Chuy's Holdings Inc (CHUY) 2014 Q3 法說會逐字稿

Good day, everyone. and welcome to the Chuy's Holdings Incorporated Third Quarter 2014 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the presentation. 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 third quarter 2014 earnings release; can also be found at our website at www.chuys.com in the Investors 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 a 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. Our third quarter proved to be a challenging one, with the results coming in below our internal plan. We did see a continuation in comparable sales growth at a 3% increase during the quarter, which represents our 17th consecutive quarter of positive comps. However, we continue to be negatively impacted by sales in our non-comparable restaurants, particularly in our 2013 class, that have settled in below our historical new unit targets as well as a corresponding labor and fixed cost inefficiencies at those restaurants. These non-comparable restaurants currently comprise approximately 33% of our total stores.

In addition, like many in the industry, we have been plagued by elevated food cost pressures that in time will pass, but continue to hamper four-wall profitability throughout our system. As a consequence, our restaurant-level EBITDA as a percent of sales decreased by 100 basis points despite a 20% increase in revenues.

As we had previously discussed, we are targeting 80% of our new development through 2015, largely around backfilling existing markets, which we believe will continue to enhance the awareness of the Chuy's brand and ultimately have a positive effect on the performance of our developing markets.

Additionally, as we continue to grow our footprint in developing markets, we are recognizing that our new unit volumes are not as predictable as those in our core markets. We continue to build restaurants in our developing markets that achieve results at or above our historical $4.2 million year one target. However, we must acknowledge that many or some of our new units will scale and mature at lower AUVs. While sales volumes at 85% to 90% of our targets would yield solid returns of 25% to 30%, we are continuing to evaluate potential tweaks to improve returns at these sales levels.

As for our existing development market restaurants, we continue to look for ways to improve their performance as well. Last quarter, we noted sales-enhancing initiatives focused on local store marketing and branding at our newer restaurants to highlight our strength in points of differentiation that we believe have been key drivers to the success of our business for over 30 years.

We are also looking at some of our mature lower-volume restaurants that have historically run mid-teen margins for best practices to improve our operating performance and some of our newer restaurants without disrupting the guest experience. We are confident that our developing market units can over time reach profitability and return levels that are in line with the balance of our unit base. We're still pleased with the early results of our 2014 openings and we believe we are seeing improving performance in certain markets. However, I would caution that changes will not occur overnight. As a result, we are lowering our near-term expectations, of which Jon will provide more detail in just a second.

During the third quarter, we opened four new restaurants; in San Antonio, Texas; in Kennesaw, Georgia outside of Atlanta; Fairfax, Virginia, in the Washington, DC metropolitan area; and Sugar Land, Texas, outside of Houston. Subsequent to the end of the quarter, we opened our 11th and final new restaurant of 2014 in Springfield, Virginia, also outside Washington DC.

For our 2015 development plan, we currently are targeting 11 to 12 new restaurants openings and have signed leases or hard LOIs for all of our planned openings at this time. Again, our 2015 development will continue to include a majority of new restaurants in developing markets with existing restaurants to elevate awareness of the brand. With only 59 Chuy's restaurants as of today, we continue to have a tremendous amount of white space development ahead of us.

Now, for a more detailed look at our third quarter results, I'd like to turn the call over to our CFO, Jon Howie.

Thanks, Steve. For our third quarter ended September 28, 2014, revenue increased 19.9% to $64.1 million from $53.5 million in last year's third quarter. The increase was due primarily to $10.9 million in incremental revenue from an additional 140 operating weeks provided by 14 new restaurants opened during and subsequent to the third quarter of 2013. The increase is partially offset by a decrease in revenue related to units that are not yet in the comparable restaurant sales base and are lacking their honeymoon period.

Total operating weeks for the third quarter of 2014 were at 729. As mentioned earlier, comparable restaurant sales increased 3% in the quarter, driven by a 1.7% increase in average check and a 1.3% increase in traffic. This included a price increase of approximately 1% effectively implemented at the end of August, which had minimal effect on our third quarter average check.

