chuy-20230924

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________

FORM 10-Q

__________________________________


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 24, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-35603

__________________________________

CHUY’S HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

__________________________________


Delaware						20-5717694
(State of Incorporation or Organization)						(I.R.S. Employer Identification No.)

1623 Toomey Rd.

Austin, Texas 78704

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (512) 473-2783

__________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	CHUY	Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

☐

Accelerated filer

☑

Emerging growth company

☐

Non-accelerated filer

☐

Smaller reporting company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The number of shares of the registrant’s common stock outstanding at October 20, 2023 was 17,352,569.

Table of Contents



Part I – Financial Information			3
Item 1. Financial Statements			3
Unaudited Condensed Consolidated Balance Sheets			3
Unaudited Condensed Consolidated Income Statements			4
Unaudited Condensed Consolidated Statements of Stockholders' Equity			5
Unaudited Condensed Consolidated Statements of Cash Flows			6
Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures about Market Risk			15
Item 4. Controls and Procedures			15
Part II – Other Information			16
Item 1. Legal Proceedings			16
Item 1A. Risk Factors			16
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities			16
Item 3. Defaults Upon Senior Securities			16
Item 4. Mine Safety Disclosures			16
Item 5. Other Information			16
Item 6. Exhibits			17

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Part I—Financial Information

Item 1. Financial Statements

Chuy's Holdings, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	September 24, 2023		December 25, 2022
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$	69,863	$	78,028
Accounts receivable	2,148		2,004
Lease incentives receivable	900		900
Inventories	1,681		2,069
Income tax receivable	117		—
Prepaid expenses and other current assets	5,821		4,817
Total current assets	80,530		87,818
Property and equipment, net	200,125		185,956
Operating lease assets	139,491		146,920
Deferred tax asset, net	3,802		4,958
Other assets and intangible assets, net	4,386		3,160

Tradename	21,900		21,900
Goodwill	24,069		24,069
Total assets	$	474,303	$	474,781
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	5,917	$	8,059
Accrued liabilities	29,280		23,321
Operating lease liabilities	12,553		12,499
Income tax payable	—		479




Total current liabilities	47,750		44,358

Operating lease liabilities, less current portion	173,971		183,670
Other liabilities	3,355		2,192



Total liabilities	225,076		230,220

Contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 17,501,620 shares issued and outstanding at September 24, 2023 and 17,998,170 shares issued and outstanding at December 25, 2022	175		180
Preferred stock, $0.01 par value; 15,000,000 shares authorized and no shares issued or outstanding at September 24, 2023 and December 25, 2022	—		—
Paid-in capital	75,227		96,586
Retained earnings	173,825		147,795
Total stockholders’ equity	249,227		244,561
Total liabilities and stockholders’ equity	$	474,303	$	474,781

See Notes to the Unaudited Condensed Consolidated Financial Statements

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Chuy's Holdings, Inc.

Unaudited Condensed Consolidated Income Statements

(in thousands, except share and per share data)


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 24, 2023		September 25, 2022		September 24, 2023		September 25, 2022
Revenue	$	113,464	$	106,682	$	344,963	$	318,114
Costs and expenses:
Cost of sales	28,517		29,149		86,667		86,266
Labor	34,548		32,378		103,809		94,470
Operating	19,047		17,441		56,021		51,164
Occupancy	7,772		7,490		23,770		22,698
General and administrative	7,885		6,700		23,389		19,848
Marketing	1,609		1,541		4,852		4,568
Restaurant pre-opening	343		266		1,437		733

Impairment, closed restaurant and other costs	1,017		1,190		1,870		3,203

Depreciation	5,378		5,102		15,740		15,065
Total costs and expenses	106,116		101,257		317,555		298,015
Income from operations	7,348		5,425		27,408		20,099
Interest income, net	(945)		(331)		(2,576)		(378)
Income before income taxes	8,293		5,756		29,984		20,477
Income tax expense	1,219		767		3,954		2,099
Net income	$	7,074	$	4,989	$	26,030	$	18,378
Net income per common share:
Basic	$	0.40	$	0.27	$	1.45	$	0.97
Diluted	$	0.39	$	0.27	$	1.44	$	0.97
Weighted-average shares outstanding:
Basic	17,877,063		18,685,401		17,992,608		18,901,542
Diluted	17,987,525		18,761,263		18,103,825		19,010,238

See Notes to the Unaudited Condensed Consolidated Financial Statements

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Chuy's Holdings, Inc.

