CHUY'S HOLDINGS, INC. - Quarter Report: 2021 June (Form 10-Q)

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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 June 27, 2021


☐			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 July 30, 2021 was 19,997,123.

Table of Contents



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 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			16
Item 4. Controls and Procedures			17
Part II – Other Information			17
Item 1. Legal Proceedings			17
Item 1A. Risk Factors			17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			17
Item 3. Defaults Upon Senior Securities			17
Item 4. Mine Safety Disclosures			17
Item 5. Other Information			17
Item 6. Exhibits			17

Table of Contents

Part I—Financial Information

Item 1. Financial Statements

Chuy's Holdings, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)


	June 27, 2021		December 27, 2020
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$	113,547	$	86,817
Accounts receivable	1,246		1,507
Lease incentives receivable	—		200
Inventories	1,431		1,449
Income tax receivable	—		974
Prepaid expenses and other current assets	4,933		3,614
Total current assets	121,157		94,561
Property and equipment, net	181,354		185,105
Operating lease assets	158,162		159,156
Deferred tax asset, net	7,933		7,806
Other assets and intangible assets, net	1,330		1,078

Tradename	21,900		21,900
Goodwill	24,069		24,069
Total assets	$	515,905	$	493,675
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	4,310	$	2,977
Accrued liabilities	29,657		25,775
Operating lease liabilities	13,717		14,566





Total current liabilities	47,684		43,318

Operating lease liabilities, less current portion	203,663		207,601
Other liabilities	1,219		898



Total liabilities	252,566		251,817

Contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 19,997,123 shares issued and outstanding at June 27, 2021 and 19,710,549 shares issued and outstanding at December 27, 2020	200		197
Preferred stock, $0.01 par value; 15,000,000 shares authorized and no shares issued or outstanding at June 27, 2021 and December 27, 2020	—		—
Paid-in capital	148,191		144,897
Retained earnings	114,948		96,764
Total stockholders’ equity	263,339		241,858
Total liabilities and stockholders’ equity	$	515,905	$	493,675

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
	June 27, 2021		June 28, 2020		June 27, 2021		June 28, 2020
Revenue	$	108,153	$	65,712	$	195,863	$	160,212
Costs and expenses:
Cost of sales	25,565		15,410		46,012		39,972
Labor	30,306		17,337		55,135		50,917
Operating	15,944		10,720		29,415		25,305
Occupancy	7,459		7,097		14,698		15,083
General and administrative	6,679		4,774		13,527		10,494
Marketing	1,238		365		2,215		1,374
Restaurant pre-opening	615		278		1,292		1,138

Impairment, closed restaurant and other costs	1,404		1,782		3,748		20,555
Gain on insurance settlements	—		(1,000)		—		(1,000)
Depreciation	5,086		4,895		10,004		10,184
Total costs and expenses	94,296		61,658		176,046		174,022
Income (loss) from operations	13,857		4,054		19,817		(13,810)
Interest expense, net	21		153		44		205
Income (loss) before income taxes	13,836		3,901		19,773		(14,015)
Income tax expense (benefit)	2,306		(601)		1,589		(6,113)
Net income (loss)	$	11,530	$	4,502	$	18,184	$	(7,902)
Net income (loss) per common share:
Basic	$	0.58	$	0.26	$	0.92	$	(0.46)
Diluted	$	0.57	$	0.26	$	0.90	$	(0.46)
Weighted-average shares outstanding:
Basic	19,980,513		17,555,506		19,866,721		17,095,422
Diluted	20,197,574		17,578,129		20,165,155		17,095,422

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, March 28, 2021	19,946,228	$	199	$	145,731	$	103,418	$	249,348
Stock-based compensation	—	—		1,053		—		1,053
Proceeds from exercise of stock options	50,000	1		1,425		—		1,426
Settlement of restricted stock units	1,304	—		—		—		—

Indirect repurchase of shares for minimum tax withholdings	(409)	—		(18)		—		(18)
Net income	—	—		—		11,530		11,530
Balance, June 27, 2021	19,997,123	$	200	$	148,191	$	114,948	$	263,339

Balance, March 29, 2020	16,640,190	$	166	$	93,576	$	87,654	$	181,396
Stock-based compensation	—	—		1,045		—		1,045
Proceeds from exercise of stock options	3,171	—		34		—		34
Sale of common stock from ATM offering, net of fees and expenses	3,041,256	31		48,136		—		48,167
Settlement of restricted stock units	7,401	—		—		—		—

Indirect repurchase of shares for minimum tax withholdings	(2,126)	—		(29)		—		(29)
Net income	—	—		—		4,502		4,502
Balance, June 28, 2020	19,689,892	$	197	$	142,762	$	92,156	$	235,115

	Twenty-Six Weeks Ended
	Common Stock					Retained
	Shares	Amount		Paid-in Capital		Earnings		Total
Balance, December 27, 2020	19,710,549	$	197	$	144,897	$	96,764	$	241,858

Stock-based compensation	—	—		2,044		—		2,044
Proceeds from exercise of stock options	163,354	2		3,759		—		3,761
Settlement of restricted stock units	179,818	2		(2)		—		—

