Chuy's Holdings Inc (CHUY) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to the Chuy's Holdings Incorporated first quarter 2015 earnings conference call. As a reminder, today's' conference is being recorded.

(Operator Instructions)

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 2015 earnings release. It can also be found on 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 risk 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.

With that out of the way, of the day, I would like to turn the call over to Steve.

Thank you, Jon, and thank you everyone for joining us on the call today. We are pleased to have begun 2015 with solid financial results, which included earnings per share of $0.19, an increase just shy of 19%.compared to last year. Additionally, our comparable store sales increased a solid 1.9% during the first quarter, despite the effects of winter weather that negatively impacted our comparable sales by approximately 2 percentage points.

During the quarter, we continued our focus on initiatives to drive sales and improve margins, and we are pleased to see our initial progress related to cost of sales and labor, particularly in our non-comp stores. We have emphasized zero-based management of our production sheets and rolling ordering guides to better control our cost of sales. And we have implemented scheduling best practices and managing staffing levels based upon volumes to maximize our labor productivity. We'll continue to implement these initiatives throughout our system during the second quarter to augment our day-to day-store level execution.

In addition to our margin-enhancing initiatives, we believe our enhanced local store marketing and branding designed to highlight our key strengths and points of differentiation are beginning to gain traction as sales drivers. As we continue to fill out smaller existing markets in 2015 and beyond, and brand awareness continues to improve, we believe we'll see a corresponding improvement in AUVs.

Switching to development, we opened three new Chuy's restaurants during the first quarter, in Southlake Texas, part of the Dallas Metroplex, our second Little Rock, Arkansas location, and our third Orlando, Florida location. Subsequent to the end of the quarter, we opened our fourth new restaurant in 2015 in Dayton, Ohio.

We are still on plan to open 10 to 11 new Chuy's restaurants this year, and our 2016 plan is already shaping up nicely. We continue to focus on getting to larger denser markets more quickly, as we grow our restaurant base. While we are still staying on the same geographical footprint that we've historically discussed, we will make a quicker leap into major densely populated markets like Chicago and Southeastern Florida, similar to our entry in the DC market.

Although our focus is on larger markets, we'll continue to backfill the existing markets, which we believe will provide a boost to awareness and branding in those markets. We continue to believe we have a huge runway for growth ahead of us.

Now I would like to turn the call over to our CFO, Jon Howie, for a more detailed review of our first quarter results.

Thanks, Steve. Revenues increased 19.4% year-over-year to approximately $66.8 million for the first quarter ended March 29, 2015. The increase included $10.4 million in incremental revenues from an additional 142 operating weeks, produced by 14 new restaurants opened during and subsequent to the first quarter of last year. We had a total of approximately 786 operating weeks during the first quarter of 2015.

Comparable restaurant sales grew 1.9% during the first quarter, driven by a 3.3% increase in average check, offset by a 1.4% decrease in traffic. We estimate that the severe winter weather negatively affected approximately 4 out of 13 operating weeks in our Texas, Oklahoma, and Southeast markets, which as Steve noted negatively impacted comparable restaurant sales by approximately 200 basis points.

There were 44 restaurants in the comparable base during the first quarter of 2015, including 3 new restaurants added to the base at the beginning of the quarter. We consider restaurants to be comparable in the first full quarter, following 18 months of operation. As a reminder, our restaurants can open at volumes greater than their normalized run rate. In the case of our strongest openings, the honeymoon period may last longer than the 18 months we allow before a restaurant enters into the comp base.

Given the small number of restaurants currently in the comparable base, the timing and strength of new unit openings may create a short-term head wind in our comparable restaurant sales growth in some quarters. To date, that headwind has typically our reduced our comparable restaurant sales growth by about 50 basis points to 120 basis points in any given quarter.

Switching over to expenses, cost of sales as a percentage of revenue decreased approximately 150 basis points year-over-year to 26.3%. The improvement resulted from the combination of lapping last year's inflationary spike in dairy and produce, which has now decreased to more normal levels. And the benefit from recent price increases taken in September of 2104, and in February of 2015.

While we are pleased with the year-over-year improvement, I caution you that we don't expect to see it continue for the balance of the year. Our second quarter chicken costs are expected to be up approximately 25% sequentially, due to an unexpected change in spec from our supplier, as well as an increase in market prices. We also expect increases in beef, and our limes have begun to spike again as well, although not -- although we don't expect them to reach the cost per case that we saw last year.

