Edgar Filing: CHUY'S HOLDINGS, INC.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________

FORM 10-Q

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

For the quarterly period ended July 1, 2018



☐	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 ROAD AUSTIN, TEXAS		78704
(Address of Principal Executive Offices)		(Zip Code)

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

__________________________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ☐

Indicate by check mark 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	þ	Emerging growth company	¨
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	¨	Emerging growth 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 þ

The number of shares of the registrant’s common stock outstanding at July 27, 2018 was 16,946,889.

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Part I – Financial Information	3
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets	3
Unaudited Condensed Consolidated Income Statements	4
Unaudited Condensed Consolidated Statements of Cash Flows	5
Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3. Quantitative and Qualitative Disclosures about Market Risk	20
Item 4. Controls and Procedures	20
Part II – Other Information	21
Item 1. Legal Proceedings	21
Item 1A. Risk Factors	21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3. Defaults Upon Senior Securities	21
Item 4. Mine Safety Disclosures	21
Item 5. Other Information	21
Item 6. Exhibits	22

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Part I—Financial Information

Item 1. Financial Statements

Chuy's Holdings, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)



	July 1, 2018		December 31, 2017
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$	10,290	$	8,785
Accounts receivable	1,027		2,696
Lease incentives receivable	2,158		6,351
Income tax receivable	755		1,225
Inventories	1,591		1,605
Prepaid expenses and other current assets	6,418		5,924
Total current assets	22,239		26,586
Property and equipment, net	213,102		197,255
Other assets and intangible assets, net	2,231		2,157
Tradename	21,900		21,900
Goodwill	24,069		24,069
Total assets	$	283,541	$	271,967
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	7,086	$	6,396
Accrued liabilities	16,139		16,488
Deferred lease incentives	2,846		2,773
Total current liabilities	26,071		25,657
Deferred tax liability, net	6,715		6,438
Accrued deferred rent	13,336		11,764
Deferred lease incentives, less current portion	39,128		39,146
Total liabilities	85,250		83,005

Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 16,946,362 shares issued and outstanding at July 1, 2018 and 16,923,741 shares issued and outstanding at December 31, 2017	169		169
Preferred stock, $0.01 par value; 15,000,000 shares authorized and no shares issued or outstanding at July 1, 2018 and December 31, 2017	—		—
Paid-in capital	99,830		100,140
Retained earnings	98,292		88,653
Total stockholders’ equity	198,291		188,962
Total liabilities and stockholders’ equity	$	283,541	$	271,967

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				Twenty-Six Weeks Ended
	July 1, 2018		June 25, 2017		July 1, 2018		June 25, 2017
Revenue	$	106,340	$	94,472	$	200,190	$	181,376
Costs and expenses:

Cost of sales	26,958		24,449		50,531		46,274
Labor	37,411		31,732		70,879		61,431
Operating	14,773		13,164		28,125		25,196
Occupancy	7,472		6,324		14,569		12,445
General and administrative	5,235		4,704		10,706		9,576
Marketing	1,089		712		2,169		1,343
Restaurant pre-opening	1,310		1,722		2,731		2,824
Depreciation and amortization	4,902		4,307		9,615		8,468
Total costs and expenses	99,150		87,114		189,325		167,557
Income from operations	7,190		7,358		10,865		13,819
Interest expense, net	19		16		35		32
Income before income taxes	7,171		7,342		10,830		13,787
Income tax expense	715		2,013		1,191		3,908
Net income	$	6,456	$	5,329	$	9,639	$	9,879
Net income per common share:
Basic	$	0.38	$	0.32	$	0.57	$	0.59
Diluted	$	0.38	$	0.31	$	0.56	$	0.58
Weighted-average shares outstanding:
Basic	16,936,807		16,899,249		16,936,815		16,877,262
Diluted	17,072,179		17,016,006		17,067,715		17,006,845

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)



	Twenty-Six Weeks Ended
	July 1, 2018			June 25, 2017
Cash flows from operating activities:
Net income	$	9,639		$	9,879
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,615			8,468
Amortization of loan origination costs	16			16
Stock-based compensation	1,557			1,354
Loss on disposal of property and equipment	—			14
Amortization of deferred lease incentives	(1,429		)	(1,192		)
Deferred income taxes	277			2,286
Changes in operating assets and liabilities:
Accounts receivable	1,669			129
Income tax receivable	470			1,216
Inventories	14			173
Prepaid expenses and other current assets	(494		)	(106		)
Accounts payable	(1,612		)	(1,844		)
Accrued liabilities and deferred rent	1,223			1,043
Deferred lease incentives	5,677			3,642
Net cash provided by operating activities	26,622			25,078
Cash flows from investing activities:
Purchase of property and equipment	(22,994		)	(18,469		)
Purchase of other assets	(155		)	(200		)
Net cash used in investing activities	(23,149		)	(18,669		)
Cash flows from financing activities:
Repurchase of shares of common stock	(1,618		)	—
Proceeds from the exercise of stock options	412			125
Indirect repurchase of shares for minimum tax withholdings	(762		)	(482		)
Net cash used in financing activities	(1,968		)	(357		)
Net increase in cash and cash equivalents	1,505			6,052
Cash and cash equivalents, beginning of period	8,785			13,694
Cash and cash equivalents, end of period	$	10,290		$	19,746

Supplemental disclosure of non-cash investing and financing activities:
Property and equipment and other assets acquired by accounts payable	$	2,302		$	2,416

Supplemental cash flow disclosures:
Cash paid for interest	$	19		$	16
Cash paid for income taxes	$	445		$	406

See notes to the Unaudited Condensed Consolidated Financial Statements

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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)

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 fast-growing, full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex-Mex inspired food. As of July 1, 2018, the Company operated 96 restaurants in 19 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 31, 2017. The accompanying condensed consolidated balance sheet as of December 31, 2017, 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 2018 fiscal year consists of 52 weeks and our 2017 fiscal year consisted of 53 weeks.

