Chuy's Holdings, Inc.
Q1 2013 Earnings Call Transcript

Published: 6 May 2013

[Operator:]

Good day ladies and gentlemen, and thank you for standing-by. Welcome to the Chuy's Holdings, Incorporated First Quarter 2013 Earnings Conference. At this time, all participants have been placed in a listen-only mode. All lines will be opened for your questions following the presentation. Please note that this conference is being recorded today, May, 06, 2013. On the call today, we have Steve Hislop, President and Chief Executive Officer and Jon Howie, Chief Financial Officer. And now, I would like to turn the conference over to Mr. Jon Howie. Please go ahead sir.

[Jon Howie:]

Thank you, operator, and good afternoon everyone. By now, everyone should have access to the first quarter 2013 earnings release. It can also be found at www.chuys.com in the Investors section. Before we begin our review of the formal remarks, I need to remind everyone that part of our discussions today will include forward-looking statements. These forward-looking 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. Also during today’s call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for the results prepared in accordance with GAAP and the reconciliation to comparable GAAP measures is available in our earnings release. With that out of the way, I would like to turn the call over to Steve.

[Steve Hislop:]

Well, thank you, Jon and thank you all for joining us today on the call. We are very pleased to have been continuing on our operating momentum in the first quarter. On a proforma basis, we earned $0.15 per diluted share for the quarter led by a strong new unit performance and a solid contribution from our comparable sales base, this despite a charging quarter for the restaurant sales and the industry. I would also like to point out that our 53rd week in 2012, the week between Christmas and New Year’s which has traditionally been a very strong week for Chuy’s was captured in both the first quarter and fourth quarter of 2012. So in effect the high value week was swapped for a more normalized week during the first quarter of 2013. On a comparison basis, this shift reduced our revenues during the quarter by approximately $700,000. So all-in-all, I am very proud of our results and the performance of our team during the quarter. Our results continue to reflect the part our employees take each and every day providing our guest with unique dining experience; whether it’s a hand-rolled tortilla, one of our nine to 11 home made sauces made daily or hand squeezed lime juice for our signature modulators or our commitment to made from scratch food prepared fresh every day, we provide great value for our guest in a fun, energetic environment which is instrumental in driving our business momentum. Basically, those are our fundamentals. On the development front, we opened two restaurants during the first quarter; one in San Antonio, Texas; one in Kissimmee, Florida. As I noted, we remain pleased with the performance of our new units as they continue to hit our expectations. Our operators as well as our development team, training and marketing teams continue to do a fantastic job from installing the tourist culture in all our new units. Our EPS growth over the next few years will largely be driven by new unit growth. We believe that broad appeal of the Chuy’s concept are strong unit economics and our flexible real estate strategy with focus on convergence of existing restaurants, but also with the selective use of our prototype building for ground up construction present us a with a large runway of opportunity for continued expansion. During 2013, we expect to open eight to nine new Chuy’s restaurants and in addition to the two openings in the first quarter, we've already opened one additional restaurant in the second quarter and tomorrow we will open our new unit in Little Rock, Arkansas. So we are feeling really good about our 2013 development schedule. With that, I would like to turn the call over to our CFO, Jon Howie to review the details of our first quarter. Jon?

[Jon Howie:]

