Chuy's Holdings Inc (CHUY) 2015 Q2 法說會逐字稿

Good day everyone and welcome to the Chuy's Holding Incorporated Second Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, all participants will be 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 will 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 second quarter 2015 earnings release. It can also be found on our website at ww.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 conditions.

With that out of the way, I'd like to turn the call over to Steve.

Thank you, Jon, and thank you everyone for joining us on the call today. At a high level, we are pleased to see our operating momentum continue into the second quarter. Highlights from our financial results included a 3.2% increase in comparable restaurant sales, a 19% increase in revenues and a 52% increase in EPS to $0.32 per share. And in addition to solid revenue growth driven by new unit growth and our 20th consecutive quarter of positive comparable restaurant sales growth, we saw continued improvement in our restaurant operating margins as a result of better than expected food costs and increased labor-related efficiencies gained from internal initiatives.

Our margin improvement in the quarter is a direct result of the hard work and dedication of the entire team, as they execute on these initiatives, as well as the ongoing consistency of our business driven by improved habits and routines.

With regard to our labor initiatives, we continue to benefit from our labor scheduling best practices and manager rationalization plan at not only our lower volume stores, but all our stores, which we have completed earlier than originally planned. While we are seeing some labor margin improvement at our comparable restaurants, we are seeing a much larger improvement at our non-comparable and lower volume restaurants.

While we are very pleased with our progress during the first half of 2015, I would caution you that as we have now implemented the majority of our major initiatives, we would not expect to see the same magnitude of improvement year-over-year in our restaurant operating margins during the second half of the year. Additionally, I'll remind you that the back-end loaded nature of our 2015 development schedule will likely result in increased inefficiency in our cost of sales and labor lines during the second half as well. We will however as always continue to look for ways in which we can continue to improve our business.

Switching to development, we opened one new Chuy's restaurant during the second quarter in Dayton, Ohio. Subsequent to the end of the quarter, we opened one new restaurant in El Paso, Texas. To-date, we have opened five new restaurants during 2015 and I'm very pleased with the performance so far. 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 into larger, denser markets more quickly, as we grow our restaurant base.

We are currently focused on the same geographical footprint that was historically discussed, we will make a quicker leap in the major densely populated markets like Chicago and Southeastern and Florida similar to our entry into DC market, which includes our openings in Fairfax in Springfield, Virginia. Although, our focus is on larger markets, we will 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 19.1% year-over-year to $75.4 million for the second quarter ended June 28, 2015. The increase included $11 million in incremental revenues from an additional 133 operating weeks, produced by 12 new restaurants opened during and subsequent to the second quarter last year. We had a total of approximately 816 operating weeks during the second quarter of 2015. Comparable restaurant sales grew 3.2% during the second quarter, driven by a 3.9% increase in average check offset by a 0.7% decrease in traffic. There were 46 restaurants in our comparable base during the second quarter of 2015, including two 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.

Turning to expenses, cost of sales as a percentage of revenue improved approximately 210 basis points year-over-year to 26.3%, primarily resulting from the combination of lapping last year's inflationary spike in dairy [lines], which has now decreased to more normal levels, as well as the benefit from recent price increases taken in September 2014 and February 2015. As we noted on our Q1 call, we were expecting higher prices in chicken lines and other produce, as we moved into the second quarter. While we did see price escalation in these items, it did not occur to the extent expected. For the first half of 2015, we have experienced commodity deflation of approximately 4%. Looking ahead, we expect continued deflation in the back half of the year but on a more modest basis, plus we expect cost of sales inefficiencies related to our second half opening schedule. As a result, we expect our full year 2015 cost of sale as a percentage of revenue to range from 26.7% to 26.9%.

Labor cost as a percentage of restaurant revenue improved 90 basis points from last year to 32% as we benefited from labor initiatives and manager rationalization in all stores but particularly in our non-comparable stores. Keep in mind that our second quarter is historically our highest indexing sales quarter and therefore our most efficient from a margin standpoint. Similar to our cost of sales, we also expect that labor margin benefit from our current initiatives will be partially offset in the second half of the year due to the concentration of store openings during the end of Q3 and into Q4. As a result, we do not expect the same magnitude of year-over-year labor margin improvement going forward that we had in Q2. Restaurant operating cost as a percentage of revenue improved slightly by 10 basis points to 13.5% largely due to decreases in liquor taxes as we build more stores out of our taxes and travel related expenses, partially offset by an increase in insurance cost related to the Affordable Care Act. Occupancy cost as a percentage of revenue increased approximately 50 basis points year-over-year to 6.5% driven by higher rental expense and property taxes as a percentage of sales in our newer location, as we continue our expansion in larger markets in the East and Northeast. General and administrative expenses increased $1.4 million to $4.3 million in the second quarter. As a percentage of revenue, G&A increased approximately 110 basis points year-over-year to 5.7%. The increase was driven primarily by an increase in performance-based bonuses, stock-based compensation and legal expense in addition to investments in new employees.