2. Recent Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)." This update requires a lessee to recognize on the balance sheet the right-of-use assets and lease liabilities for leases with a lease term of more than twelve months. This update also requires additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. This ASU is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective approach to adoption for leases existing at, or entered into after the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.

In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842) - Targeted Improvements", which provides another transition method that allows entities to apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This transition method option is in addition to the existing transition method of using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating which transition method it will use.

We had operating leases with remaining rental payments of approximately $404.7 million as of December 31, 2017. The discounted minimum remaining rental payments will be the starting point for determining the assets and liabilities for the rights and obligations created by those leases. While the Company is still evaluating the guidance and the impact on its consolidated financial statements, we expect the adoption of this standard will have a significant impact on the Company’s consolidated balance sheet as we will recognize the right-of-use assets and liabilities for current operating leases, but will likely have an insignificant impact on the consolidated statement of income or cash flows and overall liquidity. In preparation for the adoption of the guidance, the Company will implement controls and key systems changes to enable the preparation of financial information.

Revenue Recognition

The Company adopted ASU 2014-09, "Revenue with Contracts from Customers (Topic 606)", in the first quarter of 2018. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of this ASU was immaterial to the Company's consolidated financial statements.

The Company's revenue is mainly comprised of food and beverage sales. Proceeds from the sale of gift cards are recorded as deferred revenue at the time of sale and recognized as revenue upon redemption by the customer. ASU 2014-09 does not have an impact on revenue recognition related to food and beverage sales. However, it requires gift card breakage to be recognized as revenue proportionate to the pattern of gift card redemptions. Under the previous guidance, the Company determined breakage

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Chuy's Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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

when the likelihood of redemption of the gift card by the customer was remote. The Company continues to record gift card breakage as a component of revenue.

The Company reviewed all other 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 the Company's common stock is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential shares of common stock equivalents outstanding during the period using the treasury stock method for dilutive options and deferred shares (these deferred shares were granted under the Chuy's Holdings, Inc. 2012 Omnibus Equity Incentive Plan (the "2012 Plan"), and are referred to herein as "restricted stock units"). For the thirteen weeks ended July 1, 2018 and June 25, 2017, there were approximately 4,600 and 25,000 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 twenty-six weeks ended July 1, 2018 and June 25, 2017, there were approximately 6,200 and 8,000 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.

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



	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 1, 2018		June 25, 2017		July 1, 2018		June 25, 2017
BASIC
Net income	$	6,456	$	5,329	$	9,639	$	9,879

Weighted-average common shares outstanding	16,936,807		16,899,249		16,936,815		16,877,262
Basic net income per common share	$	0.38	$	0.32	$	0.57	$	0.59

DILUTED
Net income	$	6,456	$	5,329	$	9,639	$	9,879

Weighted-average common shares outstanding	16,936,807		16,899,249		16,936,815		16,877,262
Dilutive effect of stock options and restricted stock units	135,372		116,757		130,900		129,583
Weighted-average of diluted shares	17,072,179		17,016,006		17,067,715		17,006,845
Diluted net income per common share	$	0.38	$	0.31	$	0.56	$	0.58

4. Stock-Based Compensation

The Company has outstanding awards under the Chuy's Holdings, Inc. 2006 Stock Option Plan (the "2006 Plan") and the 2012 Plan. Options granted under these plans vest over five years from the date of grant and have a maximum term of 10 years. Restricted stock units granted under the 2012 Plan vest over four to five years from the date of grant. As of July 1, 2018, a total of 496,265 shares of common stock are reserved and remain available for issuance under the 2012 Plan.

Stock-based compensation expense recognized in the accompanying condensed consolidated income statements was approximately $821,000 and $757,000 for the thirteen weeks ended July 1, 2018 and June 25, 2017, respectively, and $1,557,000 and $1,354,000 for the twenty-six ended July 1, 2018 and June 25, 2017, respectively.

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Chuy's Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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

Stock Options

A summary of stock-based compensation activity related to stock options for the twenty-six weeks ended July 1, 2018 are as follows:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2017	274,110		$	19.54
Exercised	(23,168	)	17.82
Forfeited	(936	)	32.02
Outstanding at July 1, 2018	250,006		$	19.65	3.69	$	2,789
Exercisable at July 1, 2018	248,150		$	19.57	3.67	$	2,784

The aggregate intrinsic value in the table above is obtained by subtracting the exercise price from the estimated fair value of the underlying common stock as of July 1, 2018 and multiplying this result by the related number of options outstanding and exercisable at July 1, 2018. The estimated fair value of the common stock as of July 1, 2018 used in the above calculation was $30.70 per share, the closing price of the Company’s common stock on June 29, 2018, the last trading day of the second quarter. The total intrinsic value of options exercised during the twenty-six weeks ended July 1, 2018 was approximately $254,000. The fair value of options vested during the twenty-six weeks ended July 1, 2018 was approximately $255,000.

There was approximately $11,000 of total unrecognized compensation expense related to options granted under the 2006 Plan and the 2012 Plan as of July 1, 2018. This expense will be recognized ratably over the next year.

Restricted Stock Units

A summary of stock-based compensation activity related to restricted stock units for the twenty-six weeks ended July 1, 2018 are as follows:



	Shares		Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Year)
Outstanding at December 31, 2017	258,486		$	29.64
Granted	215,199		25.72
Vested	(92,155	)	30.97
Forfeited	(4,427	)	27.50
Outstanding at July 1, 2018	377,103		$	27.10	3.08

The fair value of the restricted stock units is the quoted market value of our common stock on the date of grant. As of July 1, 2018, total unrecognized stock-based compensation expense related to non-vested restricted stock units was approximately $9.1 million, which is expected to be recognized ratably over the next five years.

