Chuy's Holdings, Inc.
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good day, everyone. And welcome to the Chuy's Holdings, Incorporated Third Quarter 2017 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode, and the 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. And at this time, I'll turn the conference over to Mr. Howie. Please go ahead, sir.

[Jon W. Howie:]

Thank you, operator, and good afternoon. By now, everyone should have access to the third quarter 2017 earnings release. It can also be found on our website at 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.

[Steven J. Hislop:]

Thank you, Jon, and thank you to everyone for joining us on the call today. I'll start the call with an overview of our third quarter and then share our thoughts on development for the remainder of the year, Jon will then review our third quarter financial results in a more detail before we open up your call for questions. As you're well aware, during the quarter, we faced operating disruptions from Hurricane Harvey in the Houston area, and, to a lesser degree, from Hurricane Irma in the state of Florida that affected 36% of our store base. In total, we lost 44 operating days during the third quarter from these two storms as well as a reduced sales days leading up to these storms and then subsequently after reopening the stores as certain restaurants were not able to remain open for normal operating hours, which resulted in approximately a $1.2 million loss in sales. Included in our $0.19 of reported earnings per diluted share is approximately $0.03 of negative impact from these hurricanes. I can't tell you how proud I am of the efforts of our entire team to get our restaurants up and running in the wake of the storms. While I'm sure you saw pictures in the news, they really didn't do justice to the challenges that these areas faced, and in many cases, still face in the aftermath. The response time of our people was nothing short of phenomenal. While some of our employees suffered hardships with lost property and other personal inconveniences, I'm very pleased to say that no one was hurt, which is a blessing. Additionally, I'm proud to note that our Redfish Relief Fund has so far paid out over $70,000 in aid to our employees in both Texas and Florida related to hurricane disasters. Switching back to our third quarter results. Revenues grew 7.7% from last year's to $92.2 million and a comparable restaurant sales decrease of 2.1%. To provide a bit more context, comparable sales in the quarter were negatively impacted by approximately 90 basis points as a result of the hurricanes and 50 basis points due to the strategic cannibalization. We also faced a 60 basis point headwind as a result of new units entering the comp base on the back end of their honeymoon curve. Additionally, despite the hurricane disruption, we saw underlying sales improvements in our business during September. I'm also pleased to note that while it's still early, comparable restaurant sales through October are running slightly positive. So while we're not quite where we want to be, our underlying trends appear to be improving. Our focus remains squarely on our core fundamentals of taking care of our guests. We believe our service standards, our made from scratch offerings, our value and the unique atmosphere of our restaurants are our most valuable assets, and we'll continue to manage our business for long-term health. Additionally, as I spoke about last quarter, we have ramped up our local store marking 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 system-wide basis. We have also recently initiated catering tests in three of our markets. While we have had a limited menu catering trailer and van in Nashville since 2006, we have recently added new vans in Dallas and Houston, which in addition to the catering opportunity, are also beneficial in terms of brand awareness. If successful, we will expand it to additional markets in 2018. Finally, we are in the beginning stages of starting our online ordering project that should be rolled out to the stores late in the second quarter of 2018. Turning to development, we opened two Chuy's restaurants during the third quarter of 2017, one in Warrenville, Illinois, our first restaurant in Chicagoland area, and one in Jacksonville, Florida. Additionally, during the fourth quarter, we opened a restaurant in Pasadena, Texas, just outside of Houston, which was originally scheduled for a third quarter opening, but was delayed as a result of Hurricane Harvey. We also recently opened our second Chuy's in the Chicago area in Schaumburg, Illinois. For the balance of the year, we expect to open two additional restaurants in the fourth quarter, giving us 11 new restaurants in 2017. We will also reopen one additional restaurant in Houston area that was severely damaged by Hurricane Harvey and has been closed since August 26. Our new unit in Miami, originally slated for the fourth quarter, will now open in early 2018 as a result of delays and damages associated with Hurricane Irma. As stated on last quarter's call, we expect to open between 8 and 12 units in 2018. Finally, in addition to having a long runway of growth opportunity ahead, we also have a strong balance sheet that gives us the flexibility to use our excess capital to create additional value for our shareholders. To that end, subsequent to the end of the third quarter, our Board of Directors approved the initiation of a $30 million share repurchase program through December 31, 2019. We believe this authorization is indicative of the confidence we have in our core business, our ability to continue growing the Chuy's brand, and our commitment to enhancing long-term returns for our shareholders. With that, I'd like to turn the call over to our CFO, Jon Howie, for a more detailed review of our third quarter results.

