Company Reports

We surmise Texas Roadhouse is a stout operator poised for market share gains in the competitive full-service dining vertical. Years of conservative price hikes and investment in a throughput-focused operating model have built a flywheel that peers have struggled to replicate. We believe strong traffic enables them to invest in labor, capacity, technology, and pricing, as it helps preserve the dependable value and experience that keep consumers hooked. That, in turn, supports full dining rooms, attractive unit economics, and gives Texas Roadhouse more room to invest in value and the experience. We posit that this has propelled 7.5% comparable sales growth in the last decade, against 3.2% total sales growth for the full-service industry, according to Euromonitor. Our forecast calls for a 4.0% lift in comparable sales and 4.4% growth in company-owned units over the next five years, outperforming our 3% sales outlook for the full-service category.

As peers leaned on price or cut investments to defend profits, Texas Roadhouse held firm to its low entry price points while reinvesting in labor, technology, and capacity to win consumers. As such, comparable sales grew 7.5% over the last decade, outpacing full-service's 3.2% total sales rate.

We are transitioning our coverage for Texas Roadhouse and plan to publish an updated report shortly. Our report on Texas Roadhouse will now utilize our quantitative ratings in conjunction with an analysis on the firm's business strategy and competitive advantage from our analyst team. The quantitative ratings are philosophically analogous to Morningstar's proprietary, analyst-driven equity ratings. However, they are derived using advanced techniques that compare the firms to those with similar attributes from our universe of analyst-driven ratings.

As food cost inflation continued to squeeze profit margins during the second quarter, Texas Roadhouse TXRH delivered solid top-line growth as same-store restaurant sales grew 4.5% and 5.3% at company and franchise restaurants, respectively. Increased revenue was largely consumed, however, by an uptick in sales costs and higher general and administrative expenses, which included a higher-than-expected outlay to finance the company's annual managing partner conference held in Hawaii, which cost $2.3 million more than the prior year. Higher sales costs were largely a factor of increased commodity prices, which knocked the company's restaurant margin by nearly 50 basis points. During the period, Texas Roadhouse opened seven company restaurants and one franchise restaurant, bringing it to 36% of its 2013 target of 28 company restaurant openings.

Texas Roadhouse, like the majority of casual diners, is hampered by conservative discretionary spending, an issue that has been exacerbated by rising food costs and the inability to fully offset these expenses with price increases. However, we think the company still has enough prospects to excel over the long term.

Texas Roadhouse TXRH reported impressive first-quarter results despite ongoing food cost inflation that has toppled several of its casual dining peers. The firm generated solid bottom-line growth on the back of positive traffic trends and an improved guest check, and it also announced positive early second-quarter results that have sent the firm's shares higher in early trading. At this point, we plan to reassess our operating assumptions and are placing our $16 fair value estimate under review. We intend to maintain our no-moat rating.

Texas Roadhouse TXRH posted fourth-quarter results that were bolstered by solid same-store sales. The firm continues to deliver respectable numbers against an increasingly competitive casual dining restaurant landscape, but continued food cost inflation looms, which may bite into any hopes of meaningful margin expansion. We are maintaining our $16 fair value estimate and our no-moat rating.

Texas Roadhouse, like the majority of casual diners, is hampered by conservative discretionary spending, an issue that has been exacerbated by rising food costs and the inability to fully offset these expenses with price increases. However, we think the company still has enough prospects to excel over the long term.

Texas Roadhouse, like the majority of casual diners, is hampered by conservative discretionary spending, an issue that has been exacerbated by rising food costs and the inability to fully offset these expenses with price increases. However, we think the company still has enough prospects to excel over the long term.

Texas Roadhouse, like the majority of casual diners, is hampered by conservative discretionary spending, an issue that has been exacerbated by rising food costs and the inability to fully offset these expenses with price increases. However, we think the company still has enough prospects to excel over the long term.

