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CHUY > SEC Filings for CHUY > Form 10-K on 11-Mar-2014All Recent SEC Filings

Show all filings for CHUY'S HOLDINGS, INC.

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


11-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with Item 6. "Selected Financial Data" and our consolidated financial statements and the related notes to those statements included in Item 8. "Financial Statements and Supplementary Data."
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 Item 1A. "Risk Factors" and elsewhere in this 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. 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 December 29, 2013, we operated 48 Chuy's restaurants across fourteen states. 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.

We opened nine restaurants in fiscal 2013. During 2014, we have opened two restaurants as of February 28, 2014, and plan to open a total of ten to eleven restaurants for the year. Over the next five years, we expect to grow our restaurant base by approximately 20%, annually. 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. For additional discussion of our growth strategies and outlook, see Item 1. "Business-Our Business Strategies."
Newly opened restaurants typically experience normal inefficiencies in the form of higher cost of sales, labor and direct operating and occupancy costs for several months after their opening in both percentage and dollar terms when compared with our more mature, established restaurants. Accordingly, the number and timing of newly opened restaurants has had, and is expected to continue to have, an impact on restaurant opening expenses, cost of sales, labor and occupancy and operating expenses. Additionally, initial restaurant openings in new markets may experience even greater inefficiencies for several months, if not longer, due to lower initial sales volumes, which results from initially low consumer awareness levels, and a lack of operating cost leverage until additional restaurants can be opened in these markets and build the overall consumer awareness in the market.
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.


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• Comparable Restaurant Sales. We consider a restaurant to be comparable in the first full quarter following the eighteenth 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 32 and 24 restaurants at December 29, 2013 and December 30, 2012, respectively.

• 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:

                                                                     Year Ended
                                                 December 29,       December 30,       December 25,
                                                     2013               2012               2011
Total restaurants (at end of period)                      48                 39                 31
Total comparable restaurants (at end of period)           32                 24                 18
Average sales per comparable restaurant (in
thousands)                                       $     4,884        $     4,986        $     4,987
Change in comparable restaurant sales                    2.3 % (1)          2.8 % (2)          3.1 %
Average check (3)                                $     13.46        $     13.18        $     12.98

(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 fiscal 2013 ended December 29, 2013, to fiscal 2012 ended December 30, 2012. As a result, our comparable restaurant sales calculation above for 2013 is based on comparing sales in the fiscal year 2013 to sales in the comparable 52-week calendar period ended December 30, 2012. Sales for the same 32 restaurants in the comparable restaurant base in the year ended December 29, 2013 increased 2.1% as compared to the 52-week period ended December 23, 2012.

(2) Our change in comparable restaurant sales calculation above for 2012, is based upon comparable sales for the 52-weeks ended December 23, 2012 as compared to comparable sales for the fiscal year ended December 25, 2011.

(3) 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 2013 and 2011 fiscal years consisted of 52 weeks and our 2012 fiscal year consisted of 53 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.


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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 may increase or decrease 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.
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 prior to termination of the advisory agreement with Goode Partners, legal and professional fees, information systems, corporate office rent and other related corporate costs.
Marketing. Marketing costs include costs associated with our 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
Year Ended December 29, 2013 Compared to the Year Ended December 30, 2012 The following table presents, for the periods indicated, the consolidated statement of operations (in thousands):

