Shares of casual steakhouse chain Texas Roadhouse (NASDAQ: TXRH) are down slightly since reporting an impressive third quarter of 2017. In spite of the positive report card, investors chose to be cautious as the casual dining industry has been beat up this year.
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1. Two tailwinds for higher sales
Total revenue increased 12.2% year-over-year to $540.5 million. The company yet again enjoyed two key factors that pushed revenues higher: the successful opening of new stores and positive comparable-store sales.
To the first point, Texas Roadhouse had 33 more stores than it did during the same period last year. That brings its total location count to 540, with 455 of those being company-owned and -operated.
That leads to the second and more important factor that boosted the top line: positive comparable sales. For Roadhouse-owned and -operated locations, comparable sales were up 4.5%. Existing franchised locations saw an increase of 4.7%. Those are impressive figures in their own right, but even more so considering the overall restaurant industry has been trending negative for two years now.
2. Bottom-line growth back in double digits
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Earnings per share were up 19.9% year-over-year to $0.43, bringing the year-to-date total to $1.44. Bottom-line growth had slowed earlier in the year as total sales growth has slowed a bit and the company works through rising wages and other employee expenses.
While labor expense is up 16% so far this year, that has been partially offset with lower food costs – expected to finish 2017 down 2%. Management said labor costs should continue rising in the mid-single digits through 2018, while the cost of food should remain relatively flat.
The good news is that comparable sales are reportedly higher again so far in the fourth quarter, and Roadhouse thinks that will continue in 2018. The chain's mantra of quality food and big portions at a value is speaking to the American diner, so there is reason to expect that the bottom line will continue to rise even as company expenses go up.
3. A new brand growing
One international franchise and seven company-owned restaurants were opened up in the last quarter, including two Bubba's 33 sports bar restaurants. Year-to-date, 23 total new restaurants have been opened, four of which are the new Bubba's 33 concept. By the end of 2017, management thinks 26 or 27 will have been opened in total, a downgrade from the previously projected 27 to 29.
2018 should be a busier year, though, as 30 openings are expected. Of those, up to seven will be Bubba's 33 as Roadhouse continues to scale back development of its namesake brand and ratchet up its new concept. At the end of the last quarter, there were only 20 Bubba's 33, so the company is still testing and learning from the small base of existing stores.
However, it's a good sign that all is well if the company sees growing the store base by a third. Even should growth start to stall out for Roadhouse because of industry woes, having a second horse in the stable could come in handy.
All in all, though investors were unimpressed, the third quarter of 2017 was a great one for Texas Roadhouse. Any business that can outperform its industry by a wide margin is worthy of consideration for investors.
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