Chuy's Holdings, Inc. (DRI) Earnings Call Transcript & Summary

Thank you for standing by. Welcome to the Darden Restaurants Conference Call. [Operator Instructions] Please note, today's conference is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Ms. Courtney Aquilla. Thank you, you may begin.

Thank you, Daryll. Good morning, everyone, and thank you for participating on today's call. With me today are Rick Cardenas, Darden's President and CEO; and Raj Vennam, CFO. Yesterday, we announced that Darden Restaurants has entered into an agreement to acquire Chuy's for $37.50 per share. This morning, Rick will share with you why we are confident this deal will strengthen Darden and the Chuy's brand, and Raj will provide transaction terms and high-level financials. Following our prepared remarks and presentation, we will open the call for a brief question-and-answer session, where we will only take questions related to this transaction. As a reminder, we plan to release first quarter results on Thursday, September 19, before the market opens with a conference call to follow. During the course of this call and presentation, comments made will include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in our press release, which was distributed yesterday and in Darden's filings with the Securities and Exchange Commission. We are simultaneously broadcasting a presentation during this call, which is posted on the Investor Relations section of our website at darden.com. Today's discussion and presentation includes certain non-GAAP measures, and a reconciliation of those measures is included in the presentation. Now I will turn the call over to Rick.

Thank you, Courtney. Good morning, everyone. We appreciate you joining us today as we share the exciting news about the addition of Chuy's to the Darden portfolio. Whenever we consider adding a brand to our portfolio, we have a set of criteria we evaluate. The brand should be a full-service dining concept with strong guest appeal, have the ability to exceed the sales growth in our long-term framework and make an impact to our financial performance over time. Chuy's checks all these boxes. Founded in 1982 in Austin, Texas, Chuy's is a full-service casual dining restaurant and a leader in the Mexican dining category. It is a differentiated brand serving a distinct menu of authentic, TexMex inspired dishes in a fun, eclectic atmosphere. Their commitment to high quality and made-from-scratch food and beverage offered at a compelling price fuels high guest loyalty. With attractive unit economics and a strong business model, there is ample runway for new restaurant growth. And finally, it is large enough to make a meaningful impact to Darden's performance over time. However, to be an excellent fit for Darden, a brand must also strengthen our winning strategy, which is grounded in our 4 competitive advantages, our back-to-basics operating philosophy and our portfolio of iconic brands. This strategy has served us well for many years and helps us continually strengthen our portfolio. Our competitive advantages give our brands an edge, leveraging our scale, creates cost advantages, which allows us to drive value for our guests, such as our ability to price below inflation over the long term and invest in our team members. Our extensive data provides insights to help our brands better understand their guests and effectively communicate with them. Additionally, each of our brands regularly go through a strategic planning process to ensure they are focused on the right work. And finally, we have a results-oriented culture to create teams that have a passion to nourish and delight everyone we serve, earning the loyalty of our team members and our guests. We have proven that as brands join our organization, we can strengthen their business while increasing the power of the Darden platform. Just as our competitive advantages will benefit them, Chuy's will further amplify these advantages, which is critical to our success. Our back-to-basics operating philosophy is a driving force behind the way our brand teams run their restaurants. This simple, yet powerful philosophy, demands that we remain incredibly focused on executing on the fundamentals of serving exceptional food with attentive service and an engaging atmosphere. And these priorities are supported by relevant marketing programs that resonate with our guests. Darden and Chuy's share a similar operating philosophy focused on the guest experience as well as the same passion for a strong team member culture, which will help create an easy transition. Finally, Chuy's complements our existing portfolio by allowing us to access the popular Mexican dining category, which we do not compete in today. The Mexican category is one of the fastest-growing dining categories and Chuy's is the largest full service operator with strong unit economics. Today, Chuy's has 101 restaurants, all of which are company-owned, in 15 states with ample opportunity for continued growth, both in new and existing markets. For all these reasons, Chuy's is an excellent fit in the Darden portfolio. Over the past 15 years, we have successfully integrated 6 brands into Darden and just completed the Ruth's Chris integration within our last fiscal year. Though the process can be complex, we have an experienced team ready to ensure that it proceeds as smoothly as possible following the close. I want to thank Steve Hislop and the Chuy's leadership team for their partnership through this process and their 7,400 team members for building such a beloved brand. This is just the beginning of our journey together. Now I'll turn it over to Raj to discuss the financial details of this transaction.

