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Edited Transcript of CHUY.OQ earnings conference call or presentation 5-Nov-20 10:00pm GMT

·40 min read

Q3 2020 Chuy's Holdings Inc Earnings Call Austin Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Chuy's Holdings Inc earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jon W. Howie Chuy's Holdings, Inc. - VP, CFO & Director * Steven J. Hislop Chuy's Holdings, Inc. - Chairman, CEO & President ================================================================================ Conference Call Participants ================================================================================ * Andrew Marc Barish Jefferies LLC, Research Division - MD and Senior Equity Research Analyst * Brian Michael Vaccaro Raymond James & Associates, Inc., Research Division - VP * Christopher Thomas O'Cull Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst * Daniel Salmon BMO Capital Markets Equity Research - Analyst * James Paul Rutherford Stephens Inc., Research Division - Research Analyst * Mary L. Hodes Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst * Nerses Setyan Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst * Todd Morrison Brooks CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, everyone, and welcome to the Chuy's Holdings Third Quarter 2020 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, Chief Financial Officer of Chuy's Holdings, Inc. At this time, I will turn the call over to Mr. Howie. Please go ahead, sir. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [2] -------------------------------------------------------------------------------- Thank you, operator, and good afternoon. By now, everyone should have access to our third quarter 2020 earnings release. If not, it can be found at 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 guaranteeing 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. With that, all the way, I'd like to turn the call over to Steve. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [3] -------------------------------------------------------------------------------- Thank you, Jon. Good afternoon, everyone, and thank you for joining us on our third quarter earnings call today. I hope everyone is staying safe and healthy. I'd like to begin by expressing my appreciation for each and every one of our Chuy's team members. Their relentless dedication in serving our loyal guests during this challenging environment has truly made a difference for both the company and our guests. And we believe their hard work is paying off, as you can see from our third quarter results. During the quarter, we continued our business recovery and delivered comparable restaurant sales improvement of negative 19.8%, from a negative 39% in the second quarter. As various states were easing their restrictions, we were able to make sequential progress each month through the quarter, and culminating with a comparable restaurant sales of negative $13.8 million in September. At the end of the third quarter, 92 of our restaurants were open for indoor dining, with various capacity restrictions. In addition, we continue to maintain a strong off-premise business of about 30% -- 33% of total sales during the quarter or more than double last year levels. Even as we've reopened up more on-premise dining opportunities for our guests, all in all, we continue to see strong demand for our offerings through all-current avenues of our business. We've also continued to make significant progress with regard to our operating efficiencies. For the third quarter, we grew restaurant-level operating profit by approximately 12% and increased our restaurant-level margin by 700 basis points on lower year-over-year sales. Our restaurant teams have done a tremendous job with cost of sales and labor management despite lower year-over-year sales. Looking ahead, as in-dining rooms' restrictions are further loosened and our sales volume returned to a more normalized level, we would direct some of our efficiency gains to slow as we bring back additional costs. However, there is no doubt that the hard work of our teams during the last 6 months will have a long-term benefit to our operations. We have resumed a portion of our marketing effort with key messaging in the safety, convenience and value, all of which have been resonating very well with our guests during this uncertain time. Naturally, these 3 key messages translate to what we do in each of our restaurants, to ensure our guests can continue to enjoy freshly prepared, craveable Mexican-inspired offerings. Starting with safety. Our investment in technology from this past year has certainly played an important role in keeping our team members and our guests safe while dining in our restaurants. We are currently testing a pay-at-the-table device, which will allow our guests to quickly complete their transactions while minimizing any contact point with our waiters. To further promote convenience, we are continuously improving our off-premise business through enhanced takeout, curbside pickup procedures and DoorDash delivery services. Even with all our dining rooms opened during the third quarter, as I've said, our off-premise business remains strong and performed at more than double our pre-COVID sales. Lastly, we have promoted value by streaming our menu offerings to feature a reduced number of entrées as well as adding convenient family meal and beverage kits, which has proven to be very popular with our guests. As we go into the fourth quarter, we will start to add some of our popular menu items back into our main offerings, with the support of digital marketing efforts to drive awareness. Before I turn the call over to Jon, let me quickly discuss our development. As you know, we opened 1 restaurant in February and subsequently suspended development for the balance of 2020. Barring major changes in the external environment, we currently expect to resume new store development next year and are targeting 4 to 6 new restaurant openings in 2021, starting with a restaurant in Pembroke Pines and 1 in Indianapolis, each expected to open during the first half of the year. With that, I'll now turn the call over to our CFO, Jon Howie, to discuss our third quarter results in greater detail. