Chuy's Holdings, Inc.
Q4 2015 Earnings Call Transcript

Published: 2 Mar 2016

[Operator:]

Please stand-by. Good day, everyone, welcome to the Chuy's Holdings, Incorporated Fourth Quarter 2015 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 opened 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 would like to turn things over to Mr. Howie. Please go ahead, sir.

[Jon Howie:]

Thank you, operator, and good afternoon. By now everyone should have access to our fourth quarter 2015 earnings release. It can also be found on our Web site 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 conditions. With that out of the way, I would like to turn the call over to Steve.

[Steve Hislop:]

Thank you, Jon, and thank you to everyone for joining us on the call today. By every account 2015 was a very successful year for our business. As we entered the year our key areas of focus have been on our initiatives to drive sales and improve our store level margin in addition to continue to growing of restaurant base. I'm pleased to say, in closing out 2015 that we have succeeded on both counts. From ha top line standpoint our growth continuously led by new unit development. During 2015 we successfully expanded our store base by approximately 17% with the addition of 10 new Chuy’s locations during the year. While it's still early, we are very pleased with the initial results of our 2015 class. In addition, initiatives such as enhanced local store marketing and branding design to highlight our key strength and point of differentiation were also put in place. These efforts have helped us maintain the consistency of our comparable stores sales which now stands at 22 straight quarters of growth. For the full year our comparable store sales growth increased 3.1% and combined with our new development resulted in a full year revenue growth of over 17%. Finally, our success didn’t end at the top line, during early 2015 we began with the implementation of a number of operating initiatives focused on key items like food waste, labor scheduling and manager rationalization across our system. In conjunction with the benefits of year-over-year commodity deflation our 2015 restaurant level EBITDA margin improved over 200 basis points leading to a restaurant EBITDA growth of approximately 33% and an adjusted net increase growth of approximately 36%. As I have noted previously the improvement in our business during 2015 is a testament of the hard work and dedication of our entire team as they've executed on these internal initiatives as well as the ongoing consistency of our business driven by improved habits and routines that we stressed throughout our system. While it'd be a challenge to maintain the same level of improvement in 2016, particularly as it relates to restaurant level margins, our initiative, habits and routines will continue to serve our business well into the future. Switching now to development, we opened four new Chuy’s restaurants during the fourth quarter of 2015, in Tuscaloosa, Alabama; Columbus, Ohio; Beavercreek, Ohio or Suburban Dayton; and Orlando, Florida. As I noted previously we continue to be pleased with the performance of our new restaurants, not only as it relates to their high initial sales volume but also with regards that our early profitability which are meeting our expectation. A priority of our opening themes this year has been a store level operating margin glide path of our new restaurants and we continue to see a quicker improvement on our new store margins in the 2015 class of stores. For 2016 we currently expect to open 11 to 13 new restaurants, subsequent to the end of fourth quarter we opened a restaurant in Woodbridge, Virginia, our first of the year and the third Chuy’s in the Washington, DC area. Additionally our second restaurant of the year is on track to open by the end of the month in Lafayette, Louisiana. We have leases signed for the balance of our 2016 development plan and expect the cadence of our openings to be somewhat concentrated in the middle two quarters of the year. With that I'd now like to turn the call over to our CFO, Jon Howie for a detailed review of our fourth quarter results.

[Jon Howie:]

