Texas Roadhouse (TXRH, Financial) reported solid results for the second quarter with growth in its revenue and profits. As a result of its strong performance, the stock rose considerably in the past few months. The company managed to reduce costs, which improved its bottom line, and the compnay expects to do even better in the days ahead. Let’s have a detailed analysis of this stock and see what its future prospects are.Â
Analysis of the results
Its revenue for the quarter rose 12% to $395.5 million from a year ago period of $352.1 million. Income from operations increased 15% to $34.4 million from last year. And a similar increase was seen in earnings as well that came at 33 cents a share, up 17% from 28 cents last year.
The numbers are indeed impressive, which displays the continued strength of its new restaurants and comp sales. This is a good sign in an environment where consumers are hesitant to spend on eating out. In spite of this, it managed to increase its comp sales year over year, which has in fact extended in to the third quarter as well. Texas Roadhouse is also progressing well with its new store openings and opened 14 company-operated restaurants this year and expects to add another 25 to 30 restaurants in 2015.
Concerns and solutions
During the quarter, food inflation was a matter of concern as it exceeded the company’s expectations; this was mainly driven by items such as beef and berries. But Texas Roadhouse believes that the worse is over, and for the remaining half of the year, food inflation would remain in the low single-digits. Apart from this, there is a major liability on the company, which needs to be met in the third quarter. It is on account of a $1.3 million general liability insurance credit from the prior year.
In spite of these headwind, Texas Roadhouse had a good performance compared to some of its peers such as Darden Restaurants (DRI), which reported a huge loss for the first quarter. Restaurants like Olive Garden are significant to Darden’s performance and accounts for more than half its overall revenue.
But sales at Olive Garden fell 1.3% on a year-over-year basis, which weighed on its balance sheet. Although Darden is undergoing a lot of structural changes to turn around its situation, it will be a matter of time to see how things work out for this restaurant chain. Moreover, it has a forward P/E of 19.59 compared to tailing P/E of 9.01, indicating further decline in earnings. Compared to Darden, Texas Roadhouse seems to be better positioned for long term growth.
Conclusion
Currently, the company has a trailing P/E of 23.48 compared to the industry P/E of 29.58 and its forward P/E looks even more impressive at 18.92 reflecting significant improvement in earnings. The company posted solid numbers for the quarter and consequently it reported a significant increase in its shares, a trend that can continue.
