Chuy's Holdings Inc (CHUY) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to the Chuy's Holdings, Inc. First Quarter 2017 Earnings Conference Call. Today's call is being recorded. (Operator Instructions)

On today's call, we have Steve Hislop, President and Chief Executive Officer; and Jon Howie, Vice President and Chief Financial Officer of Chuy's Holdings, Inc.

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 first quarter 2017 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'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 review our first quarter earnings.

For the quarter, revenues grew 11% compared to last year. Comparable restaurant sales in the first quarter decreased 0.7% as we are lapping a 3.2% comparable sales increase in the first quarter of 2016, the strongest quarterly comparison from last year. Our comparable sales were also negatively impacted by approximately 30 basis points related to calendar shifts and unfavorable weather, of which Jon will provide more info shortly.

Restaurant-level operating profit improved 4.2% during the quarter, while our restaurant-level operating margin decreased to 19.1% from 20.4% as favorable cost of sales were offset by the continued wage rate pressures. Net income for the first quarter was $4.6 million or $0.27 per diluted share.

By now, you are all well aware of the challenges that have impacted the industry at large during the past few quarters. We remain confident that by taking care of our guests, we will weather these near-term challenges. To that end, we will maintain our focus on delivering high-quality, made-from-scratch food offerings and handcrafted cocktails to our guests, a tremendous value in a unique and upbeat atmosphere.

As we noted last quarter, we have been keeping track of a growing desire for convenience from our customers. We continue to make progress in adding delivery service to our restaurants, adding 2 more Chuy's locations during the first quarter. Currently, 56 locations offer delivery as an option, and we will continue to evaluate additional restaurants where we can cost-effectively add delivery service. We also continue to see strong growth in our to-go sales during the first quarter and expect this trend to continue during 2017.

Additionally, we're regularly looking for ways to increase awareness of the Chuy's brand. To that end, we recently formed a new partnership with Dinova, a $6 billion marketplace that better connects business clientele with dining options. We believe this can help drive sales during the week and introduce our product to new guests as well as loyal business travelers.

Turning to development. We opened 2 new Chuy's restaurants during the first quarter of 2017, in Cedar Park, Texas and Cumberland, Georgia. The new Chuy's in Cumberland marks our third restaurant in the Atlanta Metro area. We continue to expect to open 12 to 14 new Chuy's restaurants during 2017. As mentioned on our last call, our 2017 openings will be somewhat back-end loaded. We are currently planning to open 3 new restaurants in the second quarter, 1 of which recently opened in West Chester, Ohio. For the second half of the year, we expect to open between 3 and 4 -- 3 to 4 restaurants in the third quarter and 4 to 5 restaurants in the fourth quarter.

Our development team has done a great job at identifying a healthy blend of new and existing markets, and we look forward to opening our first restaurants in Denver, Chicago and Miami this year.

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

Thanks, Steve. Revenues increased 11.3% year-over-year to $86.9 million for the first quarter ended March 26, 2017. The increase included $11.7 million in incremental revenues from an additional 157 operating weeks produced by 14 new restaurants opened during and subsequent to the first quarter of last year. We had a total of approximately 1,052 operating weeks during the first quarter of 2017.

As Steve noted, comparable restaurant sales decreased 0.7% during the first quarter, a combination of a 2.2% decrease in traffic combined with a 1.5% increase in average check. Comparable restaurant sales were negatively affected by approximately 60 basis points due to unfavorable weather and the timing of Valentine's Day within the week. This was partially offset by approximately 30 basis points due to Easter falling in the second quarter this year compared to the first quarter in 2016. Effective pricing in the first quarter was approximately 1.5%.

There were 62 restaurants in our comparable base at the end of the first quarter of 2017. We consider restaurants to be compared -- comparable in the first full quarter following 18 months of operation.

Turning to a discussion of selected expense line items. Cost of sales as a percentage of revenue improved 50 basis points year-over-year to 25.1%, driven largely by lower beef prices and produce cost, offset by higher grocery and dairy cost. In terms of cadence, we have seen sequential increases in certain commodity prices early in the second quarter, particularly with regard to produce and chicken. We expect cost of sales to slowly increase as the year progresses, and we are still anticipating inflation rate of between 0% and 2% for the full year of 2017, with cost of sales in the low 26% range during the second quarter.

Labor cost as a percentage of revenue increased 130 basis points due -- to 34.2%, 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 2017 new restaurant opening schedule. Given the inflation in our hourly rates, we continue to expect labor pressure for the balance of the year.

