CHUY
#Thank you, operator, and good afternoon.
By now, everyone should have access to the third quarter 2017 earnings release.
It can also be found on our website at 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 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.
With that out of the way, I'd like to turn the call over to Steve.
Thank you, John, and thank you to everyone for joining us on the call today.
I'll start the call with an overview of our third quarter and then share our thoughts on development for the remainder of the year.
John will then review our third quarter financial results in more detail, before we open the call for questions.
As you're well aware, during the quarter, we faced operating disruptions from Hurricane Harvey in the Houston area and to a lesser degree from Hurricane Irma in the state of Florida that affected 36% of our store base.
In total, we lost 44 operating days during the third quarter from these 2 storms as well as a reduced sales days leading up to these storms and then subsequently after reopening the stores, as certain restaurants were not able to remain open for normal operating hours, which resulted in approximately a $1.2 million loss in sales.
Included in our $0.19 of reported earnings per diluted share is approximately $0.03 of negative impact from these hurricanes.
I can't tell you how proud I'm of the efforts of our entire team to get our restaurants up and running in the wake of the storms.
While I'm sure you saw pictures in the news, they really didn't do justice to the challenges that these areas faced and in many cases, still face in the aftermath.
The response time of our people was nothing short of phenomenal.
While some of our employees suffered hardships with lost property and other personal inconveniences, I'm very pleased to say that no one was hurt, which is a blessing.
Additionally, I'm proud to note that our Red Fish relief fund has so far paid out over $70,000 in aid to our employees in both Texas and Florida related to hurricane disasters.
Switching back to our third quarter results.
Revenues grew 7.7% from last year's to $92.2 million and a comparable restaurant sales decrease of 2.1%.
To provide a bit more context, comparable sales in the quarter were negatively impacted by approximately 90 basis points as a result of the hurricanes and 50 basis points due to the strategic cannibalization.
We also faced a 60 basis point headwind as a result of new units entering the comp base on the back end of the honeymoon curve.
Additionally, despite the hurricane disruption, we saw underlining sales improvements in our business during September.
I'm also pleased to note that, while it's still early, comparable restaurant sales through October are running slightly positive.
So while we're not quite where we want to be, our underlying trends appear to be improving.
Our focus remains squarely on our core fundamentals of taking care of our guests.
We believe our service standards, our made-from-scratch offerings, our value and the unique atmosphere of our restaurants are our almost valuable assets, and we'll continue to manage our business for long-term health.
Additionally, as I spoke about last quarter, we have ramped up our local store marketing activities, including reviewing and updating plans for each store on a quarterly basis.
We're also continuing with social media campaigns to promote various store events, both on a local and systemwide basis.
We have also recently initiated catering tests in 3 of our markets.
While we have had a limited menu catering trailer and van in Nashville, since 2006, we have recently added new vans in Dallas and Houston, which in addition to the catering opportunity are also beneficial in terms of brand awareness.
If successful, we will expand it to additional markets in 2018.
Finally, we are in the beginning stages of starting our online ordering project that should be rolled out to the stores late in the second quarter of 2018.
Turning to development.
We opened 2 Chuy's restaurants during the third quarter of 2017.
One in Warrenville, Illinois, our first restaurant in Chicago land area, and one in Jacksonville, Florida.
Additionally, during the fourth quarter, we opened a restaurant in Pasadena, Texas, just outside of Houston, which was originally scheduled for a third quarter opening, but was delayed as a result of Hurricane Harvey.
We also recently opened our second Chuy's in the Chicago area in Schaumburg, Illinois.
For the balance of the year, we expect to open 2 additional restaurants in the fourth quarter, giving us 11 new restaurants in 2017.
We will also reopen one additional restaurant in Houston area that was severely damaged by Hurricane Harvey, and has been closed since August 26.
Our new unit in Miami, originally slated for the fourth quarter, will now open in early 2018 as a result of delays and damages associated with Hurricane Irma.
As stated on last quarter's call, we expect to open between 8 and 12 units in 2018.
Finally, in addition to having a long runway of growth opportunity ahead, we also have a strong balance sheet that gives us the flexiblility to use our excess capital to create additional value for our shareholders.
To that end, subsequent to the end of the third quarter, our Board of Directors approved the initiation of a $30 million share repurchase program through December 31, 2019.
We believe this authorization is indicative of the confidence we have in our core business, our ability to continue growing the Chuy's brand and our commitment to enhancing long-term returns for our shareholders.
