BJRI BJs Restaurants Inc

Texas Roadhouse Inc. (TXRH) recently posted first quarter 2011 earnings of 27 cents that missed the Zacks Consensus Estimate of 29 cents and rose 1% year over year. The results were lower than expected due to higher costs that contracted margin. A significantly high amount of pre-opening expenses also adversely impacted its earnings.

Total revenue climbed 9.0% from the prior-year quarter to $283.8 million, which inched past the Zacks Consensus Estimate of $282 million. The upside in revenue was attributable to higher comparable sales growth. Restaurant sales jumped 9.3% to $281.3 million, whereas franchise royalties and fees upped 8.0% to $2.5 million. Texas Roadhouse excelled in top line aided by rising guest counts and new restaurant performance. Comparable-store sales grew 4.6% at company-owned restaurants and 3.8% at franchised restaurants during the quarter.

During the quarter, restaurant operating margin declined 88 basis points (bps) to 19.2%, due to a 108-bp rise in cost of sales and a 30-bp rise in labor cost, partially compensated by a 46-bp fall in other operating costs and a 4-bp dip in rent.

Store Update

During the quarter, Texas Roadhouse opened 2 company-owned restaurants, and plans to open 20 more outlets in fiscal 2011 compared with 2010. The company remains on track to ramp up its development pipeline in 2012. At the end of the quarter, there were 276 company-owned and 71 franchised restaurants.

Financial Position

Texas Roadhouse ended the quarter with cash and cash equivalents of $77.4 million, total long-term debt of $51.8 million and shareholders’ equity of $489.6 million. The company repurchased 1,500,000 shares of its common stock for a total purchase price of $25.3 million.

Management anticipates capital expenditure in the range of $65–$70 million for fiscal 2011.

Outlook

Management expects earnings growth of 5% to 10% in 2011 as compared with its previous expectation of 10%. The narrowed outlook can be credited to the stringent cost environment. The company expects food cost inflation of 4% in fiscal 2011, which is higher than the previous guidance of 3%.

Texas Roadhouse raised its comparable-store sales growth outlook to 3.5–5.0% compared to its earlier guidance of 3.0% in fiscal 2011.

Our Take

Louisville, Kentucky-based Texas Roadhouse is presently reeling under rising input cost pressure like many of its restaurant peers. Although the company, which offers specially seasoned steaks, took some pricing action in the first quarter, it was not sufficient enough to weather the full inflationary impact, which resulted in margin erosion. Management commented that they will take further modest price increases to offset inflation in future.

Another downside in the quarter was higher pre-opening expenses for the future unit development of the company. Texas Roadhouse expects this burden to exist throughout the year. Hence, although we remain negative on the short-term outlook, we believe the stock will perform better once the new units will begin to pay off. Additionally, the company’s top-line momentum is in place and management seeks to enhance shareholder value through share repurchases.

One of Texas Roadhouse's primary competitors, BJ’s Restaurants Inc. (BJRI) reported first quarter 2011 adjusted earnings of 25 cents per share, which surpassed the Zacks Consensus Estimate of 19 cents and increased 56% from the prior-year quarter. The company’s revenue also outperformed during the quarter.

Texas Roadhouse currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. We are also maintaining our long-term “Neutral” recommendation on the stock.

 
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