Chuy's Holdings, Inc.

Q1 2024 Earnings Conference Call

5/9/2024

spk07: Good day, everyone, and welcome to the Chewy's Holdings First Quarter 2024 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed on 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 Incorporated. At this time, I'll turn the call over to Mr. Howey. Please go ahead, sir.
spk05: Thank you, Operator, and good afternoon. By now, everyone should have access to our first quarter 2024 earnings release. If not, it can be found on our website at www.chewies.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 and 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 risk that could impact our future operating results and financial condition. Looking ahead, we plan to release our second quarter 2024 earnings on Thursday, August 8, 2024 after the market closed. With that out of the way, I'd like to turn the call over to Chewy's President and CEO, Steve Hislop.
spk01: Steve Hislop Thank you, John. Good afternoon, everyone, and thank you for joining us on today's call. In the first quarter, we experienced the same weather and macro challenges facing the broader restaurant industry, leading to a top-line growth that was below our expectations. That said, we were encouraged to see our top-line trends improve as we moved through the quarter when adjusting March for the Easter calendar shift. In addition, our off-premise business continued to see growth as consumers embrace the opportunity to enjoy Chewy's high-quality, made-from-scratch food from the comfort of their own home. Ultimately, despite top-line headwinds, our team's continued focus on four-wall operational excellence allowed us to deliver an 18.8 restaurant-level operating margin, which remains among the best in our industry. Before I jump into our growth drivers, I want to acknowledge the hard work and dedication of our team members who make Chewy truly special. In times of macro uncertainty, our ability to refocus on the fundamentals of driving great guest experiences is what will allow us to be successful in the long term despite these short-term pressures. Shifting to our growth drivers, menu innovation remains to be the backbone of our growth as we continuously introduce fresh and flavorful options for our guests. In January, we were thrilled to introduce a new CKO iteration that includes shrimp and crab enchiladas, with our delicious lobster bisque sauce, machos nachos, and lastly, our cheesy pig burrito. We continue to be encouraged by our guest feedback on the platform, which is resonating well with our guests. To build upon our momentum, we were thrilled to introduce our next CKO at the end of April that includes green chili barbecue ribs, Pablo enchiladas, and our fat daddy flattas. So far, our guests are very receptive, with the new options, and we look forward to successfully truly knock out campaigns in the future. In conjunction with our CKO offerings, as we mentioned in our last call, we're also optimizing our menu by adding some of our guest favorite CKOs to our regular menu to further drive traffic growth in our restaurants. As part of this initiative, we were encouraged by the performance of our burrito bowls as we added them to the menu as a permanent item. We expect the CKOs will continue to be a culinary testing ground for us, but remain committed to the streamlined menu we achieved during the pandemic. Moving on to off-premise, we are pleased to have delivered another strong quarter of off-premise performance, mixing at approximately 29%. Our delivery channel continued to perform well with 130 basis point improvement year over year and mixing at approximately 12% during the first quarter. In terms of our catering channel, we remain focused on building awareness around our capabilities and working on completing the rollout of our easy cater platform to all of our restaurants. For the first quarter, catering is mixing at around 3.5%. As we look ahead, we continue to believe our off-premise channel will remain at least 25% of our sales, with catering contributing approximately four to six of total sales long-term. Turning to our marketing initiatives, our marketing approach has continued to be favorable in communicating our strong brand value and sharing our unique Chewy's experience with the guests near and far. To that end, we will remain focused on utilizing digital media platforms such as Meta, Google, TikTok, YouTube video advertising, and organic influencer programs to share our defining differences of our incredible value through our made-from-scratch food and drink. And finally, let's turn to our development plans. Unit growth remains to be a core piece of our long-term growth and development. growth plan with a strong focus in markets that have a proven track record of brand awareness and high average unit volumes. During the first quarter, we successfully opened one restaurant in New Bronzeville, Texas, followed by another new restaurant opening in Austin, Texas, subsequent to the end of the first quarter. This is aligned with our plans to open two new restaurants in the first half of 2024, and we are pleased with the performance of these restaurants thus far. As we look ahead to the remainder of 2024, our pipeline remains robust, and we plan on opening between six to eight new restaurants in our core markets for the year. With that, I'll now turn the call over to our CFO, John Howey, to discuss our first quarter results in greater detail. Thank you, Steve.
