Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________ 
FORM 10-Q
__________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 24, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-35603
__________________________________  
CHUY’S HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 __________________________________ 
DELAWARE
 
20-5717694
(State of Incorporation
or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
1623 TOOMEY ROAD
AUSTIN, TEXAS
 
78704
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (512) 473-2783
 __________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ   No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  þ     No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
þ
Emerging growth company
þ
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
¨

 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  þ  
The number of shares of the registrant’s common stock outstanding at October 31, 2017 was 16,913,697.


Table of Contents

Table of Contents
 
 
 



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Part I—Financial Information
Item 1.    Financial Statements
Chuy's Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
 
 
September 24, 2017
 
December 25, 2016
Assets
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
17,401

 
$
13,694

Accounts receivable
1,486

 
1,132

Lease incentives receivable
2,934

 
4,022

Inventories
1,314

 
1,451

Income tax receivable
521

 
2,183

Prepaid expenses and other current assets
6,446

 
5,207

Total current assets
30,102

 
27,689

Property and equipment, net
185,219

 
165,150

Other assets and intangible assets, net
2,104

 
1,920

Tradename
21,900

 
21,900

Goodwill
24,069

 
24,069

Total assets
$
263,394

 
$
240,728

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,224

 
$
8,014

Accrued liabilities
16,602

 
17,757

Deferred lease incentives
2,545

 
2,335

Total current liabilities
28,371

 
28,106

Deferred tax liability, net
16,437

 
13,769

Accrued deferred rent
11,129

 
9,169

Deferred lease incentives, less current portion
35,390

 
32,619

Total liabilities
91,327

 
83,663

 
 
 
 
Commitments and contingencies (note 7)

 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value; 60,000,000 shares authorized; 16,906,760 shares issued and outstanding at September 24, 2017 and 16,839,348 shares issued and outstanding at December 25, 2016
169

 
168

Preferred stock, $0.01 par value; 15,000,000 shares authorized and no shares issued or outstanding at September 24, 2017 and December 25, 2016

 

Paid-in capital
99,127

 
97,200

Retained earnings
72,771

 
59,697

Total stockholders’ equity
172,067

 
157,065

Total liabilities and stockholders’ equity
$
263,394

 
$
240,728




See notes to the Unaudited Condensed Consolidated Financial Statements




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Chuy's Holdings, Inc.
Unaudited Condensed Consolidated Income Statements
(In thousands, except share and per share data)
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 24, 2017
 
September 25, 2016
 
September 24, 2017
 
September 25, 2016
Revenue
$
92,193

 
$
85,597

 
$
273,570

 
$
251,560

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
24,659

 
22,528

 
70,933

 
64,923

Labor
32,423

 
28,469

 
93,855

 
82,857

Operating
13,201

 
12,003

 
38,396

 
34,593

Occupancy
6,483

 
5,695

 
18,928

 
16,637

General and administrative
4,814

 
4,132

 
14,390

 
13,535

Marketing
699

 
641

 
2,043

 
1,916

Restaurant pre-opening
1,244

 
1,178

 
4,068

 
4,145

Closure costs

 
390

 

 
390

Depreciation and amortization
4,483

 
3,821

 
12,951

 
11,005

Total costs and expenses
88,006

 
78,857

 
255,564

 
230,001

Income from operations
4,187

 
6,740

 
18,006

 
21,559

Interest expense, net
16

 
16

 
48

 
47

Income before income taxes
4,171

 
6,724

 
17,958

 
21,512

Income tax expense
976

 
2,125

 
4,884

 
6,601

Net income
$
3,195

 
$
4,599

 
$
13,074

 
$
14,911

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.27

 
$
0.77

 
$
0.90

Diluted
$
0.19

 
$
0.27

 
$
0.77

 
$
0.88

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
16,905,705

 
16,803,188

 
16,886,743

 
16,625,008

Diluted
16,986,794

 
16,953,093

 
16,998,313

 
16,861,667




















See notes to the Unaudited Condensed Consolidated Financial Statements




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Chuy's Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
 
Thirty-Nine Weeks Ended
 
September 24, 2017
 
September 25, 2016
Cash flows from operating activities:
 
 
 
Net income
$
13,074

 
$
14,911

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,951

 
11,005

Amortization of loan origination costs
25

 
25

Closure costs

 
269

Stock-based compensation
2,102

 
1,624

Excess tax benefit from stock-based compensation

 
(3,158
)
Loss on disposal of property and equipment
34

 
48

Amortization of deferred lease incentives
(1,853
)
 
(1,548
)
Deferred income taxes
2,668

 
4,458

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(354
)
 
345

Inventories
137

 
(22
)
Income tax receivable
1,662

 
(2,402
)
Prepaid expenses and other current assets
(1,239
)
 
(2,190
)
Accounts payable
(1,607
)
 
(1,732
)
Accrued liabilities and deferred rent
805

 
5,427

Deferred lease incentives
5,922

 
5,632

Net cash provided by operating activities
34,327

 
32,692

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(29,977
)
 
(31,290
)
Purchase of other assets
(313
)
 
(202
)
Net cash used in investing activities
(30,290
)
 
(31,492
)
Cash flows from financing activities:
 
 
 
Excess tax benefit from stock-based compensation

 
3,158

Proceeds from the exercise of stock options
161

 
1,379

Indirect repurchase of shares for minimum tax withholdings
(491
)
 
(322
)
Net cash (used in) provided by financing activities
(330
)
 
4,215

Net increase in cash and cash equivalents
3,707

 
5,415

Cash and cash equivalents, beginning of period
13,694

 
8,529

Cash and cash equivalents, end of period
$
17,401

 
$
13,944

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Property and equipment and other assets acquired by accounts payable
$
2,817

 
$
2,357

 
 
 
 
Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
24

 
$
25

Cash paid for income taxes
$
553

 
$
1,384




See notes to the Unaudited Condensed Consolidated Financial Statements


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Chuy's Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(Tabular dollar amounts in thousands, except share and per share data)
1. Basis of Presentation
Chuy’s Holdings, Inc. (the “Company” or “Chuy’s”) develops and operates Chuy’s restaurants throughout the United States. Chuy’s is a fast-growing, full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex-Mex inspired food. As of September 24, 2017, the Company operated 86 restaurants in 19 states.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements and the related notes reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. The unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”), except that certain information and notes have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (the “SEC”). Results for interim periods are not necessarily indicative of the results that may be expected for the full fiscal year. The unaudited condensed consolidated financial statements should be read in conjunction with consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2016. The accompanying condensed consolidated balance sheet as of December 25, 2016, has been derived from our audited consolidated financial statements.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ from those estimates.
The Company operates 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 2017 fiscal year will consist of 53 weeks and our 2016 fiscal year consisted of 52 weeks.
2. Recent Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)." This update requires a lessee to recognize on the balance sheet the right-of-use assets and lease liabilities for leases with a lease term of more than twelve months. This update also requires additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. This ASU is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective approach to adoption for lessees existing at, or entered into after the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
We had operating leases with remaining rental payments of approximately $337.4 million as of December 25, 2016. The discounted minimum remaining rental payments will be the starting point for determining the assets and liabilities for the rights and obligations created by those leases. While the Company is still evaluating the guidance and its impact on its consolidated financial statements, we expect the adoption of this standard will have a significant impact on the Company’s consolidated balance sheet as it will recognize the right-of-use assets and liabilities for current operating leases. The Company does not expect the adoption of the guidance to have a material impact on the consolidated statement of cash flows, net income or overall liquidity.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, "Revenue with Contracts from Customers (Topic 606)." ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted only for interim and annual periods beginning after December 15, 2016. In regards to implementation, the Company is currently evaluating the guidance and it does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.
Stock Compensation
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting (Topic 718)." This update simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU was effective for interim and annual periods beginning after December 15, 2016. The Company adopted ASU 2016-09 in the first quarter of 2017 and elected to apply this adoption prospectively. All excess tax benefits and deficiencies are recognized in the income tax


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Chuy's Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)


expense line item on the Company's consolidated income statements, and are included within the changes in the income tax receivable line item on the consolidated statement of cash flows. The Company has elected to recognize forfeitures for awards with a requisite service period as they occur. The adoption of this ASU was immaterial to the Company's consolidated financial statements.
The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on the Company's consolidated financial statements.
3. Net Income Per Share
The number of shares and net income per share data for all periods presented are based on the historical weighted-average shares of common stock outstanding.
Basic net income per share of the Company's common stock is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period.
Diluted net income per share of the Company's common stock is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential shares of common stock equivalents outstanding during the period using the treasury stock method for dilutive options and deferred shares (these deferred shares were granted under the Chuy's Holdings, Inc. 2012 Omnibus Equity Incentive Plan (the "2012 Plan"), and are referred to herein as "restricted stock units"). For the thirteen weeks ended September 24, 2017 and September 25, 2016, there were approximately 100,000 and 1,000 shares, respectively, of common stock equivalents that were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive. For the thirty-nine weeks ended September 24, 2017 and September 25, 2016, there were approximately 32,000 and 1,000 shares, respectively, of common stock equivalents that were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive.
The computation of basic and diluted earnings per share is as follows:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 24, 2017
 
September 25, 2016
 
September 24, 2017
 
September 25, 2016
BASIC
 
 
 
 
 
 
 
Net income
$
3,195

 
$
4,599

 
$
13,074

 
$
14,911

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
16,905,705

 
16,803,188

 
16,886,743

 
16,625,008

Basic net income per common share
$
0.19

 
$
0.27

 
$
0.77

 
$
0.90

 
 
 
 
 
 
 
 
DILUTED
 
 
 
 
 
 
 
Net income
$
3,195

 
$
4,599

 
$
13,074

 
$
14,911

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
16,905,705

 
16,803,188

 
16,886,743

 
16,625,008

Dilutive effect of stock options and restricted stock units
81,089

 
149,905

 
111,570

 
236,659

Weighted-average of diluted shares
16,986,794

 
16,953,093

 
16,998,313

 
16,861,667

Diluted net income per common share
$
0.19

 
$
0.27

 
$
0.77

 
$
0.88

 
4. Stock-Based Compensation
The Company has outstanding awards under the Chuy's Holdings, Inc. 2006 Stock Option Plan (the "2006 Plan") and the 2012 Plan. Options granted under these plans vest over five years from the date of grant and have a maximum term of 10 years. Restricted stock units granted under the 2012 Plan vest over four to five years from the date of grant. As of September 24, 2017, a total of 706,136 shares of common stock are reserved and remain available for issuance under the 2012 Plan.
Stock-based compensation cost recognized in the accompanying condensed consolidated income statements was approximately $747,000 and $565,000 for the thirteen weeks ended September 24, 2017 and September 25, 2016, respectively, and $2,102,000 and $1,624,000 for the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively.



