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CHUY > SEC Filings for CHUY > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for CHUY'S HOLDINGS, INC.


8-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes. Unless otherwise specified, or the context otherwise requires, the references in this report to "our Company", "the Company", "us", "we" and "our" refer to Chuy's Holdings, Inc. together with its subsidiaries.
The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 30, 2012 (our "Annual Report").
Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements. We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as may be required by law.
The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our Annual Report and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein.
Overview
We are a fast-growing, full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex Mex inspired food. We were founded in Austin, Texas in 1982 by Mike Young and John Zapp, and as of September 29, 2013, we operated 46 Chuy's restaurants across Texas, Tennessee, Kentucky, Alabama, Indiana, Georgia, Oklahoma, Florida, Virginia, Arkansas, North Carolina, South Carolina and Ohio.
We are committed to providing value to our customers through offering generous portions of made-from-scratch, flavorful Mexican and Tex Mex inspired dishes. We also offer a full-service bar in all of our restaurants providing our customers a wide variety of beverage offerings. We believe the Chuy's culture is one of our most valuable assets, and we are committed to preserving and continually investing in our culture and our customers' restaurant experience. Our restaurants have a common décor, but we believe each location is unique in format, offering an "unchained" look and feel, as expressed by our motto "If you've seen one Chuy's, you've seen one Chuy's!" We believe our restaurants have an upbeat, funky, eclectic, somewhat irreverent atmosphere while still maintaining a family-friendly environment. Our Growth Strategies and Outlook
Our growth is based primarily on the following strategies:
• Pursue new restaurant development;

• Deliver consistent same store sales through providing high-quality food and service; and

• Leverage our infrastructure.

As of September 29, 2013, we opened seven restaurants year-to-date. We also opened one additional restaurant subsequent to September 29, 2013, our first restaurant in Missouri. We have an established presence in Texas, the Southeast and the Midwest, with restaurants in multiple large markets in these regions. Our growth plan over the next five years focuses on developing additional locations in our existing core markets, new core markets and in smaller markets surrounding each of those core markets.
Performance Indicators
We use the following performance indicators in evaluating our performance:
• Number of Restaurant Openings. Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For restaurant openings we incur pre-opening costs, which are defined below, before the restaurant opens. Typically new restaurants open with an initial start-up period of higher than normalized sales volumes, which decrease to a steady level approximately six to twelve months after opening. However, operating costs during this initial six to twelve month period are also higher than normal, resulting in restaurant operating margins that are generally lower during the start-up period of operation and increase to a steady level approximately nine to twelve months after opening.

• Comparable Restaurant Sales. We consider a restaurant to be comparable in the first full quarter following the 18th month of operations. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Changes in comparable sales reflect changes in customer count trends as well as changes in average check. Our comparable restaurant base consisted of 31 and 23 restaurants at September 29, 2013 and September 23, 2012, respectively.


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• Average Check. Average check is calculated by dividing revenue by total entrées sold for a given time period. Average check reflects menu price influences as well as changes in menu mix. Our management team uses this indicator to analyze trends in customers' preferences, effectiveness of menu changes and price increases and per customer expenditures.

• Average Weekly Customers. Average weekly customers is measured by the number of entrées sold per week. Our management team uses this metric to measure changes in customer traffic.

• Average Unit Volume. Average unit volume consists of the average sales of our comparable restaurants over a certain period of time. This measure is calculated by dividing total comparable restaurant sales within a period of time by the total number of comparable restaurants within the relevant period. This indicator assists management in measuring changes in customer traffic, pricing and development of our brand.

• Operating Margin. Operating margin represents income from operations as a percentage of our revenue. By monitoring and controlling our operating margins, we can gauge the overall profitability of our company.

