Chuy's Holdings Inc. Q1 2023 Earnings Call
Good day, everyone and welcome to the Chili's Holdings first quarter 2023 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 opened for your questions. Following the prepared remarks on today's call we have Steve Hislop President.
And Chief Executive Officer, and Jon Howie, Vice President and Chief Financial Officer of Chili's Holdings incorporated.
At this time I'll turn the call over to Mr. Howie. Please go ahead Sir.
Thank you operator and good afternoon.
By now everyone should have access to our first quarter 2023 earnings release, if not it can be found on our website at <unk> dot 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.
And therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect we refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.
With that all the way I'd like to turn the call over to <unk>, President and CEO , Steve Hislop.
Thank you John Good afternoon, everyone and thank you for joining us on our first quarter earnings call. Today, we're proud of our results for the quarter with topline momentum from the fourth quarter continuing to continuing into the new year, resulting in comparable restaurant sales growth of 8%. In addition, we achieved store level operating margins of 19, 7%.
Up 70 basis points year over year, which continues to be among the best in casual dining industry combined with the extensive unit growth opportunity ahead of US we have never been more excited about what lies ahead for choice. During the first quarter. We saw positive comparable sales growth across all periods with January and February benefiting from that.
I'm Gonna Com variant and favorable weather.
Pearsons importantly, our positive momentum has continued into April ultimately, we believe our fresh made from scratch food and drink at an incredible value continued to resonate with our guests across the income spectrum and are the driving force behind our growth turning to our growth drivers.
Start with menu innovation January saw the return of our fan favorite veggie Enchiladas as well as the introduction of our new WILDBERRY, though and hatch beef tacos.
Through our choice knockout platform, we continue to be excited about our see chaos as that platform drove incremental traffic and mixed at approximately two 5% of all entrees sold during a six week period, which is in line with our first iteration in October and our third iteration.
In late April saw the Tex Mex Burrito Bowl Grilled group of Tacos, Inc. Creamy Green Chili chicken and July this added to the Chili's menu for a limited time, while we are only two weeks into the current C. K O periods. We remain encouraged by the results we've seen thus far.
Our momentum also continued with the growth of our off premise channel, which represents 27% of total sales this quarter, while our off premise mix is down modestly compared to last year. We are thrilled to see the off premise dollars are up year over year, what they reduce off premise mix driven by continued improvement in our dine in.
Sales long term, we believe the off premise will represent mid 20% of our sales with catering contributed approximately 4% to 6%.
Finally in terms of our marketing initiatives, we continue to put heavy emphasis on digital media, including the use of tech talk organic influencer programs on Instagram Youtube video advertising and promotional advertising partnership with door Dash. These initiatives have allowed us to effectively communicate our defining differences.
From our incredible value for made for scratch food and drink to our newly introduced CK offerings and the new unique overall experience at every chili's restaurants move.
Moving to profitability, our ongoing focus on operational efficiencies and cost management resulted in a strong 19.7 restaurant level operating margin, representing a 70 basis point improvement year over year. We believe these results showcase the strength of choice brand and our ability to generate restaurant level margin that is among the <unk>.
Best in the industry.
As a reminder, at the end of January we took approximately three 5% pricing. We believe this is the appropriate level to balance our strong value proposition to our consumers with solidifying our margin profile as demonstrated by the results we were able to achieve this quarter.
Lastly, before I turn the call to John Let me update you on development plan during the first quarter. We successfully opened one new restaurant in Fayetteville, Arkansas, bringing our total to 99 restaurants. Looking ahead, we remain excited about the organic growth opportunities for.
For the brand through accelerated unit expansion for 2023, we continue to anticipate opening six to seven new restaurants focus it on markets, where our concept has proven with high <unk> and brand awareness with that I'll now turn the call over to our CFO , Jon Howie to discuss our first quarter results in greater detail.
Thanks, Steve revenues for the first quarter increased 12% to $112 5 million compared to $100 5 million in the same quarter last year. The increase was primarily related to improvement in our comparable restaurant sales as an additional 43 operating weeks from new restaurants opened subsequent to the first quarter of 2022.
In total we had approximately 278 operating weeks during the first quarter of 2023 and off premise sales were approximately 27% of total revenue comparable restaurant sales in the first quarter increased 8% versus last year, primarily driven by a six 2% increase in average weekly customers any one.
