Chuy's (CHUY) CEO Steve Hislop on Q2 2016 Results - Earnings Call Transcript

| About: Chuy's Holdings (CHUY)

Chuy’s Holdings (NASDAQ:CHUY)

Q2 2016 Earnings Conference Call

August 2, 2016 17:00 ET

Executives

Steve Hislop - President and Chief Executive Officer

Jon Howie - Vice President and Chief Financial Officer

Analysts

Will Slabaugh - Stephens

David Tarantino - Robert W. Baird

Jeff Farmer - Wells Fargo

Andy Barish - Jefferies

David Carlson - KeyBanc

Andrew Strelzi - BMO Capital Markets

Nick Setyan - Wedbush Securities

Brian Vaccar - Raymond James

Operator

Good day, everyone and welcome to the Chuy’s Holdings, Inc. Second Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, all participants have been placed in a listen-only mode and the lines will be open for your questions following the presentation.

On today’s call we have Steve Hislop, President and Chief Executive Officer; and Jon Howie, Vice President and Chief Financial Officer of Chuy’s Holdings, Inc.

At this time I’ll turn the conference over to Mr. Howie. Please go ahead, sir.

Jon Howie

Thank you, operator and good afternoon. By now, everyone should have access to our second quarter 2016 earnings release. It can also be found on our website at www.chuys.com in the Investors section.

Before we begin our review of 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 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 condition.

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

Steve Hislop

Thank you, Jon and thank you to everyone for joining us on the call today. We are pleased to report another quarter of strong operating results for the second quarter of 2016 which culminated in a diluted earnings per share of $0.34. Second-quarter revenues grew 16.6% compared to last year which were helped by comparable restaurant sales growth of 1% which is our 24th consecutive quarter of comparable restaurant sales growth. Additionally, our restaurant level EBITDA margins remained a very healthy at 21% as improvements in cost of sales were offset by increased labor market. Nevertheless, overall restaurant level profit increased a healthy 16.8% in the quarter. As [technical difficulty] the restaurant MC as a whole is facing its share of challenges. While we have been pleased with the overall performance of our business, we did begin to experience sales softness late in the second quarter and extended into the third quarter to-date. Regardless of these near-term challenges, we will continue to fixate on the execution of our fundamentals day in and day out.

In face we recently met with our operation leadership team in Austin to reinforce the benefits of taking care of our guest, focusing on our core strengths and managing our business for the long term. By executing this successfully, I believe the current environment provides us with the opportunity to increase our market share. Switching to development, we opened four new Chuy’s restaurants during the second quarter of 2016 in Fort Worth, Texas; Cary, North Carolina just outside of Raleigh; Sterling, Virginia and the Washington DC metropolitan area and Tallahassee, Florida. Subsequent to the quarter, we have opened two additional restaurants one in Chattanooga, Tennessee and one in Winter Park, Florida that’s in the Orlando area bringing our year-to-date development to eight new Chuy’s restaurant in 2016. We continue to be pleased with the performance of our new restaurants not only as it relates to their initial sales volume but also with regard to their initial profitability.

For 2016, we continue to expect to open 11 to 13 new restaurants including one additional restaurant expected to open during the third quarter. Our development team is already focused on potential 2017 site and I am very pleased that next year’s development plan is shaping up nicely.

With that, I now turn the call over to our CFO, Jon Howie for a more detailed review of our second-quarter result.

Jon Howie

Thanks, Steve. Revenues increased 16.6% year-over-year to $87.9 million for the second quarter ended June 26, 2016. The increase included $13 million and an incremental revenues from an additional 146 operating weeks produced by 13 new restaurants open during and subsequent to the second quarter last year. We had a total of approximately 962 operating weeks during the second quarter of 2016. Comparable restaurant sales grew 1% during the second quarter driven by 1.5% increase in average check and a 0.5% decrease in traffic.

We estimate that comparable restaurant sales in the second quarter were negatively impacted by 90 to 100 basis points as a result of weather. This adverse impact was offset by approximately 35 to 40 basis points due to the timing of Easter falling in the first quarter of 2016 compared to falling in the second quarter during 2015. All-in-all, we believe our normalized comparable restaurant sales run rate was a bit over 1.5% for the second quarter. There were 58 restaurants in our comparable base during the second quarter of 2016. We can say the restaurants to be comparable in the first quarter following 18 months of operation.

