J. Alexander's Holdings, Inc.
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the J. Alexander’s Holdings, Inc. First Quarter 2017 Earnings Conference Call. Today’s conference call is being recorded. At this time, all participants are in a listen-only mode. [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Tom Lawrence for introduction of today’s speakers. Please go ahead, Mr. Lawrence.

[Tom Lawrence:]

Thank you, Audrey. 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 2017. By now, everyone should have received a copy of the news release that was distributed yesterday, Tuesday, May 2. 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 will 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 upon 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, risk factors and other sections of the company’s annual report Form 10-K for the year ended January 1, 2017 filed with the SEC that 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 2, 2017. 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 3, 2017. 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 maybe 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 II:]

Thank you, Tom and I want to welcome all of you to our conference call today. With me is Mark Parkey, our Chief Financial Officer and Executive Vice President. I will get right into the quarter. We have sustained a solid sales momentum that we had in the last half of last year, specifically the fourth quarter, into the first quarter of this year. Sales in our J. Alexander’s grill restaurant group were very strong. Sales were a little soft, but acceptable in our Stoney River Steakhouses and Grills. We anticipate that our same-store weekly sales average relative to Stoney River locations will reflect a bit more momentum as the year progresses. But overall, we were pleased with the performance of all of our restaurant groups on a same-store basis. Traffic in both the J. Alexander’s grill group as well as Stoney River locations was up and on balance, we are very pleased with these trends. As I mentioned, they were present in the fourth quarter and carried on over with the strong first quarter. Our J. Alexander’s restaurants’ average weekly same-store sales per restaurant rose 3.5% to $119,800 a week, up from $115,700 a week in the first quarter of 2016. Our Stoney River group average weekly restaurant sales per restaurant increased 0.4% to $75,400, up from $75,100 achieved in the corresponding quarter last year. Net sales of J. Alexander’s Holdings advanced 5.2% to $59.822 million in the most recent quarter, that’s up from $56.879 million in the first quarter a year ago. This past quarter included the sales for 5 weeks from our newest Stoney River that we opened on February 27 at Chapel Hill, North Carolina, along with sales for a full quarter for our Stoney River that we opened in Germantown, Tennessee on January 25, 2016. We also realized sales for a full quarter from our new J. Alexander’s restaurant that we opened December 12, 2016 in Raleigh, North Carolina, along with sales for three weeks from our newest J. Alexander’s restaurant opened on March 13, 2017 in Lexington, Kentucky. Finally, as mentioned in our last conference call, we did not renew the lease on our J. Alex restaurant in Houston, Texas. We closed this restaurant on January 28, 2017. The first quarter included sales from the Houston location for 27 days. On a consolidated basis, net income for the quarter, for the first quarter of 2017, was $2.684 million. That compares to $2.290 million in the first quarter of last year. Adjusted EBITDA for the first quarter of 2017 was $7.601 million, up from $6.728 million in the first quarter of 2016. There was a handful of items that had a significant impact on net income on a comparable basis. I will just note a few of them. Our pre-opening costs in the first quarter of 2017 reflected the opening of a new J. Alexander’s in Lexington as well as the Stoney River in Chapel Hill. This amounted to about $876,000, that’s up $538,000 from pre-opening costs posted in the first quarter of 2016. Another item which impacted our earnings, but had no impact on adjusted EBITDA relates to the quarterly valuation of the profit interest grant issued to Black Knight Advisory Services, LLC in connection with our spinout back in October of 2015. As we have previously discussed, this grant is required to be revalued at the end of each quarter during the 3-year vesting period and any changes in that valuation are required to be reflected in the current quarter on a cumulative basis. At year end 2016, the grant had a valuation of approximately $6.5 million compared to a $5.3 million valuation as of April 2, 2017. As a result of this decreased valuation, we recorded a benefit of $39,000 related to this item during the first quarter of 2017 compared to an expense of $594,000 that was reported during the first quarter of 2016. This difference of $633,000 we didn’t anticipate in our annual guidance issued back in March 2017. Finally, with respect to our input cost, the beef market remained favorable across all of our concepts during the first quarter. We estimate that beef prices declined about 9.8% within our J. Alexander’s group and about 7.6% for the Stoney River restaurants during the first quarter of 2017 compared to the first quarter of 2016. This had a favorable impact on our consolidated cost of sales during the most recent quarter. Turning to our development program, within the past few weeks, we announced plans to open our first J. Alexander’s restaurant in Pennsylvania and our first Stoney River Steakhouse and Grill in Michigan. Leases have been signed to build our next J. Alexander’s in Pennsylvania. It’s in the King of Prussia area, which is a suburb of Philadelphia about 15 miles north of downtown. Our Stoney River will be in Troy, Michigan on Big Beaver Road located in the greater metropolitan area of Detroit. The restaurant side of King of Prussia is situated in a market we have been evaluating and working on for several years. We are very excited about the potential of this market and we have in-depth knowledge of the Troy, Michigan market where we have a very successful J. Alexander’s and we look forward to opening a Stoney River in that market. Construction related to both of these announced locations is expected to begin in the third quarter of this year and we estimate openings probably in early 2018. I will come back shortly for further comments on 2017. I would like now to turn the call over to Mark Parkey, our Chief Financial Officer, for more details on the first quarter and updated guidance for the current year. Mark?