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [4] -------------------------------------------------------------------------------- Thanks, Steve. Revenues for the third quarter ended September 27, 2020, decreased to $82 million compared to $109.1 million in the same quarter last year, primarily driven by traffic decline due to COVID-19, including the loss of 117 operating weeks on temporary closures of 9 restaurants as well as a loss of 52 operating weeks from stores that were permanently closed during fiscal year 2019. In total, we had approximately 1,196 operating weeks during the third quarter of 2020. Comparable restaurant sales decreased 19.8% during the third quarter. As Steve mentioned, our off-premise sales remained solid during the third quarter at approximately 33% of total revenue. Please refer to today's earnings release for our third quarter sales improvement cadence by period. Turning to expenses. Cost of sales as a percentage of revenue decreased 210 basis points to 24.2%, primarily as a result of switching to a limited menu and eliminating our complimentary buffet-style chips and salsa, Nacho Car, partially offset by 70 basis points increase in the cost of beef and 10 basis points increase in the cost of dairy and cheese. Currently, through the fourth quarter, cost of sales has increased approximately 80 basis points from the Q2 -- from the -- excuse me, the third quarter because of increases in prices of produce and dairy. These prices have remained elevated, and we would expect cost of sales percentage in the 25% to 25.4% for the fourth quarter. Labor cost as a percentage of revenue decreased approximately 640 basis points to 29.1%, primarily due to reduction in hourly employees and store management personnel as the company transitioned to an off-premise operating model with reduced dine-in capacity, coupled with hourly labor rate deflation of approximately 1.8% during the quarter. Currently, we expect our labor costs to be in the 30% to 31% range during the fourth quarter as more dine-in opportunities open. Operating cost as a percentage of revenue increased 60 basis points to 15.4% compared to last year's quarter, primarily due to increases in delivery charges and to-go supplies as a result of the growth in off-premise business, partially offset by lower credit card fees and insurance costs. Marketing expense as a percentage of revenue decreased 80 basis points to 0.6%, driven by the expansion of our national-level marketing initiatives in response to COVID-19 pandemic, while relying on a more cost-effective local store digital marketing effort. We are planning to increase our marketing spend during the fourth quarter as we resume our digital marketing efforts to around 1% to 1.1% of revenues. Occupancy expense as a percentage of revenue increased 160 basis points to 9.1%, primarily as a result of sales deleverage of fixed occupancy expenses. General and administrative expenses decreased to $5.7 million in the third quarter, from $6 million in the same period last year, primarily driven by reduced travel, recruiting and various other expenses as a result of cost-saving measures in response to COVID-19. We expect our G&A to total approximately $6 million during the fourth quarter, including the accrual of special bonus to reward our employees for their performance during this COVID-19 crisis and to make them whole from salary decreases that were implemented earlier in the year. In summary, net income for the quarter of 2020 was $2.8 million or $0.14 per diluted share compared to a net loss of $1.8 million or $0.11 per diluted share in the same period last year. During the third quarter of 2020, we incurred a $3.4 million in impairment, closed restaurant costs as well as a $0.6 million in deferred tax revaluation adjustment in conjunction with the CARES Act. Taking that into account, adjusted net income for the third quarter of 2020 increased 61.1% to $6.1 million or $0.31 per diluted share compared to $3.8 million or $0.23 per diluted share in the same period last year. Before I turn it back to Steve, let me quickly touch on our liquidity and balance sheet. As of -- for the quarter, we had $77.8 million in cash and cash equivalents, no debt and $25 million of available -- or availability from our revolving credit facility. We firmly believe that based on the steps we've taken since the onset of this pandemic, we are standing on a solid financial footing and continue to aggressively navigate this COVID environment. With that, I'll turn the call back to Steve. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [5] -------------------------------------------------------------------------------- Thanks, Jon. While uncertainty surrounding COVID-19 remains, our business is recovering, with ample liquidity and strong financial footing, positive sales trajectory, relentless dedication of each and every one of our team members and the strength of our concept. We are equipped to weather the ever-changing market conditions and are ready to capitalize on our improved business operations once this pandemic subsides. And to our team members, I'm proud to be working alongside a tremendous group of people who work tirelessly to earn a dollar every single day. With that, we're happy to answer any and all questions. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question will come from Chris O'Cull with Stifel. -------------------------------------------------------------------------------- Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [2] -------------------------------------------------------------------------------- Jon, how should we think about the sales and cost correlation as sales recover? I mean do you think the recent 20%-ish [romps] in the past 2 quarters will increase or decrease as sales recover? -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [3] -------------------------------------------------------------------------------- Well, again, we have limited some of the costs coming back, Chris. And so as we open the dining rooms, some of those fixed costs, like we talked about last quarter, we're continually starting to bring those back. And also, labor, as far as front-of-the-house labor will come back. But we do think that we can maintain at least 300 basis points of some of this margin that we've accomplished in the current environment. So if you look at the pre-COVID and add about 300 -- or 350 basis points on that, I think we can attain that. -------------------------------------------------------------------------------- Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [4] -------------------------------------------------------------------------------- And you gave some pretty detailed restaurant line item guidance on the last call. So I'm just curious whether something changed in the plans during the quarter, for the third quarter? Or if you were just trying to be conservative in light of the current environment? -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [5] -------------------------------------------------------------------------------- Well, really, just being somewhat -- I don't know if conservative is the word or just not knowing what the environment is going to entail going forward, because we do have a couple stores that have gone back to to-go only. So -- and depending upon the volatility of what we're seeing kind of with the presidential and the lockups and stuff like that, there's just a lot of uncertainty out there, Chris. So we've been somewhat conservative in that. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [6] -------------------------------------------------------------------------------- Yes. Our crystal ball, at times, get a little bit murky. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question will come from Mary Hodes with Baird. -------------------------------------------------------------------------------- Mary L. Hodes, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [8] -------------------------------------------------------------------------------- I wanted to ask on the comps. The pace of improvement appears to have stalled or maybe even reversed a little bit here in October. And I was just wondering if you could walk through why you think that might be, including whether you're running into capacity constraints at that down mid-teens level? Or whether you think the media attention surrounding the recent rise in COVID cases is having an impact? Just any perspective would be helpful. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [9] -------------------------------------------------------------------------------- Yes to all of the above. So I mean, again, that crystal ball thing is -- yes, definitely, it's definitely been an uptick in the news, even more so lately. We do believe that we're doing pretty well. The key thing for us, as we've mentioned in the last 2 calls, has been the 6-foot distancing. Until that really subsides, 50% to 75% of capacity doesn't really matter. Because that 50% capacity is where we're at with 6-foot distancing. So that's what we've been working on. So we're definitely getting closer to capacity, although we're not all the way there. We believe we can -- through the next few months, even with the existing capacity that we currently have, we believe we have the improvements that we can make in larger parties and home dining over the holiday periods at home, possibly a little bit of catering into the fourth -- last 2 periods in the fourth quarter. And we also believe, with the little bit of marketing that we've added on, that we didn't start again until the beginning of the fourth quarter, and we're 1 month into that, talking about safety, convenience and our value message, we believe will resonate with our customers also. So we do believe we have some capacity as we move forward through the rest of the year from our numbers in August and September. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [10] -------------------------------------------------------------------------------- And I guess another thing, too, is we've had -- we had some delays in school openings as well that... -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [11] -------------------------------------------------------------------------------- Pushed back. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [12] -------------------------------------------------------------------------------- That pushed it back a little bit. But one thing we look at is really look at the weekly AUVs. And if you look at those weekly AUVs, they were about $68,500 in September, and they're about $68,500 in October. So it's staying pretty [good]. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [13] -------------------------------------------------------------------------------- We're pretty excited with where we are at, to be straight up and honest with you. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [14] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Mary L. Hodes, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [15] -------------------------------------------------------------------------------- Yes. That's helpful. And then separately, can you just talk a little bit about what you're seeing in terms of guest feedback or customer satisfaction since you've moved to the simplified menu and changed the labor model here with a fewer number of managers per restaurant? -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [16] -------------------------------------------------------------------------------- Yes. We've seen some consistency in that pre-COVID and through this. I mean it's been very, very consistent. Obviously, the guests, number one, are happy that we're open with any type of menu in a lot of areas that we're in. And then they appreciate the speed and the safety issues that we've taken and the concerns that we have for them and our employees. So again, it's been pretty stable. As far as the manager reduction a little bit, again, with a simplified menu and a different operating hours, because we're not open as long as we were before pre-COVID. We close Sunday through Thursday at around 8. On weekends, we're closing at 9. Again, so the level of service levels are remaining very consistent and very good. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Our next question will come from Nick Setyan with Wedbush Securities. -------------------------------------------------------------------------------- Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [18] -------------------------------------------------------------------------------- Congrats on the amazing margins. A couple of quick questions, just to follow up on an earlier question. Did you say you went back to just to-go only on a couple of stores? And how's that impacted the quarter-to-date number? -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [19] -------------------------------------------------------------------------------- Nada. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [20] -------------------------------------------------------------------------------- No. It hasn't impacted it that much, Nick. But in Chicago, it went back to to-go only. As you know, we only have 1 open in that market right now. And then El Paso had a spike in COVID cases. And so they've gone back to to-go only. Those weren't significantly high-volume units anyway, but those have gone back. So we're ready for those to open back up. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [21] -------------------------------------------------------------------------------- Yes. And then we're talking about a 2-week time frame on those. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [22] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [23] -------------------------------------------------------------------------------- Understood. Just to give us context, any chance you'd be able to tell us like what the 2019 unit level margins for these 92 stores were, just so we understand what the year-over-year comparison is? -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [24] -------------------------------------------------------------------------------- I don't have that with me, Nick. I do not have that with me. But I can provide them. -------------------------------------------------------------------------------- Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [25] -------------------------------------------------------------------------------- Yes, no worries. No worries. And then just overall, on the competitive kind of landscape, the 4 to 6 units next year is a pretty aggressive unit growth rate relative to what, at least, I was expecting. Are you seeing the comparative kind of decline in supply? Have you refined your new unit volume target or -- and even your new unit economic targets? -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [26] -------------------------------------------------------------------------------- Yes. With where we are -- you're seeing us go, specifically the last quarter, Nick, I mean, and then the -- and where we're heading -- moving forward, we feel comfortable right now. If everything stays like, let's say, it is right now, we're comfortable moving forward with what we've been able to do with our management labor, our hourly labor, our smaller menu that we can execute and drive margin even in new units as we sit here today. So as we move forward, that's what we'll be looking at. Again, anything better than that, we're excited about. And anything goes backwards, we'll take a hard look at. But that decision on 4 to 6 is if what we see today or over the -- specifically the last couple of quarters -- I mean, a couple of periods remain the same. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- The next question will come from Andy Barish with Jefferies. -------------------------------------------------------------------------------- Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [28] -------------------------------------------------------------------------------- The labor hourly wage deflation is something we really haven't heard much of. In fact, it's been more finding it a little bit tougher staffing. And obviously, now with the COVID spikes, just kind of managing through sick team members and stuff like that. But can you give us a little bit more color on the wage deflation, actually? -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [29] -------------------------------------------------------------------------------- Sure. What we're seeing on that, Andy, is it's mainly the front of the house. The back of the house has actually ticked up a little bit. But I think the front of the house, I think we -- as we were waiting to hire people back, I think some found other jobs. So we're hiring them back at some lower rates and as well as some of our to-go people were at higher wages. And as we hired them back, to-go has been so busy that they're making so much money that we didn't have to hire them back at the rates that they were. And so the biggest driver of it is really front-of-the-house and to-go wages. -------------------------------------------------------------------------------- Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [30] -------------------------------------------------------------------------------- Very helpful. And did you transition exclusively during the 3Q to DoorDash? And does that help as you kind of implemented -- drive down some of the increase in delivery fees that seemed to show up in the 3Q? -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [31] -------------------------------------------------------------------------------- No. I mean we did that -- we finalized that at the 1st of the year and fully got implemented with DoorDash in the first quarter, I mean, right before [COVID hit]. And so that's been in the whole time. But yes, we've seen -- with the increase, we also implemented increases in our delivery. So we have a different menu on delivery and increased those prices with our regular menu prices in period 2. And so that's helped us out tremendously on those fees -- offsetting those fees. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Our next question will come from Jim Rutherford with Stephens. -------------------------------------------------------------------------------- James Paul Rutherford, Stephens Inc., Research Division - Research Analyst [33] -------------------------------------------------------------------------------- I wanted to circle back to Chris' line of question at the beginning of the call on margins. Just I was curious if you could break down that 350 basis points of what sounds like sustainable margin step-up compared to pre-COVID. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [34] -------------------------------------------------------------------------------- Yes. I mean I'd tell you, most of it, James, will probably be in labor. You're talking probably 300 basis points in labor alone. And the other 50, like we said, I think when we get our full menu back, I think our cost of sales will come back. But that will be gradual. But we still -- we don't anticipate getting the Nacho Car back. So that's a savings of probably 50 to 100 basis points. So really, those are the variables that are totaling up to that 300, 350 basis points. -------------------------------------------------------------------------------- James Paul Rutherford, Stephens Inc., Research Division - Research Analyst [35] -------------------------------------------------------------------------------- Okay. Got it. And then on the table-side payment, is that just payments? Or do you envision this being expanded into maybe ordering and potentially even loyalty down the road? Just curious what the logic behind making that investment in table-side payment is. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [36] -------------------------------------------------------------------------------- Right now, we're just looking at table-side payments from a contactless standpoint. But we continue to test all different things, handhelds. We currently still have handhelds in some restaurants that we're testing, where the servers can take those orders on the handhelds. So we continue to test different items, but this is a new thing at the -- pay at the table. And it's really pay at the table through a QR code in your phone. So it works pretty [slow]. -------------------------------------------------------------------------------- James Paul Rutherford, Stephens Inc., Research Division - Research Analyst [37] -------------------------------------------------------------------------------- I see. If I could sneak just one more in there. I noticed that the average check growth, I think, accelerated sequentially a little bit. I'm just curious what drove that, please. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [38] -------------------------------------------------------------------------------- Yes. What drove that is, obviously, when we reduced our menu, some of the things that we took off were a couple of the lower-priced appetizer items, so people are moving up. So it's definitely on the product mix side of our business, and that's what's really moved it up. And again, if you go out and into the marketplace, you're going to see a lot of [reduced] menus as the same things happened out in the industry. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Our next question will come from Andrew Strelzik with BMO Capital Markets. -------------------------------------------------------------------------------- Daniel Salmon, BMO Capital Markets Equity Research - Analyst [40] -------------------------------------------------------------------------------- It's actually Dan on for Andrew today. First is the -- for me. Those 4 to 6 openings next year, I know you mentioned those do sound like they'll be in existing markets. But just curious if you're potentially looking at moving into any new markets next year, or if these existing markets are really the focus right now. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [41] -------------------------------------------------------------------------------- It will be all in existing markets, where we have strong AUVs already. -------------------------------------------------------------------------------- Daniel Salmon, BMO Capital Markets Equity Research - Analyst [42] -------------------------------------------------------------------------------- Got it. That makes sense. And then, Steve, I know last quarter you talked about how you guys had observed some competitive closures in some of your markets. So I'm just wondering if you've seen that kind of continue through the past few months or even accelerated in any way? And if you could just give us maybe some incremental details on what kind of stores you're seeing close, and whether those are potential real estate opportunities for Chuy's, either from a new store or relocation perspective. I know we've heard some others talk about maybe how some of the real estate development right now is lower quality, but I imagine that probably varies by market. So just curious what you guys are seeing. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [43] -------------------------------------------------------------------------------- Yes. I think what I mentioned last time is the rumor of it all happening. We haven't seen a whole bunch, and I really don't anticipate to see a whole bunch We've heard, though, some of the smaller ones, local guys might have gone out. But I think it's going to really be after the holidays is where you're going to see it during the first quarter. And that's what we're looking for, and that's why we'll be really taking a look at our existing market points and what's happening in the competitive landscape as we move forward. Again, not a ton of it so far. Again, just rumors, whether it's restaurant news or what you're hearing out there. And again, a few locals. But as we get it over through the holiday, past the holiday into the first quarter, I am hearing a little bit more. And until that happens, we haven't seen any big trend in the sites opportunities, cost opportunities or any of that yet. -------------------------------------------------------------------------------- Daniel Salmon, BMO Capital Markets Equity Research - Analyst [44] -------------------------------------------------------------------------------- Okay. That's helpful. And then just one more quick one, if I could. I know you had previously paused the marketing, opt some time out. Obviously, it's coming back here in 4Q. But I'm just wondering, if there is a second wave of shutdowns, is there the potential to pause that marketing again? Or are you more comfortable in sort of an off-premise-only capacity kind of continuing those marketing efforts if we are forced to go through a second wave of shutdowns next year? -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [45] -------------------------------------------------------------------------------- Yes. Thank you. Great question. We're very nimble, okay? We're very nimble, as we've been able to show and what we've been able to do over the last 6 months. And we'll continue to be nimble on any and all, whether it be cost expenses or whatever it goes from there. So we have the ability to turn on and off things as we like. What I like about this right now is, in this environment, the 3 main issues that we're doing, which is an all-digital and it's all paid, both social and digital. We're talking about the things that I think are really are our drivers, which is the concerns of our employees and hourlies and also customers is safety being #1; convenience and ease of execution, #2; and then value being #3, I think, resonates in this period of time. But obviously, we'll be able to turn that wick up or down as we see fit. Right now, I'm comfortable over the next 2 months, depending on whether we stay where we're at. And I expect, as Jon mentioned, that we'll probably increase our spend up to that 1%, and we'll play it by ear as we move forward. But I'm anticipating for that to carry over through into the first quarter and second quarter of 2021. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- The next question will come from Todd Brooks with CL King. -------------------------------------------------------------------------------- Todd Morrison Brooks, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [47] -------------------------------------------------------------------------------- Just a couple left here. First, if you can talk about -- I know we've got the streamlined menu now, but you talked about some items coming back on here for holiday. Can you talk about the type of things that you're adding back and the impact on food cost as you bring these back on the menu? -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [48] -------------------------------------------------------------------------------- Yes. Yes. And we're talking just a handful. We don't see a big food cost mix change, and so we don't see a huge effect on food cost per se. But you'll see us add a few of our appetizers that we wanted to add on, whether it be the quesadillas, the nachos and the panchos. You'll see some of those pop back on. You'll see a couple of things, an add-on salad that we'll be bringing back, chicken enchilada we'll be bringing back. And then through the winter time, it makes sense to bring back our tortilla soup and all that type of stuff that we make from scratch in our building -- that we'll do that daily. So those will be the main ones. And then we also think coming back into the holidays, we have the Tres Leches cake that we want to bring back for everybody during the holidays, which makes a lot of sense for us. So again, that's a handful of items. And you'll see a stay there probably for the next couple, 2, 3 months, and we'll evaluate where we're at in this pandemic and look at some sort of change in our menu around period 3 of 2021, where we might have some add-ons and a little bit of a newer menu right around then. As long as things are progressing well through the pandemic, and we're getting a little less of the social distancing sizes. -------------------------------------------------------------------------------- Todd Morrison Brooks, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [49] -------------------------------------------------------------------------------- And Steve, with some of these additions being kind of plus items, whether it's appetizers or desserts, do you think that there's an average tailwind as you add these back to the menu? Or are they replacing things that are in the same categories? -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [50] -------------------------------------------------------------------------------- I think it could go down a little bit, to be straight up and honest with you. Because, again, it's bringing back the appetizers, it's a little bit lower check average. And if you've eaten in our restaurants, if you eat our appetizers, there could be full meals on how people eat them in our restaurants. So it could be a tad bit. And again, it really goes along with that convenience and, specifically, value message that I wanted in the holiday time period. But no, I don't expect the check average to go up. -------------------------------------------------------------------------------- Todd Morrison Brooks, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [51] -------------------------------------------------------------------------------- Okay. Great. And then my final question, if we just talk about maybe how many stores you're able to do alcohol to go with the to-go orders, how many of the stores is that in? What percent of off-premise sales is alcohol? And do you think that this -- now that, that the genie has been led out of the bottle that this is here to stay, and you'll be able to do it (inaudible)? -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [52] -------------------------------------------------------------------------------- I think it is, yes. Thank you. I apologize. I think it is here to say. I mean once -- and anybody that had some revenue, it's going to be hard to move away from it from a tax perspective, especially in the local government. So I think that is here to stay. I'd say we probably have it in the 70% to 80% of our restaurants. And right now, the alcohol sales is about 3.1% of our sales. Again, that... -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [53] -------------------------------------------------------------------------------- Of to-go sales. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [54] -------------------------------------------------------------------------------- Of to-go sales. So we feel pretty good about that, and it's been consistent over the last 2 to 3 periods in a row. And again, I see that staying there. And I do think you might end up seeing that 70% to 80% get bigger as time goes by also. So we like it, and we'll continue with it. -------------------------------------------------------------------------------- Todd Morrison Brooks, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [55] -------------------------------------------------------------------------------- Yes. And a quick follow-up. I know you've had some success with kits. Do you have further adult beverage kits in development that could drive that mix higher? -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [56] -------------------------------------------------------------------------------- Right now, we have a whole bunch of things we're looking at, but nothing ready to talk about or roll out. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- (Operator Instructions) Our next question will come from Brian Vaccaro with Raymond James. -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [58] -------------------------------------------------------------------------------- Jon, I wanted to circle back on store margins, if we could, and appreciate your fourth quarter guidance there. But could you give us some perspective on the margins kind of as you moved through the third quarter? And give us some -- any perspective on where margins were quarter-to-date? -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [59] -------------------------------------------------------------------------------- As far as quarter-to-date in the fourth quarter? -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [60] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [61] -------------------------------------------------------------------------------- Yes. So we just closed out the period 10, and so we're still finalizing those financial statements. But they're similar. They're a little lower by probably 100 basis points, but they're in that range. I think I said on the call last quarter that margins were in that 19%, 20% range in July, August and September. They remain kind of right around that 19% to 21% to come up with the ones that we had here in the quarter. So they're consistent, right around that 20%. I mean the things that we're looking at in the fourth quarter, obviously, is -- it is our lower indexing quarter. So we'll have -- it is our lowest indexing quarter. So we'll continue to have -- if there is some -- if we stay consistent, it could have some deleverage there as well as -- if it does increase a little bit, and we're able to open our dining rooms back, we're going to have some added costs there. But we still expect it to be in those high teens. -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [62] -------------------------------------------------------------------------------- Okay. That's great. And speaking of seasonality, when you look back at the fourth quarter, your historical seasonality, if you will, or maybe just hone in on Q4 of '19. Can you remind us how much lower are your AWS in December as it relates to October, November? Or just maybe comparatively to October? -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [63] -------------------------------------------------------------------------------- So if I'm looking at Q4 of 2019, I mean, we're looking at average AUVs in the like $70,000 -- high $70,000 range in Q4 2019. And in Q3, we were at last year at about $81,000 to $82,000 a week. So that ought to give you kind of the drop there. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [64] -------------------------------------------------------------------------------- Having said that... -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [65] -------------------------------------------------------------------------------- Right. I guess the question was does December -- are October through December pretty even? Or is there a continued falloff as you move into the holiday season. I just -- that's really kind of like the cadence quarter. Sorry if I didn't ask that effectively. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [66] -------------------------------------------------------------------------------- Yes, I'm sorry. There is a continued falloff during the holidays, except for that kind of last week of the year. That's probably one of our biggest weeks of the year, generally. I don't know what it's going to be this year, but that week between the Christmas and New Year's tends to be a very big week for us. -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [67] -------------------------------------------------------------------------------- Okay. And sorry, Steve, I didn't mean to talk over you. What was that? -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [68] -------------------------------------------------------------------------------- No, that was good. I was about to interrupt Jon, but I know him better. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [69] -------------------------------------------------------------------------------- Yes. The other thing, too, I might mention, and this was asked earlier, I think, by Nick, the difference between -- if we were looking at our existing stores and what we call the existing -- they were in the comp base at the end of the year, which was that 81 stores. Our margins have increased about 430 basis points on those stores. So I'm not, for sure, kind of what the question was, but our existing stores have had a significant year-over-year margin savings as well. -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [70] -------------------------------------------------------------------------------- Okay. Great. Real quickly on commodity inflation. Has the beef inflation you saw in Q3 abated at all? Or what are your 4Q commodity inflation expectations? I'm curious if you have an early look based on your contracts, et cetera, on how you think '21 could play out from a commodity standpoint. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [71] -------------------------------------------------------------------------------- Well, we've actually -- our fajita beef has been somewhat consistent. And we've actually -- we're starting to lock up 2021. We think we'll be at a decent price on that. But we did have increase in ground beef a little bit, that's what's driving that. But the biggest thing on that is not as much price, it is mix. Because our mix is really skewed towards fajitas, and with these fajita kits and what people are getting at the store. So that's really what's driving that increase in the cost of sales is a higher-priced item at a higher mix. -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [72] -------------------------------------------------------------------------------- Right. Great. And I guess the last one for me. I know it's only been a few hours, but I wanted to ask about the Florida state minimum wage increase that was voted in earlier this week. Could you help us frame how much of a cost pressure that represents with the tipped wage sort of expected to increase pretty meaningfully over