Turning to expenses, cost of sales as a percentage of revenue improved approximately 80 basis points year-over-year to 25.5% as we experienced a favorable impact from lower chicken, grocery and dairy prices offset by higher beef price. As we begin to lap last year’s favorable commodity prices, we would naturally expect the magnitude of year-over-year deflations to lesson in the second half of this year. We are also seeing a sequential increase in certain commodity prices early in the third quarter particularly with regard to produce, dairy and chicken. As a result, we expect cost of sales as a percentage of revenue in the back half of the year to be in the low 26% range.

Labor cost as a percentage of restaurant revenue increased 70 basis points to 32.7% driven by ongoing wage rate pressures and inefficiencies in our new unit development. We would expect labor pressure to continue and even increase for the balance of the year. Restaurant operating expenses as a percentage of revenue increased 20 basis points to 13.7%. This increase was primarily related to higher general repairs and maintenance costs partially offset by lower utility cost.

General and administrative expenses increased approximately 570,000 to $4.9 million in the second quarter. The increase was largely driven by ongoing investment from personnel to support our growth. As a percentage of revenue, G&A decreased approximately 20 basis points year-over-year to 5.5%. Pre-opening expenses during the second-quarter of 2016 was approximately $1.5 million compared to approximately $699,000 in last year’s second-quarter. The increase was due to the timing of our 2016 development schedule compared to last year. Looking ahead, we expect the balance of our pre-opening expense for the year to be evenly split between the third and fourth quarters.

In summary, net income for the second quarter of 2016 increased $5.8 million or $0.34 per diluted share as compared to $5.4 million or $0.32 per diluted share based again in the year ago period. We ended the quarter with $13.8 million of cash on the balance sheet and currently have no debt. Switching to our 2016 outlook, we are updating our annual diluted net income per share guidance to $1.5 to $1.8 versus our previous range of $1.3 to $1.7. This compares to adjusted diluted net income per share of $0.93 per share in 2015. We have recently experienced increased softness in our comparable store sales with this as well as recent industry sales trends at the backdrop. We believe it prudent to be a bit more conservative in our comp expectations. As a result, our guidance now assumes flat to 1% comparable sales growth for the balance of the year.

In addition, our annual diluted net income per share guidance for 2016 includes the following function, restaurant pre-opening expenses of $5 million to $5.9 million. We now expect G&A expenses between $17.8 million to $18.4 million. Our effective tax rate is estimated to be between 29% and 31%. We expect annual weighted average diluted shares outstanding of $16.8 million to $16.9 million and we expect to open between 11 and 13 new Chuy’s restaurant. Lastly, our capital expenditures tenant improvement allowances are projected to be between $33 million to $38 million.

Now, I will turn the call back over to Steve to wrap up.

Steve Hislop

Thanks Jon. In closing, we remain confident in our long-term plan while the entire industry faces a challenging external environment, we are fortunate to be able to lean on a long history of delivering high quality made from scratch food option and handcrafted cocktails to our guest at a tremendous value. This formula has resulted in 24 consecutive quarters of positive comparable restaurant sales and average unit volumes of $4.7 million. In addition, our new units continue to open well and we are already are looking in to a solid 2017 development plan. More importantly, the broad appeal of Chuy’s concept, our historical unit economics and flexible real estate strategy combined with our modest store base size present us with a large runway of opportunity for continued expansion. Before I turn the call back over to the operator for questions, I would like to take a moment to thank all of our Chuy’s employees. Our success has always been a testament to the hard work and dedication to earning the dollar every single day. With that, we are happy to answer any question. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take our first question from Will Slabaugh with Stephens.

Will Slabaugh

Yes, thanks guys. First, I just want to follow-up on the recent softness that you mentioned, just curious if you would give any more color on when that started and then how severe maybe you could characterize it as being and then lastly if there any geographical or day part details do you think might be helpful?

Steve Hislop

As far as day part details, no, we have kept our spread, I think you asked the same – similar question last quarter as well. And we are up little bit more at lunch than we are up at dinner but we are up in both on that. As far as geographical areas, it’s really not only in geographical areas, it’s a little bit, a little bit everywhere currently and as far as with the first one. Yes, I would say obviously in the fourth period which is the beginning of our quarter, we had all the rain and the flooding in Texas specifically but it even went all the way up to Nashville, Tennessee. So it’s probably in the middle of the quarter to the end right in there. Again we are still up but that’s when it probably started.