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Chuy's Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)


Stock Options
A summary of stock-based compensation activity related to stock options for the thirty-nine weeks ended September 24, 2017 are as follows:
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
(Years)
 
Aggregate
Intrinsic
Value
Outstanding at December 25, 2016
316,027

 
$
18.64

 
 
 
 
Exercised
(18,671
)
 
8.66

 
 
 
 
Forfeited
(6,747
)
 
28.91

 
 
 
 
Outstanding at September 24, 2017
290,609

 
$
19.05

 
4.33
 
$
1,394

Exercisable at September 24, 2017
264,871

 
$
18.08

 
4.21
 
$
1,394

The aggregate intrinsic value in the table above is obtained by subtracting the exercise price from the estimated fair value of the underlying common stock as of September 24, 2017 and multiplying this result by the related number of options outstanding and exercisable at September 24, 2017. The estimated fair value of the common stock as of September 24, 2017 used in the above calculation was $20.15 per share, the closing price of the Company’s common stock on September 22, 2017, the last trading day of the third quarter. The total intrinsic value of options exercised during the thirty-nine weeks ended September 24, 2017 was approximately $370,000. The fair value of options vested during the thirty-nine weeks ended September 24, 2017 was approximately $305,000.
There was approximately $133,000 of total unrecognized compensation costs related to options granted under the 2006 Plan and the 2012 Plan as of September 24, 2017. These costs will be recognized ratably over the next three years.
Restricted Stock Units
A summary of stock-based compensation activity related to restricted stock units for the thirty-nine weeks ended September 24, 2017 are as follows:
 
Shares
 
Weighted
Average
Fair Value
 
Weighted
Average
Remaining
Contractual
Term
(Year)
Outstanding at December 25, 2016
206,750

 
$
31.57

 
 
Granted
126,034

 
28.02

 
 
Vested
(66,468
)
 
32.14

 
 
Forfeited
(7,166
)
 
30.37

 
 
Outstanding at September 24, 2017
259,150

 
$
29.73

 
2.76
The fair value of the restricted stock units is the quoted market value of our common stock on the date of grant. As of September 24, 2017, total unrecognized stock-based compensation expense related to non-vested restricted stock units was approximately $6.1 million, which is expected to be recognized ratably over the next five years.
5. Long-Term Debt
Revolving Credit Facility
On November 30, 2012, the Company entered into a $25.0 million Revolving Credit Facility with Wells Fargo Bank, National Association.  On October 30, 2015, the Company entered into an amendment to its Revolving Credit Facility to, among other things, (1) extend the maturity date of the Revolving Credit Facility to October 30, 2020 from November 30, 2017 and (2) revise the applicable margins and leverage ratios that determine the commitment fees and interest rates payable by the Company under the Revolving Credit Facility.
Under the Company's Revolving Credit Facility, the Company may request to increase the size of the Revolving Credit Facility by up to an additional $25.0 million, in minimum principal amounts of $5.0 million or the remaining amount of the $25.0 million if


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Chuy's Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)


less than $5.0 million (the "Incremental Revolving Loan"), which Incremental Revolving Loan will be effective after 10 days written notice to the agent. In the event that any of the lenders fund the Incremental Revolving Loan, the terms and provisions of the Incremental Revolving Loan will be the same as under the Company's Revolving Credit Facility.
Borrowings under the Revolving Credit Facility generally bear interest at a variable rate based upon the Company's election, of (i) the base rate (which is the highest of prime rate, federal funds rate plus 0.5% or one month LIBOR plus 1.0%), or (ii) LIBOR, plus, in either case, an applicable margin based on the Company's consolidated total lease adjusted leverage ratio (as defined in the Revolving Credit Facility agreement). The Revolving Credit Facility also requires payment for commitment fees that accrue on the daily unused commitment of the lender at the applicable margin, which varies based on the Company's consolidated total lease adjusted leverage ratio.
The Revolving Credit Facility also requires compliance with a fixed charge coverage ratio, a lease adjusted leverage ratio and certain non-financial covenants. The Revolving Credit Facility also places certain restrictions on the payment of dividends and distributions. Under the Revolving Credit Facility, the Company may declare and make dividend payments so long as (i) no default or event of default has occurred and is continuing or would result therefrom and (ii) immediately after giving effect to any such dividend payment, on a pro forma basis, the lease adjusted leverage ratio does not exceed 3.50 to 1.00.
The obligations under the Company’s Revolving Credit Facility are secured by a first priority lien on substantially all of the Company’s assets. As of September 24, 2017 the Company had no borrowings under our Revolving Credit Facility.
6. Accrued Liabilities
The major classes of accrued liabilities at September 24, 2017 and December 25, 2016 are summarized as follows:
 
September 24, 2017
 
December 25, 2016
Accrued compensation and related benefits
$
6,395

 
$
7,572

Other accruals
3,191

 
3,061

Sales and use tax
2,465

 
2,200

Property tax
1,696

 
1,191

Deferred gift card revenue
1,457

 
2,074

Accrued closure costs
1,398

 
1,659

Total accrued liabilities
$
16,602

 
$
17,757

7. Commitments and Contingencies
We are involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our condensed consolidated financial position, results of operations, or cash flows.
8. Subsequent events
Subsequent to September 24, 2017, the Company opened two new restaurants for a total of 88 restaurants, in 19 states.
Subsequent to the end of the third quarter, the Company’s Board of Directors approved a share repurchase program under which it authorized the Company, at its discretion, to repurchase up to $30 million of its common shares outstanding through December 31, 2019. Repurchases of the Company’s outstanding common stock will be made in accordance with applicable securities 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.


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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes. 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 Chuy’s Holdings, Inc. together with its subsidiary.
The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 25, 2016 (our "Annual Report") and those set forth under "Cautionary Statements Concerning Forward-Looking Statements" in this report.
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. We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as may be required by law.
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 and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein.
Overview
We are a fast-growing, full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex-Mex inspired food. We were founded in Austin, Texas in 1982 and, as of September 24, 2017, we operated 86 Chuy’s restaurants across 19 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.
Our Growth Strategies and Outlook
Our growth is based primarily on the following strategies:
Pursue new restaurant development in major markets;
Backfill smaller existing markets to build brand awareness;
Deliver consistent same store sales through providing high-quality food and service; and
Leverage our infrastructure.
As of September 24, 2017, we opened seven new restaurants year-to-date and we also opened two additional restaurant subsequent to September 24, 2017. We have an established presence in Texas, the Southeast and the Midwest, with restaurants in multiple large markets in these regions. Our growth plan over the next five years focuses on developing additional locations in our existing core markets and major markets while continuing to "backfill" our existing markets in order to build our brand awareness.
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 average weekly customer trends as well


