Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Steve Hislop - President and CEO

Jon Howie - Vice President and CFO

Analysts

Alton Stump - Northcoast Research

Will Slabaugh - Stephens, Inc.

Alex Slagle - Jefferies

Jay Donnelly - Wells Fargo

Bryan Elliott - Raymond James

Chuy's Holdings, Inc. (CHUY) Q3 2013 Earnings Conference Call October 30, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Chuy’s Holdings Incorporated Third Quarter 2013 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the presentation. Please note that this conference is being on today October 30, 2013.

On the call today, we have Steve Hislop, President and Chief Executive Officer of the company and Jon Howie, Vice President and Chief Financial Officer.

And now I would 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 third quarter 2013 earnings release, it could also be found at our website in the Investor section.

Before we begin our review of the formal remarks, I need to remind everyone that part of our discussions today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance upon 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 the 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 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 to have reported another strong quarter of operations. On a pro forma we earned $0.17 per diluted share for the third quarter of 2013, an increase of approximately 31% compared to the prior year.

I would like to point out that our healthy earnings growth came in spite of the calendar shift resulting from the extra week in fiscal 2012 that negatively impacted our revenues by approximately $690,000 in the quarter and also had a negative affect on margin leverage. As many of you know, the third quarter also appears have been a challenging one for the investment industry overall. So as you can imagine we are quite proud of our results, these results continue to be driven by strong new unit performance and a solid contribution of our comparable sales base and reflect the quality of made-from-scratch food prepared fresh every day, our commitment to value and most importantly the hard work and dedication of our employees take each day providing our guests with a fun, energetic dining experience. This attributes combined have resulted in a strong business momentum today.

Looking at development, we opened two restaurants during the third quarter Greenville, South Carolina and Madeira, Ohio outside Cincinnati area. Early in the fourth quarter we opened an additional restaurant in Kansas City, Missouri bringing the number of new units opened year-to-date to eight. We expect to open our ninth and final Chuy’s restaurant in Raleigh, North Carolina during the fourth quarter which will accommodate in the 23% increase of new units during 2013.

We continue to be pleased with the performance of our new units. Our operators as well as our development, training and marketing teams continue to do a fantastic job of installing the Chuy’s culture in our new units. The early results of our most recent units bear that up, especially when you consider that six out of our last eight openings have been in brand new markets.

As we have noticed, our EPS growth over the next few years would be largely driven by new unit growth. We believe that broad appeal of the Chuy’s concept, are strong economics and our flexible real estate strategy with a focus on conversion of existing restaurants, but also reflective use of our prototype building from round up construction present us with a large runway of opportunity for continued expansion.

Our development pipelines continue to be in great shape for 2014. We expect to open 10 to 11 new restaurants balanced throughout the year with all our new restaurants currently projected to open in our existing markets.

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

Jon Howie

Thanks Steve. For our third quarter ended September 29, 2013 revenues increased 19% to $53.5 million from $44.9 million in last year’s third quarter. As Steve noted, the one week countership, resulting from last year's 53rd week negatively impacted revenues in the third quarter of 2013 by approximately $690,000 as a quarter included a lower volume fall week in place of a typically higher volume summer week compared to last year. The year over year increase in our revenues was driven primarily by $9.2 million in incremental revenue provided by an additional 110 operating weeks from new restaurants opened during and subsequent to the third quarter of 2012. Total operating weeks in the third quarter of 2013 increased 23% to 589.

Comparable restaurant sales increased 3.1% for the 13-week period ended September 29, 2013 compared to the 13-week period calendar period ended September 30, 2012, driven by a 2% increase in average check and 1.1% increase in traffic, this is an apples-to-apples calendar comparison, which includes a slightly different base period than using the last year's 13-week fiscal third quarter, ending on September 23, 2012.

On a strict fiscal quarter basis, comparable sales for the same restaurant increased 1.9%. There were 31 restaurants included in comparable store base during the third quarter of 2013, which included two new restaurants added to the comparable store base at the beginning of the quarter. We consider a restaurant to be comparable in the first full quarter following its 18th month of operation.

I will continue to remind everyone that many of the restaurants opened at volumes greater than their eventual normalized run rate. In the case of our strongest openings this honeymoon period may last longer than the 18 months we allow before a restaurant enters the comparable store base. Given the modest number of restaurants currently in our comparable store base, the timing and strength of our new unit openings may create a headwind in our comparable restaurant sales percentage in some quarters in the near term.

