Q3 2021 Chuy's Holdings Inc Earnings Call

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Please stand by we're about to begin.

Good day, everyone and welcome to the choose holding third quarter of 2021 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 John Howie, Vice President and Chief Financial Officer of Chewy Holdings incorporated.

And now at this time like to turn the conference over to Mister Howie. Please go ahead Sir.

[noise]. Thank you operator, good afternoon, Bye now everyone should have access or a third quarter of 2021 earnings release, if not it can be found on our website at www Dot com and the investors section before we begin a review of formal remarks, I need to remind everyone that part of our discussion today will include forward looking statements.

Eight months.

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 the 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.

[noise] impact our future operating results and financial condition with that out of the way I would like to turn the call over to Steve. Thank.

Thank you John Good afternoon, everyone and thank you for joining us on our third quarter earnings call. Today, I hope everyone is staying safe and healthy. We are pleased to report a solid top line growth of over 24% during the third quarter. Despite the emergence of the COVID-19 Delta variant and our core markets. Moreover, our continued focus on.

Cost management, and operating efficiencies allowed us to grow our restaurant level operating margin to over 23% an increase of approximately 180 basis points compared to last year.

880 basis points compared to 2019, despite industrywide staffing challenges and inflationary pressures as.

As I noted our third quarter performance was negatively impacted by two major macro challenges during the quarter. Our business is negatively impacted by the emergence of the Delta variant, particularly in August including stricter locally mandated capacity restrictions in many markets in which we operate this temporary hall.

Often the sales recovery momentum that we had seen during 2021 with comparable restaurant sales declining 2% to 4% compared to 2019.

We also expanded our pay by tech solutions to more stores, where they plan to rollout all of these solutions system wide by the end of the year. Our second pillar is convenience, we believe that allowing our guests to enjoy our unique offerings, what where and whenever and wherever they want as equally important given the environment. We live in a solid 26 per.

Sent off premise mix during the third quarter and 27% during the second quarter clearly demonstrate this if you recall our mix was approximately 12% to 14% prior to the pandemic and given how well our food travels. We believe we can continue to maintain a low to mid twenty's off premise mix going forward.

Lastly, our guests continue to appreciate the value we are offering in our menu and we are excited to bring back some menu items in the first quarter of 2022, including the highly requested Baja shrimp Taco and some of our more popular combo place in terms of development. We successfully opened one new restaurant in Brentwood, Tennessee during the third.

Third quarter, which completed our development plan for 2021 in total we opened four new restaurants during the year, bringing our total restaurant count to 96 as we look ahead, we are planning to open between six to eight new restaurants in 2022, we're excited with the upcoming development pipeline as we plan to utilize a smaller prototype that will further.

Improve operating efficiency and better serve our off premise guests with that I'll now turn the call over to our CFO, Jon Howie to discuss our third quarter results in greater detail.

Thanks, Steve.

News for the third quarter ended September 26, 2021 increased 24, 3% to $101 9 million compared to 82 million in the same quarter last year. The increase was primarily related to growth in customer traffic as we continue to relax indoor dining capacity restrictions for all of our restaurants.

As well as a $3 1 million of incremental revenue from new restaurants opened during fiscal year 2021 for the third quarter of 2021 off premise sales were approximately 26% of total revenue compared to approximately 33% in 2020 and 12% in 2019 in total.

We had approximately 240 operating weeks during the third quarter of 2021 comparable restaurant sales increased 25% during the third quarter versus last year and included a 22, 2% increase in average weekly customers, partially offset by a one 7% decrease in <unk>.

Average check for a more accurate picture of our sales recovery third quarter comparable restaurant sales declined two 4% versus 2019 as Steve mentioned earlier. This decline was mainly due to the emergence of the delta variant, which impacted our stores heavily in the month of August.

Turning to expenses.

Cost of sales as a percentage of revenue increased 30 basis points to 24, 5% primarily due to overall commodity inflation of approximately three 6%, partially offset by a decrease in the mix of family.

He had a family kits sold as compared to the prior year based on current trends, we expect commodity inflation of 7% to 9% for the fourth quarter of 2021.

Labor cost as a percentage of revenue increased approximately 10 basis points to 29, 2% largely as a result of hourly labor rate inflation of approximately eight 3% in part due to increased overtime. This was mostly offset by sales leverage on management labor costs. We also incurred <unk> 8 million.

As of the end of the quarter, we had $105 1 million in cash and cash equivalents, no debt and $35 million of availability from our new credit facility we closed.

Closed at the beginning of the third quarter. As a reminder, this facility can be expanded to $60 million based upon certain requirements. If we chose to do so.

This new credit facility will mature in July of 2024 during the third quarter of 2021, the company repurchased approximately 197000 shares of its common stock for a total of $6 1 million since the beginning of the current share repurchase program. The company has repurchased approximately 280 <unk>.

<unk> thousand shares of common stock for a total of $7 5 million through September 26, 2021 as of the end of the third quarter. The company had approximately $22 5 million remaining under our $30 million repurchase program.

