Document
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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 June 28, 2020
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 Rd.
Austin, Texas 78704
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (512) 473-2783
 __________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.01 per share
CHUY
Nasdaq Stock Market LLC
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    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).     Yes       No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
Emerging growth company
Non-accelerated filer
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No   
The number of shares of the registrant’s common stock outstanding at July 31, 2020 was 19,689,892.
 





Table of Contents
 
 
 





2




Part I—Financial Information
Item 1.    Financial Statements
Chuy's Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
 
 
June 28, 2020
 
December 29, 2019
Assets
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
67,237

 
$
10,074

Accounts receivable
1,223

 
1,426

Lease incentives receivable
400

 
250

Income tax receivable
523

 

Inventories
1,538

 
1,657

Prepaid expenses and other current assets
5,440

 
3,376

Total current assets
76,361

 
16,783

Property and equipment, net
193,285

 
210,750

Operating lease assets
160,996

 
169,299

Deferred tax asset
8,455

 
2,601

Other assets and intangible assets, net
1,015

 
667

Tradename
21,900

 
21,900

Goodwill
24,069

 
24,069

Total assets
$
486,081

 
$
446,069

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
5,622

 
$
4,253

Accrued liabilities
20,725

 
21,107

Operating lease liabilities
14,891

 
10,307

Income tax payable

 
532

Total current liabilities
41,238

 
36,199

Operating lease liabilities, less current portion
209,076

 
214,541

Other liabilities
652

 
393

Total liabilities
250,966

 
251,133

 
 
 
 
Commitments and contingencies (Note 8)

 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value; 60,000,000 shares authorized; 19,689,892 shares issued and outstanding at June 28, 2020 and 16,636,464 shares issued and outstanding at December 29, 2019
197

 
166

Preferred stock, $0.01 par value; 15,000,000 shares authorized and no shares issued or outstanding at June 28, 2020 and December 29, 2019

 

Paid-in capital
142,762

 
94,712

Retained earnings
92,156

 
100,058

Total stockholders’ equity
235,115

 
194,936

Total liabilities and stockholders’ equity
$
486,081

 
$
446,069







See notes to the Unaudited Condensed Consolidated Financial Statements


3




Chuy's Holdings, Inc.
Unaudited Condensed Consolidated Income Statements
(In thousands, except share and per share data)
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
June 28, 2020
 
June 30, 2019
 
June 28, 2020
 
June 30, 2019
Revenue
$
65,712

 
$
113,132

 
$
160,212

 
$
215,243

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
15,410

 
29,174

 
39,972

 
54,889

Labor
17,337

 
38,854

 
50,917

 
75,553

Operating
10,720

 
15,897

 
25,305

 
30,456

Occupancy
7,097

 
8,152

 
15,083

 
16,134

General and administrative
4,774

 
5,868

 
10,494

 
12,035

Marketing
365

 
1,544

 
1,374

 
2,995

Restaurant pre-opening
278

 
1,182

 
1,138

 
1,900

Legal settlement

 
775

 

 
775

Impairment and closed restaurant costs
1,782

 
216

 
20,555

 
588

Gain on insurance settlements
(1,000
)
 

 
(1,000
)
 

Depreciation and amortization
4,895

 
5,124

 
10,184

 
10,201

Total costs and expenses
61,658

 
106,786

 
174,022

 
205,526

Income (loss) from operations
4,054

 
6,346

 
(13,810
)
 
9,717

Interest expense, net
153

 
23

 
205

 
62

Income (loss) before income taxes
3,901

 
6,323

 
(14,015
)
 
9,655

Income tax (benefit) expense
(601
)
 
78

 
(6,113
)
 
193

Net income (loss)
$
4,502

 
$
6,245

 
$
(7,902
)
 
$
9,462

Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.26

 
$
0.37

 
$
(0.46
)
 
$
0.56

Diluted
$
0.26

 
$
0.37

 
$
(0.46
)
 
$
0.56

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
17,555,506

 
16,804,465

 
17,095,422

 
16,838,052

Diluted
17,578,129

 
16,859,657

 
17,095,422

 
16,902,656























See notes to the Unaudited Condensed Consolidated Financial Statements


4




Chuy's Holdings, Inc.
Unaudited Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except share and per share data)
 
Thirteen Weeks Ended
 
Common Stock
 
 
 
Retained
 
 
 
Shares
 
Amount
 
Paid-in Capital
 
Earnings
 
Total
Balance, March 31, 2019
16,860,639

 
$
169

 
$
97,694

 
$
97,060

 
$
194,923

Stock-based compensation

 

 
928

 

 
928

Proceeds from exercise of stock options
11,956

 

 
99

 

 
99

Settlement of restricted stock units
3,493

 

 
(1
)
 

 
(1
)
Repurchase of shares of common stock
(176,171
)
 
(2
)
 
(3,873
)
 

 
(3,875
)
Indirect repurchase of shares for minimum tax withholdings
(1,265
)
 

 
(27
)
 

 
(27
)
Net income

 

 

 
6,245

 
6,245

Balance, June 30, 2019
16,698,652

 
$
167

 
$
94,820

 
$
103,305

 
$
198,292

 
 
 
 
 
 
 
 
 
 
Balance, March 29, 2020
16,640,190

 
$
166

 
$
93,576

 
$
87,654

 
$
181,396

Stock-based compensation

 

 
1,045

 

 
1,045

Proceeds from exercise of stock options
3,171

 

 
34

 

 
34

Sale of common stock from ATM offering, net of fees and expenses
3,041,256

 
31

 
48,136

 

 
48,167

Settlement of restricted stock units
7,401

 

 

 

 

Indirect repurchase of shares for minimum tax withholdings
(2,126
)
 

 
(29
)
 

 
(29
)
Net income

 

 

 
4,502

 
4,502

Balance, June 28, 2020
19,689,892

 
$
197

 
$
142,762

 
$
92,156

 
$
235,115

 
 
 
 
 
 
 
 
 
 
