There's been a lot of debate recently about the need for companies to live up to expectations on a quarterly basis. Many investors take their eyes off the long-term story behind a stock, focusing instead on whether numbers every three months are better or worse than what the analysts following that stock are expecting to see. For steakhouse specialist Texas Roadhouse (NASDAQ:TXRH), failing to meet quarterly projections led to a substantial drop in its stock, but the fundamental growth story for the restaurant chain remained largely unchanged.
Coming into Monday evening's second-quarter financial report, Texas Roadhouse investors had high hopes that the company would continue to produce the revenue and profit growth that they've seen in past periods. Texas Roadhouse was able to keep growing, and for those who can look beyond the last three months and put the latest results in the proper context, the restaurant chain seems to be on track to stay on its long-term growth trajectory.
How Texas Roadhouse fared during the spring
Texas Roadhouse's second-quarter results disappointed traders who focused primarily on projections. Revenue of $629.2 million was up 11% from where it was the previous year, but those following the stock were looking for a 12% growth rate on the top line. Similarly, an 18% rise in net income, to $44.2 million, produced earnings of $0.62 per share, but investors had expected to see $0.67 per share from the restaurant chain.
Fundamentally, Texas Roadhouse continued to show that it can defy tough trends in the restaurant industry and deliver growth. Comparable restaurant sales were up 5.7% at company-owned locations, accelerating from its growth rate three months ago. Domestic franchise locations saw comps rise 3.9%, which was consistent with past periods.
In addition to squeezing more from its existing locations, Texas Roadhouse still wants to keep opening new locations at a healthy pace. During the quarter, the company opened seven new restaurants, including three Bubba's 33 locations. In addition, the steakhouse chain continued its globalization by opening one more international franchise restaurant during the period. You can now find 565 Texas Roadhouse eateries in all but one state in the U.S. and in eight other nations worldwide.
Yet as investors have seen before, Texas Roadhouse kept struggling with costs. Rising labor rates sent restaurant margin rates down by more than three-quarters of a percentage point, to 18.2%, and the company's managing-partner conference added to general overhead expenses, as well. To a substantial extent, those higher costs offset the benefit from a huge cut in income tax rates that Texas Roadhouse paid, falling from nearly 28% to less than 16% over the past year, thanks to tax reform.
CEO Kent Taylor celebrated just how reliable the business has been lately. "We are pleased with the consistency of our traffic gains this year," Taylor said, "and the continued strength headed into the third quarter." The CEO specifically pointed to ongoing double-digit sales growth as a sign of health for Texas Roadhouse.
What's on tap for Texas Roadhouse?
Texas Roadhouse also has high hopes for treating its investors well. As Taylor put it, "We continue to fund our new restaurant growth through internal cash flow, while also returning excess capital to our shareholders through dividends, further driving shareholder value."
However, there were a couple of warning signs on the horizon. Texas Roadhouse said that early indications from the third quarter suggest a potential slowing in comps growth, with comparable sales up 4.7% at company-owned locations so far this quarter. In addition, the steakhouse chain acknowledged that its expansion plans haven't moved quite as quickly as originally hoped, and so it cut its expectations for new restaurant openings for the full year to 27 or 28, down from 30 earlier in the year.
It was those negative numbers that most Texas Roadhouse investors looked at most closely, sending the stock down sharply immediately after the results were announced, before recovering somewhat to just a 5% drop at the close on Tuesday. Yet given how well the company has done over time in outperforming most of its restaurant peers, fears about the smallest of possible shortfalls seem overblown and don't really justify the pullback that the share price saw in response to the news. Long-term investors can continue to have confidence in Texas Roadhouse's strategic vision for the future.