Q2 2020 Chuy's Holdings Inc Earnings Call
[music].
Good day, everyone and welcome to choice Holdings second quarter 2020, <unk> earnings Conference call.
Today's call is being recorded.
Hi, all the participants have been joined didn't listen only mode and the line will be open for questions. Following the presentation.
On this call today, we have Steve has slop, President and Chief Executive Officer, and Jon Howie, Vice President and Chief Financial Officer, I've always holding incorporate.
At this time I'll turn the conference over to Mr. Howie. Please go ahead.
Thank you operator, and good afternoon by now everyone should have access to our second quarter 2020 earnings release, if not it can be found on our website at www dot com in the Investor section.
Well, we began our review a formal remarks I need to remind everyone that part of our discussions today will include forward looking statements. These forward looking statements are not guaranteeing feature performance and therefore, you should not put undue reliance on them. These statements are also subject to numerous risk and uncertainties that could cause actual.
So to differ materially from what we expect we repeat for all of you to our recent FCC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition with data all the way I'd like to turn the call over to Steve.
Thank you John Good afternoon, everyone and thank you for joining us on the second quarter earnings call today, I hope, everyone is safe staying safe and healthy.
I'm encouraged within Carnival progress we made during the second quarter. Our results are a testament to our team's hard work in transforming our business and their relentless dedication and serving our loyal guests during this challenging called bid environment.
For that I'd like to thank every one of our team members and I couldn't be pottery to be working alongside this incredible group of people. If you recall, we took several steps at the onset of Colgate 19 to ensure that we will emerge a stronger brand. When this pandemic subsides, we transformed our restaurants into one have sufficient time mismatch.
Ill with enhanced takeout curbside pickup procedures as well as a delivery service through door data our national delivery partner in conjunction with our new operating model, we streamlined our menu offering trophy trade reduced number of entrees as was adding convenient family meal and beverage kits.
We also had to make the hard decision to for all some of our managers and employees and reduce our remaining teams salaries.
Starting in May we began the process of reopening our dining rooms in accordance with the state and local mandates and by the end of June we had opened all the all of the dining and our 92 stores that are currently open. We were also pleased to have rehired a majority of off for a lot hourly employees by the end of the second quarter as of today, our restaurants or.
Staff and we have returned to everyone salary to its normal level. It is understatement, just say that we're all eager to welcome our gets back in our restaurants, but our number one dollar will continue to be the safety and well being a both our employees and gas.
All in all our efforts have generated second quarter results that we are proud off with average weekly sales per restaurant, improving some sequentially throughout the second quarter from 38.8 thousand in April with no indoor dining 70.5 thousand in June with all dining rooms open. Moreover, even what there'll be opening of our dining room.
On the sales remained strong and continued to perform at a rate more than double its pre covered 19 levels. Despite recent roll back reopenings of our dining rooms from increased called good 19 cases in various states, including Texas and Florida, We're very pleased to see our sales volumes remained solid thus far in there.
At quarter end.
In addition to our improved top line performs we also made great strides and enhancing our operational efficiencies through better cost of sales and labor cost management, we were able to improve our restaurant level operating margin in the second quarter by 620 basis points. In fact in the June period, we were able to generate higher year over year.
Free cash flow despite lower sales, while we expect that our restaurant operating cost will increase when the dining room capacity restrictions are further loosen. We're confident that we can build upon our recent operational efficiency to positive positively impact our business over the long run.
Our dining rooms now open although at various limited capacity is based on state and local mandates will begin to resume on marketing effort in the fourth quarter with key messaging is on value convenience and safety value has always been a hallmark of to choose brand and combined with the convenience of our contact list pickup and delivery chain.
Sales as well the safety procedures were put in place in our dining rooms. Our guests can continue enjoy our freshly prepared creditable Mexican inspired offerings, either and the safe environment of our dining rooms, or and the comfort of their homes with that I'll turn the call to our CFO, Jon Howie to discuss our second quarter results in greater detail.