8% increase in average check.
<unk> pricing during the quarter was just shy of 7% turning to expenses cost of sales as a percentage of revenue decreased 60 basis points to 25, 5% driven by menu price increases taken subsequent to the first quarter of 2022, partially offset by approximately 5% commodity inflation.
Just on the current market conditions, we are currently expecting flat to slightly positive commodity inflation for the fiscal year with deflation of low single digits for the second quarter.
Labor cost as a percentage of revenue increased approximately 60 basis points to 33%, primarily due to hourly labor inflation of approximately 7% at 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 first quarter of 2022.
We expect hourly rate inflation of mid single digits for the fiscal year in the second quarter. Both in addition to a continuation of year over year staffing level increases operating cost as a percentage of revenue decreased 10 basis points to 16, 1% driven by lower to lower to go.
<unk> from lower off premise mix during the quarter as we continued to see improved dining itself, our occupancy cost as a percentage of revenue decreased 60 basis points to 7% as a result, as a result of sales leverage on fixed occupancy costs.
Market expense marketing expense as a percentage of revenue held steady at one 4% general administrative expenses increased to $7 8 million in the first quarter from $6 7 million in the same period last year, driven mainly by higher performance based bonuses.
As a percentage of revenue G&A increased to six 9% from six 6% during the same period last year in summary, net income for the first quarter of 2023 was $8 2 million or <unk> 45 per diluted share compared to $5 5 million or <unk> 29 per diluted share in the same period last year.
During the first quarter of 2023, we incurred $4 million or <unk> <unk> per diluted share in impairment.
Closed restaurant and other costs compared to $1 3 million or <unk> <unk> per diluted share in the same period last year. The decrease was primarily related to a reduction in the rent paid on previously closed restaurants, taking that into account adjusted net income for the first quarter of 2023 was $8 5 million or 40.
<unk> per diluted share compared to $6 5 million or <unk> 34 per diluted share in the same period last year.
Moving to our liquidity and balance sheet as of the end of the quarter, we had $82 6 million in cash and cash equivalents no debt outstanding and $35 million available under our revolving credit facility turning to our 2023 outlook. We are now expecting an adjusted EPS of $1 71 to $1 seven.
Six which includes an estimated eight to 10 push positive per share positive impact due to the fourth quarter of 2023 contained 14 weeks versus 13 weeks in fiscal 2022.
This is based in part on the following annual assumptions.
G&A expenses or expense of $29 million to $30 million six to seven new restaurants, net capital expenditures of approximately 35% to $39 million.
Restaurant pre opening expenses of approximately two $5 million to $3 million effective annual tax rate of approximately 13% to 14% annual weighted diluted shares outstanding of 18, 1% to $18 2 million and with that I'll turn the call back over to Steve. Thanks, John We remain excited by the law.
Long term opportunity ahead for Chili's will maintain our topline momentum driven further improvement in restaurant margins and have an extensive pipeline of unit growth ahead together with our disciplined capital allocation. We believe we've put <unk> on a path to maximize shareholder value in 2023 and beyond with that we're happy to answer any.
Questions operator, please open the lines for questions.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up.
Your handset before pressing the star keys.
Our first question is coming from the line of Nick <unk> with Wedbush Securities. Please proceed with your question.
Hey, congrats on another incredible quarter that's become.
I appreciate it.
I don't even know for congratulations in order has become so routine now.
I guess April .
A lot of a lot of.
Interest in the into April .
No trends just given the industry data would you be willing to comment on what you've seen so far in April .
Sure I mean, if you look at the progression I think it's similar to what everybody else is seeing we.
We saw that come down a little bit in March and then continue to come down a little bit in April . So we saw a three 3% in March and then about a 2% in April and those trends have stayed somewhat consistent after that stabilized.
Okay. So about two percentage or so that's where we are right now.
Around that that trending yes, okay, yes, right and no lower than that.
Got it okay.
The mix did that heading into the quarter were you expecting the mix to be still negative in transactions to be so positive.
Or is that something that just kind of happened during the quarter.
Well I mean as you know, we're rolling over Mama Kron, and so we're expecting positive traffic for sure going into the quarter absent rolling over that especially in January and February and maybe a little bit of March mainly January and February and then after the omicron we added some.
Fever last year, why the third quarter and fourth quarter, I'm, sorry, <unk> and <unk> were pretty strong for us last year.
