Chuy's Holdings vs. Chipotle Mexican Grill: Which Is the Better Buy?

Source:  Chipotle Mexican Grill

Tiny little Chuy's Holdings and its 50-something full service Tex-Mex restaurant chain is something to keep an eye on. It's not fast casual like Chipotle Mexican Grill , but it serves food within the same species (even if genetically modified) and is starting to show similar sales growth percentage numbers. With the company's stock price falling off lately, it may be a good time to watch Chuy's Holdings carefully for further weakness which could come in the latter half of the year.

The Texas-sized results
On May 6, Chuy's Holdings reported its fiscal first quarter results. Revenue screamed higher 19.8% to $56.0 million, while same-store sales soared 4.2%. Net income was a solid $2.6 million or $0.16 per share, which was a bit higher by 4% over last year. Net income would have been even higher if not for increased commodities and labor costs from bad weather and new openings.

Chipotle Mexican Grill complained similarly of commodities costs eating into its bottom line. Last quarter, Chipotle Mexican Grill reported that revenue jumped 24.4%, same-store sales leaped 13.4%, and diluted earnings per share popped 7.8%. Just like Chuy's Holdings, Chipotle Mexican Grill's net income didn't rise as fast as sales due to costs chomping away at the bottom line.

Going forward
Chipotle Mexican Grill expects more in the way of same-store sales growth percentage, but Chuy's Holdings expects more in the way of unit growth. Chipotle Mexican Grill expects unit growth somewhere between 10% and 12% along with same-store sales in the upper single digits.

Chuy's Holdings expects between 20% and 22% unit growth but with same-store sales only being between 2% and 2.5% in growth. Overall, analysts have Chuy's Holdings at around 20% sales growth this year and next with Chipotle Mexican Grill at 21.5% for fiscal 2014 and 16.7% for 2015. They're both within the same range on growth percentage.

Both Chuy's Holdings and Chipotle Mexican Grill trade with similar P/Es of around 34 based on the current share price and analyst estimates of $0.99 and $15.99 for each respectively for fiscal year 2014.

Source: Chuy's Holdings

The short-term Chuy's problem
The reason Chuy's Holdings may go lower before it goes higher has to do with the third and fourth quarter results. For starters, the 4.2% same-store sales growth in the first quarter was great, but it may not be repeated for quite some time.

Part of the reason Chipotle Mexican Grill has been able to maintain a somewhat high-looking P/E is its growth trajectory has continued to amaze the street. Chuy's Holdings may need to show a similar growth pattern or it may suffer a temporary setback in its share price.

Chuy's Holdings' same-store sales guidance for the remainder of the year means that it only expects between 1.5% and 2% same-store sales on average for the last three quarters of the year. According to the company's conference call, the second quarter may be even stronger than the other two due to a "honeymoon effect" from the bad weather of the first quarter.

This is where sales bounce back from certain people returning who were previously forced to stay home due to store closings and dangerous travel. Chipotle Mexican Grill also mentioned this in its conference call that often sales would rebound even bigger than they were before the storms as the restaurant closings only increased the cravings.

Further conference call warnings
Two problems with the third and fourth quarter for Chuy's Holdings. Steve Hislop, CEO of Chuy's Holdings, did caution that he doesn't have a crystal ball so the results could be even worse. There are two challenges that the company knows it in store for already.

First, there will be a material number of restaurants entering the same-store sales group for the first time. These are restaurants that in the comparable period underwent a "honeymoon period." (Yes, Chuy's Holdings likes that term.) In the restaurant industry, when a new restaurant opens up in town, it tends to see an initial spike in sales from curious residents eager to try something new. These initial sales often cool off after this initial jump.

Second, the third and fourth quarters of 2013 happened to be Chuy's Holdings' best quarters in years. This is what analysts like to call "a tough comp" because it will be difficult for the company to show impressive-looking year-over-year gains and sometimes results in stock price weakness in reaction.

Foolish takeaway
All in all, Chuy's Holdings seems more attractive than Chipotle Mexican Grill. Its price seems more attractive on a P/E, growth, and overall potential basis. However, given its small size it also has more risk and less of a solid brand establishment than Chipotle Mexican Grill has. As such, I'd prefer to get Chuy's Holdings at more of a discount to Chipotle Mexican Grill. That opportunity may come later this year if and when the same-store sales growth number fails to impress.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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