With that, I'd like to turn the call over to our CFO, Jon <UNK>, for a more detailed review of our third quarter results.
Thanks, Steve.
Revenues increased 7.7% year-over-year to $92.2 million for the third quarter ended September 24, 2017.
The increase included $11.3 million in incremental revenues from an additional 136 operating weeks, produced by 12 new restaurants opened during and subsequent to the third quarter of last year, partially offset by the loss of 6 operating weeks due to the closing of our Charlotte and North Carolina locations during last year's third quarter.
We had a total of approximately 1,116 operating weeks during the third quarter of 2017.
As Steve noted earlier, with 36% or 32 of our stores impacted during the quarter from hurricanes, we lost 44 operating days as well as other limited sales days.
We estimate that the closed days and other limited sales days resulted in $1.2 million in lost sales.
Additionally, we estimate the lost revenue negatively impacted our restaurant operating profit margins by approximately 40 to 50 basis points and our operating income by about $0.03 per diluted share for the quarter.
Comparable restaurant sales decreased 2.1% during the third quarter, driven by a 3.7% decrease in traffic offset by 1.6% increase in average check.
Effective pricing for the third quarter was approximately 1.5%.
To reiterate Steve's earlier comments, comparable restaurant sales were negatively impacted by approximately 90 basis points due to the hurricane activity, 50 basis points as a result of the strategic cannibalization of 2 high-volume restaurants in Austin and 60 basis points from newer units entering our comparable restaurant base, whose honeymoon periods have lasted longer than the 18 months we allow before a restaurant enters the comparable sales calculation.
There were 67 restaurants in our comparable base at the end of the third quarter of 2017.
Turning to a discussion of selected expense items.
Cost of sales as a percentage of revenue increased approximately 40 basis points year-over-year to 26.7%, driven largely by inflation of 2.1% in commodity pricing related to produce and chicken and to a lesser degree, groceries, partially offset by favorable beef prices.
Looking at the balance of the year, we continue to experience elevated prices in produce and expect this continued volatility in pricing through the remainder of the year.
As a result, we expect cost of sales as a percentage of revenue in the fourth quarter of 2017 to increase approximately 40 to 50 basis points compared to the prior year quarter.
Labor cost as a percentage of restaurant revenue increased approximately 190 basis points to 35.2%.
The increase was attributable to disruptions from the hurricanes, new unit inefficiencies, ongoing hourly wage rate pressures and management labor, particularly managers in training as a result of our scheduled opening delays, specifically in Chicago, the Miami-Jacksonville area and Denver markets during 2017.
We are currently in the process of implementing a new point-of-sale system, which we expect to complete by mid-November.
In conjunction with this new point-of-sale system, we will implement additional modules on our labor scheduling program, which we believe will enhance our sales projections and the management of our scheduled hourly labor.
Additionally, we continue to review and approve ---+ improve operations and training processes related to our new restaurant-wide path to productivity to shorten the time it takes our new stores to reach a normal labor productivity rate.
Restaurant operating cost, as a percentage of revenue, increased 30 basis points to 14.3%, primarily due to increases in overall insurance costs, higher credit card and delivery fees and reduced operating leverage from the lost sales related to the hurricane activity.
Occupancy cost as a percentage of revenue increased approximately 30 basis points year-over-year to 7%, driven by higher rental expense as a percentage of sales in our newer locations, and again, reduced operating leverage on our existing stores due to lost sales related to the hurricanes.
General and administrative expenses decreased approximately $700,000 to $4.8 million in the third quarter, driven primarily by an increase in management salaries and equity compensation due to additional headcount to support our growth as well as an increase in rent, maintenance and utility cost related to the expansion of our office, which will benefit our business over the long term.
We are also beginning to see increases in professional fees associated with being in our final year of our emerging growth exemption status, which requires us to be SaaS compliant by the end of this fiscal year.
As a percentage of revenue, G&A increased approximately 40 basis points year-over-year to 5.2%.
On a year-to-date basis, G&A decreased by approximately 10 basis points to 5.3%, mainly related to decreases in performance bonuses.
In summary, net income for the third quarter of 2017 was $3.2 million or $0.19 per diluted share, compared to $4.6 million or $0.27 per diluted share in the year ago period.
Third quarter 2016 results included a $4 million pretax expenses related to the closure of 1 restaurant.
Excluding expenses related to the closure, adjusted net income in last year's third quarter was $4.9 million or $0.29 per diluted share.
We ended the quarter with $17.4 million of cash on the balance sheet, and we currently have no debt.
