UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K10-K/A
(Amendment No. 1)
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
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| ¨ | 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)
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| DELAWARE | | 20-5717694 |
(State of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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1623 TOOMEY ROAD AUSTIN, TEXAS | | 78704 |
| (Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (512) 473-2783
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Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | | Nasdaq Stock Market LLC |
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or a emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check One):
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| Large accelerated filer | | ¨ | | Accelerated filer | þ | þEmerging growth company | ¨
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| Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | | Smaller reporting company | | ¨ |
| | | | Emerging growth company | | ¨
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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 þ
As of June 23, 2017 (the last business day of our most recently completed second fiscal quarter), the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $364 million.
The number of shares of the registrant’s common stock outstanding at March 7,April 2, 2018 was 16,965,910.
Table of Contents
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Item 1. | | |
Item 1A. | | |
Item 1B. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 5. | | |
Item 6. | | |
Item 7. | | |
Item 7A. | | |
Item 8. | | |
Item 9. | | |
Item 9A. | | |
Item 9B. | | |
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| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| Item 15. | | |
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SIGNATURES | |
Forward-Looking StatementsEXPLANATORY NOTE
This annual reportChuy's Holdings, Inc. (the “Company,” “we,” “us,” or “our”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment No. 1”) to amend our Annual Report on Form 10-K contains forward-looking statementsfor the year ended December 31, 2017, originally filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2018 (the “Original Form 10-K”), to include the information required by Items 10 through 14 of Part III of Form 10-K. This information was previously omitted from the Original Form 10-K in reliance on General Instruction G(3) to Form 10-K, which permits the information in the above referenced items to be incorporated in the Form 10-K by reference from our definitive proxy statement if such statement is filed no later than 120 days after our fiscal year-end. We are filing this Amendment No. 1 to provide the information required in Part III of Form 10-K because a definitive proxy statement containing such information will not be filed by the Company within 120 days after the meaningend of the Private Securities Litigation Reformfiscal year covered by the Form 10-K.
Pursuant to the rules of the SEC, Part IV, Item 15 has also been amended to contain the currently dated certifications from the Company’s principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 1995. These2002. The certifications of the Company’s principal executive officer and principal financial officer are attached to this Amendment No. 1 as Exhibits 31.1 and 31.2. Because no financial statements reflect the current views of our senior managementhave been included in this Amendment No. 1 and this Amendment No. 1 does not contain or amend any disclosure with respect to future eventsItems 307 and our financial performance. These statements include forward-looking statements with respect to our business308 of Regulation S-K, paragraphs 3, 4 and industry in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes5 of the federal securities laws or otherwise.
Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, butcertifications have been omitted. Additionally, we are not limitedincluding the certificate under Section 906 of the Sarbanes-Oxley Act of 2002 as no financial statements are being filed with this Form 10-K/A.
This Amendment No. 1 does not amend any other information set forth in the Original Form 10-K, and we have not updated disclosures included therein to reflect any subsequent events. This Amendment No. 1 should be read in conjunction with the Original Form 10-K and with our filings with the SEC subsequent to the following:
the success of our existing and new restaurants;
our ability to identify appropriate sites and develop and expand our operations;
our ability to manage our growth effectively;
we operate most of our restaurants under long-term leases which we would be obligated to perform even if we closed our restaurants;
we may not be able to renew leases;
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, particularly as we are no longer an emerging growth company;
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 may be suspended or discontinued;
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.
Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements. The foregoing factors should not be construed as exhaustive. 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 Form 10-K reflect our views as of the date of this annual report with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. You should not place undue reliance on these forward-looking statements and you should carefully consider all of the factors identified in this report that could cause actual results to differ. We assume no obligation to update these forward looking statements, except as required by law.
Basis of Presentation
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 consisted of 53 weeks and our 2016 and 2015 fiscal years each consisted of 52 weeks. Fiscal years are identified in this annual report according to the calendar year in which the fiscal year ends. For example, references to “2017,” “fiscal 2017,” “fiscal year 2017” or similar references refer to the fiscal year ending December 31, 2017.
PART I
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.
III
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ITEM 1.10. | BUSINESSDIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
General
Chuy’s is a fast-growing, full-service restaurant concept offering a distinct menu of authentic, freshly-prepared MexicanThe following table sets forth certain information about our executive officers and Tex-Mex inspired food. We were founded in Austin, Texas in 1982 and,directors as of December 31, 2017, we operated 91 Chuy’s restaurants across 19 states, with an average unit volume of $4.4 million for our 70 comparable restaurants for the twelve months ended December 31, 2017. Our restaurants haveApril 2, 2018:
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| NAMES | | AGE | | POSITIONS |
| Steve Hislop | | 58 | | Director, President and Chief Executive Officer (1) |
| Jon Howie | | 50 | | Vice President and Chief Financial Officer |
| Michael Hatcher | | 57 | | Vice President of Real Estate and Development |
| John Zapp | | 65 | | Chairman of the Board, Director (1) |
| Starlette Johnson | | 54 | | Director (2)(4)(6) |
| Saed Mohseni | | 55 | | Director (3)(4)(5)(6) |
| Ira Zecher | | 65 | | Director (3)(4)(5) |
| Randall M. DeWitt | | 59 | | Director (2)(5) |
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| (1) | Class II Director with a term expiring at the 2020 annual meeting. |
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| (2) | Class III Director with a term expiring at the 2018 annual meeting. |
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| (3) | Class I Director with a term expiring at the 2019 annual meeting. |
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| (4) | Member of audit committee. |
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| (5) | Member of compensation committee. |
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| (6) | Member of nominating and corporate governance committee. |
Executive Officers Biographies
Steve Hislop has served as President, Chief Executive Officer and 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. 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 believe our employees are a cornerstonemember of our cultureboard of directors since July 2007. From July 2006 through June 2007, Steve was President and set the tone for a fun, family-friendly atmosphere with attentive service. We believe the Chuy’s culture is oneChief Executive Officer of our most valuable assets, and we are committedSam Seltzer Steak House. Prior to preserving and continually investing in our culture and our customers’ restaurant experience.
Our core menu was established using recipes from family and friends of our founders, and has remained relatively unchanged over the years. We offer the same menu during lunch and dinner, which includes enchiladas, fajitas, rellenos, tacos, burritos, combination platters and daily specials, complemented by a variety of appetizers, soups and salads. Each of our restaurants also offers a variety of homemade sauces, including the signature Hatch green chile, Boom-Boom and creamy jalapeño sauces, all of which we make from scratch daily in each restaurant. These sauces are a key element of our offering and provide our customers with an added ability to customize their orders. Our menu offers considerable value to our customers, with our average check of $14.75 as of December 31, 2017, which we believe is on the lower end of our casual dining peer group. We also offer a full-service bar in all of our restaurants providing our customers a wide variety of beverage offerings, featuring a selection of specialty cocktails including our signature on-the-rocks margaritas made with fresh, hand-squeezed lime juice and the King's Punch, a made-to-order, hand-shaken rum cocktailthat, Steve served in our signature shaker. The bar represents an important aspect of our concept, where customers frequently gather prior to being seated. For the twelve months ended December 31, 2017, alcoholic beverages constituted 18.4% of our total restaurant sales.
We strive to create a unique and memorable customer experience at each of our locations. While the layout in each of our restaurants varies, we maintain distinguishable elements across our locations, including hand-carved, hand-painted wooden fish imported from Mexico, a variety of vibrant Mexican folk art, a “Nacho Car” that provides complimentary chips, salsa and chile con queso in the trunk of a classic car, vintage hubcaps hanging from the ceiling, colorful hand-made floor and wall tile and festive metal palm trees. Including patio space, our restaurants range in size from 5,300 to 12,200 square feet, with seating for approximately 225 to 400 customers. Nearly all of our restaurants feature outdoor patios. We design our restaurants to have flexible seating arrangements that allow us to cater to families and parties of all sizes. Our brand strategy of having an “unchained” look and feel allows our restaurants to establish their own identity and provides us with a flexible real estate model. Our site selection process is focused on conversions of existing restaurants as well as new ground-up prototypes in select locations. Our restaurants are open for lunch and dinner seven days a week. We serve approximately 5,800 customers per location per week or 303,000 customers per location per year, on average, by providing high-quality, freshly prepared food at a competitive price point. We believe that many of Chuy’s frequent customers visit one of our restaurants multiple times per week.
Our Business Strengths
Over our 35-year operating history, we have developed and refined the following strengths:
Fresh, Authentic Mexican and Tex-Mex Inspired Cuisine. Our goal is to provide unique, authentic Mexican and Tex-Mex inspired food using only the freshest ingredients. We believe we serve authentic Mexican and Tex-Mex inspired food based on our recipes, ingredients, cooking techniques and food pairings, which originated from our founders’ friends and families from Mexico, New Mexico and Texas. Every day in each restaurant, we roast and hand pull whole bone-in chicken breasts, hand roll fresh tortillas, squeeze fresh lime juice and prepare fresh guacamole from whole avocados. In addition, we make all ten of our homemade sauces daily using high-quality ingredients. We believe this commitment to made-from-scratch, freshly prepared cooking results in great tasting, high-quality food, a sense of pride among our restaurant employees and loyalty among our customers. Some of our kitchen managers travel to Hatch, New Mexico every summer to hand-select batches of our green chiles. We believe our commitment to serving high-quality food is also evidenced by serving only Choice quality beef and fresh ingredients. We believe our servers and kitchen staff are highly proficient in executing the core menu and capable of satisfying large quantities of custom orders, as the majority of our orders are customized.
Considerable Dining Value with Broad Customer Appeal. We are committed to providing value to our customers through offering generous portions of flavorful Mexican and Tex-Mex inspired dishes using fresh, high-quality ingredients. We believe our menu offers a considerable value proposition to our customers, with our average check of $14.75 as of December 31, 2017, which we believe is on the lower end of our casual dining peer group. Through our training programs, we train our employees to make sure that each plate is prepared according to our presentation and recipe standards.
Although our core demographic is ages 21 to 44, we believe our restaurants appeal to a broad spectrum of customers and will continue to benefit from trends in consumers’ preferences. We believe consumers are craving bold, spicy and flavorful foods, like those featured in our core offering. Additionally, we believe our brand appeals to a wide demographic and will continue to benefit from the growing demand for fresh, authentic Mexican and Tex-Mex inspired food and a fun, festive dining experience. We believe we are also an attractive venue for families and other large parties, and consider some of our restaurants to be destination locations, drawing customers from as far as 30 miles away. We locate our restaurants in high-traffic locations to attract primarily local patrons with limited reliance on business travelers.
Upbeat Atmosphere Coupled with Irreverent Brand Helps Differentiate Concept. As stated in our motto “If you’ve seen one Chuy’s, you’ve seen one Chuy’s!” each of our restaurants is uniquely designed. However, most share a few common elements—hand-carved, hand-painted wooden fish, vintage hubcaps hanging from the ceiling, colorful hand-made floor and wall tile, palm trees hand-crafted from scrap metal and a variety of colorful Mexican folk art. Much of this décor, including all of the wooden fish and painted tiles, is sourced from vendors in Mexican villages that have partnered with us for decades. Additionally, virtually all restaurants during weekday happy hours feature a complimentary self-serve “Nacho Car,” a hollowed-out, customized classic car trunk filled with fresh chips, salsa, chile con queso and more.
We believe these signature elements, combined with attentive service from our friendly and energetic employees create an upbeat ambience with a funky, eclectic and somewhat irreverent atmosphere. Our restaurants feature a fun mix of rock and roll rather than traditional Mexican-style music, which we believe helps to provide an energetic customer experience. We also believe that each restaurant reflects the character and history of its individual community. Many of our restaurants have added unique, local elements such as a special wall of photos featuring customers with their dogs. We believe this has allowed our customers to develop a strong sense of pride and ownership in their local Chuy’s.
Deep Rooted and Inspiring Company Culture. 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 restaurant experience. Since our founding in 1982, we believe we have developed close personal relationships with our customers, employees and vendors. We emphasize a fun, passionate and authentic culture and support active social responsibility and involvement in local communities. We regularly sponsor a variety of community events including our annual Chuy’s Children Giving to Children Parade and other local charitable events. We believe our employees and customers share a unique energy and passion for our concept. We believe these characteristics contribute to our favorable annual employee turnover rate at our comparable restaurants and our goal of promoting 40% of restaurant-level managers from within, as well as our solid base of repeat customers.
In order to retain our unique culture as we grow, we invest significant time and capital into our training programs. We devote substantial resources to identifying, selecting and training our restaurant-level employees. We believe our focus on cultural training is a core aspect of our Company and reinforces our commitment to the Chuy’s brand identity. In conjunction with our training activities, we hold “Culture Clubs” 15 times or more per year, as a means to fully impart the Chuy’s story through personal appearances by our founders.
Flexible Business Model with Industry Leading Unit Economics. We have a long standing track record of consistently producing high average unit volumes relative to competing Mexican concepts, as well as established casual dining restaurants. For the twelve months ended December 31, 2017, our comparable restaurants generated average unit volumes of $4.4 million, with our highest volume comparable restaurant generating approximately $9.0 million. We have opened and operated restaurants in Texas, the Southeast and the Midwest and achieved attractive rates of return on our invested capital, providing a strong foundation for expansion in both new and existing markets. Under our investment model, our new restaurant openings have historically required a net cash investment of approximately $2.3 million. For our new unit openings, we estimate the cost of a conversion or ground-up buildout will require a total cash investment of $2.6 million to $3.6 million (net of estimated tenant incentives of between zero and $1.0 million). We currently target a cash-on-cash return beginning in the third operating year of approximately 30.0%, and a sales to investment ratio of 1.9:1.
Experienced Management Team. We are led by a management team with significant experience in all aspects of restaurant operations. As of December 31, 2017 our senior management team has an average of approximately 33 years of restaurant experience and our 93 general managers have an average tenure at Chuy’s of approximately 6 years. In 2007, we hired our CEO and President, Steve Hislop. Mr. Hislop is the former President of O’Charley’s Restaurants, where he spent 19 years performing a variety of functions, including serving as Concept President and a member of the board of directors andof O’Charley’s Restaurants for 18 years, where he helped grow the business from 12 restaurants to a multi-concept company with 347 restaurants duringrestaurants. Steve currently serves on the board of directors of Not Your Average Joe's, Inc. and Silver Diner, Inc., which are privately held companies. The board concluded that Steve should serve on our board based upon his tenure. Since Mr. Hislop’s arrival in 2007, we
have accelerated our growth plan and opened 83 new restaurants, net of a relocation, as of March 7, 2018, and entered 18 new states.
Our Business Strategies
Pursue New Restaurant Development. We plan to identify and pursue major markets for expansion, where we believe we can achieve high unit volumes and attractive unit level returns, while at the same time backfilling in our existing markets to continue to build brand awareness. We believe the broad appealoperational expertise, knowledge of the Chuy’s concept, historical unit economicsrestaurant industry and flexible real estate strategy enhance the portabilityleadership experience.
Jon Howie has served as our Chief Financial Officer since August 2011 and Vice President since April of our concept and provide us opportunity for continued expansion. Currently, our new restaurant development primarily consists of ground up construction and conversions of existing structures.
We have built a scalable infrastructure and have grown our restaurant base through a challenging economic environment. In 2015, we opened ten new restaurants, four in new markets and six backfilling existing markets. We opened twelve new restaurants in 2016, one in a new market and eleven backfilling existing markets. We opened eleven new restaurants in 2017, three in new markets and eight backfilling existing markets. Our restaurants opened since 2001 that have been in operations for more than three years have generated average cash-on-cash returns of more than 30.0% in the third year of operations. During 2018, we plan2013. From March 2007 to open a total of eight to twelve restaurants for the year.
Deliver Consistent Comparable Restaurant Sales Through Providing High-Quality Food and Service. We believe we will be able to generate comparable restaurant sales growth by consistently providing an attractive price/value proposition for our customers with excellent service in an upbeat atmosphere. We remain focused on delivering freshly prepared, authentic, high-quality Mexican and Tex-Mex inspired cuisine at a considerable value to our customers. Though the core menu will remain unchanged, we will continue to explore potential additions as well as limited time food and drink offerings. Additionally, we will continue to promote our brand and drive traffic through local marketing efforts, social media and charity events suchJuly 2011, Jon served as the Chuy’s Children GivingChief Financial Officer of Del Frisco’s Restaurant Group, LLC. Prior to Children Parade,that, he served for five years as well as our line of eclectic t-shirts.
We prioritize customer service in our restaurants,Controller and will continuewas then promoted to invest significantly in ongoing training of our employees. In addition to our new manager training program and frequent “Culture Clubs,” 20 to 24 of our trainers are dispatched to open new restaurants and ensure a solid foundation of customer service, food preparation and our cultured environment. We believe these initiatives will help enhance customer satisfaction, minimize wait times and help us serve our customers more efficiently during peak periods, which we believe is particularly important at our restaurants that operate at or near capacity.
Leverage Our Infrastructure. In preparation for our new restaurant development plan, we have made investments in our infrastructure over the past several years. We believe we now have the corporate and restaurant-level supervisory personnel in place to support our growth plan for the foreseeable future without significant additional investments in infrastructure. Therefore, we believe that as the restaurant base grows, our general and administrative costs will increase at a slower growth rate than our revenue.
Real Estate
As of March 7, 2018, we leased 101 locations, of which 82 are free-standing restaurants and 19 are end-cap or in-line restaurants in Class A locations. Of these locations, ten are scheduled to open by the end of 2018. End-cap restaurants are highly visible locations at oneChief Accounting Officer of the endsLone Star Steakhouse & Saloon, Inc. Jon is a certified public accountant and prior to joining Lone Star Steakhouse & Saloon, Inc. was employed as an audit senior manager with Grant Thornton, LLP for one year and served at Ernst & Young LLP for 10 years where he held various audit positions, including audit senior manager. At Grant Thornton and Ernst & Young, he served as an accounting and business advisor to both private and public companies and advised a number of a retail development whereas in-line restaurants are locations that are between multiple retail locations within a development. Class A locations are upscale propertiesthese companies in conjunction with easily identifiable locationstheir initial and convenient access that are surrounded by other upscale properties. Including patio space, our restaurants range in size from approximately 5,300 to 12,200 square feet, averaging approximately 8,600 square feet with seating capacity for approximately 225 to 400 customers. Since the beginning of 2008 through March 7, 2018, we have opened 83 new restaurants, net of a relocation. Since our inception in 1982, we have only moved three locations and closed three locations. In 2016, we closed and moved our Charlotte, North Carolina location, our first closure or relocation since 2004. All of our leases provide for base (fixed) rent, plus the majority provide for additional rent based on gross sales (as defined in each lease agreement) in excess of a stipulated amount, multiplied by a stated percentage. A significant percentage of our leases also provide for periodic escalation of minimum annual rent either based upon increases in the Consumer Price Index or a pre-determined schedule. Typically, the initial lease terms of our leases are 10 or 15 years in length with two to three, five-year extension options. The initial terms of our leases currently expire between 2019 and 2039. We are also generally obligated to pay certain real estate taxes, insurances, common area maintenance charges and various other expenses related to the properties. Our corporate headquarters is also leased and is located at 1623 Toomey Road, Austin, Texas 78704.secondary public offerings.
Site Selection Process
We have developed a targeted site acquisition and qualification process incorporating management’s experienceMichael Hatcher has served as well as extensive data collection, analysis and interpretation. We are actively developing restaurants in both new and existing markets, and we will continue to expand in selected regions throughout the U.S. Our Director of Real Estate and Development works with a master broker who is responsible for identifying and working with local brokers to conduct preliminary research regarding possible development locations. This master broker also assists in site selection and market research. The preliminary research includes an analysis of traffic patterns, parking, access, demographic characteristics, population density, hotel occupancy, major employers, restaurant sales, level of affluence and current or expected co-retail and restaurant tenants. Our Director of Real and Estate Development and the master broker then present potential sites to our Vice President of Real Estate and Development. IfDevelopment since November 2009. Michael joined Chuy’s as a restaurant manager in 1987 and served as General Manager from 1989 to 2002. He was Director of Purchasing and Real Estate from 2002 to 2009.
Director Biographies
John Zapp, one of our financial criteria forfounders, has served as a member of our board since November 2006. He served as Co-Chairman of the site are satisfied,board from October 2013 to April 2017 and since April 2017 has served as Chairman of the board. John has also been a restaurant owner and operator since 1976. The board concluded that John should serve on our Viceboard based upon his experience as an investor and operator of restaurant businesses as well as his intimate knowledge of our operations and culture.
Starlette Johnson has served as a member of our board since September 2012. Since 2012, Starlette has served as an independent consultant to private equity funds, and to companies in the restaurant and hospitality industries. From October 2015 to October 2016, Starlette served as President and Directors of Operations and Chief Executive Officer visitof Twin Restaurant Holdings, the siteparent company of the Twin Peaks restaurant chain. Additionally, she served as President and Chief Operating Officer, as well as a Director, of Dave & Buster’s, Inc. from 2007 to 2010. Starlette joined Dave & Buster’s as Chief Strategic Officer in 2006. Prior to joining Dave & Buster’s, Starlette worked at Brinker International, where she held positions of increasing responsibility, including serving as the Executive Vice President and Chief Strategic Officer. Starlette served as a member of the board of directors for Tuesday Morning, Inc. from 2008 to 2013, during which time she served on the Audit Committee and the Nominating/Governance Committee. Starlette has served on the board of Bojangle’s (NASDAQ: BOJA) since March 2016, and is chair of the Audit Committee. Since 2015, she has also served as the chairman of the board for SusieCakes, LLC., a privately held bakery. In addition, Starlette is a member of
the Advisory Board for the Hospitality & Tourism Program at Virginia Tech and serves on the Pamplin College of Business Cabinet at Virginia Tech. Starlette received a B.S. in Finance from Virginia Tech and an M.B.A. from The Fuqua School of Business at Duke University. The board concluded that Starlette should serve on our management negotiates the lease. The key criteria we have for a site is that the population within a three mile radiusboard based upon her experience as an executive and board member and her knowledge of the restaurant industry.
Saed Mohsenihas served as a high concentrationmember of our target demographic,board since September 2012. Saed served as the President and Chief Executive Officer and a director of Bob Evans Farms, Inc. from January 2016 until May 2017. In May 2017, he became the Chief Executive Officer of Bob Evans Restaurants LLC. Saed has more than 30 years of management experience in the restaurant industry. Prior to joining Bob Evans Farms, he served as Director, President and Chief Executive Officer of Bravo Brio Restaurant Group, Inc., the parent company of BRAVO! Cucina Italiana, Bon Vie Bistro, and BRIO Tuscan Grille restaurant chains, from 2007 to 2015. He assumed the additional role of President in 2009 and led the company through the IPO process in 2010. Prior to joining Bravo Brio, Saed worked at McCormick & Schmick for 21 years, where he held positions of increasing responsibility, including serving as a Director from 2004 to 2007 and as Chief Executive Officer from 2000 to 2007 and led the company through the IPO process in 2004. Saed attended Portland State University and Oregon State University. The board concluded that Saed should serve on our board based upon his experience as an executive and board member and his knowledge of the restaurant industry.
Ira Zecher has served as a member of our board since June 2011. Ira has been a managing member of ILZ, LLC, an accounting consulting firm since 2010 and has served as a director, audit committee chairman and nominating and corporate governance committee member of the board for The Habit Restaurants, Inc. since August 2014. He previously served as a director, audit committee chairman and compensation committee member of the board of Norcraft Companies, Inc. from October 2013 to May 2015. Prior to joining the Chuy’s board, Mr. Zecher was with Ernst & Young LLP, a registered public accounting firm, for over 36 years until his retirement as a partner in 2010. From 1986 to 2010, he served as a senior transaction advisory services partner and Far East private equity leader for Ernst & Young, where he advised clients on mergers and acquisitions across a broad range of industries. Prior to joining the transaction advisory services group, Ira provided accounting, audit and business-advisory services to both public and private clients. He received his Bachelor's degree from Queens College of the City of New York. He is also a certified public accountant, a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. He also completed the Executive Program of the Kellogg School of Management at Northwestern University. From 2010 to 2013, he taught in the Graduate Accounting program at Rutgers, the State University of New Jersey. The board concluded that Ira should serve on our board based upon his extensive professional accounting and financial expertise, which allow him to provide key contributions to the Board on financial, accounting, corporate governance and strategic matters.
Randall M. DeWitt has served as a member of our board since October 2016. Randall is persons ages 21a well-known restaurant executive with over 22 years of restaurant experience. Randall is the founder and has been the chief executive officer of Front Burner Restaurants since 1994. Front Burner currently has ten different concepts and is known for developing innovative restaurant concepts that span the fast casual, casual and upscale casual dining segments. Front Burner operates, among others, Whiskey Cake, Velvet Taco, Sixty Vines, Mexican Sugar, and The Ranch at Las Colinas. Prior to 44founding Front Burner, Randall worked for ten years in commercial real estate development and personssales. The board concluded that Randy should serve on our board based on his operational and business development experience within the restaurant industry.
Board of Directors
Our board of directors currently consists of six directors. Five of these directors were elected by our stockholders at our annual meetings of stockholders. Mr. DeWitt was appointed to the board to fill a vacancy.
Our bylaws provide that the authorized number of directors may be changed only by resolution of the board of directors, and our amended and restated certificate of incorporation divides our board into three classes with median income rangesstaggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election or until their earlier death, resignation or removal.
Our amended and restated certificate of incorporation provides that directors may only be removed for cause. To remove a director for cause, 66 2/3% of the voting power of the outstanding voting stock must vote as a single class to remove the director at an annual or special meeting. The certificate also provides that, if a director is removed or if a vacancy occurs due to either an increase in excessthe size of $60,000 per yearthe board or the death, resignation, disqualification or other cause, the vacancy will be filled solely by the affirmative vote of a majority of the remaining directors then in office, even if less than a quorum remain.
Director Independence
Our board of directors will review at least annually the independence of each director. During these reviews, the board will consider transactions and relationships between each director (and his or her immediate family and affiliates) and our Company and its management to determine whether any such transactions or relationships are inconsistent with a determination that dine out frequently. We also prefer locations with high visibility, especiallythe director is independent. This review will be based primarily on responses of the directors to questions in a new market,directors’ and ample surface parking spaces.officers’ questionnaire regarding employment, business, familial, compensation and other relationships with the Company and our management. Our board of directors has determined that each of Ira Zecher, Starlette Johnson, Saed Mohseni and Randall M. DeWitt are independent
within the meaning of the Nasdaq Marketplace Rules. As required by the Nasdaq Global Select Market, a majority of our directors are independent and our independent directors meet in regularly scheduled executive sessions at which only independent directors are present.
Corporate Governance
We seekbelieve that good corporate governance is important to identify sitesensure that, contributeas a public company, we will be managed for the long-term benefit of our stockholders. We and our board of directors have been reviewing the corporate governance policies and practices of other public companies, as well as those suggested by various authorities in corporate governance. We have also considered the provisions of the Sarbanes-Oxley Act and the rules of the SEC and the Nasdaq Global Select Market.
Based on this review, we have established and adopted, charters for the audit committee, compensation committee and nominating and corporate governance committee, as well as a code of business conduct and ethics applicable to all of our directors, officers and employees.
Board Committees
Our board of directors has three standing committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each committee are described below. Members will serve on these committees until their resignation or until otherwise determined by our board of directors.
Audit Committee
Our audit committee is a standing committee of our board of directors. The functions of our audit committee include:
appointing and determining the compensation for our independent registered public accounting firm;
establishing procedures for the receipt, retention and treatment of complaints regarding internal accounting controls; and
reviewing and overseeing our independent registered public accounting firm.
Our audit committee currently consists of Ira Zecher, Starlette Johnson and Saed Mohseni, with Ira Zecher serving as chairman. All of our audit committee members are independent as defined by Section 10A(m)(3) of the Securities Exchange Act of 1934 (the "Exchange Act") and the Nasdaq Marketplace Rules. Our audit committee charter also requires us to have at least one audit committee financial expert. Our board of directors has determined that Ira Zecher is an audit committee financial expert.
Our board of directors has adopted a written charter under which the audit committee operates. A copy of the charter, which satisfies the applicable standards of the SEC and the Nasdaq Global Select Market, is available on our website.
Compensation Committee
Our compensation committee is a standing committee of our board of directors. The compensation committee’s functions include:
reviewing and recommending to our “If you’ve seen one Chuy’s, you’ve seen one Chuy’s” vision, meaning no two restaurantsboard of directors the salaries and benefits for our executive officers;
recommending overall employee compensation policies; and
administering our equity compensation plans.
Our compensation committee currently consists of Ira Zecher, Randall M. DeWitt and Saed Mohseni, with Saed Mohseni serving as chairman. All members of our compensation committee are alike. As we do not have standardized restaurant requirementsindependent as defined by Section 10(c) of the Exchange Act, Rule 10C of the Exchange Act Rules and the Nasdaq Marketplace Rules.
Our board of directors has adopted a written charter under which the compensation committee operates. A copy of the charter, which satisfies the applicable standards of the SEC and the Nasdaq Global Select Market, is available on our website.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee is a standing committee of our board of directors. The functions of our nominating and corporate governance committee include:
identifying individuals qualified to serve as members of our board of directors;
recommending to our board nominees for our annual meetings of stockholders;
evaluating our board’s performance;
developing and recommending to our board corporate governance guidelines; and
providing oversight with respect to size, location or layout, we are able to be flexible in our real estate selection process. In linecorporate governance and ethical conduct.
Our nominating and corporate governance committee consists of Saed Mohseni and Starlette Johnson, with this strategy, we prefer to identify a combination of conversion sitesStarlette Johnson serving as well as ground-up prototypes.
Design
After identifying a lease site, we commence our restaurant buildout. We strive to create a unique and memorable customer experience at eachthe committee chairman. All members of our locations. Whilenominating and corporate governance committee are independent as defined by the layout in eachNasdaq Marketplace rules.
Our board of directors has adopted a written charter under which the nominating and corporate governance committee operates. A copy of the charter, which satisfies the applicable standards of the SEC and the Nasdaq Global Select Market, is available on our website.
Other Committees
Our board of directors may establish other committees as it deems necessary or appropriate from time to time.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions ("covered persons"). A current copy of the code is posted on our website, which is located at www.chuys.com. Any amendments to or waivers from a provision of our restaurants varies, we maintain certain distinguishablecode of conduct and ethics that applies to our covered persons and that relates to the elements across virtually all locations – hand-carved, hand-painted wooden fish imported from Mexico, a variety of vibrant Mexican folk art, a “Nacho Car”Item 406(b) of Regulation S-K will be disclosed on our website promptly following the date of such amendment or waiver.
Board Leadership Structure and Board’s Role in Risk Oversight
John Zapp serves as Chairman of our board of directors. We support separating the positions of Chief Executive Officer and Chairman to allow our Chief Executive Officer to focus on our day-to-day business, while allowing the Chairman to lead our board of directors in its fundamental role of providing advice to, and oversight of, management. Our board of directors recognizes the time, effort and energy that provides complimentary chips, salsa and chile con quesothe Chief Executive Officer is required to devote to his position in the trunk of a classic car, vintage hubcaps hanging from the ceiling, colorful hand-made floor and wall tile and festive metal palm trees. Nearly all of our restaurants feature outdoor patios. Additionally, our flexible seating arrangements allow us to cater to families and parties of all sizes including larger groups, which we believe is a key differentiator from other casual dining operators.
