J. Alexander's Holdings, Inc.
Q4 2016 Earnings Call Transcript

Published: 3 Mar 2017

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to J. Alexander’s Holdings Fourth Quarter 2016 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. Instructions will be provided at the time for you to queue up for questions. It is now my pleasure to turn the conference over to Mr. Tom Lawrence for an introduction of today’s speakers. Please go ahead, Mr. Lawrence.

[Tom Lawrence:]

Thank you. We appreciate your interest in joining us on J. Alexander’s Holdings Inc. conference call to discuss results for the fourth quarter and full year of 2016. By now, everyone should have received a copy of the news release that was distributed yesterday, Thursday, March 2. If anyone does need a copy, it is available on J. Alexander’s website at www.jalexandersholdings.com, or you can call Rob Hoskins at 615-244-1818 and he 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, I’d 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, Risk Factors, and other sections of the Company's Annual Report, Form 10-K for the year-ended January 3, 2016, 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 March 2, 2016. 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, March 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 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 J. Stout:]

Thank you, Tom. I want to welcome everyone to the J. Alexander's fourth quarter conference call. With me today is our Chief Financial Officer and Executive Vice President, Mark Parkey. For the 13 weeks ended January 1, 2017 it marked another successful quarter for J. Alexander’s Holdings, reflecting gains in several key areas of measurement. We finished the year with improving sales trends in all of our restaurant concepts. We were encouraged though with our performance particularly against the comparable quarter of 2015, which included an next week of operations. For the fourth quarter of 2016, net sales amount $57,323,000 that was a decrease of 3.3%, compared to the fourth quarter a year earlier. However, we had an extra week in the fourth quarter of 2015. We estimate that extra week last year accounted for about $3.9 million, $110,000 in net income and $350,000 in adjusted EBITDA. On a comparable 13 week basis, net sales in the fourth quarter of 2016, increased by estimated $1,919,000 or 3.5% compared to those reported in the fourth quarter of 2015. On a consolidated basis, net income for the fourth quarter of 2016 was $2,721,000. This compared to $2,321,000 in the fourth quarter of 2015. Adjusted EBITDA for the fourth quarter of 2016 was $8,256,000 compared to $8,382,000 in the same quarter of 2015. Our J. Alexander's Redland’s group had consolidated weekly sales of $111,000 in the fourth quarter of 2015. This compares to $112,800 in the fourth quarter of 2016. Our average weekly same-store sales increased 1.8% in the final quarter of 2016, during a very difficult environment for the restaurant industry. This is aided in part by a 6.2% increase posted during the critical holiday season that ran from November 28, 2016 through January 1, 2017. December 2016 was an excellent holiday month for us. In addition to the momentum achieved at the revenue line we also were pleased to see a successful gift card selling season during the last quarter of 2016 and this is serving us well in our guests traffic during the first quarter of 2017. In addition to strong fourth quarter holiday sales and gift card sales, our results at the JAX Redlands Group, benefited by easing of beef prices. These costs were estimated to have decreased about 10%, compared to the fourth quarter of 2015. The over-reaching theme for 2016 within the J. Alexander’s Redlands restaurants was at the first six months of the year were a struggle at the net sales line, which predictably impacted our bottom line results. The encouraging takeaway is that the corrective measures we implemented at the beginning of last year produced the desired results starting in the third quarter and that momentum continued into the final quarter of 2016 as well. Our only disappointment related to 2016 is that the sales turnaround did not occur as rapidly as we had hoped. Over at our Stoney River Steakhouse and Grill restaurant sales continued to benefit from the excellent performance at the Germantown restaurants that we opened in January of last year. Our weekly sales average during the most recent quarter was $79,300, up 2.6% from the $77,300 posted in the same quarter of 2015. The 10 restaurants in the same-store space had a sales average of $76,000 during the fourth quarter of 2016 that is a 1.7% decrease from the $77,300 achieved in the fourth quarter of 2015. At our JAX Redlands Group and our Stoney River restaurant and Grill restaurants, they experienced a decrease in beef prices as well and those costs were approximately 8.9% less than the fourth quarter of the previous year. Our primary concern relative to Stoney River was soft sales performance in the first few months of the fourth quarter. However, we had an excellent December at Stoney River both in a same-store sales increase in December of 7.8%, but we have seen some softening in same-store sales at Stoney River during the early part of 2007, nothing that concerns us to a great degree. Let's turn now to our development program. During the fourth quarter of 2016, we opened the new J. Alexander's in Raleigh, North Carolina, we have been pleased with the results to date. Earlier this week, we opened the 12th Stoney River Steakhouse and Grill in Chapel Hill, North Carolina. On March, the 13th we’ll be opening a new J. Alexander’s in Lexington, Kentucky. Later this month, we expect to announce plans for what new J. Alexander’s restaurant and when new Stoney River are. Stoney River Steakhouse and Grill with targeted openings in the fourth quarter of 2017. Finally, the company decided not to renew the lease and we closed our J. Alexander's restaurant in Houston, Texas at the end of January. Our guest rewarded us with an almost record six day week, the last week we were open. We believe Houston is a good market for us and we’ll carefully evaluate opportunities to reenter that market in the future. I'll be back on the call after we have some comments from Mark Parkey. I'll now turn it over to Mark, our Chief Financial Officer.