Texas Roadhouse, like the majority of casual diners, is hampered by conservative discretionary spending, an issue that has been exacerbated by rising food costs and the inability to fully offset these expenses with price increases. However, we think the company still has enough prospects to excel over the long term.

While Texas Roadhouse TXRH is admittedly facing strong pressure from elevated food costs, particularly for beef, produce, and dairy, the company still posted solid fourth-quarter and yearly results. Given the firm's resilience in withstanding such high food-cost inflation and solid 2012 guidance, we will be placing our fair value estimate under review as we reassess our outlook for Texas Roadhouse.

Texas Roadhouse, like the majority of casual diners, is hampered by conservative discretionary spending, an issue that has been exacerbated by rising food costs and the inability to fully offset these expenses with price increases. However, we think the company still has enough prospects to excel over the long term.

Texas Roadhouse, like the majority of casual diners, is hampered by a reining in of discretionary spending, but we think the company still has enough prospects to lift the firm once the economy turns the corner.

Texas Roadhouse, like the majority of casual diners, is hampered by a reining in of discretionary spending, but we think the company still has enough prospects to lift the firm once the economy turns the corner.

Texas Roadhouse, like the majority of casual diners, is hampered by a reining in of discretionary spending, but we think the company still has enough prospects to lift the firm once the economy turns the corner.

Texas Roadhouse, like the majority of casual diners, is hampered by a reining in of discretionary spending, but we think the company still has enough prospects to lift the firm once the economy turns the corner.

Texas Roadhouse, like the majority of casual diners, is hampered by a reining in of discretionary spending, but we think the company still has enough prospects to lift the firm once the economy turns the corner. Texas Roadhouse operates a moderately priced chain of nearly 330 restaurants, of which about 80% are company-owned and the remainder franchised. The concept is known for its attractively priced aged steaks, which represent nearly half of all entree sales, but the firm has also been able to diversify its menu with comfort foods such as ribs, chicken, and pork chops. We are fond of the menus' range of prices and its ability to attract different clientele, with entrees ranging in price from $8.99 to $20.99. Additionally, the rustic, yet comfortable atmosphere and design of each unit is integral to the customer experience, and we think this experience may help drive repeat customers. However, a $14.70 average guest check, while low for a steakhouse, is high for casual diners and may deter repeat business during the economic downturn. Despite the concern about check size, we believe Texas Roadhouse will be able to overcome short-term woes via an efficient, lean business model. For starters, the firm typically only operates during the dinner shift on weekdays, limiting down-time costs during the day and keeping the staff fresh. The management team focuses on productivity in its units by limiting worker shifts, curbing regular menu changes and thereby fostering kitchen consistency, and controlling guest table turns. Managers are also incentivized to grow their business thanks to a performance-based compensation program. This limits turnover at the manager level and allows for units to run efficiently over the long haul. Still, Texas Roadhouse is not immune to problems that plague the fragmented restaurant industry. Texas Roadhouse caters to a wide audience, but discretionary spending is being cut at all income-class levels, leaving the firm susceptible to guests trading down and trading out. The firm's guests are not hard-pressed to find another steak, whether it be from a butcher, grocery store, or another casual steakhouse chain such as Outback Steakhouse and Darden's Longhorn Steakhouse DRI. The nonexistent switching costs from one steakhouse to the next have created fierce competition, which we think has intensified during the recession. Even though Texas Roadhouse must endure tough industry characteristics, we believe the firm has room to grow, albeit at a slower pace than in previous years when it doubled its store base and revenues from 2003 to 2008. The company's presence on the West Coast is lacking, presenting an expansion opportunity, and comps during the downturn have held up well compared to its rivals, leading us to believe the firm will be better able to weather a potentially extended decline in consumer spending.

Texas Roadhouse, like the majority of casual diners, is hampered by a reining in of discretionary spending, but we think the company still has enough prospects to lift the firm once the economy turns the corner.

Texas Roadhouse, like the majority of casual diners, is hampered by a reining in of discretionary spending, but we think the company still has enough prospects to lift the firm once the economy turns the corner.