The restaurant industry has gone through tough times, and Tex-Mex specialist Chuy's Holdings (NASDAQ: CHUY) hasn't been able to buck the adverse trend among casual-dining establishments. Chuy's was resilient throughout much of 2016, even when some of its peers were already starting to see declines, but the Tex-Mex eatery finally succumbed to falling comparable-restaurant sales to start out 2017, and a repeat performance made some start to question Chuy's growth trajectory.
Coming into Thursday's second-quarter financial report, Chuy's investors were prepared for falling earnings, but they wanted to see considerable growth in revenue. Unfortunately, weakness in the bottom line came with slower-than-expected sales growth, as well, and the resulting cut in guidance for the remainder of the year is even more troubling for those who've counted on expansion to keep Chuy's financials looking better. Let's look more closely at Chuy's Holdings and what its latest results say about its prospects.
Chuy's makes it three in a row
Chuy's second-quarter results continued a number of troubling trends. Revenue gained just 7.5%, to $94.5 million, falling short of the 9% growth rate that investors had wanted to see. Net income fell by 8%, to $5.33 million, and that worked out to earnings of $0.31 per share, exactly matching the consensus forecast among those following the stock.
Taking a closer look at Chuy's report, the company suffered a third-straight quarter of lower comparable-restaurant sales performance. Comps were down 1%, accelerating from their decline in the first quarter of 2017.
Check size was actually up from the year-ago period, but a 2.4% drop in average-traffic figures dragged down Chuy's results. The timing of the Easter holiday had a minor negative impact on the figure, but not enough to have caused the loss by itself. Revenue gains came from the 14 new restaurants opened over the past 12 months that weren't included in the comparable-restaurant base.
Expense management remains a tough order for Chuy's. Operating costs rose nearly 10%, and labor and occupancy expenses grew at double-digit percentage rates, as well. Efforts to rein in overhead expenses weren't sufficient to prevent the hit to Chuy's bottom line, and the company cited repairs and maintenance, as well as utility costs, along with more expensive ingredients.
Investors didn't see any immediate impact from new restaurant openings. The chain opened a location in the Denver suburb of Westminster during the quarter, as well as other locations in Ohio and Kansas. After the quarter ended, the Chicago-area suburb of Warrenville got a Chuy's location, as well.
How can Chuy's improve?
CEO Steve Hislop simply reasserted Chuy's mission going forward. "Despite ongoing challenges in the restaurant industry," Hislop said, "we remain focused on fundamentals and execution at the store level to ensure we provide our guests with high-quality food and great service in an upbeat environment." The CEO also said it intends to make new efforts with marketing and social media to boost brand awareness.
Chuy's also said it would rein in expansion, with just 12 new restaurants during the year. The company also thinks it could cut its 2018 pace of openings to between eight and 12 restaurants. For investors who've wanted to see dramatic growth, the new strategy seems to imply a level of caution that's disturbing.
Cuts to guidance were painful for Chuy's investors. The Tex-Mex chain once again cut its comps predictions, now expecting figures between -1.5% and +0.5%, down from expectations for a 0.5% to 1.5% gain. The company also reduced its earnings guidance by $0.07 per share, now expecting between $1.04 and $1.08 per share on the bottom line, even though Chuy's intends to cut overhead expense by more than $1 million from previous expectations.
Chuy's shareholders were stunned by the news, and the stock dropped 10% in after-hours trading following the announcement. Without a clearer strategy for determining the optimal pace of growth for the Tex-Mex chain, Chuy's is leaving investors wondering whether there might be another shoe to drop in the future.
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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 October 2017 $30 puts on Chuy's Holdings. The Motley Fool has a disclosure policy.