Will Slabaugh

Got it. And one more if I could on, on tickets in particular, you mentioned that that was still underperforming but what a relatively positive stay for you last quarter, I am curious if you are seeing any firming at all at this point and oil it tend to market such as Houston, San Antonio or if you think that could be something that would last to comparison that I assume are get a little bit easier in the back half that you are looking for that to firm up in the back half?

Jon Howie

Will, I tell you, well this is Jon. As far as the oil market and specifically Houston, it’s really hard to tell because that is where the brunt of our poor weather was this quarter. And so I think a lot of that was hit by the weather. So we really couldn’t tell whether that was firming up so much.

Steve Hislop

And as I forget, Texas as a whole were up there and moving forward. And again we have done well in this environment down there specifically in Houston and San Antonio. But it is still continuing, well there is still layoffs coming.

Will Slabaugh

Got it. Thanks, guys.

Steve Hislop

Thank you.

Operator

We will take our next question from David Tarantino with Robert W. Baird.

David Tarantino

Hi good afternoon. I got one clarification question on the recent comp trends, I think you mentioned that you are still positive but I guess could you please verify that and whether you are running inside that range, do you expect for the rest of the year?

Steve Hislop

Yes we are currently positive and that’s what the range is, and you know obviously, we don’t really know what’s going to happen 100% with the Olympics and all that type of stuff in the election. So we are being a little bit cautious that we have improved I believe.

Jon Howie

Well I guess one thing to add there David, if you were to look at our stack, two year comp trend, you know if you are looking at the comp trend that we are running for the stack just about 4.6 on average for the Q1 and Q2 and we are going to roll over and average for the back half of the year for 3.7. So we are rolling over a 4.2 last year. Remember that about 110 basis point was related to the mix last year and so we are lapping over that. We are not like I have been saying on some of these conferences, where I know it was to cover all of that mix that we saw last year about half of it. So we are seeing a little negative impact of rolling over that.

Steve Hislop

And now as the new menu we introduced last year in the second quarter on the new bar menu David with the bigger drink.

David Tarantino

Yes, got it, yes that was going to be my next question. So I guess when did that bar menu start, when did you start to lap that and I guess when did the mix went from being positive.

Steve Hislop

Effectively it was about the last two weeks of the second quarter last year. So basically the first part Q3.

David Tarantino

Got it, okay, and you. Okay, great, that’s helpful. And then I guess the second question I had was around the new unit productivity which looks pretty good relative to at least how I modeled it. So I guess related to that how are the 2016 opening tracking relative to your internal plan so far?

Steve Hislop

As I mentioned in my prepared statements is that we are very pleased that as far as the plan and not only pleased with the sales plan hitting expectations but also the profitability plan hitting expectation, so we are very, very pleased.

David Tarantino

Great, thank you very much.

Steve Hislop

Welcome.

Operator

Our next question is from Jeff Farmer with Wells Fargo.

Jeff Farmer

Thanks. Just following up on Will’s earlier questions, I would say almost every casual dining management team has been asked to share their opinion on the drivers of the slowing segment’s interest sales over the last two, three, four, five months. Can you guys share your opinion?

Steve Hislop

What I am just dunking is, what we do is when anything of that pops in externally, I kind of always look internally and that has been my approach and it will always be my approach. Right now, what we are working on is just the fundamentals of our business and then we really don’t worry about everybody else’s, still we are bullet out there. But we are just working on the fundamentals and doing everything right to start our four walls and we believe if we do that we will be able to improve our share.

Jeff Farmer

Okay. And then Jon, I heard your cogs guidance for the back half of the year but what level of commodity basket deflation did you see in Q2, I am not sure if you said that or I might have missed it and what do you expect in the back half of the year?

Jon Howie

Sure. Q2 deflation, Q2-over-Q2 was about 2.5%. If you are looking year-to-date we are down about 1.6% year-to-date. So we are expecting lesser deflation if you will on the back half. If you remember last year into Q3 we did, we had about 3.2% deflation and in Q4 6.28% deflation. So currently in the third quarter what we are seeing is that sequentially our prices over the second quarter have increased about 3%. But quarter-over-quarter it about 80 basis points negative or depleted quarter-over-quarter for the third quarter. So we are just through a period seven right now. So, as you can see that deflation has really decreased.

