J. Alexander's Holdings, Inc.
Q1 2019 Earnings Call Transcript

Published: 5 May 2019

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the J. Alexander's Holdings, Inc. First Quarter 2019 Earnings Conference Call. Today's conference call is being recorded. [Operator Instructions]. It is now my pleasure to turn the conference over to Mr. Tom Lawrence for introduction of today's first speaker. Please go ahead, Mr. Lawrence.

[Tom Lawrence:]

Thank you, Elmer. We appreciate your interest in joining us on this conference call to discuss results of J. Alexander's Holdings, Inc. for the first quarter of 2019. By now, everyone should have received a copy of the news release that was distributed yesterday afternoon. If anyone does need a copy, it is available on J. Alexander's website at www.investor.jalexandersholdings.com, or you can call Tammy Allen at 615-244-1818, and she will send you a copy immediately. Before I turn the call over to Lonnie Stout II, Executive Chairman of J. Alexander's Holdings, Inc., I'll remind you that all statements made in the news release and during this conference call, other than statements of historical fact, are forward-looking statements. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The company believes that its expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the company's actual results, performance or achievements or industry results to differ materially from the company's expectations of future results, performance or achievements expressed or implied by these forward-looking statements. Additional information concerning those risks, uncertainties and other factors is described under the headings, Forward-looking Statements, in yesterday's press release and in Risk Factors and other sections of the company's annual report on Form 10-K, for the year ended December 30, 2018, and subsequent filings with the SEC, which you can find on the SEC's website and the Investor Relations section of the company's website. For non-GAAP measures disclosed in this call, and related GAAP measures and other information are available in the financial and statistical summary accompanying the press release dated May 1, 2019. In addition, the company's past results of operations do not necessarily indicate its future results. Finally, we wanted to let people know that the information statements made during the call are made as of the date of the call, May 2, 2019. Those listening to any replay should understand that the passage of time by itself will diminish the quality of the statements. Also, the contents of the call are the property of the company, and the replay or transmission of the call may be done only with the consent of J. Alexander's Holdings, Inc. It's now my pleasure to turn the call over to Lonnie Stout for his opening remarks.

[Lonnie Stout:]

Thank you, Tom, and welcome to our quarterly earnings call. I'd like to introduce to you our new leadership team. We've completed our management succession plan, Mark Parkey, a 26-year-old veteran of the company, as our new Chief Executive Officer, and we're extremely excited about Mark in this role. Jessica Hagler has been promoted to Chief Financial Officer. Jessica is a highly gifted financial executive. And also Mike Moore, who started the company with me in 1991, is our Chief Operating Officer, and is increasing his role in the operations area of the company. I like to now turn the call over to Mark Parkey. Mark?

[Mark Parkey:]

