Overview

Texas Roadhouse, Inc. (NASDAQ:TXRH) has solidified its position as a leading player in the casual dining industry, consistently delivering impressive financial and operational performance. With a diverse portfolio of restaurant concepts, including the flagship Texas Roadhouse brand, Bubba's 33, and Jaggers, Texas Roadhouse has demonstrated its ability to navigate the evolving consumer landscape and capitalize on emerging trends.

Financials

In the latest fiscal year, Texas Roadhouse reported annual revenue of $4,631,672,000, a testament to the strength of its brand and the appeal of its offerings. Texas Roadhouse's net income for the year reached $304,876,000, showcasing its ability to translate top-line growth into robust profitability. Additionally, Texas Roadhouse generated annual operating cash flow of $564,984,000 and annual free cash flow of $217,950,000, providing ample financial flexibility to fund its strategic initiatives and reward shareholders.

Texas Roadhouse's performance in the most recent quarter further underscores its resilience. In Q2 2023, Texas Roadhouse reported revenue growth of 14.5%, driven by an 8.5% increase in average unit volume and 5.6% store week growth. Texas Roadhouse's restaurant margin dollars increased by an impressive 32.7% to $243 million, and diluted earnings per share grew by 46.4% to $1.79.

Business Overview

A Diversified Concept Portfolio Driving Growth

Texas Roadhouse's success can be attributed to its diversified portfolio of restaurant concepts, each catering to distinct consumer preferences and occasions.

The flagship Texas Roadhouse brand continues to be the backbone of Texas Roadhouse's operations, with 591 company-owned restaurants and 56 domestic franchise locations as of the end of Q2 2023. The brand's focus on delivering a legendary dining experience, featuring hand-cut steaks, fall-off-the-bone ribs, and made-from-scratch sides, has resonated strongly with customers. In Q2 2023, Texas Roadhouse restaurants averaged approximately $163,000 in weekly sales, showcasing the brand's enduring appeal.

Bubba's 33, Texas Roadhouse's sports-themed concept featuring burgers, pizza, and wings, has also demonstrated impressive momentum. With 45 company-owned locations, Bubba's 33 maintained a positive trend, averaging approximately $123,000 in weekly sales during the second quarter. The brand's focus on quality ingredients and a lively atmosphere has helped it gain traction and recognition, with several local awards, including "Best Burger" and "Best Family and Casual Dining Restaurant" in Chesapeake, Virginia, and "2023 Best Pizza" in Buford, Georgia.

Jaggers, Texas Roadhouse's quick-service brand, is also gaining increased consumer awareness, generating approximately $73,000 in weekly sales during the second quarter. The brand's burger was named a community choice finalist in Louisville, Kentucky, further bolstering its reputation. Additionally, Texas Roadhouse is looking forward to the opening of its first international Jaggers franchise location later this year on the Camp Humphreys military base in South Korea, showcasing the brand's potential for global expansion.

Operational Excellence Driving Margin Expansion

Texas Roadhouse's operational excellence has been a key driver of its financial performance. In Q2 2023, Texas Roadhouse reported a significant expansion in restaurant margin, with the metric increasing by 250 basis points year-over-year to 18.2% of total sales.

This margin expansion was primarily driven by Texas Roadhouse's ability to leverage its scale and operational efficiencies. Food and beverage costs as a percentage of total sales decreased by 176 basis points to 32.7%, largely due to the benefit of a 4.8% increase in average check, which offset commodity inflation of 0.4% for the quarter.

On the labor front, Texas Roadhouse has made significant strides in improving productivity, with labor expenses as a percentage of total sales decreasing by 76 basis points to 32.8%. Texas Roadhouse's investment in rebuilding its management teams and hourly ranks has paid off, as its fully staffed restaurants with longer-tenured employees have enabled greater labor efficiency.

Looking ahead, Texas Roadhouse expects to maintain its focus on operational excellence, with the continued rollout of its digital kitchen technology expected to further enhance efficiency and productivity in the back-of-house operations.