 
Twenty-Six Weeks Ended
 
Common Stock
 
 
 
Retained
 
 
 
Shares
 
Amount
 
Paid-in Capital
 
Earnings
 
Total
Balance, December 30, 2018
16,856,373

 
$
169

 
$
99,490

 
$
94,192

 
$
193,851

Adoption of ASC 842 (Leases)

 

 

 
(349
)
 
(349
)
Stock-based compensation

 

 
1,726

 

 
1,726

Proceeds from exercise of stock options
16,643

 

 
133

 

 
133

Settlement of restricted stock units
119,181

 
1

 
(1
)
 

 

Repurchase of shares of common stock
(256,480
)
 
(3
)
 
(5,690
)
 

 
(5,693
)
Indirect repurchase of shares for minimum tax withholdings
(37,065
)
 

 
(838
)
 

 
(838
)
Net income

 

 

 
9,462

 
9,462

Balance, June 30, 2019
16,698,652

 
$
167

 
$
94,820

 
$
103,305

 
$
198,292

 
 
 
 
 
 
 
 
 
 
Balance, December 29, 2019
16,636,464

 
166

 
$
94,712

 
$
100,058

 
$
194,936

Stock-based compensation

 

 
1,957

 

 
1,957

Proceeds from exercise of stock options
3,171

 

 
34

 

 
34

Sale of common stock from ATM offering, net of fees and expenses
3,041,256

 
31

 
48,136

 

 
48,167

Settlement of restricted stock units
141,931

 
1

 
(1
)
 

 

Repurchase of shares of common stock
(90,144
)
 
(1
)
 
(1,421
)
 

 
(1,422
)
Indirect repurchase of shares for minimum tax withholdings
(42,786
)
 

 
(655
)
 

 
(655
)
Net loss

 

 

 
(7,902
)
 
(7,902
)
Balance, June 28, 2020
19,689,892

 
$
197

 
$
142,762

 
$
92,156

 
$
235,115


See notes to the Unaudited Condensed Consolidated Financial Statements


5




Chuy's Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
 
Twenty-Six Weeks Ended
 
June 28, 2020
 
June 30, 2019
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(7,902
)
 
$
9,462

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
10,184

 
10,201

Amortization of operating lease assets
5,170

 
222

Amortization of loan origination costs
18

 
16

Loss on asset impairment
18,277

 

Stock-based compensation
1,823

 
1,622

Loss on disposal of property and equipment
409

 
121

Deferred income taxes
(5,854
)
 
(956
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
203

 
651

Lease incentive receivable
(150
)
 
1,239

Income tax receivable and payable
(1,055
)
 
603

Inventories
119

 
(182
)
Prepaid expenses and other current assets
(2,064
)
 
(3,368
)
Accounts payable
1,217

 
(1,804
)
Accrued liabilities
(123
)
 
7,159

Operating lease liabilities
(881
)
 
(315
)
Net cash provided by operating activities
19,391

 
24,671

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(7,986
)
 
(14,510
)
Purchase of other assets
(366
)
 
(210
)
Net cash used in investing activities
(8,352
)
 
(14,720
)
Cash flows from financing activities:
 
 
 
Net proceeds from sale of common stock
48,167

 

Borrowings under revolving line of credit
25,000

 
5,000

Payments under revolving line of credit
(25,000
)
 
(5,000
)
Repurchase of shares of common stock
(1,422
)
 
(5,693
)
Proceeds from the exercise of stock options
34

 
133

Indirect repurchase of shares for minimum tax withholdings
(655
)
 
(838
)
Net cash provided by (used in) financing activities
46,124

 
(6,398
)
Net increase in cash and cash equivalents
57,163

 
3,553

Cash and cash equivalents, beginning of period
10,074

 
8,199

Cash and cash equivalents, end of period
$
67,237

 
$
11,752

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Property and equipment and other assets acquired by accounts payable
$
152

 
$
1,012

 
 
 
 
Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
147

 
$
33

Cash paid for income taxes
$
824

 
$
494


See notes to the Unaudited Condensed Consolidated Financial Statements


6




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 growing, full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex-Mex inspired food. As of June 28, 2020, the Company operated 92 restaurants across 19 states and had nine restaurants temporarily closed due to the Coronavirus ("COVID-19") pandemic.
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 29, 2019. The accompanying condensed consolidated balance sheet as of December 29, 2019, 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.
Certain prior year amounts have been reclassified in our unaudited condensed consolidated financial statements and notes thereto to conform to current year presentation.
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 2020 and 2019 fiscal years both consist of 52 weeks.
COVID-19 Pandemic
During March 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has significantly impacted health and economic conditions throughout the United States. Federal, state and local governments took a variety of actions to contain the spread of COVID-19. Many jurisdictions where our restaurants are located required mandatory closures or imposed capacity limitations and other restrictions affecting our operations. In late March 2020, the Company quickly began transforming its existing take-out and delivery business to a safe and efficient operation for its guests as well as its employees. In May 2020, the Company began the process of reopening dining rooms in accordance with new government restrictions and as of June 28, 2020, the Company had reopened dining rooms to varying degrees of operating capacity in 92 of its 101 restaurants. Nine restaurants remain temporarily closed.
During fiscal 2020, the Company has taken various steps to reduce non-essential spend, postpone restaurant development and rightsize operations in light of reduced sales volume to improve our store level profitability and increase our cash flows. The Company also enhanced its liquidity position by repaying the $25.0 million outstanding under its revolving credit facility with a portion of the net proceeds from the sale of its common stock in its "At-The-Market" ("ATM") offering. As of June 28, 2020, the Company had $67.2 million in cash and cash equivalents, no debt and $25.0 million of availability under its revolving credit facility. Management believes the Company's strong financial position combined with the measures it took during the pandemic will allow the Company to meet its financial obligations over the next twelve months.
We cannot predict how soon we will be able to reopen all of our restaurants at full capacity, and our ability to reopen and stay open will depend in part on the actions of a number of governmental bodies over which we have no control. Moreover, once restrictions are lifted, it is unclear how quickly customers will return to our restaurants, which may be a function of continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions, including job losses.
2. Recent Accounting Pronouncements
The Company reviewed all 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.


