Q2 2023 Chuy's Holdings Inc Earnings Call
Good day, everyone and welcome to the Chewy Holdings second 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 open 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 second quarter 2023 earnings release.
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 discussion 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, but looking ahead, we plan to release, our third quarter 2023 earnings on Thursday November 2nd after the market close with that out of the way I'd like to turn the call.
Over to <unk>, President and CEO , Steve <unk>.
Thank you John 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 three 2% improvement in comparable restaurant sales during the quarter, we saw solid comparable sales growth across all periods. Moreover, a strong topline momentum has continued and we are pleased with the results.
We've seen thus far into the third quarter.
<unk> a profitability, we grew restaurant level operating margin dollars by over 21% and generated an industry, leading restaurant level margin as 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.
<unk> and believe that these results are a testament to the continued progress we are making on the various initiatives, we put in place to drive sustainable topline growth and profitability.
Moving on to our growth drivers, we continue to focus on menu innovation through our chewy Knockouts RC KL platform in April we introduced our guests to several exciting menu items, including the Tex Mex Burrito Bowl Grilled group, our tacos and creamy green Chili chicken Anschel audits the CK ARPA.
Perform continues to resonate with our guests as our April <unk> drove incremental traffic and mix at a higher percentage of sales than our previous CK house.
To build upon this excitement in late July we launched our most recent <unk> with hatch Green Chili Burger Steak Burrito Bowl and chicken Tenga 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 promise 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 build out our catering markets, representing three 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 twenties.
Of our sales with catering contributed approximately 4% to 6% of the total sales in.
In terms of our marketing initiatives are optimized digital media strategy effectively communicates our defining differences from our incredible value for our made from scratch food and drink direct citing CK offerings and overall differentiated experience at every <unk> restaurants. This includes the use of Tictoc organic influence.
As our programs on Instagram and Facebook Youtube video advertising and promotional advertising partnership with door dash.
Lastly, let me provide some update on our development plan during the second quarter. We successfully opened one new restaurant in Oklahoma City, Oklahoma subsequent to the end of the second quarter. We opened one additional restaurant in Harcar Heights, Texas. We're pleased to report that all of our recent openings and performed to our expectations.
Additionally, in the second quarter, we closed one restaurant in the state of Illinois. This wasn't 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 five new restaurants, three of three 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 higher <unk> 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.
Thanks, Steve revenues for the second quarter increased seven 3% to $119 million compared to $110 9 million in the same quarter last year the.
The increase was primarily related to improved 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 289 operating weeks during the second quarter of 2023 and off premise sales were approximately 28% of total revenue as compared to 27% a year ago comparable restaurant sales in the second quarter increased three 2% versus last year, primarily.
Driven by a five 8% increase in average check partially offset by a two 6% decrease in average weekly customers effective pricing during the quarter was just shy of 7% and we expect to carry approximately three 5% to three 5% pricing 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 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.
229, 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 les.
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.
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 six 5% from five 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 <unk> 59 per diluted share compared to $7 nine or <unk> 41 per diluted share in the same period last year during the second quarter of 2023, we incurred.
<unk> 5 million or <unk> <unk> per diluted share in impairment closed restaurants, and other costs compared to <unk> seven or <unk> <unk> 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 <unk> 61 per diluted share compared to $8 4 million or <unk> 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 83521 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 eight to 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 five new restaurants net.
Net capital expenditures are expenditures of approximately $30 million to $35 million rest.
Restaurant pre opening expenses of approximately two five to $2 7 million.
<unk>.
Annual tax rate of approximately 13%.
<unk> to 14% and annual weighted diluted shares outstanding of $18, one to $18 2 million shares with that I'll turn the call back over to Steve.
Thanks, John .
Passion has always been to provide our guests with the unique <unk> 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 fall ball four wall operational excellence thoughtful capital allocation.
An 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 choice 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.
Thank you.
And ladies and gentlemen at this time, we will conduct 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 comes from Joshua long with Stephens. Please state your question.
Great. Thank you for taking my question.
When we think about just the underlying environment and the strong results you reported I think you mentioned that there was more.
Solid comps through the quarter.
Curious if you could talk about that what youre seeing from the consumer and then maybe just any.
Other reads you have in terms of how they are using your concept it feels like perhaps the mix piece and.
With traffic pieces.
Consistent if you kind of look at the underlying piece it would be curious what your perspective, given kind of the update of the current environment.
We haven't seen that it's been pretty consistent over the last year year, and a half and we've been very busy and we haven't seen a whole bunch of pull back in any one area, maybe slightly and bar mix.
