Chuy's Holdings Inc (CHUY) 2016 Q1 法說會逐字稿

Good day everyone, and welcome to the Chuy's Holdings, Incorporated first quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time all participants have been placed in a listen-only mode, and the lines will be open 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 first quarter 2016 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 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 would like to turn the call over to Steve.

Thank you, Jon, and thank you to everyone for joining us on the call today. We are very pleased to begin fiscal 2016 with strong operating results, which included net income growth of over 40%, and diluted earnings-per-share of $0.27. First quarter revenues grew over 16% compared to last year, which were helped by our 23rd consecutive quarter of comparable restaurant sales growth at 3.2%. While our comparable sales benefited from improved weather compared to last year partially offset by Easter, we generally saw consistent comparable sales growth through the entire quarter.

Contributing to our earnings growth was an increase of approximately 25% in restaurant-level EBITDA. Lower than expected cost of sales was the key contributor to the 130 basis point improvement on our store level profitability. However, we generally saw profitability improve across the board, which is reflective the hard work and dedication of the entire team, as they continue to focus on improved habits and routines that we stress throughout our system. Switching to development, we opened two new Chuy's restaurants during the first quarter of 2016, in Woodbridge, Virginia, and Lafayette, Louisiana. Subsequent to the quarter we have opened three additional restaurants in Fort Worth, Texas, Cary, North Carolina, and Sterling, Virginia.

We continue to be pleased with the performance of our new restaurants, not only as it relates to their initial sales volumes, but also with regard to their early profitability which are meeting our expectations. For 2016 we continue to expect to open 11 to 13 new restaurants as we had previously noted, we have leases signed for the balance of our 2016 development plan, and expect the cadence of our openings to be concentrated in the middle two quarters of the year. With that 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 16.8% year-over-year to $78.1 million for the first quarter ended March 27th, 2016. The increase included $10 million in incremental revenues from an additional 122 operating weeks, produced by 12 new restaurants opened during and subsequent to the first quarter of last year. We had a total of approximately 908 operating weeks during the first quarter of 2016. Comparable restaurant sales grew to 3.2% during the first quarter, driven by 2.1% increase in average check, with a 1.1% increase in traffic. We estimate that comparable restaurant sales in the first quarter benefited by approximately 110 basis points due to the better weather in this year's quarter, compared to the first quarter of last year. However, this benefit was offset by approximately 35 to 40 basis points, due to the timing of Easter falling in the first quarter of 2016 compared to falling in the second quarter during 2015. During the first quarter we lapped last year's 2.5% menu price increase in early February, and implemented a new price increase of approximately 1.5%. There were 54 restaurants in our comparable base during the first quarter of 2016, including three 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 percentage of revenue improved approximately 70 basis points year-over-year to 25.6%, as we experienced a favorable impact from lower chicken, grocery, and dairy prices, offset by higher produce prices.

Currently we would expect our full year 2016 inflation to run at the mid-point of our initial range of 0% to 2%. Labor costs as a percentage of restaurant revenue improved 20 basis points to 32.9%, as we continued to gain operating efficiencies through last year's labor and managed rationalization initiatives, in addition to leveraging our comparable store sales growth. For the balance of the year we expect year-over-year labor costs to increase approximately 50 to 60 basis points as the implementation of last year's labor initiatives, combined with inflation in our core level hourly rate. We also expect increased in efficiencies from new unit development, particularly in the second and third quarter.

Restaurant operating cost as a percentage of revenue decreased by 50 basis points to 13.5%. This decrease primarily related to lower utility and insurance costs, combined with the leveraging of our comparable sales growth. General and Administrative expenses increased approximately $450,000 to $4.5 million in the first quarter. The increase was largely driven by ongoing investments in personnel to support our growth. As a percentage of revenue G&A decreased by approximately 30 basis points year-over-year to 5.8%. Preopening expenses during the first quarter of 2016 was approximately $1.4 million compared to approximately $1.1 million in last year's first quarter. This increase was due to the timing of our 2016 development schedule compared to last year.

As a reminder our development will be concentrated in the second and third quarters with four to five units in each quarter, and then one to two units in the fourth quarter. In summary net income for the first quarter of 2016 increased 40.1% to $4.5 million, or $0.27 per diluted share compared to $3.2 million, or $0.19 per diluted share in the year-ago period. We ended the quarter with $4.8 million in cash on the balance sheet, and currently have no debt.

