Texas Roadhouse Beats, Outlook Up

Texas Roadhouse Inc (TXRH - Snapshot Report) recently posted third quarter 2011 earnings of 22 cents, which exceeded the Zacks Consensus Estimate of 19 cents and grew 15% year over year. The higher-than-expected results were attributable to lower than anticipated workers compensation expense, property tax expense and income tax rate.

Total revenue climbed 10.0% from the prior-year quarter to $269.3 million, in line with the Zacks Consensus Estimate. The upside was attributable to higher comparable sales growth. Company-owned restaurant sales increased 9.6% to $266.9 million, whereas franchise royalties and fees upped 9.1% to $2.4 million. Comparable-restaurant sales grew 4.0% at company-owned restaurants and 3.7% at franchised restaurants.

During the quarter, restaurant operating margin upped 10 basis points (bps) to 18.0% on a 100-bp fall in other operating costs and flat rent, partially offset by an 80-bp rise in cost of sales and a 10-bp rise in labor cost.

Store Update

During the quarter, Texas Roadhouse opened 10 company-owned restaurants and one franchise restaurant. The company plans to open 20 more company-owned outlets in the remainder of fiscal 2011 compared with 2010. The company remains on track to ramp up its development pipeline in 2012.

Management’s 2012 goal includes 25 unit openings, reflecting a 25% growth from the projected base for this year. At the end of the quarter, there were 284 company-owned and 72 franchised restaurants.

Financial Position

Texas Roadhouse ended the quarter with cash and cash equivalents of $55.7 million and total long-term debt of $51.7 million. The company repurchased 1,503,400 shares of its common stock for a total price of $21.2 million.

Outlook

Management expects earnings growth of 7% to 8% in 2011 as compared with its previous expectation of 5%. The company expects food cost inflation of 4% in fiscal 2011. Texas Roadhouse maintained its comparable-store sales growth outlook of 4.0–4.5%. Capital expenditure is expected to be $70 million for fiscal 2011. For 2012, the food cost environment is expected to be more expensive with inflation increasing 7% to 9%.

Our Take

Louisville, Kentucky-based Texas Roadhouse’s top-line momentum is in place, as evident from the continuous rise in comparable sales. The company, which offers specially seasoned steaks, also took a modest price increase in the third quarter. It has also increased its earnings outlook for 2011 based on the lower cost structure in the quarter.

The quarter’s downside was higher pre-opening expenses for future unit development. Texas Roadhouse expects this burden to exist throughout the year. Like many of its restaurant peers, the company is also reeling under rising input cost pressure.

For 2012, the company will have to grapple with higher labor costs due to an increase in minimum and tip wages in 6 states and a rise in the income tax rate given the scheduled expiration of certain federal tax credits at the end of 2011.

One of Texas Roadhouse's primary competitors, BJ’s Restaurants Inc. (BJRI - Analyst Report) reported third quarter 2011 adjusted earnings of 24 cents per share, in line with our estimate. Texas Roadhouse currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are also maintaining our long-term “Neutral” recommendation on the stock.

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