Casual steakhouse chain Texas Roadhouse (TXRH 1.06%) is putting up yet another year of double-digit sales growth -- driven by loyal guests who continue to flock to existing locations and a slow-and-steady pipeline of new openings received with equally warm enthusiasm.
In spite of this, the stock is down 15% year to date in 2019. Labor and wage increases have been all the rage -- and not in a good way. Along with other operating expenses, labor costs have been offsetting big gains on Texas Roadhouse's top line, equating to what has been a down year for profits thus far. That trend did moderate in the second quarter, though, and it looks like it is about to moderate even more during the second half of the year.
When happy diners equal falling profits
Total revenue was up 9.6% in the second quarter, adding to the 10% gain in the first quarter and the 10.7% gain in 2018. Fueling Roadhouse's growth was a 4.3% increase in same-store sales (a combination of foot traffic and average guest ticket size) at franchised stores and a 4.7% increase at company-owned stores. With the average U.S. restaurant still struggling under the weight of aggressive industry over-expansion, that makes the steakhouse one of the better performers out there -- at least as far as foot traffic growth is concerned.
|
Metric |
Six Months Ended June 25, 2019 |
Six Months Ended June 26, 2018 |
Change |
|---|---|---|---|
|
Revenue |
$1.38 billion |
$1.26 billion |
10% |
|
Operating expenses |
$1.27 billion |
$1.14 billion |
11% |
|
Earnings per share |
$1.32 |
$1.37 |
(4%) |
Data source: Texas Roadhouse.
Also helping sales were a net 25 more restaurants open at quarter-end versus the year prior, bringing the total count up to 591. It's all added up to a great start to the year, one marked by higher operating expenses that did more than their fair share to eat up the bottom line. And that's what has had investors down. Wages -- including for upper management and other support staff that were increased the second half of 2018 -- have been the primary drag. High labor costs vary from state to state, but aggressive minimum wage hikes in many that started to roll out last year have taken a toll.
|
Expense |
Six Months Ended June 25, 2019 |
Six Months Ended June 26, 2018 |
Change |
|---|---|---|---|
|
Cost of sales |
$445 million |
$407 million |
9% |
|
Labor |
$449 million |
$396 million |
13% |
|
General and admin |
$75.9 million |
$65.2 million |
16% |
Data source: Texas Roadhouse.
The good news is that some of those expenses came in lower than originally anticipated -- like food costs, for example. Beef prices reportedly moderated in May and June, which helped revenue grow faster than total cost of sales did.
Image source: Texas Roadhouse.
On the downhill side of labor expense
There's good news on the horizon, though. As I outlined back in the spring, labor expenses should begin to moderate further as the year progresses and Roadhouse starts to lap some of the initial wage hikes that states enacted in 2018. Management as much as confirmed this, reiterating that full-year wage inflation should come in at 7% to 8%. That would at least imply a slowdown for the back half of 2019, which could help the bottom line mount a recovery.
Paired with more location openings (a total of 25 are expected this year) and further same-store sales increases (comps were up another 4.3% through the first month of the third quarter), 2019 is still salvageable. Either way, Roadhouse seems to think its year-to-date stock performance created a buying opportunity. The company already used $112 million of its just recently announced $250 million share repurchase program during the second quarter alone.
Looking longer-term, though, Texas Roadhouse is still a solid pick in the restaurant industry. The chain's focus on underserved suburban areas and generous portions at a reasonable price continues to resonate loud and clear with the public, and excluding the high expense headwind, the second-quarter performance reiterates that the positive trend is still intact.
