2018 has been an up-and-down year so far for Chuy's Holdings (NASDAQ:CHUY). The Tex-Mex restaurant chain's expansion has continued to sweep the country, but tough conditions like rising labor costs and intense competition have prevented the Austin-based company from achieving its full potential, and some investors are getting a bit impatient to see better results.
Coming into Tuesday's third-quarter financial report, Chuy's shareholders were looking for extremely strong gains in earnings driven by solid sales numbers. Chuy's wasn't able to come close to showing the performance that its investors had hoped for, and some of the reasons the restaurant chain gave for its lackluster results neither satisfied skeptics nor reassured them that better times are coming soon. Moreover, a change in strategy suggests that Chuy's might well be giving up on some of its biggest dreams.
Chuy's stumbles through a tough summer
Chuy's third-quarter numbers were discouraging. Revenue was higher by less than 10% to $101.2 million, falling well short of the 13% gains that those following the stock had wanted to see. Adjusted net income of $3.49 million was up an even weaker 9% from year-earlier levels, and the resulting adjusted earnings of $0.20 per share couldn't come close to matching the $0.29-per-share consensus forecast among investors.
Fundamentals spelled trouble for Chuy's. Comparable-restaurant sales were up just 0.5% from the year-ago period, even after making allowances for a change in the fiscal calendar. Without that adjustment, comps would have dropped 0.4%. What's especially disappointing about those numbers is that last year's third quarter saw massive disruptions coming from Hurricanes Harvey and Irma. Yet Chuy's said that poor weather conditions during this year's third quarter, which included both heavy rains in Texas and Hurricane Florence in the Southeastern U.S., were even worse than Harvey and Irma's downward pressure last year. In particular, Chuy's said that patio sales plunged 18% because of the bad weather, taking away a major source of revenue for the Tex-Mex chain.
Operating costs also continued their troubling climb. Total costs as a percentage of revenue jumped nearly 2 percentage points to 86%, with labor, insurance, marketing, and occupancy costs all contributing to the rise. A boost in the costs of deliveries also weighed on Chuy's bottom line, and efforts to cut overhead at the corporate level had only mixed success.
Chuy's did celebrate a milestone, opening its 100th restaurant location just after the end of the quarter. Two new Florida locations in the greater Miami area opened during the summer months, and an additional location in Houston as well as a new restaurant in the Kansas City suburb of Overland Park completed Chuy's development plans for the calendar year.
Why Chuy's sees slower growth ahead
CEO Steve Hislop couldn't be entirely positive about Chuy's performance. "Despite top-line improvement," Hislop said, "we experienced a challenging third quarter as we continued to face industrywide labor cost pressure and heavier rainfall than normal that resulted in the wettest September in history in most of our core Texas markets."
Chuy's does hope that it can pull out of its tailspin. In the CEO's words, "We are encouraged that our new market efforts that are being tested in November and December will build added awareness and frequency and set us up well for successful execution in 2019."
Yet Chuy's once again cut its guidance, making it hard for investors to feel optimistic. New projections slashed the restaurant chain's full-year earnings range by more than $0.20 per share, with new figures of just $0.88 to $0.92 per share. Comps will come in just flat, down from previous guidance for a 1% gain, and the company will make do with just nine new restaurants rather than 10 for 2018.
Even worse, Chuy's reined in its expansion plans for 2019. Now, the chain expects to open just five to seven restaurants next year. The company hopes that the pause will help it concentrate on boosting labor efficiency, adding technology, and otherwise looking to improve profit margin figures. Yet investors fear that the slowdown will end up being longer-term in nature than Chuy's is suggesting.
Chuy's investors hated the news, and the stock plummeted 24% in after-hours trading following the announcement. Until the Tex-Mex chain can make its financial results look as good as its queso, Chuy's will have trouble reassuring its shareholders that better times are still ahead.