CHUY (2020 - Q1)

Good day everyone and welcome to the Chuy's Holdings First Quarter 2020 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the presentation. 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 Incorporated. At this time, I'll turn the conference over to Mr. Howie. Please go ahead, sir. Jon Howi

Thank you, operator, and good afternoon. By now, everyone should have access to our first quarter 2020 earnings release. If not, it can also be found on our website at www.chuys.com in the Investors section. Before we begin our review of formal remarks, I need to remind everyone that part of our discussions today will include forward-looking statements. These forward-looking statements are not guaranteeing for 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 conditions. With that out of the way, I'd like to turn the call over to Steve.

Thank you, Jon. Good afternoon everyone and thank you for joining us on the call today. While we will briefly touch on our quarterly results, our main focus today will be the impact of COVID-19 on our business and the actions that we have taken and will be taken in response. Beginning with the first quarter results, we had a solid start to 2020 as we continue to build upon the success of our key initiatives, including those surrounding targeted marketing, investments in technology, and off-premise sales. The positive sales trajectory was evident in the 3.3% increase in our comparable restaurant sales for the first 10 weeks of the first quarter. However, as you would imagine, we're experiencing a material slowdown during the last three weeks of March, as our company along with the rest of the country has been impacted by the COVID-19 pandemic. Since then, we have taken several steps to ensure that we can weather the short-term crisis and emerge as a stronger company in the long run. As many of you know to comply with both state and local mandates, our team members' work tirelessly to transition 92 of our restaurants to an efficient off-premise model. During the stay-at-home order, we have offered our guests a focused menu, featuring a number of long-term favorites, as well as a convenient family meal and beverage kits, delivered safely to address to enhance takeout in curbside pickup procedures. We have also provided delivery services through our national delivery partner DoorDash as well as other local delivery services in some markets. I'm pleased to say that our team's hard work has paid off as our off-primes sales of more than tripled from pre-COVID levels. And our comparable sales have improved from a negative 67% right after this, we transition to an off-premise only operating model to the world 50% range just prior to the reopening of our dining rooms in certain locations. Additionally, many of our guests opted to celebrate Cinco de Mayo and Mother's Day with us earlier in May, result in one of the best weekly sales results since the onset of the crisis. I believe this is a lasting testament to the appeal of our made from scratch offerings, even when consumed at home. I'm extremely proud of what our team members have accomplished during this unprecedented time. Their commitment and ability to skillfully adapt in the face of COVID-19 crisis has been nothing short of amazing, and we're trying to do our part to help ease the impact that this pandemic has had on many of them. To that end, we have been providing support through our Red Fish Relief fund that was put in place several years ago to provide assistance to employees facing financial hardship. We are also currently paying the full cost of health insurance for all of our employees, including those currently furloughed. Lastly, it is an understatement to say that we're eager to welcome our guests back in our restaurants. With a number of states recently announcing new guidelines for business operations, we have begun the process of reopening our dining rooms. We are currently reopened the dining rooms of approximately 70 Chuy's restaurants with varying degrees of capacity. As you can imagine, our goal is to reopen each restaurant in an efficient manner and also prioritize the safety and wellbeing of both our employees and guests. In addition to proper social distancing, we have established procedures for regularly sanitizing our restaurants and our employees are following local guidelines with regard to glove and mask wearing. Early on, we've had a very positive response to reopening from our guests. I can tell you it's been great to see the renewed energy in our restaurants, as we welcome back our employees and our guests. In closing, we're fortunate to be facing these current challenges in a solid financial position as Jon will discuss in a moment. We believe we are equipped to weather this current crisis and will remain committed to ensure that our loyal guests can continue enjoying many of our freshly-repaired, favorable Mexican inspired offerings either in a safe environment of our dining rooms, or in the comfort of their own homes. With that, I will now turn the call over to our CFO, Jon Howie, to discuss financial steps we have taken and will be taken in the near future.

