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Why Texas Roadhouse Shares Dove Today

Jeremy Bowman, The Motley Fool

What happened

Shares of Texas Roadhouse (NASDAQ: TXRH) were getting burned after margin concerns and falling profit torched the stock following its first-quarter earnings release last night. Shares were down 11% as of 1:11 p.m. EDT.

So what

On the sales side, the popular steakhouse chain posted another strong set of results, as comparable sales rose 5.2% at company-owned restaurants and 4.3% at franchised locations. That led to overall revenue rising 10% to $690.6 million, though that was short of expectations for $693.7 million.

A steak and vegetables on a grill

Image source: Getty Images.

Meanwhile, labor costs bit into profits: Restaurant-level operating margin fell 128 basis points to 17.9%, due to a 118-basis-point rise in labor costs. That pushed operating income down 6.4% to $60.4 million, and earnings per share slipped from $0.76 to $0.70, well below the analyst consensus of $0.82.

President Scott Colosi said: "Our top-line momentum continued this quarter highlighted by comparable restaurant sales growth of 5.2%. Despite our ongoing sales strength, our profits continue to be pressured by higher labor costs. Much of the labor increase was driven by wage rate and other labor inflation that currently does not show signs of abating."

Now what

Like other restaurant chains, Texas Roadhouse is facing challenges from rising minimum wages and a tight labor market. The company increased prices by 1.5% in the beginning of the second quarter, which should help it absorb some of the rising labor costs.

Looking ahead, management said that comparable sales were up 2.9% for the first four weeks of the second quarter, and maintained full-year guidance for positive comparable-sales growth and 25-30 new store openings. However, executives said that they now expected total labor dollars per store week to increase 7% to 8%, up from previous guidance in the mid-single digits.

Though Texas Roadhouse did not give earnings guidance, that increase seems to indicate that the company will struggle to grow profits for the rest of the year. Given that and the weak first-quarter results, it's not surprising to see the stock down by double digits today.

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Jeremy Bowman 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.