Chuy's Holdings Inc (CHUY) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to the Chuy's Holdings, Incorporated, first-quarter 2014 earnings conference call. Today's conference is being recorded.

On today's call, we have Steve Hislop, President and Chief Executive Officer, and Jon Howie, Vice President and Chief Financial Officer of Chuy's Holdings, Incorporated.

At this time, I'll turn the conference over to Mr. Howie. Please go ahead, sir.

Thank you, Operator, and good afternoon. By now, everyone should have access to our first-quarter 2014 earnings release. It can also be found at www.chuys.com in the Investor 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 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.

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

We were very pleased to see our sales momentum continue into 2014. Our first-quarter revenue growth of 19.8% was led by comparable restaurant sales growth of 4.2%, reflecting the quality of our made-from-scratch food prepared fresh every day, our commitment to value, and, most importantly, the hard work and dedication of our employees and consistently providing our guests with a fun, energetic dining experience. We believe these attributes have helped us maintain our strong sales momentum.

We did experience some challenges during the quarter, including commodity cost prices that were higher than we anticipated, and continued labor pressure related to some of our newer restaurants that we discussed on our last call, as well as a labor inefficiency related to severe weather, winter weather that affected 6 of the 13 weeks during the quarter. In the end, however, our strong comp growth allowed us to overcome these cost pressures, resulting in a solid EPS of $0.16 per share, which was consistent with our original expectations. As a result, we remain comfortable with our full-year EPS guidance for 2014.

Switching to development, during the first quarter, we opened three new Chuy's restaurants in Rogers, Arkansas, Orlando, Florida, and Addison, Texas, part of the Dallas Metroplex. Additionally, subsequent to the end of the quarter, we opened our fourth new restaurant of 2014, in Noblesville, Indiana, near Indianapolis.

While it is very early, we are very, very pleased with our new class of restaurants to date. As we have noted, our development plans for 2014, call for 10 to 11 new Chuy's restaurants, with this year's development consisting largely of backfilling into our newer-developed trade areas, which we believe will result in increased awareness for these 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 first quarter.

Thanks, Steve. For our first quarter ended March 30th, 2014, revenue increased 19.8%, to $56 million, from $46.7 million in last year's first quarter. The increase was due primarily to an $8.6 million in incremental revenue from an additional 124 operating weeks provided by 12 new restaurants open during and subsequent to the first quarter of 2013. The increase is partially offset by units open prior to the first quarter of 2013, that are not yet in the comparable store sales base and are lapping their honeymoon period.

Total operating weeks for the first quarter of 2014, were at 644. As Steve noted, comparable restaurant sales increased 4.2% in the quarter. The increase included a 1.9% increase in average check and a 2.3% increase in traffic. There were 35 restaurants included in the comparable store base during the first quarter of 2014, which included three new restaurants added to the base at the beginning of the quarter. We consider a restaurant to be comparable in the first quarter following its 18th month of operation.

Switching over to expenses, cost of sales as a percent of revenue increased 90 basis points to 27.8%. The increase was driven by higher beef, dairy, and produce costs during the quarter. We've continued to experience food cost pressure into the second quarter, and, as a result, now expect food cost inflation for the full year to increase to 3% to 4%, compared to our original expectation of 2% to 3%, which would put our cost of sales as a percentage of revenue in the 27.7% to 27.9% range for the year.

Specifically, with regard to the second quarter, we would expect cost of sales as a percentage of revenue to be in the 28.2% to 28.5% range, higher than our expected range for the full year, before settling back down in the second half of the year.

Labor cost as a percentage of revenue increased 130 basis points to 33.4%. Labor during the quarter was negatively affected by lower sales volumes on fixed labor, and increased training and staffing levels at some of our newer restaurants, as well as inefficiencies associated with the bad weather we experienced in the first quarter across the south and southeast.

However, we continue to experience improved labor efficiency in our comparable restaurants. As we've mentioned in the past, with ongoing focus on local store marketing in our newer markets, as well as backfilling these markets with additional stores and more focused training of the fundamental, we believe we will see our labor cost as a percentage of sales return to normalized levels over time.

In the second quarter, we expect labor as a percentage of revenue to run somewhere in the range of 32.5% to 32.9%. Restaurant operating cost as a percentage of revenue decreased approximately 50 basis points to 13.5%. The improvement was largely attributed to the impact of the new Texas liquor tax law, which went into effect on January 1st of 2014, partially offset by higher utility and insurance costs as a percentage of revenue.

