Texas Roadhouse (NASDAQ:TXRH) reported strong F1Q2022 financial results. Outsized revenue growth was driven by solid comparable store growth derived from an increase in: customer traffic and average check. Solid growth in dine-in sales and shift in menu mix towards higher priced entrees, fueled the growth in average check. In addition, average unit volumes and store growth/week were similarly higher for the first quarter. Further, despite the uptrend in dine-in transactions, off-premise sales continued to be sustained in dollar terms. Consequently, despite margin contraction due to inflation linked to commodities and labor, the revenue leverage from the dramatic increase in sales resulted in significant upside in year-over-year earnings/share. During F1Q2022, TXRH opened five Texas Roadhouse restaurants comprised of three company owned restaurants and two franchisee operated restaurants in international territories. In addition, it acquired seven Texas Roadhouse restaurants located in Georgia and South Carolina from franchisees.
Over upcoming quarters, based on strong first quarter financial results and trends evidenced in April, we expect TXRH’s business momentum to continue. In that regard, it is noteworthy that for the first time since the pandemic, dine-in sales were higher than levels experienced prior to the pandemic, on a three year basis. Although, second and third quarter sales are typically weaker for Texas Roadhouse restaurants, we expect strong sales during the periods, based on our argument that there is a pent up demand for the full service dining experience. Therefore, combining revenue leverage from reasonably stronger sales, with moderating commodity inflation (as TXRH typically locks in prices of most key items utilized in its cuisine through futures contracts), relatively less onerous wage inflation, and greater labor productivity, as staffing levels improve, we expect margin expansion and consequently a substantial boost in earnings and free cash flows over the next few quarters.
Longer term, given the success of Texas Roadhouse, we expect the accelerated growth in the restaurant footprint to continue. In addition, TXRH is likely to rapidly expand the number of Bubba’s 33, over the near-term. A majority of the domestic restaurant footprint for both brands will be owned and operated by TXRH. Conversely, the firm will seek franchisees to develop the U.S. Jaggers restaurant footprint. Internationally, as is the case with Texas Roadhouse, development of Bubba’s 33 and Jaggers will be driven by franchisees. Growth derived from new unit development will be supported by same-store sales, driven by the strong value proposition offered by the brands to customers, off-premise sales, and the potential loyalty programs. Given the dynamics, we expect dramatically higher retail sales and consequently revenue leverage at the restaurant level with lower marginal operating costs, and margin expansion derived from economies of scale related to: marketing, technology, and system overheads, on the corporate level. As a flow through of considerable uptrend in retail sales and margin expansion, earnings and free cash flows are likely to surge on a long-term basis, in our judgment.
Considering that F1Q2022 results have only reinforced our secular outlook on TXRH, we remain constructive on the company. TXRH appears well positioned to meet and exceed the estimates for growth in revenues and operating cash flows factored into our 10-year Discounted Cash Flow model. Therefore, we’re maintaining our 1-year Price Target of $129/share. Reiterate Buy Rating (Please go through our initiation report "Texas Roadhouse: Low Risk Rapid Growth Story - Buy On Strong Long-Term Outlook" for our long term opinion on the stock).
F1Q2022 Results Summary. For the quarter, revenues of ~$987 million (+23.3% on a year-over-year basis) beat consensus estimates of ~$974 million, and earnings per share of $1.08 (+18.5% compared to F1Q2021), was above analyst projections of $0.91. In addition, on a year-over-year basis, same store sales increased: by 16% at company operated restaurants, and by 20.4% at franchisee operated restaurants. Net income for the period was ~$75.2 million, reflecting an increase of 17.2% over the previous year. Restaurant margins for the quarter were ~16.4%, a 213 basis point decrease from F1Q2021. At the end of F1Q2022, operating cash flows and free cash flows were ~$188 million and ~$114 million.
Customer Demand Appears Price Elastic. Considering the strong momentum in TXRH’s sales over the previous twelve months, it appears that customers view Texas Roadhouse’s value proposition (considering food and service) as superior to that of the competition, in their respective areas. In that regard, it is important to note that customers have ignored the increases in menu prices that have continually been rolled out, including a 3.2% price hike during F1Q2022. Overall, year-over-year, customers paid an additional 6% for dining at Texas Roadhouse during the first quarter, and will be paying an incremental 7.5%, 7.4%, and 4.1% over the next three quarters, if menu prices remain stable.
