J. Alexander's Holdings, Inc. First Quarter 2016 Earnings Conference Call, May 4, 2016

Transcription

1 J. Alexander's Holdings, Inc. First Quarter 2016 Earnings Conference Call May 4, 2016

2 C O R P O R A T E P A R T I C I P A N T S Tom Lawrence, DVL Seigenthaler, Moderator Lonnie J. Stout, II, President and Chief Executive Officer Mark A. Parkey, Vice President and Chief Financial Officer C O N F E R E N C E C A L L P A R T I C I P A N T S Will Slabaugh, Stephens, Inc. P R E S E N T A T I O N Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to J. Alexander s Holdings, Inc. First Quarter 2016 Earnings Conference Call. Today s conference call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at the time for you to queue up for questions. It is now my pleasure to turn the conference over to Mr. Tom Lawrence for an introduction of today s speakers. Thank you, Mr. Lawrence; please go ahead. Tom Lawrence: Thank you, Michelle. We appreciate your interest in joining us on J. Alexander s Holdings Conference Call to discuss results for the first quarter of By now, everyone should have received a copy of the news release that was distributed yesterday. If anyone does need a copy, it is available on J. Alexander s website at or you can call Katherine Burnt (phon) at and she will send you a copy immediately. Before I turn the call over to Lonnie J. Stout, II, President and CEO of J. Alexander s Holdings, Inc., I remind you that all statements made in the news release and during this conference call, other than statements of historical fact, are forward-looking statements. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of The Company believes that its expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties, and other important factors that could cause the Company s actual results, performance or achievements, or industry results to differ materially from the Company s expectations of future results, performance, or achievements expressed or implied by these forward-looking statements. Additional information concerning those risks, uncertainties, and other 1

3 factors is described under the headings Forward Looking Statements, Risk Factors, and other sections of the Company s Annual Report on Form-10K for the year ended January 3, 2016, filed with the SEC, which you can find on the SEC s website and the Investor Relations section of the Company s website. For historical non-gaap or pro forma related financial information disclosed in this call, the related GAAP measures and other information required by Reg. G of the SEC are available in the financial and statistical summary accompanying the press release dated May 3, In addition, the Company s past results of operations do not necessarily indicate its future results. Finally, we wanted to let you know that the information statements made during the call are made as of the date of the call, May 4, Those listening to any replays should understand that the passage of time by itself will diminish the quality of the statements. Also, the contents of the call are the property of the Company and the replay or transmission of the call may be done only with the consent of J. Alexander s Holdings Team. It s now my pleasure to turn the call over to Lonnie Stout for his opening remarks. Thank you, Tom. Welcome, everybody. We have Mark Parkey with us today, and after my comments I'll turn the call over to Mark to review in depth some of our financial results. As reported in our year-end release for 2015, we have observed some sales softness in the first quarter that started in the latter part of the fourth quarter. That continued, as we thought, throughout the first quarter of 2016 for the JAX/Redlands Restaurant Group. In contrast, the quarter ended April 3, We had positive same-store sales gains for our Stoney River Steakhouse and Grill concept. During the most recent 13-week quarter, a little over half of our JAX/Redlands restaurants posted down same-store sales, with many of them being in our Ohio markets, and I'll provide a little detail later on some of the sales performance issues and Mark will address some of those also. It's important to point out, though, that the first quarter of 2015 was a particularly strong quarter for the JAX/Redlands Restaurant Group. We have posted a same-store sales increase that quarter of 6.1%. If we go back to 2010, we averaged about $92,000 in the first quarter 2010 and that builds to $118,600 weekly sales average in the first quarter of That represents a 5.2% compounded growth in sales averages weekly averages for that five-year period. So we're comparing this in really strong numbers. It's also important to review a few other factors that impacted sales results in the first quarter of New Year's Eve week, which is traditionally one of our strongest sales weeks of the year and also one of our most profitable, occurred twice during fiscal year 2015 and had a favorable impact on both the first and fourth quarters of The first quarter of 2016 began on January 4, 2016, and as such, the Company did not have a benefit of the New Year's Eve week. We estimate approximately half of our decrease in weekly sales same-store sales was attributed to this shift of the New Year's Eve week. On a consolidated basis, the estimated impact on sales due to the absence of the New Year's week in the first quarter of 2016 was approximately $905,000 within the same-store sales base of restaurants. Correspondently, this impacted profits on an estimated basis of about $535,000 on the pretax income line. So, it certainly negatively impacted the quarter. During the first quarter of 2015, also we had weather impact on J. Alexander's/Redlands and Stoney. We had about a total of 17 days for JAX/Redlands and 15 days for Stoney River Grill and Steakhouse where 2

