Chipotle Mexican Grill (CMG) is the undisputed champ of the restaurant industry, but another Mexican chain is posting double-digit revenue growth and consistently positive comparable restaurant sales. It's also a lot smaller and earlier in its growth cycle than Chipotle, translating into a potentially bigger opportunity for investors -- if things play out the right way.
Chuy's (CHUY) has just 59 locations, scattered across the country. However, that should also provide years of growth as the concept expands.
Chuy's doesn't fall into the "fast casual" niche that Chipotle has mastered. It's a sit-down table-service restaurant. That's not a strong selling point at first. We've seen El Torito, Chevy's and On the Border peak in popularity as casual-dining chains serving up Mexican food after an initial buzz.
Chuy's is different. It's festive, and not in a strolling mariachi kind of way. We're talking about Elvis shrines and complimentary happy hour nacho bars served out of makeshift car trunks. We're talking about a wall of customer-submitted snapshots of their pet dogs. Going by Chuy's latest quarter, it seems to be working.
Everything Goes Better with Salsa
Chuy's is on a roll, despite posting mixed quarterly results after Tuesday's market close. Revenue soared 20 percent to $64.1 million in its latest quarter when pitted against last year's third quarter. Expansion was the biggest contributor to the top-line spike. There are 11 more locations open than there were a year ago. However, even at the individual restaurant level we're seeing a 3 percent improvement in comps as a combination of a 1.3 percent increase in customers and a 1.7 percent bump in the average check.
This isn't a fluke. Comparable restaurant sales have moved higher for 17 consecutive quarters.
Things get scarier for Chuy's as we work our way down the income statement, explaining why the stock took a dive on Wednesday. A spike in food cost inflation and weakness at some of its newer locations drove margins lower. Earnings only grew half as quickly as Chuy's top line, and the current quarter will continue to be challenging.
Chuy's now expects earnings per share to clock in between 67 cents and 69 cents this year, vs. its earlier range of 76 cents to 78 cents. That's obviously not cool with Mr. Market -- and the stock is being punished accordingly -- but it doesn't take away from the growth of Chuy's popularity as a concept in a niche where Chipotle has been the lone standout.
There's Only One Chipotle
It's hard to top Chipotle's most recent quarter. Revenue and earnings per share soared 31 percent and 56 percent, respectively, over the prior year. Comparable restaurant sales soared a jaw-dropping 19.8 percent.
However, a big reason for the accelerating comps growth and widening margins is that Chipotle kicked in a menu price increase in May. It was the chain's first major hike in three years. Chuy's wasn't as aggressive, absorbing most of the increase in commodity prices this time around. It moved prices marginally higher during the latter half of the quarter -- in late August -- but Chuy's will wait until February to roll out another hike.
Chipotle is in a fortunate position where it can increase prices substantially without having its customers blink. We may see Chuy's pricing flexibility in a few months. For now, Chuy's is popular in part because of its reasonable pricing. Most of its menu items are priced in the single digits, with Chuy's knowing that it can make a lot of that back in beverage sales. If February's pricing change gets margins back on track, the market will once again get talking about the high ceiling at Chuy's with just dozens of restaurants open -- and dozens if not hundreds more to go.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
5 Less-Known Restaurant Chains You Should Eat At and Invest In
Chipotle Isn't the Only Burrito Roller Growing Quickly
If investors are hungry for something a little more exciting, thankfully there's no shortage of faster growing publicly traded restaurant chains that are doing just fine.
So sorry, Olive Garden. You may still offer tasty breadsticks, but that's not the kind of rising dough that investors -- and diners -- crave these days.
One of this summer's hottest IPOs was for Noodles & Company (NDLS), a fast casual restaurant chain that specializes in all types of noodles. Olive Garden bashers will find plenty of Italian pastas on the menu, but diners can also be globetrotters by checking out Asian noodle bowls or come closer to home with the classic Americana comfort food of mac and cheese.
Unlike the many table service restaurants facing an alarming number of empty tables, Noodles & Company has delivered positive comps in 29 of the past 30 quarters. Revenue climbed 17 percent to $300.4 million last year, and it's on pace for similar growth through the first half of this year.
Ignite Restaurant Group (IRG) owns and operates 134 Joe's Crab Shacks and 16 Brick House Tavern + Taps. The operator essentially doubled in size in April when it acquired smaller Olive Garden rival Romano's Macaroni Grill. The 186-unit Italian casual dining chain was once owned by Brinker, and it's a work in progress. Comps were positive at Ignite's two original concepts in its latest quarter, but the same can't be said for Macaroni Grill.
Then again, the sluggish performance at Macaroni Grill also led to an attractive acquisition price. With Macaroni Grill butting pasta bowls with Olive Garden and Joe's Crab Shack fishing against Red Lobster, we can possibly call Ignite a mini Darden. That's a good thing, especially since Ignite has a lot of room for any of its three concepts to grow before it saturates the market.
Casual dining and Mexican don't mix well over time. There's probably a shuttered El Torito, Chi Chi's or Chevy's somewhere near you.
However, Chuy's (CHUY) has raised the bar by creating a lively environment filled with Elvis shrines and customer-submitted dog photos, and it's winning over patrons with its extensive happy hour specials and a bargain-minded menu where nearly every entree costs less than $10.
Chuy's sales surged 23 percent in its latest quarter, and with just 45 locations across twelve states, there are still plenty more places for pooch snapshots and Elvis busts to go up.
As one of the largest franchisees of Buffalo Wild Wings (BWLD), Diversified's (BAGR) largest concept is no stranger to most sports bar enthusiasts. However, the reason that Diversified makes the cut is because it's in the process of rapidly expanding its proprietary Bagger Dave's Legendary Burger Tavern.
There were just 13 of the full-service, ultra-casual restaurant and bar units open by the end of June, but Diversified is hoping to open another six locations later this year. It may soon rival the nearly three dozen Buffalo Wild Wings eateries that it currently watches over. The genius here is that it's probably putting a lot of what it learned at Buffalo Wild Wings into practice at Bagger Dave's.
Revenue soared 61 percent in its latest quarter, propelled almost entirely by new restaurants, but there was still a healthy 7 percent spike in same-store sales during the period.
Customers looking to trade up from fast food without shelling out more in time and money at a casual dining concept are flocking to fast casual chains that deliver quality ethnic dishes quickly.
Fiesta (FRGI) owns and operates 96 Pollo Tropical restaurants (primarily in South Florida) and 164 Taco Cabana eateries (mostly in Texas). The company also has dozens of franchised locations, especially overseas, as its Latin American-inspired Pollo Tropical rotisserie chicken has proven to be a potent export.
Revenue climbed 9 percent in its latest quarter, fueled by a healthy 6 percent spike in same-restaurant sales at Pollo Tropical.