In addition, it is noteworthy that record cost inflation, including substantially higher gas prices are not impacting the brand’s customer demand. Instead, sales of premium priced entrees and adult beverages are growing substantially. Management believes that, not wavering from the large portion sizes and heaping sides as well as superb service that are hallmarks of Texas Roadhouse restaurants, despite higher commodity costs, are key factors driving sales growth in the midst of the inflationary environment. The strategy appeared to work during the 2007-2008 economic crisis, and continues to work in the current macroeconomic climate.
Investments In Technology Continued To Deliver. With a view to drive sales growth through operating efficiencies that are likely to reduce friction points in customer experience, TXRH continued to implement the technological initiatives rolled out over the previous two years. The digital wait list feature which provides consumers an opportunity to select time slots convenient for them to dine-in at Texas Roadhouse restaurants, has been implemented across the whole system, and has probably reflected in a greater number of customers actually coming in to dine rather than the simply surmising. In addition, the Roadhouse mobile application has been downloaded by ~3.7 million customers since its debut, resulting in growth in digital sales, as ~70% of off-premise orders were transacted digitally, during the first quarter.
Additional technology based initiatives currently being rolled out include Roadhouse Pay (which provides customers the option to make payments digitally at the table), that is currently active in ~100 restaurants, and the deployment of hand-held digital devices for servers to take customer orders at the table, which is currently being piloted in selective restaurants. Further, a Jaggers’ mobile order and pay app, which facilitates the brand’s loyalty program was launched recently.
We are encouraged that TXRH is assuming an industry leading digital profile, with the deployment of technology at multiple levels of its operations, with a view to enhance customer experience. Given that guest satisfaction is a predominant predictor of sales growth, the strategy is likely to reflect materially on the bottom line.
Footprint Growth Targets On Track. Despite the shortages in labor and supplies that have gripped the nation, TXRH appears well positioned to expand its restaurant footprint by 25% to 30% this year, in-line with long-term guidance. In addition to the five Texas Roadhouse restaurants launched in the first quarter, the company plans on adding another 25 corporate Texas Roadhouse and Bubba’s 33 restaurants by YE2022. At the end of F1Q2022, TXRH was operating 599 Texas Roadhouse outlets, 36 Bubba’s 33 locations, and 4 Jaggers restaurants.
In regard to the Texas Roadhouse new unit development opportunity, it is noteworthy that the strategy has shifted to include small towns across the U.S. as potential white space for expansion. In addition, with a view to benefit from the substantial momentum the business is experiencing, management is considering capacity extension approaches, including opening restaurants earlier and closing them later.
With respect to Bubba’s 33, TXRH indicated that they are focused on the rapid development of the brand’s footprint and are in the midst of finalizing the average costs associated with building the outlets. Given management’s upbeat attitude towards increasing the rate of new restaurants added every year beyond the 30, they previously strongly defended, this time around there appears an urgency to leverage the considerable opportunity the business represents. TXRH’s third brand Jaggers is being developed as a franchisee led concept. The company has already signed agreements with two operators to open Jaggers restaurants. One of the outlets is expected to be launched this year and the other early next year.
Considering the significant opportunity for TXRH’s growth, the footprint expansion plans of the three brands underpin, we are highly supportive of the development. Specifically, we are excited about Bubba’s 33 and Jaggers as a large fraction of long-term growth will be derived from the concepts. Moreover, given the tremendous success of the Texas Roadhouse brand, we expect eventual strong earnings from the two emerging businesses.
Balance Sheet Appears Strong. At the end of F1Q2022, the company had a cash and cash equivalents balance of ~$326 million and long-term debt of $100 million, on its balance sheet. TXRH refinanced its debt over F2Q2021, increasing the borrowing capacity associated with its revolving line of credit to $300 million, of which a balance of $189 million remains available for use. Consequently, we believe that the firm is appropriately funded to operate effectively and execute on its significant footprint expansion objectives. During F1Q2022, TXRH approved a $300 million share repurchase program, and announced a dividend of $0.46/share.
Based on the runaway sales growth TXRH’s Texas Roadhouse brand has enjoyed since the first quarter of last year, it is clear that long-time customers continue to enjoy the experience its restaurants offer, and as awareness of the concept advances, new customers in large numbers are getting equally hooked. In addition, the restaurant chain is not done growing. Its footprint is expected to keep expanding materially, at least for the next three to five years, accelerating growth even further. Given the cult following Texas Roadhouse enjoys, the group’s sales are likely the most insulated among public full-service restaurant chains, if a recession were to unfold, over the next year. Therefore, simply based on the Texas Roadhouse asset, TXRH shares might be a holdout, in case of a market sell-off.
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