Chuy's Holdings, Inc. (CHUY) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day everyone, and welcome to the Chuy's Holdings Incorporated First Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode, and we will take 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 at Chuy's Holdings Inc. 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 2021 earnings release. If not, it can be found on our website at www.chuys.com in the Investors section.
Steve Hislop: Thank you Jon. Good afternoon everybody and thank you for joining us on our first quarter earnings call today. I hope everyone is staying safe and healthy. 2021 is off to a solid start reflecting continued momentum in our business. While we experienced severe winter weather affecting the central and Southern US that have a negative impact on our February period, our underlying sales trends were positive throughout the quarter, including March comparable sales of under 5% of 2019 levels. Also notable during the quarter was our continued focus on cost management and operating efficiencies that resulted in a 60-plus percent improvement in restaurant level profitability, as our restaurant-level operating margin almost doubled compared to the year ago period. In fact our quarter results included record restaurant-level operating profit both on a dollar and margin basis. Looking ahead, I am pleased to report that our positive trajectory has continued thus far into the second quarter with the comparable sales in our April period down just 0.3% from 2019 levels and average weekly volumes are substantially up from March. Our results are a direct testament to the hard work and resilience of our team members and I'm hopeful that this momentum will set us up well for the remainder of the year. Keep in mind that most of our restaurant remains subject to social distancing and capacity restrictions, some of them are a result of our own caution and we are staying prepared in an environment that has proven to be unpredictable. However, we are all eager to return to a more normal operating environment. And while the COVID situation is improving, our team members are maintaining their focus on three key pillars that have continued to resonate with our guests safety, convenience and value. Let me briefly update you on these. During the quarter, we continued testing our pay at the table solutions, as well as other payment methods, including QR code payment and pay by tech solutions. The feedback thus far has been very positive. Again, safety will continue to be the forefront of our operations, and we believe this investment will not only help us improve in-restaurant peace of mind, as more states are loosening up their dining room capacity restrictions, but it will also create efficiencies that will help our business longer-term.
Jon Howie: Thanks Steve. Revenues for the first quarter ended March 28, 2021 decreased to $87.7 million, compared to $94.5 million in the same quarter last year. This was primarily driven by traffic decline due to COVID-19, including the loss of 108 operating weeks due to various closures of restaurants during the latter part of March of 2020, partially offset by incremental revenue from an additional 12 operating weeks provided by new restaurants opened during and subsequent to the first quarter of 2020. In total, we had approximately 1,202 operating weeks during the first quarter of 2021. Comparable restaurant sales decreased 3.2% during the first quarter and included an 8% decrease in average weekly customers, partially offset by a 4.8% increase in average check. As you know during March, we began to lap the impact of COVID-19 on last year's sales. So to provide a clearer picture of our current sales trends, we have begun providing comparable sales as compared to 2019.
Steve Hislop: Thanks, Jon. With vaccinations becoming more widely available sales momentum trending positively coming out of the first quarter, and improving operational efficiencies we remain cautiously optimistic about the health of our business. Moreover, with our strong balance sheet and ample liquidity, we believe we have the means to remain nimble in this post COVID world. Most importantly, we will continue to ensure that our guests can enjoy the high-quality, made-from-scratch food in drink safely, wherever and wherever they choose.
Operator: We'll go first to James Rutherford from Stephens Inc. Your line is open.
James Rutherford: All right. Good afternoon Steve and Jon, hope you're hosting well. Congrats on the improving trends here. I wanted to confirm that, yeah. It's good to see. I want to start off about April result. I think the positive read on that number is you've effectively returned to pre-pandemic sales levels, which I'm sure feels really good. On the other hand, the step-up in the top and weekly sales levels between March and April, wasn't quite the same magnitude compared to some of your peers in the cash lending landscape. So I was just curious, if you could give any color on that and whether staffing challenges weighed on your ability to meet the demand, or maybe was there anything else at play there?
Steve Hislop: Yeah. The key for us is, if you come into our restaurants you noticed that we – most of our restaurants are all tables. There are freestanding tables. We don't have many booths. And so we're still in all our markets dealing with the six foot distancing, where if you have just booths you can have the dividers in between them. And so it's mostly on the capacity within – in our four walls is what it really is.