Our new restaurants are either ground-up prototypes or conversions. For our new unit openings, we estimate the cost of a conversion or ground-up buildout will require a total cash investment of $2.6 million to $3.6 million (net of estimated tenant incentives of between zero and $1.0 million). The flexibility of our concepts has enabled us to open restaurants in a wide variety of locations, including high-density residential areas and near shopping malls, lifestyle centers and other high-traffic locations. On average, it takes us approximately 14 to 18 months from identification of the specific site to opening the doors for business. In order to maintain consistency of food and customer servicecurrent business environment, as well as the unique atmosphere atcommitment required to serve as our restaurants, we have set processes and timelinesChairman, particularly as our board of directors’ oversight responsibilities continue to followgrow. Our board of directors also believes that this structure ensures a greater role for all restaurant openings.
The development and constructionthe non-management directors in the oversight of our new sitescompany and establishing priorities and procedures for the work of our board of directors.
While our amended and restated bylaws do not require that our Chairman and Chief Executive Officer positions be separate, our board of directors believes that having separate positions and having a non-employee director serve as our Chairman is the responsibility ofappropriate leadership structure for us at this time and demonstrates our real estate and development team. Several project managers are responsible for building the restaurants, and several staff members manage purchasing, budgeting, scheduling and other related administrative functions.
New Restaurant Development
We have opened 83 new locations, net of a relocation, since the beginning of 2008 through March 7, 2018 and our management believes we are well-positioned to continue this growth through our new restaurant pipeline, which includes locations currently under development. We maintain a commitment to capitalizing on opportunities and realizing efficiencies in our existing markets while also pursuing attractive locations in new markets. We seek to identify new markets in which we believe theregood corporate governance.
Risk is capacity for us to open multiple restaurants.
Restaurant Operations
We currently have eighteen supervisors that report directly to our three Director of Operations and Vice President of Operations who in turn reports to our Chief Executive Officer. Each supervisor oversees an average of approximately four to six restaurants. The staffing at our restaurants typically consists of a general manager, a kitchen manager and three to five assistant managers. In addition, each of our restaurants employs approximately 100 hourly employees.
Sourcing and Supply
We rely on two regional distributors, Labatt Foodservice ("Labatt") in Texas, Oklahoma, Louisiana and Colorado, and Performance Food Group (“PFG”) in the rest of the United States, and various suppliers to provide our beef, cheese, beans, soybean oil, beverages and our groceries. Our distributors deliver supplies to each restaurant two to three times each week. Our distributor relationshipsinherent with Labatt and PFG have been in place for approximately 15 and five years, respectively, and the distributors cover 41 and 50 locations, respectively, as of March 7, 2018. For our chicken products, we rely on two suppliers, one supplier for our Southeast
locations and one supplier for Texas, Oklahoma, Louisiana and Colorado. For our green chiles, we contract to buy through two suppliers located in New Mexico. Each restaurant, through its general manager and kitchen manager, purchases its produce locally. Changes in the price or availability of certain food products could affect the profitability of certain food items, our ability to maintain existing prices and our ability to purchase sufficient amounts of items to satisfy our customers’ demands.
We are currently under contract with our principal non-alcoholic beverage providers through 2018 and intend to renew these contracts. Our ability to arrange national distribution of alcoholic beverages is restricted by state law; however, where possible, we negotiate directly with spirit companies and/or regional distributors. We also contract with a third-party provider to source our cooking oil.
Food Safety
Providing a safe and clean dining experience for our customers is essential to our mission statement. We have taken steps to control food quality and safety risks, including implementing a training program for our kitchen staff, employees and managers focusing on food safety and quality assurance. In addition, to minimize the risk of food-borne illness, we have implemented a Hazard Analysis and Critical Control Points (“HACCP”) system for managing food safety and quality. We also consider food safety and quality assurance when selecting our distributors and suppliers. Our suppliers are inspected by federal, state and local regulators or other reputable, qualified inspection services, which helps ensure their compliance with all federal food safety and quality guidelines.
Building Our Brand
We believe our restaurants appeal to a broad spectrum of customers due to our freshly-prepared food and beverage offerings, attentive service and festive dining experience. Our target demographic is persons ages 21 to 44 and persons with median income ranges in excess of $60,000 per year that dine out frequently. We aim to build our brand image and awareness while retaining local neighborhood relationships by increasing the frequency of visits by our current customers and attracting new customers. We primarily foster relationships with local schools, businesses, sports teams and neighborhood associations through hosting tasting events and partnering in and sponsoring local charity events. Our marketing strategy also focuses on generating significant brand awareness at new restaurant openings.
Local Brand Building
A key aspect of our local restaurant marketing/branding strategy is developing community relationships. Our restaurant managers are closely involved in developing and implementing the majority of our local restaurant marketing/branding programs.
Since our founding in 1982, Chuy’s success has stemmed from close personal relationships with our customers, employees and vendors. We believe the Chuy’s culture, which emphasizes fun and authenticity while fostering social responsibility and involvement in local communities, is one of our most valuable assets,every business and we are committed to preserving and continually investing in it.
We regularly hold a variety of community events. During the winter holidays, we sponsor the Chuy’s Children Giving to Children Parade, which collects toys for Operation Blue Santa in Austin, Texas. Operation Blue Santa gives gifts and holiday meals to families in need in Central Texas. We participate in and sponsor several community events across all of our locations, specifically focusing on helping children’s charities. For example, we participate in the Give Kids the World and Something mAAgic Foundation event in Orlando, Florida, the Youth for Tomorrow Golf Classic in Northern Virginia, and the Vanderbilt Children's Hospital River of Hope Radiothon in Nashville, Tennessee. To celebrate one of our signature ingredients, the Hatch green chile, we hold an annual Green Chile Festival in all of our restaurants during the August and September harvest, with special menu items featuring Hatch chiles and promotional give-aways.
New Restaurant Openings
We have developed a marketing/branding strategy that we use in connection with new restaurant openings to help build local brand recognition and create a “buzz.” In new markets, we generally host a pre-opening party called a “Redfish Rally” after our emblematic redfish for our social media fans, influencers from the local community and food bloggers experiencing Chuy’s for the first time. During our “Redfish Rallies”, we serve our food and margaritas and give away free Chuy’s eclectic t-shirts. In addition to the “Redfish Rallies”, we employ a variety of pre-opening marketing initiatives such as issuing press releases, delivering free food to local businesses highlighting our defining differences, using social media channels, hosting a dog event to collect pictures for our “dog wall” and to collect money to benefit a local pet charity and food tasting through training lunches and dinners with local residents, media, community leaders and businesses.
We use the pre-opening period for our new restaurants as an opportunity to reach out to various media outlets as well as the local community. For our new and expanding markets, we retain local public relations partners to assist us with addressing the local market, establishing relationships with local charities, meeting local community leaders, identifying events for Chuy’s to be a part of and gaining brand recognition.
Social Media & E-Marketing
We have increased our social presence, which enables us to reach a significant number of people in a timely and targeted fashion at a fraction of the cost of traditional media. At a corporate level we utilize social media outlets such as Facebook, Twitter and Instagram to promote our brand. We have a local Facebook page for every restaurant location to engage with the community and enhance our local store marketing efforts. We also have an e-mail database for each location that allows us to send customers updates about events at their local Chuy’s.
Training and Employee Programs
We devote significant resources to identifying, selecting and training restaurant-level employees, with an approximately 20-week training program for all of our restaurant managers that includes an average of 11 weeks of restaurant training and eight to nine weeks of “cultural” training, in which managers observe our established restaurants’ operations and customer interactions. We typically have ten in-store trainers at each existing location who provide both front- and back-of-the-house training on site. We conduct comprehensive training programs for our management, hourly employees and corporate personnel. Our training program covers leadership, team building, food safety certification, alcohol safety programs, customer service philosophy training, sexual harassment training and other topics.
Our training process in connection with opening new restaurants has been refined over the course of our experience. Trainers oversee and conduct both service and kitchen training and are on site through the first two weeks of opening and remain on site for two to three additional weeks as needed and depending on unit volumes during the initial weeks. We have two front- and two back-of-the-house training coordinators, and these training coordinators remain on-site to manage the opening for approximately the same period as our other trainers. The lead and other trainers assist in opening new locations and lend support and introduce our standards and culture to the new team. We believe that hiring the best available team members and committing to their training helps keep retention high during the restaurant opening process.
Management Information Systems
We made significant improvements to our data processing and data security during fiscal year 2017. We completed the implementation of a new point-of-sale system ("POS"), which was rolled out to all of our restaurants during 2017. The goals of implementing a new POS system was to leverage our existing information technology infrastructure, to allow easy integrations from other business applications and provide for POS redundancy at the restaurants. POS processing at our restaurants includes payment of obligations, collection of cash, credit and debit card transactions and other processes and procedures. We use an enterprise back office software program in all of our locations. This program compiles our sales, accounts payable, payroll, inventory and purchasing information and communicates that information to our headquarters to provide visibility to restaurant level operations.
We accept credit cards as a method of payment at all of our restaurants. In an effort to provide the best security to our customers' credit card information, we implemented P2Pe solution, encryption platform, to ensure no credit card data is stored in our internal systems. This also included the installation of equipment that can also process smart payment cards, commonly referred to as EMV (Europay, Mastercard and Visa) for credit card processing. This implementation was performed by in-house and third party teams to ensure all equipment was installed in a manner consistent with Payment Card Industry Data Security Standard requirements and manufacturer recommendations. In addition, we deployed industry-leading switching and firewall protection at all company owned internet connections. This allowed us to increase our visibility into the use of our private network, and enhanced our ability to detect malicious or improper digital activity.
In 2018, we will implement an online ordering system which will allow us to expand our to-go sales. In addition we plan to invest in business intelligence technologies and data infrastructure, which will create efficiencies and simplification to our business operations.
Government Regulation
We are subject to numerous federal, state and local laws affecting our business. Each of our restaurants is subject to licensing and regulation byface a number of government authorities, which may include alcoholic beverage control, nutritional information disclosure, health, sanitation, environmental, zoning and public safety agenciesrisks as outlined in Item 1a. “Risk Factors” included in the state or municipality in whichCompany's Original Form 10-K. Management is responsible for the restaurantday-to-day management of risks we face, while our board of directors, as a whole and through our audit committee, is located.
For the twelve months ended December 31, 2017, 18.4%responsible for overseeing our management and operations, including overseeing its risk assessment and risk management functions. Our board of directors has delegated responsibility for reviewing our total restaurant sales were attributable to alcoholic beverages. Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county and municipal authorities, for licenses and permits to sell alcoholic beverages on the premises. Typically, licenses must be renewed annually and may be subject to penalties, temporary suspension or revocation for cause at any time. Alcoholic beverage control regulations impact many aspects of the daily operations of our restaurants, including the minimum ages of patrons and staff members consuming or serving these beverages, respectively; staff member alcoholic beverage training and certification requirements; hours of operation; advertising; wholesale purchasing and inventory control of these beverages; the seating of minors and the servicing of food within our bar areas; special menus and events, such as happy hours; and the storage and dispensing of
alcoholic beverages. State and local authorities in many jurisdictions routinely monitor compliance with alcoholic beverage laws. We are subject to “dram shop” statutes in most of the states in which we operate, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.
Various federal and state labor laws govern our operations and our relationships with our staff members, including such matters as minimum wages, breaks, overtime, fringe benefits, safety, working conditions and citizenship or work authorization requirements. We are also subject to the regulations of the U.S. Citizenship and Immigration Services and U.S. Customs and Immigration Enforcement. In addition, some states in which we operate have adopted immigration employment laws which impose additional conditions on employers. Even if we operate our restaurants in strict compliance with the laws, rules and regulations of these federal and state agencies, some of our staff members may not meet federal citizenship or residency requirements or lack appropriate work authorizations, which could lead to a disruption in our work force. Significant government-imposed increases in minimum wages, paid or unpaid leaves of absence, sick leave, and mandated health benefits, or increased tax reporting, assessment or payment requirements related to our staff members who receive gratuities, could be detrimental to the profitability of our restaurants operations. Further, we continue to assess the impact of federal health care legislation on our health care benefit costs. Our distributors and suppliers also may be affected by higher minimum wage and benefit standards, which could result in higher costs for goods and services supplied to us. In addition, while we carry employment practices insurance covering a variety of labor-related liability claims, a settlement or judgment against us that is uninsured or in excess of our coverage limitations could have a material adverse effect on our results of operations, liquidity, financial position or business.
We are or may become subject to laws and regulations requiring disclosure of calorie, fat, trans-fat, salt and allergen content. Several states and local jurisdictions have adopted or are considering various food and menu nutritional labeling requirements, many of which are inconsistent or are interpreted differently from one jurisdiction to another and many of which may be superseded by the new federal regulations under the Patient Protection and Affordable Care Act of 2010 ("PPACA") which are scheduled to go into effect on May 7, 2018. The PPACA federal legislation requires chain restaurants with 20 or more locations in the United States to comply with federal nutritional disclosure requirements. However, future regulatory action may result in changes to the federal nutritional disclosure requirements. For additional information, see “Risk Factors - Legislation and regulations requiring the display and provision of nutritional information for our menu offerings, and new information or attitudes regarding diet and health or adverse opinions about the health effects of consuming our menu offerings, could affect consumer preferences and negatively impact our results of operations.” While we believe our ability to adapt to consumer preferences is a strength of our concept, the effect of such labeling requirements on consumer choices, if any, is unclear at this time.
There is also a potential for increased regulation of food in the United States, such as requirements to maintain a HACCP system. HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption of the finished product. Many states have adopted legislation or implemented regulations which require restaurants to develop and implement HACCP Systems. Similarly, the United States Congress and the FDA continue to expand the sectors of the food industry that must adopt and implement HACCP programs. For example, the Food Safety Modernization Act (the “FSMA”) was signed into law in January 2011 and significantly expanded FDA’s authority over food safety. Among other requirements, the FSMA granted the FDA with authority to proactively ensure the safety of the entire food system, including through new and additional hazard analysis, food safety planning, increased inspections, and permitting mandatory food recalls. Although restaurants are specifically exempted from some of the requirements outlined in the FSMA and not directly implicated by other requirements, we anticipate that some of the FSMA provisions and FDA’s implementation of the requirements may impact our industry. We cannot assure you that we will not have to expend additional time and resources to comply with new food safety requirements either required by the FSMA or future federal food safety regulation or legislation. Additionally, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require us to take actions that could be costly for us or otherwise harm our business.
We are subject to a variety of federal and state environmental regulations concerning the handling, storage and disposal of hazardous materials, such as cleaning solvents, and the operation of restaurants in environmentally sensitive locations may impact aspects of our operations. During fiscal 2017, there were no material capital expenditures for environmental control facilities, and no such expenditures are anticipated.
Our facilities must comply with the applicable requirements of the Americans with Disabilities Act of 1990 (“ADA”) and related federal and state statutes. The ADA prohibits discrimination on the basis of disabilitypolicies with respect to public accommodationsrisk assessment and employment. Under the ADA and related federal and state laws, we must make accessrisk management to our new or significantly remodeled restaurants readily accessible to disabled persons. We must also make reasonable accommodations for the employmentaudit committee through its charter. Our board of disabled persons.
We have a significant number of hourly restaurant staff members who receive income from gratuities. We rely ondirectors has determined that this oversight responsibility can be most efficiently performed by our staff members to accurately disclose the full amount of their tip income and we base our FICA tax reporting on the disclosures provided to us by such tipped employees.
Intellectual Property
We believe that having distinctive marks that are registered and readily identifiable is an important factor in identifying our brand and differentiating our brand from our competitors. We currently own registrations from the United States Patent and Trademark Office (“USPTO”) for the following trademarks: Chuy’s; Chuy’s Mil Pescados Bar (stylized lettering); Chuy’s Green Chile Festival; Fish with sunglasses (our emblematic fish design); and Chuy’s Children Giving to Children Parade, which we have the right to use under our Parade Sponsorship agreement. We have also registered our chuys.com domain name. However,audit committee as a result of our settlement agreement with an unaffiliated entity, Baja Chuy’s, we may not use “Chuy’s” in Nevada, California or Arizona. An important part of our intellectual property strategy is the monitoring and enforcement of our rights in markets in which our restaurants currently exist or markets which we intend to enter in the future. We also monitor trademark registers to oppose the applications to register confusingly similar trademarks or to limit the expansion of the scope of goods and services covered by existing similar trademarks. We enforce our rights through a number of methods, including the issuance of cease-and-desist letters or making infringement claims in federal court.
Competition
The restaurant business is intensely competitiveits overall responsibility for providing independent, objective oversight with respect to food quality, price/value relationships, ambience, serviceour accounting and location,financial reporting functions, internal and is affected by many factors, includingexternal audit functions and systems of internal controls over financial reporting and legal, ethical and regulatory compliance. Our audit committee will regularly report to our board of directors with respect to its oversight of these areas.
Section 16(a) Beneficial Ownership Reporting Compliance
Compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s executive officers and directors and persons who own more than 10% of a registered class of its equity securities to file reports of ownership and changes in consumer tastesownership with the SEC. Officers, directors and discretionary spending patterns, macroeconomic conditions, demographic trends, weather conditions,greater than 10% stockholders are required by SEC rules to furnish the cost and availabilityCompany with copies of raw materials, labor and energy and government regulations. Our main competitors are full service concepts inall Section 16(a) forms they file.
Based solely on a review of the multi-location, casual dining segment in which we compete most directly for real estate locations and customers, including Texas Roadhouse, Cheddar’s Scratch Kitchen and BJ’s Restaurants. We also compete with other providerscopies of Tex-Mex and Mexican fare and adjacent segments, including casual and fast casual segments. We believe we compete favorably for consumers on our food quality, price/value and unique ambience and experience of our restaurants.
Seasonality
Our business is subject to seasonal fluctuations with restaurant sales typically higher during the spring and summer months. Adverse weather conditions during our most favorable months or periods may affect customer traffic. In addition, at nearly all of our restaurants we have outdoor seating, and the effects of adverse weather may impact the use of these areas and may negatively impact our revenues.
Employees
As of December 31, 2017, we had approximately 9,000 employees, including 94 corporate management and staff personnel, 650 restaurant level managers and 8,200 hourly employees. None of our employees are unionized or covered by a collective bargaining agreement. We believe that we have good relations with our employees.
Company Information
The Company was incorporated in Delaware in 2006. Our principal executive office is located at 1623 Toomey Road, Austin, Texas 78704 and our telephone number is 1-888-HEY-CHUY. Our website address is www.chuys.com. The information on our website is not incorporated by reference into this report.
The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on the Company’s website as soon as reasonably practicable after such material is electronically filed with, orforms furnished to the SecuritiesCompany and Exchange Commission ("SEC"). In addition, copies of the Company’s annual report willwritten representations received from the directors and executive officers, the Company believes that during 2017, all reports required to be made available, free of charge,filed by Section 16(a) were filed on written request.a timely basis except for one Form 4 that reported one transaction that was not reported on a timely basis for Mrs. Russell.
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ITEM 1A.Item 11. | RISK FACTORSEXECUTIVE COMPENSATION |
In evaluatingCompensation Discussion and Analysis
This compensation discussion provides an overview of our Company, you should consider carefully the following risk factors and the other information in this report, including our consolidated financial statements and related notes to those statements. If anyexecutive compensation program, together with a description of the following risks actually occur, our business, financial condition and operating results could be adversely affected.
Risks Relating to Our Business and Industry
Our financial results depend significantly uponmaterial factors underlying the success of our existing and new restaurants.
Future growth in our revenues and profits will depend on our ability to develop profitable new restaurants, maintain or grow sales and efficiently manage costs in our existing and new restaurants. As of December 31, 2017, we operated 91 restaurants, of which 21 restaurants are not considered comparable. The results achieved by these restaurants may not be indicative of longer-term performance or the potential market acceptance of restaurants in other locations.
The success of our restaurants revolves principally around customer traffic and average check per customer and customer experience. Significant factorsdecisions that might adversely affect the average customer traffic and average check include, without limitation:
uncertain or declining economic conditions, including housing market downturns, rising unemployment rates, lower disposable income, credit conditions, fuel prices and consumer confidence and other events or factors that adversely affect consumer spending in the markets we serve;
increased competition in the restaurant industry, particularly in the Mexican cuisine and casual and fast-casual dining segments;
changes in consumer preferences;
customers’ budgeting constraints;
customers’ failure to accept menu price increases that we may make to offset increases in key operating costs;
our reputation and consumer perception of our concepts’ offerings in terms of quality, price, value, ambiance and service; and
customer experiences from dining in our restaurants.
Our restaurants are also susceptible to increases in certain key operating expenses that are either wholly or partially beyond our control, including, without limitation:
food and other raw materials costs, many of which we do not or cannot effectively hedge;
labor costs, including wage, workers’ compensation and other benefits expenses;
rent expenses and construction, remodeling, maintenance and other costs under leases for our new and existing restaurants;
compliance costs as a result of changes in regulatory or industry standards;
energy, water and other utility costs;
costs for insurance (including health, liability and workers’ compensation);
information technology and other logistical costs; and
expenses due to litigation against us.
Certain of our restaurants operate at or near capacity. As a result, we may be unable to grow or maintain same store sales at those restaurants, particularly if additional restaurants are opened near the existing location. The failure of our existing or new restaurants to perform as expected could have a significant negative impact on our financial condition and results of operations.
Our long-term success is highly dependent on our ability to successfully identify appropriate sites and develop and expand our operations in existing and new markets.
We intend to develop new restaurants in our existing markets, and selectively enter into new markets. Since the start of 2008, we have expanded from 8 to 91 restaurants as of December 31, 2017. We plan to open a total of eight to twelve restaurants for the year. There can be no assurance that any new restaurant that we open will have similar operating results to those of existing restaurants. We may not be able to open our planned new restaurants on a timely basis, if at all, and, if opened, these restaurants may not be operated profitably. The number and timing of new restaurants opened during any given period, and their associated contribution to operating growth, may be negatively impacted by a number of factors including, without limitation:
identification and availability of appropriate locations that will drive high levels of customer traffic and sales per unit;
inability to generate sufficient funds from operations or to obtain acceptable financing to support our development;
recruitment and training of qualified operating personnel in the local market;
availability of acceptable lease arrangements, including sufficient levels of tenant allowances;
the financial viability of our landlords, including the availability of financing for our landlords and our landlords ability to pay tenant incentives on a timely basis;
construction and development cost management;
timely delivery of the leased premises to us from our landlords and punctual commencement of our buildout construction activities;
delays due to the customized nature of our restaurant concepts and decor, construction and pre-opening processes for each new location;
obtaining all necessary governmental licenses and permits, including our liquor licenses, on a timely basis to construct or remodel and operate our restaurants;
inability to comply with certain covenants under our revolving credit facility (the "Revolving Credit Facility") that could limit our ability to open new restaurants;
consumer tastes in new geographic regions and acceptance of our restaurant concept;
competition in new markets, including competition for restaurant sites;
unforeseen engineering or environmental problems with the leased premises;
adverse weather during the construction period;
anticipated commercial, residential and infrastructure development near our new restaurants; and
other unanticipated increases in costs, any of which could give rise to delays or cost overruns.
We have experienced, and expect to continue to experience, delays in restaurant openings from time to time. Such actions may limit our growth opportunities. We cannot assure you that we will be able to successfully expand or acquire critical market presence for our brand in new geographical markets, as we may encounter well-established competitors with substantially greater financial resources. We may be unable to find attractive locations, build name recognition, successfully market our brand or attract new customers. We may incur additional costs in new markets, particularly for transportation and distribution, which may impact the profitability of those restaurants. Competitive circumstances and consumer characteristics and preferences in new market segments and new geographical markets may differ substantially from those in the market segments and geographical markets in which we have substantial experience. If we are unable to expand in existing markets or penetrate new markets, our ability to increase our revenues and profitability may be harmed.
If we fail to manage our growth effectively, it could harm our business.
Failure to manage our growth effectively could harm our business. We have grown significantly since 2008 and intend to continue growing in the future. Our objective is to grow our business and increase stockholder value by (1) expanding our base of company restaurants that are profitable and (2) increasing sales and profits at existing restaurants. While both these methods of achieving our objective are important to us, historically the most significant means of achieving our objective has been through opening new restaurants and operating these restaurants on a profitable basis. As we open and operate more restaurants, our rate of expansion relative to the size of our existing restaurant base will decline, which may make it increasingly difficult to achieve levels of sales and profitability growth that we have seen in the past. In addition, our existing restaurant management systems, financial and management controls and information systems may not be adequate to support our planned expansion. Our ability to manage our growth effectively will require us to continue to enhance these systems, procedures and controls and to locate, hire, train and retain management and operating personnel. We also place a lot of importance on our culture, which we believe has been an important contributor to our success. As we grow, we may have difficulty maintaining our culture or adapting it sufficiently to meet the needs of our operations. We cannot assure you that we will be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and on our existing infrastructure. If we are unable to manage our growth effectively, our business and operating results could be materially adversely impacted.
We occupy most of our restaurants under long-term non-cancelable leases for which we may remain obligated to perform under even after a restaurant closes, and we may be unable to renew leases at the end of their terms.
Many of our current leases are non-cancelable and typically have initial terms ranging from 10 to 15 years with two to three five-year extension options. The initial terms of our leases currently expire between 2019 and 2039. We believe that leases that we enter into in the future will be on substantially similar terms. If we were to close or fail to open a restaurant at a location we lease, we would generally remain committed to perform our obligations under the applicable lease, which could include, among other things, payment of the base rent for the balance of the lease term. Our obligation to continue making rental payments and fulfilling other lease obligations in respect of leases for closed or unopened restaurants could have a material adverse effect on our business and results of operations. Alternatively, at the end of the lease term and any renewal period for a restaurant, we may be unable to renew the lease without substantial additional cost, if at all. If we cannot renew such a lease we may be forced to close or relocate a restaurant, which could subject us to construction and other costs and risks. If we are required to make payments or otherwise perform under one of our leases after a restaurant closes or if we are unable to renew our restaurant leases, our business and results of operations could be adversely affected.
The success of our restaurants depends in large part on leased locations. As demographic and economic patterns change, current locations may or may not continue to be attractive or profitable. Possible declines in trade areas where our restaurants are located or adverse economic conditions in surrounding areas could result in reduced revenues in those locations. In addition, desirable locations for new restaurant openings or for the relocation of existing restaurants may not be available at an acceptable cost.
Changes in economic conditions could materially affect our business, financial condition and results of operations.
The restaurant industry depends on consumer discretionary spending. Economic conditions may remain volatile and may repress consumer confidence and discretionary spending. If current volatile economic conditions continue for a prolonged period of time
or worsens, customer traffic could be adversely impacted if our customers choose to dine out less frequently or reduce the amount they spend on meals while dining out. We believe that if the current volatile economic conditions persist for a long period of time or become more pervasive, consumers might make long-lasting changes to their discretionary spending behavior, including dining out less frequently on a permanent basis. If restaurant sales decrease, our profitability could decline as we spread fixed costs across a lower level of sales. Reductions in staff levels, asset impairment charges and potential restaurant closures could result from prolonged negative restaurant sales.
Damage to our reputation or lack of acceptance of our brand in existing or new markets could negatively impact our business, financial condition and results of operations.
We believe we have built our reputation on the high-quality of our food, service and staff, as well as on our unique culture and the ambience in our restaurants, and we must protect and grow the value of our brand to continue to be successful in the future. Any incident that erodes consumer affinity for our brand, including any foodborne illness or foodborne illness scare could significantly reduce its value and damage our business. For example, our brand value could suffer and our business could be adversely affected if customers perceive a reduction in the quality of our food, service or staff, or an adverse change in our culture or ambience, or otherwise believe we have failed to deliver a consistently positive experience. Additionally, negative incidents that occur at other restaurants may decrease demand for restaurant dining broadly including at our restaurant.
In addition, our ability to successfully develop new restaurants in new markets may be adversely affected by a lack of awareness or acceptance of our brand in these new markets. To the extent that we are unable to foster name recognition and affinity for our brand in new markets, our new restaurants may not perform as expected and our growth may be significantly delayed or impaired.
We may be adversely affected by news reports or other negative publicity regardless of their accuracy, regarding food quality issues, public health concerns, illness, safety, injury or government or industry findings concerning our restaurants, restaurants operated by other food service providers, or others across the food industry supply chain. The risks associated with such negative publicity cannot be completely eliminated or mitigated and may materially harm our results of operations and result in damage to our brand.
Also, there has been a marked increase in the use of social media platforms and similar devices, including blogs, social media websites and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Consumers value readily available information concerning goods and services that they have or plan to purchase, and may act on such information without further investigation or authentication. The availability of information on social media platforms is virtually immediate as is its impact. Many social media platforms immediately publish the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning our company may be posted on such platforms at any time. Information posted may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects or business. The harm may be immediate without affording us an opportunity for redress or correction. Such platforms also could be used for dissemination of trade secret information, compromising valuable company assets. In sum, the dissemination of information online could harm our business, prospects, financial condition and results of operations, regardless of the information’s accuracy.
Our brand could also be confused with brands that have similar names, including Baja Chuy’s Mesquite Broiler, Inc. (“Baja Chuy’s”), an unaffiliated restaurant chain with whom we have entered into a settlement agreement regarding use of the Chuy’s name. As a result, our brand value may be adversely affected by any negative publicity related to Baja Chuy’s or any other restaurant that may use brand names, trademarks or trade dress that are similar to ours.
Our expansion into new markets may present increased risks due to our unfamiliarity with the area.
Some of our new restaurants will be located in areas where we have little or no meaningful experience. Those markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause our new restaurants to be less successful than restaurants in our existing markets. An additional risk of expanding into new markets is the lack of market awareness of our brands. Restaurants opened in new markets may open at lower average weekly sales volume than restaurants opened in existing markets and may have higher restaurant-level operating expense ratios than in existing markets. Sales at restaurants opened in new markets may take longer to reach average unit volume, if at all, thereby affecting our overall profitability.
Further, the restaurant industry is subject to extensive state and local laws and regulations, which we may be unfamiliar with as we expand into new locations. We are subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards and the sale of alcoholic beverages. We are also subject to laws and regulations relating to the preparation and sale of food, including regulations regarding product safety, nutritional content and menu labeling. Compliance with these laws and regulations can be costly, and any failure or perceived failure to comply with those laws could adversely affect our business, financial condition and results of operation.
Approximately 38% of our restaurants are located in Texas and, as a result, we are sensitive to economic and other trends and developments in that state.
As of December 31, 2017, we operated a total of 35 restaurants in Texas. As a result, we are particularly susceptible to adverse trends and economic conditions in this state, including its labor market. In addition, given our geographic concentration in this state, negative publicity regarding any of our restaurants in Texas, local labor issues, terrorist attacks, changes in energy prices, adverse weather conditions, hurricanes, droughts, fires or other natural or man-made disasters could have a material adverse effect on our business and operations.
We are susceptible to economic and other trends and developments, including adverse weather conditions, in the local or regional areas in which our restaurants are located.
Our financial performance is dependent on our restaurants located in Texas and the Southeastern and Midwestern United States. As a result, adverse economic conditions in any of these areas could have a material adverse effect on our overall results of operations. In recent years, certain of these states have been more negatively impacted by the housing decline, high unemployment rates the overall economic crisis and most recently the decline in oil prices than other geographic areas. In addition, given our geographic concentrations, particularly in Texas, negative publicity regarding any of our restaurants in these areas could have a material adverse effect on our business and operations, as could other regional occurrences such as local labor issues, terrorist attacks, changes in energy prices, adverse weather conditions, hurricanes, droughts, fires or other natural or man-made disasters. Adverse weather conditions may also impact customer traffic at our restaurants, cause the temporary underutilization of outdoor patio seating, and, in more severe cases, cause temporary restaurant closures, sometimes for prolonged periods.