[Mark A. Parkey:]

Thank you, Lonnie and good morning everyone. We concluded 2016 with solid momentum in sales from all of our restaurant concepts. We're coming off a quarter with excellent holiday and gift card sales along with success in the programs we implemented in early 2016 to build sales in our Ohio markets. So we were pleased with our results, particularly against the final quarter of 2015, which as Lonnie alluded to included an additional week of sales. Lonnie has provided an overview of fourth quarter sales results and the impact of the extra week. Let’s look now at other important measurements of our performance in the fourth quarter of 2016. For the final quarter of 2016, average weekly guest counts on the same-store base in the J. Alexander’s Redlands Grill restaurants were up to 2.0%. While average weekly guest counts on a same-store base in the Stoney River Steakhouse and Grill restaurants decreased by 1.5%. However, due to the strength of the Stoney River location in Germantown, Tennessee, consolidated average weekly guest counts for Stoney River increased by 7.7% percent during the fourth quarter of 2016 compared to the same quarter in 2015. At the combined J. Alexander’s Redlands Grill restaurants average guest checks, which includes alcoholic beverage sales, decreased one-fifth of 1% to $31.10 in the fourth quarter of 2016 as compared with $31.13 in the corresponding quarter a year earlier. Average guest checks for the Stoney River Steakhouse and Grill restaurants we're down to 4.7% to $44.90 in the fourth quarter of 2016 compared to $47.12 in the fourth quarter of 2015. This is primarily due to the impact of the Germantown restaurant, which serves both lunch and dinner. In fact, remaining price adjustments for the most recent quarter was estimated to be six-tenths of 1% increase for the J. Alexander’s Redlands Grill restaurants and six-tenths of 1% decrease for the Stoney River Steakhouse and Grill restaurants river safe as they grow restaurants as compared to the same quarter of the prior year. Deflation include costs for the fourth quarter of 2016 was estimated to total 3.8% and 5.3% for the J. Alexander’s Redlands Grill restaurants and the Stoney River restaurants respectively as compared to the fourth quarter of 2015. The company's consolidated operating income for the last quarter of 2016 was $3,794,000 compared to consolidated operating income of $4,192,000 recorded in the corresponding quarter of 2015. Our effective tax rate for the fourth quarter of 2016 was 23.8% compared to 40.8% in the final quarter of 2015. Our income from continuing operations before income taxes in the final quarter of 2016 totaled $3,679,000 compared to income from continuing operations before income taxes of $4,033,000 in the final periods of previous year. The results for the fourth quarter of 2015 were impacted by non-recurring transaction and integration expenses at $870,000 associated with our ultimate spin-off from Fidelity National Financial Ventures, LLC in 2015. Excluding these non-recurring transaction and integration expenses income from continuing operations before income taxes would have totaled $4,903,000 for the fourth quarter of 2015. The results also included income tax expense of $852,000 in the fourth quarter of 2016 compared income tax expense of $1.6 million in the fourth quarter of 2015. Net income for the fourth quarter of 2016 was $2,721,000, which is up $400,000 compared to net income of $2,321,000 posted in the comparable quarter of 2015. Basic and diluted earnings per share totaled $0.19 and $0.18 respectively for the fourth quarter of 2016 as compared to $0.15 for both basic and diluted earnings per share in the second quarter of 2015. Total restaurant operating expenses were 83.4% of net sales in the fourth quarter of 2016 compared to 82.9% of net sales in the corresponding quarter of 2015. Positive sales, which includes the cost of food and beverages as a percentage of net sales in the fourth quarter of 2016 in at 30.7% as compared to the 31.4% in the comparable quarter of 2015. Consolidated general and administrative expenses were 8.5% of net sales in the fourth quarter of 2016 as compared the 8.2% of net sales in the same quarter of the prior year. Included in the fourth quarter expenses from 2016 were consulting fees of $249,000 from our management agreement with Black Knight Advisory Services, LLC and that compares to $262,000 in the fourth quarter at the prior year. Also during the fourth quarter of 2016, the company recognized $881,000 of non-cash profits interest compensation expense related to the Black Knight profits interest grant compared to $661,000 of such expense in the final quarter of 2015. We remind those listening that's a fair value of the Black Knight profits interest grant is recalculated on a quarterly basis during the three year period over which it is scheduled to vest. Any change in the estimated fair value of the grant is reported at the end of the quarter in a manner, which brings the cumulative expense recognized relative to the grant current with the latest valuation. The valuation at the end of the fourth quarter of 2016 was calculated to be approximately $6.5 million, as compared to an estimated $5.5 million at the end of the third quarter of 2016. 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 outstanding common stock over a period of three years ending October 29, 2018. Shares 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 that maybe made from time-to-time in the open market. The 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 companies to acquire any particular amount of stock. During the fourth quarter of 2016, the company purchased 5,000 shares under the program. Since the inception of the stock repurchase program, 305,059 shares have been purchased by the Company at an aggregate price of $3,203,000. As we look ahead to 2017 our guidance includes the following. Increase in average weekly same-store sales of 1.5% to 2.5% at the J. Alexander’s Grills locations as well as, 1.5% to 2.5% increase in average weekly same-store sales for our Stoney River restaurants. Capital expenditures ranging from $19 million to $22 million, total revenue ranging from $232 million to $234 million, net income of $6.4 million to $7.2 million, adjusted EBITDA of $25.7 million to $26.7 million and effective tax rate of 21% and basic earnings per share of $0.44 to $0.49 cents. I’ll now turn the call back to the operator to open the participant calling segment for this morning's call.

