The restaurant industry has gone through relatively tough times lately, and that's been a problem even for successful chains like Tex-Mex specialist Chuy's Holdings (NASDAQ:CHUY). Even though the company has done a good job of steadily expanding its geographical reach across the country, Chuy's still has to deal with macroeconomic trends that keep potential customers from going out to eat. Coming into Tuesday's third-quarter financial report, Chuy's investors still expected solid growth, and for the most part, they got what they were looking to see. Yet some of the Tex-Mex chain's results show just how difficult an environment Chuy's faces right now. Let's take a closer look at how Chuy's did and whether better times lie ahead.
Chuy's keeps cranking out the tortillas
Chuy's third-quarter results looked similar in many ways to what investors have gotten used to seeing from the Tex-Mex specialist. Revenue rose 16% to $85.6 million, falling just shy of the 17% growth rate that most of those following the stock were hoping for from Chuy's this quarter. Adjusted net income rose almost 20% to $4.9 million, and that produced adjusted earnings of $0.29 per share, which was $0.01 per share higher than the consensus forecast among investors.
A closer look at how Chuy's fared shows some mixed signs. Just about all of the growth that Chuy's has experienced lately is coming from its newer restaurant locations. Comparable restaurant sales gains amounted to just 0.3%, continuing a slowing trend that largely reflects the overall environment for dining out. Average check size rose 1.1%, but a 0.8% decrease in customer counts wiped out most of that gain. To show the impact another way, the 15 new restaurants that Chuy's has opened over the past 12 months provided $13 million in incremental revenue, or more than 15% of total sales for the company.
In addition, rising costs of operations had an impact on profitability. Chuy's said that its total operating costs as a percentage of revenue rose by more than a full percentage point to 81%, and it blamed inflation in hourly labor rates and inefficiencies related to new stores for much of the gain. Food price deflation was an offsetting factor, but it wasn't enough to eliminate rising costs entirely.
Meanwhile, the expansion push that Chuy's has made continued during the quarter. The third quarter brought three new locations, including restaurants in Central Florida, Tennessee, and Central Texas. An additional location in Maryland opened after the end of the quarter, bringing its total restaurant count to 78.
CEO Steve Hislop was happy with Chuy's results. "Despite a challenging external environment," Hislop said, "our third quarter results included double-digit increases in revenue and diluted net income per share, and we were also pleased to continue our consecutive streak of comparable sales growth to 25 quarters." The CEO also pointed to expansion efforts in driving growth.
What's next for Chuy's?
Chuy's has already completed most of its planned expansion for 2016, but investors can expect another two restaurants to open before the end of the calendar year. Moreover, Chuy's will aim to sustain its growth efforts in 2017, with an overall strategy that includes both adding to areas in which the Tex-Mex chain already has a presence and moving into new territories with dense populations that can help support solid financial results for the company.
Chuy's largely reiterated its previous outlook for the full year. The company expects adjusted earnings to come in between $1.05 and $1.08 per share, which is consistent with the consensus forecast among investors. However, comparable-restaurant sales are likely to remain weak, with fourth-quarter figures coming in between flat and up 1% and leading to overall 2016 growth in comps of between 1% and 1.4%.
Investors didn't react all that strong to the news, with Chuy's stock climbing less than 1% in after-hours trading following the announcement. Until conditions in the restaurant industry improve, Chuy's will have a tough time continuing the pace of growth that investors have come to expect in the past.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chuy's Holdings. The Motley Fool has the following options: short January 2017 $30 puts on Chuy's Holdings. Try any of our Foolish newsletter services free for 30 days. 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.