The following table presents operating data for the periods indicated:

                                                   Thirteen Weeks Ended                    Thirty-Nine Weeks Ended
                                                                   September 23,                            September 23,
                                           September 29, 2013          2012          September 29, 2013          2012
Total restaurants (at end of period)                     46                38                     46                  38
Total comparable restaurants (at end of
period)                                                  31                23                     31                  23
Average sales per comparable restaurant
(in thousands)                            $           1,233       $     1,263       $          3,732        $      3,823
Change in comparable restaurant sales (1)               3.1 %             1.5 %                  2.5 %               2.0 %
Average check (2)                         $           13.47       $     13.20       $          13.48        $      13.20

(1) We consider a restaurant to be comparable in the first full quarter following the eighteenth month of operations. Change in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Due to the inclusion of a 53rd week in fiscal 2012, there is a one-week calendar shift in the comparison of the first three fiscal quarters of 2013 ended September 29, 2013, to the first three fiscal quarters of 2012 ended September 23, 2012. As a result, our comparable restaurant sales calculation above is based on comparing sales in the fiscal thirteen-week and thirty-nine week periods in 2013 to sales in the corresponding calendar periods of 2012. Sales for the same 31 restaurants in the comparable restaurant base in the thirteen-week and thirty-nine week periods ended September 29, 2013 increased 1.9% and 1.8%, respectively, as compared to the thirteen-week and thirty-nine week fiscal periods ended September 23, 2012.

(2) Average check is calculated by dividing revenue by number of entrées sold for a given period of time.

Our Fiscal Year
We operate on a 52- or 53-week fiscal year that ends on the last Sunday of the calendar year. Each quarterly period has 13 weeks, except for a 53-week year when the fourth quarter has 14 weeks. Our 2012 fiscal year consisted of 53 weeks and our 2013 fiscal year will consist of 52 weeks. Key Financial Definitions
Revenue. Revenue primarily consists of food and beverage sales and also includes sales of our t-shirts, sweatshirts and hats. Revenue is presented net of discounts, such as management and employee meals, associated with each sale. Revenue in a given period is directly influenced by the number of operating weeks in such period, the number of restaurants we operate and comparable restaurant sales growth.
Cost of Sales. Cost of sales consists primarily of food, beverage and merchandise related costs. The components of cost of sales are variable in nature, change with sales volume and are subject to increases or decreases based on fluctuations in commodity costs.
Labor Costs. Labor costs include restaurant management salaries, front- and back-of-house hourly wages and restaurant-level manager bonus expense, employee benefits and payroll taxes.
Operating Costs. Operating costs consist primarily of restaurant-related operating expenses, such as supplies, utilities, repairs and maintenance, travel cost, insurance, credit card fees, recruiting, delivery service and security. These costs generally increase with sales volume but decline as a percentage of revenue.
Occupancy Costs. Occupancy costs include rent charges, both fixed and variable, as well as common area maintenance costs, property insurance and taxes, the amortization of tenant allowances and the adjustment to straight-line rent. These costs are generally fixed but a portion may vary with an increase in sales when the lease contains percentage rent.


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General and Administrative Expenses. General and administrative expenses include costs associated with corporate and administrative functions that support our operations, including senior and supervisory management and staff compensation (including stock-based compensation) and benefits, travel, financial advisory fees paid to Goode Partners LLC (during 2012), legal and professional fees, information systems, corporate office rent and other related corporate costs. As a public company, we expect our stock-based compensation expense to increase. In addition, we estimate that we will incur approximately $1.3 million to $1.6 million of incremental general and administrative expenses annually as a result of being a public company.
Marketing. Marketing costs include costs associated with our local restaurant marketing programs, community service and sponsorship activities, our menus and other promotional activities.
Restaurant Pre-opening Costs. Restaurant pre-opening costs consist of costs incurred before opening a restaurant, including manager salaries, relocation costs, supplies, recruiting expenses, initial new market public relations costs, pre-opening activities, employee payroll and related training costs for new employees. Restaurant pre-opening costs also include rent recorded during the period between date of possession and the restaurant opening date.
Depreciation and Amortization. Depreciation and amortization principally include depreciation on fixed assets, including equipment and leasehold improvements, and amortization of certain intangible assets for restaurants. Interest Expense. Interest expense consists primarily of interest on our outstanding indebtedness and the amortization of our debt issuance costs reduced by capitalized interest.
Results of Operations
Potential Fluctuations in Quarterly Results and Seasonality Our quarterly operating results may fluctuate significantly as a result of a variety of factors, including the timing of new restaurant openings and related expenses, profitability of new restaurants, weather, increases or decreases in comparable restaurant sales, general economic conditions, consumer confidence in the economy, changes in consumer preferences, competitive factors, changes in food costs, changes in labor costs and rising gas prices. In the past, we have experienced significant variability in restaurant pre-opening costs from quarter to quarter primarily due to the timing of restaurant openings. We typically incur restaurant pre-opening costs in the five months preceding a new restaurant opening. In addition, our experience to date has been that labor and direct operating costs associated with a newly opened restaurant during the first three to six months of operation are often materially greater than what will be expected after that time, both in aggregate dollars and as a percentage of restaurant sales. Accordingly, the number and timing of new restaurant openings in any quarter has had, and is expected to continue to have, a significant impact on quarterly restaurant pre-opening costs, labor and direct operating costs.
Our business also is subject to fluctuations due to seasonality and adverse weather. The spring and summer months have traditionally had higher sales volume than other periods of the year. Holidays, severe winter weather, hurricanes, thunderstorms and similar conditions may impact restaurant unit volumes in some of the markets where we operate and may have a greater impact should they occur during our higher volume months. As a result of these and other factors, our financial results for any given quarter may not be indicative of the results that may be achieved for a full fiscal year.


