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Texas Roadhouse Inc. (TXRH - Snapshot Report) recently posted third quarter 2012 earnings of 25 cents per share, which beat the Zacks Consensus Estimate of 23 cents and prior-year earnings of 22 cents.

Total revenue climbed 15.0% from the prior-year quarter to $308.7 million, benefiting from comparable sales growth. Reported revenue was almost in-line with the Zacks Consensus Estimate of $309.0 million. Company-owned restaurant sales increased 15.0% to $306.1 million, whereas franchise royalties and fees jumped 11.0% to $2.6 million. Comparable restaurant sales grew 3.6% at company-owned restaurants and 4.9% at franchised restaurants.

During the quarter, restaurant operating margin slipped 8 basis points (bps) to 17.9% on a 31-bps rise in cost of sales and 33-bps hike in labor cost, partially offset by a cut of 51 bps in other operating costs and 5 bps in rent.

Store Update

During the quarter, Texas Roadhouse opened 3 company-owned restaurants but did not open any franchise restaurant. The company did not close any unit. As of September 25, 2012, the company operated 384 restaurants, of which 312 are company-owned and 72 are franchised.

It remains on track to ramp up its development pipeline in 2012 and 2013. Management is still focused to achieve its 2012 goal of opening 25 new units, reflecting a 25% growth from the unit base in 2011. In 2013, the company aims to unveil 28 new units.

Liquidity Position

Texas Roadhouse ended the quarter with cash and cash equivalents of $84.3 million and long-term debt of $51.4 million.

Outlook

Including legal settlement charges of 4 cents, the company expects 2012 earnings towards the higher end of its previous guided range of 94 cents to 96 cents. The company expects food cost inflation in between 6.5% and 7.0% in fiscal 2012 versus the previous estimate of 7%.

Texas Roadhouse maintained its comparable-store sales growth outlook of 4.0–4.5%. Capital expenditure is expected to be $90 million for 2012.

For 2013, the company anticipates positive comparable sales growth and food cost inflation in the range of 5.0% to 8.0%.

Our Take

Despite tough consumer environment, Texas Roadhouse continues to witness growth in comparable sales. Comparable restaurant sales, for the first four weeks of  fourth quarter 2012, have already increased about 3.0% compared with the prior-year period. Thus, comp sales growth trend remains encouraging. The casual dining chain also remains focused on enhancing shareholders' value and expansion through unit growth.

However, food cost pressure, wary consumer spending and intense competition among restaurant companies with respect to price, service; location and concept in order to drive traffic remain headwinds.

Texas Roadhouse, which competes with Domino’s Pizza, Inc. (DPZ - Analyst Report), 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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