[Mark Parkey:]

Thanks Lonnie and good morning everyone. For the quarter ended April 2, 2017, we achieved solid growth in sales and net income for J. Alexander’s Holdings Inc. Increases in net sales and net income were driven by favorable beef prices as Lonnie noted, growth in guest traffic and the continued favorable impact of our plan instituted last year to build sales and guest counts in certain targeted markets. We began to realize the success of this initiative in the latter portion of 2016 with sales trends extending into the New Year. We experienced higher average weekly same-store sales in all of our restaurant collections during the most recent quarter. Average weekly guest counts on the same-store base in the J. Alexander’s Grill collection were up 1.5% in the first quarter of 2017. Guest counts on a same-store basis in our Stoney River Steakhouse and Grill collection also rose by 1.5% compared to the first quarter in 2016. With respect to average guest checks, which include alcohol and beverage sales, the average guest check within the J. Alexander’s Grills collection same-store base of restaurants during the first quarter of 2017 totaled $31.08, which is a gain of 1.9% from $30.49 during the first quarter of the prior year. The average guest check within the same-store base at Stoney River restaurants totaled $45.72, a 1.3% decrease from the $46.33 during the first quarter of 2016. On a consolidated basis, average weekly guest counts within the company’s J. Alexander’s Grills and Stoney River Steakhouse and Grill locations rose 1.5% and 2.3% respectively for the first quarter of 2017 as compared to the corresponding quarter of the prior year. Average guest checks for the combined J. Alexander’s Grills collections advanced 2.0% to $31.15 in the first quarter of 2017 as compared to $30.54 during the comparable quarter of 2016, while the average guest checks for the Stoney River group decreased 3.0% to $43.60 in the first quarter of 2017 as compared to $44.96 in the same quarter a year ago. The effective menu pricing for the quarter just ended was estimated to be an increase of 2.1% for the J. Alexander’s Grills restaurants and 0.4% decrease for the Stoney River Steakhouse and Grill restaurants compared to the same quarter of 2016. Inflation in food costs for the first quarter of 2017 was estimated at 2.9% for the J. Alexander’s Grills restaurants, largely driven by the estimated 9.8% decrease in beef costs that Lonnie previously noted. For the Stoney River group, deflation for the first quarter of 2017 was an estimated 3.8% with the previously referenced decline of beef costs of approximately 7.6%, again being the most significant driver. The company’s consolidated operating income for the first quarter of 2017 totaled $3.794 million, up $622,000 or 19.6% from the $3.172 million recorded during the first quarter of 2016. Income from continuing operations before income taxes totaled $3.641 million during the first quarter of 2017, up $642,000, or 21.4% from $2.999 million recorded during the first quarter of the prior year. Tax provision during the most recent quarter totaled $844,000, an increase of $241,000 from the first quarter of 2016 and as Lonnie noted earlier, net income for the first quarter of 2017 totaled $2.684 million, up $394,000, or 17.2% from the $2.290 million recorded during the first quarter of 2016. Our effective tax rate for the first quarter of 2017 was 23.9% compared to an effective rate of 20.8% recorded during the first quarter of 2016. Basic and diluted earnings per share totaled $0.18 for the first quarter of ‘17 compared to $0.15 recorded during the first quarter of 2016. The company’s total restaurant operating expenses were 84.1% of net sales in the first quarter of 2017 as compared to 84.8% in the corresponding quarter of 2016, the decrease of 70 basis points was primarily due to the impact of the favorable beef prices we have previously noted. Cost of sales, which includes the cost of food and beverages as a percentage of net sales, in the first quarter of 2017 totaled 30.8% of net