Down 30% Since May, Are Investors Giving Up on Chuy's Holdings?

Markets Motley Fool

The last couple of months haven't been kind to Chuy's Holdings (NASDAQ: CHUY) shareholders, with the stock falling from the low-$30 range in early May to around $22 at the time of this writing.

Continue Reading Below

Two downgrades from Wells Fargo and Wedbush cited worsening comparable-restaurant sales trends and falling margins as the company expands into larger, pricier markets, and they helped contribute to the steep drop. These analyst outlooks seem to call into question Chuy's belief that its comps can return to positive growth by the end of 2017.

Confirming what we already knew

Chuy's first-quarter results set the stage for these downgrades. The Tex-Mex restaurant chain posted its second straight quarter of sliding comps, driven by weak customer traffic. As a result, Chuy's lowered its full-year comps guidance to a range of 0.5% to 1.5%, down from a previous range of 1% to 2%.

Additionally, first-quarter restaurant-level operating margin fell by 1.3 percentage points, primarily due to higher labor costs. And Chuy's has noted that investors should expect higher costs for occupancy and wages as it pushes into bigger metro areas like Denver -- where it recently opened its first store -- and Chicago and Miami, where openings are planned later this year.

So in May, when Wells Fargo downgraded Chuy's from outperform to market perform, reducing its target price from $33 to $31 based on weak comps performance and rising costs, it wasn't exactly groundbreaking news. Wedbush's downgrade in late June -- from outperform to neutral -- also cited flagging same-store sales and margin pressures, and the analyst reduced its price target more drastically from $34 to $23. While the reasons given by the analysts aren't anything unexpected, a closer look at second-quarter trends provides a little more context for lowered expectations.

Continue Reading Below

The restaurant recession lingers on

The entire restaurant industry continues to struggle with falling traffic as fewer customers are choosing to dine out, and things don't appear to be improving. According to Black Box Intelligence, in April, average restaurant comps fell 1%, with traffic declines of 3.3%. And for May, industry comps fell an average of 1.1%, with traffic declines of 3%. The numbers in Texas (Chuy's largest market, with 35 of its 85 locations) were even worse, with comps and traffic declines in June of 2.4% and 4.3%, respectively.

CFO Jon Howie pointed out at a June conference that Chuy's comps slowdown began in Q2 2016, so the company should fare better as it begins to lap those weaker year-ago comparisons. Even so, with negative consumer traffic trends now extending well into the second quarter, one has to wonder whether Chuy's continued guidance for positive full-year comps is realistic.

To-go sales: one emerging bright spot?

One area where Chuy's has seen good growth lately is in off-premise dining, which already makes up around 11% of sales at stores in its comparable base (stores open at least 18 months). Off-premise sales have grown at double-digit rates for the past two years and were up another 8% to 9% in the first quarter. Believing this represents a large opportunity, Chuy's will be testing online ordering in the back half of 2017 and plans to roll that functionality out nationally next year. If successful, strong growth in to-go orders could at least begin to help compensate for the weakness Chuy's is seeing in sit-down dining.

While Chuy's may be correct that its recent comps troubles are a macro issue largely out of its control, that isn't likely to reassure shareholders who aren't seeing any signs of improvement on the horizon. Indeed, investors seem to have abandoned the stock as the hard reality of an extended period of falling customer traffic sets in.

10 stocks we like better than Chuy's Holdings
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Chuy's Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 5, 2017

Andy Gould owns shares of Chuy's Holdings, and 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.