Chuy’s Holdings, Inc. (NASDAQ:CHUY) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good day, everyone, and welcome to the Chuy’s Holdings First Quarter 2023 Earnings Conference Call. Today’s call is being recorded. [Operator Instructions] 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 call over to Mr. Howie. Please go ahead, sir.

Jon Howie: Thank you, operator. And good afternoon. By now, everyone should have access to our first quarter 2023 earnings release. If not, it can be found on our website at chuys.com in the Investors section. Before we begin our formal remarks, I need to remind everyone that part of our discussions today will include forward-looking statements. These forward-looking statements are not a guarantee 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 would like to turn the call over to Chuy’s President and CEO, Steve Hislop.

Steve Hislop: Thank you, Jon. Good afternoon, everyone, and thank you for joining us on our first quarter earnings call today. We’re proud of our results for the quarter with top line momentum from the fourth quarter continuing into the new year, resulting in comparable restaurant sales growth of 8%. In addition, we achieved store-level operating margins of 19.7%, up 70 basis points year-over-year, which continues to be among the best in casual dining industry. Combined with the extensive unit growth opportunity ahead of us, we have never been more excited about what lies ahead for Chuy’s. During the first quarter, we saw positive comparable sales growth across all periods with January and February benefiting from the Omicron variant and favorable weather comparisons.

Importantly, our positive momentum has continued into April. Ultimately, we believe our fresh, made-from-scratch food and drink and incredible value continue to resonate with our guests across the income spectrum and are the driving force behind our growth. Turning to our growth drivers, we’ll start with menu innovation. January saw the return of our fan-favorite, Veggie Enchiladas as well as the introduction of our new Wild Burrito and Hatch Beef Tacos through our Chuy’s Knockout platform. We continue to be excited about our CKOs as that platform drove incremental traffic and mix at approximately 2.5% of all entrees sold during the six-week period, which is in line with our first iteration in October. And our third iteration late April saw the Tex-Mex Burrito Bowl, Grilled Grouper Tacos and Creamy Green Chile Chicken Enchiladas added to the Chuy’s menu for a limited time.

While we are only two weeks into the current CKO period, we remain encouraged by the results we’ve seen thus far. Our momentum also continued with the growth of our off-premise channel, which represents 27% of total sales this quarter. While our off-premise mix is down modestly compared to last year, we are thrilled to see the off-premise dollars are up year-over-year with the reduced off-premise mix driven by continued improvement in our dine-in sales. Long term, we believe the off-premise will represent mid-20% of our sales with catering contributing approximately 4% to 6%. Finally, in terms of our marketing initiatives, we continue to put heavy emphasis on digital media, including the use of TikTok, organic influencer programs on Instagram, YouTube video advertising and a promotional advertising partnership with DoorDash.

These initiatives have allowed us to effectively communicate our defining differences from our incredible value, from made-from-scratch food and drink to our newly introduced CKO offerings and the unique overall experience at every Chuy’s restaurants. Moving to profitability, our ongoing focus on operational efficiencies and cost management resulted in a strong 19.7% restaurant-level operating margin, representing a 70-basis point improvement year-over-year. We believe these results showcase the strength of Chuy’s brand and our ability to generate restaurant-level margin that is among the best in the industry. As a reminder, at the end of January, we took approximately 3.5% pricing. We believe this is the appropriate level to balance our strong value proposition to our consumers with solidifying our margin profile as demonstrated by the results we were able to achieve this quarter.

Lastly, before I turn the call to Jon, let me update you on development plan. During the first quarter, we successfully opened one new restaurant in Fayetteville, Arkansas, bringing our total to 99 restaurants. Looking ahead, we remain excited about the organic growth opportunities ahead for the brand through accelerated unit expansion. For 2023, we continue to anticipate opening six to seven new restaurants focused on our markets where our concept is proven with high AUVs and brand awareness. With that, I’ll now turn the call over to our CFO, Jon Howie, to discuss our first quarter results in greater detail.

Jon Howie: Thanks, Steve. Revenues for the first quarter increased 12% to $112.5 million compared to $100.5 million in the same quarter last year. The increase was primarily related to improvement in our comparable restaurant sales as an additional 43 operating weeks from new restaurants opened subsequent to the first quarter of 2022. In total, we had approximately 1,278 operating weeks during the first quarter of 2023, and off-premise sales were approximately 27% of total revenue. Comparable restaurant sales in the first quarter increased 8% versus last year, primarily driven by a 6.2% increase in average weekly customers and a 1.8% increase in average check. Effective pricing during the quarter was just shy of 7%. Turning to expenses, cost of sales as a percentage of revenue decreased 60 basis points to 25.5%, driven by menu price increases taken subsequent to the first quarter of 2022, partially offset by approximately 5% commodity inflation.

