Have you ever wondered why Texas Roadhouse (NASDAQ:TXRH) is experiencing a downward trend in its stock price? In this article, we will delve into the factors behind the recent decline and provide an earnings preview, offering insights for investors and traders interested in the financial markets.
Earlier this year, I wrote an article sharing why I purchased shares of Texas Roadhouse at the end of 2022. Since then, the stock has experienced fluctuations, and I am currently at a modest profit. However, despite the underperformance compared to the broader market, I remain optimistic about the company’s potential. In this article, I will explain the reasons behind my bullish outlook and provide forecasts for the upcoming earnings.
Unraveling the Mystery
One of the key reasons I became interested in Texas Roadhouse is its deviation from other leading restaurant companies such as McDonald’s (MCD). During uncertain economic times, Texas Roadhouse is often considered to be riskier than its counterparts. However, the more I researched the company, the less risky it appeared to me. Texas Roadhouse is highly customer-oriented, focused on offering excellent value to its patrons, which ultimately translates into consistent growth in comparable sales. Even during the challenging times of the COVID-19 pandemic, the company demonstrated resilience and emerged stronger than ever.
Recently, the stock price of Texas Roadhouse, as well as other fast food and casual dining establishments, has been experiencing a decline. This downward trend is attributed to two main factors. Firstly, there is a proposal from the Department of Labor to extend overtime protections for low-paid salaried workers. This rule, if implemented, could impact profit margins for restaurants. However, companies like Texas Roadhouse, with a strong franchise and pricing power, are well-positioned to mitigate the impact by gradually raising prices to offset higher costs.
Secondly, weight loss drugs that have gained popularity in the market pose a potential threat to the snacking and unhealthy food industry. Concerns regarding these drugs causing a decline in the consumption of snacks and unhealthy food have raised alarms among investors. However, it is important to note that the restaurant industry, including Texas Roadhouse, is expected to continue thriving in the long run. As consumers become more health-conscious, restaurants are adapting their menus to offer healthier options while still meeting the demand for comfort foods. Companies like Texas Roadhouse have already invested in developing low-calorie or sugar-free options, ensuring they remain relevant even in changing dietary trends.
When evaluating a restaurant company, several key measures are used, including comparable restaurant sales, average unit volume, new store openings, and restaurant margins. Texas Roadhouse’s recent earnings report showed promising results, with revenue growing by 14.3% due to higher average unit volume and an increase in the number of store weeks. Comparable sales also saw an impressive growth of 9.1% driven by increased traffic and a higher average check.
For the third quarter, Texas Roadhouse expects continued growth, with comparable sales already increasing by 10.7% compared to the previous year. The company remains committed to serving made-from-scratch food in a fun and friendly environment, attracting a loyal customer base. Despite the potential challenges posed by the proposed overtime rule and weight loss drugs, Texas Roadhouse has proven its ability to adapt and meet consumer demands.
Analysts are forecasting a quarterly revenue of $1.12 billion, representing a year-over-year growth of 12.9%. Considering the steady performance of commodity costs, we can expect a solid net income margin of 6.7%. This would result in an estimated EPS of $1.11, slightly higher than the current forecast.
Furthermore, it is possible that Texas Roadhouse implemented share buybacks during the quarter, taking advantage of the lower share price. This could potentially boost the EPS further, resulting in an attractive forward price-to-earnings (P/E) multiple compared to the company’s historical average.
Looking ahead to the earnings release, I am confident that Texas Roadhouse will deliver a solid performance. The company’s focus on customer satisfaction, coupled with its ability to adjust to changing market conditions, makes it an attractive investment opportunity. In the event of a market overreaction, presenting a buying opportunity, Texas Roadhouse will be one of the stocks I will consider adding to my portfolio.
Investors and traders interested in the financial markets should closely monitor Texas Roadhouse’s upcoming earnings release to gain valuable insights into the company’s performance and future prospects. As always, it is crucial to conduct thorough research and analysis before making any investment decisions.