Texas Roadhouse (TXRH) is a moderately priced, full-service, casual dining restaurant — known for its free unlimited supply of in-shell peanuts and rolls along with friendly, attentive service, notes Doug Gerlach, editor of Investor Advisory Service.
A high percentage of restaurants offer only dinner with about half only offering lunch on Friday. The belief is this leads to higher-quality, more consistent food and service.
Though the large majority of the company’s restaurants carry the Texas Roadhouse nameplate, it also includes Bubba’s 33, a family-friendly sports restaurant featuring scratch-made food that was launched in 2013, and Jaggers, a fast-casual concept offering burgers, chicken, and salads launched in 2014.
While the company franchises some restaurants, including all international locations, approximately 85% of its locations are company-owned. Typical Texas Roadhouse restaurants are freestanding with capacity of approximately 300 guests.
Properties are primarily leased, though it owns approximately 25% of its locations. Average annual unit volume is about $5.5 million, with targeted long-term restaurant-level margin in the 17%-18% range. Average capital investment for new restaurants is around $6 million.
The concept has resonated with customers as reflected by consistent comparable restaurant sales growth. The pandemic broke the positive comparable sales streak, but year-to-date comps have snapped back nicely.
To-go sales provide another growth opportunity, as prior to the pandemic the company had limited takeout exposure. As of the most recent quarter, 15% of total sales were to-go, more than double pre-pandemic levels even as its restaurants have returned to full seating capacity.
Unit growth remains a key component of the company’s strategy. The current total domestic restaurant count is just over 600 with a long-term unit opportunity of at least 700-800 units, providing several years of runway even before considering the potential from further international growth.
The restaurant industry is currently facing several challenges including higher food costs, supply chain shortages, and a tight labor market. To help offset some of the cost pressures, Texas Roadhouse recently implemented a 4% increase in menu prices. The expectation is cost inflation will moderate through 2022 and eventually will normalize, allowing the company to return to its targeted restaurant-level margin of 17%-18%.
The company also has a history of modest share repurchases, supporting projected earnings growth of 12% over the next five years. This implies EPS of $5.32 at the end of this period.
Applying a high P/E of 30.8, we get a potential high price of 164. Using a low P/E of 21.5 combined with trailing twelve-month EPS of $3.02 results in a potential low price of 65. Therefore, we model an upside/downside ratio of 3.1 to 1 and a projected high return of nearly 15% annually.
