E Texas Roadhouse: Buy On Weakness

Texas Roadhouse (TXRH) has caught our attention today. The stock is on the move after just reported earnings. In this column, we discuss the results as well as our outlook for the name going forward.

The company delivered another strong year of results, with double-digit revenue and diluted earnings per share growth for both the fourth quarter and full year. The company also achieved its 32^nd consecutive quarter of positive comparable restaurant sales growth with comparable restaurant sales growth that was driven by strong traffic gains.  

Q4 Synopsis

There were a number of highlights in the quarter. AS we mentioned, comparable restaurant sales growth was strong and they increased 5.8% at company restaurants, including a positive impact of approximately 0.4% related to the calendar shift of the Christmas holiday, and 4.7% at domestic franchise restaurants.

Revenue was up to $545 million and diluted earnings per share increased 37.0% to $0.40 from $0.29 in the prior year primarily due to restaurant margin performance and a lower income tax rate. Margins were strong but dipped slightly on a percentage basis. Restaurant margin dollars increased 11.9% to $92.2 million from $82.4 million in the prior year and restaurant margin, as a percentage of restaurant sales, decreased 11 basis points to 17.0%.  The decrease was primarily driven by labor inflation, partially offset by the benefit of lower food costs.

The biggest positive of course is a lower tax rate. The company’s income tax rate decreased to 19.8% from 28.8% in the prior year primarily due to the impact of new tax legislation enacted in the current quarter, which resulted in a $3.1 million reduction in income tax expense, or $0.04 per diluted share. 2018 will see more of an impact on earnings from the tax bill.

Looking to 2018

In 2017 the company opened 27 restaurants while returning $58.2 million of excess capital to shareholders through our dividend program. We expect this growth to continue, and think 30 new stores is probable in 2018. We are looking for comp sales growth of 4.5%-5.5% which should drive revenues higher. We are targeting $600 million in revenues, and earnings per share growth in the double-digits. All in all, we want to buy on any weakness.