[Jon W. Howie:]

Thanks, Steve. Revenues increased 7.7% year-over-year to $92.2 million for the third quarter ended September 24, 2017. The increase included $11.3 million in incremental revenues from an additional 136 operating weeks, produced by 12 new restaurants opened during and subsequent to the third quarter of last year, partially offset by the loss of six operating weeks due to the closing of our Charlotte, North Carolina locations during last year's third quarter. We had a total of approximately 1,116 operating weeks during the third quarter of 2017. As Steve noted earlier with 36% or 32 of our stores impacted during the quarter from hurricanes, we lost 44 operating days as well as other limited sales days. We estimate that the closed days and other limited sales days resulted in $1.2 million in lost sales. Additionally, we estimate the loss revenue negatively impacted our restaurant operating profit margins by approximately 40 basis points to 50 basis points and our operating income by about $0.03 per diluted share for the quarter. Comparable restaurant sales decreased 2.1% during the third quarter, driven by a 3.7% decrease in traffic, offset by 1.6% increase in average check. Effective pricing for the third quarter was approximately 1.5%. To reiterate Steve's earlier comments, comparable restaurant sales were negatively impacted by approximately 90 basis points due to the hurricane activity, 50 basis points as a result of the strategic cannibalization of two high-volume restaurants in Austin and 60 basis points from newer units entering our comparable restaurant base, whose honeymoon periods have lasted longer than the 18 months we allow before restaurant enters the comparable sales calculation. There were 67 restaurants in our comparable base at the end of the third quarter of 2017. Turning to a discussion of selected expense items. Cost of sales as a percentage of revenue increased approximately 40 basis points year-over-year to 26.7%, driven largely by inflation of 2.1% in commodity pricing related to produce and chicken, and, to a lesser degree, groceries, partially offset by favorable beef prices. Looking at the balance of the year, we continue to experience elevated prices in produce and expect this continued volatility in pricing through the remainder of the year. As a result, we expect cost to sales as a percentage of revenue in the fourth quarter of 2017 to increase approximately 40 basis points to 50 basis points compared to the prior year quarter. Labor cost as a percentage of restaurant revenue increased approximately 190 basis points to 35.2%. The increase was attributable to disruptions from the hurricane, new unit inefficiencies, ongoing hourly waste rate pressures, and management labor, particularly managers and trainee, as a result of our scheduled opening delays, specifically in Chicago, the Miami, Jacksonville area and Denver markets during 2017. We are currently in the process of implementing a new point-of-sale system which we expect to complete by mid-November. In conjunction with this new point-of-sale system, we will implement additional modules on our labor scheduling program, which we believe will enhance our sales projections and the management of our scheduled hourly labor. Additionally, we continue to review and improve operations and training processes related to our new restaurant glide path to productivity to shorten the time it takes our new stores to reach a normal labor productivity rate. Restaurant operating costs as a percentage of revenue increased 30 basis points to 14.3%, primarily due to increases in overall insurance costs, higher credit card and delivery fees, and reduced operating leverage from the lost sales related to the Hurricane activity. Occupancy cost as a percentage of revenue increased approximately 30 basis points year-over-year to 7%, driven by higher rental expense as a percentage of sales in our newer locations, and again reduced operating leverage on our existing stores due to lost sales related to the hurricanes. General and administrative expenses decreased approximately $700,000 to $4.8 million in the third quarter, driven primarily by an increase in management salaries and equity compensation due to additional head count to support our growth as well as an increase in rent, maintenance and utility costs related to the expansion of our office, which will benefit our business over the long term. We are also beginning to see increases in professional fees associated with being in our final year of our emerging growth exemption status, which requires us to be SOX compliant by the end of this fiscal year. As a percentage of revenue, G&A increased approximately 40 basis points year-over-year to 5.2%. On a year-to-date basis, G&A decreased by approximately 10 basis points to 5.3%, mainly related to decreases in performance bonuses. In summary, net income for the third quarter of 2017 was $3.2 million, or $0.19 per diluted share, compared to $4.6 million, or $0.27 per diluted share, in the year ago period. Third quarter 2016 results included the expenses related to the closure of one restaurant. Excluding expenses related to the closure, adjusted net income in last year's third quarter was $4.9 million, or $0.29 per diluted share. We ended the quarter with $17.4 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 environment, as well as the lingering effects of the hurricanes, we are lowering our annual diluted net income per share guidance to a range of $0.96 to $1. This compares to our previous range of $1.04 to $1.08. 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 flat 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 two 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 pre-opening expenses of $5.5 million to $5.9 million versus a previous range of $6 million to $6.5 million. We now expect G&A expenses between $18.8 million and $19.1 million versus a previous range of $19.5 million to $20 million. Our effective tax rate is now estimated to be between 26% and 28% versus a previous range of 28% to 30%. We continue to expect annual weighted average diluted shares outstanding of 17 million to 17.1 million shares. And due to the hurricane damage in Florida, we now expect to open 11 new Chuy's restaurants this year. Lastly, our capital expenditures net of tenant improvement allowances are projected to be between $36 million and $41 million. With that, I'll turn the call back over to Steve to wrap up.