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Thirteen Weeks Ended September 29, 2013 Compared to Thirteen Weeks Ended
September 23, 2012
The following table presents, for the periods indicated, the consolidated
statement of operations (in thousands):
                                                        Thirteen Weeks Ended
                        September 29,       % of      September 23,       % of                         %
                             2013         Revenue          2012         Revenue       Change        Change
Revenue                 $     53,476        100.0 %   $     44,939        100.0 %   $   8,537         19.0  %
Costs and expenses:
Cost of sales                 14,863         27.8 %         12,194         27.1 %       2,669         21.9  %
Labor                         17,552         32.8 %         14,613         32.5 %       2,939         20.1  %
Operating                      7,658         14.3 %          6,490         14.4 %       1,168         18.0  %
Occupancy                      3,221          6.0 %          2,726          6.1 %         495         18.2  %
General and
administrative                 2,418          4.5 %          2,497          5.6 %         (79 )       (3.2 )%
Marketing                        409          0.8 %            344          0.8 %          65         18.9  %
Restaurant pre-opening           983          1.9 %            934          2.1 %          49          5.2  %
Depreciation and
amortization                   2,324          4.3 %          1,725          3.8 %         599         34.7  %
Total costs and
expenses                      49,428         92.4 %         41,523         92.4 %       7,905         19.0  %
Income from operations         4,048          7.6 %          3,416          7.6 %         632         18.5  %
Interest expense                  23          0.1 %          2,285          5.1 %      (2,262 )      (99.0 )%
Income before income
taxes                          4,025          7.5 %          1,131          2.5 %       2,894        255.9  %
Income tax expense             1,209          2.2 %            341          0.8 %         868        254.5  %
Net income              $      2,816          5.3 %   $        790          1.7 %   $   2,026        256.5  %

Revenue. Revenue increased $8.5 million, or 19.0%, to $53.5 million for the thirteen weeks ended September 29, 2013, as compared to $44.9 million for the thirteen weeks ended September 23, 2012. This increase was primarily driven by $9.2 million in incremental revenue from an additional 110 operating weeks provided by 11 new restaurants opened during and subsequent to the thirteen weeks ended September 23, 2012 and increased revenue at our comparable restaurants. These increases were partially offset by a decrease in revenue related to non-comparable restaurants that are not included in the incremental revenue discussed above. Our non-comparable restaurant revenue decreased from higher than normal revenue during the thirteen weeks ended September 29, 2013 as a result of the 'honeymoon' period that follows a restaurant's initial opening. Due to the inclusion of a 53rd week in fiscal 2012, there is a one-week calendar shift in the comparison of the third fiscal quarter of 2013 ended September 29, 2013, to the third fiscal quarter of 2012 ended September 23, 2012. As a result, we calculate comparable restaurant sales by comparing sales in the third fiscal quarter of 2013 to sales in the corresponding thirteen week calendar period ended September 30, 2012. Comparable restaurant sales increased 3.1% for the thirteen week period ended September 29, 2013 compared to the thirteen week calendar period ended September 30, 2012. The increase in comparable restaurant sales was driven primarily by a 2.0% increase in average check and a 1.1% increase in average weekly customers. Sales for the same restaurants in the third fiscal quarter ended September 29, 2013 increased 1.9% compared to the third fiscal quarter of 2012 ended September 23, 2012. Our revenue mix attributed to bar sales decreased to 18.5% during the thirteen weeks ended September 29, 2013 from 19.2%, primarily as the result of lower bar sales as a percent of total revenue at certain new locations.
Cost of Sales. Cost of sales as a percentage of revenue increased to 27.8% during the thirteen weeks ended September 29, 2013, from 27.1% during the same period in 2012, primarily as a result of higher chicken and produce costs. Labor Costs. Labor costs as a percentage of revenue increased to 32.8% during the thirteen weeks ended September 29, 2013, from 32.5% during the same period in 2012, primarily as a result of increased training and staffing levels at our new restaurants, partially offset by improved labor efficiency in our comparable restaurants.
Operating Costs. Operating costs as a percentage of revenue decreased to 14.3% during the thirteen weeks ended September 29, 2013 from 14.4% during the same period in 2012. The decrease in the current period was primarily caused by lower liquor taxes as a result of opening more locations outside of Texas, which charges a higher liquor tax than other jurisdictions, partially offset by higher utility costs as a percentage of revenue.
Occupancy Costs. Occupancy costs as a percentage of revenue decreased to 6.0% during the thirteen weeks ended September 29, 2013 from 6.1% during the same period in 2012, primarily as a result of lower common area maintenance costs as a percentage of revenue.


