Chuy's Holdings Inc (CHUY) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the Chuy's Holdings, Inc. Second 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 second 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 discussion 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, John, and thank you to everyone for joining us on the call today. I'll start the call with an overview of our second quarter and then share our thoughts on development for the remainder of 2017. John will then review our second quarter financial results before we open up the call for your questions.

For the second quarter of 2017, revenues grew 7.5% compared to last year, while comparable restaurant sales decreased 1%. Comparable sales in the second quarter of 2017 were negatively impacted by approximately 30 basis points from the shift of Easter to the second quarter, and a 40 basis points due to the strategic cannibalization of 2 high-volume restaurants in Austin. We continue to face restaurant-level operating margin pressure driven largely by labor pressures, and to a lesser degree, commodity costs. Overall, net income for the quarter was $5.3 million or $0.31 per diluted share. While we continue to face a challenging consumer environment, we remain focused on the core fundamentals of taking care of our guests. We will continuously look to enhance the customer experience through a long-term lens and stay away from so-called silver bullets or short-term initiatives, including cheapening our high-quality offerings through discounting our careless cost cutting. We believe our service standards, our made from scratch offerings and our unique atmosphere of our restaurants are our most valuable assets.

That being said, we have continued to look for ways to improve our marketing efforts. As you know, we have historically spent only a modest amount on marketing and that will not change. However, we are doubling our local store marketing activities, including reviewing and updating plans for each store on a quarterly basis. We're also continuing with social media campaigns to promote various store events, both on a local and systemwide basis, including our upcoming Green Chile Festival. The 29th annual Green Chile Festival kicks off Monday, August 14, and runs through Sunday, September 3. As many of you know, green chiles are an annual crop only picked during the peak season starting in August. Our co-founders, Mike Young and John Zapp, were the first to bring Hatch green chiles to Central Texas, and this year, we're bringing in over 3 million pounds of peppers from the fields of Hatch, New Mexico, to our restaurants. For the 3-week festival, we will feature 5 special menu items made with legendary Hatch green chiles and limited-time signature drinks, including our famous New Mexican martini made with green chile-infused tequila. This is the one-time during the year that we run specials to our menu, and I hope you get a chance to enjoy what has become a fantastic tradition for Chuy's and our guests.

Turning to development. We opened 3 new Chuy's restaurants during the quarter of 2017. In -- 1 in West Chester, Ohio, just outside Cincinnati, in Olathe, Kansas, part of the Kansas City DMA, and in Westminster, Colorado, outside of Denver. Additionally, just last week, we opened a new Chuy's restaurant in Warrenville, Illinois, our first restaurant in the Chicago area. For the second half of 2017, we expect to open 2 additional restaurants in the third quarter and 4 restaurants in the fourth. Combined, with the 6 restaurants we have opened year-to-date, that will give us 12 new restaurants for the full year.

We're also taking a hard look at our 2018 development pipeline. While we are pleased with our development plans and have already locked in a number of high quality sites for next year, we believe it makes sense to balance the speed of our new unit development with the uncertainty of industry-wide sales with an eye towards creating the best returns for our shareholders. We are still in the early stages of scrubbing the current portfolio. However, we currently expect 2018 openings will range between 8 and 12 units.

As we review our growth plans, I point out that even at a very early stage in Chuy's growth curve, we have a strong balance sheet that gives us the flexibility to softly manage our development in the near term. With the ability to use our excess capital and other ways to create value to our shareholders. All in all, we continue to believe we have a very long runway for expanding the Chuy's brand.

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

Thanks, Steve. Revenues increased 7.5% year-over-year to $94.5 million for the second quarter ended June 25, 2017. The increase included $10.9 million in incremental revenues from an additional 134 operating weeks, produced by 14 new restaurants opened during and subsequent to the second quarter of last year, partially offset by the loss of 13 operating weeks due to the closing of our Charlotte, North Carolina, location. We had a total of approximately 1,083 operating weeks during the second quarter of 2017. As Steve noted, comparable restaurant sales decreased 1% during the second quarter, driven by a 2.4% decrease in traffic offset by a 1.4% increase in average check. Comparable restaurant sales were negatively impacted by approximately 30 basis points due to Easter falling in the second quarter of 2017 compared to the first quarter in 2016, and negatively impacted by approximately 40 basis points as a result of the strategic cannibalization of 2 high-volume restaurants in Austin. Effective pricing in the second quarter was approximately 1.5%. There were 64 restaurants in our comparable base at the end of the second quarter of 2017. We consider restaurants to be comparable in the first quarter following 18 months of operation.

