The brand won't cheapen its product or invest in short-term initiatives as it looks to turn around sales.

Tex-Mex casual dining chain Chuy’s Holdings disappointed investors in its financial report Thursday when it announced its third straight quarter of same-store comparable sales decreases, falling by 1 percent. Per share, Chuy’s had profits of 31 cents, meeting Wall Street expectations, but revenues increased year-over-year by 7.5 percent to $94.5 million, which fell short of expectations.

Traffic for the second quarter decreased 2.4 percent, which Jon W. Howie, vice president and CFO of Chuy’s Holdings Inc., attributed to Easter falling in the second quarter this year when it fell in the first quarter last year.

A 1.4 percent increase in check averages helped offset some of these losses. The chain also opened 14 new restaurants in the past year, creating gains that were not including in the year-over-year comparable sales.

Yet because of lower-than-expected financial performance, the brand cut comparable sales predictions from projected 0.5–1.5 percent gains to negative 1.5–0.5 percent. The company’s stock dropped 10 percent in after-hours trading as a result, bringing shares to a 33 percent decline over the past 12 months.

President and CEO Steven J. Hislop said rising costs were partially to blame for the effect, noting that cost of sales increased year-over-year to 25.9 percent. This, he notes, was driven by rising commodity pricing related to dairy, produce, chicken, and other groceries. Higher utility and maintenance costs also drove increases, while occupancy costs also increased by 6.7 percent.

Labor costs also rose by 33.6 percent, which Hislop said were driven by “operating inefficiencies from new unit development, ongoing wage rate pressures, and the deleverage of management labor … as a result of construction delays.”

Though the chain took measures to reduce overhead expenses, it listed repairs, maintenance, utility costs, and expensive ingredients as large factors.

Chuy’s leadership said the brand plans to increase store-level marketing and social media campaigns for store events. Customer service will also be an ongoing focus.

“We will continuously look to enhance the customer experience through a long-term lens and stay away from so-called silver bullets or short-term initiatives, including cheapening our high-quality offerings through discounting our careless cost cutting,” Hislop said in a conference call. “We believe our service standards are made from scratch offerings and our unique atmosphere of our restaurants are our most valuable assets.”

The chain also hopes that new stores will bolster sales in its three new key markets, Denver, Chicago, and South Florida. Three stores were opened during second quarter and the brand plans to open an additional six restaurants in the second half of the year, bringing the total to 12 new restaurants in 2017. Expansion in 2018 is expected to include eight to 12 new stores.

“Despite a challenging external environment, we continue to be excited about the opportunities ahead for Chuy’s,” Hislop said. “Our ultimate focus remains simple: to continue to deliver high-quality, made-from-scratch food offerings and handcrafted cocktails to our guests at a tremendous value in a unique, upbeat environment.”

Casual Dining, Chain Restaurants, Feature, Finance, Chuy's