5. Long-Term Debt

Revolving Credit Facility

On November 30, 2012, the Company entered into a $25.0 million Revolving Credit Facility with Wells Fargo Bank, National Association. On October 30, 2015, the Company entered into an amendment to its Revolving Credit Facility to, among other things, (1) extend the maturity date of the Revolving Credit Facility to October 30, 2020 from November 30, 2017 and (2) revise the applicable margins and leverage ratios that determine the commitment fees and interest rates payable by the Company under the Revolving Credit Facility.

Under the Company's Revolving Credit Facility, the Company may request to increase the size of the Revolving Credit Facility by up to an additional $25.0 million, in minimum principal amounts of $5.0 million or the remaining amount of the $25.0 million if less than $5.0 million (the "Incremental Revolving Loan"), which Incremental Revolving Loan will be effective after 10 days

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Chuy's Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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

written notice to the agent. In the event that any of the lenders fund the Incremental Revolving Loan, the terms and provisions of the Incremental Revolving Loan will be the same as under the Company's Revolving Credit Facility.

Borrowings under the Revolving Credit Facility generally bear interest at a variable rate based upon the Company's election, of (i) the base rate (which is the highest of prime rate, federal funds rate plus 0.5% or one month LIBOR plus 1.0%), or (ii) LIBOR, plus, in either case, an applicable margin based on the Company's consolidated total lease adjusted leverage ratio (as defined in the Revolving Credit Facility agreement). The Revolving Credit Facility also requires payment for commitment fees that accrue on the daily unused commitment of the lender at the applicable margin, which varies based on the Company's consolidated total lease adjusted leverage ratio.

The Revolving Credit Facility also requires compliance with a fixed charge coverage ratio, a lease adjusted leverage ratio and certain non-financial covenants. The Revolving Credit Facility also places certain restrictions on the payment of dividends and distributions. Under the Revolving Credit Facility, the Company may declare and make dividend payments so long as (i) no default or event of default has occurred and is continuing or would result therefrom and (ii) immediately after giving effect to any such dividend payment, on a pro forma basis, the lease adjusted leverage ratio does not exceed 3.50 to 1.00.

The obligations under the Company’s Revolving Credit Facility are secured by a first priority lien on substantially all of the Company’s assets. As of July 1, 2018 the Company had no borrowings under our Revolving Credit Facility.

6. Accrued Liabilities

The major classes of accrued liabilities at July 1, 2018 and December 31, 2017 are summarized as follows:



	July 1, 2018		December 31, 2017
Accrued compensation and related benefits	$	6,778	$	5,964
Other accruals	3,615		4,101
Sales and use tax	3,044		3,131
Deferred gift card revenue	1,422		2,098
Property tax	1,280		1,194
Total accrued liabilities	$	16,139	$	16,488

7. Share Repurchase Program

On October 26, 2017, the Company's board of directors approved a share repurchase program under which it authorized the Company, at its discretion, to repurchase up to $30.0 million of its common stock through December 31, 2019. Repurchases of the Company's outstanding common stock will be made in accordance with applicable laws and may be made at management's discretion from time to time in the open market, through privately negotiated transactions or otherwise, including pursuant to Rule 10b5-1 trading plans. There is no guarantee as to the exact number of shares to be repurchased by the Company. The timing and extent of repurchases will depend upon several factors, including market and business conditions, regulatory requirements and other corporate considerations, and repurchases may be discontinued at any time.

We did not repurchase any shares of common stock during the thirteen weeks ended July 1, 2018. We repurchased approximately 65,000 shares of common stock during the twenty-six weeks ended July 1, 2018 for $1.6 million. As of July 1, 2018, we have $28.4 million remaining to be repurchased under this plan.

8. Commitments and Contingencies

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

9. Subsequent events

Subsequent to July 1, 2018, the Company opened one new restaurant for a total of 97 restaurants, in 19 states.

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

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes. 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 contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017 (our "Annual Report") and those set forth under "Cautionary Statement Concerning Forward-Looking Statements" in this report.

Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements. We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as may be required by law.

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our Annual Report and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein.

Overview

We are a fast-growing, full-service restaurant concept offering a distinct menu of authentic, freshly-prepared Mexican and Tex-Mex inspired food. We were founded in Austin, Texas in 1982 and, as of July 1, 2018, we operated 96 Chuy’s restaurants across 19 states.

We are committed to providing value to our customers through offering generous portions of made-from-scratch, flavorful Mexican and Tex-Mex inspired dishes. We also offer a full-service bar in all of our restaurants providing our customers a wide variety of beverage offerings. We believe the Chuy’s culture is one of our most valuable assets, and we are committed to preserving and continually investing in our culture and our customers’ restaurant experience.

Our restaurants have a common décor, but we believe each location is unique in format, offering an “unchained” look and feel, as expressed by our motto “If you’ve seen one Chuy’s, you’ve seen one Chuy’s!” We believe our restaurants have an upbeat, funky, eclectic, somewhat irreverent atmosphere while still maintaining a family-friendly environment.

Our Growth Strategies and Outlook

Our growth is based primarily on the following strategies:


•	Pursue new restaurant development in major markets;


•	Backfill smaller existing markets to build brand awareness;


•	Deliver consistent same store sales through providing high-quality food and service; and


•	Leverage our infrastructure.

During the 13-week period ended July 1, 2018, we opened three new restaurants and we also opened one additional restaurant subsequent to July 1, 2018. We have an established presence in Texas, the Southeast and the Midwest, with restaurants in multiple large markets in these regions. Our growth plan over the next five years focuses on developing additional locations in major markets while continuing to "backfill" our existing core markets in order to build our brand awareness.

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 12 months after opening. However, operating costs during this initial six to 12 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 12 months after opening.


