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Chuy's Holdings Inc (NASDAQ:CHUY)

Q4 2013 Earnings Conference Call

February 27, 2014 05:30 PM ET

Executives

Steve Hislop - President and CEO

Jon Howie - VP and CFO

Analysts

Andy Barish - Jefferies

Will Slabaugh - Stephens, Inc

David Tarantino - Robert W. Baird

Imran Ali - Wells Fargo

Nick Setyan - Wedbush Securities

Bryan Elliott - Raymond James

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Chuy’s Holdings Incorporated Fourth 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 February 27, 2014.

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 fourth quarter 2013 earnings release, it can also be found at www.chuys.com 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 place 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 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?

Steve Hislop

Well, thank you, Jon and thank you all for joining us today on the call. We are very pleased to have reported solid fourth quarter results despite a challenging quarter for more restaurant companies which also capped off a very successful year for Chuy’s. Including our fourth quarter earnings per share of $0.15, our 2013 pro forma diluted earnings per share increased to $0.69, a 24% increase from 2012 after adjusting for last year’s extra week.

Our results both during the quarter and throughout 2013 continue to reflect the quality of our made from scratch food prepared fresh every day, our commitments of value and most importantly the hard work and dedication our employees take in consistently providing our guest with a fun energetic dining experience. We believe these attributes have helped us maintain our strong business momentum.

During the fourth quarter, we opened our eighth and ninth restaurants in 2013 they were in Kansas City, Missouri and Raleigh, North Carolina. And as we look ahead our new unit development will continue to drive our EPS growth. As we have previously stated our development plans for 2014 call for 10 to11 new restaurants during the year. I am pleased to note that two of those units have already opened one in Rogers, Arkansas and another one in Orlando, Florida.

During 2013, our new unit development included nine new units and eight new markets located within six new states. As a result of seeding so many new markets during the year we have seen a greater operating inefficiencies within our 2013 class of unit. In contrast, our 2014 development will largely consist of backfilling into many to go same trade areas which we believe will drive increased awareness of our brand and the new dual markets as well as allow for greater training and local store marketing efficiency.

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

Jon Howie

Thanks Steve. And for our fourth quarter ended December 29, 2013, revenue increased to $50.8 million from $46.7 million in last year’s fourth quarter. As a reminder last year’s fourth quarter consisted of 14 weeks compared to 13 weeks in the just completed fourth quarter of 2013, which positively impacted last year’s revenue by approximately $3.3 million. We also see severe winter weather during the last quarter of 2013 specifically an ice storm in early December, which we believe negatively impacted Q4 2013 revenue by approximately $500,000. Revenue in the fourth quarter of 2013 included $7.3 million in incremental revenue provided by an additional 114 operating week from new restaurants opened during and subsequent to the fourth quarter of 2012. Total operating weeks in the fourth quarter of 2013 were 650.

Comparable restaurant sales increased 3% for the 13-week period ended December 29, 2013 compared to the 13-week period ended December 31, 2012. The increase was driven by 1.9% increase in average check and 1.1% increase in traffic. There were 32 restaurants included in the comparable store base during the fourth quarter of 2013 which included one new restaurant added to the base at the beginning of the quarter. We consider a restaurant to be comparable in the first full quarter following its 18th months of operation.

Switching over to expenses, cost of sales as a percent of revenue was flat at 27.2%. Cost of sales in the quarter came in better than our expectation largely because of volume rebates earned associated with meeting certainly annual volume thresholds and entering into a new beverage agreement which retroactively was effective to the beginning of the quarter. Excluding these items, cost of sales as a percentage of revenues would have been approximately 27.5% as compared to 27.2% in 14-weeks ended September 30, 2012.

The increase was caused by increases in potent, groceries and seafood offset by a reduction in dairy looking into 2014 we expect food cost inflation to be 2% to 3% we put our cost of sales as a percentage of revenue in the 27.6 to 27.8 range for the year.

Labor cost as a percentage of revenue increased 210 basis points to 34.1%. Labor during the quarter was negatively affected by the loss of leverage due to one less week in the current quarter compared to last year, the severe winter weather in early December and finally higher management training labor due to timing. However, as Steve noted earlier, most of this increase was a result of greater inefficiencies within our new 2013 restaurant particularly higher than expected labor as a whole due to the decreased leverage on our management labor and some longer learning curves at the hourly level.