And then the negative mix as just a shift into the dining room is that what it is just just guest traffic in the dining room.
What do you mean, sorry negative shift.
Negative shifts negative mix the negative mix.
On sales you mean.
Well just within the comp within same store sales growth.
Okay are you talking about like the.
I'm sorry, Nick.
Are you talking to price.
Because we have <unk>.
Okay. So yes, we have price of about 7% and then.
The mix is.
Has decreased a little bit.
Some of that is the attachment rate that we've seen on the bar and also the appetizers.
And yes that was a little bit of a surprise.
Okay, and then on the on the cost of sales.
$25 five.
Again was that relative to your expectation was that you know well below coming into the quarter.
And how should how should we think about that level going forward for the rest of the year.
Well actually that came in a little lower than what we expected.
And obviously, a little higher margin because of that but what we're seeing like I think I said, we are now I think we were expecting.
Commodity cost inflation to be in the mid single digits and now we're expecting that to be flat to slightly positive for the year.
So we are seeing low.
Low single digit deflation here in the second quarter.
And we see that kind of continuing for the second quarter at least until we rollover.
We roll out the pricing in the third and fourth quarter that we probably at this point don't intend on making another price increase as you know we took a price increase in July of last year of about three 5%.
Got it okay. Thank you very much thanks.
Thanks, Nick.
Yeah.
Thank you. Our next question is coming from the line of Alex Slagle with Jefferies. Please proceed with your question.
Hey, thanks.
I think Glenn next question before I think he means.
Flipped the check in traffic a little in Europe .
Prepared remarks that may have been a little bit of a confusion but.
Just on following up on the commodity deflation outlook, which is pretty surprising just how it's come down that much in.
Thinking about the first quarter earnings performance.
Right.
Tencent need or so in raising the outlook for the year.
About the same.
I'm just kind of wondering how that changed your thinking I guess.
Not looking to take additional pricing that also are there opportunities to reinvest some of that savings.
On the cost of goods line elsewhere in the business, maybe labor hours or something to enhance the guest experience.
We're always looking at balancing that everything we do and it's not so much on that.
Sure.
A statement on what they're saying, but right now we're working and continue to work on all of that and then we will continue to increase our labor line over the last couple of quarters, if you've noticed that and we will continue to look at it a little bit of that as we move forward and invest in our people a little bit more.
And thanks, Alex you are right I want to make sure I correct that so we.
We did have an increase in average weekly customers or one 8% and then average increase in check of six 2% I apologize.
Good catch brown.
And then a question on the dine in traffic versus kind of maybe where we are versus the base of 19 or so.
And kind of how that's that's looking at the opportunity to further fill the dining room and what the margin implications could be.
As you look ahead.
So we're running traffic.
And kind of the mid to upper 70, right now of what we did in 2019 as you know and we've been very open with that we've reduced the number of tables in our restaurants by about 25%. So that's really running in line with kind of the reduction in payables and the reduction in staff related to those tables, so well.
We continue to build that I think there is an opportunity there with table turns to build that.
But we're kind of running in line with what kind of our new bases that we've talked about in the last couple of years and the key of it all of that is maintained in that to go number that we have which we said long term we expect it to be in the mid 25% right now last quarter was at 27% and pre COVID-19 that was in that 12% to 14% range.
Great and just a follow up on the knockouts and the performance you've seen to date.
Kind of how your thinking has evolved how well it's working with what's working best in opportunities to.
To drive frequency and check.
Just any thoughts about what you.
We're looking at we're excited we're excited.
Started our third one we started in the fourth quarter and then.
We did it in the first and we just actually started the second quarter. One a couple of weeks ago, and we're actually really pleased that it actually performed a little bit higher than the first two so we're pretty excited about them.
What we've learned on those is obviously more from an operational point of view of getting all of our servers and everybody excited about them in the stores as far as selling them. So that's really has been good for us as you see us and as we continue to move through you will see a little bit of a barbell approach to these.
And that will probably start in the fourth quarter Youll see one it shouldnt change a whole bunch on your PPA, Mexico, because youre talking one out of the Doctor <unk>, So, but that's what we're going to see is that we have the ability to maybe have a little bit higher price on one of the <unk> items as we move forward.
Great. Thank you.
Thank you.
Thank you.