spk05: Revenues for the fourth quarter was $110.5 million compared to $112.5 million in the same quarter last year. As a reminder, there was a one-week calendar shift in comparison to the fiscal first quarter of 2024 to the fiscal first quarter of 2023 due to a 53rd week in fiscal 2023. This resulted in reduced revenue in the first quarter of 2024 as a shift caused the week between Christmas and New Year's, traditionally a high-volume week for our brand's units, to be included in the first quarter of 2023. was replaced by an average volume week in the first quarter of 2024. Overall, we estimate that the 53rd week shift negatively impacted sales by $1.8 million, EBITDA by approximately $900,000, and EPS by approximately four to five cents per share. Comparable restaurant sales on a calendar basis in the first quarter adjusted for the shift decreased 4.3% versus last year, driven by a 6.9% decrease in average weekly customers and partially offset by a 2.6% increase in average check. Effective pricing during the quarter was approximately 2.9%, and off-premise sales were approximately 29% of total revenue as compared to 27% of total revenue a year ago. Turning to expenses, Cost to sales as a percentage of revenue decreased 30 basis points to 25.2%, driven by overall commodity deflation of 1.3% as compared to last year. Looking to 2024, we currently expect commodity inflation in the low single digits for the year. Labor costs as a percentage of revenue increased 110 basis points to 31.4%, primarily due to hourly inflation. labor inflation of approximately 3.6% at comparable restaurants, as well as meaningful improvement in hourly labor staffing levels compared to last year. We are currently expecting labor inflation of mid-single digits for fiscal 2024. Operating costs as a percentage of revenue increased 30 basis points to 16.4%, driven by higher delivery service fees from an increase in off-premise sales. an increase in restaurant repair and maintenance costs, partially offset by a decrease in utility costs and to-go supplies as compared to last year. General administrative expenses decreased to $7.1 million in the first quarter from $7.8 million in the same period last year, driven mainly by lower performance-based bonuses as a percentage of revenue increased to 6.5% from 6.9% during the same period last year. In summary, net income for the first quarter of 2024 was $6.9 million, or $0.40 per diluted share, compared to $8.2 million, or $0.45 per diluted share, in the same period last year. During the first quarter of 2024 and 2023, we incurred a $0.4 million, or $0.02 per share, diluted share in impairment, closed restaurant, and other costs. Taking that into account, adjusted net income for the first quarter of 2024 was 7.3 million or 42 cents per diluted share compared to 8.5 million or 47 cents 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 56.4 million in cash and cash equivalents, no debt outstanding, and 25 million available under our revolving credit facility. We also purchased 214,659 shares of our common stock during the quarter for a total of approximately 7.3 million. I'm proud to say following these purchases, we have repurchased over 3.1 million shares since 2020 and have reacquired the shares we issued in our ATM offering in 2020 at the height of the pandemic. As of March 31st, 2024, we had 13.8 million remaining under our $50 million repurchase program, which will expire on December 31st, 2024. With that, we'll now provide you with the following outlook for 2024. We are reaffirming our expectations of adjusted EPS of $1.82 to $1.87 for 2024 as compared to the adjusted EPS of $1.87 after adjusting for the extra week in 2023. This is based in part on the following annual assumptions. G&A expense of $29 to $30 million, six to eight new restaurants, net cap X expenditures of approximately $41 to $46 million, restaurant pre-opening expenses of approximately $2.7 to $3.2 million, effective annual tax rate of approximately 13 to 14 percent, and annual weighted diluted shares outstanding of $17.4 million. With that, I'll turn the call back over to Steve.
spk01: Thanks, John. Overall, we remain optimistic about our ability to capitalize on the long-term growth opportunities ahead for Chewy's. Through the initiatives we've put in place, we will continue to focus on our full-wall operational excellence and provide our guests with the unique choose experience they all know and love. Combined with a strong balance sheet, disciplined capital allocation, and a robust development pipeline, we are in a position to maximize long-term shareholder value in 2024 and beyond. With that, we're happy to answer any questions. Operator, please open the lines for questions.