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as changes in average check. Our comparable restaurant base consisted of 67 and 58 restaurants at September 24, 2017 and September 25, 2016, respectively.
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 menu changes and price increases and 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 operating data for the periods indicated:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 24, 2017
 
September 25, 2016
 
September 24, 2017
 
September 25, 2016
Total restaurants (at end of period)
86

 
77

 
86

 
77

Total comparable restaurants (at end of period)
67

 
58

 
67

 
58

Average comparable unit volumes (in thousands)
$
1,107

 
$
1,165

 
$
3,413

 
$
3,539

Change in comparable restaurant sales
(2.1
)%
 
0.3
%
 
(1.2
)%
 
1.5
%
Average check
$
14.75

 
$
14.48

 
$
14.76

 
$
14.49

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 2017 fiscal year will consist of 53 weeks and our 2016 fiscal year consisted of 52 weeks.
Key Financial Definitions
Revenue. Revenue primarily consists of food and beverage sales and also includes sales of our merchandise. 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, 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, insurance, employee benefits, credit card fees, recruiting, delivery service and security. These costs generally increase with sales volume but decline as a percentage of revenue.
Occupancy Costs. Occupancy costs include rent charges, both fixed and variable, as well as common area maintenance costs, property insurance and 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,


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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.
Depreciation and Amortization. Depreciation and amortization principally include depreciation on fixed assets, including equipment and leasehold improvements, and amortization of certain intangible assets for our restaurants.
Interest Expense. Interest expense consists primarily of interest on our outstanding indebtedness and the amortization of our debt issuance costs reduced by capitalized interest.
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 also is 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 September 24, 2017 Compared to Thirteen Weeks Ended September 25, 2016
The following table presents, for the periods indicated, the condensed consolidated statement of operations (in thousands):
 
Thirteen Weeks Ended
 
September 24, 2017
 
% of
Revenue
 
September 25, 2016
 
% of
Revenue
 
$ Change
 
%
Change
Revenue
$
92,193

 
100.0
%
 
$
85,597

 
100.0
%
 
$
6,596

 
7.7
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
24,659

 
26.7
%
 
22,528

 
26.3
%
 
2,131

 
9.5
 %
Labor
32,423

 
35.2
%
 
28,469

 
33.3
%
 
3,954

 
13.9
 %
Operating
13,201

 
14.3
%
 
12,003

 
14.0
%
 
1,198

 
10.0
 %
Occupancy
6,483

 
7.0
%
 
5,695

 
6.7
%
 
788

 
13.8
 %
General and administrative
4,814

 
5.2
%
 
4,132

 
4.8
%
 
682

 
16.5
 %
Marketing
699

 
0.9
%
 
641

 
0.7
%
 
58

 
9.0
 %
Restaurant pre-opening
1,244

 
1.3
%
 
1,178

 
1.4
%
 
66

 
5.6
 %
Closure costs

 
%
 
390

 
0.4
%
 
(390
)
 
*

Depreciation and amortization
4,483

 
4.9
%
 
3,821

 
4.5
%
 
662

 
17.3
 %
Total costs and expenses
88,006

 
95.5
%
 
78,857

 
92.1
%
 
9,149

 
11.6
 %
Income from operations
4,187

 
4.5
%
 
6,740

 
7.9
%
 
(2,553
)
 
(37.9
)%
Interest expense, net
16

 
%
 
16

 
%
 

 
 %
Income before income taxes
4,171

 
4.5
%
 
6,724

 
7.9
%
 
(2,553
)
 
(38.0
)%
Income tax expense
976

 
1.0
%
 
2,125

 
2.5
%
 
(1,149
)
 
(54.1
)%
Net income
$
3,195

 
3.5
%
 
$
4,599

 
5.4
%
 
$
(1,404
)
 
(30.5
)%
 
 
 
 
 
 
 
 
 
 
 
 
* Not meaningful
 
 
 
 
 
 
 
 
 
 
 
Revenue. Revenue increased $6.6 million, or 7.7%, to $92.2 million for the thirteen weeks ended September 24, 2017 from $85.6 million for the comparable period in 2016. This increase was primarily driven by $11.3 million in incremental revenue from an additional 136 operating weeks provided by 12 new restaurants opened during and subsequent to the thirteen weeks ended


