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Chuy’s Holdings, Inc. (NASDAQ:CHUY)

Q4 2012 Earnings Conference Call

February 25, 2013 16:30 ET

Executives

Steve Hislop - President and Chief Executive Officer

Jon Howie - Chief Financial Officer

Analysts

Will Slabaugh - Stephens Inc.

Chris O’Cull - KeyBanc

Jonathan Komp - Robert W. Baird

Nick Setyan - Wedbush Securities

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Chuy’s Holdings Inc. Fourth Quarter 2012 Earnings Conference Call. Please note that this conference is being recorded today, February 25, 2013. On the call today, we have Steve Hislop, Chief Executive Officer and President of the company and Jon Howie, Chief Financial Officer.

And now, I’d like to turn the conference over to Mr. Jon Howie. Please go ahead sir.

Jon Howie

Thank you, operator, and good afternoon everyone. By now, everyone should have access to our fourth quarter 2012 earnings release. It can also be found at www.chuys.com in the Investor Relations section. Before we begin our review of the formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These forward-looking are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings for a more detailed discussion of risks that could impact our future operating results and financial conditions.

Also during today’s call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for the results prepared in accordance with GAAP. And the reconciliation to comparable GAAP measures is available in our earnings release.

With that out of the way, I’d like to turn the call over to Steve.

Steve Hislop

Thank you, Jon and thank you all for joining us today on the call. We are very pleased that we continued our operating momentum in the fourth quarter. On a pro forma basis, we earned $0.16 for the quarter led by strong new unit performance and solid contribution from our comparable sales base. I want to remind you that our fourth quarter consisted of 14 weeks in 2012 compared to 13 weeks in the fourth quarter of 2011. However, excluding the impact of the extra week, our pro forma earnings for the quarter increased over 40% compared to last year’s pro forma EPS of $0.07.

Our results continued to reflect to proud our employees take each and everyday providing our guests with a unique dining experience whether it’s our hand roll tortillas, one of our 9 to 11 homemade sauces made daily, our hand squeeze line juice for our signature margaritas, our commitment to made-from-scratch food prepared fresh everyday, we provide great value for our guests in a fun, energetic environment, which is instrumental in driving our business momentum.

On the development front, we opened one restaurant in the fourth quarter in Florence, Kentucky. For the full year, we opened 8 new Chuy’s restaurants during 2012 or an increase of over 25%. As I have noted, we remained pleased with the performance of our newer units as they continued to hit our expectations. Our operators as well as our development training and marketing teams continued to do a fantastic job of installing the Chuy’s culture in our new units.

Our EPS growth over the next five years will be largely driven by our new unit growth. We believe the broad appeal of the Chuy’s concept, our strong unit economics, our flexible real estate strategy with their focus on conversions of existing restaurants, but also with the selective use of our prototype building for ground up construction presents us with a large runway of opportunity for continued expansion. During 2013, we expect to open 8 to 9 new Chuy’s restaurants, including our first Chuy’s that opened up in San Antonio in mid-January. We expect to open one more restaurant in the first quarter.

With that, I would like to turn the call over to our CFO, Jon Howie to review the details of our fourth quarter. Jon?

Jon Howie

Thanks, Steve. For our fourth quarter ended December 30, 2012, revenue increased 40.3% to $46.7 million from $33.3 million in the same period last year. As Steve noted, our fourth quarter of 2012 consisted of 14 weeks compared to 13 weeks in the fourth quarter of 2011. Approximately, $3.3 million of the increase in revenues was attributed to the extra week. Excluding the extra week, the increase was driven primarily by $9.3 million in incremental revenue provided by an additional 116 operating weeks from 10 new restaurants opened during and subsequent to the fourth quarter of 2011.

Total operating weeks in the fourth quarter of 2012 increased 39.8% to 544 weeks from 389 weeks, including 39 additional weeks as a result of 14th week during the fourth quarter of 2012. Also contributing to our revenue growth during the fourth quarter was a 5.2% increase in comparable restaurant sales on a 13-week comparable basis. Comparable restaurant sales were positively impacted by an extra 1.5 operating days in 2012 as a result of our restaurant closing schedule on Christmas Eve and Christmas Day during the fourth quarter of 2011.