There were 39 restaurants included in the comparable restaurant base during the third quarter of 2014, which included one new restaurant added as a base at the beginning of the quarter. We consider restaurants be comparable in the first full quarter following 18 month of operation. As a reminder, our restaurants can 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 restaurant enters the comparable restaurant base. Given the small number of restaurants currently in our comparable restaurant 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. To date, that headwind has reduced our comparable restaurant sales percentage, ranging from 0.5% to 1.2% in any given quarter.

Switching over to expenses, cost of sales as a percent of revenue increased 40 basis points to 28.2%, primarily due to continued commodity pressures related to beef, chicken and dairy. Currently, we expect pressures with regard to beef and dairy to continue through the fourth quarter and into 2015 and expect cost pressures with regard to produce to affect us through the fourth quarter. We have recently seen some relief in chicken, but it's very early. So based on our results to date and new expectations for the remainder of the year, our outlook for food inflation for the full year of 2014 has increased to between 4.5% and 5%. This would put our cost of sales as a percentage of revenue between 28.2% and 28.4% for fiscal 2014.

As I mentioned previously, we expect to see the commodity pressures to continue with regard to dairy, beef and to some extent chicken into 2015. Remember, we only contract approximately 25% to 30% of our commodity base and we are currently finalizing some of those contracts. So while we are not ready to release any specific projections for 2015 at this time, we believe our 2015 food cost inflation will increase at a lower rate than we experienced during 2014.

Labor cost as a percentage of revenue increased 110 basis points to 33.9%, primarily due to lower sales volumes on fixed labor coupled with labor inefficiencies at some of our non-comparable restaurant locations which still account for 33% of our overall restaurant base. Labor in our comparable restaurants as a percentage of revenue was down 50 basis points.

As Steve mentioned, in addition to backfilling developing markets, we are focused on sales-driving and operations-enhancing initiatives in certain of our developing market restaurants, which we believe can help return labor cost as a percentage of sales in these restaurants to normalize levels over time. However, given our current results, we now expect our labor for the year to be in the range of 33.8% to 34%.

Restaurant operating cost as a percentage of revenue decreased approximately 30 basis points to 14%. The improvement was largely attributable to lower liquor taxes as a result of the impact of the new liquor tax law in Texas which went into effect on January 1, 2014, and a continued increase in a number of new restaurants openings outside of Texas, which generally has lower liquor taxes in Texas, if any. The improvement was partially offset by higher utility and insurance cost as a percentage of revenues. Occupancy cost as a percentage of revenue decreased slightly by 10 basis points to 5.9% as a result of lower property taxes, which was partially offset by higher rent expense at certain new restaurants as we continue to expand and backfill into new markets.

General and administrative expenses in the third quarter increased to $2.9 million from $2.4 million last year. The increase on a dollar basis was driven by higher stock-based compensation as a result of changes in our long-term incentive program, increases in headcount since last year and higher legal and professional fee, partially offset by lower performance-based bonuses. As a percentage of revenue, G&A expenses remained steady at 4.5%. Restaurant pre-opening cost increased $290,000 to $1.3 million in the third quarter, due to the opening of four restaurants during the quarter versus two restaurants during the same quarter last year, as well as timing of the opening date and the stage of development for these restaurants in our current pipeline. We expect our pre-opening expenses for the year to be approximately $4.4 million, which included the opening of our 11th restaurant subsequent to the end of the third quarter to finish our 2014 development as well as slightly higher pre-opening costs related to obtaining possession of these properties earlier in construction process.

Depreciation and amortization increased approximately $339,000 to $2.7 million in the third quarter, primarily driven by increases in equipment and leasehold improvements costs associated with our new restaurants. Interest expense was $36,000 in the quarter and our total outstanding debt under our credit facility at the end of the third quarter was $8.8 million. Our effective tax rate for the third quarter of 2014 was approximately 26.3% compared to 30% during the third quarter of last year. This year's lower effective rate was primarily attributable to a higher percentage of employment tax credits to pre-tax income in 2014 versus 2013.