However, now based upon the current favorability in what we project, we expect to see overall inflation for 2015 between 0% and 1%, versus previous guidance of 1% to 2%. Labor costs, as a percentage of restaurant revenue decreased 30 basis points from last year to 33.1%. As Steve mentioned, we have made progress with our labor initiative, particularly at our non-comp restaurants, and we continue to focus on best practices throughout our system.

Restaurant operating costs as a percentage of revenue increased approximately 50 basis points year-over-year to 14%, largely due to increases in our hourly health insurance costs related to the Affordable Care Act and increases in Workmen's comp insurance. Occupancy costs as a percentage of revenue increased approximately 30 basis points year-over-year to 6.7%, driven by increased rent and property taxes as a percentage of sales in our newer locations, as we seek out more development in larger markets in the east and northeast.

General and administrative expenses increased $1.2 million to $4.1 million in the first quarter. As a percentage of revenue, G&A increased approximately 90 basis points year-over-year to 6.1%. The increase was driven primarily by an increase in compensation and long-term incentives of approximately $800,000, as we continue to invest our employees. And this amount includes staffing additions made during the last 12 months. G&A also included a write-off of scrubbed sites of approximately $100,000.

Depreciation and amortization expenses increased approximately $682,000 to $3 million, from a $2.3 million in the first quarter of 2014. The increase was driven by increases in equipment and leasehold improvement costs associated with new restaurants. Finally, net income in the first quarter of 2015 increased 22.9% to $3.2 million or $0.$0.19 per share, as compared to $2.6 million or $0.16 per share in the first quarter of last year.

With respect to our 2015 outlook, we are providing the following update to our annual guidance. Our diluted net income per share is now expected to range from $0.76 to $0.79, versus our previous range of $0.74 to $0.77. This compares the diluted net income per share of $0.69 in 2014.

Our net income guidance for FY15 is based in part on the following annual assumptions. Our revenue expectations, including comparable store sales increase of approximately 2.5% for the balance of the year. Restaurant pre-opening expenses are expected to range between $4.2 million and $4.7 million.

We expect G&A expenses to run between 14.8% and 15.3%, versus previous guidance of 14.5% and 15.0%. We expect our pro forma effective tax rate for the full year to range between 28% and 30%, and we expect our annual weighted average diluted shares outstanding of 16.7 million to 16.8 million.

Lastly, our development plans for 2015 call for 10 to 11 new Chuy's restaurants, of which 4 have already opened. One important note regarding our development schedule, while we had originally expected a relatively even opening schedule during 2015, the change in our development plans to focus on larger markets, and its effect on specific 2015 site decisions, and inclement weather we've experienced during the construction of some of our new locations, will result in a more backend-loaded schedule than we had anticipated. Our capital expenditures, net of tenant improvement allowances are projected to be approximately $27.5 million to $30 million.

Now, I'll call -- I'll turn the call back over to Steve to wrap up.

Thanks, Jon. In close, we are pleased with the start of 2015, and are excited about the short- and long-term prospects of our business, including the continued growth of our restaurant base, with sales volumes and returns well ahead of industry norms. Our freshly prepared cravable Mexican-inspired offerings, tremendous value and energetic atmosphere has led to industry-leading average unit volumes, and a long history of same-store sale growth.

We continue to tackle the near-term challenges. We believe that the sales-driving and operational-enhancing initiatives put in place, along with the continued backfill of these developing markets will drive those results towards the Company's average. We are using the learnings from all the recent openings to optimize our new unit model going forward.

Before I turn the call back over to the operator for questions, I'd first like to take a moment to thank all of our Chuy's employees. Our success has always been a testament to their hard work and dedication to earn the dollar every single day.

With that, we are happy to answer any questions. Thank you.

(Operator Instructions)

We will take the first question from Will Slabaugh with Stephens Inc.

Yes, thanks. I had a question on the same-store sales. We heard a number of the peers reference that, obviously you saw a pop in January, subsequent slow down. And then, a few of the Texas exposure even talked about things kind of ticking back up a bit, as the weather compares got better into April. So I don't know how much you would care to comment on what you saw throughout the quarter, and then anything quarter-to-date you care to comment on?

Hi, Will, this is Steve.

Throughout the thing, we finished last year kind of around [3%] and it has kind of stayed pretty much right around there, except for the weeks that we had the weather, which was really around [8%], [9%], [10%], and a little bit around, just week two at the beginning of the year. So we've been pretty consistent throughout the whole quarter, except for those particular weeks.

Got you. That's helpful. And then another question if I could around that, the new units and then the margin improvements that you are seeing there. You referenced some definite improvements you are seeing around the labor line. So I am just curious, along the bigger picture line of improving these newer lower volume units to get to that mid teens margin over time, how you feel about that progression? If what you are seeing now, gives you more confidence that you are going to get there, over a certain period of time?

