Texas Roadhouse: Potential Growth Catalysts; Added to my watchlist (NASDAQ: TXRH)

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Investment thesis

Texas Roadhouse Inc. (NASDAQ: THRX) has recorded strong growth over the past 10 years, with median revenue growth close to 11%. Through its strategy of consistently opening new restaurants, driving same-store sales growth, and providing attractive pricing to customers, THRX has outperformed the S&P 500 by more than 200 percentage points over the past decade. I believe the company is well positioned to continue to deliver strong results for its shareholders. In terms of valuation, THRX isn’t cheap at the moment, trading at over 24x LTM free cash flow. I will add this stock to my watchlist and look to earn less than $70 per share.

Refinitiv Eikon

Refinitiv Eikon

Company Details

Texas Roadhouse Inc. is a United States-based restaurant company that operates in the casual dining segment. The Company owns and operates approximately 566 restaurants and has franchised an additional 101 restaurants in 49 states and 10 foreign countries. Of the 566 restaurants, it operates approximately 526 Texas Roadhouse restaurants, 36 as 33 Bubba restaurants and 4 as Jaggers restaurants. Texas Roadhouse is a full-service casual dining concept featuring an assortment of seasoned and aged steaks hand-cut daily on site and cooked to order on open grills. Bubba’s 33 is a family-run sports restaurant concept featuring home-cooked food, ice-cold beer and signature drinks. Its menu features burgers, pizzas, and wings as well as a variety of appetizers, sandwiches, and entrees. Jaggers is a fast-casual restaurant concept featuring burgers, hand-breaded chicken breasts and chicken sandwiches served with signature sauces. THRX generates approximately 99% of its sales from company-owned restaurants and the remainder, approximately 1%, from franchise and royalty fees.

The market opportunity

A full-service restaurant is a restaurant where meals are primarily prepared individually for the customer and served to customers at their table. Global Full-Service Restaurant Market was estimated at USD 1.2 Trillion in 2020 and is projected to reach a size of USD 1.7 Trillion by 2027, growing at a CAGR of 4.7% during this period.

Global Industry Analysts, Inc

Global Industry Analysts, Inc

According to the same source, the US full-service restaurant market was estimated at $334.8 billion in 2020 and is expected to grow at a CAGR of 3.96% through 2023, which is slightly higher than the growth rate. of the country’s expected long-term GDP.

Business strategy

Unlike many of its competitors, TXRH is not slow growing. The median annual revenue growth rate over the past 6 years is approximately 11.5%, which is well above the median industry growth rate over this period. To put things in perspective, sales nearly tripled compared to FY11, driven by positive same-store sales growth and new unit openings. I think comparable sales are a very good indicator of a brand’s performance in general. TXRH averaged ~5% comparable sales between FY15 and FY19, which is a good result in my opinion. Growth has not come at the expense of profitability unlike many other companies in this market. TXRH has managed to maintain a stable gross profit margin of 17-19% in the past. However, the company hasn’t really benefited from economies of scale when opening new restaurants, which TXRH may benefit from in the future.

the morning star

the morning star

EPS, on the other hand, has grown much faster, recording a median annual growth rate of around 13%, over the past 6 years. The main factor at play that has contributed to this trend is the management-led buyback program. The company has repurchased about $262 million of its own stock over the past six years, which is about 4% of current market capitalization.

The company’s main strategy is to compete on price and drive growth through new units. The Texas Roadhouse concept has attractive prices ranging from $9.99 to $26.99 for adults and $3.99 to $9.99 for children under 12. At Bubba’s 33, prices are even more competitive, ranging from $9.99 to $19.99, which management says is lower than what most competitors offer.

Being a low-cost operator is definitely a competitive advantage. That said, this operating model comes with its own challenges. Low-cost carriers generally have fragile margins and they can easily run into trouble if there is a sudden increase in costs. I personally think inflation is here to stay and will likely continue to put pressure on TXRH margins. For FY22, management only hedged a small portion of its basket, with the rest at risk if inflation remains elevated.

For the second half of 2022, we only have a small portion of our basket locked in, which makes it difficult to provide meaningful inflation guidance for this period. However, based on our internal projections which we review and update continuously, we expect inflation in the second half of the year to moderate mainly due to beef prices and other prices that we will overtake.

Overall, this would lead to inflation of 12% to 14% for the whole of 2022. But keep in mind that even if inflation moderates in the second half of the year, the underlying dollar costs of beef and other high-use items will likely be higher still, both year over year and sequentially.

Jerry Morgan – Chairman and CEO – FY21 Fourth Quarter Earnings Call Transcript

In addition, the company is executing its new store opening strategy well. In the fourth quarter of FY22, TXRH opened all 11 planned restaurants. These restaurants are already doing very well, averaging more than $142,000 in weekly sales. For FY22, the company is targeting 25 new openings and expects its franchise partners to open up to 5 Texas Roadhouse restaurants, representing approximately 4.5% unit growth.

On the development front, during the fourth quarter, despite equipment supply issues, we were able to open all 11 restaurants that were scheduled to open. These openings included 9 Texas Roadhouses, 1 Bubba’s 33 and 1 Jaggers. We remain very satisfied with the performance of our new restaurants. To put that into perspective, for the first 7 weeks of 2022, the 10 Texas Roadhouse and 33 Bubba restaurants that opened in Q4 averaged over $142,000 in weekly sales.

Jerry Morgan – Chairman and CEO – FY21 Fourth Quarter Earnings Call Transcript

Business valuation

Based on 69.6 million shares outstanding and a price of $93 per share, the company has a market capitalization of approximately $6.5 billion. In this part, I used a discounted free cash flow model to value the business. The following assumptions were made in the model:

  • Estimated FY22 free cash flow of $236 million based on approximately $466 million of operating cash flow and approximately $230 million of CapEx.
  • A growth rate of 11.5% over the next four years, in line with the historical growth rate of turnover.
  • A terminal growth rate of 2%.
  • An 8% discount rate, in line with the company’s WACC.

Author

Author’s DCF model

Based on the model, the intrinsic value of TXRH is approximately $72 per share. The stock is currently priced at more than 24x LTM free cash flow, making it expensive for a company that is likely to grow 10-12% in the future.

Key points to remember

In summary, I like the business model of the company. TXRH has a proven track record of successfully growing brands and, more importantly, profitably. There are many catalysts that can accelerate EPS growth, such as buyouts, margin expansion, or domestic/foreign unit expansion. I will add this stock to my watchlist and look to earn less than $70 per stock.

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