Q2 2023 Chuy's Holdings Inc Earnings Call
Participants
Jon W. Howie; VP, CFO & Director; Chuy's Holdings, Inc.
Steven J. Hislop; Chairman, President & CEO; Chuy's Holdings, Inc.
Aisling Ronan Grueninger; Research Analyst; Piper Sandler & Co., Research Division
Andrew Marc Barish; MD and Senior Equity Research Analyst; Jefferies LLC, Research Division
Brian Michael Vaccaro; MD; Raymond James & Associates, Inc., Research Division
Christopher Thomas O'Cull; MD & Senior Analyst; Stifel, Nicolaus & Company, Incorporated, Research Division
David E. Tarantino; Director of Research & Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Joshua C. Long; MD & Research Analyst; Stephens Inc., Research Division
Nerses Setyan; Senior VP of Equity Research & Senior Equity Analyst; Wedbush Securities Inc., Research Division
Todd Morrison Brooks; Senior Equity Analyst; The Benchmark Company, LLC, Research Division
Presentation
Operator
Good day, everyone, and welcome to the Chuy's Holdings Second Quarter 2023 Earnings Conference Call. Today's call is being recorded.
(Operator Instructions)
On today's call, we have Steve Hislop, President and Chief Executive Officer; and Jon Howie, Vice President and Chief Financial Officer of Chuy's Holdings, Inc.
At this time, I'll turn the call over to Mr. Howie. Please go ahead, sir.
Jon W. Howie
Thank you, operator, and good afternoon. By now, everyone should have access to our second quarter 2023 earnings release. If not, it can be found on our website at chuys.com in the Investors section. Before we begin our formal remarks, I need to remind everyone that part of our discussions today will include forward-looking statements. These forward-looking statements are not a guarantee of future 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.
Looking ahead, we plan to release our third quarter 2023 earnings on Thursday, November 2 after the market closed. With that out of the way, I'd like to turn the call over to Chuy's President and CEO, Steve.
Steven J. Hislop
Thank you, Jon. Good afternoon, everybody, and thank you for joining us on our call today. Our results marked another strong quarterly performance with second quarter revenue growth of over 7%, including a 3.2% improvement in comparable restaurant sales. During the quarter, we saw solid comparable sales growth across all periods. Moreover, our strong top line momentum has continued, and we are pleased with the results we've seen thus far into the third quarter. In terms of profitability, we grew restaurant level operating margin dollars by over 21% and generated an industry-leading restaurant level margin as of a percent of revenue up 21.6%, which represents a 250 basis point improvement over last year.
We are proud of what our team was able to accomplish during the quarter and believe that these results are a testament to the continued progress we are making on the various initiatives we've put in place to drive sustainable top line growth and profitability.
Moving on to our growth drivers. We continue to focus on menu innovation through our Chuy's Knockouts, our CKO platform. In April, we introduced our guests to several exciting menu items, including the Tex-Mex Burrito Bowl, Grilled Grupo Tacos and Creamy Green Chile Chicken Enchilada. The CKO performance continues to resonate with our guests as our April CKO drove incremental traffic and mix at a higher percentage of the sales than our previous CKOs.
To build upon this excitement in late July, we launched our most recent CKO with Hatch Green Chile Burger, Steak Burrito Bowl and Chicken Tinga Enchiladas. Early feedback from our guests thus far has been very encouraging.
Our off-premise channel also performed very well during the quarter, mixing at approximately 28% of total sales as compared to 27% a year ago. The delivery channel helped drive our off-premise growth with over a 30% increase in volume, mixing now at approximately 10.6% of our second quarter sales, an increase of approximately 210 basis points versus last year. In addition, we saw a significant improvement in our catering channel as we continue to build out our catering markets, representing 3.5% of our second quarter sales, an increase of approximately 80 basis points versus last year.
Over time, we continue to believe our off-premise business will represent at least the mid-20s of our sales with catering contributing approximately 4% to 6% of the total sales. In terms of our marketing initiatives, our optimized digital media strategy effectively communicates our defining differences from our incredible value for our made-from-scratch food and drink to our exciting CKO offerings and overall differentiated experience at every Chuy's restaurant. This includes the use of TikTok, organic influencer programs on Instagram and Facebook, YouTube video advertising and the promotional advertising partnership with DoorDash.
