Chuy's Holdings Inc (CHUY) 2016 Q2 法說會逐字稿

Good day everyone, and welcome to the Chuy's Holdings Incorporated Second Quarter 2016 Earnings Conference Call. 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 second quarter 2016 earnings release. It can also be 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 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 to everyone for joining us on the call today. We're pleased to report another quarter of strong operating results for the second quarter of 2016, which culminated in a diluted earnings per share of $0.34. second quarter revenues grew 16.6% compared to last year, which were helped by comparable restaurant sales growth of 1%, which is our 24th consecutive quarter of comparable restaurant sales growth. Additionally, our restaurant level EBITDA margins remained very healthy at 21%.

As improvements in cost of sales were offset by increased labor margins, nevertheless, overall restaurant-level profit increased a healthy 16.8% in the quarter. As you have no doubt (inaudible) the restaurant industry as a whole is facing its share of challenges. While we have been pleased with the overall performance of our business, we did begin to experience sales softness late in the second quarter and extended into the third quarter to date. Regardless of these near-term challenges, we will continue to fixate on the execution of our fundamentals day in and day out. In fact, we recently met with our operational leadership team in Austin to reinforce the benefits of taking care of our guests, focusing on our core strengths and managing our business for the long-term. By executing this successfully, I believe the current environment provides us with the opportunity to increase our market share.

Switching to development, we opened four new Chuy's Restaurants during the second quarter of 2016, in Ft. Worth, Texas, Cary, North Carolina, just outside of Raleigh, Sterling, Virginia, and the Washington, D.C. Metropolitan area, and Tallahassee, Florida. Subsequent to the quarter, we have opened two additional restaurants, one in Chattanooga, Tennessee, and one in Winter Park, Florida -- that's in the Orlando area -- bringing our year-to-date development to eight new Chuy's Restaurants in 2016. We continue to be pleased with the performance of our new restaurants, not only as it relates to their initial sales volume, but also with regard to their initial profitability.

For 2016, we continue to expect to open 11 to 13 new restaurants, including one additional restaurant expected to open during the third quarter. A development team is already focused on potential 2017 sites, and I'm very pleased that next year's development plan is shaping up nicely.

With that, I'd now turn the call over to our CFO, Jon Howie, for a more detailed review of our second quarter results.

Thanks, Steve. Revenues increased 16.6% year-over-year to $87.9 million for the second quarter ended June 26, 2016. The increase included $13 million in incremental revenues from an additional 146 operating weeks produced by 13 new restaurants opened during and subsequent to the second quarter last year. We had a total of approximately 962 operating weeks during the second quarter of 2016.

Comparable restaurant sales grew 1% during the second quarter, driven by a 1.5% increase in average check, and a 0.5% decrease in traffic. We estimate that comparable restaurant sales in the second quarter were negatively impacted by 90 to 100 basis points as a result of weather. This adverse impact 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.

All in all, we believe our normalized comparable restaurant sales run rate was a bit over 1.5% for the second quarter. There were 58 restaurants in our comparable base during second quarter of 2016. We consider restaurants to be comparable in the first quarter following 18 months of operation.

Turning to expenses, the cost of sales as a percentage of revenue improved approximately 80 basis points year-over-year to 25.5%. As we experienced a favorable impact from lower chicken, grocery, and dairy prices, offset by higher beef prices. As we begin to lap last year's favorable commodity prices, we would naturally expect the magnitude of year-over-year deflation to lessen in the second half of this year. We are also seeing a sequential increase in certain commodity prices early in the third quarter, particularly with regard to produce, dairy, and chicken. As a result, we expect cost of sales as a percentage of revenue in the back half of the year to be in the low 26% range.

Labor cost as a percentage of restaurant revenue increased 70 basis points to 32.7%, driven by ongoing wage rate pressures and inefficiencies in our new unit development. We would expect labor pressure to continue, and even to increase, for the balance of the year. Restaurant operating expenses as a percentage of revenue increased 20 basis points to 13.7%. This increase was primarily related to higher general repairs and maintenance costs, partially offset by lower utility costs. General and administrative expenses increased approximately $570,000 to $4.9 million in the second quarter. The increase was largely driven by ongoing investments in personnel to support our growth. As a percentage of revenue, G&A decreased approximately 20 basis points year-over-year to 5.5%.

Pre-opening expenses during the second quarter of 2016 was approximately $1.5 million compared to approximately $699,000 in last year's second quarter. The increase was due to the timing of our 2016 development schedule compared to last year. Looking ahead, we expect the balance of our pre-opening expense for the year to be evenly split between the third and fourth quarters.

In summary, net income for the second quarter of 2016 increased $5.8 million, or $0.34 per diluted share compared to $5.4 million, or $0.32 per diluted share in the year-ago period. We ended the quarter with $13.8 million of cash on the balance sheet and currently have no debt.

