Restaurants have dealt with difficult conditions for some time, and even fast-growing concepts like Tex-Mex specialist Chuy's Holdings (NASDAQ:CHUY) haven't been immune from sales pressure in the face of tougher competition and changes in behavior among patrons. As if falling comparable-restaurant sales for three quarters in a row hadn't already been enough for the Tex-Mex chain, Chuy's also had to deal with the impact of Hurricane Harvey in its home state of Texas and Hurricane Irma in Florida and surrounding areas.
Coming into Thursday's third-quarter financial report, Chuy's investors already expected a drop in profits but hoped that solid revenue growth would signal better times ahead. Chuy's wasn't able to live up to even those somewhat toned-down expectations, but the restaurant chain has made some strategic shifts that it hopes will better reflect its best opportunities. Let's take a closer look at Chuy's Holdings to see whether it's on the right track.
Stormy times at Chuy's
Chuy's third-quarter results were unfortunately consistent with the difficult times that the Tex-Mex chain has faced lately. Revenue gains of 8% to $92.2 million were incrementally smaller than the 9% growth that investors had hoped for. Net income plunged 30% to $3.2 million, and that resulted in earnings of $0.19 per share, well short of the consensus forecast for $0.22 per share on the bottom line.
Comparable-restaurant sales performance continued to be a weak point for Chuy's. Comps for the third quarter were down 2.1%, which was double the pace of declines in the second quarter. Average check sizes were up 1.6%, but decreases in customer counts of 3.7% produced the overall comps decline. Chuy's said that Hurricanes Harvey and Irma were responsible for 0.9 percentage points of the downward comps figures, which resulted in a loss of about $1.2 million in revenue for the restaurant company and $0.03 per share in earnings.
Meanwhile, restaurant operating costs soared. Labor inflation, higher ingredient costs, and a rise in expenses related to items like maintenance and insurance sent the proportion of sales used for operating costs up three percentage points to 84%.
Chuy's expansion continued at a measured pace. Two new locations opened during the quarter, one in Jacksonville and one in the Chicago suburb of Warrenville. Since the end of the quarter, Chuy's has opened two more restaurants, including another Chicago-area location and one in the Houston-area city of Pasadena.
What's ahead for Chuy's?
CEO Steve Hislop tried to find reasons for optimism. "Despite the hurricane disruption," Hislop said, "we saw underlying sales improvement in our business during September, [and] this improvement continued to evidence itself in comparable restaurant sales that are slightly positive to date through the month of October." The CEO still believes that Chuy's unique approach to restaurant atmosphere should win out in the long run, with plans for 11 new restaurants in 2017 and eight to 12 in 2018.
Chuy's also announced measures to address its flagging share price. The company approved a $30 million stock repurchase program, which works out to almost 10% of its market capitalization.
Yet Chuy's investors had to endure more downward revisions to guidance. The Tex-Mex chain gave up on hopes for possible positive comps, cutting its prediction to a range of break-even to down 1.5%. An $0.08 per share reduction in earnings guidance brings new figures to $0.96 to $1 per share, reflecting the decision not to open a previously expected 12th restaurant in 2017 due to hurricane damage in Florida.
Chuy's has seen its stock struggle during the year, and the latest news won't make investors happy about its immediate prospects. Investors have to hope that the Tex-Mex restaurant chain will find a way to refine its strategy and connect with customers who truly want the best-quality food they can get, even as competitive conditions in the restaurant industry get even tougher.
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 January 2018 $25 calls on Chuy's Holdings. The Motley Fool has a disclosure policy.