Switching to our 2016 outlook based on our first quarter financial performance, we are updating our annual diluted net income per share guidance range to $1.03 to $1.07, versus our previous range of $1.01 to $1.05. This compares to adjusted diluted net income per share of $0.93 in 2015. Our revised net income expectation for fiscal year 2016 is based in part on the following annual assumptions. Comparable store sales growth of approximately 2% for the remainder of the year, restaurant preopening expenses of $5 million to $5.9 million, expected G&A expenses between $17.2 million and $17.8 million, an effective tax rate is estimated to be 29% to 31%.

We expect annual weighted average diluted shares outstanding of 16.8 million to 16.9 million, and we expect to open between 11 and 13 new Chuy's restaurants. Lastly our capital expenditures net of tenant improvement allowances are projected to be between $33 million and $38 million. Now I will turn the call back over to Steve to wrap up.

Thanks Jon. In closing, we are pleased with our start of 2016, and look forward to maintaining our momentum during the year. Our 2016 development plan is off to a great start, and we are already working on our 2017 plan. We continue to be excited about the opportunities ahead of 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 the questions, I would 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 are happy to answer any questions. Thank you.

(Operator Instructions). Your first question will come from David Tarantino with Baird.

Hi. Good afternoon, and congratulations on a great start to the year.

Thank you, Dave.

My question is about the recent trends you have been seeing in the business, and I know, Steve, you mentioned that excluding the calendar shift the comps were fairly even across the quarter, but there's been a lot of noise about industry trends falling in March and April, and perhaps could you address what you're seeing in those months on I guess, excluding the timing of Easter and are you seeing that sort of slowdown that folks are talking about in April?

Well, it's kind of a little bit hard to talk about April, but March it was pretty balanced throughout the whole first quarter. April what we did is in the middle two weeks of April we had all of the flooding in Houston, and all of the rain in the whole Southeast. So it's a little bit hairy, we definitely got hit with a little bit of weather. So it's really hard to see on that so much, but at the end of the day I think it's been moving basically like our first quarter.

Got it. That's helpful. And then --

But again, like I said, 'm sure everybody saw all the flooding in Houston, but we had rain all of the way up through Nashville to the DC area for a good two weeks of the period.

Got it. Thanks. That's helpful. And then Jon, the labor line looked very well managed, and came in a lot better than we had projected it. It doesn't seem like you're assuming that continues. Can you just talk about the drivers of why you could see a reversal in the balance of the year again, and why some of the efficiencies you're gaining in Q1 won't carryover for the rest of the year?

Sure, David. A couple of things. First of all, we opened three stores during Q1 last year. So we had a few more inefficiencies last year versus this year, and secondly, we didn't have all of the efficiencies, although we had quite a few of those, we didn't have all of those initiatives implemented in Q1 of last year, but we are going to be lapping those in Q2, Q3 along with four to five restaurants opening in second quarter and third quarter last year, and if you remember we have had very few restaurants open during that period last year. So the other thing, the third thing that we're seeing is, as everybody else is seeing we're seeing hourly rate increase pretty substantially. What we have seen in the past was it was averaging about 1.5% to 2%, and I think on the call we were expecting 3% to 4%. It's probably going to be expanded to about 3% to 5%, because we're seeing right about 3.9% to 4% currently in our average rate.

Got it. Okay. That's helpful. And then lastly, Steve, if you could maybe address how the 2016 class of openings is tracking from a sales and profitability standpoint relative to your targets?

Yes.

-- targets?

By the targets again, it's so early. We're just starting into the honeymoon periods on all of these, but you we're very, very pleased with the openings, and we're expecting the same trend that you saw in 2015, as far as how we bring these stores into profitability, in a nice glide pathway, so we are very, very pleased with all our operations specifically 2015 and 2016.

Got it. Great. Thank you very much.

Thank you.

And from Stephens Inc. we'll hear from Will Slabaugh.

Yes. I was wondering if you could give us any more specifics on some of the newer stores and the productivity there? In the larger market such as DC in particular. It sounds like you're pretty pleased overall, but I know a lot of us are really interested in seeing that success there, and how that may translate into some larger markets? So any more color how you think guest frequency is trending, or any sort of feedback around the value proposition, or any of the metrics might be helpful would be appreciated?