Thanks, Steve. Our first quarter ended March 31, 2012, revenue increased 24.6% to 46.7 million from 37.5 million in the same period last year. The increase was driven primarily by 7.8 million in incremental revenue, provided by an additional 110 operating weeks from the 10 new restaurant open during and subsequent to the first quarter of 2012. Total operating weeks for the first quarter of 2013 increased 27% to 518 weeks from 408 weeks in the comparable quarter last year. Comparable restaurant sales increased 2.3% during the first quarter driven by 2.2% increase in average check, and 0.1% increase in traffic. For clarity I would like to point out that this is an apples-to-apples comparison for the 13 weeks ended March 31, 2013, compared to the 13 weeks ended April 1, 2012, which is a slightly different base period than you’ve seen the last year’s 13-week fiscal quarter ended on March 25th, 2012. On a strict fiscal quarter basis, which includes the one we calendar shift and the loss of the high volume week that Steve referred to earlier during the 53rd week of 2012, sales for the same restaurant increased 1%. There were 27 restaurants included in a comparable store based during the first quarter of 2013, which included three new restaurants added to the comparable store base that’s beginning of the quarter. Comparable store base in the first quarter of 2012 had 18 restaurants. We consider restaurants to be comparable in the first four quarter following the 18-month of operation. Like to remind everyone that many of our restaurant open at volumes greater than the residential normalized run rate. In the case of our strongest openings since honeymoon period may last longer than the 18 months we allow before restaurants inner to comparable store base. Given the small number of restaurants currently in our comparable store base, the timing and strength of our new restaurant opening may create a headwind in our comparable restaurant sales percentage in some quarters in the near-term. Today that headwind has reduced our comparable store sales percentage ranging from 0.5% to 1.2% in any given quarter. Switching over to expenses, I will touch on some key line items; cost of sales as a percentage of revenues increased approximately 40 basis points in the first quarter to 26.9%. The increase resulted primarily from higher produce cost and chicken cost. For 2013 we continue to expect commodity cost inflation to be around 2% to 3% and see cost of sales as a percentage of revenue in the 27.5% to 27.9% range for the rest of 2013. Labor cost as a percentage of revenue increased 20 basis points to 32.1%. The increase was largely attributable to increased training cost and staffing levels at our new restaurants partially offset by improved labor efficiencies in our comparable restaurants. General and administrative expenses increased approximately $1 million to $2.8 million in the first quarter of 2013 from $1.8 million in the first quarter of 2012. This increase was primarily driven by increases in staffing as we continue to strengthen our infrastructure for growth and increase in performance based bonuses as a result of our stronger overall profitability for the quarter and additional payroll taxes due to the exercise employees stock options and incremental cost associated with operating as a public company. During the first quarter of 2013, we incurred 417,000 of offering expenses related to two secondary operating of the company's common stock. All of the stock in each offering was sold by a certain existing stockholders and as a result of company do not receive any proceeds from either offering. We expect to incur approximately and additional 255,000 of expenses related to the second of the two offering in the second quarter of 2013. Depreciation and amortization as a percentage of revenue increased 50 basis points to 4.2% from 3.7% last year. Driven primarily by the increased equipment and leasehold improvement cost associated with our newer restaurants. We expect our depreciation and amortization as a percentage of revenue to run approximately 4.3% of revenues for the year. On a GAAP basis, interest expense decreased to 33,000 for the quarter from $1.3 million in the first quarter of 2012. On a pro forma basis, interest expense totaled 107,000 for the first quarter of 2012. The total outstanding debt under our credit facility at the end of the first quarter was approximately $5 million. During the first quarter our tax rate was favorably impacted by one-time adjustment for incremental employees to limit tax credits from open tax years. This was partially offset by the unfavorable impact of non-deductible secondary offering costs during the quarter ended. Excluding this net favorable benefit, our pro forma effective tax rate was 29.9% the midpoint of our expected range. Our GAAP EPS result reflects our capital structure prior to our IPO, a component of our pre-IPO capital structure was participating convertible preferred stock for each historical period presented, our GAAP results include undistributed earnings allocated to preferred participating interest. In connection with the IPO, these preferred shares were converted into common shares. With that background I'll provide the following; GAAP net income for the first quarter of 2013 was approximately $2.6 million compared to $381,000 in 2012. Net income available to common stockholders in the first quarter of 2013 was approximately $2.6 million or $0.16 per diluted shares compared to breakeven net income for 2012. Weighted average diluted shares outstanding were 16,577,053 for the first quarter of 2013 and 10,906,805 for 2012. Please also note that the historical weighted average shares outstanding for 2012 does not reflect the full impact of our IPO transaction. The conversion of our preferred stock or our stock repurchase during the second quarter of 2012. Attached to our press release is a reconciliation of our GAAP results to our pro forma financial results in connection with our recent IPO. We simplified our capital structure by converting all preferred stock to common stock and reduced our long term debt. Our pro forma results include adjustments to reflect our post-IPO capital structure including our basic and diluted shares count as if the IPO conversion of preferred stock and stock repurchase occurred at the beginning of fiscal 2012 as well as other non-recurring or one-time adjustments. We believe that our pro forma results provide a useful view of our business given our new capital structure and post IPO cost structure. Pro forma net income for the first quarter of 2013 was $2.5 million or $0.15 per diluted shares and $2.4 million or $0.15 per diluted shares in 2012. For our pro forma earnings per share calculation note that the diluted weighted share count of approximately 16.6 million shares for the first quarter of 2012 reflects our estimated post-IPO share count. With respect to our 2013 outlook, we are providing the following update to our annual guidance. We have narrowed our guidance range and currently expect our diluted net income per share to range from $0.67 to $0.69. This compares to pro forma diluted net income per share of $0.60 in 2012 which included an estimated $0.04 to $0.05 per share positive impact due to the 53 week during that fiscal year. Net income guidance for the fiscal year 2013 is based in part on the following annual assumptions. Our revenue expectations include a comparable store sales increase for the year ranging from 1% to 1.5%. Restaurant pre-opening expenses are expected to range between $3.3 million and $3.9 million. We expect G&A expenses to run between $10.5 million and $11 million. This excludes approximately $672,000 of expenses related to the two recent secondary offering which we’ll disclose separately from G&A expenses on the income statement. We expect pro forma effective tax rate for the full-year to range between 29% and 31%, and we expect annual weighted average diluted shares outstanding of 16.7 million to 16.8 million. Lastly as Steve noted, our development plans for 2013 called for eight to nine new Chuy’s restaurants of which three have opened here to-date. Our capital expenditures net of tenant improvement allowances are projected to be approximately 19.1 million to 21.2 million. And now, I'll turn the call back over to Steve to wrap up.