Thanks, Steve. The financial steps we've taken thus far have primarily been focused on managing our liquidity to ensure that our business is well funded for the long term. As of May 17th, we had approximately $27 million in cash, which included the previously announced credit facility drawdown. In addition, we just amended our revolving credit facility to extend its maturity to April 30, 2022, and provide additional financial flexibility during that COVID-19 pandemic by relaxing financial covenants through the new maturity date. To give you some additional color on our liquidity, as of May 17th, we reduced our weekly cash burn rate to approximately $200,000 as compared to $500,000 a week during April, mainly driven by the increase in our off-premise business and cost savings initiatives we announced in recent weeks. Our burn rate assumes current sales levels spending, normalized rent as well as the delay or cancellation of non-essential planned capital expenditures including new restaurant openings during the remainder for 2020. That being said, we have temporarily suspended our rent payments on offering leases, and we are continuing to work with our landlords to negotiate rent concessions, abatement and deferrals. We are also expecting approximately $3 million in tax refunds in conjunction with the CARES Act as a result of an administrative correction of the depreciation recovery period for qualified improvement properties, as well as the reinstatement of the net operating loss carryback period. Lastly, on May 5th, we file the shelf registration statement for up to $100 million to allow us to access the capital markets and further enhance our financial position, if necessary during this uncertain time. As a reminder, given the ongoing uncertainty around the magnitude and duration of the COVID-19 pandemic, we have withdrawn our previously issued guidance for fiscal year 2020. In summary, we believe we have the financial flexibility needed to weather this crisis, and we look forward to welcoming back our furloughed employees as we are slowly returning to normal restaurant operation.

Thanks, Jon. We are pleased with how our company has been able to adapt during this turbulent time and evolve our business into an off-premise business only, all while keeping the safety and wellbeing of our guests and employees foremost in our minds, while still serving our Chuy's brands, the food they've come to crave and expect. I can't say enough about the dedication and hard work our entire Chuy's family has shown by being able to revise to the challenges this pandemic has caused on our industry as well as each of our lives. Thank you to all of you. With that, we are happy to answer any questions. Thank you.

Thank you. We will be now conducting a question-and-answer session [Operator Instructions]. The first question is come from the line of Nick Setyan of Wedbush. Please proceed with your question.

Thank you. It's great to see the accelerating sales trends week-to-week. A quick clarification, of the 9 units that will close out, any of those units now open?

No, they're not.

Yes. Go ahead.

We're going to continue to get all the ones that have been in doing to go for the last two months once we get those up, we'll look at reopening and looking at the feasibility of those restaurants.

Got it. And could you maybe talk about your experience as these dining rooms are opening relative to the capacity constraints? Are you seeing sort of the Friday night, Friday's night crowd at capacity? And how your shoulder periods are doing weekdays' lunch versus dinner, anything would be very helpful?

Yes. Again, it's so early. It's basically maybe ten 8 to 10 days into this and a lot of the markets. One thing that I'm very excited about those, how fast our guys mobilized to get in such a short time, seven of these restaurants, about seven of these restaurants open in time. But we haven't -- it's too early to say -- give you a whole bunch of color because a lot of the restaurants and like example, in Austin, it's25%; in Tennessee, it's 50%. And it's going by the local laws in the different markets, but it would be too early really even to comment on that.

Okay, fair enough. And then Jon just the $48,500 in terms of the weekly sales for the weekend being 5/17, would it be possible for you to tell us what portion of that is dine-in versus off-premise?

Well, I think what we have there, that is mainly just off-premise because if you look through [audio gap] I think that's all off-premise.

No, no, a little bit. We've got a couple in that

We've got a couple in that, but for the most part I would say 90% of that is off-premise.

Yes. I agree.

Our next question comes from the line of Chris O'Cull of Stifel. Please proceed with your question.

Thanks. Thanks for taking the question. Jon, I know the Company had a furlough a large portion of its hourly workforce during the period when dining rooms were closed, but now that dining rooms are reopening and you are rehiring people. What kind of flow-through rate should we expect from the reopened dining room sales?

