Restaurant company Texas Roadhouse (NASDAQ:TXRH) missed analysts' expectations in Q3 FY2023, with revenue up 12.9% year on year to $1.12 billion. Turning to EPS, Texas Roadhouse made a GAAP profit of $0.95 per share, improving from its profit of $0.93 per share in the same quarter last year.
Texas Roadhouse (TXRH) Q3 FY2023 Highlights:
- Revenue: $1.12 billion vs analyst estimates of $1.12 billion (small miss)
- EPS: $0.95 vs analyst expectations of $1.07 (11.2% miss)
- Gross Margin (GAAP): 15.1%, down from 15.9% in the same quarter last year
- Same-Store Sales were up 8.2% year on year (beat vs. expectations of up 7.4% year on year)
- Store Locations: 722 at quarter end, increasing by 37 over the last 12 months
With locations often featuring Western-inspired decor, Texas Roadhouse (NASDAQ:TXRH) is an American restaurant chain specializing in Southern-style cuisine and steaks.
The company operates under the Texas Roadhouse, Bubba's 33, and Jaggers banners. Across its different brands, Texas Roadhouse is known for its hand-cut steaks, fall-off-the-bone ribs, made-from-scratch sides, and fresh-baked bread. Portions tend to be hearty, giving customers a good bang for their buck.
Texas Roadhouse primarily targets suburban and rural families seeking high-quality comfort food. Given the sit-down nature of the dining experience, the target customer will certainly spend more at Texas Roadhouse than a typical fast-food joint. However, prices also are meaningfully cheaper than fine dining experiences at stuffier “white tablecloth” establishments.
Restaurants are typically 6,000 to 7,500 square feet and located in high-traffic areas of suburban and rural cities and towns. Locations feature a rustic ambiance and sometimes feature nostalgic Southern memorabilia and even line dancing performances. Open kitchens allow customers to witness the preparation of their meals.
Sit-Down Dining
Sit-down restaurants offer a complete dining experience with table service. These establishments span various cuisines and are renowned for their warm hospitality and welcoming ambiance, making them perfect for family gatherings, special occasions, or simply unwinding. Their extensive menus range from appetizers to indulgent desserts and wines and cocktails. This space is extremely fragmented and competition includes everything from publicly-traded companies owning multiple chains to single-location mom-and-pop restaurants.
Multi-brand full-service restaurant competitors include Bloomin’ Brands (NASDAQ:BLMN), Brinker International (NYSE:EAT), Darden Restaurants (NYSE:DRI), Dine Brands (NYSE:DIN), and The Cheesecake Factory (NASDAQ:CAKE).Sales Growth
Texas Roadhouse is one of the larger restaurant chains in the industry and benefits from a strong brand, giving it customer mindshare and influence over purchasing decisions.
As you can see below, the company's annualized revenue growth rate of 14.1% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was excellent as it added more dining locations and increased sales at existing, established restaurants.
This quarter, Texas Roadhouse's revenue grew 12.9% year on year to $1.12 billion, falling short of Wall Street's estimates. Looking ahead, the analysts covering the company expect sales to grow 9.78% over the next 12 months.
Number of Stores
A restaurant chain's total number of dining locations is a crucial factor influencing how much it can sell and how quickly company-level sales can grow.
When a chain like Texas Roadhouse is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. Texas Roadhouse's restaurant count increased by 37, or 5.4%, over the last 12 months to 722 locations in the most recently reported quarter.
Over the last two years, Texas Roadhouse has rapidly opened new restaurants, averaging 4.93% annual increases in new locations. This growth is among the fastest in the restaurant sector. Analyzing a restaurant's location growth is important because expansion means Texas Roadhouse has more opportunities to feed customers and generate sales.
Same-Store Sales
Same-store sales growth is a key performance indicator used to measure organic growth and demand for restaurants.
Texas Roadhouse has been one of the most successful restaurants over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted impressive year-on-year same-store sales growth of 15.6%. This performance suggests its steady rollout of new restaurants could be beneficial for shareholders. When a company has strong demand, more locations should help it reach more customers seeking its meals.
In the latest quarter, Texas Roadhouse's same-store sales rose 9.1% year on year. This growth was an acceleration from the 7.6% year-on-year increase it posted 12 months ago, which is always an encouraging sign.
Same-Store Sales
Same-store sales growth is an important metric that tracks organic growth and demand for a restaurant's established locations.
Texas Roadhouse's demand has been spectacular for a restaurant business over the last eight quarters. On average, the company has grown its same-store sales by an impressive 12.8% year on year. This performance suggests its steady rollout of new restaurants could be beneficial for shareholders. When a company has strong demand, more locations should help it reach more customers seeking its meals.
In the latest quarter, Texas Roadhouse's same-store sales rose 8.2% year on year. This growth was in line with the 8.2% year-on-year increase it posted 12 months ago.
