J. Alexander's Holdings, Inc.
Q3 2017 Earnings Call Transcript

Published: 11 Nov 2017

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the J. Alexander’s Holdings Incorporated Third Quarter 2017 Earnings Conference Call. Today’s conference call is being recorded. At this time, all participants are in listen-only mode. Following the presentation, we will conduct the question-and-answer session and instructions will be provided at that time for you to queue up for question. 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. We appreciate your interest in joining us on this conference call to discuss results of J. Alexander’s Holdings Inc. for the third quarter of 2017. By now, everyone should have received a copy of the news release that was distributed earlier this morning. 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, the second 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 expectation 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 this morning’s press release and in 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, 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 November 9, 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, November 9, 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 a 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:]

Thank you, Tom. We want to welcome everyone to our third quarter call. In an operating environment that was difficult, we were pleased to report an increase in same-store sales for both J. Alexander’s and Grill restaurants as well as our Stoney River restaurants during the third quarter of 2017. All same-store sales were up in both of our restaurant concepts. Our bottom line performance was negatively impacted by a combination of factors. As noted in our third quarter release, these factors included forced restaurant closings in six Florida markets during Hurricane Irma, along with incremental operating expenses and three new restaurants open during the past 10 months, which we typically experience post-opening. These incremental increases – the expense increases primarily related to higher than average cost of sales, as our kitchens become accustomed to operating at volume and extra labor staffing to ensure that our guests have an outstanding experience. In addition to these factors, we had nonrecurring transaction and integration expenses associated with the planned acquisition of the Ninety Nine Restaurant and Pub concept. I’ll provide an update on this proposed acquisition in a few moments. Net sales of J. Alexander’s Holdings in the third quarter of 2017 increased 4.7% to $53,879,000, up from $51,459,000 in the third quarter of 2016. For the J. Alexander’s/Grill Restaurants, average weekly sales of the restaurant advanced 1.4% from $105,500 in the third quarter of 2016 to $107,000 in the most recent quarter. Same-store guest counts for this group of restaurants decreased 1.2%, while the average guest check increased 2.7%. The increase in average guest check was due primarily to a combination of pricing, which was up 1.5% compared to the third quarter of 2016, and a product’s mix shift during the quarter to higher priced menu items. For the Stoney River Steakhouse and Grill restaurants, average weekly same-store sales increased 3.7% from $64,900 posted in the third quarter a year ago to $67,300 in the third quarter ended October 1, 2017. Our check average at Stoney River decreased 2.6% within the same-store sales base due to the success of some of our lunch programs and a mix shift to some lower-priced items. Thus, the increase in weekly sales averages at Stoney River was primarily attributed to increase in guest counts, which were up 6% within the same-store sales base of restaurants during the most recent quarter. Transaction cost related to the Ninety Nine acquisition totaled $1,975,000 during the third quarter 2017 and consisted primarily of the fee associated with the payment and fairness opinion from Stephens and then legal fees associated with the preparation of the proxy statement that was filed with the Securities and Exchange Commission on October 11, 2017. The company reported a loss from continuing operations before income taxes of $1,597,000 in the third quarter of 2017 compared to income from continuing operations before income taxes of $1,177,000 achieved in the third quarter of 2016. With respect to our tax provision, we estimate an annual effective tax rate before discreet items, for the 9-months period ended October 1, 2017 and October 2, 2016, was 4.8% and 22%, respectively. The impact on the effective tax rate for discreet items for the 9-months period ended October 1, 2017 and October 2, 2016, was negative 18.6% and negative 0.1%, respectively, which resulted in a net effective tax rate of negative 13.8% and positive 21.9% for the 9-months period ended October 1, 