Texas Roadhouse: Loud and Promising
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Texas Roadhouse Inc (NASDAQ: TXRH) is an American restaurant chain that specializes in steaks, promotes a Western theme, and is known for its free bucket of peanuts and bread basket at each table. Upbeat country music, laughter, full restaurants and line dancing make for a great experience. The company started the year on a good note. In April, Texas Roadhouse reported a 15% rise in Q1 earnings and sales growth of 14%, marking the biggest gain in years as well as the second straight period of growth acceleration. We believe the company is moving in the right direction as the steakhouse concept is on the rise, coupled with huge domestic and international unit growth opportunities.
Texas Roadhouse’s SSS have consistently outperformed the casual dining peer group, a trend likely to continue in 2012: TXRH’s SSS have outperformed the casual dining index by an average of 3% over the past five years. For the majority of the past seven years, Texas Roadhouse has consistently outperformed its two primary competitors, Outback Steakhouse and LongHorn Steakhouse. The company has managed to post consistent SSS growth without spending even a single penny on national advertising and without other standard revenue growth operations like extended hours or introduction of discounted menu items. The company provides high-quality value positioning with an average check of less than $14.89 for made from scratch food, which is a 20% discount to steakhouse peers with average check between $18-20. The other factors responsible for strong SSS performance are a small and midsize market unit development strategy where the chain restaurant competition is not as intense, and high-quality operations, with TXRH attracting some of the best managers in the industry by offering one of the most competitive compensation structures among its peers.
Unit Growth Opportunities Texas Roadhouse has only 374 company and franchised units, with its unit growth rate slowing dramatically in recent years, but the company remains one of the four fastest growing casual-dining concepts and is seventh-fastest across all segments. The company has a big unit growth opportunity in California with only six stores, and Florida where they've got just 13 restaurants. Globally, the company has a negligible presence, with just one store in Dubai which posted the highest volume among all the units. The company is targeting a 7% unit growth in 2012 as compared to 4.2% in 2010 and 6.1% in 2011. Texas Roadhouse signed an agreement to establish 35 restaurants over ten years across eight Middle East countries and the company has also commented that it is exploring additional international franchise relationships in Mexico, Canada, Russia, and China. So, there is a big opportunity to expand in international markets as well likely to result in accelerated unit growth in 2013 and beyond.
The steakhouse players are outperforming their casual-dining peers over the past two years: The steakhouse concept as a whole is on the rise; though, with their higher average checks, they underperformed the casual-dining SSS index in 2008 and 2009 at the peak of the recessionary headwinds. As unemployment and consumer confidence levels stabilized and slowly improved in 2010 and 2011, the steakhouse concepts have delivered a material SSS outperformance. Steakhouse players had greater SSS relative to the Knapp Track index (an indicator of casual dining industry’s same store sales) in all eight quarters of 2010 and 2011, and the trend is likely to continue.
Texas Roadhouse is trading at a forward PE of 15.79, which is at a premium compared to its peer group of Ruby Tuesday Inc (NYSE: RT) and Brinker International Inc. (NYSE: EAT). We believe premium valuation is justified due to Ruby Tuesday’s weakening same-store sales and revenues in recent periods. Texas Roadhouse is a smaller and expanding concept as compared to Brinker (with around 1,600 restaurants worldwide), and thus has higher unit growth opportunities in domestic and international markets. The current valuation provides an attractive entry point as the company can grow operating cash flow in the mid-teens range annually over the long term. Thus, we recommend it a buy.
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