Texas Roadhouse Is Building Out Fast, but at What Cost?

Full-service and partially franchised chain Texas Roadhouse (NASDAQ: TXRH  ) released earnings this week, and the results were mixed, if ultimately encouraging. The roughly 400-restaurant-strong business, operating under its namesake as well as Aspen Creek, failed to meet analyst estimates on both the top and bottom lines, but continues to grow attractively on a unit basis. Additionally, the company is tacking on new restaurants at an impressive clip -- which is likely to buoy the top line and generate more cash down the line. The market may not have reacted positively to the earnings report, but there is more to Texas Roadhouse that investors should know in order to make an informed decision.

Earnings recap
For the third fiscal quarter, Texas Roadhouse saw its top-line earnings grow 8.5% to $334.8 million, but that wasn't enough to satisfy the Street, which expected roughly $4 million more. On the bottom line, the company actually saw earnings fall slightly -- about $0.01 per share, to $0.24 per share. Average analyst estimates saw earnings coming in on par with those of the year-ago quarter.

It wasn't all bad news, though, as the company managed a 2.6% bump in same-store sales, with a 4% gain coming from franchised stores. Since the beginning of the year, the company has opened 14 new company-owned stores and four franchised stores.

Pre-opening costs (associated with company-owned stores) and commodity costs are keeping pressure on earnings. The latter should not be an issue going forward, though, as management sees lower commodity inflation in 2014.

For the full year 2013, Texas Roadhouse is expecting 28 new restaurants and 7% food cost inflation. For 2014, the company looks to add another 25 to 30 restaurants and low-single-digit cost inflation. Capex should remain steady for the next year, around the $105 million mark.

Based on new restaurant growth, Texas Roadhouse may be an appealing stock going forward, but the company could improve to bump cash flow and lower costs.

Franchise away
Management's strategy is to build out company-owned stores, which is a guaranteed way to increase the top line quickly and keep a close hold on the company's expansion. The thing is, for easily scalable full-service restaurants like Texas Roadhouse, a franchise model is usually better for the company and investors over the long term. Revenues don't grow as fast, but the company generates long-term recurring cash flows and enjoys lower costs (such as the pre-opening costs that are keeping earnings limited at the moment).

Growth investors should take a closer look at the company, as it's fairly valued at around 21 times forward earnings (pricey compared to some peers, but not so when new restaurant expansion is taken into account). For more value-oriented investors, wait to see the company's ROIC on the new stores and whether management puts the pedal down on more franchised stores. Either way, the company should be increasing its free cash flow over the long term, and deserves to be on an investment watchlist.

3 must-have stocks for your watchlist 
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2706498, ~/Articles/ArticleHandler.aspx, 4/24/2014 5:43:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement