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Edited Transcript of HABT earnings conference call or presentation 2-Aug-17 9:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Habit Restaurants Inc Earnings Call

Irvine Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Habit Restaurants Inc earnings conference call or presentation Wednesday, August 2, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ira M. Fils

The Habit Restaurants, Inc. - CFO, Secretary and Director

* Matthew D. Hood

The Habit Restaurants, Inc. - CMO

* Russell W. Bendel

The Habit Restaurants, Inc. - CEO, President and Director

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Conference Call Participants

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* Andrew Michael Charles

Cowen and Company, LLC, Research Division - VP

* Brandon Sonnemaker

* Colin D. Radke

Wedbush Securities Inc., Research Division - Analyst

* Hugh Gordon Gooding

Stephens Inc., Research Division - Research Associate

* James Alan Fuller

Guggenheim Securities, LLC, Research Division - MD and Senior Internet Analyst

* Jeffrey Daniel Farmer

Wells Fargo Securities, LLC, Research Division - MD and Senior Restaurant Analyst

* Mary L. McNellis

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

* Nicole Miller Regan

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Habit Restaurants, Inc., Second Quarter 2017 Earnings Conference Call. Please note that this conference is being recorded today, August 2, 2017.

On the call today, we have Russ Bendel, President and Chief Executive Officer, and Ira Fils, Chief Financial Officer. And they'll be joined by Chief Marketing Officer, Matt Hood, for the Q&A session.

By now, everyone should have access to the company's second quarter 2017 earnings release. If not, it can be found at www.habitburger.com in the Investor Relations section.

Before the company begins their formal remarks, I need to remind everyone that the discussion 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 the company expects. The company refers you to their recent SEC filings for a more detailed discussion on the risks that could impact their future operating results and financial conditions.

Lastly, during today's call, the company will discuss non-GAAP measures, which they believe can be useful in evaluating the company's performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to comparable GAAP measures are available in the company's earnings release.

With that, I'll now turn the call over to Russ Bendel. Please go ahead.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [2]

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Thank you, and good afternoon, everyone. Welcome to our earnings conference call.

I'll start the call with an overview of the second quarter and then share our thoughts for the remainder of 2017. Ira will then review our second quarter financial results before we open up the call for your questions.

At a high level, we were again pleased with our results for the second quarter despite an unfavorable Easter calendar shift. We successfully lapped the highest comp quarter from last year, 2016. For the quarter, total revenue increased 17.2% year-over-year to $83.3 million.

Adjusted EBITDA for the quarter increased to $8.8 million compared to $8.7 million in the prior year. And company-operated comparable restaurant sales increased 0.1%, marking our 54th consecutive quarter of positive comparable restaurant sales.

During the quarter, we continued to build on our strategy of introducing premium-priced high-quality limited-time offerings while also promoting our everyday value.

From early March until late April, we featured our Golden Chicken Salad, which was extremely popular with our guests and was the best-selling entree salad on the menu during this promotional period. In late April, we began promoting our Tempura Jalapeño Charburger. This Charburger tops a flame-grilled beef patty with crisp tempura-battered jalapeños, American cheese, fresh lettuce, tomatoes, spicy jalapeño ranch mustard and pickles, served on a toasted bun. This burger had become one of our most requested items, and we were pleased to return it to our menu for this limited time.

This summer, we have been featuring our Santa Barbara Charburger as well as a Strawberry Balsamic Chicken Salad. The salad includes perfectly seasoned chargrilled chicken breast on a bed of hand-cut garden greens with fresh sliced strawberries, dried blueberries, feta cheese crumbles tossed in a house-made strawberry balsamic vinaigrette.

We have also innovated our beverage offerings this summer by introducing a peach ginger limeade. This is in response to the industry-wide shift away from carbonated beverages. These menu initiatives are in line with our philosophy of menu evolution, not revolution. And our ability to introduce new culinary items or LTOs that are at a tremendous everyday value even at a slightly higher menu price, which is great for our customers and great for us.

