Chuy's Holdings Inc (CHUY) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Chuy's Holdings, Incorporated fourth quarter 2013 earnings conference call. (Operator Instructions) Please note that this conference is being recorded today, February 27th, 2014.

On the call today, we have Steve Hislop, President of Chief Executive Officer of the Company; and Jon Howie, Vice President and Chief Financial Officer.

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 fourth quarter 2013 earnings release. It can also be found at www.chuys.com in the Investors 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 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 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 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. Steve?

Thank you, Jon. And thank you all for joining us today on the call.

We're pleased to have reported solid fourth quarter results, despite a challenging quarter for most restaurant companies, which also capped off a very successful year for Chuy's. Including our fourth quarter earnings per share of $0.15, our 2013 pro forma diluted earnings per share increased to $0.69, a 24% increase from 2012 after adjusting for last year's extra week.

Our results both during the quarter and throughout 2013 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 in consistently providing our guests with a fun, energetic dining experience. We believe these attributes have helped us maintain our strong business momentum.

During the fourth quarter, we opened our eighth and ninth restaurants in 2013. They were in Kansas City, Missouri and Raleigh, North Carolina.

As we look ahead, our new unit development will continue to drive our EPS growth. As we have previously stated, our development plans for 2014 call for 10 to 11 new restaurants during the year. I'm pleased to note that two of those units have already opened, one in Rogers, Arkansas; and another one in Orlando, Florida.

During 2013, our new unit developing included nine new units in eight new markets located within six new states. As a result of seeding so many new markets during the year, we have seen the greater operating inefficiencies within our 2013 cost of unit. In contrast, our 2014 development will largely consist of backfilling into many of those same trade areas, which we believe will drive increased awareness of our brand in these newer markets, as well as allow for greater training and local store marketing efficiencies.

With that, I'd like to turn the call over to our CFO, Jon Howie, to review the details of our fourth quarter.

Thanks, Steve.

For our fourth quarter ended December 29th, 2013, revenue increased to $50.8 million from $46.7 million in last year's fourth quarter. As a reminder, last year's fourth quarter consisted of 14 weeks, compared to 13 weeks in the just-completed fourth quarter of 2013, which positively impacted last year's revenue by approximately $3.3 million. We also faced severe winter weather during the last quarter of 2013, specifically an ice storm in early December which we believe negatively impacted Q4 2013 revenue by approximately $500,000.

Revenue in the fourth quarter of 2013 included $7.3 million in incremental revenue provided by an additional 114 operating weeks from new restaurants opened during and subsequent to the fourth quarter of 2012. Total operating weeks in the fourth quarter of 2013 were [615].

Comparable restaurant sales increased 3% for the 13-week period ended December 29th, 2013, compared to the 13-week period ended December 31st, 2012. The increase was driven by 1.9% increase in average check and 1.1% increase in traffic. There were 32 restaurants included in the comparable store base during the fourth quarter of 2013, which included one new restaurant added to the 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.

Switching over to expenses -- the cost of sales as a percent of revenue was flat at 27.2%. Cost of sales in the quarter came in better than our expectation, largely because of volume rebates earnings associated with meeting certain annual volume thresholds and entering into a new beverage agreement, which retroactively was effective to the beginning of the quarter.

Excluding these items, cost of sales as a percentage of revenues would've been approximately 27.5%, as compared to 27.2% in the 14 weeks ended September 30th, 2012. The increase was caused by increases in produce, groceries and seafood, offset by a reduction in dairy. Looking into 2014, we expect food cost inflation to be 2% to 3%, which will put our cost of sales as a percentage of revenue in the 27.6% to 27.8% range for the year.

Labor cost as a percentage of revenue increased 210 basis points to 34.1%. Labor during the quarter was negatively affected by the loss of leverage due to one less week in the current quarter compared to last year's, the severe winter weather in early December, and finally higher management training labor due to timing.