2017 and October 2, 2016, respectively. As such, the company recorded an income tax benefit of $832,000 during the third quarter of 2017 compared to an income tax expense of $121,000 in the third quarter of 2016. With respect to bottom line results, we recorded a net loss of $876,000 for the quarter ended October 1, 2017, compared to net income of $945,000 in the corresponding quarter of 2016. Our basic and diluted loss per share was $0.06 for the third quarter of 2017 compared to a basic and diluted earnings per share of $0.06 for the third quarter of 2016. Adjusted EBITDA for the third quarter of 2017 was $3,725,000, down $672,000 or 15.3% from $4,397,000 for the third quarter a year ago. The decline in adjusted EBITDA can be traced back to a decrease in restaurant operating profits of $656,000. Hurricane Irma had a significant impact on our business in Florida during the last quarter. We estimated a loss of approximately $650,000 in net sales due to the hurricane, while the impact on our profitability was closer to $400,000 reduction in operating income in the third quarter of 2017. Almost $300,000 of this loss was estimated lost restaurant operating profit and another $100,000 of expenses related to food spoilage losses, cleanup costs and restarting expenses associated with reopening the six restaurants that were closed for a total of 36 days during the quarter. There were couple of other factors impacting results for the most recent quarter. These include some unexpected softness in same-store sales in the J. Alexander’s/Grill restaurant group, especially during July and August. The downward trend was reversed in September. And as I mentioned, guest counts in the J. Alexander’s/Grill restaurant group was down during July and August in the third quarter. On a positive note, we have seen an improvement in our guest count numbers during September and October. While we always take declines in same-store sales and guest counts seriously, it’s important to point out that third quarter is the most difficult quarter of the year for us due to mix shifts, vacations, back-to-school timing and the loss of business guests during the summer. It has historically been our lowest sales average quarter for the year. Mark will elaborate on this more during his remarks. Finally, during the last quarter, we realized restaurant-level operating losses at our three new restaurants, Raleigh, Chapel Hill, both in North Carolina, and Lexington in Kentucky. This is not unexpected as we typically anticipate that new restaurants will take at least 12 months to break even and approximately 36 months to reach maturity. We are generally satisfied with our sales performance in these new restaurants, but it will probably be a least another quarter before we can back off the extra cost that we incur to support operations in new restaurants. As previously mentioned, this is necessary to ensure that our guests have an outstanding experience in all three of these restaurants during the initial trial periods. Cost of sales as a percentage of net sales in the third quarter of 2017 was 32% compared to 31.6% in the corresponding quarter a year ago. Cost of sales was somewhat higher, principally because of sharp spikes in jumbo lump crab meat along with more moderate cost increases in produce and dairy products. And while beef cost declined compared to the third quarter of 2016, they were higher than we anticipated, based on the forecast we obtained from our primary beef supplier. In the restaurant development area, we began construction on two new restaurants during the third quarter. One of these is a J. Alexander’s Restaurant located in the King of Prussia, Pennsylvania, a suburb of Philadelphia, while the other restaurant is a Stoney River Steakhouse and Grill to be located in Troy, Michigan. This Stoney River will be a lunch and dinner Stoney River. Each of these new restaurants is expected to open in 2018. On August 4, 2017, the company and Fidelity National Financial announced that J. Alexander’s Holdings, Fidelity Newport Holdings and Fidelity National Financial Ventures, a direct wholly-owned subsidiary of FNF, have entered into a definitive agreement under which J. Alexander’s Holdings will acquire Ninety Nine Restaurants LLC in an all-stock transaction valued at approximately $199 million, including the assumption of $20 million in net debt. A preliminary proxy statement related to the acquisition was filed with the Securities and Exchange Commission on October 11, 2017. The SEC has notified the company that this document will be subject to their standard review process. I will come back with closing comments in a few moments. I want to now turn the call over to Mark Parkey, our Chief Financial Officer, to discuss more detail about the third quarter and to update our guidance for the rest of the year. Mark?