Thanks, Rick. As mentioned, yesterday, we announced that Darden Restaurants has entered into an agreement to purchase Chuy's for $37.50 per share. The transaction is valued at approximately $605 million, representing a multiple of 10.3x Chuy's trailing 12-month transaction-adjusted EBITDA as of March 2024. We anticipate closing on the deal during the back half of our fiscal second quarter, following a 30-day go-shop period. We're committed to maintaining our investment-grade credit profile, and we have sufficient liquidity and debt capacity to complete the all-cash transaction. With the financing of this transaction, we anticipate being at the lower end of our targeted leverage range of 2 to 2.5x adjusted debt to adjusted EBITDA. Chuy's has a strong business model with attractive restaurant level economics. In the 12 months ending March 2024, they achieved more than $450 million in sales, average restaurant volumes of $4.5 million with an average check of $19 and an impressive restaurant-level EBITDA margin of almost 20%. With these strong national-level economics, Chuy's is a great fit for our portfolio. We anticipate furthering our scale advantage with this addition, which, as Rick mentioned, drives value for our guests. By leveraging this advantage, we anticipate achieving net run rate synergies of $15 million by the end of fiscal 2026, primarily through supply chain and G&A savings, partially offset by team member investments. Over the long term, we expect this transaction to be accretive to Darden. Given the timing of the transaction, we anticipate that it will be neutral to our adjusted earnings per share for the current fiscal year. This does not include the pretax transaction and integration-related expenses of $50 million to $55 million. By fiscal 2027, we anticipate this transaction will be $0.12 to $0.15 accretive to our earnings per share. [Technical Difficulties]

Ladies and Gentlemen please standby. Okay, I do have that speaker line back in. Sorry about that.

Yes, we're back.

Okay. Thank you. Let me open up for Q&A. [Operator Instructions] Our first question comes from the line of Chris O'Cull with Stifel.

Rick, I know in the past, Chuy's believed the brand's unit potential was at least 350 units. I'm just curious, was that the estimate you guys used to inform your purchase decision? Or do you believe that potential is greater? And then I had a follow-up.

Chris, we're not going to talk about what we think the potential is. We just think it can grow higher than our long-term framework over time. And when we learn even more, we'll probably continue to increase the unit potential that we think they have. But we're not going to get into the exact number that we think.

Okay. And then I believe Chuy's had plans to open 10 to 12 units in calendar '25, with many of those locations kind of having signed leases and LOIs. Is the plan -- or does Darden plan to still accelerate the pace of Chuy's development?

If you think about what we've said in the past, we believe Chuy's, and I just said it a second ago, we believe Chuy's can grow well above our long-term framework. And -- but we've also said that we don't expect brands to grow well above 10% in any kind of long term. So they do have quite a few restaurants in our pipeline. We're going to keep those going, and we're going to continue to build the pipeline. But we do expect it to be higher than our long-term framework and unit growth.

Our next question comes from the line of Jim Salera with Stephens.

I wanted to ask on the off-premise mix. I know Chuy's has seen a pretty significant step-up in off-premise as a percentage of their mix. I think it was like 13% in FY 2019, up to almost 30% in 1Q. When you guys took over Ruth's, I believe you took it off of third party. Do you have any thoughts around what the strategy is going to be for Chuy's with the aggregators and kind of off-premise?

Yes, Jim, you've mentioned that off-premise is a big part of Chuy's business and third-party aggregators are a big part of that. As of right now, we don't anticipate changing that for them, and maybe we can learn.

Our next question comes from the line of Jeffrey Bernstein with Barclays.