I do. I'm very confident. But I think what we originally told everybody, is some of these labor improvements really stayed maybe a little flat, to even a little bit higher in the first half of the year, and then some reduction in the second half of the year. So I have been pleased with our guys on the best practices within that, of jumping out there a little quicker than I kind of expected. But by the second half of the year, we should still do what we guided for the second half of the year.

Great. Congratulations.

Thank you.

We will take our next question from Jeff Farmer with Wells Fargo.

Great, thanks. Just actually following up and drilling down a bit on the labor. So considering that you did see that 200 basis point weather headwind, how good could have weather been -- or I'm sorry, could have labor been, had you not seen that weather headwind? Could it have been much more favorable than what you saw?

Yes. I think we might have done a little better, but I tell you what. I think my operators out in the field, and the supervisors really did a nice job of dealing with it. One thing about weather, the weathermen were pretty accurate the first quarter.

So we did the really nice plans, and it just happened to hit us a lot on the weekends, but I think we had real, real good plans in place. So maybe a tiny bit, but not much.

Okay. And then, you hit the back-ended unit openings. Anything more specific than that by quarter that you can provide?

Sure. Well, like we said on the first call, or to start the year off, we thought it was going be more evenly spaced during the year. But in the Q2, we're only going to open one unit, and then we'll open three in Q3 and Q4. So it is more back loaded, given we're not going to have any more than one in Q2.

Okay. And then just last, completely unrelated question. I was just looking at your unit map, and I know that Nashville, that market is not a great proxy for some of those higher population density cities like DC and Chicago, but it is a good-sized market. I think you have four restaurants there, pretty close approximately. The question is how does that concept perform in a market like this?

Do you see, or did you see average unit volumes grow with brand awareness? Is there a good case study there, that you can share with us, as you begin start to move into markets like DC and Chicago?

And we are mentioning, Nashville, did you?

Yes, Nashville.

Nashville, we got off on a good pop there. But obviously, as we have grown the market, I think I originally scaled it to three, and we have four there now. And as a market, they act pretty much like any of our Texas stores. They average over a $5 million AUV in the whole market as a group, so we are pretty pleased with that.

Okay. Thank you.

You're welcome.

And we will take our next question from David Tarantino with Robert W. Baird.

Hi, good afternoon. My first question mainly, well, my first question is related to the guidance for this year. Jon, can you talk about the factors that are driving the increase in the guidance? Is it overperformance versus your expectations in Q1, or is it something related to the outlook, or some combination of both of those?

It's really a combination of both, the overperformance in Q1. In the back half of the year, we haven't changed our guidance all that much other than, back-end loading of the store openings. And then, having a little more favorable cost of sales that we've seen in the first quarter. But like I guided, I don't anticipate that coming, or continuing on at that level. But I do expect a little more favorable in the back, than what we saw in -- I mean, than we saw last year.

Got it. And on the Q1 overperformance, can you give us some sense of what -- what portion of that was related to maybe the commodity inflation settling in, versus some of your initiatives to drive better margins for the non-comp units? Is there a way to talk about the contribution to the overage of those two buckets?

I haven't really broken those out per se, but we -- some of that commodity increase, or I should say the cost of sales performance was based on some of the initiatives we had in place, as well. But as far as the labor, as we said earlier or to start our guidance out, we were expecting labor to be flat to slightly up. So most of that was all overperformance in that area.

Got it. Sounds good. And then, on the cost optimization initiatives, I think there was a reference to managing food costs a lot better. Was there -- is there anything there that you can share in terms of that impact in the first quarter, and for the rest of the year?

Yes. And again, as Jon just said, the commodities definitely was a plus for us. But some of the things that we were looking at, was based on historical sales and inventory management, and specifically waste management, and just awareness and fundamentals in our operation. And I am very, very pleased, as a group of dealing with the best practices, high to low in sales increment categories, that we have gotten much tighter.

And we've always been rather good at that, but we've even gotten a little bit better in the first quarter. And then, obviously the bigger one is the quick push into the labor efficiencies through the best practices. And again, how we are doing that is just really looking at like $50,000 increments of sales volumes, putting them into a category, and using best practices on schedules.

To go back to the cost of sales, we were expecting flat inflation to maybe a little down in the first quarter, and then it going back up, to get to that 1% to 2%. And we were actually down a little over 2% in the first quarter, quarter over quarter.

Got it, okay. Great. Thank you very much.

Thank you.

And we will take our next question from Andrew Strelzik with BMO Capital Markets.

Hey, good afternoon, everyone.

Hi, Andrew.