However, as Steve noted earlier, most of this increase was a result of greater inefficiencies within our new 2013 restaurants, particularly higher-than-expected labor as a whole due to the decreased leverage under management labor, and some longer learning curves at the hourly level. We believe our current focus on local store marketing in these newer markets, as well as backfilling these markets with additional stores and more focused training of the fundamentals, will get this labor cost percentage back to normalized levels over time.

In the first quarter, we expect labor as a percentage of revenue to run somewhere in the range of 33.4% to 33.7%. Restaurant operating cost as a percentage of revenue increased approximately 50 basis points to 14.8%. The increase was largely related to higher insurance and utility costs and higher credit card fees, offset by lower liquor taxes as a percentage of [bill] as we continue to grow our restaurant based outside of the state of Texas.

Additionally, as we start fiscal 2014, we expect the impact of the new Texas liquor tax law to decrease our restaurant operating costs as a percentage of revenues by approximately 70 to 80 basis points, which will bring our restaurant operating costs as a percentage of revenue for 2014 to a range in the mid- to upper 13%.

Occupancy cost as a percentage of revenue was flat compared to last year, at 6%; and came in better than we expected due to lower-than-estimated property and real estate taxes on our newer location, which had a favorable impact on occupancy costs of approximately 40 basis points. General and administrative expenses in the fourth quarter improved approximately $650,000 on a dollar basis, compared to last year at $2.3 million; and as a percentage of revenues improved approximately 180 basis points. The improvement was generally related to lower performance-based bonuses as compared to the prior year in 2012, where the bonuses earned were above average.

Marketing expense as a percent of revenues decreased approximately 50 basis points to 0.3%, as compared to the 14-week period in 2012. This decrease was primarily a result of timing in addition to redirecting our marketing effort, focused more on local store marketing.

Depreciation and amortization increased to $580,000 and as a percent of revenue increased 80 basis points to 4.8%, driven by the timing of late 2013 restaurant openings and the increased equipment and leasehold improvement costs associated with our newer restaurants. Interest expense was $29,000, compared to $145,000 in the fourth quarter of 2012. And on a pro forma basis, interest expense totaled approximately $107,000 in the fourth quarter of 2012. The total outstanding debt on our credit facility at the end of the fourth quarter of 2013 was $6 million.

Our effective tax rate for the quarter was 24.9%, which brought our overall tax rate for the fiscal year 2013 to approximately 27.5%, as compared to 29.1% for the fiscal year 2012. The decrease in the effective income tax rate from the prior year was primarily attributable to the favorable impact of a one-time adjustment made for incremental employment tax credits for the current year as well as the previous [open] tax year. This was partially offset by the unfavorable impact of non-deductable secondary operating costs during the year.

Excluding this net favorable benefit, our pro forma-effective tax rate for the year was approximately 29%, at the lower end of our forecasted range.

Net income for the 13-week fourth quarter of 2013 was $2.5 million, or $0.15 per diluted share. Net income for the 14-week fourth quarter of 2012 was $2.6 million, or $0.15 per diluted share. Net income for the fourth quarter of 2012 included approximately $228,000 in costs associated with a follow-on offering of secondary shares of the Company's common stock.

Pro forma net income for the fourth quarter of 2012 was $2.7 million, or $0.16 per diluted share. Fourth quarter 2012 results also include a 4% to 5% per-share positive impact due to the extra week in the quarter.

Attached to our press release is a reconciliation of our GAAP results to our pro forma financial results. With respect to our 2014 outlook, we are providing the following annual guidance. Our diluted net income per share is expected to range from $0.81 to $0.84. This compares to pro forma diluted net income per share of $0.59 in 2013.

Our net income guidance for fiscal year 2014 is based in part on the following annual assumptions. Our revenue expectations, including comparable store sales increase for the full year ranging between 1.5% and 2%. Restaurant preopening expenses are expected to range between $3.8 million and $4.3 million. We expect G&A expenses to run between $12.5 million and $13 million, which includes approximately $1.4 million in incremental expense related to the Company's changes to its compensation and long-term incentive programs.