Thanks, Steve. Revenues increased 14.9% year-over-year to 71 million for the fourth quarter ended December 27, 2015. The increase included 8.8 million in incremental revenue from an additional 107 operating weeks produced by 11 new restaurants opened during and subsequent to the fourth quarter last year. We had a total of approximately 870 operating weeks during the fourth quarter of 2015. Comparable restaurant sales grew 3.2% during the fourth quarter driven by a 3.2% increase in average check, with flat traffic. Comparable restaurant sales and traffic were negatively impacted by approximately 60 basis points during the fourth quarter of 2015 due to Halloween shifting from the Friday to the Saturday and Christmas shifting from a Thursday to a Friday. Effective pricing in the fourth quarter was just under 2.5%. For modeling purposes we lapped last year's 2.5% increase in early February and implemented a new price increase of approximately 1.5%. There were 51 restaurants in our comparable base during the fourth quarter of 2015, including three new restaurants added to the base at the beginning of the quarter. As a reminder we consider restaurants to be comparable in the first full quarter following 18 months of operations. Turning to expenses, cost of sales as a percentage of revenue improved approximately 210 basis points year-over-year to 26.3% as we experienced a favorable impact from lower grocery, dairy, chicken and produce cost during the quarter offset by increases in beef. Looking ahead in 2016 we expect our commodity basket inflation to be flat up 2% and overall cost of sales be flat up 10 basis points over 2015. Labor cost as a percentage of restaurant revenue improved 120 basis points from last year to 33.4% as we continue to gain operating efficiencies through our labor and manager rationalization initiative, in addition to leveraging our comparable stores sales growth. Approximately 50 basis points related to a reduction and expected [indiscernible] payment surcharges in certain states, an improvement resulting from a short term decrease in our managers and training extent as our manager rationalization initiative has allowed us to more efficiently reallocate our current managers. We do not expect these benefits going forward in 2016, and looking out 2016 we expect some additional labor pressure. Restaurant operating costs as a percentage of revenue increased by 20 basis points to 14.4%, this cost increase was primarily related to increases in employee health insurance and credit card fees. Occupancy cost as a percentage of revenue increased approximately 40 basis points year-over-year to 6.9% driven by higher rental expense and property taxes as a percentage of sales in our newer location. General administrative expenses increased 0.8 million to 3.7 million in the fourth quarter. As a percentage of revenue G&A increased approximately 40 basis points year-over-year to 5.2%, the increase is driven primarily by an increase in performance based bonuses, stock based compensation and additional investments in new employee. Pre-opening expenses during the fourth quarter of 2015 was approximately 1.5 million compared to approximately 0.8 million in last year's fourth quarter, primarily due to the differences in timing of our development schedule. We opened four new restaurants during the fourth quarter this year and one early in the first quarter of 2016 while we opened one restaurant in the fourth quarter last year. Net income for the fourth quarter of 2015 was 0.2 million or $0.01 per share as compared to a net income of 2.3 million or $0.14 per share in the fourth quarter of last year. During the quarter we determined that carrying value at three of our locations exceeded their estimated future cash value. As a result we have recognized a 4.4 million non-cash pre-tax impairment charge related to the write down of the carrying value of these assets. Excluding this charge adjusted net income in the fourth quarter of 2015 increased 28.7% to 3 million or $0.18 per diluted share compared to 2.3 million or $0.14 per diluted share in the comparable period last year. Income-tax expense -- our adjusted effective tax rate for the quarter after excluding the benefit related to the asset impairment was 30.65%, finally we ended the year with 8.5 million of cash and currently we have no debt on our balance sheet. As we mentioned on our last call during the fourth quarter we amended our current credit facility which extended the maturity date to October 30th, 2020 from November 30th 2017. And favorably revised the applicable margins and leverage ratio that determined the commitment fees and interest rates payable by the company. Additionally, we retain the ability to expand this credit facility from 25 million to 50 million if needed. With that let's now discuss our 2016 outlook. We are expecting our annual diluted net income per share guidance to be between a $1.01 and $1.05. This compares to adjusted diluted income per share of $0.93 in 2015. Our net income expectation for fiscal year 2016 is based in part on the following annual assumptions. Comparable store sales growth of approximately 2%, restaurant pre-opening expenses of 5 million to 5.9 million. We expect G&A expenses between 17.2 million and 17.8 million. Our effective tax rate is estimated to be between 29% and 31%. We expect annual weighted average diluted shares outstanding of 16.8 million to 16.9 million and we expect to open 11 to 13 new restaurants. Lastly our capital expenditures net of tenant improvement allowances are projected to be between 33 million and 38 million. Now I'll turn the call back over to Steve to wrap up.

