J. Alexander's Holdings, Inc.
Q2 2018 Earnings Call Transcript

Published: 12 Aug 2018

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the J. Alexander's Holdings, Inc. Second 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 and instructions will be provided at that time for you to queue up for questions. It is now my Pleasure to turn the conference over to Mr. Tom Lawrence for the introduction of today's speakers. Please go ahead, Mr. Lawrence.

[Tom Lawrence:]

Thank you. We appreciate your interest in joining us on this conference call to discuss results of J. Alexander's Holdings Inc. for the second 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 [phone], 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 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 in other sections of the company's Annual Report, Form 10-K for the year ended December 31, 2017 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, the related GAAP measures and other information are available in the financial and statistical summary accompanying the press release dated August 8, 2018. In addition, the company's past results of operations do not necessarily indicate its future results. Finally, we want to let people know that the information statements made during the call are made as of the date of the call, August 9, 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 a replay or transmission of the call may be done only with the consent of J. Alexander's Holdings Inc. Now it's my pleasure turn the call over to Lonnie Stout for his opening remarks.

[Lonnie Stout:]

Thank you, Tom. We are pleased of our results for the second quarter ended, July 1, 2018. It was a good quarter, evidenced by solid performance in virtually all areas. As noted in our press release issued yesterday afternoon, we once again delivered higher same-store sales in both of our restaurant groups. Same-store sales rose 1.9% in the J. Alexander's/Grill restaurants and advanced 6.2% in our Stoney River Steakhouse and Grill restaurants. We were particularly encouraged with the momentum at Stoney River, which continued to build throughout the first half of the year. For the second quarter of 2018, net sales of J. Alexander's Holdings reached $60,420,000, a gain of 3.8% over the $58,216,000 reported in the comparable quarter of 2017. Income from continuing operations before income taxes was $203,000 in the most recent quarter, compared to income from continuing operations before income taxes of $42,000 in the same quarter last year. The significant increase in the most recent quarter was primarily due to a favorable swing in the quarterly valuation of the Black Knight Advisory Services LLC profit interest grant. Mark will address this in more detail shortly. Net income for the second quarter of 2018 was $2,105,000, up from net income of $186,000 reported in the corresponding quarter of 2018. Basic and diluted earnings per share were $0.14 for the most recent quarter, compared to $0.01 recorded in the second quarter a year ago. Adjusted EBITDA climbed 9.9% from $5,465,000 in the second quarter of 2017 to $6,007,000 in the second quarter of 2018. As many of you know, our restaurant management team uses restaurant operating profit margin to measure operating performance at the restaurant level. For the most recent quarter, restaurant operating profit margin was 12.5% of sales, which compares favorably to 12.1% we posted in the second quarter a year ago. The company's preopening expenses for the quarter totaled $504,000. This compares to $10,000 during the second quarter of 2017. This sharp increase was attributable to the timing of new restaurant openings on a year-over-year basis. Finally, at the holding company level, our cost of sales as a percentage of net sales decreased from 33% in the second quarter of the prior year to 32.2% in the second quarter of 2018. This improvement was primarily attributable to decreasing cost of beef and produce, which more than offset