Based on the current market conditions, we are currently expecting flat to slightly positive commodity inflation for the fiscal year, with deflation of low single digits for the second quarter. Labor costs as a percentage of revenue increased approximately 60 basis points to 30.3%, primarily due to hourly labor inflation of approximately 7% at comparable restaurants as well as incremental improvement in our hourly staffing levels as compared to last year. This was partially offset by menu price increases taken subsequent to the first quarter of 2022. We expect hourly rate inflation of mid-single digits for the fiscal year and the second quarter both in addition to a continuation of year-over-year staffing level increases. Operating costs as a percentage of revenue decreased 10 basis points to 16.1%, driven by lower to-go supplies from lower off-premise mix during the quarter as we continue to see improved dine-in sales.

Our occupancy cost as a percentage of revenue decreased 60 basis points to 7% as a result of sales leverage on fixed occupancy costs. Marketing expense as a percentage of revenue held steady at 1.4%. General and administrative expenses increased to $7.8 million in the first quarter from $6.7 million in the same period last year, driven mainly by higher performance-based bonuses. As a percentage of revenue, G&A increased to 6.9% from 6.6% during the same period last year. In summary, net income for the first quarter of 2023 was $8.2 million or $0.45 per diluted share compared to $5.5 million or $0.29 per diluted share in the same period last year. During the first quarter of 2023, we incurred $0.4 million or $0.02 per diluted share in impairment, closed restaurants and other costs compared to $1.3 million or $0.05 per diluted share in the same period last year.

The decrease was primarily related to a reduction in the rent paid on previously closed restaurants. Taking that into account, adjusted net income for the first quarter of 2023 was $8.5 million or $0.47 per diluted share compared to $6.5 million or $0.34 per diluted share in the same period last year. Moving to our liquidity and balance sheet, as of the end of the quarter, we had $82.6 million in cash and cash equivalents, no debt outstanding and $35 million available under our revolving credit facility. Turning to our 2023 outlook, we are now expecting an adjusted EPS of $1.71 to $1.76, which includes an estimated $0.08 to $0.10 – per share positive impact due to the fourth quarter of 2023 containing 14 weeks versus 13 weeks in fiscal 2022.

This is based in part on the following annual assumptions. G&A expenses, or expense of $29 million to $30 million, six to seven new restaurants, net capital expenditures of approximately $35 million to $39 million, restaurant preopening expenses of approximately $2.5 million to $3 million, effective annual tax rate of approximately 13% to 14%, annual weighted diluted shares outstanding of 18.1 million to 18.2 million. And with that, I’ll turn the call back over to Steve.

Steve Hislop: Thanks, Jon. We remain excited by the long-term opportunity ahead for Chuy’s. We’ve maintained our top line momentum, driven further improvement in restaurant margins and have an extensive pipeline of unit growth ahead. Together with our disciplined capital allocation, we believe we’ve put Chuy’s on a path to maximize shareholder value in 2023 and beyond. With that, we’re happy to answer any questions. Operator, please open the line for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is coming from the line of Nick Setyan with Wedbush Securities. Please proceed with your question.

Operator: Thank you. Our next question is coming from the line of Alex Slagle with Jefferies. Please proceed with your question.

Operator: Thank you. Our next question is coming from Todd Brooks with The Benchmark Company. Please proceed with your question.

Operator: Thank you. Our next question is coming from the line of Andrew Wolf with CL King. Please proceed with your question.

Operator: Thank you. Our next question is coming from Joshua Long with Stephens. Please proceed with your question.

Operator: Thank you. Our next question is coming from the line of Drew North with Baird. Please proceed with your question.

Operator: Thank you. [Operator Instructions] Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the floor back over to Mr. Steve Hislop for closing remarks.

Steve Hislop: Thank you so much. Jon and I appreciate your continued interest in Chuy’s and are available to answer any and all questions. Again, thank you, and have a good evening.

Operator: Ladies and gentlemen, this does conclude our teleconference. You may disconnect your lines at this time. We thank you for your participation.