[Steve Hislop:]

Thanks Jon. In closing we are pleased with the success of our business during the past year and eagerly look forward to maintaining our momentum in 2016. We continue to be excited about the opportunities ahead for us to grow Chuy's brand and bring our distinct menu of authentic freshly prepared Mexican and Tex-Mec inspired food to a wider audience while enhancing long term values 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:]

Thank you gentlemen, [Operator Instructions] and we'll go first to David Tarantino of Robert W. Baird.

[David Tarantino:]

Jon I had a question about the guidance for 2016, I guess if I look at your earnings growth assumptions that it does imply the margin compression especially at the restaurant levels, but maybe if you could walk us through what's driving that compression at the restaurant level?

[Jon Howie:]

There's a several things, I guess one of the big things which we talked about is the labor, we’re expecting labor pressure to the extent that we're looking at roughly 40, 50 basis points higher in labor expense next year, given some of the inefficiencies in some of the area that we're expecting to open up as well as some wage pressure as well. Also operating expenses, we're looking at those to be just a little bit higher as well. And then obviously our prototype has the new stores coming on at those single digit margins which is automatically, mathematically going to bring some margin in there as well.

[David Tarantino:]

And I guess on that front on the labor side or on the overall restaurant margin side however you want to look at it, is the biggest factor that last thing you mentioned which is the unit coming into the base. Was there may be some upward inflation in the comp base the offer consider.

[Jon Howie:]

There's a little upward inflation in the comp base but a lot of it are the new stores coming in. [Multiple Speakers].

[David Tarantino:]

And when do you expect that to stabilize as you look out in modeling the business out to maybe '17 and '18, when does that dynamic start to stabilize at the restaurant level?

[Jon Howie:]

We're looking at it stabilizing in about 2018.

[David Tarantino:]

And then last, do you -- it looks like the restaurants or the new openings for 2015 have been very good and consistent, I think you mentioned consistent with your profitability expectations, but could you talk a little bit about where do you think those are going to annualize in terms of sales volumes and then as you look at the 2016 timeline how do you think that shaping up from the sales volume perspective?

[Jon Howie:]

I think 2016 is going to be more like our blended rate and our prototype, 2015 has -- it's exceeded those a just a little bit, we are very happy with the results of those, that we're looking at 2016 to be more along the lines of our prototypes.

[Steve Hislop:]

Yes, and again a lot of the story are still in there, more than half of them running in the honeymoon period still at '15, but they're tracking a little bit better than 2014.

[Operator:]

Next we'll hear from Will Slabaugh of Stephens.

[Will Slabaugh:]

Wanted to little bit of a follow-up on the last question around that, the new stores, can you talk about the new stores in your newer markets and maybe bigger versus small performed in '15 and as you look at '16 how that mix may change?

[Steve Hislop:]

Although last couple of years we've been kind of 80-20 mix of the well where we've been back filling and that's going to be the exact same pretty much again in 2016. As we're going down the road you've said, I've mentioned that we are looking at the bigger markets, we'll be looking at Chicago at the end of this year early '17, will be the real big market we're going into and we're right now spend a lot of time focused on back filling and also filling out our DC market.

[Will Slabaugh:]

Got it. You mentioned DC. I wanted to ask there, since that's sort of the first big market outside of Texas, can you talk about how the first two stores have done there and obviously I think as that number 3 coming out?

[Steve Hislop:]

Yes, we're very pleased with where we are in those markets, they're right on our projection.

[Will Slabaugh:]

And last question I think, I’m sure you get a lot, a quick take on was happening in Texas and how you guys still like your bearings?

[Steve Hislop:]

Again as I mentioned previously, we're positive in Texas, as you go through the whole market of Texas, we've seen a little softening in Houston and San Antonio, but again both markets are still up.

[Operator:]

Our next question comes from Jeff Farmer of Wells Fargo.

