With inflation sharply on the rise -- especially in food prices -- restaurant stocks are getting hit hard right now. For many, increased costs are taking a big bite out of profit margins.
One of the top casual chains of suburbia, Texas Roadhouse (TXRH 0.21%), isn't immune, but it's still notching profitable growth. It's also benefiting from its exposure to more rural areas of the country (nearly 700 stores in 49 states, with most locations outside of city centers), a trend that could keep this business steadily on the rise for years.
Despite some economic issues, this steakhouse chain is winning with consumers. Here's why Texas Roadhouse should be on your stock menu.
Disciplined expansion is where it's at
Through the first half of 2022, Texas Roadhouse reported revenue of $2 billion, an 18.4% rise from the same period last year. This was driven by an 11.7% increase in comparable-restaurant sales at company-owned Roadhouses as well as an increase in the number of restaurants in operation (678 at the end of June, up from 647 a year earlier). Only 10% of domestic stores are franchised, and another 34 are operated outside of the U.S. under franchisees.
Overall, investors have been pleased. As of this writing, Texas Roadhouse's stock is only down 4.5% this year, while the S&P 500 is down some 24%.
The company pushed some increased food costs onto the consumer -- but not all of it. Texas Roadhouse said it experienced an 11.8% increase in "commodity inflation" in the second quarter. Think beef and other basic food items, paper and materials, and the like.
Inflation hits both ways. While it has contributed to the higher revenue growth, it's also lowered Roadhouse's profit margins too. Restaurant-level profit margins shrank to 16.6% in Q2 compared to 17.7% last year.
There are other moving parts here as well. Customers opted for the dining room again versus to-go. For example, to-go orders were just over 13% of sales in Q2 versus nearly 17% last year. Some of the new locations the company is building have a larger layout to help with to-go order flow, and that is elevating some construction costs.
But overall, the year hasn't been a total loss. For that, we can thank this restaurant chain's still-robust profit margins and strong balance sheet.
Poised for a run higher?
Through the first half of 2022, Texas Roadhouse's earnings have increased 8% to $2.15 per share, thanks in large part to $230 million-worth of share repurchases. The company had another $167 million remaining on its current repurchase program.
How is a casual dining chain focused on suburban America repurchasing so much stock? While Texas Roadhouse is known among its patrons for its large portions and fair pricing, this is a profitable business. Even with some elevated costs this year, the operating margin was nearly 9% through the first half of 2022, compared to 10% last year.
And the company's slow-and-steady expansion of its store base has paid off well, especially coming out of the pandemic. The company dipped into its balance sheet for some of those stock buybacks this year, but at the end of June, Roadhouse had $180 million in cash and equivalents offset by debt of just $75 million.
While the company waits for food prices to moderate, it's taking other steps to bolster earnings. In October, management will begin speaking with restaurant operators to evaluate another round of menu price increases. And more stock buybacks could be on the way in the back half of 2022.
As of this writing, Texas Roadhouse shares trade for just shy of 24 times trailing 12-month free cash flow. With the exception of a brief pause in 2020, the dividend payout has also steadily increased every year since 2011 and currently yields 2.2% a year. If you're looking for a solid restaurant stock, Texas Roadhouse deserves to be on your buy list.
