While promising data on the coronavirus vaccine front has boosted the prices of casual dining company stocks lately, the pandemic has created a difficult operating environment for the sector. Naturally, this includes Texas Roadhouse (TXRH 0.07%).
However, the timing and distribution of a vaccine remain uncertain. In the meantime, cases are spiking throughout the U.S., and local authorities are reimposing certain restrictions, including on dining establishments. Therefore, Texas Roadhouse continues to face challenges.
However, all is not glum for the company. There are reasons patient investors are likely to get rewarded by owning the stock.
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Achieving success
Offering high-quality food at reasonable prices, Texas Roadhouse has struck a chord with restaurant goers. That's why it has posted same-restaurant sales (comps) increases for the last several years, including 4.7% in 2019. Higher profitability accompanied the increased sales, with operating income growing to $212 million, nearly 50% higher than 2015's figure.
While this past success is encouraging, the world has changed immensely this year. Management's adjustments to the current climate should provide investors a sense of comfort, though.
Quickly adapting
After the coronavirus spread and became a major health concern, state and local governments took steps to restrict people's activity. Therefore, by the end of March, Texas Roadhouse closed all of its restaurants to indoor dining, restricting customers to pick-up and delivery.
However, management deserves credit for rapidly adapting to this model and adding outdoor seating. During the second quarter, its comps improved every month throughout the quarter, from negative 46.1% in April to down 14.1% in June.
As governments eased restrictions, comps further improved in the third quarter. While they were down 6.3% for the period, comps went from negative 13% in July to just a 0.5% drop in September. They went into positive territory in October, rising 0.8%. The quarterly sales drop did impact profitability, with Texas Roadhouse's operating income down 22% year over year to $35 million.
Still, while no one knows what the future may hold, it is impressive that Texas Roadhouse was able to quickly and efficiently adjust to the conditions so customers clearly felt comfortable going back to the restaurants once they had the opportunity.
Growth opportunity
Opening up about 30 restaurants annually for the last several years, Texas Roadhouse has room to expand domestically and internationally. At the start of the year, there were 611 locations, the bulk of which it placed in the U.S., but it has also been franchising international locations over the last few years. Management planned to open at least 30 restaurants in 2020. Although COVID-19 altered its plans, the company expects to still expand by 20 restaurants this year.
Texas Roadhouse has ramped up construction, with 18 restaurants in the pipeline. It has these scheduled to open this quarter and the first half of next year. The sales numbers show that management is on the right track with its expansion plan.
While the virus may keep restrictions in place, the company has muddled through it and customers have found their way back to Texas Roadhouse. This makes sense -- reasonable prices and good food will always draw a crowd. With the market far from saturated, the company has plenty of growth left. That makes the shares a good place to park your money and fatten your wallet.