Yes, Will. I don't really go into market-by-market but again as a whole I'm pretty pleased with all the openings from 2014, 2015 and 2016. They're hitting our projections, and they're hitting the glide paths that were set up. So we're pleased about the markets. We just opened Sterling, which is our last week, which is our fourth store in the Virginia market, and we have another one coming up, so we're excited about the market in general.

Great. And to follow-up on David's question around the industry, it sounds like a decent amount of the volatility or softness however you want to call it, has been around the lunch day part. So I'm curious sort of how your day parts trended, and then if you wouldn't mind speaking to geography as well?

Again, I don't get a whole bunch into the geography, but lunch part is actually up a little bit more than our dinner part. So we're pleased with our lunch part.

Great to hear. Thanks guys.

Thank you.

And next we'll hear from Jeff Farmer with Wells Fargo.

Thanks. Good afternoon. Just hopefully a little bit more color on the April weather impact. I know we have got a lot left in this quarter, but even just sort of looking at my model going back to Q1 of 2015, that's the quarter you guys saw 200 basis points of pressure, and it looks like most of that was felt in just a matter of a couple of weeks. So can you give us some order of magnitude on what potentially those April weather impacts could have, over the Q, the full quarter?

Currently, depending on if we have any more bad weather, but I think currently it is going to be about 50 to 60 basis point spread the quarter.

Okay. That is helpful, and then on G&A, just coming down on that a little. So a lot of pressure in 2015 and you swung it around the other way, a lot of favorability. It looks like you guys have got into for this year. As we think about this model moving forward into 2017, 2018, 2019, and beyond. Have you guys culled out a relationship we should be thinking about between G&A and revenue growth over the longer term?

Yes. We have. We have always talked about G&A growing at about 70%, right around there. 70% of the overall store growth. So there's some built-in other than some anomalies that we fall into on any given year, there's some leverage built into that line item.

Okay. Just last one. Steve, curious about your thoughts on how Chuy's market selection, site selection models have evolved over the last two years. It sounds like you guys have learned a lot going back to that class of 2013, I believe, and I'm just curious how that has influenced the development in both 2016, 2017 and beyond? So any broad strokes would be helpful.

Sure. Sure. Again, going back to the 2013 that was when we had to seed the markets with the size of our restaurants. We haven't made restaurants, and with 20% growth. We need to seed the markets to get some growth opportunities. And so what you saw in 2014, 2015, 2016 it will probably go, continue this year also, is where we have done 80% backfill, 20% new. So that's been our biggest thing, and then our recent development that we have had, is you see us hitting the bigger markets that you saw us hit in 2014 and 2015, you saw us enter the DC market. You're going to continue that growth in 2016. Right now in 2017, you will see us also hitting in the Chicago market, going in to a bigger market and also the eastern side of Miami area down in Florida. We're already up in Orlando. We will hit those markets, and why we chose to hit those markets probably a year, 1.5 years earlier is because we wanted a more dense market. We wanted a really good competition, a propensity to eat Mexican food out there. We also know the in-between markets, the ones that backfill, are traveling to those larger markets, so we will build some awareness with that, along with us continuing to backfill, but the big change, is in 2013 we had to seed a whole bunch of markets, I think we did eight new stores out of our nine in new markets, and then ever since then we have done 20/80. 80% existing, 20% new.

All right. Thank you, Steve.

You're very welcome.

And next we'll hear from Chris O'Cull with KeyBanc.

Thanks. I just wanted to follow up on the new stores. It appears that new stores are reaching mature margin faster than they had in the past. Would you guys agree with that statement?

As far as I guess how you define past. It is faster than the 2013 for sure, but it's basically been kind of right on target, if you're looking at the group as a whole.

What should we assume, Jon, for years one and two in terms of margin performance at these stores?

Well, we have said, we haven't changed that new of kind of prototype, if you will, and these stores are right on target hitting that, or maybe exceeding them a little bit, but basically right on target. And that's your first year high single digits, your second year, kind of your low double-digit and then your third year you're looking at that 16%, 17% average.

So in the past you have kind of given us some guidance around labor with these new stores in efficiency. It seems like it's been based on that yet we have also seen quite a bit of upside as a result of better labor control. I mean I know you guys have put in some initiatives to improve new store productivity, or new store efficiency. Talk about how to reconcile that?

