Introduction
Texas Roadhouse (NASDAQ:TXRH), is a flourishing Southern-inspired American restaurant chain that has undergone noteworthy growth, rewarding shareholders with a 94% increase in the share price over the past five years. With a strong brand and multiple avenues for growth, Texas Roadhouse looks set for a bright future. However, with strong growth in the company’s share price over the past few years, concerns about potential future returns arise. Although I anticipate positive returns over the next few years, returns look set to be lower than in the past 5 years, leading me to assign the shares a “hold” rating.
Company Overview
Texas Roadhouse is an American restaurant chain renowned for its authentic Southern-inspired cuisine and distinct dining experience. Founded in 1993 and headquartered in Louisville, Kentucky, the company has rapidly grown to operate over 722 restaurants, across 49 states and over 10 countries.
These restaurants are split across 3 brands.
- Texas Roadhouse is the main brand with 671 locations and serves products typically found in a steakhouse. This brand operates as a casual diner.
- Bubba 33, consists of 43 restaurants serving a range of pizzas, burgers, and chicken wings.
- Jagger, made up of 8 locations, is a fast-casual style restaurant that serves burgers, chicken tenders, and chicken sandwiches.
Texas Roadhouse operates a majority of its restaurants as company-owned locations, with 614 under management. This enables the company to maintain strict quality control and provide a consistent dining experience across its restaurants. Additionally, Texas Roadhouse has 95 franchise-operated restaurants, allowing it to expand its brand presence and reach a broader customer base, with lower capital needs from the company. Of its 68 international locations, all are franchisees.
Company Growth
One key driver of Texas Roadhouse's growth in the coming years will be in expanding its network of restaurants. Currently, Texas Roadhouse operates 722 restaurants, with plans to open 33 company-operated stores and 9 franchised stores in 2024. With many rival chains operating in the 1000’s of restaurants, there is still significant expansion opportunity available.
Texas Roadhouse also has plans to increase its international presence which may help drive future sales growth. However, many restaurant chains have struggled to expand in international markets before, given the differences in consumer tastes and regulations. For Texas Roadhouse, all international locations are, however, franchised, which helps to reduce the upfront capital required. Additionally, these locations are run by franchisees who know the prevailing business and consumer culture in their respective country, so can make adjustments accordingly, giving Texas Roadhouse local market knowledge, key for a successful international expansion.
Growth does not just have to come from new locations, however. Texas Roadhouse has continued to grow same-store sales with sales in the third quarter up 8.2% compared to the previous year, driven by a 4.1% increase in customers and a 4.1% increase in average spend. With a growing store count and increasing same-store sales, Texas Roadhouse looks set to increase revenue strongly in the coming years.
Q3 Results
On October 26th, Texas Roadhouse released their 3rd quarter results. Earnings missed market expectations, with earnings per share of $0.95 vs the $1.07 per share expected. Revenue was however in line, at $1.12 billion for the quarter, an increase of 12.8% against the corresponding quarter in the previous year. Management also provided some initial expectations for 2024, where they expect to see continued positive sales growth, and capital expenditures of $340-350 million, underlining the company’s growth story.
Overall, I believe these results underscore Texas Roadhouse’s ambitions to grow the business, positioning it in a solid place for future growth and success.
Q4 Outlook
Texas Roadhouse is set to report its results for Q4 2023 later this month. Current expectations are for its growth to continue, with revenue set to be $1.16 billion an improvement of 14.9% when compared to the corresponding quarter the previous year. Similarly, earnings per share is set to see an increase from $0.89 per share to $1.06 per share in the latest quarter. I believe the company is on track to meet expectations, with data for the first four weeks of Q4 showing 14.6% growth in sales.
Further store openings during the quarter, and the potential for improvements from economies of scale, also support these expectations. On the macroeconomic level, December's retail sales growth of 11.1% year-on-year in the food services and drinking places segment indicate a strong quarter for food service operators such as Texas Roadhouse, further supporting prospects for a strong set of results.
Valuation
To value Texas Roadhouse, I employed an EV/EBITDA methodology for the period to 2026. I assumed Texas Roadhouse would continue buying back shares at a rate of 2% a year, reducing the share count from the current 66.8 million shares to 62.9 million at the end of 2026. For purposes of simplicity, I assumed cash and debt levels remain constant.
Based on Texas Roadhouse’s EBITDA margin over the past 5 years, I expect it to remain constant at 12%, with the large size of the company meaning there is little room for EBITDA margin improvement from economies of scale as revenue grows. For future revenue, I used analyst estimates on Seeking Alpha.
To determine an exit EV/EBITDA multiple, I took the midpoint of the company's 5-year average of 19.00 and the industry average of 9.92, giving an exit multiple of 14.46.
Performing the calculations implies a market cap of $9.75 billion at the end of 2026. With an estimated 62.9 million shares outstanding, this corresponds to a price target of $155.12 per share, an upside of 26% from the current price for a CAGR of 8.3% over the next 3 years.