[Steve Hislop:]

Thank you, Jon. We continue to be excited about the opportunities we have to grow that Chuy’s brand and bring our distinct menu of authentic, (inaudible) Mexican and Tex-Mex inspired food to wider audience, while enhancing long-term value for our stockholders. Before we got to question-and-answer portion of the call, I would like to again take a moment to thank all of our Chuy’s employees. Our successful results are a testament to their hard work and dedication to earn a dollar every single day. And with that said, we thank you for your interest in our company; we’ll be happy to any questions you might have. Operator, please open the lines for question.

[Operator:]

Certainly, thank you. (Operator Instructions) We will hear first from David Tarantino of Robert W. Baird.

[David Tarantino:]

Just a question, maybe Jon first a clarification on the comp trends. I was wondering if you could maybe quantify the impact of the newer stores entering the comp base on the comps calculation.

[Jon Howie:]

Sure David, with 2.3% on the comparable store sales without the new -- or excuse me with the new ones and if you look at our existing store base, which were the original 24 that started the year is at 3.1%. So that trend is really comparable to what we saw in the fourth quarter last year.

[Steve Hislop:]

Yeah. It's exactly the same trend, Dave.

[David Tarantino:]

Great, that’s helpful. And then I guess a lot of the folks of the industry saw a little bit of a slow down in the middle of the quarter and exited the quarter with better trends. I was wondering if maybe you could talk about your trends during the quarter and may be the trends exiting the quarter and into early Q2?

[Jon Howie:]

Sure. I mean we actually saw pretty consistent trend throughout, David. We actually took a price increase in second period of this year. So we solve some slower traffic in February, but bounced back in March, so it's pretty consistent throughout.

[Steve Hislop:]

And we also Dave see that consistent trend as we moved into where we are sitting at today. So it's been pretty consistent for us for the whole year.

[David Tarantino:]

Great, that’s helpful. And then lastly, Steve, maybe as you look at the new store openings that you’ve had recently, could you comment on how the volumes for those new stores that have opened in 2013 have looked relative to your plan, and in particular the one in Virginia as you entered that new market, what do you see in early stages of the brand into that market?

[Steve Hislop:]

Well, thank you, David. Yeah, great, we opened San Antonio, it was the first one. Obviously in a Heritage market, we’ve done very well. We have hit our expectations there and also Richmond, we’re really excited about our entrance into the Richmond market. We have all been opened three weeks there. Right now they are hitting or exceeding our expectations up there, so we are very, very pleased and [Kismis] also done very well and we’re expecting and we are excited to continue to hit out expectations as we open Millrock first thing tomorrow morning. So they are right on plan and we feel really good about them.

[Operator:]

Moving on, we will take a question from Will Slabaugh, Stephens.

[Will Slabaugh:]

I wanted to ask just another question about me in the opening to call David there and obviously (inaudible) including at or above your expectations. I wondered if you could talk just on the call side for a minute as you go into (inaudible) in the southeast, Midwest, just other areas outside of [Packers], how that is hitting your expectations or is it not hitting, is it above or below both from a preopening expense standpoint and then built our cost standpoint?

[Steve Hislop:]

Again every single thing was not done. We build a lot of fundamentals in our business and this is basically one. And so as far as our sales and the cost objectives that we have in our new store openings, they are all hitting our expectations.

[Will Slabaugh:]

Perfect. And then cost of sales that came a little bit lower than we expected, can you give us an update just on where you lock for the year, inflation expectation for the remainder of the 2013?

[Jon Howie:]

Sure, Will, you are absolutely right, they did come in little lower than we expected, but we are starting to see that inflation that we expected now in some of that cost produce and chicken continue to rise especially going into the second quarter. Also as I have mentioned previously we have ground beef in for the rest other of the year but are flat which is our (Tahiti) meat was locked in through the first quarter, same prices in Q4 of last year, and then it was capped out at 6% to 7% for the rest of the year. Well that cap is now offs and it has moved up 6% to 7% in the second quarter. So we are seeing increases in flap and chicken and produce. So I don't think we are going to see the favorable cost of sales that we did in the first quarter and second quarter, and there are going to be more in line with what we were talking about previously.

