Unless otherwise specified, or the context otherwise requires, the references in
this report to "Chuy's," "our Company," "the Company," "us," "we" 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 endedDecember 25, 2022 (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 inAustin, Texas in 1982 and, as ofMarch 26, 2023 , we operated 99 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.
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 94 restaurants atMarch 26, 2023 . •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. •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
March 26, 2023 March 27, 2022 Total open restaurants (at end of period) 99
96
Total comparable restaurants (at end of period) 94
92
Average unit volumes (in thousands)$ 1,133 $
1,054
Change in comparable restaurant sales(1) 8.0 %
11.4 % Average check$ 18.81 $ 17.71
(1) We consider a restaurant to be comparable in the first full quarter following the 18th month of operations. Change in comparable restaurant sales reflects changes in sales for the comparable group of restaurants over a specified 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 2023 fiscal year consists of 53 weeks and our 2022 fiscal year consisted 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 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 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 and national 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.
Depreciation. Depreciation principally includes depreciation on fixed assets, including equipment and leasehold improvements.
Interest (income) expense, net. Interest (income) expense consists primarily of interest income earned on the excess cash invested in money market funds, reduced by interest on our outstanding indebtedness, uncommitted credit facility fees and the amortization of our debt issuance costs.
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 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 Ended
The following table presents, for the periods indicated, the condensed consolidated statement of operations (in thousands):
Thirteen Weeks Ended % of % of % March 26, 2023 Revenue March 27, 2022 Revenue $ Change Change Revenue$ 112,498 100.0 %$ 100,486 100.0 %$ 12,012 12.0 % Costs and expenses: Cost of sales 28,718 25.5 26,243 26.1 2,475 9.4 Labor 34,102 30.3 29,825 29.7 4,277 14.3 Operating 18,078 16.1 16,230 16.2 1,848 11.4 Occupancy 7,882 7.0 7,652 7.6 230 3.0 General and administrative 7,806 6.9 6,654 6.6 1,152 17.3 Marketing 1,550 1.4 1,413 1.4 137 9.7 Restaurant pre-opening 481 0.4 125 0.1 356 284.8 Impairment, closed restaurant and other costs 371 0.3 1,279 1.3 (908) (71.0) Depreciation 5,140 4.7 4,982 4.9 158 3.2 Total costs and expenses 104,128 92.6 94,403 93.9 9,725
10.3
Income from operations 8,370 7.4 6,083 6.1 2,287
37.6
Interest (income) expense, net (777) (0.7) 28 0.1 (805) * Income before income taxes 9,147 8.1 6,055 6.0 3,092 51.1 Income tax expense 925 0.8 537 0.5 388 72.3 Net income $ 8,222 7.3 % $ 5,518 5.5 %$ 2,704 49.0 % * Not meaningful Revenue. Revenue increased$12.0 million , or 12.0%, to$112.5 million for the thirteen weeks endedMarch 26, 2023 from$100.5 million for the comparable period in 2022. The increase was primarily related to an increase in our comparable restaurant sales as well as incremental revenue from an additional 43 operating weeks provided by new restaurants opened during and subsequent to the first quarter of 2022. For the first quarter of 2023, off-premise sales were approximately 27% of total revenue compared to approximately 28% during the same period in fiscal 2022. Comparable restaurant sales increased 8.0% for the first quarter of 2023 compared to the same period last year primarily driven by a 1.8% increase in average weekly customers and a 6.2% increase in average check. The comparable restaurant sales and
traffic growth was positively impacted by less severe weather in the first quarter of 2023 and the negative effect that the Omicron variant had on January and February of 2022.
Cost of sales. Cost of sales as a percentage of revenue decreased to 25.5%
during the thirteen weeks ended
Labor costs. Labor costs as a percentage of revenue increased to 30.3% during the thirteen weeks endedMarch 26, 2023 from 29.7% during the comparable period in 2022 largely as a result of hourly labor rate inflation of approximately 7% at comparable restaurants as well as an incremental improvement in our hourly staffing levels as compared to last year. This increase was partially offset by menu price increases taken subsequent to the first quarter of 2022. Operating costs. Operating costs as a percentage of revenue decreased to 16.1% during the thirteen weeks endedMarch 26, 2023 from 16.2% during the same period in 2022 primarily driven by lower to-go supplies costs as compared to last year as well as a decrease in our off-premise business to 27% from 28% of our total sales in the first quarter of 2023. Occupancy costs. Occupancy costs as a percentage of revenue decreased to 7.0% during the thirteen weeks endedMarch 26, 2023 from 7.6% during the comparable period in 2022 primarily as a result of sales leverage on fixed occupancy expenses. General and administrative expenses. General and administrative expenses increased to$7.8 million for the thirteen weeks endedMarch 26, 2023 as compared to$6.7 million for the same period in 2022. The increase was primarily driven by higher performance-based bonuses and an increase in management salaries. As a percentage of revenues, general and administrative expenses increased to 6.9% in the first quarter of 2023 from 6.6% in the first quarter of 2022. Restaurant pre-opening costs. Restaurant pre-opening costs increased to$0.5 million for the thirteen weeks endedMarch 26, 2023 as compared to$0.1 million for the same period in 2022 due to the timing of new store openings. Impairment, closed restaurant and other costs. Impairment, closed restaurant and other costs decreased to$0.4 million during the thirteen weeks endedMarch 26, 2023 from$1.3 million during the comparable period in 2022. The decrease was primarily related to a reduction in rent paid on previously closed restaurants. Closed restaurant costs include rent expense, utilities, insurance and other costs required to maintain the remaining closed locations. Depreciation. Depreciation expense increased to$5.1 million during the thirteen weeks endedMarch 26, 2023 from$5.0 million recorded during the comparable period in 2022 primarily due to an increase in depreciation associated with our new restaurants. Interest (income) expense, net. Interest (income) expense, net increased to$0.8 million in the first quarter of 2023 as compared to the same period in 2022. The increase was mainly a result of a higher rate of return on the excess cash invested in money market funds. Income tax expense. We recorded an income tax expense of$0.9 million in the first quarter of 2023 compared to an income tax expense of$0.5 million during the comparable period in 2022. The effective income tax rate for fiscal 2023 was 10.1% compared to 8.9% in the same period last year. The increase in the effective tax rate was mainly attributed to a decrease in the proportion of employee tax credits to estimated annual income. InAugust 2020 , theIRS issued 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 theIRS's position 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 theIRS's appeal or litigation processes, if any. As a result, no further tax accrual was made. The Company estimates if theIRS's position was upheld, the Company's tax liability associated with theIRS's position could range between$0.5 million and$2.5 million .
