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Edited Transcript of CHUY earnings conference call or presentation 7-May-19 9:00pm GMT

Q1 2019 Chuy's Holdings Inc Earnings Call

Austin May 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Chuy's Holdings Inc earnings conference call or presentation Tuesday, May 7, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jon W. Howie

Chuy's Holdings, Inc. - VP, CFO & Director

* Steven J. Hislop

Chuy's Holdings, Inc. - Chairman, CEO & President

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Conference Call Participants

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* Brian Michae Vaccaro

Raymond James & Associates, Inc., Research Division - VP

* Dennis Mitchell Van Zelfden

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Mary L. Hodes

Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to Chuy's Holdings First Quarter 2019 Earnings Conference Call. Today's call is being recorded. (Operator Instructions) On today's call, we have Steve Hislop, President and Chief Executive Officer; and Jon Howie, Vice President and Chief Financial Officer of Chuy's Holdings, Inc. At this time, I'll turn the conference over to Mr. Howie. Please go ahead, sir.

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Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [2]

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Thank you, operator, and good afternoon. By now, everyone should have access to our first quarter 2019 earnings release. It can also be found on our website at www.chuys.com, in the Investors section.

Before we begin our review of formal remarks, I need to remind everyone that part of our discussions today will include forward-looking statements. These forward-looking statements are not guarantees 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 conditions.

With that out of the way, I'd like to turn the call over to Steve.

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Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [3]

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Thank you, Jon. Good afternoon, everyone, and thank you for joining us on the call today. On a high level, we improved our top line performance during the first quarter as we grew revenues by almost 9%. Comparable restaurant sales also improved by 3.2%. While we are pleased with our sales trajectory, which we believe has been augmented by our recent marketing efforts, we also remain focused on the opportunities we have to improve upon our profitability. For 2019, we intend to leverage on a variety of initiatives we've laid out previously to drive sustainable top line growth over the long term. And in addition to marketing, these initiatives include renewed push on technology, labor and off-premise strategies. Let me update you on each of these items.

Starting with marketing. Our strategy for the first half of the year will lean heavily on paid search, paid social media campaigns and location-based mobile advertising that will cover all of our markets. In addition to these overall efforts, we are also focusing on certain markets, particularly this quarter Chicago and Houston. With only 3 locations in Chicago, our goal is to improve brand awareness and educate the market in the Chuy's experience. In Houston, where we currently have 10 restaurants, our focus is to drive increased frequency to our restaurants.

To that end, we launched targeted marketing efforts in these 2 markets in late April following a successful media test during the fourth quarter of 2018. In addition, we are employing promotional radio, strategic highway and stadium signage and advertising on digital platforms like YouTube, Hulu and Spotify. We also leveraged the Cinco de Mayo celebration to create excitement and further drive traffic to our restaurants.

On the technology initiative front, we continue to see an increase in our Olo online ordering adoption rate despite the lack of advertising in it. As of the end of the first quarter, our to-go sales through Olo represents approximately 13% to 15% of all our to-go ordering. Starting in May, we will begin promoting online ordering in all markets, which should drive increased adoption and strengthen our off-premise business. As I've said in the past, we view this platform as the foundation to our future loyalty program, which we'll explore in the back half of this year.

Further, as it relates to off-premise initiatives, we continue to believe that catering is an important part of our off-premise strategy, and it gives us another platform for top line growth while at the same time improving awareness of the Chuy's brand. Beginning in the second quarter, we will add 2 caterings -- provide catering to 2 additional markets and on track to launch catering to 6 new markets by year-end. At that time, we'll have catering offerings in 11 markets.

Other important off-premise initiatives include delivery and our to-go business, both of which continue to gain traction. We believe our guests are becoming increasingly aware of our delivery offerings, as we saw increase in delivery engagement during the first quarter, which now contributes almost 2.7% of our sales. Overall, total off-premise business continues to grow and now makes up approximately 13.6% of our sales.

With regard to labor, we continue to improve on store-level efficiencies and, together with a newly integrated POS system which is still in test, we look forward to further optimizing our labor productivity. We also continue to make tangible progress related to new store labor efficiencies, reducing opening labor new hires by 20%, and our focus on achieving system average labor targets by month 7 in our improved glide path -- with our improved glide path initiative.