Restaurant operating cost as a percentage of revenue increased 30 basis points to 13.9%, primarily due to higher utility cost during the quarter.

Occupancy cost as a percentage of revenue increased approximately 20 basis points year-over-year to 7%, driven by higher rental expense as a percentage of sales in our newer locations.

General and administrative expenses increased approximately $339,000 to $4.9 million in the first quarter. The increase was primarily driven by an increase in management salaries and equity compensation due to additional headcount to support our growth, offset by a decrease in performance-based bonuses. As a percentage of revenue, G&A decreased approximately 20 basis points year-over-year to 5.6%.

Preopening expenses during the first quarter of 2017 decreased approximately $331,000 to $1.1 million, resulting from the timing of expenses related to our new restaurant opening schedule.

In summary, net income for the first quarter of 2017 was generally unchanged at $4.6 million or $0.27 per diluted share compared to the first quarter of 2016. We ended the quarter with $14.2 million of cash on the balance sheet, and we currently have no debt.

I would now like to turn to our 2017 outlook. As a reminder, 2017 is a 53rd-week year, and our guidance includes an extra week, which will occur in our fourth quarter. We continue to expect annual diluted net income per share of $1.11 to $1.15. Included in our EPS expectations is a positive $0.05 per diluted share impact from the extra week in the fourth quarter.

Our annual diluted net income per share guidance for 2017 includes the following assumptions. We now expect comparable restaurant sales growth of 0.5% to 1.5% on a comparable 52-week basis. As we have noted, our full year comparable store sales growth, incorporates a negative 50 basis point impact resulting from the strategic cannibalization of 2 high-volume restaurants in Austin. While this will help our system, both from an operational and a return standpoint, over the long term, we continue to expect it to have a near-term impact on comparable sales. We now expect restaurant preopening expenses of $5.8 million to $6.3 million. We continue to expect G&A expenses between $20.6 million and $21.1 million. 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 to Steve to wrap up.

Thanks, Jon. In closing, our 2017 development plan is off to a great start, and our team is already working on our 2018 plan. Despite the external environment, we continue to be excited about our opportunities ahead to grow the Chuy's brand and bring our broad appeal of authentic, freshly prepared Tex-Mex inspired food to both new and returning guests.

Before I turn call over to the operator for questions, I'd like to thank all of our Chuy's employees for their hard work and dedication to earning the dollar every single day.

With that, we're happy to answer any and all questions. Thank you.

(Operator Instructions) And our first question is from Chris O'Cull with KeyBanc.

Steve, can you describe where you're seeing the traffic decline? I mean, is it in certain geographies, maybe dayparts or days of the week? If you could just give us some color on that, that'd be great.

On big ones, well, Chris, I'd say a little bit more at lunch than at dinner. We've definitely got a little bit hurt this second half of the year in the oil markets in Texas. And then the rest of Texas is acting like the rest of the company. But it's pretty overall, Chris, and those were the big, big changes right there.

Okay. And then you talked about wage pressures, Steve, and -- but if you look at the labor dollars spent per week or per store week, they were actually down year-over-year. What are you doing to find savings at the store level?

The big things for us right now, Chris, as always, as you know, just looking at the productivity. But the key thing for us, it might be down a little bit, but so is our sales a little bit. So that's a key thing, and it should be measurable that way. But at the end of the day, we've been working on productivity. At the end of the day, Chris, I've been actually adding into the front of the house and being more productive in the back.

Our next question comes from Andrew Strelzik with BMO Capital Markets.

First question I wanted to ask on the comp outlook. By my math, for the remainder of the year, you're kind of still in that 1% to 2% range. Obviously, the quarter was a little softer than you thought it would be. We've heard some of your peers talking about maybe the industry outlook being a little softer than they originally thought it would be. Can you just talk about what gives you the confidence to maintain kind of that remainder of the year component of the comp outlook?

The key for us is this. While everybody -- we're sticking to our knitting and really not going under any operations sides of our business and making sure we're getting better every single day. The big thing for us is we -- as we mentioned in my script, that we just lapped our biggest quarter last year. We're up 3.2%, I believe, in the first quarter a year ago. We have easier comps really in the second, third -- I mean, the third and fourth quarter this year than, obviously, that. And so we're pretty comfortable, if we continue to do what we're doing, that we'll have a better second half of the year.

