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It's been a hot summer for restaurant chains to go public, as long as the eateries master the art of portion control.
Bloomin' Brands (Nasdaq: BLMN ) -- the company behind the Outback Steakhouse and Carrabba's Italian Grill chains -- wanted to go public between $13 and $15 last week. It settled for $11 a share on Wednesday.
Del Frisco's (Nasdaq: DFRG ) -- the high-end chophouse operator of Del Frisco's Double Eagle Steak House and Sullivan's -- planned to offer 7 million shares for as much as $16 a share. Del Frisco's had to settle for 5.8 million shares at $13.
Bloomin' Brands is trading a bit higher than its initial pricing and Del Frisco's is technically a busted IPO after slipping below $13 last week. However, both companies are trading below even the low end of their initial pricing expectations.
There is a restaurant debutante that is bucking the trend, though.
Chuy's Holdings (Nasdaq: CHUY ) sold 6.7 million shares at $13 three weeks ago. The stock of the fast-growing chain of Tex-Mex casual-dining restaurants opened higher, and hasn't looked back. Chuy's closed at a fresh high last week of $19.69, up a rousing 51% off its debut.
Kicking the tires -- and tortillas
Most of Chuy's three dozen locations are in Texas, but its latest opening was in my home state of Florida.
I ventured out to Gainesville over the weekend to check it out.
The restaurant was surprisingly busy at 2 p.m. on Friday. Chuy's claims that the average unit rings up an impressive $5 million in annual sales, and I believe it. Even though most of the menu items sell for $10 or less, the upselling potential of alcoholic beverages at Mexican restaurants has a funny way of drawing tabs higher.
The Chuy's website promises an Elvis Presley shrine in every location, and the new Florida unit didn't disappoint. Just past the entrance, a shrine devoted to the legendary singer was on display. A ceramic bust of Elvis -- sandwiched between a pair of lava lamps against a leopard skin background and under a sparkling mirror ball -- watched over the bar's entrance through protective bars.
Photo by Rick Munarriz.
The restaurant decor may be considered gaudy or hokey, but that's par for the course when it comes to both casual dining in general and Tex-Mex cantinas in particular.
Car parts, throwback bar stools, and walls studded with colorful tchotchke gave the place a festive flair, but nothing would prepare me for the artwork by my table.
Perched above my wife's head was a painting of a woman with the head of a Chihuahua. All around the portrait were snapshots of real dogs. I was later informed that guests who bring in a framed picture of their pooch get a free appetizer. It's a clever way to decorate your restaurant by folks who will come back to see if their dog's snapshot made it onto the wall.
Photo by Rick Munarriz.
Sales at Chuy's are booming. Revenue soared 38% last year to $130.6 million, fueled primarily by the company's breakneck expansion. Adjusted EBITDA margins have held steady at just below 15% in each of the past three years. Comps did decline by 2% in 2009 when recession-weary consumers stayed away from most eateries, though comps have been positive ever since.
Last month's IPO raised enough money to repay most if not all of the company's debt, so it's ready to ramp up its expansion in new markets craving the company's spin on Tex Mex.
The menu itself isn't all that different than most sit-down Tex-Mex-inspired restaurants. The usual assortment of tacos, "big as yo' face" burritos, and fajitas is accented with a surprisingly wide array of enchilada choices and signature sauces. There's also a deep-fried chicken dish that's breaded with Lay's potato chip crumbs, but my wife and I played it safe. I had a chimichanga. She went for the chicken enchilada.
We walked away impressed.
The risk of restaurant stocks
The problem with investing in eateries is that consumers can be fickle. Chipotle Mexican Grill (NYSE: CMG ) has been a welcome exception, but we can't compare the quick-service burrito roller to the sit-down experience at Chuy's.
Chuy's is more in the mold of El Torito, Chevys Fresh Mex, or the On the Border chain that Brinker (NYSE: EAT ) sold two years ago.
The difference here is that Chuy's is early in its growth cycle, and there appears to be plenty of room to run.
Valuation is the one thing that investors will want to keep an eye on here. Chuy's would've been a steal at $13, but three healthy weekly gains have pushed the stock to a market cap north of $300 million based on its 15.9 million shares outstanding. An earnings multiple that is 55 times the pro forma profit of $0.36 a share that it served up last year isn't going to win over too many value hounds.
You still have to admire Chuy's moxie. The Gainesville restaurant is actually within a few feet of both a Taco Bell and the casual quick-service Tijuana Flats. There's a Chipotle a few blocks down. One could argue that the company didn't think its first Florida location through, but the healthy crowd gathering for my late lunch on Friday tells a more encouraging tale of brazenness.
Now if only I can get my dog to sit still for a picture. A free order of quesadillas sounds like it would hit the spot.