Switching over to expenses, I will touch on some key line items in a few cases discuss our expectations with regard to the fourth quarter cost. Cost of sales as a percent of revenue increased approximately 70 basis points in the second quarter to 27.8%. The increase resulted primarily from sustained increases in chicken and produce costs. While we have seen some relief in the chicken prices we continue to feel upward pressure with regard to produce prices and as a result expect to see fourth quarter cost of sales as a percent of revenue to remain in the 27.7% to 27.9% range.

Labor cost as a percentage of revenue increased 30 basis points to 32.8%. The increase was largely attributable to a greater number of new stores in our overall unit base, while we are pleased that this year’s group of new units currently running slightly better labor as a percent of sales in last year’s group they do run a higher labor margin than a more matured stores and the increase in number of new units relative to our entire base is putting pressure on the overall labor margin.

Given our relatively smaller unit base we would expect this to continue in the near-term. In the fourth quarter we expect labor as a percentage of revenue to run a little north of 33%. Occupancy cost as a percentage of revenue decreased approximately 10 basis points to 6%. Note as you look into the fourth, quarter last year’s occupancy cost as a percent of revenue benefited from the extra leverage as a result of the extra week in that quarter in 2012. On a more normalized basis, we expect our occupancy cost as a percentage of revenues to be in the range of 6.4% to 6.6% in the fourth quarter of 2013.

General and administrative expenses in the third quarter were largely flat on a dollar basis compared to last year at approximately $2.4 million. On a pro forma basis, our G&A spending in dollars was down approximately 200,000 year-over-year. Depreciation and amortization as a percentage of revenue increased 50 basis points to 4.3% driven primarily by the increased equipment and leasehold improvement cost associated with our new restaurants.

On a GAAP basis, interest expense was 23,000 for the quarter compared to 2.3 million in the third quarter of 2012 which included a 1.6 million write-off upon amortized loan origination cost. On a pro forma basis, interest expense totalled approximately 107,000 in the second quarter of 2012.

The total outstanding debt under our credit facility at the end of the third quarter was approximately $4 million.

A component of our pre-IPO capital structure was participating vertical preferred stock. For each prior period presented our GAAP results included undistributed earning allocated to preferred participating interest. In connection with the IPO these shares were converted into common shares.

On a GAAP basis, net income in the third quarter of 2013 was approximately $2.8 million compared to $790,000 in 2012. Net income available to common stockholders in the third quarter of 2013 was also approximately $2.8 million or $0.17 per diluted share, compared to net income of $533,000 or $0.05 per diluted share in 2012. Net income for the third quarter of 2012 included $1.6 million write-off of deferred loan origination costs associated with pay down of the debt with the IPO proceeds of approximately 1.1 million net of tax.

Weighted average diluted shares outstanding were approximately $16.7 million for the third quarter of 2013 and approximately $14 million for 2012. Please also note that the historical weighted average shares outstanding for the third quarter of 2012 does not reflect the full impact of our IPO transaction or its conversion of our preferred stock during the third quarter of 2012.

Attached is our press release is a reconciliation of our GAAP results to our pro forma financial results. In connection with 2012 IPO we simplified our capital structure by converting all preferred stock to common stock and reducing our long term debt. Our pro forma results included 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 2012 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 structure and post IPO cost structure.

On pro forma basis, net income for the third quarter of 2013 increased approximately 27% to $2.8 million compared to $2.2 million in the third quarter of 2012. Earnings per diluted share increased approximately 31% to $0.17 compared to $0.13 in the prior year quarter. For our pro forma earnings per share calculation, the diluted weighted average share count of approximately 16.7 million shares for the third quarter 2012 reflects our estimated post IPO share count.

With respect to our 2013 outlook, we are reaffirming our guidance and currently expect our diluted net income per share to range from $0.68 per share to $0.70 per share. This compares to pro forma diluted income per share of $0.60 in 2012 which included an estimated $0.04 to $0.05 per share positive impact due to the 53rd week during that fiscal year.

