CHUY’S HOLDINGS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
Unless otherwise indicated, or the context otherwise requires, references in this report to “Chuy’s”, “our company”, “the company”, “we”, “us” and “our” refer to
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 on Form 10-K for the year ended
December 26, 2021(our "Annual Report") and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein. Overview We are a growing full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex-Mex inspired food. We were founded in Austin, Texasin 1982 and, as of March 27, 2022, we operated 96 restaurants across 17 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.
We use the following performance indicators to assess 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 92 restaurants at
March 27, 2022. •Comparable Restaurant Sales as compared to 2019. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time as compared to that time in fiscal year 2019. The comparable group of restaurants include the restaurants that were in the comparable base as of the end of fiscal year 2019. Our comparable restaurant base consisted of 81 restaurants at March 27, 2022. •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 changes in menu and price increases as well as 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 the operating data for the periods indicated:
March 27, 2022 March 28, 2021Total open restaurants (at end of period) 96
Total comparable restaurants (at end of period) 92
Average unit volumes (in thousands)
Change in comparable restaurant sales(1) 11.4 %
(3.2) % Average check
$ 17.71 $ 17.15
(1) We consider a restaurant to be comparable to the first full quarter following the 18th month of operation. The change in same restaurant sales reflects the changes in the same restaurant group’s sales over a given period.
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 2022 and 2021 fiscal years each consists of 52 weeks.
Key financial definitions
Revenue. Revenue consists primarily of food and beverage sales and also includes sales of our t-shirts, sweatshirts and hats. Sales are presented net of discounts associated with each sale. Revenues in any given period are directly impacted by the number of weeks of operation in that period, the number of restaurants we operate and comparable restaurant sales growth.
Cost of sales. Cost of sales consists 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, restaurant manager bonus expenses, and payroll taxes.
Operating costs. Operating costs consist primarily of restaurant-related operating expenses, such as supplies, utilities, repairs and maintenance, travel cost, insurance, employee benefits, 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 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. Impairment, closed restaurant and other costs. Impairment costs include impairment of long-lived assets associated with restaurants where the carrying amount of the asset is not recoverable and exceeds the fair value of the asset. Closed restaurant costs consist of any costs associated with the closure of a restaurant such as lease termination costs, severance benefits, other miscellaneous closing costs as well as costs to maintain these closed restaurants through the lease termination date such as occupancy costs, including rent payments less sublease income, if any, and insurance and utility costs. Other costs consist of closed restaurant lease termination fees.
Depreciation. Amortization primarily includes amortization of capital assets, including equipment and leasehold improvements.
Interest charges. Interest expense consists primarily of interest on our outstanding debt, fees related to uncommitted credit facilities and the amortization of our debt issuance costs, less interest income, if any.
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 changes in 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 is also 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. Timing of 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 over
The following table presents, for the periods indicated, the condensed consolidated statement of income (in thousands):
Thirteen Weeks Ended % of March 28, % of % March 27, 2022 Revenue 2021 Revenue $ Change Change Revenue
$ 100,486100.0 % $ 87,710100.0 % $ 12,77614.6 % Costs and expenses: Cost of sales 26,243 26.1 20,447 23.3 5,796 28.3 Labor 29,825 29.7 24,829 28.3 4,996 20.1 Operating 16,230 16.2 13,471 15.4 2,759 20.5 Occupancy 7,652 7.6 7,239 8.3 413 5.7 General and administrative 6,654 6.6 6,848 7.8 (194) (2.8) Marketing 1,413 1.4 977 1.1 436 44.6 Restaurant pre-opening 125 0.1 677 0.8 (552) (81.5) Impairment, closed restaurant and other costs 1,279 1.3 2,344 2.7 (1,065) (45.4) Depreciation 4,982 4.9 4,918 5.5 64 1.3 Total costs and expenses 94,403 93.9 81,750 93.2 12,653 15.5 Income from operations 6,083 6.1 5,960 6.8 123 2.1 Interest expense, net 28 0.1 23 - 5 21.7 Income before income taxes 6,055 6.0 5,937 6.8 118 2.0 Income tax expense (benefit) 537 0.5 (717) (0.8) 1,254 (174.9) Net income $ 5,518 5.5 % $ 6,6547.6 % $ (1,136)(17.1) % Revenue. Revenue increased $12.8 million, or 14.6%, to $100.5 millionfor the thirteen weeks ended March 27, 2022from $87.7 millionfor the comparable period in 2021. The increase was primarily related to growth in customer traffic as the Company continued to relax indoor dining capacity restrictions throughout its restaurants, as well as $3.1 millionof incremental revenue from an additional 46 operating weeks provided by new restaurants opened during and subsequent to the first quarter of 2021. For the first quarter of 2022, off-premise sales were approximately 28% of total revenue compared to approximately 32% in the same period last year. Comparable restaurant sales increased 11.4% for the thirteen weeks ended March 27, 2022compared to the same period last year primarily driven by a 7.8% increase in average weekly customers and a 3.6% increase in average check. Comparable restaurant sales decreased 1.7% as compared to the same period in fiscal 2019. The comparable restaurant sales as compared to 2019 were negatively impacted by the Omicron variant outbreak during January and the first half of February of 2022 as well as an approximately 120 basis point decrease due to the severe winter weather across most of the Central United States.