Net income in the third quarter of 2014 was $3.1 million or $0.19 per diluted share compared to $2.8 million or $0.17 per diluted share in the third quarter of 2013. As we discussed, we continue to feel the impact of lower sales at certain of our non-comparable restaurants which causes labor and fixed costs inefficiencies as a result. Additionally, we've also experienced higher than expected commodity costs.

With that in mind, we are lowering our outlook for the balance of 2014. We now expect our fiscal 2014 diluted net income per share in the range of $0.67 to $0.69 per share. Our revised net income guidance for the fiscal 2014 is based in part on the following annual assumptions.

We expect comparable restaurant sales to increase between 2.7% and 2.9% for the full year. Food cost inflation for the full year is expected to increase approximately 4.5% to 5%. We expect labor costs as a percentage of revenue of approximately 33.8% to 34% and we expect a restaurant pre-opening expenses to run approximately $4.4 million for 2014. G&A expense should run approximately $12 million for the year, which includes approximately 00$1.4 million of projected incremental expense related to the Company's changes to its compensation and long-term incentive programs.

Finally, we now expect because of our lower projected income that our effective tax rate for the full year would range between 28% and 29% and annual weighted average diluted shares outstanding of 16.7 million to 16.8 million. As Steve noted, we've completed our 2014 development plan with the opening of our 11th restaurant in late October. Our capital expenditures, net of tenant improvement allowances, are still projected to be approximately $27.5 million to $30 million.

And now, I'll turn the call back over to Steve to wrap up.

Thanks, Jon. In closing, we are working diligently to tackle what we believe are near-term challenges as well as taking a thoughtful look at the evolution of our new unit model as we grow our brand nationally. While we continue to face near-term food cost inflation, we believe that our value proposition affords us pricing power should elevate input pricing remain for an extended period of time.

We have every reason to be excited about the long-term potential of our business, including the continued growth of our restaurant base with sales volumes and returns that will exceed industry norms. The combination of freshly prepared, craveable, Mexican-inspired offerings, tremendous value and a fun energetic environment has led to industry leading average unit volumes and a lot of history of consistent comparable sales growth and we believe this is an enviable base to build on.

Before we go to question and answers portions of our call, I would like to take a moment to thank all of our Chuy's employees. Success has always been a testament to their hard work and dedication to earning 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.

Absolutely. (Operator instructions) David Tarantino, Robert W. Baird.

Hi, good afternoon. Steve, I wanted to follow up on your commentary around evolving the new unit model, and I just want to first clarify, is this mostly related to what you've seen in the 2013 class or you're also seeing that in the 2014 class? And then, I guess secondly, could you elaborate on what you mean by evolving the model?

Sure, I'd say still most of it, I do talk about 2014 first, 2014 is exceeding our expectations as far as the model currently. We will definitely be going into our lowest-indexing quarter of the year, is in the fourth quarter, as you know. So as we look at that whole classes, we probably figure and will probably come in around a $4 million number on the average. So that's what we're looking at there. But that most of it is definitely the 2013 model of what we've got. And what we want to do is, the variability that we've seen of opening markets outside of our core base, we've seen as I mentioned earlier, it's a little harder to predict. We're not embarrassed by a $3.6 million number or a $3.8 million number at all, that's very wrong, we should be able to make a lot of money, but we're having a hard time sticking to the variability of the new markets outside of our core.

And so I guess as a follow-up, what's the game plan on how to achieve the type of returns that you seek on those maybe lower volumes and developing markets? Is there something you can do maybe in the near term to right-size the cost structure in those units?

Sure, sure. Like I mentioned, we have a lot of stores that are in that $3.5 million to $3.7 million numbers and we are going to take all of those stores as our best practices to help us with our new or emerging stores at the proper time in their growth spurt through their honeymoon period. But we have plenty of examples of how to be very profitable in those areas.

Got it. And then, I guess as it relates to the guidance, that's a fairly big change versus what you're thinking three months ago, and I know part of that's through cost. But I guess the question on the labor side is, what specifically was the issue that caused the surprise on the labor side? Because it sounds like that's quite a bit higher than what you were thinking three months ago.