Turning to a discussion of selected expense line items. Cost of sales as a percentage of revenue increased 40 basis points year-over-year to 25.9%, driven largely by unfavorable commodity pricing related to produce, dairy, chicken and grocery costs, partially offset by favorable feed prices. We continue to anticipate an inflation rate of between 0% and 2% for the full year of 2017, with cost of sales steadily increasing as the year progresses.

Labor costs as a percentage of revenue -- restaurant revenue increased 90 basis points to 33.6%, driven by operating inefficiencies from new unit development, ongoing wage rate pressures and the deleverage of management labor, particularly our managers in training, as a result of construction delays on the 2017 new restaurant opening schedule. We continue to expect labor pressure for the balance of the year. Restaurant operating costs as a percentage of revenue increased 20 basis points to 13.9%, primarily due to deleverage from negative comparable restaurant sales and higher utility costs and higher year-over-year maintenance costs. Occupancy costs as a percentage of revenue increased approximately 30 basis points year-over-year to 6.7%, driven by higher rental expense as a percentage of sales in our newer locations as well as reduced operating leverage on our existing locations.

General and administrative expenses decreased approximately $166,000 to $4.7 million in the second quarter, driven primarily by a decrease in performance-based compensation and payroll taxes from divesting of stock compensation, partially offset by an increase in management salaries and equity compensation due to an additional head count to support our growth. As a percentage of revenue, G&A decreased approximately 50 basis points year-over-year to 5%. Preopening expenses during the second quarter of 2017 increased approximately $188,000 to $1.7 million, resulting from the timing of expenses related to our new restaurant opening schedule, which has been delayed due to the construction delays.

In summary, net income for the second quarter of 2017 was $5.3 million or $0.31 per diluted share, compared to $5.8 million or $0.34 per diluted share in the year-ago period. We ended the quarter with $19.7 million of cash on the balance sheet and we currently have no debt.

Turning to our 2017 outlook, given the current challenging retail and consumer environments, we are taking a more cautious approach to our expectations for the back half of the year. As a result, we are lowering our annual diluted net income per share guidance to a range of $1.04 to $1.08 per share. This compares to our previous range of $1.11 to $1.15. As a reminder, 2017 is a 53-week year and our guidance includes an extra week, which will occur in the fourth quarter. Our adjusted annual diluted net income per share guidance for 2017 is based on the following revised assumptions. We now expect comparable restaurant sales growth of negative 1.5% to positive 0.5% on a comparable 52-week basis. Our full year comparable store sales growth still 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 returning 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 $6 million to $6.5 million. We now expect G&A expenses between $19.5 million and $20 million. Our effective tax rate is now estimated to be between 28% and 30%. We continue to expect annual weighted average diluted shares outstanding of 17 million to 17.1 million shares, and we now expect to open 12 new Chuy's restaurants this year, which at the low end of our previous 12 to 14 range.

Lastly, our capital expenditures net of tenant improvement allowances, are now projected to be between $36 million and $41 million. With that, I'll turn the call back over to Steve to wrap up.

Thanks, John. Despite a challenging external environment, we continue to be excited about the opportunities ahead for Chuy's. Our ultimate focus remains simple: to continue to deliver high-quality, made-from-scratch food offerings and handcrafted cocktails to our guests at a tremendous value in a unique, upbeat environment. Before I turn the call back over to the operator for questions, I'd like to thank all of our Chuy's employees for their hard work and dedication again to earning the dollar every single day. With that, we are happy to answer any questions.

(Operator Instructions) We'll have our first question from Will Slabaugh with Stephens Inc.