Our business is subject to seasonal fluctuations, with restaurant sales typically higher during the spring and summer months as well as in December. Adverse weather conditions during our most favorable months or periods may exacerbate the effect of adverse weather on customer traffic and may cause fluctuations in our operating results from quarter-to-quarter within a fiscal year. In addition, outdoor patio seating is available at nearly all of our restaurants and may be impacted by a number of weather-related factors. Our inability to fully utilize our restaurants’ seating capacity as planned may negatively impact our revenues and results of operations.
The impact of negative economic factors, including the availability of credit, on our landlords and surrounding tenants could negatively affect our financial results.
Negative effects on our existing and potential landlords due to the inaccessibility of credit and other unfavorable economic factors may, in turn, adversely affect our business and results of operations. If our landlords are unable to obtain financing or remain in good standing under their existing financing arrangements, they may be unable to provide construction contributions or satisfy other lease covenants to us. In addition, if our landlords are unable to obtain sufficient credit to continue to properly manage their retail sites, we may experience a drop in the level of quality of such retail centers. Our development of new restaurants may also be adversely affected by the negative financial situations of developers and potential landlords. Landlords may try to delay or cancel recent development projects (as well as renovations of existing projects) due to the instability in the credit markets which could reduce the number of appropriate locations available that we would consider for our new restaurants. Furthermore, the failure of landlords to obtain licenses or permits for development projects on a timely basis, which is beyond our control, may negatively impact our ability to implement our development plan.
Changes in food availability and costs could adversely affect our operating results.
Our profitability and operating margins are dependent in part on our ability to anticipate and react to changes in food costs. We rely on two regional distributors, Labatt in Texas, Oklahoma, Louisiana and Colorado and PFG in the rest of the United States, and various suppliers to provide our beef, cheese, beans, soybean oil, beverages and our groceries. For our chicken products, we rely on two suppliers, one supplier for our Texas, Oklahoma, Louisiana and Colorado locations and one for the rest of our locations. For our green chiles, each year we contract with a supplier to buy from a group of farmers in Hatch, New Mexico, which we have the right to select under our agreement. If and to the extent the farmers are unable or do not supply a sufficient amount of green chiles or if we need chiles out of season, we purchase the excess amount from several approved suppliers. Each restaurant, through its general manager and kitchen manager, purchases its produce locally. Any increase in distribution prices, increase in the prices charged by suppliers or failure to perform by these third-parties could cause our food costs to increase or us to experience short-term unavailability of certain products. Failure to identify an alternate source of supply for these items may result in significant cost increases and an inability to provide certain of the items on our menu. If these events occur, it may reduce the profitability of certain of our offerings and may cause us to increase our prices. In addition, any material interruptions in our supply chain, such as a material interruption of ingredient supply due to the failures of third-party distributors or suppliers, or interruptions in service by common carriers that ship goods within our distribution channels, may result in significant cost increases and reduce sales. Changes in the price, as a result of inflation or otherwise, or availability of certain food products could affect the profitability of certain food items, our ability to maintain existing prices and our ability to purchase sufficient amounts of items to satisfy our customer’s demands, which could materially adversely affect our profitability and reputation.
The type, variety, quality, availability and price of produce, beef, chicken and cheese are more volatile than other types of food and are subject to factors beyond our control, including weather, governmental regulation, availability and seasonality, each of which may affect our food costs or cause a disruption in our supply. Our food distributors and suppliers also may be affected by higher costs to produce and transport commodities used in our restaurants, higher minimum wage and benefit costs and other expenses that they pass through to their customers, which could result in higher costs for goods and services supplied to us. Although we are able to contract for some of the food commodities used in our restaurants for periods of up to one year, the pricing and availability of some of the commodities used in our operations, such as our produce, cannot be locked in for periods of longer than one week or at all. We do not use financial instruments to hedge our risk to market fluctuations in the price of our ingredients and other commodities at this time. We may not be able to anticipate and react to changing food costs through our purchasing practices and menu price adjustments in the future, and failure to do so could negatively impact our revenues and results of operations.
Increases in our labor costs, including as a result of changes in government regulation, could slow our growth or harm our business.
We are subject to a wide range of labor costs. Because our labor costs are, as a percentage of revenues, higher than other industries, we may be significantly harmed by labor cost increases. Unfavorable fluctuations in market conditions, availability of insurance or changes in state and/or federal regulations could significantly increase our labor costs. We are subject to federal, state, and local laws governing employment practices and working conditions. These laws cover wage and hour practices, labor relations, paid and family leave, and workplace safety, among others. The myriad of laws and regulations being passed at the state and local level creates unique challenges as different standards apply to different locations, sometimes with conflicting requirements. We will continue to monitor and adapt our employment practices to comply with these various laws and regulations. In addition, we are subject to the risk of employment-related litigation at both the state and federal levels, including claims styled as class action lawsuits which are more costly to defend. Also, some employment related claims in the area of wage and hour disputes are not insurable risks.
Significant increases in health care costs may continue to occur, and we can provide no assurance that we will be able to contain those costs.
In addition, many of our restaurant personnel are hourly workers subject to various minimum wage requirements or changes to tip credits. Mandated increases in minimum wage levels and changes to the tip credit, which are the amounts an employer is permitted to assume an employee receives in tips when calculating the employee’s hourly wage for minimum wage compliance purposes, have recently been and continue to be proposed and implemented at both federal and state government levels. For example, in Kentucky employers may not require employees to pool tips in order to share those tips with wait staff, bartenders and bussing staff. As a result, we may be required to pay our wait staff, bartenders and bussing staff in our Kentucky locations additional amounts to ensure they receive minimum wage. Continued minimum wage increases or changes to allowable tip credits may further increase our labor costs or effective tax rate.
Various states in which we operate are considering or have already adopted new immigration laws, and the U.S. Congress and Department of Homeland Security from time to time consider or implement changes to Federal immigration laws, regulations or enforcement programs as well. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome, or reduce the availability of potential employees. Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our workers are found to be unauthorized we could experience adverse publicity that negatively impacts our brand and may make it more difficult to hire and keep qualified employees. Termination of a significant number of employees that unbeknown to us were unauthorized employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in additional adverse publicity. Our financial performance could be materially harmed as a result of any of these factors.
Labor shortages could increase our labor costs significantly or restrict our growth plans.
Our restaurants are highly dependent on qualified management and operating personnel. Qualified individuals have historically been in short supply and an inability to attract and retain them would limit the success of our existing restaurants as well as our development of new restaurants. We place a heavy emphasis on the qualification and training of our personnel and spend significantly more on training our employees than our competitors. We can make no assurances that we will be able to attract and retain qualified individuals in the future which may have a more significant effect on our operation than those of our competitors. Additionally, the cost of attracting and retaining qualified individuals may be higher than we anticipate, and as a result, our profitability could decline.
Food safety and foodborne illness concerns may have an adverse effect on our business by reducing demand and increasing costs.
Food safety is a top priority, and we dedicate substantial resources to help ensure that our guests enjoy safe, quality food products. However, foodborne illnesses and food safety issues have occurred in the food industry in the past, and could occur in the future. Any report or publicity linking us to instances of foodborne illness or other food safety issues, including food tampering or contamination, could adversely affect our brand and reputation as well as our revenues and profits. In addition, instances of foodborne illness, food tampering or food contamination occurring at our competitors' restaurants could result in negative publicity about the food service industry generally and adversely impact our sales.
Furthermore, our reliance on third-party food suppliers and distributors increases the risk that foodborne illness incidents could be caused by factors outside of our control and that multiple locations would be affected rather than a single restaurant. We cannot assure that all food items are properly maintained during transport throughout the supply chain and that our employees will identify all products that may be spoiled and should not be used in our restaurants. If our guests become ill from foodborne illnesses, we could be forced to temporarily close some restaurants. Furthermore, any instances of food contamination, whether or not at our restaurants, could subject us or our suppliers to a food recall. Any such results could adversely affect our brand and reputation as well as our business and results of operations.
The United States and other countries have experienced, or may experience in the future, outbreaks of viruses, such as Ebola, Avian Flu, SARS and H1N1. To the extent that a virus is foodborne, future outbreaks may adversely affect the price and availability of certain food products and cause our guests to eat less of a product. To the extent that a virus is transmitted by human-to-human contact, our employees or guests could become infected, or could choose, or be advised or required, to avoid gathering in public places, any one of which could adversely affect our business.
Customer traffic at our restaurants could be significantly affected by competition in the restaurant industry in general and, in particular, within the dining segments of the restaurant industry in which we compete.
The restaurant industry is highly competitive with respect to food quality, ambience, service, price and value and location, and a substantial number of restaurant operations compete with us for customer traffic. The main competitors for our brand are other operators of mid-priced, full service concepts in the multi-location casual dining and Tex-Mex/Mexican food segments in which we compete most directly for real estate locations and customers. Some of our competitors have significantly greater financial, marketing, personnel and other resources than we do, and many of our competitors are well established in markets in which we have existing restaurants or intend to locate new restaurants. Any inability to successfully compete with the other restaurants in our markets will place downward pressure on our customer traffic and may prevent us from increasing or sustaining our revenues and profitability. We may also need to evolve our concept in order to compete with popular new restaurant formats or concepts that develop from time to time, and we cannot offer any assurance that we will be successful in doing so or that modifications to our concept will not reduce our profitability. In addition, with improving product offerings at fast casual restaurants, quick-service restaurants and grocery stores and the influence of negative economic conditions and other factors, consumers may choose less expensive alternatives, which could also negatively affect customer traffic at our restaurants.
Legislation and regulations requiring the display and provision of nutritional information for our menu offerings, and new information or attitudes regarding diet and health or adverse opinions about the health effects of consuming our menu offerings, could affect consumer preferences and negatively impact our results of operations.
Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the health effects of consuming our menu offerings. These changes have resulted in, and may continue to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings, or laws and regulations requiring us to disclose the nutritional content of our food offerings. The Patient Protection and Affordable Care Act of 2010 (the “PPACA”) establishes a uniform, federal requirement for certain restaurants to post nutritional information on their menus. The FDA finalized regulations to implement the nutritional menu labeling provisions of the PPACA. These final regulations will be effective in May 2018 and will establish a uniform, federal requirement for certain restaurants, including ours, to post nutritional information on their menus. We will be required to publish the total number of calories of standard menu items on menus, along with a statement that puts this calorie information in the context of a total daily calorie intake. The PPACA also requires us to provide to consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus about the availability of this information. An unfavorable report on, or reaction to, our menu ingredients, the size of our portions, or the nutritional content of our menu items could negatively influence the demand for our offerings. We cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions or our ability to successfully implement the nutrient content disclosure requirements and to adapt our menu offerings to trends and eating habits. The imposition of menu-labeling laws could have an adverse effect on our results of operations and financial position, as well as the restaurant industry in general.
Multiple jurisdictions in which we operate have recently enacted new requirements that require us to adopt and implement a Hazard Analysis and Critical Control Points (“HACCP”) System for managing food safety and quality. HACCP refers to a management
system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption of the finished product. We expect to incur certain costs to comply with these regulations and these costs may be more than we anticipate. If we fail to comply with these laws or regulations or our HACCP system is unable to prevent an issue, our business could experience a material adverse effect.
Federal, state and local beer, liquor and food service regulations may have a significant adverse impact on our operations.
We are required to operate in compliance with federal laws and regulations relating to alcoholic beverages administered by the Bureau of Alcohol, Tobacco, Firearms and Explosives of the U.S. Department of Justice, as well as the laws and licensing requirements for alcoholic beverages of states and municipalities where our restaurants are or will be located. In addition, each restaurant must obtain a food service license from local authorities. Failure to comply with federal, state or local regulations could cause our licenses to be revoked and force us to cease the sale of food or alcoholic beverages at certain locations. Any difficulties, delays or failures in obtaining such licenses, permits or approvals could delay or prevent the opening of a restaurant in a particular area or increase the costs associated therewith. In addition, in certain states, including states where we have existing restaurants or where we plan to open a restaurant, the number of liquor licenses available is limited, and licenses are traded on the open market. Liquor, beer and wine sales comprise a significant portion of our revenues. If we are unable to maintain our existing licenses, our customer patronage, revenues and results of operations could be adversely affected. Or, if we choose to open a restaurant in those states where the number of licenses available is limited, the cost of a new license could be significant.
We apply for our liquor licenses with the advice of outside legal and licensing consultants. Because of the many and various state and federal licensing and permitting requirements, there is a significant risk that one or more regulatory agencies could determine that we have not complied with applicable licensing or permitting regulations or have not maintained the approvals necessary for us to conduct business within its jurisdiction. Any changes in the application or interpretation of existing laws may adversely impact our restaurants in that state, and could also cause us to lose, either temporarily or permanently, the licenses, permits and regulations necessary to conduct our restaurant operations, and subject us to fines and penalties.
Restaurant companies have been the target of class-actions and other litigation alleging, among other things, violations of federal and state law.
We are subject to a variety of lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. In recent years, a number of restaurant companies have been subject to claims by customers, employees and others regarding issues such as food safety, personal injury and premises liability, employment-related claims, harassment, discrimination, disability and other operational issues common to the foodservice industry. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. An adverse judgment or settlement that is not insured or is in excess of insurance coverage could have an adverse impact on our profitability and could cause variability in our results comparedcompensation provided to expectations. We carry insurance policies for a significant portion of our risks and associated liabilities with respect to workers’ compensation, general liability, employer’s liability, health benefits and other insurable risks. Regardless of whether any claims that may be brought against us are valid or whether we are ultimately determined to be liable, we could also be adversely affected by negative publicity, litigation costs resulting from the defense of these claims and the diversion of time and resources from our operations.
We are subject to state “dram shop” laws and regulations, which generally provide that a person injured by an intoxicated person may seek to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Recent litigation against restaurant chains has resulted in significant judgments, including punitive damages, under such “dram shop” statutes. While we carry liquor liability coverage as part of our existing comprehensive general liability insurance, we may still be subject to a judgment in excess of our insurance coverage, and we may not be able to obtain or continue to maintain such insurance coverage at reasonable costs, if at all. Regardless of whether any claims against us are valid or whether we are liable, we may be adversely affected by publicity resulting from such laws.
Our marketing programs may not be successful.
We expend resources in our marketing efforts using a variety of media, including social media. We expect to continue to conduct brand awareness programs and customer initiatives to attract and retain customers. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues. Additionally, some of our competitors have greater financial resources, which enable them to spend significantly more on marketing and advertising than we are able to. Should our competitors increase spending on marketing and advertising or our marketing funds decrease for any reason, or should our advertising and promotions be less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition.
The impact of new restaurant openings could result in fluctuations in our financial performance.
Quarterly results have been, and in the future may continue to be, significantly impacted by the timing of new restaurant openings (often dictated by factors outside of our control), including associated restaurant pre-opening costs and operating inefficiencies, as well as changes in our geographic concentration due to the opening of new restaurants. We typically incur the most significant portion of restaurant pre-opening expenses associated with a given restaurant within the five months immediately preceding and the month of the opening of the restaurant. As the regional and national economies in which we operate improve, we may encounter
more competition in obtaining lease sites and, as a result, may be unable to negotiate similar levels of tenant incentives under our new leases. If we are unable to obtain similar levels of tenant incentives for a particular unit, we would expect to incur increased capital expenditures in advance of opening and pay lower rent with respect to the restaurant. Our experience has been that labor and operating costs associated with a newly opened restaurant for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Our new restaurants commonly take nine months to one year to reach planned operating levels due to inefficiencies typically associated with new restaurants, including the training of new personnel, lack of market awareness, inability to hire sufficient qualified staff and other factors. Accordingly, the volume and timing of new restaurant openings has had, and may continue to have, a meaningful impact on our profitability. Due to the foregoing factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for a full fiscal year, and these fluctuations may cause our operating results to be below expectations of public market analysts and investors.
Opening new restaurants in existing markets may negatively affect sales at our existing restaurants.
The consumer target area of our restaurants varies by location, depending on a number of factors such as population density, local retail and business attractions, area demographics and geography. As a result, the opening of a new restaurant in or near markets in which we already have existing restaurants could adversely impact the sales of new or existing restaurants. Our core business strategy does not entail opening new restaurants that materially impact sales at our existing restaurants but we may selectively open new restaurants in and around areas of existing restaurants that are operating at or near capacity. There can be no assurance that sales cannibalization between our restaurants will not occur or become more significant in the future as we continue to expand our operations.
Our business operations and future development could be significantly disrupted if we lose key members of our management team.
The success of our business continues to depend to a significant degree upon the continued contributions of our senior officers and key employees, both individually and as a group. Our future performance will be substantially dependent in particular on our ability to retain and motivate Steve Hislop, our Chief Executive Officer and Chief Financial Officer and our two other highest paid executive officers during fiscal year 2017 (collectively, the “named executive officers”). During fiscal year 2017, there were only four executive officers of the Company. Subsequent to the end of fiscal year 2017, Sharon Russell resigned from her positions as Chief Administrative Officer and Secretary of the Company effective March 6, 2018. This compensation discussion contains statements regarding our performance targets and goals. These targets and goals are disclosed in the limited context of our compensation program and should not be understood to be statements of management’s expectations or estimates of financial results or other guidance. We specifically caution investors not to apply these statements to other contexts.
Objective of Compensation Policy
The objective of our compensation policy is to provide a total compensation package to each named executive officer that will enable us to:
attract, motivate and retain outstanding individuals;
reward named executive officers for performance; and
align the financial interests of each named executive officer with the interests of our stockholders to encourage each named executive officer to contribute to our long-term performance and success.
Overall, our compensation program is designed to reward both individual and company performance. A significant portion of each of our named executive officers’ annual compensation is comprised of performance-based bonuses. We also intend to continue to use long-term incentive awards to reward long-term company and individual performance and to promote retention through delayed vesting of awards.
Administration
Our compensation committee, which is comprised exclusively of independent directors, oversees our executive compensation program and is responsible for approving or recommending to the board the nature and amount of the compensation paid to, and any employment and related agreements entered into with, our named executive officers. The committee also administers our equity compensation plans and awards.
Process for Setting Total Compensation
At the first meeting of each new fiscal year, our compensation committee sets annual base salaries, determines the amount of performance-based and discretionary bonuses for the prior year, sets performance criteria for our performance-based bonuses for the following year and determines the amount of equity-based incentive compensation to grant to our named executive officers. In making these compensation decisions, our compensation committee considers the recommendations of our Chief Executive Officer, particularly with respect to salary adjustments, performance-based and discretionary bonus targets and awards and equity incentive awards of our other named executive officers. Our compensation committee meets with our Chief Executive Officer at least annually to discuss and review his recommendations for compensation of our executive officers, excluding himself. When making individual compensation decisions for our named executive officers, the compensation committee takes many factors into account, including the officer’s experience, responsibilities, management abilities and job performance, our performance as a whole, current market conditions and competitive pay levels for similar positions at comparable companies. These factors are considered by the compensation committee in a subjective manner without any specific formula or weighting.
During its annual review process, our compensation committee has set compensation for each named executive officer at a level we believe is appropriate considering each named executive officer’s annual review, level of responsibility, the awards and compensation paid to the named executive officer in past years and progress toward or attainment of previously set personal and corporate goals and objectives, including attainment of financial performance goals and such other factors as the compensation committee has deemed appropriate and in our best interests and the best interests of our stockholders. The compensation committee has given different weight at different times to different factors for each named executive officer. Our performance criteria are discussed more fully below under the heading “—Bonus Compensation—Performance-Based Bonus.” Other than with respect to our performance-based bonuses, the compensation committee has not relied on predetermined formulas or a limited set of criteria when it evaluates the performance of our named executive officers.
The charter of the compensation committee authorizes the committee to engage independent consultants at any time at the expense of the Company.
Elements of Compensation
Our compensation program for named executive officers consists of the following elements of compensation, each described in greater depth below:
Base salaries.
Performance-based and discretionary bonuses.
Equity-based incentive compensation.
Severance and change-in-control benefits.
Perquisites.
General benefits.
Employment agreements.
We may, from time to time, enter into written agreements to reflect the terms and conditions of employment of a particular named executive officer, whether at the time of hire or thereafter. We consider entering into these agreements when it serves as a meaningful recruitment and retention mechanism. We currently have employment agreements in place with each of our named executive officers. See below under the heading “—Employment Agreements” for additional information regarding our executive officer’s employment agreements.
Base Salary
|
| | |
| NAME | 2017 SALARY ($) |
| Steve Hislop | 630,823 |
|
| Jon Howie | 314,962 |
|
| Michael Hatcher | 208,000 |
|
| Sharon Russell | 109,499 |
|
We pay base salaries to attract, recruit and retain qualified employees. Our compensation committee reviews and sets base salaries of our named executive officers annually. These salary levels are and will continue to be set based on the named executive officer’s experience and performance with previous employers and negotiations with individual named executive officers. The compensation committee may increase base salaries each year based on its subjective assessment of our company’s and the individual executive officer’s performance and each named executive officer’s experience, length of service and changes in responsibilities. The weight given such factors by the compensation committee may vary from one named executive officer to another.
Bonus Compensation
|
| | | | | | | | | | | | | | | |
| | | | | PERFORMANCE-BASED BONUS |
| NAME | | DISCRETIONARY AWARD ($) | | THRESHOLD AWARD ($) | | TARGET AWARD ($) | | MAXIMUM AWARD ($) | | ACTUAL AWARD ($) |
| Steve Hislop | | 1,000 |
| | — |
| | 315,412 |
| | 630,823 |
| | — |
|
| Jon Howie | | 1,000 |
| | — |
| | 157,481 |
| | 314,962 |
| | — |
|
| Michael Hatcher | | 1,000 |
| | — |
| | 62,400 |
| | 124,800 |
| | — |
|
| Sharon Russell | | 1,000 |
| | — |
| | 32,850 |
| | 65,700 |
| | — |
|
Performance-Based Bonus
In line with our strategy of rewarding performance, our executive compensation program includes performance-based bonuses to named executive officers under our cash bonus plan. While there is no federal tax advantage to "performance-based" compensation any longer, we are committed to our strategy of rewarding performance based on achievement of goals which are tied to success of the Company. Our compensation committee establishes annual target performance-based bonuses for each named executive officer during the first quarter of the year.
The target and maximum performance-based bonuses have been set at levels our compensation committee believes will provide a meaningful incentive to achieve company and individual goals and contribute to our financial performance. In 2017, the target and maximum performance-based bonus were set at 50% and 100%, respectively, of annual base salary for our Chief Executive Officer and Chief Financial Officer and 30% and 60%, respectively, of annual base salary for our other named executive officer. No bonus is paid if actual Company Adjusted EBITDA is 90% or less of budget Company Adjusted EBITDA. To the extent that actual Company Adjusted EBITDA exceeds 90% of budget Company Adjusted EBITDA, the plan provides that we will pay a bonus based on where performance falls on a linear basis between 90% and 100% of budget Company Adjusted EBITDA and between 100% and 110% of budget Company Adjusted EBITDA. In each circumstance, the compensation committee retains discretion to adjust the amount paid under the plan based on individual and company circumstances. If our budgeted Company Adjusted EBITDA is achieved, each individual will earn 100% of their target bonus.
This performance bonus is determined based primarily on the extent to which we achieve our budget Company Adjusted EBITDA goal. Company Adjusted EBITDA is our earnings before interest, taxes, depreciation and amortization plus any loss on sales of asset (less any gain on a sale of assets) and excludes stock-based compensation and certain non-cash and other adjustments. For each 1.0% that actual Company Adjusted EBITDA is above or below budget Company Adjusted EBITDA, the percentage of the target they receive will increase or decrease by 10%, respectively, of the Company Adjusted EBITDA portion of their target bonus. For example, if actual Company Adjusted EBITDA is 1% above budget Company Adjusted EBITDA, the named executive officers will receive 1.1 times their target bonus. The maximum a named executive officer may receive for Company Adjusted EBITDA performance is 2.0 times their target bonus. We use our Company Adjusted EBITDA, together with financial measures prepared
in accordance with GAAP, such as revenue, net income and cash flows from operations, to assess our historical and prospective operating performance and to enhance our understanding of our core operating performance. We also use our Company Adjusted EBITDA internally to evaluate the performance of our personnel and also as a benchmark to evaluate our operating performance or compare our performance to that of our competitors. The use of Company Adjusted EBITDA as a performance measure permits a comparative assessment of our operating performance relative to our performance based on our GAAP results, while isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies.
Target, maximum and actual performance-based bonuses for 2017 for each of the named executive officers are shown in the table above and the actual paid performance-based bonus is shown in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table. For fiscal year 2017, no performance-based bonuses were paid because our actual Company Adjusted EBITDA was less than 90% of our budget Company Adjusted EBITDA.
Discretionary Bonus
Historically, each of our named executive officers has received a $1,000 holiday bonus each December. The discretionary bonuses awarded to our named executive officers in 2017 are set forth in the "Bonus" column of the Summary Compensation Table.
Equity Compensation
We pay equity-based compensation to our named executive officers because it links our long-term results achieved for our stockholders and the rewards provided to named executive officers, thereby ensuring that such officers have a continuing stake in our long-term success.
Historically, we have granted equity awards to our named executive officers in conjunction with significant transactions and in conjunction with a named executive officer’s initial hire or promotion to an executive position. Additionally, we have granted equity awards to our named executive officers annually to further align the interests of our executives with those of our stockholders. For information regarding the number and grant date fair value of deferred shares (referred to herein as restricted stock units) granted to our named executive officers during fiscal year 2017, see "—Grants of Plan Based Awards” below.
We have provided this equity compensation to reward performance as well as to promote retention through delayed vesting. However, we believe that by weighting total compensation in favor of performance-based and discretionary bonuses, we have appropriately rewarded individual achievement while at the same time providing incentives to promote Company performance. In addition to stock options and deferred shares (referred to herein as restricted stock units), the 2012 Omnibus Equity Incentive Plan (the "2012 Plan") provides for the issuance of share appreciation rights, restricted shares, performance shares and other share based awards. In the future, we may consider granting other forms of equity to our named executive officers. For additional information regarding our 2012 Plan, see below under the heading "—2012 Omnibus Equity Incentive Plan.”
We will make future grants of equity awards to the current named executive officers and other employees under the 2012 Plan. The compensation committee may grant stock options, restricted stock units or a combination of both.
We also make grants of equity awards to our named executive officers and other employees because we believe that we should provide our employees an opportunity to share in our success provided they continue to contribute to our success.
Restricted stock units held by each of the named executive officers (and certain of our other salaried employees) vest ratably over a period of four years, subject to the applicable named executive officer remaining employed through each vesting date.
Severance and Change-in-Control Benefits
We currently have employment agreements in place with all of our named executive officers that provide termination or severance benefits. We agreed to pay termination or severance benefits in the event of an executive’s termination by us without cause as a retention incentive. We believe this level of severance benefit provides our executives with the assurance of security if their employment is terminated for reasons beyond their control. For additional information on the severance benefits provided under the employment agreements with our executive officers see “—Employment Agreements.”
Under the 2012 Plan, a named executive officer's awards granted under that plan will immediately vest in the event a change in control (as defined in the 2012 Plan) occurs and the officer's employment is terminated without cause within 24 months following the change in control.
The amount each named executive would be entitled to receive in the event of a termination is reported below under the heading “—Potential Payments upon Termination or Change in Control.”
Perquisites
In 2017, the aggregate incremental cost to us of the perquisites received by each of the named executive officers did not exceed $10,000 and, accordingly, this benefit is not included in the Summary Compensation Table below. We provide the named executive officers with complimentary dining privileges at our restaurants. We view complimentary dining privileges as a meaningful benefit to our named executive officers as it is important for named executive officers to experience our products and services in order to better perform their duties for us.
General Benefits
We provide a limited number of personal benefits to our named executive officers. Our named executive officers participate in our health and benefit plans, and are entitled to vacation and paid time off based on our general vacation policies.
The following are standard benefits offered to all of our eligible employees, including the named executive officers.
Retirement Benefits. We maintain a tax-qualified 401(k) savings plan. Employees are eligible after one year of service and may defer up to the maximum amount allowable by the IRS.
Medical, Dental, Life Insurance and Disability Coverage. Active employee benefits such as medical, dental, life insurance and disability coverage are available to all eligible employees, including our named executive officers.
Moving Costs. We will reimburse out-of-pocket moving expenses for eligible executive officers in conjunction with their hiring.
Other Paid Time Off Benefits. We also provide vacation and other paid holidays to all employees, including the named executive officers, which we believe are appropriate for a company of our size and in our industry.
Employment Agreements
We have entered into employment agreements with Messrs. Hislop, Howie and Hatcher and Mrs. Russell. The employment agreements do not provide for fixed terms.
The employment agreements provide that Messrs. Hislop, Howie and Hatcher and Mrs. Russell, will receive an annual base salary of at least $366,608, $250,000, $149,205 and $167,094, respectively. In 2017, the Company and Mrs. Russell agreed to reduce her salary to $109,499. Mr. Hislop and Mr. Howie are each eligible to receive a target annual bonus of 50% of their annual base salary, based upon the achievement of goals and objectives determined by our compensation committee with a minimum and maximum bonus of 0% and 100% of their annual base salary, respectively. Mr. Hatcher and Mrs. Russell are eligible to receive a target annual bonus of 30% of their annual base salary, based upon the achievement of goals and objectives determined by our compensation committee with a minimum and maximum bonus of 0% and 60% of their annual base salary respectively. The employment agreements provide that each executive will be eligible to participate in employee plans, including 401(k), medical and dental plans, made available to our other senior executives generally.
Each employment agreement provides for severance benefits if the executive’s employment is terminated without cause (as defined in the employment agreement), subject to the executive’s compliance with certain confidentiality, non-compete, non-solicitation and non-disparagement obligations and the execution of a general release of claims. In the event Mr. Hislop’s employment is terminated without cause, he is entitled to continue to receive his base salary for two years following the termination of his employment. In the event Mr. Howie, Hatcher or Mrs. Russell is terminated without cause, each is entitled to continue to receive one year’s base salary following their termination. In the event of termination, all of our executive officers are entitled to continue to receive the amount that the Company was subsidizing for the executive and his or her dependents’ medical and dental insurance coverage during the same period the executive is entitled to continue to receive his or her base salary after his termination.
Tax and Accounting Considerations
Section 162(m) of the Internal Revenue Code (the "Code") generally limits the tax deductibility of compensation we pay to our executive officers to $1.0 million in the year the compensation becomes taxable to the executive officers. Historically, there was an exception to the limit on deductibility for "performance-based compensation" that meets certain requirements under Section 162(m) of the Code, but this exception has now been repealed, effective for taxable years beginning after December 31, 2017, unless transition relief for certain compensation arrangements in place as of November 2, 2017 is available. In addition, effective for taxable years beginning after December 31, 2017, the group of executive officers whose compensation is subject to Section 162(m) limitation on deductibility was expanded. As a result, compensation paid to our executive officers in excess of $1.0 million may not be deductible unless it is "performance-based compensation" that qualifies for certain transition relief. Although deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs. Rather, we seek to maintain flexibility in how we compensate our executive officers so as to meet a broader set of corporate and strategic goals and the needs of stockholders, and as such, we may be limited in our ability to deduct the full amount of such compensation.
Accounting rules require us to expense the cost of our stock option and restricted stock unit awards. Because of option and restricted stock unit expensing and the impact of dilution on our stockholders, we pay close attention to, among other factors, the type of equity awards we grant and the number and value of the shares underlying such awards.
Compensation Committee Report
The compensation committee has reviewed and discussed with management the Compensation Discussion and Analysis. Based on that review and discussion, the compensation committee recommended to the board of directors of the Company that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and this Form 10-K/A.
This report is submitted by the members of the compensation committee of the board named below, who received, discussed with management and recommended that this Compensation Discussion and Analysis be included in the Company’s Annual Report for the year ended December 31, 2017 and this Form 10-K/A.