spk07: Thank you. We'll now be conducting a question and answer session. If you'd 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'd 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 key.
spk08: One moment, please, while we poll for questions. Thank you.
spk07: Our first question is from crystal Cole with people. Please proceed with your question.
spk09: Thanks. Good afternoon guys. Um, Hey guys. Um, Steve, I know you said comps improved during the quarter, but can you help us understand the rate of change and maybe where comps are quarter today?
spk01: You have that Johnny.
spk05: Um, as far as quarter to date, let's see, we were after period four. So quarter to date, we are down about 2.2%. Does that include the Easter benefit, John? It does, Chris, but it was kind of offset by Cinco, so that's flat. You've got Cinco, that was a Friday last year, and then... It was a Sunday this year. Sunday this year. Okay, that's helpful.
spk09: And then John, what comp sales assumption are you using for the earnings range that the company is guiding?
spk05: So for the year, we're going to be a little right around flat to slightly positive, Chris. Okay. Okay.
spk09: Okay, that's helpful. And then, Steve, I know in the past the company has slowed its unit growth plans when comp sales have been challenged. And, you know, a lot of the restaurants have talked about the environment being more challenging here recently. And I'm just wondering if comps do continue to be challenged for the balance of the year. Do you think it will affect development plans for 2025?
spk01: As I sit here now, Chris, I'd say no. Again, if you look at what we're rolling over in the first quarter, last year for the first quarter, along with what John already mentioned about the $1.8 million shift in the 53rd week, we're rolling over a first quarter of 8% increase in the whole first quarter. So if you look at our two-year stack, we're still up 3.7 on the whole first quarter. So, again, I think it would be a little premature, but you are right. If it goes that way, I'll always consider that because, you know, the sales and obviously guest counts are a lifeblood of any concept.
spk09: Okay. That's helpful. Thanks, guys. I'll pass it on.
spk07: Thank you, sir. Thank you. Our next question is from Jim Solera with Steven. Please proceed with your question.
spk04: Hi, guys. Good afternoon. Thanks for taking our questions. I appreciate the color around the 53rd week and the impact from that. We've heard a lot of people in the industry talk about impacts from weather in January. Do you have any sense for what that impact was in the first quarter and maybe what comps have been if you were to strip that out?
spk05: Sure. Basically, with the weather and the shift in the Easter is about 1.2% on our comp sales.
spk04: Okay, great. That's super helpful. And then if I look at restaurant level margin growth, you know, you guys are up significantly since pre-COVID. Is there any opportunity to maybe reinvent some of that back into value offerings for the consumer, maybe more into the marketing line? Just any thoughts on that as you guys progress through the year?
spk01: Yeah, one thing that we've always prided ourselves in is our value within our whole menu as it currently stands. You know, we're not a discount people like you've seen a lot of other companies out there because our whole menu, you know, they're out there doing a lot of two for 20, two for 25. You can do that all day in our existing menu. We've always constantly looking at our marketing spend as we move forward. But we're pretty comfortable. One thing about digital, it's easy to spin on a dime. So no doubt we've definitely looked at really talking more about value and even more so than our defining differences. Although the freshness of our product, making everything from scratch, we think is still a unique message. So we'll continue that. But right now we're pretty happy with the way our model is situated.
spk04: Okay, great. Appreciate the color. I'll hop back in the queue.
spk07: Thank you. Thank you. Our next question is from David Tarantino with Baird. Please proceed with your question.
spk02: Hi, good afternoon. My question is on the outlook for the year, John, that you mentioned for comps, kind of flattish to slightly positive comps. I guess that would require a pretty big improvement from what you're seeing currently. So I was just wondering if you could share your thoughts on why you expect comps to get better as the year goes on, and I guess what are the key drivers of that improvement?
