Chuy’s Holdings, Inc. (NASDAQ:CHUY) Q3 2023 Earnings Call Transcript

Chuy’s Holdings, Inc. (NASDAQ:CHUY) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Good day, everyone, and welcome to the Chuy’s Holdings Third Quarter of 2023 Earnings Conference Call. Today’s call is being recorded. At this time, all participants have been placed in a listen-only mode and the lines will be open for questions following the prepared remarks. 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 Incorporated. 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 third 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.

Looking ahead, we plan to release our fourth quarter of 2023 earnings on Thursday, February 22, 2024, after market close. With that out of the way, I’d 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 call today. We are pleased with the solid performance during the third quarter, highlighted by revenue growth of over 6% and a comparable sales increase of 2%, including positive comp growth across all periods. Equally important, our ability to maintain a strong value gap relative to our peers has allowed our traffic performance to exceed our broader casual dining peers as we continue to gain share. We also drove improved profitability with a 17.6% increase in restaurant level profit dollars and an industry-leading restaurant level margin of 19.4%, representing a 190 basis point improvement over last year. This result further demonstrates our team’s ability to effectively and efficiently execute our four-wall operations.

We are proud of what our team was able to accomplish during the quarter. As we look towards the end of the year, we will continue to make progress on the various initiatives we have put in place to drive sustainable top line growth and profitability. With that, let me update you on our growth drivers. Our team’s focus on menu innovation has allowed us to generate one of our most successful Chuy’s Knockouts or CKO campaigns during the quarter with items like Hatch Green Chile Burger, Steak Burrito Bowl, and Chicken Tinga Enchiladas, clearly resonating with our guests and driving incremental traffic to our restaurants. To build upon this momentum and keep our offerings top of mind, we are adding a slight twist to our next CKO offering. In late October, we introduced our first barbell approach to the CKO platform with Braised Short Ribs as a higher-priced CKO menu item, along with stuffed avocado and the Elvis Presley Memorial combo offering.

We are encouraged by the early feedback thus far. We are also pleased with the continued strength of our off-premise channel during the quarter, mixing at approximately 28% of total sales as compared to 26% last year. Similar to last quarter, we enjoyed another solid performance from our — from the delivery channel, which was mixing at an approximately 11.4% of our third quarter sales, a 300 basis point increase versus last year. Catering also performed well with mixing increases 80 basis points year-over-year to 3.3% of total sales. To further capitalize on the catering opportunities ahead, we recently partnered with ezCater and are currently in the process of rolling out the platform to all of our restaurants. We continue to believe our off-premise channel will remain at least in the mid-20s of our sales with catering contributing approximately four to six of total sales long term.

Turning to marketing initiatives. We continue to optimize our digital media campaign using Google, TikTok, Instagram, and Facebook, including organic influencer content, YouTube video advertising and the promotional advertising with DoorDash and Uber. Ultimately, we believe this approach to marketing yields the best results in our effort to effectively communicate our defining differences, from our incredible value from made from scratch food and drinks to our exciting CKO offerings and overall differentiated experience at every Chuy’s restaurants. Finally, I would like to provide an update to our development plan. During the third quarter, we successfully opened our third restaurant of the year in Harker Heights, Texas, bringing our total restaurant count to 100.

We are also on track to open one additional new restaurant in December for a total of four openings for fiscal 2023. Due to continued construction and inspection delays, our New Braunfels, Texas restaurant are generally expected to open towards the end of December, will now open in late January. As we look forward to fiscal 2024, we are initially expecting to open six to eight new restaurants with a focus on markets where our concept is proven with high AUVs and brand awareness. The delay of our New Braunfels opening will likely move our development target to the higher end of this range. Overall, we are very pleased with the performance of our recent openings and remain excited about our organic growth opportunities ahead for the brand. With that, I will now turn the call over to our CFO, Jon Howie, to discuss our third quarter results in greater detail.

Jon Howie: Thanks, Steve. Revenues for the third quarter increased 6.4% to $113.5 million compared to $106.7 million in the same quarter last year. The increase was primarily related to the growth of our comparable restaurant sales as well as an additional 65 operating weeks from new restaurants opened subsequent to the third quarter of 2022. In total, we had approximately 1,300 operating weeks during the third quarter of 2023 and off-premise sales were approximately 28% of total revenue as compared to 26% a year ago. Comparable restaurant sales in the third quarter increased 2% versus last year, primarily driven by a 3.8% increase in average check, partially offset by a 1.8% decrease in average weekly customers. Effective pricing during the quarter was approximately 3.5%.

We expect to carry about the same amount of pricing for the remainder of the year. Turning to expenses. Cost of sales as a percentage of revenue decreased 220 basis points to 25.1%, driven by overall commodity deflation of approximately 5% as compared to last year as well as leverage on menu price taken subsequent to the third quarter of last year. Based on the current market conditions, we now expect low single-digit commodity deflation for the fourth quarter as well as the fiscal year. Labor costs as a percentage of revenue held steady during the quarter at 30.4%, primarily due to hourly labor inflation of approximately 5% at comparable restaurants, which was offset by a menu price increase taken subsequent to the third quarter of last year.