[noise] safety revenues for the second quarter ended June 28, 2020 decreased to 65.7 million compared to 113.1 million in the same quarter last year. The decrease was primarily driven by a traffic declined due to covert 19, including the loss of 117.
In operating weeks from temporary closures of nine restaurants in total we had approximately 1100 96 operating weeks during the second quarter of 2020.
As Steve mentioned, we transitioned our restaurant operation to off premise only at the end of the first quarter in reopened our dining rooms to varying degrees of capacity during the second quarter for the second quarter. Our off premise sales were approximately 60% of total revenue comparable restaurant sales decreased 39% during the second.
At quarter end included 42.8% decrease in average weekly customers, partially offset by 3.8% increase in average check.
Please note that we've laid out our sales improvement cadence for the second quarter by period in today's earnings release.
Turning to expenses.
Cost of sales as a percentage of revenue decreased 230 basis points to 23.5%, primarily as a result of switching to a limited menu and eliminating our complementary but they style chips and salsa Nacho car all in all commodity deflation for the second quarter was approximately one point.
Looking ahead, we are currently seen inflation in cost to sales increasing approximately 100 basis points during July as compared to Q2 and expect us to continue through Q2, and Q or two three in Q4.
Labour cost as a percentage of revenue decreased approximately 790 basis points to 26.4% as result of Furloughing, a substantial number of hourly employees and store management personnel when the company transition to an off premise only operating mile model hourly labor rate inflation on.
Comparable stores during the quarter was approximately 3.1% as Steve alluded to earlier in conjunction with ourselves improvement and dining room reopening we have since rehired a number of our furloughed employees and are now stat for our current volumes with that mine, we expect our labor cost as a percentage of sales to increase approximately.
500, 600 basis points during the third and fourth quarter from current quarter levels as we continue to expand the capacity of our dining rooms.
Operating cost as a percentage of revenue increased 220 basis points to 16.3% compared to last year's quarter, primarily due to increases in delivery service charges and to go supplies as a result of the growth and off premise business as well as the sales deleverage of fixed restaurant operator.
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Marketing expense as a percentage of revenue decreased 80 basis points to 0.6% driven by the suspension of our national level marketing initiative in response to covert 19 pandemic, while relying on a more cost effective local store marketing effort. However, as Steve mentioned earlier, we are planning to resume our marketing efforts.
During the fourth quarter and would expect a more normalized spend of around 1% to 1.5% of sale.
Fancy costs as a percentage of revenue increased 360 basis points to 10.8% primarily as a result of sales deleverage of fixed occupancy expenses.
General and administrative expenses decreased to 4.8 million in the second quarter from 5.9 million in the same period last year.
Primarily driven by a decrease in management salaries and bonuses and the temporary pay reductions, partially offset by higher IP and professional services costs and the suspension of quick pay vendor rebates in summary, net income for the second quarter of 2020 was 4.5 million or 26 cents per diluted share.
Year compared to net income of 6.2 million or 37 cents per diluted share in the same period last year. During the second quarter of 2020, we received a onetime insurance settlement of 1 million recorded closed a restaurant cost of $1.8 million and received a favorable tax adjustment related to the cares.
Of $1.1 million, taking all that into account adjusted net income for the second quarter 2020 was $4 million or 23 cents per diluted share compared to 7 million or 42 cents per diluted share in the same period last year.
Finally, I'd like to quickly touch on our liquidity and strength of our balance sheet as we mentioned on our last call. We've taken steps to ensure that our business as well funded for the long term during the second quarter, we issued approximately 3 million shares of common stock, resulting in net proceeds of 48.2 million to accompany a portion of the proceeds was used to re.
Repay the 25 million outstanding balance of our revolving credit facility as of the end of the second quarter, We had 67.2 million in cash and cash equivalents and 25 million available under our revolving credit facility and no outstanding debt.
