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What Slowed Chuy's Down to Start 2018?

By Dan Caplinger - May 8, 2018 at 9:41PM

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The Tex-Mex specialist continued to struggle.

As an investor, it's always hard when a company you love doesn't see things go its way. I ate at Tex-Mex chain Chuy's Holdings (CHUY 3.38%) original Austin locations hundreds of times during my time in Texas' capital city, and eating at not one but two of its Houston-area restaurants on a recent trip to my hometown was a highlight of my time there. Yet despite my own contributions toward boosting Chuy's sales performance, the company's broader fortunes have remained mixed, and a brutally competitive restaurant industry has made it hard for Chuy's to keep itself moving forward despite its ambitious expansion efforts.

Coming into Tuesday's first-quarter financial report, Chuy's investors were prepared for some earnings pressure but wanted to see solid sales performance. Chuy's wasn't able to deliver even on those modest hopes, and the poor results left many wondering exactly what's behind the Tex-Mex chain's difficulties. Without a quick answer, it'll be difficult for Chuy's to get itself back into position to grow more strongly.

Steak and chicken fajitas on an iron skillet, with tortillas, salsa, cheese, guacamole, and sour cream on the side.

Image source: Chuy's.

Tough times for Chuy's

Chuy's wasn't able to duplicate the strong performance it saw in the fourth quarter of 2017 to start 2018. Revenue growth slowed to just 8%, and the $93.9 million in sales was a bit less than most of those following the stock had expected. Net income fell a steeper-than-expected 30% to $3.2 million, and earnings of $0.19 per share missed the consensus forecast among investors for $0.22 per share on the bottom line.

Sales were weak partly because of calendar effects. Yet that hit was only about $1.4 million, accounting for between one and two percentage points of growth. Either way, comparable-restaurant sales felt the pain, falling 1.5% on a fiscal basis and 0.6% on a calendar basis. Chuy's blamed the shortfall on a combination of bad weather, the timing of the Easter holiday, and the cannibalization inherent in its strategy of expanding in markets in which it already has a presence. In total, those factors cost the company about 1.7 percentage points of potential gains in comps.

Cost issues also continued to weigh Chuy's down. Restaurant operating costs as a percentage of total sales jumped nearly three percentage points. The main culprit was labor costs, as the company has had to deal with wage inflation in markets in which it already has a presence, as well as relatively high hourly rates in the new markets that it's entered more recently. National-level marketing efforts are also putting more pressure on its advertising budget, and rental costs on leased locations have also climbed.

Nevertheless, Chuy's expansion efforts continued. The restaurant chain opened two new locations during the quarter, including one in the Miami suburb of Doral and one in the Chicago-area suburb of Orland Park. After the end of the quarter, Chuy's opened two more restaurants, one near Denver and the other near Tampa.

What's ahead for Chuy's?

CEO Steve Hislop tried to stay upbeat. "While our first quarter results reflected multiple weather interruptions, a negative impact from the timing of Easter, and the loss of the week after Christmas, which is our highest volume and most profitable week of the year," Hislop said, "we continue to reaffirm our earnings per share guidance for the year." The CEO said Chuy's has seen favorable conditions in underlying sales trends that it believes should continue into the current quarter.

Chuy's did make a few changes to its guidance. Although it left its earnings projections unchanged at $1.12 to $1.16 per share, the company now expects comps to grow about 1% during 2018, which is the lower end of its previous range. Effective tax rates will be just 13% to 14%, and Chuy's still sees itself on track to open between eight and 12 restaurants for the year in total.

Chuy's investors didn't react much to the news, and the stock remained unchanged in after-hours trading following the announcement. Yet the company can't afford to see falling comps for very long before shareholders will start to worry that Chuy's simply can't live up to its ambitious plans to dominate the Tex-Mex restaurant industry nationwide.

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