[Jeff Farmer:]

You guys had enormous identifying cost inefficiencies and then just delivering big time on improved margins especially on a labor lines, so it's -- I wouldn't say it's hard to believe but if you guys take a step back and you’re in 2016 now is there additional opportunity, are you going to take a closer look, do you think there's a chance even if it's on a smaller scale to deliver some incremental efficiencies, even if it’s not on the labor line, maybe operating line, some other line on the P&L?

[Jon Howie:]

I'll tell you as you look at our year 2015 we said most of the performance advantages will come in the second half and if you remember we saw them right off the bat in quarter one, so now those are pretty much onetime adjustments and certain things on our labor scheduling and we feel we’ll maximize that throughout the year of '15 and it should not go into '16 as far as any big jump as far as that goes, but what we've learned, we'll be able to continue with as far as trend line on percentages.

[Jeff Farmer:]

And then Jon just two other quick ones on the P&L, a lot of this was touched on, but occupancy has jumped pretty much early and you warned us about this over the last few years. And you alluded to it, for the class of '16 but I think your occupancy was up 40 basis points year over year at '15 versus '14. Is that it, should we be looking at it or thinking about it or something in that ball park range as we get into '16 in terms of year-over-year pressure on that line.

[Jon Howie:]

We're going to see some year-over-year pressure, probably not as much as the 40 basis points, it's more like in the 20 to 30, but we're going to see some pressure in that over the next couple of years as we enter some of these larger markets. You know we're looking at some higher real estate costs in these markets. Solely offset by our price increase.

[Jeff Farmer:]

All right, I appreciate that, I think you said flat to 2% on the commodity basket, but can you just tell us -- and I might have missed it, what it was in the Q4 of '15 and how should we be thinking about the first two quarters of '16 in terms of inflation from the basket.

[Jon Howie:]

Well 2014, so we finished the year at about 4% down, for the quarter though quarter-over-quarter this is a little over 6% down. So we had very favorable, I think in the third quarter I thought sequentially we'd be about the same as the third quarter and sequentially it was down just less than 1%, so it stayed fairly confident going into the fourth quarter. And going into the first quarter again we're expecting zero to 2% for the year, we really don't talk you know quarter-over-quarter, but if you're talking about the cadence we expect that cadence to be a little lower in the first half of the year and increase during the year.

[Operator:]

Moving on we'll hear from Andy Barish of Jefferies.

[Andy Barish:]

I think the bar program if I'm recalling correctly contributed or maybe a 100 bips or so, is that the right number, you know as you roll that out in the back half and is anything planned as you, you sort of lap that in the June timeframe of this year?

[Jon Howie:]

Well Andy, we did see a little over a 100 bips there in the third quarter and we said due to the newness we thought that it would come down a little bit, it has. I think if you were to look at the price that we had and our comps which was about 2.5% it would come out the mix of about 60-70 basis points. So it has come down a little bit, we would expect little of that mix to continue on through June 28 which is when we put that in place this year. We're going to come out with a new bar menu or just say changes to the bar menu at the end of May. But we're not adding any bigger drinks like we did last year they're just different drinks and you know making some.

[Steve Hislop:]

Just so we’re staying a little updated, but again the size of the drinks, the price of the drinks, will be similar to a year ago.

[Andy Barish:]

And then on the menu chairing work that you've done over the past few years is that pretty much in place and how do we -- do we just think about this year's pricing as kind of getting more back to the sort of 1.5 that you've done historically.

[Jon Howie:]

Absolutely Andy, last year we made a couple of adjustments on the tiered side of the menu, specifically in 4, 3, 2 meaning, Tier 4, Tier 3, and Tier 2. Tier 1 was pretty -- very similar to a price increase that we’ve always done. But we'll be back to right around that 1.5, 1.75, year-in and year-out, that's what we’ve averaged to the last eight years even with last year.

[Operator:]

[Operator Instructions] We'll go next to Paul Westra of Stifel.

[Paul Westra:]

Seem that maybe your commentary of your same store sales outlook is at 2%. Obviously you know it's still a good number, but it would be your lowest in about five years, and should we think about it may be little higher in the first quarter or two, is there -- you seeing anything slowing on the margin or maybe a comment on how you’re looking at the 2% number?

