The restaurant industry has been a tough place to do business lately. With so much competition, it's tough to establish a competitive edge. For a long time, Texas Roadhouse (NASDAQ:TXRH) managed to beat the odds and keep ahead of competitors, with customers gravitating to its restaurant atmosphere and finding value in its menu offerings. Yet there are some headwinds that even the steakhouse chain couldn't overcome.
Coming into Monday's third-quarter financial report, Texas Roadhouse investors wanted to see impressive gains in earnings and sales. Yet even though revenue numbers were solid, pressures on its bottom line caught up with the restaurant chain, and shareholders now want more reassurance that Texas Roadhouse can avoid a protracted downturn that could hit the entire industry.
Texas Roadhouse delivers medium results
Texas Roadhouse's third-quarter results weren't entirely satisfying. Sales performance was pretty good, with total revenue jumping 10% to $594.6 million, which was even better than most of those following the stock had anticipated. Yet net income was down 6% to $29.1 million, and the resulting earnings of $0.40 per share fell well short of the $0.54-per-share consensus figure among investors.
On the top line, Texas Roadhouse stayed popular. The company saw comparable-restaurant sales climb 5.5% at its company-owned locations, and franchises posted a solid 4.2% rise domestically. In addition to those same-location gains, Texas Roadhouse opened three new company restaurants, and added another international franchisee to its restaurant network. That helped to bring the total number of restaurants across the system to 575, with 49 states and nine foreign countries represented.
But expense issues weighed heavily on Texas Roadhouse's bottom line. The company reported a massive drop in restaurant margin of almost 1.6 percentage points, to 16.2%. Texas Roadhouse blamed most of the margin decline on higher costs of labor, although insurance reserve adjustments also had a negative impact on earnings. The hit would've been far worse had it not been for lower taxes related to the tax reform of late 2017, which helped to cut tax expense by more than half compared to the previous year's third quarter.
CEO Kent Taylor tried to keep things in perspective. "Our top-line momentum continued this quarter, highlighted by positive comparable restaurant sales driven by positive traffic growth," Taylor said. "However, restaurant-level performance continues to be pressured by higher labor costs."
Can Texas Roadhouse recover?
Texas Roadhouse is optimistic that it can bounce back from the tough industry conditions. As the CEO noted: "We are confident that our business is well-positioned for long-term sales and profit growth." Taylor also repeated Texas Roadhouse's commitment to return capital to shareholders through dividends, while still funding restaurant expansion.
Texas Roadhouse's outlook for 2019 should be that the steakhouse chain is staying on track with its overall strategic vision. The company expects positive comparable-restaurant growth while planning to open 25 to 30 new restaurants, including four new locations of its Bubba's 33 chain. Commodity costs will likely keep rising at a rate of about 1% to 2%, and mid-single-digit percentage growth in labor dollars per store week shows that workforce costs are likely to remain a source of anxiety for investors, for at least the next year.
Texas Roadhouse investors weren't happy about the idea that the restaurant chain couldn't control its costs more effectively, and the stock plunged 11% in after-hours trading following the announcement. Texas Roadhouse has been able to overcome similar obstacles in the past, but investors seem to be taking the latest cost issues more seriously -- as a potential long-term threat to the impressive growth the steakhouse specialist has enjoyed throughout its history.