Occupancy cost as a percentage of revenue increased 20 basis points to 6.4%, due to higher rent expense at certain new restaurants as we continue to move into new markets.

General and administrative expenses in the first quarter increased slightly on the dollar basis to $2.9 million, from $2.8 million last year. However, as a percentage of revenue, our G&A expenses improved approximately 80 basis points to 5.2%. We expect this to trend higher in the following quarters, as our first grant under our new long-term incentive program was made in March and, therefore, only had one month's vesting in the current quarter.

Depreciation and amortization increased $348,000 on the dollar basis, primarily driven by the increase in equipment and leasehold improvement costs associated with our newer restaurants, offset by a change in our estimated economic life of our signage and certain equipment items. As a percentage of revenue, depreciation and amortization decreased by 10% -- or 10 basis points to 4.1%.

Interest expense was $22,000 in the quarter, and our total outstanding debt under our credit facility at the end of the first quarter was $8 million. Our effective tax rate for the first quarter of 2014, was 30%, compared to 17% the first quarter of last year. Last year's effective rate included the favorable impact of a one-time tax adjustment for incremental employment tax credits from open tax years, offset by the unfavorable tax impact of non-deductible expenses related to two secondary offerings of stock.

Net income in the first quarter of 2014, was $2.6 million, or $0.16 per diluted share. Net income was also $2.6 million, or $0.16 per diluted share, in the first quarter of 2013. Net income for the first quarter of 2013, included approximately $417,000 in costs associated with two separate secondary offerings of the Company's common stock, as well as net favorable tax benefit of $527,000.

Adjusting for these one-time items, pro forma net income for the first quarter of 2013, was $2.5 million, or $0.15 per diluted share. Attached to our press release is a reconciliation of GAAP results to our pro forma financial results.

With respect to our 2014 outlook, we are providing the following annual guidance. We continue to expect fiscal 2014 diluted net income per share in the range of $0.81 to $0.84. This compares to pro forma diluted net income per share of $0.69 in 2013. Our net income guidance for fiscal 2014, is based, in part, on the following annual assumptions. Our revenue expectations include a comparable store sales increase for the full year, ranging between 2.0% and 2.5%, which implies a 1.5% to 2% comparable sales growth during the last three quarters of 2014.

Restaurant reopening 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 the approximately $1.4 million in incremental expense related to the Company's changes and its compensation and long-term incentive programs.

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, our development plans for 2014, call for 10 to 11 new Chuy's restaurants, of which four 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. With a solid start to 2014, we remain excited about the opportunities ahead, 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-answers portion of the call, I would like to thank all of our Chuy's employees. Our success is 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'll be happy to answer any questions you might have. Operator, please open the lines for questions.

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

Good afternoon, and good job on the quarter.

Thank you, Alton.

I guess I just had a quick question. I was surprised at how strong the comp was at 4.2% in the first quarter. Is there more color as to what you think drove that comp? And then also, as [is the case], your full-year guidance calls for a sequential deceleration. Any reason for that over the last three quarters of the year?

No. I think the first section is where the -- basically why it was 4.2% and it's basically on top of a 3% from the fourth quarter, is I believe, as I've mentioned every single time, there's no silver bullets on what we do at Chuy's, except, obviously, hiring the best people we can find and letting them do a great job. And the key for us and why we drive sales is, obviously, our made-from-scratch food and, obviously, our price-value relationship, which I think is as good as anybody's in our market point. And I think that's what drove it a little bit for us.

We had three stores are all in for the quarter. I tell you, as we move forward, we're pretty comfortable the 1.5 to 2, simply because I'm not a -- I don't have a crystal ball. But more importantly, we still have stores that are going to roll in that opened up in 2011, for the rest of the year. We've always mentioned that we have between a 0.5% and a 1.2% headwind when they roll in on our honeymoons.

And we're also, for the second half of the year, really going up against strong comps in the third and fourth quarter of 2013, that were the highest that we've had in a few years.

So I think we're feeling pretty, pretty good right now [seeing] those type of expectations.

Okay. Thanks, Steve. And then just one follow-up [input cost run] update, probably [spoil] your guidance a little bit from, I think it was up 2% to 3% previously. Is there any certain, like one or two [points] that are the key driver of that? And then if you can talk at all about where you may or may not be covered on the commodities for the rest of the year.

You're talking commodity cost?

Yes.

Yes.

Yes.

