Chuy's Holdings, Inc.

and welcome to the Chewy's Holdings fourth quarter 2022 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 open for your questions following the prepared remarks. On today's call, we have Steve Hislop, President and Chief Executive Officer, and John Howey, Vice President and Chief Financial Officer of Chewy's Holdings, Inc. At this time, I'll turn the call over to Mr. Howey. Please go ahead, sir.

Thank you, Operator, and good afternoon. By now, everyone should have access to the fourth quarter 2022 earnings release. If not, it can be found at our website at Chewy's.com in the Investors section. Before we begin our formal remarks, I need to remind everyone that part of our discussions today will include forward-looking statements. These forward-looking statements are not a guarantee of 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 Chief President and CEO, Steve Hislop.

Thank you, John. Good afternoon, everyone, and thank you for joining us on our fourth quarter earnings call today. We're proud of our strong results for the quarter, driven by organic, top-line growth and sustained operational efficiencies. Such was complemented by our continued capital return to shareholders through our share repurchases, enabled by the ongoing strength of our operating model. During the fourth quarter, we saw strong, comfortable sales growth across all periods, and importantly, our momentum has continued into January. We believe our fresh, made-from-scratch food and drinks at an incredible value continue to resonate with our guests and are the driving force behind our growth, regardless of how our guests choose to access the brand. Turning to our growth drivers, we'll start with menu innovation. As we noted last call, we launched our first-ever limited-time offer platform, Chewy's Knockouts in October. Chewy's Knockouts through quarterly specials introduced our guests to exciting new menu innovation while also reintroducing our guests to old favorites for a limited time. We plan to offer Chewy's Knockouts once per quarter for a six-week period of time. I'm thrilled to report that our first CKO drove incremental traffic and mixed at approximately 2.5% of all entrees sold during the six-week period. Importantly, We did not see consumer demand trail off in the latter weeks of the CKO period, as you do with many limited-time offers, and thus giving us increased confidence in the platform longer term. That said, while these results are encouraging, the CKO platform is still new to the brand, and we intend to continue to reiterate and experiment with their platform to determine what resonates best with our guests in the long term. Following the success of our first CKO, late January saw a return of our fan favorite, veggie enchiladas, as well as an introduction of our new wild burrito and hatched beef tacos. While we are only three weeks into the CKO period, we're excited by the results we've seen thus far. Next, we will turn to off-premise. Our momentum continued with the growth of our off-premise, which represented approximately 29% of total sales for this quarter. The delivery channel helped drive our off-premise growth as consumers embraced the opportunity to enjoy Chewy's high-quality, made-from-scratch food from the comfort of their own home. We also continue to fill out our existing catering markets and have further opportunities to expand in several other new markets in 2023 to complete the rollout of the catering program system-wide. Catering represented almost 4% of our fourth quarter sales and approximately 2.6% of our annual sales. We continue to believe that off-premise will represent a low to mid-20s of our sales over time, with catering contributing approximately four to six percent. Finally, in terms of our marketing initiatives, we continue to put heavy emphasis on digital media, including the use of TikTok, organic influencer programs on Instagram, YouTube video advertising, and a promotional advertising partnership with DoorDash. These initiatives initiatives have allowed us to effectively communicate our defining differences from our made from scratch food and drinks offered at an incredible value to our newly introduced CKO offerings and the unique overall experience at every Chewy's restaurant. Along with our new website, we believe these initiatives will help us to better connect with both new and returning guests. Moving to profitability, our ongoing focus on operational efficiencies and cost management resulted in a strong 17% restaurant-level operating margin, representing a 270-base point improvement over 2019. We achieved these results despite double-digit commodity inflation and high single-digit labor inflation. Looking at 2023, at the end of January, it took approximately 3.5% pricing. We believe this is an appropriate level to balance our strong value proposition to our consumers as well as solidifying our margin profile. We have not made any decisions on any additional pricing actions for the year, and we will reevaluate as necessary given the macro environment. Lastly, before I turn the call over to John, let me update you on our development plan. During the fourth quarter, we successfully opened two new restaurants in our core markets of Texas and Tennessee, bringing our total development to three restaurants during the year. We also closed one restaurant at the end of its lease term, as we have already developed another restaurant in a more desirable location for the trade area. In total, we had 98 restaurants at the end of fiscal year. As we look ahead, we are excited about the organic growth opportunities ahead for the brand through accelerated unit expansion. For 2023, we've developed a robust pipeline now consisting of six to seven new restaurants focused on markets where our concept is proven with high AUVs and brand awareness. This includes a Fayetteville, Arkansas restaurant, which is slated to open in late February, early March. With that, I will now turn the call over to our CFO, John Howey, to discuss our fourth quarter results in greater detail.

