Restaurateur Texas Roadhouse
To help us make sense of its value as an investment, I will be joined by the ever-optimistic Bodhi Zappa and always-skeptical Hank Schofield. Blending our bullish, bearish, and Foolish perspectives, we will use the company's latest quarterly conference call as a springboard for our commentary.
On the latest results:
Bodhi: Before responding to management's remarks, I have to say I'm totally blown away by its recent performance. Fourth-quarter revenues and operating income increased 21.4% and 19.2%, respectively. Restaurant openings for fiscal 2005 increased 14.5%. Double-digit growth in revenues, operating income, and units . are you kidding me?
Hank: Whoa, partner. You've been sitting in the sun too long. It had better post strong results, since the market has stamped a trailing P/E of almost 40 on this dog.
Jeremy: OK, you two. Let's highlight a few areas of discussion from the conference call.
Bodhi: CEO G.J. Hart said it best when he mentioned that the company had "a great gift card season" and achieved all of its sales goals, including those that were set "relative to same-store sales." How do you like them apples, Hank?
Hank: Hmph. I'm failing to see what makes this franchise unique. Everybody's doing gift cards, including Outback Steakhouse
Bodhi: I don't see your point. If it works, why not use gift cards? Texas Roadhouse still managed to outpace both the Outback Steakhouse chain and Applebee's
Jeremy: That's a good observation, Bodhi -- comps during the quarter were up 3.6% for company-owned restaurants and 1.6% for its franchised units. But keep in mind you're comparing this up-and-comer with a stalwart like Applebee's that has more than 1,800 restaurants. Considering that Texas Roadhouse had only 221 units at the end of the fourth quarter, it's tough to make a simple comparison between the two concepts.
Hank: Another concern is rising utility costs. When commenting on margins, Hart admitted that his company expects "to experience a quite a bit of utility inflation for at least the first two-thirds of the year." Management has already raised prices once this year, by 1% in mid-January, and he added that it might have to implement another "small increase" later this year. You can see that this has already had an effect on margins -- gross, operating, and net margins have all been on a steady decline over the past year.
Bodhi: Despite the price increases, customer traffic hasn't been adversely affected. The company experienced 4.5% growth in transactions through the first seven weeks of 2006.
Jeremy: There's no question that rising energy costs are a real problem confronting the industry. But it's not like this is a new phenomenon. Energy costs weren't exactly on the cheap side in 2005, yet Texas Roadhouse managed to keep restaurant operating costs as a percentage of restaurant sales -- currently at 82.6% -- relatively flat against the year-ago period. Additionally, CFO Scott Colosi states, "We expect G&A as a percentage of revenue to fall over time." General and administrative expenses for the quarter as a percentage of total revenues declined slightly to 5.8% from 5.9% last year.
Bodhi: For 2006, management expects Texas Roadhouse to earn $0.52 per share, with plans to open an additional 23 to 24 company-owned restaurants and three to four franchised units. Dude, this company rocks -- another year of double-digit unit and earnings-per-share growth is on tap, and I'm drinking it up.
Hank: Maybe you should listen to the rest of the story, where CFO Colosi added, "We now expect the impact on diluted EPS from expensing stock options in 2006 to be $0.08 to $0.09." The $0.52-per-share estimate didn't include the expensing of stock options. Between higher food and utility costs, as well as stock option expensing, it looks like the company isn't expecting much higher than mid-single-digit growth in EPS.
Jeremy: On a comparative basis, however, Colosi did state its EPS forecast would be 29% above 2004. Another significant positive jumped out, and that was his remark that the $65 million to $75 million projected in capital spending for 2006 -- a large part of that to pay for the new restaurants -- will be funded with its existing operating cash flow. This means that it doesn't have to resort to substantial loads of debt to fund growth.
On other commodity items:
Bodhi: Since I seem to be on the winning side today, I'll add that another positive was the expectation of a 1% deflation in commodity costs despite flat beef costs, which make up 55% of the company's food expenses. It is seeing a 10% drop on chicken prices and mid-single-digit declines on ribs.
Hank: Yes, but Colosi added that the company is anticipating inflation in other areas -- "particularly in produce," he said, "because it has been kind of crazy. Even tomatoes were going nuts back at the end of December and early January for us."
Bodhi: Crazy produce and nutty tomatoes. Wonder where they grow that stuff?
On its position in the market:
Bodhi: I dig where the company is positioned in the market right now. In tough economic times, its value-focused menu helps it draw higher-income customers that might otherwise venture toward a Smith & Wollensky
Hank: Well, if he wasn't on record before, he is now. And just how has Southwest Airlines' stock performed over the past five years? It's been pretty flat. I hope that's not an omen for Texas Roadhouse!
Foolish bottom line:
Jeremy: When you hear CEO Hart comment that this is the company's "time to shine," you definitely get the sense the executive team at Texas Roadhouse is a confident bunch. But this confidence is not baseless. Earlier in the call, he stated, "We believe we have a very strong foundation from which to drive continued EPS growth in excess of 20%." Management doesn't seem to be cocky -- but it is comfortable with the company's position in the industry.
With only 200-plus units, the company has ample room for growth. It's good to see that it is currently able to pay for this expansion with existing cash flow. Given its early penetration in the market and the solid operational foundation that it has established, Texas Roadhouse is certainly worthy of further consideration for those with an investment horizon of at least three to five years.
Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.