Many investors in Chuy's Holdings (NASDAQ:CHUY) hope that the Tex-Mex restaurant chain will be the next logical success story following the explosive popularity of Chipotle Mexican Grill (NYSE:CMG). Yet given how far Chipotle has come in such a short period of time, duplicating that chain's success is a tall order for any company. In its third-quarter report on Tuesday afternoon, Chuy's wasn't able to give growth investors the unparalleled revenue or earnings gains that they'd hoped to see, once more demonstrating that the Tex-Mex up-and-comer will have to follow its own path to success rather than riding on the coattails of Chipotle. Let's take a closer look at how Chuy's did last quarter and whether the restaurant chain has a chance at improving its results going forward.
Chuy's earnings: Coming in a bit bland
The headline numbers for Chuy's weren't all disappointing, as the company managed to post solid growth in overall revenue. Total sales climbed almost 20% to $64.1 million, and pre-tax operating income at the restaurant level posted gains of more than 13%. Yet comparable restaurant sales growth of 3% showed that Chuy's simply isn't in Chipotle's league in terms of attracting new customers to its existing locations, and net income growth of just 10% led to earnings per share of $0.19, a penny below what investors had expected to see from Chuy's.
Looking more closely at the results, Chuy's faces some true challenges. Average check size rose just 1.7%, and average weekly customers gained 1.3%. Moreover, operating costs rose by a full percentage point to 82.7% of revenue, with Chuy's having to pay higher labor costs, food costs, and utility costs.
CEO Steve Hislop didn't mince words with his explanation of the results, arguing that solid top-line growth remains attractive but that Chuy's "results continue to reflect near-term cost challenges related to commodities and the ongoing inefficiencies at our non-comparable restaurants." Given the pace of Chuy's expansion, about a third of its open restaurants have moved beyond what Chuy's calls the "honeymoon period" following their initial opening, where restaurants settle into their core customer base and lose some of the excitement surrounding a new location. As expansion continues, Chuy's will have to work harder to maintain its most loyal patrons while still encouraging new visitors.
What's next for Chuy's?
Chuy's did manage to open four new restaurants during the quarter, including one in San Antonio, one in the Houston suburb of Sugarland, one in the Atlanta-area city of Kennesaw, and one in Fairfax, Va. That brings the total of new locations for 2014 to 11. Looking forward, Chuy's will continue to emphasize building out a greater geographical presence in areas that don't necessarily already have exposure to the Tex-Mex chain's concept. Even though Chuy's recognizes that building brand awareness won't be as easy in these new locations, the company sees it as a necessary stepping stone toward having a nationwide reach in its restaurant network.
That said, of even greater concern to some investors than the immediate earnings shortfall was the guidance that Chuy's gave for the full 2014 fiscal year. The company cut its expected earnings per share range for the year by $0.09 and now expects EPS to come in between $0.67 and $0.69. Even though Chuy's expects slightly faster comparable-store sales growth than it did previously, gains of 2.7% to 2.9% still won't blow out the lights for the company. Moreover, higher food-cost inflation will add an extra 1% to 1.5% to what Chuy's pays for its ingredients, and labor costs, pre-opening expenses for new locations, and general overhead will all put pressure on Chuy's profitability.
Within the first hour after Chuy's bad news, the stock fell 8% in after-hours trading after the announcement. Even though the restaurant chain's results were somewhat disappointing, the share price has already fallen quite a bit from its highest levels, and arguably already reflects the uncertainty about its future growth trajectory. As much as investors would like to see greater same-store sales, Chuy's immediate future will require it to move forward with its aggressive store-count expansion plans. If those are successful, then Chuy's can hope to improve its engagement levels with its newest communities and drive further growth that way.