Chuy's Holdings Inc (CHUY) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to the Chuy's Holdings, Incorporated fourth-quarter 2016 earnings call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and 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'll turn over the conference to Mr. Howie. Please go ahead, sir.

Thank you, operator, and good afternoon. By now, everyone should have access to our fourth-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 condition.

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

Thank you, Jon, and thank you to everyone for joining us on the call today. 2016 was a very good year for Chuy's. We managed to grow our revenue over 15% for the year, maintain positive comparable restaurant sales for the seventh year in a row, and produce adjusted net income growth of 17%. Our average annual unit volumes of $4.6 million continue to remain some of the best in the industry.

From a topline standpoint, our growth continued to be led by new unit development. During 2016, we successfully expanded our store base by approximately 17% with the addition of 12 new Chuy's locations during the year, including one relocation. While it's still early, we are pleased with the initial results of our 2016 class.

We've also been keeping track of a growing desire for convenience from our customers, and during 2016, we continued to make progress, adding more delivery service to our current locations. At present, over half the Company's units offer delivery, and we plan to introduce additional locations during 2017. We believe this helped drive double-digit growth in our to-go sales during 2016.

The current restaurant environment remains challenging, and we felt the impact of that in the fourth quarter in addition to some external events beyond our control. We increased our revenues during the quarter by 11.4% to $79.1 million, however, negative comparable restaurant sales in December resulted in a 1.1% decrease for the full quarter. Fourth-quarter sales were negatively impacted by weather and the calendar shift of Christmas, which Jon will provide more detail around in a moment.

Adjusted net income for the quarter was $3.1 million, or $0.18 per diluted share. We continue to believe in the long-term strength of our brand, which is driven by our people staying focused on our habits, routines, and fundamentals to provide all our guests made-from-scratch food at a great value and the VIP experience they expect.

During the fourth quarter, we opened three new Chuy's restaurants in Rockville, Maryland, Corpus Christie, Texas, and Charlotte, North Carolina as part of a relocation. During 2017, we have opened two restaurants to date, one in Cedar Park, Texas just northwest of Austin, and one in Cumberland, Georgia, our third restaurant in the Atlanta metropolitan area.

For 2017, we expect to open 12 to 14 new restaurants, which will be somewhat back-end loaded. We're excited about our 2017 development plan, which includes a healthy blend of new and existing markets, including our first restaurants in Denver, Chicago, and Miami. We continue to target blended new unit sales of $3.75 million on a modest investment of $2.0 to $2.1 million yielding a targeted cash-on-cash return of 30%, which is as good as you'll find in the industry. We believe we have a huge runway of profitable 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 fourth-quarter results.

Thanks, Steve. Revenues increased 11.4% year over year to $79.1 million for the fourth quarter ended December 25, 2016. The increase included $10.9 million in incremental revenues from an additional 162 operating weeks produced by 16 new restaurants opened during and subsequent to the fourth quarter of last year. We had a total of approximately 1,019 operating weeks during the quarter of 2016.

For the full year, revenue increased 15.2% year over year to $330.6 million. The increase included $47.0 million in incremental revenues from an additional 596 operating weeks produced by 22 new restaurants opened during and subsequent to fiscal 2015. We had a total of approximately 3,879 operating weeks during fiscal 2016.

Comparable restaurant sales decreased 1.1% during the fourth quarter, a combination of a 1.3% increase in average check combined with a 2.4% decrease in traffic. Comparable restaurant sales were negatively affected by approximately 120 basis points due to unfavorable weather and the calendar shift of Christmas day from a Friday to a Sunday.

We also faced a 40 basis point headwind during the quarter from newer stores in our comp base that have not yet settled from their honeymoon into a normalized run rate.

Effective pricing in the fourth quarter was approximately 1.5%.

There were 61 restaurants in our comparable base at the end of the fourth quarter of 2016. As a reminder, we consider restaurants to be comparable in the first full quarter following 18 months of operations.

Turning to a discussion of expense line items, cost of sales as a percentage of revenue improved 20 basis points year over year to 26.1% driven largely by lower grocery, chicken, and beef prices. Looking ahead, we expect sales to be roughly flat for 2017 with the potential for more favorability earlier in the year versus later in 2017.

Labor cost as a percentage of restaurant revenue increased 190 basis points to 35.3% driven by ongoing wage rate pressures, operating inefficiencies from new unit development, and the deleverage of management labor, particularly our managers in training as a result of the back-end-loaded nature of our 2016 restaurant opening schedule. Given the inflation in our hourly rates, we would expect labor pressure to continue in 2017.