Thank you, Lonnie, and good morning to everyone on the call. I, too, would like to thank you for joining us on today's call to review and comment on results for the first quarter of 2019. As Lonnie noted, Jessica Hagler, our Chief Financial Officer, will join me on this call and will follow my remarks in a few moments. As expressed in our news release yesterday, we were generally pleased with our operational execution in both restaurant concepts during the most recent quarter. We turned in positive same-store sales increases, despite continued softness in guest traffic at certain restaurants of our J. Alexander's/Grill collection. We are working aggressively to build guest counts at these locations, as I will discuss in more detail shortly. For the first quarter ended March 31, 2019, net sales of J. Alexander's Holdings, Inc. advanced 4.6% to $64,734,000 from $61,909,000 in the same quarter a year ago. Average weekly same-store sales per restaurant in our J. Alexander's/Grill locations were $118,700, up 0.3% from $118,300 reported in the first quarter of 2018. With the Stoney River Steakhouse and Grill restaurants, average weekly same-store sales per restaurant were $84,500, up 2.2% from $82,700 recorded in the first quarter of 2018. On March 11, 2019, we announced the signing of a lease to open a new J. Alexander's/Grill restaurant in Houston, Texas. Construction has started on this restaurant, located in the Uptown Park district of Houston, and we expect it to open in the fourth quarter of this year. This past Monday, we announced the signing of a lease for a new Redlands Grill restaurant in San Antonio, Texas. This will be our second J. Alexander's/Grill restaurant in this market and the first to be developed exclusively under the Redlands Grill name. We anticipate starting construction on this restaurant later this year, and expect to open it during the first half of 2020. The first half opening in 2020 will not materially impact our previously issued guidance for 2019, except for the impact on capital expenditures and preopening expense. As Lonnie noted in his recent letter to shareholders, we've opened 6 new restaurants since the beginning of 2016. For fiscal 2019, we are going to be prudent about investing our capital dollars, and we'll be focusing on ramping up sales at these newer locations. As we've shared in the past, our restaurants often have a slower ramp-up than many other restaurant groups. This is because we are a repeat business-driven concept. Approximately 62% of our revenue is derived from 16% of our guests, and it takes some time for that 16% to settle in and become loyal regulars. And we believe that a measured development pace over the next year or so is a prudent decision. Elsewhere, during the first quarter of 2019, we continued to see new restaurants opening in many of our markets. As noted in yesterday's release, while such openings have historically not presented long-term issues, they have the potential to generate short-term guest trial in some locations. While we are always cautious about taking a price increase in the face of such competition for guest traffic, we believe that we have room to implement a modest price increase, and will do so during the second quarter at select restaurants. Beef prices through the first quarter of 2019 remained higher than prices in the first quarter of 2018. These price increases in both restaurant concepts were primarily responsible for the increase in our cost of sales which increased by 60 basis points to 31.7% of net sales in the first quarter of 2019 compared to 31.1% in the first quarter of 2018. Overall, our cost of sales was manageable during the most recent quarter. And aside from any negative ramifications that may result from the recent Midwest flooding later this year, we are not overly concerned with the cost of sales outlook for the balance of 2019. I would also note that we lost 14 days of revenue during the first quarter of 2019 from restaurant closings due to harsh winter weather, representing approximately $175,000 of lost revenue in the first quarter of 2019. In the comparable quarter a year ago, however, we lost 27 days of revenue from weather-related restaurant closings, representing approximately $400,000 in lost revenue last year. For the quarter ended March 31, 2019, the company recorded income from continuing operations before income taxes of $4,146,000. This compared to income from continuing operations before income taxes of $1,842,000 in the first quarter of 2018. The principal factor, which adversely impacted our operating results in the first quarter of 2018, was the quarterly valuation of the profits interest ramp of Black Knight Advisory Services LLC. Under this agreement, which was terminated on November 30, 2018, the company recognized profits interest expense of $1,907,000 in the first quarter of 2018. The company also incurred consulting fees under its management consulting agreement with Black Knight of $244,000 in the first quarter of 2018. And finally, during the first quarter of 2018, the company's income from continuing operations before income taxes was impacted by non-recurring transaction expenses of $926,000. March 15, 2019, the company used cash on hand to pay Black Knight $705,000 representing the final prorated 2018 consulting fee, which was accrued during fiscal 2018. The company recorded net income of $3,848,000 in the first quarter of 2019, up from net income of $1,593,000 related to the corresponding quarter of 2018. Results for the first quarter of 2019 included an income tax provision of $239,000 compared to an income tax provision of $138,000 in the first quarter of 2018. Basic and diluted earnings per share totaled $0.26 for the first quarter of 2019 compared to $0.11 in the first quarter of 2018. Adjusted EBITDA was $7,712,000 in the first quarter of 2019 and 5.4% from $8,151,000 of adjusted EBITDA in the first quarter 2018. For the first quarter of 2019, our restaurant operating profit margin as a percentage of net sales was 14% compared to 15.9% in the first quarter a year ago. At this time, I'll turn the call over to Jessica Hagler, who will deliver her remarks on the first quarter of 2019 and provide updated guidance for the remainder of the current year. Jessica?