Pre-opening expense during the second quarter of 2015 was approximately $700,000 compared to approximately $1.3 million in last year's second quarter. This lower expense was primarily the result of opening only one store during the current quarter versus three during the same period in 2014. Our 2015 development schedule is more back-end loaded this year and we expect our pre-opening expenses to increase in the second half of this year including approximately $1.3 million to 1.4 million in the third quarter.

Depreciation and amortization expenses increased approximately $0.8 million to $3.2 million from $2.4 million in the second quarter of 2014, primarily driven by increases in equipment and higher gross leasehold improvement costs associated with new restaurants.

Net income in the second quarter of 2015 increased 55.9% to $5.4 million or $0.32 per share as compared to $3.4 million or $0.21 per share in the second quarter of last year.

Finally, we ended the quarter with $7.6 million of cash on the balance sheet and no debt as compared to $6.8 million of cash and debt of $8.5 million at the end of the first quarter of 2015, a positive net cash swing of $9.4 million during the quarter. Based on our performance in the first half of 2015, we are revising our annual guidance with diluted net income per share of $0.82 to $0.85 versus our previous range of $0.76 to $0.79. This compares to the diluted net income per share of $0.69 in 2014.

Our net income expectation for fiscal year 2015 is based in part on the following annual assumptions, comparable store sales growth of approximately 2.5% for the balance of the year; restaurant preopening expenses of approximately $4.2 million and $4.7 million; we now expect G&A expenses to run between $15.8 million and $16.3 million. Our pro forma effective tax rate for the full year to remain between 28% and 30%. We continue to expect our annual weighted average diluted shares outstanding of $16.7 million to $16.8 million. Our development plans for 2015 remain on track with 10 to 11 new Chuy's restaurants of which five have already opened.

Lastly, our capital expenditures net of tenant improvement allowances are projected to be approximately $27.5 million to $30 million.

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

Thanks, Jon. In closing, 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 favorable Mexican inspired offerings,tremendous value and energetic atmosphere has led to industry leading average unit volumes and a long history of same-store sales growth. We continue to tackle the near-term challenges. We believe the sales driving and operationally 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 recent openings to optimize our new unit model going forward.

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

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

(Operator Instructions) Jeff Farmer, Wells Fargo.

Just as it relates to the [COGS variabilities] on Q2 and even Q1, you did call out that commodity basket deflation, but I'm just more curious what role was played by that more sustainable cost control efforts across inventory waste and management, whatever else you're doing, I know there's more to it than just the basket deflation. So can you help us understand some of the efforts there to control costs beyond just the pure deflation?

Sure. And you are specifically talking COGS?

Yes, I'm sorry.

Yes. Again the real key thing what we did is, it really is simple as far as production sheets. What we do is we produce only for the shift and only the shift only and we're making things all the day. So it's really eliminated always with more fire, a closer look at all our forecasting is number one thing and obviously the inventory management is baked on that too. Also we definitely in the second half of the quarter, we had saw a nice little increase in our liquor mix and it's actually had some improvements in our liquor mix, so that definitely helps us in the cost of sales. And also if you guys remember about a year ago, a little bit more than that, we hired a R&B guy to run food and beverage for us and also purchasing and he's come in and just done a real nice job, won some contracts, whether they would be a beef bases or beans or oils, he has done a very, very nice job of bringing that. And I've got some low hanging fruit that he is taking care of a little bit in the first half of the year and that's the basis of it.

Okay. And then just a follow-up on that. So I know it's a difficult question to answer, but 210 basis points of COGS in the second quarter. Can you handicap sort of what's just pure commodity deflation versus a lot of these cost control efforts you've put out there. So is it maybe 50 basis points of that 210 basis points was driven by cost control, any help there would be helpful.

With Jeff, remember we're rolling over our line last year as well. And we've taken a little higher price increase this year than we have in the past, which is probably causing 50, 60 basis points of that as well. So those factors along with that is probably what's causing that 210 basis point favorability?

Okay, thank you.

You're welcome.

