Texas Roadhouse Inc (NASDAQ:TXRH)’s stock has grown by 46% in the last six months. This is quite a feat given the competition full service, casual dining restaurant companies are facing from their Quick Service Restaurant (QSR) peers. Texas Roadhouse Inc (NASDAQ:TXRH) has taken several initiatives that are expected to continue driving the company’s same store sales. In this article I discuss some of these initiatives in detail.
Store expansion plans will drive sales growth in the long term
Texas Roadhouse Inc (NASDAQ:TXRH) is expanding its store base to locations in 49 out of the 50 states. It has store growth plans in place and is looking to reach 700 to 800 stores in the future, up from its current 400 locations. It has opened three new company-owned units and two franchised units in the first quarter this fiscal year. It has store expansion plans for 28 stores this year, with most of the store openings taking place in the second half of the year. Productivity for the new stores is below system average sales, but unit volumes are strong. The company also plans to increase its store presence in the Middle East and will also be targeting Canada in the latter part of the year.
Price increase is likely to offset some effect of food inflation
Food inflation is on the rise and beef prices are expected to increase this year, which will in turn increase the cost of goods sold. Beef cost is 40% of the company’s food cost and is expected to increase more than the other commodities. Texas Roadhouse Inc (NASDAQ:TXRH) has contracted for 80% of the beef that it requires for the year, a factor that will reduce costs. The company tested menu price increases this summer and is expected to increase its menu price by 2% in the latter part of the year. This will not completely offset the inflation effect, but it will be helpful in maintaining margin levels.
Store-level initiatives will help same-restaurant sales increase
Texas Roadhouse Inc (NASDAQ:TXRH)’s store operators are taking some stores-level initiatives to attract new customers into their stores. They are running small remodeling programs and adding more seats at locations where demand is high at peak times. The remodeling of 100 stores is complete so far, and an additional 25 to 30 stores will be remodeled this year. Store operators are doing local store marketing and remain active in local communities. These initiatives have helped them to increase same-restaurant sales, with SRS growth of 3.5% being reported in the first quarter this fiscal year. This was above the consensus estimate of 2.2%.
Peer analysis
In casual dining restaurants, the other two major players are Darden Restaurants, Inc. (NYSE:DRI) and Brinker International, Inc. (NYSE:EAT). Darden is taking initiatives in regard to menu changes and promotional offers to attract customers to its two major brands, Olive Garden and Red Lobster. Olive Garden has expanded its “Italian Dinner” platform and added core menu products, while Red Lobster began offering “Seaside Express” service at some restaurants that offers some of the qualities of fast casual restaurants. The company will attempt to attract customers with value-based promotional offers such as “Buy One, Get One” and “2 for $25 seafood Fest” promotions. The company has growth potential, with a store expansion plan in place designed to add 150 to 170 stores in the next 4 to 5 years. These initiatives are expected to drive growth in the long term.
Brinker International, Inc. (NYSE:EAT) has invested in technology for growth. The company has invested in new kitchen technology to make a “kitchen of the future” and point-of-sale Ziosk tabletop technology. The new kitchen technology has helped it to offer new product lines including pizza and flatbread dishes in its restaurants. At the same time, these technologies will help the company to reduce food waste and labor charges. The Ziosk tabletop technology will enhance the in-store customer experience, allowing for smooth ordering and an easier payment process. It will also enable the company to have more advertising and promotional opportunities inside of its stores. Brinker is reimagining its Chili’s brand and is also renovating 40% of its company-owned stores. The reimagined stores are performing around 3% better in same-store sales than untouched stores. The technological enhancement efforts and reimaging are expected to give good results.
| Company | P/S ratio | Op. Margin | 1Yr. Fwd. P/E |
|---|---|---|---|
| Texas Roadhouse | 1.17 | 10.61% | 18.37 |
| Darden Restaurants | 0.75 | 9.42% | 16.56 |
| Brinker International | 0.96 | 10.68% | 14.73 |
Source: Google Finance and Yahoo! Finance
Texas Roadhouse Inc (NASDAQ:TXRH) has reported an operating margin of 10.61% but reports the highest forward price-to-earnings ratio among the three mentioned peers at 18.69. Darden Restaurants, Inc. (NYSE:DRI) has the lowest price-to-sales ratio at 0.75, but also has the lowest operating margin of 9.42%. Brinker International, Inc. (NYSE:EAT) has performed the best among the peers, reporting the highest operating margin at 10.68% and lowest forward price-to-earnings ratio at 14.73.
Conclusion
Texas Roadhouse Inc (NASDAQ:TXRH) has store growth plans in place and has entered into two new states this year to increase its presence to 49 states. A menu price increase is expected in the latter part of the year to marginalize the food inflation effect on its margin. Its store-level initiatives of extra seats at peak time and local marketing are expected to increase the company’s sales in the long term. As a result, I would recommend “BUY” for this stock. In addition to Texas Roadhouse Inc (NASDAQ:TXRH), I would also recommend that investors consider Brinker International, Inc. (NYSE:EAT) as an investment. I have discussed my bullish thesis on the company in my previous article here.
Ash Sharma has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants, Inc. (NYSE:DRI).
The article Will Store Expansion Help This Restaurant Company Grow? originally appeared on Fool.com.
Ash is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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