J. Alexander's Holdings, Inc.
Q1 2018 Earnings Call Transcript

Published: 6 May 2018

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the J. Alexander's Holdings, Inc., First Quarter 2018 Earnings Conference Call. Today's conference call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Tom Lawrence for introduction of our speakers. Please go ahead, Mr. Lawrence.

[Tom Lawrence:]

Thank you, Michelle. We appreciate your interest in joining us on this conference call to discuss results of the J. Alexander's Holdings, Inc. for the first quarter of 2018. 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 Katherine Berendt at 615-244-1818, and she will send you a copy immediately. Before I turn the call over to Lonnie J. Stout II, President and CEO of J. Alexander's Holdings Inc., I 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, Form 10-K, for the year ended December 31, 2017, filed 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, the related GAAP measures and other information are available in the financial and statistical summary accompanying the press release dated May 3, 2018. 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 4, 2018. 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. I want to welcome everybody today. I have Mark Parkey with me, our Chief Financial Officer, and he will be on the call after my remarks. We were pleased yesterday to report another solid overall performance for the Company highlighted by positive same-store sales in both of our restaurant groups. Our average weekly sales of same-store at the J. Alexander's restaurants and grills were somewhat soft, but acceptable at a $120,100 per week, which came in 0.3% ahead of results reported in the comparable quarter of 2017. We had strong performance from our Stoney River group, has generated average weekly same-store sales or same-store sales average of $83,700 for the quarter, an increase of 6.2% compared to the first quarter of 2017. As we noted yesterday, our top-line results in the first quarter were achieved despite adverse - the impact of adverse hash weather conditions in several of our Midwestern markets and some unusual harsh weather in our southern markets. The inclement weather had more effect on our J. Alexander's/Grills restaurants then it did on our Stoney River restaurants. We experienced severe winter weather in all three months of the quarter, with the most extreme conditions occurring during January and February. On a consolidated basis, we had restaurant closings for approximately 27 days during the first quarter. There were numerous other days where we didn't close, but the weather had a negative impact on the guest traffic as these harsh weather conditions persisted. As a comparison, we had closings for a total of three days during the first quarter of 2017. Guest counts in our J. Alexander's/Grill collections were down 2% on a same-store basis, and down 2.5% on a consulate basis during the quarter. And we estimate a little over half of the same-store sales decline in guest counts is attributable to the severe winter weather. That having been said, we're always concerned when guest counts are down, and we're glad to be past the winter months of 2018. We are cautiously optimistic that our guest count trends will continue to normalize during the remainder of the year. For the first quarter of 2018, net sales of J. Alexander's Holdings increased 3.5% to $61,909,000, up from $59,822,000 in the first quarter of 2017. For the J. Alexander's/Grill restaurants, as I said, average weekly same-store sales per restaurant advanced 0.3% from $119,800 in the first quarter of 2017 to $120,100 in the most recent quarter. Average weekly sales per restaurant for all of the J. Alexander's/Grill locations increased 0.1% from $118,200 to $118,300 in the first quarter for 2018. Overall, our performance in the first quarter of 2018 for this group was as expected with the exception of the weather impact previously noted. Though our sales growth in the first quarter was modest, we expect improvement, as the year progresses. We are pleased on balance with results of our newer restaurants as they continue to mature. For the Stoney River Steakhouse and Grill restaurants, average weekly same-store sales per restaurant rose 6.2% from $78,800 in the first quarter of 2017 to $83,700 in the most recent quarter of 2018. Average weekly same-store sales per restaurant for all Stoney River locations improved 6.2% from $77,900 in the first quarter of 2017 to $82,700 in the first quarter of 2018. The most recent sales results exceeded our expectations for the quarter, and we continue to be encouraged with the progress at our Stoney River locations are making with each passing quarter. As we noted in yesterday's release, we're