Lastly, let me provide some update on our development plan. During the second quarter, we successfully opened 1 new restaurant in Oklahoma City, Oklahoma. Subsequent to the end of the second quarter, we opened 1 additional restaurant in Hawker Heights, Texas. We're pleased to report that all of our recent openings have performed to our expectation. Additionally, in the second quarter, we closed 1 restaurant in the state of Illinois. This was a unique opportunity to exit the lease of a satellite location at no cost to the company, and we do not currently expect any additional strategic closures.
As we look ahead, we remain excited about our organic growth opportunities for 2023 due to the continued permitting and inspection delays that are outside of our control, we are now expected to open 5 new restaurants, 3 of which have already opened and the remaining units scheduled for the fourth quarter.
Unit growth remains a core piece of our long-term growth model with our strategic focus on markets where our concept has is proven with high AUVs and brand awareness. We continue to believe we can achieve 10% unit growth over time and the growth we expect to achieve in 2023 and 2024 will be important steps to get there.
With that, I'll now turn the call over to our CFO, Jon Howie, to discuss our first quarter results in greater detail.
Jon W. Howie
Thanks, Steve. Revenues for the second quarter increased 7.3% to $119 million compared to $110.9 million in the same quarter last year. The increase was primarily related to improvement in our comparable restaurant sales as well as an additional 53 operating weeks from new restaurants opened subsequent to the second quarter of 2022.
In total, we had approximately 1,289 operating weeks during the second quarter of 2023 and off-prem sales were approximately 28% of total revenue as compared to 27% a year ago. Comparable restaurant sales in the second quarter increased 3.2% versus last year, primarily driven by a 5.8% increase in average check, partially offset by a 2.6% decrease in average weekly customers. Effective pricing during the quarter was just shy of 7%. And we expect to carry approximately 3.25% to 3.5% pricing for the remainder of the year.
Turning to expense. Cost of sales as a percentage of revenue decreased 310 basis points to 24.7% driven by the leverage on menu price increases as well as overall commodity deflation of approximately 4% during the quarter. Based on the current market conditions, we continue to expect flat commodity inflation for the fiscal year with deflation of low single digits for the third quarter. Labor cost as a percentage of revenue increased approximately 40 basis points to 29.5%, primarily due to hourly labor inflation of approximately 5% at our comparable restaurants as well as incremental improvement in our hourly staffing levels as compared to last year.
This was partially offset by menu price increases taken subsequent to the second quarter of 2022. We continue to expect hourly labor rate inflation of mid-single digits for the fiscal year and third quarter in addition to a continuation of year-over-year staffing level increases. Operating costs as a percentage of revenue increased 10 basis points to 15.9% driven by higher delivery service charges from increase in delivery sales and an increase in repairs and maintenance costs, partially offset by lower utilities and higher sales leverage on insurance costs as compared to last year.
General and administrative expenses increased to $7.7 million in the second quarter from $6.5 million in the same period last year, driven mainly by higher performance-based bonuses. As a percentage of revenue, G&A increased to 6.5% from 5.9% during the same period last year.
In summary, net income for the second quarter of 2023 increased $2.8 million or 36.4% to $10.7 million or $0.59 per diluted share compared to $7.9 million or $0.41 per diluted share in the same period last year. During the second quarter of 2023, we incurred $0.5 million or $0.02 per diluted share in impairment, closed restaurant and other costs compared to $0.7 million or $0.03 per diluted share in the same period last year. The decrease was primarily related to a reduction in rent paid on previously closed restaurants.
Taking that into account, adjusted net income for the second quarter of 2023 increased $2.7 million or 31.6% to $11.1 million or $0.61 per diluted share compared to $8.4 million or $0.44 per diluted share in the same period last year.
Moving to our liquidity and balance sheet as of the quarter -- end of the quarter, we had $82.6 million in cash and cash equivalents, no debt outstanding, $35 million available under our revolving credit facility. We also purchased 83,521 shares of our common stock during the quarter for a total of $3 million. As of June 25, 2023, we had $47 million remaining under our $50 million repurchase program, which will expire on December 31, 2024.
