Chuy's Holdings, Inc.
Q1 2016 Earnings Call Transcript

Published: 4 May 2016

[Operator:]

Good day, everyone and welcome to the Chuy's Holdings, Inc. First Quarter 2016 Earnings Conference Call. Today's conference 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, Inc. 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 our first quarter 2016 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.

[Steven J. Hislop:]

Thank you, Jon, and thank you to everyone for joining us on the call today. We are very pleased to begin fiscal 2016 with strong operating results which included net income growth of over 40% and diluted earnings per share of $0.27. First quarter revenues grew over 16% compared to last year, which were helped by our 23rd consecutive quarter of comparable restaurant sales growth at 3.2%. While our comparable sales benefited from improved weather compared to last year partially offset by Easter, we generally saw consistent comparable sales growth through the entire quarter. Contributing to our earnings growth was an increase of approximately 25% in restaurant-level EBITDA. Lower than expected cost of sales was a key contributor to the 130 basis point improvement on our store-level profitability. However, we generally saw profitability improve across the board, which is reflective of the hard work and dedication of the entire team as they continue to focus on improved habits and routines that we stress throughout our system. Switching to development, we opened two new Chuy's restaurants during the first quarter of 2016 in Woodbridge, Virginia and Lafayette, Louisiana. Subsequent to the quarter, we have opened three additional restaurants in Fort Worth, Texas; Cary, North Carolina; and Sterling Virginia. We continue to be pleased with the performance of our new restaurants, not only as it relates to their initial sales volumes, but also with regard to their early profitability which are meeting our expectations. For 2016, we continue to expect to open 11 to 13 new restaurants. As we have previously noted, we have leases signed for the balance of our 2016 development plan and expect the cadence of our openings to be concentrated in the middle two quarters of the year. With that I'd like to turn the call over to our CFO, John Howie for a more detailed review of our first quarter results.

[Jon W. Howie:]

Thanks, Steve. Revenues increased 16.8% year-over-year to $78.1 million for the first quarter ended March 27, 2016. The increase included $10 million in incremental revenues from an additional 122 operating weeks, produced by 12 new restaurants opened during and subsequent to the first quarter of last year. We had a total of approximately 908 operating weeks during the first quarter of 2016. Comparable restaurant sales grew 3.2% during the first quarter, driven by a 2.1% increase in average check with a 1.1% increase in traffic. We estimate that comparable restaurant sales in the first quarter benefit by approximately 110 basis points due to better weather in this year's quarter compared to the first quarter of last year. However, this benefit was offset by approximately 35 basis points to 40 basis points due to the timing of Easter falling in the first quarter of 2016 compared to falling in the second quarter during 2015. During the first quarter, we lapped last year's 2.5% in menu price increases in early February and implemented a new price increase of approximately 1.5%. There were 54 restaurants in our comparable base during the first quarter of 2016, including three new restaurants added to the base at the beginning of the quarter. We consider restaurants to be comparable in the first full quarter following 18 months of operation. Turning to expenses, cost of sales as a percentage of revenue improved approximately 70 basis points year-over-year to 25.6% as we experienced a favorable impact from lower chicken, grocery, and dairy prices offset by higher produce prices. Currently, we would expect our full year 2016 inflation to run at the midpoint of our initial range of zero to 2%. Labor cost as a percentage of restaurant revenue improved 20 basis points at 32.9% as we continued to gain operating efficiencies through last year's labor and manager rationalization initiatives, in addition to leveraging our comparable store sales growth. For the balance of the year, we expect year-over-year labor cost to increase approximately 50 basis points to 60 basis points as we lack the implementation of last year's labor initiatives, combined with inflation in our store level hourly rate. We also expect increased inefficiencies from new unit development, particularly in the second quarter and third quarter. Restaurant operating costs, as a percentage of revenue, decreased by 50 basis points to 13.5%. This decrease is primarily related to lower utility and entrance costs combined with the leveraging of our comparable sales growth. General and administrative expenses increased approximately $450,000 to $4.5 million in the first quarter. The increase was largely driven by ongoing investments in personnel to support our growth. As a percentage of revenue, G&A decreased by approximately 30 basis points year-over-year to 5.8%. Pre-opening expenses during the first quarter of 2016 was approximately $1.4 million, compared to approximately $1.1 million in last year's first quarter. The increase was due to the timing of our 2016 development schedule compared to last year. As a reminder, our development will be concentrated in the second and third quarters, with four units to five units in each quarter and then one unit to two units in the fourth quarter. In summary, net income for the first quarter of 2016 increased 40.1% to $4.5 million or $0.27 per diluted share, compared to [Technical Difficulty] (07

