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EPS came in at $0.22 versus $0.23 consensus.  The top-line numbers, as we expected were strong, but margins were weaker-than-expected and guidance for full-year EPS growth was as margin pressures were brought to bear on the company’s P&L.  As we wrote this afternoon, there are other companies that we would prefer on the long side in casual dining, particularly given what we view as a lofty multiple for what TXRH offers investors.

Below is our Top Ten Takeaways from the quarter:

  1. The company’s top-line is healthy.  Two-year average trends accelerated sequentially in the second quarter and accelerated in July versus the 2Q number also.  For the first four weeks of the third quarter, comps were reported as +3.9%.
  2. Following a (average system) price increase of 1% in March, a further 1% (average) price increase has been taken to bring the store base up to 2% pricing on the menu.  Despite this, traffic has remained strong and the comp overall, as pointed out above, seems to be improving through July.
  3. Later this month, the company will test an additional price increase of just over 2% at 19 locations.  If successful, the hike could be rolled out system-wide next year if food costs remain at elevated levels.
  4. Despite this impressive top-line performance the comp growth has not been sufficient to offset the significant margin pressure brought on by commodity and labor costs.
  5. The company expects continuing deleveraging on the labor line due to new restaurant labor costs and higher investment in labor hours.
  6. The primary items that boosted the company’s cost of sales were proteins, cooking oil, butter, potatoes.
  7. The company anticipates increased inflationary costs, particularly around proteins, in 2012.
  8. New unit growth is set to accelerate in 2012 with 25% growth in unit openings versus the projected 20 company restaurant openings in 2011.
  9. This stock was priced for near perfection with a lofty EV/EBITDA multiple and, upon not delivering just that, is selling off sharply post-market.  We do not expect this to be the last stock to do so this earnings season.
  10. Sell-side sentiment is certainly not bearish with zero sells on the stock and ~60% of analysts rating it a “Buy”.  There is plenty of room for sentiment to swing.

TXRH: (NARROW) MISS AND LOWER - txrh sell side sentment

Howard Penney

Managing Director

Rory Green

Analyst