Members of the Compensation Committee
|
| | |
| Randall M. DeWitt | Saed Mohseni | Ira Zecher |
Summary Compensation Table
|
| | | | | | | | | | | | | | | |
NAME & PRINCIPAL POSITION | YEAR | SALARY ($) | BONUS ($) | STOCK
AWARDS
($)(1) | OPTION AWARDS ($)(1) | NON-EQUITY INCENTIVE PLAN COMPENSATION ($) | ALL OTHER COMPENSATION ($)(2) | TOTAL COMPENSATION ($) |
Steve Hislop President and Chief Executive Officer | 2017 | 630,823 |
| 1,000 |
| 630,807 |
| — |
| — |
| — |
| 1,262,630 |
|
| 2016 | 606,561 |
| 1,000 |
| 454,920 |
| — |
| 365,648 |
| — |
| 1,428,129 |
|
| 2015 | 583,232 |
| 1,000 |
| 291,613 |
| — |
| 583,232 |
| — |
| 1,459,077 |
|
Jon Howie Vice President and Chief Financial Officer | 2017 | 314,962 |
| 1,000 |
| 236,220 |
| — |
| — |
| — |
| 552,182 |
|
| 2016 | 302,848 |
| 1,000 |
| 227,132 |
| — |
| 182,564 |
| — |
| 713,544 |
|
| 2015 | 291,200 |
| 1,000 |
| 291,196 |
| — |
| 291,200 |
| — |
| 874,596 |
|
Michael Hatcher Vice President of Real Estate and Development | 2017 | 208,000 |
| 1,000 |
| 103,974 |
| — |
| — |
| — |
| 312,974 |
|
| 2016 | 200,000 |
| 1,000 |
| 99,988 |
| — |
| 72,339 |
| — |
| 373,327 |
|
| 2015 | 179,978 |
| 1,000 |
| 89,983 |
| — |
| 107,986 |
| — |
| 378,947 |
|
Sharon Russell
Secretary and Chief Administrative Officer | 2017 | 109,499 |
| 1,000 |
| 82,098 |
| — |
| — |
| — |
| 192,597 |
|
| 2016 | 210,575 |
| 1,000 |
| 157,928 |
| — |
| 76,163 |
| — |
| 445,666 |
|
| 2015 | 202,476 |
| 1,000 |
| 101,219 |
| — |
| 121,486 |
| — |
| 426,181 |
|
| |
| (1) | Represents the aggregate grant date fair value, calculated in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718, for awards of options and restricted stock units. See Note 11 to our consolidated financial statements for a discussion of the calculations of grant date fair value. |
| |
| (2) | All other compensation is less than $10,000. |
Grants of Plan-Based Awards
|
| | | | | | | | | | | | | | | | | | | |
| NAME | | COMMITTEE ACTION DATE | | GRANT DATE | | ESTIMATED FUTURE PAYOUTS UNDER NON-EQUITY INCENTIVE PLAN AWARDS | | ALL OTHER STOCK AWARDS: NUMBER OF SHARES OF STOCK OR UNITS (#) | | GRANT DATE FAIR VALUE OF STOCK AND OPTION AWARDS ($)(1) |
| | THRESHOLD ($) | | TARGET ($) | | MAXIMUM ($) | |
| Steve Hislop | | 2/23/2017 | | 3/15/2017 | | — |
| | 315,412 |
| | 630,823 |
| | 22,290 |
| | 630,807 |
|
| Jon Howie | | 2/23/2017 | | 3/15/2017 | | — |
| | 157,481 |
| | 314,962 |
| | 8,347 |
| | 236,220 |
|
| Michael Hatcher | | 2/23/2017 | | 3/15/2017 | | — |
| | 62,400 |
| | 124,800 |
| | 3,674 |
| | 103,974 |
|
| Sharon Russell | | 2/23/2017 | | 3/15/2017 | | — |
| | 32,850 |
| | 65,700 |
| | 2,901 |
| | 82,098 |
|
| |
| (1) | Represents the aggregate grant date fair value, calculated in accordance with FASB ASC Topic 718, for awards of restricted stock units. See Note 11 to our consolidated financial statements for a discussion of the calculations of grant date fair value. |
2012 Omnibus Equity Incentive Plan
The purposes of the 2012 Plan are to provide additional incentives to our management, employees, directors, independent contractors and consultants, to strengthen their commitment, motivate them to faithfully and diligently perform their responsibilities and to attract and retain competent and dedicated persons whose contributions are essential to the success of our business and whose efforts will impact our long-term growth and profitability. To accomplish such purposes, the 2012 Plan provides for the issuance of stock options, share appreciation rights, restricted shares, restricted stock units, performance shares and other share-based awards, which we refer to as plan awards.
Summary of 2012 Plan Terms
We reserved a total of 1,250,000 shares of common stock that are available for issuance under the 2012 Plan. The maximum aggregate awards that may be granted during any fiscal year to any individual will be 200,000 shares, and in the case of options to acquire shares, with a per share exercise price equal to the grant date fair market value of a share. If the shares underlying any plan award are forfeited, canceled, exchanged or surrendered or if a plan award otherwise terminates or expires without a distribution of shares, the shares will again become available under the 2012 Plan provided that shares surrendered or withheld as payment of either the exercise price of an award (including shares otherwise underlying an award of a share appreciation right that are retained by us to account for the grant price of such share appreciation right) and/or withholding taxes in respect of an award will no longer be available for grant under the 2012 Plan, and notwithstanding that a share appreciation right is settled by the delivery of a net number of shares of the full number of shares underlying such share appreciation right will not be available for subsequent awards under the 2012 Plan. In addition, awards are paid or settled in cash, the number of shares with respect to which such payment or settlement is made will again be available for grants of awards under the 2012 Plan and shares underlying awards that can only be settled in cash will not be counted against the aggregate number of shares available for awards under the 2012 Plan.
The 2012 Plan is administered by our compensation committee (the "Plan Administrator"). The Plan Administrator may construe and interpret the 2012 Plan and may adopt, alter and repeal rules and make all other determinations necessary or desirable to administer the 2012 Plan.
The Plan Administrator may select the employees, directors, independent contractors and consultants who will receive plan awards, determine the terms and conditions of those awards, including but not limited to the exercise price, the number of shares of common stock subject to awards, the term of the awards, and the vesting schedule applicable to awards. Unless otherwise determined by the Plan Administrator, all awards that vest solely on a requirement of continued employment or service may not become fully vested prior to the second anniversary of the date upon which the award is granted.
We may issue stock options under the 2012 Plan. All stock options granted under the 2012 Plan are intended to be non-qualified stock options and are not intended to qualify as incentive stock options within the meaning of Section 422 of the Code. The option exercise price of all stock options granted under the 2012 Plan will be determined by the Plan Administrator, but in no event will the exercise price be less than 100% of the fair market value of the common stock on the date of grant. The term of all stock options granted under the 2012 Plan will be determined by the Plan Administrator, but may not exceed ten years from the date of grant. Each stock option will be exercisable at such time and subject to such terms and conditions as determined by the Plan Administrator in the applicable stock option agreement. Other than equitable adjustments made in connection to a change in capitalization, under no circumstances will an exercise price be reduced following the date of the grant of an option, nor will an option be cancelled in exchange for a replacement option with a lower exercise price without stockholder approval.
Unless the applicable stock option agreement provides otherwise, in the event of an optionee’s termination of employment or service for any reason other than for cause, disability or death, such optionee’s stock options (to the extent exercisable at the time of such termination) generally will remain exercisable until 30 days after such termination and then expire. Unless the applicable stock option agreement provides otherwise, in the event of an optionee’s termination of employment or service due to, disability or death, such optionee’s stock options (to the extent exercisable at the time of such termination) generally will remain exercisable until one year after such termination and will then expire. For certain employees, a demotion in position will result in a loss of unvested options. If termination was for any other reason other than for cause, stock options that were not exercisable on the date of termination will expire at the close of business on the date of such termination. In the event of an optionee’s termination of employment or service for cause, such optionee’s outstanding stock options will expire at the commencement of business on the date of such termination. The Plan Administrator may waive the vesting requirements based on such factors as the Plan Administrator deems appropriate.
Share appreciation rights (“SARs”) may be granted under the 2012 Plan either alone or in conjunction with all or part of any stock option granted under the 2012 Plan. A free-standing SAR granted under the 2012 Plan entitles its holder to receive, at the time of exercise, the number of shares, or alternate form of payment determined by the Plan Administrator, equal in value to the excess of the fair market value (at the date of exercise) over a specified price fixed by the Plan Administrator (which shall be no less than fair market value at the date of grant). A SAR granted in conjunction with all or part of an option under the 2012 Plan entitles its holder to receive, upon surrendering of the related option, the number of shares, or alternate form of payment determined by the Plan Administrator, equal in value to the excess of the fair market value (at the date of exercise) over the exercise price of the
related stock option. The term of all SARs granted under the 2012 Plan will be determined by the Plan Administrator, but may not exceed ten years from the date of grant. In the event of a participant’s termination of employment or service, free-standing SARs will be exercisable at such times and subject to such terms and conditions determined by the Plan Administrator, while SARs granted in conjunction with all or part of an option will be exercisable at such times and subject to terms and conditions applicable to the related option. Other than equitable adjustments made in connection to a change in capitalization, under no circumstances will an exercise price be reduced following the date of the grant of a SAR, nor will a SAR be cancelled in exchange for a replacement SAR with a lower exercise price without stockholder approval.
Restricted shares, restricted stock units and performance shares may be granted under the 2012 Plan. The Plan Administrator will determine the number of shares to be awarded, the purchase price, vesting schedule and performance objectives, if any, applicable to the grant of restricted shares, restricted stock units and performance shares. Participants with restricted shares and performance shares generally have all of the rights of a stockholder and restricted stock units generally do not have the rights of a stockholder. However, during the restricted period, restricted stock units may be paid dividends on the number of shares covered by the restricted stock units if the applicable award agreement so provides. If the performance goals and other restrictions are not satisfied, the restricted shares, restricted stock units and/or performance shares will be forfeited in accordance with the terms of the grant. Subject to the provisions of the 2012 Plan and applicable award agreement, the Plan Administrator has sole discretion to provide for the lapse of restrictions in installments or the acceleration or waiver of restrictions (in whole or part) under certain circumstances, based upon such factors including, but not limited to, the attainment of certain performance goals, a participant’s termination of employment or service or a participant’s death or disability.
The 2012 Plan also authorizes grants of other share-based awards, such as unrestricted shares, restricted stock units, dividend equivalents or performance units. The Plan Administrator will determine the terms and conditions of such awards, consistent with the terms of the 2012 Plan, at the date of grant or thereafter, including any performance goals and performance periods.
In the case of awards subject to performance goals, such goal may be based on one or more of the following criteria: (a) earnings, including one or more of operating income, earnings before or after taxes, earnings before or after interest, depreciation, amortization, adjusted EBITDA, economic earnings, or extraordinary or special items or book value per share (which may exclude nonrecurring items); (b) pre-tax income or after-tax income; (c) earnings per share (basic or diluted); (d) operating profit; (e) revenue, revenue growth or rate of revenue growth; (f) return on assets (gross or net), return on investment, return on capital, or return on equity; (g) returns on sales or revenues; (h) operating expenses; (i) share price appreciation; (j) cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital; (k) implementation or completion of critical projects or processes; (l) cumulative earnings per share growth; (m) operating margin or profit margin; (n) cost targets, reductions and savings, productivity and efficiencies; (o) strategic business criteria, consisting of one or more objectives based on meeting specified market penetration, geographic business expansion, customer satisfaction, employee satisfaction, human resources management, supervision of litigation, information technology, and goals relating to acquisitions, divestitures, joint ventures and similar transactions, and budget comparisons; (p) personal professional objectives, including any of the foregoing performance goals, the implementation of policies and plans, the negotiation of transactions, the development of long term business goals, formation of joint ventures, research or development collaborations, and the completion of other corporate transactions; and (q) any combination of, or a specified increase in, any of the foregoing. Where applicable, a performance goal may be expressed in terms of attaining a specified level of the particular criteria or the attainment of a percentage increase or decrease in the particular criteria, and may be applied to one or more of the company or a company affiliate, or a division or strategic business unit of the company, or may be applied to the performance of the company relative to a market index, a group of other companies or a combination thereof, all as determined by the Administrator. The performance goals may include a threshold level of performance below which no payment may be made (or no vesting may occur), levels of performance at which specified payments may be made (or specified vesting may occur), and a maximum level of performance above which no additional payment shall be made (or at which full vesting may occur). Each of the foregoing performance goals will determine in accordance with generally accepted accounting principles, as applicable, and may be subject to certification by the committee; provided, that the committee shall have the authority to make equitable adjustments to the performance goals, to the extent permitted under Section 162(m) of the Code, if applicable, in recognition of unusual or non-recurring events affecting the company or any company affiliate thereof or the financial statements of the company or any company affiliate thereof, in response to changes in applicable laws or regulations, or to account for items of gain, loss or expense determined to be extraordinary or unusual in nature or infrequent in occurrence or related to the disposal of a segment of a business or related to a change in accounting principles.
In the event of a merger, amalgamation, consolidation, recapitalization, reorganization, stock dividend, stock split or other change in corporate structure affecting the common stock, an equitable substitution or proportionate adjustment shall be made, as may be determined by the Plan Administrator, in (a) the aggregate number of shares of common stock reserved for issuance under the 2012 Plan and the maximum number of shares of common stock that may be subject to awards granted to any participant in any calendar year, (b) the kind, number and exercise price subject to outstanding stock options and SARs granted under the 2012 Plan, and (c) the kind, number and purchase price of shares of common stock subject to outstanding awards of restricted shares, restricted stock units, performance shares or other share-based awards granted under the 2012 Plan. In addition, the Plan Administrator, in
its discretion, may terminate all outstanding awards for the payment of cash or in-kind consideration. However, no adjustment or payment may cause any award under the 2012 Plan that is or becomes subject to Section 409A of the Code to fail to comply with the requirements of that section.
Unless otherwise determined by the Plan Administrator and evidenced in an award agreement, in the event that a change in control occurs and a participant’s employment or service is terminated without cause on or after the effective date of the change in control but prior to 24 months following the change in control, then any unvested or unexercisable portion of any award carrying a right to exercise shall become fully vested and exercisable, and the restrictions, deferral limitations, payment conditions and forfeiture conditions applicable to an award granted under the 2012 Plan will lapse and such unvested awards will be deemed fully vested and any performance conditions imposed with respect to such awards will be deemed to be fully achieved at the target level. Under the 2012 Plan, the term change in control generally means: (a) any person other than the company, any company affiliate or subsidiary, becomes the beneficial owner, directly or indirectly, of securities representing 50% or more of our then-outstanding voting power (excluding shares purchased directly from us or our affiliates); (b) a change in the majority of the membership of our board of directors other than directors approved by two-thirds of the directors (other than directors assuming office in conjunction with an election contest) who constituted the board of directors at the time our IPO was consummated, or whose election was previously so approved; (c) the consummation of a merger, amalgamation or consolidation of us or any of our subsidiaries with any other corporation, other than a merger or amalgamation immediately following which our board of directors immediately prior to the merger or amalgamation constitute at least a majority of the directors of the company surviving or continuing after the merger or amalgamation or, if the surviving company is a subsidiary, the ultimate parent thereof; or (d) our stockholders approve a plan of complete liquidation or dissolution of our company or there is consummated an agreement for the sale or disposition of all or substantially all of our assets, other than (1) a sale of such assets to an entity, at least 50% of the voting power of which is held by our stockholders following the transaction in substantially the same proportions as their ownership of the company immediately prior to the transaction or (2) a sale or disposition of such assets immediately following which our board of directors immediately prior to such sale constitute at least a majority of the board of directors of the entity to which the assets are sold or disposed, or, if that entity is a subsidiary, the ultimate parent thereof.
Until such time as the awards are fully vested and/or exercisable in accordance with the 2012 Plan, awards may not be sold, assigned, mortgaged, hypothecated, transferred, charged, pledged, encumbrance, gifted, transferred in trust (voting or other) or disposed in any other manner, except with the prior written consent of the administrator, which consent may be granted or withheld in the sole discretion of the Plan Administrator.
The 2012 Plan provides our board of directors with authority to suspend or terminate the 2012 Plan or any award, or revise and amend the 2012 Plan. However, stockholder approval is required for any amendment to the extent it is required to comply with applicable law or stock exchange listing requirements. The 2012 Plan will automatically terminate on the tenth anniversary of the effective date (although awards granted before that time will remain outstanding in accordance with their terms).
The award agreements for the 2012 Plan provide the board of directors and the Plan Administrator with the sole discretion to cancel or require repayments of awards in the event an award recipient engages in certain conduct deemed harmful to the Company.
2006 Stock Option Plan
In connection with the adoption of the 2012 Plan the board of directors terminated the 2006 Stock Option Plan (the "2006 Plan") effective as of July 27, 2012, and no further awards may be granted under the 2006 Plan after such date. However, the termination of the 2006 Plan did not affect awards outstanding under the 2006 Plan at the time of its termination and the terms of the 2006 Plan continue to govern outstanding awards granted under the 2006 Plan. The options granted under the 2006 Plan expire 10 years after the date of grant. The outstanding options under the 2006 Plan were fully vested as of December 31, 2017.
Outstanding Equity Awards at Fiscal Year End
|
| | | | | | | | | | | | | | | | | | |
| | | OPTION AWARDS | | STOCK AWARDS | |
| NAME | | NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS (#) EXERCISABLE | | NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS (#) UNEXERCISABLE | | OPTION EXERCISE PRICE ($/SH) | | OPTION EXPIRATION DATE | | NUMBER OF SHARES OR UNITS OF STOCK THAT HAVE NOT VESTED (#) | | MARKET VALUE OF SHARES OR UNITS OF STOCK THAT HAVE NOT VESTED ($) | |
| Steve Hislop | | 32,000 |
| (1) | 8,000 |
| (1) | 28.51 |
| | 2/28/2023 | | | | | |
| | | | | | | | | | | 5,170 |
| (2) | 145,019 |
| |
| | | | | | | | | | | 6,307 |
| (3) | 176,911 |
| |
| | | | | | | | | | | 9,876 |
| (4) | 277,022 |
| |
| | | | | | | | | | | 22,290 |
| (5) | 625,235 |
| |
| Jon Howie | | 48,938 |
| (6) | — |
| (6) | 13.54 |
| | 4/10/2022 | | | | | |
| | | | | | | | | | | 2,581 |
| (2) | 72,397 |
| |
| | | | | | | | | | | 6,298 |
| (3) | 176,659 |
| |
| | | | | | | | | | | 4,931 |
| (4) | 138,315 |
| |
| | | | | | | | | | | 8,347 |
| (5) | 234,133 |
| |
| Michael Hatcher | | 8,000 |
| (1) | 2,000 |
| (1) | 28.51 |
| | 2/28/2023 | | | | | |
| | | 9,208 |
| (7) | — |
| | 8.22 |
| | 1/1/2020 | | | |
|
| |
| | | | | | | | | | | 1,596 |
| (2) | 44,768 |
| |
| | | | | | | | | | | 1,946 |
| (3) | 54,585 |
| |
| | | | | | | | | | | 2,171 |
| (4) | 60,897 |
| |
| | | | | | | | | | | 3,674 |
| (5) | 103,056 |
| |
| Sharon Russell | | 8,000 |
| (1) | 2,000 |
| (1) | 28.51 |
| | 2/28/2023 | | | | | |
| | | | | | | | | | | 1,795 |
| (2) | 50,350 |
| |
| | | | | | | | | | | 2,189 |
| (3) | 61,401 |
| |
| | | | | | | | | | | 3,429 |
| (4) | 96,183 |
| |
| | | | | | | | | | | 2,901 |
| (5) | 81,373 |
| |
| |
| (1) | These options were granted on February 28, 2013 and vest 20% on each of the first five anniversaries of the grant date. |
| |
| (2) | These restricted stock units were granted on March 4, 2014 and vest 25% on each of the first four anniversaries of the grant date. |
| |
| (3) | These restricted stock units were granted on March 5, 2015 and vest 25% on each of the first four anniversaries of the grant date. |
| |
| (4) | These restricted stock units were granted on March 4, 2016 and vest 25% on each of the first four anniversaries of the grant date. |
| |
| (5) | These restricted stock units were granted on March 15, 2017 and vest 25% on each of the first four anniversaries of the grant date. |
| |
| (6) | These options were granted on April 10, 2012 and vested 20% on August 14, 2012 and 20% on each of the next four anniversaries of the first vesting date of August 14, 2012. |
| |
| (7) | These options were granted on January 1, 2010 and vested 20% on each of the first five anniversaries of the grant date. |
Option Exercises and Stock Vested
|
| | | | | | | | | | | | |
| | | OPTION AWARDS | | STOCK AWARDS |
| NAME | | NUMBER OF SHARES ACQUIRED ON EXERCISE (#) | | VALUE REALIZED ON EXERCISE ($)(1) | | NUMBER OF SHARES ACQUIRED ON VESTING (#) | | VALUE REALIZED ON VESTING ($)(2) |
| Steve Hislop | | — |
| | — |
| | 11,613 |
| | 322,841 |
|
| Jon Howie | | — |
| | — |
| | 7,373 |
| | 204,969 |
|
| Michael Hatcher | | — |
| | — |
| | 3,291 |
| | 91,490 |
|
| Sharon Russell | | — |
| | — |
| | 4,031 |
| | 112,062 |
|
| |
| (1) | Reflects the difference between the market price of our common stock at the time of exercise and the exercise price of the options. |
| |
| (2) | Value based on market value of our common stock on the dates of vesting. |
Potential Payments upon Termination or Change in Control
Termination of Employment
We currently have employment agreements in place with Messrs. Hislop, Howie and Hatcher and Mrs. Russell. The lossRussell that would entitle them to severance payments upon termination of employment. Assuming the servicesemployment of our CEO, other seniorexecutive officers or other key employees could have a material adverse effectwas terminated by us without cause on ourDecember 29, 2017, the last business day of fiscal year 2017, Messrs. Hislop, Howie and plans for future development. We currently have no effective replacement for any of these individuals dueHatcher and Mrs. Russell would be entitled to their experience, reputation in the industry$1,261,646, $314,962, $208,000 and special role in our operations. We also do not maintain any key man life insurance policies for any of our employees.
Our growth may strain our infrastructure and resources, which could slow our development of new restaurants and adversely affect our ability to manage our existing restaurants.
During fiscal years 2015, 2016 and 2017 we opened ten, twelve and eleven restaurants,$109,499, respectively. During 2018, we plan to open a total of eight to twelve restaurants for the year. Our future growth may strain our administrative staff, management systems and resources, financial controls andFor information systems. Those demands on our infrastructure and resources may also adversely affect our ability to manage our existing restaurants. If we fail to continue to improve our infrastructure or to manage other factors necessary for us to meet our expansion objectives, our operating results could be materially and adversely affected. Likewise, if sales decline, we may be unable to reduce our infrastructure quickly enough to prevent sales deleveraging, which would adversely affect our profitability.
Our insurance policies may not provide adequate levels of coverage against all claims, and fluctuating insurance requirements and costs could negatively impact our profitability.
We believe our insurance coverage is customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure. These losses, if they occur, could have a material and adverse effect on our business and results of operations. In addition, the cost of workers’ compensation insurance, general liability insurance and directors’ and officers’ liability insurance fluctuates based on our historical trends, market conditions and availability. Additionally, health insurance costs in general have risen significantly over the past few years and are expected to continue to increase. These increases, as well as federal legislation requiring employers to provide specified levels of health insurance to all employees, could have a negative impact on our profitability, and there can be no assurance that we will be able to successfully offset the effect of such increases with plan modifications and cost control measures, additional operating efficiencies or the pass-through of such increased costs to our customers.
Limitations in our Revolving Credit Facility may limit our ability to invest in the ongoing needs of our business and if we are unable to comply with our financial covenants, our liquidity and results of operations could be adversely affected.
At December 31, 2017 we had no outstanding indebtedness under our Revolving Credit Facility.
Our Revolving Credit Facility places certain conditions on us, including that it:
limits our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;
makes us more vulnerable to increases in interest rates, as borrowings under our Revolving Credit Facility are at variable rates;
limits our ability to obtain additional financing in the future for working capital or other purposes; and
could place us at a competitive disadvantage compared to our competitors that have less indebtedness.
Our Revolving Credit Facility places certain limitations on our ability to incur additional indebtedness. However, subject to the qualifications and exceptions in our Revolving Credit Facility, we may incur substantial additional indebtedness under that facility and may incur obligations that do not constitute indebtedness under that facility. The Revolving Credit Facility also places certain limitations on, among other things, our ability to enter into certain types of transactions, financing arrangements and investments, to make certain changes to our capital structure and to guarantee certain indebtedness. The Revolving Credit Facility also places certain restrictions on the payment of dividends and distributions. These restrictions limit or prohibit, among other things, our ability to:
pay dividends on, redeem or repurchase our stock or make other distributions;
incur or guarantee additional indebtedness;
sell stock in our subsidiaries;
create or incur liens;
make acquisitions or investments;
transfer or sell certain assets or merge or consolidate with or into other companies; and
enter into certain transactions with our affiliates.
Failureseverance benefits the executives are entitled to comply with certain covenants or the occurrence of a change of control under our Revolving Credit Facility could result in the acceleration of our obligations under the Revolving Credit Facility, which would have an adverse effect on our liquidity, capital resources and results of operations.
Our Revolving Credit Facility also requires us to comply with certain financial covenants including a minimum fixed charge coverage ratio and a maximum total lease adjusted leverage ratio. Changes with respect to these financial covenants may increase our interest rate and failure to comply with these covenants could result in a default and an acceleration of our obligations under the Revolving Credit Facility, which would have an adverse effect on our liquidity, capital resources and results of operations.
We may be unable to obtain debt or other financing on favorable terms or at all.
There are inherent risks in our ability to borrow. Our lenders may be unable to lend to us or tighten their lending standards, which could make it more difficult for us to increase the available commitment under our Revolving Credit Facility, refinance our existing indebtedness or to obtain other financing on favorable terms or at all. Our financial condition and results of operations would be adversely affected if we were unable to draw funds under our Revolving Credit Facility because of a lender default or to obtain other cost-effective financing.
Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, failures of significant financial institutions or other events could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business can be arranged. Such measures could include deferring capital expenditures (including the opening of new restaurants) and reducing or eliminating other discretionary uses of cash.
We may be required to record asset impairment charges in the future.
In accordance with accounting guidance as it relates to the impairment of long-lived assets, we review 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 cash flows and other relevant factors and circumstances. Deficient restaurant-level cash flow (defined as restaurant net income plus depreciation, gain and/or loss on assets and pre-opening expense) over the previous 24-month period in a stabilized location is considered a potential impairment indicator. In such situations, the Company evaluates future cash flow projections in conjunction with qualitative factors and future operating plans. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the restaurant to the estimated undiscounted future cash flow expected to be generated by the restaurant. If the carrying amount of the restaurant exceeds estimated future cash flow, an impairment charge is recognized for the amount by which the asset’s carrying amount exceeds its fair value. As a result of the above-mentioned review process, we recognized a non-cash loss on asset impairment of $4.4 million related to three restaurants in fiscal 2015. We did not recognize an impairment charge during fiscal 2017 or 2016.
Economic weakness within our respective markets could adversely impact consumer discretionary spending and may result in lower restaurant sales. Unfavorable fluctuations in our commodity costs, supply costs and labor rates, which may or may not be within our control, may also impact our operating margins. Any of these factors could as a result affect the estimates used in our impairment analysis and require additional impairment tests and charges to earnings. We continue to assess the performance of our restaurants and monitor the need for future impairment. There can be no assurance that future impairment tests will not result in additional charges to earnings.
Security breaches of confidential customer information in connection with our electronic processing of credit and debit card transactions may adversely affect our business.
The majority of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information of their customers has been stolen. We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our customers’ credit or debit card information. In addition, most states have enacted legislation requiring notification of security breaches involving personal information, including credit and debit card information. Any such claim, proceeding, or mandatory notification could cause us to incur significant unplanned expenses, which could have an adverse impact on our financial condition and results of operations. Further, adverse publicity resulting from these allegations may have a material adverse effect on us and our restaurants.
We may not be able to adequately protect our intellectual property, which, in turn, could harm the value of our brand and adversely affect our business.
Our ability to implement our business plan successfully depends in part on our ability to build brand recognition in the areas surrounding our locations using our trademarks and other proprietary intellectual property, including our brand names, logos and the unique ambience of our restaurants. We have registered or applied to register a number of our trademarks. We cannot assure you that our trademark applications will be approved. Also, as a result of the settlement agreement with an unaffiliated entity, Baja Chuy’s, we may not use “Chuy’s” in Nevada, California or Arizona, which may have an adverse effect on our growth plans in these states. Additionally, our brand value may be diluted as a result of their use of “Chuy’s” in these states. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our goods and services, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands.
We enforce our rights through a number of methods, including the issuance of cease-and-desist letters or making infringement claims in federal court. If our efforts to register, maintain and protect our trademarks or other intellectual property are inadequate, or if any third party misappropriates, dilutes or infringes on our intellectual property, the value of our brand may be harmed, which could have a material adverse effect on our business and might prevent our brand from achieving or maintaining market acceptance. We may also face the risk of claims that we have infringed third parties’ intellectual property rights. A successful claim of infringement against us could result in our being required to pay significant damages or enter into costly licensing or royalty agreements in order to obtain the right to use a third party’s intellectual property, any of which could have a negative impact on our results of operations and harm our future prospects. If such royalty or licensing agreements are not available to us on acceptable terms or at all, we may be forced to stop the sale of certain products or services. Any claims of intellectual property infringement, even those without merit, could be expensive and time consuming to defend, require us to rebrand our services, if feasible, and divert management’s attention.
We also rely on trade secrets and proprietary know-how to protect our brand. Our methods of safeguarding this information may not be adequate. Moreover, we may face claims of misappropriation or infringement of third parties’ rights that could interfere with our use of this information. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary information in the future and may result in a judgment or monetary damages. We do not maintain confidentiality agreements with all of our team members or suppliers. Even with respect to the confidentiality agreements we have, we cannot assure you that those agreements will not be breached, that they will provide meaningful protection, or that adequate remedies will be available in the event of an unauthorized use or disclosurea termination of our proprietary information. If competitors independently develop or otherwise obtain access to our trade secrets or proprietary know-how,employment, under their employment agreements, see Item 11. “Executive Compensation—Employment Agreements.”
Change-in-Control
Under the appeal of our restaurants could be reduced and our business could be harmed. In addition, if we default2012 Plan, a named executive officer’s awards granted under our lease agreements at certain of our locations, our landlord at those locations, Young/Zapp GP, LLC (“Young/Zapp”) and its subsidiaries, may havethat plan will immediately vest in the right to operateevent that a Tex-Mex or Mexican food restaurant at that location using our recipes and our trade dress. If such default were to occur, the brand value of our recipes and our trade dress might suffer.
Information technology system failures or breaches of our network security could interrupt our operations and adversely affect our business.
We rely on our computer systems and network infrastructure across our operations, including point-of-sale processing at our restaurants. Our operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses, worms and other disruptions. Any damage or failure of our computer systems or network infrastructure that
causes an interruptionchange in our operations could have a material adverse effect on our business and subject us to litigation or actions by regulatory authorities. Further, adverse publicity resulting from such an event may have a material adverse affect on us and our restaurants. Although we have employed both internal resources and external consultants to audit our systems, and test them for vulnerability, and we have implemented firewalls, data encryption and other security controls and intend to maintain and upgrade our security technology and operational procedures to prevent damage, breaches or other disruptions, these measures may not eliminate all risks.