We expect our pro forma effective 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, our development plans for 2014 call for 10 to 11 new Chuy's Restaurants, of which two have already opened. Our capital expenditures net of tenant improvement allowances are projected to be approximately $27.5 million to $30 million.

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 stockholders.

Before we go to question-and-answer portion of the 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.

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

(Operator Instructions) Andy Barish, Jefferies.

On the margin side, is there a way to kind of quantify the inefficiency impact in 2013, and how we should think about that 2014? And then, kind of holistically, I would assume restaurant-level margins would still probably be down in 2014, even though you have less of sort of a new market inefficiency?

I think what we said in the guidance there was kind of an expected range of our labor percentage. And that is including those inefficiencies for 2014.

Okay. And is that labor [guidance] -- I thought you just said for the first quarter. Is that for the full year, or --?

(Multiple speakers) for the full year, it would be -- it'd be closer to -- yes, it would be closer to right around that 33%, in the low 33s.

Okay. And have you seen any particular, in the first quarter, sort of weather impacts still lingering either on the sales or the margin line that may be showing up in labor as well?

Well, Andy, as far as the sales line, we're basically eight weeks into our quarter of 2013. We definitely have seen some weather issues basically in four out of the eight weeks. I haven't said that -- basically, we're seeing our sales kind of going with our fourth quarter trend. So we're kind of pleased there. And so that's kind of where we're at after only eight weeks out of the quarter.

Okay. Thank you.

Thank you.

Will Slabaugh, Stephens.

Thanks, Jon. Congrats on the great year.

On development -- can you give us the usual rundown of your take on the unit performance in the quarter, and then those that have started off in this first quarter of 2014?

And then, secondarily, as you look at the performance of your recent group of new units in the past couple years, can you talk about what the units in Texas, and maybe some other markets that know the brand pretty well, look like? Or just maybe some of your newer markets in terms of sales progression?

And then, you think about how you're building in -- more or less backfilling in 2014 -- what do you think that might mean in terms of what those new units might look like?

Thanks, Will. This is Steve.

At the end of the day, real quickly this year, we've opened up Rogers, Arkansas and Orlando. Rogers opened up in January; Orlando opened last week. And we're just getting ready for a very, very busy upcoming three to four weeks, starting three weeks from now when we have the vacations going on down there.

So we're excited about both those openings. And as you have mentioned, this year in 2014, most of our stores are in backfill markets.

Last year, in 2013 specifically, as I mentioned to you, we did six new states, eight new markets. And it's rather expensive to seed those. We feel really good about all the markets that we've entered.

As I've mentioned before, as we go into these markets, we're kind of like a new pair of jeans -- you put a new pair of jeans on, they're a little scratchy. And the more awareness we get in the market, the more awareness as we build in the market, the more comfortable we get in a market as far as awareness plays for us.

So that was a big chunk that we took off to expand our footprint in 2013. And we expect to be able to grow from there. But we're excited about our backfill in 2014. And in 2015, will be very, very similar.

So 2015 should look fairly similar in terms of almost all backfill there as well?

I'd say about 80%, yes.

Thanks, guys.

Thanks.

Thank you so much.

David Tarantino, Robert W. Baird.

A question to follow up on the new store performance, first from a sales volume perspective -- in the most recent quarter, the new store contribution was a little lower than we had expected. And I'm wondering maybe if we had [mis-leveled] that, or if the volumes are running maybe a little lower than where you thought they would be, given all the new markets and low brand awareness. But if you could help me to reconcile that, that'd be great.

Yes. Thank you, Dave. At the end of the day, the way it worked out -- and again, it's a pay-me-now, pay-me-later as we seed these markets to extend our footprint.

The way it worked out for me last year is we went into probably, like I mentioned, eight new markets, six new states. And that's spreading us out a little bit more than I would like, probably. At the end of the day, as I look back on it, I probably still would've done it to get our footprint extended. And we know, as we continue to grow in these markets, we'll have more awareness (technical difficulty) help us grow our concept.