4 we were closed due to weather conditions. We had a much milder winter in the first quarter of 2016 and we were only closed five and six days respectively in the first quarter of this year. Also during the first quarter of 2015, we closed our Troy, Michigan J. Alexander's restaurant for 35 days while we conducted a significant remodeling. There were no corresponding closures during the first quarter of '16 for remodeling activity. On January 25, 2016 we opened our newest Stoney River Steakhouse and Grill in Germantown, Tennessee near Memphis. The first quarter of this year reflects results of operations for the 10 weeks that that restaurant was open during the quarter. We recently completed a marketing research project that we do about every three to four years. We didn't see anything in the marketing research to indicate that we have any operational or structural issues impacting same-store sales in the JAX/Redlands Group. In other words, we found no linkage of anything. Anytime we have sales issues, the first place we look at is our own operations. We recognize that there are no perfect restaurants, and we would certainly not tell you that ours are perfect. We can make improvements in all of them, but we do not believe operations are responsible for any of our sales issues. The softness that we've seen this last quarter is mostly occurring late lunch and early dinner and some late dinner hours. We've addressed some of these soft periods with some lower-priced feature items at both lunch and dinner, coupled with some modified pricing on some of our signature items in a few of our markets. Our core guest is still strong. Core business is very strong. Most of the early dinner, late lunch guests are what we call guests that are somewhat subject to promotional matters. They're generally a more mature guest, aspirational guest. So we think that's where our weakness has been. The last time we saw any of this kind of weakness in these day parts was back during the Great Recession. As all of you know, GDP was only up about a half a point for the first quarter of this year, so there are some markets around the country that probably had negative GDP growth. We're pleased to report, though, that the Stoney River Steakhouse and Grill concept turned in another positive quarter of same-store sales; for the most recent period, marked the seventh quarter of increases in same-store sales for the Stoney River Steakhouse and Grill concept. Stoney River posted an average weekly sales increase of $0.70 (phon) during the most recent quarter and recorded a 5% increase in average weekly sales per restaurant. This reflected the positive impact of our recent Stoney River opening in Germantown. While we don't make it a habit of talking about specific restaurants, many of you have inquired about the new Stoney River Steakhouse and Grill, since there hasn't been a Stoney River opened in several years, and it has been averaging in excess of $115,000 a week since it opened, and we're very pleased with that result. That's significantly higher than the Stoney River system's average, and we believe that's the highest volume that a Stoney River has ever opened. The Stoney River markets were somewhat less impacted by some of the issues we noted on the JAX/Redlands Group. We do not operate any Stoney Rivers in the state of Ohio, and the only Stoney Rivers we have in smaller suburban markets are in the Maryland suburbs where we still have considerable sales momentum from the lunch program we implemented in these mall locations. For the 13-week quarter just ended, Adjusted EBITDA was $6,728,000. That is down from $718,000 in the first quarter of 2015, and Mark will dive into that a little deeper for you. Our net sales for the first quarter of 2016 totaled $56,879,000. That was up 1.2% from the $56,184,000 we posted a year early. Consolidated operating profits for the quarter were $3,172,000. That compares to $5,376,000 in the first quarter of

