Zacks_Analysts' Blog : Texas Beats by a Penny - Analyst Blog

Texas Roadhouse Inc. (TXRH), a casual dining restaurant chain, recently posted third quarter 2010 earnings of 19 cents that surpassed the Zacks Consensus Estimate by a penny and escalated 28.0% year over year. The better-than-expected results were driven by comparable-store sales growth, higher traffic and margin expansion.

Louisville, Kentucky-based Texas Roadhouse said that total revenue in the quarter climbed 8.5% from the prior-year quarter to $245.6 million. The upside in revenues was attributable to higher comparable sales growth. Restaurant sales jumped 5.4% to $257.3 million, whereas franchise royalties and fees upped 7.7% to $2.2 million.

Comparable-store sales grew 4.3% at company-owned restaurants and 4.4% at franchised restaurants during the quarter, as the economy is reviving, resulting in an increase in consumer demand. Moreover, Texas Roadhouse pointed out that comparable-store sales grew 3.5% in the first four weeks of fourth quarter 2010.

Restaurant operating margin expanded 79 basis points (bps) to 17.9%, aided by a 69 bps fall in cost of sales to 32.5% due to lower commodity cost, a 62 bps dip in labor cost to 29.5% and a 5 bps drop in rent to 2.2%, partially offset by a rise of 58 bps to 17.9% in other operating costs. Going forward, management anticipates a favorable commodity environment for the remainder of 2010, and forecasts a food cost deflation of 2.5% for the full year. However, in fiscal 2011, the company expects cost inflation in the range of 2% to 3%.

Store Update

During the quarter, Texas Roadhouse opened 3 company-owned restaurants, and plans to open 14 outlets in fiscal 2010. At the end of the quarter, there were 267 company-owned and 71 franchised restaurants.

Financial Position

Texas Roadhouse ended the quarter with cash and cash equivalents of $55.4 million, total long-term debt of $62.0 million and shareholders’ equity of $670.5 million. Management anticipates capital expenditure of $50 million in fiscal 2010 and in the range of $60–$65 million in fiscal 2011.

Outlook

Management now expects fiscal 2010 earnings to rise at the high end of its previous guidance, i.e. 20% year over year as compared with its previous expectation range of 16% to 20%. For fiscal 2011, it expects earnings growth in the range of 5% to 15%.

Texas Roadhouse, which offers specially seasoned steaks, now expects comparable-store sales to be up 2% in fiscal 2010 and 2% to 3% in fiscal 2011.

Our Take

As the economy is showing signs of improvement, we believe Texas will be able to generate improved earnings. Therefore, based on better-than-expected third quarter results and an improved outlook, we expect estimates to rise in the coming days.