The commodities for the first quarter were actually up about 5%, and we gave a 2% to 3% guidance for the year. We're seeing, the biggest thing on that is limes, as I'm sure you've heard. Limes, the limes impact alone for us has about a 70 to 80 basis point impact on overall cost of sales.

We think, from what we're hearing from our purveyors, that limes will be coming back down to normality by the end of June. We already saw a drop of about 20 bucks a case this week. So they were as high $110 a case, and normally they're about 15 to 20 bucks a case.

And the key, also, just to let you know, the reason that is, is we hand squeeze all limes. We don't use any cartons or anything and would never go to a carton. We'd search high and low to find, even though they're expensive, limes somewhere. So that's why we use so many limes in our company.

Okay, great. Thanks again, guys.

Imran Ali, Wells Fargo.

Thanks for taking my questions. Just talk about your development. As you continue to backfill just in markets, have you seen any tailwinds from increasing brand awareness that you might have seen?

Well, yes, we have. If you look at -- go all the way back to 2009. But I think you're really specifically talking about 2013. Last year we went into eight new markets out of the nine new stores. We're going to spend this year and next year really backfilling those markets. And that's when we'll expect the awareness, the tailwinds, to really start picking up, probably more in 2015, on the 13 stores.

But if you look at our company, our first store outside of Texas was our 16th store, which we opened in 2009, which is Nashville, Tennessee. We currently now have filled that market with four restaurants, and they have all the attributes of our Austin market currently.

So the more we fill out our markets, the better off we do, just not only on the awareness of having more stores in the market that don't cannibalize themselves or each other, and the second thing is extending our reach into our, what we call our local store marketing from really about a 10-mile area to about a 30-minute drive time, is really where we're focused, not only on our 13 stores, but our 12 and 11.

Okay, great. That's really helpful. And actually, you just touched on this a little bit just before. Referring to the new restaurants that you opened in states like Tennessee or Kentucky, four or five years ago, can you talk about or provide some color on how your sales volumes have trended in those states?

Well, we don't really look at it as a segment like that. But we're pleased. We're pleased with all of them. We're having some really, really strong increases in both those markets on our sales, especially the ones that we opened up in Kentucky and so forth. But we're pleased with the sales increases on all those sales.

All right. Great. Thanks very much.

David Tarantino, Robert W. Baird.

Jon, question on the earnings outlook for the year. It's still very healthy for the year. But based on some of the cost metrics you gave, it looks like it's very weighted to the second half. Could you just, maybe at a high level, talk about why the growth is so low in the first half, relative to what you expect in the second half and what gives you confidence in that second half acceleration?

David, I think the biggest thing is the cost of sales. I mean, it was a lot higher in the first half. We do think it's going to go down from what we've been discussing. So I think there's some margin improvement there. And also labor, I think we're seeing some improvement in the labor area on some of the new stores with some of the initiatives that we have going. And, but it's just taking some time.

So we are projecting a little more in the back half than normal, but I think more of it is, other than labor, is beyond our control with the cost of sales.

And then, I guess back to the question, I think it was asked, but it does look like the guidance for the rest of the year on comps at least has a conservative vent to it. So I guess why shouldn't we view it as conservative? And why, I guess said differently, why not continue the momentum that you're seeing in the business or that you saw in the business in Q1, as you go through the next several quarters?

Well, at the end of the day, Dave -- this is Steve. We've always built our model off of 1.5 to 2, and, yes, we've had a nice little run here. But it's so predicated on all the stores that we've opened that roll in quarter to quarter to quarter, as you know, where we've always talked about the 0.5% to 1.2% headwind.

We are pleased with how we started the second quarter. But again, it's all predicated on our roll-ins. And specifically, as I mentioned to you, the two strongest quarters we had in same-store sales increase over the last three years was the third and fourth quarter of 2013.

Yes, got it. And just, you mentioned that you're pleased with how you started this quarter. Have you seen a change in the trend line of the business, either positively or negatively, so far in the quarter?

We're just pleased. I think it's too early to really give a lot of light on that, Dave, as it sits right now. But we're moving in, and, knock on wood, we're moving forward at a nice rate.

Great. Thank you very much.

Chris O'Cull, KeyBank.

Jon, just as a follow-up on a previous question regarding the guidance, it looks like -- and I was trying to write down your line item guidance and do the math. But it looks like you're expecting the second-quarter earnings to be relatively flat year over year. Is that true?

The second-quarter earnings is a little up, but not significant, yes.

Okay. So the back half would imply earnings of at least 35% to get to the low end of the guided range. And I know you gave the cost of sales assumption. Help me understand, where are some of the other lines in the back half that are -- that need to show some improvement year over year to really get to that type of earnings growth?