Cost of sales. Cost of sales as a percentage of revenue increased to 26.1% in the thirteen weeks ended
Labor costs. Labor costs as a percentage of revenue increased to 29.7% during the thirteen weeks ended
March 27, 2022from 28.3% during the comparable period in 2021 largely as a result of hourly labor rate inflation of approximately 13% at comparable restaurants as well as an incremental improvement in our hourly staffing levels as compared to last year. Operating costs. Operating costs as a percentage of revenue increased to 16.2% during the thirteen weeks ended March 27, 2022from 15.4% during the same period in 2021 mainly as a result of higher restaurant repair and maintenance costs, increase in delivery service charges, cost pressures on to-go supplies and utility costs as well as higher credit card fees due to an increase in dine-in transactions that have a higher transaction fee. Occupancy costs. Occupancy costs as a percentage of revenue decreased to 7.6% during the thirteen weeks ended March 27, 2022from 8.3% during the comparable period in 2021 primarily as a result of sales leverage on fixed occupancy expenses, partially offset by higher percentage rent. General and administrative expenses. General and administrative expenses decreased to $6.7 millionfor the thirteen weeks ended March 27, 2022as compared to $6.8 millionfor the same period in 2021. The decrease was primarily driven by lower performance-based bonuses, partially offset by an increase in management salaries and stock based compensation. As a percentage of revenues, general and administrative expenses decreased to 6.6% in the first quarter of 2022 from 7.8% in the first quarter of 2021. Restaurant pre-opening costs. Restaurant pre-opening costs decreased to $0.1 millionfor the thirteen weeks ended March 27, 2022as compared to $0.7 millionfor the same period in 2021 due to the timing of new store openings. Marketing. Marketing expense as a percentage of revenue increased to 1.4% during the thirteen weeks ended March 27, 2022as compared to 1.1% for the same period in 2021 as the Company reinstated its digital advertising campaigns across the nation. Impairment, closed restaurant and other costs. Impairment, closed restaurant and other costs decreased to $1.3 millionduring the thirteen weeks ended March 27, 2022from $2.3 millionduring the comparable period in 2021. During the first quarter of 2022, we recorded $1.3 millionof closed restaurant costs such as rent expense, utility and insurance among other costs required to maintain the remaining closed locations. During the same period last year, we recorded $1.6 millionof closed restaurant costs, a $0.5 millionloss on lease termination of two operating leases, and a $0.3 millionnon-cash impairment charge related to their long-lived assets. Depreciation. Depreciation expense increased to $5.0 millionduring the thirteen weeks ended March 27, 2022from $4.9 millionrecorded during the comparable period in 2021 primarily due to an increase in depreciation associated with our new restaurants. Income tax expense (benefit). We recorded an income tax expense of $0.5 millionin the first quarter of 2022 compared to an income tax benefit of $0.7 millionduring the comparable period in 2021. The increase in income tax expense was primarily driven by a $1.3 milliondiscrete tax benefit recorded during the first quarter of 2021 related to stock based compensation. As of March 27, 2022, the Company had a $5.0 milliondeferred tax asset, which management believes will be fully realized, therefore, no valuation allowance is required at this time. In August 2020, the IRSissued a Notice of Proposed Adjustment to the Company asserting that the tenant allowances paid under our operating leases should be recorded as taxable income for years 2016 and prior. The Company disagrees with the IRS'sposition and believes that it is more likely than not that the Company's position will ultimately be sustained upon further examination, including the resolution of the IRS'sappeal or litigation processes, if any. As a result, no further tax accrual was made. The Company estimates if the IRS'sposition was upheld, the Company's tax liability associated with the IRS'sposition could range between $0.5 millionand $2.5 million.