[Jessica Hagler:]

Thank you, Mark, and good morning, everyone. As Mark noted, we delivered positive same-store sales in both of our restaurant concepts during the first quarter of 2019, while focusing intently on building guest traffic at a select number of our newer J. Alexander's/Grill restaurant. Operating results at our Stoney River Steakhouse and Grill restaurant continued to meet our expectations, with increases in average guest count and guest check within the same-store sales base. The average weekly guest counts within the same-store base of the company's J. Alexander's/Grill restaurant were down 1.1% in the first quarter of 2019 compared to the first quarter of the prior year, while guest counts within the same-store base at our Stoney River restaurants were up 1.2% for the first quarter of 2019 over the first quarter of 2018. With respect to average guest check, which include alcoholic beverage sales, the average guest check within the J. Alexander's/Grill same-store base of restaurants increased by 1.5% during the first quarter of 2019 to $32.36 from $31.89 during the comparable quarter of 2018. The average guest check within the same-store base of Stoney River Steakhouse and Grill restaurants was $43.02 during the first quarter of 2019, up 0.8% from $42.66 during the corresponding quarter of 2018. The effect of menu pricing for the first quarter of 2019 was estimated to be a 0.3% increase for both the J. Alexander's/Grill restaurant and Stoney River Steakhouse and Grill restaurant compared to the first quarter of 2018. Inflation in food costs for the first quarter of 2019 was estimated to total 1.9% for the J. Alexander's/Grill restaurant, with beef costs increasing by an estimated 5.7% compared to the first quarter of 2018. At our Stoney River restaurant, inflation for the first quarter of 2019 was estimated to total 3.2%, with beef costs rising by approximately 7.2% over the corresponding quarter of 2018. The company's restaurant labor and related costs as a percentage of net sales totaled 30.2% during the first quarter of 2019 compared to 29.4% of net sales in the first quarter of 2018. Other restaurant operating expenses were 19.6% of net sales in the first quarter of 2019 compared to 19.4% of net sales in the first quarter of 2018. During the first quarter 2019, the company adopted Accounting Standards Codification 842, Leases, which requires the lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. The adoption of this standard had a material impact on the company's assets and liabilities due to the recognition of operating lease right-of-use assets and lease liabilities on its condensed consolidated balance sheet as of the first day of fiscal 2019, which was the company's adoption date. Additionally, the adoption required the company to recognize an adjustment to its opening retained earnings for fiscal 2019 related to the impairment of the adoption date right-of-use asset for one of the company's locations, which is no longer in operation, but for which the company remains party to a lease agreement. The adoption of this standard does not have a material effect on the company's condensed consolidated statements of income and condensed consolidated statement of cash flows for the first quarter of 2019. Finally, the company's performance outlook for fiscal 2019 is based on current information as of May 1, 2019. The company does not expect to update its 2019 guidance before the next quarter's earnings release. However, the information on which the outlook is based is subject to change, and the company may update its full business outlook or any portion thereof at any time for any reason. Based upon current information, the range of guidance for fiscal year 2019 is the same as reported on March 11, 2019 in all areas, except for capital expenditures, which are now estimated to range from $14 million to $16 million. This is down from $19 million to $21 million as of March 11, 2019, and it's based on the revised timing related to the opening date of the new Redlands Grill in San Antonio, Texas. I will now turn the call back to the operator to open the participant call-in segment of this morning's call.

[Operator:]

[Operator Instructions]. Our first question comes from Will Slabaugh, Stephens.

[William Slabaugh:]

Congrats, Lonnie, Mark and Jessica on the promotions as well. First question, just given the noise in the quarter around weather, calendar shifts, geographic differences, how are you thinking internally about the underlying run rate of the J. Alexander's business, in particular?

[Mark Parkey:]

Well, we're pretty encouraged by the run rate. The holiday timing bounced around a little bit with Easter but that wasn't a significant impact for us. So on balance, as Lonnie has said for a number of years, winter comes every year and we're always glad when we kind of escape the clutches of mother nature. And we're pretty encouraged by the run rate that we've got in place right now. Specifically at our mature restaurants, as we noted in the release yesterday, we're certainly focused on some of the newer restaurants and working diligently to get the traffic accounts that we seek there. We're encouraged, our three newest J. Alexander's restaurants are all positive with respect to the traffic trend for the first 4 months of 2019. So we're basically pretty optimistic about where we are and where we're headed.