All in all we believe we are in great position financially to whether this challenging time with that I'll turn the call back to Steve.
Thanks, John.
To summarize we had a great quarter and our sales momentum continues thus far into the third quarter. Despite the recent rollback in dining room, we openings in certain states as business operations, a more efficient and our balance sheet is strong while there continues to be a level of uncertainty surrounding coven 19 in the near future. We believe our team is very resilient.
We will remain nimble to adapt to any challenges in the market conditions.
Lastly, none of these accomplishments what had been possible without the hard work dedication of all our choose employees. Despite hard times that today, but they've been during this pandemic. Thanks for all you do with that we're happy to answer any questions. Thank you.
We will now begin the question and answer session.
Yes. Good question you My Press Star then one on your telephone keypad.
If you use the guest speaker phone please pick up your handset before pressing the key.
So withdraw your question. Please press Star then too.
This time, we will pause momentarily to assemble a roster.
Our first question is from James will differ from Steven.
Go ahead.
Hey, Thanks for taking the questions here I wanted to sort of the margin side, given how much stronger those words and expectations here.
Can you share with the restaurant level margins were in July possible, given how you started to be higher some folks at that point and then just what pieces of this more profitable operating model, we should assume kind of carry forward into the Threeq you end the for acute given all the moving pieces within labor and cost of sales and so forth.
Sure.
Our operating margin in July and of course, we don't have the final financial statements are still around that 20% level at the restaurant operating level.
However, when you're looking at projections for Q3 in Q4 like I said in my remarks, we run into 26 four in labor this quarter I'm expecting that to increase to five to 600 basis points. So you're looking at.
Between 31 and 33.
During Q3 in Q4 operating expenses it really depends on the Crystal ball right of water sales are if ourselves kind of remain consistent where they are or increase a little bit.
With the come back of our dining rooms are operating expenses are going to be a little higher so we're expecting kind of those in that 16% to 17% range going into Q3 in Q4.
And then our cost to sales like I said in my remarks, we ran a 20 I think it was a 23 for this quarter.
We're looking at 2.35, we're looking for those the increased about 100 basis points, where they have increased a 100 basis points in period, seven and we expect that continue in Q3 in Q4.
Okay. Excellent then just continuing on that question when do you expect to start reintroducing the full menu I know my local chooses now second my favorite Tex Mex soft against I'm pleased with that what's your view on the return of the broader menu throughout the course of 2020 and next year.
Through the this is Steve through the remainder of the third quarter, you'll still see the limited menu.
Where it is currently youll, probably see us in the fourth quarter have a handful of items pop back onto the menu in the fourth quarter with a reprints what will be our existing menu in next year.
Excellent Okay handbags.
Thank you.
Our next question is from both Caroline we know from Baird.
Go ahead.
Hi, good afternoon.
Congrats.
Delivering good results in a tough environment.
Thanks, Dave other quick questions on about.
About the kind of labor made clear that theyre going.
If we looked at that comment we've had been the low thirtys pick that rolls.
That's correct.
Surprisingly low in relation to your current sales so I guess.
Can you just to elaborate on what's driving that I mean, if I look at kind of report that spend more in the mid Thirtys and now you're sales were down well roughly 25% and now it's lower than that so I guess, what what inside of that is driving.
What.
Is sustainable or or not.
Ratable and that equation.
Well, that's a great question David.
And I'll answer it this way I mean, we we've been working on our management part for quite some time as you know.
And when we went into the Covance situation, we've basically brought all our managers down to four four managers per store and reevaluated, what we needed when we opened up the dining room. So we have decreased the number of managers per store going forward. So that has helped tremendously we've got some new tools that basically we had.
To put in place and we're monitoring labor.
I want to best practice standpoint, as we have in the past but.
Better tools and better visibility into it as has allowed us to even do that more effectively and so when we're setting Don and we get back to normal level.