Turning to our 2017 outlook.
Given the current challenging retail and consumer environment as well as the lingering effects of the hurricanes, we are lowering our annual diluted net income per share guidance to a range of $0.96 to $1.
This compares to our previous range of $1.04 to $1.08.
As a reminder, 2017 is a 53-week year and our guidance includes an extra week, which will occur in the fourth quarter.
Our adjusted annual diluted net income per share guidance for 2017 is based on the following revised assumptions.
We now expect comparable restaurant sales growth of negative 1.5% to flat on a comparable 52-week basis.
Our full year comparable store sales growth still incorporates a negative 50 basis point impact resulting from the strategic cannibalization of 2 high-volume restaurants in Austin.
While this will help our system both from an operational and a return standpoint over the long term, we continue to expect it to have a near-term impact on comparable sales.
We now expect restaurant preopening expenses of $5.5 million to $5.9 million versus a previous range of $6 million to $6.5 million.
We now expect G&A expenses between $18.8 million and $19.1 million versus the previous range of $19.5 million to $20 million.
Our effective tax rate is now estimated to be between 26% and 28% versus a previous range of 28% to 30%.
We continue to expect annual weighted average diluted shares outstanding of 17 million to 17.1 million shares.
And due to the hurricane damage in Florida, we now expect to open 11 new Chuy's restaurants this year.
Lastly, our capital expenditures net of tenant improvement allowances are projected to be between $36 million and $41 million.
With that, I'll turn the call back over to Steve to wrap up.
Thanks, Jon.
We continue to take a long-term focus to our business.
We believe through a steadfast focus on our core fundamentals, maintaining a disciplined development strategy and returning excess capital, we can achieve consistent growth and solid shareholder returns over time.
Before I turn the call back over to the operator for questions, I'd like to thank all of our Chuy's employees for their hard work and dedication to earning the dollar every single day.
With that, we are happy to answer any questions.
Thank you.
Well, the seventh and eight period was following the same trend from the second quarter, Will.
And then, obviously, in the first and second period ---+ first and second week we dealt with both the hurricanes.
And obviously, that was dreadful, but from that is really we saw a slight uptick in specifically same-store sales really with our back-to-school time and a little bit with our Green Chile items.
And that's when we saw a little bit of an uptick that continued through, take away the hurricane noise through the September period and right into October, where we're slightly up through October.
And how I attribute that is all along as ---+ we don't knee-jerk.
We kind of ---+ when things get tough for us, we kind of knuckle under kind of like a tortoise, and we get in our shell and really evaluate everything that we do.
Everything we're doing from greeting of a person, to how we're cooking the food, to making sure we're taking care of large parties, very ---+ and with focus ---+ and we really focus on our people and loving on them and specifically, all our food.
So that we attribute to why we probably go into tough times a little bit later, and how I think we come out a little bit early.
And so that's what our real main focus has been, really nothing really outside our four walls.
Not a whole bunch.
Because the first one was Warrenville, which was our first one into the market where we built in a new emerging area.
We're pleased with how it started.
We just opened Schaumburg, not even 2 weeks ago and again, we're real excited about being in that market.
We've been in the Denver market roughly for about 5 or 6 months now or was it 2 ---+ 3 or 4 months, and again, we're excited about our entrance into those markets.
The awareness in Denver of the Chuy's brand is very, very solid.
The awareness in Chicago, we need to continue to work on.
Yes.
So the cannibalization ---+ I'll address that first.
The cannibalization of Boston will continue on through the first period.
In 2018, we should start lapping it in the second period of 2018, because we opened that store January 31, I believe, of 2017.
As far as the cost of going forward, there is a little cost associated with the labor going into that, because we have 1 closed store in Houston that was actually under about 7-foot of water.
So it's taken us a little time to get that store, remodel it and get it back opened.
We're hoping to open that by the end of November here.
And in the meantime, we've tried to keep some of those employees busy at other stores even if it cost us extra labor.
So that will be in that, it's not really directly identified labor that we can put in the hurricane line, but we're actually looking at possibly recording a gain in the fourth quarter, just kind of the crazy way GAAP requires you to record insurance proceeds.
And we expect those insurance proceeds either to be in the fourth quarter or the first quarter of 2018.
But all in all, that will broken out on one line item and it will eventually result in probably about $1 million gain.
Just wanted to circle back on the comps.
And last quarter, you mentioned some shifts in trends versus lunch and dinner and I think flipping between one or the other.
