Chuy's Holdings Inc (CHUY) 2015 Q4 法說會逐字稿

Good day, everyone. Welcome to the Chuy's Holdings, Incorporated fourth-quarter 2015 earnings conference call. Today's call 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 would like to turn things over to Mr. Howie. Please go ahead, sir.

Thank you, Operator, and good afternoon. By now everyone should have access to our fourth-quarter 2015 earnings release. It can also be also found on our website at www.chuys.com in the investor section.

Before we begin our review of formal remarks, I need to remind everyone that part of our discussion 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. With that out of the way, I'd like to turn the call over to Steve.

Thank you, Jon, and thank you to everyone for joining us on the call today. By every account, 2015 was a very successful year for our business. As we entered the year, our key areas of focus centered on our initiatives to drive sales and improve our store-level margins in addition to continuing to grow in our restaurant base. I'm pleased to say in closing out 2015 that we succeeded on both counts. From a top-line standpoint, our growth continues to be led by new unit development.

During 2015 we successfully expanded our store base by approximately 17% with the addition of 10 new Chuy's locations during year. While still early, we are very pleased the initial results of our 2015 class.

In addition, initiatives such as enhanced local store marketing and branding designed to highlight our key strengths in points of differentiation were also put in place. These efforts have helped us maintain the consistency of our comparable store sales which now stands at 22 straight quarters of growth. For the full year, our comparable store sales growth increased 3.1% and combined with our new development, result in a full-year revenue growth of over 17%.

Finally, our success didn't end of the top line. During early 2015, we began the implementation of number of operating initiatives, focused on key items like food waste, labor scheduling and manager rationalizing across our system. In conjunction with the benefits of year-over-year commodity deflation, our 2015 restaurant level EBITDA margin improved over 200 basis points, leading to a restaurant level EBITDA growth of approximately 33% and an adjusted net income growth of approximately 36%.

As I've noted previously, the improvement in our businesses during 2015 is a testament to the hard work and dedication of our entire team as they have executed on these internal initiatives, as well as the ongoing consistency of our business, driven by improved habits and routines that we stress throughout our system. While it would be a challenge to maintain the same level of improvement in 2016, particularly as it relates to restaurant level margins, our initiatives, habits and routines will continue to serve our business well into the future.

Switching now to development, we opened four new Chuy's restaurants during the fourth quarter of 2015 in Tuscaloosa, Alabama; Columbus, Ohio; Beavercreek, Ohio, a suburb of Dayton; and Orlando, Florida. As I noted previously, we continue to be pleased with the performance of our new restaurants, not only as it relates to their high initial sales volume, but also with regard to their early profitability, which are meeting our expectations. A priority of our opening teams this year has been the store level operating margin glide path of our new restaurants and we continued to see a quicker improvement on our new store margins in the 2015 class of stores.

For 2016, we currently expect to open 11 to 13 new restaurants. Subsequent to the end of the fourth quarter, we opened a restaurant Woodbridge, Virginia, our first of the year and the third Chuy's in the Washington, DC, area. Additionally, our second restaurant of the year is on track to open by the end of the month in Lafayette, Louisiana.

We have leases signed for the balance of our 2016 development plan and expect the cadence of our openings to be somewhat concentrated in the middle two quarters of the year. With that, I'd now like to turn the call over to our CFO, Jon Howie, for a detailed review of our fourth-quarter results.

Thanks, Steve. Revenues increased 14.9% year over year to $71 million for the fourth quarter ended December 27, 2015. The increase included $8.8 million in incremental revenues from an additional 107 operating weeks produced by 11 new restaurants opened during and subsequent to the fourth quarter last year.

We have a total of approximately 870 operating weeks during the fourth quarter of 2015. Comparable restaurant sales grew 3.2% during the fourth quarter, driven by a 3.2% increase in average check with flat traffic. Comparable restaurant sales and traffic were negatively affected by approximately 60 basis points during the fourth quarter of 2015 due to Halloween shifting from a Friday to a Saturday and Christmas shifting from a Thursday to a Friday.

Effective pricing in the fourth quarter was just under 2.5%. For modeling purposes, we lapped last year's 2.5% increase in early February and implemented a new price increase of approximately 1.5%. There were 51 restaurant in our comparable base during the fourth quarter of 2015, including three new restaurants added to the base at the beginning of the quarter. As a reminder, 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% as we experienced a favorable impact from lower grocery, dairy, chicken and produce cost during the quarter, offset by increases in beef. Looking ahead, in 2016 we expect our commodity basket inflation to be flat to up 2% and our overall cost of sales to be flat to up 10 basis points over 2015.