With that, let me provide an update on our outlook. For 2023, we are now expecting an adjusted EPS of $1.80 to $1.85, which includes an estimated $0.08 to $0.10 per share positive impact due to the fourth quarter of 2023 containing 14 weeks versus 13 weeks in fiscal 2022. This is based in part on the following annual assumptions. G&A expense of $30 million to $31 million; 5 new restaurants; net capital expenditures of approximately $30 million to $35 million; restaurant preopening expenses of approximately $2.5 million to $2.7 million; effective annual tax rate of approximately 13% to 14% and annual weighted diluted shares outstanding of 18.1 million to 18.2 million shares.
With that, I'll turn the call back over to Steve.
Steven J. Hislop
Thanks, Jon. Our passion has always been to provide our guests with the unique Chuy's experience through our high-quality, made-from-scratch food and drinks offered at an incredible value. We believe this is clearly reflected by our performance year-to-date. Through our continued focus on four-wall operational excellence, thoughtful capital allocation and exciting pipeline of unit growth, we are well positioned to capitalize on our positive momentum and the vast opportunity ahead of us.
Most importantly, I'd like to thank each and every Chuy's team member for their hard work and dedication to earning the dollar every single day. With that, we're happy to answer any questions. Operator, please open the line for questions.
Question and Answer Session
Operator
(Operator Instructions)
Our first question comes from Joshua Long with Stephens.
Joshua C. Long
When we think about just the underlying environment and the strong results you reported, Steve, I think you mentioned that there was solid comps through the quarter. Curious if you could talk about that, what you're seeing from the consumer? And then maybe just any other reads you have in terms of how they're using your concept. It feels like perhaps the mix piece and the traffic pieces consistent, if you kind of look at the underlying piece that I would be curious what your perspective is, given kind of the update in the current environment.
Steven J. Hislop
We haven't seen -- it's been pretty consistent over the last 1 year, 1.5 years, and we've been -- we haven't seen a whole bunch of pullback in any 1 area, maybe slightly in bar mix. And a few months back, probably slightly in [apps], but since we added on our bowls, you've seen that rebound a little bit. So we haven't really seen any main issue as far as our real differences our track had over the last year.
Joshua C. Long
Got it. That's helpful. And when we think about some of the strength you called out on the CKO platform. Can you talk about how that's progressing versus your expectations? And it seems like that maybe in April or in the 2Q period that brought in some incremental guests. I'm just curious if you attribute that to awareness, just culinary innovation, maybe all of the above, but anything that you could share there in terms of just...
Steven J. Hislop
Yes, all of the above. Thanks for answering the question. Yes, a little bit all of the above. We've realized probably 1%, 1.5% of traffic, I'd say, by the CKOs. And obviously, we just finished our third -- we just finished our third, entering our fourth one ever for us. And so it's really got a level of excitement starting with our people first. And then obviously, on all our digital marketing and so far that we're doing is really getting people excited about trying some new stuff that's out there.
Like we mentioned before, we usually run 3 items that will run for a total of 4 weeks in our stores, so -- 4 to 6 weeks. So we're pretty excited about those. Coming up in the fourth quarter, you'll see a little bit of a change in some of the CKO where we're going to do a barbell approach to 1 item that will start in quarter 4, that's coming up. But yes, it's built with a nice excitement and really, it's nice to have some new things to talk about on a quarterly basis.
Joshua C. Long
Appreciate it. And then one last one, then I'll hop in the queue. When we think about just the overall development environment. I mean we've heard a lot from your peers in terms of just permitting being the primary point of friction. It seems like you might be seeing something similar to that. But just curious how you're thinking about development overall human capital investments to support that. And then specific to the 2 units that sound like they might have slipped as part of your updated unit development guidance. Do you think about those slipping into next year and being additive? Or does that just kind of push the entire pipeline now?
Steven J. Hislop
I'll go with the end first. It's definitely going to just push the whole pipeline out a little bit. That's how that's going to work with the construction, not only the permits and getting some people coming out and walking the units, it's still the construction cost is still quite a bit higher than it has been. And we've seen that kind of flatten out, but it definitely hasn't come back down yet. So we're kind of also looking at that as we move forward. But you'll see us this year in that 5 that we mentioned and then our long-term goal right around probably in '25 is to get back to that 10% growth rate.