Well, for the third quarter, we definitely had it in there, but basically at the end of the day it was the new stores volumes and more specifically about the 13 stores. When you look at our indexing quarter going down in the third quarter and then our worst quarter in the fourth. So that's what most of it was right there. So that's basically the new store volumes that we (technical difficulty) stores.

And don't forget, Jon, David, also that when we have opened our new stores, all of 2014 stores, as we've mentioned many times before, it's a full-year ramp up on labor when we do everything from scratch in our stores and all our cross-training and so forth.

Got it. Thank you very much.

Thanks.

Thank you. Will Slabaugh, Stephens Incorporated.

Yes, thanks, guys. Wanted to ask about the 2014 stores. It sounds like those are still off to a pretty good start and I know last quarter, you had referenced those as being somewhat similar to your 2011 and 2012 class of stores. So wanted to kind of come back and circle around and double check that was still the case and you're still pretty pleased with the trajectory of those stores. And then, I had a follow-up after that.

Yes. David, as I mentioned to you earlier, right now, there are --

Will.

Will, I'm sorry, Will. As we mentioned to you before, we were pleased of beating the $4.2 million right now. The key to the 2011 and -- 2010, 2011 and 2012 stores is that there was (technical difficulty).

(technical difficulty) around these, the newer markets that are currently opening is a little bit softer than what you've seen historically. Are you planning for those to kind of open up at similar levels? How should we think about modeling that going forward in terms of -- should we think about the newer stores going forward that aren't in the core market as being a $3.5 million to $3.7 million type store.

Well, that's what I think goes back to David's question earlier about the evolution of the new store model. Again, we're learning that every single day how, what's evolving, but we probably as in the out-of-town markets, where you don't have core markets, i.e., Texas, it will definitely be less than the $4.2 million, I would say.

Got you. And the last question from me in terms of the guidance and in trying to get there for 4Q to get down to the new guide. Is there any material change in quarter-to-date trends at the top line that drove that as well or is it mainly just around the efficiencies and in cost of goods sales spiking up on you a little bit?

We have efficiencies in the cost of goods sales, exactly that.

Okay. Thanks.

Thank you.

Thank you. Andy Barish, Jefferies.

Hey, guys. Is there a way to kind of I guess look at those two buckets that you've finished up on there, Steve, the higher inflation on food cost versus the inefficiencies in terms of the impact in the 4Q? Is it roughly equal or do you have enough detail on that to share with us?

I think --

I'd say it's roughly equal.

Yes.

So --

Okay. And then, I guess what historical data points kind of give you confidence as you add second and third stores in a market that may have started out slow I'd say a Kansas City, is it similar to what you saw in Nashville or can you give us a little comfort on that when you build brand awareness and you build more stores, it actually raises the volume of all the stores, it's not chipping away from that original store?

Yes, absolutely, Andy; and obviously, our strategy is, when we go into a market as a dominated in the number of units and the volumes without cannibalization when we add stores. An example would be, back in 2010-2011, we had the Louisville, Lexington, stores that started rather shy of our AUV average on our new store model. Those two now are -- one is leading the Company in same-store sales in double digits currently right now and that's the Lexington store; and Louisville store is moving up and we're having real nice comps in both of those stores, but that's an example. And also, from my past, Andy, where you looked at a similar-type model on growth model, I was always better off as I've built out the market and had more awareness. So, that's most it. But I could give other examples.

Thanks. And then, just one final thing, Jon, on the food cost basket, unless limes go crazy again, that was a big number in the first half, 70, 80 BPs, what are you seeing currently? You mentioned produce, is it tomatoes or -- and then should that look better in the first half, getting some of that lime increases back in 2015?

It's just, look, but remember the lime has kind of increased right at the end of the first quarter, so it should look a little better in [2000] in the first quarter. What we're seeing produce is up about 5% already in the fourth quarter. So we're seeing a pickup and most of that you're correct is in tomatoes and also lettuce.

Yes, lettuce is kind of all rusty and it's real, real light and it's expensive. So it's kind of a perfect hit on that type of stock.

But we continue to see the cost pressures also in chicken, in beef and also dairy although chicken has come down a little bit in the last five weeks.

