Texas Roadhouse Leaves Investors Hungry for More

By Markets Fool.com


Image source: Texas Roadhouse.

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Steakhouse chain Texas Roadhouse (NASDAQ: TXRH) has stood out from its peers by being able to sustain attractive growth rates even in a competitive industry environment. Yet for a while, some investors have worried that Texas Roadhouse might have trouble keeping up its growth pace at the level they've gotten used to seeing. Coming into its second-quarter financial report, Texas Roadhouse shareholders wanted to see evidence that the restaurant chain wouldn't slow down.

The disappointment in the report on that score hurt the stock hard, and now many wonder if the best times for the steakhouse chain are over. Let's take a closer look at what Texas Roadhouse told investors, and whether they're right to be nervous going forward.

Texas Roadhouse flames out

Texas Roadhouse's second-quarter results actually seemed relatively favorable at first glance. Revenue of $508.8 million was up 12% from year-ago levels, and just barely fell short of what most investors wanted to see. Net income soared by nearly 60%, to $33.6 million; that produced earnings of $0.47 per share, topping the consensus forecast by $0.02 per share, and seemingly giving investors the growth they wanted.

Looking more closely at the numbers, Texas Roadhouse wasn't able to allay all of the concerns of its investors. Comparable-restaurant sales grew at a 3.7% rate, which was slower than last quarter's growth rate for comps, and continued a disturbing trend. Both franchise-owned and company-owned restaurants saw pressure on comparables, and in particular, franchise-based comps of 2.6% underperformed their company-owned counterparts by more than a third.

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Further gains from cost savings drove Texas Roadhouse's results higher. Lower food costs helped send restaurant margin up by more than three percentage points, approaching the 20% mark. Even a sizable jump in labor costs and rental expenses weren't enough to prevent Texas Roadhouse from positing impressive gains in operating margin that worked their way down to the bottom line.

Texas Roadhouse continues to believe that expansion is the key to its immediate success. The company added another seven company-owned restaurants during the quarter, matching its pace from the first quarter. One of those locations was a Bubba's 33 restaurant.

CEO Kent Taylor continued to show optimism about his company. "Our operators continued to deliver strong operational and financial results," Taylor said, "with solid comparable-restaurant sales growth and an increase in restaurant margin." The CEO noted that positive guest counts were the primary driver for gains in comps.

What disappointed Texas Roadhouse investors?

Texas Roadhouse also tried to show its planned course forward. Taylor said that the company is "on track" to open about 30 new restaurants this year, and the company intends to continue to build out its base network of restaurants into 2017 and beyond.

Yet some early guidance suggests that Texas Roadhouse could continue to have trouble driving sales. So far, during the first four weeks of the new quarter, company-owned restaurant comps are up just 3.7%. That's even slower than the second-quarter pace, and if it persists, Texas Roadhouse shareholders could be even more disappointed with its performance this quarter.

Still, better trends for food prices could help bail out the steakhouse chain, especially on its bottom line. Texas Roadhouse said that it now believes that food-cost deflation for the full year will be between 2.5% and 3%, producing even bigger savings than its previous 1% to 2% deflation guidance.

Texas Roadhouse investors initially punished the stock because of growth concerns, sending shares down more than 12% the day following the announcement. Yet the company has seen its stock regain most of that lost ground over the past week, and that suggests that investors are more comfortable with the long-term trajectory that Texas Roadhouse is on -- even if it means slower growth than they saw in the past.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Texas Roadhouse. 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.