Joshua C. Long
Got it. One more there, do you think that you can accelerate that in 2024 kind of a step function, if you're going to do 5 this year, is that the right number in absolute terms? Or can you step that up despite some of the headwinds that we're seeing out there?
Steven J. Hislop
I'd say a couple more than 5. We'll be looking at probably for next year and then by 25% to get back to that 10% growth, as I mentioned a second ago.
Operator
Our next question comes from David Tarantino with Baird.
David E. Tarantino
First question is on the recent sales trends. I think, Steve, you mentioned that you were pleased with what you've seen so far in Q3. I was wondering if you could elaborate on what you're seeing more specifically. I know you have less pricing than you had in Q2. So any color would be helpful.
Steven J. Hislop
It's really trending fairly similar to P6 in that 2-plus range, 2 to 3.
David E. Tarantino
Okay. And that's the total comp?
Steven J. Hislop
Yes.
Jon W. Howie
The total comp, yes. And as you mentioned, we had about 3%, 3.5% pricing roll off. So that's talking -- you're talking about a 1% negative traffic possibly, yes.
David E. Tarantino
That's good. That's helpful. And then Jon, if I look at your guidance and the performance you've had on restaurant margin, it looks like maybe this year shaping up to be at least at the high end, if not above the high end of that long-term target you shared previously. So I was wondering if you can kind of frame up how you're thinking about the margin structure longer term? And is it possible to think about 20% plus type restaurant margins as you look at the business?
Jon W. Howie
Well, I mean, it's all related to kind of the volumes and how those shake out. But what we're seeing for the rest of the year, we're looking in the third quarter with those prices coming off. We're not going to have the sales leverage that we've had in the first 2 quarters. And so we're going to see a little less margin here in the third quarter.
And then in the fourth quarter, obviously, we have the extra week, but we're also rolling over the addition of our extra delivery partner in the fourth quarter. So that's going to flatten that out a little bit as well. So I think that will temper the margins a little bit than what we're seeing right now. But long term, I mean, we're still looking at that 350 basis points above, so in that 19% to 20% range.
Operator
Our next question comes from Brian Mullan with Piper Sandler.
Aisling Ronan Grueninger
This is actually Aisling on for Brian. My question is about your recent catering business and how that is coming along versus your own internal expectations of that? And what kind of impact has it had to your off-premise business?
Steven J. Hislop
We're excited, obviously, we're in 16 states, well, how many -- 17 markets currently on the catering, and we're excited. I think I mentioned in my prepared statement, we are about 80 basis points higher than the year. And so we're very, very excited about that. We'll continue to add certain trucks and refill some of our markets as we continue forward. But we believe long term, we believe that catering number can be in that 4% to 6% range over the next few years.
Operator
Your next question comes from Brian Vaccaro with Raymond James.
Brian Michael Vaccaro
I just wanted to circle back on commodities. And Jon, could you provide some more color on the items you're seeing favorability on driving that recent deflation? And also remind us where you are on beef contracts specifically?
Jon W. Howie
Sure. So I'll just start with the beef. Beef, we're contracted through the rest of the year, just a little spillover in the next year, but not much. So it's really just basically through the rest of the year. And those are at prices a little less than last year. So that's some of that deflation. We're also seeing significant deflation, obviously, in chicken, as I think most people are coming off of the all-time highs from last year, seeing deflation in dairy as well and then some of our produce.
But we expect kind of the produce that always kind of jumps up here in kind of the third and fourth quarter. We're also seeing inflation in some of our grains and oils and things in our grocery basket. But those are really the big items.
Brian Michael Vaccaro
Okay. Great. And on labor, I just -- you talked about increasing staffing levels, which I think makes a lot of sense as dining continues to recover. But could you provide any perspective just on how much average hours were up or some other way that you might be able to quantify that? And maybe more broadly, just speak to what you're seeing in terms of turnover? And are you seeing any tangible benefits of more tenured teams driving better ops, increasing guest satisfaction, et cetera? Maybe just speak to that dynamic a little bit?