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September 25, 2016. This increase was partially offset by a $1.2 million decrease in revenue related to hurricanes Harvey and Irma, the loss of six operating weeks due to the closing of the Charlotte, NC location during the third quarter of 2016 and our non-comparable restaurants that are not included in the incremental revenue discussed above. Revenue for non-comparable restaurants is historically lower as the restaurants transition out of the 'honeymoon' period that follows a restaurant's initial opening.
Comparable restaurant sales decreased 2.1% for the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. The decrease in comparable restaurant sales was primarily driven by a 3.7% decrease in average weekly customers, partially offset by a 1.6% increase in average check. Comparable restaurant sales were negatively impacted by 90 basis points related to hurricanes Harvey and Irma. Our total revenue mix attributed to bar sales was 18.4% during the thirteen weeks ended September 24, 2017 and during the comparable period in 2016.
Cost of Sales. Cost of sales as a percentage of revenue increased to 26.7% during the thirteen weeks ended September 24, 2017 from 26.3% during the comparable period in 2016, primarily as a result of increases in produce of approximately 40 basis points, chicken of approximately 40 basis points, and grocery costs of approximately 10 basis points, partially offset by decreases in beef of approximately 50 basis points.
Labor Costs. Labor costs as a percentage of revenue increased to 35.2% during the thirteen weeks ended September 24, 2017 from 33.3% during the comparable period in 2016, primarily due to new store labor inefficiencies, new store manager training, as a result of delayed new store openings, deleverage resulting from negative comparable restaurant sales, and hourly labor rate inflation of approximately 2.0%.
Operating Costs. Operating costs as a percentage of revenue increased to 14.3% during the thirteen weeks ended September 24, 2017 from 14.0% during the comparable period in 2016 primarily due to higher repairs and maintenance costs of approximately 10 basis points; higher insurance costs of approximately 10 basis points; higher credit card fees and delivery service charges of approximately 10 basis points.
Occupancy Costs. Occupancy costs as a percentage of revenue increased to 7.0% during the thirteen weeks ended September 24, 2017 from 6.7% during the comparable period in 2016, primarily as a result of higher rental expense at certain newly opened restaurants as we continue our expansion into larger markets and reduced operating leverage on existing stores.
General and Administrative Expenses. General and administrative expenses increased $0.7 million, or 16.5%, to $4.8 million for the thirteen weeks ended September 24, 2017 compared to the comparable period in 2016. This increase was primarily driven by a $0.5 million increase in management salaries and equity compensation due to additional headcount to support our growth, $0.1 million increase in rental, maintenance and utility costs as a result of our office space expansion, $0.1 million increase in professional fees as well as $0.1 million increase in various other costs. These increases were partially offset by a $0.1 million decrease in performance based bonuses.
Restaurant Pre-opening Costs. Restaurant pre-opening costs remained relatively flat at $1.2 million during the thirteen weeks ended September 24, 2017 compared to the same period in 2016. During the thirteen weeks ended September 24, 2017, we incurred pre-opening costs for two new restaurants and pre-opening costs for six more new restaurants that will open in the fourth quarter of 2017 or later. During the comparable period in 2016, we incurred pre-opening costs for three new restaurants and pre-opening costs for four new restaurants that opened in the fourth quarter of 2016 or later.
Impairment and closure costs. During the thirteen weeks ended September 25, 2016 we recorded $0.4 million of closure costs related to one restaurant that was closed and relocated. In the third quarter of 2017, we incurred losses and damages related to the hurricanes, including temporary closures of several restaurants, one of which is expected to remain closed until the middle of the fourth quarter of 2017. The losses incurred were fully offset by the recovery proceeds expected from our insurance. We estimate additional insurance proceeds relating to the hurricanes to result in a gain to be recorded in the fourth quarter of 2017.
Depreciation and Amortization. Depreciation and amortization costs increased $0.7 million to $4.5 million during the thirteen weeks ended September 24, 2017 from $3.8 million during the comparable period in 2016, primarily as the result of an increase in equipment and leasehold improvement costs associated with our new restaurants.
Income Tax Expense. For the thirteen weeks ended September 24, 2017 our effective tax rate decreased to approximately 23.4% from approximately 31.6% during the comparable period in 2016. The decrease in our effective tax rate is primarily related to an increase in employee tax credits in proportion to taxable income.
Net Income. As a result of the foregoing, net income decreased 30.5% to $3.2 million during the thirteen weeks ended September 24, 2017 from $4.6 million during the comparable period in 2016.



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Thirty-Nine Weeks Ended September 24, 2017 Compared to Thirty-Nine Weeks Ended September 25, 2016
The following table presents, for the periods indicated, the condensed consolidated statement of operations (in thousands):
 
Thirty-Nine Weeks Ended
 
September 24, 2017
 
% of
Revenue
 
September 25, 2016
 
% of
Revenue
 
$ Change
 
%
Change
Revenue
$
273,570

 
100.0
%
 
$
251,560

 
100.0
%
 
$
22,010

 
8.7
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
70,933

 
25.9
%
 
64,923

 
25.8
%
 
6,010

 
9.3
 %
Labor
93,855

 
34.3
%
 
82,857

 
32.9
%
 
10,998

 
13.3
 %
Operating
38,396

 
14.0
%
 
34,593

 
13.7
%
 
3,803

 
11.0
 %
Occupancy
18,928

 
6.9
%
 
16,637

 
6.6
%
 
2,291

 
13.8
 %
General and administrative
14,390

 
5.3
%
 
13,535

 
5.4
%
 
855

 
6.3
 %
Marketing
2,043

 
0.8
%
 
1,916

 
0.8
%
 
127

 
6.6
 %
Restaurant pre-opening
4,068

 
1.5
%
 
4,145

 
1.6
%
 
(77
)
 
(1.9
)%
Closure costs

 
%
 
390

 
0.2
%
 
(390
)
 
*

Depreciation and amortization
12,951

 
4.7
%
 
11,005

 
4.4
%
 
1,946

 
17.7
 %
Total costs and expenses
255,564

 
93.4
%
 
230,001

 
91.4
%
 
25,563

 
11.1
 %
Income from operations
18,006

 
6.6
%
 
21,559

 
8.6
%
 
(3,553
)
 
(16.5
)%
Interest expense
48

 
%
 
47

 
%
 
1

 
2.1
 %
Income before income taxes
17,958

 
6.6
%
 
21,512

 
8.6
%
 
(3,554
)
 
(16.5
)%
Income tax expense
4,884

 
1.8
%
 
6,601

 
2.7
%
 
(1,717
)
 
(26.0
)%
Net income
$
13,074

 
4.8
%
 
$
14,911

 
5.9
%
 
$
(1,837
)
 
(12.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
* Not meaningful
 
 
 
 
 
 
 
 
 
 
 