Unaudited Condensed Consolidated Statements of Stockholders' Equity

(in thousands, except share and per share data)


	Thirteen Weeks Ended
	Common Stock					Retained
	Shares	Amount		Paid-in Capital		Earnings		Total
Balance, June 25, 2023	18,038,554	$	180	$	94,476	$	166,751	$	261,407
Stock-based compensation	—	—		1,062		—		1,062
Proceeds from exercise of stock options	527	—		15		—		15
Settlement of restricted stock units	1,982	—		—		—		—
Repurchase of shares of common stock	(538,907)	(5)		(20,286)		—		(20,291)
Indirect repurchase of shares for minimum tax withholdings	(536)	—		(40)		—		(40)
Net income	—	—		—		7,074		7,074
Balance, September 24, 2023	17,501,620	$	175	$	75,227	$	173,825	$	249,227

Balance, June 26, 2022	18,879,917	$	189	$	115,232	$	140,329	$	255,750
Stock-based compensation	—	—		987		—		987


Settlement of restricted stock units	1,850	—		—		—		—
Repurchase of shares of common stock	(557,576)	(6)		(12,749)		—		(12,755)
Indirect repurchase of shares for minimum tax withholdings	(544)	—		(12)		—		(12)
Net income	—	—		—		4,989		4,989
Balance, September 25, 2022	18,323,647	$	183	$	103,458	$	145,318	$	248,959

	Thirty-Nine Weeks Ended
	Common Stock					Retained
	Shares	Amount		Paid-in Capital		Earnings		Total
Balance, December 25, 2022	17,998,170	$	180	$	96,586	$	147,795	$	244,561

Stock-based compensation	—	—		3,160		—		3,160
Proceeds from exercise of stock options	10,157	—		291		—		291
Settlement of restricted stock units	159,706	2		(2)		—		—
Repurchase of shares of common stock	(622,428)	(6)		(23,246)		—		(23,252)
Indirect repurchase of shares for minimum tax withholdings	(43,985)	(1)		(1,562)		—		(1,563)
Net income	—	—		—		26,030		26,030
Balance, September 24, 2023	17,501,620	$	175	$	75,227	$	173,825	$	249,227

Balance, December 26, 2021	19,538,058	$	195	$	135,659	$	126,940	$	262,794

Stock-based compensation	—	—		3,042		—		3,042


Settlement of restricted stock units	174,596	2		(2)		—		—
Repurchase of shares of common stock	(1,334,388)	(13)		(33,794)		—		(33,807)
Indirect repurchase of shares for minimum tax withholdings	(54,619)	(1)		(1,447)		—		(1,448)
Net income	—	—		—		18,378		18,378
Balance, September 25, 2022	18,323,647	$	183	$	103,458	$	145,318	$	248,959

See Notes to the Unaudited Condensed Consolidated Financial Statements

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Chuy's Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)


	Thirty-Nine Weeks Ended
	September 24, 2023		September 25, 2022
Cash flows from operating activities:
Net income	$	26,030	$	18,378
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	15,740		15,065
Amortization of operating lease assets	7,528		7,149
Amortization of loan origination costs	65		65
Impairment, closed restaurant and other costs	535		880
Stock-based compensation	2,962		2,885

Loss on disposal of property and equipment	182		204

Deferred income taxes	1,156		497
Changes in operating assets and liabilities:
Accounts receivable	(144)		164

Income tax receivable and payable	(596)		1,136
Inventories	388		54
Prepaid expenses and other assets	(2,035)		(1,858)
Accounts payable	(3,697)		985
Accrued and other liabilities	7,122		(756)

Operating lease liabilities	(10,061)		(11,975)


Net cash provided by operating activities	45,175		32,873
Cash flows from investing activities:
Purchase of property and equipment, net	(28,654)		(20,113)

Net cash used in investing activities	(28,654)		(20,113)
Cash flows from financing activities:









Loan origination costs	(162)		—
Repurchase of shares of common stock	(23,252)		(33,807)
Proceeds from the exercise of stock options	291		—
Indirect repurchase of shares for minimum tax withholdings	(1,563)		(1,448)
Net cash used in financing activities	(24,686)		(35,255)
Net decrease in cash and cash equivalents	(8,165)		(22,495)
Cash and cash equivalents, beginning of period	78,028		106,621
Cash and cash equivalents, end of period	$	69,863	$	84,126

Supplemental disclosure of non-cash investing and financing activities:
Property and equipment and other assets acquired by accounts payable	$	1,555	$	1,522

Supplemental cash flow disclosures:
Cash paid for interest	$	33	$	41
Cash paid for income taxes	$	3,407	$	466

See Notes to the Unaudited Condensed Consolidated Financial Statements

Chuy's Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(Tabular dollar amounts in thousands, except share and per share data)

1. Basis of Presentation

Chuy’s Holdings, Inc. (the “Company” or “Chuy’s”) develops and operates Chuy’s restaurants throughout the United States. Chuy’s is a growing, full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex-Mex inspired food. As of September 24, 2023, the Company operated 100 restaurants across 16 states.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements and the related notes reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. The unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”), except that certain information and notes have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (the “SEC”). Results for interim periods are not necessarily indicative of the results that may be expected for the full fiscal year. The unaudited condensed consolidated financial statements should be read in conjunction with consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2022. The accompanying condensed consolidated balance sheet as of December 25, 2022, has been derived from our audited consolidated financial statements.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ from those estimates.

The Company operates on a 52- or 53- week fiscal year that ends on the last Sunday of the calendar year. Each quarterly period has 13 weeks, except for a 53-week year when the fourth quarter has 14 weeks. Our 2023 fiscal year consists of 53 weeks and our 2022 fiscal year consisted of 52 weeks.

