This restaurant stock continues to build on a strategy that has generated strong growth.
The company relies on the menu quality of its moderately-priced main chain, while it slowly expands a subsidiary chain of family-friendly sports restaurants. Although rising labour costs cut into earnings in the latest quarter, revenue and earnings have grown steadily over the past five years. The stock has also raised its dividend by 19% in each of the past five years.
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TEXAS ROADHOUSE (Nasdaq symbol TXRH; www.texasroadhouse.com) is a full-service, casual dining restaurant chain with 570 locations spread across 49 U.S. states and eight foreign countries. Its restaurants operate under two banners—Texas Roadhouse (545 locations) and Bubba’s 33 (25). Most outlets are company-owned.
Founded in 1993, the Texas Roadhouse chain offers moderately priced, full-service dining. It specializes in hand-cut steaks cooked over an open grill. Ribs, seafood, chicken, pork chops, pulled pork and vegetable plates are also on the menu, along with hamburgers, salads and sandwiches. Texas Roadhouse gives its guests a free unlimited supply of in-shell roasted peanuts and fresh-baked dinner rolls.
Bubba’s 33 is a family-friendly sports restaurant offering an assortment of wings, sandwiches, pizza and burgers. That includes its signature 33% bacon-grind patty. In addition, the chain offers an extensive selection of draft beer.
In the last five years, the company’s overall revenue has increased 57.1%, from $1.4 billion in 2013 to $2.2 billion in 2017. Earnings have risen 63.6%, from $80.4 million (or $1.13 per share) in 2013 to $131.5 million (or $1.84 per share) in 2017.
Dividend stocks: Company looks to higher menu prices to boost profitability
For the most-recent quarter, ended September 30, 2018, overall revenue rose 10.0%, to $594.6 million from $540.5 million a year earlier. Same-store sales increased 5.5% for company-owned restaurants and 4.2% for franchise locations in the U.S. Texas Roadhouse opened three company restaurants and one international franchise restaurant in the latest quarter.
The company’s earnings fell 6.1%, to $29.1 million, or $0.40 per share, from $31.0 million, or $0.43, a year earlier. That was well below the consensus estimate of $0.54. The decline was mostly due to higher labour costs, as well as other expenses. That was partially offset by the higher revenue and lower income tax expense.
To boost profitability, Texas Roadhouse is raising menu prices by about 1.7% in November. It may further raise prices in the first half of 2019.
The company also plans to keep expanding: in 2019, it aims to open 25 to 30 new company restaurants, including four Bubba’s 33 locations.
Like most U.S. restaurant chains, Texas Roadhouse is vulnerable to a slowdown in business when consumer confidence is weak and families cut back on eating out. Labour costs for all restaurant operators also continue to move up.
However, Texas Roadhouse will benefit from today’s stronger U.S. economy and high employment. As well, while it has chosen to slowly roll out its Bubba’s 33 concept in order to cut risk, that brand has significant potential to broaden the company’s customer base. Overall consistency in its food quality and customer experience should also continue to pay off.
The stock trades at 26.2 times the forecast 2018 earnings of $2.45 a share, and at a somewhat more moderate 25.3 times the estimated 2019 earnings.
Texas Roadhouse has raised its quarterly dividend by 19.0% annually for the past five years. With the March 2018 payment, the dividend rose to $0.25 from $0.21. The shares now yield 1.6%.
Recommendation in Stock Pickers Digest: Texas Roadhouse is a buy.
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