Indirect repurchase of shares for minimum tax withholdings	(56,598)	(1)		(2,507)		—		(2,508)
Net income	—	—		—		18,184		18,184
Balance, June 27, 2021	19,997,123	$	200	$	148,191	$	114,948	$	263,339

Balance, December 29, 2019	16,636,464	$	166	$	94,712	$	100,058	$	194,936

Stock-based compensation	—	—		1,957		—		1,957
Proceeds from exercise of stock options	3,171	—		34		—		34
Sale of common stock from ATM offering, net of fees and expenses	3,041,256	31		48,136		—		48,167
Settlement of restricted stock units	141,931	1		(1)		—		—
Repurchase of shares of common stock	(90,144)	(1)		(1,421)		—		(1,422)
Indirect repurchase of shares for minimum tax withholdings	(42,786)	—		(655)		—		(655)
Net loss	—	—		—		(7,902)		(7,902)
Balance, June 28, 2020	19,689,892	$	197	$	142,762	$	92,156	$	235,115

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
	June 27, 2021		June 28, 2020
Cash flows from operating activities:
Net income (loss)	$	18,184	$	(7,902)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	10,004		10,184
Amortization of operating lease assets	4,851		4,494
Amortization of loan origination costs	34		18
Impairment, closed restaurant and other costs	(1,575)		18,277
Stock-based compensation	1,947		1,823

Loss on disposal of property and equipment	—		409

Deferred income taxes	(127)		(5,854)
Changes in operating assets and liabilities:
Accounts receivable	261		203
Lease incentive receivable	200		(150)
Income tax receivable and payable	974		(1,055)
Inventories	18		119
Prepaid expenses and other assets	(1,585)		(2,067)
Accounts payable	1,199		1,217
Accrued and other liabilities	4,619		(123)

Operating lease liabilities	(6,922)		(202)


Net cash provided by operating activities	32,082		19,391
Cash flows from investing activities:
Purchase of property and equipment	(6,582)		(7,986)
Purchase of other assets	—		(366)
Net cash used in investing activities	(6,582)		(8,352)
Cash flows from financing activities:




Net proceeds from sale of common stock	—		48,167

Borrowings under revolving line of credit	—		25,000
Payments under revolving line of credit	—		(25,000)

Loan origination costs	(24)		—
Repurchase of shares of common stock	—		(1,422)
Proceeds from the exercise of stock options	3,761		34
Indirect repurchase of shares for minimum tax withholdings	(2,507)		(655)
Net cash provided by financing activities	1,230		46,124
Net increase in cash and cash equivalents	26,730		57,163
Cash and cash equivalents, beginning of period	86,817		10,074
Cash and cash equivalents, end of period	$	113,547	$	67,237

Supplemental disclosure of non-cash investing and financing activities:
Property and equipment and other assets acquired by accounts payable	$	134	$	152

Supplemental cash flow disclosures:
Cash paid for interest	$	16	$	147
Cash paid for income taxes	$	704	$	824

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 June 27, 2021, the Company operated 95 restaurants across 17 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 27, 2020. The accompanying condensed consolidated balance sheet as of December 27, 2020, 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.

Certain prior year amounts have been reclassified in our unaudited condensed consolidated financial statements and notes thereto to conform to current year presentation.

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 2021 and 2020 fiscal years both consist 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 (Loss) Per Share

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

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

Diluted net income (loss) per share of common stock is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential shares of common stock equivalents outstanding during the period using the treasury stock method for dilutive options and 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 June 27, 2021 and June 28, 2020, there were approximately none and 241,700 shares, respectively, of common stock equivalents that were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive. For the twenty-six weeks ended June 27, 2021 and June 28, 2020, there were approximately 3,396 and 38,500 shares, respectively, of common stock equivalents that were excluded from the calculation of diluted net income (loss) 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 (loss) per share is as follows:


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	June 27, 2021		June 28, 2020		June 27, 2021		June 28, 2020
BASIC
Net income (loss)	$	11,530	$	4,502	$	18,184	$	(7,902)

Weighted-average common shares outstanding	19,980,513		17,555,506		19,866,721		17,095,422
Basic net income (loss) per common share	$	0.58	$	0.26	$	0.92	$	(0.46)

DILUTED
Net income (loss)	$	11,530	$	4,502	$	18,184	$	(7,902)

Weighted-average common shares outstanding	19,980,513		17,555,506		19,866,721		17,095,422
Dilutive effect of stock options and restricted stock units	217,061		22,623		298,434		—
Weighted-average of diluted shares	20,197,574		17,578,129		20,165,155		17,095,422
Diluted net income (loss) per common share	$	0.57	$	0.26	$	0.90	$	(0.46)

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 June 27, 2021 the Company had 13,846 of stock options outstanding and exercisable with a remaining weighted average contractual term of approximately two years.

Restricted stock units granted under the 2012 Plan and 2020 Plan vest over four to five years from the date of grant. As of June 27, 2021, a total of 1,022,344 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 $1,003,000 and $967,000 for the thirteen weeks ended June 27, 2021 and June 28, 2020, respectively, and $1,947,000 and $1,823,000 for the twenty-six weeks ended June 27, 2021 and June 28, 2020, respectively.

