Could Chuy's Earnings Really Drop This Quarter?

Image source: Chuy's Holdings.

The casual-dining space has been extremely popular in recent years, and Tex-Mex restaurant chain Chuy's Holdings (CHUY 0.53%) has taken full advantage of the improving U.S. economy to expand from its Texas base outward throughout much of the nation. The stock price has performed admirably in recent months, yet as the date of its second-quarter financial report approaches, Chuy's investors actually fear that the company's bottom line could fall slightly from year-ago levels. Nevertheless, with high expectations for sales growth, Chuy's will need to demonstrate that its expansion efforts are paying off for the company. Let's take an early look at Chuy's Holdings to see what you can look forward to seeing in its quarterly report on Aug. 2.

Stats on Chuy's Holdings

Data source: Yahoo! Finance.

Are Chuy's earnings going to leave a bitter taste in investors' mouths?

Investors have generally been optimistic in recent months about Chuy's earnings, leaving their current-quarter projections unchanged but boosting their full-year estimates for 2016 and 2017. The stock has also delivered tasty gains for shareholders, rising more than 25% since mid-April.

Chuy's first-quarter report in early May spurred a big upward move in the stock price that started the ball rolling for the Tex-Mex chain. Revenue soared 17%, accelerating from its pace in the previous quarter, and net income jumped more than 40% to top expectations by a sizable margin. Comparable-restaurant sales gains of 3.2% were in line with past results, but operating costs fell, helping boost Chuy's bottom line. The restaurant chain also increased its guidance for the full year and was generally pleased with the pace of its expansion efforts.

Some believe that part of the success that Chuy's has enjoyed has come at the expense of a leader in the Mexican food segment. Fast-casual giant Chipotle Mexican Grill continues to see customer defections in the aftermath of its food-borne illness issues, and comparable-restaurant sales reflect the reluctance of some customers to return to the burrito maker. Chuy's isn't quite a comparable chain, because its casual-dining experience doesn't purport to be tailored for those looking for speed. However, Chuy's prices are extremely attractive and roughly in line with what you'd pay at Chipotle. It's entirely possible that some of Chuy's traffic increase is coming from former Chipotle customers who are looking for alternatives.

Why you shouldn't worry about Chuy's

For those who are concerned by the somewhat downbeat expectations of Chuy's investors, history provides some comforting insights. Over the past four quarters, the company has consistently topped earnings estimates by double-digit percentage margins, outperforming the consensus forecast by roughly a nickel per share on average. It's risky to take for granted the idea that a company will consistently do better than most investors following the stock expect, but some companies do have a history of leading the analysts covering them to make predictions that allow the actual results to produce optimism and positive momentum.

In Chuy's report, investors should keep a close eye on how well the Tex-Mex restaurant chain is able to sustain comparable-restaurant sales growth, especially at its older locations. Many restaurants see steep drop-offs between the time that they first come into an area and the time they become established anchors in their locations. Aggressive expansion will keep pushing Chuy's revenue higher for years to come, and based on past experience, earnings could easily defy the forecasts and keep climbing. But for truly long-term investors, the question that the restaurant chain has to answer is whether there will be any growth left for Chuy's once the size of its network has reached a saturation point in its most lucrative markets.