Jeff Farmer

Okay. And just one more on the labor line, you called out the 60 to 70 basis points of labor cost pressure, but I am just curious how that break down between your more typical wage and benefit inflation and how much would you attribute to sort of some of the new restaurant inefficiencies?

Steve Hislop

Well I tell you most of that is the new restaurant inefficiencies. If I were to look at the existing restaurants comparable restaurant, labor was pretty flat over last year. So most of that is all the inefficiencies in the restaurant. And how many have we opened last year, Jon?

Jon Howie

Last year we only opened one in the quarter, this year we opened four.

Steve Hislop

Thank you.

Jeff Farmer

Okay, thank you guys.

Operator

We will go next to Andy Barish with Jefferies.

Andy Barish

Hi guys, I think next year you may wind up entering three new Denver, Chicago and South Florida. Should we expect any kind of G&A infrastructure cost that’s built in association with that. And how do we view occupancy in those markets kind of versus the current fleet of stores?

Steve Hislop

I will take the front side and give Jon the back side, Andy. Now the infrastructure has already been planned and for the G&A section, obviously we will hire a local GM and supervisor but they are already on board currently, so we already have them seven. You know, me, I am usually out six months to a year when you are looking at new market, so they have been absorbed already. So the infrastructure is all set. As far as occupancies, Jon?

Jon Howie

As far as the occupancy that’s really built into those number Andy that we have been talking about expecting that occupancy to rise over the next few years, 20 or 30 basis points a year. So I do see that rising next year and as we get into these market, they will continue to go up a little bit. So we level off, I am thinking will level off around the high seven, low eight.

Andy Barish

Okay. And then what was the reasoning behind the G&A numbers going up by half a million or so?

Steve Hislop

Two reasons, one from a guidance standpoint, one whether the significant options that were exercised during the first half of the year that increased our G&A more than we were expecting for the payroll taxes. And then secondly, as I think I said before on these calls, we don’t really guide to a full performance bonus. We guide to the middle range and so we’ve adjusted that a little bit to the extent that that comes back down or goes up is all self funded as far as that performance bonus of the bottom line will go up flow.

Andy Barish

Okay, thank you.

Steve Hislop

Welcome.

Operator

[Operator Instructions] We will go next to David Carlson with KeyBanc

David Carlson

Hi guys. Couple of quick questions. Jon, did you say what the rate of wage inflation that you attribute during the second was?

Jon Howie

It’s right around 3.8%. I think it was 3.9% the first quarter. So, we are seeing pretty steady rate at 3.8% to 4%.

David Carlson

Okay. And I apologize I am sorry, go ahead.

Jon Howie

No, no, go ahead, I am sorry.

David Carlson

Apologize if I missed this. What was the menu pricing in the second quarter and what are the pricing assumptions for the third and the fourth?

Jon Howie

We pickup new price and we do it every year in February with beginning of our second period and it was approximately 1.5% and there will be no more pricing throughout this year. We usually do our menu pricing once a year.

David Carlson

Yes, so that was my follow-up to that was you know given the pressure you guys are experiencing on the labor line, I think Jon you indicated, you expect to see that pressure build the remainder of the year, are there any plans at this point to take additional pricing?

Jon Howie

No, no, what we are doing is that it was very important for us as price value equation in this tough time and also the fundamentals and we feel pretty well, obviously we feel that the deflation in food cost, it allows us to make sure we maintain the balance going forward.

David Carlson

Sure, enough. Thank you, guys.

Operator

We will take our next question from Andrew Strelzi with BMO Capital Markets.

Andrew Strelzi

Hi, good afternoon, guys. So I wanted to ask first on the guidance. Is the right assumption that the guidance raise is do really to outperformance here in the second quarter and the back half is such weaker or there is some offsets on the cost side given the reduction in the comps that maybe offset that and make the back half better?

Steve Hislop

No, I mean, obviously we had a beat of to the consensus of $0.03, so yes given our guidance on sales obviously we are expecting little slow down in the back half, so all of the increase was related to our beat here in the second quarter.

