half of the year we continue to see cost pressures in produce and chicken and therefore we still expect to see cost of sales as a percentage of revenue in the 27.5 % to 27.9% range for the rest of 2013.

Labor costs as a percentage of revenue decreased 30 basis points to 31.3%. The decrease was largely attributable to improved labor efficiencies in our comparable restaurants and lower training costs as a percentage of revenues.

SG&A in the second quarter increased approximately $400,000 to $2.5 million. This increase was primarily driven by increases in staffing as we continue to strengthen our infrastructure for future growth, additional payroll taxes, due to the exercise employee stock options, and incremental costs associated with being a public company.

During the second quarter of 2013 we incurred $508,000 of operating expenses related to the two secondary offerings of the Company's common stock. All the stock in each offering was sold by certain existing stockholders and as a result the Company did not receive any proceeds from either offering.

Depreciation and amortization as a percentage of revenue increased 40 basis points to 3.9% from 3.5% last year driven primarily by the increased equipment and leasehold improvement costs associated with our newer restaurants.

We expect our depreciation and amortization as a percentage of revenue to run approximately 4.3% of revenues for the year. On a GAAP basis interest expense was $24,000 for the quarter compared with approximately $1.9 million in the second quarter of 2012.

On a pro forma basis interest expense totalled approximately $107,000 in the second quarter of 2012. The total outstanding debt under our credit facility at the end of the second quarter of 2013 was approximately $4.5 million.

During the second quarter our tax rate was negatively impacted by the non-deductibility of the previously mentioned secondary offering cost after excluding the effect of these costs our pro forma effective tax rate ways approximately 30%, the mid-point of our expected range.

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

GAAP net income in the second quarter of 2013 was approximately $3.2 million compared to $1.7 million in 2012.

Net income available to common stockholders in the second quarter of 2013 was also approximately $3.2 million or $0.19 per diluted share compared to net income available to common stock holders of $31,000 or $0.15 per diluted share in 2012.

Weighted average diluted shares outstanding were approximately $16.7 million for the second quarter of 2013 and approximately $9.5 million for 2012. Please also note that the historical weighted average shares outstanding for 2012 does not reflect the full impact of our IPO transaction, the conversion of our preferred stock, or our stock repurchased during the second quarter of 2012.

Attached to our press release is a reconciliation of our GAAP results to our pro forma financial results. In connection with our 2012 IPO we simplified our capital structure by converting all preferred stock to common stock and reducing our long-term debt.

Our pro forma results includes adjustments to reflect our post-IPO capital structure including our basic and diluted share count as if the IPO conversion of preferred stock in the stock repurchase occurred at the beginning of fiscal 2012, as well as other non-recurring or one time adjustments. We believe that our pro forma results provide a useful view of our business given our new capital structure and post-IPO cost structure.

Pro forma net income for the second quarter of 2013 increased approximately 35% to $3.7 million compared to $2.7 million in the second quarter of 2012. Earnings per diluted share increased approximately 29% to $0.22 a share compared to $0.17 a share in the prior-year quarter.

For our pro forma earnings-per-share calculation note that the diluted weighted average share counts of approximately 16.6 million shares for the second quarter of 2012 reflects our estimated post-IPO share count.

With respect to our 2013 outlook, we are providing the following update to our annual guidance. We are increasing our guidance range and currently expect our pro forma diluted net income per share to range from $0.68 to $0.70.

This compares to pro forma diluted net income per share of $0.60 in 2012 which included and estimated $0.04 to $0.05 per share positive impact due to the 53rd week during that fiscal year.

Net income guidance for the fiscal 2013 is based in part on the following annual assumptions. Our revenue expectations include a comparable store sales increase for the full year of approximately 1.75%, which implies a range of 1% to 1.5% in the back half of the year.

I would like to point out that on the comparable calendar week basis we expect our third quarter comparable sales growth to be consistent with our guidance. However, as previously noted, due to the 53rd week in fiscal 2012 there is a one week calendar shift in the start of each fiscal quarter of 2013 compared to each fiscal quarter in 2012.

As a result of this shift this year's third quarter will include a lower volume fall week in place of a typically higher volume summer week compared to last year. The Company estimates this shift will reduce revenues by approximately $600,000 to $700,000 and negatively impact comparable restaurant sales on a fiscal basis by approximately 120 basis points.

Continuing on with the 2013 assumptions, restaurants pre-opening expenses are expected to range between $3.3 million to $3.9 million. We expect G&A expenses to run between $10.5 million and $11 million, this excluded approximately $925,000 of expenses related to the two recent secondary offerings which we will disclose separately from G&A expenses on the income statement.

We expect our pro forma effective tax rate for the full year to range between 29% and 31%, and we expect annual weighted average diluted shares outstanding of $16.7 million to $16.8 million.