Thank you. Our next question is coming from Todd Brooks with the Benchmark Company. Please proceed with your question.
Okay, Thanks, and I'll add my congratulations great results.
Thank you.
Couple of quick questions one longer term.
I think we're talking six to 70 units this year as we're looking at the current real estate environment and operational readiness Steve.
I know your goal is to get back to kind of 10% unit growth over time do you see that being a.
Achievable in 'twenty, four or do we need things to change further either for the cost to construct or the ease of ability to construct before we can really unlock next step of growth this year.
Yeah, I would say, yes on that.
We're going to work real hard at looking at it though but.
Now we have not seen that easing up of the construction dollars until I've seen it flat line, but its still in that 25% to 30% up on all construction and it's not any easier to get permits it's not any easier on the supply chain you know I'd say, we'd probably have added on our basic timeline another.
60% to 96% to 75 days to get a construction job done for us just because of the delays, but I really wanted to watch I'd like to see that the construction dollars come down a little bit but.
Our pipeline, we have the ability from an operating perspective to get all of this as far as people wise that to make it happen I just like to see some things settle out as we move forward, it's a tough environment for construction and get anything done, but some of these cities whether it'd be permits are still supply chain.
Great. Thanks, John .
Just trying to think on.
G&A and as we've looked at a six 9%.
In this quarter are there any.
Year over year over year variances that we need to think about in the.
Upcoming quarters bonus spend versus maybe how bonus was accrued last year or is using kind of that $6, 97% range. The right number to use for the balance of the year.
Actually you should probably use somewhere around between six to six five for the rest of the year on App.
Actually im sorry.
I've always got to add the stock comp back.
Are you, including are you, including that in there right.
Yes, yeah.
Yes.
That is pretty comparable right around that $6 97.
Okay, Great and then one final one just I know that.
When you were talking about maintaining the mid 20% level for off premise and catering is a big part of it how is that business accelerating.
Now you've you've rolled out across all the markets.
A little 10 year I'm trying to build those relationships, where do we stand in building that business and how does it make sense in this quarter. Thanks.
Yes, we're sitting like as you know we were at about three point.
7% at the end of the year last year, we were up just a quarter Jon for just the quarter, we're up about $1 million in sales this quarter over the same quarter last year.
And from a percentage standpoint, we're at about two 3% versus a one 6% last year.
Great. Thank you and we do have the opportunity to add a couple more catering.
Drugs as we continue this year I'd say three to four more in existing markets and a couple of one off market. So we will have some some improvement in that and then like we said that 4% to 6% catering number is more of a long term number as we've mentioned over the next three years three to four years.
Okay. Thanks, Steve is also yes.
Tim mentioned, we said $3 seven in the fourth quarter last year that is our biggest catering quarter to put that in perspective.
Okay.
Thank you. Our next question is coming from the line of Andrew Wolf with C. L. King. Please proceed with your question.
Okay.
Thank you.
A sense of sort of the pricing cadence for the rest of the year.
Is pricing rolls off.
This quarter was.
A 7% I guess you said.
When does it sort of.
The last thing you said was January three and a half or so.
Yes.
Just how it sort of rules.
Sure at the end of June three.
Three 5% will roll off from the 7%, we just mentioned and we don't anticipate anticipate taking any more price this year at all.
So for the year Youll average probably in that five one level, but the second half of the year will be in that three 5% level.
Okay. Thank you and just using the check amount for the first quarter.
Taking that out of the April comp so if traffic is down around 4%.
Is that coming more from delivery because of the chart.
Extra cost or is that kind of equally dispersed between the in dining at the restaurant and the delivery.
Yeah.
I'm trying to I'm trying to I don't know I understand so you're saying traffic being down four youre, assuming traffic is down 4% where is that coming from I think it's pretty equally dispersed I mean as far as delivery yes.
Actually from a transaction standpoint up in delivery.
We're delivering now is for the quarter was about 10, 7%.
It was about nine points.
4% last year at this time, so our delivery continues to increase its dividend increase from the fourth quarter.
Okay.
Okay, Alright, yes, I was more asking about April , but maybe you don't have that data right in front of you.
Because you know what we're hearing as well.
Value conscious consumers paying the extra five bucks or whatever it is per order.
We continue to see the same trends in delivery even in April its movement.
Continuing to grow.
Okay great.
Lee.
Could you tell us.
