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A Strong Quarter Pushes Chuy's Guidance Higher

By Dan Caplinger - Updated Aug 9, 2019 at 9:12AM

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The Tex-Mex restaurant chain is building positive momentum.

Chuy's Holdings (CHUY -4.09%) has a reputation for serving some of the best Tex-Mex cuisine in the country. The Texas-based restaurant company has gone far beyond its routes, spreading its locations into dozens of states from Colorado and Illinois to Maryland and Florida. The ups and downs of the broader restaurant industry have affected Chuy's results along the way, but the company has worked hard to come up with a strategic vision that can lead to sustained growth.

Coming into Thursday's second-quarter financial report, Chuy's shareholders were expecting that continued labor cost pressures would likely bring about a modest earnings decline, even as sales growth remained solid. Chuy's results were better than that, and more optimistic guidance for the full year showed that the efforts the company has made are paying off.

Chuy's gets a boost

Chuy's second-quarter numbers were generally favorable. Revenue rose 6.4% to $113.1 million, which was more than $1 million higher than what most of those following the stock were expecting from the Tex-Mex chain. Adjusted net income rose at a 9% rate to $7.1 million, and that produced adjusted earnings of $0.42 per share, topping the $0.37-per-share consensus forecast among investors.

Plate with burrito, rice, and salsa.

Image source: Chuy's.

Fundamental performance for the restaurateur was reasonably good. Comparable restaurant sales were up 1.9%, which was slower than it was in the first quarter but better than results in several periods before that. Chuy's said that average check size jumped 3.9% over year-ago levels, but there was a 2% decrease in average weekly customer counts. Unfavorable weather conditions early in the quarter and the timing of the Easter holiday cost the company about a percentage point of comparable sales growth, with weather improving during the remainder of the quarter.

Costs remained a challenge for Chuy's, but the company did manage to make a dent in what's been the key headwind on the expense front. Labor costs were down almost a full percentage point as a percentage of total sales as Chuy's boosted labor efficiency at its new stores and was more cost-effective in its training of managers. That was enough to offset rising hourly labor rates, especially in certain higher-cost markets. New marketing initiatives raised promotional costs, and more expensive beef and produce prices outweighed lower costs for chicken, cheese, and other dairy products. Operating and occupancy costs also inched higher. Performance-based bonuses also boosted compensation costs for Chuy's.

Chuy's continued to expand. The company opened three new restaurants, including locations in Kentucky and Alabama along with another restaurant in Houston. After the quarter ended, a new Indiana-based location opened its doors.

What's ahead for Chuy's?

CEO Steve Hislop was pleased with how things have gone lately. "Through our focus on improving brand awareness and driving frequency in both newer and existing markets," Hislop said, "we delivered solid top line growth and positive comparable restaurant sales during the second quarter." The CEO noted that bottom-line gains were especially impressive given continued cost pressures.

Looking ahead, Chuy's seems comfortable with its strategic vision. In Hislop's words, Chuy's is "confident that the initiatives we've put in place related to targeted marketing, technology, off-premise sales, and labor, coupled with a disciplined development strategy, will give us the foundation to expand and further improve our profitability in the years to come."

In response to its quarterly results, Chuy's delivered increased guidance for the full year. The Tex-Mex chain now expects earnings to come in between $0.93 and $0.97 per share, up $0.02 from its previous range. The company still sees comps rising 1.5% to 2.5% and narrowed its expectation for network expansion to six locations for 2019, and most of its other guidance was little-changed.

Chuy's also increased the pace of its share repurchase program. The restaurant chain bought back 176,000 shares of stock in the second quarter at a cost of $3.9 million, which was more than double the amount it repurchased in the first quarter. That leaves $20.7 million for future repurchases under its current authorization.

Chuy's investors seemed to find the report encouraging, and the stock moved up by 2% in after-hours trading following the announcement. There's still plenty of room for improvement at Chuy's, but it's still nice for shareholders to see the company make progress toward its longer-term strategic goals.

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