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Taking a look at Chuy's (CHUY)



January 15, 2014 – Comments (2) | RELATED TICKERS: CHUY , CMG

I have been hearing a lot about Chuy's (CHUY) lately from my friends at college. Rave reviews across the board. 

From my basic research, Chuy's is a Tex-Mex chain -- making authentic Tex-Mex dishes from scratch -- with 47 restaurants (all company-owned) in operation in 14 states. The company was founded in 1982, so expanding via new restaurants has been a relatively recent development for the company. The company opened two new restaurants in the 3Q 2013, and estimates opening nine restaurants in 2013. Management is targeting 20% unit expansion annually in the next several years. 

I like a lot of what I see with Chuy's. Sales have annually increased over 25% over the past four years, with earnings expanding nearly 20% annually over the same period. Recent quarterly results show the company is basically crushing it so far as year-over-year sales/earnings growth is concerned. The balance sheet is pretty healthy with $3.22 million in cash and $4 million in debt. 

The company's operating cash flow has increased over 35% annually over the past several years, which is quite impressive. However, the business is still producing negative free cash flow despite this growth in operating cash flow. This is the main concern I see comparing Chuy's to the next Chipotle -- or even as a Chipotle-esque investment -- in its early history as a public company Chipotle generated sufficient cash flow to finance expansion without going into debt. 

This isn't to say that Chuy's can't produce positive free cash flow down the road, but with a P/E of 65 the company has a lot riding on its future operations. Chipotle traded at similar valuation levels, but the business itself was capable of financing rapid expansion. 

The company's comparable restaurant sales -- estimated to be 2.2% in 2013 -- also lag Chipotle's comps performance. This essentially means that, like Noodles & Company, sales in new restaurants will have to drive most of the company's growth. Again, not necessarily a bad thing, but this puts even more pressure on the successful expansion of new locations. 

All in all, I like a lot of what I see with Chuy's. Many of the company's executives have been with Chuy's since 2009 or longer. The company is growing at impressive rates, although they are still dependent on debt/stock financing to finance expansion at the moment.

Until the company produces positive free cash flow I would be reluctant to start a position at the stock's current P/E of 65, but if the shares get hit I would seriously consider opening a position. This is similar reasoning as with Noodles & Company -- a great concept, experienced management, fast growth, but unable to fully fuel expansion through the business. Positive free cash flow is an indicator, in my mind, of whether a business is growing sustainably. Chuy's is almost there, but not quite yet. 

This looks like a great restaurant story with considerable potential, particularly if operating cash flow begins to fully fuel the company's expansion. If word-of-mouth is any indicator -- and I think it is -- Chuy's is a popular concept that should be able to expand beyond its current 14 states of operation. I know my friends, and many students at my college, love Chuy's. 

Just a few thoughts for now; Chuy's is on my watchlist and is a business I wouldn't mind investing in at some point down the road. For now, with its premium valuation, I need to learn more about the company and/or wait until the company's operating cash flow outweighs capital expenditures. Small restaurants like this are fun to watch, and I look forward to following Chuy's here. 

David K

2 Comments – Post Your Own

#1) On January 15, 2014 at 11:55 PM, Smitter11 (73.52) wrote:

A lot of people want to compare any hot new restaurant chain to Chipotle, but I'm not sure that the comparison makes sense here.  Chiplotle's service model is much different and they can build much smaller restaurants.  The better comparison for CHUY is Buffalo Wild Wings with the fun, hip atmosphere and the ability to scale the chain quickly.

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#2) On January 16, 2014 at 10:33 AM, TMFPencils (99.90) wrote:

The better comparison for CHUY is Buffalo Wild Wings with the fun, hip atmosphere and the ability to scale the chain quickly.

Fair enough, but my main point remains the same: Buffalo Wild Wings has financed its growth through operating cash flow, not debt or stock offerings. Until Chuy's generates positive free cash flow, the company is placing a lot of pressure on future locations to perform very well (especially given relatively low comps compared to BWLD and CMG). The business has a lot of promise, but the cash flow is the main thing giving me pause at this point. 

However, I think you're right about the concept's potential. It will be interesting to see how the company performs this year! 

David K

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