Well, Chris. Again, I think it's too early because there's a lot of moving pieces until we can get some trends. Because as you know, when we turned it into it to-go only kind of operation, we cut a lot of services, we turned off all the lights in the dining rooms, we did a lot of things, right. So now, it's really trying to dial-in the right amount of labor for the front of the house, as we bring in 25% capacity or 50% capacity and then slowly turn on those services. So at this point, I really understand your question, but it's really hard to give you an idea of what that is yet, until we can get some better trends.

And as we’re moving just in 25, 50, Chris, we'll bring in back some of the furloughed, that would be coming back as you move down the road. We will have some training impact on some labor, as we move forward because specifically in the back of the house, say, in a Texas, they kept construction. A lot of our kitchen fellows are working in construction right now. So, we will have some startup on some employee hiring, as we move forward a little bit.

Okay. And then, Jon, can you guys describe the margin for takeout sales compared to dining sales? How did they compare?

As far as the margin, they're almost comparable now, because what we've done is, as far as the delivery as well, we've increased the prices on those like we said we were going to for the most part, so that it would be kind of cash neutral going out the back door, a margin neutral. And so for the most part, we've done that on the delivery. On the pickup, what we're finding is that, it's a little higher check average given some of our kits and then also our margarita kits as well. So, it's not taken up all the 18%, but we are seeing in the high single digits as far as bar mix, which we've been very pleased about. And then for the stores that we have opened up, that bar mix is actually coming back quite nicely. So that to go, the margins are a little less, but I would say probably not more than a hundred basis points less.

The next question is from the line of Andrew Strelzik with BMO Capital Markets. Please proceed with your question.

My first question, can you talk a little bit about what the customer experience is like in the stores right now, where you've reopened the dining room, some of the stuff you’ve taken? And how are you managing waits?

Managing waits? Actually, I would have stopped there. First of all, right now, we have everybody usually waiting it well and wait in their cars, because obviously, the social distancing and our vestibules wouldn't allow anything else. Believe it or not, they're pretty much self managing that themselves to be straight up and actually as consumers are checking the wait, and then, then going back up to the cars. But as far as operations are going, again, we're opening 25% of the standards that we've always had kept. Obviously, the safetiness is the number one thing, making sure we're sanitizing everything, making sure we have our mask and our gloves, and making sure we have sanitizing solutions in all the areas they are expected for us to have them, but we've done very, very well with that. Part of the things that are allowing us to do it very, very well, especially on a ramp up as we continue to do is we're running a very slimmed down menu at this current time, which is very similar to the menu that we use during all our to-go and delivery services. So that's what's in our restaurants now. So our execution is as very, very good. We're pretty excited about the operations and how well they've been able to execute and we're using that technology to make sure we're working on the waits and the call times just as we're going. But I'm very, very pleased with the executions on the four walls, just as I was really pleased with the execution and the increase in our to-go volumes throughout the last eight weeks.

Okay, great, that's helpful. And then, as overtime you've grown into newer states versus kind of your home base. Can you talk about, if there's any regional differences with highlighting either in the legacy markets or the newer markets? How kind of sales has varied across the system?

I mean, honestly, just like when we're open -- I mean, the Texas obviously have the stronger AUBs, but really no significant --

Times, it was similar. The ones and then Nashville is very strong, also very similar to Texas, but it hasn't been in all categories before and after this thing. So, I think it's just that acted like we expected them to than they haven't traditionally in the past.

And then my last one, how sticky do you think the off-premise business will be? And is there anything you're thinking of doing in the stores or operationally to support what could be maybe a higher off-promise mix over time?

Sure. I mean, I think if you go back even a year ago, while we were on this call probably we talked about off-premise, we were in a 14% to 15% to go off-premise anyway. And we were looking at a big initiative throughout the rest of the year and also with catering last year, that we were looking at go areas and all our real estate in our stores to enhance those. I think they're going to definitely be enhanced as we move forward with what's happened with this pandemic. And I don't think it's all going to go away. I don't expect it to be 45-50 but I definitely expect it to be well north of where we were, which in that 14% range. So, we're going to continue with the thought process. Obviously, we've learned a ton of stuff just to go only on how to really set it up and how to stage it. And we're going to continue that within the parking lot and in our store level operations also. But it's here to stay. As the industry is working right now, convenience was always a big across in quick casual. Convenience is going to be a big plus. It's going to be a major uptick in just casual also. Convenience of the guests, whether it be how they do to go, how we do delivery, but also how we do the checks and do we have handhelds and all that stuff is going to become more and more important as we move down the road.

