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CHUY > SEC Filings for CHUY > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for CHUY'S HOLDINGS, INC.

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


8-Aug-2014

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 29, 2013 (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 June 29, 2014, we operated 54 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.

As of June 29, 2014, we opened six restaurants year-to-date and opened two additional restaurant subsequent to June 29, 2014. 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 38 and 29 restaurants at June 29, 2014 and June 30, 2013, 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 increases 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            Twenty-Six Weeks Ended
                                            June 29,         June 30,        June 29,         June 30,
                                              2014             2013            2014             2013
Total restaurants (at end of period)              54               44              54               44
Total comparable restaurants (at end of
period)                                           38               29              38               29
Average sales per comparable restaurant
(in thousands)                            $    1,286       $    1,290     $     2,499       $    2,500
Change in comparable restaurant sales            2.4 %            2.1 %           3.2 %            2.2 %
Average check                             $    13.84       $    13.63     $     13.74       $    13.49

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 fiscal year consisted of 52 weeks and our 2014 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 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.
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, legal and professional fees, information systems, corporate office rent and other related corporate costs.
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.


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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 several 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.
Thirteen Weeks Ended June 29, 2014 Compared to Thirteen Weeks Ended June 30, 2013
The following table presents, for the periods indicated, the consolidated statement of operations (in thousands):

                                                      Thirteen Weeks Ended
                               June 29,      % of      June 30,      % of                     %
                                 2014      Revenue       2013      Revenue     Change      Change
Revenue                       $  63,284     100.0 %   $  53,427     100.0 %   $ 9,857       18.4  %
Costs and expenses:
Cost of sales                    17,980      28.4 %      14,644      27.4 %     3,336       22.8  %
Labor                            20,806      32.9 %      16,740      31.3 %     4,066       24.3  %
Operating                         8,595      13.6 %       7,537      14.1 %     1,058       14.0  %
Occupancy                         3,804       6.0 %       3,108       5.8 %       696       22.4  %
General and administrative        2,939       4.6 %       2,507       4.7 %       432       17.2  %
Secondary offering costs              -         - %         508       1.0 %      (508 )   (100.0 )%
Marketing                           483       0.8 %         402       0.8 %        81       20.1  %
Restaurant pre-opening            1,305       2.1 %       1,050       2.0 %       255       24.3  %
Depreciation and amortization     2,439       3.8 %       2,126       3.9 %       313       14.7  %
Total costs and expenses         58,351      92.2 %      48,622      91.0 %     9,729       20.0  %
Income from operations            4,933       7.8 %       4,805       9.0 %       128        2.7  %
Interest expense                     19         - %          24       0.1 %        (5 )    (20.8 )%
Income before income taxes        4,914       7.8 %       4,781       8.9 %       133        2.8  %
Income tax expense                1,468       2.4 %       1,621       3.0 %      (153 )     (9.4 )%
Net income                    $   3,446       5.4 %   $   3,160       5.9 %   $   286        9.1  %

Revenue. Revenue increased $9.9 million, or 18.4%, to $63.3 million for the thirteen weeks ended June 29, 2014 from $53.4 million for the comparable period in 2013. This increase was primarily driven by $10.0 million in incremental revenue from an additional 129 operating weeks provided by 13 new restaurants opened during and subsequent to the thirteen weeks ended June 30, 2013 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 for these non-comparable restaurants is historically lower as the stores transition out of the 'honeymoon' period that follows a restaurant's initial opening.