A summary of stock-based compensation activity related to restricted stock units for the twenty-six weeks ended June 27, 2021 are as follows:


	Shares	Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Year)
Outstanding at December 27, 2020	518,540	$	19.42
Granted	91,714	44.32
Vested	(179,818)	21.33
Forfeited	(311)	21.06
Outstanding at June 27, 2021	430,125	$	23.93	2.76

The fair value of the restricted stock units is the quoted market value of our common stock on the date of grant. As of June 27, 2021, 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 grants.

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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)

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 May 21, 2020, the Company entered into the second amendment (the “Amendment”) to its Revolving Credit Facility (as amended, the "Revolving Credit Facility") to (1) extend the maturity date to April 30, 2022, (2) relax compliance with the financial covenants contained in the Revolving Credit Facility during the COVID-19 pandemic through the new maturity date and (3) revise the applicable margins and leverage ratios that determine the commitment fees and interest payable by the Company.

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"). 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 the prime rate, federal funds rate plus 0.5% and one month LIBOR plus 1.0%), or (ii) LIBOR, plus, in either case, an applicable margin based on the Company's consolidated total leverage ratio with a LIBOR floor of 1.0%. 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 leverage ratio.

The Revolving Credit Facility also requires compliance with a fixed charge coverage ratio, a consolidated total leverage ratio, growth capital expenditure limitations during fiscal years 2020 and 2021 and a minimum monthly liquidity requirement of $5.0 million. The Revolving Credit Facility also has 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 June 27, 2021, the Company had no borrowings under the Revolving Credit Facility, and was in compliance with all covenants under the Revolving Credit Facility.

6. Accrued Liabilities

The major classes of accrued liabilities at June 27, 2021 and December 27, 2020 are summarized as follows:


	June 27, 2021		December 27, 2020
Accrued compensation and related benefits	$	16,601	$	14,007
Other accruals	5,257		3,987
Sales and use tax	3,045		2,200
Property tax	2,598		3,054
Deferred gift card revenue	2,156		2,527

Total accrued liabilities	$	29,657	$	25,775

7. Stockholders' Equity

Share Repurchase Program

On October 31, 2019, the Company’s board of directors authorized a share repurchase program under which the Company may, at its discretion, repurchase up to $30.0 million of its common stock through December 31, 2022. 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.

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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 Company did not repurchase any shares of common stock during the twenty-six weeks ended June 27, 2021 and, prior to the COVID-19 pandemic, repurchased approximately 90,000 shares of common stock for $1.4 million during the twenty-six weeks ended June 28, 2020. As of June 27, 2021, the Company had $28.6 million remaining to be repurchased under this plan.

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 years 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 June 27, 2021, all of the Company's leases were operating.

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				Twenty-Six Weeks Ended
Lease cost	June 27, 2021		June 28, 2020		June 27, 2021		June 28, 2020
Operating lease cost (a)	$	6,489	$	6,634	$	12,874	$	13,228
Variable lease cost	303		95		539		218
	$	6,792	$	6,729	$	13,413	$	13,446

(a) Includes short-term operating lease costs which are immaterial.

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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)

Supplemental cash flow disclosures for the twenty-six weeks ended June 27, 2021 and June 28, 2020, respectively:


	Twenty-Six Weeks Ended
	June 27, 2021		June 28, 2020
Cash paid for operating lease liabilities	$	14,503	$	8,517
Operating lease assets obtained in exchange for operating lease liabilities (a)	3,858		(1,351)

(a) The twenty-six weeks ended June 27, 2021 includes a $6.9 million increase mainly due to extending remaining lives of certain leases partially offset by a $3.1 million decrease to operating lease assets and liabilities related to the termination of two closed restaurant leases. The twenty-six weeks ended June 28, 2020 includes a $7.0 million reduction to the operating lease assets and liabilities as a result of shortening the remaining life of certain leases, partially offset by a $5.7 million increase related to new lease commencements.

The Company recorded no additional deferred lease incentives during the twenty-six weeks ended June 27, 2021 and $0.2 million during the twenty-six weeks ended June 28, 2020.

Supplemental balance sheet and other lease disclosures:


Operating leases	Classification	June 27, 2021			December 27, 2020
Right-of-use assets	Operating lease assets	$	158,162		$	159,156

Deferred rent payments	Operating lease liability	1,302			2,169
Current lease liabilities	Operating lease liability	12,415			12,397
		13,717			14,566

Deferred rent payments	Operating lease liability, less current portion	303			746
Non-current lease liabilities	Operating lease liability, less current portion	203,360			206,855
		203,663			207,601

Total lease liabilities		$	217,380		$	222,167

Weighted average remaining lease term (in years)		13.4			13.8
Weighted average discount rate		7.8		%	7.9		%

Future minimum rent payments for our operating leases for the next five years as of June 27, 2021 are as follows:


Fiscal year ending:
Remainder of 2021	$	15,216
2022	29,193
2023	28,730
2024	27,476
2025	27,026
Thereafter	221,862
Total minimum lease payments	349,503
Less: imputed interest	132,123
Present value of lease liabilities	$	217,380

As of June 27, 2021, operating lease payments exclude approximately $2.1 million of legally binding minimum lease payments for leases signed but which we have not yet taken possession.