A major natural or man-made disaster could have a material adverse effect on our business.
Most of our corporate systems, processes and corporate support for our restaurant operations are centralized at our headquarters in Austin, Texas, with certain systems and processes being concurrently stored at an offsite storage facility in accordance with our disaster recovery plan. As part of our disaster recovery plan, we have backup processes for our core systems at our co-location facility. If we are unable to fully implement this new disaster recovery plan, we may experience failures or delays in recovery of data, delayed reporting and compliance, inability to perform necessary corporate functions and other breakdowns in normal operating procedures that could have a material adverse effect on our business and create exposure to administrative and other legal claims against us.
We incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, particularly after we are no longer an “emerging growth company,” which could adversely affect our business, operating results and financial condition.
As a public company, we incur significant legal, accounting and other expenses. We are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the rules and regulations of the Nasdaq Stock Market. These requirements have increased and will continue to increase our legal, accounting and financial compliance costs. Further, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements.
At the end of fiscal 2017, we lost our status as an “emerging growth company” ascontrol (as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBs Act"). AsPlan or a result, we are no longer able to take advantage of certain exemptions from various reporting requirements. We expect that the loss of our "emerging growth company" status and compliance with the additional requirements will increase our legal and financial compliance costs and make some activities more time consuming and costly.
Failure of our internal control over financial reporting could adversely affect our business and financial results.
Our management is responsible for establishing and maintaining effective internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes"2012 Change in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. The identification of a material weakness could indicate a lack of controls adequate to generate accurate financial statements that, in turn, could cause a loss of investor confidence and decline in the market price of our common stock. We cannot assure you that we will be able to timely remediate any material weaknesses that may be identified in future periods or maintain all of the controls necessary for continued compliance. Likewise, we cannot assure you that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.
Federal, state and local tax laws may adversely impact our results of operations and financial position.
We are subject to federal, state and local taxes in the U.S. If the Internal Revenue Service (“IRS”Control") or other taxing authority disagrees with the positions we have taken on our tax returns, we could face additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations and financial position. In addition, complying with new tax laws, rules or regulations could impact our financial condition, and increases to federal or state statutory tax rates and other changes in tax laws, rules or regulations may increase our effective tax rate. Any increase in our effective tax rate could have a material impact on our financial results.
Risks Relating to Ownership of our Common Stock
The price of our common stock may be volatile and you could lose all or part of your investment.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares. The market price of our common stock could fluctuate significantly for various reasons, which include:
our quarterly or annual earnings or those of other companies in our industry;
changes in laws or regulations, or new interpretations or applications of laws and regulations, that are applicable to our business;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
changes in accounting standards, policies, guidance, interpretations or principles;
additions or departures of our senior management personnel;
sales of our common stock by our directors and executive officers;
adverse market reaction to any indebtedness we may incur or securities we may issue in the future;
actions by stockholders;
the level and quality of research analyst coverage for our common stock, changes in financial estimates or investment recommendations by securities analysts following our business or failure to meet such estimates;
the financial disclosure we may provide to the public, any changes in such disclosure or our failure to meet such disclosure;
various market factors or perceived market factors, including rumors, whether or not correct, involving us, our distributors or suppliers or our competitors;
acquisitions or strategic alliances by us or our competitors;
short sales, hedging and other derivative transactions in our common stock;
the operating and stock price performance of other companies that investors may deem comparable to us; and
other events or factors, including changes in general conditions in the United States and global economies or financial markets (including those resulting from acts of God, war, incidents of terrorism or responses to such events).
Recently, the stock market has experienced considerable price and volume fluctuations. This volatility has had an impact on the market price of securities issued by many companies, including companies in our industry. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our share price.
In the past, following periods of market volatility in the price of a company’s securities, security holders have often instituted class action litigation. If the market value of our common stock experiences adverse fluctuations and we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our business, causing our business to suffer.
Future sales of our common stock in the public market could lower our share price,occurs and the exerciseofficer’s employment is terminated without cause within 24 months following the change in control.
If a 2012 Change in Control occurred and the employment of stock optionsMessrs. Hislop, Howie and any additional capital raised by us throughHatcher and Mrs. Russell was terminated on December 29, 2017, the salelast business day of our common stock may dilute your ownership in us.
Salesfiscal year 2017, Messrs. Hislop, Howie and Hatcher and Mrs. Russell would have received $1,224,187, $621,504, $263,306 and $289,307, respectively, related to accelerated vesting of substantial amounts of our common stock in the public market by our existing stockholders except from registration or upon the exercise ofequity awards outstanding stock options or stock options granted in the future may adversely affect the market price of our common stock. Such sales could also create public perception of difficulties or problems with our business. These sales might also make it more difficult for us to sell securities in the future at a time and price that we deem appropriate.
As of December 31, 2017, we have 706,101 shares of common stock reserved for issuance under the 2012 Omnibus Equity Incentive Plan. Additionally there were 274,110 shares of common stock issuable upon exercise of outstanding options, of which 248,745 of these options were fully vested.
If securities analysts or industry analysts downgrade our shares, publish negative research or reports, or do not publish reports about our business, our share price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us, our business and our industry. If one or more analysts adversely change their recommendation regarding our shares or our competitors’ stock, our share price would likely decline. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our certificate of incorporation and bylaws, as amended and restated, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
authorize our board of directors to issue, without further action by the stockholders, up to 15,000,000 shares of undesignated preferred stock;
require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
specify that special meetings of our stockholders can be called only by a majority of our board of directors, the Chair of our board of directors, or our Chief Executive Officer;
establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
establish that our board of directors is divided into three classes, with each class serving three-year staggered terms;
prohibit cumulative voting in the election of directors;
provide that our directors may be removed only for cause by the holders of a supermajority of our outstanding shares of capital stock;
provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and
require the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder (any stockholder with 15% or more of our capital stock) for a period of three years following the date on which the stockholder became an “interested” stockholder.
Since we do not expect to pay any dividends for the foreseeable future, investors may be forced to sell their stock in order to realize a return on their investment.
Since we do not expect to pay any dividends for the foreseeable future, investors may be forced to sell their shares in order to realize a return on their investment. Other than the dividend paid in connection with entering into our old credit facility, which was terminated in connection with entering into our Revolving Credit Facility in November 2012, we have not declared or paid any dividends on our common stock. We do not anticipate that we will pay any dividends to holders of our common stock for the foreseeable future. Any payment of cash dividends will be at the discretion of our board of directors and will depend on our financial condition, capital requirements, legal requirements, earnings and other factors. Our ability to pay dividends is restricted by the terms of our Revolving Credit Facility and might be restricted by the terms of any indebtedness that we incur in the future. Consequently, you should not rely on dividends in order to receive a return on your investment. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividend Policy.”
Our reported financial results may be adversely affected by changes in accounting principles applicable to us.
Our reported financial results may be adversely affected by changes in accounting principles applicable to us. Generally accepted accounting principles in the U.S. (“GAAP”) are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by U.S. issuers in their SEC filings. Any such change could have a significant effect on our reported financial results.
Our ability to raise capital in the future may be limited.
Our ability to raise capital in the future may be limited. Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities, existing stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or
estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future securities offerings, diluting their interest and reducing the market price of our common stock.
Conflicts of interest may arise with some of our directors.
John Zapp, one of our founders, serves as Chairman of our board of directors. He could invest in entities that directly or indirectly compete with us. As a result of our relationship with John Zapp, when conflicts arise between his interests and the interests of our stockholders, he may not be disinterested.
| |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None
ITEM 2. PROPERTIES
As of March 7, 2018, we operated 91 Chuy’s restaurants located in the following states:
|
| | |
LOCATION | NUMBER OF RESTAURANTS |
Alabama | 2 |
|
Arkansas | 3 |
|
Colorado | 2 |
|
Florida | 8 |
|
Georgia | 4 |
|
Illinois | 2 |
|
Indiana | 2 |
|
Louisiana | 1 |
|
Kentucky | 4 |
|
Kansas | 1 |
|
Maryland | 2 |
|
Missouri | 1 |
|
North Carolina | 4 |
|
Ohio | 4 |
|
Oklahoma | 3 |
|
South Carolina | 1 |
|
Tennessee | 6 |
|
Texas | 35 |
|
Virginia | 6 |
|
Total | 91 |
|
| |
As of March 7, 2018 we have also signed leases and are in development for 10 additional restaurants in New Tampa, Doral, Kendall and Miami, Florida; Orland Park, Illinois; Lakewood and Greenwood Village, Colorado; Houston, Texas; Overland Park, Kansas and Huntsville, Alabama. We lease all of the land, parking lots and buildings used in our restaurant operations under various long-term operating lease agreements. For additional information regarding our obligations under our leases, see Note 9 to our Consolidated Financial Statements.
All of our restaurant leases provide for base (fixed) rent, plus the majority provide for additional rent based on gross sales (as defined in each lease agreement) in excess of a stipulated amount, multiplied by a stated percentage. A significant percentage of our restaurant leases also provide for periodic escalation of minimum annual rent either based upon increases in the Consumer Price Index or a pre-determined schedule. Typically, the initial lease term is 10 or 15 years in length with two to three five-year extension options. The initial terms of our leases currently expire between 2019 and 2039. We are also generally obligated to pay certain real estate taxes, insurances, common area maintenance charges and various other expenses related to the properties. Our corporate headquarters is also leased and is located at 1623 Toomey Road, Austin, Texas 78704. We subleased additional office space from certain related parties to expand our corporate headquarters in fiscal year 2017.
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, and as of December 31, 2017, 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 4. | MINE SAFETY DISCLOSURES |
None
PART II
| |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common shares are traded on the Nasdaq Global Select Market under the symbol “CHUY”. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock, as reported by the Nasdaq Global Select Market:
|
| | | | | | | |
| | High | | Low |
| Fourth Quarter of 2017 (September 25, 2017 – December 31, 2017) | $ | 28.50 |
| | $ | 28.00 |
|
| Third Quarter of 2017 (June 26, 2017 – September 24, 2017) | $ | 25.70 |
| | $ | 18.00 |
|
| Second Quarter of 2017 (March 27, 2017 – June 25, 2017) | $ | 32.10 |
| | $ | 21.59 |
|
| First Quarter of 2017 (December 26, 2016 – March 26, 2017) | $ | 33.60 |
| | $ | 26.60 |
|
| Fourth Quarter of 2016 (September 26, 2016 – December 25, 2016) | $ | 35.30 |
| | $ | 25.87 |
|
| Third Quarter of 2016 (June 27, 2016 – September 25, 2016) | $ | 37.78 |
| | $ | 27.78 |
|
| Second Quarter of 2016 (March 28, 2016 – June 26, 2016) | $ | 35.94 |
| | $ | 28.43 |
|
| First Quarter of 2016 (December 28, 2015 – March 27, 2016) | $ | 37.34 |
| | $ | 27.00 |
|
On March 7, 2018, the closing price of our common stock on the Nasdaq Global Select MarketDecember 29, 2017 was $27.40$28.05 per share.
HoldersDirector Compensation
AsThe elements of March 7, 2018, there were approximately 8 holders of record ofcompensation payable to our common stock. The number of holders of record is based upon the actual numbers of holders registered at such date and does not include holders of sharesnon-management directors in “street name” or persons, partnerships, associates, corporations or other entities in security position listings maintained by depositories.
Dividend Policy and Stock Repurchases
During the fiscal years ended December 31, 2017 and December 25, 2016 we did not declare or pay any dividends on our common stock. We currently expect to retain future earnings, if any, for useare briefly described in the operation, growthfollowing table:
|
| | | |
| | |
| Board Service: | |
| Annual cash retainer | $ | 40,000 |
|
| Annual equity award grant | $ | 40,000 |
|
| Board Committee Service: | |
| Audit Committee Chair annual cash retainer | $ | 10,000 |
|
| Compensation Committee Chair annual cash retainer | $ | 5,000 |
|
| Nominating & Corporate Governance Committee Chair annual cash retainer | $ | 2,500 |
|
Our non-management directors receive compensation for their services as directors. Committee chairs receive additional compensation for serving as chairs. We reimburse directors for all expenses incurred in attending board meetings.
Grants of our business and,equity awards to the extent that our board of directors believes appropriate in light of market conditions, the repurchase of shares of our common stock pursuant to the board-approved share repurchase plan. We currently do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretionmembers of our board of directors and will dependare made under the 2012 Plan. These equity awards vest 25% on our financial condition, operating results, capital requirements and such other factors as our board of directors deems relevant. In addition, in certain circumstances, our Revolving Credit Facility restricts our ability to pay dividends. For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
On October 26, 2017, 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. Repurchaseseach 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 infirst four anniversaries of 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. As of December 31, 2017, we had $30.0 million yet to be repurchased under this plan.
Purchases of Equity Securities by the IssuerDirector Compensation Table
The following table below provides information with respect to our purchase of sharesregarding the compensation of our common stock duringnon-employee directors for the three monthsyear ended December 31, 2017:
|
| | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) (2) |
| September 25, 2017 - October 22, 2017 | | — |
| | $ | — |
| — |
| $ | — |
|
| October 23, 2017 - November 19, 2017 | | 217 |
| | 23.4 |
| — |
| 30.0 |
|
| November 20, 2017 - December 31, 2017 | | — |
| | — |
| — |
| 30.0 |
|
| Total | | 217 |
| | $ | 23.4 |
| — |
| |
|
| | | | | | | | | |
| NAME | | FEES EARNED OR PAID IN CASH ($) | | STOCK AWARDS ($) | | TOTAL ($) |
| Mike Young | | 20,000 |
| (2) | 39,988 |
| (1) | 59,988 |
|
| John Zapp | | 40,000 |
| | 39,988 |
| (1) | 79,988 |
|
| Starlette Johnson | | 42,500 |
| | 39,988 |
| (1) | 82,488 |
|
| Saed Mohseni | | 45,000 |
| | 39,988 |
| (1) | 84,988 |
|
| Ira Zecher | | 50,000 |
| | 39,988 |
| (1) | 89,988 |
|
| Randall M. DeWitt | | 40,000 |
| | 39,988 |
| (1) | 79,988 |
|
| |
| (1) | These restricted stock units were granted on March 15, 2017 and vest 25% on each of the first four anniversaries of the grant date. |
| |
| (2) | Mike Young resigned from the Board of Directors on April 27, 2017. The fees paid are for a partial year of service. |
The grant date fair value of each award was equal to the closing price of the Company's stock on the date of grant as calculated in accordance with FASB ASC Topic 718 (“Topic 718”). Pursuant to SEC rules, the amounts shown in this column exclude the impact of estimated forfeitures related to service-based vesting conditions. See Note 11 to our consolidated financial statements included in the Original Form 10-K for information regarding the assumptions made in determining these values.
The following table provides information regarding the aggregate number of option and restricted stock unit awards held by our non-management directors as of December 31, 2017:
|
| | | | | | | | | |
| NAME | | AGGREGATE OPTION AWARDS | | AGGREGATE RESTRICTED STOCK UNIT AWARDS | | TOTAL AGGREGATE NUMBER OF AWARDS |
| John Zapp | | — |
| | 3,361 |
| | 3,361 |
|
| Starlette Johnson | | 7,250 |
| | 3,361 |
| | 10,611 |
|
| Saed Mohseni | | 7,250 |
| | 3,361 |
| | 10,611 |
|
| Ira Zecher | | 4,350 |
| | 3,361 |
| | 7,711 |
|
| Randall M. DeWitt | | — |
| | 1,653 |
| | 1,653 |
|
Compensation Committee Interlocks and Insider Participation
None of our executive officers have served as a member of the board of directors or compensation committee of any related entity that has one or more executive officers serving on our board of directors or compensation committee.
CEO Pay Ratio
As a recent “emerging growth company” we are not yet required to provide information relating to the ratio of total compensation of our Chief Executive Officer to the median of the annual total compensation of all of our employees other than our Chief Executive Officer, as required by Item 402(u) of Regulation S-K.
| |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Equity Compensation Plan Information
The following table sets forth, in tabular format, as of December 31, 2017 a summary of certain information related to our equity incentive plans under which our equity securities are authorized for issuance:
|
| | | | | | | | |
| PLAN CATEGORY | NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS (a) | | WEIGHTED-AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS ($)(b) | | NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES REFLECTED IN COLUMN (a)) |
| Equity compensation plans approved by security holders | | | | | |
| 2012 Omnibus Equity Incentive Plan | 398,593 |
| (1) | 27.78 |
| (2) | 706,101 |
|
| 2006 Stock Option Plan | 134,003 |
| | 10.92 |
| | — |
|
| Total | 532,596 |
| | 19.54 |
| | 706,101 |
|
| |
| (1) | Includes 258,486 shares that were surrendered to the Company to satisfy tax withholding obligations in connection with vesting ofunderlying time-based restricted stock units. |
| |
| (2) | On November 2, 2017, we announced that our BoardWeighted average exercise price of Directors authorized us to repurchase an indeterminate number of our commonoutstanding options excludes restricted stock through December 31, 2019 at an aggregate market value of up to $30.0 million.units. |
Stock Performance ChartBeneficial Ownership
The following graph comparestables below set forth the cumulative five-year stockholder return onbeneficial ownership information of our common stock relativeas of April 2, 2018 for:
each of our named executive officers;
each of our directors;
all of our executive officers and directors as a group; and
each person known to us to be the Nasdaq Composite,beneficial owner of more than 5% of our shares of common stock.
Unless otherwise noted below, the S&P 600 Restaurants Indexaddress of the persons and a peer group consisting of: Bloomin' Brands, Inc., Bravo Brio Restaurant Group, Brinker International, Inc., Buffalo Wild Wings, Inc., The Cheesecake Factory Incorporated, BJ's Restaurants, Inc., Famous Dave's of America, Inc., Red Robin Gourmet Burgers, Inc. and Texas Roadhouse, Inc. The peer group consists of companies which competeentities listed in the casual dining segmenttable below is c/o Chuy’s Holdings, Inc., 1623 Toomey Rd., Austin, Texas 78704. We have determined beneficial ownership in accordance with the rules of the restaurant industry. The comparison assumes a $100 initialSEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock reflected as beneficially owned, subject to applicable community property laws.
Beneficial ownership and the reinvestmentpercentage of dividends. This graphbeneficial ownership is furnished and not filed with the SEC. Notwithstanding anything to the contrary set forth in anybased on 16,925,099 shares of our previous filings made under the Securities Actcommon stock outstanding at April 2, 2018. Shares of 1933common stock subject to options or the Securities Exchange Actrestricted stock units that a person has a right to acquire or receive within 60 days of 1934 that incorporate future filings made by us under those statutes, the below stock performance graph is notApril 2, 2018 are deemed to be incorporatedoutstanding and beneficially owned by reference inthe person holding the options or restricted stock units for the purpose of computing the percentage of beneficial ownership of that person and any prior filings, nor shall it be incorporated by reference intogroup of which that person is a member, but are not deemed outstanding for the purpose of computing the percentage of beneficial ownership for any future filings made by us under those statutes.other person.
Directors and Named Executive Officers
|
| | | | | | | | | | | | | | | | | | |
| | 12/30/2012 | 12/29/2013 | 12/28/2014 | 12/27/2015 | 12/25/2016 | 12/31/2017 |
| Chuy's Holdings, Inc. | $ | 100.00 |
| $ | 163.31 |
| $ | 86.89 |
| $ | 138.83 |
| $ | 146.90 |
| $ | 125.06 |
|
| S&P 600 Restaurants | $ | 100.00 |
| $ | 163.95 |
| $ | 205.81 |
| $ | 197.30 |
| $ | 234.29 |
| $ | 243.20 |
|
Peer Group (1) | $ | 100.00 |
| $ | 157.43 |
| $ | 185.92 |
| $ | 163.18 |
| $ | 190.27 |
| $ | 185.54 |
|
| NASDAQ Composite Index | $ | 100.00 |
| $ | 140.41 |
| $ | 162.38 |
| $ | 170.54 |
| $ | 184.53 |
| $ | 233.20 |
|
(1) We believe a peer group performance provides a better comparison to the company's stock performance than the S&P 600 Restaurants Index because it consists of our direct competitors in the casual dining segment of the restaurant industry.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial and operating data for each of the five fiscal years in the period ended December 31, 2017 are derived from our audited consolidated financial statements. Not all periods shown below are discussed in this Annual Report on Form 10-K. This selected consolidated financial and operating data should be read in conjunction with the consolidated financial statements and accompanying notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in the Annual Report on Form 10-K. Historical results are not necessarily indicative of future performance. |
| | | | | | |
| NAME | | BENEFICIALLY OWNED (1) | | PERCENT OF CLASS |
| John Zapp | | 176,150 |
| | 1.0 | % |
| Steve Hislop | | 162,540 |
| | 1.0 | % |
| Jon Howie | | 65,900 |
| | * |
|
| Michael Hatcher | | 34,585 |
| | * |
|
Sharon Russell (2) | | 15,001 |
| | * |
|
| Starlette Johnson | | 10,339 |
| | * |
|
| Saed Mohseni | | 10,339 |
| | * |
|
| Ira Zecher | | 6,624 |
| | * |
|
| Randall M. DeWitt | | 433 |
| | * |
|
| | | | | |
| All Directors and Executive Officers as a group (8 persons) | | 466,910 |
| | 2.7 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended (1) |
| | December 31, 2017 | | December 25, 2016 | | December 27, 2015 | | December 28, 2014 | | December 29, 2013 |
| | (Amounts are shown in thousands, except per share amounts) |
| Consolidated Statements of Income: | | | | | | | | | |
| Revenue | $ | 369,589 |
| | $ | 330,613 |
| | $ | 287,062 |
| | $ | 245,101 |
| | $ | 204,361 |
|
| Costs and Expenses: | | | | | | | | | |
| Cost of sales | 96,270 |
| | 85,542 |
| | 75,686 |
| | 69,159 |
| | 55,894 |
|
| Labor | 128,846 |
| | 110,730 |
| | 93,625 |
| | 82,665 |
| | 66,565 |
|
| Operating | 51,462 |
| | 45,900 |
| | 39,954 |
| | 33,897 |
| | 29,279 |
|
| Occupancy | 25,642 |
| | 22,204 |
| | 19,019 |
| | 15,167 |
| | 12,262 |
|
| General and administrative | 18,661 |
| | 17,560 |
| | 16,176 |
| | 11,693 |
| | 10,015 |
|
| Secondary offering costs | — |
| | — |
| | — |
| | — |
| | 925 |
|
| Marketing | 2,756 |
| | 2,390 |
| | 2,249 |
| | 1,719 |
| | 1,306 |
|
| Restaurant pre-opening | 6,233 |
| | 5,348 |
| | 4,417 |
| | 4,539 |
| | 3,883 |
|
| Impairment and closure costs | — |
| | 1,517 |
| | 4,360 |
| | — |
| | — |
|
| Gain on insurance settlements | (1,362 | ) | | — |
| | — |
| | — |
| | — |
|
| Depreciation and amortization | 17,560 |
| | 15,081 |
| | 12,827 |
| | 10,310 |
| | 8,858 |
|
| Total cost and expenses | 346,068 |
| | 306,272 |
| | 268,313 |
| | 229,149 |
| | 188,987 |
|
| Income from operations | 23,521 |
| | 24,341 |
| | 18,749 |
| | 15,952 |
| | 15,374 |
|
| Interest expense, net | 65 |
| | 63 |
| | 110 |
| | 124 |
| | 109 |
|
| Income before income taxes | 23,456 |
| | 24,278 |
| | 18,639 |
| | 15,828 |
| | 15,265 |
|
| Income tax (benefit) expense | (5,500 | ) | | 7,034 |
| | 5,743 |
| | 4,337 |
| | 4,196 |
|
| Net income | $ | 28,956 |
| | $ | 17,244 |
| | $ | 12,896 |
| | $ | 11,491 |
| | $ | 11,069 |
|
| Per Share Data: | | | | | | | | | |
| Basic net income per share | $ | 1.71 |
| | $ | 1.03 |
| | $ | 0.78 |
| | $ | 0.70 |
| | $ | 0.68 |
|
| Diluted net income per share | $ | 1.70 |
| | $ | 1.02 |
| | $ | 0.77 |
| | $ | 0.69 |
| | $ | 0.66 |
|
| Weighted average common stock outstanding | | | | | | | | | |
| Basic | 16,894,986 |
| | 16,676,073 |
| | 16,470,278 |
| | 16,427,732 |
| | 16,276,999 |
|
| Diluted | 17,003,233 |
| | 16,887,882 |
| | 16,739,387 |
| | 16,709,471 |
| | 16,677,387 |
|
| Consolidated Balance Sheets Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 8,785 |
| | $ | 13,694 |
| | $ | 8,529 |
| | $ | 3,815 |
| | $ | 5,323 |
|
| Net working capital (deficit) | 929 |
| | (417 | ) | | (7,785 | ) | | (4,823 | ) | | (4,849 | ) |
| Total assets | 271,967 |
| | 240,728 |
| | 201,448 |
| | 179,212 |
| | 151,162 |
|
| Total debt | — |
| | — |
| | — |
| | 8,750 |
| | 6,000 |
|
| Total stockholders’ equity | $ | 188,962 |
| | $ | 157,065 |
| | $ | 133,057 |
| | $ | 118,188 |
| | $ | 104,488 |
|
|
| |
| * | Indicates ownership of less than 1%. |
| |
| (1) | We utilizeBased on shares of common stock outstanding as of April 2, 2018. Steve Hislop, Jon Howie, Michael Hatcher, Sharon Russell, Starlette Johnson, Saed Mohseni and Ira Zecher held options to purchase 40,000, 48,938, 19,208, 10,000, 7,250, 7,250 and 4,350 shares of common stock, respectively, which are exercisable within the 60 days of April 2, 2018. All Directors and Executive Officers as a 52- or 53-week accounting period which ends ongroup line item includes 126,996 options to purchase shares of our common stock exercisable within the last Sunday60 days of April 2, 2018. |
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| (2) | On March 6, 2018, Mrs. Russell resigned from her positions as Chief Administrative Officer and Secretary of the calendarCompany and notified the Company of her intent to retire from the Company effective August 5, 2018. |
Five Percent Holders
The following table sets forth information regarding the number and percentage of shares of common stock held by all persons and entities who are known by the Company to beneficially own five percent or more of the Company ’s outstanding common stock. The information regarding beneficial ownership of common stock by the entities identified below is included in reliance on a report filed with the Securities and Exchange Commission by such entity, except that the percentages are based upon the Company’s calculations made in reliance upon the number of shares reported to be beneficially owned by such entity in such report and the number of shares of common stock outstanding on April 2, 2018.
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| | | | | | |
| NAME | | NUMBER OF SHARES | | PERCENTAGE OF OUTSTANDING SHARES |
BlackRock, Inc. (1) | | 2,181,895 |
| | 12.9 | % |
Wasatch Advisors, Inc. (2) | | 1,483,002 |
| | 8.8 | % |
Stephens Investment Management Group, LLC (3) | | 1,292,947 |
| | 7.6 | % |
T. Rowe Price Associates, Inc. (4) | | 948,412 |
| | 5.6 | % |
Dimensional Fund Advisors LP (5) | | 941,573 |
| | 5.6 | % |
Vanguard Group, Inc. (6) | | 859,797 |
| | 5.1 | % |
| |
| (1) | According to Amendment No. 3 to Schedule 13G filed on January 19, 2018 by BlackRock, Inc., BlackRock, Inc. beneficially owns and has sole dispositive power with respect to 2,181,895 shares of our common stock and has sole voting power with respect to 2,153,325 shares of our common stock. The address of BlackRock Inc. is 55 East 52nd Street, New York, NY 10055. |
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| (2) | According to Amendment No. 1 to Schedule 13G filed on February 14, 2018 by Wasatch Advisors, Inc., Wasatch Advisors, Inc. beneficially owns and has sole voting and dispositive power with respect to 1,483,002 shares of our common stock. The address of Wasatch Advisors, Inc. is 505 Wakara Way, Salt Lake City, UT 84108. |
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| (3) | According to Amendment No. 4 to Schedule 13G (the "Amendment") filed on February 13, 2018 by Stephens Investment Management Group, LLC, Stephens Investments Holdings LLC, Stephens Inc. and Warren A. Stephens, Stephens Investment Management Group and Stephens Investment Holdings beneficially own and have sole dispositive power with respect to 1,292,947 shares of our common stock and shared voting power with respect to 629,922 shares of our common stock, Stephens Inc. beneficially owns and has sole dispositive power with respect to 35,273 shares of our common stock and shared voting power with respect to 35,218 shares of our common stock and Warren A. Stephens |
beneficially owns and has sole dispositive power with respect to 1,328,220 shares of our common stock and shared voting power with respect to 655,140 shares of our common stock. The address of these reporting persons is 111 Center Street, Little Rock, Arkansas 72201.
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| (4) | According to Schedule 13G filed on February 14, 2018 by T. Rowe Price Associates, Inc., T. Rowe Price Associates, Inc. beneficially owns and has sole dispositive power with respect to 948,412 shares of our common stock and has sole voting power with respect to 152,596 shares of our common stock. The address of T. Rowe Price Associates, Inc. is 100 East Pratt St., Baltimore, MD 21202. |
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| (5) | According to Schedule 13G filed on February 9, 2018 by Dimensional Fund Advisors LP, Dimensional Fund Advisors LP beneficially owns and has sole dispositive power with respect to 941,573 shares of our common stock and has sole voting power of 891,292 shares of our common stock. The address of Dimensional Fund Advisors LP is 6300 Bee Cave Road, Building One, Austin, TX 78746. |
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| (6) | According to Schedule 13G filed on February 8, 2018 by Vanguard Group, Inc., Vanguard Group, Inc. beneficially owns 859,797 shares of our common stock, has sole dispositive power with respect to 827,526 shares of our common stock, has shared dispositive power with respect to 32,271 shares of our common stock, has sole voting power of 33,271 shares of our common stock and shared voting power with respect to 700 shares of our common stock. The address of Vanguard Group, Inc. is 100 Vanguard Blvd., Malvern, PA 19355. |
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| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The following is a summary of transactions that occurred on or were in effect after December 26, 2016 to which we have been a party in which the amount involved exceeded $120,000 and in which any of our executive officers, directors or beneficial holders of more than 5% of our capital stock had or will have a direct or indirect material interest.
Default License Letter Agreements
We entered into letter agreements in November 2006 with respect to the properties that we lease from Young/Zapp GP, LLC ("Young/Zapp") and its subsidiaries, an entity owned 47.5% by each of our Founders and 5.0% by Sharon Russell, a former executive officer of the Company and its subsidiaries. Pursuant to these letter agreements, if we default under our lease agreements with Young/Zapp and terminate possession of the lease location, Young/Zapp may operate a Tex-Mex or Mexican food restaurant in that location. However, they may not use our trademarks or trade names or confusingly similar trademarks or tradenames. The approximate dollar value of this agreement was not determinable.
Intellectual Property
We entered into a recipe license agreement with MY/ZP IP Group, Ltd ("MY/ZP IP") in November 2006 to allow the use of certain of our recipes by MY/ZP IP at Shady Grove, Inc. ("Shady Grove"), a restaurant owned by our Founders, one of which is also a director of our Company. Shady Grove is a restaurant that serves American and Southwestern cuisine, such as hamburgers, sandwiches, fries, queso, cheese sticks and chili, and for which we provide management and administrative services pursuant to a management agreement with Three Star Management, Ltd. The approximate dollar value of this agreement was not determinable.