The first question around the unit development. You talked about modestly slowing for the year and then even more so in the next year. As we look at the P&L, first wanted to ask if you could think about any benefits that we might be able to see come through in the way of fewer inefficiencies or otherwise, not just from building to your restaurants.

Yes. I think you're going to see the benefit next year from an EPS standpoint for sure. You're going to have the lower preopening costs for one, and like you're saying, you're going to see just kind of a lower proportion of inefficiencies per year comp stores. So that ought to moderate as well.

Okay. And you did talk a decent amount about the sort of uncertainty in the marketplace that also leading to that reduction in unit development. And you left a fairly wide gap in the back half in terms of same-store sales in the outlook. So I'm wondering if you'd be willing to talk any more about what you've been seeing either early on in 3Q or any further expectations on trajectory as we look into the back half of '17.

It's hard to give a rhyme or reason if it's popping up and down. I will tell you in the seventh period of July, we did see about a negative 2 -- under 2% -- 2%-plus a little bit there. It was just a slowdown and definitely comes with the weather we think because of the heat, but also just the patio weather. It's just hard to predict right now, that's what I'm looking at. And so that's why the range is as wide as it is. Obviously, if it comes back quicker than I'm thinking, we could increase it and if it doesn't, then we'll go to the lower end of that.

Got you. And last thing, I wanted to ask you about the new markets. You mentioned you're pretty pleased with those so far. I'm curious one of the larger markets (inaudible) Denver where you opened up. What you're seeing those -- obviously overcoming a bigger piece of the growth story going forward, so just curious on any more commentary you might have on having some of the larger markets you're going into.

Yes, we opened Denver. It was a little roughly about a month ago, and we're excited and the reason we went to Denver, there was a lot of awareness of Chuy's and it bodes very well for us. So again, we're excited, it's really too early to even say, but we're excited about the first month to open over there. And the second one was Chicago, and we actually opened that last week and we're pleased with that entrance into that market already, but again, it's only a week. But we're excited -- very excited about both markets.

We'll go next to Andrew Strelzik with BMO Capital Markets.

I look back over time, Chuy's has done a very nice job navigating different types of industry environments but that doesn't seem to be the case now. So I guess I'm wondering what's different this time? Is it the intensity of the industry weakness? Or as you've expanded across markets, are you not viewed the same way in those newer markets as you are now? And that's why you're talking about the brand recognition? Maybe if you could offer some commentary about comps maybe in markets open in the last several years versus your legacy markets or store classes, things like that, would be helpful.

Yes. Andrew, the key to the sales drop, it's really evenly across all markets, including Texas and the Houston markets and all over in Dallas. So it's a pretty wide range as far as the softening of the sales and throughout the markets. So it's not anything -- there's no one thing to put your finger on any of it.

Okay. And I guess asking about the development pace. Why 8 to 12 for next year? Why do you think that's the right number as of right now? What was the process you went through as you kind of whittled that down? And I guess as you said that you're still reviewing it, does that mean that it could move lower from there?

No. I think I'm pretty comfortable with what we've been looking at it for a little bit now and as we move forward, that's why I kept such a wide range. And again, it could go to the top end or could go to the bottom end, depending on the visibility of the sales as we move forward. So I'm pretty comfortable with that 8 to 10. And just with the cloudy environment, I wasn't comfortable doing more than that spread.

I guess my question is, when you were looking at the markets, did you choose the markets where you felt like you had the best sites, or more legacy markets or newer markets? How did you prioritize those 8 to 12 over, what maybe the pace would've been otherwise?

Yes. We want to continue. Obviously, you don't want to leave one sitting in Chicago and one in Warrenville -- I mean one in Denver. So you're going to see us add stores in those markets. Then all the rest would be backfill more to a couple in Texas and a couple in markets that we know very, very well.

(Operator Instructions) We'll go next to Brian Vaccaro, Raymond James.

I wanted to ask about the comps, just circle back a couple of quick clarifications. In the second quarter -- last call, you were talking about a shift in Cinco de Mayo. Did that have much of an impact on the second quarter?