Just one second here. I think for the most part --

For the most part -- I'm going to answer a couple quick ones. We're expecting, as we said, Chris, the commodities have really moved up in the second quarter, higher than the first. And we expect that to normalize in the second half of the year to get closer to the projections we talked about for the year on the commodities. But that will be the big player for us is the commodity number the second half of the year.

Okay. Is there any additional pricing plan, Steve, for the back half?

No. No, sir. Yeah, not at this point in time. Chris, it's a good question. Right now we took our price increase, and we usually do it once a year, which is in the beginning of our third period, our second period of the year.

Chris, very rarely -- I won't look at anything on a quarterly basis, on a spike for a quarterly basis, that [I'm going to] do anything with our price value relationship as far as a price increase.

I think what we've always told everybody, we kind of feel pretty comfortable on our menu and our menu engineering of somewhere in the 27.8% to 28.2% cost of sales area, long term. So once it gets above that for much longer than a quarter, would I look at anything on a price point avenue.

And then lastly, and I'm not sure if you guys look at it this way, but the stores that are in the comp base, did they see -- I mean, they had a nice comp lift, obviously, in the first quarter, and I know they had the inflation with the commodities. But did they see a profit dollar increase year over year?

For the what?

For the quarter?

For the quarter?

Yes, for the quarter. Year over year, did they see a profit dollar increase?

Yes.

Okay, great. Good. Thanks.

And, Chris, the other thing to add to that, too, is, we think we have a better mix of going inside our existing markets. And so from an incremental sales standpoint and the new stores layering on, I think the margins are going to be better in the second half than they were in the third and fourth quarter last year.

Our backfilling in the markets, Chris.

Great. Thanks, guys.

(Operator Instructions) Will Slabaugh, Stephens, Incorporated.

Congrats on another great quarter.

Thank you, Will.

Whenever you look at the different pieces of earnings, and, obviously, the sales were great in the quarter. When you think about earnings in the quarter and the pieces that may have hurt you, can you help us out with the relative impact that you think may be the lack of labor and other productivity around weather impact may have had in the quarter versus any inefficiencies in new store openings?

Well, I'll answer the first part, because I'll talk in general. I'll let Jon talk a little bit more specific. At the end of the day, a sales increase, you have a nice little flow through around that 35%, 40%. And I'm going to tell you when you expect it higher and then you don't get the sales, you lose a lot more than you thought, much more than the 35% to 40% on the negative side.

So that, on a general basis, as far as our planning and budgeting, definitely affected us a little bit in the first quarter, with us being affected on weather, not so much like the northeast with the snow, but really with ice and the closing of Atlanta for a couple days, definitely affected us on the negative side.

And to add to that, I guess with the sales volume increase that we had during the quarter, I guess you would expect a little more leverage on the labor. And like Steve said, you have little inefficiencies with regard to the weather. So they kind of counteracted each other, if you will, because I think we gave a range of 33.4 on the labor to, I think it was something like 33.7, and we --

Yes.

-- were at the low end of that.

Yes.

So had we not had the sales increase, I think it would have been significantly higher than that, given the weather.

Got you. That makes sense. And then to hit on the pipeline, could you give us an update there as far as how far out in time you are in terms of signing up sites for next year? And then just a quick follow-up there to check a box on the unit openings, how, if you could speak to the strength in Arkansas, Orlando, Addison, how well those went in this quarter.

All right. I'll take the last one first. We're very, very pleased of the initial results going into these new markets. Not new markets. Backfilling into these markets. So we're very pleased with our four openings. Obviously, very early to tell, but we've been pleased with those markets. Arkansas's been good for us and so is Noblesville. So we're very excited about all of them.

As far as our pipeline, we're very, very good. We have all, through 2015, really, all the LOIs are all set. Obviously, 2014's set. 2015, all LOIs are done, and we're really working more now on the following year. So we're very, very well set.

It's also important to note that as we mentioned in the past, that 2014, 2015, at least 80% of our new units will be in backfill markets or our new markets that we entered in 2013. That'll be the same for 2014 and 2015. And then as we continue out, you'll never have more than 50% in any new market as we continue to grow for the foreseeable future.

Perfect. Thanks, guys.

Nick Setyan of Wedbush Securities.

This is [Conrad Kei] on for Nick. I was just wondering if you guys have quantified what the weather impact was in Q1. I think in Q4, you talked about it being sort of $95,000, $100,000 range.