                                                            Year Ended
                        December 29,       % of      December 30,       % of                         %
                            2013         Revenue         2012         Revenue       Change        Change
Revenue                 $   204,361        100.0 %   $   172,640        100.0 %   $  31,721         18.4  %
Costs and expenses:
Cost of sales                55,894         27.4 %        46,475         26.9 %       9,419         20.3  %
Labor                        66,565         32.6 %        55,223         32.0 %      11,342         20.5  %
Operating                    29,279         14.3 %        24,498         14.2 %       4,781         19.5  %
Occupancy                    12,262          6.0 %        10,332          6.0 %       1,930         18.7  %
General and
administrative               10,015          4.9 %         9,358          5.4 %         657          7.0  %
Advisory agreement
termination fee                   -            - %         2,000          1.2 %      (2,000 )     (100.0 )%
Secondary offering
costs                           925          0.5 %           228          0.1 %         697        305.7  %
Marketing                     1,306          0.6 %         1,319          0.8 %         (13 )       (1.0 )%
Restaurant pre-opening        3,883          1.9 %         3,383          2.0 %         500         14.8  %
Depreciation and
amortization                  8,858          4.3 %         6,528          3.7 %       2,330         35.7  %
Total costs and
expenses                    188,987         92.5 %       159,344         92.3 %      29,643         18.6  %
Income from operations       15,374          7.5 %        13,296          7.7 %       2,078         15.6  %
Loss on extinguishment
of debt                           -            - %         1,673          0.9 %      (1,673 )     (100.0 )%
Interest expense, net           109          0.1 %         3,923          2.3 %      (3,814 )      (97.2 )%
Income before income
taxes                        15,265          7.4 %         7,700          4.5 %       7,565         98.2  %
Income tax expense            4,196          2.0 %         2,243          1.3 %       1,953         87.1  %
Net income              $    11,069          5.4 %   $     5,457          3.2 %   $   5,612        102.8  %

Revenue. Revenue increased $31.7 million, or 18.4%, to $204.4 million for the year ended December 29, 2013, as compared to $172.6 million for the year ended December 30, 2012. Revenue for the fiscal year ended December 30, 2012 included one extra operating week which included revenues of $3.3 million. This increase was primarily driven by $36.2 million in incremental


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revenue from an additional 446 operating weeks provided by 17 new restaurants opened during and subsequent to the year ended December 30, 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. Revenue related to non-comparable restaurants is typically lower following the year the restaurants open as a result of the 'honeymoon' period. The honeymoon period refers to the weeks following a restaurant's initial opening, during which sales are typically higher than normal. In addition, 2013 results were negatively impacted by an ice storm in early December, which had an approximate $500,000 negative impact on revenue.
Due to the inclusion of a 53rd week in fiscal 2012, there is a one-week calendar shift in the comparison of the comparable sales for 52-week period ended December 29, 2013, to the 52-week period ended December 30, 2012. As a result, we calculate comparable restaurant sales by comparing sales in fiscal 2013 to sales in the corresponding 52-week calendar period ended December 30, 2012. Comparable restaurant sales increased 2.3% for the 52-week period ended December 29, 2013 compared to the 52-week calendar period ended December 30, 2012. The increase in comparable restaurant sales was driven primarily by a 2.0% increase in average check and a 0.3% increase in average weekly customers. Sales for the same restaurants in the fiscal year ended December 29, 2013 increased 2.1% compared to the 52-week period ended December 23, 2012. Our revenue mix attributed to bar sales decreased to 18.6% during the year ended December 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 27.4% during the year ended December 29, 2013, from 26.9% during the same period in 2012, primarily as a result of higher produce and chicken costs.
Labor Costs. Labor costs as a percentage of revenue increased to 32.6% during the year ended December 29, 2013, from 32.0% during the same period in 2012, primarily as a result of decreased leverage from one less week in 2013, increases in management costs as a percentage of sales caused by lower volumes at our non-comparable restaurants as well as increased hourly labor due to longer learning curves at these same non-comparable restaurants, partially offset by improved labor efficiencies in our comparable restaurants. Operating Costs. Operating costs as a percentage of revenue increased to 14.3% during the year ended December 29, 2013 from 14.2% during the same period in 2012. The increase in the current period was primarily caused by higher utility and insurance costs as a percentage of revenue, partially offset by lower liquor taxes as a result of opening more locations outside of Texas, which charges a higher liquor tax than other jurisdictions.
Occupancy Costs. As a percentage of revenue, occupancy costs remained flat at approximately 6.0%.
General and Administrative Expenses. General and administrative expenses increased $0.7 million, or 7.0%, to $10.0 million for the year ended December 29, 2013, as compared to $9.4 million during the same period in 2012. This increase was primarily driven by an increase in salary and stock based compensation expense associated with additional employees as we continue to strengthen our infrastructure for future growth and an increase in incremental costs associated with operating as a public company for a full fiscal year in 2013 as compared to only half a year for fiscal 2012. These increases were partially offset by a decrease in performance based bonuses.
Advisory Agreement Termination Fee. On March 21, 2012, we paid a $2.0 million termination fee to terminate our advisory agreement with Goode Partners. We paid the termination fee using the proceeds from our additional borrowings of $25.0 million under our Old Credit Facility.
Secondary Offering Costs. In fiscal 2013 and 2012, we incurred approximately $925,000 and $228,000, respectively, of offering expenses related to our January 2013 and April 2013 secondary offerings of the Company's common stock. All of the stock in these offerings were sold by certain existing stockholders and as a result, the Company did not receive any proceeds from the offerings. Marketing Costs. Marketing costs as a percentage of revenue decreased to 0.6% during the year ended December 29, 2013, from 0.8% during the same period in 2012, primarily as the result of decreasing external marketing expenses and focusing more on local store marketing. We also reduced expenditures for the annual conference for our restaurant general managers as compared to the year ended December 30, 2012.
Restaurant Pre-opening Costs. Restaurant pre-opening costs increased by $0.5 million, or 14.8%, to $3.9 million for the year ended December 29, 2013, as compared to $3.4 million for the year ended December 30, 2012. This increase is primarily due to opening one additional restaurant in 2013.
Depreciation and Amortization. Depreciation and amortization as a percentage of revenue increased to 4.3% for the year ended December 29, 2013, as compared to 3.7% during the same period in 2012. This increase is primarily related to one less week of revenue in 2013 and the increase in equipment and leasehold improvement costs related to new restaurant openings.