Could you talk more about the chicken supply issue that you were talking about? And how long is that going to take, the 25% step-up sequentially? How do we think about that in terms of duration, and how long does that take to work itself through?

It is basically a -- the change in spec, you're talking about?

Yes, exactly.

We are working through that issue right now. The market has been up a little bit. We are thinking that it probably will take three or four weeks to work through that, or maybe at least a period.

Yes, it will take a full period. And then, at the end of the day, right now chicken is going up anyway, because it's going into the summertime with the cookouts and so forth, and that's a normal trend year in, and year out. But no, it will be a small blip, probably for four to six weeks.

Okay. And then, when you think about marketing in some of the denser markets, is there anything that you are planning to do differently, or that you think you need to do differently versus what you've done in some of your legacy markets? Or is it pretty much the same game plan going forward?

It's again, as we've mentioned to you, that's evolving. It is constantly evolving, as we go into every single new store and new market where we add on some best practices. But as far as a leap into major media, no. It's all going to be still at a local level, and it's going to be definitely about our charities, and getting on some with our -- really talking about going to a new markets, with new managers in those markets, but really, really getting our message of our defining differences out.

As you know, we always get a local PR firm, and we start our PR a good six months before we ever go into a opening. We've actually changed our direction from a 10-mile radius to more of a 30-mile radius. So we are enhancing that as we go, but there will be no major marketing.

Okay, great. Thanks a lot.

You're welcome.

(Operator Instructions)

We will take our next question from Andy Barish with Jefferies.

Hello. Nice job on the labor. I guess, it surprised me how quickly -- is it a factor that you tell operators to focus on something, and they are really good at focusing on something, and maybe pushing it a little bit too far? Or do you think this progress can continue through the rest of the year?

Andy, that's a great question, and what we do is very balanced. If you know anything about us, we've always had the binoculars on, right, and sales is a fix-all for anything. So that is going to be our main emphasis that we chat about every single day.

What we've done really, is just we reacted quicker. As you know, we really started these initiatives, about the last period of last year. But we just took it all in, where we all had meetings, and we really all got in a great game plan, and had all our general managers and our supervisors buy into understanding, that if you are overproductive or underproductive, the same thing happens to you, you have sales decreases.

So we really balanced it through our best practices of scheduling, and we jumped into it a little quick, and I was very, very pleased with the operators on that. But make no mistake, it is always a balance to drive the top line, and that is our main, and always will be our number one focus. And as you said, we planned to add a little bit in the second half, and that's included in our yearly guidance.

Okay. And then, hey Jon, I guess, on the 2013 class, some of which are entering the comp base, can you just give us a broad brush stroke on how those stores are acting? Do they actually have a honeymoon headwind here in the first quarter, or are some of those stores starting to grow and reduce that headwind?

There was still a little headwind associated with those. It is a little smaller. If you were to look at the headwind, it was about 50 basis points. So it is on the low end of our range, but we're definitely not seeing a tailwind yet.

And how much do you think limes helped in that first quarter, Jon?

(Laughter). That's a great question. So I mean normally, those run about $20 a case, and they have spiked recently at about $50 to $60 a case. But as you know last year, it really -- it really straddled the quarter, quarter one and quarter two, and it went up to about $120 a case. But I don't have that at my fingertips, but if I was to have to guess, I would say probably 20 basis points.

Thanks.

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

Thanks. Good afternoon.

Hi, Chris.

How much of the labor -- well, Jon, it sounded like maybe labor benefited 30 to 50 basis points from changes to the non-comp basis labor plan. Is that true? And then, also is -- should we expect that type of improvement going through the rest of the year?

Well, we had, like Steve said, we have got the benefit a little earlier than we thought. We still have the improvement already baked in the back half of the year. But as far as, we did see some improvement on the comp stores as well, but a significant improvement on the non-comp stores.

But for example, the second quarter, I mean, should we assume that is going to be down year-over-year?

Sequentially, I would say sequentially from the first quarter, it would be flat to down, and flat to down over the first quarter. But I wouldn't see it being substantially down at this point.

Okay. And then, can you help us understand the non-comp store margin in the quarter? And then what trend it's running at to, maybe for its first year, the store's first year?

As far as 2013?

No. The stores that have been open the last 12 months, what trend are we seeing in terms of margin for those stores? Is it mid-digits, high single-digits?

Well, we are seeing those trends like our new -- we are hitting those trends like we talked about on our new prototypes. So in the second year, we are starting to see the low double-digits. In that first year, we are starting to see those high-single digits.

Okay, great. And then, can you remind us how much pricing is going to be in the menu the remaining quarters? Assuming you don't (inaudible).

