As far as restaurant stocks go, Texas Roadhouse (TXRH 1.22%) has been one of the best there is in the last decade. At the onset of 2020, shares were sporting a 400% return over the last trailing 10 years, powered by Roadhouse's focus on slow-and-steady expansion in suburban America.
Coronavirus has changed things for the steakhouse, though. It was an epic run for comparable-store sales growth (or "comps," a combination of foot traffic and guest ticket size), but the rising metric has come to an end after bucking the unpredictable swings in comps for the rest of the industry. But long-term winners tend to continue winning, which is why I'm still in Texas Roadhouse acquisition mode after its first-quarter 2020 results were released.
First, the bad news
As to specifics on comps, Texas Roadhouse has been growing the metric for its existing store base for years. But in Q1, things took an abrupt turn thanks to the coronavirus. January and February comps at company-operated stores were positive 8% and 4.2%, respectively, before tumbling 29.7% in March. Q1 2020 comps ended down 8.4% for company-operated locations and down 8.5% for franchise stores.
Chart by author. Data source: Texas Roadhouse.
All told, revenue fell 5.5% to $653 million and restaurant-level profit fell 36% to $78.6 million (good for a profit margin of 12.1%, down from 17.9% a year ago) in Q1.
Comps bottomed during the week ended March 24 at a rate of negative 73%, and finished April at negative 46.7% -- substantially improved but still a painful figure to look at. Much will depend on how smoothly efforts to restart the economy go, but it's safe to say the second-quarter headline numbers will be worse than the first quarter's. Roadhouse management, led by founder and CEO Kent Taylor, pulled any financial guidance, but it's safe to assume full-year comps will likely end negatively for the first time in a decade.
Image source: Texas Roadhouse.
Why buy now?
Either way, shares look like a buy to me right now. I'm a big fan of this restaurant operator and the measured approach Taylor and his team take to growing the business. But in this time of crisis, the team took drastic action, experimented, and landed on an operating model that's working for the moment. In a letter to shareholders, Taylor expounded:
As everyone's world has obviously changed, so has ours. I still remember the early days of Texas Roadhouse back in the mid-1990's, when three of our first five stores failed. Survival mode was where I lived for quite a few years. Well, damn, if I didn't find myself right back there again. Five restaurants have become 600 and 400 employees have become 75,000+. Back then in my mid-30's, our Roadies were close to my age, and I thought of our company as a people company that happened to serve steaks. We were a family. Today, I still view us as a people company that serves steaks, however the stakes (no pun intended) and our family are obviously quite larger.
Somehow my early struggles, along with my many years of operating restaurants (some fifteen years of running daily shifts), have helped provide me with a unique perspective. Perhaps a different perspective than that of a marketing or finance person that may be running a restaurant company (no offense, just sayin'). I try as much as possible to live in the mindset of our store Managing Partners.
Response efforts are working. A temporary "to-go only" operation has grown from an $8,400-a-week restaurant to-go sales average to $56,000 in average weekly sales at the end of April, with some stores doing more than $100,000 a week. Other experiments like takeaway meal kits are also being tested. What was a fight for survival turned into massive success -- at least measured against the current world backdrop -- and Texas Roadhouse will begin opening up dining rooms on a limited basis in May. It's early on, but it would appear a new base from which to grow has been established.
The really good news here was that Texas Roadhouse had zero debt headed into this crisis, in stark contrast to many of its casual dining concept peers. The company drew down $190 million from its revolving credit facility as a safety net to increase its cash and equivalents position to $231 million. In April, $30 million in cash was used but no additional debt was taken. Dividends and share repurchases were temporarily suspended as well. Under its limiting foodservice circumstances, Roadhouse expects to eat into its war chest at a rate of $5 million a week -- certainly not a sustainable rate, but nonetheless pretty good given the situation!
In times of economic distress, the restaurant industry gets hit hard, and that's especially the case during the current COVID-19 lockdown. But Texas Roadhouse is in enviable shape, has made great strides to adapt with the times, and has enduring fans. When it's most uncomfortable to do so is usually the time to purchase quality restaurant stocks. Down 21% so far in 2020 as of this writing, Roadhouse is near the top of my purchase list at the moment.