In addition to our LTO strategy, we continue to leverage digital media and electronic media with selected campaigns in key markets. During the second quarter, we spent about 80 basis points in marketing and feel our efforts have been successful in helping to increase awareness and drive trial.

One additional tactic we used in the second quarter was successfully tapping into our CharClub data page, which now has over 600,000 active and engaged Habit guests. We exclusively offer CharClub members a free Charburger with cheese to celebrate the Father's Day graduation time in June and into the first week of July. While we do not anticipate using this tactic frequently, limited-time, narrowly executed offers like this allow us to leverage the power of our database while bringing guest loyalty and driving traffic.

Looking ahead, we will be holding our own Hatch Chile Festival again this September. Hatch chiles are grown in New Mexico and were created by combining 3 chiles to create the perfect blend of heat and flavor. We chargrill each chile over an open flame to bring out its smoky flavor and deepen its savory taste. The limited-time Hatch chile menu items include our Hatch Chile Charburger, a Hatch Chile Chicken Sandwich and a Hatch Chile Chicken Salad.

In light of the choppy sales trends in the back half of the second quarter and to start the third quarter, we're increasing our targeted and mass media initiatives in the second half of Q3. We will be executing our proven digital and electronic media tactics from prior quarters at a higher media rate to help build awareness and drive traffic. We will focus on our LTOs and everyday value messaging as well as promoting our No Kid Hungry partnership, which has continually resonated well with our guests.

Moving on to unit growth. During the second quarter, we opened 10 new company-operated locations, and franchisees opened one new location. These 10 new locations include one each in Arizona, Florida and Utah with the 7 remaining being in California. Two of these openings were end-cap drive-throughs, including the first drive-through in Utah. We remain on track to open 8 to 10 drive-through locations in 2017.

In fact, subsequent to the second quarter, we've opened 2 more drive-throughs and anticipate opening 1 to 2 more in the third quarter. 6 more East Coast stores are scheduled to open in 2017, and we continue to be pleased with the performance of our stores in these new markets. The one franchised location opened during the quarter was in the newly renovated food court at the Reno Circus Circus Hotel.

We finished the quarter with 175 company-operated locations, 14 franchised licensed locations for a total of 189 systemwide locations. We did have one planned store closure in California in July due to the expiration of its 10-year lease. All this -- although this store was cash flow positive, we chose not to renew the lease and are actively looking for another location in the trade area.

We continue to remain confident in our ability to open between 31 and 33 new company-operated restaurants in 2017, and we expect to open 8 to 10 new company-operated locations in Q3. We continue to expect our franchisees to open 5 to 7 locations for the full year.

With that, I'd like to turn it over -- turn the call over to Ira to discuss our results in more detail.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [3]

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Thanks, Russ. Now turning to the results for our 13-week second quarter ended June 27, 2017. Total revenue increased 17.2% to $83.3 million in the second quarter of 2017 from $71.1 million in the comparable quarter last year. The 10 new company-operated restaurants opened during the quarter were open for a combined 51 sales weeks. The 175 company-operated locations were open for a combined 2,196 sales weeks in the second quarter.

As Russ mentioned, comparable company-operated restaurant sales increased 0.1% in the second quarter. In breaking down the 0.1% comp store sales increase, we saw a 0.3% increase in traffic, which was offset by a 0.2% decline in the average transaction amount. In breaking down the 0.2% decline in average transaction, we had a 1.5% net increase in price, offset by a 1.7% decline in mix.

Turning to expenses. As a percentage of company revenue, food and paper costs were 31.6%, which was a 180 basis point increase compared to last year. The increase was largely driven by significant commodity pressure in produce, beef and chicken. Labor and labor-related expenses as a percentage of company revenue were 32.6%, which is a 30 basis point increase from the second quarter of 2016. Of the 30 basis point increase, 50 basis points was due to an increase in direct wages partially offset by a 20 basis point decrease in labor-related expenses.

