Texas Roadhouse Second Quarter Results: Slow and Steady

Texas-themed steakhouse chain Texas Roadhouse (TXRH 0.07%) just reported another solid quarter. The spring of 2018 was a busy one for the small-town America restaurant, with foot traffic continuing to edge higher and a few new store openings getting a warm reception from diners.

In an industry that's being punished by years of overexpansion, Texas Roadhouse's discipline is paying off for investors in spite of higher costs.

The second-quarter at a glance

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

The trend in the restaurant industry for the last decade has been fast-casual -- higher quality food in a quick and convenient format like a fast-food chain. Casual dining has taken a hit as a result but not Texas Roadhouse. Its focus on suburban America and keeping menu prices low has helped its stores get busier while the competition's foot traffic has suffered, and that was on display in the second quarter.

While overall sales got a big boost from 34 more stores in operation than a year ago, the bigger bump came from a 5.7% and 3.9% increase in comps from company-owned and franchised locations, respectively. The primary driver was 4.3% more foot traffic than a year ago, with the balance coming from slightly higher menu pricing.

Restaurants have been dealing with labor and food inflation. But tight cost control helped Texas Roadhouse keep operating expenses from getting out of hand. Labor costs went up 14.3%, and food and packaging costs for takeout orders were up 10.2%. That was slightly higher than revenue growth, but a lower tax rate thanks to U.S. tax reform lent a hand. Taxes fell to 15.6% in the period from 27.9% in the year prior.

Image source: Texas Roadhouse.

Business keeps getting better

By the end of 2018, management says 27 to 28 new stores will have been opened, including up to five of the new Bubba's 33 sports bars. That's down from the 30 planned new openings announced a few months ago, as two Bubba's 33 openings were pushed to early 2019 by permitting issues.

That's only a 5% increase in store count, and the 30 planned openings for next year will be less than 5%. That includes a handful of Bubba's 33 openings and possibly a new Jaggers fried chicken and burger concept, the first two of which are in operation in the Indianapolis area.

But slow and steady, especially on development of new stores, has served Texas Roadhouse well over the years. Management says it is also being cautious with delivery, an area competitors are expanding into with mixed results. Given Texas Roadhouse's strong performance without it, don't expect it to jump onto the bandwagon anytime soon.

Same-store sales at company-owned locations increased another 4.7% in the first four weeks of the third quarter. In light of the strong results, the company is in talks to possibly acquire some of its franchises to add them back into the company-owned category. The full-year tax rate was also updated to a range of 14% to 15% from previous guidance of 15% to 16%. Plus, there was a more than 7% comps increase at the 12 Bubba's 33 locations opened so far.

Shares are down since the report showed the slower-than-expected earnings increase, but Texas Roadhouse is still one of the best performers in the restaurant industry. A sharp rise in labor, food, and supply costs are weighing down profit growth this year, but the chain is being disciplined as it copes with these headwinds -- all while it continues to grow. This last report wasn't perfect, but it was pretty good considering the situation.