Steak fajitas at Chuy’s Tex-Mex.

Chuy’s Tex-Mex

Chuy’s same-store sales increased 1 percent in the second quarter.

Chuy's Feels the Labor Burn, But Keeps Making Progress

The Mexican brand's digital business continues to grow at an impressive clip.

Chuy’s is another restaurant brand feeling the labor burn. Largely due to increasing labor costs, the brand continued to experience restaurant-level margin pressure this past quarter, president and CEO Steve Hislop said. Labor costs, as a percentage of revenue, upped about 160 basis points, year-over-year, to 35.2 percent. Chuy’s credited the increase to hourly rate inflation of 3.5 percent in its comps base, higher tip wage in new markets, and new store labor efficiencies. If you count some units from those higher-cost markets, Chuy’s actually experienced a 5 percent or so rise. And as those units join the comps count moving forward, it’s fair to say Chuy’s isn’t prime for any organic relief anytime soon.

Hislop said the issue is affecting the entire industry. In June, the unemployment rate dropped to 3.8 percent, the lowest in 18 years. It was 3.9 percent in July, according to the Bureau of Labor Statistics, making it four straight months of 4 percent or lower unemployment. This has fostered a challenging hiring dynamic for restaurants. As TDn2K’s People Report for July showed, restaurant turnover has stood at record highs as the labor market remains at full employment. Meanwhile, the number of chain restaurant jobs increased by 1.7 percent in July, year-over-year. Turnover for hourly employees and managers continues to surge as well. Rolling 12-month turnover for restaurant managers increased in June. “This is a critical performance metric the industry should be focusing on, given its relationship with hourly turnover, guest service sentiment, and its linkage to same-store sales growth,” TDn2K said.

Chuy’s, Hislop said, is approaching the issue by focusing on maximizing its labor efficiency in a non-guest-facing way. “One of our key initiatives has been the integration of a new labor management tool with our [point-of-sale] system. Once completed, we believe this new platform will help enhance our sales projection and further assist us in optimizing our labor productivity,” he said.

Technology speedbumps delayed the rollout, but Hislop said it’s on pace to rollout by the end of the quarter.

Hislop explained how the labor tool is designed to work.

“The key for us is what this labor tool's going to do is, it's just going to be, from a budgeting prospect to a projection prospect, it's going to highlight an exceptional report, anybody that's outside their window as far as the sales volume and the productivity that we're looking for that store to have. So it will be more of an exception-reporting thing,” he said.

It will also give Chuy’s schedule enforcement, meaning the beginning and ending of a shift, when an employee punches in and punches out. Hislop said this might not sound like a major part of the equation, but it stacks up.

“As far as the labor scheduling, the key for us there, believe it or not, with all the labor losses, is getting rid of the early punches and the late punches, and that's what we're going to be able to do with this system,” he said earlier in the year.

Chuy’s is also doing what it calls “problem projections,” in regards to scheduling projections. “I think the biggest savings you're going to see with us is the known hours that we have by the sales hour,” Hislop added.

Chuy’s had to adjust some of its 2018 guidance partly in response to the labor pressure. Mainly it updated its expectation of net income per diluted share to $1.09–$1.13 from $1.12–$1.16. Chuy’s expects labor inflation to be about 3–5 percent compared to its previous expectation of 3 percent.

This was shared after a second quarter where Chuy’s same-store sales increased 1 percent, driven primarily by a 2.1 percent lift in average check and offset by a 1.1 decrease in average weekly customers. Chuy’s took a 40-basis point hit from unfavorable weather conditions.

Like past quarters, Chuy’s achieved impressive digital progress. Off-premises hiked 15 percent in the quarter to 11.5 percent of company sales. The brand is working on a new online ordering system with Olo. Chuy’s is piloting the platform in one Austin, Texas, store, with plans to further expand into Austin, Dallas, and two additional Southeast markets. About 25 stores in total, with a full systemwide rollout expected by early Q4. Currently, about 65 percent of restaurants offer third-party delivery.

“As we mentioned, this online ordering platform will be a stepping stone for our future loyalty program, so we are taking our time to make sure everything is designed properly,” Hislop said.

Additionally, Chuy’s is testing catering in three markets. Last quarter, it contributed about $180,000 worth of volume. Hislop said it was closer to $275,000 in Q2. The chain is looking at adding two more catering vans this upcoming year—one in the D.C. market and one in Atlanta.

Three Chuy’s opened in Q2—one in Lakewood, Colorado; Greenwood Village, Colorado; and New Tampa, Florida. Another unit opened at the end of the quarter in Kendall, Florida, bringing the total to 97 locations across 19 states. Two are planned for the third quarter with nine to 10 on tap for the entire year.