Net revenue. Due to the above, the net profit was
Our principal sources of cash are cash and cash equivalents, net cash provided by operating activities, which includes tenant improvement allowances from our landlords, and borrowings, if any, under our
$35.0 millionrevolving credit facility as further discussed in Note 5, Long-Term Debt. Consistent with many other restaurant and retail store operations, we typically use operating lease arrangements for our restaurants. From time to time, we may also purchase the underlying land for development. We believe that our operating lease arrangements provide appropriate leverage of our capital structure in a financially efficient manner. We may also from time to time sell equity or engage in other capital markets transactions. Our main requirements for liquidity are to support our working capital, restaurant expansion plans, ongoing maintenance of our existing restaurants, investment in infrastructure, obligations under our operating leases, interest payments on our debt, if any, and to repurchase shares of our common stock subject to market conditions. Repurchases of the Company's outstanding common stock will be made in accordance with applicable laws and may be made at management's discretion from time to time in the open market, through privately negotiated transactions or otherwise, including pursuant to Rule 10b5-1 trading plans. There is no guarantee as to the exact number of shares to be repurchased by the Company. The timing and extent of repurchases will depend upon several factors, including market and business conditions, regulatory requirements and other corporate considerations, and repurchases may be discontinued at any time. The Company repurchased 718,112 shares for approximately $19.7 millionduring the first quarter of 2022. As of March 27, 2022, the Company had repurchased a total of 983,044 shares and had $21.9 millionremaining under its $50.0 millionrepurchase program.
Our liquidity may be adversely affected by a number of factors, including a decrease in customer traffic or average check per customer due to changes in economic conditions, as described in Item 1A. “Risk Factors” of our annual report.
Cash flow for the thirteen weeks ended
The following table summarizes the statement of cash flows (in thousands):
Thirteen weeks over
March 27, 2022 March 28, 2021 Net cash provided by operating activities
$ 6,851 $ 12,315Net cash used in investing activities (2,613) (1,719) Net cash used in financing activities (21,146) (155) Net (decrease) increase in cash and cash equivalents (16,908) 10,441 Cash and cash equivalents at beginning of year 106,621 86,817 Cash and cash equivalents at end of period $ 89,713 $ 97,258Operating Activities. Net cash provided by operating activities decreased $5.4 millionto $6.9 millionfor the thirteen weeks ended March 27, 2022from $12.3 millionduring the comparable period in 2021. Our business is almost exclusively a cash business. Almost all of our receipts come in the form of cash and cash equivalents and a large majority of our expenditures are paid within a 30 day period. The decrease in net cash provided by operating activities was mainly attributable to $3.3 milliondecrease in accrued and other liabilities driven by higher bonus payments this year as compared to fiscal 2021 as well as a $1.0 millionlease incentive receivable recorded during the first quarter of 2022. Investing Activities. Net cash used in investing activities increased $0.9 millionto $2.6 millionfor the thirteen weeks ended March 27, 2022from $1.7 millionduring the comparable period in 2021, mainly driven by a timing of our new restaurant construction as compared to the same period last year. Financing Activities. Net cash used by financing activities increased $20.9 millionto $21.1 millionfor the thirteen weeks ended March 27, 2022from $0.2 millionduring the comparable period in 2021 primarily due to a $19.7 millionincrease in the repurchases of shares of common stock. As of March 27, 2022, we had no other financing transactions, arrangements or other relationships with any unconsolidated affiliates or related parties. Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.