2. Recent Accounting Pronouncements

The Company reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on the Company's consolidated financial statements.

3. Net Income Per Share

The number of shares and net income per share data for all periods presented are based on the historical weighted-average shares of common stock outstanding.

Basic net income per share of the Company's common stock is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period.

Diluted net income per share of common stock is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive common stock equivalents outstanding during the period using the treasury stock method for dilutive options and restricted stock units (the options and restricted stock units were granted under the Chuy's Holdings, Inc. 2012 Omnibus Equity Incentive Plan (the "2012 Plan") and the Chuy's Holdings, Inc. 2020 Omnibus Incentive Plan (the "2020 Plan")).

For the thirteen weeks ended September 24, 2023 and September 25, 2022, there were approximately 44 and 91,952 shares, respectively, of common stock equivalents that were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive. For the thirty-nine weeks ended September 24, 2023 and September 25, 2022, there were approximately 171 and 65,638 shares, respectively, of common stock equivalents that were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive.

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Chuy's Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(Tabular dollar amounts in thousands, except share and per share data)

The computation of basic and diluted net income per share is as follows:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 24, 2023		September 25, 2022		September 24, 2023		September 25, 2022
BASIC
Net income	$	7,074	$	4,989	$	26,030	$	18,378

Weighted-average common shares outstanding	17,877,063		18,685,401		17,992,608		18,901,542
Basic net income per common share	$	0.40	$	0.27	$	1.45	$	0.97

DILUTED
Net income	$	7,074	$	4,989	$	26,030	$	18,378

Weighted-average common shares outstanding	17,877,063		18,685,401		17,992,608		18,901,542
Dilutive effect of stock options and restricted stock units	110,462		75,862		111,217		108,696
Weighted-average of diluted shares	17,987,525		18,761,263		18,103,825		19,010,238
Diluted net income per common share	$	0.39	$	0.27	$	1.44	$	0.97

4. Stock-Based Compensation

The Company has outstanding awards under the 2012 Plan and the 2020 Plan. On July 30, 2020, the Company’s stockholders approved the 2020 Plan, which replaced the 2012 Plan and no further awards may be granted under the 2012 plan. The termination of the 2012 Plan did not affect outstanding awards granted under the 2012 Plan. Options granted under these plans vest over five years from the date of grant and have a maximum term of ten years. As of September 24, 2023, the Company had 1,819 of stock options outstanding and exercisable with a remaining weighted average contractual term of less than one year.

Restricted stock units granted under the 2012 Plan and 2020 Plan vest over four years to five years from the date of grant. As of September 24, 2023, a total of 743,117 shares of common stock were reserved and remained available for issuance under the 2020 Plan.

Stock-based compensation expense recognized in the accompanying condensed consolidated income statements was approximately $1.0 million and $0.9 million for the thirteen weeks ended September 24, 2023 and September 25, 2022, respectively. Stock-based compensation expense recognized in the accompanying condensed consolidated income statements was approximately $3.0 million and $2.9 million for the thirty-nine weeks ended September 24, 2023 and September 25, 2022.

On July 27, 2023, the Company’s stockholders approved the 2023 Employee Stock Purchase Plan ("the 2023 ESPP"). As of September 24, 2023, the Company had 500,000 shares of common stock reserved and available for issuance under the 2023 ESPP. As of September 24, 2023, there has not been any offering period or purchase period under the 2023 ESPP, and no such period will begin unless and until determined by the administrator.

A summary of stock-based compensation activity related to restricted stock units for the thirty-nine weeks ended September 24, 2023 is as follows:


	Shares	Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Year)
Outstanding at December 25, 2022	383,098	$	27.06
Granted	136,145	36.76
Vested	(159,706)	24.38
Forfeited	(4,126)	27.99
Outstanding at September 24, 2023	355,411	$	31.97	2.68

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Chuy's Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(Tabular dollar amounts in thousands, except share and per share data)

The fair value of the restricted stock units is the quoted market value of our common stock on the date of grant. As of September 24, 2023, total unrecognized stock-based compensation expense related to non-vested restricted stock units was approximately $9.1 million. This amount is expected to be recognized evenly over the remaining vesting period of the awards.

5. Long-Term Debt

Revolving Credit Facility

On July 30, 2021, the Company entered into a secured $35.0 million revolving credit facility with JPMorgan Chase Bank, N.A. (the “Credit Facility”). The Credit Facility may be increased up to an additional $25.0 million subject to certain conditions and at the Company’s option if the lenders agree to increase their commitments. The Credit Facility will mature on July 30, 2024, unless the Company exercises its option to voluntarily and permanently reduce all of the commitments before the maturity date.

On June 30, 2023, the Company entered into Amendment No. 1 (the “Amendment”) to the Credit Facility with JPMorgan Chase Bank, N.A. The Amendment replaced the London Interbank Offered Rate (“LIBOR”) interest rate with an Adjusted Term Secured Overnight Financing Rate (“Adjusted Term SOFR”) interest rate.