Okay, thank you.

Thanks.

Thank you. Chris O'Cull, KeyBanc.

Thanks, guys. Jon, on the last call, you had seen kind of three quarters where the 2013 opening class had clearly pressured labor costs, but you seem pretty confident that labor would be up only slightly in the back half of the year. So I guess I'm trying to understand what changed or what happened or what were you expecting to happen to this 13 class in the back half here?

Well, a couple things; one, I was expecting kind of our Labor Day to ratchet down a little more, we were expecting the sales to kind of flatten out versus go down with kind of the normal trends with some of the sales initiatives that we were doing in those stores, but we saw the normal drop-off going back to school as the other ones. And the third thing was even though we were looking and analyzing a price increase during our call, I had factored in because I was looking at the cost of sales and factoring a little leverage in that price increase, which we got very little flow-through in that price increase that we took during the third quarter.

And also, Chris, on the volumes that they were, we thought it would have a little bit better back-to-school time and it just followed the actual history. So that's another -- being a little too optimistic on the 13 stores.

Great. And then, you mentioned 33% of the stores are struggling with inefficiencies, I think in the release, which would equate to 18 to 19 stores which would be --

Now, that's not what I said, Chris. I'm sorry. If I misinterpreted or I said that, what I meant is that we have 33% stores are not in our -- they are not in our comp base, that's what I meant by that.

How many stores are really contributing to these inefficiencies?

I would say about half of them, half of them meaning that they're not hitting our $4.2 million model.

Half of the 2013 class?

Hmm.

Okay.

Yes.

Okay. Are there common factors that you can identify? Is it real estate? Is it --?

That's a great question. Now, as you look at it, Chris, obviously, it's evolving and as I told you the variability of our new markets. I'd be lying to you if we haven't learned things over the years. What we learned in Texas, whenever I built a store, you want good ingress, egress, but if it's a little difficult, they still find a way there.

As we move outside of Texas up into the Southeast, it has to be perfect, it has to be perfect ingress, egress; it can't be behind anything. It also has to have a full parking field, it can't have any garage parking which we've learned over the years that we've done; has to be on a major road and it's going to be in an A area. But we've been looking at that. But we've learned a few things. But as far as big markets, small markets, we've done well in the Little Rocks, the Louisvilles. And we've just recently opened two stores up in our major metropolitan market up in DC, which I'm really excited about. Those were the last two that we opened this year with the density in the urban areas up there.

So, we've definitely enhanced our real estate and development side. We've hired another gentleman in there; that [gentleman] is now the director of real estate and development that is continuing to evolve our -- the science to our demographic information, his name is Don and he comes from -- [to] Chuck E. Cheese's and he was there for 20 years. So we're learning stuff every single day, but we don't believe it's a site per se area issue.

Okay. So Steve, the ones that you do have a sales issue, is it possible to adjust a labor model in those restaurants to improve the margin and profitability of those stores or are you going to be required to just really increase the sales to improve the margin structure of those stores?

No, I think that it's both, but obviously there are ways. Like that was mentioned in my script, I think I said that we have stores that are out there that are doing $3.5 million, $3.6 million, that are making that 15% restaurant number and we believe we have a lot of best practices that we can work on and we're going to continue to quickly get those in line with the expectations of the more mature stores at that time.

Okay. Okay. Okay. Thanks, guys.

Thank you.

(Operator Instructions) Andrew Strelzik, BMO Capital Markets.

Hey, good afternoon, everyone. So based on the new guidance for 2014, we're looking at basically flat to down a little bit earnings and some of the issues that you've had this year, it seems like in terms of whether it's labor or cost of goods inflation are going to linger into 2015. So I'm just wondering what you can point to or what gives you the confidence that we're going to see an acceleration in terms of that earnings growth and any color around kind of the cadence to that and when you may see some of those things subside.

Andrew, this is Jon. I would say, in 2015, we're seeing some of the cost of sales hopefully towards the end of the year subside a little bit from what we're hearing dairy and chicken, but going into -- the beef will remain out elevated, but as we work through some of these issues and get the labor like Steve said, it's a year-long proposition of training the back of the house with this made-from-scratch food. So a lot of these stores will have that year and we can start doing the best practices of our stores that have those high margins in those lower-volume stores, and we believe that will turn around and basically set this new base to where we can grow from.

