I'll be the first to admit that I have a soft spot in my heart for Chuy's Holdings (NASDAQ:CHUY). The Tex-Mex restaurant chain was instrumental in feeding me during my school years in Austin, and the idea of being able to get a Chuy's fix far from the Lone Star State has special appeal for me. Yet for investors, the restaurant business involves cutthroat competition, and Chuy's has run into difficulty sustaining its initial growth.
Coming into Thursday's first-quarter financial report, Chuy's investors wanted to see solid sales gains and were willing to accept flat earnings performance. The Tex-Mex chain's top-line growth wasn't quite as strong as those following the stock had wanted to see, and falling comparable-restaurant sales for the second quarter in a row were troubling for what many had seen as a high-growth stock. Let's take a closer look at Chuy's Holdings and what might lie ahead.
Chuy's sees comps sink again
Chuy's first-quarter results didn't assuage concerns that arose during its previous quarterly report. Sales growth came in at 11%, sending sales to $86.9 million and falling short of the 12% growth rate that investors expected. Adjusted net income of $4.55 million was up just a fraction of a percent from year-earlier figures, and that produced flat earnings of $0.27 per share, matching the consensus forecast.
Looking more closely at the numbers, Chuy's once again suffered falling comparable-restaurant sales. With a decline of 0.7%, the comps drop wasn't quite as bad as it was in the fourth quarter of 2016, but it nevertheless extended a streak that investors had never wanted to see begin. Although average check size was actually up a reasonable 1.5%, a more than 2% drop in average numbers of weekly customers more than outweighed bigger orders.
Chuy's pointed to unfavorable weather and the timing of Valentine's Day on a weekday as having a downward impact on comps, but the change in the timing of Easter actually offset some of that decline. Once again, Chuy's had to get its growth from the 14 new restaurants that opened over the past year, as they generated $11.7 million in additional revenue.
Operating costs also remain a challenge for Chuy's. Higher labor costs and increasing utility expenses helped drive operating margin figures down more than 1 percentage point, with lower food-input costs failing to fully offset those increases.
The winter season is typically slow for restaurant expansion, and that was true for Chuy's this quarter. The company opened two restaurants during the quarter in Texas and Georgia, and another location in Ohio opened after the end of the quarter.
CEO Steve Hislop didn't really address the decline in comparable-restaurant sales, or any concerns about the company's long-term prospects. "Our main focus remains taking care of our customers one customer at a time," Hislop said, "delivering high-quality made-from-scratch food and drink at a tremendous value in a unique and upbeat atmosphere." The CEO also pointed to expansion in Chuy's store base as instrumental in its growth picture.
Will Chuy's look tastier?
Chuy's hasn't changed its expectations about how the rest of the year will go. It still sees 12 to 14 new locations during the year, and the key expansions into the major metropolitan areas of Chicago, Denver, and Miami could spur lasting growth in new regions. Despite its ambitious pace of expansion, Chuy's still hasn't come close to blanketing the entire country with locations.
Chuy's did make one major change to its 2017 guidance, and it was a negative move. The Tex-Mex chain said that it now sees comparable-restaurant growth of just 0.5% to 1.5%, down from its previous range of 1% to 2% for the year. Yet Chuy's now thinks that pre-opening expenses for new restaurants should be less expensive than originally projected, and that will help the company reach its previous earnings guidance of between $1.11 and $1.15 per share.
Chuy's shareholders didn't seem happy with the restaurant chain's results, and the stock fell 3% in after-hours trading following the announcement. No matter how good its food tastes, Chuy's has to find ways to appeal to a broader set of restaurant-goers if it wants to make itself an investment as appealing as its chips and queso are to me.
Dan Caplinger owns shares of Chuy's Holdings. The Motley Fool owns shares of and recommends Chuy's Holdings. The Motley Fool has the following options: short October 2017 $30 puts on Chuy's Holdings. The Motley Fool has a disclosure policy.