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Chipotle Isn't the Only Burrito Roller Growing Quickly

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Chuy's - Decor
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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.


 

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