Tough Road Ahead for Texas Roadhouse

Texas Roadhouse (TXRH) stock isn’t very attractive these days. The first, and perhaps most important, reason to dislike the stock is the fact that it’s a casual dining chain.

Negative consumer sentiment, struggling homeowners, and the overall down market all make for a gloomy economic environment that’ll make even the most ardent of steak lovers close up their wallets.

That observation aside, a few things came out of the company’s recent conference call that should worry current and prospective shareholders alike.

Sales decreased sharply in short order. Year-over-year sales at company-owned restaurants decreased .8%. The slump continued into the new year as same store sales dropped another 1.5% during the first six weeks of 2008.

High commodity prices are hurting TXRH. While the company has stated that they expect their favorable beef contracts to help in the short-term, they acknowledged that produce, dairy, and grain costs have negatively affected them. As long as higher commodity prices remain the trend, TXRH’s margins should suffer.

TXRH management seems to be inflexible in terms of cost-cutting and pricing. The company’s CEO, G.J. Hart, stated that the company is not asking its operators to cut back on staffing. Furthermore, he expressed a preference to avoid near-term price hikes to increase the company’s performance.

The biggest concern coming out of the conference call was the talk about the impairment charge. During the last quarter, TXRH took a -$0.014 hit to earnings. This charge stems from an unprofitable restaurant that will likely be closed.

While the closing of a single unprofitable restaurant may not be such bad news, the possible closure or relocation of other underperforming restaurants is. During the conference call, CFO Scott Colosi mentioned that the company anticipates more impairment costs in the future. Such costs forecast poor planning on choices of site location, general mismanagement, and the acceptance (or lack thereof) of the TXRH concept. If these impairment costs come to light, earnings should be negatively affected.

Taking all of the presented facts into consideration, TXRH stock should languish for the foreseeable future.

Disclosure: Author has a long position in TXRH

Comments

[Pj568:]

I'd expect further declines in stock value. I'd expect to see lower margins, greater impairments, overall profits turning into losses and increased debt. With around 50% of their 200 units leased, closing units could be cash intensive and they have very little.

2008 Feb 28 01:58 PM

[Betty Blowt...:]

Like a lot of companies, TXRH needs to embrace inflation. It's here and it ain't going away so adapt. TXRH, PNRA and others should maintain margins by hiking prices as needed. TXRH can try to maintain traffic by offering some cheaper cuts or proteins at lower price points. If they can't pass through the higher cost of biscuits ("made from scratch!") or other items, then 86 them. Traffic is going to slow regardless and can't be controlled. Margins are controllable.

Restaurants that take price and give up traffic are just successfully adapting to the new world order. Unfortunately, most want to maintain traffic and are willing to take huge margin hits to do so. Lower margin/same traffic is the most common outcome. Higher margins, less traffic is a better option.

It's the Seventies all over again, get used to it.

2008 Feb 28 06:15 PM