the next 5 years? I know Florida is only, say, 10% or so of your stores. But could you help us frame that at a high level? -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [73] -------------------------------------------------------------------------------- Well, I'd tell you what, it's just been a few hours, you're right. I still haven't got over -- I shouldn't say, but -- so anyway, no, I mean, we're still analyzing that. But I mean, you can see those rates in pretty well. We won't have that entire rate, obviously, because we're above some of those rates already, right? So it's not going to be the significance of all of that rate on our wages. But there will be a good piece that obviously will raise the overall rate wages, too, which we don't know how that will impact until they start being implemented. -------------------------------------------------------------------------------- Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [74] -------------------------------------------------------------------------------- Okay. And Steve, I guess, while I have you on that topic, just generally speaking, thinking about server wages in most markets, are you that much above, say, the tipped wage that's allowed in that state? I know back of house, you can see wages that are well above state minimum wage levels. Just curious if that wage dynamic holds on the server side? Or does, say, in Texas, $2.13, say, in Florida, you're in the $5.50s. Just broadly curious on the server entry wage topic. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [75] -------------------------------------------------------------------------------- Yes. Right now, you're going with the tipped wage, whatever, that's by market-by-market. So we're at or above it in each and every one of the markets that we're currently already in. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [76] -------------------------------------------------------------------------------- Yes. Probably the one thing to look at that, there are some that are indirectly fit that we will pay more, obviously. And some that aren't that we still have at the front of the house, and that would be your hostess, and some of those that are paid more than the regular wage, not tipped wage. So that's all going in the front of the house as well. -------------------------------------------------------------------------------- Operator [77] -------------------------------------------------------------------------------- Our next question will come from Chris O'Cull with Stifel. -------------------------------------------------------------------------------- Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [78] -------------------------------------------------------------------------------- Most of my questions have been answered, but I had a couple of follow-ups. One was, Steve, do you think it's going to be difficult to rebuild sales in the 9 stores that have been closed for the past several months? -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [79] -------------------------------------------------------------------------------- Chris, I think those markets, we'll take a hard look at them. Again, as I told you last time, I'm going to be visiting those in this fourth quarter, really, to understand the changes in those markets based on competition and everything that's happened in the marketplace as we looked at them. We're going to make sure that we have the opportunity not only to build, but also grow, or we'll make a tough decision possibly not to open them. So we will look at all that stuff. -------------------------------------------------------------------------------- Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [80] -------------------------------------------------------------------------------- Okay. And then I know patio sales were running up, I think, 10%, 13% at the end of the last quarter, which was up year-over-year. Do you guys have an update on the patio mix for the third quarter? And then should we expect the tailwind from that to abate in the fourth quarter with cooler weather? -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [81] -------------------------------------------------------------------------------- Yes. So at the third quarter, we were at about 11.5% for the quarter, and that's compared to 7.3% last year. So we've seen a significant increase in that. If you look at period 10, period 10 and the first period into the fourth quarter, that actually jumped up to 13.3%. So we're still seeing some decent days to be out in the patios, definitely in the Southern markets. And so we continue to build that. Obviously, when we get into the heavy winter, that may come back a little bit. But we've done a lot of things to extend that patio. We've extended the patios, but then we've put heaters out there and things like that to extend that patio season. So we're pretty happy where we are, but we do know in the winter months that, that could come back a little bit. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [82] -------------------------------------------------------------------------------- Specifically in December, January and the beginning of February. -------------------------------------------------------------------------------- Jon W. Howie, Chuy's Holdings, Inc. - VP, CFO & Director [83] -------------------------------------------------------------------------------- Yes. Is that it? -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [84] -------------------------------------------------------------------------------- Operator? -------------------------------------------------------------------------------- Operator [85] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I would like to turn the conference back over to Steve Hislop for any closing remarks. Please go ahead, sir. -------------------------------------------------------------------------------- Steven J. Hislop, Chuy's Holdings, Inc. - Chairman, CEO & President [86] -------------------------------------------------------------------------------- Again, thank you guys 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. Stay healthy, and have a good evening. -------------------------------------------------------------------------------- Operator [87] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.