Okay. And then given the long-term unit growth profile of the company and the challenges within the labor market, just wondering what you're seeing from a staffing perspective. Are you having trouble? I know your wage rates are going up, but are you pleased with the caliber of people that you're able to hire, management level, those different types of pieces? And maybe if you can comment on turnover as well.

Sure. As far as on the management level, we're very, very good on that level. It's always been tough on an hourly level, and it still is, but we have been able to get that done, and that's good. And as far as the over time -- I mean, management turnover, we're right around at 20%, 21%, which is good. And at an hourly level, they're at 96%, 97%, which also is very good.

And then if I can just squeeze one more in, if I may, seemed like given the quarter today, commentary that you provided on last quarter's earnings call, March was the worst month despite Easter. I know for the industry, the industry that we have says it was the best month of the quarter for the industry. So is that when you really started to see the cannibalization from the Texas unit opening? Is there something else that was going on there? If you could just give us a little color on that, it'd be helpful.

Yes. I think from us, our standpoint, February was the tough month for us, and that was -- the beginning of that period, we also opened Cedar Park, which is the store in Texas that cannibalized a little bit of the other 2 stores. So that started in the second period for us. We came back a little bit in the third period, but we had some better comps in there, but that's where we stand right now.

Our next question comes from Andy Barish with Jefferies.

What is the labor wage inflation running approximately right now?

It's approximately 3%, Andy, right now for the quarter.

And I think we've said, Andy, for the year, we mentioned that last year, what our -- our inflation rate was -- last year was about 4%. And I think we mentioned anywhere from 2.5% to 3% this year because I think we jumped in front of it a little bit. And right now, we still believe it's going to be in that trend of 2.5% to 3% for the year.

Yes, let me, I guess, grapple a little bit with why some of the new restaurant inefficiencies are showing up a little bit more on the margin and how does the move into some of the bigger markets in the back half of the year, more expensive markets, I believe, particularly Chicago and South Florida, kind of factor into your margin thinking in terms of new restaurant inefficiencies for the rest of '17?

As far as that, Andy, as you know, we have different tiered menus for these more expensive markets, just like when we went up to D.C., and D.C. has been working out pretty well for us. But we have a different tiered menu that's for, definitely, Chicago, in Denver and Miami. So that's how we'll be dealing with the labor pressures and specifically the wage rates. Obviously, we already have stores in Florida, so we understand the tip credit issues over there. And that will help us as we move over into Denver also.

Okay. And what is -- what's off-premise sales approximately throughout the system or in the subset of stores where you're looking at delivery maybe?

It's about 10.74 for the quarter, Andy.

And that's for the whole company, Andy. And as we're adding...

And that's for the comp..

Yes, that's for the comp.

Comp stores.

But as far as stores that would be adding to-go or delivery programs, you're going to be looking at that 6% to 7% range where we think if we go with the delivery, you can pop it at a good 4% to 5%. And that makes sense with the cost of it.

Our next question comes from Brian Vaccaro with Raymond James.

Just wanted to follow up on the comps discussion. Would you be willing to give an update on what you're seeing quarter-to-date?

What we're seeing is a continuation. Take all the noise of the weather and the different dates, we're sitting there about 0.3, 0.4 down. And we're seeing that continue in the fourth. And the big thing for us that's coming up is the switch in the fifth period on Cinco de Mayo, which is this Friday. Last year, it was a Thursday. And we actually doubled our sales last year on a Thursday, and obviously, we won't have that opportunity on a Friday to be able to do that.

Let me clarify, though, that's without the noise that we've got Easter that impacted that about 95 basis points. So tagging that back on, you're a little -- you're over 1% down.

Yes.

Okay. Okay. And then the Cinco de Mayo shift, Jon, is it worth calling that out in terms of quantifying the impact on the second quarter?

Oh, yes.

Yes, it's definitely worth calling out. I mean, it's we're thinking it's going to be anywhere from 50 to 70 basis points. We haven't had in our short life a time when Cinco de Mayo fell on a Friday. But going back and comparing it to maybe a comparable weekend, it's looking like it could be anywhere from 50 to 70 basis points on the quarter.

Okay. Okay. That's helpful. Circling back on to-go, you said it was strong in Q1. Could you quantify the year-on-year increase that you saw on off-premise for the quarter?

Sure. It was -- it's about 10.74, and it's up about 9% over last year.

Okay. All right. Great. And then last one, I just wanted to sort of high level the annual guidance. I understand you lowered the comp guidance a little bit, but you maintained the EPS guided. Sounds like your food cost expectation hasn't really changed, but we've got some pressure to deal with in the second quarter. Can you maybe provide some color on what some of the offsets were to those factors that will allow you to keep the EPS guidance unchanged?