[Steven J. Hislop:]

Thanks, Jon. In closing, we are pleased with our start of 2016 and look forward to maintaining our momentum during the year. Our 2016 development plan is off to a great start, and we're already working on our 2017 plan. We continue to be excited about the opportunities ahead of us to grow the Chuy's brand and bring our distinct menu of authentic freshly prepared Mexican and Tex Mex-inspired food to a wider audience, while enhancing long-term value for our shareholders. Before I turn the call back over to the operator for questions, I'd like to take a moment to thank all of our Chuy's employees. Our success has always been a testament to the hard work and dedication to earning the dollar every single day. With that, we're happy to answer any questions. Thank you.

[Operator:]

And your first question will come from David Tarantino with Baird.

[David E. Tarantino:]

Hi, good afternoon, and congratulations on a great start to the year.

[Steven J. Hislop:]

Thank you, Dave.

[David E. Tarantino:]

My question is about the recent trends you've been seeing in the business. And I know, Steve, you mentioned that, excluding the calendar shifts, the comps were fairly even across the quarter. But there's been a lot of noise about industry trends slowing in March and April. And, perhaps, could you address kind of what you're seeing in those months on – I guess, excluding the timing of Easter? And are you seeing that sort of slowdown that what we're talking about in April?

[Steven J. Hislop:]

Well, it's kind of a little bit hard to talk about April, but March, it was pretty balanced throughout the whole of first quarter. April, what we did is, in the middle two weeks of April, we had all the flooding in Houston and all the rain in the whole Southeast. So it's a little bit heavy. We definitely got hit with a little bit of weather. So it's kind of really hard to see on that so much. But at the end of the day, I think it's been moving basically like our first quarter.

[David E. Tarantino:]

Got it. That's helpful. And then...

[Steven J. Hislop:]

Yeah. But again, like I said, we had all the (10

[David E. Tarantino:]

Got it. Thanks. That's helpful. And then, Jon, the labor line looked very well managed and came in a lot better than we had projected it. Can you – it doesn't seem like you're assuming that, that continues. Can you just talk about the drivers of why you could see a reversal in the balance of the year again and why some of the efficiencies you're gaining in Q1 won't carry over for the rest of the year?

[Jon W. Howie:]

Sure, David. A couple of things. First of all, we opened 3 stores during Q1 of last year. So we had a few more inefficiencies last year versus this year. And secondly, we didn't have all the efficiencies. Although we had quite a few, we didn't have all those initiatives implemented in Q1 of last year. But we are going to be lacking those in Q2, Q3 along with 4 to 5 restaurants opening in second quarter and third quarter last year. And if you remember, we had very few restaurants opened during that period last year. So the other thing – the third thing that we're seeing is, as everybody else is seeing, we're seeing hourly rate increase pretty substantially. What we've seen in the past was, it was averaging by 1.5% to 2%. And I think I said on the call we're expecting 3% to 4%. That's probably going to be expanded to about 3% to 5% because we're seeing right about 3.9% to 4% currently in our average rate.

[David E. Tarantino:]

Got it. Okay. That's helpful. And then, lastly, Steve, if you could maybe address how the 2016 class of opening is tracking from a sales and profitability standpoint relative to the targets...

[Steven J. Hislop:]

Yeah. By the targets, again, it's still early. We're just starting into the honeymoon periods on all these. But we're very, very pleased with the openings. And we're expecting the same trend that you saw in 2015 as far as how we bring these stores and profitability in a nice bright pathway. So we're very, very pleased with all our operations, specifically 2015 and 2016.

[David E. Tarantino:]

Got it. Great. Thank you very much.

[Steven J. Hislop:]

Thank you.

[Operator:]

And from Stephens Inc., we'll hear from Will Slabaugh.

[Will Slabaugh:]

Guys, I wonder if you could give us anymore specifics on some of the newer stores and productivity there. In the larger market, such as D.C. in particular, it sounds like you're pretty pleased overall. But I know a lot of us are really interested in seeing a success there and how that may translate into some other larger markets. So anymore color in terms of how you think guest frequency is trending or any sort of feedback around the value proposition or any other metrics that might be helpful would be appreciated.

[Steven J. Hislop:]

Yeah. Will, I don't really go into market-by-market, but again, as a whole, I'm pretty pleased with all the openings from 2014, 2015, and 2016. They're hitting our projections, and they're hitting the glide paths that we've set up. So we're pleased about the market. We just opened Sterling last week, which is our fourth store in the Virginia market, and we have another one coming up. So we're excited about the market in general.