Labor cost as a percentage of restaurant revenue improved 120 basis points from last year to 33.4% as we continue to gain operating efficiencies through our labor and manager rationalization initiatives in addition to leveraging our comparable store sales growth. Approximately 50 basis points related to a reduction in expected [fuda] payment surcharges in certain states, an improvement resulting from our short-term decrease in our managers and training expense as our manager rationalization initiative has allowed us to more efficiently reallocate our current managers. We do not expect these benefits going forward in 2016 and looking out in 2016, we expect some additional labor pressure.

Restaurant operating cost as a percentage of revenue increased by 20 basis points to 14.4%. This cost increase was primarily related to increases in employee health insurance and credit card fees. Occupancy cost as a percentage of revenue increased approximately 40 basis points year over year to 6.9%, driven by higher rental expense and property taxes as a percentage of sales in our newer locations.

General and administrative expense increased $0.8 million to $3.7 million in the fourth quarter. As a percentage of revenue, G&A increased approximately 40 basis points year over year to 5.2%. The increase was driven primarily by an increase in performance-based bonuses, stock-based compensation and additional investments in new employees.

Pre-opening expenses during the fourth quarter of 2015 was approximately $1.5 million compared to approximately $0.8 million in last year's fourth quarter, primarily due to the differences in timing of our development schedule. We opened four new restaurants during fourth quarter this year and one early in the first quarter of 2016, while we opened one restaurant in the fourth quarter last year.

Net income for the fourth quarter of 2015 was $0.2 million, or $0.01 per share, as compared to a net income of $2.3 million, or $0.14 per share, in the fourth quarter last year. During the quarter we determined that the carrying value at three of our locations exceeded their estimated future cash values. As a result, we have recognized a $4.4 million non-cash pretax impairment charge related to the write down of the carrying value of these assets. Excluding this charge, adjusted net income in the fourth quarter of 2015 increased 28.7% to $3 million, or $0.18 per diluted share, compared to $2.3 million, or $0.14 per diluted share, in the comparable period last year.

Income tax expense -- our adjusted effective tax rate for the quarter, after excluding the benefit related to the asset impairment, was 30.65%. Finally, we ended the year with $8.5 million in cash and currently have no debt on our balance sheet.

As we mentioned on our last call, during the fourth quarter we amend our current credit facility which extended the maturity date to October 30, 2020, from November 30, 2017, and favorably revised the applicable margins and leverage ratios that determine the commitment fees and interest rates payable by the Company. Additionally, we retain the ability to expand this credit facility from $25 million to $50 million if needed.

With that, lets now discuss our 2016 outlook. We're expecting our annual diluted net income per share guidance to be between $1.01 and $1.05. This compares to adjusted diluted income per share of $0.93 in 2015. Our net income expectation for FY16 is based in part on the following annual assumptions, comparable store sales growth of approximately 2%, restaurant pre-opening expenses of $5 million to $5.9 million. We expect G&A expenses between $17.2 million and $17.8 million. Our effective tax rate is estimated to be between 29% and 31%. We expect annual weighted average diluted shares outstanding of 16.8 million to 16.9 million. We expect to open 11 to 13 new restaurants. Lastly, our capital expenditures, net of tenant improvement allowances, are projected to be $33 million and $38 million.

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

Thanks, John. In closing, we are pleased with the success of our business during the past year and eagerly look forward to maintaining our momentum in 2016. We continue to be excited about the opportunities ahead for us to grow the Chuy's brand and bring our distinct menu of authentic, freshly prepared Mexican and Tex-Mex inspired food to a wider audience while enhancing long-term value for our shareholders.

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)

David Tarantino, Robert W Baird.

Hi. Good afternoon and congratulations on a terrific 2015.

Thanks, Dave.

Jon, I have a question about the guidance for 2016. If I look at your earnings growth assumptions it does seem to imply some margin compression, especially at the restaurant level. Maybe could you could walk us through what's driving that compression at the restaurant level?

There are several things. One of the big things which we've talked about is the labor. We expect some labor pressure to the extent that we're looking at probably 40 to 50 basis points higher in labor expense next year, given some of the inefficiencies in some of the areas that we're expecting to open up, as well as some wage pressure, as well. Also operating expenses, we're looking at those to be just a little bit higher, as well. And then obviously you know our prototype has the new stores coming on in those single-digit margins, which is automatically mathematically going to bring some margin in there, as well.

Great. On that front, on the labor side, or on the overall restaurant margin side, however you want to look at it, is the biggest factor that last thing you mentioned, which is the new units coming into the base, or is there maybe some upward inflation in the comp base to also consider?

There's a little upward inflation in the comp base, but a lot of it are the new stores coming in at the lower margin.

Got it. When do you expect that to stabilize as you look out in modeling the business out to maybe 2017 and 2018? When does that dynamic start stabilize at the restaurant level?