[Jon Howie:]

We're looking at it Paul, you know we have the 1.5% price, we're looking at you know about 50 basis points in traffic, offset by our normal headwind of 45 or 50 basis points. And plus or minus some mix in there, is kind of how we’re looking at it.

[Paul Westra:]

As my follow up on that 45-50 basis points you talking about the new stores entering the comp here.

[Jon Howie:]

Yes.

[Paul Westra:]

And in light of that I guess and also that group entering the comp base classes, I guess 14 now I would be looking at mostly. Seems like it knows originally troubled stores and you know the margin turnaround seems to be well above your expectations and pretty solid. But maybe could you talk a little bit about the sales performance there, you still expecting the drag on comp?

[Jon Howie:]

Well the 2014 stores are really acting like normal stores, right in accordance with our plan. The 2013 stores are already all in the comp base, and they are progressing a little higher than our other stores but again they're at a lower level to, so that percentage is kind of offset in the whole dollars.

[Paul Westra:]

And how many markets right now do you feel you're in high need of further penetration, you know as in that class of '13 to '14 is yet to do markets, are most of those, you feel good having a sister restaurant or two at this point.

[Jon Howie:]

I'd say we got a long way to go on that actually, the only places where we're really filled out in all of -- we see all of Texas, and Nashville we'll probably all filled out, all the rest and then we can adding stores in there.

[Operator:]

Our next question will come from Andrew Strelzik of BMO Capital Markets.

[Andrew Strelzik:]

Wanted to ask within that commodities basket, what specifically is it that you're seeing or expecting potential inflation from within the basket?

[Steve Hislop:]

Well, one thing, as I think I said at on the road, a lot of people in casual dining are expecting a lot of deflation in the beef area, we're not expecting to participate in that much. Because we've got our beef locked in, for 60% of our beef purchases which is fajita meat at 6% higher than all of 2015. So, in the end it's going to be offset a little bit by ground beef, but that's going to stay pat, if you will. And then dairy we had such decreases in dairy and chicken, we're not anticipating those decreases in the current year. And then one thing that we can't lock in and we buy locally and it's really up to mother nature is our produce and that’s one of our highest percentages of our basket -- composition of our basket and so that can fluctuate as you know and it has fluctuated in the past, anywhere from 70 to 80 basis points in any given quarter.

[Andrew Strelzik:]

And then can you talk about the units where you took the impairment, where were those units located, when were they opened and as there anything specific to those units that maybe caused the performance to be less than you might have expected?

[Steve Hislop:]

Obviously in every story you learn things, but in same-store I'm sorry, I'm not going to really name or talk about the areas that these stores were, but obviously we learned a tremendous amount every time we open a store and we'll use that as we move forward.

[Andrew Strelzik:]

And then the last question I wanted to ask you is on G&A, you gave the guidance for the year but I'm kind of thinking further out in that, there was a bigger step in '15 and I know you added some teams on the real estate side, I guess number one, why the lower increase this year and as we're thinking further out how do you feel about your overhead structures as such that you could support the growth over the next several years or you think you're going to continue that?

[Steve Hislop:]

I think, our infrastructure is very good right now and so we just need to make minor adjustments going forward, it's a big increase that you have this year, which is showing kind of the smaller increase next year, it's typically had the performance going in this year, if you remember in 2014 there was no performance bonus, this year it was little higher than target, so that's the offsetting. So next year comparable bonuses should flatten than out a little bit and that's why you're seeing the less -- the smaller increase in 2016. And going forward there you should see some leverage on that line item.

[Operator:]

And gentlemen we have no further questions at this time. I'd like to turn the call back to Mr. Hislop for any closing remarks.

[Steve Hislop:]

Thank you so much. And Jon and I appreciate your continued interest in Chuy's and we will always be available to answer to any and all questions. Again thank you and have a good evening.

[Operator:]

That does conclude today's conference. Again we thank you all for your participation.