Restaurant operating cost as a percentage of revenue decreased 10 basis points to 14.3%. This decrease was a result of lower insurance costs offset by higher general repairs and maintenance. Occupancy costs as a percentage of revenue increased approximately 10 basis points year over year to 7% driven by higher rental expense as a percentage of sales in our newer locations offset by lower real estate and [personal] property taxes in the current year.

General and administrative expenses decreased approximately $305,000 to $4 million in the quarter. As a percentage of revenue, G&A decreased approximately 10 basis points year over year to 5.1%. This is primarily related to lower performance-based bonuses offset by normal increases related to infrastructure to support our growth.

Pre-opening expenses during the fourth quarter of 2016 decreased approximately $340,000 to $1.2 million resulting from the timing of expenses related to our new restaurant opening schedule.

In summary, net income for the fourth quarter of 2016 increased to $2.3 million, or $0.14 per diluted share, compared to $0.2 million, or $0.01 per diluted share in the year-ago period. This year's fourth-quarter results include store closure expenses of $1.1 million related to the lease termination, closure, and relocation of one restaurant, and the fourth-quarter results for last year included an impairment charge of $4.4 million.

Excluding expenses related to the closure in the current year and the impairment in the prior year, adjusted net income increased to $3.1 million, or $0.18 per diluted share, in the fourth quarter of 2016 compared to adjusted net income of $3 million, or $0.18 per diluted share, in the fourth quarter of 2016 -- excuse me, 2015.

Our adjusted earnings for the fourth quarter reflects an effective tax rate of 19.8% compared to 30.7% in the same quarter last year. The lower rate reflects pending WOTC credits from prior years totaling approximately $167,000 after tax, which were delayed prior to the PATH Act of extending these lapsed credits through 2019. This resulted in a $0.01 per share benefit for the quarter and for the year.

We have included a reconciliation from GAAP net income to adjusted net income in the accompanying financial tables of our earnings release. We ended the quarter with $13.7 million of cash on the balance sheet, and we currently have no debt.

With respect to our 2017 outlook, we are providing the following annual guidance. We would remind you that 2017 is a 53-week year and our guidance includes an extra week, which will occur in our fourth quarter. We currently expect annual diluted net income per share of $1.11 to $1.15. Included in our EPS expectation is a positive $0.05 per diluted share impact from the extra week in the fourth quarter.

Our annual diluted net income for share guidance for 2016 includes the following assumptions. We expect comparable restaurant sales growth of 1% to 2% on a comparable 52-week basis. Incorporated in our full-year comparable store sales growth is a negative 50 basis point impact resulting from the strategic cannibalization of two high-volume restaurants in the Austin area with the opening of our Cedar Park restaurant in late January. While this will help our system both from an operational and a return standpoint over the long term, we expect it to have a near-term impact on comparable sales and profitability of approximately $0.03 a share.

We expect restaurant pre-opening expenses of $6 million to $6.5 million. We expect G&A expenses between $20.6 million and $21.1 million. While the expected year-over-year growth in G&A dollars is greater than our historical run rate, our 2017 G&A guidance includes investment spending related to office space expansion, which will include a new test kitchen, senior level personnel, and several technology upgrades, which will all benefit our business over the long term. In addition, we are in our fifth year of being a public company, which requires additional professional fees associated with becoming SOX compliant.

Our effective tax rate is estimated to be between 29% and 31%. We expect annual weighted average diluted shares outstanding of 17 million to 17.1 million shares, and we expect to open 12 to 14 new Chuy's restaurants. Lastly, our capital expenditures net of tenant improvement allowances are projected to be between $39 million and $44 million.

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

Thanks, Jon. In closing, we remain confident in our long-term plan. The broad appeal of the Chuy's concept, our historically unit economics and flexible real estate strategy combined with our modest store-based size presents us with a large run rate of opportunity for continued expansion.

Before I turn the call back over the operator for questions, I'd like to take a moment to thank all 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) David Tarantino, Robert W. Baird.

Hi, good afternoon. Jon, my first question's on the performance for the new units. It looks like the revenue contribution, at least the way we calculate it, came in a little soft in Q4, yet I think Steve mentioned that you're pleased with the 2016 class. So can you perhaps reconcile that and comment on how the new units are performing?

Sure. I think you're referring to the incremental sales versus incremental weeks. If you look at -- we had that happen last quarter as well. Remember, this is our lowest indexing quarter for the year. But with that said, it is down over last year. If you go back and compare that to 2014 though, it's down a little bit, but not as much. It's down about 4.8%.