[Will Slabaugh:]

Great. And a follow-up on David's question around the industry. It sounds like a decent amount of the volatility or softness, however you want to call it, has been around the lunch day part. So I'm curious sort of how your day parts trended? And then, if you wouldn't mind speaking to geography as well.

[Steven J. Hislop:]

Again, I don't get a whole bunch into the geography. But the lunch part, it's actually up a little bit more than dinner part. So we're pleased with our lunch part.

[Will Slabaugh:]

Great to hear. Thanks, guys.

[Steven J. Hislop:]

Thank you.

[Jon W. Howie:]

Thanks.

[Operator:]

And next, we'll hear from Jeff Farmer with Wells Fargo.

[Jeff D. Farmer:]

Thanks. Good afternoon. Just, hopefully, a little bit more color on the April weather impact. I know we've got a lot left in this quarter. But even just sort of looking at my model going back to Q1 of 2015, that's the quarter you guys saw a 200 basis point suppression. It looks like most of that was felt in just a matter of a couple of weeks. So can you give us some order of magnitude on what potentially this April weather impact could have had on – or will have on the Q, the full quarter?

[Jon W. Howie:]

Currently, depending upon if we have any more bad weather, but I think currently, it's going to be about 50 basis points, 60 basis points for the quarter.

[Jeff D. Farmer:]

Okay. That's helpful. And then, on G&A, just drilling down on that a little bit. So a lot of pressure in 2015, then you just swung it around the other way a lot of favorability, looks like you guys have guided to for this year. As we think about this model moving forward into 2017, 2018, 2019, and beyond, have you guys called out sort of a relationship we should be thinking about between G&A and revenue growth over the longer term?

[Jon W. Howie:]

Yeah, we have. We've always talked about G&A growing at about 70%, right around there, 70% of the overall store growth. So there is some built-in – other than some anomalies that we fall into on any given year, there is some leverage built into that line item.

[Jeff D. Farmer:]

Okay. And just last one. Steve, curious about your thoughts on how Chuy's market selection, site selection models have evolved over the last few years. It sounds like you guys have learned a lot going back to that class of 2013, I believe. And I'm just curious how that has influenced the development in both 2016, 2017, and beyond? So any broad strokes would be helpful.

[Steven J. Hislop:]

Sure, sure. Again, going back to 2013 that was when we had to see the markets with the sizes of our restaurants. And (16

[Jeff D. Farmer:]

All right. Thank you, Steve.

[Steven J. Hislop:]

Very welcome.

[Operator:]

And next, we'll hear from Chris O'Cull with KeyBanc.

[Chris O'Cull:]

Thanks. I just had a follow-up on the new stores. It appears that new stores are reaching mature margin faster than they had in the past. Would you guys agree with that statement?

[Jon W. Howie:]

As far as – I can tell you to find path, it's faster than 2013 for sure, but it's basically been kind of right on target if you're looking at the group as a whole.

[Chris O'Cull:]

What should we assume, Jon, for years one and two in terms of margin performance at these stores?

[Jon W. Howie:]

Well, we said we haven't changed that new kind of prototype, if you will. And these stores are right on target, hitting that or maybe exceeding a little bit but basically, right on target. And that's that first year, you're high single digit; your second quarter, it's kind of low double digit; and then your third year, you're looking at that 16%, 17% average.

[Chris O'Cull:]

So, in the past, you've kind of given some guidance around labor with these new stores inefficiencies. It seems like it's been based on that yet we've also seen quite a bit of upside as a result of the federal labor control. I mean, I know you guys are putting some initiatives to improve new store productivity or new store efficiencies you talk about. How do you reconcile that?

[Jon W. Howie:]

Well, I think we're getting close to – I mean, we're still not hitting the 2013 margins that we saw when we had the old model, the 4-2 and the higher margin. We're getting obviously better than the 2014, but we're not hitting those margins yet.

[Chris O'Cull:]

Okay. And then, just on pricing for the rest of the year and maybe I may have missed it, but commodity deflation for the quarter, what was that?

[Jon W. Howie:]

For the quarter year-over-year, it's 1.3%.

[Chris O'Cull:]

That's the commodity deflation?

[Jon W. Howie:]

Yes.

[Chris O'Cull:]

And then – and what's the menu pricing? Is it going to stay around 1.5% for the next three quarters?

[Steven J. Hislop:]

Yeah. Chris, we took out price increase in the beginning of the second period. It's about approximately 1.5% and now be the only one we take this year.

