Chuy's Gets a Bit Spicier, But Will It Deliver in 2015?

Source: Chuy's.

Last year was a tough one for shareholders in Chuy's Holdings , as the Tex-Mex restaurant chain didn't produce the strong growth that most investors wanted to see. Coming into Monday afternoon's fourth-quarter financial report, Chuy's investors were looking for signs of accelerating growth as a potential basis for a share-price rebound. As it turned out, Chuy's did manage to boost its sales, but earnings growth remains elusive for the restaurant company. Let's take a closer look at how the quarter went for Chuy's and what you should expect for 2015.

Mixed results for Chuy'sChuy's headline results show the tug of war going on at the Tex-Mex chain right now. Revenue jumped almost 22% to $61.8 million, almost exactly matching the growth that investors were hoping to see. But most of that gain came from the new restaurants that Chuy's opened during and after last year's quarter. On a comparable-restaurant basis, sales climbed 3.8% during the quarter, up from 3% in the previous quarter but still at a relatively sluggish pace compared to some of the company's competitors. Net income slumped, falling almost 6% from the year-ago quarter, but earnings of $0.14 per share were still a penny ahead of the consensus forecast.

One problem that Chuy's is having is attracting new customers into the fold. Chuy's average check size rose by 2.8%, which was more than a percentage point higher than in the third quarter. But the average weekly customer count rose by only 1%, reflecting a slower pace of growth.

Elvis plays a key role at Chuy's. Source: Chuy's.

In addition, overhead costs weighed on the company. Chuy's reported a two percentage point increase in operating costs to 84.4% of revenue. The company cited higher food, labor, and occupancy costs. Reduced liquor taxes in Texas weren't enough to fully offset rising prices elsewhere.

CEO Steve Hislop pointed to the positives of Chuy's performance. "We're pleased with the continued momentum of our core business," Hislop said, as "[w]e continue to focus on initiatives to drive sales and improve margins." With Chuy's having opened 11 new locations during 2014, the company has stayed on target with its measured pace of growth.

How does 2015 look for Chuy's?Chuy's guidance, though, isn't full of optimism. In its 2015 outlook, Chuy's is looking for comps growth of just 2.5%, decelerating from 2014's already slow pace and making it even more important for the chain to keep up its pace of restaurant openings. Earnings guidance of $0.74 to $0.77 per share is also on the low end of what investors were expecting from the Tex-Mex restaurant chain.

Source: Chuy's.

That said, Chuy's isn't doomed to a poor year this year. The company plans to open 10 or 11 new restaurants for 2015, and it has already opened two in the first two months of the year, with one location in Texas and one in Florida. Hislop also pointed to Chuy's strategy "to increase focus on new unit growth in larger densely populated markets" as the key to its boosting its geographical presence and solidifying its overall growth plans.

In addition, the underlying story behind Chuy's potential success remains intact. The restaurant chain offers a festive experience that's appealing to customers of all ages, and its price point is reasonable enough to give its patrons an affordable meal while also giving Chuy's the potential to boost its menu prices in the future. Chuy's would probably prefer to hold off on dramatic price increases until it starts growing its customer base more rapidly, but it still has the flexibility to consider menu moves that many of its competitors don't have the luxury of doing.

Chuy's shares were volatile in the first 45 minutes of after-hours trading following the announcement, initially dropping as much as 2% but then rising as much as 5%. Those oscillations reflect the huge uncertainty that investors have about the pace of Chuy's future growth. With relatively weak comparable-restaurant sales, Chuy's will rely almost entirely on expanding its restaurant base in order to grow, and that leaves the company exposed to the risks that new markets won't take to the Tex-Mex concept as well as its well-established restaurant areas have. Still, if uncomfortably high food price inflation finally moderates or even reverses itself, it could give Chuy's a much easier time of hitting its guidance and hopefully giving investors a positive surprise.

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