particularly encouraged with the progress we're seeing within the Stoney River restaurant group, as we continue to expand our lunch and brunch offerings. In markets where we have determined we can support lunch and brunch. Our lunch and brunch menus typically include lower-priced offerings, which by design drive down average guest check. However, we firmly believe that the more often our guests visit our restaurants, the more likely it is these guests will become part of the foundational base upon which all of our successful locations has historically been established. Six of our Stoney River restaurants are now serving lunch, while nine locations offer brunch at least one day each week. In our development program, we announced earlier this week, the opening of our newest J. Alexander's restaurant in King of Prussia, a suburb of Philadelphia. We're excited about this location. It is in a market that we have evaluated and worked on for several years. Most restaurants operating in this community tended to do very well, we're expecting to do the same. As previously communicated, our next Stoney River Steakhouse and Grill will be in Troy, Michigan. We are enthusiastically looking forward to the opening of this restaurant in the fourth quarter of 2018. With respect to cost of sales, during the first quarter of 2017, these prices were extremely favorable, down 9.8% at J. Alexander's and the Grills, and down 7.6% at the Stoney River group compared to the first quarter of 2016. [Indiscernible] favorable pricing last year, we did not expect a repeat performance and the first quarter just ended. While beef costs were up 2.7% at the J. Alexander's/Grill restaurants, and up 3% at Stoney River Steakhouse and Grill restaurants compared to the opening quarter of 2017. Our input cost for beef were considered to be well within our normal range of expectations for the first quarter of 2018. Total cost of sales as a percent of net sales in the first quarter of 2018 was 31.1%. This compared to 30.8% posted in the same quarter of 2017. Also impacting our results for the most recent quarter were transaction expenses of $928,000 - $926,000 related to our proposed acquisition of the 99 Restaurant concept originally announced in August of 2017. On February 1, 2018, we announced that we did not receive the required number of disinterested shareholder votes to approve the proposed acquisition. And the merger agreement was terminated thereafter. The transaction expenses were primarily related to professional fees that we incurred during the first quarter of 2018. Another significant item impacting results in the first quarter of 2018 was the valuation of the Black Knight Advisory Services LLC profit interest grant, resulting in a profit interest expense of $1,907,000, which was approximately $1.5 million higher than anticipated. Mark will discuss details of our profit interest grant during his comments in a few moments. Income from continuing operations before income taxes was $1,842,000 for the first quarter of 2018 compared to income from continuing operations before income taxes of $3,641,000 in the first quarter of 2017. As mentioned, there were several primary factors impacting results for the most recent quarter of 2018, including the transaction expenses, the increase in the valuation of the Black Knight Advisory Services profit interest and the impact of pre-opening expenses associated with new restaurant openings. And to a lesser degree, the impact of new accounting requirements, which affects the timing of the recognition of discard breakage. Excluding the impact of these items, income from continuing operations before income taxes would have totaled approximately as much as we posted in the first quarter of 2017. Net income for the first quarter of 2018 amounted to $1,593,000, down from net income of $2,684,000 recorded in the comparable quarter a year-ago. Results include an income tax provision of $138,000 in the first quarter of 2018 compared to an income tax provision of $844,000 in the corresponding quarter of 2017. Our basic and diluted earnings per share for the most recent quarter totaled $0.11 when compared to $0.18 reported in the first quarter of 2017. Adjusted EBITDA for the first quarter of 2018 was $8,151,000, an improvement of 7.2% or $550,000 from the $7,601,000 in the first quarter of the prior year. In summary, our performance was in line with our expectations for the first quarter. We believe it was a good quarter, particularly given the negative impact of the planet's weather on sales throughout much of January and February. I will come back with some closing comments on the second quarter and the balance of 2018 in a few moments. I now turn the call over to Mark Parkey, our Chief Financial Officer. Mark?