Excluding the impact of the extra 1.5 operating days in 2012, comparable restaurant sales increased 3%, which included a 2.1% increase in average check and a 0.9% increase in traffic. Effective pricing during the quarter was approximately 1.5%. There were 24 restaurants included in the comparable store base during the fourth quarter of 2012 which included one new restaurant that was added to the comparable store base at the beginning of the fourth quarter. A total of six new stores rolled into the comparable store base in 2012. The comparable store base in the fourth quarter of 2011 had 18 restaurants.

We consider restaurants be comparable in the first full quarter following its 18th month of operation. I would like to remind everyone that many of our restaurants open at high volumes, which are greater than their individual base run rate. In the case of our strongest openings these honeymoon periods may last longer than the 18 months we allow before restaurant entrance to comparable store base. Given the small number of our restaurants currently in our comparable store base, the timing and strength of our new unit openings may create a headwind in comparable restaurant sales percentage in some quarters in the near-term. To-date that headwind has reduced our comparable store sales percentage ranging from 0.5% to 1.2% in any given quarter.

Switching over to expenses by line item, cost of sales as a percent of revenue increased approximately 10 basis points in the fourth quarter of 2012 to 27.2%. Slight increases primarily – the slight increase primarily reflects increases in chicken and beef costs that were partially offset by decreases in pork costs. Cost of sales for the full year 2012 as a percentage of revenue decreased 80 basis points to 26.9%. This decrease primarily reflects decreases in produce and to a lesser degree dairy cost offset by increases in chicken and beef costs. For 2013, we expect commodity cost inflation to be around 2% to 3%.

Labor cost as a percent of revenue declined approximately 100 basis points to 32% compared to 33% in last year’s fourth quarter. This improvement was largely attributable to decreases in training costs, leverage from the increase in comparable sales, and improved labor productivity in both the comparable restaurant base and the non-comparable restaurants. Restaurant operating cost improved approximately 90 basis points during the fourth quarter to 14.3% of revenue. The improvement was largely due to the lower liquor taxes as a result of opening more locations outside of Texas, which charges a higher liquor tax in another jurisdiction.

Lower repairs and maintenance and leverage from the extra week partially offset by increases in workers’ compensations insurance, also a result of opening more units outside of Texas. Occupancy cost as a percent of revenue decreased approximately 20 basis points to 6% primarily attributable to leverage from the extra weeks partially offset by higher rent expense in common area maintenance as a percent of revenue for certain non-comparable restaurants.

General and administrative expenses increased approximately $1 million to $2.9 million for the fourth quarter of 2012 from $1.9 million in 2011. This was primarily attributable to an increase in staffing as we continue to prepare our infrastructure for growth, performance based bonuses as a result of our strong overall profitability for the year, and incremental cost associated with operating as a public company. Additionally for the fourth quarter of 2012, we incurred $228,000 of operating expenses related to the recently completed secondary offering of the company’s common stock. All of the stock in the offering was sold by certain existing shareholders, and as a result, the company did not receive any proceeds from the offering. We expect to incur approximately an additional $320,000 of expenses related to the secondary offering in the first quarter of 2013.

On a pro forma basis, general and administrative expenses for the fourth quarter of 2012 were $2.9 million and for the fiscal year of 2012 were $10.1 million. This is a bit higher than we had originally forecasted for the quarter and was largely driven by an increase in performance-based bonuses as a result of our stronger overall profitability for the year. Restaurant pre-opening costs were $469,000 during the quarter compared to $817,000 for the fourth quarter of last year. This is directly related to only opening one restaurant in the fourth quarter of 2012 versus two restaurants in the fourth quarter of 2011. We continue to project our pre-opening cost at $350,000 to $400,000 per opening.

On a GAAP basis, interest expense decreased to $145,000 for the quarter from $1.2 million in the fourth quarter of 2011. On a pro forma basis, interest expense totaled approximately $107,000 in fourth quarter of 2012 and 2011 respectively. The total outstanding debt under our credit facility at the end of the fourth quarter was approximately $5 million.

Our GAAP EPS results reflect our capital structure prior to our IPO. A component of our pre-IPO capital structure was participating convertible preferred stock. For each historical period presented, our GAAP results include undistributed earnings allocated to preferred participating interest. In connection with the IPO, these preferred shares were converted into common shares.

With that background, I’ll provide the following. GAAP net income for the fourth quarter was $2.6 million compared to $300,000 in 2011. Net income to common stockholders in the fourth quarter of 2012 was approximately $2.6 million or $0.05 per diluted share compared to breakeven net income per diluted share for 2011. Weighted average diluted shares outstanding were 16,736,781 for the fourth quarter of 2012 and 10,869,992 for 2011.