We believe our current focus on local store market in these newer markets as well as backfilling these markets with additional stores and more focused training as a fundamental will gives us labor cost percentage back to normalized levels over time. In the first quarter, we expect labor as a percentage of revenue to run somewhere in the range of 33.4 to 33.7. Restaurant operating cost as a percentage of revenue increased approximately 50 basis points to 14.8% the increase was largely related to higher insurance and utility cost and higher credit card fees offset by lower liquor taxes as a percentage of sales as we continue to grow our restaurant base outside of the State of Texas. Additionally, as we start fiscal 2014 we expect the impact of the new Texas Liquor Tax Law to decrease our restaurant operating cost as a percentage of revenue by approximately 70 to 80 basis points which will bring our restaurant operating cost as a percentage of revenue for 2014 is the range in the mid upper 30%.

Occupancy cost as a percentage of revenue was flat compared to last year at 6% and came in better than we expected due to a lower than related property and real estate taxes on our newer location which had a favorable impact on occupancy cost of approximately 40 basis points. General and administrative expenses in the fourth quarter improved to approximately 650,000 on a dollar basis compared to last year at 2.3 million, and as a percentage of revenues improved approximately 180 basis points. The improvement was generally related to lower performance based bonuses as compared to the prior year in 2012 where the bonuses earned were above average.

Marketing expense as a percent of revenues decreased approximately 50 basis points to 0.3% as compared to the 14-weeks period in 2012 this decrease was primarily resulted on in addition to re-directed our marketing efforts focus more on local store marketing. Depreciation and amortization increased to 580,000 and as a percentage of revenue increased 80 basis points to 4.8% driven by the timing of late 2013 restaurant openings and the increased equipment and resold improvements cost associated with our newer restaurant.

Interest expense was $29,000 compared to $145,000 in the fourth quarter of 2012 and on a pro forma basis interest expense total approximately $107,000 in the fourth quarter of 2012. The total outstanding debt on our credit facility at the end of the fourth quarter of 2013 was $6 million. Our effective tax rate for the quarter was 24.9% which brought our overall tax rate for the fiscal year of 2013 to approximately 27.5% as compared to 29.1% for the fiscal year 2012.

The decrease in the effective income tax rate from the prior year was primarily attributable to the favorable impact of a one-time adjustment made for incremental employment tax credit for the current year as well as the previous tax year. This was partially offset by the unfavorable impact non-deductible secondary offering costs during the year. Excluding this net favorable benefit, our pro forma effective tax rate for the year was approximately 29%, at the lower end of our forecasted range.

Net income for the 13-weeks fourth quarter of 2013 was $2.5 million or $0.15 per diluted share. Net income for the 14-weeks fourth quarter of 2012 was $2.6 million or $0.15 per diluted share. Net income for the fourth quarter of 2012 included approximately $228,000 in cost associated with a follow on offering of secondary shares of the company’s common stock. Pro forma net income for the fourth quarter of 2012 was $2.7 million or $0.16 per diluted share. Fourth quarter 2012 results also include a 4% to 5% per share positive impact due to the extra week in the quarter. Attached to our press release is a reconciliation of our GAAP results to our pro forma financial results.

With respect to our 2014 outlook, we are providing the following annual guidance. Our diluted net income per share is expected to range from $0.81 to $0.84. This compares to pro forma diluted net income per share of $0.69 in 2013. Our net income guidance for fiscal year 2014 is baked in part on the following annual assumptions: our revenue expectations including comparable store sales increase for the full year ranging between 1.5% and 2%; restaurant pre-opening expenses are expected to range between $3.8 million and $4.3 million; we expect G&A expense to run between $12.5 million and $13.0 million, which included approximately $1.4 million in incremental expense related to the company’s changes to its compensation and long term incentive program; we expect the pro forma effective rate for the full year to range between 29% and 31% and we expect annual weighted average diluted shares outstanding to $16.7 million to $16.8 million.