Our next question comes from the line of David Tarantino of Baird. Please proceed with your questions.

Hi, good afternoon. I hope you both are doing well. I had a couple of questions. The first one relates to your plan to drive traffic as the dining room reopen. I guess can you talk a little bit about kind of what's the marketing plan or what you're doing to try to drive awareness and traffic as things reopen?

Sure. As the basic thing and one thing that's great for us is we're very always been a strong local store marketing company and how we do things from a grassroots emphasis. And obviously, that's what we've been doing the last two months just doing to go. And you're going to see us continue that probably through the rest of this quarter into the third as you find out how big our areas are going to be allowed to get inside our dining rooms, whether it's 50% do they go to a 75%? And we're also doing organic smart social media talking about our special days, whether it be Cinco or we have, Tequila Day coming up here in the next month and those types of things. But as we get back and you'll see us go back in probably if things that trends go similar, you'll see us get back into our the marketing plan that we executed more like 2019. And you'll see us definitely focused on social, digital as we were in all 2019 and that was having a great results for us I believe, and we'll do that. You will see us maybe change the messages a tiny bit on some of our postings and some of our digital and social stand and you'll see us definitely talking about the convenience of what we do, obviously that the Gulf area and the convenience side, they'll talk to it. You'll definitely hear us talk about value within our menu, which is going to be so important as you move through with all the things that's happened to our communities over the last two months. And you're also going to see us talk a lot about safety and then how we take care of our employees and how we take care of our guests. But, you'll see probably in the fourth quarter very similar to the plans that we were executed in all 2019.

Got it. And then, I guess the second question I have is a bit more qualitative and it relates to some of the actions that you've taken to reduce costs, which seem necessary at this point. But in furloughing a lot of employees, I'm just wondering what your thoughts are on the impacts that will have either on the culture of the Company or your ability to pull them back in once you're able to and I guess overall how much that disruption might affect the outlook in the next year or so?

Yes, one thing that you know about us a little bit, we're in constant contact within hourly furloughed and specifically all anybody in management and specifically home office. We're talking with them. We'd like as Jon mentioned to me earlier that, I have pay and benefits for all those people throughout this time, but we're in constant contact with them and talk about it, and I think we've done and communicated the right things. And what our role is to be safe and cautious and to make sure we come out of this at the end of it better than when we even went into it and offer them and our group and our company a long-term strategy for success, not only for the Company, but for them personally and professionally also. So, we're in constant contacts. We're excited about how we dealt with this in a very personable way with our employees and we're getting most of our hourly as we said, we just started on the hourly two weeks ago, bringing them back. We're pretty pleased how they've reacted. And then they've all come back and the same thing is in the home office. We haven't really started bringing folks back from a home office perspective yet. We'll continue to look at that and see how the sales continue to ramp up and the level of work. But we're looking forward to getting our folks back working and just add on and constantly evolve the culture as we move forward.

Great. Thanks for that. And then the last question I had is. What are the sequence of events for the factors that you're looking at that would dictate when you would start putting capital to work and growing units again? I guess what should we be looking for to gauge when you might be ready to resume growth?

Yes. As it is, again, I'd like to see, I wish I had a real, real crystal ball that would tell me everything is going to happen and no one's going to go backwards or any of that type of stuff. But as we move forward, obviously, I think we were comfortable with our cash position, as Jon mentioned to you earlier, whether with our burn rate and so forth. But as we go through, you probably see us where we have a couple of stores that were pretty close to being complete and to be opened in 2007 that we put a halt to. You'll see us probably open to those two to three, possibly four, depending on where it is in 2021 if everything goes as planned. And you probably see us the following year be very, very similar to that over the next two years is what I'd say.

