New Best Idea: Short CHUY

Takeaway: We’re hosting a flash call, Wednesday, Oct. 27th at 11:00am EST. Dial-in details and associated materials to follow.

We’ve covered the majority of our shorts in the casual dining space, but remain bearish on a select few stocks.  Today, we’re adding one of these names, CHUY, to the Hedgeye Best Ideas list as a short.


Three Key Points:

  1. In addition to being phonetically challenging, the Chuy’s brand is having difficult generating awareness is new markets.  The street is assuming that other states will be able to produce the same levels of revenues and returns generated in its core market (Texas) as it pursues its nationwide expansion plans.
  2. The issues associated with a disappointing 2013 class of restaurants are not a one quarter issue.  In fact, AUVs have declined every single quarter since 4Q12, a trend we believe will persist for the balance of 2015.  The concept has already proven it doesn’t travel well, suggesting growth expectations are being overvalued in the marketplace today.  Considering an onslaught of new, underperforming restaurants, the cost structure of the company is deleveraging.  This, coupled with increasing food and labor costs, likely means that more margin deterioration is on the way – precisely what the street is missing.
  3. Trading at 33x consensus NTM EPS, CHUY is currently one of the most expensive publicly traded casual dining stocks.  The company has maintained a premium valuation despite declining AUVs, returns and consensus EPS estimates.  Furthermore, we believe 2014 and 2015 earnings estimates are too high, which would imply this 33x multiple is closer to 39x by our estimates.  We see 30-40% downside in this name and believe 3Q14 earnings will be the catalyst the shorts are looking for.


CHUY has been on our Long Bench for the majority of 2014, until recently when we spotted several disconnects between the street’s expectations and reality.  For this reason, we believe the current issues the company faces will take longer to correct than most are giving them credit for.  At 39x NTM EPS, we believe there are too many risks in the current business, and the future of the business, to support such a multiple.  Importantly, we believe 3Q14 earnings will be the downside catalyst shorts are hoping for.


Our short thesis focuses on the following:

  • Disappointing new unit productivity
  • Cash burn necessitates the current new unit growth rate
  • Rampant support from the biased bulls (read: high expectations, aggressive estimates)
  • Significant insider selling
  • Strong sell-side sentiment and unjustified premium multiple
  • Significant food inflation (dairy, beef, avocados, produce)
  • Overly optimistic consensus food and labor cost assumptions in 2H14
  • A lack of leverage in the business model considering higher year-over-year G&A, D&A and pre-opening spend
  • Aggressive 2H14 and 2015 EPS estimates
  • Approximately 30-40% downside to the name


We’re in the early stages of this earnings season and, so far, we’ve seen bigger casual dining chains posting slightly stronger sales trends than a year ago.  While this trend is important to consider, some of this sales growth is coming at a significant cost to margins.  To that extent, Wyman Roberts, CEO of Brinker, recently said on the company’s earnings call: “If you look at NPD numbers 12 months rolling August, the category hit the highest deal rate that it’s ever hit, and some players in there are reaching some pretty aggressive numbers.”


So while gas prices may be helping the macro picture, it’s undoubtedly difficult to gauge the impact that increased discounting is having on several players in the industry.  What we do know, however, is that discounting is never good for margins.


Chuy’s looks to be one of the promising companies that can beat on the top-line, however, we suspect it will miss on margins and earnings.  The bulls on CHUY will likely point to stronger industry trends and the unexpected price increase management enacted sometime in September (we believe) to help mitigate the margin pressure the company is facing.  While both of these may likely occurred in the quarter, it will not be enough to save it. 


The underperformance of new units, in addition to lower margins, puts the company in a difficult spot, increasing the need for the company to tap the capital market in order to deliver on aggressive unit growth plans.  Over the past 12 months, capital spending has grown by 29%, while the cash burn has more than doubled to $12 million.


From a sentiment standpoint, one issue of concern on the short side is the 18% of short interest.  The average casual dining chain is running closer to 9.8%, so Chuy’s issues are fairly widely known.  Given the massive declines we’ve seen in restaurant stocks this year (with higher short interest) and the fact that insiders have been selling shares faster than gazelles, we believe the short side is a much better place to be.


We look forward to sharing more with you on the call.


Howard Penney

Managing Director


Fred Masotta



Takeaway: We expect a beat and a more positive tone from management regarding capital return to shareholders

Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow


Please see our note


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Cartoon of the Day: It Is Fall After All

Cartoon of the Day: It Is Fall After All - falling leaves cartoon 10.27.2014


It’s the season for #Quad4, which means both growth and inflation are slowing.


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Real-Time Alerts Description

Hedgeye CEO Keith McCullough takes you through all the features of our Real-Time Alerts product.




The Hedgeye Macro Team will be hosting a conference call tomorrow (Tuesday, October 28th at 11:00am EDT) on two misunderstood but heated topics in the energy space:

  1. The technological advances in oil and gas extraction from shale resources and its impact on the marginal cost of tight oil and shale gas production
  2. The opportunities and obstacles for U.S. participation in global LNG trade

On the call, we will be joined by specialist Leonardo Maugeri, former executive of Eni S.p.A., Italy's largest energy company. Dr. Maugeri is currently an associate with the Geopolitics of Energy Project and the Environment and Natural Resources Program at the Harvard Kennedy School's Belfer Center for Science and International Affairs.



  • Dispel the un-factual conclusions creating the wide variance in perceived production costs associated with U.S. shale plays with an analysis of the wide differences in production costs within just one shale play (regional analysis within Bakken). As a whole, consensus underestimates the technological and logistical advancement of oil and gas extraction from shale resources.
  • U.S. LNG is the most competitive of any non-traditional source globally, but because of all the essential infrastructural and logistical investments that must take place, current natural gas prices are a large burden for private investment.



  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 494176#
  • Materials: CLICK HERE (slides will be available approximately 1 hour prior to the call)

Ping  for more information.




Dr. Maugeri is currently an Associate for the Environment and Natural Resources Program at Harvard's Geopolitics of Energy Project. He is also executive director of the board of Vitale&Associati, an Italian investment bank, and chairman of Ironbark Investments, a U.S. based investment fund.


Prior to his current post he held the title of Executive Chairman of Polimeri Europa, Eni's Petrochemical Branch, from March 2010-June 2011. Before Polimeri, Dr. Maugeri spent eight years as Senior Executive Vice President of Strategies and Development at Eni S.p.A. from 2000-2010.


Dr. Maugeri has gained recognition for researching and predicting the shale gas and tight oil boom In the early 2000s. He has written four books on energy including the following:

  • The Age of Oil: the Mythology, History, and Future of the World's Most Controversial Resource
  • Beyond the Age of Oil: The Myths and Realities of Fossil Fuels and Their Alternatives

In addition to his involvement in the Geopolitics of Energy Project, he is a member of MIT's External Advisory Board, an International Counselor of the Center for Strategic and International Studies (Washington, D.C.), a member of the Global Energy Advisory Board of Accenture, and a senior fellow of the Foreign Policy Association (New York). 


Macro Team


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