James Rutherford: Okay. Is there a way that you could share what your average capacity is today?
Jon Howie: Well we're running – James, this is Jon. We're running about 65% to 70% capacity right now kind of overall throughout the country, I would say. And the rest of it, what you're seeing here as we make up the 2019 levels, it's really on our to-go making up the difference.
James Rutherford: Got it. Okay. That makes sense. Shifting over to the labor side, I was curious if you could share how many total hourly employees you have in your restaurants today and how many you would need to hire to get back. Does that kind of service the full pre-pandemic dine-in traffic load? Just curious, if that's going to be an initiative?
Steve Hislop: Yeah. Yeah, of course. But at the end of the day until six foot distancing from a CDC perspective is eliminated which it isn't in any of our markets. I'd say, for that type of capacity levels, we're probably in that 85% to 90% employee rate as far as hired up. As we get into no six foot distancing, we would have to get into a little hiring. But again, that's normal as we move forward through anything.
James Rutherford: Yeah. Okay. And then just squeeze one more in, if I could and I'll turn it back to the queue. I noticed the comment on the manager retention program. I didn't quite understand entirely whether that was a one-time bonus, or kind of retention tool, or an ongoing salary and wage increase. So any color Jon that you could provide you great?
Jon Howie: Yeah. I mean, right now we're looking at kind of a one-time bonus, but paid out over a couple of quarters.
James Rutherford: All right.
Steve Hislop : And as we look at that – yes, as we look at that we see a lot of folks out there really who are spending a lot of money on new recruits and new managers in a recruiting basis. What we decided to do and we've always done this, is we constantly look at re-recruiting and retaining our employees because of obviously the great job they've done over the last 1.5 years dealing with this pandemic.
James Rutherford: Very helpful. Thank you.
Steve Hislop : Thank you.
Operator: And next we'll go to Drew North from Baird. Your line is open.
Drew North: Thanks. I was wondering if you could provide a bit of context on what margins could look like in the second quarter, if current sales trends continue maybe walking through some of the puts and takes on the margin line. I believe Q2 is typically the highest margin quarter just given seasonality where you're coming off very impressive margin performance again in Q1. So any sort of framework or context you could provide there would be helpful?
Steve Hislop : Yes. Drew, I would hate to say that it's going to be comparable to what we just did. I mean that was a monster quarter that we just put up. However, we are still -- until we get to full capacity we're still -- let's not say tourniquet mode, but we are in tourniquet mode in that we're operating our restaurants in that, with a reduced menu, the reduced capacities and so on and so forth. So I think when you're looking at the margins for Q2, you could still see margins in the low 20s, but probably not as high as what we had this quarter.
Drew North: Okay. That's helpful. And I wanted to just squeeze one in on the real estate market or just in terms of unit development. I know you have plans to accelerate new openings in the next couple of years. I was wondering if you've just seen any upward pressure as it relates to development costs or construction delays due to labor shortages out there? And if that's impacting the ROIC on new units? Anything that's developing in the kind of unit development outlook that is starting to present issues, I just thought I would get some color on? Thanks.
Steve Hislop : Yes. Sure. As we've stated before I think we've said that we're looking at four to six this year as we mentioned and then six to eight in 2021. And back to that low double-digit 10 stores starting in '23. Yes, we've definitely seen an increase whether it be steel, lumber, wiring and so forth. And that's probably in the tune of 20%, I'd say as we're currently sitting here looking at it. Obviously, we're looking at value engineering any one of our buildings. And you do see us this year, specifically being built in 2022 a smaller building in that 5500 square foot range that we'll have roughly a little bit more convenient to go area and maybe a little bit of a patio, but it's something that we're dealing with and it doesn't seem to affect and it won't affect our plans for our growth rates.
Drew North: That’s helpful. I'll send it back to the queue.
Steve Hislop : Thank you.
Operator: And next we'll go to Andrew Strelzik from BMO. Your line is open.
Andrew Strelzik : Hey, good afternoon. I know that you're seeing kind of the limitations from the social distancing across the entire system. But I was curious kind of under the hood, if you're seeing the same type of volume recovery in your more penetrated legacy markets as you are in some of your newer markets? Are you seeing kind of a gap emerge there? Any color would be helpful.
