Steak fajitas at Chuy’s Tex-Mex.

Chuy’s Tex-Mex

Chuy’s same-store sales increased 0.5 percent in the third quarter.

Weather, Labor Costs Slow Down Progress for Chuy’s

The Mexican brand is ramping up digital marketing and expanding in-store technology.

For Chuy’s, issues like persistent inflation of labor costs and the aftermath of a rainy hurricane season continue to squeeze the company’s profitability. Chuy’s president and chief executive officer, Steven Hislop, said it was a challenging third quarter for the company.

The company’s revenue grew about 9.7 percent to $101.2 million and same-store sales increased 0.5 percent compared to this time last year. This growth in revenue is due to an additional 144 operating weeks compared to the previous year.

“The 0.5 percent increase in comparable restaurant sales on a calendar basis was driven primarily by a 1.7 percent increase in average check, partially offset by a 1.2 percent decrease in average weekly customers,” Chuy’s chief financial officer Jon Howie said.

Hurricane-related weather and continuous rain led to a decrease in sales, especially in Texas markets. At the beginning of the third quarter, Chuy’s was trending in a positive direction, but things took a negative turn in September with a decrease of 1.4 percent in sales.

“We experienced heavier rainfall than normal during much of the quarter, including the wettest September in history in most of our core Texas markets, which further muted our results by reducing our patio sales by over 18 percent,” Hislop said.

“October started just like September as far as the rain. And then we're flat probably right now in October, but we had again the rain from every single weekend,” Hislop added. “Luckily, we've had a break last weekend in some weather that was happy to—we were happy to see that.”

Pricing of produce and other ingredients, such as chicken and beef, also affected operation costs for the company. Cost of sales decreased 110 points to 25.6 percent during the third quarter, which means Chuy’s will likely report year-over-year improvement in cost of sales in the fourth quarter, Howie said.

“We've begun to see increases in cost of beef we use for our fajitas in addition to rising tomato and avocado prices in the top, again, October of this year,” Howie said. “Year-to-date, our commodity inflation was approximately flat with last year, and we are still expecting to end up between zero and 0.5 percent for the full year.”

Produce pricing largely affected cost of sales expectations during the third quarter. Going into the third quarter, the company’s cost of sales was down 3 percent, but with the hurricanes in September and October, produce prices spiked.

“We're also seeing the phenomenon with our inside skirts … because of a bunch of exporting to Japan, those have spiked on us a little bit in the year,” Howie said. “So now we're expecting some inflation in the range around 2 percent for the fourth quarter.”

Moving into the fourth quarter, the brand ramped up its digital marketing in hopes of improving brand awareness in a few targeted markets.

Throughout the holiday season, the marketing campaigns will focus on Chicago, Washington, D.C., and Nashville using a mix of digital and traditional marketing tools, like billboards, iHeartRadio and ESPN Radio campaigns, and metro rail posters. Hislop said the campaigns would begin about a week before Thanksgiving and run through the end of the year

“We continue to work closely with our new market—our new media marketing partner, Kelly Scott Madison, to focus on improving our brand awareness and value messaging in both core and new markets through local store marketing and social media campaigns,” Hislop said. “We recently started our digital campaign in mid-September that includes paid search and mobile location-based advertising, which is a first for the company.”

Improvements to restaurant operations are also in development to help the brand work more efficiently throughout 2019. Chuy’s integrated Olo, a digital ordering technology, into its point-of-sale systems to help improve the online ordering and delivering within Chuy’s. At the end of October, the Olo system was integrated into all of the restaurants.

“While still in its infancy with little to no marketing behind it, early adoption rate is encouraging, with Olo now representing 8 to 10 percent of all to-go ordering,” Hislop said. “We will use this system as a stepping stone for a future loyalty program during 2019.”

Howie added that those numbers are coming in without any marketing pushing the new online ordering tool. The brand will begin putting marketing behind Olo to boost online ordering and delivery numbers in 2019.

Chuy’s recently integrated a new labor management tool into its POS system to improve employee efficiency and scheduling issues at restaurants. This new technology will also help with properly scheduling employees during slow and peak hours. While the new “clock-in enforcement” tool is only in 40 stores, it could be integrated into all restaurants if it shows results in 2019, Howie said.

“We've got some great initiatives in—I would say, in labor and marketing and some other things as far as menu analysis, back of the house analysis and things that we're doing that we're excited about in 2019, that to the extent that we can, if the marketing turns around and gives us a lift at that 2.5 percent, 3 percent, I think we can see our margins stabilize,” Howie said.

While the company is slowing down growth in 2019, it just passed a major milestone—the opening of its 100th restaurant in Vintage Park. During the third quarter, three other restaurants opened, bringing the total number of openings in 2018 to nine. There are no plans currently in place to open any more restaurants in 2018.

Hislop said development in 2019 would continue in existing markets. Five to seven new restaurants are slated to open in 2019.

“As far as some of the initiatives that we have in place, especially around labor and then driving sales, we're always looking to save on margins,” Howie said. “And with our reduced development, that's what we're going to focus on next year.”