The Credit Facility contains representations and warranties, affirmative and negative covenants and events of default that the Company considers customary for an agreement of this type. The agreement requires the Company to be in compliance with a minimum fixed charge coverage ratio of no less than 1.25 to 1.00, and a maximum consolidated total lease adjusted leverage ratio of no more than 4.00 to 1.00. The Credit Facility also has certain restrictions on the payment of dividends and distributions. Under the 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 consolidated total lease adjusted leverage ratio does not exceed 3.50 to 1.00.

Borrowings under the Credit Facility accrue interest at a per annum rate equal to, at the Company’s election, either Adjusted Term SOFR plus a margin of 1.5% to 2.0%, depending on the Company’s consolidated total lease adjusted leverage ratio, or a base rate determined according to the highest of (a) the prime rate, (b) the federal funds rate plus 0.5% or (c) Adjusted Term SOFR plus 1.0%, plus a margin of 0.5% to 1.0%, depending on the Company’s consolidated total lease adjusted leverage ratio.

An unused commitment fee at a rate of 0.125% applies to unutilized borrowing capacity under the Credit Facility.

The obligations under the Company’s Credit Facility are guaranteed by certain subsidiaries of the Company and, subject to certain exceptions, secured by a continuing security interest in substantially all of the Company’s assets. As of September 24, 2023, the Company had no borrowings under the Credit Facility, and was in compliance with all covenants under the Credit Facility.

Subsequent to the quarter end, on September 27, 2023, the Company entered into an Amended and Restated Credit Agreement (the “A&R Credit Facility”) with JPMorgan Chase Bank, N.A. to, among other things, (1) extend the maturity date of the credit facility to September 27, 2026 from July 30, 2024, (2) revise the adjustment applicable to the Adjusted Term SOFR rate as well as the commitment fee and (3) reduce the aggregate principal commitment to $25.0 million which could be increased up to an additional $35.0 million at the Company’s option if the lenders agree to increase their commitments.

6. Accrued Liabilities

The major classes of accrued liabilities at September 24, 2023 and December 25, 2022 are summarized as follows:


	September 24, 2023		December 25, 2022
Accrued compensation and related benefits	$	12,861	$	9,117
Other accruals	7,039		5,202
Property tax	3,857		2,820
Sales and use tax	3,043		3,007
Deferred gift card revenue	2,480		3,175

Total accrued liabilities	$	29,280	$	23,321

7. Stockholders' Equity

Share Repurchase Program

On October 28, 2021, the Company’s Board of Directors replaced the Company's previous $30.0 million share repurchase program and approved a new share repurchase program under which the Company may repurchase up to $50.0 million of its

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Chuy's Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(Tabular dollar amounts in thousands, except share and per share data)

common shares outstanding. This repurchase program became effective on October 28, 2021. The Company repurchased 557,576 shares for approximately $12.8 million during the third quarter of 2022 and 1,334,388 shares for approximately $33.8 million during the thirty-nine weeks ended September 25, 2022. As of December 25, 2022, the Company completed its previous $50.0 million repurchase program.

On October 27, 2022, the Company’s Board of Directors approved a new share repurchase program under which the Company may repurchase up to $50.0 million of its common shares outstanding through December 31, 2024. The Company repurchased 538,907 shares for approximately $20.0 million during the third quarter of 2023 and 622,428 shares of its common stock for a total of approximately $23.0 million during the thirty-nine weeks ended September 24, 2023. As of September 24, 2023, the Company had $27.0 million remaining under its $50.0 million repurchase program.

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.

8. Contingencies

The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our condensed consolidated financial position, results of operations, or cash flows.

9. Leases

The Company determines if a contract contains a lease at inception. The Company's material long-term operating lease agreements are for the land and buildings for our restaurants as well as our corporate offices. The lease term begins on the date that the Company takes possession under the lease, including the pre-opening period during construction, when in many cases the Company is not making rent payments. The initial lease terms range from 10 to 15 years, most of which include renewal options totaling 10 to 15 years. The lease term is generally the minimum of the noncancelable period or the lease term including renewal options which are reasonably certain of being exercised up to a term of approximately 20 years.

Operating lease assets and liabilities are recognized at the lease commencement date for material leases with a term of greater than 12 months. Operating lease liabilities represent the present value of future minimum lease payments. Since our leases do not provide an implicit rate, our operating lease liabilities are calculated using the Company's secured incremental borrowing rate at lease commencement. We estimate this rate based on prevailing financial market conditions, comparable companies, credit analysis and management judgment. Minimum lease payments include only fixed lease components of the agreement, as well as variable rate payments that depend on an index, initially measured using the index at the lease commencement date.

Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepaid or accrued lease payments, initial direct costs and lease incentives. Lease incentives are recognized when construction milestones are met and reduce our operating lease asset. They are amortized through the operating lease assets as reductions of rent expense over the lease term.

Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease payments that do not depend on a rate or index, escalation in the index subsequent to the initial measurement, payments associated with non-lease components such as common area maintenance, real estate taxes and insurance, and short-term lease payments (leases with a term with 12 months or less) are expensed as incurred. Certain of the Company’s operating leases contain clauses that provide for contingent rent based on a percentage of sales greater than certain specified target amounts. These variable payments are expensed when the achievement of the specified target that triggers the contingent rent is considered probable. As of September 24, 2023, all of the Company's leases were operating.

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Chuy's Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(Tabular dollar amounts in thousands, except share and per share data)

Components of operating lease costs are included in occupancy, closed restaurant costs, restaurant pre-opening, general and administrative expense and property and equipment, net:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
Lease cost	September 24, 2023		September 25, 2022		September 24, 2023		September 25, 2022
Operating lease cost	$	6,019	$	6,072	$	18,060	$	18,426
Variable lease cost	443		358		1,374		1,094
	$	6,462	$	6,430	$	19,434	$	19,520

Supplemental cash flow disclosures and other lease information:


	Thirty-Nine Weeks Ended
	September 24, 2023		September 25, 2022
Cash paid for operating lease liabilities	$	20,520	$	23,377
Operating lease assets obtained in exchange for operating lease liabilities(a)	197		7,724

(a) The thirty-nine weeks ended September 24, 2023 includes a $2.7 million increase due to extending remaining lives of certain leases, partially offset by a $1.9 million decrease as a result of a purchase of an existing operating lease and a $0.6 million decrease as a result of the termination of a closed restaurant lease. The thirty-nine weeks ended September 25, 2022 includes a $7.4 million increase to operating lease assets and liabilities related to new lease commencements, a $2.8 million increase due to extending remaining lives of certain leases, partially offset by a $2.5 million decrease as a result of the termination of closed restaurant leases.

The Company recorded no deferred lease incentives during the thirty-nine weeks ended September 24, 2023 and $1.0 million of deferred lease incentives during the thirty-nine weeks ended September 25, 2022.

Supplemental balance sheet disclosures:


Operating leases	Classification	September 24, 2023			December 25, 2022
Right-of-use assets	Operating lease assets	$	139,491		$	146,920

Deferred rent payments	Operating lease liability	5			84
Current lease liabilities	Operating lease liability	12,548			12,415
		12,553			12,499

Deferred rent payments	Operating lease liability, less current portion	64			68
Non-current lease liabilities	Operating lease liability, less current portion	173,907			183,602
		173,971			183,670

Total lease liabilities		$	186,524		$	196,169

Weighted average remaining lease term (in years)		12.1			12.7
Weighted average discount rate		7.6		%	7.6%

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Chuy's Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(Tabular dollar amounts in thousands, except share and per share data)

Future minimum rent payments for our operating leases for the next five years as of September 24, 2023 are as follows:


Fiscal year ending:
Remainder of 2023	$	6,502
2024	26,262
2025	26,378
2026	25,468
2027	23,419
Thereafter	176,402
Total minimum lease payments	284,431
Less: imputed interest	97,907
Present value of lease liabilities	$	186,524

As of September 24, 2023, operating lease payments exclude approximately $12.1 million of legally binding minimum lease payments for leases signed but which we have not yet taken possession.

10. Income Taxes

The following is a reconciliation of the expected federal income taxes at the statutory rates of 21%:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 24, 2023		September 25, 2022		September 24, 2023		September 25, 2022
Expected income tax expense	$	1,742	$	1,209	$	6,297	$	4,300
State tax expense, net of federal benefit	267		199		977		767
FICA tip credit	(860)		(727)		(3,191)		(3,099)

Officers' compensation	66		49		247		206
Stock compensation	(7)		33		(394)		(94)
Other	11		4		18		19
Income tax expense	$	1,219	$	767	$	3,954	$	2,099

Deferred tax assets are reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred taxes will not be realized. Both positive and negative evidence is considered in forming management’s judgment as to whether a valuation allowance is appropriate, and more weight is given to evidence that can be objectively verified. The tax benefits relating to any reversal of the valuation allowance on the deferred tax assets would be recognized as a reduction of future income tax expense. As of September 24, 2023, the Company believes that it will realize all of its deferred tax assets. Therefore, no valuation allowance has been recorded.

The Internal Revenue Service ("IRS") audited our tax return for the fiscal year 2016. In August 2020, the IRS issued a Notice of Proposed Adjustment to the Company asserting that the tenant allowances paid to us under our operating leases should be recorded as taxable income for years 2016 and prior. The Company disagrees with this position based on the underlying facts and circumstances as well as standard industry practice. The Company estimates if the IRS's position was upheld, the Company's tax liability associated with this position could range between $0.5 million and $2.5 million. In accordance with the provisions of FASB Accounting Standards Codification Subtopic 740-10, Accounting for Uncertainty in Income Taxes, the Company believes that it is more likely than not that the Company's position will ultimately be sustained upon further examination, including the resolution of the IRS's appeal or litigation processes, if any. As of September 24, 2023 and September 25, 2022, 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.

The tax years 2021, 2020 and 2019 remain open for IRS audit. The Company has received no notice of audit or any notifications from the IRS for any of the open tax years.