spk05: Great question, David. One is by the end of this month, we should be fully on Easy Cater. We have approximately 27 more stores on Easy Cater, which will help. Two, as we get further right now in Q2 and in Q3, we're going to start to roll over at Uber Eats. Right now, we're basically challenged with rolling over those comps from last year. As we get into Q4, we'll be fully kind of rolled over that, and so that will be helpful with that. So we think that's going to be beneficial. And those are the big things.
spk01: Can you think of... Yeah, and sequentially, if you look at it, as I mentioned as we started, when you're looking at the first quarter... It was an anomaly a little bit where we're up last year, 8%. It goes progressively down to normal numbers in the second and the third, and actually we roll over a little bit easier numbers in the fourth quarter. So sequentially it just moves throughout the whole year like that.
spk05: And, David, if you look at a two-year stack, I mean, even for the quarter, we were up about 3.7% on the two-year stack. So if you keep rolling, and we've been pretty consistent with that, if you keep rolling that forward, that would suggest higher comps going forward.
spk01: Specifically the second half of the year and definitely in the fourth quarter.
spk02: Got it. And then, John, on the cost outlook, it also looks like you're assuming that inflation might get a little stronger as the year goes on. I think you mentioned, you know, in both cases, commodities and labor being a little bit higher for the year than what you saw in Q1. So I guess what's driving that assumption for each of those buckets?
spk05: Well, the big thing is we think labor is going to be in that mid-single digits, probably a little lighter than that at this point, probably in that 4% to 5%, or maybe a little shy of 4% at the present time. On the cost side, though, the biggest thing is we have beef locked in through the second quarter with ground beef and locked in through the third quarter to heat it. Right now, if we were to lock that in, it's significantly higher than what we have it locked in at. Now, with that being said, the slaughter rates are starting to increase above 600,000, and so hopefully by the time we have to lock that in or buy on the market, those will come down. But right now we are projecting some inflation related to our cuts, which, as you know, are the thin meats, and right now they are running a little higher than your center cuts today.
spk02: Got it. So just in terms of sequencing, you would expect, Would you expect Q2 to be similar to Q1 in terms of maybe flat to slightly down, and then you get some step-ups in the second half based on what you just said?
spk05: No, I mean, Q2, we're expecting, because we actually have stepped up with the Q2 because we have a different purchase for the ground beef in Q2, so that's stepped it up a little bit. So we're expecting inflation over the prior year, in that 2% to 3% in Q2, and it's kind of staying at that rate a little higher than that, probably another 100 basis points in Q3, and then another 200 basis points in Q4.
spk02: Got it. Okay. Great. Thanks for all that color. Thank you.
spk07: Thanks, David.
spk08: Thanks. Our next question is from Andy Bowers with Jefferies. Please proceed with your question. Hey, guys.
spk10: Yeah, just checking on, are the 2Q CKOs, are those, you know, kind of barbelled as well? Do you have, is the flout as kind of a lower price point in there with ribs being premium, I would imagine?
spk01: Yes, exactly, exactly. And we're just starting our second week of it this year. We also have the barbecue as an add-on, a three-bone add-on, which is the first time we've done anything like that that should help us on some incremental sales.
spk05: And that has definitely been a crowd favorite, the add-on.
spk10: Nice. And then just wondering, I know Austin's a big market, but they're also high-volume restaurants. I mean, you've opened two here recently. Is that a headwind in any way to same-store sales this year? How do you kind of think about that?
spk01: You know, as we open these, you know, we're opening, you know, in basically five states for the next three to five years, as we mentioned before, Andy, and as we modeled all these, we made sure they had no cannibalization above 5%. Having said that, on the two that we've opened right now, one's down in New Bronzeville, as I've mentioned to you earlier. There's been really no cannibalization on any of our stores for that one so far. And again, we're only in our third week at Mueller, which is an Austin store. But again, we've been pretty comfortable on all the stores that there's really not much effect of cannibalization in any of them so far.
spk08: Got it. Thank you very much. Thanks, Andy. Thank you. Our next question is from Nick Sutton with Webfoot Securities.
spk07: Please proceed with your question.