[Mark Parkey:]

Thank you, Lonnie, and good morning, everyone. As Lonnie noted, we were generally pleased with our same-store sales performance during the most recent quarter and are encouraged by the momentum generated by such sales as we head into the 2017 holiday season. As also previously noted, our third quarter of each year frequently consists of formidable challenges, and the three months ended October 1, 2017, were no exception, reflecting both unforeseen and foreseen challenges that impacted our top and bottom line performance. We were faced with a combination of factors that Lonnie has reviewed. I will spend a just a moment to offer additional information that typically characterizes the third quarter, and then provide further financial highlights before closing with our revised guidance for the year. The several months of the third quarter posed difficulties that are markedly different than at any other time of the year. A look at our marketing research shows that approximately 16% of our guests generated approximately 62% of our revenues in the J. Alexander’s/Grills segment of our business. Thus, at any time of the year, if the core group of heavy users deviates from their normal routine, there is an adverse impact. Modifications and behavior by our guests such as increased family vacation travel, frequent grilling out at home and eating a lighter fare has an effect on our restaurant sales. When schools reopen in late summer and families return to their normal routines, our restaurants predictably feel the positive benefit. We also can face challenges with hurricanes during the months of June through November of each year. Such challenges typically occur in the third quarter and are principally related to the logistical knot that occurs when there are mandatory evacuations impacting our staff and the ability of vendors to service our locations with fresh product on the backside of a weather event. This year’s post-hurricane experience was the first time in our collective memory that we were short of product that was otherwise available in order to ensure that FEMA had enough to meet its needs. We do have action plans in place to keep our critical products at appropriate temperatures, but we still must discard a certain amount of food in the aftermath of the major storm, such as Hurricane Irma. Despite the aforementioned challenges and others mentioned earlier by Lonnie, we had another quarter of increases in same-store sales in both of our restaurant groups. At the same time, guest counts were down in the J. Alexander’s/Grill collection and up in our Stoney River Steakhouse and Grill concept. With respect to average guest checks, which include alcoholic beverage sales, the average guest check within the J. Alexander’s/Grill collection, same-store base of restaurants during the third quarter of 2017 totaled $30.85, an increase of 2.7% from $30.04 during the same quarter of the prior year. The average guest check within the same-store base of Stoney River Steakhouse and Grill Restaurants totaled $42.32, a 2.6% decrease from $43.44 during the third quarter of 2016. Average guest checks from the combined J. Alexander’s/Grill collection advanced 2.6% to $30.90 in the third quarter of 2017 as compared to $30.11 in the comparable quarter of 2016, while the average guest checks for the Stoney River Steakhouse and Grill Restaurants decreased 2.9% to $42.19 in the third quarter of 2017 from $43.44 in the same quarter a year ago. With respect to consolidated guest counts, average weekly guest counts within the J. Alexander’s/Grill locations decreased by 1.3% in the third quarter of 2017 when compared to the third quarter of 2016. At Stoney River, average weekly guest counts increased by 5.0% during the most recent quarter compared to the third quarter of 2016. The effective menu pricing for the third quarter of 2017 was estimated to be an increase of 1.5% for the J. Alexander’s/Grill restaurants and a 0.2% decrease for the Stoney River Steakhouse and Grill Restaurants compared to the same quarter of 2016. Inflation and food cost for the third quarter of 2017 was estimated to total 0.8% for the J. Alexander’s/Grill restaurants, with beef cost decreasing by an estimated 3.3% compared to the third quarter of 2016. At the Stoney River restaurants, inflation for the third quarter of 2017 was estimated to total 0.4% with beef costs down approximately 1.8%. Company’s restaurant operating margins as a percent of net sales were 9.2% in the third quarter of 2017, compared to 10.9% in the third quarter of 2016. Restaurant labor and related cost as a percent of net sales were 32.6% compared to 32.1% in the third quarter of the previous year. Other restaurant operating expenses were 21.5% of net sales during the third quarter of 2017 compared to 21.1% of net sales in the corresponding quarter of 2016. Consolidated general and administrative expenses were 8.0% of net sales in both the third quarter of 2017 as well as the third quarter of 2016. During the most recent quarter, our profits interest grant related to Black Knight Advisory Services LLC resulted in our recording non-cash profits interest expense of $40,000, down from an expense of $246,000 in the comparable quarter of 2016. The agreement with Black Knight is based on a quarterly valuation of the profits interest grant, which was issued in October of 2015. The non-cash expense associated with this grant is required to be recognized over the 3-year vesting period of the grant and is calculated each quarter based upon the most recent valuation performed using the Black-Scholes valuation model, with any cumulative charge associated with the most recent valuation impacting the current quarter. Primarily due to the $11.60 per share closing price of the company’s stock at the end of the most recent quarter, the grant’s valuation decreased from $7,533,000 at July 2, 2017, to $6,650,000 at October 1, 2017. Also, during the third quarter of 2017, the company incurred consulting fees of $120,000 under our management agreement with Black Knight. This compares to consulting fees of $133,000 in the third quarter a year ago. If our proposed merger with Ninety Nine Restaurants is completed, the Black Knight consulting agreement will be terminated and the profits interest grant will become fully vested at that time. Black Knight will have 90 days in which to exercise the exchange of their rights under the profits interest grant in the Class A common shares of J. Alexander’s Holdings Inc. Subsequent to such an election or the expiration of the 90-day period, the company will no longer be required to perform a quarterly valuation relative to this grant. Lonnie touched on our tax provision in his earlier comments, and it bears mentioning that the factors that caused the net effective tax rate to vary from the federal statutory rate of 35% for the 9-month period ended October 1, 2017 and October 2, 2016, include the impact of the Federal Insurance Contribution Act tip and another credits, partially offset by state income taxes and certain nondeductible expenses. The decrease in the estimated annual effective tax rate from 22% for the 9-month period ended October 2, 2016, to 4.8% for the 9-month period ended October 1, 2017, is due primarily to the decrease in pretax book income during the same periods. Because the decrease in pretax book income is due primarily to the impact of transaction cost, the decreased pretax book income has no affect on the FICA tip credit benefit, but does amplify its rate effect when it is compared with a significantly lower pretax book income number in fiscal year 2017. 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 three years ending October 29, 2018. No shares were repurchased by the company in the third quarter of 2017. Based upon current information, the company is updating one item of our previously released guidance for 2017, as disclosed in the company’s release dated August 10, 2017. The same-store sales of our prior guidance range for Stoney River Steakhouse and Grill Restaurants was an annual increase of 1.0% to 2.0% over 2016. The updated guidance for 2017 anticipates an increase of 2.0% to 3.0% over 2016. As noted in this morning’s release, our guidance relative to adjusted EBITDA included in the March 2, 2017, release remains unchanged. Although it should be noted that due in large part to the impact of Hurricane Irma during the third quarter of 2017, the company anticipates that adjusted EBITDA for the full year 2017 will approximate the lower end of the targeted guidance. The company’s guidance range relative to capital expenditures included in the May 2, 2017, release remains unchanged, as is the company’s guidance included in the August 10, 2017, release relative to consolidated revenue and same-store sales for the J. Alexander’s/Grill restaurants for 2017. As a result of the company’s planned acquisition of Ninety Nine Restaurants and the uncertainty of transaction cost and changes to the company’s financial statements that may result in the transaction, the company is not presenting other items of guidance and previous disclosures of those items should not be relied upon. 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] First question is from Mr. Will Slabaugh of Stephens Incorporated. Please go ahead sir.

