A Stellar 2018 Gets Shade From Higher Expenses at Texas Roadhouse

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Casual dining chain Texas Roadhouse (NASDAQ: TXRH) capped off 2018 with some of the best numbers in the restaurant industry. Comparable sales (foot traffic and average guest bill) soared during the holiday season, but investors were in a glum mood because of nagging expense increases that dragged down profits once again.

Nevertheless, there was a lot to like at Roadhouse last year, and initial guidance indicates the good times will keep rolling.

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Higher sales and higher costs

2018 was a great year for Texas Roadhouse. As consumers spent lots of extra cash on eating out, the steakhouse was a favorite go-to option. Comparable-store sales were up 5.4% and 4.3% at company-owned and franchised locations, respectively. Plus, 11 new stores were opened during the fourth quarter alone, bringing the total count to 582 at year-end. All of that added up to big gains in sales.

Great news, except that profits lagged behind late in the year. Fourth-quarter earnings increased a mere 5%, dragging the full-year advance down to 20%. That's nonetheless an enviable stat, except that full-year results were up because of lower taxes due to U.S. corporate tax reform passed in late 2017 -- from 26.1% to 12.9%, to be specific.

Expenses were to blame for the sluggishness in the bottom line. Minimum wage hikes were made in various states over the course of the year, causing labor costs to outpace sales growth. Add in a little inflation on food and material, and it added up to a lackluster report card for earnings.

Two big reasons for hope

Though earnings didn't live up to the same hype as sales did, there's reason to believe that could change in 2019. First is the company's growth outlook. CEO Kent Taylor had this to say:

In addition to the company's measured approach to new store openings, comparable sales keep chugging higher. Nearly two months into the first quarter, comps are up 6% compared with the year prior. The company's full-year outlook is for positive momentum, helped in part by a menu price hike of 1.5% to kick off the second quarter and an enduringly loyal customer base.

Second, while higher wages will continue to weigh on results (management called for a mid-single-digit increase in 2019), some of that pressure should ease as Roadhouse laps the big labor cost increases over the summer months. Thus, while some near-term pressure remains, the profitability picture should improve later in the year -- assuming sales momentum continues.

In short, while investors may have been left wanting more from the fourth quarter, there's still a lot to like about the steakhouse chain right now.

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Nicholas Rossolillo and his clients own shares of Texas Roadhouse. The Motley Fool owns shares of and recommends Texas Roadhouse. The Motley Fool has a disclosure policy.