Revenue. Revenue increased $22.0 million, or 8.7%, to $273.6 million for the thirty-nine weeks ended September 24, 2017 from $251.6 million for the comparable period in 2016. This increase was primarily driven by $33.9 million in incremental revenue from an additional 427 operating weeks provided by 19 new restaurants opened during and subsequent to the thirty-nine weeks ended September 25, 2016. These increases were partially offset by a $1.2 million decrease in revenue related to hurricanes Harvey and Irma, the loss of 32 operating weeks due to the closing of the Charlotte, NC location during the third quarter of 2016 and our non-comparable restaurants that are not included in the incremental revenue discussed above. Revenue for non-comparable restaurants is historically lower as the stores transition out of the 'honeymoon' period that follows a restaurant's initial opening.
Comparable restaurant sales decreased 1.2% for the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016. The decrease in comparable restaurant sales was primarily driven by a 2.8% decrease in average weekly customers, partially offset by a 1.5% increase in average check. We estimate comparable restaurant sales were negatively impacted by 30 basis points related to hurricanes Harvey and Irma. Our total revenue mix attributed to bar sales was 18.7% during the thirty-nine weeks ended September 24, 2017 compared to 18.5% during the comparable period in 2016.
Cost of Sales. Cost of sales as a percentage of revenue increased to 25.9% during the thirty-nine weeks ended September 24, 2017 from 25.8% during the comparable period in 2016. This increase is primarily due to increases in chicken of approximately 30 basis points, dairy of approximately 20 basis points, produce of approximately 10 basis points and grocery costs of approximately 10 basis points, partially offset by decreases in beef of approximately 50 basis points.
Labor Costs. Labor costs as a percentage of revenue increased to 34.3% during the thirty-nine weeks ended September 24, 2017 from 32.9% during the comparable period in 2016, primarily due to new store labor inefficiencies, new store manager training, as a result of delayed new store openings, deleverage resulting from negative comparable restaurant sales and hourly labor rate inflation of approximately 2.6%.
Operating Costs. Operating costs as a percentage of revenue increased to 14.0% during the thirty-nine weeks ended September 24, 2017 from 13.7% during the comparable period in 2016, primarily due to increases in repairs and maintenance costs of approximately 10 basis points, utility costs of approximately 20 basis points, higher credit card fees and delivery service charges of approximately 10 basis points, offset by a decrease in supply costs of approximately 10 basis points.
Occupancy Costs. Occupancy costs as a percentage of revenue increased to 6.9% during the thirty-nine weeks ended September 24, 2017 from 6.6% during the comparable period in 2016, primarily as a result of higher rental expense at certain newly opened restaurants as we continue our expansion into larger markets.


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General and Administrative Expenses. General and administrative expenses increased $0.9 million, or 6.3%, to $14.4 million for the thirty-nine weeks ended September 24, 2017 from $13.5 million during the comparable period in 2016. This increase was primarily driven by an increase in management salaries and equity compensation of $1.4 million due to additional headcount to support our growth, offset by a $1.0 million decrease in performance based bonuses as well as $0.3 million increase in rental, maintenance and utility costs as a result of our office space expansion and $0.1 million increase in professional fees.
Restaurant Pre-opening Costs. Restaurant pre-opening costs remained relatively flat at $4.1 million during the thirty-nine weeks ended September 24, 2017 compared to the same period in 2016. During the thirty-nine weeks ended September 24, 2017, we incurred pre-opening costs for seven new restaurants that opened and for six new restaurants that will open in the fourth quarter of 2017 or later. During the comparable period in 2016, we incurred pre-opening costs for nine new restaurants and pre-opening costs for four new restaurants that opened in the fourth quarter of 2016 or later.
Impairment and closure costs. During the thirty-nine weeks ended September 25, 2016 we recorded $0.4 million of closure costs related to one restaurant that was closed and relocated. In the third quarter of 2017, we incurred losses and damages related to the hurricanes, including temporary closures of several restaurants, one of which is expected to remain closed until the middle of the fourth quarter of 2017. The losses incurred were fully offset by the recovery proceeds expected from our insurance. We project additional insurance proceeds relating to the hurricanes to result in a gain be recorded in the fourth quarter of 2017.
Depreciation and Amortization. Depreciation and amortization costs increased $1.9 million to $13.0 million during the thirty-nine weeks ended September 24, 2017 from $11.0 million during the comparable period in 2016, primarily as the result of an increase in equipment and leasehold improvement costs associated with our new restaurants.
Income Tax Expense. For the thirty-nine weeks ended September 24, 2017 our effective tax rate decreased to 27.2% from 30.7% during the comparable period in 2016. The decrease in our effective tax rate is primarily related to an increase in employee tax credits in proportion to taxable income.
Net Income. As a result of the foregoing, net income decreased 12.3% to $13.1 million during the thirty-nine weeks ended September 24, 2017 from $14.9 million during the comparable period in 2016.
Liquidity
Our principal sources of cash are net cash provided by operating activities, which includes tenant improvement allowances from our landlords, and borrowings under our $25.0 million Revolving Credit Facility. Our need for capital resources is driven by our restaurant expansion plans, ongoing maintenance of our restaurants, investment in our corporate and information technology infrastructure and obligations under our operating leases. Based on our current growth plans, we believe our expected cash flows from operations, expected tenant improvement allowances and available borrowings under our Revolving Credit Facility will be sufficient to finance our planned capital expenditures and other operating activities for at least the next twelve months.
Consistent with many other restaurant and retail chain store operations, we use operating lease arrangements for our restaurants. We believe that these operating lease arrangements provide appropriate leverage of our capital structure in a financially efficient manner. We have entered into operating leases with certain related parties with respect to six of our restaurants and our corporate headquarters.
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.

Subsequent to the end of the third quarter, the Company’s Board of Directors approved a share repurchase program under which it authorized the Company, at its discretion, to repurchase up to $30 million of its common shares outstanding through December 31, 2019. Repurchases of the Company’s outstanding common stock will be made in accordance with applicable securities 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.