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Comparable restaurant sales increased 2.4% for the thirteen weeks ended June 29, 2014 compared to the thirteen weeks ended June 30, 2013. The increase in comparable restaurant sales was driven primarily by a 1.5% increase in average check and a 0.9% increase in average weekly customers. Our revenue mix attributed to bar sales was 19.3% during the thirteen weeks ended June 29, 2014 compared to 19.6% during the comparable period in 2013.
Cost of Sales. Cost of sales as a percentage of revenue increased to 28.4% during the thirteen weeks ended June 29, 2014 from 27.4% during the comparable period in 2013, primarily as a result of higher beef, dairy and produce costs. Labor Costs. Labor costs as a percentage of revenue increased to 32.9% during the thirteen weeks ended June 29, 2014 from 31.3% during the comparable period in 2013, primarily as a result of lower volumes on fixed labor and longer learning curves related to hourly labor at some of our newer locations. Operating Costs. Operating costs as a percentage of revenue decreased to 13.6% during the thirteen weeks ended June 29, 2014 from 14.1% during the comparable period in 2013. The decrease in the current period was primarily caused by lower liquor taxes as a result of the impact of the new Texas liquor tax law, which went into effect on January 1, 2014 and a continued increase in the number of new store openings outside of Texas, which generally has lower liquor taxes than Texas, if any. This decrease was partially offset by an increase in utility costs as a percentage of revenue of approximately 20 basis points. Occupancy Costs. Occupancy costs as a percentage of revenue increased to 6.0% during the thirteen weeks ended June 29, 2014 from 5.8% during the comparable period in 2013, primarily as a result of higher rent expense as a percentage of revenue at certain new restaurants as we expand into newer markets. General and Administrative Expenses. General and administrative expenses increased $0.4 million, or 17.2%, to $2.9 million for the thirteen weeks ended June 29, 2014 from $2.5 million during the comparable period in 2013. This increase was primarily driven by an increase in stock-based compensation and an increase in salary expense of $0.2 million associated with our new long term incentive program and additional employees as we continue to strengthen our infrastructure for growth and higher legal and professional fees of $0.2 million related to increased public company costs as well as smaller increases in other categories related to growth of $0.2 million, partially offset by lower performance-based bonuses of $0.2 million.
Secondary Offering Costs. During the thirteen weeks ended June 30, 2013 we incurred $508,000 of offering expenses related to two secondary offerings of the Company's common stock that were completed in January 2013 and April 2013. All of the common stock sold in the offerings was sold by certain existing stockholders and as a result, the Company did not receive any proceeds from these offerings.
Marketing Costs. As a percentage of revenue, marketing costs remained flat at approximately 0.8%.
Restaurant Pre-opening Costs. Restaurant pre-opening costs increased $0.2 million, or 24.3%, to $1.3 million for the thirteen weeks ended June 29, 2014 from $1.1 million during the comparable period in 2013. This increase is primarily due to the timing of the opening dates and stage of development for the restaurants in development and scheduled to open during the third quarter. Depreciation and Amortization. Depreciation and amortization costs increased $0.3 million to $2.4 million during the thirteen weeks ended June 29, 2014 from $2.1 million during the comparable period in 2013, primarily as the result of an increase in equipment and leasehold improvement costs associated with our new restaurants.
Interest Expense. Interest expense as a percentage of revenue remained flat at approximately 0.1%. Our average interest rate on outstanding borrowings during the thirteen weeks ended June 29, 2014 was 1.91% compared to 1.95% during the thirteen weeks ended June 30, 2013.
Income Tax Expense. For the thirteen weeks ended June 29, 2014 our effective tax rate decreased to 29.9% from 33.9% during the comparable period in 2013 primarily as a result of non-deductible secondary offering costs of $508,000, which were expensed during thirteen weeks ended June 30, 2013 and treated as a discrete tax item. The effective tax rates differ from the statutory rate of 35.0% primarily due to the non-deductible secondary offering costs offset by normal recurring tax credits attributable to employment taxes paid on employee tips.
Net Income. As a result of the foregoing, net income increased 9.1% to $3.4 million during thirteen weeks ended June 29, 2014 from $3.2 million during the comparable period in 2013.


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Twenty-Six Weeks Ended June 29, 2014 Compared to Twenty-Six Weeks Ended June 30, 2013
The following table presents, for the periods indicated, the consolidated statement of operations (in thousands):

                                                     Twenty-Six Weeks Ended
                               June 29,      % of      June 30,      % of                     %
                                 2014      Revenue       2013      Revenue      Change      Change
Revenue                       $ 119,235     100.0 %   $ 100,125     100.0 %   $ 19,110      19.1  %
Costs and expenses:
Cost of sales                    33,508      28.1 %      27,201      27.2 %      6,307      23.2  %
Labor                            39,516      33.1 %      31,715      31.7 %      7,801      24.6  %
Operating                        16,156      13.5 %      14,084      14.1 %      2,072      14.7  %
Occupancy                         7,358       6.2 %       5,999       6.0 %      1,359      22.7  %
General and administrative        5,862       4.9 %       5,302       5.3 %        560      10.6  %
Secondary offering costs              -         - %         925       0.9 %       (925 )   100.0  %
Marketing                           905       0.8 %         754       0.8 %        151      20.0  %
Restaurant pre-opening            2,460       2.1 %       2,021       2.0 %        439      21.7  %
Depreciation and amortization     4,755       4.0 %       4,094       4.0 %        661      16.1  %
Total costs and expenses        110,520      92.7 %      92,095      92.0 %     18,425      20.0  %
Income from operations            8,715       7.3 %       8,030       8.0 %        685       8.5  %
Interest expense                     41         - %          57       0.1 %        (16 )   (28.1 )%
Income before income taxes        8,674       7.3 %       7,973       7.9 %        701       8.8  %
Income tax expense                2,596       2.2 %       2,172       2.1 %        424      19.5  %
Net income                    $   6,078       5.1 %   $   5,801       5.8 %   $    277       4.8  %