7

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

3. Net Income (Loss) Per Share
The number of shares and net income (loss) per share data for all periods presented are based on the historical weighted-average shares of common stock outstanding.
Basic net income (loss) per share of the Company's common stock is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding for the period.
Diluted net income (loss) 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 June 28, 2020 and June 30, 2019, there were approximately 241,700 and 73,200 shares, respectively, of common stock equivalents that were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive. For the twenty-six weeks ended June 28, 2020 and June 30, 2019, there were approximately 38,500 and 48,700 shares, respectively, of common stock equivalents that were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive.
The computation of basic and diluted net income (loss) per share is as follows:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
June 28, 2020
 
June 30, 2019
 
June 28, 2020
 
June 30, 2019
BASIC
 
 
 
 
 
 
 
Net income (loss)
$
4,502

 
$
6,245

 
$
(7,902
)
 
$
9,462

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
17,555,506

 
16,804,465

 
17,095,422

 
16,838,052

Basic net income (loss) per common share
$
0.26

 
$
0.37

 
$
(0.46
)
 
$
0.56

 
 
 
 
 
 
 
 
DILUTED
 
 
 
 
 
 
 
Net income (loss)
$
4,502

 
$
6,245

 
$
(7,902
)
 
$
9,462

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
17,555,506

 
16,804,465

 
17,095,422

 
16,838,052

Dilutive effect of stock options and restricted stock units
22,623

 
55,192

 

 
64,604

Weighted-average of diluted shares
17,578,129

 
16,859,657

 
17,095,422

 
16,902,656

Diluted net income (loss) per common share
$
0.26

 
$
0.37

 
$
(0.46
)
 
$
0.56

 
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. The 2006 Plan was terminated by the board effective July 27, 2012, and no further awards may be granted under the plan after such date. However, the termination of the 2006 Plan did not affect outstanding awards granted. Options granted under these plans vest over five years from the date of grant and have a maximum term of 10 years. As of June 28, 2020 the Company had 194,266 of stock options outstanding and exercisable with a remaining weighted average contractual term of 2.23 years.
Restricted stock units granted under the 2012 Plan vest over four to five years from the date of grant. As of June 28, 2020, a total of 85,876 shares of common stock are reserved and remain available for issuance under the 2012 Plan.
Stock-based compensation expense recognized in the accompanying condensed consolidated income statements was approximately $967,000 and $872,000 for the thirteen weeks ended June 28, 2020 and June 30, 2019, respectively, and $1,823,000 and $1,622,000 for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively.


8

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

A summary of stock-based compensation activity related to restricted stock units for the twenty-six weeks ended June 28, 2020 are as follows:
 
Shares
 
Weighted
Average
Fair Value
 
Weighted
Average
Remaining
Contractual
Term
(Year)
Outstanding at December 29, 2019
406,205

 
$
25.02

 
 
Granted
279,642

 
14.70

 
 
Vested
(141,931
)
 
26.19

 
 
Forfeited
(23,257
)
 
18.43

 
 
Outstanding at June 28, 2020
520,659

 
$
19.45

 
2.78

The fair value of the restricted stock units is the quoted market value of our common stock on the date of grant. As of June 28, 2020, total unrecognized stock-based compensation expense related to non-vested restricted stock units was approximately $8.9 million. This amount is expected to be recognized evenly over the remaining vesting period of the grants.
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 May 21, 2020, the Company entered into the second amendment (the “Amendment”) to its Revolving Credit Facility (as amended, the "Revolving Credit Facility") to (1) extend the maturity date to April 30, 2022, (2) relax compliance with the financial covenants during the COVID-19 pandemic through the new maturity date and (3) revise the applicable margins and leverage ratios that determine the commitment fees and interest payable by the Company.
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 less than $5.0 million (the "Incremental Revolving Loan"). 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 the prime rate, federal funds rate plus 0.5% and one month LIBOR plus 1.0%), or (ii) LIBOR, plus, in either case, an applicable margin based on the Company's consolidated total leverage ratio (as defined in the Amendment) with a LIBOR floor of 1.0%. 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 leverage ratio.
The Revolving Credit Facility also requires compliance with a fixed charge coverage ratio, a consolidated total leverage ratio, growth capital expenditure limitation during fiscal years 2020 and 2021 and a minimum monthly liquidity requirement of $5.0 million. The Revolving Credit Facility also has 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 June 28, 2020, the Company had no borrowings under the Revolving Credit Facility.


9

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

6. Accrued Liabilities
The major classes of accrued liabilities at June 28, 2020 and December 29, 2019 are summarized as follows:
 
