Texas Roadhouse

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Texas Roadhouse, Inc. is a full-service restaurant company, primarily operating steakhouses under the Texas Roadhouse brand, known for its hand-cut steaks, fall-off-the-bone ribs, and fresh-baked bread.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Texas Roadhouse’s economic moat is rated 3/5 - While the company has some sources of competitive advantage, they are not the strongest and most defensible. It has been in place for years and have shown good consistency. The business is a bit difficult to predict in the long-term though. The company has great financials, but it is not a straightforward to understand the financials of the company and has some tricky aspects.

Business Overview

Texas Roadhouse operates in the highly competitive restaurant industry, focusing on full-service, moderately priced steakhouses. The company primarily operates under the Texas Roadhouse brand, along with a small number of Bubba’s 33 and Jaggers locations.

While steak and ribs are the core offerings, the restaurants also feature other items on the menu, such as chicken, seafood, salads, and sides.

  • Revenue Distribution:
    • Restaurant sales form the vast majority of revenue, with a relatively small portion coming from franchise royalties and other sources.
    • The company operates both company owned stores, and some franchised ones, a large portion of its expansion comes from new company operated restaurants.
    • The key driver is comparable sales, which can be influenced by traffic and menu mix
    • Pricing is also an important driver for revenue.
  • Industry Trends:
    • The restaurant industry is highly sensitive to consumer discretionary spending and is characterized by high competition.
    • Changing consumer preferences toward healthier, more sustainable food options can pose a challenge for traditional steakhouses.
    • Growth for many restaurants has been primarily driven through new restaurants.
    • There are increasing costs due to staffing and ingredients.
  • Competitive Landscape:
  • Competition in the restaurant industry is fierce.
  • Texas Roadhouse competes with other casual dining chains, but also faces competition from smaller, independent operators as well.

  • Restaurants frequently compete on taste, ambiance, service, price, convenience, value, and location.

  • What Makes TXRH Different:
    • The core value proposition is “Legendary Food, Legendary Service.”
    • The company attempts to offer high-quality steaks at affordable prices with large portions, in a fun, family-friendly atmosphere.
    • Texas Roadhouse also leverages its unique country-style decor and its tradition of handing out free buckets of peanuts to attract and retain customers.
    • The company also has a relatively large number of locations with high levels of efficiency and customer satisfaction.

Financial Analysis

Texas Roadhouse’s financials are impressive, but their accounting is not the simplest, having some tricky aspects and adjustments that are important to take into account for accurate evaluation.

  • Income Statement:
    • Revenue growth has been consistent but has been influenced in part by new restaurants, menu prices, and the number of restaurant operating days.
    • Margins, particularly operating margins, have been under pressure in recent times with higher inflation, as a result net margins have taken a hit.
    • Labor and raw materials are the largest expenses for the company.
    • There is a continued increase in impairment on property, equipment, and restaurant closures, which may be a headwind for profits.
    • The effective tax rates were 13.9% in 2021 and 11.8% in 2022 due to tax incentives.
  • Balance Sheet:
    • The company’s cash and cash equivalents are extremely high (at 843.9 million), as they are not making many big acquisitions.
    • Long-term debt is also very high (around $499 million) with high obligations as a result of their credit agreements.
    • The company’s equity is quite large (around $1,3 billion)
    • Goodwill is quite high ($350 million) which should be taken into account.
    • Capital leases are a big component of their liabilities.
  • Cash Flow Statement:
    • Texas Roadhouse’s operating cash flow is excellent and consistently growing, indicating that it generates more cash than it uses.
    • Capital expenditures are substantial, as they open a large number of restaurants each year.
    • There is significant share repurchasing from year to year which is typical for companies in mature industries.

Moat Analysis (3/5)

  • Brand Recognition: Texas Roadhouse has a well-recognized brand, especially in its core steak market. The chain’s combination of quality, hearty portions, and a lively atmosphere has cultivated a loyal customer base. However, it faces competition from other casual dining chains and fast-food competitors. The brand has some strength but not to the level of a “wide moat”.
  • Location-Based Advantage: Its chain is largely concentrated in the United States, however it has locations in other countries as well. Also it benefits from local operations that require regional supply chains. It can also be more competitive by having stores closer to their customers.
  • Cost Advantages: The company has some ability to control costs, and their business model revolves around providing a lot of value to customers for the price, so if competition increases their margins will go down. The company could be viewed as a low-cost provider for certain regions.
  • Switching costs: There are limited switching costs for dining out options so there is a potential for customers to switch whenever competition increases.
  • Intangibles: There are limited intangible assets, other than the brand.