[Operator Instructions] Our next question comes from the line of Andy Barish of Jefferies. Please proceed with your question.

Hey guys, good to hear your voice. Just a couple of quick follow on conversation. To-go and delivery mix, has there been any significant change, in the last eight weeks or so with the ramp up of off-premise?

Yes, I mean, what we've seen which we've been trying as a goal is to increase our digital sales. And what we've seen is our digital sales have far exceeded, obviously delivery and the call in.

And this is not that way, so that was…

No, I mean it's surpassed that, so our digital sales are probably about 45% right now. Our delivery is still around 20%, it's increased, but it stays as a percentage of total off-premise, it's stayed somewhat consistent at about 20%.

Okay. And then on the mix of off-premise, you gave us the alcohol number, how much are other items like the family meals and things like that just to kind of get a sense of what the core menu is driving right now?

I don't have at that mix report with me, Andy. But I would tell you that, it’s pretty strong in those family kits.

Yes, family kits.

I would beg to say, it's in the 20% to 30%.

It’s still not, obviously the majority, obviously the core menu is still driving it, but those family meals and the convenience of those are doing very, very well. And like the margarita kits has done very, very well.

I can follow up with Andy on that.

Okay, no problem. And then, do you have a sense you can share with us on the next 20 stores or so as you go from the current openings to get back up to 92?

Yes, I'll tell you by the end of this month, we'll probably be open in all of them except five that I still have to be determined on the last five based on the local municipalities.

And that's Colorado.

Yes.

Yes.

But pretty much by the end of this month.

Our next question is from the line of Brian Vaccaro of Raymond James. Please proceed with your question.

Thanks and good evening. I just want to circle back to the family meal kits and firstly a big fan, but I'm curious if you think, does it attract a new customer or occasion even in some ways during this period? And as you gradually reopened the dining rooms, are you planning on keeping those on the menu?

Absolutely, and we're going to keep the alcohol kits on the menu too because I do believe that's the new way of the markets right now. So, we're going to keep all those and have those as a part of our to-go and delivery options, except not the alcohol obviously. That has to be a pickup, but yes, it's definitely going to be part as we move forward. And also as far as a new customer, maybe a little bit. But again, time to bring that out. One thing that it is, we definitely in this value conscious world that we're obviously in now and how it's going to continue definitely throughout the rest of this year, there is a little -- but a huge discount, but they're very, very well priced, very, very well priced in all areas. But again, my plan is to keep that price point on all those things, as we move forward through the rest of the year, really looking at it at the time frame of our February price increase that we usually do every year. So, we're going to have to be a little bit of an even more value conscious as we move forward through the rest of this year.

That's great. And then, I know it's very early, but I wanted to circle back and ask about the recent sales trends, I guess, down 45% in the weekend is 5.17. Could you break that down and help us frame kind of what the units that reopen the dining rooms look like versus those that were still off-premise only? And also, I wanted to clarify, were those 50 units that you mentioned that were partially reopened? Were they reopened for the entire week, all seven days?

No. So if you're looking at that, Brian, probably the average unit they be take their total that started the week ended the week. The total units opened were about 35 stores. And I do have that mix that that Nick asked earlier. So, of that 48,495 or 500, about 34% of that figure was dine-in sales. So, that's an anomaly, but it's pretty close, the 35 average stores and 34% dine-in.

Okay.

That makes that up.

Yes. And then obviously, you don't open everything up on one day, they've all been different days of the week. And they've all been kind of -- so couple of them have -- all of been a couple of days or week one was open in the four weeks. So it's all shuffled in a little bit.

Okay, that's great. And then just last one. Jon, I wanted to circle back on the weekly burn rate. Just wanted to clarify that $200,000 that assumes you are paying full rent, but currently, you're not paying rent if I heard that correctly? And then also what is it embedded in terms of a G&A run-rate?

Well, right now it is basically our cash G&A burn rate, not a GAAP. But that G&A burn rate runs right around $1.1 million to $1.2 million right now period, so a four week period. So, I see it's -- yes, so 300,000.