June 28, 2020
 
December 29, 2019
Accrued compensation and related benefits
$
9,385

 
$
9,342

Other accruals
4,202

 
4,302

Property tax
2,804

 
2,220

Sales and use tax
2,425

 
2,954

Deferred gift card revenue
1,909

 
2,289

Total accrued liabilities
$
20,725

 
$
21,107


7. Stockholders' Equity
ATM Offering
During the second quarter of 2020, the Company issued 3,041,256 shares of its common stock and received net proceeds of $48.2 million after deducting sales agent commissions and offering expenses. A portion of the net proceeds was used to repay the $25.0 million outstanding under the Company revolving credit facility as of the end of the first quarter of 2020. The Company intends to use the remaining net proceeds from the ATM offering for general corporate purposes, including, but not limited to, increasing its liquidity as a result of the COVID-19 pandemic.
Share Repurchase Program
On October 31, 2019, the Company’s board of directors authorized a new share repurchase program under which the Company may, at its discretion, repurchase up to $30.0 million of its common stock through December 31, 2022. Repurchases of the Company's outstanding common stock will be made in accordance with applicable laws and may be made at management's discretion from time to time in the open market, through privately negotiated transactions or otherwise, including pursuant to Rule 10b5-1 trading plans. There is no guarantee as to the exact number of shares to be repurchased by the Company. The timing and extent of repurchases will depend upon several factors, including market and business conditions, regulatory requirements and other corporate considerations, and repurchases may be discontinued at any time.
We repurchased approximately 90,000 shares of common stock for $1.4 million during the first quarter of 2020. As a result of COVID-19, the Company temporarily suspended any further activity under the program and did not repurchase any shares during the second quarter of 2020. As of June 28, 2020, the Company had $28.6 million remaining to be repurchased under this plan.
8. Commitments and Contingencies
As of June 28, 2020, 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.
9. Leases
The Company determines if a contract contains a lease at inception. The Company's material long-term operating lease agreements are for the land and buildings for our restaurants as well as our corporate offices. The lease term begins on the date that the Company takes possession under the lease, including the pre-opening period during construction, when in many cases the Company is not making rent payments. The initial lease terms range from 10 years to 15 years, most of which include renewal options totaling 10 to 15 years. The lease term is generally the minimum of the noncancelable period or the lease term including renewal options which are reasonably certain of being exercised up to a term of approximately 20 years.
Operating lease assets and liabilities are recognized at the lease commencement date for material leases with a term of greater than 12 months. Operating lease liabilities represent the present value of future minimum lease payments. Since our leases do not provide an implicit rate, our operating lease liabilities are calculated using the Company's secured incremental borrowing rate at lease commencement. We estimate this rate based on prevailing financial market conditions, comparable companies, credit analysis and management judgment. Minimum lease payments include only fixed lease components of the agreement, as well as variable rate payments that depend on an index, initially measured using the index at the lease commencement date.


10

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

Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepaid or accrued lease payments, initial direct costs and lease incentives. Lease incentives are recognized when earned and reduce our operating lease asset. They are amortized through the operating lease assets as reductions of rent expense over the lease term.
Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease payments that do not depend on a rate or index, escalation in the index subsequent to the initial measurement, payments associated with non-lease components such as common area maintenance, real estate taxes and insurance, and short-term lease payments (leases with a term with 12 months or less) are expensed as incurred. Certain of the Company’s operating leases contain clauses that provide for contingent rent based on a percentage of sales greater than certain specified target amounts. These variable payments are expensed when the achievement of the specified target that triggers the contingent rent is considered probable. As of June 28, 2020, all of the Company's leases were operating.
During the second quarter of 2020, the Company suspended lease payments for the months of April through June 2020 as a result of the COVID-19 pandemic. The Company was able to negotiate rent concessions, abatements and deferrals with landlords on large portion of our operating leases. Financial Accounting Standards Board ("FASB") issued a clarification to accounting for lease concessions in response to the COVID-19 pandemic to reduce the operational challenges and complexity of lease accounting. The company used the relief provisions provided by FASB and made an election to account for the lease concessions as if they were part of the original lease agreement. The recognition of rent concessions did not have a material impact on our consolidated financial statements as of June 28, 2020.
Components of operating lease costs are included in occupancy, closed restaurant costs, restaurant pre-opening, general and administrative expense and property and equipment, net:
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
Lease cost
 
June 28, 2020
 
June 30, 2019
 
June 28, 2020
 
June 30, 2019
Operating lease cost (a)
 
$
6,634

 
$
6,378

 
$
13,228

 
$
12,564

Variable lease cost
 
95

 
298

 
218

 
550

 
 
$
6,729

 
$
6,676

 
$
13,446

 
$
13,114

(a) Includes short-term operating lease costs which are immaterial.
Supplemental cash flow disclosures for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively:
 
Twenty-Six Weeks Ended
 
June 28, 2020
 
June 30, 2019
Cash paid for operating lease liabilities
8,517

 
12,683

Operating lease assets obtained in exchange for operating lease liabilities (a)
(1,351
)
 
173,949

(a) The twenty-six weeks ended June 28, 2020 includes a $7.0 million reduction to the operating lease assets and liabilities mainly as a result of shortening the remaining life of certain leases during the first quarter of 2020. The twenty-six weeks ended June 30, 2019 includes the transition adjustment for the adoption of Leases (Topic 842) of $170.3 million as well as a $1.3 million reduction to the operating lease assets and liabilities as a result of shortening the remaining life of certain leases.
The Company recorded $0.2 million and $0.7 million in deferred lease incentives during the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively.


11

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

Supplemental balance sheet and other lease disclosures:
Operating leases
Classification
 
June 28, 2020
 
December 29, 2019
Right-of-use assets
Operating lease assets
 
$
160,996

 
$
169,299

 
 
 
 
 
 
Deferred rent payments (a)
Operating lease liability
 
3,593

 

Current lease liabilities
Operating lease liability
 
11,298

 
10,307

 
 
 
14,891

 
10,307

Non-current lease liabilities
Operating lease liability, less current portion
 
209,076

 
214,541

 
 
223,967

 
224,848

(a) Majority of the deferred rent payments is payable within the next 12 months
 
 
 
 
 
 
 
 
 
 
Weighted average remaining lease term (in years)
 
14.2

 
15.0

Weighted average discount rate
 
7.9
%
 
7.8
%

Future minimum rent payments for our operating leases, excluding the deferred rent payments of $3.6 million, for the next five years as of June 28, 2020 are as follows:
Fiscal year ending:
 
 
Remainder of 2020
 
$
13,672

2021
 
28,521

2022
 
27,753

2023
 
27,625

2024
 
26,459

Thereafter
 
243,203

Total minimum lease payments
 
367,233

Less: imputed interest
 
146,859

Present value of lease liabilities
 
$
220,374


As of June 28, 2020, operating lease payments exclude approximately $7.1 million of legally binding minimum lease payments for leases signed but which we have not yet taken possession.
10. Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. The CARES Act includes provisions that allow net operating losses in 2018, 2019 and 2020 to be carried back for up to five years and eliminates the 80% taxable income limitation on such net operating loss deductions if utilized before 2021. Additionally, the CARES Act includes an administrative correction of the depreciation recovery period for qualified improvement property ("QIP"), including certain restaurant leasehold improvement costs that will result in the acceleration of depreciation on these assets retroactive to 2018. As a result, we estimate we will receive federal tax refunds for a total of approximately $2.5 million.