The increase in direct labor was largely due to wage rate increases for hourly employees. For the quarter, our average hourly rate increased a little under 6%. Partially offsetting the wage rate increase were productivity gains centered around enhancements to our opening and closing procedures. The decrease of labor-related expenses was primarily due to slightly lower workers' compensation expense. Occupancy and other-related expenses as a percentage of company revenue increased approximately 40 basis points to 16.4% of company revenue. The increase was largely due to higher rent primarily associated with new unit development as well as slightly higher utilities expense.

Our general and administrative expenses increased approximately $0.8 million to $8.3 million during the second quarter primarily due to costs associated with supporting an increasing number of restaurants in a larger geographic area. As a percentage of total revenue, general and administrative expenses decreased to 10% from 10.6% of revenue.

Depreciation and amortization expense increased $5.4 million (sic) [increased to $5.4 million] from $3.6 million last year as a percentage of revenue. Depreciation and amortization increased to 5.4% in the second quarter of 2017 compared to 5% in the second quarter of 2016. Preopening costs were $735,000 for the second quarter of 2017 compared to $533,000 in the prior year quarter. We continue to expect preopening costs to range between $85,000 and $90,000 per new restaurant for 2017.

GAAP net income for the second quarter of 2017 was $1.1 million or $0.05 per diluted share compared to $1.2 million or $0.07 per diluted share in the prior year. On an adjusted fully distributed pro forma basis, net income for the second quarter was $1.7 million or $0.06 per fully distributed weighted average share compared to $2.3 million or $0.09 per fully distributed weighted average share in the second quarter of 2016.

In terms of our liquidity and balance sheet, as of June 27, 2017, we had cash and cash equivalents of approximately $45.3 million and outstanding debt of $10.6 million, which consists solely of our deemed landlord financing. We expect capital expenditures to be between $44 million and $47 million for the fiscal year 2017. Based on our growth plans, we believe expected cash flows from operations and current cash on hand will be sufficient to fund our capital needs for the next several years.

Our $35 million credit facility expired in July of 2017, of which we had zero borrowing against. While we do not expect it will be necessary to borrow against a credit facility in the near term, we are in the process of executing a new credit agreement with Bank of the West, which provides us with a $20 million revolver.

With regard to our fiscal 2017, we are updating our full year guidance and now expect the following: Total revenue will now be between $335 million and $338 million compared to our prior guidance of revenue between $338 million and $342 million. Comparable restaurant sales are now expected to be flat to up 1% for the year.

Given the sales that we saw during the second quarter and into the early part of the third quarter, our current trends would lead us to expect comparable sales at the lower end of our full year range. However, as Russ noted, we have a few marketing-related initiatives planned throughout the remainder of the year that we believe can contribute to our sales growth.

We expect our restaurant contribution margin to now be between 19% to 19.5% of sales for the full year compared to our prior guidance of approximately 20%. it is also now our expectation that commodities will be up 3% to 4% for the year primarily driven by escalating ground beef, chicken and produce prices. Our prior expectation on commodities was an increase of between 1% to 2% for 2017.

In regard to labor, we expect our average wage rate increase to increase 6% to 7% in 2017. General and administrative expenses are expected to be between 33 -- $330,250,000 and $330,750,000, which is a slight reduction from our prior guidance of $33.5 million to $34 million.

As Russ stated earlier, we continue to expect to open between 31 and 33 company-operated locations for the full year with 8 to 10 opening in the third quarter. We expect our franchisees to open between 5 and 7 locations for the full year. We continue to expect our depreciation and amortization expense to be a little under $19 million for the full year. And finally, we expect a pro forma effective tax rate of approximately 41.5%.