•	Comparable Restaurant Sales. We consider a restaurant to be comparable in the first full quarter following the 18th month of operations. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Changes in comparable sales reflect changes in average weekly customer trends as well

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as changes in average check. Our comparable restaurant base consisted of 77 and 64 restaurants at July 1, 2018 and June 25, 2017, respectively.


•	Average Check. Average check is calculated by dividing revenue by total entrées sold for a given time period. Average check reflects menu price increases as well as changes in menu mix. Our management team uses this indicator to analyze trends in customers’ preferences, effectiveness of menu changes and price increases and per customer expenditures.


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

•

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


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

The following table presents operating data for the periods indicated:



	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 1, 2018			June 25, 2017			July 1, 2018			June 25, 2017
Total restaurants (at end of period)	96			85			96			85
Total comparable restaurants (at end of period)	77			64			77			64
Average comparable unit volumes (in thousands)	$	1,144		$	1,185		$	2,201		$	2,307
Change in comparable restaurant sales ⁽¹⁾	1.0		%	(1.0		)%	0.3		%	(0.9		)%
Average check	$	15.23		$	14.87		$	15.12		$	14.77

⁽¹⁾

We consider a restaurant to be comparable in the first full quarter following the 18th month of operations. Change in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Due to the inclusion of a 53rd week in fiscal 2017, there is a one-week calendar shift in the comparison of the second fiscal quarter of 2018 ended July 1, 2018, to the second fiscal quarter of 2017 ended June 25, 2017. As a result, our comparable restaurant sales calculation is based on comparing sales in the second fiscal quarter of 2018 to sales in the corresponding calendar period of 2017. Sales for the same 77 restaurants in the comparable restaurant base increased 1.0% for the fiscal thirteen week period ended July 1, 2018 and decreased 0.2% for the fiscal twenty-six week period ended July 1, 2018.

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 2018 fiscal year consists of 52 weeks and our 2017 fiscal year consisted of 53 weeks.

Key Financial Definitions

Revenue. Revenue primarily consists of food and beverage sales and also includes sales of our merchandise. 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, 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, property insurance, travel, insurance, employee benefits, credit card fees, recruiting, delivery service and security. These costs generally increase with sales volume but decline 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.

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

Marketing. Marketing costs include costs associated with our local restaurant marketing programs, community service and sponsorship activities, our menus and other promotional activities.

Restaurant Pre-opening Costs. Restaurant pre-opening costs consist of costs incurred before opening a restaurant, including manager salaries, relocation costs, supplies, recruiting expenses, initial new market public relations costs, pre-opening activities, employee payroll and related training costs for new employees. Restaurant pre-opening costs also include rent recorded during the period between date of possession and the restaurant opening date.

Depreciation and Amortization. Depreciation and amortization principally include depreciation on fixed assets, including equipment and leasehold improvements, and amortization of certain intangible assets for our restaurants.

Interest Expense. Interest expense consists primarily of interest on our outstanding indebtedness and the amortization of our debt issuance costs reduced by capitalized interest.

Results of Operations

Potential Fluctuations in Quarterly Results and Seasonality

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.

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Thirteen Weeks Ended July 1, 2018 Compared to Thirteen Weeks Ended June 25, 2017

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



	Thirteen Weeks Ended
	July 1, 2018		% of Revenue		June 25, 2017		% of Revenue		$ Change			% Change
Revenue	$	106,340	100.0	%	$	94,472	100.0	%	$	11,868		12.6	%
Costs and expenses:
Cost of sales	26,958		25.4	%	24,449		25.9	%	2,509			10.3	%
Labor	37,411		35.2	%	31,732		33.6	%	5,679			17.9	%
Operating	14,773		13.9	%	13,164		13.9	%	1,609			12.2	%
Occupancy	7,472		7.0	%	6,324		6.7	%	1,148			18.2	%
General and administrative	5,235		4.9	%	4,704		5.0	%	531			11.3	%
Marketing	1,089		1.0	%	712		0.7	%	377			52.9	%
Restaurant pre-opening	1,310		1.2	%	1,722		1.8	%	(412		)	(23.9	)%
Depreciation and amortization	4,902		4.6	%	4,307		4.6	%	595			13.8	%
Total costs and expenses	99,150		93.2	%	87,114		92.2	%	12,036			13.8	%
Income from operations	7,190		6.8	%	7,358		7.8	%	(168		)	(2.3	)%
Interest expense, net	19		0.1	%	16		—	%	3			18.8	%
Income before income taxes	7,171		6.7	%	7,342		7.8	%	(171		)	(2.3	)%
Income tax expense	715		0.6	%	2,013		2.1	%	(1,298		)	(64.5	)%
Net income	$	6,456	6.1	%	$	5,329	5.7	%	$	1,127		21.1	%

Revenue. Revenue increased $11.9 million, or 12.6%, to $106.3 million for the thirteen weeks ended July 1, 2018 from $94.5 million for the comparable period in 2017. This increase was primarily driven by $11.8 million in incremental revenue from an additional 147 operating weeks provided by 14 new restaurants opened during and subsequent to the thirteen weeks ended June 25, 2017 and increased revenue at our comparable restaurants. These increases were partially offset by a decrease in revenue related to our non-comparable restaurants that are not included in the incremental revenue discussed above. Revenue for non-comparable restaurants is historically lower as the restaurants transition out of the 'honeymoon' period that follows a restaurant's initial opening.

Due to the inclusion of a 53rd week in fiscal 2017, there is a one-week calendar shift in the comparison of the second fiscal quarter of 2018 to the second fiscal quarter of 2017. After adjusting for the timing of the 53rd week in fiscal 2017 and measuring restaurant performance on a comparable calendar basis, comparable restaurant sales increased 1.0% for the thirteen weeks ended July 1, 2018 compared to the thirteen weeks ended July 2, 2017. The increase in comparable restaurant sales was primarily driven by a 2.1% increase in average check, partially offset by a 1.1% decrease in average weekly customers. Our total revenue mix attributed to bar sales was 19.3% during the thirteen weeks ended July 1, 2018 as compared to 19.2% during the comparable period in 2017.