[William Slabaugh:]

Good to hear. And just to follow up on the performance of some of those recently opened stores. Can you talk a little bit more about that and how those newer stores have been performing versus what you've seen in the past few years? And then, it sounds like from your comments, trying to - I don't want to say be hesitant but sort of prudent in terms of how you're thinking about future development. So curious how the recent performance of these stores informs what 2020 may look like if you're willing to talk that far out?

[Mark Parkey:]

Well, yes. And as we've shared in the past, each location is kind of its own story as far as what is - what's occurring in that local market. And so in King of Prussia, that was our first foray into the Northeast. And we have been working very aggressively with social media and with promotional-type events to make ourselves better known in that market. We're encouraged by the response that we've gotten. It still has a long way to go from where we expect it to be, but we're certainly optimistic that it will get there. As we've noted in some of our previous conversations, most of the concepts in that development exceed their system sales average by a pretty healthy margin, and we are certainly expecting that we will fall into that category as well once people - once we develop the foundation, the 16% that drives the 62% top line business. So that's a little different flavor than, say, some of the other restaurants just because of the geographics involved, but we are very encouraged by what we've seen thus far in 2019 with respect to the foundational elements, which is - always starts with traffic.

[William Slabaugh:]

Understood, and good to hear. I wanted to ask you as well about the new share repurchase authorization of $15 million, and if you had any thoughts you're willing to share about plans for spending that money.

[Mark Parkey:]

Well, we certainly anticipate that it will be an option as we go forward. But as far as any more specifics as to the when and the how, I don't anticipate that we want to get into too much detail on that at this point. The window needs to be open, obviously and once the window does open back up, that's an option. But at this particular time, I really don't have any other comments to add to that.

[William Slabaugh:]

Got it. And the last thing for me. Any updated thoughts on beef given sort of what you saw this quarter, which was a little ahead of what we were thinking but I realized it obviously depends on what you saw last year in the first quarter. And then also what we've been hearing around, some fears with African swine fever and any other supply or demand issues that you may have been seeing out in the marketplace?

[Mark Parkey:]

Yes, we really are kind of in wait-and-see mode. I know a lot of the producers have been talking about the impact of the floods and some numbers that sound large get thrown around. But when you think about the number of cattle that are slaughtered on a daily basis across the country, it may not be as large as it sounds initially. So we're kind of in wait-and-see mode. We do talk to - Cargill is our primary partner in that regard, and we do talk to them on a regular basis. At this point, we're not overly concerned that beef is going to become an issue in the near term, but I'm sure that will come into better focus by the time we have this call next quarter.

[Operator:]

[Operator Instructions]. There are no further questions at this time, and I will now turn the call back over to Mark Parkey for closing remarks.

[Mark Parkey:]

Thank you, Elmer. While our first quarter results were basically in line with our business plan, we will not be fully pleased with our overall performance in the J. Alexander's/Grill restaurants until our guest traffic and sales ramp up to higher levels. As expressed, most of the softness is limited to a handful of our newer restaurants, and we're closely monitoring the metrics related to these locations. To date, we are encouraged that our plans to drive both traffic and sales at these locations generally appear to be achieving the desired outcomes during the first 4 months of 2019. Our outlook for the year is basically consistent with that which we communicated in March 2019. As we previously discussed, beef prices do remain under pressure compared to the first 4 months of 2018. But as we look out over the remainder of the year, we anticipate that these prices will be relatively manageable compared to historical trends. We expect both our restaurant concepts to post improvement in same-store sales versus the previous year. As reflected in our guidance, we continue to believe that 2019 will be a good year, and look forward to communicating with you again following the close of the second quarter. Thank you, again, for joining us this morning.

[Operator:]

And this does conclude today's conference call. At this time, you may disconnect.