However, subsequent to the quarter in the company's board of directors replace the share purchase program and approved a new repurchase program under which the company may repurchase up to $15 million of its common stock outstanding.

This repurchase program became effective on October 22nd our October 28, 2021, and expires on December 31 2023.

Lastly, while we are we're still not in a position to provide our usual financial guidance I will give you some directional metrics that I hope will be helpful. As Steve mentioned earlier, we have now completed our 2021 development plan with a total of four openings. We continue to expect net capital expenditures net of 10.

On an improvement allowances to be approximately $15 million to $17 million. We are now expecting restaurant preopening expenses to be approximately $2 million in 2021, and and lastly, our effective annual tax rate is.

He is expected to be approximately 14% to 16%.

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

Thanks, John while the operating environment means uncertain due to the virus and its variants. We believe underlying business recovery continues to be very strong with a healthy pent up demand for our high quality made from scratch food. We will continue to work on properly staffing our restaurants in order to increase our dining room capacity, while focusing on.

The three pillars that have resonated well with our guests through out the pandemic again safety convenience and value.

Lastly, I'd like to recognize all of our team members for their hard work and dedication to ensure our guests can continue to enjoy the unique choose atmosphere safely. They are truly the backbone of our recovery and I'm proud to be working alongside them. During this uncertain time.

With that we're happy to answer any questions. Thank you.

Thank you if you'd like to ask a question. Please state your question Scott wondering your telephone keypad.

A speaker phone. Please make sure to hear me a function is turned off play your signal to reach our equipment.

And that is star one if you'd like to ask a question we.

We'll take our first question from mix.

In Virginia.

Got it and so I guess that begs the question in terms of you know the the margins you know obviously you continue to exceed your expectations. You include in Q3, but.

Is there any way to frame up you know where where do you know if you <unk> if the current sales trends poker sustained through the end of the quarter.

You know as a talk about in the past again, we're still at the end of what we consider I'll hopefully it is the end of of what would be considered a tourniquet mode on highway run out of restaurants sandwiches, you know a limited menu, it's unlimited hours at times and and we're continuing with that to a really all the way through this variant will start adding menu items as as I see fit.

Now as I see probably at the beginning of the second period of the year coming up that you're gonna see us out a few items that back onto our menu probably seven to eight items I think I mentioned, the shrimp and a lot of our combos that will coming back in and as we've stayed over the last few quarters, we expect to.

To maintain and have an increased margin of about that 300 to 350 basis point margin improvement over 2019.

We think that's a little conservative, but that's what we're projecting as we move forward and so you know I think if you look at 2019 that margin was around a 15 for so three to 350 basis points on top of that is where we think we're going to settle once we get fully operating in a full menu back out there.

Got it.

And then dragged clarification.

Just a quick clerk clerk I Should've done you say 1240 operating weeks in Q3.

Yes, I believe that's correct 1200, 20, I'm, sorry, 1200 40.

Okay perfect thing.

Thanks snack we appreciate it.

Thank you will hear next from Andrew stress Lick with BMO.

Hey, good afternoon.

My first question I've, just been trying to think about how much some of the restrictions and the staffing challenges is kind of limiting the sales recovery.

So.

Then your hospitality levels. So we won't over serve someone that ambulance, if you're ever going to wait you wait at the door and and I've read a table. So that's something so we definitely although we're open at a 100% capacity were probably and that 80% to 85% inside our four walls because of the rough staffing levels that we're working hard on moving forward.

Got it okay that makes sense and then.

On on the the food costs and the Cogs side.

First in terms of the impact from adding a couple of those menu items.

That you talked about in the first quarter, how impactful will that be and then what's kind of the the expectation on the progression with the menu from there.

Yeah right now as we mentioned came but we don't anticipate the combos are well except for inflation rates.

So from that standpoint has been locked in at the fajita beef level.

We still have a locked in on some of our grocery items like beans, and other things, but beans have been going up as well so there's going to be some inflation next year for sure.

We haven't I don't think we're prepared to really quantify that at this time.

But definitely probably what you've been hearing from others as well I think they are anticipating it so.

Got it. Thank you that's that's helpful. I appreciate it.

Thanks, Andrew.

Thank you we'll take our next question from Chris <unk> with Stifel.

Hey, good afternoon guys.

Hi, Chris.

John I was hoping you could just help us understand how we should be thinking about margin next year and I believe the company expects labor to get back to the low to mid 30% range, which would be a couple hundred basis points to 300 basis points higher than what you're likely to end up this year. So I'm just trying to understand is there going to be any offsets when we think about March.

And over the next 12 months other than pricing.

Yeah.

When you think about the the recent store openings looks like they performed extremely well in a lot of them I think have been backfill markets like Brentwood, Tennessee, I mean, when you think about the unit openings next year are those going to be in core markets like Texas, and Tennessee, primarily.

Yes, they will yes, and welcome to and that's going to be kind of our strategy as we move forward, Chris, especially with the smaller prototype is as we've just really going to be adding stores in markets that you know we've been pretty successful in currently and then assuming that the.