Thanks, Steve. Revenues for the fourth quarter increased 5.5% to $104.1 million, compared to $98.7 million in the same quarter last year. The increase was primarily related to improvement in our comparable restaurant sales, as well as an additional 22 operating weeks from new restaurants opened subsequent to the fourth quarter of 2021. In total, we had approximately 1,269 operating weeks during the fourth quarter of 2022, and off-premise sales were approximately 29% of total revenues. Comparable restaurant sales in the fourth quarter increased 3.4% versus last year, primarily driven by a 6.1% increase in average check, partially offset by a 2.7% decrease in average weekly customers. Effective pricing during the quarter was just shy of 7%. Compared to 2019, comparable restaurant sales increased 3.1%. Turning to expenses, Cost of sales as a percentage of revenue increased 170 basis points to 27.5%, driven by an increase in the cost of beef and chicken, as well as fresh produce, cheese, and grocery items. Overall, commodity inflation during the quarter was in line with our expectations at approximately 15%, and partially offset by menu price taken during the year. Based on the current market condition, we are currently expecting commodity inflation of mid-single digits for fiscal 2023 with high single digits for the first quarter. Labor costs as a percentage of revenue increased approximately 140 basis points to 30.5%, primarily due to hourly labor inflation of approximately 9%. At comparable restaurants, as well as an improvement in our hourly staffing levels as compared to last year, this was partially offset by menu price increase taken during the year. We are currently expecting hourly labor rate inflation of mid-single digits for fiscal 2023, with a high single-digit inflation for the first quarter, in addition to a continuation of year-over-year staffing level increases. Operating cost as a percentage of revenue increased 120 basis points to 16.6% due to higher delivery charges and to-go supplies, as well as continued inflationary pressure on other operating expenses, including increase in utility costs, restaurant repair and maintenance costs, insurance premiums, and credit card fees. Marketing expenses as a percentage of revenue increased 40 basis points to 1.4% as the company reinstated digital advertising nationwide. Our occupancy costs as a percentage of revenue decreased 30 basis points to 7% as a result of sales leverage on fixed occupancy costs. General administrative expenses increased $6.5 million in the fourth quarter from $6.1 million in the same period last year, driven by higher management salaries as well as an increase in public company and travel costs. As a percentage of revenue, G&A held steady at 6.2%. In summary, net income for the fourth quarter of 2022 was $2.5 million or $0.14 per diluted share, compared to $6 million or $0.30 per diluted share in the same period last year. During the fourth quarter of 2022, we incurred $3.2 million, or $0.14 per diluted share, in impairment, closed restaurants, and other costs compared to $2.5 million, or 10% per diluted share, in the same period last year. The increase was primarily related to a non-cash loss on long-lived assets of a restaurant partially offset by a reduction in rent paid on previously closed restaurants. Taking that into account, adjusted net income for the fourth quarter of 2022 was $5 million or $0.27 per diluted share compared to $7.9 million or $0.40 per diluted share in the same period last year. Moving to our liquidity and balance sheet, as of the end of the quarter, we had $78 million in cash and cash equivalents, no debt, and $35 million of availability from our credit facilities. As we mentioned on our last call, during the fourth quarter of 2022, we purchased approximately 327,000 shares of our common stock for a total of $7.8 million and completed our existing $50 million repurchase program. In conjunction with that, the Board has also approved a new share repurchase program effective October 27, 2022, with an authorization to repurchase another $50 million of our common shares. As of December 25, 2022, the company had $50 million remaining under that new program. We believe this further demonstrates the strength of our financial position and our ongoing commitment to long-term shareholder value. Turning to our 2023 outlook, we are currently expecting adjusted EPS of $1.60 to $1.65 per share, which includes an estimated $0.08 to $0.10 per share positive impact to the fourth quarter of 2023, containing 14 weeks versus the normal 13 weeks in fiscal 2022. This is based in part on the following annual assumptions. G&A expenses of $28 to $29 million, six to seven new restaurants, net capital expenditures of approximately $35 to $39 million, restaurant pre-opening expenses of approximately $2.5 to $3 million, effective annual tax rate of approximately 13%, and annual weighted diluted shares outstanding of 18.1 to 18.2 million shares. With that, I'll turn the call back over to Steve.