Gross Margin & Pricing Power
Texas Roadhouse has poor unit economics for a restaurant company, leaving it with little room for error if things go awry. As you can see below, it's averaged a 16.2% gross margin over the last two years. This means the company makes $0.16 for every $1 in revenue before accounting for its operating expenses. 
Texas Roadhouse's gross profit margin came in at 15.1% this quarter, flat with the same quarter last year. This steady margin signals that it has stable input costs (such as ingredients and transportation expenses) and aims to keep prices low for consumers.
Operating Margin
Operating margin is a key profitability metric for restaurants because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
This quarter, Texas Roadhouse generated an operating profit margin of 6.58%, down 1.1 percentage points year on year. Because Texas Roadhouse's operating margin decreased more than its gross margin, we can infer the company was less efficient with its expenses or had lower leverage on its fixed costs.
Zooming out, Texas Roadhouse was profitable over the last two years but held back by its large expense base. It's demonstrated mediocre profitability for a restaurant business, producing an average operating margin of 7.83%. Its margin has also seen few fluctuations, meaning it will take a big change to improve profitability.Operating Margin
Operating margin is an important measure of profitability for restaurants as it accounts for all expenses that keep the lights on, including wages, rent, advertising, and other administrative costs.
This quarter, Texas Roadhouse generated an operating profit margin of 8.15%, down 0.3 percentage points year on year. This reduction is quite minuscule and was driven by the company's gross margin contraction, suggesting its operating expenses are still under control.
Zooming out, Texas Roadhouse was profitable but over the last two years, it has been held back by its large expense base. It's demonstrated mediocre profitability for a restaurant business, producing an average operating margin of 7.9%. However, Texas Roadhouse's margin has remained more or less the same, highlighting the consistency of its business.
EPS
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
In Q3, Texas Roadhouse reported EPS at $0.95, up from $0.93 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-range EPS growth rather than short-term movements.
Between FY2020 and FY2023, Texas Roadhouse's adjusted diluted EPS grew 52.8%, translating into a solid 17.6% average annual growth rate. This growth is materially higher than its revenue growth over the same period and was driven by excellent expense management (leading to higher profitability) and share repurchases (leading to higher PER share earnings).
Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 19.5% year-on-year increase in EPS each quarter.
Return on Invested Capital (ROIC)
Texas Roadhouse has an excellent track record of making successful investments and is led by a competent management team. Its five-year average return on invested capital (ROIC) is 16.3%, beating other restaurant companies by a wide margin.
We like to track ROIC because it tells us about a company’s prospects for profitable growth and its management team's ability to achieve it through capital allocation decisions such as organic investments, acquisitions, and share buybacks. ROIC is also a helpful tool to benchmark performance versus peers, and just like how we focus on long-term investment returns, we care more about a company's long-term ROIC because short-term market volatility can distort results.
Key Takeaways from Texas Roadhouse's Q3 Results
Sporting a market capitalization of $6.44 billion, Texas Roadhouse is among smaller companies, but its more than $69.3 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
Same store sales beat expectations although revenue was roughly in line. Both gross and operating margin missed analysts' expectations and its EPS also missed Wall Street's estimates. The company largely reiterated its previous outlook although new store openings for 2023 is higher than previously estimated. Overall, this was a mixed quarter for Texas Roadhouse. The company is down 1.72% on the results and currently trades at $93 per share.
Is Now The Time?
Texas Roadhouse may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We think Texas Roadhouse is a solid business. First off, its revenue growth has been good over the last four years. And while its gross margins make it more challenging to reach positive operating profits compared to other restaurant businesses, the good news is its new restaurant openings have increased its brand equity. On top of that, its high ROIC suggests it can grow very profitably and has been well managed.
Texas Roadhouse's price-to-earnings ratio based on the next 12 months is 18.4x. There are definitely things to like about Texas Roadhouse, and looking at the consumer landscape right now, it seems that it trades at a reasonable price.
Wall Street analysts covering the company had a one-year price target of $115.4 per share right before these results, implying that they saw upside in buying Texas Roadhouse even in the short term.
To get the best start with StockStory, check out our most recent stock picks and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.
Is Now The Time?
When considering an investment in Texas Roadhouse, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
There are several reasons why we think Texas Roadhouse is a great business. For starters, its revenue growth has been good over the last four years. And while its gross margins make it more challenging to reach positive operating profits compared to other restaurant businesses, the good news is its new restaurant openings has increased its brand equity. On top of that, its wonderful same-store sales growth has been among the best in the restaurant sector.
Texas Roadhouse's price-to-earnings ratio based on the next 12 months is 18.7x. But looking at the consumer restaurant landscape today, Texas Roadhouse's qualities stand out and we still like it at this price.
Wall Street analysts covering the company had a one-year price target of $120.4 per share right before these results, implying that they saw upside in buying Texas Roadhouse even in the short term.
To get the best start with StockStory, check out our most recent stock picks and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.