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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)

10. Income Taxes

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


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	June 27, 2021		June 28, 2020		June 27, 2021	June 28, 2020
Expected income tax expense (benefit)	$	2,905	$	820	4,152	(2,943)
State tax expense, net of federal benefit	428		197		705	(108)
FICA tip credit	(1,138)		(540)		(2,258)	(1,792)
Deferred tax balance adjustment (a)	—		(1,103)		—	(1,636)
Officers compensation	172		—		373	—
Stock compensation	(67)		25		(1,396)	366
Other	6		—		13	—
Income tax expense (benefit)	$	2,306	$	(601)	1,589	(6,113)

(a) Reflects the tax benefit recorded in the quarter associated with a carryback of federal net operating losses due to the CARES Act administrative correction of the deprecation recovery period for qualified improvement property.

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 June 27, 2021 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 a result, no additional accrual has been made as of June 27, 2021.

The tax years 2019, 2018 and 2017 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.

11. Impairment, Closed Restaurant and Other Costs

The Company reviews long-lived assets, such as property and equipment and intangibles, subject to amortization, for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable. In determining the recoverability of the asset value, an analysis is performed at the individual restaurant level and primarily includes an assessment of historical 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.

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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 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				Twenty-Six Weeks Ended
	June 27, 2021		June 28, 2020		June 27, 2021		June 28, 2020
Operating lease assets impairment	$	—	$	—	$	—	$	3,133
Property and equipment impairment	—		—		288		15,144
Total impairment charge	—		—		288		18,277

Closed restaurant costs	1,404		1,782		2,969		2,278
Loss on lease termination	—		—		491		—
Impairment, closed restaurant and other costs	$	1,404	$	1,782	$	3,748	$	20,555

Closed restaurant costs represent on-going expenses to maintain the closed restaurants such as rent expense, utility and insurance costs.

During the twenty-six weeks ended June 27, 2021, the Company terminated two of its closed restaurant lease agreements and recorded a $0.5 million loss on lease termination as well as a $0.3 million non-cash impairment charge related to long-lived assets.

During the twenty-six weeks ended June 28, 2020, the company recorded a $18.3 million impairment charge mainly as a result of restaurant closures driven by the COVID-19 pandemic.

12. Subsequent events

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. The Credit Facility will mature on July 30, 2024. The agreement requires the Company to be in compliance with a minimum fixed charge coverage ratio and a maximum consolidated total lease adjusted leverage ratio. The interest rate is either LIBOR 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) LIBOR plus 1.0%, plus a margin of 0.5% to 1.0%, depending on the Company’s consolidated total lease adjusted leverage ratio. The Revolving Credit Facility also requires payment for commitment fees that accrue on the daily unused commitment of the lender at 0.125%.

In connection with entering the Credit Facility, the Company terminated its $25.0 million revolving credit facility with Wells Fargo Bank, N.A.

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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 29, 2020 (our "Annual Report") and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein.

COVID-19 Pandemic

The onset of the COVID-19 pandemic at the end of the first quarter of 2020 caused significant disruption to the Company's business operations as a result of mandatory closures, imposed capacity limitations and other restrictions. As of June 27, 2021, the Company continued to operate under various capacity restrictions in the dining rooms in most of its locations in accordance with CDC and local guidance for safety of our guests and team members. We cannot predict how soon we will be able to operate all of our restaurants at full capacity, and our ability to stay open will depend in part on the actions of a number of governmental bodies over which we have no control. Moreover, once restrictions are lifted, it is unclear how quickly customers will return to our restaurants, which may be a function of continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions, including job losses.

Comparable restaurant sales, average weekly sales per restaurant and off-premise sales as a percentage of total revenue for the second quarter and the third quarter to-date of 2021 are as follows:


	Q2 2021	July
Comparable Restaurant Sales over 2020	60.0%	31.7%
Comparable Restaurant Sales over 2019	(1.4)%	(1.7)%
Average Weekly Sales per Restaurant	$87,969	$86,707
Off-premise sales as % of total revenue	27.0%	23.6%

During the second quarter of 2021, the Company continued to relax indoor dining capacity restrictions throughout its restaurants. As of August 5, 2021, all restaurants were operating without restriction. July comparable restaurant sales as compared to 2019 were negatively impacted by the unfavorable timing of Independence Day in 2021.

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 June 27, 2021, we operated 95 restaurants across 17 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.

During the twenty-six weeks ended June 27, 2021, we opened three new restaurants. We have an established presence in Texas, the Southeast and the Midwest, with restaurants in multiple large markets in these regions. Our growth plan over the next five years focuses on developing additional locations in our existing markets with proven average unit volumes and customer 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 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 as compared to that time in the prior year. Changes in comparable sales reflect changes in customer count trends as well as changes in average check. Our comparable restaurant base consisted of 90 restaurants at June 27, 2021.

•Comparable Restaurant Sales over 2019. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time as compared to that time in fiscal year 2019. The comparable group of restaurants include the restaurants that were in the comparable base as of the end of fiscal year 2019. Our comparable restaurant base consisted of 81 restaurants at June 27, 2021.

•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.

•Average Weekly Sales per Restaurant. Average Weekly Sales per Restaurant is calculated by dividing total weekly sales by the number of operating restaurants in a given week.

