Chuy's Gets Love from Wall Street Following July IPO


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Wall Street seems to have rediscovered its appetite for Mexican food, if the performance of Chuy's Holdings is any indication.

Chuy's ( CHUY ) owns and operates 37 full-service Mexican and Tex Mex-inspired restaurants across eight states. Nearly two-thirds of its units are located in Texas, where the company was founded in 1982.

It plans to expand into a bunch more markets in coming years, mainly in the Midwest and Southeast. Chuy's opened its first restaurant outside of Texas in 2009, when it set up shop in Nashville. It now has five restaurants in Tennessee, as well as units in Oklahoma, Alabama, Georgia, Florida, Kentucky and Indiana.

To help free up money for its growth plans, Chuy's had an initial public offering in late July. The IPO delivered total net proceeds of nearly $80 million, which was used to pay down debt.

The stock debuted at 13 and closed its first day at 15.06. Since then shares have been on a steep and rapid ascent. They peaked at 24.72 on Thursday and still trade near there.

That's not a bad performance for a smallish company most people outside of Texas have probably never heard of.

Searching For A Meal Ticket

"Investors don't have a lot of new restaurant growth opportunities right now, so that has really attracted a lot of investors to the Chuy's story," said Andy Barish, restaurant analyst at Jefferies & Co.

In addition, he says, the landscape for publicly traded full-service Mexican eateries is pretty barren these days.

"There have been some players in the past who made a run at it, but they didn't necessarily succeed," Barish said.

Those players include On the Border Mexican Grill & Cantina, Chevy's Fresh Mex and the now-defunct Rio Bravo. Each was acquired by larger corporations intent on rapidly expanding into new markets. Each also ran into problems and were either sold off or shut down.

"A lot of them didn't stick to their core competencies," Barish said. "They cheapened the food and the quality as they tried to get larger, and it kind of alienated the customer."

Chuy's Chief Executive Steve Hislop knows all about the challenges of rapid expansion. Before taking over his current position in 2007, Hislop spent 20 years at O'Charley's Restaurants, where he helped build the concept into a national brand.

Hislop is well aware that full-service Mexican chains have not fared well on a national scale.

"If you look at every major Mexican restaurant, something happened to make them very blase and homogenized," Hislop said.

He looks to avoid that with Chuy's by staying true to the company's core concepts.

"The key thing for us is we make everything from scratch. We have 10 to 12 homemade sauces; we hand-roll our tortillas in front of our guests; we use fresh roasted chicken for our burritos and enchiladas," he said. "Our intent is to stay true to our fundamentals and our culture and stick to our knitting."

Chuy's also puts a big emphasis on providing a funky atmosphere. All of the units feature hand-carved and hand-painted wooden fish imported from Mexico, vintage hubcaps hanging from the ceiling, and "Elvis shrines."

Analyst Bryan Elliott of Raymond James reckons Chuy's fresh food and festive atmosphere should help it avoid some of the pitfalls of other full-service Mexican chains.

"We believe the concept possesses several key points of differentiation -- high-quality food, a strong value proposition, unique design elements and an irreverent atmosphere -- that should allow Chuy's to successfully expand into new markets and gain market share," he noted in an August report initiating coverage on the stock.

One Mexican eatery that has fared well on a national level isChipotle Mexican Grill ( CMG ), a fast-casual chain with more than 1,200 units in the U.S., Canada and UK and plans to open 155 to 165 more this year.

Chipotle, which does not compete in the same category as Chuy's, has earned industry accolades for its consistently strong financial growth and aggressive expansion strategy.

"Chipotle is a good example of a company that never changed who they were," Hislop said. "I have a great deal of respect and admiration for what they've done."

The success of Chipotle might even benefit Chuy's as it expands into more markets, analyst Barish says.

"Chipotle expanded rapidly and introduced a lot of consumers to fresh, higher-quality restaurant food," he said. "A lot more people are familiar with this type of food than 15 years ago."

Expansion Plans

Chuy's plan is to expand its restaurant count by about 20% a year, CEO Hislop says. That's been its rate over the past few years, so he figures the company should have no problem meeting its growth targets.

"We're not promising something we haven't already done," he said.

Many of the new restaurants will be clustered together, he says. "We want to go into a major market with a number of units so they can feed off of one another."

Nashville serves as the "hub" for Chuy's Southeast strategy. After putting its first restaurant there three years ago, Chuy's went north with a unit in Louisville, south with one in Birmingham, Ala., and east with one in Atlanta.

The average ticket price at a Chuy's restaurant is $13. Restaurants average about 400,000 guests a year, or 7,500 a week.

Last quarter the company rang up revenue of $43.5 million, a gain of 32% from the prior year. Same-store sales rose 1.9%, while net income more than doubled to $1.7 million.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas
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