Yes. Okay. And I was interpreting your rate comments correctly. It's fully burdened with rent, but….

Yes, it's normalized rent. Because as we obviously defer some of those payments, we'll have some extra payments as we go in the future into 2021, where some we've negotiated deferring those payments into '21. But on a normalized basis, that's what that's based on.

Perfect. Thank you very much.

[Operator Instructions] Our next question is from the line and Todd Brooks with C.L. King & Associates. Please proceed with your question.

Hey, good evening, everyone. I hope you're well. Couple of questions, one on the whole, not paying rent and negotiating with landlords, I guess where do we stand on how much of the base we've worked maybe with landlords? And what has been the top ask? Has it been for abatement or has it been for more of a change to a percentage sales type of model for the lease? What's your number one goal when you're talking to these landlords?

Really, it's all of them. So, Jon, I was just talking, obviously, we talked about everything under the sun and all that, but our priorities at the beginning was in April, May, June abatement. We were pretty pleased on at least partial abatements and to be honest we're pleased with partial abatements on our floor abatement, partial abatement was about 15% of them. So, we're kind of pleased with that. Then the number two priority was really defer them, and that's probably a good number of those, where are you're starting to pay back some a little bit in '21, a lot of in '22 and beyond. So that's been a couple of that. We definitely have talked about percentage rent and so forth on, but overall it's been a little bit involved, but the main one is the deferment to later years.

Okay, great. And the second question, just coming back to capacity, I know with Texas being at 25%, I guess early openings and just what you've seen traffic wise. What do you think you're missing with 25% capacity? And do you think that going to a 50% capacity in the Texas market will allow you to capture all the demand that you're seeing at the stores in that market now?

I don't think 50% you're going to capture all the demand, but at 25% you're not capturing hardly any. What you're doing there is really getting ready to get the 50%, because I'll put our restaurants at 25% long-term company wide, not same-store specific, company-wide is really might be a little bit of a cash strain on you when you're trying to do that. So our goal is always to get ready to be set up, test some stores at 25 to make sure that we're ready to go when it actually goes 50, as an example in Texas it's 50%, it's going to go 50% tomorrow. So, that's how we have a few that we can open up and get ready for it, brought some people back, get a little extra training on the menu to really get up. But the key for us was at 50% we can have some good sales that we can have some leverage with.

Then the other Todd to remember, one of our advantages has always been our patios, not an extreme advantage when it's raining, but during the time for the most part, most of these municipalities don't include that in your capacity limitations. They just want social distancing out there. So, we've been able to spread those tables up and fill our patios up, beyond those capacity limits. So, that's been helpful in a lot of areas to help combat the 25% or 50%.

Our next question comes from the line of Andy Barish of Jefferies. Please proceed with your question.

Hey guys. Just circling back, I know it's early and this is still evolving, but the operating chops you guys have shown during this process. Are there learnings kind of coming out of the last eight weeks, on staffing and efficiencies and running obviously a very, very lean back of the house and front of the house that, that maybe apply going forward with restarts and things like that?

Absolutely, Andy, we've obviously became very, very quick, very good at being able to do-go and making the proper adjustments to our menu mix and our menu itself to where we could execute to-go in these basically kits on a quick basis. We're going to take all those learnings as we go back into reopening and how our menu might evolve through the rest of this year, but specifically more important into next year. And I was also watching go service levels and also service steps have also will be amended as we move forward and then all that stuff. And obviously, part of that is you're really looking at, all your P&L, like, our guys are really good at looking at cash right now, really good at looking at cash. So, obviously, there's going to be the best practices that will start and really we're talking about kilowatt hours and all that type of stuff now. So, it's a lot of old things, but we're expecting to come out of this better than we went into.

There are no further questions at this time. I will now hand the call back over to management for any closing remarks.

Okay guys, I hope everybody is safe out there, everybody is doing well. Thanks for asking about us. We're both doing well and our groups doing pretty, pretty well, but thank you so much. Jon and I appreciate your continued interest in Chuy's, and we will always be available to answer any and all questions again. Thank you and have a good evening.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.