•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
	June 27, 2021			June 28, 2020			June 27, 2021			June 28, 2020
Total open restaurants (at end of period)	95			92			95			92
Total comparable restaurants (at end of period)	90			84			90			84
Average unit volumes (in thousands)	$	1,142		$	627		$	2,094		$	1,591
Change in comparable restaurant sales(1)	60.0		%	(39.0)		%	23.6		%	(25.0)		%
Average check	$	17.53		$	17.03		$	17.36		$	16.59

(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 2021 and 2020 fiscal years each consists 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 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. Other costs consist of closed restaurant lease termination fees.

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

Interest expense. Interest expense consists primarily of interest on our outstanding indebtedness, uncommitted credit facility fees and the amortization of our debt issuance costs reduced by interest income, if any.

Results of Operations

Potential Fluctuations in Quarterly Results and Seasonality

In addition to the impacts of the COVID-19 pandemic discussed above, 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 June 27, 2021 Compared to Thirteen Weeks Ended June 28, 2020

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


	Thirteen Weeks Ended
	June 27, 2021		% of Revenue		June 28, 2020		% of Revenue		$ Change		% Change
Revenue	$	108,153	100.0	%	$	65,712	100.0	%	$	42,441	64.6	%
Costs and expenses:
Cost of sales	25,565		23.6		15,410		23.5		10,155		65.9
Labor	30,306		28.0		17,337		26.4		12,969		74.8
Operating	15,944		14.7		10,720		16.3		5,224		48.7
Occupancy	7,459		6.9		7,097		10.8		362		5.1
General and administrative	6,679		6.3		4,774		7.3		1,905		39.9
Marketing	1,238		1.1		365		0.6		873		239.2
Restaurant pre-opening	615		0.6		278		0.4		337		121.2

Impairment, closed restaurant and other costs	1,404		1.3		1,782		2.7		(378)		(21.2)
Gain on insurance settlements	—		—		(1,000)		(1.5)		1,000		*
Depreciation	5,086		4.7		4,895		7.3		191		3.9
Total costs and expenses	94,296		87.2		61,658		93.8		32,638		52.9
Income from operations	13,857		12.8		4,054		6.2		9,803		241.8
Interest expense, net	21		—		153		0.3		(132)		(86.3)
Income before income taxes	13,836		12.8		3,901		5.9		9,935		254.7
Income tax expense (benefit)	2,306		2.1		(601)		(1.0)		2,907		*
Net income	$	11,530	10.7	%	$	4,502	6.9	%	$	7,028	156.1

* Not meaningful

Revenue. Revenue increased $42.4 million, or 64.6%, to $108.2 million for the thirteen weeks ended June 27, 2021 from $65.7 million for the comparable period in 2020. The increase was primarily related to growth in customer traffic as the Company continued to relax indoor dining capacity restrictions throughout its restaurants, as well as $3.0 million of incremental revenue from new restaurants opened during fiscal year 2021. For the second quarter of 2021, off-premise sales were approximately 27% of total revenue compared to approximately 61% and 13% in the same period last year and two years ago, respectively.

Comparable restaurant sales increased 60.0% for the thirteen weeks ended June 27, 2021 compared to the thirteen weeks ended June 28, 2020. The increase in comparable restaurant sales was primarily driven by an 55.2% increase in average weekly customers and a 4.8% increase in average check. Comparable restaurant sales decreased 1.4% as compared to the same period in fiscal 2019.

Cost of sales. Cost of sales as a percentage of revenue increased to 23.6% during the thirteen weeks ended June 27, 2021 compared to 23.5% during the comparable period in 2020 primarily as a result of overall commodity inflation of 5.0%, partially offset by favorable mix driven by a decrease in fajita family kits sold as compared to the second quarter of 2020.

Labor costs. Labor costs as a percentage of revenue increased to 28.0% during the thirteen weeks ended June 27, 2021 from 26.4% during the comparable period in 2020 as a result of increased hourly and management labor as the Company reopened all of its dining rooms and reinstated the temporarily reduced manager salaries. The Company also incurred $0.8 million of incremental manager bonuses in conjunction with its $1.6 million manager retention bonus program. Hourly labor rate inflation at comparable restaurants was approximately 1.3%.

Operating costs. Operating costs as a percentage of revenue decreased to 14.7% during the thirteen weeks ended June 27, 2021 from 16.3% during the same period in 2020 as a result of decreases in delivery service charges and to-go supplies as the Company continued to relax indoor dining capacity restrictions, as well as sales leverage on fixed restaurant operating costs, partially offset by an increase in liquor taxes driven by higher bar sales mix as compared to the same period last year.

Occupancy costs. Occupancy costs as a percentage of revenue decreased to 6.9% during the thirteen weeks ended June 27, 2021 from 10.8% during the comparable period in 2020 primarily as a result of sales leverage on fixed occupancy expenses, partially offset by higher percentage rent as well as occupancy expenses related to three new restaurants opened during fiscal 2021.

General and administrative expenses. General and administrative expenses increased to $6.7 million for the thirteen weeks ended June 27, 2021 as compared to $4.8 million for the same period in 2020. The increase was primarily driven by lower expenses in 2020 due to the temporarily reduced salaries of corporate employees during the COVID-19 pandemic, as well as higher performance-based bonuses and travel expenses in fiscal 2021. As a percentage of revenues, general and administrative expenses decreased 100 basis points to 6.3%.

