Shares of Texas Roadhouse (NASDAQ:TXRH) were lassoed last week, shedding 12.48% of their value after the casual steakhouse chain posted disappointing quarterly results. The stock had just hit a new all-time high two months ago, but now it's trading 16.41% lower.
Revenue climbed 7% to $484.7 million in the fourth quarter, as new restaurants and a 1.2% uptick in comparable-restaurant sales combined to provide what would be its weakest top-line growth since the second quarter of 2010. Analysts were holding out for revenue of $497.5 and a 3.1% pop in comps.
Texas Roadhouse also fell short of Wall Street's bottom-line targets. Earnings declined 10% to $20.7 million, or $0.29 a share. Analysts were modeling year-over-year profit growth. Wall Street pros expecting net income of $0.38 a share were way off the mark. It's the second quarter in a row that Texas Roadhouse failed to meet analyst estimates, but it fell only 5% short in the third quarter. Texas Roadhouse's net income missed by 24% this time around, and that's not the kind of performance that allows a stock to trade near its all-time highs the way it did when the week began.
Revenue growth has decelerated for seven straight quarters, according to data from S&P Global Market Intelligence. The real shock was Texas Roadhouse's bottom line. This is only the second time the chain has posted a quarter of declining earnings over the past three years and its first double-digit percentage slide since going public in 2004.
Restaurant margin contracted at Texas Roadhouse, as wage-rate inflation teamed up with higher costs related to payroll taxes, insurance reserve adjustments, and gift-card fees to gnaw away at profitability. Texas Roadhouse couldn't take advantage of shrinking food costs in this climate.
It's not easy running a restaurant these days, much less a casual steakhouse. Texas Roadhouse is the last in its niche trading as a standalone namesake company. The 1990s were merry times for casual steakhouse operators, and the initial market success of Outback Steakhouse and Lone Star Steakhouse & Saloon inspired underwriters to take smaller outfits public. LongHorn Steakhouse, Sagebrush, Timber Lodge, Roadhouse Grill, and Logan's Roadhouse were just some of the casual steakhouses that traded publicly. They all either folded or were taken private, and a couple of them came back as a part of larger diversified enterprises.
Saving room for dessert
It was a rough quarter, and the stock reacted accordingly. But there are still plenty of things to like about Texas Roadhouse even after last week's slide. The 517-unit chain, specializing in big portions, complimentary yeast rolls, and buckets of shelled peanuts at every table, is still growing. Texas Roadhouse has pieced together 28 consecutive quarters of positive comps, an impressive achievement of consistency. The streak should keep going in the near term. Comps rose 1.5% through the first 55 days of the current quarter, and Texas Roadhouse is targeting positive comps for all of 2017.
It's not just the original concept fueling the restaurateur's growth. Nearly half of the nine new restaurants Texas Roadhouse opened during the fourth quarter were Bubba's 33, a multi-platform concept that serves up burgers, pizza, and beer in either a casual-dining, sports-bar or outdoor setting. Bubba's 33 isn't moving the needle with just 16 locations, and just six of the 30 new restaurants that Texas Roadhouse is looking to open this year will be Bubba's 33 units. However, it does give the eatery operator a second vehicle to ride if the namesake concept begins to fall out of favor.
Texas Roadhouse fell down hard last week, but the near-term trends are encouraging, with food costs holding steady. As long as customers keep coming, Texas Roadhouse will find a way to make things work.