Steve Hislop : It's been pretty consistent throughout the last three periods. As far as the improvement in all the markets have been pretty sequential. So no it's not anything. One of our markets that we have some of the biggest jump is over in the North Carolina areas. But again overall it's pretty sequential throughout all the markets.
Andrew Strelzik : Okay. And then I know you reiterated kind of the mid- 20s off-premise mix and full banding recovery. But it's pretty impressive that you're seeing the mix stay as consistent as you are. I'm just curious are you lowering anything incrementally as the dine-in is recovering and you're retaining all of that off-premise business? Are you learning anything incrementally about that customer, that usage occasion anything that kind of informs your thinking incrementally from when we last spoke?
Steve Hislop : Well, I would say what we are learning is when the dining room comes back even though the mix is going down as a percentage, the dollar amount is staying creatively -- not the same consistent. And so what I think we've learned is that we've got a lot of new customers that are treating us in a to-go fashion and continue to do that, while we have some of our good customers and long-term customers coming back in the dining room. So I think it really gives us a little more confidence in that percentage that we're talking about even before the catering comes back that we can maintain that low 20s to mid-20s and the to-go.
Andrew Strelzik : Yes. Okay. And if I could just squeeze one more quick one in. I'm just kind of curious more broadly how you're thinking about the trajectory of margins here? Obviously, the sales should continue to recover, but you have commodities that are shifting maybe to -- it says it sounds like to inflation labor, which may not be quite as favorable and then eventually kind of some of the items coming back to the menu et cetera. I mean is this kind of a steady progression back towards kind of what you've been targeting longer-term from a restaurant-level margin perspective, or are there other puts and takes to kind of consider?
Steve Hislop : No, I think that's -- I think you pretty well just hit it on the head. I mean, as we bring back items obviously, we'll have -- bring back a little more cost in the back of the house. Cost of sales is starting to rise a little bit as we were talking about especially here in the second quarter. And so that's why we are expecting 2% to 4% kind of in the last few quarters -- the last three quarters of the year. And also we're rolling over, we're starting to roll over the menu change from last year. So we're not going to see -- so it's going to beat the true inflation. We're not going to see the efficiencies we have on the menu. Obviously, we're going to start rolling over and we're going to start rolling over against all this change that we made in the to-go on the labor -- hourly labor. So we've enjoyed deflation in our hourly labor over the last couple of quarters. We don't expect that going forward because we're going to be rolling over, specially in the second quarter total to-go labor for 1.5 months before we started opening our dining room. So we'll start seeing some inflation in those numbers. And so that's kind of why we're looking -- going through those long-term savings of what we've always said 300 to 350 basis points.
Jon Howie: Yes, off of 2019 numbers.
Steve Hislop : Yes.
Andrew Strelzik : Great. That’s super helpful. Thank you very much.
Steve Hislop : Thank you, Andrew.
Operator: And next we'll go to Chris O'Cull from Stifel. Your line is open.
Chris O'Cull : Hey. Good afternoon, guys.
Steve Hislop : Hi, Chris.
Chris O'Cull : I just had a few more questions on the margin outlook. I'm curious, do you think when the traffic needs to get back to the 2019 levels before you start to see labor cost as a percentage of sales to start to normalize?
Steve Hislop : Yes. I mean I think so. Stripping out inflation because I really think that we're going to start seeing some inflation here especially in the second quarter. Like I said, we've enjoyed the deflation year-over-year given the strength in our to-go. That's going to start rolling over here in the second, third, and fourth quarter as we roll over those numbers. So, we're going to start seeing some inflation in those numbers.
Chris O'Cull: Well, that was my next question. What do you expect normalized labor costs to look like? I mean in 2019 I think it was around 35% of sales is the 300 basis points of -- how much of the 300 basis points of margin improvement is coming from that line?
Steve Hislop: We said it's $250 million to $300 million. So, I mean we would expect labor percentage in that low 30% like 32%, 33%, similar to what we were. I think we can get back to those levels that we were when we first went public to be quite honest and maintain those going forward.
Chris O'Cull: But that may not start until you guys start to see traffic levels get closer to where they were in 2019?