Net income. As a result of the foregoing, net income was
Liquidity
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 million revolving 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 million during the first quarter of 2022. As ofDecember 25, 2022 , the Company completed its previous$50.0 million repurchase program. OnOctober 27, 2022 , the Company's Board of Directors approved a new share repurchase program under which the Company may repurchase up to$50.0 million of its common shares outstanding throughDecember 31, 2024 . As ofMarch 26, 2023 , the Company had$50.0 million remaining under its$50.0 million repurchase program.
Our liquidity may be adversely affected by a number of factors, including a decrease in customer traffic or average check per customer due to changes in economic conditions, as described in Item 1A. "Risk Factors" of our Annual Report.
As of
Cash Flows for Thirteen Weeks Ended
The following table summarizes the statement of cash flows (in thousands):
Thirteen Weeks Ended
March 26, 2023 March 27, 2022 Net cash provided by operating activities$ 12,129 $ 6,851 Net cash used in investing activities (6,318) (2,613) Net cash used in financing activities (1,241) (21,146) Net increase (decrease) in cash and cash equivalents 4,570 (16,908) Cash and cash equivalents at beginning of year 78,028 106,621 Cash and cash equivalents at end of period$ 82,598 $ 89,713 Operating Activities. Net cash provided by operating activities increased$5.3 million to$12.1 million for the thirteen weeks endedMarch 26, 2023 from$6.9 million during the comparable period in 2022. 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 increase in net cash provided by operating activities was mainly attributable to: 1)a$2.7 million increase in net income; 2)a$4.0 million increase in accrued and other liabilities largely driven by a lower performance-based bonus pay-out in the first quarter of 2023 as compared to the comparable period last year as well as an increase in accrued wages due to timing of our hourly payroll; and 3)a$1.0 million collection of a lease incentive receivable subsequent to the first quarter 2022. This overall increase of$7.7 million , as detailed above, is partially offset by$3.7 million in higher payments on accounts payable mainly driven by timing of payments as compared to last year. Investing Activities. Net cash used in investing activities increased$3.7 million to$6.3 million for the thirteen weeks endedMarch 26, 2023 from$2.6 million during the comparable period in 2022, 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 decreased$19.9 million to$1.2 million for the thirteen weeks endedMarch 26, 2023 from$21.1 million during the comparable period in 2022 primarily due to a$19.7 million decrease in the repurchases of shares of common stock. As ofMarch 26, 2023 , 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.
Capital Resources
Long-Term and Short-Term Capital Requirements
There have been no material changes to our long-term or short-term capital
requirements from what was previously disclosed in our Annual Report filed with
the
Contractual Obligations
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
As of
Critical Accounting Policies and Estimates
There have been no material changes to the critical accounting policies and
estimates from what was previously disclosed in our Annual Report filed with the
Recent Accounting Pronouncements
For information regarding new accounting pronouncements, see Note 2, Recent Accounting Pronouncements in the notes to our unaudited condensed consolidated financial statements.
Cautionary Statement Concerning 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 impact of negative economic factors, including inflation and the availability of credit;
•the success of our existing and new restaurants;
•our ability to identify appropriate sites and develop and expand our operations;
•our ability to manage our growth effectively and the resulting changes to pre-opening costs;
•we operate most of our restaurants under long-term leases which we may not be able to renew and would be obligated to perform even if we closed our restaurants;
•changes in economic conditions and consumer buying patterns;
•damage to our reputation or lack of acceptance of our brand in existing or new markets;
•our expansion into markets that we are unfamiliar with;
•economic and other trends and developments, including adverse weather
conditions, in the local or regional areas in which our restaurants are located
and specifically in
•acts of violence at or threatened against our restaurants or centers in which they are located;
•changes in food availability and costs;
•food safety and food borne illness concerns;
•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 opening new restaurants in the same markets and restaurant closures;
•strain on our infrastructure and resources caused by our growth;
•the inadequacy 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;
•the failure of our information technology system or the breach of our network security;
•a major natural or man-made disaster;
•labor shortages and increases in our labor costs, including as a result of changes in government regulation;
•the 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 licenses and food services;
•the impact of litigation;
•the impact of impairment charges;
•the failure of our internal control over financial reporting;
•the impact of federal, state and local tax laws and the Internal Revenue Service disagreeing with our tax position;
•the effect of changes in 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 at all;
•volatility in the price of our common stock;
•the timing and amount of repurchases 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 grants of additional equity-based compensation;
•the impact of a downgrade of our shares by securities analysts or industry analysts, the publication of negative research or reports, or lack of publication of reports about our business;
•the effect of anti-takeover provisions in our charter documents and under
•the effect of our decision to not 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 filings 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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