Texas Roadhouse reports after the market close. Price action in the name has been soft lately as casual dining has underperformed other categories within Food, Beverage and Restaurant sectors.
Our fundamental view of Texas Roadhouse is currently negative from a top-line perspective. While there has been an improvement in average check from an increase in price, the comp remains traffic-heavy. Traffic compares are increasingly difficult over the next three quarters. Given that TXRH’s customer is sensitive to elevated gas prices, it is possible that high gas prices, while declining through 2Q from an early May peak, could have impaired the company’s top-line. In terms of any commentary around 3Q, July saw gas prices gain 4.4% to $3.70 on a national average basis. The stock is currently trading at 7.5x EV/EBITDA NTM versus 8.3x when we penned our casual dining top-line snapshot on 7/20. Still, it remains the fourth most expensive stock in the casual dining space (behind BJRI, DIN, and BWLD) and we think there are better plays on the long side within the category, such as EAT at 6.5x.
The macro environment is certainly raising some red flags at the moment. Various economic data points, as well as 2Q earnings in general, have come in below expectations. We will be listening keenly to see if management alters its forward-looking statements.
Hedgeye’s quantitative setup for TXRH is bearish, as the chart below illustrates.
Below is a selection of forward-looking statements from the most recent earnings call and our take on each.
SALES TRENDS: “First quarter comps increased 4.6%, and the first four weeks of the second quarter have started off very strong as well, with comps up 5.4%. Increased traffic has been the main driver and we believe that's a result of continued market share gains. In addition, the pricing we took in March is flowing through which is very encouraging…we are also experiencing improvement in check, as our average check is running up a little over 1% after the increase we took back in March. Based on what we're seeing in terms of sales, we're comfortable assuming 3.5% to 5% comparable sales growth for the year, and combining this with operating week growth of a little north of 5% gets us close to 10% revenue growth for the year.”
HEDGEYE: TXRH saw strong sales performance during the first four weeks of the second quarter and, given the continuing strong numbers from Malcolm Knapp’s Knapp Track casual dining sales figures, we would expect that the strong sales performances continued for the remainder of 2Q. Management’s assertion that the price increase in March flowed through well in April is positive, but as the chart below illustrates, the concept has typically relied on traffic for top-line growth. Any shift in consumer behavior in the face of higher check prices could impair traffic growth in the face of tougher year-over-year compares going forward.
GAS PRICES: “that's where we're closely monitoring it [gasoline prices]. I think there's some delayed reaction to this stuff and we need to be very, very careful.”
HEDGEYE: On the margin, gas prices were less of a headwind during the balance of 2Q than at the time when management held the most recent earnings call (May 2nd). However, we will be watching for commentary about the ensuing bounce in gas prices through July and the concurrent softening of economic data.
NEW UNIT PERFORMANCE: “In addition to our comparable store sales continuing to grow, sales performance at our newer restaurants continues to outperform our existing restaurant sales. This plus the cost reductions we saw in overall development costs last year further validates our decision to build more restaurants this year and in 2012.”
HEDGEYE: The Company is planning to grow aggressively in 2012 and we believe that changes on the margin in commentary on new unit performance are important to watch.
COMMODITY COSTS: "We now expect commodity inflation to be higher than we had originally anticipated and believe that it is prudent to slightly revise our EPS expectations for the year.
For the quarter, commodity inflation was approximately 3%. Although we have seen some easing on some specific produce items, we are certainly anticipating these costs to be higher for the year than we originally forecasted. This is the driver behind us increasing our expectations for commodity inflation in 2011 from approximately 3% to approximately 4%, and thus we are revising our diluted EPS expectations as well."
HEDGEYE: Commodity costs remain elevated for TXRH, and we expect the company to highlight the drought in Texas and other events as reason for caution regarding their commodity basket.
EARNINGS EXPECTATIONS: "Margins remain our biggest challenge. We are anticipating that restaurant margins will be down this year, although it's too early to predict how much. This is primarily due to the commodity inflation as I've mentioned. Netting the potential for better than originally anticipated comparable sales with higher commodity costs led us to moderate our estimated EPS growth for 2011 from approximately 10% to 5% to 10%...I’ll tell you to get to the upper end of our EPS guidance we’d be hard pressed to get to the 10% side of that without any additional pricing within that 3.5% to 5% traffic."
HEDGEYE: TXRH would not be alone this earnings season if it were to miss lofty expectations. Given consumer confidence trends, the fact that gas prices remain elevated, the employment situation remaining dire and economic data softening quite substantially, we would think it quite risky for a traffic-reliant concept like TXRH to raise prices further in 2H11.
GROWTH: We are absolutely on track in accelerating our development plans for this year and for 2012…We are growing faster and our pipeline is larger as we are preparing to grow even more restaurants in 2012…While this results in higher pre-opening costs, we understand that the key to creating long-term shareholder value is to invest capital and assets earning a higher rate of return than what that money costs. That is good for our shareholders and very good for our teams, as growth creates opportunities, energy and excitement.
HEDGEYE: There is a long lead time for TXRH to indentify a site and progress through the preopening process but it will be interesting to see if management remains as bullish on growth today as it was in May and if new unit performance is holding up in the recent months.