Before I turn the call back to Jon, I'd like to briefly review our 2019 development. During the first quarter, we opened 1 restaurant in Colorado Springs, Colorado. Subsequent to the end of the first quarter, we opened 2 additional restaurants, 1 in Hamburg, Kentucky and one in Huntsville, Alabama. All in all, we're very pleased with the performance of these 3 recent openings. Our operators and development team continue to do an excellent job of instilling our unique Chuy's culture in these new restaurants.

For the full year, we continue to expect to open between 5 and 7 restaurants as part of our strategy to balance new unit growth while driving sales and improving restaurant-level profitability through the initiatives I've laid out.

All of our new units in 2019 are in proven markets with a history of strong AUVs, and we're excited to complete our remaining development for the year.

Lastly, we're in the later stages of building our real estate analytics tool, which will allow us to create a psychographic profile of our top markets and use it to identify new markets for successful expansion going forward. We're not going to go -- we're not going to open up any new markets until we have this tool fully developed and tested, which we believe will be sometime during 2020.

With that, I'd like to turn the call over to our CFO, Jon Howie, for more detailed review of the fourth quarter results.

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Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [4]

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Thanks, Steve. Revenues increased to $102.1 million for the first quarter ended March 31, 2019, compared to $93.9 million in the same quarter last year, driven primarily by comparable restaurant sales growth and $7.1 million in incremental revenue from an additional 99 new store operating weeks. In total, we had approximately 1,286 operating weeks during the first quarter of 2019.

Comparable restaurant sales increased 3.2% during the first quarter, driven primarily by 2.9% increase in average check and a 0.3% increase in average weekly customers. Comparable restaurant sales benefited by approximately 30 basis points due to the timing of New Year's Eve and Easter, net of unfavorable weather in the Southeast and Midwest regions during the first quarter. Effective pricing during the quarter was approximately 2.6%.

Turning to a discussion of selected expense line items. Cost of sales as a percentage of revenue increased 10 basis points to 25.2%, driven largely by 2.4% in commodity inflation. This inflation was largely attributable to unfavorable beef and produce pricing partially offset by favorable pricing in dairy. For the year, we continue to expect commodity inflation of approximately 1% to 2%.

Labor cost as a percentage of revenue increased approximately 20 basis points to 35.9%. The increase was attributable to new store labor inefficiencies, hourly labor rate inflation in our comparable stores of approximately 3.3% and higher labor rates in some of our newer markets, offset by lower training costs for our new managers. Occupancy cost as a percentage of revenue increased 20 basis points to 7.8%, primarily due to higher rental expense and real estate taxes at certain newly opened restaurants.

General and administrative expenses increased to $6.2 million in the first quarter compared to $5.5 million in the same period last year, primarily driven by higher management compensation in part due to additional head count as part of growth, higher performance-based bonuses and an increase in professional fees, while we incurred costs of $0.4 million or $0.02 per diluted share related to closing of 2 restaurants during the quarter, which we discussed on our last call.

In summary, net income for the first quarter of 2019 was $3.2 million or $0.19 per diluted share compared to $3.2 million or $0.19 per diluted share in the same period last year. Adjusted net income for the first quarter of 2019 was $3.6 million or $0.21 per diluted share compared to $3.2 million or $0.19 per diluted share in the same period last year. We ended the quarter with $7.3 million of cash on the balance sheet, and we currently have no debt.

With that, we will now review our outlook for 2019. We continue to expect full year diluted earnings per share of between $0.91 and $0.95 for 2019. This compares to 2018 adjusted earnings per share of $0.88. Our guidance is based on the following updated assumptions: we continue to expect comparable restaurant sales growth for the year of 1.5% to 2.5%; we expect restaurant preopening expenses of approximately $2.1 million to $2.9 million; we now expect G&A expenses between $23.6 million and $24.1 million. Our effective tax rate is now expected to be approximately 0% to 5% versus our previous range of 6% to 8%, and we are now modeling annual weighted-average diluted per share -- or shares outstanding of 17 million to 17.1 million shares. We are maintaining our development plan for 5 to 7 Chuy's restaurants this year. And lastly, our capital expenditures net of tenant improvement allowances continue to be projected at $24.5 million and $30.7 million.

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

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Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [5]

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Thanks, Jon. As we look ahead, our goal is to create a solid foundation for sustainable top line growth. We believe this is achievable through the initiatives that are being -- that are designed to not only improve brand awareness in newer markets but also drive frequency in our existing markets. Together with our ongoing initiatives, a disciplined development strategy and superior restaurant operations, we also believe we have ample opportunities to improve our profitability and drive shareholder value.