cost increases related to seafood, principally jumbo lump crab meat in dairy products. Beef prices were down an estimated 4.6% at our J. Alexander's and Grill locations and an estimated 7.2% decrease at our Stoney River Steakhouse and Grill restaurants. Overall, we continue to be encouraged by the performance of our newer restaurants in the second quarter, our Stoney River Restaurant in Germantown, Tennessee, and the Stoney River in Chapel Hill as well as our J. Alexander's restaurant in North Carolina in Raleigh, have been on solid sales runs. All our J. Alexander's restaurant in Lexington, Kentucky continues to post strong sales numbers, although not as robust as when we entered the market. The Lexington restaurant's in a new development, we were the first to open there. Since then, other concepts and restaurants have entered the development, and we are taking steps to aggressively build sales in that location but sales overall, are still very, very good in Lexington. Our most recent opening is J. Alexander's restaurant King of Prussia, Pennsylvania, just outside of Philadelphia, which was opened on April 30, 2018. This is a new region of the country for us, and as such, it may take a bit longer than originally anticipated to establish our guest base in this market. People in Philadelphia simply don't know us yet. We have an excellent management team in place and we're focused on building recognition of our concept and driving sales in that market, and we're confident that we will develop a very loyal sales base. We've recently taken a menu price increase of approximately 1% in both the J. Alexander's and Grill groups of restaurants as well as the Stoney River restaurants. And are thus far pleased with our guest response to this modest increase. With respect to guest counts, we were encouraged that guest counts on our J. Alexander's/Grill restaurants showed improvement over the first quarter's performance. We realized, however, further improvement is needed in the final half of the year, and we remain tightly focused on making certain that each guest visit is an outstanding experience. The modest decrease in guest counts within the company's J. Alexander's/Grills same-store sales group during the second quarter was significantly influenced by three specific locations. From time to time, we will encounter situations that impact our traditional guest traffic patterns, and require us to work harder to recapture and replace that business. Examples include the relocation of a major corporate presence within one specific market, for a limited period of time competitive intrusion has affected in another specific market. And as we analyze our same-store guest traffic, excluding these three restaurants that have been subject to events similar to these examples I just gave, our performance for the second quarter of 2018 would have reflected a slight increase instead of the 0.6% decrease previously noted. Over in the Stoney River Steakhouse and Grill restaurant groups, our same-store counts have increased 6.2% during the second quarter of 2018, compared to the second quarter of 2017. We continue to reap the benefits of adding lunch and brunch at several Stoney River restaurants during the past year, which was estimated to be approximately 0.6% of the increase related to the second quarter of 2018 on a comparable basis. However, we were pleased that most of the increase in guest counts generated within the Stoney River group same-store sales base was organic. My way of a reminder, we are under construction on our newest Stoney River Steakhouse and Grill in Troy, Michigan. This restaurant is in close proximity to one of our higher volume J. Alexander's locations, and it will be open for both lunch and dinner. This restaurant is scheduled to open in the fourth quarter of this year. I'd like to turn the call over to Mark Parkey, our Chief Financial Officer, for his remarks on the second quarter and guidance for the remainder of the year. Mark?

