Texas Roadhouse Investors Spooked By Inflation
Shares of Texas Roadhouse (NASDAQ: TXRH) moved lower in the wake of the Q3 report but that was a knee-jerk reaction and a mistake, or, more to the point, an opportunity for us today. Texas Roadhouse reported a mixed quarter and forecast double-digit inflation for next year but still delivered a very good report. Not only is pre-pandemic growth back on the table but margins are widening and the cash is flowing. The takeaways for investors are that the outlook remains positive, the company is investing in further growth, the dividend is safe and the company has started buying back shares.
“Our strong cashflow continues to solidify our financial position and allowed us to resume the repurchase of common stock this quarter, continue our payment of quarterly dividends, open new restaurants, and grow our development pipeline. In addition, we signed the first franchise development agreement for our fast-casual Jaggers concept this quarter. We remain excited about our growth opportunities across all three of our brands.”
Texas Roadhouse Misses The Consensus, Barely
Texas Roadhouse produced a mixed report in that revenue and earnings growth are robust but missed the consensus estimates, barely. The company reported $868.94 million in consolidated revenue which is good for growth of 37% over last year, 33% over 2019, and set a company record but it missed by a mere 15 basis points. On a comp basis, comp sales are up 30.2% YOY and 22.3% vs 2019 and aided by an increasing store count. The company added 18 new stores during the quarter and is on track to complete as many as 29 new openings this year including Texas Roadhouse and Bubba Gump locations.
Moving down to the earnings, the company experience significant headwinds in the form of commodity costs and labor costs but was able to more than offset them. Revenue leverage associated with reopening and expansion coupled with menu price increases helped widen restaurant-level margin by 111 basis points. The increase in restaurant-level margin helped drive a near 200 basis point improvement in operating margin and drive a near 80% increase in YOY GAAP earnings. The GAAP earnings, however, missed the consensus by $0.06 and are also weighing on price action.
Turning to the guidance, the company offered a positive outlook but refrained from giving hard numbers. The salient point is that comps should run in the range of 5% to 6% on an average store-week basis and be bolstered by the addition of up to 60 new stores.
Texas Roadhouse Resumes Buybacks
Texas Roadhouse resumed its capital return program a few quarters by reinstating the dividend and has upped the ante by resuming share repurchases as well. The company repurchased $14.7 million worth of its shares over the quarter and can be expected to buy additional shares on an opportunistic basis. As for the dividend, it’s a low-yielding 0.9% but a safe yield and compounded by a fortress balance sheet, strategic growth, and repurchase activity.
The Technical Outlook: Texas Roadhouse Confirms Support
Shares of Texas Roadhouse moved lower in pre-market action and opened with a loss but the buyers were quick to step in. Price action is now up more than 2.0% and forming a strong green candle that confirms support at the $88 level. The support is also confirmed by the indicators which are forming a strong entry signal with price action above the short-term moving average. Assuming the market follows through on this action next week, we see this stock moving up to and above the Pricetarget.com consensus estimate of $106 for a gain of more than 20%.
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