A temporary rise in the cost of a commodity can sometimes mask otherwise fantastic execution by a company. Such is the case with Texas Roadhouse (NASDAQ:TXRH), as beef prices rose last quarter. Texas Roadhouse is not alone. Other steak chains, such as Ruth Hospitality Group (NASDAQ:RUTH) and Outback Steakhouse of Bloomin' Brands (NASDAQ:BLMN), have also felt a bit overcooked from inflation. Focus on company execution, and look for Texas Roadhouse to serve up impressive numbers in 2014.
Texas Roadhouse's results
Total EPS at Texas Roadhouse dropped 5% to $0.24. Overall sales rose 8% to $335 million, and same-store sales rose 2.6% at company locations and 4% at franchises. The main reason for the lower profit, despite continued sales increases, was food inflation, mostly from beef, which came out to 8%. That spike is difficult to overcome, no matter how well the company executes. Despite this, more guests came through the doors, as measured by guest counts.
Food cost inflation is expected to slow significantly in 2014 compared to 2013, according to CEO Kent Taylor. Meanwhile, Texas Roadhouse expects same-store sales to continue climbing, while the company also continues to open additional restaurants. The total target for new restaurants is 28 for 2013, and another 25-30 for 2014. This is a total growth of 10% in new restaurants, in addition to solid same-store growth in old restaurants. Expect a sizable increase in total sales and profit for 2014.
The conference call
During the conference call, Taylor revealed that the first four weeks of the quarter already saw a 3.4% same-store sales rise. He discussed the company's expectation for slower food inflation in 2014, ending two years of high inflation. Additionally, Texas Roadhouse plans to raise its prices in December. It's reasonable to expect much of that price hike to become extra revenue that falls straight to the bottom line.
Sometimes a company reports something weak in its results and blames the economy or something else outside its control. Often, in reality, the company executed poorly. As such, it's always a good idea to check out competitors to see if similar claims have been made. This helps weigh the credibility of the claim.
Bloomin' Brands owns four different restaurant concepts, two of which are steakhouses. Its steakhouses saw a 2.8% and 3.8% rise in same-store sales, while it's other style concepts only saw a 0.3% and 0.2% increase. Clearly, its steak is seeing increasing demand, similar to what Texas Roadhouse is experiencing. Bloomin' Brands said of its food inflation that it was "primarily associated with beef." As beef inflation stabilizes, the fundamental value of Bloom' Brands steak concepts should rise as well.
Ruth Hospitality Group is the owner and operator of Ruth's Chris Steak House and Mitchell's Fish Market. With results reported on Nov. 1, Ruth's Hospitality Group reported a same-store sales increase of 4.2% for the Steak House, but a decline of 1.4% for the Fish Market. Ruth's didn't mention inflation in its earnings release, but in its conference call it described the situation as a "moderate level of beef inflation thus far in 2013." However, it also said it contracts up to 70% of its beef well in advance. That would likely explain why the inflation effect was "moderate," as only the other 30% was exposed to beef inflation.
Texas Road House's story about food inflation is in line with those of Bloomin' Brands and Ruth Hospitality Group. Since food costs were the only weakness that stood out in the Texas Roadhouse report, it is fair to say the company executed well.
Final foolish thoughts
The intention of Texas Roadhouse for 2014 is simple: lower-cost growth with higher menu prices, continued increased guest count and sales at existing restaurants, and aggressive expansion of new restaurants. All of this points to a strong future. Texas Roadhouse appears in control of its destiny on all fronts. Just make sure same-store sales keep up the trend, and everything else should fall into place as a strong investment.