Yes, the impact on comparable sales was about 1%.

Okay, great. And then just on the labor guidance for the year, any updates there given some of the inefficiencies you might have seen in Q1?

No, because, like I said, I think the comp sales kind of counteracted the weather. So I think we're still on track for the guidance for the year.

Okay, great. Thanks a lot.

Thank you.

Brian Elliott, Raymond James.

Thanks. A couple sort of clarificaitons first. Jon, when we -- just thinking about spreading the rest of the new openings, how many do you expect here in Q2? Two or another three totally for the quarter, new units?

We've got three in the quarter.

Yes. We've already opened one. We have another couple this quarter, Brian.

Okay. And then the -- back to beat the same-store-sales horse, it's still kicking a little bit, haven't killed it yet. So with the 100 bps of weather impact, the underlying was 5.2. Was that concentrated? Maybe could you just aggregate that a bit and just maybe just talk without quantifying? But oldest store, stronger stores, maybe a year-plus in the comp base coming out of their, well out of their honeymoon period? That's just, again, a very strong number and given industry, et cetera, really is an outlier. And then to have guidance be for a material slowdown is confusing a bit, frankly.

Yes, it's not a material slowdown, though. I understand what you're saying though, it's across the board, obviously since all the way through 2012, stores, by the way. But at the end of the day, when we're looking at it and we have the weather and, actually, you have some honeymoon from that weather when it pops back in. The biggest thing is the crystal ball, and [not] knowing what's going on with some commodity issues and the pressure's the regular consumer's going to have even in the grocery stores.

But again, the big thing is really rolling over the highest two quarters that we had for the last three or four years in quarter three and quarter four.

All right. Fair enough. When I think about new unit performance, Jon, you've talked about the backfills being less inefficient. And I assume that you would expect the sales of backfill restaurants to be -- come out of the box a little stronger than some of the pioneer markets. So given that, should we expect the same-store sales versus average weekly sales gap to narrow as we move through this year?

Not as you move through this year. I'm specifically talking about the stores in 2013, when we entered so many new markets. And as you know, we really don't go into same-store-sales until 18 months first full quarter out. So that's really important to notice. So the stores that aren't -- they're not going to really go into the same-store-sales until, let's say the bulk of them in 2015, through 2015 into 2016.

So that's when you might hear us talk a little bit of a reversion of the sales starting around the end of 2015, early 2016.

I'm sorry. I misunderstood that, Steve. Sorry. So you were talking about comps or were you talking average unit volumes?

I was talking about comps.

Okay. I was asking, actually, about average unit volume.

Okay. I'm sorry, Brian.

Well, your overall average unit volumes, as we've talking in the past, are going to continue to go down until we've got the comp sales that [make] kind of the news sales projections at the 4.2. So they may narrow a little bit, but I would see that weekly volume going down in the near future.

And (inaudible) coincide right around that 2016 rate, when we're talking about the same-store sales. It's kind of the same time frame.

That's when you --

Yes.

-- [they can get that convergence]. Okay. All right. Thanks a lot.

(Operator Instructions) Andrew Mannik, Mount Kamet Partners.

I just had a question about the performance of your new units. You indicated that new units in the quarter generated $8.6 million in revenue on 124 operating weeks, or about $69,000 per week. While in the Q1 of last year, the new units generated $9.4 million in revenue on 110 week, so $85,000 per week. I'm just wondering what accounts for the 19% decline in revenue per week here. Are there any differences in the store characteristics from one year to the next? Or is the new batch of stores just performing [poorly] (inaudible) batch?

Well, if you go back to the transcript in Q4, it was really the batch of stores in 2013, that we opened. We opened in six new states, eight new markets out of the nine stores that we opened. So they were lower in 2013. If you're to look at that average for Q4, that average was about 64,000, or a little over 64000.

Sequentially, up to Q1, we're now at the 69,000, which that rate of increase is actually larger than the rate of increase in our existing store base. So we're seeing some improvement in increasing that, and we're continuing to work on that.

Yes. And the key thing is, we just bit off a lot in 2013. And it's very important to notice that from 2014, as I've mentioned, and 2015, 80% will be in those existing markets and backfill markets, and 20% new where last year was predominantly all new, to seed all those new markets for us with our growth over the next five years.

Okay. Thanks.

And, gentlemen, it does appear there are no further questions at this time. I'll turn the conference back over to you for any additional or closing comments

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 good evening.

And that does conclude today's teleconference. We thank you all for your participation.