Risks
When investing in Texas Roadhouse, I believe there are two main risks to consider.
Firstly, the increasing cost of beef. Some of the main items on Texas Roadhouse’s menus have beef as their core ingredient. Recently beef prices have hit a record high which has been attributed to drought driving feed costs higher, forcing a shrinking in the herd to a 61-year low. This has led to beef prices soaring to a record high of $1.79 a pound compared to $1.50 a pound last year. Texas Roadhouse’s reliance on beef as a core part of its menu makes it vulnerable to these higher prices, and customers may opt for competitors that offer cheaper non-beef alternatives, posing a substantial threat to Texas Roadhouse’s market position. Although the company does have some fixed-price contracts with suppliers, this does not protect it from higher prices in the long term. This risk was highlighted in the Q3 earnings call with CFO Chris Monroe stating, “Beef remains the primary driver of this year's inflation”.
Secondly, as with any food-related business, a food safety issue would cause severe reputational damage to the business. For example, Chipotle Mexican Grill (CMG) suffered tremendously due to an E. coli breakout which resulted in a fall in revenues as customers avoided its restaurants and led to a fall in share price. For Texas Roadhouse, maintaining stringent food safety measures is paramount to preserving customer trust and loyalty. Any adverse incident, such as contamination or foodborne illnesses, could not only lead to a decline in customer footfall but also trigger legal consequences and regulatory scrutiny.
Conclusion
Texas Roadhouse presents a promising growth outlook, with multiple restaurant openings planned both in the US and internationally. With a solid business model and a commitment to quality at affordable prices, it appears well-positioned for the future.
However, while my calculations suggest there is potential for an increase in the share price over the next few years, the projected return of 8.3% CAGR in the competitive restaurant market with low barriers to entry is too low for me to invest. Therefore, I assign Texas Roadhouse a hold rating at this time. In my view it is better to explore alternative opportunities which may offer higher rates of return or have a stronger competitive advantage.
This article was written by
Mountain Valley Value Investments
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I am a small investor who only manages my personal portfolio. I focus on finding overlooked value stocks and only buy at the right price. I contribute to seeking alpha as a hobby, and to share and discuss ideas.
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Insights, advice, suggestions, feedback and comments from experts
Texas Roadhouse is a popular American restaurant chain known for its Southern-inspired cuisine and unique dining experience. The company has experienced significant growth over the past few years, with a 94% increase in its share price in the last five years. Texas Roadhouse operates over 722 restaurants across 49 states and 10 countries, with three different brands: Texas Roadhouse, Bubba 33, and Jagger. The majority of its restaurants are company-owned, with 614 under management, while the remaining 95 are franchise-operated. The company has plans to open more company-operated and franchised stores in the future, both domestically and internationally, to further expand its brand presence and reach a broader customer base.
Texas Roadhouse has been successful in growing its revenue through a combination of new restaurant openings and increasing same-store sales. In the third quarter of the previous year, the company reported an 8.2% increase in same-store sales, driven by a 4.1% increase in customers and a 4.1% increase in average spend. These positive results indicate a strong potential for revenue growth in the coming years.
In terms of financial performance, Texas Roadhouse's third-quarter earnings missed market expectations, with earnings per share of $0.95 compared to the expected $1.07 per share. However, the company's revenue for the quarter was in line with expectations, at $1.12 billion, representing a 12.8% increase compared to the corresponding quarter in the previous year. Management has provided positive sales growth expectations for the future, along with capital expenditures of $340-350 million, highlighting the company's growth story.
Looking ahead to the fourth quarter of 2023, Texas Roadhouse is expected to continue its growth trajectory, with revenue projected to increase by 14.9% compared to the corresponding quarter of the previous year. Similarly, earnings per share are expected to see an improvement from $0.89 per share to $1.06 per share in the latest quarter. The company's strong sales growth in the first four weeks of the fourth quarter, along with the overall growth in the food services and drinking places segment, indicate a positive outlook for Texas Roadhouse's Q4 results.
When considering the valuation of Texas Roadhouse, an EV/EBITDA methodology was employed, taking into account factors such as share buybacks, EBITDA margin, and future revenue estimates. Based on these calculations, a price target of $155.12 per share was determined, representing an upside of 26% from the current price. However, it is important to note that investing in Texas Roadhouse does come with certain risks. The increasing cost of beef, which is a core ingredient in many of the company's menu items, poses a potential threat due to rising beef prices. Additionally, maintaining stringent food safety measures is crucial to avoid reputational damage and potential legal consequences.
In conclusion, while Texas Roadhouse presents a promising growth outlook with plans for expansion and positive sales growth, the projected return of 8.3% CAGR in a competitive restaurant market with low barriers to entry may not be sufficient for some investors. Therefore, a "hold" rating is assigned to the company at this time, suggesting that alternative investment opportunities with higher rates of return or stronger competitive advantages may be worth exploring.