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Chuy's Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(Tabular dollar amounts in thousands, except share and per share data)

11. Impairment, Closed Restaurant and Other Costs

The Company reviews long-lived assets, such as property and equipment, operating lease assets and intangibles, subject to amortization, for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable. In determining the recoverability of the asset value, an analysis is performed at the individual restaurant level and primarily includes an assessment of historical undiscounted cash flows and other relevant factors and circumstances. The Company evaluates future cash flow projections in conjunction with qualitative factors and future operating plans and regularly reviews any restaurants with a deficient level of cash flows for the previous 24 months to determine if impairment testing is necessary.

Recoverability of assets to be held and used is measured by a comparison of the carrying value of the restaurant to its estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value, we determine if there is an impairment loss by comparing the carrying value of the restaurant to its estimated fair value. Based on this analysis, if the carrying value of the restaurant exceeds its estimated fair value, an impairment charge is recognized by the amount by which the carrying value exceeds the fair value.

We make assumptions to estimate future cash flows and asset fair values. The estimated fair value is generally determined using the depreciated replacement cost method, the income approach, or discounted cash flow projections. Estimated future cash flows are highly subjective assumptions based on the Company’s projections and understanding of our business, historical operating results, and trends in sales and restaurant level operating costs.

The Company’s impairment assessment process requires the use of estimates and assumptions regarding future cash flows and operating outcomes, which are based upon a significant degree of management judgment. The estimates used in the impairment analysis represent a Level 3 fair value measurement. The Company continues to assess the performance of restaurants and monitors the need for future impairment. Changes in the economic environment, real estate markets, capital spending, overall operating performance and underlying assumptions could impact these estimates and result in future impairment charges.

The Company recorded impairment, closed restaurant and other costs as follows:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 24, 2023		September 25, 2022		September 24, 2023		September 25, 2022

Property and equipment impairment	51		673		98		673
Total impairment charge	51		673		98		673

Closed restaurant costs	596		796		1,402		2,832
Loss (gain) on lease termination	370		(279)		370		(302)

Impairment, closed restaurant and other costs	$	1,017	$	1,190	$	1,870	$	3,203

Closed restaurant costs represent on-going expenses to maintain the closed restaurants, such as rent expense, utility and insurance among other costs required to maintain the remaining closed locations

The Company terminated one and three of its closed restaurant lease agreements during the thirteen weeks ended September 24, 2023 and September 25, 2022, respectively.

The Company terminated and/or subleased one and seven of its closed restaurant lease agreements during the thirty-nine weeks ended September 24, 2023 and September 25, 2022, respectively.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise specified, or the context otherwise requires, the references in this report to "Chuy's," “our Company,” “the Company,” “us,” “we” and “our” refer to Chuy’s Holdings, Inc. together with its subsidiaries.

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 25, 2022 (our "Annual Report") and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein.

Overview

We are a growing, full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex-Mex inspired food. We were founded in Austin, Texas in 1982 and, as of September 24, 2023, we operated 100 restaurants across 16 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.

Performance Indicators

We use the following performance indicators in evaluating our performance:

•Number of Restaurant Openings. Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For restaurant openings, we incur pre-opening costs, which are defined below, before the restaurant opens. Typically, new restaurants open with an initial start-up period of higher than normalized sales volumes, which decrease to a steady level approximately six to twelve months after opening. However, operating costs during this initial six to twelve month period are also higher than normal, resulting in restaurant operating margins that are generally lower during the start-up period of operation and increase to a steady level approximately nine to twelve months after opening.

•Comparable Restaurant Sales. We consider a restaurant to be comparable in the first full quarter following the 18th month of operations. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Changes in comparable restaurant sales reflect changes in customer count trends as well as changes in average check. Our comparable restaurant base consisted of 94 restaurants at September 24, 2023.

•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.

•Average Weekly Customers. Average weekly customers is measured by the number of entrées sold per week. Our management team uses this metric to measure changes in customer traffic.

•Average Unit Volume. Average unit volume consists of the average sales of our comparable restaurants over a certain period of time. This measure is calculated by dividing total comparable restaurant sales within a period of time by the total number of comparable restaurants within the relevant period. This indicator assists management in measuring changes in customer traffic, pricing and development of our brand.

•Operating Margin. Operating margin represents income from operations as a percentage of our revenue. By monitoring and controlling our operating margins, we can gauge the overall profitability of our Company.

The following table presents operating data for the periods indicated:


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 24, 2023			September 25, 2022			September 24, 2023			September 25, 2022
Total open restaurants (at end of period)	100			97			100			97
Total comparable restaurants (at end of period)	94			92			94			92
Average unit volumes (in thousands)	$	1,124		$	1,101		$	3,470		$	3,317
Change in comparable restaurant sales(1)	2.0		%	2.6		%	4.3		%	4.9		%
Average check	$	19.07		$	18.37		$	19.04		$	18.08

(1) We consider a restaurant to be comparable in the first full quarter following the 18th month of operations. Change in comparable restaurant sales reflects changes in sales for the comparable group of restaurants over a specified period of time.