On a fiscal basis, which does not adjust for the one-week calendar shift, as previously noted, sales for the same restaurants in the comparable restaurant base for the thirteen weeks ended July 1, 2018 increased 1.0% compared to the thirteen weeks ended June 25, 2017.

Cost of Sales. Cost of sales as a percentage of revenue decreased to 25.4% during the thirteen weeks ended July 1, 2018 from 25.9% during the same period in 2017 primarily as a result of a decrease in the cost of produce of approximately 50 basis points.

Labor Costs. Labor costs as a percentage of revenue increased to 35.2% during the thirteen weeks ended July 1, 2018 from 33.6% during the comparable period in 2017, primarily due to new store labor inefficiencies, hourly labor rate inflation on comparable stores of approximately 3.5%, and higher hourly rates in new markets, partially offset by lower training expense for our new managers.

Operating Costs. Operating costs as a percentage of revenue remained flat at 13.9% during the thirteen weeks ended July 1, 2018 and the comparable period in 2017.

Occupancy Costs. Occupancy costs as a percentage of revenue increased to 7.0% during the thirteen weeks ended July 1, 2018 from 6.7% during the comparable period in 2017, primarily as a result of higher rental expense at certain newly opened restaurants as we continue our expansion into larger markets and an increase in rent on extended lease terms at some existing restaurants.

General and Administrative Expenses. General and administrative expenses increased $0.5 million, or 11.3%, to $5.2 million for the thirteen weeks ended July 1, 2018 as compared to the same period in 2017. This increase was primarily driven by a $0.4 million increase in management salaries and benefits due to both additional headcount to support our growth and performance bonuses.

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Restaurant Pre-opening Costs. Restaurant pre-opening costs decreased by $0.4 million or 23.9% to $1.3 million during the thirteen weeks ended July 1, 2018 as compared to the same period in 2017. This decrease is primarily the result of timing differences in our development schedule. During the thirteen weeks ended July 1, 2018, we incurred pre-opening costs for seven new restaurants, of which four will open in the third quarter of 2018 or later. During the comparable period in 2017, we incurred pre-opening costs for 13 new restaurants, of which eight opened in the third quarter of 2017 or later.

Marketing. Marketing expense increased $0.4 million or 52.9% to $1.1 million during the thirteen weeks ended July 1, 2018 as compared to the same period in 2017. This increase was a result of our new national-level marketing initiatives.

Depreciation and Amortization. Depreciation and amortization costs increased $0.6 million to $4.9 million during the thirteen weeks ended July 1, 2018 from $4.3 million during the comparable period in 2017, primarily as the result of an increase in equipment and leasehold improvement costs associated with our new restaurants.

Income Tax Expense. For the thirteen weeks ended July 1, 2018 our effective tax rate decreased to approximately 10.0% from approximately 27.4% during the comparable period in 2017. The decrease in our effective tax rate is primarily related to a decrease in the federal statutory tax rate from 35% to 21% effective January 1, 2018 and an increase in employee tax credits in proportion to our taxable income.

Net Income. As a result of the foregoing, net income increased 21.1% to $6.5 million during the thirteen weeks ended July 1, 2018 from $5.3 million during the comparable period in 2017.

Twenty-Six Weeks Ended July 1, 2018 Compared to Twenty-Six Weeks Ended June 25, 2017

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



	Twenty-Six Weeks Ended
	July 1, 2018		% of Revenue		June 25, 2017		% of Revenue		$ Change			% Change
Revenue	$	200,190	100.0	%	$	181,376	100.0	%	$	18,814		10.4	%
Costs and expenses:
Cost of sales	50,531		25.2	%	46,274		25.5	%	4,257			9.2	%
Labor	70,879		35.4	%	61,431		33.9	%	9,448			15.4	%
Operating	28,125		14.0	%	25,196		13.8	%	2,929			11.6	%
Occupancy	14,569		7.3	%	12,445		6.9	%	2,124			17.1	%
General and administrative	10,706		5.3	%	9,576		5.3	%	1,130			11.8	%
Marketing	2,169		1.1	%	1,343		0.7	%	826			61.5	%
Restaurant pre-opening	2,731		1.4	%	2,824		1.6	%	(93		)	(3.3	)%
Depreciation and amortization	9,615		4.9	%	8,468		4.7	%	1,147			13.5	%
Total costs and expenses	189,325		94.6	%	167,557		92.4	%	21,768			13.0	%
Income from operations	10,865		5.4	%	13,819		7.6	%	(2,954		)	(21.4	)%
Interest expense	35		—	%	32		—	%	3			9.4	%
Income before income taxes	10,830		5.4	%	13,787		7.6	%	(2,957		)	(21.4	)%
Income tax expense	1,191		0.6	%	3,908		2.2	%	(2,717		)	(69.5	)%
Net income	$	9,639	4.8	%	$	9,879	5.4	%	$	(240	)	(2.4	)%

Revenue. Revenue increased $18.8 million, or 10.4%, to $200.2 million for the twenty-six weeks ended July 1, 2018 from $181.4 million for the comparable period in 2017. This increase was primarily driven by $21.2 million in incremental revenue from an additional 282 operating weeks provided by 16 new restaurants opened during and subsequent to the twenty-six weeks ended June 25, 2017. These increases were partially offset by a slight decrease in revenue from our comparable restaurants as well as a decrease in revenue related to our non-comparable restaurants that are not included in the incremental revenue discussed above. Revenue for non-comparable restaurants is historically lower as the stores transition out of the 'honeymoon' period that follows a restaurant's initial opening.