Brian, it actually did not. It was pretty well flat. The information we were using was from 5 years ago and it was mainly Texas stores. Our marketing department has done a great job outside of Texas marketing that event and we doubled up the marketing efforts this year, and we just had a blowout Cinco. So it pretty well-matched last year even though it was in -- on a different day that we thought it would have some risk. But it was basically flat with last year.

Okay. And on the -- appreciate the quarter to-date comments. Does the July 4 shift have a material impact on the quarter to-date? And are you able to quantify that?

Not materially. It's flat up 10 to 20 basis points. So it had a flat to favorable impact.

So you're saying the July 4 period, that had a positive benefit you think to your sales in the quarter to-date, just to be clear.

Just slightly, yes. Just slight, but very little.

Okay. And on the unit growth plan, I wanted to ask, Steve, you mentioned you're going to continue to obviously grow in those new markets. But can you lay out what's in the pipeline through the end of '18 at this point? How many more will be in and around each of the big new 3, Denver, Chicago and South Florida?

I'm hesitant to send that out at that -- this point, Brian.

Okay, fair enough. And I guess on the last one, Jon, back to the margin. When we're talking about -- or trying to think about the impact of fewer new unit inefficiencies or less new unit inefficiencies last year. Can you give us a sense of the weight on the model, say in the current quarter? You obviously saw some deleverage overall, close to 200 basis points. But can you give a little color how on the comp base performed within that?

Definitely. I would think most of it -- probably of the -- excuse me, just a second here -- of those 200 basis points that you're talking about. Probably, I would say 1/2 to 3/4 of that was related to the newer stores.

We'll go next to Mary McNellis, Robert W. Baird.

Just circling back to the unit growth pullback here. Would you characterize that sort of as a temporary slowdown? And then related to that, what would make you want to reaccelerate the growth? What would you need to see them have those openings move higher going forward?

The sales visibility is the key thing. And as the sales visibility comes, which means we're moving forward and increasing sales, you would probably see me increase that and vice versa on the other side. But -- no. It's a short-term look at it, we're fully prepared for the high-teen growth and then we plan on that at the end of the day, but until there is greater visibility in the marketplace, we're going to be a little bit more cautious.

(Operator Instructions) We'll go next to Nick Setyan with Wedbush Securities.

This is Colin Radke on for Nick. I believe in June, you launched you first social media campaign. What were your takeaways from that? Did you see the sales lift you were expecting? And what did you learn, maybe in terms of how it impacted consumers using the brand, particularly in the newer markets?

Again, on social media, it's not like going on TV. It's really building the brands on a long-term basis. But we learned quite a few things actually from a year ago when we did the first one where we did a lot of stuff more on 15-second type videos on Facebook and YouTube and a few other things like that. So what we've learned is, is we just going to keep getting the brand name out there. And as far as moving the sales, that's hard to say on one promotion. I -- tell you for the rest of the year, we definitely thought we did a little bit on Cinco de Mayo, we had a great day like John already mentioned on that. We just got done with the Chuy's AF which is always fresh and really talking about our defining differences. We're about to go into our Green Chile, as I mentioned to you earlier, and that's going to be a big a campaign around that. And again, if you can take a long-term approach to the social media where it's really the branding and getting our defining differences out. To give you a number of appreciated sales, I wouldn't be able to do that.

Okay, fair enough. And then just in terms of labor inflation, I think last quarter you talked about 2.5% to 3% for the year. Is that still your expectation? Or has anything changed there?

It's still our expectation. We were actually at about 2.7% for the quarter, and year-to-date, we're right around 2.8%, 2.9%. And we expect it to come down a little bit over the next 2 quarters.

We'll go next to Bob Derrington, Telsey.

A couple of questions, if I may. Steve, as you're thinking about the little bit more marketing affect, whether digital, social and otherwise, coming into the back half of the year, should we be thinking a little bit higher percent of sales as we look at that? Do you anticipate raising the spend on that?