And also, Andrew, we're going into the fourth quarter which is our lowest comp base of the -- not comp base, average AUVs. First quarter, there is an uptick; and our best quarter of the year is always the second quarter as far as our AUVs which is significantly higher than the fourth quarter. So those are a couple other things that go with that.

Okay. Got you. And then, in terms of the G&A guidance, it's obviously only down a little bit from the earlier expectation. But I just wanted to understand are you pushing things out there or what's changed in that regard?

Well, I mean basically, what has changed is we are pulling down quite a bit of the performance-based bonus. So that's the biggest thing that's changed in that.

Yes.

Got it. Thank you very much.

Thank you.

Thank you. Nick Setyan, Wedbush Securities.

Hi guys, this is Colin Radke on for Nick. My question was just on pricing. You guys mentioned having pricing power, should import prices remain elevated? So could you look to take more than your sort of traditional 1% to 2% kind of range next year given what you're seeing with commodities?

This is Steve. A good question, Nick. One thing I did mention in our script is, obviously, over the last seven years, we've taken about 1.5% in price to 2%, and that's because we've been in a really good commodity place for the last seven years until this year. So that's what's really afforded me to be able to do that. And while I was doing that, people might have been taking a little bit more. So I think my value equation over the last seven years has even grown, it's getting bigger and bigger. So, we definitely have the pricing power to look at it. Usually, I do my price increase will be in February of 2015. Right now between now and then, I'm studying what's happening with the rest of the year in commodities, how it rolls into next year. Looking at my competitive base and I will take an appropriate one based on the commodities and my competitive set, but we have the opportunity to be higher than 1.5% to 2%, and it will be based on commodities and my competitive set.

Okay, thank you. And then, I guess my other question, your comps continue to be pretty impressive. Is there a certain level you think you need to reach in this kind of inflationary environment to kind of hold your margins?

Well, we've done pretty well with the 1.5% to 2%. But obviously in this inflationary environment, yes, I mean we would need to probably be in that probably the 2% to 3% or a little higher than that to maintain those margins in this environment. But like I say, we're hopeful that that will subside a little bit next year and will get back into a more reasonable inflationary period.

And then, going back to your first question, the same applies.

Okay, thanks very much.

Thank you.

Thank you. Paul Westra, Stifel.

Great. Thanks, good afternoon.

Hi, Paul.

Good afternoon.

Just want to follow up on some of the questions already asked. Just with respect to the second half, still have a margin outlook, it sounds like you essentially reduced it by close to 200 basis points from your prior guide at the store level; and deducing that, your comp base obviously had very good comps and a good margin increase. So just want to make sure I'm getting it right that the vast majority of that guide down is just coming from the class of 2013 stores and maybe just a half or so that's not below 4.2%. And if so, just looking at those stores seem to be maybe with negative cash flow margins or am I missing something on trying to delineate down where the trouble is coming from?

No, at the current point in time, you're absolutely right. There are a few that are pulling it down and are negative cash flow currently.

Okay. And then, when you talk about the evolution of the model, now, you've seen some of these stores I guess pull down. And so I guess in hindsight, would you have -- if you had -- [attack] me this evolution of the model commentary, just is it -- just because you maybe could be more aggressive on the labor side to prepare for it? I'm just trying to in fact to get out at your efforts to make those stores I guess more profitable at lower volumes when they're in this nascent stage of development?

Well, the big thing is time and getting in there using our best practices of the stores that are already there, that are a little bit more mature, to give them a better stair-step on how to get very, very profitable; and we expect to make good money at those numbers. So this is just basically on where they're in their life. As I mentioned to you earlier, it takes a full year in our stores to bring our labor down to when it's efficient from my mature store and a lot of those are in the middle of that stuff.