Please also note that the historical weighted average shares outstanding does not reflect the full impact of our IPO transaction, the conversion of our preferred stock or our stock repurchase during the second quarter of 2012. Attached to our press release is a reconciliation of our GAAP results to our pro forma financial results. In connection with our recent IPO, we simplified our capital structure by converting all preferred stock to common stock and reducing our long-term debt. Our pro forma results include adjustments to reflect our post-IPO capital structure, including our basic and diluted share count as if the IPO conversion of preferred stock and stock repurchase occurred at the beginning of fiscal 2011 as well as other non-recurring or one-time adjustments. We believe that our pro forma results provide a useful view of our business given our new capital and post-IPO cost structure.

Pro forma net income for the fourth quarter of 2012 increased approximately 141.9% to $2.7 million or $0.16 per diluted share from $1.1 million or $0.07 per diluted share in 2011. Our fourth quarter 2012 results included an estimated $0.04 to $0.05 per share of positive impact due to the extra weeks in the quarter for 2012. Note that, we have used a diluted weighted average count of approximately 16.7 million shares for the fourth quarter of 2012 and 16.5 million shares for 2011 or pro forma earnings per share calculations, which reflect our estimated post-IPO share count.

In regards to our liquidity, we ended the year with a little over $5 million in cash and cash equivalents. We refinanced our debt on November 30 and now heavy line of credit for $25 million, which does not expire until November 2017. At the end of the quarter, we had $5 million outstanding on the line of credit which was used to payoff the previous credit facility as well as pay some of the refinancing expenses. This lowered our effective borrowing rate from 7% to approximately 2.1% based upon the changes in LIBOR.

With respect to our 2013 outlook, we are providing the following annual guidance. Our diluted net income per share is expected to range between $0.66 to $0.69. This compares to pro forma diluted net income per share of $0.60 in 2012, which included an estimated $0.04 to $0.05 per share positive impact due to a 53rd week during the fiscal year. Net income guidance for fiscal 2013 is based in part on the following annual assumptions. Our revenue expectations include a comparable store sales increase for the year ranging from 1% to 1.5%.

Restaurant pre-opening expenses are expected to range between $3.3 million and $3.9 million. We expect G&A expenses to run between $10.5 million and $11 million, excluding approximately $320,000 of previously noted expenses in the first quarter related to operating cost for the recent secondary offering. We expect our effective tax rate for the full year to range between 29% and 31% and annual weighted average diluted shares outstanding of 16.7 million to 16.8 million.

On a comparable calendar basis, we expect the company’s reported first quarter 2013 comparable sales growth percentage to be consistent with our annual guidance. However, due to the 53rd week in fiscal 2012, there is a one-week calendar shift in comparison of the fiscal first quarter of 2013 compared to the fiscal first quarter of 2012. As a result of the shift, the week between Christmas and New Year is traditionally a high volume week for our restaurants, where it will be replaced with an average week in the first quarter of 2013.

We expect a shift to reduce revenues the first quarter of 2013 by approximately $700,000 to $800,000 compared to the prior period and impact diluted net income per share by approximately $0.01 to $0.02. Lastly, as Steve noted, our development plans for 2013 calls for 8 to 9 new Chuy’s restaurants, of which one was opened in mid-January. Our capital expenditures net of tenant improvement allowances are projected to be approximately $19.1 million to $21.2 million.

And now, I’ll turn the call back over to Steve to wrap up.

Steve Hislop

Thank you, Jon. As we look to 2013 and beyond, we continue to be excited about the opportunities we have to grow the Chuy’s brand and bring our distinct menu of authentic, freshly prepared Mexican and Tex Mex inspired food to a lot of audience, while enhancing long-term value for our shareholders. Before we go to question-and-answer portion of the call, I’d like to again take a moment to thank all of our Chuy’s employees. Our successful results are a testament to their hard work and dedication to earning the dollar every single day.

And with that said, we thank you for your interest on our company. We’ll be happy to answer any questions you might have. Operator, please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And the first question will come from Will Slabaugh with Stephens Inc.

Will Slabaugh - Stephens Inc.

Yeah, hi guys. Thanks for taking my questions.

Steve Hislop

How are you?

Jon Howie

Hi Will.

Will Slabaugh - Stephens Inc.

Sorry, you said you expect 1Q same-store sales growth to come in right around your full year range in that 1% to 1.5%, just kind of given all the negative commentary from a lot of your competitors in late January through February, I wonder if you could talk a little more about kind of what you are seeing with the consumer really?