Steve Hislop: Well, until we get our dining rooms full because once we get those -- the dining rooms full and bring back what we would consider our new full menu, that's when you're going to start seeing those percentages going up. And so that's going to be the last -- probably last quarter of this year going into first quarter of next year.
Chris O'Cull: Okay. And then how do you expect bringing items back to the menu to affect cost of sales in the second quarter?
Jon Howie: Not much in the second quarter except for just inflation Chris because again until the six-foot distancing is eliminated, you're not going to see me play too much with the menu until that starts going away because then as I open up my dining rooms and we get back to more normal running is when you'll see me add some menu items and some labor.
Chris O'Cull: Okay, great. Thanks guys. Congrats on a good quarter.
Steve Hislop: Thanks Chris.
Operator: And next we'll go to Nick Setyan from Wedbush Securities. Your line is open.
Nick Setyan: Thanks and congrats again on the great numbers. I just want to concentrate a little bit more on the growth that hopefully we'll see. Can you just remind us what the new unit target AUVs and margins are going forward?
Steve Hislop: Sure. I mean we're looking at this smaller prototype. And what we're trying to look for in that is minimum revenues of about $3.5 million in that new box. And we're looking at margins still in that with that 3.5% in that 17% range, which should get us on the investment of 28% to 31% close to that 30% margin.
Nick Setyan: And I guess if we think about kind of more of a balanced annual unit portfolio where you have some stores maybe in Texas, et cetera. I mean $3.5 million is probably on the very low end, right? I mean on balance we should probably see $4 million plus?
Steve Hislop: Yes, I mean we were looking at -- and why I say the $3.5 million I mean we're using the East side. Again we -- I think we said this last time we're looking at five states five to seven states that we've done very, very well in from an AUV standpoint. And what we're looking for are different locations that will at least do $3.5 million and not cannibalize existing sites of more than 5%. So, that's our criteria. Yes, we would expect those sites to do more in the end but that's our minimum target from a revenue standpoint.
Jon Howie: Where we'll hit our hurdle of the 17% and the 30% cash-on-cash return if we did that, but obviously, we expect to do more.
Nick Setyan: And in terms of the two new units I mean is there -- I mean I guess especially one of them was really, really new but any color on the average weekly sales thus far?
Steve Hislop: Yes, we're very happy with them especially opening them in the COVID market like we have been but we're pleased and they've both exceeded our initial expectations.
Nick Setyan: Yes. Great. And then just on G&A, Jon any early thoughts on what Q2 might look like and what the year might look like?
Jon Howie: Yes, I'd tell you G&A was a little high this quarter because we had quite a few option exercises as well as vestings of stock that caused a lot of employee taxes to be paid. And so taking that it's really heavy in the first quarter but that doesn't exist in the second, third, and fourth quarter as well as the performance bonus that was booked. So, I would expect in the latter quarters second third and fourth that to be reduced by 500,000 to 600,000 as we go through the second third and fourth quarter as compared to Q1.
Nick Setyan: Per quarter, right?
Jon Howie: What's that? About per quarter. Yes.
Nick Setyan: Yes, okay. Thank you very much.]
Operator: And next we'll go to Andy Barish from Jefferies. Your line is open.
Andy Barish: Hey guys. Just wondering on the pipeline building for 2022, are you seeing some benefits out there from closed stores things that you can convert as you've done in the past? And how many of those do you think next year will be the 5,500 square foot prototypes?
Steve Hislop: Any of our prototypes that we'll do will definitely be the 5,500. Obviously like we've always done in the past Andy. We love hermit crabs. And we love remodels and we'll look at the space as long as it's in the right area. But we're looking at that. As far as our market points where our markets are we haven't seen a whole bunch of closings. We're not in California. We're not in New York and all that type of stuff. So, we haven't seen a whole bunch of closings. If and when they do come, which I think are going to be more in the second half of the year we'll definitely look at those opportunities, especially for some remodels. But you'll see any prototype we do in 2022 will be the 5,500. And then we obviously will continue to look at opportunities in the remodel markets.
Andy Barish: Got you. And then Jon on the expense line on the operating side of things I mean as dining rooms start to normalize, do you expect that to pick up with things like utilities coming back and some of those smaller expenses that may have gone away last year when you guys hunkered down?
