Why the Market Liked McDonald’s So Much Better Than Texas Roadhouse

Considering that both fast food giant McDonald's (MCD 0.43%) and mid-market steak joint Texas Roadhouse (TXRH 2.28%) delivered strong same-store sales growth in their quarterly reports this week, you might expect Wall Street to have rewarded both with a share price boost. But no, only one got any love.

In this segment of the Market Foolery podcast, host Chris Hill and MFAM Funds' Bill Barker talk about why Texas Roadhouse stock lost more than 11% Tuesday -- look to its bottom line and labor costs -- as well as what McDonald's has been doing right with its investments in remodeling, tech, and delivery.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 30, 2019.

Chris Hill: Let's get to a tale of two restaurants. I'm just going to give you one data point and have you explain what the heck is going on here. McDonald's first-quarter, same-store sales in the United States, up 4.5%. Texas Roadhouse. First-quarter comps, up more than 5% in the U.S. Shares of McDonald's up about 1%, shares of Texas Roadhouse down 11%. What in the world? We'll get to McDonald's in a second because it seems like they're doing some things right. What is going wrong with Texas Roadhouse that they're putting up these kind of comps -- comps which, by the way, they have consistently put up for a bunch of quarters, and most restaurants would kill for these kind of comps.

Bill Barker: It's the bottom line. That's the problem. Labor is the specific problem. At a very high level, you might say, these are nice problems to have from a standpoint of the economy as a whole. People are going to their restaurants, they're opening new restaurants. People are spending more money when they go. Texas Roadhouse provides an experience of value for the service you're getting. They are not really raising prices very much. They just took a 1.5% menu price increase. But their labor costs are going to be up 8% for the year. Part of that is they have more labor working more hours. But part of it is that labor costs more to keep employed. People are willing to leave, and they are seeing I think 120% turnover. That is going to cost you. You've got to constantly be training new employees. New employees are finding that their minimum wage is going up in other places. The experience of working for Texas Roadhouse has to be competitive for people to be happy doing those jobs and serving customers well, or else the whole thing crumbles. So you see they're maintaining a level of service that people are coming back for, but they're not pocketing as much profit. And the biggest chunk of that is labor.

Hill: In terms of McDonald's, it seems like the investments that McDonald's has been making are starting to pay off. They've been remodeling a bunch of locations. The kiosks that they've installed are starting to pay off. They're doing a good job with delivery. I'd be remiss if I didn't mention the fact that the company also credited both bacon and donut sticks in the performance of this latest quarter.

Barker: They did. Everybody seemed to bite on that one, as, "Look here, this is what explains it." I think that when you talk about where their investments have been, it's remodeling, it's kiosks, this is not investments in labor. They are, I think, doing a better job than Texas Roadhouse today in separating the increase in sales, because they're getting good comp numbers as well, from increased labor costs. You can do that by automating more. They, of course, are not as employee dependent as a sit-down restaurant is. There's more labor involved in the back of the restaurant for a thing like a steak at Texas Roadhouse than McDonald's. So they're not seeing the same pressures. They are seeing some, but it's showing up in today's numbers.

Hill: Did they give any color on whatever their version of an Impossible Whopper could be? That's something we've talked about recently. By the way, yesterday, we talked about Restaurant Brands, parent company of Popeyes, Tim Hortons, and Burger King. I neglected to mention yesterday that one of the things that came out of their quarter was, Burger King, the tests they've been doing of the Impossible Whopper in the St. Louis area apparently has been going very well, because they're going to roll that out nationwide later this year.

Barker: I don't know, I didn't get a copy of the transcript yet from the McDonald's call. I would be surprised -- not that surprised, but it would make sense for them to field a question about that, since Burger King's in the news for this right now. Maybe that's the direction that they're going to need to be competitive on. They're certainly not closing their eyes to what Burger King is doing.

Hill: Yeah, I would be surprised, both if they didn't get asked about it, and I would be even more surprised if they weren't actively working on it. To go back to the donut fries, this is not a frivolous thing. I remember when they rolled this out, and there was the initial response, because Dunkin Donuts had come out with these donut sticks. McDonald's got a little prickly like, "Look, we've been testing this," because they were being called copycats for doing it. But the reviews were great. Also, I thought it was incredibly smart of McDonald's to just say, "Yeah, we've been doing breakfast all day. This item right here, this is not going to be all day. This is just going to be in the morning." I think that's the kind of thing that can boost the average ticket price and have a nice ripple effect for them. And it has.

Barker: Yeah. Apparently, that is one of the places where the competition is picking up, is in the breakfast space. I think that between that and, as we mentioned, the bacon event -- which sounds like it should have been successful, and it's getting credit for being successful, where they gave a side order of bacon away with any order for an hour on January 29th. I think we missed that one.

Hill: I totally missed that one.

Barker: You could have had free bacon with anything that you were ordering. As long as you were ordering something. "I want a shake." "Would you like some bacon with that, sir?" "Why, I hadn't thought about that, but yes, I would." That was, I think, the experience, for one hour.

Hill: The answer is almost always yes.

Barker: Would you like a free side of bacon with that? I mean, the take rate on that is very high.

Hill: Very, very, very high.