Well, I mean, right now, we still see us in that range. It could be at the lower end of that range. But really, the offset, I mean, we are seeing some pressure in cost of sales right now. We think it will continue at that level for the rest of the year, but that's kind of where it was last year. So from a comparable standpoint, it's pretty close to last year. And then as far as the labor, we are down about 130 basis points. We don't see us being down that much compared to last year during the rest of the year.

(Operator Instructions) And we'll take our next question from Will Slabaugh with Stephens.

Now that we're able to see at least a few months of all your 2016 stores, I'm curious how your take on the productivity, first, initial expectations and how that stacks up relative to your more recent years.

I mean, the 2017 stores or 2016?

Your '16, so the most recent-year stores.

They're hitting their expectations, Will. If you're looking at our end expectation, it's $3.8 million. If you're looking at what they're doing right now, they're doing a little over $4 million on a trailing 12-month basis. So we're happy with them. Could they be doing better? Yes. But we're still -- they're hitting the numbers, and we're happy with them so far.

Okay. And any color on the '17 stores as well would be helpful.

It's really early, but obviously, opening one in Austin, where we had the strategic cannibalization of 2 of our units there. We're very pleased with that store, where -- we just opened in Cumberland, which is our third store over in Atlanta. That -- it's getting out, and it's doing fine right now. And then we're a little bit of upward surprise in West Chester in Ohio. We're very happy with that opening. So they're going well.

Great. And lastly from me, as you're going into these 3 larger markets later on this year, curious how those sites are coming together and how you would kind of characterize the site that you're finding there versus somewhere that you might go in a little bit smaller market?

Again, we're not going downtown in any of them. So again, they're -- obviously, part of the plan was to go into more densely populated markets. We're going to a market that has some really good competition and the propensity to eat Mexican food was great. So it hit those 3 things. And now all the rest will be a little bit the stronger population-based. As you're going into Chicago, you'll see us going into the Napersville (sic) [Naperville] and the Schaumburg areas in this upcoming year. Then maybe Woodland Park at the beginning of next year or even at the end of this year. Over in Denver, same thing that we're saying there, the first one is.

Westminster; that Lakewood, I think, is the second one over there, and again, good communities there. And as you get down, we'll only open one in the Miami greater area down there, and that will be over in Doral area, which is very densely, densely, densely populated. So again, we're pleased and we are following the central demographic guidelines that we've always used, except a little bit more densely populated.

Our next question is from David Tarantino with Baird.

Just wanted to go back to the question on the unit performance. So if I just do the calculation, I was looking at the revenue from the new unit divided by the number of weeks, and seasonally adjust that, I do get somewhere approaching $4 million. But I assume there must be some honeymoon in that number given that some of these are new locations. So where do you think those will settle, Jon? Is it typical that they would settle 6% or 7%, and hit that target that you have, or do they typically settle more than that?

On average, being in the second year, they settle at about 7% down. So I mean, I'm looking, if they're currently over that $4 million, that they'd settle right around the $3.7 million.

Okay. Great. That's helpful. And then on the comp outlook, yes, I guess, sounds like Q2 is going to be a bit of a tough quarter, similar to Q1. I guess, what's giving you the confidence other than the comparisons for the second half? Is it just strictly the comparisons, or there's something else you have planned to drive better trends on the same-store sales?

Well, there's a few things of it, the initiatives from a standpoint of online ordering or anything that's food to-go was really an '18 initiative for us that we're looking at. The thing that we've just introduced today, Dinova, is something that we expect in the second half of the year to get some -- a little bit of a bang and some awareness out. Also, in -- starting in June, we're entering into, really, our first campaign on social media out of our first introduction from a year ago. And we're pretty excited about that. It says "Chuy's always fresh." So we're really getting out there on all the social -- Facebook, Instagram, Twitter, YouTube, where we're getting out there really talking about all our defining differences, and that's going to be like a 6-week campaign that's going to be highly hit. So we're pretty excited about getting that in, and that's obviously looking for awareness piece in all our newer markets and all the older existing markets. So it's really our first time to have a voice out there really targeted on social media.

Great. And on that Dinova partnership, can you explain what that is and maybe how that's going to work for you?