12

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

The following is a reconciliation of the expected federal income taxes at the statutory rates of 21% for the thirteen and twenty-six weeks ended June 28, 2020 and June 30, 2019:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
June 28, 2020

 
June 30, 2019

 
June 28, 2020

 
June 30, 2019

Expected income tax (benefit) expense
820

 
1,327

 
(2,943
)
 
2,027

State tax expense, net of federal benefit
197

 
328

 
(108
)
 
495

FICA tip credit
(540
)
 
(1,499
)
 
(1,792
)
 
(2,476
)
Deferred tax balance adjustment (a)
(1,103
)
 

 
(1,636
)
 

Other
25

 
(78
)
 
366

 
147

Income tax (benefit) expense
(601
)
 
78

 
(6,113
)
 
193

(a) Reflects the tax benefit recorded in the quarter associated with a carryback of federal net operating losses due to the CARES Act administrative correction of the deprecation recovery period for QIP.
Deferred tax assets were $8.5 million and $2.6 million as of June 28, 2020 and June 30, 2019, respectively.
Deferred tax assets are reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred taxes will not be realized. Both positive and negative evidence is considered in forming management’s judgment as to whether a valuation allowance is appropriate, and more weight is given to evidence that can be objectively verified. The tax benefits relating to any reversal of the valuation allowance on the deferred tax assets would be recognized as a reduction of future income tax expense. As of June 28, 2020 the Company believes that it will realize all of the deferred tax assets. Therefore, no valuation allowance has been recorded.
11. Impairment and Closed Restaurant Costs
The Company reviews long-lived assets, such as property and equipment and intangibles, subject to amortization, for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable. In determining the recoverability of the asset value, an analysis is performed at the individual restaurant level and primarily includes an assessment of historical undiscounted cash flows and other relevant factors and circumstances. The Company evaluates future cash flow projections in conjunction with qualitative factors and future operating plans and regularly reviews any restaurants with a deficient level of cash flows for the previous 24 months to determine if impairment testing is necessary. Recoverability of assets to be held and used is measured by a comparison of the carrying value of the restaurant to its estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value, we determine if there is an impairment loss by comparing the carrying value of the restaurant to its estimated fair value. Based on this analysis, if the carrying value of the restaurant exceeds its estimated fair value, an impairment charge is recognized by the amount by which the carrying value exceeds the fair value.

We make assumptions to estimate future cash flows and asset fair values. The estimated fair value is generally determined using the depreciated replacement cost method, the income approach, or discounted cash flow projections. Estimated future cash flows are highly subjective assumptions based on the Company’s projections and understanding of our business, historical operating results, and trends in sales and restaurant level operating costs.
The Company’s impairment assessment process requires the use of estimates and assumptions regarding future cash flows and operating outcomes, which are based upon a significant degree of management judgment. The estimates used in the impairment analysis represent a Level 3 fair value measurement. The Company continues to assess the performance of restaurants and monitors the need for future impairment. Changes in the economic environment, real estate markets, capital spending, overall operating performance and underlying assumptions could impact these estimates and result in future impairment charges.


13

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

The Company recorded impairment and closed restaurant costs as follows:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
June 28, 2020
 
June 30, 2019
 
June 28, 2020
 
June 30, 2019
Right of use asset impairment
$

 
$

 
$
3,133

 

Property and equipment impairment

 

 
15,144

 
$

Non-cash impairment charge

 

 
18,277

 
$

 
 
 
 
 
 
 
 
Closed restaurant costs
1,782

 
216

 
2,278

 
588

Impairment and closed restaurant costs
$
1,782

 
$
216

 
$
20,555

 
$
588


Closed restaurant costs represents on-going expenses to maintain the closed restaurants such as rent expense, utility and insurance costs.
COVID-19 had a negative impact on our assumptions for future restaurant level cash flows as well as changes in the expected life of certain operating lease assets. These changes in assumptions resulted in elevated impairment charges for the twenty-six weeks ended June 28, 2020.
12. Subsequent events
On July 30, 2020 and subsequent to the end of the quarter, the Company’s stockholders approved the Chuy’s Holdings, Inc. 2020 Omnibus Incentive Plan (the “2020 Plan”). The 2020 Plan provides that the Company may grant options, stock appreciation rights, restricted shares, restricted stock units, performance-based awards (including performance-based restricted shares and restricted stock units), other share-based awards, other cash-based awards, or any combination of the foregoing to employees, non-employee directors and consultants of the Company. The number of shares that are reserved and available for issuance under the 2020 Plan is 1,119,527.


14




Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
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 subsidiaries.
The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 29, 2019 (our "Annual Report") and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein.
COVID-19 Pandemic
During March 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has significantly impacted health and economic conditions throughout the United States. Federal, state and local governments took a variety of actions to contain the spread of COVID-19. Many jurisdictions where our restaurants are located required mandatory closures or imposed capacity limitations and other restrictions affecting our operations. In late March 2020, the Company quickly began transforming its existing take-out and delivery business to a safe and efficient operation for its guests as well as its employees. In May 2020, the Company began the process of reopening dining rooms in accordance with new government restrictions and as of June 28, 2020, the Company had reopened dining rooms to varying degrees of operating capacity in 92 of its 101 restaurants. Nine restaurants remain temporarily closed.
Selected monthly comparable restaurant sales and average weekly sales per restaurant for the second quarter and third quarter to-date are as follows:
 