Will Slabaugh ,Stephens Inc.

Yes, thanks guys. Congrats on the great quarter. Wondering if you could talk a little bit about the class of 15 stores how they've opened up so far? I know a lot of those have been in some of your more core and a few in the larger markets, expect to see your commentary on around that. And then if you could give us any update on maybe how (inaudible) what you saw from the class of 14 early on, in the class of 13 early on to the kind of, I guess, compare and contrast what you're showing now?

Again, we are pleased with our (Technical Difficulty) again it's too early to really talk a whole bunch about them. But we're very pleased, they probably have opened a little higher than our 14 and 13 stores on the average, but we are very pleased and they're right on our target. So we are very excited about the five stores that have opened already and the rest of the ones for this year.

Great. And if I could just touch back on the 13 to 14 classes. I know that's where you've been doing a lot of work in terms of the labor and cost of goods, productivity initiatives. Can you touch on the labor side of things a little bit more, in terms of what you've done so far? You mentioned you felt like most of it is sort of in place already and that benefits should be a little bit less. Can you touch more specifically on what's been done and then maybe where we should continue to see a little bit of a benefit in the back half of the year?

The big things is the base productive standardization plan, which is basically really looking at the productivity and the best practices in every one of our restaurant based on sales increments, and using the best prices and schedules to be rolled back in and we really said that we'll take you probably through the third and fourth quarter to do that, we've actually jumped in and specifically in the 13 and 14 stores and rolled those back quicker and that's been the biggest impact. So those are in there right now, then obviously the thing on that is just ramping up the new stores quicker. Then opening up our 15, we've actually done a lot better as far as rolling the labor efficiencies and quicker and so should continue this year, and that might be adversely affected with them so bunched at the back half of the year.

Got it. Just one quick one on the weather it was pretty highly publicized news, the rainiest month in Texas history in May, so just curious if you saw any hit there to your sales?

We did well, I mean it's you not all that much to talk about, but it did affect patio sales, our patio sales are quite down, 35 basis points for the quarter. So we did have an impact but not as significant as what you would expect.

Chris O'Cull, KeyBanc.

Steve, in the past you guys have raised menu prices roughly 2% but I mean this year the increase has been significantly higher, does this reflect the change in your view of the likely pricing the restaurants will take going forward? And then if you guys could also give us kind of what you expect for pricing in the menu in the third and fourth quarter that would be helpful?

No, this year what we specifically did is during the September time in 2014 if you remember, we took a 1% and that basically was to cover all the cost of ObamaCare and then get ready for that. And then this one was around 2.5%, one we took in February, which is basically we've always been about 1.5% to 2%. I see us playing in that arena from here on out. The reason we did that, Chris, is we absolutely know what was going to happen to our meat this year. And meat was significantly higher as everybody dealt with it, that's why it was a little bit more. We feel we have plenty of room in our menu, but the key thing for me is return visits. So I really like playing in that 1.5% to 2% range every single year, Chris, and you'll see that as we move forward to 2016 and 17, so right around there. And this one was just a little higher, again because of what we knew on the meat side of business.

And Chris, on the last half of the year, we are expecting pricing to be around 2.8% to 2.9% the last half, obviously a little higher in the third quarter as we add -- you will have the full 3.5% but then during September is when that 1% rolls off that we took last September.

So you all don't plan to replace that September price increase with another one?

No, sir, again, that was a one-time deal really to deal with ObamaCare that came in and I just didn't want to -- the reason we did it in September and not add it on in February is I was scared of it going over at any time, one-time over 2.5% price in February.

And then Jon, how much, I think you said deflation was expected to be less in the third and fourth quarter, can you give us a little bit more color as to what you expect deflation to be in the third and fourth quarter and how confident you are based on your contracts and what your floating?

Well, I am expecting for the last half of the year. If you look sequentially for inflation of probably 1% to 2% of where we are today. So that would give you in the back half the year somewhere around 2.5%, 3% deflation.

Okay. And you guys have -- and most of that, I mean is there any risk to that deflation or what are the commodities that would put that at risk or that you're buying on the spot market?

There is a little risk in meat, not all that much, we're still short a few load that we need to price in there; we're locked for the rest of it. So there's a little risk, there is a little risk in produce, we've seen that come up a little bit. And those are in dairy have come up a little bit since the second quarter.

It's bumped up a little bit in the thrid quarter.

Chicken, I guess, we expect that to come down a little bit from where it's at to a more normal trend, obviously last year was not a normal trend.

