Chuy's Holdings Inc (CHUY) 2016 Q3 法說會逐字稿

Please standby we're about to begin. Good day everyone and welcome to the Chuy's Third Quarter 2016 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time all participants have been placed in a listen-only mode and 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, Inc. At this time I'll turn the conference over to Mr. Howie. Please go ahead.

Thank you operator and good afternoon. By now, everyone should have access to our third quarter 2016 earnings release. It can also be found at 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'd like to turn the call over to Steve.

Thank you Jon and thank you to everyone for joining us on the call today to discuss our third quarter 2016 results. All in all, we're pleased with our performance that came in the face of a challenging external environment. Looking at highlights for the quarter, revenues increased 15.8% to $85.6 million, comparable restaurant sales increased $0.30 and adjusted net income increased 19.7% to $4.9 million or $0.29 per diluted share.

Despite the short-term headwinds, our ultimate focus remains simply to deliver high quality made from scratch food offerings and handcrafted cocktails to our guests at a tremendous value in a unique and upbeat atmosphere. The long-term formula has now resulted in 25 consecutive quarters of positive comparable restaurant sales and an average unit volume of $4.7 million. As I said before, if we continue to take care of our guests I believe the current environment provides us with an opportunity to increase our market share.

During the third quarter we also opened three new Chuy's restaurants; in Chattanooga, Tennessee, Winter Park, Florida in the metropolitan Orlando area and San Marcos, Texas just south of Austin. We also closed one restaurant in Charlotte, North Carolina which we expect to relocate by the end of the year. Subsequent to the quarter, we have opened one additional restaurant in Rockville, Maryland bringing our year-to-date development to ten 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 volumes but also with regard to their initial profitability. For 2016 we expect to open 12 new Chuy's restaurants including our new location in Charlotte.

Looking ahead our 2017 development plan is coming together nicely and we continue to believe we have a huge runway for growth ahead of us. With that I'd now like to turn the call over to our CFO, Jon Howie, for a more detailed review of our third quarter results.

Thanks Steve. Revenues increased 15.8% year-over-year to $85.6 million for the third quarter ended September 25, 2016. The increase included $13 million in incremental revenues from an additional 166 operating weeks, produced by 15 new restaurants open during and subsequent to the third quarter of last year.

We had a total of approximately 990 operating weeks during the third quarter of 2016. Comparable restaurant sales grew 0.3% during the third quarter driven by a 1.1% increase in average check combined with a 0.8% decrease in traffic. Effective pricing in the third quarter was approximately 1.5%. There were 58 restaurants in our comparable base at the end of the third quarter of 2016. 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 30 basis points year-over-year to 26.3% driven largely by lower grocery prices. Looking at the balance of the year, we have experienced sharp increases in produce and to a lesser degree in dairy. As a result, we expect cost of sales as a percentage of revenue in the fourth quarter of 2016 to increase 20 to 40 basis points compared to the prior year quarter.

Labor costs as a percentage of restaurant revenue increased 130 basis points to 33.3% driven by ongoing wage rate pressures and inefficiencies from new unit development. We would expect labor pressure to continue in the fourth quarter. Restaurant operating costs as a percentage of revenue increased 20 basis points to 14%. The increase was primarily related to higher general repairs and maintenance costs.

Occupancy costs as percentage of revenue increased approximately 20 basis points year-over-year to 6.7% driven by higher rental expense as a percentage of sales in our newer locations. General and administrative expenses increased approximately $59,000 to $4.1 million in the third quarter. As a percentage of revenue G&A decreased approximately 70 basis points year-over-year to 4.8%. This primarily related to lower performance-based bonuses, our bonus estimate, offset by normal increases related to infrastructure to support our growth.

Pre-opening expenses during the third quarter of 2016 was largely flat at approximately $1.2 million compared to approximately $1.1 million last year. We expect pre-opening in the fourth quarter to be similar to the third quarter level.

In summary, net income for the third quarter of 2016 increased to $4.6 million or $0.27 per diluted share compared to $4.1 million or $0.24 per diluted share a year ago.

Third quarter 2016 results included a $0.4 million of a one-time pre-tax expenses related to the closure of one restaurant excluding the expenses related to the closure adjusted net income increased 19.7% to $4.9 million or $0.29 per diluted share in the third quarter of 2016 compared to net income of $4.1 million or $0.24 per diluted share in the third quarter of 2015.

We have included a reconciliation from GAAP net incomes to adjusted net income in the accompanying financial tables of our earnings release. We ended the quarter with $13.9 million in cash on the balance sheet and currently have no debt.

Switching to our 2016 outlook we expect annual adjusted diluted net income per share of $1.05 to $1.08 which excludes the net effect of the previously noted closure costs. Our annual diluted net income per share guidance for 2016 includes the following assumptions; full year comparable sales increase of 1% to 1.4% which translates to 0% to 1% comparable sales growth for the fourth quarter.