With that, I'd like to turn the call back over to Russ for some final remarks.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [4]

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Thanks, Ira. While it continues to be a challenging operating environment for the restaurant industry, The Habit remains well-positioned as a brand built on innovative and craveable food, genuine hospitality and a culture of quality with everyday value. We feel as good today about the long-term trajectory of the business as we ever have. And as usual, I always like to wrap up my comments by saying a big thank you to all the men and women in our restaurants. They certainly do an outstanding job of taking good care of our guests each and every day.

With that, operator, I'd like to turn it over and start the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Nicole Miller of Piper Jaffray.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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Can you talk about the mix decline in the 2Q period, and what you attribute that to?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [3]

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Yes. It was a couple things. So it was a continuation of the decline in [beverage incidents] we've been seeing. We also saw a little decline in the mix of sides, and a lot of that has to do with the promotion that we ran the first part of the quarter and the last part of the quarter when we had our free char -- the tail end of Q1 free Charburger promotion as well as the Dads & Grads at the end of the quarter. You see a little bit lower check with those, and so that really comes out in the decline in the mix. And as well as the fact -- well, there's one more thing. We also -- the May promo we ran during the quarter, we ran the Tempura Charburger, which was up against the Super Food Salad, so it was a lower price point in the primary promotion, even during the LTO period. So it was actually there was multiple negative things pushing that down this quarter.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [4]

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But we still felt good about the items we promo-ed because they were very well received by our guests.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [5]

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Are those the same things that more or less contribute to a soft 3Q comp environment despite comparisons using by, I believe, about 400 basis points? Or is there something we should also be aware of?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [6]

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You know I think some of them are and some of them aren't. I think the beverage one is a continuation of what we've been seeing. The side's a little bit, not as much but a little bit. And I think -- and then I think, quite frankly, I think a lot of it, we feel is a lot of the macro environment that we're feeling some pressure on, on the revenue side.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [7]

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No question. Yes, the macro environment continues to be very challenging as should come as no surprise to anyone on the call.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [8]

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And then just a final question from me. In terms of beef costs seeing inflation, when does that become a net-net positive in terms of either limiting overall limited-service burger discounting and/or giving you a reason to be able to take price in the stores, very much appreciating and respecting that you're an everyday value model.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [9]

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Yes. That -- I wish we knew the answer specifically to that question because it's a good one. Most of the larger QSR players that are engaged in deep discounting right now probably are contracted for beef, and when those contracts end, if they reflect higher prices, may or may not have an effect on their -- on what they promote. But it has been -- and we don't feel right now is the time for us to take price. Value is an important component to what we are, and with 180 basis points of increased food cost pressure for the quarter, that obviously had a significant effect on our margins. But we feel very strong that the right thing to do for this business, short and long term, is to eat those additional costs right now and to continue on the path that we are.

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Operator [10]

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The next question comes from Andrew Charles of Cowen and Company.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - VP [11]

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Could you talk a little bit more specifically about the sales performance in the quarter. It sounded like last quarter, April's sales were off to a good start. You mentioned that the first half was stronger but just trying to get our arms around the fact that you did the free Charburger promotion in June while lapping the easiest monthly comparisons. So I guess that's part of the question. And also, just what are the tools in the toolkit? I know that you said there'd be some marketing adjustments, too, but in order to combat kind of the decline in sales, how else you are planning to address this?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [12]

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Hey, I'll take the first half of that, and then I'll turn it over to Matt for the second half, but...

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [13]

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A good -- we're (inaudible) to question.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [14]

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So we did, April was off -- was off to a pretty good start. We talked about that on the last call, and we definitely saw a decline from where we were running in May and into June as well. And that obviously played into kind of our decision to run the Dads & Grads promo at the end of June. And really, we've -- as we've seen Q3 start, we haven't seen things move in the positive direction yet, so it -- sales are a little softer than we'd like to see right now. There's no question. And I think that'll lead to a couple things Matt's going to talk about.

