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Chuy's Gets a Tax Break

By Dan Caplinger - Mar 8, 2018 at 6:24PM

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Find out how the Tex-Mex specialist's comps rebounded.

Investors have largely focused on the impact of tax reform on massive corporations with tens of billions of dollars locked up in overseas subsidiaries. Yet even purely U.S.-focused companies like Austin-based Tex-Mex restaurant chain Chuy's Holdings (CHUY 0.22%) stood to gain from tax reform efforts. Amid some difficult conditions throughout the restaurant industry, help from Uncle Sam was particularly welcome.

Coming into Thursday's fourth-quarter financial report, Chuy's investors wanted to see a rebound in earnings with a stronger pace of revenue growth. Sales were solid for the Tex-Mex chain, but not everyone thought that the company's bottom-line performance was good enough to celebrate. Let's look more closely at Chuy's Holdings and what investors can expect going forward.

Beef and chicken fajitas in an iron skillet, with sides of flour tortillas and cheese, guacamole, sour cream, and salsa.

Image source: Chuy's.

Chuy's brings in the green

Chuy's fourth-quarter results showed some nice revenue improvement from the sluggish results we've seen lately from the restaurant chain, but the bottom line was less spectacular. Sales soared 21%, to $96 million, outpacing even the 20% growth rate that most investors were looking to see from the company. Adjusted net income was up just 2% from year-ago levels, to $3.18 million. That worked out to adjusted earnings of $0.19 per share, falling short of the consensus forecast among those following the stock by $0.01 per share.

Tax reform was a huge boon for the company. Because of the revaluation of Chuy's deferred tax balance, the restaurant company made a positive adjustment of $11.7 million to its net income, or about $0.69 per share.

Fundamentally, Chuy's saw more mixed results. About 9 percentage points of the growth in Chuy's top line for the quarter came from the fact that the fiscal period had an extra week in 2017 compared to the comparable period in 2016. After adjusting for the extra week, comparable-restaurant sales were up 1.3% for the quarter, but that wasn't enough to prevent full-year comps from falling by 0.7%.

Hurricane impacts continued to have a slight influence on Chuy's. One restaurant remained temporarily closed for a portion of the quarter, costing the company about $0.01 per share in lost income. During the quarter, that location reopened and Chuy's also opened four new restaurants to help bolster future sales. New locations included the Houston suburb of Pasadena, the Chicago suburb of Schaumburg, the Atlanta suburb of Alpharetta, and Annapolis. That brought the total number of locations to 91.

Higher operating costs also continued to weigh on the Tex-Mex chain's profits. Labor, food, insurance, and utility costs were all higher, and inefficiencies related to the ramp-up period for new stores also contributed to higher expenses.

Can Chuy's do better in 2018?

CEO Steve Hislop was happy about the way the company finished 2017. "Our fourth quarter results were highlighted by double-digit growth in revenue," Hislop said, "and a return to positive comparable restaurant sales." The CEO also believes high-quality food and drinks will continue to help bring in loyal customers time and time again.

Looking forward, Chuy's still expects to open between eight and 12 new locations during 2018. Moreover, efforts to rein in costs of labor, along with greater marketing efforts, have the potential to dramatically improve the restaurant chain's profitability in the coming year and beyond. Chuy's will spend about $1.5 million on national marketing, as well as to-go packaging, online ordering, and catering.

Chuy's guidance for 2018 showed some optimism, as well. Net income of $1.12 to $1.16 per share would represent growth of roughly 25% to 30% compared to 2017 figures when adjusted for the calendar impact of the extra week in fiscal 2017. Comps growth of just 1% to 1.5% isn't terribly ambitious, however, suggesting some concern within the company that industry challenges could remain in place throughout the coming year.

Chuy's investors took the news in stride, and the stock was unchanged in after-hours trading following the announcement. The Tex-Mex chain will have to demonstrate that it can reach its full potential by continuing to expand across the nation, and shareholders hope that growing popularity for the Chuy's brand will drive a new wave of growth for the company.

Dan Caplinger owns shares of Chuy's Holdings. The Motley Fool owns shares of and recommends Chuy's Holdings. The Motley Fool has a disclosure policy.

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