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General and Administrative Expenses. General and administrative expenses decreased $0.1 million, or 3.2%, to $2.4 million for the thirteen weeks ended September 29, 2013, as compared to $2.5 million during the same period in 2012. This decrease was primarily driven by lower performance-based bonuses during the thirteen weeks ended September 29, 2013 compared to the same period in 2012, partially offset by an increase in salary expense associated with additional employees as we continue to strengthen our infrastructure for growth. Marketing Costs. As a percentage of revenue, marketing costs remained flat at approximately 0.8%.
Restaurant Pre-opening Costs. Restaurant pre-opening costs decreased by $0.1 million, or 5.2%, to $1.0 million for the thirteen weeks ended September 29, 2013, as compared to $0.9 million for the thirteen weeks ended September 23, 2012. This decrease is primarily due to the timing of the opening dates and stage of development for the restaurants in development during the periods. Depreciation and Amortization. Depreciation and amortization as a percentage of revenue increased to 4.3% for the thirteen weeks ended September 29, 2013, as compared to 3.8% during the same period in 2012. This increase is primarily related to the increase in equipment and leasehold improvement costs related to new restaurant openings.
Interest Expense. Interest expense decreased $2.3 million for the thirteen weeks ended September 29, 2013, as compared to the thirteen weeks ended September 23, 2012. The decrease was primarily due to the $1.6 million write off of loan origination costs associated with the pay down of $79.4 million of borrowings with proceeds from the IPO during the comparable period in 2012. In addition, interest expense decreased due to decreased average outstanding borrowings under our senior secured credit facility during the thirteen weeks ended September 29, 2013, compared to the same period in 2012. Borrowings during the thirteen weeks ended September 29, 2013 averaged approximately $4.4 million, while borrowings during the same period in 2012 averaged approximately $32.0 million. In addition, our interest rate on outstanding borrowings as of September 29, 2013 was 1.94% compared to 8.50% as of September 23, 2012.
Income Tax Expense. For the thirteen weeks ended September 29, 2013 our effective tax rate decreased to 30.0% from 30.2% during the same period in 2012. The effective tax rates differ from the statutory rate of 34.0% primarily due to the non-deductible secondary offering costs offset by normal recurring tax credits attributable to FICA taxes paid on employee tips.
Net Income. As a result of the foregoing, net income increased $2.0 million, to $2.8 million for the thirteen weeks ended September 29, 2013 from $0.8 million during the same period in 2012. We had net income available to common stockholders of $2.8 million for the thirteen weeks ended September 29, 2013 as compared to net income available to common stockholders of $0.5 million during the same period in 2012.