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Loss on Extinguishment of Debt. In fiscal 2012, we recorded a $1.6 million write off of loan origination costs associated with the pay down of $79.4 million of borrowings under our Old Credit Facility with proceeds from our IPO. In addition, on November 30, 2012 we recorded a $0.1 million write off of loan origination costs associated with the termination of our Old Credit Facility. Interest Expense. Interest expense decreased $3.8 million for the year ended December 29, 2013, as compared to the year ended December 30, 2012. The decrease was primarily due to decreased average outstanding borrowings during the year ended December 29, 2013, compared to the same period in 2012. Borrowings during the year ended December 29, 2013 averaged approximately $4.9 million, while borrowings during the same period in 2012 averaged approximately $44.0 million. In addition, the average interest rate on our outstanding borrowings during the year ended December 29, 2013 was 2.0% compared to 8.4% during the year ended December 30, 2012.
Income Tax Expense. For the year ended December 29, 2013 our effective tax rate decreased to 27.5% from 29.1% during the same period in 2012. The decrease in the effective income tax rate as compared to the same period in 2012 was primarily attributable to the favorable impact of a one time adjustment made for incremental employment tax credits for the current year as well as the previous open tax years, which resulted in a $556,000 net favorable impact on net income during the year ended December 29, 2013. The decrease in the effective income tax rate was partially offset by the unfavorable impact of the non-tax deductible secondary offering costs incurred during the year ended December 29, 2013. The effective income tax rate for 2013 excluding these items is estimated to be approximately 29%. Additionally, due to the Company's net operating loss carry forwards the net favorable tax benefit related to employment tax credits will primarily be added to the general business credits deferred tax asset and will not be utilized to reduce taxes until the net operating loss carry forwards are completely utilized. The effective tax rate differs from the statutory rate of 34% primarily due to these employment tax credits attributable to payroll taxes paid on employees' tips, non-deductible secondary offering costs and various state and local income taxes.
Net Income. As a result of the foregoing, net income increased $5.6 million, to $11.1 million for the year ended December 29, 2013 from $5.5 million during the same period in 2012. We had net income available to common stockholders of $11.1 million for the year ended December 29, 2013 as compared to net income available to common stockholders of $3.3 million during the same period in 2012. Year Ended December 30, 2012 Compared to the Year Ended December 25, 2011 The following table presents, for the periods indicated, the consolidated statement of operations (in thousands):

