Did Texas Roadhouse Deserve All That Stock Market Sizzle?

Steak-centric restaurant chain Texas Roadhouse (TXRH 0.18%) had been in the doldrums for most of 2019 -- its share price hasn't been above where it opened the year since late April. But following its recent third-quarter earnings report, the stock spiked 20% higher, bringing it back into positive territory. In this segment of the Oct. 29 MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker parse the results -- the company beat earnings and revenue expectations, with help from solidly higher comps -- and talk about what it's doing right on the business side, as well as the longer-range outlook for its smaller chain Bubba's 33.

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This video was recorded on Oct. 29, 2019.

Chris Hill: At the other end of the spectrum, we have Texas Roadhouse. Shares up 21% this morning. Third quarter profits and revenue for Texas Roadhouse came in higher than expected. Same-store sales, they've got the company-owned restaurants, they've got the franchise restaurants. Company-owned doing about 1% higher. Both doing pretty solid. Basically, solid comps for a restaurant of this size.

Bill Barker: Yeah, solid comps. Look, the stock is up 20% or so, so far today. Let's remember that it was down about 15% for the year going into today. Really, it was showing similar solid comps for the earlier part of the year, not giving enough answers to margin decline, which it has now produced a little bit better an answer to. They've raised prices a little bit. They're not talking about raising prices anymore. They've gotten a little more efficient on the labor. If labor prices are stabilizing and you can look at the business as making more money as they make more sales -- and really, they were getting increased sales but flat profits. They bought back shares. They did a little bit of everything right. They also pointed to the first four weeks of this quarter that we're now in as being better comps than last quarter in the 5% somewhere range. So, people are showing up, they're eating, they're getting a little more efficient. They bought back some shares while share price was weak. Whether all that should amount to a 20% rise in the stock price, I don't know. I think that's maybe a little bit short covering. Maybe people were expecting some continued margin weakness. But they've provided answers that are reversing people's opinions about that today.

Hill: So, Texas Roadhouse has the namesake restaurants. That's obviously overwhelmingly the biggest part of the business. But they've got essentially a sports bar concept, Bubba's 33. One of the things that came up in the conference call was -- obviously, that's a much smaller part of the business, but they've been growing that. They've been seeing much stronger comps there, encouraging enough that they're looking to expand those. That's one of those things that, because it is such a small base, there's only so much that Bubba's locations are going to do to move the overall needle. But, I think, if you're looking at Texas Roadhouse, that's something you want to keep an eye on over the next, call it six to 12 months. See if they are able to continue to grow that location count. At some point, if they can keep those comps growing -- and in this latest quarter, those comps are roughly double what they were doing at the company-owned Texas Roadhouse location -- if they keep that up, that's something that actually will start moving the needle in 2020, 2021.

Barker: Yeah, I think that Bubba's has been a question for a number of years. They have conveyed they're still working on things. They like what they see over the long term. But they put a little bit more of an immediate future in terms of, they've sorted out some of the issues that they were finding in terms of locations, and now that the name has a little bit more of a national presence, as it has grown, it's got a lot more room to grow. Texas Roadhouse has never been a rapidly expanding operation. They're a solid, consistently expanding operation. But you can see an end to that, especially given the markets that they tend to pursue, which are not an infinite number of downtown locations. They're more outside, and they like to be the best restaurant opportunity in the town or the area that they locate in. That reaches a limit on the number of times you can do that. Bubba's gives them, perhaps, a second idea, which is actually working out well.