Okay. And then, a follow-up question on the same-store sales guide or the implied one for the fourth quarter to trying to back into what that guidance is for the fourth quarter. It looks like the guide is somewhere around 1.5% or 2% which would be sequentially down for the fourth quarter. We've seen elsewhere, overall trends pick up. I just want to make sure I'm also getting that number correct. And if so is there a function of some new stores coming to the base that are adding a little more headwind than what happened in the third quarter?

Actually, the imply is -- I believe if you do that calculation, the implied is somewhere between 1.8%, 2.7%, I believe. So, that's the implied rate there.

And it was a good question and also it is important to note that we had about a 0.9% headwind of the stores that ended in the second and third quarters. So it's actually a little bit better than that.

Okay. And I think it was asked, but apologize for reasking them. When could you revisit additional pricing opportunities?

It will be February. Beginning of the second period of 2015.

Okay, great. Thank you very much.

Thank you.

Thanks.

Thank you. Bryan Elliott, Raymond James.

Hi. I just would like to clarify a couple of things that I'm not sure about. So we're focusing in on about half of the class of 2013 as being a real headwind. I don't think I've have heard much if any details on the class of 2014. Are they materially better on an AWS standpoint? Is it too early to tell because of the timing and the honeymoon curves and all of that? Or could you give us some feel for what your thoughts are on this year's class?

Yes. At the end of the day, it's a little too early to tell because we're just -- because the 2014 is gone, but as I said to you right now, they are moving ahead, they have beaten our expectations of the $4.2 million model as a group. As I mentioned to you, we're going into the fourth quarter, which is our lowest indexing quarter for AUVs. So we're expecting them to go down a little bit from where they're at and we probably expect them to settle at year-end is about around that $4 million number, which is a slightly below our $4.2 million model.

So would that be a run rate for the fourth quarter or do you expect them to be down on a full-year rate of $4.0 million versus $4.2 million annualized rate today? I don't understand quite that big difference.

That would be settling at its normalized rate of $4 million.

Okay. Even though they are running on $4.2 million now. So that's --

No, they're running in excess of that, Bryan. (inaudible). Go ahead.

Go ahead. Go ahead. I'm sorry, go ahead.

Yes. So they are running in excess of the $4.2 million right now. So, they are running in excess of that. And so, we expect them when they settle down to the normalized level after the honeymoon to be somewhere in that $4 million range or a little under.

Alright. And that's I guess a function of fourth quarter index, seasonality, I guess the drop-off is pretty substantial, it's 10% or more sequentially, looking at history, isn't it?

Yes, it is. But we've opened up some strong stores here in the latter part of the third quarter and then here in the fourth quarter. We've been very pleased with those openings.

Right. So outside of Texas, Atlanta and now two stores in Northern Virginia DC market are kind of your big urban -- dense, urban markets and a lot of the class of 2013 if I recall correctly were kind of been in smaller markets. So maybe could you speak to what you're seeing? I know it was very early in DC and continued penetration into Atlanta to get a sense of how it works and sort of prosperous growing metropolitan areas.

Sure, Bryan. Atlanta is a tough market and it's been a tough one for us just to get in and penetrate. We've been there for a few years and we finally got our second store in Kennesaw just a couple quarters or a quarter ago. And that one is a little bit different and those ones are not as high as what we believe the ones in DC are. DC, it's really too early to talk about, but we are extremely excited about both our units that we've already open there. One was in Fairfax, where we actually remodeled a smaller building actually, it's only a 6,500 square foot building. And we're really, really pleased with that store and its volumes and how efficient that little building is, something that we'll look at moving forward on that little building moving forward in other markets.

And then, we also opened one just a week ago in Springfield, right outside of DC; and we're really excited about our first week there, but it was a very, very strong opening. The acceptance level, the sophistication of the market, all the demographics that it meets, it meets us much stronger than the Atlanta market and it's definitely shown out even on their initial volumes.

Alright. Thanks a lot. Appreciate the color.

Thank you.

Thank you. And with no additional questions in the queue, I'd like to turn things back over to management for any additional or closing remarks.

Okay. Thank you, again, for joining us this afternoon and we look forward to speaking with you in the future. Thanks, again.

Thank you. And again, ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.