Our net income guidance for the fiscal year 2013 is based impart on the following annual assumptions. Our revenue expectations included comparable store sales increase for the full year of approximately 2.25% which implies an increase of approximately 1.5% in the fourth quarter on a calendar basis. Restaurant pre-opening expenses are expected to range between $3.3 million and $3.9 million and we expect G&A expenses to run between $10.3 million and $10.8 million. This excludes approximately $925,000 of expenses related to the two reasons, the secondary offerings which we have disclosed separately from the G&A expense on the income statement. We expect the pro forma effective tax rate for the full year to range between 29% and 31%. We expect our annual weighted average diluted shares outstanding of $16.7 million to $16.8 million. And our capital expenditures net of tenant improvement allowance are projected to be approximately $19.1 million to $21.2 million.

As Steve noted, we expect to open our ninth and final restaurants for 2013 during the fourth quarter.

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

Steve Hislop

Thank you, Jon. We continue to be excited about the opportunities we have ahead of us to continue to grow the Chuy’s brand and bring our distinct menu of authentic, freshly prepared Mexican and Tex-Mex inspired food to a wider audience, while enhancing long-term value for our stockholders.

Before we go to question-and-answer portion of the call, I would like to 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 in our company. We will 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). We will take our first question from Alton Stump with Northcoast Research.

Alton Stump - Northcoast Research

Hey, thank you. Good afternoon and good job on the quarter results.

Steven Hislop

Thank you.

Alton Stump - Northcoast Research

Just had a quick question at your store growth platform for next year you mentioned 10 to 11 openings. Any color you can give us which regions you are looking and to target new stores, everyday certain region to that, as you look into build into?

Steven Hislop

Yeah. Thank you very much. This is Steve. Yeah. What we have done is as we mentioned in the call that over this last year, year and a half we've opened about 6 to 7 new states and probably 7 to 8 new markets were really planned in our flag, which is very aggressive for us to go out and do. So I'm very pleased with our results as we’ve gone out and done that. And we plan those specifically a little bit North and East basically on regional footprint of expansion into the natural Louisville area and over on the East side of Atlanta.

So what we have done is we planned it this year, the flags in Charlotte Valley, Cincinnati, Richmond, Virginia. And what we'll do is compare now to go with our growth strategy which is to go in the East market, dominate the number, dominate the market with the number of units and volumes as we’ll start now building out those markets in there. So we will do a collection of building stores in the Northern East in the Southeast and we’ll continue to back build in our Texas markets, we have a store in Edison and a possibly a couple of more in the Texas markets and maybe another one in Arkansas. But they’re all going to stay in our current footprint which is basically in Texas, Oklahoma and the Southeast market.

Alton Stump - Northcoast Research

Okay. Thanks, Steve. And then just a quick follow-up on the comp sales trend, obviously a very good comp number in 3Q. Any color as to how things are trended so far in fourth quarter whether you’ve seen a material deviation from 3Q trending up?

Steve Hislop

We want a one thing that we’ve been able to hang our head on for a while right now is the consistency of our traffic count and specifically our same store sales. As we finished our last year in the fourth quarter we had our best quarter of 2012 which where we finished the year in the fourth quarter 2012 up around 3%, 3.1%, we’ll continue that trend all year luckily for us. And then it’s about a third of that is customers the rest is price. And we're seeing that through the one period of the fourth quarter that trend continuing. Again we're up against our best quarter from a year ago level.

Alton Stump - Northcoast Research

Okay, great. Thanks again, guys.

Steve Hislop

Thank you.

Operator

Thank you. And we’ll take our next question from Will Slabaugh with Stephens.

Will Slabaugh - Stephens, Inc.

Yeah. Thanks guys. I wanted to ask you what you think about modeling next year. Could you help us that out with labor and maybe some of the other restaurant level expenses? You've been investing there over the past few years and I assume with the continued growth you’re talking about would you expect some further deleverage there especially maybe on that labor line. So is my thinking correct there and could you help me out at least directionally you think what that magnitude might look like?

Jon Howie

Well, this is Jon. And you’re right, we've been saying on the last few conference calls, the labor will continue to increase until approximately 2015 or 2016 we’re going to see it flatten out and then hopefully we’ll gain some leverage at that point. We could see it as much as 20 to 30 basis points next year I think in total and then climb another 20, 30 the next year.

Will Slabaugh - Stephens, Inc.