There is a one-week calendar shift in the comparison of the twenty-six weeks ended July 1, 2018 to the fiscal comparable period in 2017 due to the 53rd week in fiscal 2017. As a result of this shift, the week between Christmas and New Year’s, traditionally a high-volume week for the Company’s restaurants was included in the first quarter of 2017 but was replaced with an average volume week in the first quarter of 2018. This shift reduced revenue by approximately $1.4 million during the twenty-six weeks ended July 1, 2018.

Adjusting for the timing of the 53rd week of 2017 and measuring performance on a comparable calendar basis, comparable restaurant sales increased 0.3% for the twenty-six weeks ended July 1, 2018 compared to the twenty-six weeks ended July 2, 2017.

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The increase in comparable restaurant sales was primarily driven by a 2.0% increase in average check, partially offset by a 1.7% decrease in average weekly customers. We estimate comparable restaurant sales were impacted by approximately 80 basis points as a result of unfavorable weather conditions and approximately 10 basis points as a result of strategic cannibalization. Our total revenue mix attributed to bar sales was 18.9% during the twenty-six weeks ended July 1, 2018 compared to 18.8% during the comparable period in 2017.

On a fiscal basis, which does not adjust for the one-week calendar shift, as previously noted, sales for the same restaurants in the comparable restaurant base for the twenty-six weeks ended July 1, 2018 decreased 0.2% compared to the twenty-six weeks ended June 25, 2017.

Cost of Sales. Cost of sales as a percentage of revenue decreased to 25.2% during the twenty-six weeks ended July 1, 2018 from 25.5% during the comparable period in 2017. This decrease is primarily due to a decrease in the cost of chicken of approximately 10 basis points, produce of approximately 10 basis points and beef of approximately 10 basis points.

Labor Costs. Labor costs as a percentage of revenue increased to 35.4% during the twenty-six weeks ended July 1, 2018 from 33.9% during the comparable period in 2017, primarily due to new store labor inefficiencies, hourly labor rate inflation on comparable stores of approximately 3.2% and higher hourly rates in new markets, partially offset by lower training expense for our new managers.

Operating Costs. Operating costs as a percentage of revenue increased to 14.0% during the twenty-six weeks ended July 1, 2018 from 13.8% during the comparable period in 2017, primarily due to increases in to-go supplies of approximately 10 basis points driven by an increase in to-go sales of approximately 10 basis points, higher utility costs of approximately 10 basis points, higher credit card fees and delivery service charges of approximately 10 basis points, partially offset by a decrease in liquor taxes of approximately 10 basis points as we expand outside of Texas.

Occupancy Costs. Occupancy costs as a percentage of revenue increased to 7.3% during the twenty-six weeks ended July 1, 2018 from 6.9% during the comparable period in 2017, primarily as a result of higher rental expense at certain newly opened restaurants as we continue our expansion into larger markets and an increase in rent on extended lease terms at some existing restaurants.

General and Administrative Expenses. General and administrative expenses increased $1.1 million, or 11.8%, to $10.7 million for the twenty-six weeks ended July 1, 2018 from $9.6 million during the comparable period in 2017. This increase was primarily driven by an increase in management salaries and equity compensation of $0.8 million due to both additional headcount to support our growth and performance bonuses, higher travel costs of $0.1 million and a $0.2 million increase in professional fees and public company costs.

Restaurant Pre-opening Costs. Restaurant pre-opening costs decreased $0.1 million, or 3.3% to $2.7 million for the twenty-six weeks ended July 1, 2018 compared to the same period in 2017. This slight decrease is primarily the result of timing differences in our development schedule and related construction payments. During the twenty-six weeks ended July 1, 2018, we incurred pre-opening costs for nine new restaurants, of which four will open in the third quarter of 2018 or later. During the comparable period in 2017, we incurred pre-opening costs for 13 new restaurants, of which eight opened in the third quarter of 2017 or later.

Depreciation and Amortization. Depreciation and amortization costs increased $1.1 million, or 13.5% to $9.6 million during the twenty-six weeks ended July 1, 2018 from $8.5 million during the comparable period in 2017, primarily as the result of an increase in equipment and leasehold improvement costs associated with our new restaurants.

Income Tax Expense. For the twenty-six weeks ended July 1, 2018 our effective tax rate decreased to 11.0% from 28.3% during the comparable period in 2017. The decrease in our effective tax rate is primarily related to a decrease in the federal statutory tax rate from 35% to 21% effective January 1, 2018 and an increase in employee tax credits in proportion to our taxable income.

Net Income. As a result of the foregoing, net income decreased 2.4% to $9.6 million during the twenty-six weeks ended July 1, 2018 from $9.9 million during the comparable period in 2017.

Liquidity

Our principal sources of cash are net cash provided by operating activities, which includes tenant improvement allowances from our landlords, and borrowings under our $25.0 million Revolving Credit Facility. Our need for capital resources is driven by our restaurant expansion plans, ongoing maintenance of our restaurants, investment in our corporate and information technology infrastructure and obligations under our operating leases. Based on our current growth plans, we believe our expected cash flows from operations, expected tenant improvement allowances and available borrowings under our Revolving Credit Facility will be sufficient to finance our planned capital expenditures and other operating activities for at least the next twelve months.

Consistent with many other restaurant and retail chain store operations, we use operating lease arrangements to operate our restaurants. We believe that these operating lease arrangements provide appropriate leverage of our capital structure in a financially

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efficient manner. We have entered into operating leases with certain related parties with respect to six of our restaurants and our corporate headquarters.

Our liquidity may be adversely affected by a number of factors, including a decrease in customer traffic or average check per customer due to changes in economic conditions.

