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Texas Roadhouse Sizzles on Huge Comps Gains

By Dan Caplinger - Feb 21, 2018 at 8:17AM

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Find out how the steakhouse chain bucked a down trend in the restaurant business.

Restaurant chains across the industry have faced tough conditions for a long time, with rising competition and structural challenges combining to put pressure on revenue and profits for many companies in the space. Texas Roadhouse (TXRH -0.96%) has found a way to avoid the restaurant downturn, and its consistent performance has produced big gains for long-term shareholders over the past several years.

Coming into Tuesday's fourth-quarter financial report, Texas Roadhouse investors wanted to see the steakhouse chain continue to show its strength. Texas Roadhouse once again managed to produce impressive financial performance, and even though some investors were still hungry for more, the long-term prospects for the chain look good. Let's take a closer look at Texas Roadhouse and what its latest results say about its future.

Texas Roadhouse restaurant location with grand opening sign and rock landscape.

Image source: Texas Roadhouse.

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Texas Roadhouse's fourth-quarter results marked a great finish to a strong year. Total revenue came in at $545.1 million, up 12.5% from a year ago and matching expectations among those following the stock. Net income jumped 38% to $28.6 million, and that translated to earnings of $0.40 per share, $0.03 higher than the consensus forecast among investors.

In several recent quarters, Texas Roadhouse has managed to build business at its existing locations, making it stand out from the crowd. That happened again this quarter, with a 5.8% rise in comparable-restaurant sales at company-owned locations and a 4.7% gain in comps for franchise restaurants domestically. That the Christmas holiday fell on a Monday this year had a positive impact that Texas Roadhouse estimated to be 0.4 percentage points, but the comps gains overall reflected even faster growth than the company has seen recently.

However, some investors weren't entirely pleased with the way that Texas Roadhouse achieved its results. Income tax rates fell by nine percentage points to just below 20% during the quarter, and that added $0.04 per share to the bottom line. It's unclear to what extent investors had incorporated tax-related changes into their expectations, but some could argue that looking at earnings on an adjusted basis would have left Texas Roadhouse just shy of what they had wanted to see. On the margin front, Texas Roadhouse kept struggling with higher labor costs, although weaker food costs helped to contain overall expense increases and left restaurant margin figures down just a tenth of a percentage point to 17%.

Texas Roadhouse kept on opening new locations at a similar pace to previous quarters. The company opened seven new corporate-owned restaurants and two international franchise restaurants during the quarter. That brought the total number of stores to 550 systemwide.

CEO Kent Taylor celebrated 2017. "We delivered another strong year of results," Taylor said, "with double-digit revenue and diluted earnings-per-share growth for both the fourth quarter and the full year." The CEO also pointed to the 32nd consecutive quarter of positive comparable restaurant sales as a milestone in Texas Roadhouse's history.

What's next for Texas Roadhouse?

Texas Roadhouse has carried its good performance into 2018. Taylor said that comps for the first 55 days of the first quarter were up 4.7%, as the company got a boost from the move of the New Year's holiday to Monday as well.

In terms of official guidance, Texas Roadhouse didn't change much in terms of what it sees ahead for 2018. The company adjusted its tax rate expectations downward to 15% to 16%, but it still sees positive comparable-restaurant sales, 30 new restaurant openings, flat food costs, and mid-single digit percentage gains in labor costs.

The restaurant chain also delivered more dividend income to shareholders. The company declared a $0.25 per share payout for the quarter, up 19% from the $0.21 it had paid previously. The new payout puts Texas Roadhouse's yield at about 1.75%.

Texas Roadhouse investors seemed to have wanted an even better quarter than the steakhouse chain had, as the stock fell 4% in after-hours trading following the announcement. Yet as long as the company can buck adverse trends that are hurting its competitors a lot more, Texas Roadhouse should be in a good position to keep expanding and being successful in the future.

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