Got you. That's helpful. And then switching gears, just about the [alcohol] tax is coming in Texas where it looks like the consumer is going to be taking a little bit of the tax that you guys had been previously and actually it looks like it would be modestly beneficial to you on the margin, but could curve consumption depending on how the gust take it. So when does that falls in line which you’re thinking and if you’re planning any changes to the menu or message et cetera to the guests in your stores?

Jon Howie

Well, great question Will. We’re currently analyzing that and that's going to be an increase to the customer of about 8.25%. And I think there is some discussion within Texas on whether we pass all that to customer or not. And specifically, Steve and I and our management team are really discussing that to keep the value in our menu. So we’re really trying to understand what we think that's going to do with the customer and where we’ll set our prices. So we’re really analyzing that now. We think that it will be modestly incremental, but we don’t know at this time.

Steve Hislop

As we’ve said, the two benchmarks for us or the two main issues obviously are made from scratch items that we’ll never get away from, but also our price value relationships, so customers can be hear very often, so when there is the dollar is getting more expensive for our guest every single day, this is not helping them. So I’ll take a hard look and shouldn’t see if we should get a little bit of back up in price to our guest, we’ll do a complete analysis. The key thing for us on pricing issues or any decisions we make is with the value and the price point how do we drive customers count. So that’s the main issue that I am going to be looking at.

Will Slabaugh - Stephens, Inc.

That’s helpful. Thanks. And last thing from me if you had any initial thoughts on what food inflation cost maybe for next year?

Jon Howie

We’re currently negotiating some of our contracts as we speak, but I would expect it be in the low single-digits probably 1 to 3 which I think is consistent with what you’ve been hearing out there.

Will Slabaugh - Stephens, Inc.

Got it. Congrats guys.

Jon Howie

Thank you.

Operator

Thank you. And we’ll take our next question from Alex Slagle with Jefferies.

Alex Slagle - Jefferies

Thanks. Hey guys. A question on the ‘14 pipeline, it sounds like the units are going to be opening in existing markets. Are there any positive margin implications there to look for?

Steve Hislop

How we look at that is we’re just going to start filling out, it’s kind of like what Jon said to you earlier looking at the labor. There will be a little bit of margin pressure as we continue to expand that base specifically through next year and a little bit of ‘15 and we should see that kind of churn and even out, the end of ‘15 early ‘16 and as we grow. So as we’re going to go out and as we’re going start filling our markets out, you’re going to have a little bit of deleverage a little bit, but like we said just with the labor we’ll certainly going out at the end of ‘15 early ‘16.

Alex Slagle - Jefferies

Okay. Is there, on the same store sales for the fourth quarter is there a difference between fiscal and calendar of any magnitude?

Steve Hislop

A little bit, go ahead, Jon.

Jon Howie

Actually between the fiscal and, well, it’s about 1.2, the fiscal is 1.9%. I think we said that in the press release for the third quarter. So yeah, that’s about a 1.2 for the third quarter. For the fourth quarter it’s kind of flip, it’s pretty well flat similar to what we had in the second quarter this year.

Alex Slagle - Jefferies

Okay. And the trends in sort of your more season comparable units maybe that’s a metric sometimes you get that on the 24 more season stores and how that holding up?

Steve Hislop

It pretty much was pretty flat actually the 1 to 24 the start of the year and 1 to 31 to the third quarter. I go through a little caveat up there. We had one store that was in the original 24 that I actually had a bridge close for the whole quarter that cost to me a ton of money that skewed that a little bit. So I’ll tell you the difference between the 124 and the 131 is probably about two basis points, 0.2% from 131 being our -- 131 to 124, 124 being 2% higher.

Alex Slagle - Jefferies

Okay.

Steve Hislop

Through cash.

Alex Slagle - Jefferies

Quick one just on D&A, I had in my notes somewhere around 4.3% for the year, is that certain update to that?

Steve Hislop

No, I think we are still looking at that -- coming in that at level 4.3%.

Alex Slagle - Jefferies

Okay, great. Thank you very much.

Operator

(Operator Instructions). We will take our next question from Jay Donnelly with Wells Fargo.

Jay Donnelly - Wells Fargo

Hey, this is Jay Donnelly on for Jeff Farmer, thanks for taking my questions. First, at high levels, it looks like casual dining same store sales have picked up over the first two weeks of October. What would you attribute the improvement to I guess from our perspective?

