The restaurant business is tricky to navigate, and steakhouse specialist Texas Roadhouse (NASDAQ:TXRH) has seen plenty of ups and downs in recent quarters as the company tries to turn its solid potential into faster growth. Coming into Monday afternoon's third-quarter financial report, Texas Roadhouse investors wanted to see further signs that the restaurant chain could turn things around from a disappointing spring quarter, and although the company's results didn't give investors everything they had hoped to see, they were nevertheless a step in the right direction. Let's look more closely at Texas Roadhouse and what its latest results say about its future prospects.
Putting the sizzle on Texas Roadhouse's steak
Texas Roadhouse's third-quarter results were mixed from a big-picture perspective. Sales climbed 14% to $438.1 million, almost exactly matching the revenue figure that most investors had expected from the steakhouse chain. On the bottom line, net income grew at a slower 8% pace to $20.5 million, and that worked out to earnings of $0.29 per share, which was a penny less than the consensus forecast among those following the stock.
Looking more closely at Texas Roadhouse's numbers, one key takeaway from the report was that comparable-restaurant sales have remained reasonably strong. Franchise-owned restaurants saw comps jump by nearly a percentage point to 7.7%, offsetting declines in company-owned restaurant comps to 6.9%, falling a bit more than a percentage point.
Restaurant margins continued to weigh on the company, but their impact was far weaker than it was in the second quarter. A decline of about a quarter of a percentage point to 16.6% came largely from higher costs for labor, but the decline was far less than the roughly two percentage point decline last quarter. Higher unit volume actually helped on the margin front, but the combination of higher wages and healthcare costs was too much for Texas Roadhouse to overcome.
Texas Roadhouse mostly kept up its past pace in opening new locations. The company opened the doors on 10 total company-owned restaurants, including one new Bubba's 33 chain location. That nearly doubled the year-to-date restaurant-opening total to 22.
CEO Kent Taylor liked how the company did, saying that "our performance continues to be driven by our commitment to legendary food and legendary service." Taylor also noted that with new stores and same-store growth contributing in roughly equal proportions to Texas Roadhouse's success, the restaurant chain has plenty of room to run higher in the future.
Will Texas Roadhouse grill up a great 2016?
Texas Roadhouse updated its 2015 guidance and also gave its initial outlook for 2016. For this year, the company kept its estimate of 30 new restaurants unchanged, although it said that it would open just four Bubba's 33 restaurants rather than the five it had previously expected. Food-cost inflation has run worse than expected, causing the company to boost its estimate from its former range of 4% to 4.5% all the way to 5%. Texas Roadhouse will also spend about $5 million to $15 million more on capital expenditures this year.
Yet for 2016, at least some of the negative aspects of 2015's situation will reverse themselves, hopefully helping to drive earnings growth. Texas Roadhouse expects positive comparable-restaurant growth in 2016, and it anticipates opening another 25 to 30 locations, including five Bubba's 33s. Texas Roadhouse sees food costs falling by a percentage in the low single digits, and total capital expenditures should end in a range that's close to 2015 expectations, between $155 million and $165 million.
Other players in the space are seeing the impact of food costs and other expense-related factors. Brinker International (NYSE:EAT) suffered negative comparable-restaurant declines for its company-owned restaurants in its most recent quarterly report, and franchise sales growth was minimal. Brinker also expects negative comps to continue into the near future, which makes Texas Roadhouse's lackluster growth estimates seem at least slightly more impressive.
Despite the perception that the company missed some of the expectations that investors had for its results, Texas Roadhouse shares rose more than 4% in the first half-hour of after-market trading following the announcement. In the long run, Texas Roadhouse will have to find even more ways to profit from a recovery in its core industry and cut out some unnecessary costs. Yet if commodity prices behave, then Texas Roadhouse could easily have a lot further to rise in the long run.
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.