Chuy’s Holdings, Inc. (NASDAQ:CHUY) Q2 2023 Earnings Call Transcript

Chuy’s Holdings, Inc. (NASDAQ:CHUY) Q2 2023 Earnings Call Transcript August 6, 2023

Operator: Good day, everyone, and welcome to the Chuy’s Holdings Second 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 second 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 third quarter 2023 earnings on Thursday, November 2 after the market closed. With that out of the way, I’d like to turn the call over to Chuy’s President and CEO, Steve.

Steven Hislop: Thank you, Jon. Good afternoon, everybody, and thank you for joining us on our call today. Our results marked another strong quarterly performance with second quarter revenue growth of over 7%, including a 3.2% improvement in comparable restaurant sales. During the quarter, we saw solid comparable sales growth across all periods. Moreover, our strong top line momentum has continued, and we are pleased with the results we’ve seen thus far into the third quarter. In terms of profitability, we grew restaurant level operating margin dollars by over 21% and generated an industry-leading restaurant level margin as of a percent of revenue up 21.6%, which represents a 250 basis point improvement over last year. We are proud of what our team was able to accomplish during the quarter and believe that these results are a testament to the continued progress we are making on the various initiatives we’ve put in place to drive sustainable top line growth and profitability.

Moving on to our growth drivers. We continue to focus on menu innovation through our Chuy’s Knockouts, our CKO platform. In April, we introduced our guests to several exciting menu items, including the Tex-Mex Burrito Bowl, Grilled Grupo Tacos and Creamy Green Chile Chicken Enchilada. The CKO performance continues to resonate with our guests as our April CKO drove incremental traffic and mix at a higher percentage of the sales than our previous CKOs. To build upon this excitement in late July, we launched our most recent CKO with Hatch Green Chile Burger, Steak Burrito Bowl and Chicken Tinga Enchiladas. Early feedback from our guests thus far has been very encouraging. Our off-premise channel also performed very well during the quarter, mixing at approximately 28% of total sales as compared to 27% a year ago.

The delivery channel helped drive our off-premise growth with over a 30% increase in volume, mixing now at approximately 10.6% of our second quarter sales, an increase of approximately 210 basis points versus last year. In addition, we saw a significant improvement in our catering channel as we continue to build out our catering markets, representing 3.5% of our second quarter sales, an increase of approximately 80 basis points versus last year. Over time, we continue to believe our off-premise business will represent at least the mid-20s of our sales with catering contributing approximately 4% to 6% of the total sales. In terms of our marketing initiatives, our optimized digital media strategy effectively communicates our defining differences from our incredible value for our made-from-scratch food and drink to our exciting CKO offerings and overall differentiated experience at every Chuy’s restaurant.

This includes the use of TikTok, organic influencer programs on Instagram and Facebook, YouTube video advertising and the promotional advertising partnership with DoorDash. Lastly, let me provide some update on our development plan. During the second quarter, we successfully opened 1 new restaurant in Oklahoma City, Oklahoma. Subsequent to the end of the second quarter, we opened 1 additional restaurant in Hawker Heights, Texas. We’re pleased to report that all of our recent openings have performed to our expectation. Additionally, in the second quarter, we closed 1 restaurant in the state of Illinois. This was a unique opportunity to exit the lease of a satellite location at no cost to the company, and we do not currently expect any additional strategic closures.

As we look ahead, we remain excited about our organic growth opportunities for 2023 due to the continued permitting and inspection delays that are outside of our control, we are now expected to open 5 new restaurants, 3 of which have already opened and the remaining units scheduled for the fourth quarter. Unit growth remains a core piece of our long-term growth model with our strategic focus on markets where our concept has is proven with high AUVs and brand awareness. We continue to believe we can achieve 10% unit growth over time and the growth we expect to achieve in 2023 and 2024 will be important steps to get there. 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 second quarter increased 7.3% to $119 million compared to $110.9 million in the same quarter last year. The increase was primarily related to improvement in our comparable restaurant sales as well as an additional 53 operating weeks from new restaurants opened subsequent to the second quarter of 2022. In total, we had approximately 1,289 operating weeks during the second quarter of 2023 and off-prem sales were approximately 28% of total revenue as compared to 27% a year ago. Comparable restaurant sales in the second quarter increased 3.2% versus last year, primarily driven by a 5.8% increase in average check, partially offset by a 2.6% decrease in average weekly customers. Effective pricing during the quarter was just shy of 7%.

And we expect to carry approximately 3.25% to 3.5% pricing for the remainder of the year. Turning to expense. Cost of sales as a percentage of revenue decreased 310 basis points to 24.7% driven by the leverage on menu price increases as well as overall commodity deflation of approximately 4% during the quarter. Based on the current market conditions, we continue to expect flat commodity inflation for the fiscal year with deflation of low single digits for the third quarter. Labor cost as a percentage of revenue increased approximately 40 basis points to 29.5%, primarily due to hourly labor inflation of approximately 5% at our 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 second quarter of 2022.

We continue to expect hourly labor rate inflation of mid-single digits for the fiscal year and third quarter in addition to a continuation of year-over-year staffing level increases. Operating costs as a percentage of revenue increased 10 basis points to 15.9% driven by higher delivery service charges from increase in delivery sales and an increase in repairs and maintenance costs, partially offset by lower utilities and higher sales leverage on insurance costs as compared to last year. General and administrative expenses increased to $7.7 million in the second quarter from $6.5 million in the same period last year, driven mainly by higher performance-based bonuses. As a percentage of revenue, G&A increased to 6.5% from 5.9% during the same period last year.