[Will Slabaugh:]

Wondering if you could quantify the impact on traffic or same-store sale that resulted from the hurricane that you mentioned in those 36 closed days. And then also, just related to that same topic, does that carry over in this – to the late September and early 4Q? I wonder what that recovery sort of look like? How you’d qualify that recovery in the same area?

[Lonnie:]

Will, we can’t really – the hurricanes, we took it out of the traffic. So with that negative traffic we talked about was not hurricane related, but the negative traffic we saw was sort of broad across all markets not at the same time during July and August. And we started seeing stronger traffic in September in all of our markets around the country and that continued on into October. Our recovery from the hurricane was good. It took a few days after the restaurants got opened for them to gear back up, but they did. Our Florida market is our strongest market in the summer so – as compared to some other markets, so that hurricane certainly hurt us. But they were back online in September and that’s what’s really important because that’s when tourism kicks back up, fall tourist season down there. So we’re – our feelings about same-store sales are very good right now and we had really good performance out of Stoney River. So whatever happened in July and August was just a blip on the screen. We’re glad to have it in the rearview mirror.

[Will Slabaugh:]

Got you. And you mentioned the King of Prussia and Troy locations on track for ‘18. I wonder if there’s any more color you could give us in terms of the development pipeline for next year and if those plans could change at all, depending on the Ninety Nine acquisition?

[Lonnie:]

Well, the Ninety Nine acquisition wouldn’t have any impact on development. We may get another restaurant in for next year. We haven’t gotten one ready to announce yet. Our goal was to try to get 3, and we’re in sort of the final throws of looking at a few things. Mark, anything you want to add on the development program?

[Mark Parkey:]

No. I think that’s pretty consistent with where we’re at. And that third one would be coming along late in the year if we’re able to –

[Lonnie:]

If we’re able to get it, Will, it would be a late fourth quarter opening. We’re real pleased with these two sites. King of Prussia is a market we’ve been working on for years to get into. All the restaurants in the Philadelphia suburb out there seem to do higher than their systems average. There are some good national restaurants as well as good locals. We like our site. It’s freestanding. We think that it’s going to be an extremely successful restaurant and we’re really delighted about the restaurant we have under development for Stoney in Troy, Michigan. We’re going to do a lunch and dinner. And I think, as we mentioned before, we’ve backed off on Stoney development a little bit until we see how this restaurant does. We think we’re going to move Stoney to a lunch and dinner model. The capital cost and operating expenses, the delta is just not that different and we think the returns can be much better at lunch and dinner. And as we mentioned earlier in the call, our lunch program sales performance at Stoney has really been strong and we’re building a lot of guest counts there. So we’re pretty pleased with that.