Before we turn to Q&A, I'd like to thank all of our Chuy's employees for their hard work and dedication to earning the dollar every single day.

With that, we are happy to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Mary Hodes with Baird.

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Mary L. Hodes, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [2]

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Could you talk a little bit about the class of openings from 2018? And if you were to back out the units that you closed there, are the remaining units tracking to meet your internal targets?

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Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [3]

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In 2018, yes, we're still tracking kind of on the pro forma that we set, with those subtracted out.

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Mary L. Hodes, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [4]

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Okay. That's helpful. And then on the newer markets like Chicago and Miami, can you just talk a little bit more about how some of the marketing initiatives are going in those markets at this stage? I know you said a few more for -- that are beginning in Q2 here, but anything that worked in Q1 or what you're seeing there?

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Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [5]

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Yes. We believe that how we track -- we're expecting a 5 to 1 return, and we've seen some movement. Again, it's such a small profile and a small time period. We tested it really in the fourth quarter, and then we ran a 6-week run on those markets in the first quarter and then, of course, the digital and paid socials throughout the whole company. And we've seen some movement in them. Again, the key for that is to get much, much more awareness even than that, because we only have the 3 stores in Chicago. And D.C., we have like 5 stores there. So again, we need to run a little bit more, but we're pleased with the return on investment so far as far as store visits.

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Operator [6]

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Our next question will come from Chris O'Cull with Stifel.

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Dennis Mitchell Van Zelfden, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [7]

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It's actually Mitch on for Chris. First, could you comment on the performance of your stores in Texas versus those in your noncore markets during the quarter? And then can you comment on how April trended from both a comp and traffic perspective?

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Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [8]

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How what?

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Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [9]

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April.

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Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [10]

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Oh, April. Well, let's just -- let's start with April. April started out -- because we had the Easter switch as well as we had some bad weather, so we were slightly down in April, but we believe there's about 235 basis points worth of the Easter shift and weather that was impacting that on the period basis. And on a quarter basis, that's about a 70 basis point impact. So after adding that back, we're still pleased with the trend there.

As far as Texas, Texas continues to -- as far as the rest of the country, it continues to do well. However, we had significant sales momentum in all of our geographic areas, but Texas was definitely slightly better.

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Dennis Mitchell Van Zelfden, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [11]

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Okay. Then next, I wanted to shift to some of the labor optimization initiatives. The company previously mentioned steps to reduce the number of store-level managers and develop an expeditor program. Could you comment on where you are on that front? And is this initiative system-wide?

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Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [12]

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Yes. Yes. It is. It's on certain -- there will be some reduction in some of our management pars in any store that has -- and really for the next part, it's mainly on the recruiting side of the business. It's really server expos or basically key hourlies that can work some management functions but more importantly will be able to be moved up into management positions as we move further.

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Dennis Mitchell Van Zelfden, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [13]

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Okay. And then one more for me. On the off-premise business, you mentioned the plan to extend catering to 6 additional markets throughout the remainder of the year, bringing the total to 11. I'm curious, what percentage of the store base at that time will have the service available?

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Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [14]

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And again, it's by market. And how we're doing that is also putting a catering van in the market. And so by the end of the year, we'll have 11, and we currently have 19 supervisory markets. So a little bit more than 50%.

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Operator [15]

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(Operator Instructions) We'll take our next question from Andrew Strelzik with BMO Capital Markets.

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Unidentified Analyst, [16]

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This is [Dan] on for Andrew today. I was hoping you could just talk a little bit about your view on the current commodity environment given that we've seen some beef and pork inflation so far this year. I know you guys called it out for the current quarter. Just wondering I guess how locked you are on your commodities for the rest of the year. And I know you didn't raise the commodities forecast, but I guess I'm just hoping you could maybe add some color about how you're thinking about that going forward.

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Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [17]

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Sure. I've been reading a few things in casual dining and where they project where the restaurant -- the industry projects inflation, and they're still projected to be somewhere in that 0% to 2%. You are correct, I mean the pork, which really doesn't affect us that much because we really don't have much mix in pork, and as far as our beef, we're locked in for the rest of the year, so that's pretty well locked in in that increase that I've mentioned.