Well, that's certainly over the next three or four years youre going to see us in that type of mode.

Okay and then just my last question I know prior to the pandemic you guys were making a big push into expanding catering as part of the business is do you think you'll get back on that track of maybe adding two or three markets a quarter with catering.

Yeah. Great question, you know right now we ended up coming back and we're opening we're actually now this quarter getting back to where we were pre pandemic, which is up to 13 14 markets.

And then what you'll see US do it next year as you will probably add a market per supervisor one of them.

One each quarter, maybe or possibly two in each quarter. So we can get it all back heavy and hard into 2022, and where we by the end of 'twenty, two where we have one in every single supervisory market in the company and then some of them you'll have a second one but yes. We believe that's a that's an upside on that what John and I have mentioned earlier that we.

To maintain that 20% to 20 mid <unk> mid to low twenty's.

To go, but we think <unk> plus on that could be enhanced catering as we continue to ramp that up we are pretty pleased in the last two periods ive seen that come back a little bit.

Before it was probably one third of our what we used to do in 2019 and in the last couple of periods. We've seen it almost matching 2019. So we're pretty excited about what we can do with that as we continue to roll that back out and enhance it in 2022.

That's great well congrats on a good quarter guys.

Thanks, Chris I appreciate it.

The job answering the question yourself.

What does it mean to lead the witness on that and it was very helpful. [laughter] [laughter] on on staffing Steve I, just thought I'd love to hear your thoughts you mentioned focusing more on staffing, but specifically what are you doing I mean, if wages is one component of it what are you doing what are your managers doing to bring people back in or their creative things and I mean, what's the what's the law.

And a side to getting back 200 per cent if that in fact is the goal kind of just the path forward that he would you know there's a there's a multiple of store level of things that you're doing whether it would be referral bonuses and getting out. The first thing is to keep what you have you know we haven't roughly about 90 per cent.

89% employee turnover, which is a great number we're excited about that that's the number one thing continue with a you know keeping what you have that's the main thing and then we really focused first on the managers because we know if we can keep the management teams in place and be stable, that's what employees like the stable environment. So that's why we really did their attention.

Bonuses that we've talked about in the second and third quarters of this year, because we really wanted to do that and and we're pretty pleased there I mean, we have.

Industry, leading turnover for managers Whereabout, 22.5% currently which is a great great numbers. So you don't really want to work on stabilization, but then referrals and and.

And we want to do is just keep in in re recruit our existing employees. All the time and then look for referrals are their friends that have similar likes and wants of our existing employee base and talk to them about our culture and how great. It is to be here, we're continuing to really pump that but then there's a whole bunch of store level things that we execute on a daily weekly.

Basis.

Alright, great John just one last quick one for you, maybe you've mentioned and I missed it but G&A stepped up a little bit in the quarter right around $7 million, just maybe what was driving that and what the outlook on that going forward. Thank you very much.

Yeah. Thanks, So the biggest thing on that was for our performance bonuses on that we kind of fully funded that this quarter. So that should step down a little bit probably about in somewhere between three to 500000 in the next quarter from where it is today.

[noise] perfect very helpful.

Thank you and once again as a reminder, that is starwood if you'd like to ask a question will hear next from <unk> with bird.

Good afternoon. Thanks for taking my question just a couple on unit development. What are you seeing in real estate and construction costs and then how should we think about the targeted return profile any smaller prototype location that you're planning to open.

Yes. Thank you. Thank you guys. This is Brandon on for Brian Vaccaro.

Circling back on the prior question around traffic it looks like your dine in sales rose to 2019, we're down to somewhere mountain retune, perhaps understandably, so given adult to pause, but just trying to get a sense of how much labor really needs to be added back to support the eventual return of dine in sales equivalent to 19 level. So I'm thinking about labor per week versus 19 down about 17.

Push out in the past few quarters now with employee dining down 14%. So should we think about that relationship as consistent heading into 'twenty two.

Yeah.

I'm not sure about that question, but let me just kind of fire off some things that I think might answer. Your question. Currently we are probably at it from an hourly perspective.

We're at about 70 in the low 70, 772% of the eye.

Hourly employees that we had in 2019 and we basically said that we think we're 80% to 85% of staff. So based upon that I think you can see that our targets are a lot lower.

<unk> levels are a lot lower.

So.

That 80 to 85, so we're talking to you know another 15% to get fully staffed up now I will say that.

You know about a third.

Maybe a third or fourth of our inflation. This quarter was related to overtime. So as we get staffed up that premium will go down and so you kind of have a net net cost as we increased staffing as well.

If that makes sense.

Yes, Okay. That's helpful and Relatedly I think staffing was also around 85% last quarter could you just give us an update on our really turn out turnover I. Appreciate the perspective on PM turnover at 22, 5%, but how's hourly and Jim current over trended over the past few quarters now and should we think about the <unk> step up in wage inflation.

The 10% to 11% as sort of peak or do you envision a further step up the staffing levels do not progress.

Well I think yeah.

That does conclude today's conference will do thank you all for your participation you may now disconnect.

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