No. It's all within the spend, Don -- I mean, Bob. And so like I mentioned in my talk just today, I think we said we'd keep it around the same. It's just allocated differently. And that's already been planned for all the social media. The key for me though, as the social media is key, but it's the local store marketing that's really what I want to really push in the second half of the year. And as I mentioned to you, on prior years, we'd look at maybe 20 to 22 real good solid what I'd consider marketing objectives from a store basis. This upcoming year, and specifically quarter by quarter, we're writing our local store marketing plans for every single store in the company. And again, it's really looking at the 20% of the things that we want to touch that's going to give us the 80% return. Not the other way. Don't work on the 80% of the stuff that gives you a 20%. So we're very, very focused on the local store marketing.

Okay, that's great color. Steve, when you look at the development plan, and forgive me if I missed this, as you look at the 3 newer markets that you're venturing into. Any kind of -- as you look at slower development next year, is the slowdown expected to come out of those and more into core markets? How should we think about that?

Well, again, like I've always said, we do better as we go into a market and dominate it in a number of units in the volume. So you don't want to leave one in a big market there by itself. So I'm going to continue to move into the Chicago market. I'll continue to move into the Miami market and the Denver market, and a little bit -- and then all the rest of the development will be in the backfill market.

So of the 8 to 12, what would you estimate would go into those 3 newer markets?

Again, I'm not a whole bunch into that. I don't really want to go into a whole bunch of that yet. I'd like to finish off 2017 strong and continue to look at all of my bases as I'm continuing development. What's really cool about the development is, I have a lot of stores that I'm ready to be able to do, so it's a pick-and-choose type scenario for me.

Got you. And last question, if I may. On the -- as we look at restaurant margin, kind of broadly, Jon, how do we think about as we're looking towards next year when we slow development? Obviously, preop will come down, but I'm just -- and labor costs and efficiency, I'm just wondering what kind of basis point effect or benefit could we see to next year's restaurant margin?

Well, I think what you're going to see is, you could probably see some 50 basis point increase from what I'm seeing at now. But obviously there's a lot of factors and we're still looking at kind of how many stores we're opening up and things like that. But I think you could see that.

We'll go next to John (inaudible), Wells Fargo.

Just a few questions. First on the comp in the quarter, can you go over perhaps any day part weakness or geographic weakness that you saw in the comp?

This is Steve. Yes, there in the quarter, we actually saw a really midweek softness and not as much on the weekends. And that was pretty much throughout the whole second quarter. In the seventh period though, it kind of flipped on us and we were trying to get a handle on that where it was more on the weekend and less on the midweek. So some puzzling things there, but that's what we're looking at.

Okay. And then I don't think you've mentioned this in this call, but where delivering and to-go stands today as a percentage of sales and how that's tracking relative to your own expectations?

Well, the delivery, we don't have a separate number for delivery, but we're at about 60% of our stores are now under delivery. And as far as to-go sales, we're right around 11% for our comp sales, which is slightly higher than last quarter, where we were about 10.74%.

Great. And then just lastly, in your comments earlier in the prepared remarks around the balance sheet and how healthy it is. It sounds like obviously you're exploring the idea of enhancing shareholder value in some form or fashion. So could you talk about how you think about that? Whether it be dividends, or perhaps, buyback and where you would feel comfortable with the leverage ratio moving, if you were to take on some debt?

Yes. This is Steve. I'm not 100% prepared to discuss that today. We're discussing with our Board and certain bankers on the best avenues for shareholder value.

(Operator Instructions) We'll go next to Brian Vaccaro, Raymond James.

Just one quick one for me. I wanted to circle back on the new unit performance and looks like the gap in new units versus the comp base narrowed and the absolute AWS continued to improve and that is moving seasonality and whatnot that impacts that, but can you speak to the performance of the new units versus your unit economic targets?

Well, Brian, right now, they're hitting the targets that we talked about. And I mean, we're looking at that 3 7 5 and after a year or two, after the honeymoon period, we're still looking at those EBITDA targets in the high single digits in that first year and low double digits in the second year, and then in that third year, that 15% to 16% EBITDA margin to get you to the -- close to that 30% cash-on-cash return. And currently that's what those stores are hitting those targets on average.

That does conclude the question-and-answer session. I'll turn the conference back over to Mr. Steve Hislop for any additional or closing results.

Thank you so much. John 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. Thank you for your participation. You may now disconnect.