[Steve Hislop:]

I believe I think Jon said somewhere between 27.5, 27.9 range, yeah.

[Will Slabaugh:]

Lastly, could you break down traffic and check in the quarter?

[Jon Howie:]

Sure. Traffic of the 2.3%, traffic was 0.1% and then check was 2.2%.

[Will Slabaugh:]

And for the fourth quarter, obviously on...

[Jon Howie:]

That was a 27, if you look at the original 24, that Dave spoke of earlier, again your PPA was relatively the same, the price was 2.2% and your traffic was actually up 0.9%.

[Operator:]

(Operator Instructions) Moving on, we will hear from Chris O'Cull, KeyBanc.

[Chris O'Cull:]

Jon, I think you said that the stores opened the last 12 months had contributed $7.8 million in revenue with a 110 operating weeks. So by my math, that's averaging roughly 71 a week during the quarter, I know opening volumes can be influenced by the season they open, which seasons are good or bad for opening new stores?

[Jon Howie:]

Well, I mean, what you have there too is, it’s not just necessarily the -- what I want to say the operating weeks, it’s the total revenues for those stores in those periods, so you have the honeymoon period involved, that's creating some of that as well. Does that make sense?

[Chris O'Cull:]

Okay.

[Jon Howie:]

I can explain that to you, but basically we are taking the same stores that were open in the quarter previously to the same stores, so it’s not necessarily just that operating week or 110 operating weeks.

[Chris O’Cull:]

Okay, I can follow up afterwards. And then I think the annualized the G&A expense in the first quarter would put you at the high end of your guidance. Do you not expect any sequential growth in G&A during the year?

[Jon Howie:]

Well, the big thing that's driving that is we recruit some of our incremental homerun bonus in the first quarter because of the results of this year. So to the extent that we should be -- excluding that we should be at the upper end of that range, you are absolutely right, but sequentially it should be right on target with what we are saying.

[Chris O'Cull:]

Okay. And then how much has tenant allowance is contributing to CapEx for the year?

[Jon Howie:]

On average they contribute about $5 million to $6 million.

[Operator:]

And our next question comes from Nick Setyan of Wedbush.

[Nick Setyan:]

On the OpEx side, I think it’s the first quarter in a while we haven't seen decent leverage there, can you just maybe talk about some of the moving parts there in Q1 and how would you think about that going forward?

[Jon Howie:]

Well, the biggest thing why don't see operating leverage there Nick is really off the sales, I mean, which is an extremely powerful cost of sales in Q1 of 2012 with very, very low produce cost and so that's really kind of offsetting any kind of leverage that we’d have.

[Nick Setyan:]

So I was asking specifically about the operating expenses line.

[Jon Howie:]

The operating expense? As far as, it was flat with last year. We didn’t, I guess, expect much leverage in that line item with the new store rolling in.

[Nick Setyan:]

Got it. So in the past we've seen pretty decent leverage in that line item. So is that something we should kind of think about that going forward, not expecting too much leverage?

[Jon Howie:]

Yeah, you have to seek too much leverage in that line item going forward. Most of your leverage is going to be, like we're talking about in the preopening line, in your labor line and then on your G&A line.

[Nick Setyan:]

Got it. And in terms of the tax rate, I know you guys kind of added that with a pro forma line. So how should we think about the tax rate in the quarters going forward to kind of get to your guidance? So should we just up it a little bit to may be 32% or so to get to that range?

[Jon Howie:]

Well, I think if you take -- say if you take the next quarters by the 29.9% to 30%, what those items are in the current quarter were discrete items and we took all of the tax impact of that in to this quarter. If you look, we have approximately $200,000 some in additional offering cost in the second quarter. That will also be non-taxable. So if you’re to take that by the non-taxable rate and the rest of it through your 29.9% to 30% tax rate, I think you will get where you need to be.

[Nick Setyan:]

Perfect. And just finally, any idea how many operating weeks we will have in Q2?

[Jon Howie:]

I don’t have that in front of me, Nick. I apologize. I will get back with you.

[Operator:]

Gentlemen, with that, we have no further questions. Mr. Hislop, I'll turn the call back to you.

[Steve Hislop:]

Well, everybody, thank you so much. Jon and I appreciate your interest in Chuy’s. We always will be available to answer any and all questions. Again, thank you and have a good evening.

[Operator:]

Again, ladies and gentlemen, that does conclude today’s conference. We thank you all for joining us.