Jon W. Howie
I'll speak to turnover. Turnover, from an hourly standpoint, we're still a little over 100% from a management standpoint, a little over 26%, 27% and as far as the hourly, I don't have that figure for you as far as the increase over the last year. But what we have been doing is replacing a lot of our overtime hours with kind of full-time positions now, which obviously, when you replace them with fresh people, that's going to help the guest experience as well. So you don't have as much overtime. So that's also helping out, but we're continuing to get fully staffed on each and every shift and that helps the customer experience.
Brian Michael Vaccaro
All right. That's great. And then just lastly, on the development front. Obviously, build-out costs have been pressured in recent years. Are you seeing any green shoots of relief on that front on the horizon? And maybe you could just level set as just in terms of your unit economics that you're underwriting as you think about the pipeline next 12 to 24 months?
Jon W. Howie
Well, we continue to underwrite. We're looking at the cost in a new unit in that [2.9 to 3.3]. It's kind of the cost of it. All in, net of landlord dollars. But as far as what we're seeing a construction cost standpoint. We're seeing costs starting to flatten out but not yet come down. I think I've heard somebody else saying we don't want to get these developers used to these prices. And so hopefully, we're trying to get as competitive as we can in some of these pricings. So we can bring those costs down. But right now, we're not seeing it.
Operator
Your next question comes from Todd Brooks with Benchmark Company.
Todd Morrison Brooks
Quick question, not much left to ask. But you talked about, Steve, you referred to kind of the June, July trends and I think they were -- Jon, you might have sized them in the 2% to 3% range, which with the pricing roll-off is very impressive for the July result. I'm just wondering with your geographic footprint is crushing heat, have you been able to use the patios to the full extent that you normally would seasonally in the summertime? And do you have a sense of maybe -- is there actually a stronger underlying demand at just this brutal heats keeping from being able to use the restaurant?
Steven J. Hislop
Yes. It's been a while, but is that really exactly -- I think if you remember a year ago at this time, we talked about the 60-something days of over 100, and we're just again. So it's very similar to a year ago. And yes, it definitely affects in Texas, obviously, and elsewhere, definitely some of the patio sales, no one's sitting out in the patio at 100 degrees. So that's definitely an effect. But like I said, it's very similar to a year ago at this particular time.
Operator
Our next question comes from Nick Setyan with Wedbush Securities.
Nerses Setyan
In terms of the commodity inflation, I appreciate the Q2 disclosure around down 4%. What's -- and I'm sorry if I missed this, but what's the Q3 expectation, the Q4 expectation. Or maybe a better way to ask it is sequentially versus Q2, are we kind of flattish in terms of [what] basket is? Or are we continuing to see it go down?
Jon W. Howie
I think it's flattening now. I mean if you're looking like over last year, we're looking -- I think we said low single-digit deflation for the third quarter. We look something similar to that to flat deflation in the back half and the fourth quarter, which gets us to basically flattish for the year is kind of how we're looking at it right now.
Nerses Setyan
And so, just given the math on the lower pricing and that the inflation is sort of a mid-25% COGS. Is the right way to think about Q3? Because it just seems like there will be a big jump from Q2.
Jon W. Howie
Yes. It's kind of -- that's kind of what we're looking at.
Nerses Setyan
Okay. Okay. And in terms of just Q3, Q4 unit-level margins, historically, Q4 is a little bit lower, but we have the extra week. So I mean, do they end up being a little bit closer to each other, both of them may be in the sort of high 17% range?
Jon W. Howie
Come back again on the unit level margins. Is that what you're saying for Q4?
Nerses Setyan
Q4 tends to be lower than Q3 historically. But given that for extra week, does that kind of help it come up closer to Q3 this year?
Jon W. Howie
Yes. It actually increased it a little bit over Q3.
Operator
Our next question comes from Andy Barish with Jefferies.
Andrew Marc Barish
Wondering if you can give us an update on sort of dining room traffic versus pre-COVID. I know there's been some big changes in seating and hours. But just trying to level set on that. And do you see that as an opportunity, just given some of the shifting consumer behavior out there?
Jon W. Howie
Well, again, with our addition of our other delivery service and that increasing from a percentage of sales, our dine-in sales are still right from a traffic standpoint, still at about 75% to 80% of what they were prior to the pandemic and then we've been pretty consistent with that. As you know, we still have taken some of those seats out and we haven't put those back in, just from a productivity standpoint.
