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Chuy's Still Needs to Spice Things Up

By Dan Caplinger - Updated Apr 11, 2019 at 9:00PM

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The Tex-Mex restaurant chain's earnings are moving in the wrong direction.

Patrons are used to getting spicy-hot food and ice-cold drinks from Chuy's Holdings ( CHUY -3.16% ) restaurant locations. Unfortunately, investors in the Tex-Mex restaurant chain haven't gotten the same treatment lately -- and there are increasing signs that shareholders are losing patience with the Austin-based company's efforts to fulfill a long-range strategic plan aimed at ongoing growth and expansion.

Coming into Thursday's fourth-quarter financial report, Chuy's shareholders were prepared for falling earnings but they wanted to see modest sales growth and encouragement about the restaurant-company's prospects for 2019. Chuy's wasn't able to reassure its investors completely on those fronts, and tough conditions might well continue for quite a while into the future.

Check out the latest earnings call transcript for Chuy's.

Burrito with rice and salsa.

Image source: Chuy's.

Revenue growth slows to a standstill as earnings weaken

Chuy's fourth-quarter numbers continued some of the ugly trends that the company has seen recently. Sales came in at $96.8 million, up by less than 1% from year-earlier levels and failing to match what most of those following the stock had expected. Adjusted net income of $1.85 million was down sharply from the $3.18 million Chuy's had last year, and the resulting adjusted earnings of $0.11 per share missed the consensus forecast among investors by $0.01 per share.

Chuy's again had to struggle through tough fundamental conditions. Comparable-restaurant sales climbed only 0.9%, with the restaurant chain pointing to unfavorable weather conditions throughout the fourth quarter that were only partially offset by the more favorable timing of the New Year's Eve holiday. The Tex-Mex chain also said that an extra week in the year-earlier quarter contributed somewhat to the sluggish numbers on the bottom line, but it still believes that the impact wouldn't have been enough to create earnings growth year over year.

The restaurant chain also kept experiencing cost pressures. Total operating costs in proportion to overall sales jumped 3 percentage points, to 87.2% in the quarter, with higher labor, utility, insurance, repair, maintenance, and occupancy costs all weighing on the expense figure. Only lower training expenses for Chuy's manager team helped to cushion the blow.

Chuy's also took a pause in its expansion plans. The company did open two new locations during the period, but investors already knew about those locations from last quarter's financial report. That kept the Chuy's restaurant network squarely at 100, with locations ranging from Annapolis to Miami and from Chicago and Denver to El Paso.

Can Chuy's get moving in the right direction again?

CEO Steve Hislop tried to keep a longer-term perspective. "While 2018 was a challenging year for the industry," Hislop said, "it was also a year of accomplishments, as we successfully laid down the foundation to further our operational excellence and generate healthy top-line growth in the years to come." The CEO pointed to Chuy's new marketing campaign, improvement in its online ordering system, and implementations of catering services as potential drivers of growth for the future.

However, Chuy's seems to recognize that its past pace of expansion isn't sustainable. The company still believes that it will open five to seven new stores during 2019, but the plan is to fill in locations within existing markets rather than moving into new territories. That's especially disappointing for would-be patrons like me, who still lives nearly 400 miles from the nearest Tex-Mex restaurant location.

Guidance for 2019 was also somewhat discouraging. Earnings of $0.91 to $0.95 per share would mean that Chuy's would claw back less than half of the profits it gave up between 2017 and 2018. With comparable-restaurant sales gains of just 1.5% to 2.5%, Chuy's expects the headwinds affecting its business to continue well into the coming year.

Chuy's investors weren't happy with the report, and the stock dropped 6% in after-hours trading following the announcement. Given how well other restaurant companies are doing in this particular niche, the excuses for Chuy's challenges are starting to grow old, even for those who believe in the company's overall mission.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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