Chuy's Holdings, Inc. (CHUY) on Q1 2022 Results - Earnings Call Transcript
Operator: Good day, everyone, and welcome to the Chuy’s Holdings Inc.’s First Quarter 2022 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 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. At this time, I’d like to 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 first quarter 2022 earnings release. If not, it can 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 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, I’d like to turn the call over to Steve.
Steve Hislop: Thank you, Jon. Good afternoon, everyone and thank you for joining us on our first quarter earnings call today. Overall, we were pleased with our results for the first quarter of 2022. While we’re faced external challenges in the form of Omicron variant of COVID and severe weather -- winter weather, we’re pleased with the sales rebound we saw toward the end of the quarter, which is extended into the second quarter to date. This rebound includes positive comparable sales in March and April compared to both last year and 2019. Despite these challenges, as well as the ongoing inflationary environment, our continued focus on cost management and operating efficiencies resulted in store level margin improvement of 360 basis points compared to 2019. This is in line with our stated expectation of 300 basis points to 350 basis points margin improvements in 2022 compared to 2019. While we’re pleased with the improvement in our store level margins from pre-pandemic levels, inflation continues to be a pressure point, which Jon will talk about in more detail. As many of you know, we pride ourselves in providing fresh made from scratch food and drinks at an incredible value to our customers, which we believe exceeds most of our peers. As a result, we have historically been very strategic with our price increases. In fact, we’ve only taken an average between 2 and 2.5 of price increases in the last 10 years, which we believe has armed us with a substantial pricing power as we navigate the current inflationary environment. For us to maintain the balance between retaining our restaurant level margin improvement and maintaining a strong value proposition for our guests, we plan on taking another price increase of about 3% to 3.5% during the third quarter, which we believe will still be below most of our peers. Turning to restaurant operations, our team continues to be fully engaged in executing against our key pillars of safety, convenience, and value, provide our guests with the unique Chuy’s experience they have come to expect. However, our work is far from done. As we navigate the current inflationary environment, we will remain focused on certain key aspects of our business including staffing, menu development, off-premise, and our marketing efforts. As I said in the past, our people are our most valuable asset and that’s one of the reasons why we put such a high emphasis in our staffing efforts to hire and retain the best hourly team members and managers. To that end, we believe the initiatives we put in place from paying our retention bonuses for our managers to providing referral bonuses to our team members for bringing new people in they will enjoy working with, we have continued to have us maintain our staffing levels despite the current tough labor environment. In terms of off-premise, we’re pleased with our 28% mix during the first quarter. On a dollar basis, our off-premise sales have remained consistent since we reopened our dining rooms in 2020. We believe we can maintain a low to mid 20% off-premise mix in 2022 and beyond. Another aspect of our off-premise is catering. As we mentioned in our last call, we are resuming our catering expansion to new markets and are attractive to have catering available system wide by the end of the year. We are also ramping up our marketing initiatives during the quarter with a heavy emphasis on digital media to not only introduce and highlight new menu items, but also utilize it as a recruiting tool. Our digital efforts will include the use of TikTok, organic influencer programs on Instagram, YouTube video advertising, and promotional advertising partnerships with DoorDash. We are also excited to launch our new website later this year, which is designed to reach a broader audience group and allow us to better connect with both new and returning guests. Finally, we now plan to open between four to six new restaurants in 2022, a decrease from previous guidance of five to eight restaurants, driven by the supply chain disruptions and construction labor shortages. As a reminder, the majority of our development is in the back half of the year and because of these disruptions, we believe some of these restaurants may move into 2023. With that, I will 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 14.6% to $100.5 million, compared to $87.7 million in the same quarter last year. The increase was