We continue to expect hourly labor inflation of mid-single digits for the fiscal year and in the fourth quarter. Operating costs as a percentage of revenue increased 50 basis points to 16.8%, driven by higher delivery service charges from an increase in delivery sales, an increase in restaurant repair and maintenance costs and higher insurance premium, partially offset by lower utility costs as compared to last year. General and administrative expenses increased $7.9 million — to $7.9 million in the third 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 6.3% during the same period last year. In summary, net income for the third quarter of 2023 increased $2.1 million or 41.8% to $7.1 million or $0.39 per diluted share compared to $5 million or $0.27 per diluted share in the same period last year.

During the third quarter of 2023, we incurred $1 million or $0.04 per diluted share in impairment closed restaurant and other costs compared to $1.2 million or $0.05 per diluted share in the same period last year. The decrease was primarily related to a reduction in rent paid on previously closed restaurants. Taking that into account, adjusted net income for the third quarter of 2023 increased $2 million or 33% to $7.9 million or $0.44 per diluted share compared to $5.9 million or $0.31 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 $69.9 million in cash and cash equivalents, no debt outstanding, and $35 million available under our revolving credit facility. We also purchased 538,907 shares of our common stock during the quarter for a total of $20 million.

And year-to-date, we purchased 622,428 shares of our common stock for a total of approximately $23 million. As of the end of the quarter, we had $27 million remaining under our $50 million repurchase program, which will expire on December 31, 2024. Finally, let me provide an update on our outlook. For 2023, we are now expecting adjusted EPS of $1.85 to $1.90 per share, again, $1.85 to $1.90 per share, 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 expense of $30 million to $31 million, four new restaurants, net capital expenditures of approximately $35 million to $37 million, restaurant preopening expenses of approximately $2 million to $2.3 million, effective annual tax rate of approximately 13% to 14%, and annual weighted diluted shares outstanding of $17.9 million to $18 million.

With that, I’ll turn the call back over to Steve.

Steve Hislop: Thanks, Jon. Overall, we believe our business fundamentals remain strong. Our team remains eager and energized to provide our guests with a unique Chuy’s experience they have come to expect when they visit one of our restaurants. With our continued focus on four-wall operational excellence, disciplined capital allocation and solid pipeline of unit growth, we have put Chuy’s on a path to maximize long-term value for our shareholders. With that, we are happy to answer any questions. Operator, please open the lines for questions.

Operator: [Operator Instructions] Our first question comes from Chris O’Cull of Stifel.

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Q&A Session

Chris O’Cull: I guess my question relates to traffic performance. Traffic has been negative in the last couple of quarters and the rate of check growth has started to slow. So I’m just curious, what do you think needs to happen to reverse that traffic decline? And I mean, are there specific company initiatives that can deliver the gains? Or is it going to require just a better consumer spending environment?

Steve Hislop: Great question, Chris. As we’re looking right now, we feel pretty good about where we’re going with our food initiatives. And we definitely have seen incremental bumps during our CKOs of roughly 100 to — 1% to 1.5%. So we think we need to stay the course on that. And then the rest of it is really just operating excellence and staying inside our four walls and just continue to execute out there. And that’s what our main, main focus on is really kind of keeping our heads down. But again, I think we have the proper amount of CKOs and the proper amount of really getting our messages out about our defining differences. And I think we’ll continue to stay that course.

Chris O’Cull: And then, Jon, I had a question about labor cost. I know labor costs as a percentage of sales were flat year-over-year. But if you look at the cost per operating week, it was only up — was up, I guess, at a lower rate than the wage inflation. So has the Company made any improvements or changes to the labor management system? Or are there anything you guys are doing to try to keep labor costs tight?

Jon Howie: No. I mean, we’re doing more of the same. We do have great transparency into kind of the hours that are spent and the hours per entree that are spent per store. We continue to look at that and manage it. We’ve — and the other thing too is that we’re doing a better job in overtime, decreasing overtime, which has helped dramatically in kind of the overall inflation of labor as well.

Chris O’Cull: Do you think there’s a lot left in terms of reducing overtime?

Jon Howie: A little bit, but not much. I think we’ve taken a lot out of that as we’ve gotten fully staffed. So I think we’re probably — I mean, we’re pretty happy where we are. There are some efficiencies that I think we’ll gain as sales grow, but I think we’re pretty happy where we are.

Operator: The next question comes from Todd Brooks of Benchmark Company.

Todd Brooks: First, I wanted to lead off on, if you look at the last couple of classes, and I know we’re kind of lagging back into a more normalized unit growth cadence. But can you look back on maybe the last couple of years of openings and talk through how those stores have produced relative to corporate average, just as we can kind of have an idea of the productivity with this strategy of infilling in kind of Chuy’s intense awareness markets?

Jon Howie: Yes. Todd, great question. And basically performing better than our expectations or at least at or better than our expectations, and those expectations were a little better considering that we’re in five of our states where the AUVs are better than the Company average. So we’ve been very pleased with the strategy and it’s coming to fruition.

Steve Hislop: Yes. And we’ll continue the strategy for the near future, definitely, the next three to four years.

Todd Brooks: Second question I had, Jon, is there any view on kind of contracting items? I know deflation has been a benefit here, and it’s still looking like a contributor in Q4 for you. But as you start to look to ’24, what’s kind of the contracting window? And how is that looking out there for items that you can fix the pricing on?