Chuy’s Holdings, Inc. (NASDAQ:CHUY) Q4 2023 Earnings Call Transcript

Chuy’s Holdings, Inc. (NASDAQ:CHUY) Q4 2023 Earnings Call Transcript February 25, 2024

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Operator: Good day, everyone and welcome to the Chuy’s Holdings Fourth Quarter 2023 Earnings Conference Call. Today’s call is being recorded. At this time, all participants have been placed in listen-only mode, and the lines will be open to 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 will now 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 fourth 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 first quarter of 2024 earnings on Thursday, May 9th, 2024 after the market close. With that out of the way, I’d like to turn the call over to Chuy’s President and CEO, Steve.

Steve Hislop: Thank you, Jon. Good afternoon, everyone and thank you for joining us on the call today. I am proud of what Chuy’s accomplished during 2023. We grew revenues almost 9.3% driven by comparable restaurant sales of approximately 3.3%. Our team’s ability to effectively execute on our four-wall operations resulted in a 200 basis point expansion of restaurant-level margins to over 20%, representing our best result in over a decade, excluding the COVID-impacted 2021 and among the best in the industry. And finally, we returned approximately $28.9 million to our shareholders through share repurchases enabled by the ongoing strength of our operating model. As we look ahead, we will continue to do what we do best to provide our guests with fresh, made from scratch food and drinks at an incredible value.

Despite weather issues across the country that has impacted the restaurant industry in January, we believe the initiatives we put in place to drive long-term sustainable top line growth and profitability has positioned us well to weather these near-term challenges. With that, let me provide some update on our growth drivers. Starting with menu innovation. As we mentioned on our last call, we introduced our first barbell approach to the CKO platform during the fourth quarter, and we were very pleased with how well it was received by our guests. In fact, this was our second most successful Chuy’s Knockouts campaign to-date. Following this success, we were thrilled to introduce to our guests the next CKO iteration in late January with Shrimp & Crab Enchiladas with Lobster Bisque sauce as a higher-priced CKO menu item, along with Macho Nachos and the Cheesy Pig Burrito.

Again, early feedback continues to be positive as our CKOs are resonating well with both new and returning guests. Alongside our exciting CKO offering, we recently added several new menu items to our permanent menu, including reintroducing the Appetizer Plate and adding the Burrito Bowls. If you recall, Burrito Bowls were part of our CKO platform during the second and third quarter of 2023 and this menu addition is a reflection of how well our Burrito Bowls performed last year and the high demand from our guests to bring them back to a permanent menu. Chuy’s Knockouts is not only a platform that we created to introduce our guests to exciting new menu innovations but also a tool to help us optimize our regular menu to further drive traffic to our restaurants.

We also delivered another strong off-premise performance during the quarter, mixing at approximately 31% with our delivery channel continuing to perform well at mixing at approximately 12%, a 160 basis point increase from last year. In terms of catering, we continue to roll out the ezCater platform to our restaurants and are on track to complete this rollout by the end of the first quarter. Our channel — our catering channel is currently mixing at approximately 4.8% for the quarter. Going forward, we continue to believe our off-premise channel will be at least 25% of our sales with catering contributing between 4% and 6% of total sales. While the fourth quarter is typically our highest mixing quarter for catering, we are encouraged by the growth we continue to see in the channel and believe we can achieve our long-term catering targets over the next 24 months.

In terms of marketing initiatives, we believe our current approach to marketing has been effective in communicating our defining differences from our made from scratch food and drink offered at an incredible value to our unique CKO offerings and the unique overall experience at every Chuy’s restaurants. To that end, we will continue to put heavy emphasis on digital media and optimize our campaigns through the use of Google, TikTok, Instagram and Facebook, including organic influencer content, YouTube video advertising and promotional advertising with DoorDash and Uber. In addition, we will include some spot on programmatic connected TV targeting live sports events during March Madness. Lastly, let me update you on our development plan. During the fourth quarter, we successfully opened one new restaurant in Terrell, Texas, bringing our total restaurant count to 101 as of the end of fiscal 2023, with four new restaurants opening — opened during this year.