(Operator Instructions) David Tarantino, Robert W. Baird.

Hi, good afternoon and congratulations on the strong earnings performance. So my question is about some of the labor productivity initiatives that you have implemented and I just want to clarify, are those generating greater than expected savings or are those savings just coming earlier than expected?

A little bit earlier than expected, we implemented it a little quicker. So it's really earlier than expected and also one thing that I'm really proud of our guys, is that flow through from our price increase has really really done well. They have really flowed through the price increase very, very well from a labor perspective in all stores, not just the 13, 14, 15 stores.

And so I guess the follow-up. Thank you for that. And the follow up I have is, how do you think that 2014, 2015 classes are now tracking relative to the targets you've laid out, is it looking like the margins are going to come into that 15% to 16.5% range or do you think there is a chance that you could be above that given the savings that you've achieved?

A little bit earlier than expected, we implemented it a little quicker. So it's really earlier than expected and also one thing that I'm really, really proud of our guys, is that flow through from our price increase has really done well. They have really flowed through the price increase very, very well from a labor perspective in all stores, not just the 13, 14, 15 stores.

Great. Okay, that's helpful. And then last question is on the same-store sales, the traffic trend was negative this quarter, I think the second quarter in a row. Can you give us some context on why you think that is, I know you mentioned a little bit of weather, but could you also talk about the impact of the new stores coming in the comp base and what you think the right underlying trend is?

Yes, I think, as you know, we've always talked about headwind of our stores that roll in from their honeymoon period and for the second quarter it was roughly 70 basis points. So a lot of that obviously is customer account, if you took those out you could see our customer accounts are really flat, I think they will be down 652 guests for the whole quarter. So we're really flat and I'm excited about that. That's the number one thing that we work on every single day is growing that customer comp line, but we definitely were a little affected. I think John mentioned bout a little bit on the patio, it definitely would affect us 35 basis points. So that's what we are attributing to a little bit, but again it's something that we are working really, really hard on becuase the lifeblood of our restaurants are same-store sales but its really customer accounts. So we're continuing with our sales growth initiatives, whether it would be local store marketing with the TV demos, events and programs and we're going to continue very strong with that. I'll tell you as a company, staffing is the key for us and we are better staffed now than anytime over the last year and a half which bodes well for growing your volumes.

Great. And then related to that Steve, if you've seen any changes in value scores or feedback, because I guess the one thing that has changed over the last 12 months as you are running more pricing in the menu, so do you see any signs of maybe the price increases have impacted the traffic?

No, not at all, not at all. The first thing we do on a price increase is to make sure that my value spread compared to my competitive set is in place and that's number one. So if you look at over the last eight years, we're still average even this year taking a 2.5% in February, we are still under the 2% over that period of time. And my competitive status still have been more than that. So, I'm very comfortable where we are at on our value equation spot. In fact, I think we have room, but the key thing as I mentioned to you when I answered Chris's question, our key deal is frequency and that's why I look at 1.5%, 2% is my kind of my safety zone that I like to play in.

Great, that's very helpful. Thank you.

Thank you.

Andrew Strelzik, BMO Capital Markets.

Just wondering, given the speed and magnitude to which you were able to benefit from some of these efficiency initiatives, does that maybe expand the scope of things that you are willing to try? Or do you think that that's really the extent of what you are able to do in the units from an efficiency perspective?

Well, as far as labor, I think those are things that as you're opening newer stores, I was very hesitant obviously to protect everything to move down. But what we've learned is more mature stores were actually growing volumes quicker. So that's only made the initial move for a quicker reduction, as far as cross-training and so forth. So now, I don't think I am going to do it any faster than I am doing it at all. So I think I am very comfortable with the long term growth of where we are at and what we've developed over the last 6 months.

And then on that long term growth profile that you have outlined historically, it does sound like there's some inefficiency that are going to come in at the back half of the year and kind of limit your ability to reestablish that long term growth trajectory in line with kind of what you had outlined? What do we need to see to get here and do you think that there is to the extent you are willing to comment on it, do you think we might see that reestablished in 2016?

Are you talking growth over Q4 to Q4?

You had talked about a 20% to 25% long term - year-after-year earnings growth type of algorithm and that's really what I am talking about?

Yes. So if you look at our new guidance, I think that gives us on the upper side of that 23% growth. So we would continue on a long-term basis to look for that 20% growth going out.

This does conclude today's question and answer session. I will now turn the call back to management for any 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 all have a good evening. Thanks everybody.

This does conclude the presentation. Thank you for your participation.