5 On the positive side, we estimated our effective tax rate going into this year, we thought it was going to be about 30%, but the actual calculation yielded an effective tax rate of approximately 21% for the first quarter. Our restaurant operating margins for the first quarter of '16 were 15.2% of sales as compared to 16.8% in the corresponding quarter of I want to comment a minute on our Development program. As we announced in the last call, we have several opportunities for opening restaurants in '17 we're working on. We're evaluating about 25 locations in 20 separate markets for We previously announced that we are under contract to open a J. Alexander's this year in Raleigh, North Carolina and another one in Lexington, Kentucky. We hope to announce the next Stoney River location soon. We're in the final steps of negotiating our lease and we'll be announcing that market hopefully in the next couple of weeks here. Finally, we're also on track to open all these restaurants in the fourth quarter of this year. I want to turn the call back over to Mark Parkey, and he's going to give you some more details about our financial results for the quarter. Mark? Mark A. Parkey: Thank you, Lonnie, and good morning, everyone. As Lonnie mentioned in his opening remarks, our performance for the first quarter ended April 3, 2016 reflected the soft sales in certain J. Alexander's/Redlands Grill restaurants with the J's Redlands Restaurant Group average weekly samestore sales per restaurant totaled $115,000, down 3.0% from the $118,600 a week reflected in the first quarter of For our Stoney River Steakhouse and Grill concept, same-store sales advanced to 0.7% to $75,100 a week from $74,600 a week in the first quarter of The J. Alexander's/Redlands Grill, the average weekly guest check, which includes alcoholic beverage sales, decreased 1.5% to $30.54 in the first quarter of 2016 as compared to $31.01 during the corresponding quarter of Average guest checks for the Stoney River concept were down 1.8% to $44.96 in the first quarter of 2016 as compared to $45.79 during the first quarter a year earlier. The affect of menu pricing for the quarter just ended was estimated to be a 0.8% decrease for the J. Alexander's/Redlands Grill restaurants and a 0.4% increase for the Stoney River Steakhouse and Grill restaurants when compared to the corresponding quarter of For the most recent quarter, average weekly guest counts for the J. Alexander's Redland's Grill samestore restaurants decreased by 1.5%. At Stoney River, average weekly same-store guest counts for the most recent quarter decreased 0.5%. For the first quarter of 2016, we reported income from continuing operations before income taxes of $2,999,000 compared to income from continuing operations before income taxes of $4,961,000 in the same quarter a year earlier. Net income for the first quarter of 2016 totaled $2,290,000, down from net income of $4,773,000 in the first quarter of Basic and diluted earnings-per-share totaled $0.15 for the first quarter of 2016 and $0.32 for the first quarter of In computing earnings-per-share for the periods prior to our spinoff from Fidelity National Financial Ventures, LLC in September of 2015, weighted average common shares outstanding are based on the number of shares outstanding at the date of the spend as if all shares had been outstanding since the beginning of the earliest period presented. Total restaurant operating expenses were 84.8% of net sales in the first quarter of 2016 as compared to 83.2% of net sales in the first quarter of The increase was primarily due to the effect of lower sales in our same-store base of J. Alexander's/Redlands Grill restaurants. Positive sales as a percentage of 4

6 net sales, which includes the cost of food and beverages, amounted to 31.8% in the first quarter of 2016 as compared to 31.1% in the corresponding quarter of This increase was due primarily to our emphasis on lower-priced feature items at both lunch and dinner at selected J. Alexander's/Redlands Grill locations and modified pricing, which Lonnie mentioned, on some of our signature items in selective markets. In addition, we experienced modest inefficiencies in our cost of sales related to the new Stoney River location, which Lonnie also previously referenced. We estimate that input costs were up 0.4%, including a 4.4% increase related to our Beef program at the J. Alexander's/Redlands Grill restaurants during the first quarter of Inflation for our Stoney River concept was estimated to be 1.3% for the first quarter of 2016, which includes a 3.1% increase in beef cost. Restaurant labor and related costs as a percent of net sales were 29.8% as compared to 29.2% in the first quarter of Other restaurant operating expenses totaled 19.4% of net sales for both the first quarter of 2016, as well as the corresponding quarter of Consolidated general and administrative expenses were 9.0% of net sales in the first quarter of 2016 as compared to 7.1% of net sales in the first quarter of 2015, an increase of $1,131,000. Included in this increase were approximately $250,000 of fees related to being a public company once again, consulting fees of $160,000 from our Management Agreement with Black Knight Advisory Services, and profits interest non-cash compensation expense for Black Knight which totaled $594,000 in the first quarter of During the fourth quarter of 2015, our Board of Directors authorized a Share Repurchase program for up to 1.5 million shares of the Company's outstanding common stock over the next three years, ending October 29, The Company expects to fund share repurchases from cash on-hand and operating cash flow. During the first quarter of 2016, 53,250 shares were repurchased by the Company under this program at an aggregate purchase price of $539,000. I will now turn the call back to the Operator to open the participant calling segment of this morning's call. Operator: Thank you. At this time we will be conducting a question-and-answer session. If you'd like to ask a question, please press star, one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star, two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from the line of Will Slabaugh with Stephen's. Please proceed with your question. Will Slabaugh: Yes, thanks, guys. Wonder if you could talk just a little bit more about what's going on in the markets that you mentioned were a little bit negative for the quarter. Surprised it's only half, considering you said you put the negative three (phon) in the J's concept. So, if you could talk about that and then a little bit more about what you think is the right course of action, and if that course of action makes sense for the entire system or just those that you're seeing more of the softness in. Sure, Will. Well, first, in our large markets with the exception of Houston and I'm going to say a large market is the SMA with over 4 million people we had no sales softness. Those restaurants all posted up same-store sales for the quarter. Those markets are densely populated, high income markets in 5