[Steven J. Hislop:]

Thanks, Jon. We continue to take a long-term focus to our business. We believe through a steadfast focus on our core fundamentals, maintaining a disciplined development strategy and returning excess capital, we can achieve consistent growth and solid shareholder returns over time. 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 to earning the dollar every single day. With that, we are happy to answer any questions. Thank you.

[Operator:]

And we will take the first question of the day from Will Slabaugh with Stephens. Please go ahead.

[Will Slabaugh:]

Yeah. Thanks, guys. Wondered if you could talk a little bit more about what you've seen or what you saw rather throughout the period. I know there were a lot of ups and downs given the hurricanes and how impacted your stores were. But if we could try to parse it out in terms of what you think trends looked like throughout the period and what you attribute the recent improvement to?

[Steven J. Hislop:]

Yeah. The 7th and 8th period was following the same trend from the second quarter, Will. And then obviously in the first and second period – first week and second week, we've dealt with both the hurricanes, and obviously, that was dreadful. But from that is really we saw a slight uptick in specifically same-store sales really with our back-to-school time and a little bit with our green chili items. And that's when we saw a little bit of an uptick that continued through, take away the hurricane noise through the September period and right into October where we're slightly up through October. And how I attribute that is all along, we don't need jerk. When things get tough for us, we kind of knuckle under kind of like a tortoise and we get in our shell and really evaluate everything that we do, everything we're doing from a greeting of a person to how we're cooking the food to making sure we're taking care of large parties and would focus and we really focus on our people and loving on them and specifically all our food. So that we attribute to why we probably go into tough times a little bit later and how I think we come out a little bit early. And so that's what our real main focus has been, really nothing really outside our four walls.

[Will Slabaugh:]

Makes sense. And you mentioned you opened up a new store in the Chicago area and Denver as well. So I'm curious in all your new markets, do you have any more commentary as far as how those are opening?

[Steven J. Hislop:]

You know not a whole bunch because the first one was Warrenville, which was our first one into the market where we built in a new emerging area. We're pleased with how it's started. We just opened Schaumburg not even two weeks ago. And again, we're really excited about being in that market. We've been in the Denver market roughly for about five or six months now or is it – excuse me – three or four months. And again, we're excited about our entrance into those markets. The awareness in Denver of the Chuy's brand is very, very solid. The awareness in Chicago, we need to continue to work on.

[Will Slabaugh:]

Got it. And last thing on the cost side, Jon, I was curious if the guidance incorporated any expenses in Houston carrying on into 4Q that we should see more as one-time and then also the strategic cannibalization in Austin if that should carry on into 2018 as well, either one of those?

[Jon W. Howie:]

Yeah. So, the cannibalization, I'll address that first. The cannibalization of Austin will continue on through the first period in 2018. We should start lapping it in the second period of 2018, because we opened that store January 31 I believe of 2017. As far as the cost going forward, there is a little cost associated with the labor going into that because we have one closed store in Houston that was actually under about seven-foot of water, so it's taken us a little time to get that store, remodel it and get it back open, we're hoping to open that by the end of November here. And in the meantime, we've tried to keep some of those employees busy at other stores even if it costs us extra labor. So that will be in that, it's not really directly identified labor that we can put in the hurricane line, but we're actually looking at possibly recording a gain in the fourth quarter just kind of the crazy way GAAP requires you to record the insurance proceeds. And we expect those insurance proceeds either to be in the fourth quarter or the first quarter of 2018. But all in all, that will be broken out on one-line item and it will eventually result in probably about $1 million gain.