We truly believe that we can have labor in that 31% to 33% level. So similar to what we were back when we went public if you can look back at those statements.
A few with all the things that yet a few of the other things is obviously.
We currently in Buffalo Kobe ahead about 60, 61 item menu items on our menu.
We've always been talking about smart move employed but.
Going into next year, you'll see us probably on south of that number obviously it will have a little bit different menu of really evaluated some of the items that we had on the menu. There is ease of operation that goes along with that and Thats part of the answer for why John saying, then that 31% to 3% also with the increase into go right now it's currently double.
What we weren't what's in the 34% to 38% range right around there right now we hope to see that north of the low twentys to mid Twentys. Once we come out and we have all the dining rooms open all the way through and the efficiencies that to go is really good for us and knows a couple other regions.
And then Steve how are you feeling about the reduction in number of managers.
And really well again to the key sense right. Yeah. Great question. The key for US on that one is number one we've also had a reduction in hours that we're operating currently right now on during the week were closing at eight o'clock Sunday through Thursday, Friday, and Saturday, we're closing at nine so that was part of that but then also.
The execution of our current menu and our future menu is makes me very comfortable with us moving forward, but that that type of model.
Great Thanks to bonds.
Thank you.
Our next question is from net thanks Ian.
I'm Wedbush Securities go ahead.
Thank you.
In terms of July trends can you maybe give us the weekly.
Cadence there and if it if we don't get a scenario where the rollbacks improve again are there anything.
The company specific that you can do too.
Drives that positive trajectory in terms of sales or does it have to come from higher capacity is again.
Well I'll answer it this way Nick obviously as we retracted backwards in some of these states like Florida and in Texas, We did see some double digit drops from a percentage of what we were running in that 70.
Weeks, where we were running to 70 to 73000, a week and we saw that dropped to 13, 14% on the first two weeks.
But I think you know and whether this will happen in the future I mean people finally start getting tired of that and they get out again and so basically towards the end of.
July we started seeing a decrease of only 5% so we're pretty close.
To where we were at our peak in June at that time.
You know however to answer your second part of the question. When we are at 50% capacity, which is where we are on most state.
I don't know that we can really do inside much more than that maybe 50 or 60% because of the six foot distancing.
There are few things that we can do with plexiglass on boost and things like that however, we as you know we don't have that many boots. So that does it help expand our dining room that much either.
So at six foot distancing, we can really.
Expand our patio and get a little extra boost which we're seeing that now where you know on in the past our patio business used to be 7% to 9% of sale.
And right now it's running in that 10% to 13% of sale and so that is increasing substantially so.
There are things.
And the biggest thing is just really promote and driving the heck out of that together, which as Steve mentioned earlier.
We're seeing some good profitability in that to go.
Got it.
And the Q3 labor commentary on some of the commentary on Q4 like the marketing normalization.
Et cetera that predicated on on a more normal sales level or if.
Ill stay down around July level for a while we're not going to seize opex increases in spending.
No I won't get a plan on doing as I think it's important around the holiday time, and that's why we're going to start the marketing initiative, a little bit in the fourth quarter as I really want us to talk about the convenience of our to go our although we're not to go and also our partnership with door Dash and then obviously our that message will be the safety of it and the convenience of it.
So that was going to be the and the value. So those are we're definitely going to have that spend in the fourth quarter that John mentioned earlier, just to get that name out and really talk about not only are defining differences, but what we think we also do while which starts with our valued that safety and then obviously the convenience so that will be an expense in the fourth quarter.
Understood and the labor uptick et cetera, all of that is going to happen basically it's not predicated on the sales trajectory.
A little bit will be based on opening up if we get rid of the six put this in same which means we'll be able to go over the 50, 60% of.
Indoor dining like John mentioned before if that goes the way you will see the increase that John mentioned on the labor if it doesnt, you'll probably see it very similar to the little bit higher than the seven Perry.