Lastly, as Steve noted, our development plan for 2013 calls for eight to nine new Chuy's Restaurants, of which, six have opened year to date. Our capital expenditures net of tenant improvement allowances are projected to be approximately $19.1 million to $21.2 million.

And now I will turn the call back over to Steve to wrap up.

Thank you, Jon. We continue to be excited about the opportunities we have ahead of us to continue to grow the Chuy's brand and bring our distinct menu of authentic freshly prepared Mexican, and Tex Mex inspired food to a wider audience. While enhancing long-term value for our shareholders.

Before we go to Q&A portions of our call I would like to again 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.

And with that said we thank you for your interest in our Company. We will be happy to answer any questions you might have. Operator, please open the lines for questions.

Thank you. (Operator Instructions). We'll take our first question from David Tarantino, with Robert W. Baird.

Hi. Good afternoon, and congratulations on delivering great results. My first question is related to the same-store sales trends you have seen recently and we've heard a lot of comments about the industry slowing, casual dining industry in particular, slowing in June and July, and I was just wondering if you could maybe share what you have seen over the last couple of months as you exited Q2 and entered Q3?

Well, thank you, David. Dave, we finished the year up around at 3.1%, what we have seen is a trend continue through the entire year, right, close to that on our existing base of our existing 24 stores that we entered the year on as far as a trend line and that's what we're seeing right around there. I think if you look at our original 24 that we started the year with we're ending the quarter right around that 2.7% number on the original 24 and so we're keeping that trends pretty much throughout the year and it's continued into the third quarter for us.

Sounds great. And then maybe a second question, Steve. You mentioned being satisfied or happy with the recent openings and I was just wondering if you could elaborate on how the opening in some of the newer markets, which have been a fairly big percentage of the openings recently, how those have trended relative to your expectations and maybe comment on what you've learned about the brand as you've entered some of those newer markets and whether that makes you think differently about the near-term opportunity for units growth?

Dave, I will tell you I'm excited as we mentioned in my comments earlier. You know, our last four restaurants we actually opened in four new states and we're right on target with our expectations, not only on a sales perspective but on a cost perspective so we're very, very pleased and we believe with all our freshly made product, our 12 sauces that we made from scratch that have very different profiles, we feel like the concept can move anywhere because of the choices within that menu and that different taste profile. So, I'm as excited as I was a year ago or I was five years ago about the expansion possibilities of our concept.

Great. Maybe just a quick follow-up on that. Some of the markets you've entered are relatively small in comparison to some of the metro markets you're in. Are you thinking now you might be able to go into some of those smaller markets or are some of the openings given you more confidence in your ability to do that and, if, so, is the long-term target in your mind for the number of locations ultimately changing or is it pretty consistent with what you thought?

Thank you for the question. I think it's exactly what we had planned. You know, Greenville, Raleigh, Charlotte, those are all good mid-sized markets. Maybe Greenville is a little bit small but it has a good draw into it so I'm real pleased, and same thing with Richmond, just and hour half from DC. I'm comfortable and that was always in our plan along with major metropolitan market that we will go into like we have whether it be Atlanta, eventually into DC market. Our plan is right on track.

I'm pretty comfortable with our layout of our towns and cities that we're going into and our original expectation over the next, what do we see in the United States, 300 to 350 initially and then as we get knowledge of the market we believe we can go up to 500 in the United States. So I think we're right on target, right on plan and exactly what I have said before.

Great thank you very much.

My pleasure. Thanks, David.

Our next question comes from Will Slabaugh, with Stevens, Inc.

Thanks, guys. Sorry our questions all sound the same every quarter but I wanted to ask you again about the new restaurant pipeline. Could you talk a little bit more about now you're at eight to nine for the year, looking out to next year, how confident do you feel that number maybe picks up by one or two or what does that outlook like over the next year or so?

Thank you, Will. You know, I really appreciate the same questions because believe me, you're going to be getting the same answers. At the end of the day we're very comfortable with our growth progress. We expect us to grow around 20% physical growth so we're really comfortable with the one extra store, two extra stores next year. Our pipeline is excellent. We're about 20 months out on our real estate, which is really good. I think

if you talk to most people in the industry, they would like to be 18 months out so I'm pretty pleased about where we're at. Also, when you look at that we've already opened six basically in the first half of this year with our goal being eight to nine we've done a nice job on that so far. 2014 I'm excited on a 20% physical growth rate and we're pretty well set for 2014. Most of our efforts are now at the end of 2015.

Perfect. As a follow-up to that in the past you've talked about your personnel building both in number and in quality so just given that 20% rate you're talking about can you just talk about your confidence around the people you have in place to do that or do you expect some more hiring to take place next year, et cetera?

