A huge number of new restaurant chains have come public in recent years, making steakhouse specialist Texas Roadhouse (NASDAQ:TXRH) look like a seasoned veteran by comparison. With the restaurant chain sporting more than 10 years of experience as a public company, Texas Roadhouse has seen its stock price climb upward dramatically over the past year. As investors prepared for its first-quarter financial report on Monday afternoon, Texas Roadhouse had set a pretty high bar for producing sizable growth, and Texas-sized earnings gains were exactly what shareholders wanted to see on the menu. Let's look more closely at Texas Roadhouse's latest quarter and what's to come for the steakhouse restaurant chain in the future.
Grilling up great results
Texas Roadhouse kept on producing the top- and bottom-line gains that shareholders have come to expect. Sales jumped 16% to $460.2 million, which was actually slightly slower than the 17% growth rate that those following the stock had wanted to see. Yet net income climbed at an even faster 22% pace, and earnings per share of $0.46 were $0.02 ahead of expectations among most investors. Comparable restaurant sales picked up substantially from last quarter's results, with gains of 8.9% for company-owned restaurants and 8% for franchise-owned locations.
Looking more closely at the results for Texas Roadhouse, the most surprising thing is how the company boosted earnings at such an impressive pace despite a slight drop in restaurant margin. Labor costs fell as a percentage of overall sales, but much higher increases in cost-of-sales, which largely includes food-related costs, boosted its share of total revenue by almost a full percentage point. Yet as we saw last quarter, margins on a per-store/week basis rose almost 7%, and a drop in overall overhead expenses as a percentage of revenue helped boost overall profit margins.
CEO Kent Taylor praised the results, noting that "We are off to a strong start for the year, with another quarter of solid revenue growth driven by increasing guest counts and new restaurant development." Taylor also pointed out how good a job Texas Roadhouse has done at controlling costs even in the face of higher commodity prices.
Can Texas Roadhouse keep on smoking higher?
One area where Texas Roadhouse sees more potential is in expansion. The company has already opened three new restaurants this year, with one of the new locations being a Bubba's 33 restaurant. Taylor expects Texas Roadhouse to continue to accelerate its new-restaurant openings, with 25 to 30 new locations expected this year.
At the same time, Texas Roadhouse is largely sticking by its overall guidance for the full 2015 year. So far in the second quarter, comps have grown at an 8.4% rate, which is largely consistent with what the company saw in the first quarter. Again, the company believes that it will see positive growth in comps, food prices to rise 3% to 4%, and capital expenditures of $135 million to $145 million to help finance new stores.
One excellent aspect of Texas Roadhouse for investors is the fact that its balance sheet remains pristine. Despite its intent to grow at a substantial pace, the company has only about $50 million in long-term debt on its books, compared to more than $630 million in shareholder equity. Moreover, with nearly $100 million in cash on the balance sheet, Texas Roadhouse has a huge amount of flexibility in deciding the pace of its future expansion plans without worrying about overextending its ability to raise money in the credit markets.
Texas Roadhouse shareholders were clearly happy about the news, with the stock rising more than 5% in after-hours trading following the announcement. As long as the company manages to keep its growth rates not only strong but accelerating, the gains that investors have enjoyed thus far could end up being just the appetizer for a main course of long-term growth for years to come.