And also the hours, we haven't brought those hours back either. Those -- we've deemed that those haven't been very profitable hours as well. So yes, we're still at that 75% to 80% in traffic from a dine-in perspective, but our off-premise has grown a little bit.
Andrew Marc Barish
Okay. And then on the marketing side, I know you're up back up to about 1.5% or so of sales. Is there any new channels or waiting kind of that you're looking at for that media spend?
Steven J. Hislop
Yes. Right now, we're pretty happy with that percent. And as things change, we're obviously looking at everything. We're doing a little bit -- I mentioned a few during the -- my prepared statement, but a couple of other things that are fairly new is programmatic, TV, and we're doing a lot of stuff with Yelp and so on, on top of that. But we're always looking at things and redistributing, but we're pretty pleased with all the mediums that we're using.
Andrew Marc Barish
Okay. And a few years back, I mean, again, pre-pandemic, you guys were doing outdoor, which seems to have some effectiveness in highlighting kind of the core values, anything along those lines in certain markets or just keeping it balanced?
Steven J. Hislop
Yes. No, we consider that. I have that in that local store marketing fund that we do and that's part of the [1.5, 1.45] and those are continuing. We do have quite a bit of outdoor and a lot of local store initiatives that we always will do from a local store profile.
Operator
(Operator Instructions)
Our next question comes from Chris O'Cull with Stifel.
Christopher Thomas O'Cull
My question relates to development. Just given the company's strong performance and sizable cash position, why not try to accelerate unit growth in '24 beyond just a handful of locations.
Jon W. Howie
Well, I mean we're going to grow as fast as deemed reasonable given the environment. I mean right now, it's not a matter of finding sites, it's a matter of getting those sites open with the permitting and things like that. So if we can -- right now, we're saying that we'd also like some of the costs to come down a little bit. But that's kind of where we're looking right now until we see kind of the construction and the permitting and some of that stuff to turn around a little bit.
Steven J. Hislop
Yes, maybe some relief in those areas.
Christopher Thomas O'Cull
I know you guys have struggled with openings in certain markets like Chicago and Denver. So I'm just wondering how those experiences are shaping your development plans over the next couple of years.
Jon W. Howie
Well, I think that's why we're looking at kind of the 5 to 7 and focusing on those states, Chris, because as we focus on those states, I think we're getting better brand recognition in some of the other states that we're in (inaudible) period of 3 to 5 years. But those states we're currently focusing in on have high AUVs, great brand recognition. And quite honestly, they're very favorable from a business standpoint, from a margin standpoint. So those are the states we're focusing on in the next 3 to 5 years.
Christopher Thomas O'Cull
Is the strategy to be more -- follow more of a contiguous market going from markets in close proximity because you just need that brand awareness as you go into newer markets?
Jon W. Howie
I think so. And I think if you go back to -- I hate to bring up 2013, but we kind of jumped into a lot of new markets. So we'll take that more slowly, I guess, when we start branching into new markets and not all at once in 1 year. So we'll continue to open in these states that we have high brand recognition and contiguously next to that state opening some of the new ones.
Steven J. Hislop
And that's over the next -- and the states that we're talking about was our growth over the next 5 years and a little bit beyond. So plenty of room.
Christopher Thomas O'Cull
Okay. And I apologize if I missed it, but Jon, did you comment on just the cash position of the company and what you guys are maybe considering for deploying that cash or returning to shareholders maybe more aggressively?
Jon W. Howie
Yes. I mean we continue to want to be somewhat opportunistic in buying back the stock, but we did buy back $3 million this quarter. We still have about $82 million to $83 million on the balance sheet, and then continue obviously opening stores. But we'd like to get a little more aggressive in buying that stock back. But again, we want to be somewhat opportunistic in that as well.
Operator
There are no further questions at this time. I'll now hand the floor over to Steve Hislop for closing remarks.
Steven J. Hislop
Thank you so much. Jon and I appreciate your continued interest in Chuy's and are available to answer any and all questions. Again, thank you, and have a good evening.
Operator
Thank you. This concludes today's conference. All parties may disconnect. Have a great evening.