And.
A few months back probably slightly.
But since we added on our our ball so you've seen that rebound a little bit. So we haven't really seen any main issue.
As far as real differences of our track it over the last year.
Got it that's helpful and when we think about some of the strength you called out on.
On the <unk> platform can you talk about how that's progressing versus your expectations and it seems like that maybe in April or in the <unk> period that brought in some incremental.
And so just curious if you attribute that to awareness.
Culinary innovation, maybe all of the above but anything that you can share there in terms of just yeah yeah.
Thanks for answering the question.
It's a little bit all of the above.
We've realized probably 115% of traffic I would say by the <unk> and obviously, we just finished our third windfall. We've 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 three items that will run for a total of four weeks in our stores.
Four to six weeks, so we're pretty excited about those coming up in the fourth quarter Youll see a little bit of a change in some of the <unk>, where we're going to do a barbell approach to one item that will start in quarter four.
It's coming up but yes, it's been a nice excitement and really it's nice to have some new things to talk about on a quarterly basis.
I appreciate it and then one last one and I'll hop in the queue and we think about just the overall development environment and 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 youre thinking about development overall human capital investments to support that and then specific to the two units that sounds like they might have.
Cliff.
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.
I'll go with the end first is 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 of the permits and getting some.
People coming out and when I'm 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 flattened 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 will see us this year in that five.
<unk> that we mentioned and then our long term goal right around probably in 25 years to get back to that 10% growth rate.
Got it one more there or do you think that you can accelerate that in 2024.
Okay.
That function, if youre going to five 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.
I'd say a couple of more than five.
Looking at probably for next year and then.
By 'twenty five to get back to that 10% growth as I mentioned, a second ago.
Great. Thank you.
Thank you.
Our next question comes from David Tarantino with Baird. Please state your question.
Hi, Good afternoon 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 Q2 Q3, I was wondering if you could elaborate on what you're seeing more specifically and I know you have less pricing.
Then you had in Q2, so any color would be helpful. Thank you.
Youre welcome.
It's really trending fairly similar to <unk> six in that two two plus range two to three.
Okay and Thats the total comp.
Yes, the total comp and as you mentioned.
We had about 333, 5% pricing roll off so that's talking you are talking about a 1% negative traffic possibly.
Got it okay. That's good.
Helpful and then.
John .
If I look at your guidance and the performance you've had on restaurant margin. It looks like maybe this year is shaping up to be.
At least at the high end, if not above the high end of that long term target you've shared previously so I.
I was wondering if you can kind of frame up how you're thinking about.
The margin structure longer term and is it possible to think about 20% plus type restaurant margins.
As you look at the business.
Well.
It's all related to kind of the volumes and how those shake out, but what we're seeing for the rest of the year.
We're looking in the third quarter with those prices coming off we're not going to have the sales leverage that we've had in the first two quarters.
And so we're going to see a little less margin here in the third quarter and then in the fourth quarter. Obviously, we have the extra week, but we're also rolling over the addition of our.
Xtra.
Delivery partner in the fourth quarter, so that's going to flatten that out a little bit as well.
So I think that will temper the margins a little bit and what we're seeing right now, but long term I mean, we're still looking at that 300 350 basis points above so in that 19% to 20% range.
Sure.
Got it.
Thank you very much.
David.
Our next question comes from Brian Mullan with Piper Sandler. Please state your question.
Hi, Good afternoon, guys. This is actually Ashley <unk> on for Brian .
My question is about.
We think catering business and how that is coming along versus your own internal expectations is that and what kind of impact has it had your off premise business.
We're excited obviously, we're in 16 states.
16.
For March 17 markets currently on the catering and we're excited I think I mentioned in my prepared statement of about 80 basis points higher than a year.
And so we're very very excited about that we will continue to add certain trucks and refill.
Phil some of our markets as we continue forward, but we believe long term.
We believe that catering number I can be in that 4% to 6% range over the next few years.
That's great. Thank you for the color I'll pass it back thank.
Thank you.
Your next question comes from Brian Vaccaro with Raymond James Please state your question.
Hey, Thanks, and good evening I, just wanted to circle back on commodities and John could you provide some more color on the items, we're seeing favorability on driving that recent deflation and also remind us where you are on your beef contracts specifically.
Sure.
So I'll just start with the beef beef, we're contracted through the rest of the year just a little spillover in the next year, but not much. So it's really just basically through the rest of the year and those are at prices.