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [15]

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Yes, Andrew, this is Matt. Just to follow up to your question, we -- over the course of the last couple of years, we've deployed somewhere between 50 to 60 basis points in marketing-related initiatives. Those have been in the digital channel. We've talked about some of the things we've done from a social standpoint. We've even done some smaller forays into radio. And what we've been able to take from that is we've been able to do enough to really continue to drive the top line, if you look at the hurdles we've had the last several years. And so what we're going to do is we're going to take sort of the best of the best of what we've seen work and deploy that at a larger scale. I think, Russ, in the opening comments, talked about expanding the reach and frequency of some of the initiatives that we've done, both on the digital side but then also leaning a little heavier into mass media with some of the radio that we've done. And without getting into the nits and nats of the details, I think seeing that we've had some success with it in the past at smaller levels gives us confidence that we can turn up the lever a little bit as we come into the third quarter. And see a little bit choppier weather out there. So that's a little bit of what we're going and why we have confidence in having seen it work over the past 3 or 4 years.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - VP [16]

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Great. If I had the right number, the 2,247 operating weeks during the quarter, since you guys saw a little bit of a deceleration in the new-store volumes, so far, it looks like, at least in the recent months, it looks like the new stores have been focused more on drive-through and less on East Coast, so I would have figured that number would be growing a little bit more. But maybe you can help us kind of frame that out a little bit more.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [17]

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Well, I think the number -- the total number is 2,196 weeks. Is that what you said for the sales weeks for the quarter?

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - VP [18]

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Yes, and then there's 51 new weeks on top of that.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [19]

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Well, so those are inclusive in that 2,196. Those are just the stores that were open during the quarter, what weeks they were open for the quarter.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - VP [20]

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Got it. Okay. Just on the topic then new-store performance, then, can you fill it in a little bit more? I guess, looking at those numbers, it looks a little bit better. But kind of what are you guys seeing relative to what you've been running?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [21]

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I think as we continue to open a few more stores on the East Coast, they don't open, obviously, at the same volumes as our Western United States stores do. But I do want to tell you, while we don't have a lot of stores in the comp base back East, the stores that are in the comp base and the stores that are open over 1 year, we are very pleased with their sales trajectory and how they're comparing to the year before. And it continues to give us great confidence on our strategy and on how we're trying to balance East Coast, West Coast store openings going forward.

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Operator [22]

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The next question comes from Will Slabaugh of Stephens Inc.

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Hugh Gordon Gooding, Stephens Inc., Research Division - Research Associate [23]

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This is Hugh on for Will. First, on the pricing, you sort of touched on this a little bit earlier, but can we expect this to keep running at the current 1.5% to 2.5% level?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [24]

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Yes, so the net price we had during the quarter was 1.5%, and that's a little bit depressed by the discount or the promotional that we did during the quarter. And so that really -- it would have been net -- it would have been about 2.1% if you had kind of backed that out. And if we did take it -- in the end of the quarter, we took a small price increase in kind of regional L.A. -- there's a part of L.A. where minimum wage went from $10.50 to $12, and it was about 15 restaurants for us. And then, in the Bay Area, just in general, where wage increases are running the highest for us in the country, we took a similar increase to help offset the wage increase. So net of that, as you blend that into the total, I think it's about 80 basis points. So if you're thinking about the back half of the year, we're going to be -- have about a 300 basis points, about 3% of pricing baked into the back half of the year. And quite frankly, as I think Russ talked on it a little earlier, we don't anticipate taking anymore until, really, January of '18, when we have another California minimum wage step-up.

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Hugh Gordon Gooding, Stephens Inc., Research Division - Research Associate [25]

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If I could get one more in on the progress of the East Coast development. And you were mentioning this a little bit earlier, too. But can you talk about the unit economics of some of your newer East Coast stores and how they're performing versus the system? And more specifically, in the past, you've mentioned they open up to about a 400 bps disadvantage on food cost and supply chain cost. What does the process and time line look like for narrowing that gap and leveraging the growth there?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [26]

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Well, stores that are open, you are correct. They open to about a 400 basis point disadvantage on supply chain, but as they -- as time has gone on, that differential has narrowed some, mostly in the New Jersey area, where we have more history. And we're starting to get some efficiency in Florida as well. And we would like to think over a period of time, we will cut that 400 basis points in about half. We don't break out performance -- unit performance by any region specifically, but we say that all new stores -- Ira, why don't you give...