As we look into 2024, we continue to have a robust pipeline with a goal to open between six to eight new restaurants focused primarily in core markets where our concept is already proven with high AUVs and brand awareness. We expect to open two restaurants in the first half of the year, including our first location of the year in New Braunfels, Texas, which opened this week. With that, I’ll now turn the call over to our CFO, Jon Howie, to discuss our fourth quarter results in greater detail.

Jon Howie: Thanks, Steve. Revenues for the fourth quarter increased 11.8% to $116.3 million compared to $104.1 million in the same quarter last year. As a reminder, our fourth quarter of 2023 included 14 weeks compared to 13 weeks in fiscal 2022. With the extra operating week contributing about $8.7 million of revenue. In addition to the extra operating week, the increase was driven by growth in our comparable restaurant sales as well as additional 62 operating weeks from new restaurants opened subsequent to the fourth quarter of 2022. In total, we had approximately [1,403] (ph) operating weeks during the fourth quarter of 2023 and off-premise sales were approximately 31% of total revenue as compared to 29% a year ago. Comparable restaurant sales in the fourth quarter increased 0.3% versus last year on a 13-week comparable basis, primarily driven by a 3.4% increase in average check, partially offset by a 3.1% decrease in average weekly customers.

Effective pricing for the quarter was approximately 3%. Turning to expenses. Cost of sales as a percentage of revenue decreased 240 basis points to 25.1%, driven by overall commodity deflation of approximately 8% compared to last year as well as leverage on our menu prices taken subsequent to the fourth quarter of last year. Looking into 2024, we currently expect commodity inflation in the low-single digits for the year. Labor cost as a percentage of revenue increased 30 basis points to 30.8%, primarily due to hourly labor inflation of approximately 4% at comparable restaurants as well as incremental improvement in our hourly labor staffing level. This was partially offset by menu price increase taken subsequent to the fourth quarter of last year.

We are currently expecting labor inflation of mid-single digits for fiscal 2024. Operating costs as a percentage of revenue increased 10 basis points to 16.7% driven by higher delivery service charges from an increase in delivery sales, an increase in restaurant repair and maintenance and higher insurance costs, partially offset by lower utility costs as compared to last year. General and administrative expenses increased to $8.1 million in the fourth quarter from $6.5 million in the same period last year, driven mainly by higher performance-based bonuses and management salaries as a percentage of revenue, G&A increased to 6.9% from 6.2% during the same period last year. In summary, net income for the fourth quarter of 2023 was $5.5 million or $0.31 per diluted share compared to $2.5 million or $0.14 per diluted share in the same period last year.

During the fourth quarter of 2023, we incurred $3.1 million or $0.14 per diluted share in impairment, closed restaurants and other costs compared to $3.2 million or $0.14 per diluted share in the same period last year. Taking that into account, adjusted net income for the fourth quarter of 2023 was $7.9 million or $0.45 per diluted share compared to $5 million or $0.27 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 $67.8 million in cash and cash equivalents, no debt outstanding and $25 million available under our revolving credit facility. We also purchased 167,535 shares of our common stock during the quarter for a total of approximately $5.9 million. For the full year of 2023, we purchased a total of 789,963 shares of our common stock for a total of approximately $28.9 million.

As of December 31st, 2023, we had $21.1 million remaining under our $50 million repurchase program, which will expire on December 31st, 2024. With that, we will now provide you with the following outlook for 2024. We are currently expecting adjusted EPS of $1.82 to $1.87 for 2024 as compared to adjusted EPS of $1.87 after adjusting out the 53rd week of 2023. This is based in part on the following annual assumptions. G&A expenses of $30 million to $31 million, six to eight new restaurants, net capital expenditures of approximately $41 million to $46 million, restaurant preopening expenses of approximately $2.7 million to $3.2 million, effective annual tax rate of approximately 13% to 14%, and annual weighted diluted shares outstanding of about $17.4 million (sic) [17.4 million].

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

Steve Hislop: Thanks, Jon. We believe our results demonstrate that our focus on our four-wall operational excellence continue to resonate well with our guests. Combined with thoughtful capital allocation, an excellent pipeline of unit growth we are well positioned to capitalize on our positive momentum and the long-term growth opportunities ahead of us, with a goal to maximize shareholder value in 2024 and beyond. In closing, I’d like to thank every Chuy’s team member for their hard work and dedication to earning the dollar every single day without whom none of these accomplishments would have been possible. With that, we’re happy to answer any questions. Operator, please open the line for questions.