We're looking at it stabilizing in about 2018.

Got it. Okay, that's helpful.

Last, Steve, it looked like the restaurant, or the new openings for 2015 have been very good and consistent. I think you mentioned consistent with your profitability expectations. Could you talk a little bit about where you think those are going to annualize in terms of sales volume? As you look at the 2016 pipeline, how do you think that's shaping up from a sales volume perspective?

Well, I think 2016 is going to be more like our blended rate and our prototype. 2015 has -- its exceeded those just a little bit. We're very happy with the results of those, but we're looking in 2016 to be more along the lines of our prototype.

Again, all the stores are still in their -- more than half of them are their honeymoon period still at 2015, but they are tracking a little bit better than 2014's.

Great. Thank you very much.

Thank you Dave.

Will Slabaugh, Stephens.

Wanted to ask a little bit of a follow-up on the last question around the new stores. Can you talk about how those, the new stores in your newer markets may be bigger versus small pro forma in 2015, and as you look to 2016 how that mix may change?

Over the last couple years we've been in an 80/20 mix at the well where we've been backfilling, and that's going to be the exact same pretty much again in 2016. As we're going down the road, you said, I mentioned to mentioned to you, we are looking at the bigger markets. We'll be looking at Chicago at the end of this year, early 2017 will be the real big market we're going into. We're right now spending a lot of time focused on backfilling and also filling out our DC market.

Got it. You mentioned DC. I wanted to ask there, since that's sort of the first big market outside of Texas, can you talk about how the first two stores have done there? And obviously you've got, I think you said, number three coming up?

We're very -- we're pleased with where we are in those markets. They're right on our projections.

Great. Last question, I think. You get a lot just -- the quick take on what is happening in Texas and how you feel like you are faring.

Again, as we've mentioned to this, we're positive in Texas. As you go through the whole market of Texas, we've seen a little softening in Houston and San Antonio, but again, both markets are still up. (Multiple speakers)

Thanks. Congratulations.

Thank you.

Jeff Farmer, Wells Fargo.

Thanks.

You had enormous success identifying cost inefficiencies and then just delivering big time on improved margins, especially on the labor line. I wouldn't say it's hard to believe, but as you take a step back and you're in 2016 now, is there additional opportunity? Are you going to take a closer look? Do you think there's a chance even if it's on the smaller scale to deliver some incremental efficiencies, even if it's not on the labor line, maybe operating line, some other line on the P&L?

I'll tell you, as you looked at our year of 2015, we said most of the performance advantages will come in the second half and if you remember, we saw them right off the bat in quarter one. Now, those are pretty much all one-time adjustments and certain things on our labor scheduling and we feel we maximized that throughout the year of 2015, and it should not go into 2016, as far as any big jumps, as far as that goes. But what we've learned we will be able to continue with as far as the trend line on percentages.

Jon, two other quick ones on the P&L. A lot of this was touched on, but occupancies jumped pretty materially and you warned us about this over the last two years. You alluded to it for the class of 2016, but I think your occupancy was up 40 basis points year over year 2015 versus 2014. Is that -- should we be looking at it or thinking about it as something in that ballpark range as we get into 2016 in terms of year-over-year pressure on that line?

We are going to see some year-over-year pressure. Probably not as much as the 40 basis points. It's more like in the 20 or the 30, but we're going to see some pressure in that over the next couple of years as we enter some of these larger markets. We're looking at some higher real estate costs in these markets, totally offset by our price increase.

All right. Sorry for cutting you off. I appreciate that.

I think you said flat to 2% on the commodity basket. Could you just tell us, and I might've missed it, what it was in the Q4 2015 and how should we be thinking about the first two quarters of 2016 in terms of inflation from the basket?

Well 2014, so we finish the year at about 4% down. For the quarter though, quarter over quarter is a little over 6% down. We had very favorable -- I think in the third quarter, I thought sequentially we'd be about the same as the third quarter and sequentially it was down just less than 1%, so it stayed fairly constant going into the fourth quarter.

Going into the first quarter, again, we're expecting zero to 2% for the year. We really don't talk quarter over quarter. But if you're talking about the cadence, we would expect that cadence to be a little lower in the first half of the year and increase during year.

All right. Thank you.

Andy Barish of Jefferies.

Hello. I think the bar program, if I'm recalling correctly, contributed maybe 100 BPs or so. Is that all right number as you rolled that out in the back half? Is anything planned as you lap that in the June timeframe of this year?

Andy, we did see a little over 100 BPs there in the third quarter. We said due to the newness, we thought that would come down a little bit. It has. I think if you were to look at the price that we had in our comps, which was about 2.5%, it would come out to a mix of about 60, 70 basis points. It has come down a little bit.