Well, I think we're getting close to, I mean we're still not hitting the 2013 margins that we saw when we had the old model, the 42 and the higher margins. We're getting obviously better than the 2014, but we're not getting those margins yet.

Okay. Okay. And then just some pricing for the rest of the year it may be, I may have missed it, but commodity deflation for the quarter what was that?

For the quarter year-over-year it is 1.3%.

That's declining deflation?

Yes.

And what's the menu pricing? Is it going to say around 1.5% for the next three quarters?

Yes. Yes. Chris, we took our price increase in the beginning of the second period. It's about approximately 1.5%, and that will be the only one we take this year.

Okay. Great. Thanks guys.

Thank you.

Next we'll go to Brian Vaccaro with Raymond James.

Thanks. Good afternoon. Just a quick follow-up on the comps. Can you comment on what you're seeing in Texas. You have obviously been holding un quite well there, but any change in the trends even sequentially, or anything worth highlighting in terms of consumer behavior in pockets of Texas?

Yes as I think I mentioned in the last call, Texas we're up. We are only slightly up in the Houston market. That took a little dip from the fourth quarter. That was the first thing, so a little bit but again the market is up, and same thing in San Antonio.

All right. That's helpful.

Austin, yes. Austin and Dallas they're trending pretty much the same.

Still trending the same. Okay. All right. Thank you for that. Jon, I wanted to ask you a quick one in the first quarter the other operating costs it looks like it was down sort of cost per operating week down around 2% or so, and you called out the insurance favorability I think and was that a lap of unusually high cost in the prior year, and then how should we think about that? Is that expected to be favorable the rest of the year, or sort of a more normal trend going forward?

It was lapping a little higher, but it should be normalized, because we're going through renewal right now, so I would expect that to increase. But we also had a lot of leverage on that line item with the extra sales.

Okay. All right. And one last one if I could. On the labor side you mentioned a little higher wage inflation, I think about the 3% to 5% range if I heard correctly. Can you give an update on what you're seeing in terms of your ability to hire high-quality managers, and sort of the manager pipeline and also maybe give an update on what you are seeing in terms of hourly turnover? Thank you.

You are very welcome. The management pipeline is actually great. We're looking at that, we're growing rather aggressively as you all know. So we're doing very well. We're very well in front management side, and the quality of people that we're attracting is tremendous. So from a management point of view we feel great. Our hourly section is much harder. It's always been hard. Never been easy. Ever. But it's definitely a lot harder to get these, especially in the new store openings that we hire about 150 people to start our day. But that's definitely more competitive, and you have seen wages, average hourly wages in markets go up a little bit, and that's why you have seen a little bit of a jump compared to our history of 1.5% to 2%, where Jon was just talking about a 3.9%. So that's what it is definitely tough out there we have a lot of planning to do. We have to get very, very creative, and we have got to stay in front of it so that's what we're working on. And it's also helpful that both our management turnover and hourly turnover is below last year.

Very helpful. Thank you.

You are welcome.

And next we'll hear from Bob Derrington with Telsey Advisory Group.

Yes. Thank you. Jon, can you help us for a second on the cost of sales line? Obviously, as a percent of sales the first quarter came in considerably better than what we had anticipated. You previously gave us guidance on the line both, as a percent and actually as a number of basis points year-over-year. Based on the first quarter trend, it certainly looks as though it would be lower than what you previously guided. So can you kind of give us a little bit of an update on that number of basis points year-over-year that you would expect that line to fall out?

Yes. So where we're expecting that is the overall inflation to be right around 1%. That would equate to your low 26 now, Bob. It came in a lot lower than we were thinking when we actually put out the model, our costs were running a lot higher in the first and second period and so it has come down quite a bit. But we're still expecting your normal increases in chicken here during the summer time, and remember we only have 40% of our commodities locked in, produce being a big part of it, which is about,- now currently the largest it's ever been since I've been with the Company it's about 17.8% of the total basket, and as you know that can change with Mother Nature. Currently we're experiencing very high line costs right now, right again? Not quite as bad as 2014, but it's definitely up about 2.5 times in the last five weeks. So normal price is about $20 a case, and currently it's trading right around $60 a case. So we're trying to factor all that in, and we there I we still have some inflation towards the later part of the year, and overall inflation will still be in the middle of that range currently. We'll be able to update you a little more in the middle of the year.

