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Chuy's Jumps on Unexpected Earnings Gains, Predicts Solid 2016 Growth

By Dan Caplinger – Mar 1, 2016 at 4:50PM

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The Tex-Mex restaurant chain is moving forward with expansion plans and finding traction with its customer base.

Image: Chuy's Holdings.

Among Tex-Mex fans, Chuy's Holdings (CHUY 1.52%) has a strong following in its home state of Texas. Some questioned whether the concept would translate outside the Lone Star State, but Chuy's has gone on an expansion spree that has put doubters to shame. Coming into Tuesday's fourth-quarter financial report, Chuy's investors were prepared for an expected modest decline in earnings, but the Tex-Mex restaurant chain instead managed to send its bottom line higher. Let's take a closer look at how Chuy's Holdings did during the quarter and what it sees coming down the road in 2016.

Chuy's Holdings gets a little spicier
Chuy's fourth-quarter results were better than most of those following the stock had expected. Revenue climbed 15% to $71 million, which was slightly better than the $70.4 million consensus forecast among investors. Adjusted net income, however, provided the real surprise, gaining 29% to $3 million. That produced adjusted earnings of $0.18 per share, which topped estimates by a nickel per share and defied calls for a slight decline.

A closer look at Chuy's results showed continuing progress for the Tex-Mex specialist. Comparable restaurant sales rose 3.2%, slowing from the pace of growth in the third quarter but still representing a solid gain. Customer counts were once again lackluster, staying flat from year-ago levels, but a rise in the average check sent comps higher. Chuy's also pointed to calendar issues in explaining some of the pressure on comps, arguing that the shift of Halloween from Friday to Saturday and Christmas from Thursday to Friday cost cost the company more than half a percentage point in comparable sales.

Chuy's expansion continued during the quarter. The company opened four new restaurants during the quarter, adding locations in Alabama, Ohio, and Florida. Since the end of the quarter, an additional Virginia location opened, and that brought the total store count to 70.

Chuy's was also able to control its expenses. The restaurant chain said that operating costs fell by nearly three percentage points, with lower food costs coming from cheaper chicken, grocery, and dairy items. Labor costs also fell because of increased efficiencies. Higher occupancy costs offset some of the gains, but overall, Chuy's has worked hard to keep its profit margins moving in the right direction.

CEO Steve Hislop was happy with Chuy's performance in 2015. "We successfully expanded our store base 17% with the addition of 10 new Chuy's locations during the year," Hislop said, "and while it's still early, we are very pleased with the initial results of this class." The CEO believes that continuing to bring Tex-Mex food to a wider audience will have appeal well into the future.

How 2016 looks for Chuy's
Chuy's set reasonably high expectations for growth in 2016. The company expects earnings to come in between $1.01 and $1.05 per share this year, which would represent growth of 8% to 13% from 2015 levels. The Tex-Mex chain is looking for comparable restaurant sales growth at 2%, and it hopes to open between 11 and 13 new locations during the calendar year.

What some might find confusing, however, is that Chuy's chose to take an asset impairment charge during the quarter. The company said that the $4.4 million pre-tax charge was related to three restaurants. In general, restaurant operators take such impairments when they decide that a restaurant location is suffering negative cash flow. Essentially, if the carrying value of the restaurant on Chuy's books exceeds what it estimates as its future cash flow, then the impairment charge is taken to reflect the true fair value of the restaurant. As Chuy's has said in past annual reports, weakness in certain markets -- especially those affected by the energy downturn -- could lead to such impairments.

Despite the impairment, Chuy's investors were pleased with the report, and the stock soared 7% in after-hours trading following the announcement. As long as Chuy's can keep growing, investors seem ready to bid its shares upward.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chuy's Holdings. 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.

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