Chuy's Holdings, Inc. - Can They Sustain Their Fine Record?

| About: Chuy's Holdings (CHUY)

Summary

The results have been stellar and the balance sheet is bullet proof.

Long-term growth prospects remain excellent, though traffic is hard to build.

The stock "fairly values" the positive outlook, so we await a buying opportunity.

Chuy's Holdings, Inc. (NASDAQ:CHUY) reported earnings about two weeks ago, exceeded analyst estimates, the stock increased the week after and has retraced back to the starting point, most likely in tune with the general consolidation in the restaurant group. While CHUY is one of the more highly valued restaurant companies, their record largely justifies it, and the key question at this point is whether they can maintain their consistency of performance.

CHUY: The Company

Chuy's Holdings, Inc. is a fast growing Austin, Texas-based full-service restaurant chain featuring freshly-prepared Mexican and Tex-Mex fare. As of the end of 2015, it operated 69 stores in mostly suburban locations in 14 states, with 30 in its home state and the remainder throughout the South eastern states and into the Virginia suburbs of Washington DC, Ohio and Indiana. The company targets 20% annual growth, making the jump from a regional chain to a national one despite encountering challenges in entering some secondary markets.

With its 2015 year-end report, the company achieved 22 consecutive quarters with positive comps. Average ticket including about 18% alcohol is $14.23, up 3.8% (5.7% in the last 2 years) but still one of the lowest of its competitive set. The company prides itself in the un-chain-like look of its stores with the slogan "If you've seen one Chuy's, you've seen one Chuy's." That doesn't apply to its kitchens, which are strictly identical.

Despite the variances in store design, the stores average 8.8K square feet with AUVs in 2015 of $4.7K ($537/sqft). The company has addressed its challenges in secondary markets by temporarily slowing new store growth and backfilling in new markets to achieve area efficiencies. Overall margins have been trending up. Store-level EBITDA margins in 2015 were 20.5% (19.7% including marketing), up from a trough of 18% a year ago. Going forward, it plans to resume 20% annual unit growth, entering only major new markets having potential for multiple units and backfilling in existing markets.

CHUY ended 2015 with no debt and its $25M credit facility (expandable to $50M) untapped. The ratio of lease-adjusted debt (consisting only of its capitalized lease obligations) at $122.4M to EBITDAR is a manageable 2.2X. Cash flows from operations in 2015 were a robust $45.4M, which net of capex of $31.6M, yielded free cash flows of $13.8M. The company does not pay dividends and has not been repurchasing stock.

CHUY: Current Developments

CHUY reported strong results for 2015. Revenues for Q4 were up 14.9% on 3.2% comps and sales contributed by 10 new restaurants added in the year. Q4 comps consisted of 2.5% pricing and 70bps from average ticket mix, while traffic was flat (hampered by unfavorable calendar shifts of Halloween and Christmas vs. '14Q4). Revenues for the year were up 17.1% on 3.1% comps and the contribution from the new restaurants.

Although 2015 restaurant operating profits grew twice as fast as revenues, higher G&A and pre-opening expense plus impairment costs for 3 locations, prevented company operating profits from growing faster than revenues. The strong restaurant operating profits (200 bps EBITDA margin expansion) were partly attributable to leverage on the strong comps but also from lower cost of sales (-210bps) on lower food costs and success in reducing waste, lower labor expense (-120bps) benefiting from efficiency initiatives, with offsets from higher occupancy and other operating costs as a percent of revenues (combined +30bps).

For 2016, management has guided to EPS of $1.01-$1.05, or 12% growth at the midpoint of the range. It expects 2% comps and plans 10-13 new restaurants, implying revenue growth of about 17% again. Management is planning a 1.5% price increase, implying it expects an increase in traffic to achieve its comps target. Below the top line, it does not expect a repeat of 2015 in terms of lower food costs but does expect labor pressures without additional labor efficiencies, implying modestly lower restaurant EBITDA margins. Additionally, it expects that modest 8% G&A growth will be more than offset by growth in D&A and pre-opening expense. Capex guidance is $33-$38M.

Our Conclusion

One has to admire the job that CHUY's management has done, and there is no tangible indication that the performance will not continue. Our caution on this name is solely due to our concern about the valuation, which at 30x '16 earnings and 26.5x '17 earnings seems to adequately discount the positive outlook. We are keeping CHUY's on our "shopping list," in the event of a turn-down in the general market and/or the restaurant stocks in general.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.