For 25 straight quarters, Tex-Mex restaurant company Chuy's Holdings (NASDAQ: CHUY) had managed to do something enviable: produce positive comparable-restaurant sales growth. Yet conditions have been extremely tough in the restaurant business lately, and coming into Tuesday's fourth-quarter financial report, Chuy's investors were concerned that a difficult industry environment could cause problems for the growing restaurant chain. Indeed, Chuy's saw its streak of comps growth come to an end during the quarter, and slower sales left some investors worried about the future.
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Let's look more closely at Chuy's Holdings to see how it did and what it sees ahead.
Image source: Chuy's.
Chuy's deals with disappointment
Chuy's fourth-quarter results showed some of the increased headwinds that the Tex-Mex chain has seen lately. Revenue was up just 11% to $79.1 million, which was slower than the 15% consensus forecast for top-line growth. Adjusted net income managed a 5% rise to $3.1 million, but the resulting adjusted earnings of $0.18 per share were flat from year-ago levels despite topping what most investors had expected to see by $0.01 per share.
Taking a closer look at the report, the most disappointing news came on the comparable restaurant sales front. Chuy's said that comps fell 1.1% for the quarter, continuing the deterioration that the Tex-Mex company has dealt with all year long. Average check size rose slightly, but a big drop in traffic pulled the restaurant's results downward. Chuy's said that unfavorable weather and the shift of Christmas to a weekend day had a substantial impact on comps, suggesting that the company might have managed at least a tiny increase had things gone more favorably. Overall growth relied on 16 new restaurants opened during the year, which provided $10.9 million in incremental revenue.
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Chuy's also continued to see difficulties in keeping its costs down. Operating costs as a percentage of revenue rose by 1.6 percentage points to 83.3%, and the restaurant chain said that higher labor costs due to new store labor inefficiencies and inflation in wages generally. Lower food costs weren't able to contain the rise elsewhere.
Expansion continued to play a role for Chuy's, but the winter pace was muted. Three new locations opened during the fourth quarter, including locations in Maryland, North Carolina, and Corpus Christi in Texas, bringing the year-end count to 80. Early 2017 brought two additional openings, including locations in Georgia and Texas.
CEO Steve Hislop tried to put a positive spin on Chuy's performance by focusing on annual results. "We grew our revenue over 15% during 2016," Hislop said, "drove positive comparable store sales for the seventh year in a row, and produced adjusted net income growth of 17%." The CEO also pointed to 12 new restaurants throughout 2016 in continuing the chain's push higher.
Can Chuy's bounce back?
Chuy's expects the pace of growth to accelerate in 2017. The company sees itself opening 12 to 14 new restaurants, with some expansions in existing markets while others extend Chuy's already impressive national footprint. Denver, Miami, and Chicago will all see Chuy's locations for the first time in 2017, and in Hislop's words, "We have a huge runway for growth ahead of us and remain excited about the long-term prospects of the Chuy's brand."
Yet Chuy's outlook for 2017 reflected ongoing concerns about the health of the industry. The company sees comparable restaurant sales growth of 1% to 2%, and adjusted earnings should come in between $1.11 and $1.15 per share. That's up just 3% to 7% from 2016's final figures, and the earnings guidance compares unfavorably to the $1.19 per share consensus forecast among those following the stock.
Investors weren't pleased with the results, and Chuy's stock plunged 7% in after-hours trading immediately after the announcement. Chuy's will have to find ways to recover from the difficult conditions that it's facing in the restaurant space right now. Despite its high-quality food offerings and pace of expansion, Chuy's will have trouble demonstrating its full potential until restaurant-goers finally get more excited about eating out again.
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Dan Caplinger owns shares of Chuy's Holdings. The Motley Fool owns shares of and recommends Chuy's Holdings. The Motley Fool has the following options: short April 2017 $30 puts on Chuy's Holdings. The Motley Fool has a disclosure policy.