And if you remember what we said last year, 2015 stores were performing a little above our target. If you look at that calculation for the full-year, which I believe you can get to that in the full-year information that we gave you, that AUV is still over $4 million, and we expect it to settle in that $3.7 million range.

Great. So is there anything unusual about Q4? I guess if I annualized Q4, I would come up with something lower than that. Is there something wrong with doing that calculation? Or perhaps (multiple speakers) --

Well, I think with the weather and Christmas both, I mean, you're talking that alone was about 120 basis points, so I don't know that that makes sense doing that.

And a key think, as he already mentioned to you, David, is our lowest indexing quarter for AUV average sales is the fourth quarter.

Understood. Great, thank you. And then, Steve, on the G&A investments that you're making, are those a new layer of costs that you're going to have going forward, or is there anything in there that's maybe one-time that won't continue beyond 2017?

There -- for the most part there is some investment -- this is Jon, I'm sorry, David. For the most part, it's the expansion into the office space. I mean, for those of you on the call that have visited our office, then you know how packed it is here. We're just expanding next door. We're not going to a new office, but we're expanding next door to keep kind of our Chuy's feel here. So that alone is about $400,000 a year, and so that will continue on.

We've brought in internal counsel in the current year, which will continue on. SOX will be an expense, which will continue on; IT investments. So most of it, David, are expenses going on. The biggest item of that that I would say is more incremental this year than kind of our normal is, again, the option expense. I think for those of you on the phone, I've always talked about G&A, we kind of view that as 70% of our store growth. And if you do that calculation, we'd have about, at the high end, about 18% store growth, so it'd be about 13% on our G&A. We're obviously a little over that.

But the investments that we're talking about are kind of the incremental variance related to that. And the biggest one is option, which we've talked about. We're going to be in our fourth year of vesting for that this year, so next year that actually ought to come down a little bit. And so we'll see some leverage on that, and we should get back to kind of that 70% of the growth rate next year.

Great, thank you very much.

Will Slabaugh, Stephens.

Yes, thanks, guys. I had a question on to-go sales. You mentioned that side of your business was growing at a double-digit rate. So I wonder if you'd talk about what you've done historically to drive that business and what you see more as the opportunity? And then I had a follow-up on delivery as well.

Yes, the big thing is when I first got here, we didn't have really any delivery services. I think our first one came in around 2009. But over the years, we've actually added on as we started getting into these markets and having multiple stores in a market where it made sense. We started adding on some delivery services that we vetted out and made sure that they represent us very, very well. So that's a big thing. And from their perspective, we use websites, social, and eblast to get those out. We also have the magnets on our own doors. But as I mentioned to you, we're continuing that, and you'll see us continue to roll more stores into the delivery side of the business.

Okay. And then on pre-opening, that looks to be just a little bit higher on a per-restaurant basis for 2017 as well. So I'm curious if that has to do with the new markets? And then also, could you talk a little bit more about what you're doing in some of these newer markets to help ensure some stronger unit openings?

Hey, Will. This is Jon. Yes, that does have to do with some of the new markets. Some of the higher rents, obviously a lot of that has to do with non-cash rent is up a little bit than what it's been in prior years. We look -- it normally takes, from when we take over the store, about four months to build that. So we've got that non-cash rent. It's been higher this year than it has been in the past. Then also in these new markets, we don't have any stores nearby like in Chicago and Denver, so our travel cost is going to be a little hire for our trainers.

Yes, and as far as, David, going into new markets, obviously with our growth, we're kind of used to going into new markets over time. But obviously it's always evolving with us. A couple years ago at the beginning of 2015, you saw us put all our defining differences on our menu. Some of the basics that we still do all the time as we go in there, we've already engaged three PR firms in each of these three areas that is a boutique PR firm that is already talking about the local management that's bringing Chuy's to their town.

We start with each of them with Red Fish Rallys six months before we've ever opened with them where we deal with a lot of Texas (inaudible), we deal with a lot of bloggers. We do get on all the cooking shows. We have Elvis driving around in the area with a pink Cadillac so people write about it. So we're very well versed and we're getting in front of the market and trying to really introduce our defining differences, especially compared to anybody in the casual segment that's up there.

And again, why we chose these markets were three basic reasons. Number one, the propensity for Mexican food and [eating] it; it's very good. It's also great competition up there, which we like. We like going right next to it. And then the population bases are so strong for us. So those are the three main reasons we've decided there. And we've been working on these three markets from a PR standpoint for at least the last three months.

