Chuy's Holdings Inc (CHUY) 2013 Q3 法說會逐字稿

Welcome to the Chuy's Holdings Incorporated third 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 today, October 30, 2013.

On the call today we have Steve Hislop, President and Chief Executive Officer of the company, and Jon Howie, Vice President and Chief Financial Officer. And now I would like to turn the conference over to Mr. Jon Howie. Please go ahead, sir.

Thank you, operator and good afternoon everyone. By now everyone should have access to our third quarter 2013 earnings release. It can also be found at our website in the Investor section.

Before we begin our review of the 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 upon 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 financial 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 have reported another strong quarter of operations. On a pro forma basis we earned $0.17 per diluted share for the third quarter of 2013, an increase of approximately 31% compared to the prior year.

I'd like to point out that our healthy earnings growth came in spite of a calendar shift, resulting from the extra week in fiscal 2012, that negatively impacted our revenues by approximately $690,000 in the quarter and also had a negative effect on margin leverage. As many of you know, the third quarter also appears to have been a challenging one for the restaurant industry overall. So as you can imagine, we're quite proud of our results.

These results continue to be driven by strong new unit performance and a solid contribution of our comparable sales base and reflect the quality of 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 energetic dining experience.

These attributes combined have resulted in our strong business momentum to date. Looking at development, we opened two restaurants during the third quarter; in Greenville, South Carolina and Madeira, Ohio, outside the Cincinnati area.

Early in the fourth quarter, we opened an additional restaurant in Kansas City, Missouri, bringing the number of new units opened year to date to eight. We expect to open our ninth and final new Chuy's restaurant in Raleigh, North Carolina during the fourth quarter, which will culminate in a 23% increase in new units during 2013.

We continue to be pleased with the performance of our newer units. Our operators, as we as our development, training and marketing teams continue to do a fantastic job of instilling the Chuy's culture in our new units. The early results of our most recent units bear that out, especially when you consider that six out of our last eight openings have been in brand new markets.

As we have noticed, 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 the selective use of our prototype building from ground-up construction, present us with a large runway of opportunity for continued expansion.

Our development pipeline continues to be in great shape for 2014. We expect to open 10 to 11 new restaurants, balanced throughout the year, with all our new restaurants currently projected to open in our existing markets.

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

Thanks, Steve. For our third quarter ended September 29, 2013 revenues increased 19% to $53.5 million from $44.9 million in last year's third quarter. As Steve noted, the one week calendar shift resulting from last year's 53rd week, negatively impacted revenues in the third quarter of 2013 by approximately $690,000, as the quarter included a lower volume fall week in place of a typically higher volume summer week compared to last year.

The year-over-year increase in our revenues was driven primarily by $9.2 million in incremental revenue provided by an additional 110 operating weeks from new restaurants opened during and subsequent to the third quarter of 2012.

Total operating weeks in the third quarter of 2013 increased 23% to 589. Comparable restaurant sales increased 3.1% for the 13 week period ended September 29, 2013 compared to the 13 week calendar period ended September 30, 2012. Driven by a 2% increase in average check and a 1.1% increase in traffic.

This is an apples-to-apples calendar comparison, which includes a slightly different base period than using the last year's 13 week fiscal third-quarter ending on September 23, 2012. On a strict fiscal quarter basis, comparable sales for the same restaurant increased 1.9%.

There were 31 restaurants included in the comparable store base during the third quarter of 2013, which included two new restaurants added to the comparable store base at the beginning of the quarter. We consider a restaurant to be comparable in the first full quarter following its 18th month of operation. I'll continue to remind everyone that many of the restaurants open at volumes greater than their eventual normalized run-rate.

In the case of our strongest openings, this honeymoon period may last longer than the 18 months we allow before a restaurants enters the comparable store base. Given the modest 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 in a few cases and discuss our expectations with regard to the fourth quarter costs. Cost of sales as a percentage of revenue increased approximately 70 basis points in the third quarter to 27.8%.

The increase resulted primarily from sustained increases in chicken and produce costs. While we have seen some relief in the chicken prices, we continue to feel upward pressure with regard to produce prices, and as a result, expect to see fourth quarter cost of sales as a percent of revenue to remain in the 27.7% to 27.9% range.

Labor costs as a percentage of revenue increased 30 basis points to 32.8%. The increase was largely attributable to a greater number of new stores in our overall unit base. While we are pleased that this year's group of new units is currently running slightly better labor as a percent of sales than last year's group, they do run a higher labor margin than our more mature stores and the increase in number of new units relative to our entire base is putting pressure on the overall labor margin. Given our relatively small unit base, we would expect this to continue in the near-term. In the fourth quarter we expect labor as a percentage of revenue to run a little north of 33%.

