Management from Tex-Mex restaurant chain Chuy's Holdings (NASDAQ: CHUY) hit the road in June, making a pair of investment conference appearances. Despite two straight quarters of declining comparable restaurant sales, CFO Jon Howie appeared confident in the company's future growth plans, saying that despite the challenging environment for restaurants right now, the company has no plans to dial back on its pace of expansion. From preserving margins in high-wage markets to the company's ultimate store count potential, here are the key takeaways.
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Despite recent comps performance, the sky isn't falling
Chuy's continues to believe that its recent comps declines are a macroeconomic issue, rather than anything restaurant-specific, noting that the entire industry is still struggling with falling customer traffic. The company has beaten Knapp-Track (a market research and analysis provider) industry same-store-sales averages for the past seven years, with that trend continuing into the first quarter. And Howie noted that back in 2008 and 2009, Chuy's was one of the last restaurants to succumb to the recession and one of the first to return to comps growth.
The company doesn't want to rely on discounting and promotions to drive traffic. However, Chuy's did roll out a corporate dining frequency program with Dinova in mid-May, and recently launched a social media campaign to build awareness around the freshness of its ingredients. Additionally, the last two quarters were up against some pretty tough year-ago comparisons of 3%+ comps growth. Over the next two quarters, Chuy's should have a much easier hurdle to clear with year-ago comps growth of 0.3% in the second quarter and a 1.1% decline in the third.
All of this leads Chuy's to believe it can return to positive comps later this year. The company is guiding for 2017 comps growth of 0.5% to 1.5%. Longer term, Howie said the company will be looking for 1.5% to 2% yearly comps growth. As Chuy's plans to continue taking around a 1.5% annual price increase, this means the company needs only modest traffic growth (or at the very least, flat traffic) to get back on track. Howie remarked that while there are a lot of factors involved, achieving a 2% or so comps number should allow Chuy's to maintain, and maybe even grow, its margins.
A simple plan to preserve profit margins
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Chuy's regularly posts impressive restaurant-level operating margins. Stores open more than 18 months averaged restaurant-level margins of 21.1% last year, with margins for all stores clocking in at an average of 19.3%.
I've written before about how Chuy's expansion into larger, pricier markets has the potential to ding margins, particularly due to higher rent expenses and wages. With the company just opening its first restaurant in the Denver area, and openings in the Chicago and Miami markets planned later this year, this has been an area of analyst concern on recent conference calls.
Chuy's simple solution was to create a tiered approach to menu pricing. With four tiers of prices now established, Howie says the company should be able to neutralize the differences in restaurant-level margins regardless of location, as higher wages and other expenses in certain markets will be offset by higher prices. While this means you'll pay more for your Elvis Presley Memorial Combo in, say, Chicago than you will in Little Rock, Chuy's believes it will still offer excellent value relative to other local dining options.
When it comes to store growth, think big ... like 4x big
Chuy's ended 2016 with 80 stores, with about half of those in the company's home state of Texas. So far this year, they've opened five additional locations, targeting a total of 12 to 14 this year. Howie indicated that as long as the company can keep finding attractive sites and quality managers to run new stores, there's no reason to hit the brakes on store growth. And though management continues to talk of doubling the store base in five years or less by growing its locations at an annual rate of 15% to 20%, Chuy's believes it's still just scratching the surface of its long-term potential.
Howie also discussed how the company thinks it can eventually build a total of 350 stores in the U.S. Once it gets to that number, there may possibly still be room for another 100 or so locations down the road. As an example of a mature Chuy's market that continues to offer expansion potential, he noted that even Austin was once thought to be just a four-store market, but the company is already planning for seven total locations there.
Don't mess with Tex-Mex success
Otherwise, despite the traffic headwinds in the industry, management doesn't plan on doing anything "rash". So long as diners start returning to restaurants relatively soon, that seems like the proper strategy. With store-level revenue and margin continuing to meet or beat company targets, and a long runway for future store growth -- not to mention the company's ability to fund new stores without taking on debt -- if comps return to growth later this year, Chuy's steady-as-she-goes expansion story should begin to look mighty tempting to investors once again.
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Andy Gould owns shares of Chuy's Holdings. Andy Gould has the following options: short October 2017 $30 puts on Chuy's Holdings. The Motley Fool owns shares of and recommends Chuy's Holdings. The Motley Fool has the following options: short October 2017 $30 puts on Chuy's Holdings. The Motley Fool has a disclosure policy.