You previously had talked about beef prices being up year-over-year, but you didn't call it out as it related to the first quarter. Has something changed there? Are you seeing a better price on your beef?

No. I would say it would be flat to up, and it's right around that, it's a little up, but it's right around flat. Not enough to call out, but we weren't going to participate in is the deflation that everybody was going to see in that line item, and we are not participating in that, but it's flat to a little up.

Yes. On our flat means we actually contract that 6% higher than a year ago.

Got you.

And we make that up a little bit, Bob, because of our ground beef.

All right. Again, thanks. Congratulations on a great quarter.

Thanks, Bob.

From Stifel Nicolaus we'll hear from Paul Westra.

Okay. Thank you. Most of my questions have been asked, but I want to follow-up on the labor line one more time, and maybe Bob's point of view, about the food cost and how you expect that to sequentially pick up coming in better. The same about labor on the second quarter on the first quarter here, 32.9. How should we think about labor normally being seasonally higher or lower in the first quarter, versus the rest the quarters? Maybe you expect that line item to end up at the end of the year?

The way we're looking at it is that, and like I think I called out on my comments we would expect it to be up anywhere from 40 to 60 basis points over the previous year the next two to three quarters.

Okay. That's very helpful. Then last question. Your average weekly sales volume for the quarter versus your same-store sales number. The lowest what we have seen in quite some time, half of what it used to be. I know it is, some of the impacts are obviously the pickup in your non-comp store base, from the ramping of those younger stores, and then of course the new volumes that are really high in the new metro markets. Can you maybe quantity those impacts and do you expect that sort of spread to continue as we model going forward?

I think we're starting to hit that spot to where we talked about early on, because our comp sales were so much higher than what we were opening our prototype at, and we said they would meet in the middle and they start growing, and I think we're starting to hit that point. So you could see that staying consistency, to going down a little less spread.

Great. That's helpful. Thank you.

(Operator Instructions). And from BMO Capital Markets we'll hear from Andrew Strelzik.

Great. Thank you. This is [Ryan Russo] on for Andrew. I was just wondering I heard from some of your peers that they were able to get farther out than normal with their development pipeline. Just wondering if you are seeing from a real estate perspective, and if you could comment on that at all? Thanks.

We feel pretty good about where we're at. As I mentioned to you, 2016 is all done. We're really working on the back end of 2017 right now. I think you have all heard me in the past talk about I would like to be two years out on our development pipeline, and we're not quite there, but we're close so I'm pretty pleased with our pipeline.

Great. Thank you.

You are welcome.

Moving on we'll hear from Nick Setyan with Wedbush Securities.

Hey, gentlemen. Congratulations on the great quarter. Mix as been a pretty nice contributor to the comp in recent quarters. It seems like it' has continued a little bit here in Q1. How should we think about for the rest of the year? Are there any opportunities around the through or the bar menu? Maybe you see that as a contributor?

Nick, currently I see that kind of disappearing and it has gradually disappeared a little bit over the last couple quarters. Remember, the third quarter when we introduced the new bar menu it was about 100 basis points, I think in the fourth quarter it was about 50 to 60 basis points, and this quarter it was right around 30 basis points. So it's coming down and we're going to lap over that new menu coming here in the second quarter. So I would see that price somewhere going close to our price increase for the year.

Got it. And have we pretty much decided we're not going to take any price increase in the back half?

Yes. We won't be taking, again most, from our, most of the time and every other year, we have only taken one price increase one time a year. That exception was last year when dealt with the Obamacare a little bit, and we actually took that one, I think in August, September of 2014 around 1%, and then we were dealing with the meats, so it was a little higher price increase in February of 2.5%. But we usually take our price increase every February.

Got it. Just kind of lastly in terms of the quota cadence how to think about the COGS, it sounds like there's a little bit of an increase in Q2, relative to Q1 as a percent of sales, and it ramps up pretty precipitously Q4. Is that a fair way to think about it?

That is a fair way to think about it, and since we take one price increase during the year and it's always in February, with normal factors and normal inflation, you would see that plus in Q3 that's when we run our green chili fest, and generally our costs run a little higher during that quarter.

Got it. Thank you.

And at this time I would like to turn the conference back over to management for any additional or concluding remarks.

Thank you all 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.

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.