spk00: Thanks, gentlemen. Just a question, you know, around the geographic sort of, you know, what you're seeing in terms of the different geographies for the comp. And also, you know, are you seeing like a better comp in your higher volume stores than your lower volume stores because of, let's say, excess demand?
spk05: No, I mean, it's been from a prorational standpoint. It's been pretty consistent throughout the population of stores, Nick.
spk08: Got it.
spk00: Okay. And on the labor piece, you know, the deleverage is what it is in Q1. Can we see sort of that 100 to 110 base point type of deleverage as the year progresses or as the comp improves? Hopefully we see less leverage or less deleverage.
spk05: Well, I mean, you're always going to see leverage in the second quarter. Nick, as you know, that's our strongest quarter. So you could see 100 basis points of leverage in that second quarter. And then third quarter is our second best quarter. So again, you'll see a little bit more leverage there than you did in the first quarter as well. So in the fourth quarter, probably none.
spk00: By 100 basis of leverage in Q2, you mean sequentially versus Q1, right?
spk05: Not year over year. Yes, sequentially, yes. Got it.
spk00: Okay, thank you very much.
spk08: Thanks, Nick. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad.
spk07: Our next question is from Todd Brooks with the Benchmark Company.
spk03: Please proceed with your question. Hey, thanks for taking my questions. Just two quick ones. John, you gave us what the pricing was in the quarter. Could you let us know what average check ran for Q1?
spk05: Yeah. The average check was actually down – 2.6, or up 2.6%, and that price was, give me a second.
spk01: Yep.
spk03: 1941. Okay, thanks. So you said up 2.6%. John, it's only like a 30 basis point drag from mix in the quarter?
spk05: Correct. Yes.
spk03: Okay, perfect. And then my second question, in thinking about CKO is proving ground for items coming back from the menu. Steve, how much broadening in the menu are you comfortable with with these customer favorites coming off the CKOs? How many would you expect to be on the menu by year end? And are you kind of rationalizing anything off the menu to try to maintain some of that simplicity that you built in over the course of the pandemic?
spk01: Great, great question. Exactly what you just said. Yeah, you know, these ones, we felt great about adding the balls because It's really a burrito that we currently pretty much almost do, but now it's in a bowl. So, again, it wasn't adding a lot of prep and a lot of excitement in the back of the house as far as, you know, moving around a lot since everything's on the station. So we were very comfortable adding those on. But we have a very disciplined approach as we continue to move forward. As we look at adding any of our CKOs, because that is a proving ground for possibly some new items as we evolve our menu, we'll be very disciplined that when we have one come on, we'll absolutely – look at our product mix, find out where it's come from, and possibly move another one off. So we'll be doing that as we do, but we'll be very disciplined in our approach across all of our stations and how well we can execute all of this.
spk08: Okay, perfect. Thank you both. Thank you so much. Thank you. Our next question is from Brian Vaccaro with Raymond James.
spk07: Please proceed with your question.
spk06: Hi, thanks. Steve, I think you alluded to it earlier, but just in light of the softer environment and one where it seems that you have to have value, but you also need to message it effectively. Could you just elaborate a little bit on just how you're adjusting your tactics, any changes in your marketing message or your CKOs beyond the latest launch that you're thinking about?
spk01: Sure, sure. You know, the one thing that we have is value all throughout our menu, not only in our price point, which is You know, our price point spread because of our pricing cases compared to our competitors. We actually increased our value spread over the years. So we're very great with that. But also, you know, we've always said that there's no white space on our plates, which is also screaming value than our meal kits. So those things that I just mentioned, we're actually moved our digital to really talking all about that type of stuff. not only the value of the price point, but also the value of the amount of food that you get and the experience that you get it in. So that's been it. And as you know, Brian, the one thing about digital is you can quickly turn on a dime on your message. Our message has been, you know, always talking about value, but we spent a lot of time talking about our defining differences, whether it be our hand-squeezed limes for our margaritas or our fresh product. We have nothing frozen. We don't have freezers. So we'll still be in it, but it's probably going to be a little bit more tainted to specifically our value message in all the mediums that we're doing. You know, obviously we're on social with Meta, Facebook, and we're on that all quarter. We're doing search with Google. We're on YouTube all quarter. We're on TikTok eight weeks in the quarter. Then we have Programmatic CTV, which is some of our videos that are really showing our value and some of our price points. We'll definitely do it on all our e-blasts that we'll do two per period. And then obviously our CKO has value and the third-party delivery promotions is dealing with value. So that's pretty much we're hitting it hard and heavy. And the reason we're hitting it hard and heavy is, you know, if you look at the competitive environment out there, specifically over the last six months, you're now seeing all our competitors and even some fast food and even some quick casual really getting on major medium and talking about their price offs or things like that. And that's really been back only for about six months. And that's after two, two and a half years where they weren't discounting at all through COVID. So now this is a new phenomenon again. And again, just like 2019, where that was part of their media plan back then, it will start doing that. And as people go in and eat those restaurants, they're going to realize the food hasn't changed. So, again, we feel our message on the value is the right way for us to go.