                                                                Year Ended
                                                   % of      December 25,       % of                         %
                          December 30, 2012      Revenue         2011         Revenue       Change        Change
Revenue                 $           172,640        100.0 %   $   130,583        100.0 %   $  42,057         32.2  %
Costs and expenses:
Cost of sales                        46,475         26.9 %        36,139         27.7 %      10,336         28.6  %
Labor                                55,223         32.0 %        41,545         31.8 %      13,678         32.9  %
Operating                            24,498         14.2 %        19,297         14.8 %       5,201         27.0  %
Occupancy                            10,332          6.0 %         7,622          5.8 %       2,710         35.6  %
General and
administrative                        9,358          5.4 %         7,478          5.7 %       1,880         25.1  %
Advisory agreement
termination fee                       2,000          1.2 %             -            - %       2,000        100.0  %
Secondary offering
costs                                   228          0.1 %             -            - %         228        100.0  %
Settlement with former
director                                  -            - %           245          0.2 %        (245 )     (100.0 )%
Marketing                             1,319          0.8 %           964          0.8 %         355         36.8  %
Restaurant pre-opening                3,383          2.0 %         3,385          2.6 %          (2 )       (0.1 )%
Depreciation and
amortization                          6,528          3.7 %         4,448          3.4 %       2,080         46.8  %
Total costs and
expenses                            159,344         92.3 %       121,123         92.8 %      38,221         31.6  %
Income from operations               13,296          7.7 %         9,460          7.2 %       3,836         40.5  %
Loss on extinguishment
of debt                               1,673          0.9 %            78          0.1 %       1,595      2,044.9  %
Interest expense                      3,923          2.3 %         4,284          3.2 %        (361 )       (8.4 )%
Income before income
taxes                                 7,700          4.5 %         5,098          4.0 %       2,602         51.0  %
Income tax expense                    2,243          1.3 %         1,634          1.2 %         609         37.3  %
Net income              $             5,457          3.2 %   $     3,464          2.8 %   $   1,993         57.5  %

Revenue. Revenue increased $42.0 million, or 32.2%, to $172.6 million for the fiscal year ended December 30, 2012 compared to $130.6 million for the fiscal year ended December 25, 2011. The Company's fiscal year 2012 included 53 weeks compared to


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52 weeks in fiscal year 2011. Revenues in fiscal year 2012 attributed to the extra week totaled approximately $3.3 million. Excluding the extra week, the increase in sales was primarily driven by $36.9 million in incremental revenue from an additional 446 operating weeks provided by 16 new restaurants opened during and subsequent to fiscal year 2011. Comparable restaurant sales increased 2.8% during the year for the 52-week period ended December 23, 2012 compared to the 52-week period ended December 25, 2011. Comparable restaurant sales were positively impacted by an extra 1.5 operating days in fiscal 2012 as a result of the Company's restaurant closing schedule on Christmas Eve and Christmas Day during the 52-week period of 2011. Excluding the impact of the extra 1.5 days, comparable restaurant sales increased 2.2%, which was driven by a 1.4% increase in average check and a 0.8% increase in average weekly customers. Revenues from alcoholic beverages were approximately 19.2% of total revenues for fiscal 2012. Cost of Sales. Cost of sales as a percentage of revenue decreased to 26.9% during the year ended December 30, 2012, from 27.7% during the same period in . . .

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