Month Ending
 
4/26/20
5/24/20
6/28/20
7/26/20
Comparable Restaurant Sales
(55.2)%
(44.8)%
(21.6)%
(26.3)%
Average Weekly Sales per Restaurant
$38,816
$51,960
$70,558
$66,065
Number of Open Restaurants
92
92
92
92
Off-premise sales remained strong at a rate more than double pre-COVID-19 levels comprising approximately 35% to 40% of all revenue in June and July 2020. The Company has seen softer sales trend during the latter part of June and July amidst increased cases of COVID-19 throughout the country which has either paused or rolled back reopening of the dining rooms in various states including Texas and Florida.
During fiscal 2020, the Company has taken various steps to reduce non-essential spend, postpone restaurant development and rightsize operations in light of reduced sales volume to improve our store level profitability and increase our cash flows. The Company also enhanced its liquidity position by repaying the $25.0 million outstanding under its revolving credit facility with a portion of the net proceeds from the sale of its common stock in its ATM offering. As of June 28, 2020, the Company had $67.2 million in cash and cash equivalents, no debt and $25.0 million of availability under its revolving credit facility. Management believes the Company's strong financial position combined with the measures it took during the pandemic will allow the Company to meet its financial obligations over the next twelve months.
We cannot predict how soon we will be able to reopen all of our restaurants at full capacity, and our ability to reopen and stay open will depend in part on the actions of a number of governmental bodies over which we have no control. Moreover, once all restrictions are lifted, it is unclear how quickly customers will return to our restaurants, which may be a function of continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions, including job losses.
Overview
We are a growing full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex-Mex inspired food. We were founded in Austin, Texas in 1982 and, as of June 28, 2020, we operated 92 restaurants across 19 states and had nine temporarily closed restaurants due to COVID-19.
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.


15




We have an established presence in Texas, the Southeast and the Midwest, with restaurants in multiple large markets in these regions. In response to COVID-19, all future restaurant development for fiscal year 2020 has been delayed and openings have been put on hold. There were three restaurants at various stages of completion at the end of the second quarter of 2020, that we intend to complete and open in fiscal year 2021.
Performance Indicators
We use the following performance indicators in evaluating our performance:
Number of Restaurant Openings. Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For restaurant openings we incur pre-opening costs, which are defined below, before the restaurant opens. Typically new restaurants open with an initial start-up period of higher than normalized sales volumes, which decrease to a steady level approximately six to twelve months after opening. However, operating costs during this initial six to twelve month period are also higher than normal, resulting in restaurant operating margins that are generally lower during the start-up period of operation and increase to a steady level approximately nine to twelve months after opening.
Comparable Restaurant Sales. We consider a restaurant to be comparable in the first full quarter following the 18th month of operations. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Changes in comparable sales reflect changes in customer count trends as well as changes in average check. Our comparable restaurant base consisted of 84 restaurants at June 28, 2020.
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.
Average Weekly Sales per Restaurant. Average Weekly Sales per Restaurant is calculated by dividing total weekly sales by number of operating restaurants in a given week.
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
 
Twenty-Six Weeks Ended
 
June 28, 2020
 
June 30, 2019
 
June 28, 2020
 
June 30, 2019
Total restaurants (at end of period)
92

 
102

 
92

 
102

Total comparable restaurants (at end of period)
84

 
85

 
84

 
85

Average unit volumes (in thousands)
$
627

 
$
1,151

 
$
1,591

 
$
2,225

Change in comparable restaurant sales(1)
(39.0
)%
 
1.9
%
 
(25.0
)%
 
2.5
%
Average check
$
17.03

 
$
15.91

 
$
16.59

 
$
15.73

(1) We consider a restaurant to be comparable in the first full quarter following the 18th month of operations. Change in comparable restaurant sales reflects changes in sales for the comparable group of restaurants over a specified period of time.
Our Fiscal Year
We operate on a 52- or 53-week fiscal year that ends on the last Sunday of the calendar year. Each quarterly period has 13 weeks, except for a 53-week year when the fourth quarter has 14 weeks. Our 2020 and 2019 fiscal years each consists of 52 weeks.
Key Financial Definitions
Revenue. Revenue primarily consists of food and beverage sales and also includes sales of our t-shirts, sweatshirts and hats. Revenue is presented net of discounts associated with each sale. Revenue in a given period is directly influenced by the number of operating weeks in such period, the number of restaurants we operate and comparable restaurant sales growth.
Cost of Sales. Cost of sales consists of food, beverage and merchandise related costs. The components of cost of sales are variable in nature, change with sales volume and are subject to increases or decreases based on fluctuations in commodity costs.