spk06: All right. Thank you. That's helpful. And, John, sorry if I missed it, just a bookkeeping question, but when we're operating weeks in the quarter, do you have that handy?
spk05: We should have it in the –
spk06: I can follow up offline if you don't have it there.
spk05: Yeah, I'll follow up with you.
spk06: Okay. Thank you very much.
spk08: Thanks, Brian.
spk07: Thank you. Our next question is from Andrew Wolf with CLK. Please proceed with your question.
spk09: Thanks. I just wanted to ask about the adjustments, the calendarization of Easter and the The weather, if we applied that number, it's almost 2% to the traffic being down 6-9. I'm making sure I'm thinking along with you. It would be down about 5% would have been sort of the calendar and weather-adjusted view of the traffic, the guest count.
spk05: Well, I mean, 6.9, you're down 1.2 with that.
spk01: Yeah, it's 1.2 on the sales impact.
spk05: Yeah, so the 4.3 was already adjusted for the calendar. So when we do ours, it's an operational base from calendar to calendar, not fiscal. We kind of give you the fiscal for your modeling purposes. But it's 4.3.
spk09: Then I took another. I took the weather out, too.
spk05: Right. So the weather and Easter was 1.2 together. Oh, okay. Off sale, so 6.9 minus the 1.2. Okay.
spk09: Does that make sense? Yeah. I guess I read that wrong. And currently, if you took the 2.2% quarter to date, took out the check, and assumed it was running that up to 6, now you're running a little under 5%. So your gas count on this basis has improved whatever, 50, 70 basis points. Sequentially? Is that about it? Yes. Yes. Okay. And is that the Uber Eats or is that more your marketing or do you think the environment's gotten a little better? How would you think about that?
spk01: Both. I think it's both. Obviously, it's both is how we're looking at it. Definitely the Uber Eats is a big headwind or rollover. And then what we said.
spk09: I just mean in the quarter to date, you know, with the guest traffic being a little better, I mean, everybody's having trouble, but I'm just trying to dig inside that given that's, you know, how important that is. Yeah, I think all of it.
spk05: Yeah, I mean, just the environment, I think, is getting a little better from what we've seen from our trends. Now, with that being said, we are in the south-southeast, and you've seen all the tornadoes going through this area in the last few weeks. So, you know, that's in those numbers as well.
spk09: And what's your sense of – your feeling about marketing as a way to get the guest count up? That highly – you know, elasticity is not the right word, but is that impactful for you, or is it – you want to do social media LTOs and stick with your net?
spk03: I think so.
spk01: Social media is, is a lot of that is really your share of voice. It's kind of just keeping your baseline out there. We believe the value messages that we've switched to on YouTube, uh, programmatic video has a little bit more of an impact on moving the needle a little bit there and just switching to a, uh, you know, about an 80% value message and a 20%, um, you know, competitive advantage message is we feel is the right way to go.
spk09: Thank you.
spk01: Thank you.
spk07: Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn the call back over to Mr. Steve Hislop for closing comments.
spk01: Thank you so much. We appreciate your continued interest and choose and are available to answer questions at any and all, I mean, answer questions, any and all questions. Again, thank you again and have a good evening.
spk07: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Disclaimer

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