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [27]

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So what we -- what our target is for all new stores to open on average at $1.4 million with the West -- the Western markets opening above that, and the Eastern markets opening below that. And kind of what we've also said is that if you think about where some of our large kind of national competitors are, they're opening -- their volumes are around $1 million, $1.1 million. They bought the Five Guys and Smashburger, and we're opening in new -- those are their national averages, and we're opening in new markets at average kind of at or above, slightly above that. So we feel pretty good about how we're coming into these markets to open. And then, as Russ also talked about earlier, we are comping up significantly above the system average in these markets.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [28]

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And again, I think this is -- it's playing out like we would have expected it to -- is that as we continue to build a little more brand awareness in each of these kind of 3 key areas: North Jersey, not as pronounced yet in the Washington, D.C. area, but in Florida, we're opening -- and the 2 competitors that Ira mentioned have significant more penetration than we do in these areas. And we're opening in their backyard at volumes that we're pretty pleased with at this point, at this stage of the game. And as I said and Ira said, as these stores can ramp over 1 year and get into the comp base, we are very pleased with where their sales are and, most important, the trajectory of where they're headed. So again, it just gives us -- it gives us confidence that we're continuing to build stores on the East Coast.

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Operator [29]

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The next question comes from Matt DiFrisco of Guggenheim Securities.

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James Alan Fuller, Guggenheim Securities, LLC, Research Division - MD and Senior Internet Analyst [30]

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This is Jake on for Matt. Kind of a bigger-picture question. Have you guys starting -- have you started to see any cannibalization for any of the new-store openings taking from any of the existing locations?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [31]

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Yes. We've seen -- we got here in 2008 when there were 16 restaurants and started building. We built a lot of restaurants. And we've seen cannibalization from year 1, well before we were a public company. As a public company, we need to be probably more mindful and sensitive to it than we ever have. But yes, we have seen cannibalization, and we have to be smart about it. And one particular store in Florida had -- is a great location, but it's all -- it has been hurt by some of the other stores that are less than 4 or 5 miles from it. So while at the same time we're trying to build brand and have better penetration, we have to be mindful of the proximity of where they're at. And we'll always have some cannibalization. We just need to make sure we're very thoughtful about it throughout our development cycle here.

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Operator [32]

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The next question comes from Jeff Farmer of Wells Fargo.

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Jeffrey Daniel Farmer, Wells Fargo Securities, LLC, Research Division - MD and Senior Restaurant Analyst [33]

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Ira, you did touch on it, but you guys have seen quite a bit of COGS volatility in recent quarters. Should we view that 31.6% number that you did see in the 2Q as representative of potential COGS number in coming quarters?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [34]

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I think as we think about Q3, that's fairly representative. We're hoping to get a little bit of favorability as we move into September, but it's fairly representative. And then as we -- what we're seeing and hearing so far is -- because first of all, seasonally, it moves down a little bit in Q4, but I think we're looking to get a little more -- first of all, the produce will start to feel a little more relief. And we're hopeful and what we're hearing a little bit is the pressure in beef starts to feel a little more relief in Q4. I think the one that we see a little less relief on is we -- a little less relief is chicken has been a little more problematic. But Q -- cost of sales are tough. And Q2 is a fairly good representation of what Q3 is going look like.

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Jeffrey Daniel Farmer, Wells Fargo Securities, LLC, Research Division - MD and Senior Restaurant Analyst [35]

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That's helpful. And then just clarifying a handful of the earlier questions. I heard the guidance, lower end of the full year range on the same-store sales. So is it safe to assume that you're implying that Habit's either currently tracking at a same-store sales decline or potentially could see one in the third or fourth quarter?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [36]

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That might be a little overstated.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [37]

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That's a little overstated. Just to clarify, we're tracking pretty flat right now. As you think about the first 5 weeks of the quarter, we're relatively flat.

