In this segment from Motley Fool Money, host Chris Hill, Million Dollar Portfolio's Jason Moser and Total Income's Ron Gross peruse the menu of problems at two restaurant chains of the Mex and Tex variety: Chuy's (NASDAQ:CHUY) big issue was its guidance, and El Pollo Loco (NASDAQ:LOCO) had less-than-promising growth prospects. But what got listeners' attention on the Texas Roadhouse (NASDAQ:TXRH) conference call was news that it's not planning to offer delivery -- and why.
A full transcript follows the video.
This video was recorded on Aug. 4, 2017.
Chris Hill: El Pollo Loco and Chuy's both serving second-quarter results up, but investors were not biting. Both stocks falling 8% this week. Jason, in the case of Chuy's, it's the lowered guidance that's hurting them.
Jason Moser: Yeah. I think with both of these restaurants, really the question is how much can we expect them to grow? And, is that really an attractive prospect for investors? When it comes to both of them, my tendency is to say no, there's not really that much of an attractive growth prospect there. With Chuy's, yeah, they guided down. Comps were down 1%, top line was up 7.5%. But what that means is that revenue is coming from opening new stores. They still have a very small store base, I think it's somewhere around 80, and they're only going to open a handful every year. Now, the flip side, there are some pretty attractive unit economics there. They said that in 2016, comp stores brought in around $4.6 million per store. So, there are some attractive economics there. Again, I just don't know if there's the growth that we'd be looking for. With Pollo Loco, it's a bigger footprint, somewhere in the neighborhood of 500, just under 500 stores today, and they do franchise. Again, that's a very competitive quick-serve market where they're competing against the likes of McDonald's, Bojangles, all the Yum! Brand stores -- Taco Bell, KFC, and what not -- so, that's a tricky one. I think Pollo Loco does differentiate in the products that they offer, but again, I'm not sure how far they can spread their wings and grow their footprint. So, I don't know that investors should be all that up for either concept at this point.
Hill: Shares of Texas Roadhouse flat this week, despite better-than-expected results in the second quarter. CEO Kent Taylor saying on the conference call, Ron, "We're not doing delivery."
Ron Gross: Interesting, right?
Hill: It was.
Gross: He's saying, if most people are calling for delivery between 6 p.m. and 8 p.m., when their kitchen is the busiest and fully utilized, it would actually be a bad decision to offer up a poor experience by delivering people lukewarm food. He welcomes the competition to continue to do so. Which makes a little bit of sense there. He said, if there are companies out there that have kitchens that are not fully utilized, OK, that perhaps is a good move. But for us, it's not necessary. But they continue to put up really good numbers. They're carrying forward from Q1 right into Q2, especially in an environment where the casual dining segment is hurting, Texas Roadhouse and our man behind the glass favorite Olive Garden are two that are kind of bucking the system, for the most part. Comp sales were up 4%, diluted earnings per share up 11%. Margins got a little bit of pressure from wage rate inflation, but that was offset by lower food costs, so not too bad, there. And they continue to grow, open new stores, open the Bubba 33 concept, as well as their Texas Roadhouse concept. They're doing a nice job.
Hill: Yeah, but they haven't opened a Bubba 33 near us.
Gross: They have not, what's up with that? Pizza, burgers, and beers, we're waiting.
Chris Hill has no position in any stocks mentioned. Jason Moser has no position in any stocks mentioned. Ron Gross has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chuy's Holdings and Texas Roadhouse. The Motley Fool has the following options: short October 2017 $30 puts on Chuy's Holdings. The Motley Fool has a disclosure policy.