Risks to the Moat and Business Resilience

The company is heavily affected by increasing costs, and any changes in taste or customer habits are a threat. If any of these effects continue for too long, they could potentially damage the moat or lower its level.

  • Rising Costs:
    • Labor and food costs are significant expenses for Texas Roadhouse, and these costs have been rising in recent times. Any further rise will affect the company’s profits.
    • Since competitors and others could absorb those costs, this could mean that the company will have to increase prices, diminishing its value proposition.
  • Intense Competition:
  • The restaurant industry is incredibly competitive and has low margins. This can mean that Texas Roadhouse needs to fight hard to keep its market share and may lead to decreased earnings.
  • Consumer Preferences:
  • Changing tastes or customer preferences can have a big impact on the company. Any shifts in demand for certain types of food can damage their revenues and market share.
    • For example the rise of plant-based meats may make their steak-based restaurants more obsolete and irrelevant.
  • Economic Downturn: The company is susceptible to economic downturns that may impact the discretionary spending of consumers and lead to lower revenues. A recession would probably hurt the companies revenue.
  • Management:
    • While current management is well-respected and experienced, it is always a risk when leadership and management changes.
    • It is also important to keep a track of company culture, especially for the highly variable human aspect of the restaurant sector.
  • Geopolitical risks: The company does have some international restaurants and they will be impacted by geopolitical risks such as war and conflict.

Understandability (2/5)

Texas Roadhouse’s business model, while easy to understand on the surface, comes with complexities that require more analysis to fully understand. These are mainly related to evaluating the companies economic moat due to the nature of the business.

  • The restaurant business model is simple to understand; provide food for people and make a profit.
  • The reliance on ROIC is very important to be able to properly value the business. It is important to look at it in an in depth matter.
  • The importance of location, brand, cost, and competition may be difficult to analyze, as it’s a very dynamic sector.
  • The financial statements include large sections of notes, which can be difficult to navigate. These notes usually include details about operations and complicated revenue recognition.

Balance Sheet Health (4/5)

Texas Roadhouse’s balance sheet is quite healthy, showing financial stability and resilience. The main thing is the high amount of debt.

  • The cash position of the company is strong (around $843 million) and they are more than capable of fulfilling their short-term obligations.
  • The company’s leverage, although high, is not alarming for a mature company with predictable revenue and strong operations.
  • Good equity to assets ratios, demonstrating solid solvency.
  • High levels of working capital, especially for operating working capital.

Latest Information

  • Q3 2023 Earnings:
    • Revenue increased by 13.5% in Q3 of 2023, mainly due to high price and higher average volume.
    • Net income is up 11.6% YoY.
    • Restaurant sales are up 13.6%.
    • Restaurant sales mix between company-owned restaurants and franchised locations was 15.3% growth in Company-owned comparable sales, and 12.4% growth in franchised locations, with 13.1% growth overall.
    • The cost of sales increased by 9.3%, while labor and occupancy costs have risen by 10.5%, and 11.1% respectively.
    • The company plans on implementing 25 new restaurants in 2023.
    • Management is very bullish on the future, and is optimistic about their growth plan.
  • Key things to look at:
    • Keep an eye on the labor costs, as these are some of the largest expenses for the company.
    • New openings are very important as that is a great source of growth for the company, and they seem to be very focused on that for the future.
    • The company seems to be confident in their prices and customers are still buying into that.
  • Concerns:
    • The main risk factor as of now is costs for inputs and staffing, which may become higher in the future.
    • There is an increase in operating expenses and other expenses, which will have to be controlled to improve profitability and earnings.
    • There may be an impending economic downturn that may cause people to reduce their spending in casual restaurants, and they should react accordingly to that.

Conclusion

Texas Roadhouse is a well-known full service casual steakhouse chain, and its stock seems to be fairly valued with some potential for growth over time. However it is important to focus on its historical performance and its moat to predict its future behavior in the long-term. In the short-term the company does look like it will have some upward momentum. It is important to not look solely at growth metrics, but also how the business generates consistent returns on capital, how sustainable its moat is, and how is the management at the helm. Also, its is key to see how the company handles high inflation and rising costs. The company has several different risk factors, and it’s best to manage your investments according to your own financial goals.