Andrew Strelzi

Okay. And on the commodity side, last quarter you guys talked about how much you were locked particularly on the beef side, has there been any change and have you started to look at 2017 yet for the commodities?

Jon Howie

We have started looking for 2017 and looking to some beef contract and but due to competitive reasons we are not wanting to get into that. But we have started looking at that and locked some of that in. But we are locked through the end of the year and then for beer starting into the next year.

Andrew Strelzi

Great, thank you very much.

Operator

We will take our next question from Nick Setyan with Wedbush Securities.

Nick Setyan

Hi Jon, thanks for taking the question, what’s your upper level with maintaining the 2016 kind of growth rate end of 2017 given obviously slower overall environment down there may be little bit more pressure on that unit?

Jon Howie

Again, we are expecting that as we move forward as what we kind of talked about in the past, you know we got to remember that we started our – all our growth actually in 2009. So we look internally and we are pretty comfortable still with the growth. And you know right now over the last couple of years you have seen that high teen number and that’s what we are expecting as we move forward.

Nick Setyan

Got it. And then Jon, just going back to the labor in Q2, I mean is it just the comp slowdown that you know in the past I guess we have some labor leverage, will it just be inefficiencies being offset by leverage maybe the comp base and are you seeing that leverage this time around?

Jon Howie

Last year we had a lot of, it wasn’t leverage, it’s really the initiatives that we implemented if you remember last year, Nick. So that got us a lot of favorability on that line item. We are rolling over those initiatives this year for the most part we are rolling over full on from the staging in the back half of the year. First quarter, we still saw some benefit from that because it wasn’t all implemented in the first quarter of 2015 but we are rolling over that So that’s flat to flat. And so what you are seeing now is a lot of the inefficiencies. Like I said we opened up four stores here in the second quarter versus one still are which I mentioned in the first quarter call and the back half of the year is looking more equal like three and three, opening three stores here in Q3 and three in – three to four in Q4 versus two last year in the third quarter and then four in the fourth quarter.

Nick Setyan

Got it, thank you.

Operator

We will take our next question from Brian Vaccar with Raymond James.

Brian Vaccar

Thanks and good evening. Just a quick followup on the labor cost side effect, so Jon, can you help us size the impact of the over time rule changes that take effect later this year as we think about your 2017 labor cost outlook?

Jon Howie

I will tell you, we are currently sizing that up and trying to figure out what we are going to do. There are several different options that people in our industry are doing and we are not really ready to talk about that right now. But you know ultimate goal is to make sure that we don’t shortchange our kids and make sure they’re going to get paid the same amount under the new regulations of the old regulation and with the over time they make get paid a little more. So we still haven’t figured out what that impact is going to be and from my understanding there may be some legislation that delay that a little bit.

Brian Vaccar

Yes.

Jon Howie

So we are not ready to talk about that yet, Brian.

Brian Vaccar

Alright fair enough. And then I also wanted to ask about the performance in some of the new markets you guys hit the last few years and sort of specifically as it relates to the back fill strategy that you shifted towards and can you give some color on how this has translated in building brand awareness and ultimately improving sales in some of these markets?

Jon Howie

Yes, I will go all the way back to 2013 if you look at those stores there comparing at a higher same store sales comparable level than existing. But the whole deal was to go back in this comp and these markets and get more awareness and I think it’s worked, it’s part of our obviously 24 consecutive quarters of same-store sales increases. So I should think that it shows that it’s working. Over the last few years, we have been doing about 20% new, 80% backfill. This year, it’s going to be not that quite that low. It’s going to be probably like a 40-60 meaning 40 new where we are going to go into the markets that I think Andy brought up earlier which would be the Chicago market, the Miami market. We are in Orlando and then we had the opportunity to look at and build out rather quickly in the Denver market which is kind of like a sister market from Austin, Texas. So those are our newer stores and the new markets and all the rest will be backed up.

Brian Vaccar

And those three new markets, those will all open in 2017 including, you will have a Denver opening or is that early 2018?

Jon Howie

No, they will at least have one in each of those markets this upcoming year.

Brian Vaccar

Great, alright, thank you.

Operator

That concludes today’s question and answer session. At this time, I would like to turn the conference back to Mr. Steve Hislop for any final remarks.

Steve Hislop

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

Operator

This does conclude today’s conference. Thank you for your participation. You may now disconnect.

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