Thanks, John. We believe our business fundamentals remain strong. This combined with our focus on full-wall operational excellence have positioned our company to capitalize on our positive momentum and and the vast opportunities ahead of us. Together with our disciplined capital allocation and accelerated unit growth plan, we believe we've put Chewy's on a path to maximize shareholder value in 23 and beyond. With that, we are happy to answer any questions. Operator, please open the line for questions.

Thank you. We will now be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. We have a first question from the line of Mary Hodes with Baird. Please go ahead.

Good afternoon, and thanks for taking the question. First, would you be willing to share a specific update on how comps have tracked to date in Q1? It seems like the broader industry indicators have improved, and your prepared remarks suggested you may have experienced that as well, but wondering if you'd be willing to share a specific update on the quarter-to-date comps.

Well, I think with everybody else, I mean, we're rolling over the Omicron, so yes, I mean, in the first period, they were up a double digit just because we're rolling over that Omicron.

Yeah, and in the second period, we ran over a little bit of weather. Although we did have a little weather, we ran over it much worse a year ago. But they're coming back into line.

Yeah.

Yes, makes sense. And then would you also be willing to share what you're assuming for same-store sales in the 2023 outlook that you provided?

Not at this time. Okay. It would be in the low single digits, low to mid single digits.

Thank you. And then based on the expected cost inflation you laid out amid single digits and pricing, I guess, how are you thinking about restaurant margins, how that shapes up in 2023 at that level of comp? I think you previously talked about returning to delivering that 300 to 350 basis points in the second half of the year. Does that still look like it could be possible?

In the second half of the year, yeah. I mean, we're looking at inflation, like we said in our remarks, you know, especially in cost of sales and also labor up into the high single digits in that to kind of tone down in the back half of the year. So we're looking at labor and cost of sales in kind of that mid-single digit. So given kind of what we're talking about in price increase, we're looking at margins that are flat to down. If we can get a little higher sales, we could see some leverage.

Yep.

Okay, great. That's all for us. Thank you.

Thank you.

Thank you. Again, if you wish to ask a question, please press star followed by one on your Darkstone phone now. We have a next question from the line of Chris O'Call with Stifel. Please go ahead.

Hi, this is Zaki on for Chris. Thanks for taking the question. This is a quick question. It looks like you lowered the top end of your unit ad guidance for 2023. Could you just give us some color on what drove that decision and what shape you expect the openings to take throughout the year?

Yeah, I think over the last two quarters, we've always said in that six plus category, and we always said we were very comfortable on the low end of that range, in that six to seven range. Taking a look at what we've dealt with with the supply chain and permitting and time spent just waiting for things to get there, and specifically the increase in construction costs in that 20% to 25% range, we thought it was prudent to push some of them back. Although, as you look at some of the openings this year, you'll see a pretty balanced attack throughout the year. of our openings quarter to quarter. So they'll be pretty evenly done. But mostly it's just the permitting, the supply chain, and honestly, the actual cost that we do expect to see some relief in the second half of the year.

Understood. Thank you. And another question is, I appreciate the guidance on your commodity inflation outlook. Could you let us know What specific commodities you're kind of contemplating when it comes to potentially taking pricing or anything outside of commodities that might drive your decision making there?

Well, right now, as we mentioned in our script and so forth, that we've already taken our about around three, approximately three and a half percent price at the beginning of our second period of the year. Right now, I contemplate that being our price increase for the year unless something goes wrong. kind of crazy throughout the rest of the year, which we don't anticipate at this particular time.

Got it. Thank you so much. You're welcome.

Thank you. Participants, if you wish to ask a question, please press star followed by one on your touchstone phone now. As there are no further questions from the participants at this time, I'd like to turn the floor back over to Steve Hislop, CEO, for closing comments. Over to you, sir.

Thank you. Thank you so much. John and I appreciate your continued interest in Chewy's and are available to answer any and all questions. And again, thank you and have a good evening.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.