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Texas Roadhouse's Earnings Growth Continues to Decelerate

By Dan Caplinger – Updated Nov 2, 2016 at 12:09AM

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A tough restaurant industry held back the steakhouse chain despite solid results.

Growth investors have been quite pleased with the long-term results of steakhouse chain Texas Roadhouse (TXRH -0.12%). Even with the rest of the industry having considerable troubles, Texas Roadhouse has been able to sustain solid growth rates. Naturally, heading into Tuesday's third-quarter financial report, Texas Roadhouse investors wanted to see evidence that the company could keep up its strong track record. When results hit the wires, he steakhouse released results that confirmed its ability to grow, but they did fall slightly short of what many investors were hoping for. Let's look more closely at how Texas Roadhouse did and whether a further slowdown is in the cards. 

Image source: Texas Roadhouse.

Texas Roadhouse keeps cooling down

Texas Roadhouse's third-quarter results showed the modest slowing that longtime investors have gotten used to seeing in recent periods. Revenue was up 10% to $481.6 million, which was almost but not quite as much as the consensus forecast of $483 million. Net income was up 25% to $25.7 million, and that produced earnings of $0.36 per share. However, investors had expected to see $0.37 per share and were thus slightly disappointed.

Taking a closer look at the steakhouse chain's financials, Texas Roadhouse had other signs that its growth was slowing. Comparable-restaurant sales rose just 3.4%, which was a step backward from its performance in previous quarters. Franchise-owned comps improved, but company-owned locations saw a larger deterioration that more than offset the positive impact on the franchise side.

Texas Roadhouse continued to make the most of tough times by cutting costs and driving more of its revenue down to the bottom line. The company saw its restaurant margin figures rise by more than one and a half percent to 18.1%. Texas Roadhouse had to pay higher labor costs, but falling prices for food and ingredients played a key role in helping the steakhouse chain control its expenses.

Expansion continued to play an important role in helping Texas Roadhouse grow even under tough industry conditions. In line with its growth rates from previous quarters, Texas Roadhouse opened seven new company-owned restaurants during the quarter, proving its consistency in its expansion efforts. Of note, two Bubba's 33 restaurant locations were among the seven openings.

CEO Kent Taylor stayed on message with his views on Texas Roadhouse's performance. "We are pleased to report another quarter of restaurant margin expansion and double-digit diluted earnings-per-share growth," he said, adding that "our results were driven by the opening of new restaurants, positive comparable restaurant sales, and continuing commodity deflation."

Can Texas Roadhouse's growth be reignited?

All in all, Texas Roadhouse seems optimistic about its future. In its CEO's words, "As we move into the fourth quarter, our sales momentum continues, with October comparable restaurant sales up 3.8%, including positive traffic growth." Taylor emphasized that Texas Roadhouse intends to keep true to its core mission of providing value and service as it looks ahead to 2017.

For the most part, Texas Roadhouse sees the year playing out in much the same way it did three months ago. It reiterated most of its previous guidance, predicting that comparable restaurant growth will remain positive for the year and keeping income tax rate and capital expenditure expectations unchanged. It expects to open a total of 30 restaurants, including up to 9 Bubba's 33 locations. Most importantly, food price deflation will keep helping Texas Roadhouse's bottom line, with new projections forecasting a 3.5% decline in food costs, up from previous guidance for declines of 2.5% to 3%.

Lastly, Texas Roadhouse gave an initial look at what it expects in 2017. The steakhouse chain sees positive comps for the year, with roughly 30 new restaurants to include seven or eight Bubba's 33 restaurants. Low-single digit food cost deflation and mid-single digit labor inflation seem roughly in line with what investors have seen lately.

Texas Roadhouse shares didn't react strongly to the news, leaving the stock unchanged in after-hours trading following the announcement. What long-term investors need to focus on is whether the steakhouse chain can keep outpacing its peers in a struggling restaurant industry. If it can, then Texas Roadhouse will be in a great position when conditions start to improve to take an even bigger piece of the pie and restore its growth back to levels that investors want to see.

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

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