Steak is an American tradition, and steakhouse restaurant chain Texas Roadhouse (NASDAQ:TXRH) has tried to capitalize on the reputation for Texas beef with its Western-themed locations. Coming into Monday afternoon's second-quarter financial report, Texas Roadhouse investors were optimistic about the restaurant company's prospects, having sent the stock to its highest levels ever. Yet even though the company's locations remain popular among restaurant-goers, Texas Roadhouse wasn't able to bring as much of its growing revenue down to the bottom line in the form of earnings as investors wanted to see. Let's take a closer look at how Texas Roadhouse did and whether it sees tastier times ahead.
Earnings get stampeded by higher costs
Texas Roadhouse gave investors mixed results, doing well on the top line but falling short on profits. Total revenue soared 15% to $454.7 million, easily surpassing the $451 million in sales that most of those following the stock had expected to see. Yet even sales gains stayed at relatively high levels, net income actually fell 8% from the year-ago quarter to $21.1 million. That led to a drop in earnings to $0.30 per share, which wasn't close to the $0.37 per share that investors had expected.
A closer look at Texas Roadhouse's results shows the disparity between the top and bottom lines quite well. The company has sustained its growth in comparable restaurant sales quite well. Despite being a bit slower than in the first quarter, 8.2% gains for locations owned by the company and a 6.9% rise in comps for franchised locations were still fairly strong.
Yet the big problem for Texas Roadhouse was a drop in its restaurant margins, which fell almost two full percentage points to 16.2% for the quarter. Food-cost inflation was the real culprit, as a rise of 9.4% came largely because of soaring beef prices. In addition, labor costs jumped by nearly 15% from the year-ago quarter. As a result, even though the company purchased higher volumes of food ingredients which would ordinarily have produced cost savings, Texas Roadhouse saw its overall expenses climb more than 17%.
Still, the company remains on its growth trajectory in terms of store-count expansion. Texas Roadhouse opened nine more company-owned restaurants during the quarter, including two new locations for its Bubba's 33 chain. That brings the total year-to-date to an even dozen, and the new restaurants have helped produce even greater revenue growth for the company.
CEO Kent Taylor was still happy with the chain's financials, noting that "increasing guest counts and strong operating-week growth" helped drive "solid top-line performance." Taylor also noted that the newest Texas Roadhouse restaurants are meeting high demand and posting strong sales results, and as long as that trend continues, he's optimistic that the company can stay healthy.
How hot can Texas Roadhouse earnings get?
In part because of its ongoing success, Texas Roadhouse is working at accelerating its expansion plans. The company said that it now expects to open 30 new company-owned restaurants in 2015, which is at the upper end of its previously announced range. Assuming that cost concerns turn out to be a one-time event, new sources of customers will only help Texas Roadhouse bring in not only more revenue but also higher profits as well.
Looking forward, though, there are some signs that Texas Roadhouse will eventually start to cool off. Early in the third quarter, the restaurant's comparable-store sales have climbed at just 7.6%, for its company-owned locations. The deceleration isn't huge, but with the company reiterating that it expects only mid-single-digit percentage growth in comps for the full 2015 year, a further slowdown in the future is possible. Meanwhile, the company expects to have to spend more money, raising its food inflation costs for the year to a range of 4% to 4.5% and its capital expenditure budget by around $10 million to a range of $145 million to $155 million.
Texas Roadhouse stock didn't react well to the news, with investors bidding shares down by more than 4% in the first two hours of after-hours trading following the announcement. To satisfy long-term shareholders, Texas Roadhouse will have to keep finding ways to foster further growth. New restaurants will help, but Texas Roadhouse also has to be innovative about keeping expenses in line to keep as much profit as possible.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Texas Roadhouse. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.