[Will Slabaugh:]

Great. Thank you.

[Steven J. Hislop:]

Thanks, Will.

[Operator:]

We will take the next question from Brian Vaccaro with Raymond James.

[Steven J. Hislop:]

Hey, Brian.

[Brian M. Vaccaro:]

Hey, Jon. Good evening, and thanks for taking my questions. Just wanted to circle back on the comps and last quarter, you mentioned some shifts in trends versus lunch and dinner and things slipping between one or the other. Curious how lunch versus dinner trends played out during the third quarter and so far sort of in the quarter to-date period. Anything worth noting in those trends?

[Steven J. Hislop:]

Well obviously, the whole last period, there was a ton of noise because of the hurricanes. But as far as the numbers, it is fairly equal on lunch and dinner on the decrease.

[Brian M. Vaccaro:]

Okay. All right. And Jon, you mentioned the 40 to 50 basis points impact of the hurricane. Was most of that – did I hear you correctly – most of that is within the labor line?

[Jon W. Howie:]

Yes. Well, it's also all the deleveraging of some of the other fixed costs in some of the other lines, but a big piece of it was in the labor line.

[Brian M. Vaccaro:]

Okay. All right. And can you remind us on the definition of your comps, you talked about being a comparable 52-week period. Just want to make sure we're all on the same page how you're going to report fourth quarter comps. What's the dates that you'll be comparing when you report?

[Jon W. Howie:]

We'll be comparing the sales through this year through December 24 as compared to December 25, last year.

[Brian M. Vaccaro:]

Okay. All right.

[Jon W. Howie:]

So when you're looking at that, that actually gives us an extra day in our 52-week comp.

[Brian M. Vaccaro:]

Okay. All right. That's helpful. Thank you.

[Jon W. Howie:]

Thanks.

[Operator:]

And we'll now take a question from Robert Mollins with Wells Fargo. Please go ahead.

[Robert Mollins:]

Hey, guys. Thanks for taking the question. I just had a couple of questions around delivery and to-go, if you could give us what to-go is as a percent of sales and how delivery is working out, that would be great.

[Steven J. Hislop:]

Sure. Jon will get the percent. As far as delivery, we roughly have delivery in about 60% of our stores, a little bit north of that. I expect that to stay stable probably right around there, because we have a very healthy to-go percent on about a $4.6 million, $4.7 million AUV. So we'll probably stay there. We don't really want to get into cannibalizing our existing delivery services, our own pickup service. And Jon the percent?

[Jon W. Howie:]

Yeah. We're at about 10.3% of overall to-go sales compared to on our comp stores and about 10.7% for the year. That's up about 7% over last year.

[Robert Mollins:]

All right, great. And then, do you guys have any initial thoughts around labor inflation and commodity inflation heading into 2018?

[Jon W. Howie:]

I think it's a little early for that now. I will tell you that we ran about a 2% inflation in labor this quarter and we're about 2.5% year-to-date. We're not in a lot of the states that have the minimum wage increases, although we are starting to enter some of those like Maryland and Colorado and Florida. So that may hit us from a weighted average standpoint next year a little bit, but from a inflation standpoint, we've been pretty low from an industry, if you compare us to the industry.

[Robert Mollins:]

Great. And then one more if I could. Could you just elaborate on the thought process around the $30 million buyback and why you think that's the best use of capital at this time?

[Jon W. Howie:]

Yeah. So I think, right now, we think it's the most flexible use. If you were to use a dividend, I think you have to continue with that. We want to have the flexibility to increase the number of stores maybe in the future. And one thing we don't want to do is to use leverage to buy it back. So, we currently have about $17.4 million on the balance sheet that we'll currently use right away. We're not going to use all of that obviously, but then we'll use future cash flow for the rest of it through the end of 2019.

[Robert Mollins:]

All right. That's perfect. Thanks, guys.

[Steven J. Hislop:]

Thank you.

[Operator:]

The next question will come from Andrew Strelzik with BMO Capital Markets.

[Jon W. Howie:]

Hi, Andrew.

