Image source: Chuy's Holdings.
OK, maybe my headline is just a tad misleading, because I'm only going to tell you about one brilliant way Chuy's (CHUY 2.37%) is investing in the future.
Ready?
It's store growth. As in new restaurants. Sixty-nine of them. Which should take this regional restaurant brand to the brink of being a national player while generating some very healthy cash flows to boot.
Doubling the store base in 3-5 years
Based in Austin, Texas, Chuy's is a growing chain of full-service Tex-Mex restaurants with national aspirations. Its irreverent brand, upbeat atmosphere, and commitment to freshly prepared food made from scratch attract diners in droves. At the end of 2015, its location count stood at 69. That's when the company -- already in rapid expansion mode -- began publicly discussing its goal to double that number over the next three to five years. And so far, so good. Through the second quarter, Chuy's had already opened eight new stores, with plans to open three to five more before the end of the year. If we assume it opens a total of 12 restaurants in 2016, that leaves 57 to go by the end of 2020 to deliver on the company's stated ambitions.
The map of Chuy's locations currently shows 30+ pins in Texas, with the remainder sprinkled across 14 other states, mostly in the southeast U.S. Every passing year, however, Chuy's continues to spread its unique brand of Tex-Mex quirkiness in markets farther from its home base, reaching Florida in 2012, Virginia in 2013 and Ohio in 2015. (And c'mon, if they can succeed selling Tex-Mex in Ohio, then the sky's the limit, right?)
While recent expansion efforts have focused on "backfilling" smaller cities in existing markets, three new markets on the horizon offer plenty of larger growth potential. Chuy's first Chicago location is scheduled to open in the second quarter of 2017, and management believes that the long-term potential exists for at least 12 locations in Chicagoland alone. 2017 will also mark the chain's first forays into the Denver and Miami/South Florida markets. Though it has a long way to go, each of these new cities brings Chuy's one step closer to establishing itself as a national brand.
Why it's brilliant
Chuy's has now posted 24 consecutive quarters of same-store-sales growth. That's a full six years without a negative quarter -- and a streak that any other restaurant chain would kill for. It's safe to say that Chuy's Tex-Mex concept resonates with consumers in a pretty big way.
Chuy's also has some of the best store-level financial metrics in the business. Locations that have been open at least 18 months average $4.7 million in annual sales -- higher than Olive Garden or P.F. Chang's. And just like Chuy's "Big As Yo' Face" burritos, restaurant-level EBITDA margins for these locations are huge, averaging 22.3% -- higher than Texas Roadhouse, BJ's, or Buffalo Wild Wings. With sales and margin figures like those, it's no wonder they're expanding so quickly.
Equally impressive, while new restaurants cost an average of $2 million to build, they quickly ramp up to a minimum of $3.8 million in revenue by their third year of operation, producing targeted cash-on-cash returns of 30%. (Cash-on-cash return is defined as restaurant-level EBITDA divided by net cash investment excluding pre-opening expense.) Multiply those figures by the 69 restaurants planned to be built and you'll see that for an approximate $138 million investment, Chuy's would eventually be earning at least $262 million in additional revenue per year, and generating incremental yearly operating cash flows of around $41 million. In short, each new location it can build stands to add to Chuy's already-robust cash machine.
Can Chuy's get there?
For the record, Chuy's three-to-five-year goal requires annual compounded store growth of somewhere between 15% and 26%. Based on the company's track record, I'd say that seems extremely doable. Consider that over the past five years, annual store growth has averaged nearly 25%. And in June at the Jeffries 2016 Consumer Conference, CFO Jon Howie stated that the company believes it can grow the existing store base by approximately 20% per year for the foreseeable future. If that holds true, Chuy's will end up doubling its store base near the end of 2019.
With the broader restaurant industry recently witnessing a slowdown in customer traffic, it's always possible that falling sales could eventually hit Chuy's as well and derail its growth plans. Or that people in one of its new locations just won't embrace the food. But with several promising new markets around the corner, some of the most appealing restaurant-level economics in the industry, and a steady plan to take their successful brand of Tex-Mex national, Chuy's future looks very tasty indeed.