[Mark Parkey:]

Thank you, Lonnie, and good morning, everyone. The first quarter ended April 1, 2018 again showed favorable results at the topline, and we were also generally pleased with the Company's overall performance. There were no significant surprises operationally during the first quarter, only previous factors or issues that we discussed or mentioned in the last quarterly call. We've adjusted the estimated effective tax rate portion of our previous guidance to reflect the impact of the Tax Cuts and Jobs Act of 2017, and included this information in our earnings release yesterday. Lonnie highlighted or covered in greater detail a few of the primary factors affecting us in the first quarter of the New Year. Among those impacting income from continuing operations before income taxes was the increase in the valuation of the Black Knight Advisory Services LLC profits interest grant, which resulted in additional profits interest expense of $1,495,000 for the quarter ended April 1, 2018, when compared to the previous valuation effective December 31, 2017. The Black Knight profits interest grant was issued in October of 2015 and requires a quarterly valuation. The non-cash expense or income associated with this grant is being recognized over a three-year vesting period, which runs through October 6, 2018. It is calculated each quarter based upon the most recent valuation performed using the Black-Scholes valuation model with an accumulative change associated with the most recent valuation impacting the most recent quarter. Due primarily to the $11.45 per share closing price of the Company's stock at the end of the most recent quarter coupled with a relatively short period remaining for the Black Knight profits interest grant to be amortized, an expense of $1,907,000 was recorded. This compared to income of $39,000 in the first quarter of 2017. The Company also incurred consulting fees of $244,000 under our management agreement with Black Knight for the most recent quarter. This compared to consulting fees of $265,000 during the first quarter of 2017. For the first quarter of 2018, our restaurant labor and related costs as a percentage of net sales were 29.4% compared to 30% of net sales in the corresponding quarter of 2017. Other operating expenses were 19.4% of net sales in the first quarter of 2018 compared to 19.3% of net sales in the same quarter a year-ago. The Company's operating income for the first quarter of 2018 was $2,058,000 compared to operating income of $3,794,000 recorded in the corresponding quarter of 2017. With respect to average guest checks, which include alcohol and beverage sales, the average guest check within the J. Alexander's/Grill grew same-store base of restaurants during the first quarter of 2018, increased by 2.5% to $31.86 from $31.08 during the first quarter of 2017. The average guest check within the same-store base of Stoney River Steakhouse and Grill restaurants during the first quarter of 2018 decreased 1.7% to $42.87 from $43.63 in the first quarter of 2017. Same-store guest counts at J. Alexander's/Grills restaurants in the first quarter of 2018 decreased 2.0% over the corresponding quarter of 2017, while the Stoney River restaurants reported an 8.3% increase in guest counts over the first quarter of 2017 within their same-store base of restaurants. The effective menu pricing for the first quarter of 2018 was estimated to be an increase of 1.8% for the J. Alexander's/Grill restaurants, and 0.2% increase for the Stoney River restaurants compared to the first quarter of 2017. Inflation and food costs for the first quarter of 2018 was estimated to total 2.9% for J. Alexander's/Grill restaurants. And at our Stoney River restaurants, inflation for the first quarter of 2018 was estimated a total 2.8%. As Lonnie pointed out, beef prices at both our J. Alexander's/Grills and Stoney River Steakhouse and Grill concepts during the first quarter of 2018 were modestly higher than the corresponding quarter of 2017. The Company's restaurant operating income margin as a percent of net sales was 15.9% for both the first quarter of 2018 as well as the first quarter of 2017. Consolidated general and administrative expenses were 10.5% of net sales in the first quarter of 2018 compared to 8.1% of net sales in the first quarter of 2017, an increase of $1,697,000. Most of this increase is related to the increase in the valuation of the Black Knight profit interest grant previously discussed. The Company's performance outlook for fiscal 2018 remains unchanged except for the estimated effective tax rate. As of May 3, 2018, we anticipate our effective tax rate will range from 1% to 7%, a decrease from the 10% to 16% range issued with our original guidance. The Company does not expect to update this guidance before the next quarterly 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. I will now turn the call back to the operator to open the participant calling segment for this morning's call.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Will Slabaugh with Stephens Inc. Please proceed with your question.

[William Slabaugh:]

Good morning, guys. I want to ask an accounting question first. Mark, can you confirm how that $1.9 million charge from the revaluation of the Black Knight agreement was treated? It looks like it was not added back to the EPS number of $0.11. I just wanted to verify that, as well as how it was treated in your adjusted EBITDA number?

[Mark Parkey:]

Yes. The non-cash expense associated with that profits interest grant will - is added back for an adjusted EBITDA impact. But it is not excluded from the earnings per share calculation. So it's an expense in the earnings per share calculation just like any other expense.

[William Slabaugh:]

Got it, and I was getting something like $0.11 from that. If I were to add that back and I'm also wondering how you're thinking about that as it relates to your guidance that you've given on EPS for the year?

