Texas Roadhouse Inc. (TXRH) recently posted second quarter 2011 earnings of 22 cents, which missed the Zacks Consensus Estimate of 24 cents and declined 7% year over year. The results were lower than expected due to higher costs that contracted margin. A significantly high amount of pre-opening expenses also adversely impacted its earnings. Pre-opening expenses also increased a drastic 68% year over year.
Total revenue climbed 10.0% from the prior-year quarter to $279.6 million. The upside in revenue was attributable to higher comparable sales growth. Company-owned restaurant sales jumped 9.6% to $277.1 million, whereas franchise royalties and fees upped 6.7% to $2.5 million. Texas Roadhouse excelled in the top line, aided by rising guest count and new restaurant performance. Comparable-restaurant sales grew 4.4% at company-owned restaurants and 3.6% at franchised restaurants. However, total revenue trailed the Zacks Consensus Estimate of $280.0 million.
During the quarter, restaurant operating margin declined 69 basis points (bps) to 18.1%, due to a 61-bp rise in cost of sales and a 46-bp rise in labor cost, partially compensated by a 34-bp fall in other operating costs and a 3-bp dip in rent.
Store Update
During the quarter, Texas Roadhouse opened 3 company-owned restaurants, and plans to open 20 more outlets in 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 279 company-owned and 71 franchised restaurants.
Financial Position
Texas Roadhouse ended the quarter with cash and cash equivalents of $79.4 million, total long-term debt of $51.8 million and shareholders’ equity of $502.6 million.
Outlook
Management expects earnings growth of 5% in 2011 as compared with its previous expectation of 5% to 10%. Prior to this, management had anticipated earnings growth of 10%. The consecutive cuts in outlook can be credited to the stringent cost environment. The company expects food cost inflation of 4% in fiscal 2011.
Texas Roadhouse raised its comparable-store sales growth outlook to 4.0–4.5% from its earlier guidance of 3.5–5.0% in fiscal 2011.
Management anticipates capital expenditure in the range of $65–$70 million for fiscal 2011.
Our Take
Louisville, Kentucky-based Texas Roadhouse is presently reeling under rising input cost pressure like many of its restaurant peers. Although the company, which offers specially seasoned steaks, took some pricing action in the first quarter, it was not sufficient to weather the full inflationary impact and resulted in margin erosion. However, management recently took a modest price increase in the third quarter.
Another downside in the quarter was higher pre-opening expenses for future unit development of the company. Texas Roadhouse expects this burden to exist throughout the year.
However, while the company is consistently narrowing its earnings outlook, the top-line momentum is in place, as evident from the rise in comparable sales guidance. This indicates the slow but steady revival of consumer confidence. Hence, although we remain negative on the company’s short-term outlook, we believe the stock will perform better once the new units begin to pay off. Additionally, management seeks to enhance shareholder value through share repurchases and dividend payment.
One of Texas Roadhouse’s primary competitors, BJ’s Restaurants Inc. (BJRI) reported second quarter 2011 adjusted earnings of 29 cents per share, which surpassed the 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.