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Cash Flows for Thirty-Nine Weeks Ended September 24, 2017 and September 25, 2016
The following table summarizes the statement of cash flows for the thirty-nine weeks ended September 24, 2017 and September 25, 2016 (in thousands): 
 
Thirty-Nine Weeks Ended
 
September 24, 2017
 
September 25, 2016
Net cash provided by operating activities
$
34,327

 
$
32,692

Net cash used in investing activities
(30,290
)
 
(31,492
)
Net cash (used in) provided by financing activities
(330
)
 
4,215

Net increase in cash and cash equivalents
3,707

 
5,415

Cash and cash equivalents at beginning of year
13,694

 
8,529

Cash and cash equivalents at end of period
$
17,401

 
$
13,944

Operating Activities. Net cash provided by operating activities increased $1.6 million to $34.3 million for the thirty-nine weeks ended September 24, 2017 from $32.7 million during the comparable period in 2016. 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 primarily due to increases in non-cash reconciling items of $3.2 million and net increase in operating assets and liabilities, or working capital, of $0.3 million, partially offset by a decrease in net income of $1.8 million. The increase in non-cash items of $3.2 million was primarily due to a $3.2 million increase from excess tax benefits, $1.9 million increase related to depreciation and amortization, partially offset by a $1.8 million decrease related to deferred income taxes. The increase in working capital of $0.3 million was primarily due to $4.1 million increase in cash related income tax receivables, a $1.0 million increase in cash related to changes in prepaid expenses and other current assets, partially offset by a $4.6 million decrease in cash related to accrued liabilities and deferred rent.
Investing Activities. Net cash used in investing activities decreased $1.2 million to $30.3 million for the thirty-nine weeks ended September 24, 2017 from $31.5 million during the comparable period in 2016. The decrease was primarily due to the timing of our construction schedule and the related construction payments associated with our seven new restaurants that opened during the thirty-nine weeks ended September 24, 2017, as well as expenditures related to future restaurant openings, maintaining our existing restaurants and other projects.
Financing Activities. Net cash used by financing activities was $0.3 million for the thirty-nine weeks ended September 24, 2017 compared to $4.2 million provide by financing activities during the comparable period in 2016. Net cash used by financing activities during the thirty-nine weeks ended September 24, 2017 consisted of repurchases of our stock for tax payments of $0.5 million, partially offset by proceeds from option exercises of $0.2 million. Net cash provided by financing activities during the thirty-nine weeks ended September 25, 2016 consisted of excess tax benefits from stock-based compensation of $3.2 million and proceeds from option exercises of $1.4 million, partially offset by repurchases of our stock for tax payments of $0.3 million.
As of September 24, 2017, we lease six of our restaurant locations and our corporate offices from entities owned by our founders and one executive officer. 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 Capital Requirements
Our capital requirements are primarily dependent upon the pace of our growth plan and resulting new restaurants. Our growth plan is dependent upon many factors, including economic conditions, real estate markets, restaurant locations and the nature of our lease agreements. Our capital expenditure outlays are also dependent on maintenance and remodel costs in our existing restaurants as well as information technology and other general corporate capital expenditures.
The capital resources required for a new restaurant depend on whether the restaurant is a ground-up construction or a conversion. For our new unit openings, we estimate the cost of a conversion or ground-up buildout will require a total cash investment of $1.9 million to $2.5 million (net of estimated tenant incentives of between zero and $1.0 million). In addition, we target approximately $400,000 to $450,000 per restaurant for restaurant pre-opening costs, however, pre-opening costs for 2017 will exceed this target due to delayed new store openings as a result of delayed construction as well as the impact of the hurricanes. We currently target a cash-on-cash return beginning in the third operating year of 30.0%, and a sales to investment ratio of 1.9:1 for our new restaurants.
For 2017, we currently estimate capital expenditure outlays will range between $36.0 million and $41.0 million, net of agreed upon tenant improvement allowances and excluding approximately $5.5 million to $5.9 million of restaurant pre-opening costs


16

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for new restaurants that are not capitalized. We spent $4.1 million on pre-opening costs during the thirty-nine weeks ended September 24, 2017. These capital expenditure estimates are based on average new restaurant capital expenditures of $2.5 million (net of estimated tenant improvement allowances) for the opening of 11 new restaurants and the reopening of one restaurant that was severely damaged by the hurricane as well as $6.6 million to maintain and remodel our existing restaurants and for general corporate purposes.
Based on our growth plans, we believe our combined expected cash flows from operations, available borrowings under our Revolving Credit Facility and expected tenant improvement allowances will be sufficient to finance our planned capital expenditures and other operating activities in fiscal 2017.
Short-Term Capital Requirements
Our operations have not required significant working capital and, like many restaurant companies, we generally operate with negative working capital. Restaurant sales are primarily paid for in cash or by credit card, and restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverages and supplies, therefore reducing the need for incremental working capital to support growth. We had a net working capital surplus of $1.7 million at September 24, 2017 compared to a deficit of $0.4 million at December 25, 2016.
Revolving Credit Facility
On November 30, 2012, we entered into our $25.0 million Revolving Credit Facility with Wells Fargo Bank, National Association. On October 30, 2015, we entered into an amendment to our Revolving Credit Facility to, among other things, (1) extend the maturity date of the Revolving Credit Facility to October 30, 2020 from November 30, 2017 and (2) revise the applicable margins and leverage ratios that determine the commitment fees and interest rates payable by the Company under the Revolving Credit Facility. As of September 24, 2017 we had no outstanding indebtedness under our Revolving Credit Facility.
Under our Revolving Credit Facility, we may request to increase the size of our Revolving Credit Facility by up to $25.0 million, in minimum principal amounts of $5.0 million or the remaining amount of the $25.0 million if less than $5.0 million (the "Incremental Revolving Loan"), the Incremental Revolving Loan will be effective after 10 days written notice to the agent. In the event that any of the lenders fund the Incremental Revolving Loan, the terms and provisions of the Incremental Revolving Loan will be the same as under our Revolving Credit Facility.
Borrowings under the Revolving Credit Facility generally bear interest at a variable rate based upon our election, of (i) the base rate (which is the highest of prime rate, federal funds rate plus 0.5% or one month LIBOR plus 1.0%), or (ii) LIBOR, plus, in either case, an applicable margin based on our consolidated total lease adjusted leverage ratio (as defined in the Revolving Credit Facility agreement). Our Revolving Credit Facility also requires payment for commitment fees that accrue on the daily unused commitment of the lender at the applicable margin, which varies based on our consolidated total lease adjusted leverage ratio. In addition, the Revolving Credit Facility requires compliance with a fixed charge coverage ratio, a lease adjusted leverage ratio and certain non-financial covenants as well as places certain restrictions on the payment of dividends and distributions. Under the Revolving Credit Facility, Chuy's may declare and make dividend payments so long as (i) no default or event of default has occurred and is continuing or would result therefrom and (ii) immediately after giving effect to any such dividend payment, on a pro forma basis, the lease adjusted leverage ratio does not exceed 3.50 to 1.00.
The obligations under the Company’s long-term debt are secured by a first priority lien on substantially all of the Company’s assets.
Contractual Obligations
There have been no material changes to our contractual obligations from what was previously disclosed in our Annual Report filed with the SEC.
Off-Balance Sheet Arrangements
As of September 24, 2017, we are not involved in any variable interest entities transactions and do not otherwise have any off-balance sheet arrangements.
Significant Accounting Policies
There have been no material changes to the significant accounting policies from what was previously disclosed in our Annual Report filed with the SEC.
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.