Great. Thanks, guys.

Chris O'Cull, Keybanc.

Thanks. Good afternoon, guys. Jon, would you walk us through the primary puts and takes to help us understand how you get relatively flat earnings in 2017 when you exclude the extra operating week?

Sure. I mean, basically the extra operating week, we also have the -- let's just take the high side of that range, [115], you take the operating week, it's [10]. So let's take the low end for instance of [111]. Take the operating week, you get to [106]. And then the cannibalization of the [183] in the Round Rock is about 3 basis points -- or about, excuse me, $0.03 a share because we plan on -- we're going to lose about 4% in one store and about 8% in the other is what we're thinking. And that's pretty significant given those volumes of stores.

And then the other significant, I guess, decrease or decrease in our EPS is our extra investment in the G&A cost. That's probably about $0.03 to $0.04.

What do you think labor inflation at the store level -- what kind of impact do you think it's going to have on year-over-year earnings?

Currently, we're estimating about 2.5% inflation is what we're thinking. We were thinking it was a little abnormally high this year. It was running around 4%, just a tad under there for the year. We did see it drop off a little in the fourth quarter from the third quarter, so that's why we think kind of our estimate is going to come to fruition.

Because what we found was we were a little under market in some of these locations. We were losing a lot of long-term employees, so we needed to bump up those salaries against the market adjustments. So we believe that 4% last year was more related to that, and we'll have some more normalized inflation next year because we're not in the markets where we're having to deal with the minimum wage increases, substantial increases. If that's the case, with a 1.5% increase, we're looking at 40 to 50 basis points when you're looking at that for a labor increase.

Okay, that's really helpful. And then, Jon, can you walk us through the profitability of a delivery order compared to a carry-out order? I wasn't sure if you guys subsidized some of the third-party delivery charge for the consumer, or is it all passed on to the consumer?

It really depends on the delivery service. So right now, we are charged. We kind of take that burden on ourselves for the most part. It ranges anywhere from 20% to 30%. We kind of treat that as the labor cost associated with delivering that. We do have, in some of our markets, a little up-charge just for delivery just for the packaging, but not in all markets. But the delivery is just, like I say, it's a charge that we bear for the customer. We're looking at possibly consolidating some of that and seeing if we can get better pricing, but currently it's about 20% to 30%.

And that's true. That's pretty traditional out there, Chris. That's what they all are.

Are you making -- I mean, it would seem like that would erode a lot of your profitability on those orders. I mean, do you feel like you're getting enough incremental traffic to support that low margin on those orders? Are you concerned at all about cannibalization of carry-out?

Well, Chris, at the end of the day, for a Company like us that we have about $4.6 million AUV, our (inaudible) stores are over 10%. And when I think I joined the Company, we were more in the 5.5% to 6% levels. So you definitely need to see increased traffic for it to make sense, and we're seeing that as we add them on.

Okay. Okay, great. Thanks, guys. I appreciate it.

Nick Setyan, Wedbush Securities.

Hi, thank you. So I know it's early, but is there an actual -- what kind of cannibalization are you actually seeing from Round Rock location thus far? I mean, I know there's big lines in those other two locations. So are you actually seeing a big impact, or maybe some of those customers are actually now getting in without as big of a wait?

Actually, it's been quite choppy, to be quite honest, Nick, since we've opened it. And we did open it right at the end of January, so we still don't have much experience yet, but we are seeing some cannibalization in those two stores currently.

Right around what we projected.

Okay. And what about the actual performance of the new unit? Is that in line or above your expectation, at least early on?

We're pleased with it.

We're very pleased with it, yes.

Okay. You talked about the back-end nature of the opening. Do you mind maybe giving us what the (inaudible) cadence is going to look like?

Yes, we're thinking about a third of the stores are going to be open in the first half and two-thirds in the back half. There's currently, quite honestly, with some of the markets we're going in and some of the permitting, it's jostling around a little bit, but I'll give you some of the cadence. We think there's going to be five stores in the first half of the year, two in the first quarter, three in the second quarter, and then four to five in each of the third and fourth quarters depending upon how that flows.

Got it. And you talked about the impact of the Round Rock store on the comps. Could you maybe comment on the start to the year? And I know December was soft industry data -- or a lot of the restaurants that are reporting, they're talking about the softness in January. How does that color your annual comp guidance?

Well, where we're at, real quick, we're nine weeks into our year, and we did have the -- like we talked about in December, and we're basically flat to a little down as we rolled into this year right now.

