Topic: Growth Stocks

Tap this expanding chain, a 20% dividend hike and big U.S. appetites

This restaurant operator continues to generate strong growth as it slowly expands a chain of family-friendly sports restaurants.

The company relied on price increases across its menus for an 11% revenue increase in the most recent quarter as well as stronger earnings and a 20% dividend hike.

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TEXAS ROADHOUSE (Nasdaq symbol TXRH; is a full-service, casual-dining chain with 582 locations spread across 49 U.S. states and 10 foreign countries. Its restaurants operate under two banners—Texas Roadhouse (557 locations) and Bubba’s 33 (25). Most outlets are company-owned restaurants.

In the three months ended December 31, 2018, overall revenue for Texas Roadhouse rose 11.2%, to $605.9 million from $545.1 million a year earlier. Increased customer traffic, higher prices and new outlets contributed to the gain. Same-store sales increased 5.6% for company-owned restaurants and 4.8% for franchised locations.

Earnings rose 6.0%, to $30.3 million, or $0.42 per share, from $28.6 million, or $0.40, a year earlier. The increase was due to the higher revenue and lower income tax expense. That was partially offset by higher labour costs.

Growth Stocks: Customers seem willing to accept menu price increases

To boost profitability, Texas Roadhouse increased menu prices by about 1.7% in mid-November. It may further raise prices in the first half of 2019. The company also plans to keep expanding: in 2019, Texas Roadhouse aims to open 25 to 30 company restaurants, including four Bubba’s 33 outlets.

Like most U.S. restaurant chains, Texas Roadhouse is vulnerable to a slowdown in business when consumer confidence is weak and families cut back on eating out. Labour costs for all restaurant operators also continue to move up.

However, Texas Roadhouse will benefit from today’s stronger U.S. economy and high employment. As well, while it has chosen to slowly roll out its Bubba’s 33 concept in order to cut risk, that brand has significant potential to broaden the company’s customer base. Overall consistency in its food quality and customer experience should also continue to pay off.

Starting March 2019, the company raised its quarterly dividend by 20.0%, to $0.30 a share from $0.25. The stock yields 2.0% and trades at a high 24.4 times the forecast 2019 earnings of $2.45 a share. However, it trades at a more reasonable 20.2 times the estimated 2020 earnings of $2.95.

Recommendation in Stock Pickers Digest: Texas Roadhouse is a buy.


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