Revenue. Revenue increased $19.1 million, or 19.1%, to $119.2 million for the twenty-six weeks ended June 29, 2014, from $100.1 million for the comparable period in 2013. This increase was primarily driven by $18.6 million in incremental revenue from an additional 253 operating weeks provided by 15 new restaurants opened during and subsequent to the twenty-six weeks ended June 30, 2013 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 for these non-comparable restaurants is historically lower as the stores transition out of the 'honeymoon' period that follows a restaurant's initial opening. Comparable restaurant sales increased 3.2% for the twenty-six weeks ended June 29, 2014 compared to the twenty-six weeks ended June 30, 2013. The increase in comparable restaurant sales was driven primarily by a 1.7% increase in average check and a 1.5% increase in average weekly customers. Our revenue mix attributed to bar sales was 18.9% during the thirteen weeks ended June 29, 2014 compared to 19.1% during the comparable period in 2013.
Cost of Sales. Cost of sales as a percentage of revenue increased to 28.1% during the twenty-six weeks ended June 29, 2014 from 27.2% during the comparable period in 2013, primarily as a result of higher beef, dairy and produce costs. Labor Costs. Labor costs as a percentage of revenue increased to 33.1% during the twenty-six weeks ended June 29, 2014 from 31.7% during the comparable period in 2013 primarily as a result of lower volumes on fixed labor and longer learning curves related to hourly labor at some of our newer locations. Operating Costs. Operating costs as a percentage of revenue decreased to 13.5% during the twenty-six weeks ended June 29, 2014 from 14.1% during the comparable period in 2013. The decrease in the current period was primarily caused by lower liquor taxes as a result of the impact of the new Texas liquor tax law, which went into effect on January 1, 2014 and a continued increase in the number of new store openings outside of Texas, which generally has lower liquor taxes than Texas, if any. This decrease was partially offset by an increase in utility costs as a percentage of revenue of approximately 30 basis points.
Occupancy Costs. Occupancy costs as a percentage of revenue increased to 6.2% in the twenty-six weeks ended June 29, 2014, from 6.0% during the comparable period in 2013, primarily as a result of higher rent expense as a percentage of revenue at certain new restaurants as we expand into newer markets.
General and Administrative Expenses. General and administrative expenses increased $0.6 million, or 10.6%, to $5.9 million for the twenty-six weeks ended June 29, 2014, as compared to $5.3 million during the comparable period in 2013. This increase was primarily driven by an increase in stock-based compensation and salary expense of $0.4 million associated with our new long-


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term incentive program and additional employees as we continue to strengthen our infrastructure for growth, higher legal and professional fees of $0.3 million related to increased public company costs and smaller increases in other categories of $0.3 million related to normal growth, partially offset by lower performance-based bonuses of $0.4 million.
Secondary Offering Costs. During the twenty-six weeks ended June 30, 2013, we incurred $925,000 of offering expenses related to two secondary offerings of the Company's common stock that were completed in January 2013 and April 2013. All of the common stock sold in the offerings was sold by certain existing stockholders, and as a result, the Company did not receive any proceeds from these offerings.
Marketing Costs. As a percentage of revenue, marketing costs remained flat at approximately 0.8%.
Restaurant Pre-opening Costs. Restaurant pre-opening costs increased $0.4 million, or 21.7%, to $2.4 million for the twenty-six weeks ended June 29, 2014 from $2.0 million during the comparable period in 2013. This increase is primarily due to opening six restaurants during the twenty-six weeks ended June 29, 2014 compared to five restaurants opened during the comparable period in 2013, and due to the timing of the opening dates and stage of development for restaurants in development and scheduled to open during the third quarter. Depreciation and Amortization. Depreciation and amortization costs increased $0.7 million to $4.8 million for the twenty-six weeks ended June 29, 2014 from $4.1 million during the comparable period in 2013, primarily as the result of an increase in equipment and leasehold improvement costs associated with our new restaurants.
Interest Expense. Interest expense remained constant at approximately $50,000 for the twenty-six weeks ended June 29, 2014, as compared to the twenty-six weeks ended June 30, 2013. Our interest rate on outstanding borrowings as of June 29, 2014 was 1.91% compared to 1.95% as of June 30, 2013.
Income Tax Expense. For the twenty-six weeks ended June 29, 2014, the effective tax rate increased to 29.9% from 27.2% for the comparable period in 2013. The increase in the effective income tax rate as compared to the comparable period in 2013 was primarily attributable to the favorable impact of a one time adjustment made for incremental employment tax credits for the prior year as well as the previous open tax years, which resulted in a $556,000 net favorable impact in net income during the twenty-six weeks ended June 30, 2013. This net favorable impact during 2013 was partially offset by the unfavorable impact of the non-tax deductible secondary offering costs incurred during the same period. The impact on the effective income tax rate for these items was treated . . .

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