Switching to our 2016 outlook, we are updating our annual diluted net income per share guidance to $1.05 to $1.08 versus our previous range of $1.03 to $1.07. This compares to adjusted diluted net income per share of $0.93 per share in 2015. We have recently experienced increased softness in our comparable store sales. With this, as well as recent industry sales trends as a backdrop, we believe it prudent to be a bit more conservative in our comp expectations. As a result, our guidance now assumes flat to 1% comparable sales growth for the balance of the year.

In addition, our annual diluted net income per share guidance for 2016 includes the following assumptions - restaurant preopening expenses of $5 million to $5.9 million. We now expect G&A expenses between $17.8 million to $18.4 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. And we expect to open between 11 and 13 new Chuy's Restaurants. Lastly, our capital expenditures net of (inaudible) improvement allowances are projected to be between $33 million and $38 million.

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

Thanks, Jon. In closing, we remain confident in our long-term plan. While the entire industry faces a challenging external environment, we are fortunate to be able to lean on a long history of delivering high quality, made-from-scratch food offerings and hand-crafted cocktails to our guests at a tremendous value. This formula has resulted in 24 consecutive quarters of positive comparable restaurant sales and average unit volumes of $4.7 million.

In addition, our new units continue to open well, and we are already looking into a solid 2017 development plan. More importantly, the broad appeal of Chuy's concept, our historical unit economics, and flexible real estate strategy, combined with our modest store-based [ties], present us with a large runway of opportunity for continued expansion.

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.) Will Slabaugh, Stephens.

Yes, thanks, guys. First, wanted to just kind of follow up on the recent softness that you mentioned. Just curious if you could give any more color on when that started, and then how severe maybe you would characterize it as being, and then, lastly, if there were any geographical or day part details you think might be helpful.

As far as day part details, no. (Inaudible), but I think you asked a similar question last quarter, Will. And we're up a little bit more at lunch than we're up at dinner, but we're up in both on that.

And as far as geographical areas, it's really not one geographical area. It's a little bit everywhere currently. And as far as -- what's the first one?

Softness (inaudible).

Yes, I'd say obviously in the fourth period, which is the beginning of our quarter, we had all the rain and the flooding in Texas specifically, but it even went all the way up to Nashville, Tennessee. So, it's probably in the middle of the quarter [through] the end, right in there. again, we're still up, but that's when it probably started.

Got it. One more quick one, if I could, on Texas in particular. You'd mentioned that that was still underperforming but a relatively positive state for you last quarter. I'm curious if you're seeing any firming at all at this point in the more oil-intensive markets, such as Houston, San Antonio, or if you think that could be something [if you] (inaudible) comparisons that I assume get a little bit easier in the back half, that you're looking for that to firm up in the back half.

Well, I'll tell you, Will, this is Jon. As far as the oil markets, and specifically Houston, it's really hard to tell because that is where the brunt of our poor weather was this quarter. And so, I think a lot of that was hit by the weather, so we really couldn't tell whether that was firming up so much.

And again, as -- Texas as a whole, we're up there, and we're moving forward. And again, we would have done well in this environment down there, specifically in Houston and San Anton, but this is still continuing, Will. There's still layoffs coming.

Got it. Thanks, guys.

David Tarantino, Robert W. Baird.

Hi, good afternoon. I have, I guess, one clarification question on the recent comp trends. I think, Steve, you mentioned that you're still positive, but I guess could you please clarify that, and whether you're running inside that range you expect for the rest of the year?

Yes, yes. We're (inaudible) positive, and that's what the range is. And obviously we don't really know what's going to happen 100% with the Olympics and all that type of stuff, and the election, but we're being a little bit cautious and prudent, I believe.

Well, and I guess one thing to add there, David, if you were going to look at our stacked two-year comp trend, if you're looking at the comp trend that we're running for the stacked, it's about 4.6 on average for the Q1 and Q2. And we're going to roll over [on] average for the back half of the year about 3.7. So, we're rolling over a 4.2 last year.

And remember, about 110 basis points was related to the mix last year, and so we're lapping over that. We're not -- like I've been saying on some of these conference, we're [not able] to cover all of that mix that we saw last year, about half of it. So, we are seeing a little negative impact of rolling over that mix.

And that was the new menu we introduced last year in the second quarter, and the new bar menu, David, with the bigger drinks.

Got it, yes, that was going to be my next question. So, I guess when did that bar menu start -- when did you start to lap that? And I guess when did the mix [slip] from being positive?

Yes. Effectively, it was about the last two weeks of the quarter last year, so basically the first part of Q3.