Management Agreement
We entered into a management agreement in November 2006 with Three Star Management, Ltd. to provide management services, such as administrative, accounting and human resources support, to Shady Grove. In consideration of the services we provide to Shady Grove, Three Star Management, Ltd. agreed to pay us a monthly fee of $10,000, a pro rata share of the wages and expenses incurred to provide the services and the reimbursement of reasonable out-of-pocket expenses. Due to a reduction in management services we provide, we agreed to reduce the fee to a $10,000 quarterly payment.
Management System License Agreement
In November 2006, we entered into a management system license agreement with MY/ZP IP to allow the use of certain of our handbooks, personnel training materials and other materials relating to our business know-how and personnel management know-how by Shady Grove and in any other endeavors of MY/ZP IP, subject to certain conditions. The approximate dollar value of this agreement was not determinable.
Cross-Marketing License Agreement
In November 2006, we entered into a cross-marketing license agreement with MY/ZP IP to allow Shady Grove to market our brand at Shady Grove and allow us to market Shady Grove at our locations. Some cross-promotional activities include selling merchandise and co-branding our website and menus. The approximate dollar value of this agreement was not determinable.
Parade Sponsorship Agreement
We entered into a parade sponsorship agreement in November 2006 with MY/ZP IP to obtain the right to sponsor, manage and operate the “Chuy’s Children Giving To Children Parade” and to use MY/ZP IP’s trademark in connection with the parade. In addition, we granted MY/ZP IP a limited license to use the Chuy’s name in their trademark “Chuy’s Children Giving To Children Parade.” The approximate dollar value of this agreement was not determinable.
Leases
On December 1, 2016, we entered through our subsidiary Chuy's Opco, Inc. into a sublease with Young Zapp Graceland, Ltd. for additional office space next to the Company’s current office space. Young Zapp Graceland, Ltd. is owned by John Zapp and Michael Young, directors of the Company, and Sharon Russell, a former executive officer of the Company. The audit committee and the disinterested directors of the board approved the transaction after determining that the transaction was in the ordinary course of the Company’s business and was on terms as favorable as would have been obtained by the Company in a comparable arm’s length transaction with an independent, unrelated third party. The sublease began on January 1, 2017 and has a five-year term with an option to extend for an additional five years. The Company will be required to pay rent of $16,320 per month during the first year. This monthly rent amount increases approximately $500 each year. The sublease is a triple net lease and the Company will be responsible for the taxes, insurance and maintenance costs related to the property.
In additional to our corporate office, we also lease our North Lamar, River Oaks, Highway 183, Round Rock, Shenandoah and Arbor Trails properties from subsidiaries of Young/Zapp. In 2017, we paid Young/Zapp $337,050, $293,450, $431,879, $513,901, $545,598, $302,344, and $411,465, which includes rent and a percentage of gross sales in excess of our base rent, with respect to our headquarters, North Lamar, River Oaks, Hwy 183, Round Rock, Shenandoah and Arbor Trails locations, respectively.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive officers. Each indemnification agreement provides that, subject to limited exceptions, and among other things, we will indemnify the director or executive officer to the fullest extent permitted by law for claims arising in his or her capacity as our director or officer and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified.
Related Party Transactions Policy
Our audit committee reviews certain financial transactions, arrangements and relationships between us and any of the following related parties to determine whether any such transaction, arrangement or relationship is a related party transaction:
any of our directors, director nominees or executive officers;
any beneficial owner of more than 5% of our outstanding stock; and
any immediate family member of any of the foregoing.
Our audit committee reviews any financial transaction, arrangement or relationship that:
involves or will involve, directly or indirectly, any related party identified above and is in an amount greater than $120,000;
would cast doubt on the independence of a director;
would present the appearance of a conflict of interest between us and the related party; or
is otherwise prohibited by law, rule or regulation.
The audit committee reviews each such transaction, arrangement or relationship to determine whether a related party has, has had or expects to have a direct or indirect material interest. Following its review, the audit committee will take such action as it deems necessary and appropriate under the circumstances, including approving, disapproving, ratifying, canceling or recommending to management how to proceed if it determines a related party has a direct or indirect material interest in a transaction, arrangement or relationship with us. Any member of the audit committee who is a related party with respect to a transaction under review will not be permitted to participate in the discussions or evaluations of the transaction; however, the audit committee member will provide all material information concerning the transaction to the audit committee. The audit committee will report its action with respect to any related party transaction to the board of directors.
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| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
RSM US LLP served as the Company’s independent registered public accounting firm in 2017 and 2016. The following sets forth fees billed by RSM for the audit of our annual financial statements and other services rendered:
|
| | | | | | | | |
| | YEARS ENDED |
| | | DECEMBER 31, 2017 | | DECEMBER 25,
2016 |
Audit fees(1) | | $ | 333,100 |
| | $ | 255,000 |
|
Tax fees(2) | | 3,495 |
| | 184,845 |
|
| Total | | $ | 336,595 |
| | $ | 439,845 |
|
| |
| (1) | Includes fees for audits of our annual financial statements and its internal control over financial reporting, reviews of the related quarterly financial statements, and services that are normally provided by independent registered public accounting firms in connection with statutory and regulatory filings or engagements, including reviews of documents filed with the SEC. |
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| (2) | Tax fees for fiscal 2017 consist of $3,495 for tax advice. Tax fees for fiscal 2016 consist of $126,350 for tax advice and tax planning and $58,495 for tax compliance including the preparation, review and filing of tax returns. The Company engaged a different tax services firm for fiscal year ended December 31, 2017 was comprised of 53 weeks and the other four fiscal years were comprised of 52 weeks.going forward. |
Pursuant to the charter of the audit committee, the audit committee is responsible for the oversight of our accounting, reporting and financial practices. The audit committee has the responsibility to select, appoint, engage, oversee, retain, evaluate and terminate our external auditors; pre-approve all audit and non-audit services to be provided, consistent with all applicable laws, to us by our external auditors; and establish the fees and other compensation to be paid to our external auditors.
The audit committee has adopted a policy to pre-approve all audit and permitted non-audit services provided by our independent registered public accounting firm. All audit and non-audit services for 2017 and 2016 were pre-approved by the audit committee.
PART IV
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ITEM 7.15. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with Item 6. “Selected Financial Data” and our consolidated financial statements and the related notes to those statements included in Item 8. “Financial Statements and Supplementary Data.”
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 Item 1A. “Risk Factors” and elsewhere 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.
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 by Mike Young and John Zapp, and as of December 31, 2017, we operated 91 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 by providing high-quality food and service at a considerable value; and
Leverage our infrastructure.
We opened eleven restaurants in fiscal 2017. During 2018, we plan to open a total of eight to twelve restaurants for the year. 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 new markets while continuing to "backfill" our smaller existing markets in order to build our brand awareness. For additional discussion of our growth strategies and outlook, see Item 1. “Business—Our Business Strategies.”
Newly opened restaurants typically experience normal inefficiencies in the form of higher cost of sales, labor and direct operating and occupancy costs for several months after their opening in both percentage and dollar terms when compared with our more mature, established restaurants. Accordingly, the number and timing of newly opened restaurants has had, and is expected to continue to have, an impact on restaurant opening expenses, cost of sales, labor and occupancy and operating expenses. Additionally, initial restaurant openings in new markets may experience even greater inefficiencies for several months, if not longer, due to lower initial sales volumes, which results from initially low consumer awareness levels, and a lack of operating cost leverage until additional restaurants can be opened in these markets and build the overall consumer awareness in the market.
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 eighteenth 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 70, 61 and 51 restaurants at December 31, 2017, December 25, 2016 and December 27, 2015, 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:
|
| | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | December 25, 2016 | | December 27, 2015 |
| Total restaurants (at end of period) | 91 |
| | 80 |
| | 69 |
|
| Total comparable restaurants (at end of period) | 70 |
| | 61 |
| | 51 |
|
| Average unit volumes (in thousands) | $ | 4,439 |
| (1) | $ | 4,581 |
| | $ | 4,729 |
|
| Change in comparable restaurant sales | (0.7 | )% | (1) | 0.8 | % | | 3.1 | % |
| Average check | $ | 14.75 |
| | $ | 14.48 |
| | $ | 14.23 |
|
| |
(1)
| We consider a restaurant to be comparable in the first full quarter following the eighteenth month of operations. Change in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. As a result, our comparable restaurant sales calculation above for 2017 is based on the comparable 52- week period. |
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 consisted of 53 weeks, our 2016 and 2015 fiscal years each consisted of 52 weeks.
Key Financial Definitions
Revenue. Revenue primarily consists of food and beverage sales and also includes sales of our t-shirts, sweatshirts and hats. Revenue is presented net of discounts associated with each sale. Revenue in a given period is directly influenced by the number of operating weeks in such period, the number of restaurants we operate and comparable restaurant sales growth.
Cost of Sales. Cost of sales consists primarily of food, beverage and merchandise related costs. The components of cost of sales are variable in nature, change with sales volume and are subject to increases or decreases based on fluctuations in commodity costs.
Labor Costs. Labor costs include restaurant management salaries, front- and back-of-house hourly wages and restaurant-level manager bonus expense, employee benefits and payroll taxes.
Operating Costs. Operating costs consist primarily of restaurant-related operating expenses, such as supplies, utilities, repairs and maintenance, travel cost, insurance, 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 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 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 closure 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. Closure costs consist of any costs associated with the closure of a restaurant, including lease termination costs, rent payments and other miscellaneous closing 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 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
53 Weeks Ended December 31, 2017 Compared to the 52 Weeks Ended December 25, 2016
The following table presents, for the periods indicated, the consolidated statement of operations (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | % of Revenue | | December 25, 2016 | | % of Revenue | | Change | | % Change |
| Revenue | $ | 369,589 |
| | 100.0 | % | | $ | 330,613 |
| | 100.0 | % | | $ | 38,976 |
| | 11.8 | % |
| Costs and expenses: | | | | | | | | | | | |
| Cost of sales | 96,270 |
| | 26.0 | % | | 85,542 |
| | 25.9 | % | | 10,728 |
| | 12.5 | % |
| Labor | 128,846 |
| | 34.9 | % | | 110,730 |
| | 33.5 | % | | 18,116 |
| | 16.4 | % |
| Operating | 51,462 |
| | 13.9 | % | | 45,900 |
| | 13.9 | % | | 5,562 |
| | 12.1 | % |
| Occupancy | 25,642 |
| | 6.9 | % | | 22,204 |
| | 6.7 | % | | 3,438 |
| | 15.5 | % |
| General and administrative | 18,661 |
| | 5.0 | % | | 17,560 |
| | 5.3 | % | | 1,101 |
| | 6.3 | % |
| Marketing | 2,756 |
| | 0.7 | % | | 2,390 |
| | 0.7 | % | | 366 |
| | 15.3 | % |
| Restaurant pre-opening | 6,233 |
| | 1.7 | % | | 5,348 |
| | 1.6 | % | | 885 |
| | 16.5 | % |
| Impairment and closure costs | — |
| | — | % | | 1,517 |
| | 0.5 | % | | (1,517 | ) | | * |
|
| Gain on insurance settlements | (1,362 | ) | | (0.3 | )% | | — |
| | — | % | | (1,362 | ) | | * |
|
| Depreciation and amortization | 17,560 |
| | 4.8 | % | | 15,081 |
| | 4.6 | % | | 2,479 |
| | 16.4 | % |
| Total costs and expenses | 346,068 |
| | 93.6 | % | | 306,272 |
| | 92.7 | % | | 39,796 |
| | 13.0 | % |
| Income from operations | 23,521 |
| | 6.4 | % | | 24,341 |
| | 7.3 | % | | (820 | ) | | (3.4 | )% |
| Interest expense, net | 65 |
| | 0.1 | % | | 63 |
| | — | % | | 2 |
| | 3.2 | % |
| Income before income taxes | 23,456 |
| | 6.3 | % | | 24,278 |
| | 7.3 | % | | (822 | ) | | (3.4 | )% |
| Income tax (benefit) expense | (5,500 | ) | | (1.5 | )% | | 7,034 |
| | 2.1 | % | | (12,534 | ) | | (178.2 | )% |
| Net income | $ | 28,956 |
| | 7.8 | % | | $ | 17,244 |
| | 5.2 | % | | $ | 11,712 |
| | 67.9 | % |
| | | | | | | | | | | | |
| * Not meaningful | | | | | | | | | | | |
Revenue. Revenue increased $39.0 million, or 11.8%, to $369.6 million for the year ended December 31, 2017, as compared to $330.6 million for the year ended December 25, 2016. The Company's fiscal year 2017 included 53 weeks compared 52 weeks in fiscal year 2016. Revenue attributed to the extra operating week was $7.3 million. In addition to the extra operating week, the increase was primarily driven by $44.6 million in incremental revenue from an additional 567 operating weeks provided by 23 new restaurants opened during and subsequent to the year ended December 25, 2016. This increase was partially offset by a decrease in our comparable sales, a $1.9 million decrease during the second half of the fiscal year as a result of Hurricanes Harvey and Irma as well as revenue from our non-comparable restaurants that are not included in the incremental revenue discussed above. Revenue related to non-comparable restaurants is historically lower as the stores transition out of the 'honeymoon' period that follows a restaurant's initial opening. The honeymoon period refers to the weeks following a restaurant's initial opening, during which sales are typically higher than normal.
Comparable restaurant sales decreased 0.7% during the year for the 52-weeks ended December 24, 2017 compared to the same period in 2016. The decrease in comparable restaurant sales was primarily driven by a 2.3% decrease in average weekly customers, partially offset by a 1.6% increase in average weekly check. Our comparable restaurant sales and average weekly customers were negatively affected by the weather conditions and sporting events by approximately 40 basis points ("bps") and strategic
cannibalization of approximately 40 bps from two Austin restaurants. This decrease was partially offset by about 20 bps as a result of an extra operating day in fiscal 2017 due to the Company’s restaurant closing schedule on Christmas Day in fiscal year 2016. Our total revenue mix attributed to bar sales increased to 18.4% during the year ended December 31, 2017 compared to 18.3% during the same period in 2016.
Cost of Sales. Cost of sales as a percentage of revenue increased to 26.0% during the year ended December 31, 2017, from 25.9% during the comparable period in 2016, primarily as a result of an increase in produce of approximately 20 bps, an increase in chicken of approximately 20 bps, increases in grocery and dairy costs of approximately 20 bps, partially offset by a decrease in beef costs of approximately 40 bps and a decrease in bar costs of approximately 10 bps.
Labor Costs. Labor costs as a percentage of revenue increased to 34.9% during the year ended December 31, 2017, from 33.5% during the comparable period in 2016, primarily due to new store labor inefficiencies, increased management labor as a result of delayed openings in new markets and hourly labor rate inflation of approximately 2.5%.
Operating Costs. Operating costs as a percentage of revenue remained relatively flat at 13.9% during the year ended December 31, 2017 compared to the same period in 2016. This remained flat because higher utilities and insurance costs of 30 bps and higher credit card and delivery charges of 5 bps were offset by hourly health care accrual adjustment of 30 bps and increased operating leverage due to an extra week in the current year.
Occupancy Costs. Occupancy costs as a percentage of revenue increased to 6.9% during the year ended December 31, 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, partially offset by 10 bps increase in operating leverage due to an extra week in the current year.
General and Administrative Expenses. General and administrative expenses increased $1.1 million, or 6.3%, to $18.7 million for the year ended December 31, 2017, as compared to $17.6 million during the comparable period in 2016. This increase was primarily driven by an increase in management salaries and equity compensation of $1.9 million due to additional headcount to support our growth, $0.3 million in additional rent expense driven by our corporate office expansion, $0.1 million of additional public company costs, and $0.3 million of various other miscellaneous administrative expenses, partially offset by a $1.5 million decrease in performance based bonuses.
Marketing Costs. Marketing costs as a percentage of revenue remained relatively flat at 0.7% during the year ended December 31, 2017 as compared to the same period in 2016.
Restaurant Pre-opening Costs. Restaurant pre-opening costs increased by $0.9 million, or 16.5%, to $6.2 million for the year ended December 31, 2017, as compared to $5.3 million during the comparable period in 2016. This increase is primarily due to timing of our development schedules and delayed openings in new markets in fiscal year 2017. During the year ended December 31, 2017 we incurred pre-opening costs for eleven new restaurants opened during 2017 as well as nine restaurants which will be opened during fiscal year 2018. During the year ended December 25, 2016 we incurred pre-opening costs for twelve new restaurants and four restaurants which opened in fiscal year 2017.
Impairment and closure costs. Closure costs were $1.5 million for the year ended December 25, 2016 related to the closure and relocation of one restaurant.
Gain on insurance settlements. During the third quarter of 2017, parts of Texas and the Southeast were struck by Hurricanes Harvey and Irma. As a result of the hurricanes, the Company incurred operating losses as well as property damage. The property damage was mainly related to a restaurant in the Houston region which was closed through the middle of the fourth quarter of 2017 and required a complete reconstruction. Most operating losses were offset by the recovery proceeds from our insurance in the same period they were incurred. The insurance settlements related to the property losses were resulted in a gain of $1.4 million recorded in the fourth quarter of 2017.
Depreciation and Amortization. Depreciation and amortization costs increased $2.5 million to $17.6 million for the year ended December 31, 2017, as compared to $15.1 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. Our effective income tax benefit rate is 23.4% for the year ended December 31, 2017 as compared to the effective income tax expense rate of 29.0% during the comparable period in 2016. The decrease in our effective tax rate is primarily related to a non-recurring deferred tax balance revaluation adjustment of $11.7 million recorded in the fourth quarter of 2017 as a result of a decrease in federal statutory tax rate from 35% to 21% effective January 1, 2018. Excluding the impact of the revaluation adjustment, our effective tax rate for fiscal year 2017 was 26.4% as compared to 29.0% for the comparable period in 2016. Our effective tax rate was impacted by several other favorable discrete tax items during the fiscal year 2017 as compared to fiscal year 2016. The effective tax rates differ from the statutory rates primarily due to wage and employment tax related credits, non-deductible expenses, and discrete items.
Net Income. As a result of the foregoing, net income increased by $11.7 million to $28.9 million for the year ended December 31, 2017 as compared to $17.2 million during the comparable period in 2016.
52 Weeks EndedDecember 25, 2016 Compared to the 52 Weeks Ended December 27, 2015
The following table presents, for the periods indicated, the consolidated statement of operations (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 25, 2016 | | % of Revenue | | December 27, 2015 | | % of Revenue | | Change | | % Change |
| Revenue | $ | 330,613 |
| | 100.0 | % | | $ | 287,062 |
| | 100.0 | % | | $ | 43,551 |
| | 15.2 | % |
| Costs and expenses: | | | | | | | | | | | |
| Cost of sales | 85,542 |
| | 25.9 | % | | 75,686 |
| | 26.4 | % | | 9,856 |
| | 13.0 | % |
| Labor | 110,730 |
| | 33.5 | % | | 93,625 |
| | 32.6 | % | | 17,105 |
| | 18.3 | % |
| Operating | 45,900 |
| | 13.9 | % | | 39,954 |
| | 13.9 | % | | 5,946 |
| | 14.9 | % |
| Occupancy | 22,204 |
| | 6.7 | % | | 19,019 |
| | 6.6 | % | | 3,185 |
| | 16.7 | % |
| General and administrative | 17,560 |
| | 5.3 | % | | 16,176 |
| | 5.6 | % | | 1,384 |
| | 8.6 | % |
| Marketing | 2,390 |
| | 0.7 | % | | 2,249 |
| | 0.8 | % | | 141 |
| | 6.3 | % |
| Restaurant pre-opening | 5,348 |
| | 1.6 | % | | 4,417 |
| | 1.5 | % | | 931 |
| | 21.1 | % |
| Impairment and closure costs | 1,517 |
| | 0.5 | % | | 4,360 |
| | 1.6 | % | | (2,843 | ) | | (65.2 | )% |
| Depreciation and amortization | 15,081 |
| | 4.6 | % | | 12,827 |
| | 4.5 | % | | 2,254 |
| | 17.6 | % |
| Total costs and expenses | 306,272 |
| | 92.7 | % | | 268,313 |
| | 93.5 | % | | 37,959 |
| | 14.1 | % |
| Income from operations | 24,341 |
| | 7.3 | % | | 18,749 |
| | 6.5 | % | | 5,592 |
| | 29.8 | % |
| Interest expense | 63 |
| | — | % | | 110 |
| | — | % | | (47 | ) | | (42.7 | )% |
| Income before income taxes | 24,278 |
| | 7.3 | % | | 18,639 |
| | 6.5 | % | | 5,639 |
| | 30.3 | % |
| Income tax expense | 7,034 |
| | 2.1 | % | | 5,743 |
| | 2.0 | % | | 1,291 |
| | 22.5 | % |
| Net income | $ | 17,244 |
| | 5.2 | % | | $ | 12,896 |
| | 4.5 | % | | $ | 4,348 |
| | 33.7 | % |
Revenue. Revenue increased $43.6 million, or 15.2%, to $330.6 million for the year ended December 25, 2016, as compared to $287.1 million for the year ended December 27, 2015. This increase was primarily driven by $47.0 million in incremental revenue from an additional 596 operating weeks provided by 22 new restaurants opened during and subsequent to the year ended December 27, 2015 and increased revenue at our comparable restaurants. These increases were partially offset by a decrease in revenue related to non-comparable restaurants that are not included in the incremental revenue discussed above. Revenue related to non-comparable restaurants is historically lower as the stores transition out of the 'honeymoon' period that follows a restaurant's initial opening. The honeymoon period refers to the weeks following a restaurant's initial opening, during which sales are typically higher than normal.
Comparable restaurant sales increased 0.8% during the year ended December 25, 2016 compared to the same period in 2015. The increase in comparable restaurant sales was driven primarily by a 1.5% increase in average check, offset by a 0.7% decrease in average weekly customers. Our comparable restaurant sales and average weekly customers were negatively affected by approximately 20 to 40 bps during fiscal 2016 primarily due to unfavorable weather and Christmas shifting from Friday to Sunday. Our revenue mix attributed to bar sales increased to 18.3% during the year ended December 25, 2016 compared to 18.2% during the same period in 2015.
Cost of Sales. Cost of sales as a percentage of revenue decreased to 25.9% during the year ended December 25, 2016, from 26.4% during the comparable period in 2015, primarily as a result of decreases in grocery and chicken costs, partially offset by increases in produce and beef costs.
Labor Costs. Labor costs as a percentage of revenue increased to 33.5% during the year ended December 25, 2016, from 32.6% during the comparable period in 2015, primarily due to new store labor inefficiencies as we opened twelve new restaurants during 2016 compared to ten new store openings in 2015 and hourly labor rate inflation of approximately 4.0%.
Operating Costs. Operating costs as a percentage of revenue remained flat at 13.9% during the year ended December 25, 2016 from the comparable period in 2015.
Occupancy Costs. Occupancy costs as a percentage of revenue increased to 6.7% during the year ended December 25, 2016 from 6.6% during the comparable period in 2015, primarily as a result of higher rental expense as a percentage of sales in our newer locations, offset by lower real estate and personal property taxes in the current year.
General and Administrative Expenses. General and administrative expenses increased $1.4 million, or 8.6%, to $17.6 million for the year ended December 25, 2016, as compared to $16.2 million during the comparable period in 2015.This increase was primarily driven by an increase in management salaries and equity compensation of $1.7 million due to additional headcount to support our growth, $0.5 million in professional services and other miscellaneous administrative expenses offset by a $0.8 million decrease in performance based bonuses.
Marketing Costs. Marketing costs as a percentage of revenue remained relatively flat at 0.7% during the year ended December 25, 2016, compared to 0.8% during the comparable period in 2015.
Restaurant Pre-opening Costs. Restaurant pre-opening costs increased by $0.9 million, or 21.1%, to $5.3 million for the year ended December 25, 2016, as compared to $4.4 million during the comparable period in 2015. This increase is primarily the result of differences in the timing of our development schedule. During the year ended December 25, 2016, we incurred pre-opening costs for twelve new restaurants compared to ten new restaurants during the comparable period in 2015.
Impairment and closure costs. Closure costs were $1.5 million for the year ended December 25, 2016 related to the closure and relocation of one restaurant. Impairment charges were $4.4 million during the comparable period in 2015 related to three underperfoming restaurants.
Depreciation and Amortization. Depreciation and amortization costs increased $2.3 million to $15.1 million for the year ended December 25, 2016, as compared to $12.8 million during the comparable period in 2015, primarily as the result of an increase in equipment and leasehold improvement costs associated with our new restaurants.
Income Tax Expense. Our effective tax rate decreased to 29.0% for the year ended December 25, 2016 from 30.8% during the comparable period in 2015. The decrease in our effective tax rate is primarily related to an increase in employee tax credits as compared to taxable income for the year ended December 25, 2016 as compared to the comparable period in 2015. Additionally, we recorded a $0.4 million tax item to increase our deferred tax liabilities as a result of our federal statutory tax rate increasing from 34% to 35% during the comparable period in 2015. The effective tax rates differ from the statutory rates primarily due to wage and employment tax related credits, non-deductible expenses, and the above discrete item.
Net Income. As a result of the foregoing, net income increased $4.3 million to $17.2 million for the year ended December 25, 2016 from $12.9 million during the comparable period in 2015.
Liquidity
Our principal sources of cash are net cash provided by operating activities, which includes tenant improvement allowances from our landlords, and borrowings, if any, under our Revolving Credit Facility, which we entered into on November 30, 2012 and amended on October 30, 2015. 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, obligations under our operating leases and interest payments on our debt, if any. 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. In 2017, we also subleased additional office space from certain related parties to expand our corporate headquarters.
On October 26, 2017, the Company's board of directors approved a share repurchase program under which it authorized the Company, at its discretion, to repurchase up to $30.0 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 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. As of December 31, 2017, we have $30.0 million yet to be repurchased under this plan.
Our liquidity may be adversely affected by a number of factors, including a decrease in customer traffic or average check per customer due to changes in economic conditions, as described in Item 1A. “Risk Factors.”
Cash Flows for the Years Ended December 31, 2017, December 25, 2016 and December 27, 2015
The following table summarizes the statements of cash flows for the years ended December 31, 2017, December 25, 2016 and December 27, 2015 (in thousands):
|
| | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | December 25, 2016 | | December 27, 2015 |
| Net cash provided by operating activities | $ | 44,382 |
| | $ | 42,638 |
| | $ | 45,393 |
|
| Net cash used in investing activities | (49,134 | ) | | (41,885 | ) | | (32,000 | ) |
| Net cash (used in) provided by financing activities | (157 | ) | | 4,412 |
| | (8,679 | ) |
| Net (decrease) increase in cash and cash equivalents | (4,909 | ) | | 5,165 |
| | 4,714 |
|
| Cash and cash equivalents at beginning of year | 13,694 |
| | 8,529 |
| | 3,815 |
|
| Cash and cash equivalents at end of period | $ | 8,785 |
| | $ | 13,694 |
| | $ | 8,529 |
|
Operating Activities. Net cash provided by operating activities increased $1.8 million to $44.4 million for the year ended December 31, 2017, from $42.6 million during the same 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 during the year ended December 31, 2017 compared to the same period in 2016 was primarily due to an increase in net income of $11.7 million, partially offset by a decrease in non-cash reconciling items of $6.1 million and decreases in cash flow from operating assets and liabilities of $3.8 million. The decrease in non-cash items of $6.1 million was primarily due to a $10.8 million decrease in deferred taxes mainly related to H.R.1, commonly referred to as the Tax Cuts and Jobs Act, and a $1.4 million decrease in impairment and closure costs, partially offset by $3.3 million increase from excess tax benefits, $2.5 million increase related to depreciation and amortization and an increase of $0.3 million in other changes. The decrease in working capital of $3.8 million was primarily due to net changes in accounts receivable, accounts payable, accrued liabilities and deferred lease incentives of $7.9 million, of which $1.3 million relates to an insurance receivable recorded in the fourth quarter of 2017, partially offset by net changes in income tax receivables, prepaid expenses and other current assets as well as inventories of $4.1 million.
Net cash provided by operating activities decreased $2.8 million to $42.6 million for the year ended December 25, 2016, from $45.4 million during the same period in 2015. The decrease in net cash provided by operating activities during the year ended December 25, 2016 compared to the same period in 2015 was primarily due to decreases in non-cash reconciling items of $3.6 million and decreases in cash flow from operating assets and liabilities of $3.5 million partially offset by an increase in net income of $4.3 million. The decreases in non-cash reconciling items were primarily related to decreases in excess tax benefits from stock-based compensation of $3.2 million, decreases in impairment and closure costs of $3.0 million and decreases in deferred lease amortization of $0.4 million, offset by increases in depreciation and amortization of $2.3 million as a result of our continued expansion, increases in stock based compensation of $0.5 million and increases in deferred income taxes of $0.4 million. The net decreases from changes in operating assets and liabilities of $3.5 million primarily related to net changes in prepaid expenses and other current assets, income tax receivables and accounts receivable of $2.6 million and net decreases in accounts payable, accrued liabilities and deferred lease incentives of $0.8 million.
Investing Activities. Net cash used in investing activities increased $7.2 million to $49.1 million for the year ended December 31, 2017, from $41.9 million for the year ended 2016. This increase was mainly the result of the timing of our construction schedule and the related payments associated with the construction of our eleven new restaurants that opened during the year ended December 31, 2017, as well as expenditures related to the reconstruction of one restaurant that was severely damaged by Hurricane Harvey and eight additional unopened restaurants under construction at December 31, 2017 as compared to twelve new restaurants opened and four additional restaurants under construction during the comparable period in 2016. This increase was partially offset by $0.5 million of insurance proceeds from property claims.
Net cash used in investing activities increased $9.9 million to $41.9 million for the year ended December 25, 2016, from $32.0 million for the year ended 2015. This change was the result of the timing of our construction schedule and the related construction payments associated with the construction of our twelve new restaurants that opened during the year ended December 25, 2016, as well as expenditures related to four additional unopened restaurants under construction at December 25, 2016 as compared to ten new restaurants opened and six additional restaurants under construction during the comparable period in 2015.
Financing Activities. Net cash used in financing activities was $0.2 million for the year ended December 31, 2017 as compared to $4.4 million provided by financing activities during the same period in 2016. The decrease in net cash provided by financing activities was primarily the result of $3.3 million decrease in excess tax benefits, $0.2 million decrease in indirect repurchases of shares and $1.1 million decrease in proceeds from the exercise of stock options during the year ended December 31, 2017.
Net cash provided by financing activities increased $13.1 million to $4.4 million for the year ended December 25, 2016 from $8.7 million used in financing activities during the same period in 2015. This increase in net cash provided by financing activities was primarily the result of an $8.8 million decrease in net payments on the Revolving Credit facility, a $3.2 million increase in excess tax benefits and $1.3 million increase in proceeds from the exercise of stock options during the year ended December 25, 2016. These were partially offset by a decrease of $0.3 million related to the indirect repurchase of shares for minimum tax withholdings.
As of December 31, 2017, we leased six of our restaurant locations and our corporate office from entities owned by our founders and one of our executive officers. 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 $2.6 million to $3.6 million (net of estimated tenant incentives of between zero and $1.0 million). In addition, we expect to spend approximately $400,000 to $475,000 per restaurant for restaurant pre-opening costs. 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 2018, we currently estimate capital expenditure outlays will range between $30.0 million and $40.0 million, net of agreed upon tenant improvement allowances and excluding approximately $3.7 million to $5.5 million of restaurant pre-opening costs for new restaurants that are not capitalized. These capital expenditure estimates are based on average new restaurant capital expenditures of $2.9 million (net of estimated tenant improvement allowances) each for the opening of 8 to 12 new restaurants as well as $8.7 million to maintain and remodel our existing restaurants, expand our corporate office and for other 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 2018.
Short-Term Capital Requirements
Our operations have not required significant working capital and, like many restaurant companies, we 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 $0.9 million at December 31, 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 December 31, 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%), 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 line of credit 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.