16




Labor Costs. Labor costs include restaurant management salaries, front- and back-of-house hourly wages and restaurant-level manager bonus expense and payroll taxes.
Operating Costs. Operating costs consist primarily of restaurant-related operating expenses, such as supplies, utilities, repairs and maintenance, travel cost, insurance, employee benefits, credit card fees, recruiting, delivery service and security. These costs generally increase with sales volume but may increase or decrease as a percentage of revenue.
Occupancy Costs. Occupancy costs include rent charges, both fixed and variable, as well as common area maintenance costs, property taxes, the amortization of tenant allowances and the adjustment to straight-line rent. These costs are generally fixed but a portion may vary with an increase in sales when the lease contains percentage rent.
General and Administrative Expenses. General and administrative expenses include costs associated with corporate and administrative functions that support our operations, including senior and supervisory management and staff compensation (including stock-based compensation) and benefits, travel, legal and professional fees, information systems, corporate office rent and other related corporate costs.
Marketing. Marketing costs include costs associated with our local restaurant marketing programs, community service and sponsorship activities, our menus and other promotional activities.
Restaurant Pre-opening Costs. Restaurant pre-opening costs consist of costs incurred before opening a restaurant, including manager salaries, relocation costs, supplies, recruiting expenses, initial new market public relations costs, pre-opening activities, employee payroll and related training costs for new employees. Restaurant pre-opening costs also include rent recorded during the period between date of possession and the restaurant opening date.
Impairment and closed restaurant costs. Impairment costs include impairment of long-lived assets associated with restaurants where the carrying amount of the asset is not recoverable and exceeds the fair value of the asset. Closed restaurant costs consist of any costs associated with the closure of a restaurant such as lease termination costs, severance benefits, other miscellaneous closing costs as well as costs to maintain these closed restaurants through the lease termination date such as occupancy costs, including rent payments less sublease income, if any, and insurance and utility costs.
Depreciation 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
In addition to the impacts of COVID-19 discussed above, our quarterly operating results may fluctuate significantly as a result of a variety of factors, including the timing of new restaurant openings and related expenses, profitability of new restaurants, weather, increases or decreases in comparable restaurant sales, general economic conditions, consumer confidence in the economy, changes in consumer preferences, competitive factors, changes in food costs, changes in labor costs and changes in gas prices. In the past, we have experienced significant variability in restaurant pre-opening costs from quarter to quarter primarily due to the timing of restaurant openings. We typically incur restaurant pre-opening costs in the five months preceding a new restaurant opening. In addition, our experience to date has been that labor and direct operating costs associated with a newly opened restaurant during the first several months of operation are often materially greater than what will be expected after that time, both in aggregate dollars and as a percentage of restaurant sales. Accordingly, the number and timing of new restaurant openings in any quarter has had, and is expected to continue to have, a significant impact on quarterly restaurant pre-opening costs, labor and direct operating costs.
Our business is also subject to fluctuations due to seasonality and adverse weather. The spring and summer months have traditionally had higher sales volume than other periods of the year. Timing of holidays, severe winter weather, hurricanes, thunderstorms and similar conditions may impact restaurant unit volumes in some of the markets where we operate and may have a greater impact should they occur during our higher volume months. As a result of these and other factors, our financial results for any given quarter may not be indicative of the results that may be achieved for a full fiscal year.


17




Thirteen Weeks Ended June 28, 2020 Compared to Thirteen Weeks Ended June 30, 2019
The following table presents, for the periods indicated, the condensed consolidated statement of operations (in thousands):
 
Thirteen Weeks Ended
 
June 28, 2020
 
% of
Revenue
 
June 30, 2019
 
% of
Revenue
 
$ Change
 
%
Change
Revenue
$
65,712

 
100.0
 %
 
$
113,132

 
100.0
%
 
$
(47,420
)
 
(41.9
)%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
15,410

 
23.5

 
29,174

 
25.8

 
(13,764
)
 
(47.2
)
Labor
17,337

 
26.4

 
38,854

 
34.3

 
(21,517
)
 
(55.4
)
Operating
10,720

 
16.3

 
15,897

 
14.1

 
(5,177
)
 
(32.6
)
Occupancy
7,097

 
10.8

 
8,152

 
7.2

 
(1,055
)
 
(12.9
)
General and administrative
4,774

 
7.3

 
5,868

 
5.2

 
(1,094
)
 
(18.6
)
Marketing
365

 
0.6

 
1,544

 
1.4

 
(1,179
)
 
(76.4
)
Restaurant pre-opening
278

 
0.4

 
1,182

 
1.0

 
(904
)
 
(76.5
)
Legal settlement

 

 
775

 
0.7

 
(775
)
 
(100.0
)%
Impairment and closed restaurant costs
1,782

 
2.7

 
216

 
0.2

 
1,566

 
*

Gain on insurance settlements
(1,000
)
 
(1.5
)
 

 

 
(1,000
)
 
*

Depreciation and amortization
4,895

 
7.3

 
5,124

 
4.5

 
(229
)
 
(4.5
)
Total costs and expenses
61,658

 
93.8

 
106,786

 
94.4

 
(45,128
)
 
(42.3
)
Income (loss) from operations
4,054

 
6.2

 
6,346

 
5.6

 
(2,292
)
 
(36.1
)
Interest expense, net
153

 
0.3

 
23

 

 
130

 
*

Income (loss) before income taxes
3,901

 
5.9

 
6,323

 
5.6

 
(2,422
)
 
(38.3
)
Income tax (benefit) expense
(601
)
 
(1.0
)
 
78

 
0.1

 
(679
)
 
*

Net income (loss)
$
4,502

 
6.9
 %
 
$
6,245

 
5.5
%
 
$
(1,743
)
 
(27.9
)%
 
 
 
 
 
 
 
 
 
 
 
 
* Not meaningful
 
 
 
 
 
 
 
 
 
 
 
Revenue. Revenue decreased $47.4 million, or 41.9%, to $65.7 million for the thirteen weeks ended June 28, 2020 from $113.1 million for the comparable period in 2019. Sales in the second quarter of 2020 were negatively impacted by a decline in customer traffic as a result of COVID-19, including the loss of 117 operating weeks due to temporary closures of nine restaurants, as well as the loss of 52 operating weeks due to stores closed during fiscal year 2019. The Company transitioned to an off-premise only operating model at the end of first quarter of 2020 and reopened its dining rooms to varying degrees of operating capacity during the second quarter of 2020. For the second quarter of 2020 off-premise sales were approximately 60% of total revenue.
Comparable restaurant sales decreased 39.0% for the thirteen weeks ended June 28, 2020 compared to the thirteen weeks ended June 30, 2019. The decrease in comparable sales was primarily driven by a 42.8% decrease in average weekly customers, partially offset by a 3.8% increase in average check. The comparable restaurant sales by month, sequentially, during the second quarter decreased: 55.2%, 44.8% and 21.6%.
Cost of Sales. Cost of sales as a percentage of revenue decreased to 23.5% during the thirteen weeks ended June 28, 2020 from 25.8% during the same period in 2019, primarily as a result of switching to a limited menu and eliminating the complimentary buffet style chips and salsa, “Nacho Car”, partially offset by 125 basis points increase in the cost of beef.
Labor Costs. Labor costs as a percentage of revenue decreased to 26.4% during the thirteen weeks ended June 28, 2020 from 34.3% during the comparable period in 2019, as a result of furloughing a substantial number of hourly employees as well as store management personnel to right-size our operations as the Company transitioned to an off-premise only operating model. As of the end of the second quarter of 2020, the Company rehired approximately 44% of furloughed management employees and approximately 65% of furloughed hourly employees. Hourly labor rate inflation in comparable stores was approximately 3.1%.
Operating Costs. Operating costs as a percentage of revenue increased to 16.3% during the thirteen weeks ended June 28, 2020 from 14.1% during the comparable period in 2019, primarily driven by increases in delivery service charges of approximately 170 basis points and to-go supplies of approximately 130 basis points as a result of the growth in our off-premise business as well as sales deleverage of fixed restaurant operating expenses.
Occupancy Costs. Occupancy costs as a percentage of revenue increased to 10.8% during the thirteen weeks ended June 28, 2020 from 7.2% during the comparable period in 2019, primarily as a result of sales deleverage of fixed occupancy expenses.