primarily related to growth in customer traffic, as we continue to relax mandated indoor dining capacity restrictions for all of our restaurants, as well as a $3.1 million incremental revenue from new restaurants opened subsequent to the first quarter of 2021. For the first quarter of 2022, off-premise sales were approximately 28% of total revenue compared to approximately 32% in 2021, and 13% in 2019. In total, we had approximately 1248 operating weeks during the first quarter of 2022. Comparable restaurant sales increased 11.4% versus last year driven by 7.8% increase in average weekly customers and a 3.6% increase in average check. Comparable restaurant sales declined 1.7% versus 2019. As Steve mentioned earlier, the Omicron variant outbreak heavily impacted our performance during January and the early part of February, in addition to severe winter weather across most of central US, which negatively impacted comparisons over 2019 by approximately 120 basis points. However, we remain pleased with the improving sales trends we have seen beginning in the latter part of the first quarter and into the second quarter to date, which includes positive comparable sales in March and April compared to last year and 2019. Turning to expenses, cost of sales as a percentage of revenue increased 280 basis points to 26.1%, due to commodity inflation of approximately 18%. We experienced price increases across all of our commodity basket during the quarter, notably beef and chicken, as well as fresh produce, cheese, and grocery items. Based on the current market condition, we expect our second quarter commodity inflation to increase to approximately 25% as compared to 2021. Labor costs, as a percentage of revenue, increased approximately 140 basis points to 29.7%, primarily due to hourly labor rate inflation of approximately 13% as comparable restaurants as well as an improvement in hourly staffing levels as compared to last year. With the lingering labor challenges, we expect hourly labor inflation to remain that elevated levels of approximately 10% to 12% for the second quarter of 2022 as compared to 2021, in addition to continuation of the year-over-year staffing increase. Operating costs as a percentage of revenue increased 80 basis points to 16.2%, due to higher restaurant repair and maintenance costs and an overall increase in other restaurant operating costs, including increases in to-go supplies and utility costs as well as higher credit card fees due to an increase in dining and transactions that have higher transaction fees. Marketing expense as a percentage revenue increased 30 basis points to 1.4%, as we continue to ramp up our digital advertising campaigns, as Steve alluded to earlier. Our occupancy cost as a percentage of revenue decreased 70 basis points to 7.6%, as a result of sales leverage on fixed occupancy expenses, partially offset by higher percentage rent. General and administrative expenses decreased to 6.7 million in the first quarter from 6.8 million in the same period last year, driven by a lower performance bonus -- base bonuses, partially offset by an increase in management salaries and stock-based compensation. As a percentage of revenue, G&A decreased 120 basis points to 6.6%. In summary, net income for the first quarter of 2022 was 5.5 million or $0.29 per diluted share compared to 6.7 million or $0.33 per diluted share in this same period last year. During the first quarter of 2022, we incurred 1.3 million or $0.05 cents per diluted share in impairment closed restaurant and other costs. Taking that into account adjusted net income for the first quarter of 2022 was 6.5 million or $0.34 per diluted share compared to 8.5 million or $0.42 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 approximately 89.7 million in cash and cash equivalents, no debt, and 35 million of availability from our credit facility. During the first quarter of 2022, we repurchased approximately 718,000 shares of our common stock for a total of 19.7 million. As of May 5, 2022, we had approximately 21.9 million remaining under our $50 million repurchase program, which will expire on December 31, 2023. Lastly, while we are still not in a position to provide our usual financial guidance, we are providing the following directional metrics for fiscal 2022. As Steve mentioned earlier, we are now expecting to open between four and six new restaurants in 2022, a decrease from previous guidance driven by supply chain disruptions as well as construction labor shortages, which are general and subcontractors are experiencing currently during these times. We now expect net capital expenditures net of tenant improvement allowances to be approximately 22 to 23 million. We’re expecting restaurant pre-opening expenses to be approximately 1.5 million to 2.5 million into 2022. And lastly, our effective annual tax rate is now expected to be approximately 12% to 14%. With that, I’ll turn the call back over to Steve.