Sure. Like Steve said, it's about a $6 million -- or $6 billion marketplace for restaurants, and they market it to all businesses. And so you can look at it like a frequent flyer program, except for restaurants. So a lot of restaurants sign up for this thing. And the corporation will go out, advertise all the restaurants in your group -- in the group. And if you eat at that restaurant, they get a rebate back similar to, like I say, a frequent flyer program. But they've got enough restaurants and their algorithm to project a pretty accurate increase in your sales. And it also increases the ticket average because most of adult business travelers, and it's generally increased revenues between your Monday and Friday time frame, not so much on the weekends, which is where you kind of want it. So that's what it is.

That will be up and running -- that will get up and running either at the middle of this month or by the end of the month.

Yes. And is that in all of your restaurants, or does that cover all of your restaurants?

It will cover all the restaurants. So some of the restaurants in some places where we're looking to build brand awareness we think they will help us at. There's also some dual marketing that we can do with the organization as well, and we're looking into those opportunities.

And what do they tell you the typical lift is when you hit all the buttons with their programs?

What do you mean the typical lift?

Lift.

Oh, typical lift?

Yes.

Like Steve said, we're putting it in, talk with others that have put it in. We're pretty excited about it. But until we have it in and operating, I don't want to go into what we think it's going to be.

(Operator Instructions) And our next question comes from Nick Setyan with Wedbush.

This is Colin Radke on for Nick. Just a question in terms of the cannibalization you're seeing. I think you called out 50 basis points as of Q4. Just wondering, is that a change at all given that you have a few months of sales there, and if you expect any changes or any moderation as the year progresses?

At the present time, it's right around our expectations. We'll call it out in the future if it gets materially off of that.

And we expect it to continue for the whole first year. We expect some relaxation of that in the second year.

Got it. And then maybe just in terms of the comp trends you're seeing, are you sort of calling out the oil geographies being a little weaker? Is there anything you're seeing in terms of the other geographies or maybe by class of openings or any other differences that you'd call out in terms of the comp trends by geography?

Not really. I mean, I think they're comparable throughout. I think we've talked about in the past, where Texas was a little stronger than the rest of the company. I think it's come right in line with the rest of the U.S. or the rest of geographies. So they were all pretty consistent. The oil markets were down a little more, obviously, this quarter than the last, but the spread between our overall comps in the oil markets without -- or the comps without the oil markets has shortened the gap, shortened a little bit. I think with and without that, it was about 80 basis points spread last quarter, and it's about 50 basis points spread this quarter. So it's getting -- it's improving or -- it's improving from a comp standpoint as far as what the impact is. But really, we've seen softness kind of throughout all of our geographies.

Our next question is from Chris O'Cull with KeyBanc.

I just got a follow-up. Jon, when you look at the performance GAAP and changes in average weekly sales versus same-store sales, I mean, it's been fairly wide here in the last couple of quarters. But shouldn't it narrow as you open stores with these higher price menu tiers?

Well, it should, theoretically. I mean, in particular, we're looking at, obviously, a little higher volumes with those menu tiers if you're looking at comparable entrées. We haven't really opened many in those tiers currently, and we will in the back half, so...

In the second half of the year.

Second half of the year. So I would expect it to decrease a little bit. If the comp sales come back, economy starts lifting a little bit. I think what you're seeing in the widening is really just kind of the overall sluggishness.

Are the newer stores that you're opening in Denver, in Chicago and Miami, are you expecting -- can you talk a little bit about the type of sales volume you're expecting in those types of locations? I know [3 7 3 8] is the average you're expecting for all new stores. But what about these more densely populated areas? Can you give us some color on what you're expecting in those markets?

Yes. Remember, part of the reason we wanted to go to the densely populated areas is, as we moved outside of Texas, we're finding out the -- although we're a little higher on business, but customers are using us like casual dining as far as the number of visits a month. So Chris, when we go to the markets, we'd like to see that [3 7 5] number, but with what percent the menu mix on the new price tier is. So to answer your question, generically, we expect to be higher than the 3 7 5 when we go onto these markets by the percentage difference between a Tier 1 and a Tier 4 per se. But again, we'll be doing some backfills into some markets that might be a tad bit lower than the [3 7] until we get awareness as we continue to grow the market.

Okay. And the difference in those tiers is the 12%, 15%, something like that?

The difference between 1 and 4 is right around that 13%.

That does conclude our question-and-answer session. I would now like to turn the call back to Steven -- to Steve Hislop for closing comments.

Thank you. Thanks 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.

Once again, that does conclude today's call, and we appreciate your participation.