Long-term and short-term capital needs
There have been no material changes in our long-term or short-term capital requirements from what was previously disclosed in our annual report filed with the
There have been no material changes to our contractual obligations from what was previously disclosed in our annual report filed with the
Off-balance sheet arrangements
Significant Accounting Policies and Estimates
There have been no material changes in significant accounting policies and estimates from what was previously disclosed in our annual report filed with the
Recent accounting pronouncements
For more information on new accounting pronouncements, see Note 2, Recent Accounting Pronouncements in the Notes to our Unaudited Condensed Consolidated Financial Statements.
Caution Regarding Forward-Looking Statements
Certain statements in this quarterly report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect the current views of our senior management with respect to future events and our financial performance. These statements include forward-looking statements with respect to our business and industry in general. Statements that include the words "expect," "intend," "plan," "believe," "project," "forecast," "estimate," "may," "should," "anticipate" and similar statements of a future or forward looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:
• the ultimate duration and severity of the COVID-19 pandemic and any new variants, and the effectiveness of measures taken, or measures that may be taken, by governmental authorities to contain the outbreak or address its impact;
•the impact of adverse economic factors, including inflation and the availability of credit, on our landlords and surrounding tenants;
•the success of our existing and new restaurants;
• our ability to identify suitable sites and to develop and expand our business;
• our ability to effectively manage our growth and the resulting changes in pre-opening costs;
•we operate most of our restaurants under long-term leases which we may not be able to renew and which we would be obligated to perform even if we closed our restaurants;
•changing economic conditions and consumer buying habits;
• damage to our reputation or lack of acceptance of our brand in existing or new markets;
•our expansion into markets that we do not know;
• economic and other trends and developments, including adverse weather conditions, in the local or regional areas in which our restaurants are located and more particularly in
•acts of violence or threats against our restaurants or the centers in which they are located;
•changes in food availability and costs;
• concerns about food safety and foodborne illness;
•increased competition in the restaurant industry and the segments in which we compete;
•the success of our marketing programs;
• the impact of new restaurant openings, including the effect on our existing restaurants when new restaurants open in the same markets and restaurant closures;
•the pressure on our infrastructure and resources caused by our growth;
•insufficiency of our insurance coverage and fluctuating insurance requirements and costs;
• the impact of security breaches of confidential customer information in connection with our electronic processing of credit and debit card transactions;
• inadequate protection of our intellectual property;
• failure of our computer system or breach of our network security;
•a major natural or man-made disaster;
•labour shortages and increases in our labor costs, including due to changes in government regulations;
•loss of key members of our management team;
•the impact of legislation and regulation regarding nutritional information and new information or attitudes regarding diet and health or adverse opinions about the health of consuming our menu offerings;
• the impact of federal, state and local laws and regulations, including with respect to liquor licensing and food service;
•the impact of litigation;
•the impact of impairments;
•the failure of our internal control over financial information;
• the impact of federal, state and local tax laws and the Internal Revenue Service’s disagreement with our tax position;
•the effect of changes in the accounting principles applicable to us;
•the impact of our indebtedness on our ability to invest in the ongoing needs of our business;
• our ability to obtain debt or other financing on favorable terms or not at all;
• volatility of our common stock price;
•the timing and amount of redemptions of our common stock;
• the impact of future sales of our common stock and any additional capital raised by us through the sale of our common stock or the granting of additional stock-based compensation;
• the impact of a rating of our shares by securities or industry analysts, the publication of negative research or reports, or the failure to publish reports on our activities;
•the effect of anti-takeover provisions in our charter documents and under
•the effect of our decision not to pay dividends for the foreseeable future;
•our ability to raise capital in the future; and
• other risks and uncertainties described from time to time in the Company’s annual report and other documents filed with the
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. The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this report and in our Annual Report. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Any forward-looking statements you read in this report reflect our views as of the date of this report with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. You should not place undue reliance on these forward-looking statements and you should carefully consider all of the factors identified in this report that could cause actual results to differ. We assume no obligation to update these forward-looking statements, except as required by law.
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