It's kind of funny, I remember when I joined the Company in 2008, the average AUVs was a little bit shy of about 5 million. And five years earlier, without the awareness, we were at 4 million. So it's very similar when you jump into these new markets. I think that's why it's very, very important as we move out continually is to quickly backfill these markets in 2014 and 2015, and also extend and use a little bit of marketing dollars to extend our reach from a 10-mile radius to a 25-minute drive time in all these markets where we're going to put [an] actual probably $0.5 million into our local store marketing in these specific markets.

That's helpful.

And then, on the labor inefficiency that you mentioned -- is that something that is more kind of operational growing pains, given how the markets are new? Or is that -- and just maybe trying to dimensionalize how challenging that'll be to bring those labor ratios down in those units, either through more training -- or does it require more sales volumes? Or, how should I think about that?

David, both. At the end of the day, it's going. Again, the [bite knock], the eight new markets in one year to extend this footprint, and also a little bit of the volumes while we're building the awareness. There's nothing wrong with our model moving forward, there's nothing wrong with our model store-level moving forward. It's just getting up to speed on the new markets and moving the sales up a little bit with an awareness issue.

Excellent. Thank you very much.

Thank you so much.

(Operator Instructions) Imran Ali, Wells Fargo.

Hi, guys. I'm on for Jeff Farmer. Thanks for taking my questions.

You touched on this a little bit earlier. But were there any surprises with the volume trends that you saw in new markets that you entered in 2013?

I don't know if you'd say they're surprises. We definitely knew, and [we're] eyes are open as you're going into the markets, as we are really developing our awareness. We get in very early, six months before we open. We work with a local PR firm. And we really start talking about our defining differences as we get into the markets.

And we've learned a few things, like I mentioned to you a little bit earlier -- that our main focus early on was basically a 10-mile radius. We've learned things throughout the year to extend that to a 25-minute drive time, and dealing with the daytime population specifically in that. And that's what we'll have learned through time.

We're not scared of where we're at. And we're really excited in all the markets on where we're going to go as we get more awareness and get more stores in the market.

Great. Thanks for that.

And just to clarify, you said that you expected maybe 2015 development to be 80% comprised of backfills? Is that correct?

Yes. Pretty much, as far as definitely the states, we'll have one new state. But everything -- the new state will be actually right next to our Kansas City, Missouri store; will be actually in Kansas. So it's really developing out all the markets we've seeded in 2013 [at] the end of 2012. And so I'm saying about 80% over the next two years will be within those market points.

And then you'll see us, probably starting in 2016, that you'd probably see a nice ratio of 50% backfill and 50% new. But that would start in 2016.

That's very helpful. Thanks so much.

You're very welcome.

Nick Setyan, Wedbush Securities.

In terms of the pricing, I think you guys said 1.9% in the quarter. When does [some] pricing drop off? Do you expect to take a little bit more pricing, just kind of for the whole year, what we think pricing might be?

Well, the pricing -- we just took price in the second period of 2014 like we do every year, Nick. And that pricing was right in between the 1.5% to 2% in the current year, going forward, in 2014.

And we don't anticipate any more price this year.

It's been kind of our standard for the last five, six years that we take it once during the first quarter. And we [have to take it] again during the year.

Yes. One of the key things, Nick, for us is -- what we're really concentrating on, and as you saw in our fourth quarter, in a pretty complex and competitive market we were able to grow our volumes, even though we lost $0.5 million in sales because of the snow -- that we were able to drive customers a little bit, and, obviously, sales increase of around 3%. And as I said, we're seeing that trend kind of continued, even with some bad weather in the first quarter, the first eight weeks of it.

We really believe one of the strongest attributes we have, after all our freshly made product that we make in-house, is that really our price value is -- in the long run, in the marathon that we're running today -- really important for us as we continue down the road. And we think that's really one of our greatest competitive advantages as we move forward.

Got it. So basically, in the second period of 2014, we should see going forward for the rest of the year about 0% pricing? Is that the correct way to think about it?