18




General and Administrative Expenses. General and administrative expenses decreased to $4.8 million for the thirteen weeks ended June 28, 2020 as compared to $5.9 million for the same period in 2019. The decline was primarily driven by a $1.3 million decrease in management salaries, stock compensation and bonuses as a result of furloughing certain corporate employees and temporarily reducing pay for the remaining employees during the second quarter of 2020. This decrease was partially offset by higher information technology and professional services costs, suspension of quick pay vendor rebates and increases in certain non-recurring charges.
Restaurant Pre-opening Costs. Restaurant pre-opening costs decreased to $0.3 million for the thirteen weeks ended June 28, 2020 as compared to $1.2 million for the same period in 2019 due to a postponement of all new store openings for the remainder of fiscal 2020.
Marketing. Marketing expense as a percentage of revenue decreased to 0.6% during the thirteen weeks ended June 28, 2020 from 1.4% during the comparable period in 2019, primarily due to the suspension of the Company’s national-level marketing initiatives in response to COVID-19 while relying on more cost effective organic local store digital marketing efforts.
Impairment and closed restaurant costs. Closed restaurant costs increased to $1.8 million during the thirteen weeks ended June 28, 2020 from $0.2 million during the comparable period in 2019 primarily due to the nine stores that were temporarily closed due to COVID-19 at the end of the first quarter of 2020. These charges include rent expense, utility and insurance costs.
Gain on insurance settlements. During the second quarter of 2020, the Company received a one-time insurance settlement in the amount of $1.0 million under its trade name restoration insurance policy.
Depreciation and Amortization. Depreciation and amortization costs decreased $0.2 million to $4.9 million during the thirteen weeks ended June 28, 2020 from $5.1 million during the comparable period in 2019 primarily due to a decrease in depreciation related to closed stores.
Income tax (benefit) expense. We recorded an income tax benefit of $0.6 million during the thirteen weeks ended June 28, 2020 compared to an expense of $0.1 million during the comparable period in 2019. The tax benefit was primarily due to a projected annual net loss as compared to net income last year as well as a tax benefit from the revaluation of deferred tax assets due to an administrative correction of the depreciation recovery period for qualified improvement property and the reinstatement of the net operating loss carryback as a result of the CARES Act. The Company believes that it will realize all of the deferred tax assets and, therefore, no valuation allowance is required at this time.
Net Income. As a result of the foregoing, net income was $4.5 million during the thirteen weeks ended June 28, 2020 as compared to $6.2 million during the comparable period in 2019.


19




Twenty-Six Weeks Ended June 28, 2020 Compared to Twenty-Six Weeks Ended June 30, 2019
The following table presents, for the periods indicated, the condensed consolidated statement of operations (in thousands):
 
Twenty-Six Weeks Ended
 
June 28, 2020
 
% of
Revenue
 
June 30, 2019
 
% of
Revenue
 
Change
 
%
Change
Revenue
$
160,212

 
100.0
 %
 
$
215,243

 
100.0
%
 
$
(55,031
)
 
(25.6
)%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
39,972

 
24.9

 
54,889

 
25.5

 
(14,917
)
 
(27.2
)
Labor
50,917

 
31.8

 
75,553

 
35.1

 
(24,636
)
 
(32.6
)
Operating
25,305

 
15.8

 
30,456

 
14.1

 
(5,151
)
 
(16.9
)
Occupancy
15,083

 
9.4

 
16,134

 
7.5

 
(1,051
)
 
(6.5
)
General and administrative
10,494

 
6.6

 
12,035

 
5.6

 
(1,541
)
 
(12.8
)
Marketing
1,374

 
0.9

 
2,995

 
1.4

 
(1,621
)
 
(54.1
)
Restaurant pre-opening
1,138

 
0.7

 
1,900

 
0.9

 
(762
)
 
(40.1
)
Legal settlement

 

 
775

 
0.4

 
(775
)
 
(100.0
)%
Impairment and closed restaurant costs
20,555

 
12.8

 
588

 
0.3

 
19,967

 
*

Gain on insurance settlements
(1,000
)
 
(0.6
)
 

 

 
(1,000
)
 
*

Depreciation and amortization
10,184

 
6.3

 
10,201

 
4.7

 
(17
)
 
(0.2
)
Total costs and expenses
174,022

 
108.6

 
205,526

 
95.5

 
(31,504
)
 
(15.3
)
Income (loss) from operations
(13,810
)
 
(8.6
)
 
9,717

 
4.5

 
(23,527
)
 
*

Interest expense, net
205

 
0.1

 
62

 

 
143

 
*

Income (loss) before income taxes
(14,015
)
 
(8.7
)
 
9,655

 
4.5

 
(23,670
)
 
*

Income tax (benefit) expense
(6,113
)
 
(3.8
)
 
193

 
0.1

 
(6,306
)
 
*

Net income (loss)
$
(7,902
)
 
(4.9
)%
 
$
9,462

 
4.4
%
 
$
(17,364
)
 
*

 
 
 
 
 
 
 
 
 
 
 
 
* Not meaningful
 
 
 
 
 
 
 
 
 
 
 
Revenue. Revenue decreased $55.0 million, or 25.6%, to $160.2 million