In summary, net income for the second quarter of 2023 increased $2.8 million or 36.4% to $10.7 million or $0.59 per diluted share compared to $7.9 million or $0.41 per diluted share in the same period last year. During the second quarter of 2023, we incurred $0.5 million or $0.02 per diluted share in impairment, closed restaurant and other costs compared to $0.7 million or $0.03 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 second quarter of 2023 increased $2.7 million or 31.6% to $11.1 million or $0.61 per diluted share compared to $8.4 million or $0.44 per diluted share in the same period last year.

Moving to our liquidity and balance sheet as of the quarter — end of the quarter, we had $82.6 million in cash and cash equivalents, no debt outstanding, $35 million available under our revolving credit facility. We also purchased 83,521 shares of our common stock during the quarter for a total of $3 million. As of June 25, 2023, we had $47 million remaining under our $50 million repurchase program, which will expire on December 31, 2024. With that, let me provide an update on our outlook. For 2023, we are now expecting an adjusted EPS of $1.80 to $1.85, 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; 5 new restaurants; net capital expenditures of approximately $30 million to $35 million; restaurant preopening expenses of approximately $2.5 million to $2.7 million; effective annual tax rate of approximately 13% to 14% and annual weighted diluted shares outstanding of 18.1 million to 18.2 million shares. With that, I’ll turn the call back over to Steve.

Steven Hislop: Thanks, Jon. Our passion has always been to provide our guests with the unique Chuy’s experience through our high-quality, made-from-scratch food and drinks offered at an incredible value. We believe this is clearly reflected by our performance year-to-date. Through our continued focus on four-wall operational excellence, thoughtful capital allocation and exciting pipeline of unit growth, we are well positioned to capitalize on our positive momentum and the vast opportunity ahead of us. Most importantly, I’d like to thank each and every Chuy’s team member for their hard work and dedication to earning the dollar every single day. With that, we’re happy to answer any questions. Operator, please open the line for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Joshua Long with Stephens.

Joshua Long: When we think about just the underlying environment and the strong results you reported, Steve, I think you mentioned that there was solid comps through the quarter. Curious if you could talk about that, what you’re seeing from the consumer? And then maybe just any other reads you have in terms of how they’re using your concept. It feels like perhaps the mix piece and the traffic pieces consistent, if you kind of look at the underlying piece that I would be curious what your perspective is, given kind of the update in the current environment.

Steven Hislop: We haven’t seen — it’s been pretty consistent over the last 1 year, 1.5 years, and we’ve been — we haven’t seen a whole bunch of pullback in any 1 area, maybe slightly in bar mix. And a few months back, probably slightly in , but since we added on our bowls, you’ve seen that rebound a little bit. So we haven’t really seen any main issue as far as our real differences our track had over the last year.

Joshua Long: Got it. That’s helpful. And when we think about some of the strength you called out on the CKO platform. Can you talk about how that’s progressing versus your expectations? And it seems like that maybe in April or in the 2Q period that brought in some incremental guests. I’m just curious if you attribute that to awareness, just culinary innovation, maybe all of the above, but anything that you could share there in terms of just…

Steven Hislop: Yes, all of the above. Thanks for answering the question. Yes, a little bit all of the above. We’ve realized probably 1%, 1.5% of traffic, I’d say, by the CKOs. And obviously, we just finished our third — we just finished our third, entering our fourth one ever for us. And so it’s really got a level of excitement starting with our people first. And then obviously, on all our digital marketing and so far that we’re doing is really getting people excited about trying some new stuff that’s out there. Like we mentioned before, we usually run 3 items that will run for a total of 4 weeks in our stores, so — 4 to 6 weeks. So we’re pretty excited about those. Coming up in the fourth quarter, you’ll see a little bit of a change in some of the CKO where we’re going to do a barbell approach to 1 item that will start in quarter 4, that’s coming up.

But yes, it’s built with a nice excitement and really, it’s nice to have some new things to talk about on a quarterly basis.

Joshua Long: Appreciate it. And then one last one, then I’ll hop in the queue. When we think about just the overall development environment. I mean we’ve heard a lot from your peers in terms of just permitting being the primary point of friction. It seems like you might be seeing something similar to that. But just curious how you’re thinking about development overall human capital investments to support that. And then specific to the 2 units that sound like they might have slipped as part of your updated unit development guidance. Do you think about those slipping into next year and being additive? Or does that just kind of push the entire pipeline now?

Steven Hislop: I’ll go with the end first. It’s definitely going to just push the whole pipeline out a little bit. That’s how that’s going to work with the construction, not only the permits and getting some people coming out and walking the units, it’s still the construction cost is still quite a bit higher than it has been. And we’ve seen that kind of flatten out, but it definitely hasn’t come back down yet. So we’re kind of also looking at that as we move forward. But you’ll see us this year in that 5 that we mentioned and then our long-term goal right around probably in ’25 is to get back to that 10% growth rate.

Joshua Long: Got it. One more there, do you think that you can accelerate that in 2024 kind of a step function, if you’re going to do 5 this year, is that the right number in absolute terms? Or can you step that up despite some of the headwinds that we’re seeing out there?

Steven Hislop: I’d say a couple more than 5. We’ll be looking at probably for next year and then by 25% to get back to that 10% growth, as I mentioned a second ago.

Operator: Our next question comes from David Tarantino with Baird.

David Tarantino: First question is on the recent sales trends. I think, Steve, you mentioned that you were pleased with what you’ve seen so far in Q3. I was wondering if you could elaborate on what you’re seeing more specifically. I know you have less pricing than you had in Q2. So any color would be helpful.

Steven Hislop: It’s really trending fairly similar to P6 in that 2-plus range, 2 to 3.