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Texas Roadhouse Sees Sales Sizzle

Dan Caplinger, The Motley Fool

The strong employment picture in the U.S. has had an impact on companies that rely on relatively low-cost labor, and restaurant chain Texas Roadhouse (NASDAQ: TXRH) has seen the impact of higher labor costs on its bottom line. Yet obviously, a strong economy also has a benefit of leaving would-be diners with more disposable income to use when visiting Texas Roadhouse.

Coming into Monday's second-quarter financial report, Texas Roadhouse investors were prepared to see the continuing drag of high labor costs on earnings, but they still wanted to see at least minimal bottom-line gains as well as strong sales performance. The steakhouse chain's results were generally in line with those expectations, and sharp revenue growth points to the ongoing popularity of Texas Roadhouse compared to some of its weaker-performing peers in the restaurant business.

Texas Roadhouse location, lit up at night.

Image source: Texas Roadhouse.

Texas Roadhouse delivers a solid quarter

Texas Roadhouse's second-quarter results looked tasty. Revenue was higher by almost 10% from year-ago levels to $689.8 million, which was a bit higher than what most of those following the stock were expecting to see. Net income inched higher by 1% to $44.8 million, and the resulting earnings of $0.63 per share matched the consensus forecast among investors.

We've seen solid performance from Texas Roadhouse recently in several key restaurant-related metrics, and things continued to look reasonably strong. Comparable restaurant sales climbed 4.7% at company-owned locations and 4.3% at domestic franchises year over year, and while the company-owned number was down slightly from its most recent quarter, the difference was just half a percentage point. Texas Roadhouse continued to expand, opening three new corporate-owned locations and two new franchises, but that was a bit slower than the six new locations the company opened during the previous quarter.

Unfortunately, where Texas Roadhouse continued to underperform was in its restaurant margin benchmark, which incorporates labor and other costs. Margin figures were down more than half a percentage point to 17.6%. Employment-related costs were the primary drivers of the margin deterioration, and that ate into some of the company's revenue growth to limit bottom-line gains.

CEO Kent Taylor said that he thinks Texas Roadhouse is making the right moves. "While restaurant margins continue to be pressured by higher labor costs driven by increasing wage rates and other inflation," Taylor said, "the additional pricing we put in place at the beginning of the quarter provided a significant benefit."

What's next for Texas Roadhouse?

Texas Roadhouse is optimistic about its development plans, despite some hurdles. As the CEO noted, "We have experienced some construction delays that we expect will push some sites into early next year but remain focused on opening approximately 15 additional locations in 2019."

Early signs from the third quarter were fairly encouraging. The company has seen company-owned restaurant comps rise about 4.3% compared to year-ago levels, sustaining most of its past growth rate.

Texas Roadhouse did make a couple of revisions to its guidance. Because of the construction delays mentioned above, the steakhouse restaurant chain now sees just 25 new restaurant locations opening this year, which is at the lower end of its previous range of 25 to 30 restaurants. Up to four of those might be restaurants under the company's Bubba's 33 concept. On the plus side, Texas Roadhouse still expects to see positive comps for the full year, and commodity inflation should remain limited to just a 1% to 2% price hike.

Texas Roadhouse investors seemed comfortable enough with the numbers, and the stock picked up 1.5% in after-hours trading following the announcement. It'll be important for Texas Roadhouse to keep trying to make progress to control its labor and other costs, but with relatively strong demand from its customers, the steakhouse specialist is in a much better position than some of its restaurant peers.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Texas Roadhouse. The Motley Fool has a disclosure policy.