Texas Roadhouse Driving Consistently Forward

By Ryan C. Fuhrmann | February 27, 2012 AAA

Casual dining restaurateur Texas Roadhouse (Nasdaq:TXRH) is experiencing unappetizing food cost inflation at its stores these days, but it has been easily digesting the near-term hit to its profitability. The coming year could see continued commodity cost pressures, but the firm's outlook over the long haul still looks solid.

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Full Year Recap
Sales advanced 10% to $1 billion on the opening of 20 new restaurants and a single overseas franchised location. Same-store sales advanced a healthy 4.7% at company-owned stores and 4.3% at the franchised ones. Texas Roadhouse ended the year with 291 company-owned locations and 72 franchised ones.

It also owns three Aspen Creek stores that specialize in a "Mountain Lodge décor" and sell food including meatloaf and pot roast. The concept is similar to the privately-held Ted's Montana Grill concept, though it and the namesake store base generally compete in the crowded casual dining space along with Brinker International (NYSE:EAT), Cheesecake Factory (Nasdaq:CAKE), O'Charleys (Nasdaq:CHUX) and Red Robin Gourmet Burgers (Nasdaq:RRGB).

Food cost inflation tempered the operating income increase to 5% and operating profits reached $95.2 million, but share buybacks boosted the bottom line back to the double digits. Net income rose 10% to $64 million, while diluted earnings improved 11% to 88 cents per share. Free cash flow increased to $55.7 million, or approximately 77 cents per diluted share. The company has been able to successfully fund new store growth with internally-generated funds; capex of $81.8 million was easily covered by operating cash flow of $137.5 million.

SEE: A Breakdown Of Stock Buybacks

Outlook
For the coming year, Texas Roadhouse expects another year of positive comps between 4 and 5%. However, higher food costs will continue to eat into profits, as management expects earnings per diluted share growth of only 5%. Analysts currently project full year sales growth of nearly 14% and total sales close to $1.3 billion.

The Bottom Line
Texas Roadhouse shares have run as of late and now trade at a forward P/E of 15. However, this is still reasonable as long as the company continues to grow at a pace similar to its historical trends. Over the past five years, sales are up nearly 17% annually while profits are up close to 14%. The relationship has improved over the past three years, with sales up 11% and profits more than 16% annually. This indicates that the company has been able to overcome a sluggish economy and higher food costs. Wide-open expansion potential surely helps, with a potential store count easily double current levels.

SEE: 5 Must-Have Metrics For Value Investors

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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