[Chris O'Cull:]

Okay. Great. Thanks, guys.

[Jon W. Howie:]

Thank you.

[Steven J. Hislop:]

Thanks.

[Operator:]

Next, we'll go to Brian Vaccaro with Raymond James.

[Brian M. Vaccaro:]

Thanks, and good afternoon. Just a quick follow-up on the comps. Can you comment on what you're seeing in Texas? You've obviously been holding up quite well there. But any change in the trends, even sequentially, or anything worth highlighting in terms of consumer behavior in pockets of Texas?

[Steven J. Hislop:]

Yeah. As I've mentioned, I think, in the last call, on Texas we're up. We are only slightly up in the Houston market, that took a little dip from the fourth quarter. That was the first, so there was a little dip. But again, the market is up and same thing in Chinatown.

[Brian M. Vaccaro:]

All right. That's helpful.

[Steven J. Hislop:]

Yeah. Austin and Dallas is – they are trending pretty much the same.

[Brian M. Vaccaro:]

They're trending the same. Okay. All right. Thank you for that. Jon, I wanted to ask you a quick one on the – in the first quarter, the other operating costs, it looks like it was down again sort of cost per operating week down around 2% or so. And you called out the insurance favorability, I think. And can you remind us, was that a lap of unusually high costs in the prior year? And then, how should we think about that? Is that expected to be favorable rest of the year or sort of a more normal trend, going forward?

[Jon W. Howie:]

I think it was lapping a little higher, but it should be normalized because we're going through renewal right now, so I would expect that to increase. But we also had a lot of leverage on that line item with the extra sales.

[Brian M. Vaccaro:]

Okay. All right. And one last one, if I could. On the labor side, you mentioned a little higher wage inflation. I think – and I was thinking about 3% to 5% range, if I heard it correctly. Can you give an update on what you're seeing in terms of variability at a higher – high-quality managers and for the manager pipeline and also maybe give an update on what you are seeing in terms of hourly turnover? Thank you.

[Steven J. Hislop:]

Very welcome. The management pipeline is actually great. We're looking at that. We're growing rather aggressively, as you all know. So we're doing very well. We're very well in front on the management side and the quality of people that we're attracting is tremendous. And from a management point of view, we feel great. Hourly section is a much harder and tough. Its always been hard, it's never been easy ever. But definitely, it's a lot harder to get these, especially in the new store openings, where we hire about 150 people to start our day. But that's definitely more competitive, and you have seen our wages, and average hourly wages in markets go up a little bit. And that's why you've seen a little bit of a jump compared to our history of 1.5% to 2%, where Jon was just talking about 3.9%. So that's what it is. Definitely, it's tough out there. We have a lot of planning to do. We have to get very, very creative, and we've got to stay in front of it. So that's what we're working on. And it's also helpful that both our management turnover and hourly turnover is below last year.

[Brian M. Vaccaro:]

Very helpful. Thank you.

[Steven J. Hislop:]

You're welcome.

[Operator:]

And next, we'll hear from Bob Derrington with Telsey Group.

[Robert Derrington:]

Yeah. Thank you. Jon, can you help us for a second on the cost of sales line. Obviously, as a percent of sales, the first quarter came in considerably better than what we had anticipated. You previously gave us guidance on the line, both as a percent and actually as a number of basis points year-over-year. Based on the first quarter trend, it certainly looks as though it would be lower than what you've previously guided. So can you kind of give us a little bit of update on that number of basis points year-over-year that you would expect that line to fall out?

[Jon W. Howie:]

Yeah. So where we're expecting that is the overall inflation to be right around 1%. But that would equate to your low 26s now, Bob. It came in a lot lower than we were thinking. When we actually put out the model, our costs were running a lot higher in the first and second period. And so, it's come down quite a bit. But we're still expecting your normal increases in check-in here during the summer time. And remember, we have only 40% of our commodities locked in. Produce has been a big part of it, which is about – now, currently, it's the largest it's ever been since I've been with the company. It's about 17.8% of the total basket. And as you know, that can change with Mother Nature. And currently, we're experiencing a very high line cost now, right. Again, not quite as bad as 2014, but it's definitely up about 2.5 times in the last five weeks. So normal size is about $20 a case and currently, it's trading right around $60 a case. So we're trying to factor all that in. And we think we still have some inflation towards the later part of the year and overall inflation will still be in the middle of that range currently. We would be able to update you a little more in the middle of the year.

[Robert Derrington:]

You previously had talked about beef price – beef prices being up year over year, but you didn't call it out as it related to the first quarter. Has something changed there? Are you seeing a better price on your beef?