As of December 31, 2017, we were in compliance with all covenants under our Revolving Credit Facility. Based on our capital expenditure plans, contractual commitments and cash flow from operations, we expect to be able to comply with these covenants in the near and long term.
Contractual Obligations
The following table summarizes contractual obligations at December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Payment Due By Period |
| | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| Contractual Obligations: | | | | | | | | | |
Long-Term Debt Obligations (1) | $ | 88 |
| | $ | 31 |
| | $ | 57 |
| | $ | — |
| | $ | — |
|
Operating Lease Obligations (2) | 404,691 |
| | 23,834 |
| | 48,886 |
| | 48,465 |
| | 283,506 |
|
Purchase Obligations (3) | 29,056 |
| | 28,515 |
| | 541 |
| | — |
| | — |
|
| Total | $ | 433,835 |
| | $ | 52,380 |
| | $ | 49,484 |
| | $ | 48,465 |
| | $ | 283,506 |
|
| |
(1) | Reflects fees on unused revolver commitments under our Revolving Credit Facility. As of December 31, 2017, no indebtedness was outstanding. All amounts under our Revolving Credit Facility are due October 30, 2020. |
| |
(2) | Reflects the aggregate minimum lease payments for our restaurant operations and corporate office. Operating lease obligations excludes contingent rent payments that may be due under certain of our leases based on a percentage of sales. |
| |
(3) | Includes contractual purchase commitments for the purchase of goods related to restaurant operations and commitments for construction of new restaurants. |
Off-Balance Sheet Arrangements
As part of our on-going business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2017, we are not involved in any variable interest entities transactions and do not otherwise have any off-balance sheet arrangements.
Critical Accounting Policies
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in Note 2 to our Consolidated Financial Statements. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. The following is a description of what we consider to be our most significant critical accounting policies.
Leases and Leasehold Improvements. We lease land, buildings and/or certain equipment for the majority of our restaurants under noncancelable lease agreements. Our land and building leases typically have initial terms ranging from 10 to 15 years, and certain renewal options for two or more five-year periods. When determining the lease term, we include option periods for which failure to renew the lease imposes a penalty on us in such an amount that a renewal appears, at the inception of the lease, to be reasonably assured. The primary penalty to which we are subject is the economic detriment associated with the existence of leasehold improvements which might become impaired if we choose not to continue the use of the leased property.
Certain of our operating leases contain predetermined fixed escalations of the minimum rent during the original term of the lease. For these leases, we recognize the related rent expense on a straight-line basis over the lease term and record the difference between the amounts charged to operations and amounts paid as deferred rent. We may receive rent holidays, which would begin on the possession date and end on the date construction of the restaurant begins, during which no cash rent payments are typically due under the terms of the lease. Rent holidays are included in the lease term when determining straight-line rent expense.
Additionally, certain of our operating leases contain clauses that provide for additional contingent rent based on a percentage of sales greater than certain specified target amounts. We recognize contingent rent expense prior to the achievement of the specified target that triggers the contingent rent, provided achievement of the target is considered probable. This may result in some variability in rent expense as a percentage of revenues over the term of the lease in restaurants where we pay contingent rent.
We make judgments regarding the probable term for each restaurant property lease, which can impact the classification and accounting for a lease as capital or operating, the rent holiday and/or escalations in payments that are taken into consideration when calculating straight-line rent and the term over which leasehold improvements and deferred lease incentives for each restaurant are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.
Impairment of Long-Lived Assets. We review 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. We have determined that our asset group for impairment testing is comprised of the assets and liabilities of each of our individual restaurants, as this is the lowest level of identifiable cash flows and primarily includes an assessment of historical cash flows and other relevant factors and circumstances. The other factors and circumstances include changes in the economic environment, changes in the manner in which assets are used, unfavorable changes in legal factors or business climate, incurring excess costs in construction of the asset, overall restaurant operating performance and projections for future performance. These estimates result in a wide range of variability on a year to year basis due to the nature of the criteria.
We regularly review restaurant-level cash flow over the previous 24-month period to determine if potential impairment indicators exist and if further testing is warranted. In such situations, we evaluate future undiscounted cash flow projections in conjunction with qualitative factors and future operating plans. Our impairment assessment process requires the use of estimates and assumptions regarding future undiscounted cash flows and operating outcomes, which are based upon a significant degree of management’s judgment. In performing our impairment testing, we forecast our future undiscounted cash flows by looking at recent restaurant level performance, restaurant level operating plans, sales trends, and cost trends for cost of sales, labor and operating expenses. We believe that this combination of information gives us a fair benchmark to estimate future undiscounted cash flows. We compare this cash flow forecast to the carrying value of the restaurant. Based on this analysis, if we believe the carrying amount of the assets are not recoverable, an impairment charge is recognized based upon the amount by which the long-lived assets carrying value exceeds fair value. As a result of the above mentioned review process, we recognized a $4.4 million non-cash loss on asset impairment related to three restaurants in fiscal 2015. We did not recognize an impairment charge during fiscal 2017 and 2016.
Economic deterioration within our respective markets may adversely impact consumer discretionary spending and may result in lower restaurant sales. Unfavorable fluctuations in our commodity costs, supply costs and labor rates, which may or may not be within our control, may also impact our operating margins. Any of these factors could as a result affect the estimates used in our impairment analysis and require additional impairment tests and charges to earnings. We continue to assess the performance of our restaurants and monitor the need for future impairment. There can be no assurance that future impairment tests will not result in additional charges to earnings.
Goodwill and Other Intangible Assets. Goodwill and indefinite life intangible assets are not amortized but are tested annually on the first day of the fourth quarter, or more frequently if events or changes in circumstances indicate that the assets might be impaired. In assessing the recoverability of goodwill and indefinite life intangible assets, the Company must make assumptions about the estimated future cash flows and other factors to determine the fair value of these assets.
For goodwill, the Company performs tests to assess potential impairments on the first day of the fourth quarter or during the year if an event or other circumstance indicates that goodwill may be impaired. The first step of the goodwill quantitative impairment test compares the implied estimated fair value of the reporting unit to the carrying amount, including goodwill. The Company considers all of its stores in total as one reporting unit. If the estimated fair value of the reporting unit is less than the carrying amount, then it is more likely than not that a goodwill impairment exits and a second step must be completed in order to determine the amount of the goodwill impairment. In the second step, the implied fair value of the goodwill is determined by allocating fair value to all of its assets and liabilities, other than goodwill, in a manner similar to a purchase price allocation. If the resulting implied fair value of the goodwill that results from the application of this second step is less than the carrying amount of the goodwill, an impairment charge is recorded for the difference. Our analysis indicated that no impairments of goodwill or indefinite-lived intangibles occurred during fiscal 2017, 2016 or 2015.
Similarly, for the impairment evaluation for indefinite life intangible assets, which includes our trade names, we first perform a quantitative assessment to determine whether the estimated fair value of the indefinite-lived intangible asset is less than its carrying value. We calculate the estimated fair value of the indefinite-lived intangible asset and compare it to the carrying value. Fair value is estimated primarily using future discounted cash flow projections in conjunction with qualitative factors and future operating plans. When the carrying value exceeds fair value, an impairment charge is recorded for the amount of the difference. An intangible asset is determined to have an indefinite useful life when there are no legal, regulatory, contractual, competitive, economic or other factors that may limit the period over which the asset is expected to contribute directly or indirectly to the future cash flows
of the Company. The Company also annually evaluates intangible assets that are not being amortized to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is determined to have a finite useful life, the asset will be amortized prospectively over the estimated remaining useful life and accounted for in the same manner as intangible assets subject to amortization.
Income Taxes. Income tax provisions consist of federal and state taxes currently due, plus deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are recognized when management considers the realization of those assets in future periods to be more likely than not. Future taxable income, adjustments in temporary difference, available carryforward periods and changes in tax laws could affect these estimates.
Stock-Based Compensation. Compensation cost for stock options and deferred shares (these deferred shares were granted under the Chuy's Holdings, Inc. 2012 Omnibus Equity Incentive Plan, and are referred to as "restricted stock units") granted is determined based on the fair value of the security at the date of grant and is recognized, net of estimated forfeitures, over the award’s requisite service period on a straight-line basis. The fair value of the restricted stock units is the quoted market value of our common stock on the date of grant. We use the Black-Scholes valuation model to determine the fair value of our stock options, which requires assumptions to be made regarding our stock price volatility, the expected life of the award, risk-free interest rate, and expected dividend rates. The volatility assumptions were derived from the volatilities of comparable public restaurant companies. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there is a difference between the assumptions used in determining stock-based compensation expense and the actual factors which become known over time, we may change the input factors used in determining stock-based compensation costs for future grants. These changes, if any, may materially impact our results of operations in the period such changes are made. We expect to continue to grant stock options and restricted stock units in the future, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase.
Recent Accounting Pronouncements
The information regarding recent accounting pronouncements materially affecting our consolidated financial statements is included in Note 2 to our consolidated financial statements.
Inflation
Our profitability is dependent, among other things, on our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our restaurant customers. The impact of inflation on food, labor, energy and occupancy costs can significantly affect the profitability of our restaurant operations.
Many of our restaurant staff members are paid hourly rates related to the federal minimum wage. Labor costs related to hourly wages have been impacted by and will continue to be impacted by mandated increases in minimum wage rates at the federal, state and local levels. Certain operating costs, such as taxes, insurance and other outside services increase with the general level of inflation and may also be subject to other cost and supply fluctuations outside of our control.
While we have been able to partially offset inflation and other changes in the costs of key operating resources by gradually increasing prices for our menu items, more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our menu pricing flexibility. In addition, macroeconomic conditions could make additional menu price increases imprudent. There can be no assurance that all future cost increases can be offset by increased menu prices or that increased menu prices will be fully absorbed by our restaurant customers without any resulting changes in their visit frequencies or purchasing patterns. A majority of the leases for our restaurants provide for contingent rent obligations based on a percentage of revenue. There can be no assurance that we will continue to generate increases in comparable restaurant sales in amounts sufficient to offset inflationary or other cost pressures.
| |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
We are subject to interest rate risk in connection with our long-term indebtedness. Our principal interest rate exposure relates to loans outstanding under our Revolving Credit Facility. All outstanding indebtedness under our Revolving Credit Facility bears interest at a variable rate based on LIBOR. Each quarter point change in interest rates on the variable portion of indebtedness under our Revolving Credit Facility would result in an annualized change to our interest expense of approximately $2,500 per every million dollars borrowed. As of December 31, 2017, we had no borrowings under our Revolving Credit Facility.
Commodity Price Risk
We are exposed to market price fluctuation in food product prices. Given the historical volatility of certain of our food product prices, including produce, chicken, beef and cheese, these fluctuations can materially impact our food and beverage costs. While we have taken steps to enter into long term agreements for some of the commodities used in our restaurant operations, there can be no assurance that future supplies and costs for such commodities will not fluctuate due to weather and other market conditions outside of our control.
Consequently, such commodities can be subject to unforeseen supply and cost fluctuations. Dairy costs can also fluctuate due to government regulation. Because we typically set our menu prices in advance of our food product prices, we cannot immediately take into account changing costs of food items. To the extent that we are unable to pass the increased costs on to our customers through price increases, our results of operations would be adversely affected. We do not use financial instruments to hedge our risk to market price fluctuations in our food product prices at this time.
| |
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our consolidated financial statements, notes thereto and the report of RSM US LLP, our independent registered public accounting firm, are set forth beginning on page F-1 hereto and are incorporated herein by reference.
| |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGEXHIBITS AND FINANCIAL DISCLOSURESTATEMENT SCHEDULES |
None
| |
ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief 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 Securities Exchange Act of 1934) 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 Securities Exchange Act of 1934) are effective as of the end of the period covered by this report to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. 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, internal control over financial reporting may not prevent or detect misstatements. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the criteria in Internal Control — Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.
RSM US LLP, the Company's independent registered public accounting firm, has audited the financial statements included in this Annual Report on Form 10-K, and has issued an attestation report on our internal control over financial reporting, which is included herein.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting 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.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Chuy’s Holdings, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Chuy’s Holdings, Inc. and its subsidiaries' (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and December 25, 2016, the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes to the consolidated financial statements (collectively, the financial statements) of the Company and our report dated March 15, 2018 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Dallas, Texas
March 15, 2018
| |
ITEM 9B. | OTHER INFORMATION |
None
PART III
The information required by Items 10, 11, 12, 13 and 14 will be furnished (and are incorporated by reference) by an amendment hereto that will contain such information.
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Report:
| |
| (1) | Financial Statements - see Index to Financial Statements appearing on page F-1.F-1 of the Original Form 10-K. |
| |
| (2) | Financial Statement Schedules – None. |
| |
| (3) | Exhibits - The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: | April 17, 2018 | | CHUY’S HOLDINGS, INC. |
| | | |
| | | By: | | /s/ Jon W. Howie |
| | | | | Jon W. Howie |
| | | | | Vice President and Chief Financial Officer |
Exhibit Index
|
| | |
| Exhibit No. | | Description of Exhibit |
| | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on July 27, 2012) |
| | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on October 30, 2013) |
| | Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 7 to the Registration Statement on Form S-1 (File No. 333-176097), filed on July 11, 2012) |
| | Chuy’s Holdings, Inc. 2012 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.3 of Amendment No. 7 to the Registration Statement on Form S-1 (File No. 333-176097), filed on July 11, 2012) |
| | Form of Restricted Share Agreement (2012 Omnibus Equity Incentive Plan) (incorporated by reference to Exhibit 10.4 of Amendment No. 7 to the Registration Statement on Form S-1 (File No. 333-176097), filed on July 11, 2012) |
| | Form of Option Agreement (2012 Omnibus Equity Incentive Plan) (incorporated by reference to Exhibit 10.5 of Amendment No. 7 to the Registration Statement on Form S-1 (File No. 333-176097), filed on July 11, 2012) |
| | Form of Restricted Stock Unit Agreement (2012 Omnibus Equity Incentive Plan) (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on form 10-K, filed on March 11, 2014) |
| | Form of Restricted Stock Unit Agreement (Amended 2015)(2012 Omnibus Equity Incentive Plan) (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K, filed on March 12, 2015) |
| | Form of Option Agreement (Amended 2015)(2012 Omnibus Equity Incentive Plan)(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, filed on May 8, 2015) |
| | Chuy’s Holdings, Inc. Amended and Restated 2006 Stock Option Plan (incorporated by reference to Exhibit 10.37 of Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-176097), filed on May 17, 2012) |
| | Chuy’s Holdings, Inc. 2006 Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Form of Stock Option Award Agreement (2006 Stock Option Plan) (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.8 of Amendment No. 7 to the Registration Statement on Form S-1 (File No. 333-176097), filed on July 11, 2012) |
| | Letter Agreement regarding Arbor Trails Chuy’s, dated November 7, 2006, by and between Chuy’s Opco, Inc. and Three Star Management, Ltd. (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Recipe License Agreement, dated November 7, 2006, by and between Chuy’s Opco, Inc. and MY/ZP IP Group, Ltd. (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Cross-Marketing License Agreement, dated November 7, 2006, by and between Chuy’s Opco, Inc. and MY/ZP IP Group, Ltd. (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Management Agreement, dated November 7, 2006, by and between Chuy’s Opco, Inc. and Three Star Management, Ltd. (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Management System License Agreement, dated November 7, 2006, by and between Chuy’s Opco, Inc. and MY/ZP IP Group, Ltd. (incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Parade Sponsorship Agreement, dated November 7, 2006, by and between Chuy’s Opco, Inc. and MY/ZP IP Group, Ltd. (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Form of License Exercisable Upon Event of Default Under Lease Agreement (incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
|
| | |
| | Lease Agreement, dated November 7, 2006, between Young Zapp Graceland, Ltd. and Chuy’s Opco, Inc. (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
|
| | |
| | Lease Agreement, dated January 1, 2002, between Young Zapp North Lamar, Ltd. and Chuy’s Opco, Inc., as amended, modified and assigned (incorporated by reference to Exhibit 10.24 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Lease Agreement, dated November 1, 1998, between Young-Zapp Joint Venture II and Chuy’s Opco, Inc., as amended, modified and assigned (incorporated by reference to Exhibit 10.25 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Lease Agreement, dated November 19, 1996, between Young Zapp Joint Venture-IV and Chuy’s Opco, Inc., as amended, modified and assigned (incorporated by reference to Exhibit 10.26 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Lease Agreement, dated January 22, 2001, between Young Zapp JVRR, Ltd. and Chuy’s Opco, Inc., as amended, modified and assigned (incorporated by reference to Exhibit 10.27 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Lease Agreement, dated June 1, 2003, between Young Zapp Shenandoah, Ltd. and Chuy’s Opco, Inc., as amended, modified and assigned (incorporated by reference to Exhibit 10.28 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Lease Agreement, dated April 22, 2008, between Young Zapp Arbor Trails, Ltd. and Chuy’s Opco, Inc. (incorporated by reference to Exhibit 10.29 to the Company’s Registration Statement on Form S-1 (File No. 333-176097), filed on August 5, 2011) |
| | Sublease Agreement, dated December 1, 2016, between Young Zapp Graceland, Ltd. and Chuy’s Opco, Inc. |
| | Form of Right to Repurchase Agreement (incorporated by reference to Exhibit 10.30 of Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-176097), filed on October 27, 2011) |
| | Employment Agreement, dated November 16, 2011, between Chuy’s Holdings, Inc., Chuy’s Opco, Inc. and Steven J. Hislop (incorporated by reference to Exhibit 10.31 of Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-176097), filed on November 17, 2011) |
| | Employment Agreement, dated November 16, 2011, between Chuy’s Holdings, Inc., Chuy’s Opco, Inc. and Jon W. Howie (incorporated by reference to Exhibit 10.32 of Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-176097), filed on November 17, 2011) |
| | Form of Employment Agreement, between Chuy’s Holdings, Inc., Chuy’s Opco, Inc. and certain employees (incorporated by reference to Exhibit 10.33 of Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-176097), filed on November 17, 2011) |
| | Chuy’s Holdings, Inc. Senior Management Incentive Plan (incorporated by reference to Exhibit 10.34 of Amendment No. 7 to the Registration Statement on Form S-1 (File No. 333-176097), filed on July 11, 2012) |
| | Credit Agreement, dated November 30, 2012, by and among Chuy’s Holdings, Inc., as borrower, the subsidiaries of Chuy’s Holdings, Inc., as guarantors, and Wells Fargo Bank, National Association, as administrative agent, swingline lender, issuing lender and lender (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on December 6, 2012) |
| | First Amendment to the Credit Agreement, dated October 30, 2015, by and among Chuy’s Holdings, Inc., as borrower, the guarantors party thereto and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on November 3, 2015) |
| | Subsidiaries of Chuy’s Holdings, Inc. |
| | Consent of RSM US LLP |
| | 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+101.INS† | | XBRL Instance Document |
101.SCH+101.SCH† | | XBRL Taxonomy Extension Schema |
101.CAL+101.CAL† | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF+101.DEF† | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB+101.LAB† | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE+101.PRE† | | XBRL Taxonomy Extension Presentation Linkbase Document |
* Indicates management contract or compensatory plan or arrangement.
+ Filed herewith
SIGNATURES
Pursuant† Filed as an exhibit to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signedChuy's Annual Report on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | |
| | | | | |
Date: | March 15, 2018 | | CHUY’S HOLDINGS, INC. |
| | | |
| | | By: | | /s/ STEVEN J. HISLOP |
| | | | | Steven J. Hislop |
| | | | | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| | | | |
Name | | Title | | Date |
/s/ STEVE HISLOP | | |
Steve Hislop | | Director, President and Chief Executive Officer (principal executive officer) | | 3/15/2018 |
/s/ JON HOWIE | | |
Jon Howie | | Vice President and Chief Financial Officer (principal financial and accounting officer) | | 3/15/2018 |
/s/ JOHN ZAPP | | |
John Zapp | | Chairman of the Board, Director | | 3/15/2018 |
/s/ STARLETTE JOHNSON | | |
Starlette Johnson | | Director | | 3/15/2018 |
/s/ SAED MOHSENI | | |
Saed Mohseni | | Director | | 3/15/2018 |
/s/ RANDALL DEWITT | | |
Randall DeWitt | | Director | | 3/15/2018 |
/s/ IRA ZECHER | | | |
Ira Zecher | | Director | | 3/15/2018 |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Chuy's Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Chuy’s Holdings, Inc. and its subsidiaries (the Company) as of December 31, 2017 and December 25, 2016, the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and December 25, 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report datedForm 10-K filed March 15, 2018 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company’s auditor since 2006.
Dallas, Texas
March 15, 2018
CHUY’S HOLDINGS, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)
|
| | | | | | | |
| | December 31, 2017 | | December 25, 2016 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 8,785 |
| | $ | 13,694 |
|
| Accounts receivable | 2,696 |
| | 1,132 |
|
| Lease incentives receivable | 6,351 |
| | 4,022 |
|
| Inventories | 1,605 |
| | 1,451 |
|
| Income tax receivable | 1,225 |
| | 2,183 |
|
| Prepaid expenses and other current assets | 5,924 |
| | 5,207 |
|
| Total current assets | 26,586 |
| | 27,689 |
|
| Property and equipment, net | 197,255 |
| | 165,150 |
|
| Other assets and intangible assets, net | 2,157 |
| | 1,920 |
|
| Trade name | 21,900 |
| | 21,900 |
|
| Goodwill | 24,069 |
| | 24,069 |
|
| Total assets | $ | 271,967 |
| | $ | 240,728 |
|
| Liabilities and Stockholders' Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 6,396 |
| | $ | 8,014 |
|
| Accrued liabilities | 16,488 |
| | 17,757 |
|
| Deferred lease incentives | 2,773 |
| | 2,335 |
|
| Total current liabilities | 25,657 |
| | 28,106 |
|
| Deferred tax liability, net | 6,438 |
| | 13,769 |
|
| Accrued deferred rent | 11,764 |
| | 9,169 |
|
| Deferred lease incentives, less current portion | 39,146 |
| | 32,619 |
|
| Total liabilities | 83,005 |
| | 83,663 |
|
| | | | |
| Commitments and contingencies |
| |
|
| Stockholders’ equity: | | | |
| Common stock, $0.01 par value; 60,000,000 shares authorized; 16,923,741 shares issued and outstanding at December 31, 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 December 31, 2017 and December 25, 2016 | — |
| | — |
|
| Paid-in capital | 100,140 |
| | 97,200 |
|
| Retained earnings | 88,653 |
| | 59,697 |
|
| Total stockholders’ equity | 188,962 |
| | 157,065 |
|
| Total liabilities and stockholders’ equity | $ | 271,967 |
| | $ | 240,728 |
|
See Notes to Consolidated Financial Statements
CHUY’S HOLDINGS, INC.
Consolidated Statements of Income
(In thousands, except share and per share data)
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 31, 2017 | | December 25, 2016 | | December 27, 2015 |
| Revenue | $ | 369,589 |
| | $ | 330,613 |
| | $ | 287,062 |
|
| Costs and expenses: | | | | | |
| Cost of sales | 96,270 |
| | 85,542 |
| | 75,686 |
|
| Labor | 128,846 |
| | 110,730 |
| | 93,625 |
|
| Operating | 51,462 |
| | 45,900 |
| | 39,954 |
|
| Occupancy | 25,642 |
| | 22,204 |
| | 19,019 |
|
| General and administrative | 18,661 |
| | 17,560 |
| | 16,176 |
|
| Marketing | 2,756 |
| | 2,390 |
| | 2,249 |
|
| Restaurant pre-opening | 6,233 |
| | 5,348 |
| | 4,417 |
|
| Impairment and closure costs | — |
| | 1,517 |
| | 4,360 |
|
| Gain on insurance settlements | (1,362 | ) | | — |
| | — |
|
| Depreciation and amortization | 17,560 |
| | 15,081 |
| | 12,827 |
|
| Total costs and expenses | 346,068 |
| | 306,272 |
| | 268,313 |
|
| Income from operations | 23,521 |
| | 24,341 |
| | 18,749 |
|
| Interest expense, net | 65 |
| | 63 |
| | 110 |
|
| Income before income taxes | 23,456 |
| | 24,278 |
| | 18,639 |
|
| Income tax (benefit) expense | (5,500 | ) | | 7,034 |
| | 5,743 |
|
| Net income | $ | 28,956 |
| | $ | 17,244 |
| | $ | 12,896 |
|
| Net income per common share: | | | | | |
| Basic | $ | 1.71 |
| | $ | 1.03 |
| | $ | 0.78 |
|
| Diluted | $ | 1.70 |
| | $ | 1.02 |
| | $ | 0.77 |
|
| Weighted-average shares outstanding: | | | | | |
| Basic | 16,894,986 |
| | 16,676,073 |
| | 16,470,278 |
|
| Diluted | 17,003,233 |
| | 16,887,882 |
| | 16,739,387 |
|
See Notes to Consolidated Financial Statements
CHUY’S HOLDINGS, INC.
Consolidated Statements of Stockholders’ Equity
For the Fiscal Years Ended December 31, 2017, December 25, 2016 and December 27, 2015
(In thousands, except share and per share data)
|
| | | | | | | | | | | | | | | | | | |
| | Common Stock | | Paid-in Capital | | Retained Earnings | | |
| Shares | | Amount | | | | Total |
| Balance, December 28, 2014 | 16,440,906 |
| | $ | 164 |
| | $ | 88,467 |
| | $ | 29,557 |
| | $ | 118,188 |
|
| Stock-based compensation | — |
| | — |
| | 1,832 |
| | — |
| | 1,832 |
|
| Proceeds from exercise of stock options | 28,520 |
| | 1 |
| | 163 |
| | — |
| | 164 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | 34 |
| | — |
| | 34 |
|
| Settlement of restricted stock units | 23,590 |
| | — |
| | — |
| | — |
| | — |
|
| Indirect repurchase of shares for minimum tax withholdings | (2,416 | ) | | — |
| | (57 | ) | | — |
| | (57 | ) |
| Net Income | — |
| | — |
| | — |
| | 12,896 |
| | 12,896 |
|
| Balance, December 27, 2015 | 16,490,600 |
| | 165 |
| | 90,439 |
| | 42,453 |
| | 133,057 |
|
| Stock-based compensation | — |
| | — |
| | 2,352 |
| | — |
| | 2,352 |
|
| Proceeds from exercise of stock options | 312,165 |
| | 3 |
| | 1,468 |
| | — |
| | 1,471 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | 3,265 |
| | — |
| | 3,265 |
|
| Settlement of restricted stock units | 46,004 |
| | — |
| | — |
| | — |
| | — |
|
| Indirect repurchase of shares for minimum tax withholdings | (9,421 | ) | | — |
| | (324 | ) | | — |
| | (324 | ) |
| Net Income | — |
| | — |
| | — |
| | 17,244 |
| | 17,244 |
|
| Balance, December 25, 2016 | 16,839,348 |
| | 168 |
| | 97,200 |
| | 59,697 |
| | 157,065 |
|
| Stock-based compensation | — |
| | — |
| | 3,098 |
| | — |
| | 3,098 |
|
| Proceeds from exercise of stock options | 35,170 |
| | — |
| | 340 |
| | — |
| | 340 |
|
| Settlement of restricted stock units | 67,198 |
| | 1 |
| | (1 | ) | | — |
| | — |
|
| Indirect repurchase of shares for minimum tax withholdings | (17,975 | ) | | — |
| | (497 | ) | | — |
| | (497 | ) |
| Net Income | — |
| | — |
| | — |
| | 28,956 |
| | 28,956 |
|
| Balance, December 31, 2017 | 16,923,741 |
| | $ | 169 |
| | $ | 100,140 |
| | $ | 88,653 |
| | $ | 188,962 |
|
See Notes to Consolidated Financial Statements.
CHUY’S HOLDINGS, INC.
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | December 31, 2017 | | December 25, 2016 | | December 27, 2015 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 28,956 |
| | $ | 17,244 |
| | $ | 12,896 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 17,560 |
| | 15,081 |
| | 12,827 |
|
| Amortization of loan origination costs | 34 |
| | 33 |
| | 43 |
|
| Impairment and closure costs | — |
| | 1,367 |
| | 4,360 |
|
| Stock-based compensation | 2,880 |
| | 2,193 |
| | 1,718 |
|
| Excess tax benefit from stock-based compensation | — |
| | (3,265 | ) | | (34 | ) |
| Gain on insurance related to property and equipment | (61 | ) | | — |
| | — |
|
| Loss on disposal of property and equipment | 107 |
| | 43 |
| | 108 |
|
| Amortization of deferred lease incentives | (2,517 | ) | | (2,125 | ) | | (1,684 | ) |
| Deferred income taxes | (7,331 | ) | | 3,488 |
| | 3,074 |
|
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (1,564 | ) | | (14 | ) | | (196 | ) |
| Inventories | (154 | ) | | (265 | ) | | (268 | ) |
| Income tax receivable | 958 |
| | (1,196 | ) | | (1,362 | ) |
| Prepaid expenses and other current assets | (717 | ) | | (2,574 | ) | | 448 |
|
| Accounts payable | (2,248 | ) | | (1,471 | ) | | (1,708 | ) |
| Accrued liabilities and deferred rent | 1,326 |
| | 5,975 |
| | 7,529 |
|
| Deferred lease incentives | 7,153 |
| | 8,124 |
| | 7,642 |
|
| Net cash provided by operating activities | 44,382 |
|
| 42,638 |
| | 45,393 |
|
| Cash flows from investing activities: | | | | | |
| Purchase of property and equipment, net | (49,185 | ) | | (41,566 | ) | | (31,628 | ) |
| Insurance proceeds from property claims | 501 |
| | — |
| | — |
|
| Purchase of other assets | (450 | ) | | (319 | ) | | (372 | ) |
| Net cash used in investing activities | (49,134 | ) | | (41,885 | ) | | (32,000 | ) |
| Cash flows from financing activities: | | | | | |
| Borrowings under revolving line of credit | — |
| | 2,000 |
| | 1,000 |
|
| Payments under revolving line of credit | — |
| | (2,000 | ) | | (9,750 | ) |
| Loan origination costs | — |
| | — |
| | (70 | ) |
| Excess tax benefit from stock-based compensation | — |
| | 3,265 |
| | 34 |
|
| Proceeds from the exercise of stock options | 340 |
| | 1,471 |
| | 164 |
|
| Indirect repurchase of shares for minimum tax withholdings | (497 | ) | | (324 | ) | | (57 | ) |
| Net cash (used in) provided by financing activities | (157 | ) | | 4,412 |
| | (8,679 | ) |
| Net (decrease) increase in cash and cash equivalents | (4,909 | ) | | 5,165 |
| | 4,714 |
|
| Cash and cash equivalents, beginning of period | 13,694 |
| | 8,529 |
| | 3,815 |
|
| Cash and cash equivalents, end of period | $ | 8,785 |
| | $ | 13,694 |
| | $ | 8,529 |
|
| | | | | | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | |
| Property and equipment and other assets acquired by accounts payable | $ | 630 |
| | $ | 2,191 |
| | $ | 3,081 |
|
| | | | | | |
| Supplemental cash flow disclosures: | | | | | |
| Cash paid for interest | $ | 39 |
| | $ | 33 |
| | $ | 95 |
|
| Cash paid for income taxes | $ | 908 |
| | $ | 1,385 |
| | $ | 4,091 |
|
See Notes to Consolidated Financial Statements
CHUY’S HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands, except share and per share data)
1. Description of Business
Chuy’s Holdings, Inc., a Delaware corporation (the “Company”), through its subsidiaries owns and operates restaurants in Texas and 19 states in the Southeastern and Midwestern United States. All of the Company’s restaurants operate under the name Chuy’s. The Company had 91, 80, and 69 restaurants, as of December 31, 2017, December 25, 2016, and December 27, 2015, respectively.