7 Chicago, Detroit, Atlanta, South Florida. Actually, we only had one South Florida restaurant with any sales softness. So our sales softness is in our much smaller markets and SMAs. Ohio we were soft everywhere. We were soft in North Florida. We were soft in Alabama. We're soft in some of our Tennessee locations. This is what I referred to earlier. Though promotional activity may hurt us from a competitive point of view with other competitors in some of these markets, I think just the economy stunk in the first quarter in a lot of markets. If GDP is up a half a point, then I would imagine there were a lot of SMAs in the United States with negative GDP for the quarter. What we did to we started this program to be more aggressive on our feature pricing, having lower priced features, making sure we had $12 and under features available at lunch and under $20 features at dinner, and we think that had a positive impact on us though it did knock the check average back a little bit. In some of our markets, we did some promotional activity in store with some of our key signature items. We did all of this before we completed our marketing research, and now that we have our marketing research, we have a few different thoughts about things. The intent to dine out by our guest is the same as it was back in 2012, so we haven't seen really any weakness there. Our concept attributes versus competitors' are still very good. So, again, where we saw this softness was around late lunch and early dinner and some late-night. Late-night business is usually younger guest; our early dinner business, much older, mature guest; and late lunch is the more mature guest. So, these are the aspirational guests that are important to us, but we think their frequency was down some. We've seen some improvement already, improvement from the program, so that's why we reconfirmed our guidance in the press release. We think that we're going to end the year about where we thought. Did that answer your question, Will? Will Slabaugh: Yes. That's great. I appreciate that. I want to also ask on that same level of questioning if you look at those markets that are a little bit softer, are there particular competitors that you think you're getting very aggressive there, or do you think it really is just more of a macro picture that's just a little bit softer than we thought it was going to be in the first quarter? I think a little softer, Will. I don't think there's any competitor that we've seen that particularly harms us. Now, what we have seen and I'll talk about Nashville, where we're very strong here. I would say in the last two years there have been more full-service upscale restaurants open in Nashville than in the last 10 years. In other words, the first couple of years after recession, there were not many openings. We're seeing restaurant development in the $30 plus check average arena everywhere. Again, this is not coming from the national publicly held chains as much as it's coming from very upscale boutique operators. But, I mean, they're just on every street corner, so obviously some of our core guests are trying these places. But an interesting statistic from our research, still 16% of the J. Alexander's/Redland guests account for 66% of our visits, so we have a strong heavy user out there and that's still present for us. But I'm sure they go out and price some of these new places. So, it's not any one competitor and I don't think it's the promotional restaurants that affect our core guests at all. The promotional restaurants probably do affect some of these aspirational guests when they can go get a cheap late lunch or early dinner. Will Slabaugh: That's great. I appreciate it. 6

8 All righty. Operator: Once again, if you would like to ask a question, please press star, one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star, two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for more questions. There are no further questions at this time. I would like to turn the call back over to Mr. Lonnie Stout for any closing comments. First, we thank everyone on the call today. We thank you, Michelle, very much. Again, we knew entering this most recent 13-week quarter that our trend of soft sales was continuing and would impact results for the quarter. As we also noted, we're comparing our results against a very consecutive group of strong first quarters over the last five years. We think we've addressed the softness in these markets as we just discussed and as we answered Will's questions. This includes, again, offering lower priced features in selective markets, modifying our menu pricing in some of our Ohio markets. I think as we see better results, we're going to back off of some of this though, and we think we can build guest counts with good operations and we are very optimistic about the back half of this year. We believe that this will continue to move us back on track to building sales and traffic, and we believe our actions and the momentum we have in the second quarter will yield the desired outcomes in this year as we make some progress. Based on our current information, as I noted earlier, our previously released guidance for 2016 as disclosed on March 9, 2016, with the exception of the effective tax rate previously noted, remains unchanged. Again, we want to thank everyone for participating in the call very much. Operator: This concludes today's conference call. At this time, you may disconnect your lines and thank you for your participation. 7