Steve Hislop: Thanks, Jon. We were pleased with our sales improvement to date and believe we were on the right path for recovery. The initiatives we have put in place will allow us to remain nimble and ready to capture the opportunities ahead. Of course, our accomplishments would not have been possible without the hard work and dedication of every Chuy’s team member and I’m proud to work alongside every single one of them. With that, we’re happy to answer any questions. Thank you.
Operator: And we’ll go first to Mary Hodes with Baird.
Mary Hodes: Good afternoon. Thanks for taking the question. First, I just want to ask on the quarter-to-date turn, are you willing to quantify the positive same store sales momentum you’ve seen to date in April, either on a one year basis or relative to 2019 just to level set?
Steve Hislop: Yeah, over 2019, it has been roughly about -- a little bit more than 2%.
Mary Hodes: Okay, great. Thank you. And then on the restaurant margin, just a couple questions, I mean, the labor line for Q1 came in better than we’d modeled. Was there anything temporarily depressing that line in Q1 or is that a good underlying run rate to think about for the balance of 2022?
Steve Hislop: Yeah, again, we’re about in our concept right now about 85% to 90% staff, so we still got a little bit more staffing to go, so that could possibly go up a little bit more.
Mary Hodes: Okay, good. Thank you. And then you know, if -- I guess if -- I know that the visibility on the inflation outlook is tough to pass through right now, but if you were to run rate the current spot prices and wage rates that you’re seeing now or in Q2 for the balance of the year, what would inflation look like for 2022 overall, given the comparisons get -- have tougher laps in the second half of the year?
Jon Howie: Yes, if you look at that, we’re well over 25% like I said in my prepared remarks for the second quarter. It gets down to about 14%, if we were looking at the current prices today, spot markets as in the end of the year. And so you’re still looking, with the prices that we have in the first quarter and the mid year, and then you’re probably still looking around that 20% on a weighted average, I would think.
Mary Hodes: Okay, great. And then lastly, is the philosophy on pricing that you’ll take what you need to stay in that 300 basis points to 350 basis points of improvement range, or what’s your current philosophy on pricing related to that?
Steve Hislop: Yeah, that’s kind of what we’ve said all along is what we’ll be looking at for this upcoming year. And again, the key for us is the value spread that we look at in every single market. So we’ll be looking at that on a competitive set. But right now, that was the approach on this one.
Mary Hodes: That’s great. Okay, I’ll pass it on. Thank you.
Jon Howie: Thank you, Mary.
Operator: Thank you. Next we’ll hear from Andrew Strelzik with BMO Capital Markets.
Daniel Gold: Hi, this is Daniel Gold on for Andrew Strelzik.
Jon Howie: Okay. Hi, Daniel.
Daniel Gold: Thanks for taking the question. Can you discuss how turnover at the manager and hourly level has trended?
Steve Hislop: Yeah, again, that’s much better than the industry average. We’re right around 100 to 105 in the hourly and about 29 in management.
Daniel Gold: Got it. And can you discuss any trends you’re seeing regionally and across the parts?
Jon Howie: No, I mean, they’re pretty -- from a performance standpoint, they’re pretty consistent throughout the geographies.
Daniel Gold: Understood. Thanks so much. I’ll pass it on.
Steve Hislop: Thank you.
Operator: Thank you. Next we’ll hear from Nick Setyan of Wedbush Securities.
Paul Hao: Hi, this is Paul Hao on behalf of Nick. Thank you for the question. My first question is, is there a way to maybe give us the AWS sales by month in Q1, and if possible, any insight on the April AWS?
Jon Howie: So the sales by month, if you’re looking at comp sales, versus 2019, as we said, was negative 2.4%, negative 4.5%, and then positive 0.9%. If you compare that to 2021, it was 7.6%, 26.1%, and 5.1%.
Steve Hislop: All up.
Jon Howie: All up, yeah, I’m sorry. All up, 7.6 positive, 26.1 positive, and 5.1 positive.