Restaurant pre-opening costs. Restaurant pre-opening costs increased to $0.6 million for the thirteen weeks ended June 27, 2021 as compared to $0.3 million for the same period in 2020 due to a restart of restaurant development during the first and second quarters of 2021 with several new restaurant openings during fiscal 2021.

Marketing. Marketing expense as a percentage of revenue increased to 1.1% during the thirteen weeks ended June 27, 2021 as compared to 0.6% for the same period in 2020 as the company reinstated its digital advertising campaigns across the nation.

Impairment, closed restaurant and other costs. Impairment, closed restaurant and other costs decreased to $1.4 million during the thirteen weeks ended June 27, 2021 from $1.8 million during the comparable period in 2020 related to reduced closed restaurant costs as a result of the termination of two closed restaurant leases. Closed restaurant costs include rent expense, utility and insurance costs.

Depreciation. Depreciation expense increased to $5.1 million during the thirteen weeks ended June 27, 2021 from $4.9 million recorded during the comparable period in 2020 primarily due to an increase in equipment and leasehold improvement costs associated with our new restaurants.

Income tax expense (benefit). We recorded an income tax expense of $2.3 million in the second quarter of 2021 compared to income tax benefit of $0.6 million during the comparable period in 2020. The increase in income tax expense was driven by an increase in estimated annual net income. As of June 27, 2021, the Company had a $7.9 million deferred tax asset, which management believes will be fully realized, therefore, no valuation allowance is required at this time.

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 position could range between $0.5 million and $2.5 million.

Net income. As a result of the foregoing, net income was $11.5 million during the thirteen weeks ended June 27, 2021 as compared to $4.5 million during the comparable period in 2020.

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Twenty-Six Weeks Ended June 27, 2021 Compared to Twenty-Six Weeks Ended June 28, 2020

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


	Twenty-Six Weeks Ended
	June 27, 2021		% of Revenue		June 28, 2020		% of Revenue		$ Change		% Change
Revenue	$	195,863	100.0	%	$	160,212	100.0	%	$	35,651	22.3	%
Costs and expenses:
Cost of sales	46,012		23.5		39,972		24.9		6,040		15.1
Labor	55,135		28.1		50,917		31.8		4,218		8.3
Operating	29,415		15.0		25,305		15.8		4,110		16.2
Occupancy	14,698		7.5		15,083		9.4		(385)		(2.6)
General and administrative	13,527		6.9		10,494		6.6		3,033		28.9
Marketing	2,215		1.1		1,374		0.9		841		61.2
Restaurant pre-opening	1,292		0.7		1,138		0.7		154		13.5

Impairment, closed restaurant and other costs	3,748		1.9		20,555		12.8		(16,807)		(81.8)
Gain on insurance settlements	—		—		(1,000)		(0.6)		1,000		*
Depreciation	10,004		5.2		10,184		6.3		(180)		(1.8)
Total costs and expenses	176,046		89.9		174,022		108.6		2,024		1.2
Income (loss) from operations	19,817		10.1		(13,810)		(8.6)		33,627		*
Interest expense, net	44		—		205		0.1		(161)		(78.5)
Income (loss) before income taxes	19,773		10.1		(14,015)		(8.7)		33,788		*
Income tax expense (benefit)	1,589		0.8		(6,113)		(3.8)		7,702		*
Net income (loss)	$	18,184	9.3	%	$	(7,902)	(4.9)	%	$	26,086	*

* Not meaningful

Revenue. Revenue increased $35.7 million, or 22.3%, to $195.9 million for the twenty-six weeks ended June 27, 2021 from $160.2 million for the comparable period in 2020. The increase in revenue was primarily related to growth in customer traffic as the Company continued to relax indoor dining capacity restrictions throughout its restaurants, as well as $4.2 million of incremental revenue from new restaurants opened during fiscal year 2021. For the twenty-six weeks ended June 27, 2021, off-premise sales were approximately 29% of total revenue compared to approximately 36% in the same period last year.

Comparable restaurant sales increased 23.6% for the twenty-six weeks ended weeks ended June 27, 2021 compared to the twenty-six weeks ended weeks ended March 29, 2020. The increase in comparable restaurant sales was primarily driven by an 18.2% increase in average weekly customers in addition to a 5.4% increase in average check. Comparable restaurant sales decreased 6.4% as compared to the same period in fiscal 2019.

Cost of sales. Cost of sales as a percentage of revenue decreased to 23.5% during the twenty-six weeks ended weeks ended June 27, 2021 from 24.9% during the same period in 2020, primarily as a result of switching to a limited menu and eliminating the complimentary buffet style chips and salsa, or “Nacho Car,” as a result of the COVID-19 pandemic.

Labor costs. Labor costs as a percentage of revenue decreased to 28.1% during the twenty-six weeks ended June 27, 2021 from 31.8% during the comparable period in 2020 as a result of a reduction in hourly employees and store management personnel due to the Company’s new operating model, which it transitioned to during the second quarter of fiscal 2020 as a result of the COVID-19 pandemic, an hourly labor rate deflation at its comparable restaurants of approximately 0.8%, partially offset by $0.8 million of incremental manager bonuses in conjunction with its $1.6 million manager bonus retention program.