Great, great question. Most important question. From an infrastructure to home office we're very excited we're in front of the curve and we're very well set for our growth in the future not only in the near but a little bit further than that. As far as operators, which is probably the most important question, we're a little top heavy, like I want to be. We have about 45 restaurants ready to open or that we have opened. I already have 10 to 11 supervisors on our roster currently. I expect them to run five stores probably the best of them can run six.

So you see I'm a little ahead on that and you always want me to be in a growth company so I'm very comfortable with our infrastructure not only at the home office and more importantly out in the field, and we currently have 36 managers in training with our par as we move forward. We're doing very, very well and we're excited about where we're at and we'll always stay in front of the curve.

Perfect. One last question for me. You noted trends that have been steady throughout the year. I wonder if you see anything different from a mix perspective, from a (inaudible) weekend versus weekday, anything like that or if it's all just been steady as it goes?

Steady as it goes.

Perfect. Thanks, guys.

Thank you.

Next question from Jeff Farmer, with Wells Fargo.

Great. Thanks. Good afternoon, guys. And just following up on that last question again we've talked about this industry same-store sales did accelerate pretty materially from May, June into July. You guys have made it pretty clear that you've been stable but just thinking about your concept if you had to point to a few things that would drive that relatively low volatility, or would drive that low volatility what would you point to if you had to point to a couple of things that you thought really stood out?

I think there's a couple of things. First of all, it's our made from scratch items. We're one of the only one's that go out there and we believe we have crave able food because we make everything from scratch. Second thing would be our price-value relationship. It's very, very, very strong. Over the last five years we're averaged only about a 1.5% price increase where our lot of our competitors have been a lot more. And finally, our operational focus is very, very fundamental and we believe we have to earn the dollar because we know the dollar is more expensive to our guests than it was yesterday or the day before. So everything that we do is looking at the focus on them and giving them a little bit more than they expect.

A lot of competitors have had the binoculars on a little bit backwards over the last few years. That's our number one mantra for the last five, six years, maybe since the concept started in 1982. So those are our three big ones, but our silver bullet, which there are none in our industry, is the fundamentals of our business and earn the dollar and we're very, very focused. We don't get outside the lines too much. We're pretty steady we're pretty basic. That's what I was saying earlier. If you're going to ask me new questions I'm probably going to give you the old answers because they seem to work for us and that's kind of our basis. We stay pretty fundamental, keep our nose down, and really pump our operations.

Alright. That's helpful. Just a follow-up our on that. Having the benefits of listening to a dozen of these casual earning calls over the last two weeks, a lot of similar themes, a lot of consumer under pressure type themes, consumers spending some of their dollars else where and what not. If you look at your core consumer, do you think they've in any way changed their behavior, checked management, or anything like that anything like that you can point to? It sounds like you're not seeing anything but anything you can point to in terms of a little bit of consumer pressure?

No. We talked about this throughout the last couple months and we actually talked a lot about it in our two secondary offerings. We saw last year. Whether it be the tax or so on, I kind of feel like in our concept and the way the world looks, it's kind of like New Years resolution where you're going to lose weight. I think you really work hard at it for a couple of weeks and then you go back to your normal everyday life. I think that's what we're seeing with our guests and, again, with our attributes I think we're the natural place for them to go.

And then just if I may just one more quick question on the site selection strategy especially as you guys go into some of these newer markets. In terms of how you're pulling this off, and I've heard a little bit of the color before but just the demographic focus, your relationship with developers, realtors, anything in terms of finding those sites that you are most comfortable with? Any color in terms of how you're doing that moving forward would be helpful.

Well, yes. We have a demographic model where we're now getting to the (inaudible) model just barely started to do that because you've got to have a really good size to be able to have that statistically viable for you. We do well in urban and suburban markets but the key for us making sure we have a great day time pop but there's plenty of markets for us that we're attacking. And then the areas in the southeast we're going to continue to backfill in Texas and backfill in the Nashville's and so forth. We're pretty comfortable, there's plenty of places. The key for us is our local broker system.

We use a primary broker out of Dallas but then we have over 30 local brokers in our market that not only are working in the markets that we're currently at but more important by working over the markets that we're going to be in the next year and a half. That's a real key our for us know our markets, know how the roads are running, how the rivers flow, what restaurants are doing well, where the new power centers are going to go, and where the nice day time pop is. So we have a very detailed site identification model and we stick to it pretty well. We never fall in love with a site. We do fall in love with the metrics of the site. So that's our pretty disciplined approach to our business as far as that goes.

Thank you.

You're welcome.

(Operator Instructions). We'll take our next question from Bryan Elliott, with Raymond James.

A couple questions to finish out here. Did you give a pricing for the quarter, Jon?

Yes. It's right around a one five.

Okay. Alright. Would you expect that to continue for the year?