We specifically have a specific type of cut with our fajitas, the thin meats, and that is driven up significantly more than some of the other cuts. And so we've locked that in, and we're comfortable with that for the rest of the year. But we believe although it was up 2.4% over the same quarter last year, it was actually down about 1.2% over the subsequent -- over the previous Q4 quarter. So we are seeing the prices come down a little bit from the last half of last year, and so that's why we are still comfortable with the 1% to 2%.

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Unidentified Analyst, [18]

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Great. And then just one follow-up for me. Back on the labor subject, the labor management system specifically. I know you said, I think on the last call, that we could expect to maybe start seeing some benefits from system implementation in the back half of 2019. Just wondering if that's still on track, I guess, given that the system is still being tested as I understand it. Any additional color you could provide on that and how the implementation is going?

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Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [19]

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Well, we have it all set. There's just -- there's a few -- and I know, there's a few bugs that we're still working out, but we have it testing in 2, 3 stores right now. We still expect it in the second half of this year to be in place.

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Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [20]

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Yes. Specifically, it's the clock-in enforcement. The real key of this tool is really our projections and having the proper number of people at the proper times, on and off times. So that's the key thing on the tool, and that's the part we're using a little bit, and that's what we're getting ready to roll, but the clock enforcement will be in the second half.

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Operator [21]

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(Operator Instructions) We'll move next to Brian Vaccaro with Raymond James.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [22]

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Just wanted to circle back on the guidance, Jon, and the lower tax rate looks to be maybe a $0.03 if not $0.04 good guy to the guidance. And so G&A was an offset there. But just curious if you could call out any other shifts in your store margin outlook, inflation outlook, et cetera, that you tweaked within your guidance.

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Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [23]

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I mean the biggest one obviously is the tax. We've got some different things brewing on that. As far as the other guidance, really nothing has really changed that much from a bps standpoint. There's gives and takes on the year-to-date -- or I should say on the full year guidance. There's some give and takes within kind of the restaurant margin, but overall, we're not changing that much. The only one is kind of the increase in G&A, which we increased that approximately $300,000, really related to kind of the performance bonuses. And preopening expenses may trend up a little bit given the timing of some of the store openings in 2020. So we'll give you more color on that as that progresses. But that could trend up a little bit.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [24]

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All right. That's helpful. And just on the quarter-to-date, I was just curious, does the Cinco de Mayo shift -- I know that's moved around in the past and sometimes had an impact on your business -- does that moving from a Sunday to a Saturday have a material impact on sort of the quarter-to-date? I guess we're talking about a couple of days ago, but does that have a material impact?

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Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [25]

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From a Saturday to a Sunday? It's still a weekend, and we try to utilize the whole weekend when we do that. So we did add some extra marketing shift to it, but we don't think the shift in the actual day had much impact this year. It will be a bigger impact when you shift it to a weekday versus a weekend.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [26]

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Okay. And then just last one. Could you spend a minute just on -- I know you've launched some new value initiatives and messaging, day of the week type of value promotions. And could you just spend a minute on kind of comparing how that's impacting your business and the marketing behind those strategies versus the other marketing initiatives that you laid out as your -- in your prepared remarks, Steve?

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Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [27]

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Yes. What we've done there is the daily specials, like we have a Taco Tuesday and we do Fajita Wednesdays. And then we do $5 margaritas in certain stores every single day. And we're busy. We just started that, and we're tackling it. It's definitely increased some customer counts. Jon is doing a down and dirty on the profitability of that as we're speaking, but we're pleased with it. And the way we're supporting it is -- as a group of stores that are doing this -- is through our social media and our paid social -- our paid digital.

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Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [28]

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Yes. And to be clear on that, Brian, it's just a select few stores.

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Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [29]

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A few stores. Yes. I mean our overall strategy is not ever really to discount from a company perspective. A store-by-store strategy, we'll look at it.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [30]

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Okay. So it's a small percentage of your stores, I just happen to be in one of the markets?

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Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [31]

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Yes.

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Operator [32]

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And there are no further telephone questions at this time. I'd like to turn the conference back over to management for any additional or closing remarks.

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Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [33]

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Well. Thank you so much. Jon and I appreciate your continued interest in Chuy's, and we will always be available to answer any and all questions. Again, thank you, and have a good evening.

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Operator [34]

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This does conclude today's conference. Thank you for your participation. You may now disconnect.