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Cautionary Statement Concerning Forward-Looking Statements
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 success of our existing and new restaurants;
our ability to identify appropriate sites and develop and expand our operations;
changes in economic conditions;
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 Texas where a large percentage of our restaurants are located;
the impact of negative economic factors, including the availability of credit, on our landlords and surrounding tenants;
changes in food availability and costs;
labor shortages and increases in our labor costs, including as a result of changes in government regulation, such as the adoption of the new federal health care legislation;
food safety and food borne illness concerns;
increased competition in the restaurant industry and the segments in which we compete;
the impact of legislation and regulations 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 beer, liquor and food service regulations;
the impact of litigation;
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;
the loss of key members of our management team;
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 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;
the impact of a potential requirement to record asset impairment charges in the future;
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;
our increased costs and obligations as a result of being a public company;
the impact of electing to take advantage of certain exemptions applicable to emerging growth companies;
the failure of our internal control over financial reporting;
the impact of federal, state and local tax laws;
volatility in the price of our common stock;
the timing and amount of repurchases of our common stock, if any, changes to the Company’s expected liquidity position and the possibility that the repurchase program may be suspended or discontinued;


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the impact of future sales of our common stock and the exercise of stock options and any additional capital raised by us through the sale of our common stock;
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 Delaware law;
the effect of our decision to not pay dividends for the foreseeable future;
the effect of changes in accounting principles applicable to us;
our ability to raise capital in the future; and
the conflicts of interest that may arise with some of our directors.

The foregoing factors should not be construed as exhaustive and should be read together with the 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. We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as may be required by law.


19

Table of Contents

Item 3.    Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our quantitative and qualitative disclosures about market risk from what was previously disclosed in our Annual Report filed with the SEC.
Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) were effective as of the end of the period covered by this report.
The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


20

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Part II—Other Information
Item 1.    Legal Proceedings
Occasionally, we are a party to various legal actions arising in the ordinary course of our business including claims resulting from “slip and fall” accidents, employment related claims and claims from customers or employees alleging illness, injury or other food quality, health or operational concerns. None of these types of litigation, most of which are covered by insurance, has had a material effect on us in the past. As of the date of this report, we are not a party to any material pending legal proceedings and are not aware of any claims that could have a materially adverse effect on our financial position, results of operations or cash flows.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in our most recent Annual Report filed with the Securities and Exchange Commission.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
The table below provides information with respect to our purchase of shares of our common stock during the three months ended September 24, 2017:
Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid Per Share
June 26, 2017 through July 23, 2017
 

 
$

July 24, 2017 through August 20, 2017
 

 

August 21, 2017 through September 24, 2017
 
507

 
20.76

Total
 
507

 
$
20.76

(1)
To satisfy tax withholding obligations associated with the vesting of restricted stock units during the third quarter of 2017, we withheld a total of 507 shares that are included in the total number of shares purchased column above.
Item 3.    Defaults Upon Senior Securities
None.
Item 4.    Mine Safety Disclosures
None.
Item 5.    Other Information
None.
Item 6.    Exhibits
Exhibit No.
Description of Exhibit
 
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document




21

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 3, 2017
CHUY’S HOLDINGS, INC.
 
 
By:
/s/ Steven J. Hislop
 
Name:
Steven J. Hislop
 
Title:
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
By:
/s/ Jon W. Howie
 
Name:
Jon W. Howie
 
Title:
Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)




22
Exhibit
Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Steven J. Hislop, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chuy’s Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2017
 
/s/ Steven J. Hislop
Steven J. Hislop
President and Chief Executive Officer
(Principal Executive Officer)



Exhibit
Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Jon W. Howie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chuy’s Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2017
 
/s/ Jon W. Howie
Jon W. Howie
Vice President and Chief Financial Officer
(Principal Financial Officer)



Exhibit
Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Chuy’s Holdings, Inc., a Delaware Corporation (the “Company”), for the period ending September 24, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Steven J. Hislop, President and Chief Executive Officer of the Company, and Jon W. Howie, Vice President and Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods indicated.



Date: November 3, 2017
/s/ Steven J. Hislop
Steven J. Hislop
President and Chief Executive Officer
(Principal Executive Officer)

/s/ Jon W. Howie
Jon W. Howie
Vice President and Chief Financial Officer
(Principal Financial Officer)