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Jeffrey Daniel Farmer, Wells Fargo Securities, LLC, Research Division - MD and Senior Restaurant Analyst [38]

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Okay. That's helpful. And then final one. In terms of the increased media weights, I think you said the back half of the third quarter. But can you just put that in perspective for us, however, is most helpful, either as a percent of revenue on the media spend or rating points? How much is this media weight going to go up?

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [39]

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I think the best way to think about it, Jeff, is that we're still going to be in our historical range of somewhere between 60 and 80 basis points as far as total spend. What we're doing is we're moving it more into some broader reach initiatives than what we may have done at more local levels. But from a P&L standpoint and from an expense standpoint, we're not doing anything fundamental to the way that we impact the business, but we're trying to be a little bit more directed in some of the markets where we get more media weights, a little more reach, a little more frequency to drive some awareness and traffic.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [40]

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And, Jeff, we haven't even finalized what that is, but in this environment, we feel it's probably the right time for us to put our toe in the water in some of the markets, most probably not L.A., but some other places that we can go to school on a little bit of this and help get our message out there of everyday value and kind of some of The Habit differences, which again, we're still working through. But it's not going to fundamentally change our economic structure.

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Operator [41]

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The next question comes from Mary McNellis of Robert W. Baird.

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Mary L. McNellis, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [42]

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I was wondering if you could elaborate just a little more on what you think is causing the weaker-than-expected comps here and whether at this stage you're seeing anything in your customer data or anything like that, that would suggest there's any kind of internal issue?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [43]

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Boy, we were hoping you would give us that answer. I think it's a little bit of everything. I think it starts -- it starts with at -- above us in casual dining and continues below us in traditional QSR, the heavy amount of media weight these brands are putting behind messaging discounting, I think it starts -- I think it starts there. I don't think, without any question, there's probably in many markets too many seats in the categories. And I think we're starting to see some effect change in that. So it just -- a little of this and a little of that can take our comps and kind of historically been running at 3.5% to 4.5% over a very long period of time. And as they're in the flat to 1% range, it makes a difference on the P&L. We still feel great about what we're doing. We're being -- we're not pulling back on development. Our returns are still best of class. We do see this as an opportunity to be a little tougher on deals because we believe there'll be less activity for sites. While we haven't seen rents come down yet, we're going to be a little bit more tough, which has been hard to do the last couple of years, and we've chosen not to take price. And our margins are a little below the 20% range, where we have historically always been and see this business. But it's the right thing to do in this environment. And while we will always be sensitive to the quarters, okay, this is a great long-term whitespace in front of us, green grass, blue skies, whatever you want to call it. And we're going to make sure that we continue on that path.

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Mary L. McNellis, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [44]

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That's helpful perspective. And just a follow-up kind of on the margin side. The labor looks pretty well managed in relation to the soft comps in Q2. Can you talk a little more specifically about the labor productivity initiatives that you have in place? And then whether you think that's sustainable for the second half?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [45]

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Yes. And it is a very challenging labor environment, and I think our labor performance has helped us in the overall picture. And that's really a project that's been driven by our COO and our field operating team. What we're really trying to accomplish, and they've done a great job thus far, is look at primarily before the restaurant opens, we generally open at 10:30 every day, and we try to take 1 hour out of the schedule per restaurant per day before there's a customer in the building, and they've been pretty successful at doing that, and that has really helped our labor efficiency kind of be at the low end of the guidance that Ira provided in the beginning of the year, which unfortunately, is being offset by all of the food cost pressures on our 3 key commodities: produce, beef and chicken. So I don't think we'll see an improvement in that labor productivity, but we would expect it to kind of continue in the range that it is today. Is that fair to say, Ira?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [46]

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Yes, that's fair to say.