Restaurant pre-opening expenses of $5 million to $5.9 million, we now expect G&A expenses between $17.6 million to $18.1 million. Our effective tax rate is estimated to be between 29% and 31%. We expect annual weighted average diluted shares outstanding of approximately $16.9 million shares and we expect to open 12 new Chuy's restaurants.

Lastly, our capital expenditures net of tenant improvement allowances are projected to be between $33 million and $35 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. The broad appeal of Chuy's concept, our historical unit economics and flexible real estate strategy combined with our modest store base size present us with a large runway of opportunity for continued expansion. Before I turn the call back over to the operator for 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.

Yes thank you, if you'd like to ask a question, please signal by pressing Star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is Star 1 to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal for a question.

And we'll go first to Chris O'Cull with Keybanc.

Hey, good afternoon guys.

Hey Chris.

Jon, I was hoping you could give us a little color on the commodity contract that you have in place for 2017, maybe how much beef is locked up and kind of give us some expectations for commodity inflation or deflation next year?

Well, I'll tell you Chris, we are currently now working on our contracts here in the fourth quarter. We have locked up our fajita beef through the end of next year at about 6% lower prices. So we're pretty happy with those. We have not locked up yet the ground beef yet but I think that's going to be a little more favorable than last year as well but the other ones are still kind of in process, a lot better information by the year-end call.

Okay, and then Steve, does the company plan to take pricing in February given that you've had several quarters of deflation?

Well, what we're looking at Chris, you know, over the last seven or eight years we've averaged about one and a half over that period of time on average. Right now as we're studying it, that would be something I'd probably be looking at right around that range again.

Okay. Do you plan to put caloric information on the menu in February or do you plan to maybe reprint in May?

We'll look into that, that's been changing so much but right now we're set to go whenever we want to and we probably won't jump the gun at it.

Okay. Okay, and then lastly Jon, could you help us understand that labor deleverage in the quarter, can you break that out between like new store inefficiency versus wage inflation and then maybe give us a little understanding of what the overtime rule could do the labor line?

I will tell you, there's probably about 20 to 30 basis points in there related to wage inflation. From the new -- most of the rest of it is the new stores. If I was looking at the existing stores they were up about 30 to 40 basis points and then the new stores is the rest of it.

And the overtime rule?

The overtime rule, right now we're still -- we're at the final stages of kind of deciding what we're going to do. We know it's going to have an impact on us. I don't think it's going to have a significant impact but it could have 20 to 30 basis points.

Great, thanks guys.

We'll go next to David Tarantino with Robert W. Baird.

Hi, good afternoon. Couple of questions here, first on the comps. Jon, do you see any sort of notable changes throughout the quarter as the quarter progressed and then maybe as the related question, were there any negative weather impacts with all of the rain in Texas?

You know, we did have a little but it wasn't much to note. I mean, it's like 20 or 30 basis points David but as far as the consistency, who's really consistent? It was like three, three, three throughout the quarter. So, there was really no fluctuation from period to period.

Got it, and then as you think about the setup for Q4, I know the comparison is perhaps a little easier but you're not necessarily guiding to the better comps. Is there anything, I guess, holding you back on that or perhaps have you seen the change in trajectory as we've entered this quarter?

Well, I'll tell you, we rolled over 4.2% this quarter which was one of the largest quarters that we've had since we've gone public. We're rolling over 3.2 which is, you're absolutely right, a little easier but not much. You know, we had the Christmas impact coming in December that could have anywhere from 50 to 70 basis points negative impact to the overall fourth quarter comps. I know we did have a little favorable lift in Halloween but that's not enough to cover that.

Okay, got it. And then I guess Steve maybe a big picture question about the development pipeline as you look into 2017. Is there any initial look at how many openings you might have next year and then are you still on track to enter the new markets that you previously outlined?

Yeah, we're still -- obviously we're still putting the whole plan together, we're very good as far as numbers of sites and what we're looking for. So -- and so we're well on track on that. I'm still just fine tuning my pencil a little bit on the number. The second thing though is that, yeah, what we've -- what I've already mentioned is we'll be definitely entering the Chicago market next year. We'll be entering the southern Florida, Easton side of Florida market and also Denver. So, those will be my three new markets for the 2017.

Got it and then on that, Steve, how many -- what percentage do you think there will be in new markets versus existing markets so to speak next year and do you have any sort of views on, I think the last time you sort of weighted a little bit more heavy on new markets. We saw a pretty negative impact on margins. Do you think that that could happen as we've looked at next year again or is this --

No, the key thing of what you're talking about is out of nine stores we had eight new markets in that one year. The last three years you've seen us basically 80% backfill, 20% new. This upcoming year you'll see us at that 35% range of new markets and the rest will be backfill also. So I think we're well set up with our size and so forth with it.