[Will Slabaugh:]

Great. And then, also, I want to ask you about Ninety Nine. I was curious if you had any insight into their performance during the quarter or in October, either one? Just given the general quarter that we’ve seen from casual dining, it was a little bit soft, but then picked back up, not unlike what you saw at J. Alexander’s in September, even more so into October.

[Lonnie:]

Sure. Part of our due diligence when we vetted the Ninety Nine business plan early on. They were looking at being down between 1% and 2% for the first nine months of this year. And we supported sort of their thinking to be cautious on price increases to see how the year fell out. Then they were way ahead of the curve on working on a reduced menu, more operating efficiency. They since rolled all that out. We anticipate that their fourth quarter same-store sales will be positive. Their recent trends over the last six to seven weeks, they’ve been up every week. So we think everything looks good and on plan for them.

[Will Slabaugh:]

Great. And last thing for me. I was curious on your updated thoughts on value and what you’re seeing out there in the marketplace and in your restaurants as well? I know we’ve talked about this over the past one or two years as a lot of competitors have gotten more aggressive on price point. You sort of evolved your thinking around that and got a little bit more aggressive yourself. Now it seems like things have somewhat kind of stabilized, if not accelerated for you. So I’m curious if you still feel like that focus on value needs to be there or how you’re addressing value at this point?

[Lonnie:]

Well, we think some markets are more value sensitive than others. What we’re seeing, though, even in the markets that we’ve always said were value sensitive, guests are buying premium features. They’re trading up voluntarily to higher-priced menu items, that’s why we saw the check average movement across the J. Alexander’s Redlands group. Stoney River is a little different proposition. We started about 1.5 years ago, moving them a little bit away from a steakhouse model. We tagged them steakhouse and grill. And so we have some lower priced, but higher margin items on the menu. And guests are moving to those as we try to increase the frequency of visit because the steakhouse has a real lower frequency and we’d like to see Stoney River having the same kind of frequencies we have at JAX. And we’re seeing some benefits of that, and I think that’s why the Stoney River guest counts were up 6%. But going in the fourth quarter, we’re anticipating that guests are going to buy the higher-priced features if they want them. We’ll still keep good value items on the menu, not force anybody to trade up, but their trading up sort of on their own. Our premium wine program is still working well. We’re seeing a lot of wine sales on high-end wines. And our premium cocktail program continues to do very well. So I think the consumer, Will, feels good about the economy. I think we’re seeing early indications of that. For all the negative stuff you read in the newspapers, people are spending the money.

[Will Slabaugh:]

Great, thank you, guys.

[Lonnie:]

Thank you.

[Operator:]

[Operator Instructions] Ladies and gentlemen, at this time, there are no further questions. I’d like to turn the conference back over to Mr. Lonnie Stout. Please go ahead.

[Lonnie:]

Thank you, Jerry. I thank all of you for being on call today. The third quarter of 2017 is behind us. And as Mark recently observed, we were glad to see it in our rearview mirror. In summary, there were a lot of moving parts causing the decline in our performance in the third quarter of 2017. We were not satisfied with the poor comparable sales results and are looking forward to improvements in the fourth quarter of this year. We are pleased that the end of the third quarter brought an increase in guest counts in our J. Alexander’s/Grill Restaurants. This pattern, as we noted on the call, has continued into the fourth quarter. At the same time, the robust guest count growth at our Stoney River Steakhouse and Grill Restaurants continues in the fourth quarter. At a high level, we’re focused on building strong fundamental basis in our three newest restaurants in Raleigh, Chapel Hill and Lexington. We’re confident all three of these will ultimately meet our targeted operational goals. We’re comfortable that our recent price increase estimated at 0.8% at the JAX/Redlands Grill groups will be sustained, and that our anticipated price increase in the Stoney River restaurant and Grill restaurant will be accepted by our guest base as well. Overall, we are encouraged with the positive trends we’ve seen early in the fourth quarter and we look forward to communicating the outcome of the full year when it closes. Thank you very much.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.