3 Reasons Chuy's Holdings Is Still A Ripoff At These Levels

| About: Chuy's Holdings (CHUY)
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CHUY has crashed but may still have plenty more to go.

CHUY earnings, outlook, and estimates are weak.

CHUY has business model problems that is seems to refuse to address.

Yes, longs, I've eaten at a Chuy's (NASDAQ:CHUY) restaurant before. My party of four ordered chips, the spiciest salsa in the house, a variety of margaritas, and four unique, popular entrees. Quite frankly all of it was wonderful including the service - and the prices were quite the bargain especially in a tourist area and right smack in the middle of posh casual dining restaurants with more expensive everything on the menu. Unfortunately a great restaurant experience and my personal opinion of the great food and ambiance aren't enough to make an investment.

1. There is nothing unique yet it is unique

What do I mean by that? I actually had such a great time I bought a t-shirt from the souvenir shop. But in the end it was the same stuff you'd find at any other typical Mexican food chain. I found nothing unique except the weird décor. And that's another problem. Chuy's motto is: Once you've been to one Chuy's, you've been to one Chuy's! Their point is each restaurant is unique and a different experience. The problem is that is the whole point of a chain as a business: namely consistency, economies of scale, cheap capital cost, and duplication of a proven model that works.

I appreciate CHUY wants to give that unique mom & pop personal feel to each restaurant, but that is extremely difficult to achieve just once never mind with each and every new restaurant. This attempt to reinvent the wheel is a losing proposition. Every other major chain has been successful by cloning itself for the most part with some tweaks based on local culture. Not surprising, CEO Steve Hislop stated in the most recent conference call that new restaurants are negatively impacting sales for the company overall and he stated "new unit volumes are not as predictable as those in our core market" with expected sales between 10% and 15% below the base.

As an example, for Kona Grill (NASDAQ:KONA) it's the opposite. Restaurants are scattered all over the country and doing well wherever they are. New units on average are experiencing an 11% increase average in sales compared to the base. KONA appears to have given evidence that its restaurants are easily (from an investment standpoint) duplicated while maintaining the consistency of current restaurants.

2. Honeymoon nightmare

To make matters worse, CFO Jon Howie warns new restaurants tend to show a "honeymoon period" with initial sales spikes that may last longer than 18 months before the new experience cools off. Personally I've been following restaurant stocks for decades and never heard of a honeymoon period lasting more than 18 months unless there was a huge spike in sales, as is the case with Ignite Restaurant's (NASDAQ:IRG) Crab Shack, but there is nothing excessively impressive about Chuy's sales in the first place to warrant that excuse when the initial honeymoon period wasn't excessive in the first place. In any event Howie warns going forward, "Today, that headwind has reduced our comparable restaurant sales percentage ranging from 0.5% to 1.2% in any given quarter."

3. Valuation

In the end, CHUY trades with a P/E of 27 based on analyst estimates for next year which is above the 23 P/E average for restaurant stocks. I'd normally be inclined to give a superior P/E rating to a small but fast-growing restaurant chain, but there seems to be much risk and question about its growth at this stage. The company cited throughout its call "near-term challenges." That, plus lackluster numbers and a questionable business model makes me think CHUY deserves to trade at a discount P/E ratio rather than a premium to its peers. Assuming the price remains where it is at today, I will likely short CHUY ahead of the next earnings report.

Disclosure: The author is long KONA.

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.