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Thirty-Nine Weeks Ended September 29, 2013 Compared to Thirty-Nine Weeks Ended
September 23, 2012
The following table presents, for the periods indicated, the consolidated
statement of operations (in thousands):
                                                      Thirty-Nine Weeks Ended
                        September 29,      % of      September 23,      % of                         %
                            2013         Revenue         2012         Revenue       Change        Change
Revenue                 $   153,601        100.0 %   $   125,960        100.0 %   $  27,641         21.9  %
Costs and expenses:
Cost of sales                42,064         27.4 %        33,764         26.8 %       8,300         24.6  %
Labor                        49,267         32.0 %        40,295         32.0 %       8,972         22.3  %
Operating                    21,742         14.2 %        17,810         14.1 %       3,932         22.1  %
Occupancy                     9,220          6.0 %         7,536          6.0 %       1,684         22.3  %
General and
administrative                7,720          5.0 %         6,419          5.1 %       1,301         20.3  %
Advisory agreement
termination fee                   -            - %         2,000          1.6 %      (2,000 )     (100.0 )%
Secondary offering
costs                           925          0.6 %             -            - %         925        100.0  %
Marketing                     1,163          0.8 %           954          0.8 %         209         21.9  %
Restaurant pre-opening        3,004          2.0 %         2,914          2.3 %          90          3.1  %
Depreciation and
amortization                  6,418          4.1 %         4,672          3.7 %       1,746         37.4  %
Total costs and
expenses                    141,523         92.1 %       116,364         92.4 %      25,159         21.6  %
Income from operations       12,078          7.9 %         9,596          7.6 %       2,482         25.9  %
Interest expense                 80          0.1 %         5,451          4.3 %      (5,371 )      (98.5 )%
Income before income
taxes                        11,998          7.8 %         4,145          3.3 %       7,853        189.5  %
Income tax expense            3,381          2.2 %         1,243          1.0 %       2,138        172.0  %
Net income              $     8,617          5.6 %   $     2,902          2.3 %   $   5,715        196.9  %

Revenue. Revenue increased $27.6 million, or 21.9%, to $153.6 million for the thirty-nine weeks ended September 29, 2013, as compared to $126.0 million for the thirty-nine weeks ended September 23, 2012. This increase was primarily driven by $28.9 million in incremental revenue from an additional 332 operating weeks provided by 15 new restaurants opened during and subsequent to the thirty-nine week period ended September 23, 2012 and increased revenue at our comparable restaurants. These increases were partially offset by a decrease in revenue related to non-comparable restaurants that are not included in the incremental revenue discussed above. Our non-comparable restaurant revenue decreased from higher than normal revenue during the thirty-nine week period ended September 29, 2013 as a result of the 'honeymoon' period that follows a restaurant's initial opening.
Due to the inclusion of a 53rd week in fiscal 2012, there is a one-week calendar shift in the comparison of the twenty-six weeks ended September 29, 2013, to the thirty-nine weeks ended September 23, 2012. As a result, we calculate comparable restaurant sales by comparing sales in the thirty-nine weeks ended September 29, 2013 to sales in the corresponding thirty-nine week calendar period ended September 30, 2012. Comparable restaurant sales increased 2.5% for the thirty-nine week period ended September 29, 2013, compared to the thirty-nine week calendar period ended September 30, 2012. The increase in comparable restaurant sales was driven by a 2.0% increase in average check and a 0.5% increase in average weekly customers. Sales for the same restaurants in the thirty-nine week fiscal period ended September 29, 2013 increased 1.8% compared to the thirty-nine week fiscal period ended September 23, 2012. Our revenue mix attributed to bar sales decreased to 18.9% during the thirty-nine weeks ended September 29, 2013 from 19.6%, primarily as a result of lower bar sales as a percent of total revenue at certain new locations.
Cost of Sales. Cost of sales as a percentage of revenue increased to 27.4% during the thirty-nine weeks ended September 29, 2013, from 26.8% during the same period in 2012, primarily as a result of higher chicken and produce costs. Labor Costs. Labor costs as a percentage of revenue remained constant at 32.0% during the thirty-nine weeks ended September 29, 2013, compared to the same period in 2012.
Operating Costs. Operating costs as a percentage of revenue increased to 14.2% during the thirty-nine weeks ended September 29, 2013 compared to 14.1% during the same period in 2012. This increase was primarily caused by increases in utility costs.
Occupancy Costs. Occupancy costs as a percentage of revenue remained constant at 6.0% during the thirty-nine weeks ended September 29, 2013 compared to the same period in 2012. . . .

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