Yes.

Okay. I wanted to make sure I heard correctly your commentary around the guidance and the comps. You said the implied full year works out to be a point to a point and a half for the second half of the year?

Yes.

And that the third quarter you said would be in line with that second half guidance or full year guidance?

The second half.

Second half guidance. Okay. That's the part I wasn't sure about. Alright. And then the calendar shift, the comps that you're guiding to are calendar, not fiscal, that's the question, right? So the shift of 600, 700 K is a fiscal issue not a comp issue, right?

Correct.

Okay. Alright. And I guess a big picture question. The payroll numbers and the government is telling us that restaurant hiring is leading the job creation out there so far this year year-to-date and that does seem to be in conflict with with what we're really hearing and seeing at the company level. Are you seeing a lot of independents opening? Are you seeing increased competition for sites? Is there evidence as you go about your day to day work that there's significantly more restaurants out there than six and 12-months ago?

No. Not really. I haven't seen anything like that. Back when I might have been able to see it, Bryan, is when we really started our growth in 2009 and 2010. But over the last year and a half as far as what's out there who's in the market, because I'm obviously going to a high profile markets where we can at least do that 42.5 and grow from there as far as sales $4.25 million. So, we're going to pretty high profile markets. All your basic players are there or are going to come in there, but we've been battling that since we started our growth prospects.

Yes so nothing has really changed.

No, I don't think so.

Alright. Thank you very much.

You're welcome.

We'll take our next question from Nick Setyan, with Wedbush Securities.

Hey. Great quarter, guys.

Thank you.

Just a quick question here on the labor line. It seems like we saw some leverage ahead of expectations. As we see so many stores opening up stronger than expected and we continue to see the strong AUV's on the new stores even as we go away from Texas, has your time frame for when we can start seeing some more leverage on some of these other unit level operated expense line items maybe move forward a little bit?

I don't think so, Nick. We had a great quarter in labor as far as our comparable stores. Last quarter we had, if you're looking on a fiscal basis, we lost the 600,000 or 700,000, so you have that de-leveraging impact. This quarter was more on in line plus we opened about the same number of stores, so you had a comparable amount of training. However, you had a larger sales line. So you saw some leverage in the training but as we continue growth, we still expect that line of those new stores roll in that it's going to be higher here in the next couple years.

Okay. Is there maybe like a ceiling on cost of sales where you just don't feel comfortable allowing it to go up? Maybe it's 28%, 28.5% where you might actually take some more pricing?

Well, Steve and I have always said that we think that the proper amount is in the high 27's, low 28s. If it got beyond your 28.5, then we would probably be talking about that.

Okay. And just a clarification question. I think you guys earlier said that at the comp base was at about 2.7% comp so that the two stores that came in pressured the comp by about 60 bps, is that correct?

Actually that 2.7% is from the beginning of the year.

Okay.

So you actually have five restaurants that are coming in diluting that by 60 bps.

What about the quarter?

The quarter, maybe 20 bps. We don't really disclose that. We've always gone with the beginning of the year comps, but it's about 20 bps I think those two stores that rolled in.

Perfect. Thanks so much.

Yes.

We'll take our next question from Chris O'Cull, with KeyBanc.

Thanks, guys. Jon, do you have the turnover numbers for hourly employees and managers?

I do. Currently they're at about 83% at the hourly level and for managers about 26%.

Is that managers all managers or just general managers.

That's all managers.

That's all managers, Chris.

Okay. I apologize if I missed this, but did you give non-comp store volumes? And, do you have the CapEx through the second quarter?

The CapEx through the second quarter I believe was right around $13 million. I apologize. Just one second.

And, Chris, no I didn't give non-comp volumes.

Yes we've never given that, is.

Okay. So the 12 stores that you talk about the incremental revenue those include some comp stores as well?

No. The incremental revenues, Chris, would just be the new stores that have opened during or subsequent to the second quarter. A quarter that doesn't have any sales in a comparable week in the prior year.

Okay. So a store goes into the comp base on a weekly basis not like at the beginning of a quarter.

No. It goes in at the beginning of the quarter. You have the incremental sales from new stores that really doesn't have a comparable week in the prior year, but then you also have the other non comparable stores, if you will, they've got beyond the calendar year but they haven't gotten to their 18th month to roll into the comp base yet.

Okay. Great. I got it. Thank you.

Okay.

The PP&E purchases for the 26 weeks into it is about 13.5, Chris.

And, ladies and gentlemen, this does conclude today's question-and-answer session. At this time for closing remarks I would like to turn the conference back over to the Management team.

Okay. This is Steve. Well, everybody thank you so much. Jon and I appreciate your interest in Chuy's. We always will be available to answer any and all questions. Again, thank you and have a great evening.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.