[Jon W. Howie:]

No. I would say it would be flat and its right around that; it's a little up, but its right around flat, so not enough to call out. But what we weren't going to participate in is the deflation that everybody was going to see in that line item. And we are not participating in that. But it's flat to a little up.

[Steven J. Hislop:]

Oh yeah. And up (25

[Robert Derrington:]

All right. Again, thanks. Congrats on the great quarter.

[Steven J. Hislop:]

Thanks, Bob.

[Operator:]

And from Stifel we'll hear from Paul Westra.

[Paul Westra:]

Great. Thank you. Most of my questions have been asked, but I want to follow up on the labor line just one more time and to maybe Bob's point of view pointing to – about the food cost and how you expect that to sequentially pick up – coming in better? I'd say the Same thing about labor. On the second quarter – on the first quarter here, 32.9 (26

[Steven J. Hislop:]

The way we are looking at it is that – and like I think I called out on my comments, we would expect it to be up anywhere from 40 basis points to 60 basis points over the previous year the next two quarters to three quarters.

[Paul Westra:]

Okay. That's very helpful. And then last question on, your average weekly sales volume for the quarter versus your same-store sales number, it was the lowest you've seen in quite same time, half of what it used to be. I know some of the impacts are the – obviously the pick-up in your non-comp store base from the ramping of those younger stores and then of course the new volumes that are really high in the new metro markets. Can you maybe quantify those impacts and do you expect that sort of spread to continue as we model it going forward?

[Steven J. Hislop:]

I think we're starting to hit that spot to where we talked about early on, because our comp sales were so much higher than what we were opening our prototype at. We said they would (27

[Paul Westra:]

Great. That's helpful. Thank you.

[Operator:]

And from BMO Capital Markets, we'll hear from Andrew Strelzik.

[Brian Welsh:]

Hi. Thank you. This is Brian Welsh on for Andrew. I was just wondering, heard from some of your peers that they were able to get farther out than normal with their development pipeline. Just wondering if you are seeing anything from a real estate perspective and if you could comment on that at all? Thanks.

[Steven J. Hislop:]

Yeah. We feel pretty good about where we're at. As I mentioned to you, 2016 is all done. We are really working on the back end of 2017 right now. I think you've all heard me in the past talk about, I'd like to be two years out on our development pipeline. And we are not quite there, but we are close. So I'm pretty pleased with our pipeline.

[Brian Welsh:]

Great. Thank you.

[Steven J. Hislop:]

You're welcome.

[Operator:]

Moving on, we will hear from Nick Setyan with Wedbush Securities.

[Nick Setyan:]

Hey, gentlemen, and congrats on a great quarter. Mix has been a pretty nice contributor to the comp in recent quarters. It seems like it continues a little bit here in Q1. How should we think about that for the rest of the year? Are there any opportunities around the menu or the bar menu, maybe to continue to see that as a contributor?

[Steven J. Hislop:]

Nick, currently I see that kind of disappearing and it has gradually disappeared a little bit over the last couple quarters. If you remember, in the third quarter when we introduced the new bar menu it was about 100 basis points. I think in the fourth quarter it was about 50 basis points, 60 basis points, and this quarter it was right around 30 basis points. So it's coming down and we're going to lap over that new menu coming here in the second quarter. So I would see that price somewhere going close to our price increase for the year.

[Nick Setyan:]

Got it. And are we pretty – have we pretty much decided that we're not going to take any price increase in the back half?

[Steven J. Hislop:]

Yes. We won't be taking. Again, most of the time in every other year, we've only taken price increase one time a year. That exception was last year when we dealt with the ObamaCare a little bit and we actually took that one in, I think, August/September of 2014, at around 1% and then we were dealing with the meats, so it was a little higher price increase in February of 2.5%. But we usually take our price increase every February.

[Nick Setyan:]

Got it. And then just kind of lastly in terms of the quarterly cadence on how to think about the COGS. It sounds like there is a little bit of an increase in Q2 relative to Q1 as a percent of sales and it wraps up pretty precipitously into Q3 and Q4. Is that a fair way to think about it?

[Steven J. Hislop:]

That is a fair way to think about it. And since we take one price increase during the year and it's always in February, with normal factors and normal inflation you will see that. Plus in Q3, that's when we run our Green Chile Fest and generally our costs run a little higher during that quarter.

[Nick Setyan:]

Got it. Thank you.

[Operator:]

And at this time, I'd like to turn the conference back over to management for any additional or concluding remarks.

[Steven J. Hislop:]

Thank you all 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.

[Operator:]

And ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.