Steven Hislop

Jeff, I'm sorry, I had troubled hearing you, buddy.

Jay Donnelly - Wells Fargo

This is Jay Donnelly on for Jeff.

Steven Hislop

Okay. I'm sorry.

Jay Donnelly - Wells Fargo

My first question was the high level of, it looks like the casual dining same-store sales have picked up over the first few weeks of October, and what would you attribute the improvement to from your perspective?

Steven Hislop

That's one thing. I know that my competitive sets specifically if I move into the southeast. I know we are going up against really strong quarter from 2012. I think if we go back and look at them, you are going to find out they are not and that's about it. I'm not spending too much attention to what they are doing. I think what we're really focused on our fundamentals and earning the dollar. I think we stay in front of the curve and we'll take our share from them.

Jay Donnelly - Wells Fargo

Okay. And then in terms of new units, you noted that you are pleased with the performance of the new units. Can you help us understand the size and duration of honeymoon periods? Have trends you have seen been consistent across markets?

Steven Hislop

It has been to a point and what we are saying as Jon mentioned in his talking today is we're seeing a little bit longer honeymoon period in the 18 months first of quarter out. And we usually have seen in the last year to two years and is continuing even though we have closer space this week, this period because of our store and forward. But they were still looking for a headwind in that 18 months to 24 month about 0.5% to 0.1% of headwind on same-store sales.

Jay Donnelly - Wells Fargo

Okay. Thank you very much

Operator

(Operator Instructions). We will take our next question from Bryan Elliott with Raymond James.

Bryan Elliott - Raymond James

Sorry Jon, I missed, do you gave out average check and traffic for the calendar, over calendar, the correct comp number of 3.1, could you give me that again?

Jon Howie

That’s correct, Bryan. It’s 1.1 traffic and 2% for average check.

Bryan Elliott - Raymond James

Great, thank you. And the rest of mine have been asked. Thank you.

Operator

We will take our next question from [San Barris] with Robert W. Baird.

Unidentified Analyst

Hi, thank you. This is [Sam Barris] on for David Tarantino. I had a quick question on the state of the 2015 pipeline and maybe the degree of confidence you have in achieving that 20% unit growth based on the amount of managers you currently have in training and that kind of the capacity that you already have with your current managers?

Steve Hislop

Great question again. Obviously one of the big things that we should be worried about with the growth number like ours is number one how is ’14, but more specifically how ‘15 is and how we're doing on the mangers, that is a great, great question. We are great. We've always been a little bit ahead of the curve. As I mentioned to you ‘14 is great. We're currently about 20 months out on all our expansion. We’d like to be 24 months. Most companies you’ll hear about 18 months, but we're looking very, very good through ‘15 and even some of our stores we're already working for ‘16.

As far as on the management perspective, we're very strong on the supervisory level, we're little ahead of the curve which you want me to be in the growth company and we currently have 52 to 55 managers currently in time and grade and training in our company. We run our restaurants with an average unit of about seven managers so you can see we're far enough out there for time and grade. Great question, that’s the number one thing we worry about and look at every single day.

Unidentified Analyst

Great. And then one more quick question just on a little bit more benign 2014 commodity environment, I think you said plus 1% to 3% you’re expecting maybe. If that does come in at the low end, would you expect to may be taking less pricing than the traditional 1.5% or would you like to keep that constant?

Steve Hislop

No, I think we’ll look at the environment out there. First thing that we will do is obviously look at our competitive set and in all market set we’re in. We’re very comfortable because of our leading a fruit basket of 1.5% over the last five years. But again my key thing that I will always push for is to make sure we’re increasing that discount and that value equations stays tremendously better my competitor set, which I believe it is today. So we’ll look at, but it’s all revenue based on our competitive set analysis that we will do and all the markets before we take a price increase. As I sit here today, I am still thinking around 1.5%.

Unidentified Analyst

Great, thank you.

Operator

Thank you. And it does appear there are no further questions at this time. I’d like to turn the conference back over to our speakers for any additional or closing remarks.

Steve Hislop

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

Operator

And again this does conclude today’s Chuy’s Holdings Incorporated third quarter 2013 earnings conference call. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Chuy's Holdings' CEO Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts