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Bear of the Day: Texas Roadhouse (TXRH)

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Texas Roadhouse, Inc. (TXRH - Free Report) is a full-service, casual dining restaurant chain that offers assorted seasoned and aged steaks hand-cut daily on site and cooked to order over open gas-fired grills. It operates restaurants under the Texas Roadhouse and Aspen Creek names. The firm also offers its guests a selection of ribs, fish, seafood, chicken, pork chops, pulled pork and vegetable plates, an assortment of hamburgers, salads and sandwiches. Texas Roadhouse also provides supervisory and administrative services for other license and franchise restaurants.

Q1 Earnings Disappoint

At the end of April, Texas Roadhouse reported disappointing first quarter results that seemed to catch investors off guard; shares fell just over 13% for that month, and continued their decline in May.

Earnings of 70 cents per share came in well-below the Zacks Consensus Estimate of 82 cents per share, and the bottom line was down 8.1% year-over-year. Net income also fell year-over-year, down 7.6%.

One of the biggest things that hurt TXRH last quarter was the unexpected rise in workforce expenses. Restaurant margin, as a percentage of restaurant and other sales, fell 128 basis points to 17.9%, mostly due to labor costs (which rose 118 basis points).

Despite the top line missing our consensus estimate, revenues managed to grow 10% over the prior-year period. And, comparable sales growth climbed 5.2%, showing strong top line expansion in the face of increasing workforce expenses.

Estimates Keep Falling

Analysts have since turned bearish on Texas Roadhouse, with nine cutting estimates in the last 60 days for the current fiscal year. However, earnings could see growth of about 4% for the year, though the Zacks Consensus Estimate has dropped 18 cents during that same time period from $2.47 to $2.29 per share.

This sentiment has stretched into 2020. Like this fiscal year, earnings growth could be positive, but our consensus estimate has dropped 19 cents in the past two months.

TXRH is now a Zacks Rank #5 (Strong Sell).

Shares of the restaurant chain have fallen almost 15% over the past six months compared to the S&P 500’s gain of 9.3%.

Looking Ahead

Management reiterated its guidance for 2019, and expects positive comps growth (including a menu price increase of 1.5% starting in Q2); the company will also open 25 to 30 new restaurants this year.

The biggest thing going forward for Texas Roadhouse will be proving to investors that it can successfully manage its expenses if they continue to rise.

Investors who are interested in adding a restaurant stock to their portfolio should take a look at Noodles & Company (NDLS - Free Report) or Chipotle (CMG - Free Report) . The companies hold a Zacks Rank #1 (Strong Buy) and #2 (Buy) and expect earnings growth of 700% and 43.5% for this fiscal year, respectively.

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