No. The pricing that you're seeing at the end of the year, the 1.9% -- that carries through January. And then we put in another price increase in the second period of 2014. So you'll see another price increase similar to last year.

Yes. Every year, we do it at the beginning of February.

Yes.

Perfect.

And then, just kind of cadence to the opening -- sounds like Q1, we're going to get a few more operating weeks than usual because of the earlier openings. And then, as the year progresses quarterly -- how should we think about -- is it going to be more fourth quarter and when the openings are --

I [can] tell you what -- we have 10 to 11 projected. I'll tell you, it'd be very even throughout the year.

Got it.

Was very even throughout the year. And next year, it'll be very even also.

Okay.

And then, just a question on G&A -- it sounds like this year, the wrap in G&A versus 2013 is going to be a little bigger than we saw in 2013 versus 2012. What's kind of driving that?

In 2014, the projection? Is that what you're saying?

Yes.

Yes. We implemented -- we had a firm come in and analyze our compensation plan and long-term incentive program. So we changed those a little bit this year, and we're seeing a one-time hit this year that's going to jump that up.

And so you're not going to see much leverage -- well, you won't see any leverage in 2014. Because there's an extra $1.4 million in there. If you were to take out the $1.4 million of incremental cost in 2014, then you would see that leverage, like we've always been saying, which is 50% to 60% of the top-line growth. But after 2014, when you get to 2015 and 2016, you ought to see that leverage come back.

Thanks very much.

Thank you.

Bryan Elliott, Raymond James.

Jon, actually, a couple clarifications, make sure I heard things right -- the food cost range that you forecast -- you said you think food inflation's going to be 2% to 3%, which would put you in a range of 27.6% to 27.8%. Was that inclusive of the pricing we just discussed, or is that before? That's inclusive, right?

That's inclusive, yes.

Yes, okay.

And then, you gave us some guidance ranges on other restaurant cost lines. They were full-year guidance projections or estimates, correct?

(Multiple speakers) they are, except for the labor one that, think, Andy mentioned. That particular one was for the first quarter. But then I gave a guidance on that labor line -- should be in the low 33s for the year.

So the 33.4% to 33.7%, that's a Q1 number.

Right.

And then low -- okay.

Yes.

Okay.

And then, you said that we've had -- four weeks of the eight have had weather impact. But we're still tracking to Q4 sales trends. Meaning the same-store sales trend?

Yes, sir.

Yes. All right. Are any new stores coming in the comp base in Q1?

Bryan, this is Steve. We ended the year with 32 restaurants. We had three stores roll into the first quarter comp store sales base. So yes, the sales that I'll report at the end of the first quarter will have 35 instead of 32.

And they go in on day one of --

They went on day one of 2014.

All right.

And then, lastly, Jon -- am I doing this math right? You give us the $7.3 million of new store sales that you referenced in your prepared remarks on 114 weeks. So I can just take total sales divided by weeks and come up with a average weekly sales number that those, however, number of restaurants not in the comp base produced on average in the fourth quarter, correct?

Yes.

And --

Right. And I will caution that a little bit. And that's what we've been talking about. So it is a little lower here in Q4 of 2013 than it has been. I will preface that Q4 is generally a low indexing quarter for us. And then you had the weather implications.

But yes, nine of those stores that are in there are the 2013 stores that Steve was referencing earlier.

Okay. And the 500K, I believe, of total weather sales impact that you referenced -- some of those were in the comp store base, because Texas was where the decrease weather was (multiple speakers) --

Absolutely Bryan, right. There's about two-thirds of the -- two-thirds of the $500,000 was in the comp base.

Yes. It was approximately, on comp stores for the quarter, Bryan, about 1%.

All right. Great, thanks.

Thank you.

Thank you. At this time, we have no further questions in our queue. I would like to turn the call back over to our management team for any additional or closing remarks.

Again, thank you, everybody. Thank you so much. Jon and I appreciate everybody's interest in Chuy's. We always will be available to answer any and all questions.

Again, thank you, guys, and have a good evening.

Thank you.

Again, ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.