Occupancy cost as a percentage of revenue, decrease approximately 10 basis points to 6%. Note, as you look into the fourth quarter, last year's occupancy cost as a percent of revenue benefited from the extra leverage as a result of the extra week in that quarter in 2012. On a more normalized basis, we expect our occupancy cost as a percentage of revenues to be in the range of 6.4% to 6.6% in the fourth quarter of 2013.

General and administrative expenses in the third quarter were largely flat on a dollar basis compared to last year, at approximately $2.4 million. On a pro forma basis, our G&A spending in dollars was down approximately $200,000 year-over-year.

Depreciation and amortization as a percentage of revenue increased 50 basis points to 4.3%, driven primarily by the increased equipment and leasehold improvement costs associated with our newer restaurants.

On a GAAP basis interest expense was $23,000 for the quarter compared to $2.3 million in the third quarter of 2012, which included a $1.6 million write-off of unamortized loan origination costs.

On a pro forma basis interest expense totaled approximately $107,000 in the second quarter of 2012. The total outstanding debt under our credit facility at the end of the third quarter of 2013 was approximately $4 million.

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

On a GAAP basis, net income in the third quarter of 2013 was approximately $2.8 million compared to $790,000 in 2012.

Net income available to common stockholders in the third quarter of 2013 was also approximately $2.8 million or $0.17 per diluted share compared to net income of $533,000 or $0.05 per diluted share in 2012. Net income for the third quarter of 2012 included a $1.6 million write-off of deferred loan origination costs associated with the pay down of the debt with the IPO proceeds or approximately $1.1 million net of tax.

Weighted average diluted shares outstanding were approximately 16.7 million for the third quarter of 2013, and approximately 14 million for 2012. Please also note that the historical weighted average shares outstanding for the third quarter of 2012, does not reflect the full impact of our IPO transaction or the conversion of our preferred stock during the third quarter of 2012.

Attached is our press release and the -- 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 include adjustments to reflect our post-IPO capital structure, including our basic and diluted share count, as if the IPO conversion of preferred stock and stock repurchase occurred at the beginning of FY12, 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.

On a pro forma basis, net income for the third quarter of 2013 increased approximately 27% to $2.8 million, compared to $2.2 million in the third quarter of 2012. Earnings per diluted share increased approximately 31% to $0.17, compared to $0.13 in the prior year quarter. For our pro forma earnings per share calculation, the diluted weighted average share count of approximately 16.7 million shares for the third quarter of 2012 reflects our estimated post-IPO share count.

With respect to our 2013 outlook, we are reaffirming our guidance and currently expect our diluted net income per share to range from $0.68 a share to $0.70 a share. This compares to pro forma diluted income per share of $0.60 in 2012, which included an estimated $0.04 to $0.05 per share positive impact due to the 53rd week during that fiscal year.

Our net income guidance for the FY13 is based in part on the following annual assumptions. Our revenue expectations include a comparable store sales increase for the full year of approximately 2.25%, which implies an increase of approximately 1.5% in the fourth quarter on a calendar basis. Restaurant pre-opening expenses are expected to range between $3.3 million and $3.9 million, and we expect G&A expenses to run between $10.3 million and $10.8 million. This excludes approximately $925,000 of expenses related to the 2 recent secondary offerings, which we have disclosed separately from the G&A expense on the income statement.

We expect a pro forma effective tax rate for the full year to range between 29% and 31%. We expect our annual weighted average diluted shares outstanding of 16.7 million to 16.8 million, and our capital expenditures, net of tenant improvement allowance, are projected to be approximately $19.1 to $21.2 million.

As Steve noted, we expect to open our ninth and final restaurant for 2013, during the fourth quarter.

And now I'll 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 question-and-answer portion of the 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 earning a dollar every single day.

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

Thank you. (Operator Instructions) Alton Stump, Northcoast Research.

Good job on the quarter result.

Thank you.

Just had a quick question, as your store growth platform for next year, you mentioned 10 to 11 openings. Any color you can give us on which regions you are looking at as you target new stores, if there's any certain region or two that you're looking to build into?

Yes. Thank you so much. This is Steve. Yes, what we've done is, as we mentioned in the call, that over this last year, year and a half, we've opened about 6 to 7 new states and probably 7 to 8 new markets [where] we really planted our flag, which is very aggressive for us to go out and do. So I'm very pleased with our results as we've gone out and done that.

And we planted those specifically a little bit north and east of, basically, our original footprint of expansion into the Nashville, Louisville area, and over on the east side of Atlanta. So what we have done is we planted this year the flags in Charlotte, Raleigh, Cincinnati, Richmond, Virginia. And what we'll do is now, to go with our growth strategy, which is to go into each market, dominate the number, dominate the market with the number of units and the volumes, is we'll start now building out those markets in there.