Prudent Capital Allocation and Shareholder Returns

Texas Roadhouse's strong financial performance has enabled Texas Roadhouse to maintain a disciplined approach to capital allocation, balancing growth investments and shareholder returns.

During the second quarter, Texas Roadhouse invested $145 million in capital expenditures, primarily directed towards new restaurant openings, refurbishments, and expansions of existing locations. Texas Roadhouse remains on track to open approximately 30 company-owned restaurants across its three brands in 2023, demonstrating its commitment to strategic growth.

In addition to its growth investments, Texas Roadhouse has also prioritized returning capital to shareholders. Texas Roadhouse paid $40.8 million in dividends during the second quarter, reflecting its confidence in the business and its commitment to rewarding shareholders. Furthermore, Texas Roadhouse repurchased $8.9 million of its common stock, underscoring its belief in the long-term value of the business.

Looking ahead, Texas Roadhouse has approved and/or accelerated additional store-level capital projects, raising its full-year 2023 capital expenditure guidance to between $360 million and $370 million. This increased investment reflects Texas Roadhouse's confidence in the productivity and returns of its restaurant portfolio, as well as its commitment to enhancing the guest experience and driving long-term shareholder value.

Risks and Challenges

Navigating Inflationary Pressures with Agility

Texas Roadhouse has demonstrated its ability to navigate the inflationary environment with agility and resilience. In the second quarter, Texas Roadhouse benefited from lower-than-expected commodity costs, with its floating beef contracts enabling it to take advantage of market prices that were lower than its initial forecast.

As a result, Texas Roadhouse has updated its full-year commodity inflation guidance to approximately 2%, down from its previous expectation of 2% to 3%. This adjustment reflects the impact of the lower-than-forecasted inflation incurred so far this year, as well as Texas Roadhouse's current expectation of between 2% and 3% commodity inflation in the second half of the year.

On the labor front, Texas Roadhouse has continued to see positive productivity trends, with wage and other labor inflation coming in as expected at 4.4% in the second quarter. Texas Roadhouse believes the benefit of fully staffed restaurants with longer-tenured employees should result in continued labor efficiency improvement through at least the end of 2023.

As Texas Roadhouse prepares for its upcoming pricing discussions with operators, Texas Roadhouse is taking a conservative approach, balancing the need to offset structural inflationary pressures while maintaining its value proposition and recognizing the importance of customer acceptance. Texas Roadhouse's disciplined pricing strategy, coupled with its operational excellence, positions it well to navigate the evolving market conditions.

Liquidity

Robust Financial Position and Liquidity

Texas Roadhouse's strong financial performance has translated into a robust balance sheet and ample liquidity, providing Texas Roadhouse with the flexibility to execute its strategic initiatives and navigate potential challenges.

As of the end of the second quarter, Texas Roadhouse reported $197 million in cash, with cash flow from operations reaching $134 million during the period. This solid cash position, combined with Texas Roadhouse's expectation for continued strong operating cash flow generation, has enabled Texas Roadhouse to accelerate and approve additional store-level capital projects, further enhancing its long-term growth potential.

Moreover, Texas Roadhouse maintains a healthy credit profile, with no outstanding borrowings under its $300 million revolving credit facility as of the end of the second quarter. This low-leverage position and access to additional liquidity provide Texas Roadhouse with the financial flexibility to pursue strategic opportunities and weather any potential economic headwinds.

Outlook

Texas Roadhouse's impressive performance in the first half of 2023 and its positive momentum heading into the second half of the year underscore the strength and resilience of its business model. Texas Roadhouse's diversified concept portfolio, operational excellence, and prudent capital allocation have positioned it as a leader in the casual dining industry.

Looking ahead, Texas Roadhouse remains optimistic about its growth prospects, with plans to open approximately 30 company-owned restaurants across its three brands in 2023. Texas Roadhouse's continued focus on enhancing the guest experience, investing in its people, and driving operational efficiencies positions it well to navigate the evolving market landscape and deliver sustainable long-term value for its shareholders.

Conclusion

Overall, Texas Roadhouse's impressive financial and operational performance, coupled with its strategic initiatives and strong liquidity, make it a compelling investment opportunity in the casual dining space.