Texas Roadhouse: High Price For Perfection

         “Texas Roadhouse is more on par with middle America and younger consumers than some of its competitors. If you were going to compare Outback to Texas Roadhouse, the first big difference is the price. Customers can expect to spend $9.99 on a early dining special or $14 to $15 on    an entree. At Outback, customers will likely pay $20 or more. Outback tends to attract an older customer whereas the Texas Roadhouse atmosphere is more energetic.”

According to founder and CEO Kent Taylor, 62, the restaurant has stayed true to its roots since its inception in 1993. Its most popular offering then – the six ounce sirloin – remains the company’s biggest seller even today. Most of the chain’s restaurants are only open during dinner hours, relieving pressure on store management and staff. Unlike other casual dining chains, Texas Roadhouse has refused to cut into labor. As Taylor stated in the most recent earnings call:

“Our competitors continue to maybe shave a little labor here and there. We don’t. I think that might be helping us.”

Fundamentals Overview

As of the quarter ended in March 2018, Texas Roadhouse counts 558 restaurants, 84 percent of which are company-owned. Of the 469 locations in the company’s portfolio, 30 percent sit on land that is also directly owned by Texas Roadhouse. Property and plant and equipment are carried on the books at $900 million, net of depreciation.

While a pure franchising model does have its advantages, there is something to be said for owning real estate. One benefit is not worrying about lease agreements if times get tough, which gives the company flexibility to close underperforming locations.

During the most recent conference call, Taylor also revealed that the company had extinguished the balance of its long-term debt. Texas Roadhouse sits on a cash pile of $200 million and generates $138 million of free cash flow. Remarkably, the company’s expansion is now financed entirely from operating cash flow and cash on hand.

Growth Story

The buy case for Texas Roadhouse rests on its potential for growth in unit count. A look at the company’s geographic footprint shows that there is still a lot of room for new restaurants. In the company’s Texas stronghold, where it counted 68 restaurants in 2017, the ratio of total restaurants to population (in millions) is 2.43.

Mike Berner – Seeking Alpha

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