In Chuy's Holdings' (NASDAQ: CHUY) third-quarter earnings release, hurricanes took center stage, impacting 36% of the restaurant chain's locations during the quarter. The company estimated that Harvey and Irma reduced revenue by $1.2 million, comps by 0.9 percentage points, restaurant-level margins by 0.45 percentage points, and earnings per share by $0.03. The company also lowered its full-year guidance as well.
In spite of all that, the stock is in positive territory since the report. What gives?
A year into their decline, comps haven't shown any improvement
Here are Chuy's last four quarters of shrinking comparable restaurant sales, along with the management's latest guidance:
This latest comps decline broke down into a 3.7% drop in weekly customers, partially offset by a 1.6% increase in the average check. As I've noted before, this isn't a problem unique to Chuy's. The industry at large has been struggling with falling customer traffic for a while now. Chuy's results were actually a bit better than the 2.2% decline in comps and the 4.1% decline in traffic that the industry saw on average this quarter.
Even excluding the effect of the hurricanes, comps are trending in the wrong direction. By my rough calculation, Chuy's wide range for full-year 2017 opens the possibility for fourth quarter comps to come in anywhere from a 2.2% decline to 3.8% growth. Clearly, management isn't feeling very confident about how it will perform in the current period.
Store-level margins are still dropping, too
Also concerning is restaurant-level operating margin, which fell over three percentage points to 15.9%. The company continues to see pressure on a number of fronts, including labor cost inflation, higher commodity costs, higher occupancy costs in larger markets, and new stores that are taking longer to ramp up to Chuy's margin targets. While Chuy's has enjoyed healthy full-year margins between 17% and 20% over the last five years, keep in mind that its blended restaurant-level margin target for new and mature stores is 15% to 16.5% -- so profitability is still on track.
However, if newer stores continue to fall behind schedule hitting benchmarks by the end of their "honeymoon period", this could create a continued drag on results. In general, falling comps and lower margins are a terrible combination -- as evidenced by Chuy's earnings per share, which declined roughly 30% year over year.
Why Chuy's stock may have already hit bottom
Despite these results, two significant developments have been pushing the stock higher. First, on the conference call, Chuy's noted that it had seen a substantial improvement in October, with comps that were "slightly positive".
Second, Chuy's authorized $30 million in share repurchases, roughly 8% of the current market cap. This is a move designed to appease shareholders who are confronted with a big slowdown in the company's expansion plans next year. Last quarter, the company lowered its "high teens" expectations for annual store growth to a range of roughly 9% to 13% for 2018.
The buyback leaves Chuy's options open. No debt will be needed to fund the repurchases, which are available through the end of 2019. At any point, if comps return to growth, the company can abandon the program and use the capital to refocus on new store openings. That's ultimately what shareholders like me would like to see, as a rapidly increasing store base can do wonders for revenue and earnings over the long-term. But for now, expect those growth plans to remain modest until traffic and comps start improving.
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Andy Gould owns shares of Chuy's Holdings. Andy Gould has the following options: short January 2018 $25 calls on Chuy's Holdings. The Motley Fool owns shares of and recommends Chuy's Holdings. The Motley Fool has the following options: short January 2018 $25 calls on Chuy's Holdings. The Motley Fool has a disclosure policy.