Our Fiscal Year

We operate on a 52- or 53-week fiscal year that ends on the last Sunday of the calendar year. Each quarterly period has 13 weeks, except for a 53-week year when the fourth quarter has 14 weeks. Our 2023 fiscal year consists of 53 weeks and our 2022 fiscal year 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 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 and payroll taxes.

Operating costs. Operating costs consist primarily of restaurant-related operating expenses, such as supplies, utilities, repairs and maintenance, travel cost, insurance, employee benefits, credit card fees, recruiting, delivery service and security. These costs generally increase with sales volume but may increase or decrease as a percentage of revenue.

Occupancy costs. Occupancy costs include rent charges, both fixed and variable, as well as common area maintenance costs, property taxes, the amortization of tenant allowances and the adjustment to straight-line rent. These costs are generally fixed but a portion may vary with an increase in sales when the lease contains percentage rent.

General and administrative expenses. General and administrative expenses include costs associated with corporate and administrative functions that support our operations, including senior and supervisory management and staff compensation (including stock-based compensation) and benefits, travel, legal and professional fees, information systems, corporate office rent and other related corporate costs.

Marketing. Marketing costs include costs associated with our local and national 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, closed restaurant and other costs. Impairment costs include impairment of long-lived assets associated with restaurants where the carrying amount of the asset is not recoverable and exceeds the fair value of the asset. Closed restaurant costs consist of any costs associated with the closure of a restaurant such as lease termination costs, severance benefits, other miscellaneous closing costs as well as costs to maintain these closed restaurants through the lease termination date such as occupancy costs, including rent payments less sublease income, if any, and insurance and utility costs.

Depreciation. Depreciation principally includes depreciation on fixed assets, including equipment and leasehold improvements.

Interest income, net. Interest income, net consists primarily of interest income earned on the excess cash invested in money market funds, reduced by interest on our outstanding indebtedness, if any, uncommitted credit facility fees and the amortization of our debt issuance costs.

Results of Operations

Potential Fluctuations in Quarterly Results and Seasonality

Our quarterly operating results may fluctuate significantly as a result of a variety of factors, including the timing of new restaurant openings and related expenses, profitability of new restaurants, weather, increases or decreases in comparable restaurant sales, general economic conditions, consumer confidence in the economy, changes in consumer preferences, competitive factors, changes in food costs, changes in labor costs and changes in gas prices. In the past, we have experienced significant variability in restaurant pre-opening costs from quarter to quarter primarily due to the timing of restaurant openings. We typically incur restaurant pre-opening costs in the five months preceding a new restaurant opening. In addition, our experience to date has been that labor and direct operating costs associated with a newly opened restaurant during the first several months of operation are often materially greater than what will be expected after that time, both in aggregate dollars and as a percentage of restaurant sales. Accordingly, the number and timing of new restaurant openings in any quarter has had, and is expected to continue to have, a significant impact on quarterly restaurant pre-opening costs, labor and direct operating costs.

Our business is also subject to fluctuations due to seasonality and adverse weather. The spring and summer months have traditionally had higher sales volume than other periods of the year. Timing of holidays, severe winter weather, hurricanes, thunderstorms and similar conditions may impact restaurant unit volumes in some of the markets where we operate and may have a greater impact should they occur during our higher volume months. As a result of these and other factors, our financial results for any given quarter may not be indicative of the results that may be achieved for a full fiscal year.

Thirteen Weeks Ended September 24, 2023 Compared to Thirteen Weeks Ended September 25, 2022

The following table presents, for the periods indicated, the condensed consolidated statement of operations (in thousands):


	Thirteen Weeks Ended
	September 24, 2023		% of Revenue		September 25, 2022		% of Revenue		$ Change		% Change
Revenue	$	113,464	100.0	%	$	106,682	100.0	%	$	6,782	6.4	%
Costs and expenses:
Cost of sales	28,517		25.1		29,149		27.3		(632)		(2.2)
Labor	34,548		30.4		32,378		30.4		2,170		6.7
Operating	19,047		16.8		17,441		16.3		1,606		9.2
Occupancy	7,772		6.8		7,490		7.0		282		3.8
General and administrative	7,885		6.9		6,700		6.3		1,185		17.7
Marketing	1,609		1.5		1,541		1.5		68		4.4
Restaurant pre-opening	343		0.3		266		0.2		77		28.9

Impairment, closed restaurant and other costs	1,017		0.9		1,190		1.1		(173)		(14.5)

Depreciation	5,378		4.8		5,102		4.8		276		5.4
Total costs and expenses	106,116		93.5		101,257		94.9		4,859		4.8
Income from operations	7,348		6.5		5,425		5.1		1,923		35.4
Interest income, net	(945)		(0.8)		(331)		(0.3)		(614)		185.5
Income before income taxes	8,293		7.3		5,756		5.4		2,537		44.1
Income tax expense	1,219		1.1		767		0.7		452		58.9
Net income	$	7,074	6.2	%	$	4,989	4.7	%	$	2,085	41.8	%

Revenue. Revenue increased $6.8 million, or 6.4%, to $113.5 million for the thirteen weeks ended September 24, 2023 from $106.7 million for the comparable period in 2022. The increase was primarily related to an increase in our comparable restaurant sales as well as incremental revenue from an additional 65 operating weeks provided by new restaurants opened during and subsequent to the third quarter of 2022. For the third quarter of 2023, off-premise sales were approximately 28% of total revenue compared to approximately 26% during the same period in fiscal 2022.