Great, thank you very much.

Thank you.

And we'll now go to Will Slabaugh with Stephens Inc.

Yeah, thanks guys. Can you talk a little more about what you've seen from your most recent opening and then from an AUV and restaurant level margin standpoint kind of if you've been pleased with those and what expectations are for next year's class versus 2016 given you'll be in some of those larger markets that you just mentioned earlier?

Again, you know, we're pleased with our openings as far as I mentioned in the call about the profitability and how quickly they'll come in and the volumes as far as our model goes on the blended rate, 3.75, and that's what we're expecting for 2016 but we're pretty pleased with the whole class this year.

Good deal and then Jon, on the guide, you're guiding us from, I believe it was just over 20% EPS growth in 3Q to roughly flattish for 4Q. Wonder if you could talk about what the bigger, biggest, drivers are there and then if you could also talk about produce a little bit more? I know you mentioned that was supposed to be up for you, is that still up or is it something that's corrected yet?

It's still up, it's still up, but we are starting to see some flattening, you know, in the avocados but it's definitely up for us right now. You know, it's trending well above our quarter three cost of sales now so that's why I guided that. As far as the fourth quarter, it's really sales deleveraged in that area. We're losing about ten operating weeks from a slide in some of the new store opening, so our sales in addition to the comps sales they're going to be down another million dollars because of that slot.

-- slide was -- as someone mentioned earlier, that slide was the hurricane and some of the weather that we've had. That affected down in Corpus Christi which is South Texas and over in Waverly which is over in the Carolinas and has a lot of weather over there.

And then when you're looking at a margin standpoint like I said, we've had some favorable matchups with cost of sales. We believe we're going to be above that number next year in cost of sales by 20 to 40 basis points and then labor is going to be right around that, 100 basis points higher than last year.

Got it, thanks very much.

Thank you.

And once again, if you'd like to ask a question, please press Star 1. We'll now take our next question from Andrew Strelzi with BMO Capital Markets.

Thanks for taking the question, this is actually Ryan Royce on for Andrew. So we've been hearing a lot about the widening gap between food at home and food away from home and the impact that can have on restaurants. I was just wondering what do you guys seeing out of the consumer and do you think that holds any water?

You know this is Steve, Andrew. You know, I think it does to certain concepts. You know, at the end of the day there's no doubt that the inflation at the grocery stores has happened. I think, you know, varied menu, bar, grill, I think that there is a little bit of risk because every single thing they have on their menu they can easily do at home and with the price points I think it does affect it a little bit more on the quick casual group. But, you know, if we think we're in a great, great position where we're at because you really can't cook my stuff at home, so that's a good benefit for us but I've done seen that. As far as any traffic patterns that are different or any spending habits that are different, really haven't seen any from lunch to dinner or alcohol or dessert and just maybe a tiny bit slower, slow down a little bit.

Great, thank you very much.

Yep.

And we'll go next to Brian Vaccar with Raymond James.

Good evening and thanks for taking the question. Just wanted to circle back on the food cost then and drill down on avocados a little bit. Can you remind us what percentage of your overall cost basket is avocados in a typical year, not right now, I should clarify?

You know, it's a little over -- I don't want to talk off the top of my head here, one second. I was calculating that up the other day from -- it's right around $20.00 a case and they got up to over $90.00 a case on it -- and that's kind of is like a lime situation. It had about a 60 basis point swing in overall cost of sales. But if you look at avocados today you're looking at --

He's quick with the calculator.

Yeah, I was looking at Jon and I think your produce is like 18%, rough number, 18% of your total cost and I thought avocados were about 25% to 30% of that in a normal year which was getting me to somewhere in the mid singles but I just wanted to run that high level sort of, again, in a typical year which I know no years are typical these days.

Brian, I just want to compare the two so I mean you're looking at 26% of total produce today versus, you know, last year it was similar to 14% of produce.

Okay. Okay, that's helpful thank you for that. And as you think about -- I wanted to ask about the 2017 COG outlook, it would seem with the fajita beef contract in place and some of the favorability on ground beef as well, is it fair to assume in broad strokes think it's fair to assume though that it will be flat to slightly favorable year-on-year, your overall COG basket next year?

You know, I don't want to say that right now. I would think it would probably be flat to maybe a little negative. You know, you just never know on produce because that's one commodity we can't lock in.

And that's our big basket, as you know, you there.

And we have some increases coming in beans and sugars and some other things that we know of today and rice. So groceries we've had a great run the last couple of years but I think that's going to turn around on us a little bit in 2017.

Okay, and then just one modeling nitpick. I just wanted to confirm, there is an extra operating week in 2017, correct?

You are correct.

All righty, thank you.

Thank you.

There appears there are no further questions at this time. I would now like to turn the conference back to management for any additional or 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 call, thank you for your participation.