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In a Hyper-Competitive Restaurant Industry, Texas Roadhouse Is Winning

By Nicholas Rossolillo - May 3, 2018 at 5:41PM

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This year got off to a great start.

Casual dining chain Texas Roadhouse (TXRH -1.35%) reported solid results for its first quarter of 2018. In spite of a restaurant industry that continues to struggle, the company has been a standout, steadily expanding and winning over diners from the competition. So far this year, the restaurant's strategy is still working.

The numbers

Metric

Q1 2018

Q1 2017

Y-o-Y Change

Revenue

$627.7 million

$567.7 million

10.6%

Operating expenses

$562.8 million

$518.7 million

8.5%

Earnings per share

$0.76

$0.48

58.3%

Chart by author. Data source: Texas Roadhouse quarterly earnings. Y-o-Y = year over year.

Roadhouse's top line was driven by increasing foot traffic at its restaurants and an additional 33 locations in operation. Management cited inflating labor costs and an expected 1% inflation in the cost of food as headwinds, but costs were kept in check despite those challenges. That and a lower tax rate equated to a 58% increase in earnings compared to a year ago.

Roadhouse is winning the restaurant battle

The Roadhouse chain was firing on all cylinders again this quarter. Not only were there more stores than last year, but same-store sales -- a combination of foot traffic and guest bill -- increased 4.9% at company locations and 3.9% at domestic franchise locations. Because of industry overexpansion, the average restaurant has had declining foot traffic the last few years. That has led to mostly negative comparable sales, making Texas Roadhouse's run that much more impressive.

Time Period

Y-o-Y Same-Store Sales Increase -- Company Owned Stores

Y-o-Y Same-Store Sales Increase -- Domestic Franchised Stores

Q1 2018

4.9%

3.9%

2017

4.5%

4.2%

2016

3.6%

3.3%

Chart by author. Data source: Texas Roadhouse quarterly earnings.

All of that implies that Roadhouse is gobbling up market share from the competition, and the momentum is continuing. Management reported that four weeks into the second quarter, same-store sales at company-owned restaurants are up another 8.5% compared to a year ago. For a well-established chain with over 560 locations, that is impressive growth.

The exterior view of a Texas Roadhouse store at night. The company's state of Texas logo is displayed on top of the building.

Image source: Texas Roadhouse.

Irons in the fire

So far, there have been 11 new openings this year, on track toward about 30 for the whole year. Specific numbers for development in 2019 weren't given, but CEO Kent Taylor said he's signed agreements for 27 sites so far.

Up to seven of the new stores this year will be Roadhouse's newer sports bar concept, Bubba's 33. There were only 21 of them at quarter end, and the company is still developing and learning from the new locations.

What it has found out so far, though, is that store profitability is much higher at Bubba's 33 than at Texas Roadhouse. Beer and bar-style food simply carry higher profit margins. Same-store sales are also beginning to increase as more consumers become aware of the name, so the plan is to continue slowly opening new Bubba's restaurants over time and continue perfecting the model.

This year got off to a great start for Texas Roadhouse. Management reiterated that little is changing going forward. Executing on its development plans and continuing to get better at what has worked so far -- offering a great value on food and making sure guests have a great time -- is the strategy here. With the numbers the chain has been posting amid a backdrop of restaurant industry struggles, there's no arguing with that.

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