Chuy’s was founded in Austin, Texas in 1982 and prior to 2006, operated as Chuy’s Comida Deluxe, Inc. (“Chuy’s”). The Company was incorporated in November 2006.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Fiscal Year
The Company utilizes a 52- or 53-week fiscal year that ends on the last Sunday of the calendar year. The fiscal year ended December 31, 2017 consisted of 53 weeks and fiscal years ended December 25, 2016 and December 27, 2015 each consisted of 52 weeks.
Accounting Estimates
The preparation of the consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles ("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 estimates.
Cash and Cash Equivalents
The Company considers all cash and short-term investments with original maturities of three months or less as cash equivalents. Amounts receivable from credit card processors are considered cash equivalents because they are both short in term and highly liquid in nature, and are typically converted to cash within three business days of the sales transactions.
Lease Incentives Receivable
Lease incentives receivable consist of receivables from landlords provided for under the lease agreements to reimburse the Company for leasehold improvements.
Inventories
Inventories consist of food, beverage, and merchandise and are stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. Equipment consists primarily of restaurant equipment, furniture, fixtures and smallwares. Depreciation is calculated using the straight-line method over the estimated useful life of the related asset, which ranges from three to seven years. Expenditures for major additions and improvements are capitalized. Leasehold improvements are capitalized and amortized using the straight-line method over the shorter of the lease term, including option periods that are reasonably assured of renewal, or the estimated useful life of the asset, which ranges from five to 20 years.
Leases
The Company leases land and/or buildings for its corporate office and all of its restaurants under various long-term operating lease agreements. The Company uses a lease life that 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 (“Rent Holiday”).
Certain of the Company’s operating leases contain predetermined fixed escalations of the minimum rent during the original term of the lease. For these leases and those with a Rent Holiday, the Company recognizes the related rent expense on a straight-line basis over the lease term and records the difference between the amounts charged to operations and amounts paid, as accrued deferred rent.
In addition, certain of the Company’s operating leases contain clauses that provide for additional contingent rent based on a percentage of sales greater than certain specified target amounts. The Company recognizes contingent rent expense prior to the achievement of the specified target that triggers the contingent rent, provided achievement of the target is considered probable.
CHUY’S HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)
Leasehold improvements financed by the landlord through lease incentive allowances are capitalized with the lease incentive allowances recorded as deferred lease incentives. Such leasehold improvements are amortized on a straight-line basis over the lesser of the life of the asset or the defined lease term, which includes option periods which are reasonably assured of renewal. Deferred lease incentives are amortized on a straight-line basis over the same defined lease term, and are recorded as a reduction of occupancy expense.
Other Assets and Intangible Assets
Other assets and intangible assets include liquor licenses, lease acquisition costs and loan origination costs and are stated at cost, less accumulated amortization.
Goodwill
Goodwill represents the excess of cost over the fair value of assets of the businesses acquired. Goodwill is not amortized, but is subject to impairment tests at least annually. The Company performs tests to assess potential impairments on the first day of the fourth quarter or during the year if an event or other circumstance indicates that goodwill may be impaired. The first step of the goodwill quantitative impairment test compares the implied estimated fair value of the reporting unit to the carrying amount, including goodwill. The Company considers all of its stores in total as one reporting unit. If the estimated fair value of the reporting unit is less than the carrying amount, then it is more likely than not that a goodwill impairment exits and a second step must be completed in order to determine the amount of the goodwill impairment. In the second step, the implied fair value of the goodwill is determined by allocating fair value to all of its assets and liabilities, other than goodwill, in a manner similar to a purchase price allocation. If the resulting implied fair value of the goodwill that results from the application of this second step is less than the carrying amount of the goodwill, an impairment charge is recorded for the difference. No goodwill impairment charges were recognized during 2017, 2016, or 2015.
Indefinite Life Intangibles
Intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized because there is no foreseeable limit to the cash flows generated by the intangible asset, and have no legal, contractual, regulatory, economic or competitive limiting factors.
The annual impairment evaluation for indefinite life intangible assets includes a quantitative assessment to determine whether the fair value of the indefinite life intangible assets is less than their carrying value. We calculate the estimated fair value of the indefinite-lived intangible asset and compare it to the carrying value. Fair value is estimated primarily using future discounted cash flow projections in conjunction with qualitative factors and future operating plans. When the carrying value exceeds fair value, an impairment charge is recorded for the amount of the difference. An intangible asset is determined to have an indefinite useful life when there are no legal, regulatory, contractual, competitive, economic or other factors that may limit the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. The Company also annually evaluates intangible assets that are not being amortized to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is determined to have a finite useful life, the asset will be amortized prospectively over the estimated remaining useful life and accounted for in the same manner as intangible assets subject to amortization. No indefinite life intangible impairment charges were recognized during 2017, 2016, or 2015.
Impairment of Long-lived Assets
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 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 amount of the restaurant to the estimated fair value. Based on this analysis, if the carrying amount of the restaurant exceeds the estimated fair value, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value.
As a result of the above mentioned review process, the Company recognized a $4.4 million non-cash loss on asset impairment as a result of the performance related to three restaurants in fiscal 2015. The Company did not recognize an impairment charge during fiscal 2017 and 2016.
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
CHUY’S HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)
the need for future impairment. Changes in economic environment, real estate markets, capital spending and overall operating performance could impact these estimates and result in future impairment charges.
Estimated Fair Value of Financial Instruments
The Company uses a three-tier value hierarchy, which classifies the inputs used in measuring fair values, in determining the fair value of the Company's non-financial assets and non-financial liabilities. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. There were no changes in the methods or assumptions used in measuring fair value during the period.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable at December 31, 2017 and December 25, 2016 approximate their fair value due to the short-term maturities of these financial instruments.
In regards to the Company's impairment analysis, we generally estimate long-lived asset fair values, including property and equipment and leasehold improvements, using either the cost and/or the income approach. The inputs used to determine fair value relate primarily to the assumptions regarding the long-lived assets exit cost at their highest and best use and future assumptions regarding restaurant sales and profitability. These inputs are categorized as Level 3 inputs. The inputs used represent assumptions about what information market participants would use in pricing the assets and are based upon the best information available at the time of the analysis.
Loan Origination Costs
Loan origination costs are capitalized and amortized over the term of the related debt and is included in Interest expense, net on the consolidated statements of income.
Revenue Recognition
Revenue from restaurant operations (food, beverage and alcohol sales) and merchandise sales are recognized upon payment by the customer at the time of sale. Revenues are reflected net of sales tax and certain discounts and allowances.
Proceeds from the sale of gift cards are recorded as deferred revenue at the time of sale and recognized as revenue upon redemption by the customer. Breakage is recognized on unredeemed gift cards based upon historical redemption patterns when the Company determines the likelihood of redemption of the gift card by the customer is remote. We recorded $0.3 million of gift card breakage in the fiscal year 2017. Gift card breakage in previous periods presented was immaterial.
Marketing
The Company expenses the printing of menus and other promotional materials as incurred. The costs of community service and sponsorship activities are expensed on the expected timing of those events. Marketing expense was $2.8 million, $2.4 million, and $2.2 million for the years ended December 31, 2017, December 25, 2016 and December 27, 2015, respectively.
Restaurant Pre-opening Costs
Restaurant pre-opening costs consist primarily of manager salaries, relocation costs, supplies, recruiting expenses, travel and lodging, pre-opening activities, employee payroll and related training costs for employees at the new location. The Company expenses such pre-opening costs as incurred. Pre-opening costs also include rent recorded during the period between date of possession and the restaurant opening date.
Stock-Based Compensation
The Company maintains an equity incentive plan under which it allows the Company's board of directors to grant stock options, restricted stock units, and other equity-based awards to directors, officers, and key employees of the Company. The plans provide for granting of options to purchase shares of common stock at an exercise price not less than the fair value of the stock on the date of grant. The Company recognizes stock-based compensation in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718 ("Topic 718"). Stock-based compensation cost includes compensation cost for all share-based payments granted based on the grant date fair value estimated in accordance with the provisions of Topic 718. Compensation cost is recognized on a straight-line basis, net of estimated forfeitures, over the requisite service period of each award.
CHUY’S HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)
Income Tax Matters
Income tax provisions are comprised of federal and state taxes currently due, plus deferred taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are recognized when management considers the realization of those assets in future periods to be more likely than not. Future taxable income, adjustments in temporary differences, available carryforward periods and changes in tax laws could affect these estimates.
Segment Reporting
ASC Topic No. 280, "Segment Reporting," establishes standards for disclosures about products and services, geographic areas and major customers. The Company currently operates one reporting segment; full-service, casual dining, Mexican food restaurants. Additionally, we operate in one geographic area: the United States of America.
Revenue from customers is derived principally from food and beverage sales and the Company does not rely on any major customers as a source of revenue.
Recent Accounting Pronouncements
The Company's management reviewed all significant newly-issued accounting pronouncements and concluded that, with the exception of the pronouncements below, they either are not applicable to the Company's operations or that no material effect is expected on the Company's consolidated financial statements as a result of future adoption.
Leases
In February 2016, the 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 $404.7 million as of December 31, 2017. 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 the 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 we will recognize the right-of-use assets and liabilities for current operating leases, but will likely have an insignificant impact on the consolidated statement of income or cash flows and overall liquidity. In preparation for the adoption of the guidance, the Company will implement controls and key systems changes to enable the preparation of financial information.
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.
The Company's revenue is comprised of food and beverage sales. ASU 2014-09 will not have an impact on revenue recognition related to food and beverage sales. However, it requires gift card breakage to be recognized as revenue proportionate to the pattern of gift card redemptions. The Company records gift card breakage as a component of revenue.
We will adopt this guidance in the first quarter of 2018. The Company 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
CHUY’S HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)
expense line item on the Company's consolidated income statement, 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.
3. Net Income Per Share
Basic net income per share of common stock was 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 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 shares were granted under the Chuy's Holdings, Inc. 2012 Omnibus Equity Incentive Plan, and are referred to as "restricted stock units").
There were approximately 33,800, 1,000 and 26,000 shares of common stock equivalents that have been excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive for the years ended December 31, 2017, December 25, 2016 and December 27, 2015, respectively.
The computations of basic and diluted net income per share is as follows:
|
| | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | December 25, 2016 | | December 27, 2015 |
| BASIC | | | | | |
| Net income | $ | 28,956 |
| | $ | 17,244 |
| | $ | 12,896 |
|
| Weighted-average common shares outstanding | 16,894,986 |
| | 16,676,073 |
| | 16,470,278 |
|
| Basic net income per common share | $ | 1.71 |
| | $ | 1.03 |
| | $ | 0.78 |
|
| | | | | | |
| DILUTED | | | | | |
| Net income | $ | 28,956 |
| | $ | 17,244 |
| | $ | 12,896 |
|
| Weighted-average common shares outstanding | 16,894,986 |
| | 16,676,073 |
| | 16,470,278 |
|
| Dilutive effect of stock options | 108,247 |
| | 211,809 |
| | 269,109 |
|
| Weighted-average of diluted shares | 17,003,233 |
| | 16,887,882 |
| | 16,739,387 |
|
| Diluted net income per common share | $ | 1.70 |
| | $ | 1.02 |
| | $ | 0.77 |
|
4. Prepaid Expenses and Other Current Assets
The major classes of prepaid expenses and other current assets at December 31, 2017 and December 25, 2016 are summarized as follows:
|
| | | | | | | |
| | December 31, 2017 | | December 25, 2016 |
| Deposits on equipment | $ | 948 |
| | $ | 1,143 |
|
| Prepaid expenses | 4,716 |
| | 3,694 |
|
| Other current assets | 260 |
| | 370 |
|
| Total prepaid expenses and other current assets | $ | 5,924 |
| | $ | 5,207 |
|
CHUY’S HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)
5. Property and Equipment
The major classes of property and equipment as of December 31, 2017 and December 25, 2016 are summarized as follows: |
| | | | | | | |
| | December 31, 2017 | | December 25, 2016 |
| Leasehold improvements | $ | 174,767 |
| | $ | 143,494 |
|
| Furniture, fixtures and equipment | 85,043 |
| | 71,305 |
|
| Construction in progress | 13,684 |
| | 11,089 |
|
| | 273,494 |
| | 225,888 |
|
| Less accumulated depreciation | (76,239 | ) | | (60,738 | ) |
| Total property and equipment, net | $ | 197,255 |
| | $ | 165,150 |
|
Depreciation expense was $17.4 million, $15.0 million and $12.7 million for the years ended December 31, 2017, December 25, 2016, and December 27, 2015, respectively.
6. Other Assets and Intangible Assets
The major classes of other assets and intangibles assets along with related accumulated amortization at December 31, 2017 and December 25, 2016 are summarized as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Average Life at December 31, 2017 | 2017 | | 2016 |
| | Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
| Finite-lived assets: | | | | | | | | | | | | |
| Loan origination costs | 2.9 | $ | 294 |
| | $ | (202 | ) | | $ | 92 |
| | $ | 294 |
| | $ | (169 | ) | | $ | 125 |
|
| Lease acquisition costs | 16.0 | 2,561 |
| | (571 | ) | | 1,990 |
| | 2,173 |
| | (453 | ) | | 1,720 |
|
| Total finite-lived assets | | 2,855 |
| | (773 | ) | | 2,082 |
| | 2,467 |
| | (622 | ) | | 1,845 |
|
| Indefinite-lived assets: | | | | | | | | | | | | |
| Liquor license | | 75 |
| | — |
| | 75 |
| | 75 |
| | — |
| | 75 |
|
| Total indefinite-lived assets | | 75 |
| | — |
| | 75 |
| | 75 |
| | — |
| | 75 |
|
| Total other assets and intangible assets | | $ | 2,930 |
| | $ | (773 | ) | | $ | 2,157 |
| | $ | 2,542 |
| | $ | (622 | ) | | $ | 1,920 |
|
Amortization expense was $0.2 million for the year ended December 31, 2017 and $0.1 million for both years ended December 25, 2016 and December 27, 2015.
The following table represents the total estimated amortization of finite-lived intangible assets for the five succeeding fiscal years and thereafter:
|
| | | |
| For the Fiscal Years Ending: | |
| 2018 | $ | 164 |
|
| 2019 | 174 |
|
| 2020 | 167 |
|
| 2021 | 140 |
|
| 2022 | 132 |
|
| Thereafter | 1,305 |
|
| | $ | 2,082 |
|
7. 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, 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
CHUY’S HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)
margins and leverage ratios that determine the commitment fees and interest rates payable by the Company under the Revolving Credit Facility. As of December 31, 2017 and December 25, 2016 the Company had no outstanding indebtedness under the Company's amended Revolving Credit Facility.
Under the Company's Revolving Credit Facility, the Company may request to increase the size of the Company's 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"), 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%), 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). 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.
The revolving line of credit 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.
8. Accrued Liabilities
The major classes of accrued liabilities at December 31, 2017 and December 25, 2016 are summarized as follows:
|
| | | | | | | |
| | December 31, 2017 | | December 25, 2016 |
| Accrued compensation and related benefits | $ | 5,964 |
| | $ | 7,572 |
|
| Other accruals | 4,037 |
| | 3,061 |
|
| Sales and use tax | 3,131 |
| | 2,200 |
|
| Deferred gift card revenue | 2,098 |
| | 2,074 |
|
| Property tax | 1,194 |
| | 1,191 |
|
| Accrued closure costs | 64 |
| | 1,659 |
|
| Total accrued liabilities | $ | 16,488 |
| | $ | 17,757 |
|
9. Leases
The Company leases land and buildings for its corporate office and all of its restaurants under various long-term operating lease agreements. The initial lease terms range from 10 years to 15 years and currently expire between 2019 and 2039. The leases typically include renewal options for 10 to 15 years, which are exercisable at the Company's option. Some of the leases provide for base rent, plus additional rent based on gross sales, as defined in each lease agreement. The Company is also generally obligated to pay certain real estate taxes, insurance and common area maintenance (“CAM”) charges, and various other expenses related to properties.
Rent expense is paid to various landlords including several companies owned and controlled by the Company’s founders and one of its executive officers. In 2017, we also subleased additional office space from certain related parties to expand our corporate headquarters.
Future minimum lease payments under noncancelable operating leases include renewal option periods for certain leases when such option periods are included for purposes of calculating straight line rents. At December 31, 2017, future minimum rentals for each of the next five years and in total are as follows:
CHUY’S HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)
|
| | | | | | | | | | | |
| | Unrelated Parties | | Related Party | | Total |
| Fiscal year ending: | | | | | |
| 2018 | $ | 21,520 |
| | $ | 2,314 |
| | $ | 23,834 |
|
| 2019 | 22,845 |
| | 1,670 |
| | 24,515 |
|
| 2020 | 22,970 |
| | 1,401 |
| | 24,371 |
|
| 2021 | 23,314 |
| | 1,413 |
| | 24,727 |
|
| 2022 | 23,345 |
| | 393 |
| | 23,738 |
|
| Thereafter | 281,830 |
| | 1,676 |
| | 283,506 |
|
| Total minimum lease payments | $ | 395,824 |
| | $ | 8,867 |
| | $ | 404,691 |
|
The above future minimum rental amounts exclude the amortization of deferred lease incentives, renewal options that are not reasonably assured of renewal, and contingent rent. The Company generally has escalating rents over the term of the leases and records rent expense on a straight-line basis.
Rent expense, excluding real estate taxes, CAM charges, insurance, deferred lease incentives and other expenses related to operating leases for the years ended December 31, 2017, December 25, 2016 and December 27, 2015 consists of the following:
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Minimum rent—related parties | $ | 2,215 |
| | $ | 1,988 |
| | $ | 1,901 |
|
| Contingent rent—related parties | 621 |
| | 663 |
| | 646 |
|
| Total rent—related parties | 2,836 |
| | 2,651 |
| | 2,547 |
|
| Minimum rent—unrelated parties | 18,304 |
| | 15,419 |
| | 12,401 |
|
| Contingent rent—unrelated parties | 397 |
| | 312 |
| | 355 |
|
| Total rent—unrelated parties | 18,701 |
| | 15,731 |
| | 12,756 |
|
| Total minimum and contingent rent | $ | 21,537 |
| | $ | 18,382 |
| | $ | 15,303 |
|
10. Employee Benefit Plan
The Chuy’s Opco, Inc. 401(k) plan, (the “401(k) Plan”), is a defined contribution plan covering all eligible employees. The 401(k) Plan provides for employee salary deferral contributions up to the maximum amount allowable by the Internal Revenue Service, as well as Company discretionary matching contributions. Company contributions relating to the 401(k) Plan were approximately $292,000, $229,000 and $209,000 for the years ended December 31, 2017, December 25, 2016 and December 27, 2015, respectively.
11. Stock-Based Compensation
The Company has outstanding awards under the 2006 Stock Option Plan (the “2006 Plan”). The outstanding options under the 2006 Plan are fully vested as of December 31, 2017. In connection with the Company's Initial Public Offering (the "IPO"), the Company terminated the 2006 Plan, and no further awards will be granted under the 2006 Plan. The termination of the 2006 Plan did not affect awards outstanding under the 2006 Plan at the time of its termination and the terms of the 2006 Plan continue to govern those outstanding awards.
In connection with the IPO, the Company adopted the Chuy's Holdings, Inc. 2012 Omnibus Equity Incentive Plan (the “2012 Plan”) which allows the Company’s board of directors to grant stock options, restricted stock, restricted stock units and other equity-based awards to directors, officers, and key employees of the Company. The 2012 Plan provides for granting of options to purchase shares of common stock at an exercise price not less than the fair value of the stock on the date of grant. The outstanding options under the 2012 Plan vest 20% on each of the first five anniversaries of the date of grant and have a maximum term of ten years. The outstanding restricted stock units vest ratably on each of the first four or five anniversaries of the date of grant. As of December 31, 2017, a total of 706,101 shares of common stock are reserved and remain available for issuance under the 2012 Plan.
Stock-based compensation cost recognized in the consolidated statements of income was $2.9 million, $2.2 million and $1.7 million for the years ended December 31, 2017, December 25, 2016 and December 27, 2015, respectively. Stock-based compensation recognized as capitalized development was approximately $218,000, $160,000 and $114,000 for the years ended December 31, 2017, December 25, 2016 and December 27, 2015, respectively. Capitalized stock-based compensation is included in Property and equipment, net on the consolidated balance sheets.
CHUY’S HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)
Stock Options
A summary of stock-based compensation activity and changes related to stock options for the year ended December 31, 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 |
| | | | |
| Granted | — |
| | — |
| | | | |
| Exercised | (35,170 | ) | | 9.67 |
| | | | |
| Forfeited | (6,747 | ) | | 28.91 |
| | | | |
| Outstanding at December 31, 2017 | 274,110 |
| | $ | 19.54 |
| | 4.16 | | $ | 2,429 |
|
| Exercisable as of December 31, 2017 | 248,745 |
| | $ | 18.59 |
| | 4.05 | | $ | 2,427 |
|
The aggregate intrinsic value in the table above is obtained by subtracting the weighted average exercise price from the estimated fair value of the underlying common stock as of December 31, 2017 and multiplying this result by the related number of options outstanding and exercisable at December 31, 2017. The estimated fair value of the common stock as of December 31, 2017 used in the above calculation was $28.05 per share, the closing price of the Company’s common stock on December 29, 2017, the last trading day of the year. The total intrinsic value of options exercised was $0.6 million and $9.1 million for the years ended December 31, 2017 and December 25, 2016, respectively. During the years ended December 31, 2017, December 25, 2016 and December 27, 2015 the total fair value of options vested was $0.3 million, $0.5 million, and $0.6 million, respectively.
There was approximately $0.1 million of total unrecognized compensation costs related to options granted under the 2006 Plan and the 2012 Plan as of December 31, 2017. These costs will be recognized through the year 2019.
Restricted Stock Units
A summary of stock-based compensation activity and changes related to restricted stock units for the year ended December 31, 2017 are as follows:
|
| | | | | | | | |
| | Shares | | Weighted Average Fair Value | | Weighted Average Remaining Contractual Term (Years) |
| Outstanding at December 25, 2016 | 206,750 |
| | $ | 31.57 |
| | |
| Granted | 129,751 |
| | 27.89 |
| | |
| Vested | (67,167 | ) | | 32.13 |
| | |
| Forfeited | (10,848 | ) | | 30.06 |
| | |
| Outstanding at December 31, 2017 | 258,486 |
| | $ | 29.64 |
| | 2.63 |
The fair value of the restricted stock units is the quoted market value of our common stock on the date of grant. As of December 31, 2017, total unrecognized stock-based compensation expense related to non-vested restricted stock units was approximately $5.3 million, which is expected to be recognized through the year 2022.
12. Impairment and Closure Costs
We recorded impairment and closure costs of $1.5 million and $4.4 million for the years ended December 25, 2016 and December 27, 2015, respectively, related to long-lived asset impairments or costs associated with the closure of restaurants. There was no impairment or closure costs recognized for the year ended December 31, 2017.
Impairment and closure costs in 2016 included $1.5 million of closure costs associated with the closure and relocation of one restaurant.
Impairment and closure costs in 2015 included $4.4 million of impairment charges associated with three restaurants.
CHUY’S HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)
13. Gain on insurance settlements
During the third quarter of 2017, parts of Texas and Southeast were struck by Hurricanes Harvey and Irma. As a result of the hurricanes, the Company incurred operating losses as well as property damage. The property damage was mainly related to a restaurant in the Houston region which was closed through the middle of the fourth quarter of 2017 and required a complete reconstruction. Additionally, we incurred property damage from a fire that took place at one restaurant during the second quarter of 2017.
The Company recovered $2.3 million in insurance settlements, of which $1.0 million was received during the fourth quarter of 2017 and $1.3 million accrued in our accounts receivables at December 31, 2017. Approximately $0.5 million of insurance settlements was recognized as a reduction to certain direct expenses which were incurred as a result of the storms. The remainder was allocated to a replacement of damaged property and equipment resulting in a gain of $1.4 million recorded in the fourth quarter of 2017.
The Company's operating losses and property damages as well as related insurance settlements during the year ended December 31, 2017 were as follows:
|
| | | |
| | December 31, 2017 |
| Insurance settlements | $ | (2,262 | ) |
| Costs and expenses | 460 |
|
| Assets disposed, net | 440 |
|
| Gain on insurance settlements | $ | (1,362 | ) |
14. Income Taxes
The provision for federal and state income taxes for the years ended December 31, 2017, December 25, 2016 and December 27, 2015 consisted of the following:
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Current: | | | | | |
| Federal | $ | 972 |
| | $ | 2,933 |
| | $ | 1,724 |
|
| State | 859 |
| | 613 |
| | 945 |
|
| Total current income tax expense | 1,831 |
| | 3,546 |
| | 2,669 |
|
| Deferred: | | | | | |
| Federal | (7,761 | ) | | 2,827 |
| | 2,903 |
|
| State | 430 |
| | 661 |
| | 171 |
|
| Total deferred income tax (benefit) expense | (7,331 | ) | | 3,488 |
| | 3,074 |
|
| Total income tax (benefit) expense | $ | (5,500 | ) | | $ | 7,034 |
| | $ | 5,743 |
|
In December 2017, the U.S. government enacted H.R.1, commonly referred to as the Tax Cuts and Jobs Act ("Tax Act"). The Tax Act impacts the Company in many ways, most notably by a reduction in the federal statutory tax rate from 35% to 21% effective January 1, 2018. As a result of this change, we were required to revalue our deferred tax balances at the 21% rate, resulting in a non-recurring deferred tax balance adjustment with a corresponding decrease to the provision for income taxes of $11.7 million in the fourth quarter of 2017. The company recognized the income tax effects of the Tax Act in accordance with Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance relating to the application of ASC Topic 740, Income Taxes, in the reporting period in which the Tax Act was signed into law. As such, the company’s financial results reflect the income tax effects of the Tax Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The company did not identify items for which the income tax effects of the Tax Act have not been completed and no significant provisional estimates were made as of December 31, 2017.
Temporary differences between tax and financial reporting basis of assets and liabilities which give rise to the deferred income tax assets (liabilities) and their related tax effects as of December 31, 2017 and December 25, 2016 are as follows:
CHUY’S HOLDINGS, INC.
Notes to Consolidated Financial Statements (Continued)
(Tabular dollar amounts in thousands, except share and per share data)
|
| | | | | | | |
| | 2017 | | 2016 |
| Deferred tax assets: | | | |
| Accrued liabilities | $ | 12,819 |
| | $ | 17,236 |
|
| General business tax credits | 13,653 |
| | 12,653 |
|
| Stock-based compensation | 1,024 |
| | 1,222 |
|
| Other | 238 |
| | 403 |
|
| Total deferred tax assets | 27,734 |
| | 31,514 |
|
| Deferred tax liability: | | | |
| Intangibles | (7,394 | ) | | (10,609 | ) |
| Prepaid expenses | (1,339 | ) | | (1,673 | ) |
| Property and equipment | (25,439 | ) | | (33,001 | ) |
| Total deferred tax liabilities | (34,172 | ) | | (45,283 | ) |
| Deferred tax liabilities, net | $ | (6,438 | ) | | $ | (13,769 | ) |
December 31, 2017 deferred tax balances were measured using a 21% federal statutory rate as a result of the Tax Act as compared to 35% in previous years.
We had approximately $9.2 million of tax benefits ($3.3 million net of tax) related to excess stock compensation which was recorded to additional paid-in-capital during the fiscal year ended December 25, 2016. Under the "tax law ordering" method, as described in ASC 740, this amount was also used as tax deductions and reduced taxable income for fiscal year ended December 25, 2016. As of December 31, 2017, the Company has general business tax credits of $13.7 million expiring in 2035.
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. The Company believes that it will realize all of the deferred tax assets. Therefore, no valuation allowance has been recorded.
The following is a reconciliation of the expected federal income taxes at the statutory rate of 35% for the fiscal years ended December 31, 2017, December 25, 2016, and December 27, 2015 to the actual provision for income taxes:
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Expected income tax expense | $ | 8,210 |
| | $ | 8,497 |
| | $ | 6,524 |
|
| State tax expense, net of federal benefit | 838 |
| | 829 |
| | 725 |
|
| FICA tip credit | (2,250 | ) | | (1,936 | ) | | (1,924 | ) |
| Deferred tax balance adjustment | (11,696 | ) | | — |
| | — |
|
| Other | (602 | ) | | (356 | ) | | 418 |
|
| Income tax (benefit) expense | $ | (5,500 | ) | | $ | 7,034 |
| | $ | 5,743 |
|
Federal tax standards require that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The standards also require that changes in judgment that result in subsequent recognition, derecognition or change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) be recognized as a discrete item in the interim period in which the change occurs. As of December 31, 2017 and December 25, 2016 the Company recognized no liability for uncertain tax positions.
It is the Company’s policy to include any penalties and interest related to income taxes in its income tax provision. However, the Company currently has no penalties or interest related to income taxes.
15. Commitments and Contingencies
The Company is involved in various claims and legal actions arising in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
16. Related Party Transactions
The Company leases its corporate office and six restaurant locations from entities owned by its founders and one of its executive officers. See Note 9 Leases.
In addition, the Company entered into a management agreement in November 2006 with Three Star Management, Ltd. (an entity owned by its founders) to provide management services, such as administrative, accounting and human resources support, to Three Star Management’s restaurants. In connection with this agreement, the Company received management fees of $40,000 for fiscal years 2017, 2016 and 2015.
17. Quarterly Financial Data (Unaudited)
The following tables set forth certain unaudited consolidated financial information for each of the four quarters in fiscal years 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| | 2017 |
| | March 26 | | June 25 | | September 24 | | December 31 |
| Revenue | $ | 86,904 |
| | $ | 94,472 |
| | $ | 92,193 |
| | $ | 96,020 |
|
Income from operations (1) | 6,461 |
| | 7,358 |
| | 4,187 |
| | 5,515 |
|
Net income(1)(2) | 4,550 |
| | 5,329 |
| | 3,195 |
| | 15,882 |
|
| Basic net income per share | $ | 0.27 |
| | $ | 0.32 |
| | $ | 0.19 |
| | $ | 0.94 |
|
| Diluted net income per share | $ | 0.27 |
| | $ | 0.31 |
| | $ | 0.19 |
| | $ | 0.93 |
|
| | 2016 |
| | March 27 | | June 26 | | September 25 | | December 25 |
| Revenue | $ | 78,054 |
| | $ | 87,909 |
| | $ | 85,597 |
| | $ | 79,053 |
|
Income from operations (3) | 6,489 |
| | 8,330 |
| | 6,740 |
| | 2,782 |
|
Net income(3) | 4,532 |
| | 5,780 |
| | 4,599 |
| | 2,333 |
|
| Basic net income per share | $ | 0.27 |
| | $ | 0.35 |
| | $ | 0.27 |
| | $ | 0.14 |
|
| Diluted net income per share | $ | 0.27 |
| | $ | 0.34 |
| | $ | 0.27 |
| | $ | 0.14 |
|
| |
(1) | Contains a gain from the insurance settlements that increased income from operations by $1.4 million and net income by $1.0 million in the fourth quarter of 2017. |
| |
(2) | Contains a deferred tax balance adjustment that increased net income by $11.7 million in the fourth quarter of 2017. |
| |
(3) | Contains closure costs that decreased income from operations by $0.4 million and $1.1 million and net income by $0.3 million and $1.0 million related to one restaurant in the third and fourth quarter of 2016, respectively.
|
18. Subsequent Events
Subsequent to December 31, 2017, the Company opened one new restaurant on March 13, 2018, for a total of 92 restaurants in 19 states.