[Mark Parkey:]

Thank you, Lonnie, and good morning, everyone. As Lonnie indicated, we recorded another positive quarter for J. Alexander's Holdings, and the key highlight of the second quarter ending July 1, 2018 was once again the increase in same-store sales from each of our restaurant groups. We were pleased to experience a continuation of solid top line trends of both J. Alexander's/Grills locations and Stoney River locations. We believe our performance reinforces the fact that we are a destination point for discerning restaurant guests. For J. Alexander's/Grills restaurants, average weekly same-store sales reached $116,200 in the second quarter of 2018, an increase of 1.9% from the $114,000 in the same quarter a year ago. For our Stoney River Steakhouse and Grill restaurants, average weekly same-store sales exceeded our expectations and reached $78,900 a week, an increase of 6.2% over the $74,300 a week reported during the second quarter of 2017. Lonnie highlighted the favorable impact of the Black Knight Advisory Services LLC profits interest grant on our income from continuing operations before income taxes. For the second quarter of 2018, we realized income of $53,000, compared to a profits interest expense of $1,714,000 in the same quarter of 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 realized 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 any cumulative change associated with the most recent valuation impacting the most recent quarter, primarily due to the $11.15 per share closing price of the company's stock at the end of the most recent quarter, the grants valuation decreased from $6,684,000 at April 1, 2018 to $6,018,000 at July 1, 2018. The company also incurred consulting fees of $205,000 under our management agreement with Black Knight Advisory Services LLC for the most recent quarter, and this compared to consulting fees of $174,000 in the second quarter of 2017. For the second quarter of 2018, our restaurant labor and related costs as a percentage of net sales were 31.1%, compared to 30.8% sales of net sales in the corresponding quarter of 2017. Other restaurant operating expenses were 19.8% of net sales in both the second quarter of 2018 as well as the second quarter of 2017. The company's operating income for the second quarter of 2018 was to $2,334,000, compared to operating income of $215,000 recorded in the corresponding quarter of 2017. The average weekly guest counts within the company's J. Alexander's/Grills were down 0.6% in the second quarter of 2018, compared to the second quarter of 2017. And guest counts within the same-store base at our Stoney River restaurants were up 6.2% for the second quarter of 2018 over the corresponding quarter of last year. With respect to average guest checks which include alcohol and beverage sales, the average guest check within the J. Alexander's/Grills same-store base of restaurants during the second quarter of 2018 increased by 2.6% to $31.60 from $30.80 during the second quarter of 2017. The average guest check within the same-store base of Stoney River Steakhouse and Grill restaurants during the second quarter of 2018 increased by 0.1% to $42.27 from $42.23 in the second quarter of 2017. The effect of menu pricing for the second quarter of 2018 was estimated to be an increase of 1.8% for the J. Alexander's/Grill restaurants, and a 1.9% increase for the Stoney River Steakhouse and Grill restaurants, compared to the second quarter of 2017. Deflation in food cost for the second quarter of 2018 was estimated to total 0.9% for the J. Alexander's/Grill restaurants, with beef cost decreasing by an estimated 4.6%, compared to the second quarter of 2017. At our Stoney River Steakhouse and Grill restaurants, deflation for the second quarter of 2018 was estimated to total 3% with beef cost down by approximately 7.2% over the corresponding quarter of 2017. As we handicap the beef market for the last half of 2018, we remain guardedly optimistic that it will continue to perform within acceptable parameters. However, we do anticipate further upward pressure in the jumbo lump crab meat market for the balance of 2018, which will impact the market pricing of our crab cake entree at the J. Alexander's/Grills restaurants until that market stabilizes. The company's performance outlook is based on current information as of August 8, 2018. The company does not expect to update its 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. Based upon current information the guidance for the 2018 fiscal year is the same as reported on May 3, 2018. I will now turn the call back to the operator to open the participant call-in segment of this morning's call.

[Operator:]

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Will Slabaugh with Stephens. Please proceed with your question.

[Hugh Gooding:]

Hi, guys, good morning. Thanks for taking my question. This is actually Hugh on for Will. I wanted to start with a question about your same-store sales growth in the quarter. It remains strong at both brands, but could you give us any more color into the – kind of the progression of the comp at both brands and any early reads into the quarter-to-date period?

[Lonnie Stout:]

Sure. We were positive same-store sales in the JAX Grill groups across – broadly across all of our markets. As we mentioned we had three locations that were underperformers during the quarter. Other than that, we were very pleased with same-store sales performance. It was good at lunch and dinner, I would say dinner slightly stronger though. In the lunch area, that's where we see our check average growing. Guests are spending more money. The other thing that our feature program continues to be a big boost for us in building same-store sales, allows us a flexibility of having different price features in different markets to meet different marketing conditions. We think that those trends – as we said we're not going to update our guidance, we feel that those trends are going to continue to post positive same-store sales. Stoney River is exceeding expectations on all fronts for us. We acquired that in 2013, did a lot of work in 2013, 2014 and 2015, we're finally sort of reaping the benefits we think of having reestablished a good reputation for Stoney River, executing on all points. Our brunch program that's in some of the restaurants has been extremely successful as well as our lunch additions. So that's not been the primary driver of same-store sales. Better satisfied guests, more frequent visits, an increase in visits by the existing old guest base has been the primary driver there, and our outlook remains the same for Stoney River. Mark, anything you want to add to it?

[Mark Parkey:]

I think that hits it.

[Hugh Gooding:]

No, that's great, guys. I appreciate it. And just going off that last comment, how much of the system has now implemented that lunch or brunch platform?

[Lonnie Stout:]

We have lunch in how many locations, Mark?