We would expect a little of that mix to continue on through June 28, which is when we put that in place this year. We are going to come out with a new bar menu, or I should say changes to the bar menu, at the end of May, but we're not adding any bigger drinks like we did last year. They are just different drinks and making some --

We're staying at a little updated, but again, the size of the drinks, the prices of drinks, will be similar to a year ago.

Okay. On the menu tiering work that you've done over the past few years, is that pretty much in place? How do we -- do we just think about this year's pricing is getting more back to the 1.5% that you've done historically?

Absolutely, Andy.

Last year we made a couple adjustments on the tiered side of the menu, specifically in four, three, and two meaning tier four, tier three and tier two. Tier one was pretty -- very similar to a price increase that we've always done. But yes, we'll be back right to about that 1.5% to 1.75% for year in and year out. That's we've averaged over the last eight years, even with last year.

Okay. Thanks, guys.

Thanks, Andy.

(Operator Instructions)

Paul Westra, Stifel.

Thanks. Congratulations on a great quarter.

Just curious about your commentary or your same-store sales outlook at 2%. Obviously it's still a good number but it would be your lowest in about five years. Should we think about it maybe a little higher in the first quarter or two? Is there -- you're seeing anything slowing on the margin? Maybe just comment on how you look at a 2% number.

We're looking at it, Paul, is that we have the 1.5% price. We're looking at about 50 basis points in traffic, offset by our normal headwind of probably 40 or 50 basis points, and plus or minus some mix in there, is how are looking at it.

I was going to follow up on that. 45, 50 basis points, you're talking the new stores entering the comp base?

Yes, sir.

In light of that, and also that group entering the comp base classes of 2014, now, we'd be looking at mostly. I know -- it seems like in those originally troubled stores, the margin turnaround seems to be well above your expectations and pretty solid. Can you maybe talk a little bit about the sales performance there? You still expect them to be a drag on comp?

The 2014 stores are really acting like normal right in accordance with our plan. The 2013 stores are already all in the comp base. They are progressing a little higher than our other stores. But again, they are at a lower level, too. That percentage is offset in the whole dollars.

How many markets right now do you feel are in high need of further penetration as you get into that class of 2013 to 2014 as you enter new markets? Are most of those, you feel good having a sister restaurant or two at this point?

No, I'd say we've got a long way to go on that, actually. The only places we're really filled out in obviously all of Texas. Nashville, we're probably all filled out. All the rest of them, we can be adding stores in there.

Great. Okay. Thanks.

You're welcome.

Andrew Strelzik, BMO Capital Markets.

Good afternoon, everyone. I wanted to ask within that commodities basket, what specifically is it that you are seeing or expecting potential inflation from within the basket?

One thing, as I think I said out on the road, a lot of people in casual dining are expecting a lot of deflation in the beef area. We're not expecting to participate in that much, because we've got our beef locked in for 60% of our beef purchases, which is our fajita meat at 6% higher than all of 2015. It's going to be offset a little bit by ground beef, but that's going to stay pat, if you will.

And then dairy, we had such decreases in dairy and chicken. We're not anticipating those decreases in the current year. One thing that we can't lock in, and we buy locally and it's really up to Mother Nature, is our produce and that's one of our highest percentages of our basket, composition of our basket. That can fluctuate, as you know, and it has fluctuated in the past of anywhere from 70 to 80 basis points in any given quarter.

Great. That's helpful.

Can you talk about the units where you took the impairment, where were those units located? When were they opened? Is there anything specific to those units that maybe caused the performance to be less than you might have expected?

Obviously, in every store you learn things, but in fairness to all our employees, I'm not going to name or talk about the area that these stores were. Obviously, we learn a tremendous amount every time you open a store and we'll use that as we move forward.

The last question I wanted to ask was on G&A. You gave a guidance for the year, but I'm thinking further out than that. There was a bigger step up in 2015 and I know you added some teams on the real estate site. Number one, why the lower increase this year? As we're thinking further out, how do you feel about your overhead structure such that you could support the growth over the next several years, or do you think you're going to need to continue to add?

I think our infrastructure is very good right now, and so we just need to make minor adjustments going forward. The big increase that you have this year, which is showing the smaller increase next year, is because we had the performance bonus this year. If you remember in 2014, there was no performance bonus.

This year it was a little bit higher than target. That's the offsetting. So next year comparable bonuses should flatten that out a little bit and that's why you're seeing the smaller increase in 2016. Going forward, you should see some leverage on that line item.

Great. Thank you very much.

Gentlemen, we have no further questions at this time. I'd like to turn the call back to Mr. Hislop for any closing remarks.

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

That does conclude today's conference. Again, we thank you all for your participation.