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Why I Own Chuy's Holdings Inc Stock

By Andy Gould – Oct 21, 2016 at 8:41AM

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Reassessing the Tex-Mex chain's strengths after a tough couple of months.

Image source: Chuy's Holdings.

Chuy's (CHUY 0.78%) is a chain of roughly 80 Tex-Mex restaurants that's big on portions and even bigger on personality. With its loud, colorful, irreverent atmostphere, each Chuy's restaurant is, in the company's own words, "a noisy, sprawling Tex-Mex hacienda full of feel-good drinks and home-cooked foods."

Lately, though, Chuy's shares have looked anything but spicy. In late July, the stock was trading near $38. That was just before Stifel Nicolaus issued a bearish call on the entire restaurant sector , sending Chuy's shares plummeting. Almost three months later, and the stock price has declined more than 25%, trading at less than $27  today.

While investors may have cooled on Chuy's for the moment, I think there's a lot to be said for the company. Let's run through the many things the company has going for it as an investment.

A restaurant concept that resonates

Chuy's is currently enjoying a winning streak that any other chain would kill for -- 24 straight quarters of comparable-restaurant sales growth. Which means that for six full years, Chuy's locations have, on average, rung up higher sales with each passing quarter. Currently, average yearly revenue for restaurants open at least 18 months stands at $4.7 million, well ahead of concepts like Olive Garden and P.F. Chang's, according to Chuy's numbers.  

What's Chuy's secret sauce? Management consistently points to the restaurant's remarkable value. With 40 out of 50 menu items priced at $10 or less, and an average guest check of only $14.38 (lower than BJ's, Texas Roadhouse or Olive Garden, according to Chuy's numbers), Chuy's offers one of the most affordable options out there for full-service dining.

A road map for national expansion

While store-level revenues are impressive, Chuy's is still a relatively small, regional chain with only 76 restaurants in 15 states. But it has national ambitions, and a plan to get there.

Last year, the company set an ambitious goal to double its number of locations over the next three to five years. That would require annual compound store growth of somewhere between 15% and 26%. And with CEO Steve Hislop stating on the company's second-quarter 2016 earnings call that annual store growth should continue in the "high teens"  for the foreseeable future, it would appear that the company is still on track.

That's important, because the company is set to enter three crucial new markets next year that should really open up its growth prospects. In the second quarter of 2017, Chuy's plans to open its first Chicago location, with an eye on ultimately developing at least 12 stores in the area. The chain will also expand into the Denver and Miami/South Florida markets, both of which are large enough to support many additional restaurants in the years to come. By the end of 2017, the map of Chuy's locations will span three time zones, stretching from the Everglades to the Rockies.

Impressive store-level profitability from existing restaurants

Management consistently touts Chuy's industry-leading restaurant-level profit margins. Locations that have been open at least 18 months average 22.1% EBITDA margins -- significantly higher than Texas Roadhouse, BJs, or Buffalo Wild Wings, according to the company.

A big contributor to those margins is Chuy's disciplined approach to managing its cost of sales -- what it pays for ingredients like meat, dairy, produce, etc. As a percentage of revenue, the company's cost of sales has stayed between 26% and 28% for five years running.

New restaurants provide a very healthy ROI

One reason the company is keen on expanding so quickly is that its new restaurants show a fantastic return on investment in just a few years. While new stores cost an average of $2 million to build, they ramp up to $3.8 million or more in revenue within three years, producing a targeted cash-on-cash return of 30%. (Cash-on-cash return is defined as restaurant-level EBITDA divided by net cash investment excluding pre-opening expense.)  

A clean balance sheet

Chuy's carries zero debt. Even better, the company plans to keep it that way by funding all expansion over the next several years with cash from operations. Chuy's management has stated they want to stay conservative with financing, something every shareholder should appreciate.

Putting it all together

For Chuy's, the points above have been a winning combination. For the past five fiscal years, the company has grown both revenue and restaurant-level EBITDA at a compound annual growth rate of 25%!  And though the broader restaurant industry is currently witnessing a slowdown in consumer traffic, Chuy's continues to look fundamentally sound and operationally excellent. I haven't even mentioned management's track record of over-delivering on their own guidance -- something that's resulted in Chuy's beating analyst estimates for five quarters in a row. As this regional concept continues its aggressive expansion, I expect more of the same. Which is why I intend to hold my Chuy's shares for years to come.

Andy Gould owns shares of BWLD and CHUY. Andy Gould has the following options: short January 2017 $30 puts on CHUY. The Motley Fool owns shares of and recommends BWLD, CHUY, and TXRH. The Motley Fool has the following options: short January 2017 $30 puts on CHUY. The Motley Fool recommends BJRI. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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