Here's What Has Chuy's Investors Nervous About the Future

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Industries run into hot and cold spells, but the best companies find ways to navigate through the tough times and come out stronger than ever. For Tex-Mex restaurant chain Chuy’s Holdings (NASDAQ:CHUY), its expansion beyond its home market in the capital of the Lone Star State into new locations across the nation has been exciting. It’s also come with plenty of challenges, though, and shareholders in Chuy’s have had to endure rising competition and operational headwinds as the company tries to establish itself as a national player within a crowded space.

Coming into Thursday’s second-quarter financial report, Chuy’s investors wanted to see the company rebound from a poor showing three months ago. At first glance, the Tex-Mex chain’s numbers were a lot better this time around, but nervousness about a drop in its future guidance has many investors worried about whether further sustained growth is in the cards for the rest of 2018 and beyond.

Iron skillet with chicken and beef fajitas, with side trays of tortillas and cheese, sour cream, guacamole, and salsa.

Image source: Chuy’s.

Chuy’s spices things up — for now

Chuy’s second-quarter numbers showed some nice pick-ups compared to a sluggish first-quarter performance. Revenue climbed 13% to $106.3 million, accelerating from its 8% pace three months ago, and roughly matching the consensus forecast among those following the stock. Net income climbed a more impressive 23% to $6.5 million, and that produced earnings of $0.38 per share, $0.01 higher than what most investors were expecting from the Tex-Mex chain.

Chuy’s some saw recovery in key fundamental business metrics. Comparable-restaurant sales were higher by 1%, bouncing back from recent declines. Average check size was higher by more than 2%, which was enough to offset about a 1% drop in average weekly customer counts. Chuy’s also pointed to $11.8 million in incremental revenue from the 14 restaurants that have opened since this time last year as contributing significantly to its top-line gains.

Expenses held Chuy’s back. Operating costs climbed almost two percentage points in relation to total sales, with rising labor costs, marketing expenses, and rent payments all hurting the company’s bottom line. In addition, overhead costs were up 11% from year-ago levels, as management also took higher compensation.

Chuy’s kept reaching to boost the size of its national footprint. Two new restaurants opened in the greater Denver metropolitan area, specifically Greenwood Village and Lakewood. Florida was also the site of new locations, with one opening in New Tampa and another coming after the third quarter formally began in the Miami-area town of Kendall.

Can Chuy’s sustain growth?

CEO Steve Hislop was pleased with the return to positive comps and sees Chuy’s taking key steps to build up its future business. “We are excited about the initiation of our alliance with Kelly Scott Madison, a media marketing agency,” Hislop said, “which we believe will help us market our unique combination of food quality, value and atmosphere to a wider audience.” The CEO also pointed to online ordering development as a key step to give guests greater convenience in how they enjoy Chuy’s food and beverage offerings.

However, Chuy’s made some changes to its guidance that suggested further difficulties. New earnings projections for $1.09 to $1.13 per share were about $0.03 lower than its previous range, and the company now sees itself opening just nine or 10 restaurants this year, down from as many as a dozen. Lower tax rates of 10% to 11% will help cushion the blow somewhat, but comparable-restaurant sales growth will remain around 1%.

Chuy’s investors weren’t happy with that forecast, and the stock plunged 11% in morning trading Friday following the Thursday afternoon announcement. For shareholders to see their faith restored, Chuy’s will need to counter rising costs more effectively and get more substantial success from its marketing and advertising efforts as it works steadily toward building a coast-to-coast presence in the North American restaurant market.

Dan Caplinger owns shares of Chuy’s Holdings. The Motley Fool owns shares of and recommends Chuy’s Holdings. The Motley Fool has a disclosure policy.

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