Cash Flows for Twenty-Six Weeks Ended July 1, 2018 and June 25, 2017

The following table summarizes the statement of cash flows for the twenty-six weeks ended July 1, 2018 and June 25, 2017 (in thousands):



	Twenty-Six Weeks Ended
	July 1, 2018			June 25, 2017
Net cash provided by operating activities	$	26,622		$	25,078
Net cash used in investing activities	(23,149		)	(18,669		)
Net cash used in financing activities	(1,968		)	(357		)
Net increase in cash and cash equivalents	1,505			6,052
Cash and cash equivalents at beginning of year	8,785			13,694
Cash and cash equivalents at end of period	$	10,290		$	19,746

Operating Activities. Net cash provided by operating activities increased $1.5 million to $26.6 million for the twenty-six weeks ended July 1, 2018 from $25.1 million during the comparable period in 2017. Our business is almost exclusively a cash business. Almost all of our receipts come in the form of cash and cash equivalents and a large majority of our expenditures are paid within a 30 day period. The increase in net cash provided by operating activities was primarily due to a $2.0 million increase in deferred lease incentives due to the addition of new restaurants, and a $1.5 decrease in accounts receivable as a result of a collection of an insurance settlement accrued as of the end of the fourth quarter of 2017, partially offset by a $2.0 million decrease in deferred income tax.

Investing Activities. Net cash used in investing activities increased $4.5 million to $23.1 million for the twenty-six weeks ended July 1, 2018 from $18.7 million during the comparable period in 2017. The increase was primarily due to the timing of our construction schedule and the related construction payments associated with our five new restaurants that opened during the twenty-six weeks ended July 1, 2018, as well as expenditures related to future restaurant openings, maintaining our existing restaurants and other projects.

Financing Activities. Net cash used in financing activities increased by $1.6 million to $2.0 million for the twenty-six weeks ended July 1, 2018 from $0.4 million during the comparable period in 2017. The increase was primarily due to $1.6 million repurchase of shares of our common stock in the open market during the twenty-six weeks ended July 1, 2018.

As of July 1, 2018, we lease six of our restaurant locations and our corporate offices from entities owned by our founders and one former executive officer. We had no other financing transactions, arrangements or other relationships with any unconsolidated affiliates or related parties. Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.

Capital Resources

Long-Term Capital Requirements

Our capital requirements are primarily dependent upon the pace of our growth plan and resulting new restaurants. Our growth plan is dependent upon many factors, including economic conditions, real estate markets, restaurant locations and the nature of our lease agreements. Our capital expenditure outlays are also dependent on maintenance and remodel costs in our existing restaurants as well as information technology and other general corporate capital expenditures.

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The capital resources required for a new restaurant depends on whether the restaurant is a ground-up construction or a conversion. For our new restaurant openings during 2018, we estimate the cost of a conversion or ground-up buildout will require a total cash investment of approximately $2.6 million to $3.6 million (net of estimated tenant incentives of between zero and $1.0 million). In addition, we expect to spend approximately $400,000 to $475,000 per restaurant for restaurant pre-opening costs. We currently target a cash-on-cash return beginning in the third operating year of 30.0%, and a sales to investment ratio of 1.9:1 for our new restaurants.

For 2018, we currently estimate capital expenditure outlays will range between $34.0 million and $37.0 million, net of agreed upon tenant improvement allowances and excluding approximately $4.4 million to $4.8 million of restaurant pre-opening costs for new restaurants that are not capitalized. We spent $2.7 million on pre-opening costs during the twenty-six weeks ended July 1, 2018. These capital expenditure estimates are based on average new restaurant capital expenditures of $2.9 million (net of estimated tenant improvement allowances) for the opening of nine to ten new restaurants and $8.7 million to maintain and remodel our existing restaurants and for general corporate purposes.

Based on our growth plans, we believe our combined expected cash flows from operations, available borrowings under our Revolving Credit Facility and expected tenant improvement allowances will be sufficient to finance our planned capital expenditures and other operating activities in fiscal 2018.

Short-Term Capital Requirements

Our operations have not required significant working capital and, like many restaurant companies, we generally operate with negative working capital. Restaurant sales are primarily paid for in cash or by credit card, and restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverages and supplies, therefore reducing the need for incremental working capital to support growth. We had a net working capital deficit of $3.8 million at July 1, 2018 compared to a surplus of $0.9 million at December 31, 2017.

Revolving Credit Facility

On November 30, 2012, we entered into our $25.0 million Revolving Credit Facility with Wells Fargo Bank, National Association. On October 30, 2015, we entered into an amendment to our Revolving Credit Facility to, among other things, (1) extend the maturity date of the Revolving Credit Facility to October 30, 2020 from November 30, 2017 and (2) revise the applicable margins and leverage ratios that determine the commitment fees and interest rates payable by the Company under the Revolving Credit Facility. As of July 1, 2018, we had no outstanding indebtedness under our Revolving Credit Facility.

Under our Revolving Credit Facility, we may request to increase the size of our Revolving Credit Facility by up to $25.0 million, in minimum principal amounts of $5.0 million or the remaining amount of the $25.0 million if less than $5.0 million (the "Incremental Revolving Loan"), the Incremental Revolving Loan will be effective after 10 days written notice to the agent. In the event that any of the lenders fund the Incremental Revolving Loan, the terms and provisions of the Incremental Revolving Loan will be the same as under our Revolving Credit Facility.

Borrowings under the Revolving Credit Facility generally bear interest at a variable rate based upon our election, of (i) the base rate (which is the highest of prime rate, federal funds rate plus 0.5% or one month LIBOR plus 1.0%), or (ii) LIBOR, plus, in either case, an applicable margin based on our consolidated total lease adjusted leverage ratio (as defined in the Revolving Credit Facility agreement). Our Revolving Credit Facility also requires payment for commitment fees that accrue on the daily unused commitment of the lender at the applicable margin, which varies based on our consolidated total lease adjusted leverage ratio. In addition, the Revolving Credit Facility requires compliance with a fixed charge coverage ratio, a lease adjusted leverage ratio and certain non-financial covenants as well as places certain restrictions on the payment of dividends and distributions. Under the Revolving Credit Facility, Chuy's may declare and make dividend payments so long as (i) no default or event of default has occurred and is continuing or would result therefrom and (ii) immediately after giving effect to any such dividend payment, on a pro forma basis, the lease adjusted leverage ratio does not exceed 3.50 to 1.00.