Well, if you were to look at the pricing in the first quarter, it was about 2.5%. If you weight it for the whole year, it will probably is going to end up right around 2.8%.

Okay. Great. Thanks.

And we will take our next question from Nick Setyan with Wedbush Securities.

Hi, gentlemen. Thanks for taking my question. Jon, you mentioned that you continue to expect the comp base -- stores or the stores entering the comp base, is to remain a little bit of a headwind to the comp. With the class of 2013 entering the comp base, could we actually start seeing that turn into a tailwind?

Well, at this point, I mean, there is some still running that normal honeymoon curve that we've seen. And so, I don't think it's going to turn into a tailwind. But like I said earlier, I do think it's going to be less of a headwind than we've seen in the past.

Yes, the key thing on the 13 stores, as we've continued the growth in our 2014 and 2015 stores as you know, we are doing 80% of our stores in existing locations where we have stores already. The more awareness we get in, we do expect them to move. But it is just time getting the stores into those markets.

Right, which kind of leads me to my other question. Maybe you can kind of talk about the Little Rock and Orlando stores in Q1, relative to maybe the early experience in 2014 -- class of 2014, relative to 2013. I mean, we are clearly seeing the operational efficiencies take a hold. Can we start seeing maybe some of these newer openings reach some targets, or even the EBITDA margins even higher than say, high single-digits in year one?

And then, going forward, it seems like you are changing or made some changes to the opening cadence, perhaps with that under consideration? So again, can we see us seeing efficiencies reaped a little bit sooner than we have seen previously?

Well, again, we talked about a blended rate, and that is our target, those high single-digits in the first year. And then the low double-digits in the second, and then getting up to that 16%. Because as we've backfill those smaller markets, we expect those to be lower than that 3.7%. So depending on the mix of the stores, you could see that vary from quarter to quarter, up and down. But our overall targets are those that we suggested, and we are hitting those currently.

Just to be clear, it is like your year three, plus the margin target, that 16%?

Yes.

Thank you.

You're welcome.

And we will take our next question from Paul Westra with Stifel.

Great. Good afternoon. Just a follow-up question on your cost of goods sold, just trying to maybe get a better gauge of how sequentially from 1Q to 2Q, or for the remainder of the year. Should we be looking for the basket to be up another 3% to 5% sequentially? Or I'm just trying to see what that, bouncing off that one quarter low might look like?

Well, we are looking at it -- in the back half of the year averaging right around the, like 2% in place.

On a year-over-year basis?

Yes.

And the second quarter being slightly above that, given the chicken and lime impact?

Yes.

Okay. That's helpful. Thanks. And on the Workers' Comp and insurance on the operating income expense line, you said that was most of the 50 basis points headwind. Is that going to be a comparable headwind, that level the rest of the year, or is some of this up-front accruals?

No. The Workers' Comp was really kind of a one-time deal. It was a retro adjustment, if you will. However, the ACA is still, like I think we said in the guide, that is probably going to be right around $500,000 or $600,000. So it is going to be about 20 to 30 basis points, 20 to 30 basis points is what we are seeing in an increase on a year-over-year basis.

Great. Okay. That's the only questions I have, thanks.

Thanks, Paul.

And we will take our next question from Robert Derrington with Wunderlich Securities.

Yes, thanks. Jon, just a couple bookkeeping questions for a second. On D&A, it drifted a little bit higher as a percent. I'm just wondering whether that was related to some of the underperformance, or is it a little bit higher asset base, as you're opening new stores? How should we think about that?

On the D&A -- the depreciation?

Yes.

It is really kind of a -- just an increase in new stores and higher asset base.

Okay. Are the new stores costing a little bit more? Are they still within the previous framework?

They are still in that frame of anywhere from $2 [million] to $2.3 [million].

Okay.

But that is net, Bob. The deal is, we've got a little more TI dollars this year, that is bringing that down. So your gross cost is up a little bit.

Okay. All right. And then just on the pre-op, it looks like pre-op came in nicely, lower than expected this past quarter, somewhere in the vicinity of $370,000 approximately. Any kind of a thought there? Are there something going on there that we should think differently as we go forward?

No, I don't think so. I mean, it was similar to last year, and we opened up the same number of stores as we did last year. So it is pretty consistent. We are looking at that $375,000 to $425,000 depending on when we get access to the store, and how much straight line rent we have in there. Got you. Very good. Great quarter. Congratulations.

And this does conclude our question and answer session for today. I will turn the call back to management for additional or closing remarks.

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

This does conclude today's conference call. Thank you again for your participation, and have a wonderful day.