Steve Hislop

We feel good about what we have already said and we are seeing the continuation, and we feel good about the guidance we have given, Will.

Will Slabaugh - Stephens Inc.

Good to hear, good to hear.

Steve Hislop

We got it.

Will Slabaugh - Stephens Inc.

And then on the new unit opening, just wonder if you could talk a little bit more, you mentioned very pleased with how those are coming out of the ground, you talk about how those are performing relative to expectations? And then on the back of that, if you could talk about geographically where you expect to put those restaurants next year?

Steve Hislop

Sure. And again we have opened one last year in the fourth quarter. We’ve already opened one in the first quarter of this year. And we are excited that they are hitting all our expectations that we planned for them. So, we are continuing with that. Our expectations through 2013 as we are going to open 8 to 9, a lot of them will be in the Southeast market. You will see us actually go into approximately five new states this year, which will be the extension of markets that we are already in, you will see us go into the Carolina’s from our Atlanta market you will see us go into Virginia from our Nashville and Knoxville market. You will see us continue up into Cincinnati from our Louisville, Lexington, Florence Kentucky market. And the big one that we will see is we’ll probably enter by the end of the year into the Kansas City, Missouri market straight up I-35 all the way out of Austin.

Will Slabaugh - Stephens Inc.

Got you. Thanks guys.

Steve Hislop

You’re welcome, Will.

Operator

Next will be Chris O’Cull with KeyBanc.

Chris O’Cull - KeyBanc

Thanks guys. Good afternoon.

Steve Hislop

Good afternoon Chris.

Chris O’Cull - KeyBanc

Hey Jon. You mentioned higher performance bonus was a reason for the higher G&A in the quarter, but was the performance bonus up at the store level too and if so what was the year-over-year impact of that on labor cost?

Jon Howie

It wasn’t up over the previous year, that’s based on a CPI and that pretty well stays consistent from year-to-year. And at the store level, it’s based on a little different metric on EBITDA, but at the store level, it’s pretty consistent from year-to-year.

Chris O’Cull - KeyBanc

Okay, okay. And just a modeling question the 1% and 1.5% comp for the first quarter, does that include the impact of that one week shift or is that 1% to 1.5% on a week comparison base – on a same week comparison basis?

Jon Howie

Great question, Chris. That 1% to 1.5% is on a comparable week basis, not a fiscal basis.

Chris O’Cull - KeyBanc

So, the fiscal comp will be less in that 1% to 1.5%?

Jon Howie

Yeah, that’s why we were mentioning the $700,000 to $800,000 shift down in the first quarter.

Chris O’Cull - KeyBanc

Okay. And a $700,000 impact is roughly 2% to the comp?

Jon Howie

That’s about right.

Steve Hislop

Yeah.

Chris O’Cull - KeyBanc

Okay, great, thanks.

Steve Hislop

You’re welcome.

Operator

(Operator Instructions) The next question comes from Jonathan Komp with Robert W. Baird.

Jonathan Komp - Robert W. Baird

Hi, thank you. Just wondering I know you have the unique factor that extra day and a half that benefited the fourth quarter for the same-store sales calculation. But could you just give a little bit more color on underlying basis, what you saw as the quarter progressed?

Steve Hislop

There were a lot of companies out saying there was a choppiness, but we really didn’t see that. It was pretty consistent in all periods. We don’t give out period information. But we didn’t see the choppiness that others had been mentioning out there.

Jon Howie

Yeah, it was a pretty consistent quarter all the way through.

Jonathan Komp - Robert W. Baird

Okay, great. That seems pretty encouraging and then may be just to ask once more on the first quarter of the day just because I know lot of other companies have definitely talked about choppiness so far. And I’m wondering maybe specifically have you seen any significant slowdown in trends or have you seen that choppiness or what have you seen so far in the first quarter?

Steve Hislop

Yeah, as we mentioned before, now we are pretty pleased with it. There has been nothing out of the expected. There has been no choppiness for us.

Jonathan Komp - Robert W. Baird

Okay, great. And then may be just a broader question on the pipeline for the units, it sounds like 2013 is shaping up very well. Do you have anymore color or anymore specifics you can help us with as you look out to 2014 and I know it’s early today, but as we start to look out your path this year, what the development pipeline looks like?