The obligations under the Company’s long-term debt are secured by a first priority lien on substantially all of the Company’s assets.

Contractual Obligations

There have been no material changes to our contractual obligations from what was previously disclosed in our Annual Report filed with the SEC.

Off-Balance Sheet Arrangements

As of July 1, 2018, we are not involved in any variable interest entities transactions and do not otherwise have any off-balance sheet arrangements.

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Significant Accounting Policies

There have been no material changes to the significant accounting policies from what was previously disclosed in our Annual Report filed with the SEC.

Recent Accounting Pronouncements

For information regarding new accounting pronouncements, see Note 2, Recent Accounting Pronouncements in the notes to our unaudited condensed consolidated financial statements.

Cautionary Statement Concerning Forward-Looking Statements

Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:


•	the success of our existing and new restaurants;


•	our ability to identify appropriate sites and develop and expand our operations;


•	our ability to manage our growth effectively;


•	we operate most of our restaurants under long-term leases which we would be obligated to perform even if we closed our restaurants;


•	we may not be able to renew leases;


•	changes in economic conditions;


•	damage to our reputation or lack of acceptance of our brand in existing or new markets;


•	our expansion into markets that we are unfamiliar with;


•	economic and other trends and developments, including adverse weather conditions, in the local or regional areas in which our restaurants are located and specifically in Texas where a large percentage of our restaurants are located;


•	the impact of negative economic factors, including the availability of credit, on our landlords and surrounding tenants;


•	changes in food availability and costs;


•	labor shortages and increases in our labor costs, including as a result of changes in government regulation such as the adoption of federal health care legislation;


•	food safety and food borne illness concerns;


•	increased competition in the restaurant industry and the segments in which we compete;


•	the impact of legislation and regulations regarding nutritional information, and new information or attitudes regarding diet and health or adverse opinions about the health of consuming our menu offerings;


•	the impact of federal, state and local beer, liquor and food service regulations;


•	the impact of litigation;


•	the success of our marketing programs;


•	the impact of new restaurant openings, including the effect on our existing restaurants when opening new restaurants in the same markets;


•	the loss of key members of our management team;


•	strain on our infrastructure and resources caused by our growth;


•	the inadequacy of our insurance coverage and fluctuating insurance requirements and costs;


•	the impact of our indebtedness on our ability to invest in the ongoing needs of our business;


•	our ability to obtain debt or other financing on favorable terms or at all;


•	the impact of a potential requirement to record asset impairment charges in the future;


•	the impact of security breaches of confidential customer information in connection with our electronic processing of credit and debit card transactions;


•	inadequate protection of our intellectual property;

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•	the failure of our information technology system or the breach of our network security;


•	a major natural or man-made disaster;


•	our increased costs and obligations as a result of being a public company;


•	the failure of our internal control over financial reporting;


•	the impact of federal, state and local tax laws;


•	volatility in the price of our common stock;


•	the timing and amount of repurchases of our common stock, if any, changes to the Company’s expected liquidity position and the possibility that the repurchase program may be suspended or discontinued;


•	the impact of future sales of our common stock and the exercise of stock options and any additional capital raised by us through the sale of our common stock;


•	the impact of a downgrade of our shares by securities analysts or industry analysts, the publication of negative research or reports, or lack of publication of reports about our business;


•	the effect of anti-takeover provisions in our charter documents and under Delaware law;


•	the effect of our decision to not pay dividends for the foreseeable future;


•	the effect of changes in accounting principles applicable to us;


•	our ability to raise capital in the future;


•	the conflicts of interest that may arise with some of our directors; and


•	the other risks discussed under "Item 1A. Risk Factors" in our Annual Report.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report and in our Annual Report. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Any forward-looking statements you read in this report reflect our views as of the date of this report with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as may be required by law.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our quantitative and qualitative disclosures about market risk from what was previously disclosed in our Annual Report filed with the SEC.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) were effective as of the end of the period covered by this report.

The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II—Other Information

Item 1. Legal Proceedings

Occasionally, we are a party to various legal actions arising in the ordinary course of our business including claims resulting from “slip and fall” accidents, employment related claims and claims from customers or employees alleging illness, injury or other food quality, health or operational concerns. None of these types of litigation, most of which are covered by insurance, has had a material effect on us in the past. As of the date of this report, we are not a party to any material pending legal proceedings and are not aware of any claims that could have a materially adverse effect on our financial position, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our most recent Annual Report filed with the Securities and Exchange Commission.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below provides information with respect to our purchase of shares of our common stock during the three months ended July 1, 2018:



Period	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid Per Share		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) ⁽²⁾
April 2, 2018 through April 29, 2018	—	$	—	—	$	28.4
April 30, 2018 through May 27, 2018	830	29.68		—	28.4
May 28, 2018 through July 1, 2018	—	—		—	28.4
Total	830	$	29.68	—


(1)	To satisfy tax withholding obligations associated with the vesting of restricted stock units during the second quarter of 2018, we withheld a total of 830 shares that are included in the total number of shares purchased column above.


(2)	On November 2, 2017, we announced that our Board of Directors authorized us to repurchase an indeterminate number of our common stock through December 31, 2019 at an aggregate market value of up to $30.0 million.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits



Exhibit No.	Description of Exhibit

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 9, 2018



CHUY’S HOLDINGS, INC.

By:	/s/ Steven J. Hislop
	Name:	Steven J. Hislop
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)




By:	/s/ Jon W. Howie
	Name:	Jon W. Howie
	Title:	Vice President and Chief Financial Officer
		(Principal Financial Officer)