Inside a Chuy's restaurant.

flickr: jpellgen

Chuy's has one more opening planned for 2019.

Chuy's Benefits from a Smart Approach to Growth

The brand has halted new market expansion for the time being.

At the back-end of 2018, Chuy’s put the brakes on new-market expansion. This wasn’t a reactionary decision as much as a preemptive one. The Tex-Mex chain was working internally on an eSite tool capable of presenting a psychographic profile of top areas. Essentially, Chuy’s wanted to analyze markets so it could hit the ground running. Take some gamble out of what’s always a toss of the real-estate dice for mid-sized chains.

In fact, it’s not all that different from what’s happening lately at Chuy’s.

The brand reached the mid-point of fiscal 2019 with momentum, turning in a solid second quarter. Revenue rose 6.4 percent year-over-year to $113.1 million—more than $1 million higher than Wall Street expectations. Adjusted net income lifted 9 percent to $7.1 million, producing earnings per share of 42 cents, easily above the 37-cent per-share consensus forecast among investors.

Same-store sales increased 1.9 percent, comprised of a 3.9 percent bump in average check, partially offset by a 2 percent decrease in average weekly customers. Chuy’s said its comps took an 80 basis-point hit from unfavorable weather and 20 more from the timing of Easter. Effective pricing was about 3.5 percent.

One of the key reasons for Chuy’s revenue lift can be traced back to Q4 comments. Chief executive officer Steve Hislop said the chain would focus on brand equity opportunities in 2019 over sheer growth, scaling back to five to seven new openings from the previous year’s goal of eight to 12. And it would do so only in areas with proven high average-unit volumes.

So far this fiscal calendar, Chuy’s opened in Hamburg, Kentucky; Huntsville, Alabama; Houston; Carmel, Indiana; and Colorado Springs, Colorado. Chuy’s closed units in Miami and Atlanta in Q1.

Hislop said those new restaurants are performing at or above sales expectations. “We’re very pleased with those openings,” he said, simply.

It’s a relative departure from years past for Chuy’s. The Texas-based brand has 103 units spread across 19 states: Alabama, Arkansas, Colorado, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Missouri, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas, and Virginia.

Fifteen of those have five or fewer restaurants.

Hislop said Chuy’s wouldn’t consider new markets until the eSite tool is ready to go. It’s currently in testing and could play a role in 2020’s development.

"Obviously, the most expensive seat is the one where no one's butt's in it. So that's what we're doing there." — Steve Hislop, Chuy's CEO.

A buzz word at Chuy’s lately has been “awareness.” And much of that is tied to how it’s grown. Also, a culprit for recent success.

In April, Chuy’s launched targeted marketing campaigns in Chicago and Houston. But to very different ends. In Chuy’s home state, where it has 37 restaurants, the push was intended to drive increased frequency. For Chicago, home to three stores, the program aimed to “better educate the market on Chuy’s experience.” This included promotional radio, strategic road and stadium signage, and digital advertising across YouTube, Hulu, Spotify, and other platforms. Orlando is up next, Hislop said, along with Dallas in Q4. At the same time, Chuy’s will continue to leverage paid search, social media campaigns, and location-based platforms. The chain noted earlier that it increased advertising spend about $1.35 million in 2019.

Chuy’s also pulsed value initiatives into less mature markets, like $5 margaritas and discounted fajita and taco nights on Tuesdays and Wednesdays, respectively. “We've increased some traffic in those stores, which is our main thing. Obviously, the most expensive seat is the one where no one's butt's in it. So that's what we're doing there,” Hislop said.

Like many brands, Chuy’s would rather focus on the traffic side of marketing than education. And that’s where the current strategy—developing in proven high AUV markets—and the analytical tool, comes into play, and sets Chuy’s up for sustained growth instead of just honeymoon booms or busts.

The brand has a growing digital story to tell, too. At the end of Q2, to-go sales through its website represented about 18 percent of all to-go ordering. Chuy’s ran a promotion to boost adoption rate, which powers through Olo.

Another part of Chuy’s relationship with Olo is “Dispatch,” which allows it to synchronize its online ordering and delivering process for better efficiency and accuracy. Customers are also given various delivery options directly from Chuy’s website. The brand plans to fully integrate the service systemwide by year’s end.

Catering, labor, more room to grow

As has been the case in recent quarters, Chuy’s witnessed solid progress in its catering arm. It rolled the platform to two additional markets in Q2. This, too, Hislop said, helps with awareness as well as giving Chuy’s another avenue for top-line growth.

Catering contributed roughly $1.5 million in revenue this past period. In the year-ago quarter, it was just $400,000. Chuy’s expects to add four more markets before 2020.

Chuy’s improved its restaurant-level operating profit by about 5 percent in Q2, despite a negative hit from continued hourly rate inflation. However, labor costs were down almost a full percentage point as a mix of total sales thanks to improved efficiency at new units and a more cost-effective approach to manager training. “As labor pressures continue, our glide path initiatives become more important than ever as it allows us to reduce opening labor new hires by approximately 20 percent and achieve system average labor targets by month seven,” Hislop said.

The exacts: Labor cost as a percentage of revenue decreased about 90 basis points to 34.3 percent, primarily due to mini price leverage, increased labor efficiency at new store openings, and lower training expense for new managers. This was partially offset by hourly labor rate inflation on comparable stores of about 3 percent and higher hourly rate in certain other markets.

In response to Q2 results, Chuy's increased guidance for the full year. It now expects earnings to report between 93–97 cents per share, up 2 cents from previous expectations. The company reaffirmed comps rising 1.5–2.5 percent.