Jon Howie: Yes. I mean it should come back. But with the sales, we should get a little leverage on that line item. So, when you're looking back at 2019 numbers, as we get some leverage on that line item without the exception of delivery that's probably going to be 40 or 50 basis points higher because of the mix of that -- of delivery fees and also to-go supplies. But other than that, I think the leverage should bring them back closer to your 2019 as we approach the 2019 levels.
Andy Barish: Great. Thank you very much.
Jon Howie: Thanks.
Steve Hislop: Thanks, Andy.
Operator: Next we'll go to Todd Brooks from C.L. King and Associates. Your line is open.
Todd Brooks: Hey. Good afternoon, guys. Hope you're well.
Steve Hislop: You too.
Todd Brooks: A few tag ins -- thank you. A few tag ins left. So, Steve you talked about once you can normalize capacity in the restaurant adding items back to the menu. Will the menu go fully back to what it was? Will there still be a streamlined nature to it, or is there any efficiencies or maybe swaps for different types of items where you would expect some cost benefit, even as you start to restore items?
Steve Hislop: Yes. I mean it will not go back to the size of the menu that we had pre-COVID. A simple fact that we kept all our big sellers, and we'll add on a few items probably a handful to 10, over the next -- as we release from the six foot distancing, but no -- but we've already planned on some efficiencies and we're going to carry those through obviously, the rest of this year then as we move into a full menu from 2022 on.
Todd Brooks: That's great. And then at the restaurant level, what are you seeing as far as alcohol mix? Is it kind of normalizing back to fiscal 2019 levels, or are people a little more exuberant and it's actually over indexing? What's your experience in the restaurant?
Steve Hislop: We're right in there around that 16.5% number. If you go back to 2019, we're closer to 18%. And the big thing for us, especially in the six foot distancing that's where we kind of have our waiting areas a lot in the bar area. And so obviously, that's not where we -- the six foot distance is where it's probably now not everybody is going in there and just waiting around. Obviously, it's not allowed. So that's definitely affected us. Once we get rid of the six foot distancing, we think where we can move up very quickly to that 18% and continue on from there. But we're pretty pleased honestly in a time and in place that our 16.5% is probably a pretty strong number definitely in the casual dining environment.
Todd Brooks: Okay, great. And final one for me. Jon, you talked about off-premise maybe settling out in the mid-20s. Does that include thoughts on catering? And where are we recovery-wise relative to when you think Chuy's can start pushing on the catering opportunity again? Thanks Jon.
Jon Howie: Well, yes, oddly enough. Yes, that would include catering getting back to the mid-20s, but we're starting to see it come back in catering, to be quite honest that we're booking some weddings and some things like that. It's not coming back strong yet, but it's definitely coming back. And we're not opening new markets like we were scheduling going into 2020 scheduling to do. So, as soon as we get out of the six foot businessing, we'll start scheduling opening those markets and expanding that like we were going to in 2020.
Steve Hislop: Yes. Our hope is that we see hopefully some softening of it, specifically getting into the fourth quarter as we get into the holiday period.
Todd Brooks: That’s helpful. Thank you both.
Jon Howie: Thank you.
Operator: And next we have a follow-up question from James Rutherford from Stephens. Your line is open again.
James Rutherford: Thanks. I just wanted to get back on the margin piece for a minute. It's extraordinary kind of leverage you're seeing with the new operating model. And even with some commodity inflation and labor costs returning, I'm curious Steve, do you see an opportunity to build additional value into that Chuy's experience, whether it's portion size, price or something else, if there's something in Nacho Car or something like that. As the six foot distancing goes away, just to kind of extend your lead on the value front. Thank you.
Steve Hislop: I think our value equation is the best in the business as currently right now. But one thing that we will be looking at is you'll probably not see us come back out with the Nacho Car again because of the buffet style on that from a health department point of view. You will see us looking at some value plates, specifically for happy hour on the food side as we get rid of the six foot distancing.
Operator: All right with no further questions, I'd like to turn it back to Steve Hislop for any closing remarks.
Steve Hislop: Well, thank you so much. Thanks to 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.
Operator: And that does conclude our call for today. Thank you for your participation. You may now disconnect.