Operating costs. Operating costs as a percentage of revenue decreased to 15.0% during the twenty-six weeks ended June 27, 2021 from 15.8% during the same period in 2020 as a result of decreases in to-go supplies as the Company continued to relax indoor dining capacity restrictions as well as sales leverage on fixed restaurant operating costs, partially offset by an increase in liquor taxes driven by higher bar sales mix as compared the same period last year.

Occupancy costs. Occupancy costs as a percentage of revenue decreased to 7.5% during the twenty-six weeks ended June 27, 2021 from 9.4% during the comparable period in 2020 primarily as a result of sales leverage on fixed occupancy expenses, as well as the closure of nine restaurants during the latter part of March 2020, partially offset by rent and occupancy expenses related to three new stores opened during fiscal 2021.

General and administrative expenses. General and administrative expenses increased to $13.5 million for the twenty-six weeks ended June 27, 2021 as compared to $10.5 million for the same period in 2020. The increase was primarily driven by lower expenses in 2020 due to the temporarily reduced salaries of corporate employees during the COVID-19 pandemic and higher performance-based bonuses and equity compensation in fiscal 2021.

Restaurant pre-opening costs. Restaurant pre-opening costs increased to $1.3 million for the twenty-six weeks ended June 27, 2021 as compared to $1.1 million for the same period in 2020. During the twenty-six weeks ended June 27, 2021, we incurred pre-opening costs for several new restaurant openings during fiscal 2021. Restaurant pre-opening costs for the comparable period of 2020 represent expenses for the store openings postponed to fiscal 2021 as a result of the COVID-19 pandemic.

Marketing. Marketing expense as a percentage of revenue increased to 1.1% during the twenty-six weeks ended June 27, 2021 as compared to 0.9% the same period in 2020 as the company reinstated its digital advertising campaigns across the nation.

Impairment, closed restaurant and other costs. Impairment, closed restaurant and other costs decreased to $3.7 million during the twenty-six weeks ended June 27, 2021 from $20.6 million during the comparable period in 2020. During fiscal 2021, the Company terminated two of its closed restaurant lease agreements and recorded a $0.5 million non-cash loss on lease termination as well as a $0.3 million non-cash impairment charge related to long-lived assets. During fiscal 2020, the Company recorded non-cash impairment charges of $18.3 million related to restaurant closures as a result of the COVID-19 pandemic. The company also incurred $3.0 million and $2.3 million of closed restaurants costs, which include rent expense, utility and insurance costs during the twenty-six weeks ended weeks ended June 27, 2021 and June 28, 2020, respectively.

Depreciation. Depreciation expense decreased to $10.0 million during the twenty-six weeks ended June 27, 2021 from $10.2 during the comparable period in 2020 primarily due to a decrease in depreciation related to closed stores, partially offset by an increase in equipment and leasehold improvement costs associated with our new restaurants.

Income tax expense (benefit). We recorded an income tax expense of $1.6 million during the twenty-six weeks ended June 27, 2021 compared to an income tax benefit of $6.1 million during the comparable period in 2020. The increase in income tax expense was driven by an increase in estimated annual net income. As of June 27, 2021, the Company had a $7.9 million deferred tax asset, which management believes will be fully realized, therefore, no valuation allowance is required at this time.

Net income (loss). As a result of the foregoing, net income was $18.2 million during the twenty-six weeks ended June 27, 2021 as compared to a loss of $7.9 million during the comparable period in 2020.

Liquidity

Our principal sources of cash are net cash provided by operating activities, which includes tenant improvement allowances from our landlords, and borrowings, if any, under our new $35.0 million revolving credit facility as further discussed below. Consistent with many other restaurant and retail store operations, we typically use operating lease arrangements for our restaurants. From time to time, we may also purchase the underlying land for development. We believe that our operating lease arrangements provide appropriate leverage of our capital structure in a financially efficient manner.

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. The Credit Facility will mature on July 30, 2024. The agreement requires the Company to be in compliance with a minimum fixed charge coverage ratio and a maximum consolidated total lease adjusted leverage ratio. The interest rate is either LIBOR plus a margin of 1.50% to 2.00%, 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 0.50% or (c) LIBOR plus 1.0%, plus a margin of 0.50% to 1.00%, depending on the Company’s consolidated total lease adjusted leverage ratio. The Revolving Credit Facility also requires payment for commitment fees that accrue on the daily unused commitment of the lender at 0.125%.

In connection with entering the Credit Facility, the Company terminated its $25.0 million revolving credit facility with Wells Fargo Bank, N.A.

Our main requirements for liquidity are to support our working capital, restaurant expansion plans, ongoing maintenance of our existing restaurants, investment in infrastructure, obligations under our operating leases, interest payments on our debt, if any, and to repurchase shares of our common stock subject to market conditions. Repurchases of the Company's outstanding common stock will be made in accordance with applicable laws and may be made at management's discretion from time to time

in the open market, through privately negotiated transactions or otherwise, including pursuant to Rule 10b5-1 trading plans. There is no guarantee as to the exact number of shares to be repurchased by the Company. The timing and extent of repurchases will depend upon several factors, including market and business conditions, regulatory requirements and other corporate considerations, and repurchases may be discontinued at any time. As of the end of the second quarter of 2021, the Company had $28.6 million remaining under its $30.0 million repurchase program that expires on December 31, 2022.