Got it, okay. Okay, great. Great, that's helpful. And then, I guess the second question I had was around the new unit productivity, which looks pretty good relative to at least how I modeled it. So, I guess related to that, how are the 2016 openings tracking relative to your internal plan so far?

Yes. As I mentioned in my prepared statement, we're very pleased as far as the plan. And not only pleased with their sales plan expectations, but also the profitability plan hitting expectations. So, we're very, very pleased.

Great. Thank you very much.

Jeff Farmer, Wells Fargo.

Thanks. Just following up on Will's earlier questions, I'd say almost every casual dining management team has been asked to share their opinion on the drivers of the slowing segment same-store sales over the last two, three, four, five months. Can you guys share your opinion?

Yes. [What I'm just looking at] -- so, what we do is, when anything that pops in externally, I kind of always look internally, and that's been my approach, and it will always be my approach. Right now what we're working on is just the fundamentals of our business, and we really don't worry about everybody else's silver bullet out there. But, we're just working on the fundamentals and doing everything right inside our four walls, and we believe, if we do that, we'll be able to improve our share.

Okay. And then, Jon, I heard your COGS guidance for the back half of the year, but what level of commodity basket deflation did you see in Q2? I'm not sure if you said that, or I might have missed it. And what do you expect in the back half of the year?

Sure. Q2 deflation, Q2 over Q2 was about 2.5%. If you're looking year-to-date, we're down about 1.6% year-to-date. So, we're expecting lesser deflation, if you will, in the back half. If you remember, last year in Q3 we had about 3.2% deflation, and in Q4 6.28% deflation. So, currently in the third quarter, what we're seeing is that, sequentially, our prices over the second quarter have increased about 3%, but quarter-over-quarter, (inaudible) about 80 basis points negative or deflated, quarter-over-quarter for the third quarter. So, we're just through period seven right now. So, as you can see, that deflation has really decreased.

Okay. And then, just one more on the labor line. You culled out 60 to 70 basis points of labor cost pressure, but I'm just curious how that breaks down between your more typical wage and benefit inflation and how much would you attribute to sort of some of the new restaurant inefficiencies?

Well, I tell you, most of that is the new restaurant inefficiencies. If I was to look at the existing restaurants, comparable restaurants, labor was pretty flat over last year, so most of that is all the inefficiencies of the new restaurants.

And how many did we open last year, Jon?

Last year we only opened one in the quarter. This year we opened four.

Okay. Thank you, guys.

Andy Barish, Jefferies.

Hey, guys. I think next year you may wind up entering three new markets - Denver, Chicago, and South Florida. Should we expect any kind of G&A infrastructure costs that build in association with that? And how do we view occupancy in those markets kind of versus the current fleet of stores?

I'll take the front side and give Jon the back side, Andy. Now, the infrastructure's already been planned, and for the G&A section. Obviously we'll hire a local GM and supervisor, but they're already on board currency. So, we already have them set. And you know me. I'm usually out six months to a year when you're looking at new markets. So, they've been absorbed already, so the infrastructure's all set.

As far as the occupancy, Jonny?

Well, as far as the occupancy, that's really built into those numbers, Andy, that we've been talking about [and expecting] that occupancy to rise over the next few years 20 or 30 basis points a year. So, I do see that rising next year. And as we get into these markets, it'll continue to go up a little bit until we level off -- I'm thinking we'll level off around the high sevens, low eights.

Okay. And then, what was the reasoning behind the G&A numbers going up $500,000 or so?

Well, two reasons, one from a guidance standpoint. One was there's significant options that were exercised during the first half of the year that increased our G&A more than we were expecting for the payroll taxes.

And then, secondly, as I think I said before on these calls, we don't really guide to a full performance bonus. We guide to the middle range, and so we've adjusted that a little bit. So, to the extent that that comes back down or goes up, it's all self-funded as far as that performance bonus, so the bottom line will go up, as well.

Thank you.

(Operator instructions.) David Carlson, KeyBanc.

Hey, guys, couple quick questions. Jon, did you say what the rate of wage inflation that you experienced during the second quarter was?

It's right around 3.8%. I think it was 3.9% the first quarter, so we're seeing pretty steady right about 3.8% to 4%.

Okay. Apologize if I missed this. What was the menu pricing in the second quarter, and what are the pricing assumptions for the third and the fourth?

Well, we pick up (inaudible) new price, and we do it every year in February, beginning of our second period. And it was approximately 1.5%, and there'll be no more pricing throughout this year. We usually [only want to] do our menu pricing once a year.

So, my follow-up to that was, given the pressure you guys are experiencing on the labor line, I think, Jon, you indicated you expect to see that pressure build the remainder of the year. Are there any plans at this point to take additional pricing?