sales as compared to 31.8% of net sales in the first quarter of 2016. Restaurant labor and related cost as a percent of net sales were 30.0% of net sales in the first quarter of 2017 as compared to 29.8% of net sales in the first quarter of 2016. Other restaurant operating expenses totaled 19.3% of net sales during the most recent quarter as compared to 19.4% of net sales in the first quarter of 2016. Consolidated general administrative expenses were 8.1% of net sales in the first quarter of 2017 as compared to 9.0% of net sales in the first quarter of 2016. During the first quarter of 2017, the company incurred consulting fees of $265,000 from its management agreement with Black Knight Advisory Services LLC as compared to $160,000 in the first quarter of 2016. As Lonnie mentioned, the company’s Black Knight profits interest valuation came in significantly under the valuation from the fourth quarter of 2016 and the benefit related to this lower valuation is included in the favorable variance in general and administrative expenses noted previously. Finally, during the fourth quarter of 2015, the company’s Board of Directors authorized a share repurchase program for up to 1.5 million shares of the company’s common stock over a period of 3 years ending October 29, 2018. Share repurchases under the program have been made and are expected to be made solely from cash on hand and available operating cash flow. Repurchases will be made in accordance with applicable securities laws and may be made from time to time in the open market. Timing, prices and amount of repurchases will depend upon prevailing market prices, general economic and marketing conditions and other considerations. The repurchase program does not obligate the company to acquire any particular amount of stock. No shares were repurchased by the company in the first quarter of 2017. Since inception of the stock repurchase program, 305,059 shares have been purchased by the company under the program at an average purchase price of $10.50 per share. We have announced plans to start construction on two new restaurants in the third quarter this year with projected openings most likely in 2018. There is a remote possibility that one of these new restaurants could be able to open during the fourth quarter of 2017. However, the most likely case, based upon what we are being told by our architects and general contractors, is that both restaurants will not likely be ready for opening until 2018. This will affect the timing of our capital expenditures related to these new restaurants as well as the timing associated with our preopening costs. The impact of the reduction of preopening costs that will be incurred in 2017 coupled with the most recent valuation associated with the Black Knight profits interest grant are the two most significant items responsible for our updated guidance relative to both net income as well as basic earnings per share. Based upon current information, the company is updating our previously released guidance for 2017 as disclosed in the company’s release dated March 2, 2017 as follows. Capital expenditures, our prior guidance was a range of $19 million to $22 million for the year, the updated guidance for 2017 is $13 million to $16 million. Net income, our prior guidance was a range of $6.4 million to $7.2 million. The updated guidance for the year is $8.4 million to $9.2 million. Finally, for basic earnings per share, our prior guidance was a range of $0.44 to $0.49. The updated guidance for 2017 is $0.57 to $0.63. All other items in our prior guidance remain unchanged. I will now turn the call back to the operator to open the participant call-in segment of this morning’s call.

[Operator:]

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

[Will Slabaugh:]

Yes, thanks guys. I wonder if you could talk a little bit more about the update on some of your more recently opened stores, if those average weekly sales are holding in where you anticipated and if there are any new learnings to take from those stores into some of the upcoming openings?