Comparable restaurant sales increased 2.0% for the third quarter of 2023 compared to the same period last year primarily driven by a 3.8% increase in average check, partially offset by a 1.8% decrease in average weekly customer.

Cost of sales. Cost of sales as a percentage of revenue decreased to 25.1% during the thirteen weeks ended September 24, 2023 compared to 27.3% during the comparable period in 2022 primarily driven by overall commodity deflation of approximately

5% during the quarter as compared to the same period a year ago as well as leverage on a menu price increase taken subsequent to the third quarter of 2022.

Operating costs. Operating costs as a percentage of revenue increased to 16.8% during the thirteen weeks ended September 24, 2023 from 16.3% during the same period in 2022 primarily driven by a 40 basis points ("bps") increase in delivery service charges as a result of increased delivery sales, a 20 bps increase in restaurant repair and maintenance costs and a 10 bps increase in insurance premiums, partially offset by a 20 bps decrease in utility costs as compared to the third quarter of 2022.

General and administrative expenses. General and administrative expenses increased to $7.9 million for the thirteen weeks ended September 24, 2023 as compared to $6.7 million for the same period in 2022. The increase was primarily driven by higher performance-based bonuses and an increase in management salaries. As a percentage of revenues, general and administrative expenses increased to 6.9% in the third quarter of 2023 from 6.3% in the third quarter of 2022.

Impairment, closed restaurant and other costs. Impairment, closed restaurant and other costs decreased to $1.0 million during the thirteen weeks ended September 24, 2023 from $1.2 million during the comparable period in 2022. The decrease was primarily related to a reduction in rent paid on previously closed restaurants. Closed restaurant costs include rent expense, utilities, insurance and other costs required to maintain the remaining closed locations.

Depreciation. Depreciation expense increased to $5.4 million during the thirteen weeks ended September 24, 2023 from $5.1 million recorded during the comparable period in 2022 primarily due to an increase in depreciation associated with our new restaurants.

Interest income, net. Interest income, net increased to $0.9 million during the thirteen weeks ended September 24, 2023 as compared to $0.3 million for the same period in 2022. The increase was mainly a result of a higher rate of return on the excess cash invested in money market funds.

Income tax expense. Income tax expense increased to $1.2 million during the thirteen weeks ended September 24, 2023 as compared to $0.8 million during the comparable period in 2022. The effective income tax rate for the quarter was 14.7% as compared to 13.3% in the same period last year. The increase in the effective tax rate was mainly attributed to a decrease in the proportion of employee tax credits to estimated annual income.

In August 2020, the IRS issued a Notice of Proposed Adjustment to the Company asserting that the tenant allowances paid under our operating leases should be recorded as taxable income for years 2016 and prior. The Company disagrees with the IRS's position and believes that it is more likely than not that the Company's position will ultimately be sustained upon further examination, including the resolution of the IRS's appeal or litigation processes, if any. As a result, no further tax accrual was made. The Company estimates if the IRS's position was upheld, the Company's tax liability associated with the IRS's position could range between $0.5 million and $2.5 million.

Net income. As a result of the foregoing, net income was $7.1 million during the thirteen weeks ended September 24, 2023 as compared to $5.0 million during the comparable period in 2022.

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Thirty-Nine Weeks Ended September 24, 2023 Compared to Thirty-Nine Weeks Ended September 25, 2022

The following table presents, for the periods indicated, the condensed consolidated statement of operations (in thousands):


	Thirty-Nine Weeks Ended
	September 24, 2023		% of Revenue		September 25, 2022		% of Revenue		$ Change		% Change
Revenue	$	344,963	100.0	%	$	318,114	100.0	%	$	26,849	8.4	%
Costs and expenses:
Cost of sales	86,667		25.1		86,266		27.1		401		0.5
Labor	103,809		30.1		94,470		29.7		9,339		9.9
Operating	56,021		16.2		51,164		16.1		4,857		9.5
Occupancy	23,770		6.9		22,698		7.1		1,072		4.7
General and administrative	23,389		6.8		19,848		6.2		3,541		17.8
Marketing	4,852		1.5		4,568		1.5		284		6.2
Restaurant pre-opening	1,437		0.4		733		0.2		704		96.0

Impairment, closed restaurant and other costs	1,870		0.5		3,203		1.0		(1,333)		(41.6)

Depreciation	15,740		4.6		15,065		4.8		675		4.5
Total costs and expenses	317,555		92.1		298,015		93.7		19,540		6.6
Income from operations	27,408		7.9		20,099		6.3		7,309		36.4
Interest income, net	(2,576)		(0.8)		(378)		(0.3)

SEC Form 10-Q filed by Chuy's Holdings Inc.