Steve Hislop

Yeah. And I think it’s a great question. I think what you did normally here is most companies will tell you that like to be 18 months out, Jon. I think we like to be around 20 to 24. We expect again we’ll grow physically at that 20% level every single year on top of our growth over the prior year. And you will see us growing petty much the similar markets that I’ve already mentioned to you. As we enter a market, we would like to get our growth strategy as a go into a market open a high number of stores to maximize the efficiencies of that growth through G&A and supervisory. So, what you will see us is when we get over into the Carolina’s we will do some stores over there. We are just entering into those markets. You will see us continue our development in the Richmond area maybe slotting up to DC by the end of ’15 actually. But you will see us do a little backfill, but you will see us entering in all those states and start – really start penetrating those markets without hurting our – without cannibalizing ourselves. But we are very – we are currently working on 55 sites in all our markets for 2014. So, I’m excited about our pipeline, but you will see it in a pretty much the same footprint I just told you about.

Jonathan Komp - Robert W. Baird

Okay, great. As you maintained kind of the ramp in pace of development and expand the number of new markets. Is there anything that gives you any concern or are you pretty comfortable in terms of the manager pipeline and any investments that you may need to make in the infrastructure?

Steve Hislop

Awesome, great, great question, obviously the key for us, we have obviously grown over the last few years a little quicker pace than 20% a year, excuse me. So, that is the number one thing that we do, but our pipeline is fantastic. We are doing very, very well with it. We are excited about it. What we want to do is make sure we are train them not only for physical task training, but also a cultural training. So, we actually doubled the type of training and how long it is, so – but our pipeline looks really, really well. Actually as you heard last year, we actually started a second opening team that actually splits the company into two halves that’s actually helpful for us. It’s actually easier to open eight last year than it was five three years ago. So, we are in a great, great shape people wise and that’s the key question of everything. As far as the pipeline of sites as I just mentioned it looks pretty good. We will never grow faster than our people, so we stamp on our people very much so, so great question.

Jonathan Komp - Robert W. Baird

Great, it seems encouraging. Thanks guys.

Steve Hislop

Thank you.

Operator

Next would be Nick Setyan with Wedbush Securities.

Nick Setyan - Wedbush Securities

Thanks.

Steve Hislop

Hey, Nick.

Nick Setyan - Wedbush Securities

Hey, Steve. Just a quick question for you, given that shift again a week, then the impact in Q1, how should we think about Q4 and how is that shift going to impact the Q4 this year?

Steve Hislop

What I am seeing is that shift is actually been observed in Q3 and Q4. So, I will see that shifting to those different quarters.

Nick Setyan - Wedbush Securities

Got it, okay. And so if we go to tax rate is that the new work opportunity does it help you guys at all?

Steve Hislop

Not at this time. We were doing that previously, but we had been doing that current. We have got a lot of intervals that we are bringing out currently.

Nick Setyan - Wedbush Securities

Got it and then just a quick question on and just to kind of make sure I heard it right. How many operating weeks you say were in the quarter in Q4?

Steve Hislop

In Q4, it was 144 in Q4, but that also includes 39 weeks for that extra weeks for that – 39 weeks for that extra week, we had 39 stores open at that time.

Nick Setyan - Wedbush Securities

Great. Thanks so much.

Operator

Moving on to Chris O’Cull with KeyBanc.

Chris O’Cull - KeyBanc

Yes. I just had a follow-up on to previous question regarding new unit development. Steve, given that more stores are opening outside of Texas, is there a need to add or I guess invest in the construction department efforts to just construct stores outside of your core markets?

Steve Hislop

Great question again Chris. As you know, we use a master construction group out of Dallas, Texas and the answer to that is no, what we use them is our major GC crest. We get into the markets as you know we are in the markets two years before we actually start building or looking at sites. We are also at that time looking for all local trades. That is so important for us, as we go into a market to use everything local, because we want to be a local restaurant to those people. So, we want to use all local trades. So, at the end of the day, I just used my master construction guy as our main GC. So, again, we are out two years looking for local construction trades.

Chris O’Cull - KeyBanc

Great, thanks guys.

Steve Hislop

You’re welcome. Great question.

Operator

And that does conclude the question-and-answer session. I’ll now turn the conference back over to Mr. Steve Hislop.

Steve Hislop

Well, everybody thank you. Jon and I appreciate your interest in Chuy’s. We’ll always be available to answer any and all questions. Again, thank you and have a good evening.

Operator

Thank you. And that does conclude today’s conference. We do thank you for your participation today.

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