A little less than last year. So that's some of that deflation. We're also seeing significant deflation obviously in chicken as I think most people are coming off of the alpine high is from last year seeing deflation in.
In.
Dairy as well.
And then some of our produce but we expect kind of the produce that always kind of jumps up here in the third and fourth quarter. We're also seeing inflation in some of our grains and oils.
And things in our grocery basket, but those are really the big items.
Okay, great. Thank you for that.
On labor I, just Don you talked about increasing staffing levels, which I think makes a lot of sense has done and continues to recover but could you provide any perspective, just on how much average hours were up or some other way that you might be able to quantify that and maybe more broadly just speak to what youre seeing in terms of turnover.
Are you seeing any tangible benefits of more tenured teams driving better ops, increasing guest satisfaction et cetera, and you speak to that dynamic a little bit.
Well I'll speak to the turnover turnover from an hourly standpoint, we're still a little over 100% from a management standpoint, a little over 26, 27%.
<unk>.
And as far as the hourly I don't have that figure for you as far as the increase over last year, but what we have been doing is replacing a lot of our overtime hours with the kind of full time positions now, which obviously when you're replacing with fresh people that's going to help the guest experience as well. So you don't have as much over time so.
Thats also.
Helping out, but we're continuing to get fully staffed on each each and every shift.
And that helps the customer experience.
Alright, Thats, great and then just lastly on the development front obviously.
The buildup cost have been pressured in recent years are you seeing any green shoots of relief on that front on the horizon and maybe you can just level set us.
Just in terms of unit economics that your underwriting as you think about the pipeline X 12 months to 24 months.
Well, we continue to underwrite.
We're looking at the costs in a new unit in that two 9% to three three.
The cost of it all in net of.
Landlord dollars, but as far as what we're seeing from a construction cost standpoint, we're seeing costs, starting to flatten out, but not yet come down.
I think I've heard somebody else, saying, we don't want to get these developers are used to these prices.
And so hopefully we're trying to get us.
Competitive as we can in some of these pricing. So we can bring those costs down but right now we're not seeing it.
Alright, great ill pass it along thank you. Thank you.
Your next question comes from Todd Brooks with Benchmark Company. Please state your question.
Hey, good evening everyone.
Quick question, there's not much left to ask but you talked about Steve here.
June July trends.
I think Dan or John .
China.
Assuming the two to three range.
Which with the pricing roll offs very impressive.
A result, I'm just wondering with your geographic footprint.
This crushing heat.
Have you been able to use the patios.
Full extent that you'd normally would seasonally in the summer time.
To get a sense maybe.
Is there is there actually a stronger underlying demand.
It's keeping from being able to use in a restaurant.
<unk>.
Yeah, it's been it's been wildly but is that really exactly I think if you remember a year ago at this time, we talked about.
The 60, some days of over 100, and we're just in it again, so it's very similar to a year ago.
And yes, it definitely affects.
Texas, obviously and elsewhere definitely some of the patio sales no one sitting out in the patio.
At 100 degrees. So that's definitely an effect, but like I said, it's very similar to a year ago at this particular time.
And the true Thanks, Steve you got it right.
Our next question comes from Nick <unk> with Wedbush Securities. Please state your question.
Thank you.
Okay in terms of the commodity inflation.
Appreciate the Q2.
Around down, 4% and I'm, sorry, if I missed this but what's.
Q3, with Q3 expectation in the Q4 expectation or maybe a better way to ask it is sequentially versus Q2.
Are we kind of flattish in terms of.
The basket is are we continuing to see that go down.
I think it's flattening out I mean, if you were looking.
Like over last year, we're looking at I think we said low single digit deflation for the third quarter, we'd look something similar to that to flat deflation in the back half.
Fourth quarter, which would get us basically flattish for the year.
Just kind of how we're looking at it right now.
And given the math on the lower pricing and that that inflation is sort of a mid 25% Cogs the right way to think about Q3, because it just seems like there would be a big jump from Q2.
Yes, that's kind of that's kind of what we're looking at.
Okay. Okay, and then in terms of just Q3 Q4.
You don't have a margins historically Q4 is little bit lower but we have the extra week. So I mean do they end up being a little bit closer to each other both of them may be in the sort of high 17% range.
Come back again on the unit level margins is that what you are seeing for Q4.
Yes.
<unk> tends to be lower than Q3 historically.
Given that extra weeks.
Does that kind of help it come up closer to Q3 this year.
It actually increased it a little bit.
Over to Q4.
Got it okay. Thank you very much.
Thanks, Nick.
Our next question comes from Andy Barish with Jefferies. Please state your question.
