Why I Shorted Chuy's Holdings Ahead Of Earnings

Aug. 5.14 | About: Chuy's Holdings (CHUY)

Summary

Chuy’s Holdings is priced for perfection.

If you pick apart the guidance, the forecast doesn’t call for much.

Other restaurant stocks are getting hit hard lately.

Chuy's Holdings (NASDAQ:CHUY) is a full service Mexican food restaurant change with the motto, "If you've seen one Chuy's, you've seen one Chuy's!" The goal of the chain is an "unchained" look and feel. To me, this seems silly. The company is sacrificing much of the benefits of being a chain - consistency, trust, uniform marketing, etc. I get that many consumers, myself included, like original décor and the enjoyment of a privately owned mom and pop restaurant where the owners put their heart and soul into the place.

But Chuy's is not privately owned, it is a chain, and we know the chain concept works very well for dozens of powerful restaurant chains. Why bother denying what you are? Embrace it.

Anyway, that's not the reason I'm shorting Chuy's for earnings after hours though I believe that silly business model may play long term into distracting management on all things. For the second quarter after hours report, analysts expect Chuy's to report $64 million in revenue and EPS of $0.22 which is flat versus a year ago. Uninspiring.

For the full year, analysts expect $0.80 per share. That's a P/E of 33 based on the current share price which isn't necessarily too high if a chain can show fast growth. For restaurants, there are two main ways to show fast growth: unit growth and same-store sales growth. Same-store sales are considered the more vital of the two because it shows the growing (or not) strength of a brand over time. High same-store sales growth can generally command a high P/E ratio. Please note: analysts have been on the money consistency when calling Chuy's earnings.

Last quarter Chuy's reported 4.2% in same-store sales growth. Not bad, but nothing to write home about. It guided for what comes out to between 1.5% and 2.0% same-store sales for the remainder of the year. Guess what? Chuy's raised the prices on its menu over the last year. Last quarter the average check was up 1.9%. This suggests the same-store sales guidance is only due to the menu price increase with possibly flat to down in actual guest traffic. That's not a strong indication of an increasingly popular brand that can realistically command a high P/E.

Other restaurant stocks such as Buffalo Wild Wings (NASDAQ:BWLD) have been reporting much higher growth yet getting killed with earnings. Buffalo Wild Wings even trades at a lower P/E, beat estimates across the board, and yet it fell by a double digit percentage following earnings.

The wild card is if Chuy's misses earnings. Bloomin' Brands (NASDAQ:BLMN) reported today earnings that missed by a couple of pennies and guided lower for the year. The stock is off by over 20%. I wouldn't be completely surprised if something similar happens to Chuy's. Twice in last conference call, CEO Steve Hislop said he doesn't have a "crystal ball" when referring to the future just this year. It seems like a strong analogy to make which says he lacks visibility with the business and perhaps maybe even fears weakness that he and the company can't see coming.

My short is admittedly highly speculative so my position is small. I don't think it's a bad company going out of business any time soon or anything like that - I just believe it is overvalued at this time and the market will correct that valuation.

Disclosure: The author is short CHUY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.