After three consecutive quarters of negative comparable-restaurant sales growth, Chuy's Holdings (NASDAQ:CHUY) investors will be looking for indications of a turnaround when the company reports its third-quarter earnings on Nov. 2. But as the industry at large continues to struggle with declining customer counts, Chuy's is fighting an uphill battle.
Here are the items I'll be watching most closely to gauge the Tex-Mex chain's quarterly performance.
How low will comps go?
For years, Chuy's posted consistent yearly comps growth in the 2% to 3% range. That streak ended in 2016, when the company turned in an anemic 0.8% comps increase.
Until recently, the silver lining was that even as comps turned negative, Chuy's was generally outperforming the industry average. But last quarter, the company's results matched the industry's 1% comps decline.
And with two quarters left to report, it's looking unlikely that Chuy's will get back to positive full-year comps in 2017. After last quarter's ugly results, the company lowered its full-year comps guidance to a range of down 1.5% to up 0.5%. According to Black Box Intelligence, Q3 2017 was the second-worst quarter for restaurants in over five years, with average comps declines of 2.2% and traffic declines of 4.1%. And while September sales did show some improvement over July and August, the effects of hurricane season are looming large over Q3 results. Hurricane Harvey will surely leave a mark, as 35 of the company's 87 or so locations are in Texas, including nine in Houston and one in Corpus Christi. Chuy's also has eight locations in Florida, where Hurricane Irma did its damage.
What to watch for: Even though the company will be lapping some weak comps figures from late last year, I wouldn't expect too much. Given the exposure to the Texas and Florida markets, even keeping pace with the broader industry's comps numbers would be a positive sign.
Will margins fall further?
The company's once-sterling margin levels have been under pressure recently, and Chuy's has warned that higher labor costs are expected to continue. Additional factors include opening the bulk of its new restaurants in larger, pricier markets, as well as the overall number of new stores that generally post lower margins during their first couple of years of operation.
Over the past three quarters, restaurant-level operating margin has declined year-over-year. In Q2, the figure fell to 19.1%, down from 21% the prior year.
New stores are, on average, still hitting their EBITDA margin targets -- high single digits in year one, and low double digits in year two. But even so, more than half of the margin compression seen in Q2 was due to new store inefficiencies.
What to watch for: Continued margin compression, as well as management forecasts for labor inflation, commodity costs, and occupancy costs. Though Chuy's is currently still well above its blended restaurant-level margin target for new and mature stores of 15% to 16.5%, investors will want to keep a close eye on costs that could further erode store-level profitability.
Is there a plan B for shareholder value?
Last quarter, Chuy's announced that it planned to slow its pace of expansion, given the difficult environment for restaurants and the uncertainty around its comps outlook. While still planning to open 12 new stores in 2017, which represents 15% annual store growth, the company will open between eight and 12 locations in 2018, representing annual store growth of just 9% to 13%.
In comments made during the conference call, management referred a couple of times to other ways of creating shareholder value, implying that management is thinking of taking advantage of the strong balance sheet to do a stock buyback, special dividend, or some other shareholder-friendly action. At the end of the second quarter, Chuy's had roughly $20 million in cash and no debt.
What to watch for: Given that it's been an entire quarter since these alternatives were discussed, perhaps something will be announced along with Q3 results. If not, at the very least, I'd expect some analyst questions on this subject during the conference call.
With little other news to go by, based on the past few months of industry data, it doesn't appear that traffic and comps challenges will be going away anytime soon. And with shares trading within a few dollars of their five-year lows, there are still plenty of questions about how Chuy's can get back to its growth rates of yesteryear.