Great. And, Rick, interesting to hear that maybe Darden can learn from those third-party aggregators, look forward to hearing more about that. My question is specific to your portfolio. Seemingly, with Chuy's, I believe we're now up to 10 brands, which is an impressive feat. I'm just wondering how you think about that from the customer's perspective. It would seem like with the addition of all these brands, there's going to be a benefit from the customer side of things. I know there are lots of benefits on your end, but any thoughts around or greater interest in potentially loyalty or other things where maybe the customer can benefit from staying within your universe of portfolio of brands?

Yes, Jeff, I don't want to get into what we would do after we make the acquisition of Chuy's. I do know that, and we all know, that the casual dining category is variety seeking. This is a segment that we're not in and it strengthens our portfolio in that way. We will figure out what ways we can strengthen our own guests through that after the integration or when we get into the integration. But yes, 10 brands is a good feat for us. We have set our organization up to be able to handle those brands with the leadership changes we made that we announced just a few weeks ago. And we feel like this is the right time to make the acquisition of Chuy's and to add a Mexican category back to Darden after many, many years.

Got it. And then just to clarify, it looks like Chuy's, with their 100 stores, I mean, the majority -- or the biggest presence is in the Southeast. I know some have said that the Mexican category is maybe a more challenging category to grow nationally just because there's different taste profiles in different regions. I'm just wondering about your thoughts as you presumably expand outside of Texas and outside of the Southeast, your confidence that the brand will resonate around the country.

Yes, Jeff, without talking about what our growth plans are for Chuy's, again, we're still early into the integration -- or I mean, started the integration, actually, we just feel Chuy's has done a lot of work on where their brand is strong and where they continue to grow, and we plan on learning from that. They have a lot more room to grow in the markets that they're in, and there's a lot of white space. So -- and I do believe that there's another Mexican brand out there that's not necessarily in our category that's all over the place. So I think there's belief that you can be in other markets that Chuy's is in today.

The next question comes from the line of David Tarantino with Baird.

Rick, I have a question just on your acquisition strategy in general. It seems like Chuy's is a very logical strategic move and a good fit with your portfolio. And I know you have to look at these types of transactions when they become available to you. But I'm curious, this is a second transaction in 2 years, and I'm just kind of curious to get your philosophy on whether, as you look forward, you're still open to these types of acquisitions or whether you think that this is good enough for now? Or how are you thinking about kind of the next several years as it relates to these types of opportunities?

Yes, David, the first part of your question mentioned that, opportunistically, things come at certain times. Yes, this is our second one in 2 years. We did do that in the past. We bought Yard House and Eddie V's within, I think, a little bit over a year of each other around there. But our Board and the management team will continue to evaluate what the best strategic alternatives are for Darden and our use of our capital. But we're going to focus on Chuy's right now and getting through the close and doing all the things we have to do to get to close and integration, and then we'll figure out what to do after that.

Our next question comes from the line of Lauren Silberman with Deutsche Bank.

I wanted to ask about just the valuation, Darden's multiple as well as the rest of the industry has pulled back, still concerns on the consumer environment, a little over 10x as reported, I think, 8x, 8.5x including synergies. Can you just talk about the considerations in terms of capital allocation and the best uses?

Lauren, so, look, when we evaluate an acquisition, we're really evaluating over a long term, and we're trying to look at what's the future cash flow and what's the right valuation and then the implied multiple. It's not the other way around. And so -- but with that said, this transaction price represents a multiple of 10.3x the trailing 12 months EBITDA. But when we look at the deal, we think this deal is right for Darden and that the price we're paying, given Chuy's growth prospects is fair, and it will allow us to create significant value to our shareholders. And in fact, when you add in the synergies, the multiple is 8.2x. And so when you take into consideration the growth side and then the other factors I mentioned, we think it's a fair price.

Our next question comes from the line of Andrew Strelzik with BMO Capital Markets.

I guess, I wanted to get your perspective on the Mexican category within Casual Dining specifically. And you mentioned kind of the faster growth profile of Mexican food and in other categories outside of casual dining, some of the success of the cuisine type. But historically, I guess, casual dining has had some challenges scaling Mexican brands nationally. So I'm curious for why you think that has been the case why this might be different now and kind of the keys to achieving the growth potential for Chuy's.