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Q&A Session

Operator: Thank you, sir. At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question that we have comes from David Tarantino from Baird. Please go ahead, sir.

David Tarantino: Hi. Good afternoon. I’ve got a couple of questions. I’ll start with the question on kind of what you’re seeing from a comp perspective in the first quarter. I know, Steve you mentioned some challenges and I know we’ve seen that elsewhere. But if you could maybe give us an update on how you’re running in the first quarter? And then I have a follow-up related to that.

Steve Hislop: Yeah. Obviously, period one, we’re up against an enormous match up, but we also had a little bit of weather that probably cost us about a full percent of sales. But we’ve started off the year in a little tough situation in that 6% to 7% down approximately right around there. And not like — it’s better than that rolling into the second period.

David Tarantino: Got it. And then I guess the real question I had is just on the guidance for the year came in a bit below what we were expecting. And I just wanted to maybe unpack some of the factors that are weighing on the earnings performance for this year. And then, in particular, Jon, if you could maybe give some perspective on what sales or same-store sales assumption is embedded in your earnings guidance?

Jon Howie: Sure. Like Steve said, I mean, the first period was rather challenging around that 7% and the second period, we’re about half to three-fourths of that, so when you’re looking at the sales down, we’ve got a lot to make up to get up to flat. So right now, based upon that and kind of what we’re expecting, especially the rollover Uber that we’ve been talking about, that comprised about of 350 basis points last year of total sales. And so we’re going to start rolling over that full implementation by the end of this quarter. And so we’re looking at kind of flat to up 1% for the year in total same-store sales. Now obviously, with our pricing in that of approximately 3%, just shy of 3%. We’re going to have about 2% negative traffic in that — 1% to 2% negative traffic into that.

So with that being said, some of the changes, if I go through and get a walk forward from the EPS this year to next year, the big items in that is obviously $0.10 on that extra week that immediately takes it down from about $1.97 to $1.87, right. We won’t have that extra week in this year. Also, we were getting fully staffed by the end of last year as far as our staffing is concerned. And so that’s now rolled — that extra cost is rolling over into the current year. And so we’ll have not only inflation of 4% to 5% in labor, but now fully staffed. So that’s going to attribute to anywhere from probably 30 to 60 basis points of the loss to margin there. And then if you flow through kind of the changes, looking at the 53 impact that we talked about, the new store openings, we’re trying to ramp up the new store openings versus four last year.

So your added cost in openings and preopening costs as well as the inefficiency is going to be a larger portion of that as well as the decrease in investment balance, we were getting a sizable amount in interest income as well. So we expect that to be down about $0.06 or $0.07 in and of itself with a decreased balance, and the new store openings is probably another $0.06 to $0.07. So those are the big items.

David Tarantino: Yeah, that’s very helpful. Thanks, Jon.

Operator: Thank you, sir. Our next question we have comes from Andy Barish of Jefferies. Please go ahead.

Andy Barish: Very good evening, guys. Jon, can you address just the occupancy cost? That number really stepped down from kind of what’s in 7% for a while. Is that just sort of getting out of and releasing some leases now and things like that from cleaning up the system over the last few years?

Jon Howie: Are you talking in the fourth quarter, Andy?

Andy Barish: I am, yeah.

Jon Howie: Well, that is — a lot of that, Andy, is the extra week in the quarter. That’s totally leveraging that occupancy.

Andy Barish: Okay. So no fundamental change. That’s still somewhere in the 6.5%, 7% range going forward.

Jon Howie: Yes.

Andy Barish: Okay. And then just secondly, any updates? I mean it hasn’t been a lot of data points, but obviously, the development strategy has been fine-tuned and honed with e-sights. Anything we should be thinking about as you kind of think about sort of first year volumes with these stores in your core markets? And then I think New Braunfels is still the Austin area. So I haven’t thought about it in a while, but any impact or sales transfer that you’re expecting from Austin openings? And I think you have one more maybe this year as well.