Lastly, our development plans for 2014 call for 10 to 11 new Chuy’s restaurants of which two have already opened. Our capital expenditures net of tenant improvement allowance are projected to be approximately $27.5 million to $30 million. 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 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 earn 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, would you please open the lines for questions?

Question-and-Answer Session

Operator

Yes, thank you gentlemen. (Operator Instructions) And our first question will come from Andy Barish with Jefferies.

Andy Barish - Jefferies

Hey guys on the margin side, just is there a way to kind of quantify the inefficiency impact in ‘13 and how we should think about that ‘14 and then kind of holistically I would assume restaurant level margins would still probably be down in ‘14 even though you have less of sort of new market inefficiency?

Steve Hislop

I think what we said in the guidance there was kind of an expected range of our labor percentage and that is including those inefficiencies for 2014.

Andy Barish - Jefferies

Okay. And that labor guy, I thought you have said for the first quarter, is that for the full year or?

Steve Hislop

Well, for the full year, it would be closer to around that 33, below 33.

Andy Barish - Jefferies

Okay. And are you seeing any particular, in the fourth quarter any particular sort of the weather impact still lingering either on the sales or the margin line that’s may be filling up at labor as well?

Steve Hislop

Andy, as far the sales side, we are basically eight weeks into our quarter of ‘13. We definitely have seen some weather issues basically in four out of the eight weeks. I haven’t said that basically we are seeing our sales kind of grown with our fourth quarter trend, so we are kind of pleased there. And so, that’s kind of where we are at after only eight weeks out of quarter.

Operator

Thank you. And our next question will come from Will Slabaugh with Stephens.

Will Slabaugh - Stephens, Inc

Thanks guys, congrats on the great year. On development, can you give us the rundown of your take on the unit performance in the quarter and then sales that have started off and this is now the first quarter of ‘14? And then secondarily, as you look at the performance of your recent group of new units in the past couple of years, can you talk about what the units attracted in maybe some markets that know the brand pretty well, it looks like or just maybe some of your newer markets in terms of sales progression and as you think about how you are building in more or less backfill at the 2014, what do you think that mean in terms of what those new units might look like?

Steve Hislop

Okay, thanks, Will. This is Steve. At the end of the day real quickly this year we have opened up Rogers, Arkansas and Orlando. Rogers opened up in Orlando, Elton last week and we are just getting ready for a very, very busy upcoming three to four weeks starting three weeks from now when we have the vacations going on down there. So, we are excited about both those opening and as you have mentioned this year in 2014, most of our stores are at backfill markets. Last year in 2013 specifically as I mentioned to you we did a six new state new markets. It is rather expensive to seed those. We feel really good about all the markets that we have entered. As I have mentioned before, as we go into these markets, we are kind of like new pair of jeans. You turn a new pair of jeans on, they're little scratchy and the more awareness we get in the market, the more awareness as we build in markets, the more comfortable we get in the market as far as awareness plays for us.

So, that was a big chunk that we took off to expand our footprints in 2013 and we expect to be able to grow from there but we are excited about our backfill in ‘14 and in ‘15 will be very, very similar.

Will Slabaugh - Stephens, Inc

So, 2015 should look fairly similar in terms of almost all backfill there as well?

Steve Hislop

I would say about 80%, yes.

Operator

Thank you. Our next question will come from David Tarantino with Robert W. Baird.

David Tarantino - Robert W. Baird

Hi, good afternoon. A question to follow-up on the new store performance, first from a sales volume perspective in the most recent quarter, the new store contribution was a little lower than we had expected. I am wondering maybe if we have miss modeled that or if the volumes are running maybe a little lower than where you thought they would be given all the new markets and low brand awareness. But if you could help me to reconcile that, that would be great?

Steve Hislop

Yes, and thank you Dave. And at the end of the day, the way it worked out and again its pay me now, pay me later as we see these markets to extend our footprint. The way it work out for me last year is when went into probably like I mentioned eight new markets, six new states and that’s spreading us out a little bit more than I would like probably. At the end of the day, as I look back I probably still would have been to get our footprint extended and we know as we continue to grow in these markets, we will have more awareness to help us grow our concept. Certainly I remember when I joined the company in 2008, the average AUVs was a little bit shy of about 5 million and five years earlier without the awareness we were at 4 million. So, it’s very similar when you jump into these new markets. I think this was very, very important as we move out continually as to quickly backfill these markets in ‘14 and ‘15 and also extend and use a little bit of marketing dollars to expand our reach from a 10 mile radius to a 25 minute drive time in all these markets where we are going to put an extra probably $0.5 million into our local store marketing in these specific markets.