So we will do a collection of building stores in the north and east and the southeast, and we'll continue to backfill in our Texas markets. You know we have a store in Addison and possibly a couple more in the Texas markets and maybe another one in Arkansas.

But they're all going to stay in our current footprint, which is basically in Texas, Oklahoma, and the southeast market.

And then just to quickly follow up on comp sales from, obviously, a very good comp number in 3Q. Any color as to how things are trended so far in fourth quarter, whether you've seen any material deviation from the 3Q trend or not?

Well, it's the one thing that we've been able to hang our hat on for a while right now is the consistency of our traffic counts and, specifically, our same-store sales. As we finished the last year, in the fourth quarter, we had our best quarter of 2012, which we finished the year in the fourth quarter 2012, up around 3%, 3.1%. We've continued that trend all year, luckily for us. And then that's about, a third of that is customers, the rest is price. And we're seeing that through the one period of the fourth quarter, that trend continuing. Again, we're up against our best quarter from a year ago, though.

Will Slabaugh, Stephens.

Wanted to ask you [as you] think about modeling next year, if you could help us out with the labor and maybe some of the other restaurant-level expenses. You've been investing there over the past few years. And I assume with the continued growth you're talking about, we should expect some further deleverage there, especially maybe on that labor line.

So is my thinking correct there? And could you help me out, at least directionally, with maybe what that magnitude might look like?

Will, this is Jon. You're right, we're been saying in the last few conference calls, the labor will continue to increase until approximately 2015, or 2016, we're going to see it flatten out and then hopefully we'll gain some leverage at that point. We could see it be as much as 20 to 30 basis points next year, I think, in total, and then climb another maybe 20, 30 the next year.

That's helpful. And then switching gears, just about the alcohol taxes coming in in Texas, where it looks like the consumer is going to be taking a little bit of the tax hit that you guys had paid previously. So initially it looks like it would be modestly beneficial to you on the margin, but could curve consumption, depending on how the guests take it.

So wondering if that falls inline with your thinking and if you're planning any changes to the menu or message, et cetera, to the guests in your stores?

Great question, Will. We're currently analyzing that, and that's going to be an increase to the customer of about [8.25%]. And I think there's some discussion within Texas on whether we pass all that to the customer or not. And specifically, Steve and I and our management team are really discussing that to keep the value in our menu.

So we're really trying to understand what we think that's going to do with the customer and where we'll set our prices. So we're really analyzing that now, and we think it'll be modestly incremental, but we don't know at this time.

And as we've always said, the two benchmarks for us or the two main issues is obviously our made-from-scratch items that we'll never get away from, but also our price-value relationship so customers can eat here very often. So when there is -- the dollar's getting more expensive for our guests every single day - this is not helping them.

So I'll take a hard look and [shouldn't] see if we should [give] a little bit back of that in price to our guests. So we'll do a complete analysis.

The key thing for us on any pricing issues or any decisions we make is with the value and the price point, how do we drive customer count. So that's the main issue that I'm going to be looking at.

That's helpful. Thanks. And last thing for me, if you had any initial thoughts on what food inflation costs may be for next year.

We're currently negotiating some of our contracts as we speak. But I would expect it to be in the low single digits, probably 1 to 3, which I think is consistent with what you've been hearing out there.

Alex Slagle, Jefferies.

Thanks. Hello, guys. Question on the 2014 pipeline. It sounds like the units are going to be opening in existing markets, and are there any positive margin implications there to look for?

How we look at that is we're just going to start feeling out -- it's kind of like what John said to you earlier, looking at the labor. There will be a little bit of margin pressure as we continue to expand that base, specifically through next year and a little bit of 2015, and we should see that kind of turn and even out in the end of 2015, early 2016, and as we grow. So as you're going to go out and as you're going to start feeling the markets out, you're going to have a little bit of a deleveraging a little bit. But like we said, just with the labor, it will start evening out end of 2015, early 2016.

Okay. And is there a -- on the same-store sales for the fourth quarter, is there a difference between the fiscal and calendar of any magnitude?

A little bit. Go ahead, John.

Actually, between the fiscal -- well, it's about 1.2. The fiscal was about 1.9%. I think we said that in the press release for the third quarter. So yes, it's about a 1.2 for the third quarter. For the fourth quarter, it's kind of a flip. It's pretty well flat, similar to what we had in the second quarter this year.

Okay. And the trends in sort of your more seasoned comparable units. Maybe that's a metric sometimes you give out on the 24 more season stores and how they're holding up.