Understood and then last question just just just competitive dynamics are you already starting to see.
Less competition and in certain markets.
How are you thinking about those stores that have been they've been temporarily closed any color there would be very helpful.
Yeah. That's a great question you know the key things for me and I wanted to definitely there's been some competition that has a close their doors and we believe as a great operators that we'd have the opportunity to going in and even dominate some those markets even more than we do today.
But one thing that I want to do as I've not been able to visit those stores in awhile. So after this is as normalized then we're comfortable traveling all over the country I'm going to visit though stores along with our real estate Department and really look at what's happened in the environment and specifically the competitive environment now those close stores and then I'll start making determinations, whether we're going to open.
And those are not until until that time I'm going to right now I'm, just saying, they're all temporarily closed, but obviously even in some markets where maybe in the past I haven't been able to get into because of them are stores, we love the hermit crab, so we'd like to go into those markets and we look at some opportunity.
Rents and see if we can't pick up some of those that will expand our footprint in our existing market points.
Got it thank you very much.
Thank you that.
Our next question is from Andrew said lit from BMO capital markets go ahead.
Hey, guys. This is actually have Dan on for Andrew today. Thanks for taking the questions just a couple of points for me.
First chooses always offered tremendous value when you've heard a lot of folks talking at the important thing value right now as we progressed through the back half a year and you touched on this a little bit and your comments around marketing, but I'm just curious how you're thinking about your value strategy moving forward, if there any sort of menu or promotional actions you can take to sort of reinforced the value.
Perception of the brand, while still maintaining margin integrity.
Yeah, I think Thats a great question and that was the first thing I was on our mine as we've reduced our menu sizes through during their and we want to go only as we opened our dining rooms, and then the mill actually before we did that we added these kits and they are these meal kits that we did also our Margarita kits that we did and we price those that even a better.
Well you then in a single item because we knew everybody through this through this thing with the layoffs and moving through the rest of the year in early into next year that value proposition is going to be even more importantly, even though we felt like we were the best in the industry spins specifically in our competitive set anyway, but we valued those meal kits on floors and eight.
Very very competitive price. So we don't believe we need to go out there and we won't discount what we'll do it as it will look at the packages like that really make sure that we are by far the best value in the marketplace.
Great. That's been makes a lot of sense and then just a follow up on more on the commodity side I guess.
Im protein markets, you know, they've obviously been pretty volatile over the past few months that I know things have kind of settle down maybe over the past few weeks, but I'm. Just wondering if you guys can talk little bit about what you're seeing in protein markets and commodity markets more broadly I know you touched on some of the inflation July. So if you can provide maybe just how lock you are in your basket for the remainder of the year, if you've had more.
Trouble than usual locking any part of the basket.
Sure I mean, we were kind of locked in prior to the cold. It any way. However, we did have some trouble I think we mentioned in the first quarter related to ground beef because the basically the company were locked in with couldn't deliver on the contract because of the shortage ground beef. So we had to go out elsewhere and that was increasing our prices 100 200 basis.
His point or 200 Bucks to two bucks a pound that it since subsided. So we don't have a problem and ground beef and then when you factor in the number of fajitas and things that we're selling a beef as a percentage of sales went up but the overall prices state kind of flat for the quarter and we don't see that going and we don't see any kind of.
No changes in supply that would affect that going forward with ground beef, we have seen a little increase in the chicken.
Going into period seven.
Or July.
And then dairy as has jumped up on us quite a bit in July and so that's really what's taken up to 100 basis points that I mentioned earlier, but we don't see any significant problems.
You know in that area going forward. However, as you know we have a high percentage of produce.
And mother nature can change that on a dime and it has been a path, but that's normally just a quarter issue at rightsides itself in the next quarter, but we don't really see any significant issues with commodities for the rest of the year currently.
Great really appreciate the color. Thank you.