Paul Hao: Okay. And how about the blended menu price increase in Q1? And if possible, what is your expected price increase in Q2?
Jon Howie: The blended menu price was a little higher than say 3.5, we had about a 3.25% price increase in there in period two but we took the price last year one period late. So if you’re looking blended, it’s a little higher than that.
Paul Hao: Okay. And is there a way to -- where are you now in terms of like dining introduction versus pre-COVID, not sale, just transaction?
Jon Howie: We are -- I think we’re right around -- we’re still right around the -- from a transaction level high 70%, like 77%, 78%, from a transactional level of dining.
Paul Hao: And just one more question, how should we think about Q2, your margin, given that Q2 tends to be a higher average weekly sales quarter, and you have some incremental price increases flowing through. And how do you think about the food costs and labor inflation?
Jon Howie: Well, that’s a great question. So yeah, second quarter is our highest indexing, period. So when you’re looking at that, you would -- like we said in our prepared remarks, we’re looking at price increases in that 3.5% to 3.5% in quarter -- starting in quarter three. And so that wouldn’t be -- we don’t have those price increases in quarter two and then when you’re looking at -- I think we said on our prepared remarks, as far as commodities, we’re looking at about mid 20% increase in commodity and I believe 10% to 12% from a labor standpoint.
Paul Hao: Okay, got it. Thank you so much.
Steve Hislop: Thank you.
Operator: Thank you. And next we’ll hear from Todd Brooks with The Benchmark Company.
Todd Brooks: Hi, good evening, guys. Hope you’re well. Few questions; the 25% commodity basket pressure that you’re talking about for the second quarter, Jon, how much of that is just the spike in avocados and limes? And just wondering because that should be -- at least an element of it, hopefully, transitory with the growing seasons and regions changing out of Mexico right?
Jon Howie: Yeah, just -- let me get that in front of me here. Yeah, a big piece of that though, as you know, is chicken and beef right now, but on the second part of that is -- let me see here, avocados is about -- of the 25%, about really 1% of that and limes, it is about 1.5% of the –
Steve Hislop: Todd, 2.5% both.
Jon Howie: Yeah.
Todd Brooks: Great. Thanks. And then just wondering, as you look at your consumer, and obviously, you’re taking the second price increase and necessitated by inflation but I know, Steve, you’re very mindful of delivering value to the customer. What are you watching for consumer health? What are you seeing? Are you seeing any changes in behaviors as far as how they build tickets or frequency or maybe less utilization of third party delivery?
Steve Hislop: Not yet and not that I’m anticipating any also because of the value spread that we do currently have, but no, we’re seeing the incidences on beverage stays similar or improve. We’ve seen the incidence on appetizers stay as improved. And our level of to go has remained -- like I just mentioned in the prepared statement, pretty much the exact same number week in and week out since 2020. So now, we haven’t seen any big change except for us hold on to that 25 to 26 to 28, that last period and to grow volume compared to a year -- 2019, which is that 12%, 13% range.
Todd Brooks: Okay, great. Thanks. And then final kind of housekeeping one, Jon. With the hit from Omicron in the quarter, we talked about from same-store sales standpoint, but was there anything in either the labor cost line or the other operating costs line from this kind of one time from dealing with the Omicron outbreak and the staffing impacts in Q1?
Jon Howie: No, I mean, we did have -- that might have been a little reason for some of the staffing too, because we did have some store closures related to that because of the tracing and things like that. So we were -- we went down to go only and things like that, which obviously has better staffing percentages.
Todd Brooks: Okay, great. Thanks. I’ll jump back in queue.
Operator: Thank you. And there are no further questions at this time. We’ll turn the conference back over to Mr. Hislop for any additional or closing remarks.
Steve Hislop: Okay. 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, stay healthy, and have a good evening.
Jon Howie: Thank you.
Operator: That does conclude today’s conference. We thank you for your participation. Have a wonderful day.