David Tarantino - Robert W. Baird

That’s helpful. And then on the labor inefficiencies that you mentioned, is that something that is more operational growing, given how the markets are new or is that, and I guess just maybe trying to dimensionalize how challenging that will be to bring those labor issues down in those units either through more training or does that require more sales volumes or how should I think about that?

Steve Hislop

David, both, at the end of the day, it’s going again, they do markets in one year and extend this footprint and also a little bit of the volumes while we are building the awareness. There is nothing wrong with our model moving forward, there is nothing wrong with our model store level moving forward. It’s just getting up to speed on the new markets and moving the sales up a little bit with an awareness issue.

Operator

(Operator Instructions) Our next question will come from Imran Ali with Wells Fargo.

Imran Ali - Wells Fargo

Hi guys, I am on for Jeff Farmer. Thanks for taking the question. It does sound a little bit earlier but where there any surprises with the volume trend that you saw in new markets that you entered in 2013?

Steve Hislop

I don’t know if you say the surprises, we definitely knew when our eyes are open as we going into the markets as we really developing our awareness. We are getting very early in six months before open, we worked with the local PR firm and we really start talking about our defining differences as we get into the markets there. And we have learned a few things like I mentioned to you a little bit earlier that our main focus early on was basically a 10 mile radius. We have learned things throughout the year to extend that to a 25 minute drive time and dealing with the daytime population specifically in that. And that’s what we have learned through time. We are not scared of where we are at and we are really excited in all the markets and where we are going to go as we get more awareness and get more stores in the market.

Imran Ali - Wells Fargo

Okay, great. Thanks for that. And just you said that, could you expect maybe 2015 development be 80% comprised of backfill, is that correct?

Steve Hislop

Yes, pretty much as far as definitely in the states here we will see, we will have one new state but everything, the new state will be actually right next to Arkansas City, Missouri store; we will be actually in Kansas. So, it’s really developing all the markets we have seen that in 2013, at the end of 2012. And so, I am saying about 80% over the next two years will be within those market points. And then you will see us probably starting in 2016 that you would probably see a nice ratio of 15% backfill and 15% new but that would start in ’16.

Operator

Thank you. Our next question will come from Nick Setyan with Wedbush Securities.

Nick Setyan - Wedbush Securities

Thank you and thank you for taking my question. In terms of the pricing I think you guys are at 1.9% this quarter, pricing drop off do you expect to take a little bit more pricing kind of for the whole year what we think pricing might be?

Steve Hislop

The pricing, we just took price in the second period of 2014 like we do every year, Nick and that pricing was right in between the 1.5% to 2% in the current year going forward in 2014. And we don’t anticipate any more price this year. It’s been kind of our standard for the last five to six years that we take it once during the first quarter and we have taken as we entered in.

Jon Howie

One of the key things, Nick, for us is what we really concentrate on and as you saw in our fourth quarter in a pretty complex and competitive market, we were able to grow our volumes even though we lost $0.5 million in sales because of the snow that we were able to drive customers a little bit and obviously sales increase of around 3%. And as I said we are seeing that trend, kind of continue to deal with some bad weather in the first quarter of the first week. We really believe one of the strongest attributes we have after all our freshly made product that we make in-house is that really our price value is in the long run; in the marathon that we are running today, really important for us as we continue down the road. And we think that’s really one of our greatest competitive advantages as we move forward.

Nick Setyan - Wedbush Securities

Got it. So basically in the second period of 2014 we should see going forward for rest of the year about 0% pricing, is that’s the correct way to think about it?

Steve Hislop

No, it was -- so the pricing that you’re seeing at the end of the year the 1.9, that carries through January and then we put in another price increase in the second period of 2014 so you’ll see another price increase similar to last year. Every year we do it at the beginning of February.

