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Texas Roadhouse Sizzles With Strong Sales Growth

By Dan Caplinger – May 1, 2017 at 6:54PM

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The steakhouse chain had a nice rebound from sluggish conditions recently.

Steakhouse chain Texas Roadhouse (TXRH 1.25%) has had to deal with an extremely difficult business environment for restaurant companies, and investors know all too well how tough times can hurt major players in the industry. Last quarter, Texas Roadhouse disappointed investors with sluggish results, and the company wanted to start 2017 on a better footing.

Coming into Monday's first-quarter financial report, Texas Roadhouse investors expected solid sales growth and modest gains in earnings. The steakhouse company managed to do better than those expectations, and times could be even better going forward. Let's look more closely at Texas Roadhouse, with an eye toward seeing how it performed and whether the good times can continue.

Texas Roadhouse restaurant location.

Image source: Texas Roadhouse.

Texas Roadhouse serves up appetizing financials

Texas Roadhouse's first-quarter results were a breath of fresh air to those who had been troubled by recent setbacks. The steakhouse chain managed to return to double-digit sales growth, boosting revenue by just over 10% to $567.7 million. GAAP net income was down 4% to $34.3 million, but after accounting for a one-time charge related to a legal matter, adjusted earnings of $0.61 per share were better than the consensus forecast for $0.58 per share and also represented growth of more than 10% from year-ago levels.

Taking a closer look at Texas Roadhouse's financials, some signs of new life for the restaurant chain appeared. Comparable-restaurant sales gains accelerated to 3.1% at company-owned locations and 3.8% at franchisee-operated restaurants. That was roughly double the pace of growth in comps during the fourth quarter of 2016, and it showed the power of Texas Roadhouse's commitment to execution.

Texas Roadhouse also continued to expand during the quarter. The company opened six company-owned restaurants and two franchise locations to begin 2017, and it also acquired four of its former franchise locations in Florida and Georgia. The steakhouse operator said that it believes the acquisitions will benefit earnings this year and beyond.

However, Texas Roadhouse continues to face some challenges. Higher labor costs weighed on restaurant margin figures, which fell slightly to close below the 20% mark. Lower food costs weren't enough to offset wage rate inflation completely, and rental costs and other operating expenses were also up from what Texas Roadhouse spent the previous year.

CEO Kent Taylor was satisfied with how Texas Roadhouse did during the quarter. "We are pleased with our top-line momentum and operating performance in the first quarter of 2017," Taylor said, "with positive restaurant sales and traffic growth." The CEO also said that the favorable trends continue into the beginning of the second quarter, with a solid April serving as a testament to the dedication of the restaurant chain's employees.

Can Texas Roadhouse keep looking tasty?

Texas Roadhouse thinks there are a number of good opportunities for future expansion. As Taylor put it, "We remain committed to investing in new restaurant growth that generates solid returns and allows us to maintain a conservative capital structure."

Texas Roadhouse also sees the good times continuing into the remainder of the year. The steakhouse chain reiterated most of its full-year guidance for 2017, including positive comparable restaurant sales growth, roughly 30 restaurant openings, and food cost deflation of between 1% to 2% from 2016 figures. Labor costs should continue to rise at mid-single-digit percentage rates.

One interesting aspect of Texas Roadhouse's strategy is that its namesake restaurant concept is doing better than its Bubba's 33 chain. Among just Texas Roadhouse restaurants, comps of 3.2% were slightly stronger than the overall performance for the company. Indeed, Bubba's 33 expansion paused during the first quarter, although the company expects six of the 30 new restaurants slated for 2017 to be Bubba's 33 locations.

Texas Roadhouse investors showed their enthusiasm for the results, and the stock climbed 9% in after-hours trading following the announcement. After dealing with a rough patch, Texas Roadhouse appears to be back on course to deliver its strong performance going forward. Moreover, if consumers really start eating out again more extensively, then Texas Roadhouse will be in a good position to capture its share of new restaurant-goers to bolster long-term growth.

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

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