And how I've got that in the guidance, Nick, is we're going to be kind of flattish in the first quarter because we're rolling over a [3.2]. But as we progress during the year, we're rolling over some easier comps. So I have that built in a little bit in the back half.

Perfect, thank you.

Andrew Strelzik, BMO Capital Markets.

Hey, good afternoon. First on the comp guidance, appreciate the color you just provided. It does imply still, once you back out some of the weather stuff, at two-year, that would be a little lower than what you've been doing before, and I appreciate the cannibalization that you mentioned. I'm wondering how you're thinking about that though in the context of the industry. Are you just assuming kind of flattish industry trends, or do you not really contemplate that when you're thinking about the guidance?

Yes, I mean, we contemplate that for sure. But from what we're seeing, it's soft. And we're saying [1] to [2]. Currently with the cannibalization, we're probably looking on the lower end of that, to be quite honest, given the situation with the industry. But no, we take that in consideration.

Okay. And on the food cost, it sounds like you're coming in a little on the low end maybe of what you had previously expected. We're also hearing some concerns about avocado supply and prices spiking there. So I guess I'm just wondering what's changed and how are you thinking about the avocados, or what are you seeing in the avocado market? How does that play into your expectation on food costs?

Well, I think we've been saying we thought it was flat to up. Contrary to what some others are saying, we think it's going to maybe be flat to slightly up from a commodity inflation standpoint. What we're seeing is obviously we have with our contracts in with meat, we're down a pretty good percentage, high single digits in beef cost to next year. But we are seeing some increases in our groceries. We had some long-term contracts in those groceries when we brought in our new director of culinary, and those are rolling out, and we're going to have new contracts with much higher prices on those areas.

And produce is really the wild card out there. There's no way that we can hedge that. And as you know with -- like you've just mentioned the avocado prices and (inaudible) prices, we factor in some definitely inflation in the produce section.

Okay, and if I could squeeze one more in, in the quarter, the other operating cost line on a per-store basis at least the way that we look at it came in much better than it had been the last couple quarters. I know you mentioned insurance favorability. Was there anything else kind of impacting that to the favorable side, or was there an effort made maybe with the comps to manage that line better?

It's basically just kind of our best practice as in managing that line. But yes, the insurance, we had quite a bit of adjustments in the insurance. We had some rebates with the Texas Restaurant Association, worker's comp, and some other credits associated with that. So those alone were probably $300,000.

Great, thank you very much.

(Operator instructions) Brian Vaccaro, Raymond James.

Thank you and good evening. Steve, I just wanted to ask you about the real estate environment. What are you seeing in terms of the actually of sites as you build out the pipeline into 2018 and beyond? And then also if you could just -- it seems that development costs continue to increase for the industry. It sounds like your cash investment's sticking in that $2 million to $2.1 million range, you said. So what are some of the initiatives you're employing to keep those developing costs in check?

Well, the key thing for us is we're very familiar and like in our approach. We're always going to find the best site, but that best site might be an existing restaurant that's already there, it might be bottom of an office building, bottom of a residential building, it might be an end cap of a center. So that helps us be very chameleon-like in our approach, and we've been able to really work on that.

But as far as the availability, it's always been tough to find great real estate, and all the players are out there still. This is the first time I've seen anything loosen up a little bit on some renegotiating or negotiating our existing prices down a little bit, which has been good for us. But that's how we've been able to do it, specifically being very chameleon-like in our approach. So as I've mentioned to everybody, the one thing that will not change as we grow, we can deal with dining rooms that might be different sizes, but our kitchen has to fit perfectly if it's a remodel-type thing, and that's what we've always been able to do.

Okay, that's helpful. And wanted to circle back just on the off-premise sales question. What's the percent of sales off-premise at the end of 2016?

On our to-gos, a little over 10% comp.

A little over 10%.

Yes, 10.5%.

10.5%. Okay, great. And then Jon, just on the extra week, can you remind us where that shows up in terms of incremental leverage costs that are accrued for weekly versus monthly?

Well, they'll show up a little bit on the operating line. Obviously, there's some semi-variable costs there. It'll show up a little bit on the G&A line, although the biggest portion of that is your labor, so it's not going to show up as much there. And then occupancy.

Okay, and then depreciation I would assume as well?

Yes. And quite honestly, there is a little bit in labor as well.

Okay. All right, that's helpful. Thank you.

It appears there are no further questions at this time. Mr. Hislop, I'd like to turn the conference back over to you 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, again, and have a good evening.

That does conclude today's presentation. Thank you for your participation. You may now disconnect.