Have you any metrics you could share on new store productivity, either I don't know if its too soon to give them that kind of metric for Fayetteville, because the way the stores open but I think there were two other restaurants it not in the context.
We've been very pleased.
Definitely hitting the numbers if.
If not exceeding them. So yes, we've been very pleased with those openings and as you know as you know we've really focused our development in the <unk> stage five to seven states. So we have great brand recognition.
And great.
And Theyre great state to operate in so.
They are hitting those targets.
On the sales side and on the profitability side.
Okay.
Okay. Thank you and also congratulations on the quarter. Thanks.
Thank you Andrew.
Okay.
Thank you. Our next question is coming from Joshua long with Stephens. Please proceed with your question.
Hi, This is Dan O'brien on for Josh long. Thank you for taking my questions. So earlier, you talked about reinstating digital advertising leaning heavy into digital marketing. So are there any learnings you can share on that front, so far as far as what <unk> seen from a customer acquisition and customer retention standpoint.
Again it is again, it's been very consistent since we brought it back us basically in the middle of last year. So it's been very very well and again its getting out our defining differences how I view digital a lot is really just making sure that we get our share of voice out there which is the main thing.
Through all of the people that are out there where are we seeing some customer acquisitions is more on our our youtube's a little bit on the tech talks.
And programmatic.
Videos. So that's why we're seeing some movement.
Again, we're just it's been real consistent over the last three quarters.
Okay. Thank you that's helpful and then on that mid twenties off premise mix how much of that is coming from third party delivery.
Well I mean third party delivery is say 10, 7% this quarter so.
Currently Youre looking over 40, 30, 30% to 40%.
Okay.
And then on the unit development cadence like how should we think about the timing of it for the rest of the year.
What I do I'd, probably look at.
Probably one in the second quarter and then the bulk of our mobile come in in the end of the year fourth quarter.
Okay. Thank you that's all I have and congrats on the quarter.
Thanks, Josh.
Thank you. Our next question is coming from the line of drew North with Baird. Please proceed with your question.
Thanks for taking the question I just was hoping you could unpack the Q2 restaurant level margin a bit further I think typically with seasonality you see a step up in margin and its quite clear on the cost of sales line.
But maybe I guess I was wondering if you could elaborate on how you are thinking about the other lines within the restaurant level margin spin.
Specifically as it relates to Q2 and setting some guardrails around the overall margin expectation there.
Sure I think if you look at Q2.
You could probably apply the same margin expansion that you saw in Q1.
Right around there to maybe plus or minus about 20 basis points.
And then you could see that come down a little bit.
From that range in Q3, as we lap over those price increases in the back half of the year and then remember in the fourth quarter. When Youre looking at margin is going to be a little more enhanced because we have that extra week in there that will enhance those margins in the fourth quarter.
Okay.
Okay. That's helpful and then.
On commodities I guess I was hoping you could just elaborate on the biggest drivers of the deflation youre seeing in Q2. Thank you.
Maybe the first we've heard among the restaurant chains and just your overall lower inflation outlook I guess, how much visibility is there to the commodities in the back half what percent are you fix today et cetera.
Yes, we can.
Generally a fixed about 40% of our <unk>.
Commodity basket, what we're seeing from a deflationary standpoint.
Biggest drivers chicken.
Which im sure Youre hearing I mean last year, we hit all time highs in chicken.
We're seeing a little decrease in cheese as well and then we locked in our beef for.
For the whole year at slightly better prices than last year. So those are your biggest drivers and then produce is.
It's a wildcard out there right now, it's providing us a little deflation, but we don't anticipate that.
For the whole year, because that kind of fluctuates up and down and then our biggest inflation drivers are.
Groceries for the most part right now.
Very helpful.
Yeah.
Thank you as a reminder, ladies and gentlemen, if you would like to ask a question at this time. Please press star one on your telephone keypad one moment, please while we poll for questions.
Okay.
Ladies and gentlemen, we have reached the end of our question and answer session I would like to turn the floor back over to Mr. Steve Hislop for closing remarks. Thank.
Thank you so much John and I. Appreciate your continued interest and choose and are available to answer any and all questions again, Thank you and have a good evening.
Ladies and gentlemen, this does conclude our teleconference. You may disconnect. Your lines at this time, we thank you for your participation.
Yeah.
Yeah.
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Okay.
And.
Sure.
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