Nick Setyan - Wedbush Securities

Perfect, okay. And then just kind of cadence in the opening sounds like Q1 we’re going to get few more operating weeks than usual to the earlier openings. And then kind of as the year progresses quarterly and then how should we think about is it going to be more first quarter and when the openings are…

Steve Hislop

I’ll tell you what we have 10 to 11 projected I’ll tell you are being very even throughout the year. We were very even throughout the year and next year it will be very even also.

Nick Setyan - Wedbush Securities

Okay, and then just the question on G&A sounds like this year the ramping G&A versus 2013 is going to be a little bigger than we signed 2013 which is 2012 what’s kind of driving that?

Steve Hislop

In 2014, the projection is that what we are saying?

Nick Setyan - Wedbush Securities

Yes.

Steve Hislop

Yes, so we had a firm command and analyzed our compensation plans and long term incentive program. And so we changed those a little bit this year and we’re seeing a one-time hit this year that’s going to jump that up and so you’re not going to see much leverage while you won’t see any leverage in 2014 because there is an extra 1.4 million in there. If you were to take out the 1.4 million of incremental cost in 2014 then you would see that leverage like we’ve always been saying with this 50% to 60% of the top line growth. But after 2014 when you get to 2015 and ’16 you got to see that leverage come back.

Operator

Thank you. Next we’ll hear from Bryan Elliott with Raymond James.

Bryan Elliott - Raymond James

Thanks, good evening, just Jon actually couple of clarifications sort of makes I heard things right. The food cost range that you forecast you said you think food inflation is going to be 2% to 3% which will puts you in a range of 27.6 to 27.8. Was that inclusive of the pricing we just discussed or is that before, that’s inclusive right?

Jon Howie

That’s inclusive, yes.

Bryan Elliott - Raymond James

Okay. And then you gave us some guidance ranges on other restaurant cost lines, they were full year guidance projections or estimates. Correct?

Jon Howie

They are except for the labor one that Andy mentioned that particular one was for the first quarter but then I gave the guidance on that labor line should be in the low 33s for the year.

Bryan Elliott - Raymond James

Okay. So the 33 [indiscernible] that’s a Q1 number and then, okay.

Jon Howie

Yes.

Bryan Elliott - Raymond James

I’m a little slow. And okay. And then you said that we’ve had four weeks of the weather impact but we’re still tracking to Q4 sales trend so meaning the same store sales trend?

Jon Howie

Yes sir.

Bryan Elliott - Raymond James

Yes, okay. All right. Are any new stores coming in the comp base in Q1?

Steve Hislop

We had three, we ended the year Bryan this is Steve. We ended the year with 32 restaurants we had three stores roll into the first quarter comp store of sales base so the sales that I’ll report at the end of the first quarter will have 35 instead of 32.

Bryan Elliott - Raymond James

Okay, I think they went on day one.

Steve Hislop

They went on day one of 2014…

Bryan Elliott - Raymond James

Okay, all right. And then lastly, Jon am I doing this math right? You give us the $7.3 million of new store sales that you referenced in your prepared remarks on a 114 weeks so I can just take total sales about weeks and come up with a average weekly sales number that those however number of restaurants not in the comp base produced on average in the fourth quarter, correct?

Jon Howie

Yes. And I will caution that a little bit it is and that’s why we’ve been talking about so it is a little lower here in Q4 of 2013 than it has been and we’ll preface (Ph) said Q4 is generally a low indexing quarter for us and then you have the weather implications but yes nine of those stores that are in there are the 2013 stores that Steve was referencing earlier.

Bryan Elliott - Raymond James

Okay. And the 500k I believe of total weather sales impact that you’ve referenced some of those were in the comp store base because Texas was where the December weather…

Jon Howie

Right, there is about two thirds of those -- two thirds of the 500,000 was in the comp stores.

Steve Hislop

Yes and it was approximately on comp stores for the quarter Bryan about 1%.

Operator

Thank you. And at this time, we have no further question in our queue. I would like to turn the call back over to our management team for any additional and closing remarks.

Steve Hislop

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

Operator

Thank you. And again ladies and gentlemen that does conclude our conference for today. We thank you for your participation.

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