No. No. what we're doing is -- [what's] very important for us is price value equation in this tough time, and also the fundamentals. And we feel pretty well. Obviously we feel the deflation in food costs has allowed us to make sure we maintain the balance, going forward.

Fair enough. Thank you, guys.

Andrew Strelzik, BMO Capital Markets.

Hey, good afternoon, guys. So, I wanted to ask first, on the guidance, is the right assumption that the guidance raise is due really to outperformance here in the second quarter, and the back half is a touch weaker, or there's some offsets on the cost side, given the reduction in the comps that maybe offset that and make the back half better?

No. I mean, obviously we had a [beat of] -- to the consensus of $0.30. So, yes, given our guidance on sales, obviously we're expecting a little slowdown in the back half. So, all of the increase was related to our [beef] here in the second quarter.

Okay. And on the commodity side, last quarter you guys talked about how much you were locked, particularly on the beef side. Has there been any change, and have you started to look at 2017 yet for the commodities?

We have started looking for 2017 and looking to some beef contracts. But, due to competitive reasons, we're not wanting to get into that. But, we have started looking at that and locking some of that in, but we are locked through the end of the year, and then for beef starting into the next year.

Great. Thank you very much.

Nick Setyan, Wedbush Securities.

Hi, gentlemen, thanks for taking the question. What's your comfort level with maintaining the 2016 [unit] growth rate into 2017, given obviously a slower overall environment, and maybe a little bit more pressure from the new units?

Again, we're expecting that we move forward as what we've kind of talked about in the past. We've got to remember that we started all our growth actually in 2009. So, we look internally, and we're pretty comfortable still with the growth.

And right now, over the last couple years, you've seen that high teen number, and that's what we're expecting as we move forward.

Got it. And Jon, just going back to the labor in Q2, I mean, is it just the comp slowdown that -- in the past I guess we had some nice labor leverage. Was it just the unit inefficiencies being offset by leverage (inaudible) the comp basis [where you couldn't see enough] leverage this time around?

Well, last year we had a lot of -- it wasn't leverage. It was really the initiatives that we implemented, if you remember last year, Nick. So, that got us a lot of favorability on that line item. We're rolling over those initiatives this year. For the most part, we are rolling over full implementation here in the back half of the year. The first quarter we still saw some benefit from that because it wasn't all implemented in the first quarter of 2015, but we're rolling over that, so that's flat to flat.

And so, what you're seeing now is a lot of the inefficiencies. Like I said, we opened up four stores here in the second quarter versus one store, which I mentioned in the first quarter call. And in the back half of the year, it's looking more equal, like three and three, opening three stores here in Q3 and three to four in Q4 versus two last year in the third quarter and then four in the fourth quarter.

Got it. Thank you.

Brian Vaccaro, Raymond James.

Thanks, and good evening. Just a quick follow-up on the labor cost [side effects today]. Jon, can you help us size the impact of the overtime rule changes that take effect later this year as you think about your 2017 labor cost outlook?

I tell you, we're currently sizing that up and trying to figure out what we're going to do. There's several different options that people in our industry are doing, and we're not really ready to talk about that right now. But, ultimately, the goal is to make sure that we don't short-change our kids, and make sure they're going to get paid just the same amount under the new regulations as the old regulations. And with the overtime, they may get paid a little more. So, we still haven't figured out what that impact is going to be. And from my understanding, there may even be some legislation to delay that a little bit. So, we're not ready to talk about that yet, Brian.

All right, fair enough. And then, I also wanted to ask about the performance in some of the new markets you've entered the last few years. And sort of specifically as it relates to the backfill strategy that you shifted towards, can you give some color on how this has translated in building brand awareness, and ultimately improving sales in some of these markets?

Yes. Yes, we're going all the way back to 2013. If you look at those stores, they're comping at a higher same-store sales comparable level than existing. But, the whole deal was to go back in these markets and get more awareness, and I think it's worked. It's part of our obviously 24 consecutive quarters of same-store sales increases, so I think that shows that it's working.

Over the last three years, we've been doing about 20% new, 80% backfill. This year it's going to not be quite that low. It's going to be probably like a 40%-60%, meaning 40% new, where we're going to go into the markets that I think Andy brought up earlier, which would be the Chicago market, the Miami market. We are in Orlando. And then, we had the opportunity to look at and build out rather quickly in [a] Denver market, which is kind of like a sister market from Austin, Texas. So, those are our newer stores in the new markets, and all the rest will be backed up.

And those three new markets, those will all open in 2017, including -- you'll have a Denver opening, or is that a early 2018?

No, that will be -- they'll at least have one in each of those markets this upcoming year.

Great. All right, thank you.

That concludes today's question and answer session. At this time, I'd like to turn the conference back to Mr. Steve Hislop for any final 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.

This does conclude today's conference. Thank you for your participation. You may now disconnect.