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Key Takeaway

CHUY delivered a low quality beat AMC yesterday and offered up a slightly disappointing outlook for 2015.  We continue to believe CHUY will face issues as it seeks to backfill newer markets.  Given the inherent lack of restaurant level and operating margin leverage in the model, one blip could dampen the 2015 outlook.

CHUY: STAYING SHORT - 2

Low quality beat. While CHUY beat top-line estimates by $8 million and delivered in-line SSS of +3.8%, the overall quality of the print was rather weak as it came on the back of a lower than expected tax rate.  Even though it was the company’s 18th consecutive quarter of positive comparable sales, it’s important to recognize that 1) the majority of the underperforming 2013 class of stores are not in the comp base 2) CHUY took ~2.8% pricing and 3) unit level margins declined for the second straight year with no turn in sight.  This was not, by any measure, an impressive “beat” from CHUY and, remember, it comes at a time when the majority of restaurant chains are crushing it. 

Disappointing guidance looks like a stretch. Guidance of +2.5% comp growth in 2015 was a little disappointing, considering the street’s +2.7% estimate and the +2.5-3% pricing in effect.  Management also guided 2015 EPS in the range of $0.74-0.77 (street was at $0.77), while lowering their targeted new unit openings from 11-12 to 10-11, suggesting 17-19% year-over-year growth.  Though it’s a slight step down from 2014’s unit growth rate of 23%, it’s not enough to make us forget about the costs and dilution associated with these openings.  Let's briefly break down 2014: 23% unit growth, 20% revenue growth, 0% earnings growth.  We haven’t seen anything that would suggest a change in the fundamentals at Chuy’s, making 11% earnings growth on 18% revenue growth more a pipe dream than a reality.

Don’t expect restaurant level margin expansion anytime soon. On the call, management hinted that non-comp unit level margins were running in the mid to high single digit range, a far cry from those of the mature base.  While food cost inflation is expected to ease to +1-2% in 2015, labor costs are expected to add a bit of pressure due to increased training, staffing, and inefficiencies at non-comparable restaurants (particularly in 1H15).  ACA, another headwind, is expected to result in an incremental $500,000 expense.  Restaurant level margins have declined nearly 300 bps since FY12, when they were running close to 20.2%.  Incidentally, this is right around the time management began aggressively expanding the concept outside of its core Texas market.  Even with their altered strategic approach to restaurant development (focused on larger, denser locations), we believe the dilutive impact of this expansion on the P&L will continue to be quite noticeable.

CHUY: STAYING SHORT - 1