Curious how lunch versus dinner trends played out during the third quarter, and so far sort of in the quarter-to-date period.
Anything worth noting in those trends.
Well, obviously, in the whole last period there was a ton of noise, because of the hurricanes.
But as far as the numbers, it was fairly equal on lunch and dinner on the decrease.
Yes.
Well, it's also all the deleveraging in some of the other fixed cost and some of the other lines.
But a big piece of it was in the labor line.
We'll be comparing the sales through this year, through December 24, as compared to December 25 last year.
Okay.
All right.
When you're looking at that, that actually gives us an extra day in our 52-week comp.
Sure.
I'll ---+ Jon will give the percent.
As far as delivery, we roughly have delivery in about 60% of our stores, a little bit north of that.
I expect that to stay stable probably right around there, because we have a very healthy to-go percent on about $4.6 million, $4.7 million AUV.
So they will probably stay there.
We don't really want to get into cannibalizing our existing delivery services, our own pickup service.
And Jon, the percent.
Yes, we're at about 10.3% of overall to-go sales compared to our ---+ on our comp stores, and about 10.7% for the year.
That's up about 7% over last year.
I think it's a little early for that now.
I will tell you that we ran about a 2% inflation in labor this quarter, and we're about 2.5% year-to-date.
With ---+ we're not in a lot of the states that have the minimum wage increases.
Although, we are starting to enter some of those, like <UNK>land and Colorado and Florida.
So that may hit us from a weighted average standpoint next year a little bit.
But from a inflation standpoint, we've been pretty low from an industry, if you compare us to the industry.
Yes.
So I think, right now, we think it's the most flexible use.
If you were to use a dividend, I think you have to continue with that.
We want to have the flexibility to increase the number of stores maybe in the future.
And we don't ---+ one thing we don't want to do is to use leverage to buy it back.
So we currently have about $17.4 million on the balance sheet that we'll currently use right away.
We're not going to use all that obviously, but then we'll use future cash flow for the rest of it through the end of 2019.
Yes.
We had initially for the first couple of weeks a little bit extra out of Houston with the people going in there seeing everything.
But not really from our existing guests over there, because they're dealing with this horrible disaster over there.
And then that got really cloudy, believe it or not, because of the playoff games with the Houston Astros, and that definitely hurt us at the end of the last few weeks of the things.
Not so much ---+ and we didn't get that a big of a bounce after the hurricanes in Florida, because it really ---+ it was kind of swept through there and was definitely with the electricity issues.
But overall, everywhere else it's been pretty consistent pickup all throughout the country.
No.
Yes, I mean what makes the Austin market special, I guess, from a cannibalization standpoint is those ---+ the 2 stores that are being cannibalized are our 2 highest volume stores in the company.
So they ---+ it definitely has an detrimental effect on those stores.
However, the new store is doing very, very well, so that more than offsets the cannibalization over the long term.
Well, we're slightly positive to date, obviously, and really the puts and takes are roll overs of some really not so good sales last year, especially during the December period.
And so to the extent we get to that, we're projecting those periods to roll over and be quite positive there in December.
And we're cautious with that.
Obviously, I'm not hearing ---+ I don't know if you are, I'm not hearing a real positive retail spend for the rest of the year, specifically at all the malls and stuff, because of a variety of things, whether it be Amazon or what.
So we're very anxious about the holiday season.
Right.
And those both fall right there in December.
So that's really the puts and takes of December.
Yes, just one more quickly, if I could.
Jon I wanted to circle back on the margin assumptions embedded in the fourth quarter guidance.
And appreciate the color on food cost, but with all the moving pieces of the extra week that will have a pretty meaningful impact on some of the other lines, would you be able to give some guardrails maybe on the labor line or maybe just overall store level margins what your expectation is for the fourth quarter.
Right now, we're expecting labor to be up over last year, probably about 50 to 60 basis points.
And the reason for that is really not existing as I've spoken with all of you I think in the past, we expect to get a little leverage with that extra week in the fourth quarter.
However, given the push back of some of our store openings, we're now opening 4 new stores in the fourth quarter as well as reopening the 1 store that got damaged in the hurricane.
So we're going to have a lot of inefficiencies going through the fourth quarter.
So now I'm really expecting that to be the up over last year by 50, 60 basis points.
And another piece that's in there, as with the push backs of the Miami and the push backs throughout the year from Chicago and Denver, we've been carrying the full management teams a good extra month to 2 months, that's in our labor figures also.
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.
Thank you.
