Chuy Stores
Source: Chuy's.

Looking at the market for initial public offerings can give you a good sense of where the hot areas of the market are, and restaurant stocks were definitely in vogue when Chuy's Holdings (NASDAQ:CHUY) did its IPO. Since then, though, Chuy's has done a good job of holding onto its post-IPO gains, and many believe that the up-and-coming Tex-Mex restaurant chain has what it takes to take on its competitors and achieve the same status that Chipotle Mexican Grill (NYSE:CMG) has found in the fast-casual Mexican space.

Chuy's is still a small company, but it draws rabid fanaticism from thousands of dedicated customers in its core Texas market. Since going public in 2012, Chuy's has revealed plans to go well beyond its current geographical reach, seeking to open locations in new markets as well as filling out its footprint in places where it already has a presence. Yet even Chuy's has been vulnerable to rising cynicism among restaurant investors about whether too many companies went public without the fundamental strength to support their share prices. Let's take an early look at what's been happening with Chuy's over the past quarter and what we're likely to see in its report.

Stats on Chuy's Holdings

Analyst EPS Estimate

$0.20

Change From Year-Ago EPS

17.6%

Revenue Estimate

$64.58 million

Change From Year-Ago Revenue

21%

Earnings Beats in Past 4 Quarters

0

Source: Yahoo! Finance.

Can Chuy's satisfy its earnings-hungry shareholders?
Investors have gotten a little less optimistic about Chuy's earnings in recent months, cutting their third-quarter projections by $0.02 per share and their full year 2014 and 2015 estimates by double that amount. But that hasn't held the stock back, as shares have risen 5% since late July.

Chuy Rick Munarriz

Image source: Rick Munarriz.

Chuy's second-quarter results back in August showed some of the challenges that the company has faced lately. Revenue soared 18%, but most of those gains came from the chain's expansion, and same-store sales climbed at only a 2.4% rate from year-ago levels. Traffic climbed just 0.9%, and a 1.5% rise in average check sizes showed some of the limits on Chuy's growth. Rising operating costs held gains in adjusted operating earnings to below 6%.

Yet the appeal of Chuy's is that its chain format is about as un-chainlike as possible. Each local restaurant maintains the flavor of its surrounding community, making even restaurants within the same city vastly different. That helps to give Chuy's a fun atmosphere that caters to an attractively young demographic that has helped boost sales of higher-margin alcoholic drinks.

That said, investors need to understand that Chuy's is far from identical to Chipotle. Chuy's has a much slower pace than its fast-casual rival, more closely resembling other casual-dining restaurant chains. Moreover, the pace of Chuy's growth has been far slower than Chipotle's, and the breadth of Chuy's menu arguably leaves it more exposed to higher food costs, while its larger locations cost more in rent and other overhead.

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Source: Chuy's.

Nevertheless, the largest part of Chuy's growth trajectory lies in the future. As Fool analysts Andy Cross and Frank Thomas noted in their recommendation of Chuy's back in August, the company's aiming to almost double the number of locations across the country in the next few years, and eventually, Chuy's could grow from its current 60-restaurant footprint to have anywhere from 200-400 locations. That will leave it with only a fraction of Chipotle's existing store count, but it nevertheless could give Chuy's stock plenty of room for further growth.

In the Chuy's earnings report, investors have to look beyond headline numbers about overall growth, because ideally, the company will be able to produce accelerating gains in comparable-restaurant sales. Otherwise, Chuy's will have to rely entirely on its expansion for growth, and given some of the unfavorable trends in expenses, investors might have to endure share prices below their highs from earlier in 2014 for some time before the stock can resume its upward trajectory.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.