Again, it seems rather question. Please press Star then one.
Our next question is from Brian Vaccaro from Raymond James.
Go ahead.
Thank you and good evening could you clarify a comment you made earlier on the recent weekly sales trends John did you say that ADW less in the most recent week was down around 5% first the peak level and at that in 72 to 73 is the peak so you're kind of in the 70000 range in recently.
Thanks.
It was slightly under 70000 Weve recent weeks, but yes, that's what I was referring to is 5% down from our peak level.
Okay, Okay, great and on the regional performance can you drill down a little further on what you're seeing in other key markets beyond Texas and.
Well that southeast, Ohio, Kentucky, Carolinas et cetera.
As you know, we don't really talk too much about a regional issue, but we're seeing it really strong kind of nationwide we did see.
Kentucky go back to 25% capacity, however, with that being said, we really didn't see much of a reduction in overall sales and Kentucky. So.
We're seeing that kind of through the region's basically some of our strong areas, Tennessee, Arkansas.
And some of those states have really been strong and Ohio is another strong one so.
It's been pretty consistent throughout the country on what we're seeing.
Okay and then just last one from me Tim what was the deferred rent balance at the end of the quarter and can you remind us what the repayment timeline looks like on that deferred rent.
I think it was about 3.6 million that the ended the quarter and that basically can go anywhere from the next step three months to the next two to three years. So we've we've got different agreements associated with that we had about 79 of the agreements.
Finalized by the end of the by the end of the second quarter.
And then we've got now about 11 more that we've got to finalize the finally, but that the bed.
Okay, and sorry, just one more than nine stores that are closed what's the status or what's on your radar in terms of when you might reopen those units and that's it from me. Thank you.
Thank you thanks, Brian Yes, Brian as I mentioned in the second ago.
What we're going to do is over the next two months I'm a visit every single store take a look at the competitive environment take a look at how the market has changed with probably some recent closings are possibly some seats in the marketplace and then I'll make a determination roughly in the next couple of months as we move forward one that will be open RF they'll reopened.
Thanks.
Brian I want to come back on the rent thing too because just because were different 3.6. It doesn't mean that our expense really changes that much because of how the because of how fast the allowed us to do the relief method in basically your straight lining those through the rest of the lease so you shouldn't see very.
The much significant change in in our rent expense, even though we deferred about 3.6 million.
Yes understood. Thank you.
Thank you.
Our next question is from Chris So called from Stifel. Please go ahead.
Thanks, Hey, good afternoon guys.
Hi, John I, just I just wanted to clarify if the sales remain at the average weekly sales level that you saw in July for the remaining two periods of the quarter why wouldn't the margin be similar to.
The remaining two periods of according to what you gave in July.
Well, because we're continuing to open up the dining rooms, and also as you know as we said last quarter are there were a bunch of services that we cut off from a from an opex standpoint that we're now getting back as well as deferred some maintenance back then as well so we've got.
Several expenses that are coming back online and.
If the sales remain down you have the fixed expenses coming back online that that's going to hurt the margins as well.
How many more dining rooms do you expect to have opened over the course of the quarter than what you have right now.
It's not a matter of a number of dining rooms, because we have all are dining rooms other than the nine that we have temporarily closed is to walk capacity, we can open them up.
And.
And to the extent some of them are still at 25% to the extent that we can get those the 50 70.
We're still we're still adding a little labor there as well as.
You know extra expenses as we're opening these dining rooms to get kind of our procedures back from a from maintenance standpoint.
Okay, great. Thanks, guys.
Thanks, Chris.
This concludes our question and answer question I would now like to turn the conference over to Steve has swap for closing remarks.
Again, thank you all so much John and I. Appreciate your continued interest in choose and then we will always be available to answer any and all questions again. Thank you have a good evening and stay safe. Thanks, guys.
Because sometimes now concluded. Thank you for attending today's presentation you may now disconnect.