Chuy's Holdings (NASDAQ:CHUY), the popular Tex-Mex restaurant chain, will release its fourth-quarter and full-year 2016 earnings on Feb. 28. While the stock, as of this writing, is down a little more than 10% since the beginning of the year, there isn't any company-specific news causing this decline. Rather, the likely culprits are industry headwinds that continue to affect restaurant companies nationwide. With that in mind, let's examine a few key metrics for investors to keep an eye on when Chuy's earnings report arrives.
The expectations game
Fourth-quarter analyst estimates for Chuy's are $81.4 million in revenue and earnings per diluted share of $0.17. That compares with year-ago numbers of $71.0 million in revenue and diluted EPS of $0.18.
Chuy's own full-year 2016 guidance includes a fourth-quarter diluted EPS forecast of $0.15 to $0.18. So, on average, analysts expect the company to come in a bit above the midpoint. Chuy's has beaten estimates for both revenue and EPS for the past five consecutive quarters, and investors would obviously love to see that trend continue.
Continued comps growth
If there's one single metric that will be most closely watched, it's comparable-restaurant sales growth. Last quarter, Chuy's raised its full-year 2016 comps guidance to a range of 1% to 1.4%, so it will probably need to at least hit the midpoint of that range to avoid disappointing the market.
The restaurant industry at large continues to struggle with slowing sales because of falling customer traffic. According to Black Box Intelligence, December 2016 was the industry's weakest month in over three years for same-store-sales growth, dragging average fourth-quarter results down 2.4% -- the worst quarter for the industry in more than five years. Against this ugly backdrop, can Chuy's hold its own and eke out a 26th consecutive quarter of comps growth?
In particular, check out the reported breakdown of customer traffic versus average check increases. The past couple of quarters, Chuy's has posted positive overall comps growth, but it's been driven entirely by increases in the average guest check that helped offset small traffic declines. The nationwide trends are not encouraging, with traffic down 6.4% in December alone, and down 4.5% for the fourth quarter, according to Black Box Intelligence. Chuy's will have to do significantly better than that to keep its growth story going.
Restaurant-level margin in the face of higher costs
Chuy's restaurants that have been open at least 18 months enjoy an enviable restaurant-level EBITDA margin of 21.8%. However, the restaurant industry is beginning to see food costs rise across multiple categories. Chuy's is not immune to this trend, stating that produce, chicken, and dairy prices were trending higher in late 2016. Chuy's cost of sales (as a percentage of restaurant revenue) rose from 25.6% in the first quarter to 26.3% in the third quarter, with management saying it expects to see that figure increase by another 20 to 40 basis points in Q4.
Adding in expectations for higher labor and occupancy costs as well, store-level EBITDA margin is likely to go lower in Q4. The only question is by how much. Investors will want an update on how the company plans to maintain its healthy margins, and also what kinds of additional cost pressures Chuy's anticipates as 2017 gets rolling.
How many new stores for 2017?
If history is any guide, management will also announce its plans for how many new locations it plans to open in total for 2017.
Chuy's currently operates 80 restaurants. The company's goal at the end of 2015 -- back when it had 69 restaurants -- was to double the number of locations in three to five years. In 2016, Chuy planned to open 12 new restaurants and close one location, for a net gain of 11, which leaves 58 stores to go to meet the doubling milestone.
As the store base gets larger, we can't expect the heady unit growth of the past five years, which saw 25% CAGR [compound annual revenue growth] from 2010 to 2015, to continue. But ideally, we'd like to see the rate of expansion stay at the "high teens" benchmark -- a number management referenced as a realistic pace for the foreseeable future. Eighteen percent annual store growth would equate to 14 new stores in 2017. Hitting that number -- or, better yet, exceeding it -- would confirm that the company's long-term expansion plans remain intact.
Investors would do well to pay special attention to the aforementioned metrics. They'll help determine whether the company's results are viewed as a sizzling success or end up leaving investors cold.