Hey, good evening guys.
Wondering if you can give us an update on sort of a dining room.
Versus pre Covid I know theres been some big changes in seating than ours, but just trying to level set on that and do you see that as an opportunity just given some of the shifting consumer behavior out there.
Well again with our addition of our.
Yeah.
The other delivery service and that increasing from a percentage of sales are dine in sales.
Still from a traffic standpoint still at about 75% to 80% of what they were prior to the pandemic.
And then we've been pretty consistent with that.
As you know we still take has taken some of those seats out and we haven't put those back in just from a productivity standpoint.
<unk>.
Ours.
And the also the hours.
Haven't brought those hours back either those we've deemed that those haven't been very profitable hours as well so.
So, yes, we're still at that 75% to 80% in traffic from a diamond perspective.
But our off premise has grown a little bit.
Okay and then.
On the marketing side I know you are up back up to about.
One 5% or so of sales is there any any new.
Channels are waiting kind of that you're looking at or for that that media spend.
Yeah, right now, we're pretty happy with that percent and as things change. We're obviously looking at everything we're doing a little bit I mentioned a few during the my prepared statement, but a couple of other things that are fairly newest program.
Programmatic.
And we're doing a lot of stuff with.
Yelp and so on top of that but we're always looking at things and redistribute and but we're pretty pleased with all the.
The mediums that we're using.
Okay.
Years back I mean again pre pandemic you guys are doing outdoor which seem to have some effectiveness and highlighting kind of the core.
The core values anything along those lines in certain markets or.
Just keeping a balanced.
Yes.
We consider that I have that in that local store marketing fund that we do and that's part of the $1 five $1 45, and those are continuing and we do have quite a bit of outdoor and a lot of local store initiatives that we always will do from a.
Local store profile.
I appreciate it guys. Okay cool. Thank you. Thank you Andy.
Thank you and a reminder to ask a question press star one.
Our next question comes from Chris <unk> with Stifel. Please state your question.
Thanks, Good afternoon guys.
Hi, Chris.
Question relates to development.
Given the company's strong performance in sizable cash position why not try to accelerate unit growth and 24 beyond just a handful of locations.
Well I mean, we're going to grow as fast as <unk>.
Deemed reasonable given the.
The environment environment, I mean, right now it's not a matter of finding sites. It's a matter of getting those sites open with the permitting and things like that so.
If we can right now we're seeing that and we'd also like some of the costs to come down a little bit.
But thats kind of where we're looking right now until we see kind of the construction and the permitting and some of that stuff to turnaround a little bit that needed some relief in those areas.
I know you guys have struggled with openings in certain markets like Chicago and Denver. So I'm just wondering how those experiences are shaping your development plans over the next couple of years.
Well I think thats.
While we're looking at kind of the five to seven and focusing on those states Chris.
Because as we focus on those states I think we'll get better brand recognition.
And some of the other states that will <unk> three to five years.
But those those states were currently focusing in on have IEPS, great brand recognition and quite honestly, they're very favorable from a business standpoint from a margin standpoint. So those are the states we're focusing in on in the next three to five years.
Is the strategy to be more follow more of a contiguous market.
Going from.
Markets and close proximity because you just need that brand awareness as you go into newer markets.
Oh I think so.
I think.
If you go back to hate to bring up 2013, but we kind of jumped into a lot of new markets. So we'll take that more slowly I guess, when we start branching into new markets and not all at once in one year. So.
We'll continue to open in these.
States that we have high brand recognition and contiguously.
Next next to that state opening.
Some news new matters and Thats over the next in the states that were talking about was our growth over the next five five years.
A little bit beyond.
So plenty of room.
Okay, and I apologize if I missed it but.
John did you comment on just the cash position of the company and.
And.
What you guys are maybe considering for deploying that cash and returning to shareholders maybe more aggressively.
Yes, I mean, we continue to want to be somewhat opportunistic in buying back the stock, but we did buyback $3 million this quarter.
We still have about $82 million to $83 million on the balance sheet.
And.
And then continue obviously opening stores, but we'd like to get a little more aggressive in buying that stock back.
But again, we want to be somewhat opportunistic in that as well.
Okay. Thanks, guys.
Thanks, Chris.
Thank you.
No further questions at this time I will now hand, the floor over to Steve Hislop for closing remarks.
Thank you so much John and I. Appreciate your continued interest in <unk> and available to answer any and all questions again, Thank you and have a good evening.
Thank you. This concludes today's conference all parties may disconnect have a great evening.