Our liquidity may be adversely affected by a number of factors, including a decrease in customer traffic, average check per customer due to changes in economic conditions or the COVID-19 pandemic.

As of June 27, 2021, the Company had a strong financial position with $113.5 million in cash and cash equivalents, no debt and $25.0 million of availability under its revolving credit facility.

Cash Flows for Twenty-Six Weeks Ended June 27, 2021 and June 28, 2020

The following table summarizes the statement of cash flows for the twenty-six weeks ended June 27, 2021 and June 28, 2020 (in thousands):


	Twenty-Six Weeks Ended
	June 27, 2021		June 28, 2020
Net cash provided by operating activities	$	32,082	$	19,391
Net cash used in investing activities	(6,582)		(8,352)
Net cash provided by financing activities	1,230		46,124
Net increase in cash and cash equivalents	26,730		57,163
Cash and cash equivalents at beginning of year	86,817		10,074
Cash and cash equivalents at end of period	$	113,547	$	67,237

Operating Activities. Net cash provided by operating activities increased $12.7 million to $32.1 million for the twenty-six weeks ended June 27, 2021 from $19.4 million during the comparable period in 2020. 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 mainly attributable to $26.1 million increase in net income driven by 60.0% increase in comparable restaurant sales as well as a substantial improvement in the restaurant-level operating margin, partially offset by a $19.9 million decrease in non-cash losses, as well as the following changes in operating activities:

•a $4.7 million increase in accrued and other liabilities primarily driven by increased payroll accruals as a result of bringing back our furloughed employees after the reopening of our dining rooms during the latter part of fiscal 2020, as well as increased marketing and sales tax spend;

•a $5.7 million increase in deferred income taxes due in part to a CARES Act administrative correction which took place in fiscal year 2020; partially offset by

•a $4.9 million decrease in deferred rent payments (included in the operating lease liabilities) driven by rent deferment and concessions during COVID-19 pandemic partially repaid during fiscal 2021.

Investing Activities. Net cash used in investing activities decreased $1.8 million to $6.6 million for the twenty-six weeks ended June 27, 2021 from $8.4 million during the comparable period in 2020, mainly driven by reduced constructions payments as a result of the postponement of new store openings which were substantially developed prior to COVID-19 pandemic to fiscal year 2021.

Financing Activities. Net cash provided by financing activities was $1.2 million for the twenty-six weeks ended June 27, 2021 as compared to $46.1 million during the comparable period in 2020. The decrease in net cash provided by financial activities was primarily due to $48.2 million in net proceeds received in the Company's ATM offering completed during the second quarter of fiscal 2020.

As of June 27, 2021, 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 and Short-Term Capital Requirements

There have been no material changes to our long-term or short-term capital requirements from what was previously disclosed in our Annual Report filed with the SEC.

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 June 27, 2021, we are not involved in any variable interest entities transactions and do not otherwise have any off-balance sheet arrangements.

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

Certain statements in this quarterly report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect the current views of our senior management with respect to future events and our financial performance. These statements include forward-looking statements with respect to our business and industry in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:

•the ultimate geographic spread, duration and severity of the COVID-19 pandemic, and the effectiveness of actions taken, or actions that may be taken, by governmental authorities to contain the outbreak or treat its impact;

•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 and the resulting changes to pre-opening costs;

•we operate most of our restaurants under long-term leases which we may not be able to renew and would be obligated to perform even if we closed our restaurants;

•changes in economic conditions and consumer buying patterns;

•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;

•acts of violence at or threatened against our restaurants or centers in which they 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;

•food safety and food borne illness concerns;

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

•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 and restaurant closures;

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

•inadequate protection of our intellectual property;

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

•a major natural or man-made disaster;

•labor shortages and increases in our labor costs, including as a result of changes in government regulation;

•the loss of key members of our management team;

•the impact of legislation and regulation 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 laws and regulations, including with respect to liquor licenses and food services;

•the impact of litigation;

•the impact of impairment charges;

•the failure of our internal control over financial reporting;

•the impact of federal, state and local tax laws and the Internal Revenue Service disagreeing with our tax position;

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

•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;

•volatility in the price of our common stock;

•the timing and amount of repurchases of our common stock;

•the impact of future sales of our common stock and any additional capital raised by us through the sale of our common stock or grants of additional equity-based compensation;

•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;

•our ability to raise capital in the future; and

•other risks and uncertainties described from time to time in the Company's Annual Report and other filings with the Securities and Exchange Commission.

Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements. The foregoing factors should not be construed as exhaustive and should be read together with 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. You should not place undue reliance on these forward-looking statements and you should carefully consider all of the factors identified in this report that could cause actual results to differ. We assume no obligation to update these forward-looking statements, except as required by law.

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.

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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 quarter ended June 27, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II—Other Information

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our Annual Report filed with the SEC.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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			Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document)

101.SCH			Inline XBRL Taxonomy Extension Schema

101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document

104			Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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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 6, 2021


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 and Accounting Officer)