[Ryan Royce:]

Thanks for taking the question. This is actually Ryan on for Andrew.

[Jon W. Howie:]

Ryan.

[Ryan Royce:]

I just had a couple, one follow-up on the comp trends that you're seeing in September and October. Are you seeing any difference in regional trends, any extra pickup from the hurricane in those markets versus your other markets?

[Steven J. Hislop:]

Yeah. We had initially for the first couple weeks a little bit extra out of Houston with the people going in there, FEMA and everything, but not really from our existing guests over there, because they were dealing with this horrible disaster over there. And then that got really cloudy, believe it or not because of the playoff games with the Houston Astros and that definitely hurt us at the end of the last few weeks of the things. Not so much and we didn't get that big of a bounce after the hurricanes in Florida because it really – it was kind of swept through there and was definitely with no-electricity issues. But overall, everywhere else it's been pretty consistent pick up all throughout the country.

[Ryan Royce:]

That's helpful. Thanks. And then, as we think about the unit openings for next year, obviously, we had some of the cannibalizations in the Austin market this year. Are there any planned openings for next year that may have a similar impact of cannibalization for next year?

[Jon W. Howie:]

No. Yeah, I mean, what makes the Austin market special, I guess, from a cannibalization standpoint is those – the two stores are being cannibalized are two highest volume stores in the company, so it definitely has detrimental effect on those stores. However, the new stores are doing very, very well, so it more than offsets the cannibalization over the long-term.

[Ryan Royce:]

Great. It's very helpful. Thank you.

[Steven J. Hislop:]

Thank you.

[Operator:]

And the next question will come from Mary McNellis with Baird.

[Mary L. McNellis:]

Good afternoon. Thanks for taking the question. I was just wondering the full-year comps guidance does imply quite a wide range for Q4, so I was wondering if you could talk a little bit about the puts and takes in the remainder of the quarter that are leading you to keep such a wide range around that, given you're running positive in the quarter-to-date period?

[Jon W. Howie:]

Well, we're slightly positive to-date obviously and really the puts and takes are rollovers of some really not so good sales last year, especially during the December period. And so, to extent we get to that, we're projecting those periods to roll over and be quite positive there in December.

[Steven J. Hislop:]

And we're cautious with that, obviously I'm not hearing it, I don't know if you are, I am not hearing a real positive retail spin for the rest of the year, specifically at all the malls and stuff because of a variety of things, whether be Amazon or what. So, we're very anxious about the holiday season.

[Jon W. Howie:]

Right, and those both fall right there in December. So, that's really the puts and takes of December.

[Mary L. McNellis:]

Understood. Quite helpful perspective. Thank you.

[Steven J. Hislop:]

Thanks.

[Operator:]

And Brian Vaccaro with Raymond James has a follow-up. Please go ahead.

[Brian M. Vaccaro:]

Yeah. Just one more quick one if I could. Jon, I wanted to circle back on the margin assumptions embedded in the fourth quarter guidance and appreciate the color on the food costs. But with all the moving pieces of the extra week that will have a pretty meaningful impact on some of the other lines. Would you be able to give some guardrails maybe on the labor line or maybe just overall store level margins, what your expectation is for the fourth quarter?

[Jon W. Howie:]

Well, right now, we're expecting labor to be up over last year, probably about 50 basis points to 60 basis points. And the reason for that is, is really not existing. As I've spoken with all of you I think in the past, we expect to get a little leverage with that extra week in the fourth quarter. However, given the pushback of some of our store openings, we're now opening four new stores in the fourth quarter as well as reopening the one store that got damaged in the hurricane. So, we're going to have a lot of inefficiencies going through the fourth quarter. So, now, I'm really expecting that to be – to up over last year by 50 basis points, 60 basis points.

[Steven J. Hislop:]

And another piece that's in there as with the push-backs of the Miami and push-backs throughout the year from Chicago and Denver, we've been carrying the full management teams a good extra month to two months that's in our labor figures also.

[Brian M. Vaccaro:]

All right. That's helpful. Thank you.

[Operator:]

And that will conclude our question-and-answer session. I'd like to turn it back to Steve Hislop for any additional or closing remarks.

[Steven J. Hislop:]

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. Thank you.

[Operator:]

Thank you very much. And that does conclude our conference for today. I'd like to thank everyone for your participation, and you may now disconnect.