It pretty much was pretty flat actually. The one through 24, the start of the year, and the one through 31 through the third quarter. I will throw a little caveat out there. We had one store that was in the original 24 that I actually had a bridge close for the whole quarter that cost me a ton of money, that skewed that a little bit. So I tell you the difference between the one through 24 and the one through 31 is probably about two, two basis -- 0.2%, from [1, 31] to [1, 24], 1, 24 being 2% higher.

Okay.

Two-tenths. I'm sorry, two-tenths. John almost killed me there.

A quick one just on D&A. I had in my notes somewhere around 4.3% for the year. Is that -- is there an update to that?

No, I think we're still looking at that coming in at that level, at 4.3%.

Okay. Great. Thank you very much.

(Operator Instructions) We'll take our next question from Jay Donnelly with Wells Fargo.

Hi, this is Jay Donnelly on for Jeff Farmer. Thanks for taking my questions. First, at a high level, it looks like the casual dining same-store sales have picked up over the first few weeks of October. What would you attribute the improvement to just from your perspective?

Jeff, I'm sorry. I had trouble hearing you, buddy.

Oh, this is Jay Donnelly on for Jeff.

Okay, I'm sorry.

Okay, sorry about that. No, my first question was at a high level it looks like the casual dining same-store sales have picked up over the first few weeks of October. And what would you attribute the improvement to from your perspective?

That's one thing, I know that's my competitive set specifically, as I move into the southeast. I know we are going up against a really strong quarter from 2012. I think if you go back and look at them you're going to find out they're not. And that's about it. I'm not spending too much attention to what they're doing. We're really focused on our own fundamentals and earning the dollar. I think if we stay in front of the curve and we'll take our share from them.

Okay. And then in terms of new units, you noted that you were pleased with the performance of the new units. Can you help us understand the size and duration of honeymoon periods? Have trends you've seen been consistent across markets?

It has been. It has been to a point and what we're saying, as John mentioned in his talking today is we're seeing a little bit longer honeymoon period than the 18 months first full quarter out. And we usually have seen in the last year to two years, and it's continuing, even though we had a closer space this week, this period because of our store in Fort Worth. But then we're still looking for a headwind in that 18 month, the 24 month of about 0.5% to 0.1% of headwind on same-store sales.

Okay. Thank you very much.

Thank you so much.

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

Hey, good evening. Sorry, John. I missed -- you gave out average check-in traffic for the calendar-over-calendar, the correct comp number of 3.1. Could you give me that again real quick.

That's correct, Brian.

Yes, it's 1.1 traffic and 2% per average check.

Great. Thank you. And the rest of mine have been asked. Thank you.

Thanks, Bryan.

Thank you. And we'll take our next question from Sam Beres with Robert W. Baird.

Hi. Thank you. This is Sam Beres on for David Tarantino. I had a quick question on the state of the 2015 pipeline and maybe the degree of confidence you have in achieving that 20% unit growth based on the amount of managers you currently have in training and kind of the capacity that you already have with your current managers.

Great question again. Obviously, one of the big things that everybody should be worried about with a growth [vendor] like ours is, number one, how is 2014, but more specifically, how 2015 is and how we're doing on the managers, and it's a great, great question. We're great. We've always been a little bit ahead of the curve. As I mentioned to you, 2014 looks great. We're currently about 20 months out on all our expansion. We'd like to be 24 months. Most companies, you'll hear about 18 months, but we're looking very, very good through 2015 and even some of our stores we're already working for 2016.

As far as on a management perspective, we're very strong on the supervisory level. We're a little ahead of the curve, which you want me to be in a growth company. And we currently have 52 to 55 managers currently in time, and grade, and training in our Company. We run our restaurants with an average unit of about seven managers. So you can see we're far enough out there for time and grade.

Great question. That's the number one thing we worry about and look at every single day.

Great. And then one more quick question just on a little bit more benign 2014 commodity environment. I think you said plus 1% to 3% you're expecting maybe. If that does come in at the low end, would you expect to maybe taking less pricing than the traditional 1.5% or would you like to keep that constant?

No, I think we'll look at the environment out there. First thing that we'll do is obviously look at our competitive set in any and all markets that we're in. We're very comfortable because of our letting our food basket about 1.5% over the last five years. But again, my key thing that I'll always push for is to make sure we're increasing that guest count and that value equation stays tremendously better than my competitive set, which I believe it is today. So we'll look at it, but it's all going to be based on our competitive set analysis that we'll do in all the markets before we take the price increase.

As it sit here today, I'm still thinking around 1.5%.

Great. Thank you. And it does appear there are no further questions at this time. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Well, everybody, thank you so much. John 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 good evening.

And again, this does conclude today's Chuy's Holdings Incorporated third quarter 2013 earnings conference call. We thank you for your participation.