[Operator:]

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

[Drew Stevenson:]

Thanks guys. This is actually Drew on for Will. So first, I just wanted to ask on your updated thoughts with regard to new store productivity and how things are progressing relative to your expectations there?

[Lonnie J. Stout:]

Well, Raleigh opened in December and is right on where we thought it would be. As we said Germantown, Stoney River that we opened in January last year exceeded our expectations by a wide margin and Chapel Hill, Stoney River has only been open for four days. So, can't really say much about it yet.

[Drew Stevenson:]

Yeah and then just any update on quarter to-date trend, you said you ended the year strong and then nothing's really concerning you to start out in January, February. But I just wanted to see if there's anything specific you had been seeing positive or negatively around the space?

[Lonnie J. Stout:]

Well, we think, things are generally positive in the sales area. Our January trends J. Alexander's and all the Redlands Grills were very strong. Stoney River we've got a couple of restaurants that are under a lot of competitive pressure from new openings. Those same-store sales were a little soft and nothing that concerns us or nothing systemic. So we generally think the environment for the upscale casual dining group is pretty positive right now or positive in the areas that we're in. You’d recalled a year or so ago, we had some sales softness in Ohio, we addressed that. That market has performed well for us, so we think things are firing on all cylinders.

[Mark A. Parkey:]

It continues to remain --

[Lonnie J. Stout:]

Yeah, Mark, said, beef is favorable to us. We’ve seen some increases in seafood costs, but beef certainly more than offset that. So, I would call our outlook positive and sales trends are continuing to encourage us.

[Drew Stevenson:]

Awesome. Great. Well, you all answered my last question on the commodities. So, congrats on the corner and thanks for answering my questions.

[Lonnie J. Stout:]

Thanks a lot.

[Operator:]

[Operator Instructions] There are no further questions in the queue. I’d like to hand the call back over to management for closing comments.

[Lonnie J. Stout:]

Well, I want to thank everyone for being on the call today. Just a couple of thoughts, as we previously mentioned, we’re encouraged by the momentum achieved during the recent holiday season and the strong finish we had to the year. On balance, we feel comfortable with our ability to get our targeted annual increases in same-store sales for 2017. As we mentioned, beef prices continue to be favorable. During the early part of the year, we anticipate they'll stay favorable for most of this year and that our input costs should be stable. While there’s some other commodity increases, beef decreases will more than offset that. We always are cautious about the cost pressures. As we mentioned seafood or salmon a few things have gone up, but beef right now is running very, very favorable. Again we're firing on all cylinders in our markets and we're looking forward to an exciting year. Thank you all.

[Operator:]

Ladies and gentlemen, this does concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.