[Mark Parkey:]

Well, there's a couple of moving parts in that. Obviously, the valuation at the end of the first quarter of 2018 was higher than at year-end. So that's going to increase our expense as we've disclosed. But our effective tax rate is lower, which will help our bottom line the other way. So the net effect of those two adjustments ends up with our guidance still remaining appropriate for the year as we originally issued.

[William Slabaugh:]

Okay. Thank you for that. And I want to ask about traffic at Stoneys, which continues to be very strong, can you talk about how steady that is across the system? And then any commentary around your newer units there would be helpful as well?

[Lonnie Stout:]

Sure, Will. This is Lonnie. Traffic is strong across most restaurants. We've got one Stoney River that's sort of a lagger on traffic and sales. Traffic's up in all the rest of them. It's a mixed bag of good reasons, the lunch program in some of the restaurants, the brunch activity, and just an increase in our general sales at Stoney River. The restaurant that we designed originally, the Germantown, Stoney River, that's open for both lunch and dinner. It's still the highest volume restaurant we have in the system, and it's still posting same-store sales increases. The restaurant we opened in Chapel Hill is dinner only, and it has done well for us from a dinner only point of view. Of course, it doesn't generate the same volume it generates in lunch and dinner. We have decided to put lunch in that location, just getting started on it. It's not that great of a lunch market, but we think the lunch will be profitable. And as we said last year, going forward all of our Stoney River will be lunch and dinner location. And the one we're working on in Troy, Michigan, will be a lunch and dinner Stoney location. So in summary, on Stoney, solid sales performance, and the traditional dinner day park, successes at lunch and the locations we rolled it out, and extremely successful brunch program that's constantly building sales in the locations that have brunch so. Like - so we do have one laggard in that group, but other than that the same-store sales increases are across all restaurants.

[William Slabaugh:]

Great to hear. And lastly, can you talk about your level of confidence in getting their stores open in 2018 that you've outlined? It seems like you feel pretty confident there, so just wanted to verify that. And then, also I imagine you're getting fairly deep into 2019 at this point. So I was hoping you could give us an update there as well?

[Lonnie Stout:]

Yes, keeping the pressure opened, and the Stoney River that we are scheduled for the fourth quarter, we're highly confident it will open. So that will complete the 2018 development plan. For 2019, I think we said three to four, we're still confident in that. We're in the final throws of negotiating leases on several locations. You have to have more things in the development queue than you're going to do to be successful, and we do. Example, we're trying to put a restaurant in Naples for the market. We have three opportunities there. We're sort of doing our due diligence and trying to determine which one is the best. We're looking at a Stoney River in the Henderson, Nevada market, but we have two sites we're evaluating and negotiating on. We're still working in our traditional markets. For Texas, for instance, we have a lot of activity, San Antonio, Dallas and Houston. So we're very confident. We'll hit our development objectives, and probably on the second quarter call, we will be able to talk some site specifics about development.

[William Slabaugh:]

Great. Thanks guys and congrats.

[Lonnie Stout:]

Thank you, Will. Appreciate it.

[Operator:]

[Operator Instructions] There are no further questions at this time. I'd like to turn the call back over to Mr. Lonnie Stout for any closing remarks.

[Lonnie Stout:]

Thank you, Michelle. As reported in our press release that we issued yesterday, the first quarter of 2018 was marked by continued gains at the top line and met most of our key measurements in other areas. The winter weather is behind us. We anticipate that the same-store sales in our J. Alexander's/Grill's restaurant collection will move to more historical levels for the balance of the year. We're also looking forward to results, which reflect ongoing continued improvement at our Stoney River Steakhouse and Grill collection during the remaining three quarters of 2018. As I mentioned earlier, we're now serving lunch at six of the Stoney River restaurants. We're serving brunch at nine Stoney River locations. We are realizing positive trends in sales and guest traffics at these locations. We anticipate continued momentum within the Stoney River concept throughout the year, as guest loyalty continues to gain momentum. We appreciate everyone's interest in joining us on the call this morning. We look forward to communicating with you again as the year progresses. Thank you.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.