[Lonnie Stout II:]

Will, we are happy with all three of them. The Stoney River we opened in Chapel Hill we opened in a dinner-only site. So, we expected it to build a little differently since it’s dinner-only as compared to Germantown. We are happy with it. It opened a little softer than we thought, but over the last 7 or 8 weeks, it’s gotten about to where we thought it would be. We think it’s a great restaurant site and a great market and then we anticipate it will continue to grow and build. J. Alexander’s that we opened in Raleigh is doing about what we expected. It’s been open for a while now and performing like a typical new J. Alexander’s. We normally open them at around 80% of where they will be in 3 years and that’s about where that one is. The one in Lexington we thought might open low volume because we are the first thing to open in the development, but we thought there was an advantage to being there before everybody opened. But as usual, as I have said, I never can guess restaurant openings correctly. So, it opened far in excess of what we thought and has continued to perform in excess of expectation, even though the other retailer is just now opening and I don’t think all the retail in that development will be totally open until September. So, we are very happy with all three restaurants. As far as learning anything new, we mentioned in the press release that we think we need to do more valuation on Stoney River long-term lunch and dinner versus this blend of dinner only and lunch and dinner sites. The site we are developing in Troy, Michigan is a lunch and dinner site for Stoney. If it does as well as we think it’s going to do, I think we might change our strategy to focus more on lunch and dinner sites. But we said we would address that after we opened that restaurant. That’s just the best guess I have on it now. The J. Alexander’s, like I said, we are very happy with them. We are extremely excited about the King of Prussia market. We have worked that corridor for years. We have a freestanding site in King of Prussia, which is very, very hard to get. So, we are really excited about it. And I think that’s pretty much it on the new restaurants. Does that answer your question, Will?

[Will Slabaugh:]

Yes, it does. It’s all good news. And also I wonder if you could talk a little bit more about the pipeline and the confidence around getting the stores done that you have talked about for this year and then how that pipeline for 2018 is starting to look. I know it’s early, but I figure you are already doing a little work there.

[Lonnie Stout II:]

So, we are doing a lot of work on 2018. I think we are working in the previously disclosed markets. We have been working Texas for a long time. We have been working Florida, where we have a lot of successful restaurants, still always working the Chicagoland area. Now that we have gone into Philadelphia, we are looking at the New Jersey Pennsylvania corridor. We have worked that market for a long time. We think we will find some other opportunities there. As I think I have mentioned in the past, you have to work a lot more markets than you are going to do restaurants, because it’s highly competitive on good sites. The other issue that always facing us is, with a lot of development activity now, we are seeing the development cycle somewhat extended. It’s hard to get inspections. So, we probably have got to add a couple of months to our cycle. But I would say opportunities for 2018 are really good and over the course of the next few months, we hope to be in a position to announce where our locations are going to be.

[Will Slabaugh:]

Great. And the last thing I had was I know in the past, you have called out performance of some of your larger versus smaller markets. So, I was curious if that gap has remained or if it’s changed at all?

[Lonnie Stout II:]

I think what Mark referred to earlier, those programs we have put in place for some of our smaller markets really started to pay a benefit last year and that’s continued. We haven’t noticed any performance differences this quarter, in the first quarter between small markets, mid-markets or large markets. Everybody seems to be hitting on all cylinders right now. So, we are very pleased with the actions we took midyear last year in some of the smaller markets like Ohio and our big markets continue to perform very well. And so we are sort of hitting on all cylinders right now.

[Will Slabaugh:]

Great. Thank you.

[Lonnie Stout II:]

Alright.

[Operator:]

Thank you. [Operator Instructions] I am showing no further questions at this time. That does conclude our question-and-answer session. I will turn it back to Mr. Stout for closing comments.

[Lonnie Stout II:]

Thank you. Again, we had solid performance in the first quarter. We are glad to have it behind us, but we are in the second quarter now. A couple of things I do want to mention – April was a very challenging month for us. Beef prices spiked upward significantly due to the wildfires in Oklahoma and Kansas. We don’t anticipate any lingering impact from that, but I just did want to mention that. Produce prices and the quality and yields on produce were horrible in April principally from wet weather in California and that’s prevented significant acreage from being planted. We expect all of these situations to normalize very soon based on discussions we have had with our produce brokers and our beef suppliers. But as a result of these factors, we saw our consolidated cost of sales move up significantly higher in the month of April than we posted in the first quarter of 2017. We are starting to see some relief on all these costs. We believe that, if they remain at unacceptably high levels, we certainly have room to take a price increase if we need to. We will just monitor the situation closely and we will keep you posted on our progress. As we noted, we updated our guidance, which reflects our current view for the full 2017 year. Once again, we appreciate your time and interest in the company this morning and we look forward to communicating with you throughout the year.

[Operator:]

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