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Operator [47]

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The next question comes from Nick Setyan of Wedbush Securities.

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Colin D. Radke, Wedbush Securities Inc., Research Division - Analyst [48]

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This is Colin Radke on for Nick. Just a question in terms of the comp trends by geographies. I appreciate the color around the East Coast units outcomping the rest of the system. But in terms of the West Coast stores that you have, are you seeing any difference, whether between your stores in California versus the ones in the Mountain region? Or are you seeing any differences by class or year of opening or any other color or changes that you would be willing to call out.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [49]

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Not really. I mean there, obviously, are some differences by geography, but there's definitely not any difference necessarily by -- specifically by class. And it's -- the top to bottom is insignificant to say that there's any real differences. Am I missing something there?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [50]

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No. You'll see, as Russ talked about, we do have a little bit of cannibalization. So in some of the smaller markets, they can be impacted more by a little bit of cannibalization early on.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [51]

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Early on, yes.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [52]

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But that comes and goes based on -- and you can clearly see what those are. When we factor those out, most of the markets are moving.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [53]

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Yes. In lockstep.

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Operator [54]

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(Operator Instructions) The next question comes from Brian Vaccaro of Raymond James.

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Brandon Sonnemaker, [55]

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This is Brandon Sonnemaker filling in for Brian. I guess, going off that, could you guys give some color on what you're seeing with the lunch versus the dinner trend?

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [56]

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The lunch versus dinner.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [57]

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Yes, Ira. I mean -- we've seen -- it hasn't moved that much. I mean it's been pretty -- for a while, we had dinner outperforming lunch by a wide margin and now it's closer in. And now, over time, it's come in a lot closer.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [58]

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It's about 50-50 lunch/dinner breakdown.

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Brandon Sonnemaker, [59]

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Okay. Awesome. And then moving to -- on the real estate side, it's only been a few months, but I'm curious if there's been any new insights or tweaks to your real estate strategy since Doug joined?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [60]

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No, not really. I mean, and we're delighted Doug is here, but we have a quite talented team of real estate construction development professionals upstairs that have done an amazing job in the last year of starting to balance out our schedule, fill our pipeline, that we sit here with lots of confidence on hitting our targets for this year and where the pipeline is for next year. I think what our expectations for Doug short, medium and long term are, are really to help on our overall long-term strategy and really allow the people that we have in those departments to reach their full personal and professional goals as well. So no significant shift in strategy or any differences in that like -- that train was moving down the track pretty nicely.

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Brandon Sonnemaker, [61]

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Okay. Great. And then, if I could sneak one in. On that 2018 pipeline you mentioned, do you have any early reads in terms of regional concentration or what you expect in terms of development cost inflation?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [62]

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Well, a little softness in new stores by our competitors or the overall environment, I think maybe we would hope to see some of those. Of course, construction and real estate costs have certainly outpaced inflation the last couple of years. And we would hope, while we don't know yet, that those numbers would start to come more in line with inflation.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [63]

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Yes, and I would say I think if you look regionally, not huge differences. We're going to continue to have a balanced approach to East Coast development versus West. I think the difference that we will see as we're starting to put the pipeline together as an increased percentage of our restaurants will be drive-throughs.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [64]

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Yes. And that probably adds more of a significant impact on development cost than anything. Again, we don't have a lot of history necessarily of drive-throughs, but we continue to be very pleased with how they're performing and our -- this year, we expect 8 to 10 of our total new stores to be drive-throughs, of which I believe 5 are already open for the year. So we feel very nice about that.

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Operator [65]

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There are no more questions at this time. This concludes the question-and-answer session. I'd now like to turn the conference back over to Mr. Russ Bendel for any closing remarks.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [66]

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As always, we appreciate your interest in the company and we're always available. Have a great day.

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Operator [67]

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This concludes today's conference call. You may disconnect your lines. Thanks for participating. Have a pleasant day.