Tex-Mex Restaurant Chain Moves Beyond Lone Star State

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Tex-Mex restaurant chain Chuy's is a perfect fit for the eclectic character of its hometown, Austin, Texas, where the motto is "Keep Austin Weird." But that's not stopping it from expanding its offbeat eateries beyond the state's borders.

From one colorful location in the heart of Austin in 1982 to 40 restaurants in eight states today, the recently publicChuy's Holdings ( CHUY )is one of the fastest-growing companies in the casual dining space.

"The consumer broadly is voting that their food is exceptional for the price point," said Bryan Elliott, senior restaurant analyst at Raymond James. "Their sales per square foot are well over $600 and full-service casual dining norms are below $500."

Chuy's opened eight restaurants in 2012, equivalent to a unit growth rate of 25%. The new locations were in Texas, Florida and Kentucky. It plans to expand by another eight or nine this year in five new regions, representing a growth rate of 23%.

Each restaurant is unique as indicated by the company's own motto: "If you've seen one Chuy's, you've seen one Chuy's."

Traditional Tex-Mex

"The concept itself is a fairly traditional Tex-Mex from a menu standpoint," said Will Slabaugh, equity research analyst at Stephens. "Although there are a few notable exceptions -- and I think this is what really sets the concept off from other Tex-Mex concepts that guests have seen in the past -- it's really the experience."

When you walk into a Chuy's, you'll notice an Elvis shrine, vintage hubcaps nailed to the wall and ceiling, red fish hanging from the ceiling, scrap metal palm trees and colorful handmade floor and wall tiles. Rock music plays in the background. There's a bigger bar and more alcohol sales as a percentage of overall sales than most other restaurants in that category, noted Slabaugh.

"It's a very inviting atmosphere, very open, and it's an atmosphere that really translates across different demographics and across different age groups as well," he added. "All those things create energy in the restaurant and invite a different and a more diverse crowd than most Tex-Mex concepts and casual dining concepts."

The menu consists of fresh, daily-made and high-quality food with 46 out of 49 items on the menu priced at less than $10. The average customer check is $13 with a 19% alcohol mix.

"As far as the menu goes, there are some traditional Tex-Mex items on there, but they add on their own flair," said Slabaugh. "They have their own sauces that are handmade daily and people know that. All their chicken items, all their beef items are always fresh. There are no freezers inside the restaurants. So there is this inherent value proposition that these guys put forth along with high food quality, and all that's been really resonating in this environment."

The restaurants range in size from 5,300 to 12,500 square feet and accommodate 225 to 400 customers. Each location gets an average of 7,500 customers per week, or 400,000 per year.

The average revenue per restaurant has been $5 million per year, which, according to analysts, is about double of most other casual diners.

"Chuy's is operationally very efficient," said Slabaugh. "They have very quick ticket times; you can get in and out for lunch in 30 minutes. In most sit-down restaurants, you're not able to do that.

"They've been putting out industry-leading, cash-on-cash returns for years. A lot of returns north of 50%. That means you get your money back in two years, vs. most casual diners that typically get their money back in the range of four to six years."

Same-store sales growth has been very consistent and is forecast to be in the low single-digits.

Chuy's carries almost no debt and generates sufficient cash flow to finance its expansion internally without having to take on any external funding.

"Their sales per square foot and cash flow per square foot are among the best in casual dining," said Elliott. "Their investment per square foot is about average and so their returns on investment are superlative. That's partly why they can self-finance 20% physical growth."

Sales growth has ranged between 28% and 48% in the past seven quarters, while earnings per share jumped 175%, 50% and 150% in the prior three quarters.

Resonating Brand

A risk would be going into a new market where their brand wouldn't resonate. However, there has been no indication of that so far, noted Slabaugh.

The company went public in July 2012, when private equity firm Goode Partners divested about a third of their original 80% ownership. A secondary offering at the end of January further reduced their share to about 25%. The original founders still own approximately 3% of the company and serve on its board.

"They (Goode Partners) historically have been very shrewd investors," said Elliott. "They tend to buy small, early-stage companies and lead them well. They clearly have done that here with Chuy's and executed their strategy quite well."

Management has strong experience in the restaurant industry, with CEO Steve Hislop having previously helped expand O'Charley's Restaurants from 12 to 347 units before joining Chuy's in 2007. CFO Jon Howe also has 22 years of experience in the restaurant industry.

"If they continue to do what they've done like clockwork since inception, long-term, the company has a chance to be a substantially larger enterprise than it is now," said Elliott.



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



This article appears in: Investing , Investing Ideas

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