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Restaurateur Texas Roadhouse Inc.’s second-quarter 2013 earnings of 28 cents per share missed the Zacks Consensus Estimate by 3.5% and were flat year over year. Margin shortfall was offset by lower taxes, which led to flat earnings in the quarter.

Total revenue climbed 10.0% from the prior-year quarter to $352.1 million, benefiting from positive comparable sales growth and 6.4% higher store weeks. Comparable restaurant sales grew 4.5% at company-owned restaurants and 5.3% at franchised restaurants. However, reported revenues lagged the Zacks Consensus Estimate of $354.0 million.

During the quarter, restaurant operating margin dropped 47 basis points (bps) to 18.6% due to higher commodity costs. Food cost inflation was around 6.0% in the quarter mainly driven by higher beef costs, which weighed on labor and other operating costs leverage.

Store Update

During the quarter, Texas Roadhouse opened 6 company-owned restaurants and 1 franchised restaurant. At the end of the second quarter of 2013, the company operated 405 restaurants, of which 330 were company-owned and 75 were franchised.

Texas Roadhouse remains on track to ramp up its development pipeline in 2013. In 2013, the company aims to unveil 28 new units. The development schedule is expected to be backend loaded with two-third of openings taking place in the second half of the year.

Outlook

For 2013, the company anticipates positive comparable sales growth and food cost inflation in the range of 6.5% to 7.0%, slightly higher than the previously guided range of 6.0% to 7.0%.

Management expects pressure on restaurant margins to be pronounced in the back half of the year due to higher average check and lower food cost inflation in the first half of the year. These benefits are not expected in the second half. Food cost inflation is expected to come in at the range of 7% to 8% in the third quarter and 6% to 7% in the fourth quarter.

Comps at company restaurants for the first four weeks of the third quarter increased 1.9%, indicating an average start to the next quarter.

Our Take

While we have a favorable view of Texas Roadhouse’ ability to continuously register solid comparable sales despite a tough consumer environment, shortfall in restaurant margin remains a persistent concern with the company.  

Beef costs, to which the company is most exposed to, have been a concern for quite some time. With management’s projection of a higher rate of cost inflation for the remainder of the year, margin pressure will keep bothering the company. Going forward, we believe that it might get difficult for management to weather cost issues if consumer discretionary spending slows down.  

Texas Roadhouse currently carries a Zacks Rank #3 (Hold). Some restaurant companies that are worth a look at the current level are Red Robin Gourmet Burgers Inc. , Domino’s Pizza Inc. and Famous Dave's of America Inc. all of which carry a Zacks Rank #2 (Buy).

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