[Mark Parkey:]

We've got lunch in half of our restaurants. Six of the 12 do not serve lunch and six of the 12 do.

[Lonnie Stout:]

And we probably won't be adding any more lunch, because remember when we acquired Stoney River, it was basically a dinner-only concept, but we inherited some mall restaurants. And what we did is we put a lunch program in the mall restaurants, it was very successful, and then we looked at any Stoney River sites that we thought had some lunch potential and added lunch to them. We do have some very good Stoney River sites that just aren't in markets where we can be successful at lunch, limited parking or just no daytime business population where we're doing lunch business. I think we mentioned on the last call, going forward, after the success of Germantown, we did add lunch to our location in Chapel Hill. And going forward, all Stoney River's will be in lunch and dinner markets.

[Hugh Gooding:]

That's great. I appreciate it. And then just going back to the three restaurants that you noted were weighing on the system at J. Alexander's, at least from the traffic side, for reasons that appear to be a little bit outside of your control. Is this more of a recent development and how long can we expect these slight headwinds on traffic to be around?

[Lonnie Stout:]

Yes, that's certainly different. We had one location where a gigantic national company relocated their corporate headquarters, so that had a huge impact on our lunch business and some of our after-work business. We had another location that's in a smaller trade area, market that had heavy volume of new restaurants, probably six or seven in the marketplace, a lot of trial, the restaurant is doing well. Then we've had one restaurant where it's been sort of a shift in traffic for a host of different reasons. It's about the turnaround. The other two are too far away from turning around, but it's sort of like managing the stock portfolio. If you get 40 stocks, you rarely have all 40 of them up, and that's sort of the way it is with our restaurants, because they're in unique markets. We always have one or two locations that are struggling for one reason or another, it just so happened that these three lost a lot of guest counts, more so than normal, especially because of these, sort of unique conditions. We don't think that's going to last long. We think probably within a couple of quarters, they'll both be – all three will be on positive same-store sales tracks, growing revenue and guest counts.

[Hugh Gooding:]

Great. And just one last one for me, guys. You spoke a little bit on the commodity pricing and the outlook for the year and knowing that you recently just took that 1% pricing at both brands, does the updated commodity outlook change the way you're thinking about menu pricing moving forward? Or can we, kind of, expect to see more of the same there?

[Lonnie Stout:]

Well, the current outlook as we've – recently people are saying that there is a surplus of beef and prices are going to stay stable. We try to take it even from 1% to 2% price increase every year because even if commodities don't increase on us, utilities go up, rents change every five years, linen cost, there is just a host of things that go up, so we, usually – when we're building our business plan, we assume we can get a 1%, 1.5%. But with beef prices dropping, we were pretty cautious with the level of price increase that we took, cost of sales dropped significantly and Stoney River did too. So I guess I'd say that if the market stays like it is, and beef – abundant beef and decent pricing, then we won't be very aggressive. If we need to, we can take prices up, we think we have room, but we are always cautious about aggressive price increases.

[Hugh Gooding:]

That’s all, guys. That’s it from me. And congrats on the quarter.

[Lonnie Stout:]

Thank you.

[Mark Parkey:]

Thanks, Hugh.

[Operator:]

[Operator Instructions] Since there are no further questions, I would like to turn the call back over to Mr. Lonnie Stout for closing remarks.

[Lonnie Stout:]

Thank you, Devon. We appreciate everyone being on the call this morning. We are now a month into the third quarter of 2018, following a solid second quarter performance. We remain committed to improving our performance in our restaurant groups and to sustaining increases in our same-store sales base. The addition of our new Stoney River location in Troy will become the second restaurant opened by the company this year. As previously stated, we anticipate opening three to four in 2019. We will announce details of these once the leases are executed, and we look forward to making some announcements in the next quarter. Thank you for joining us this morning and we look forward to communicating with you following our third quarter results.

[Operator:]

And this does conclude today's teleconference. At this time, you may now disconnect. Thank you, and have a great day.