Skip to main content

Texas Roadhouse Inc(TXRH-Q)
NASDAQ

Today's Change
Real-Time Last Update Last Sale Cboe BZX Real-Time

How This Top Restaurant Stock Pulled Off a 40% Return in a Year

Motley Fool - Sat Feb 24, 7:37AM CST

After an incredibly difficult period during the pandemic, plus tragically losing its founder and CEO, the late Wayne Kent Taylor, Texas Roadhouse (NASDAQ: TXRH) stock is back. Total return (stock price plus a small dividend currently yielding 1.5% a year) has topped 40% over the last 12-month stretch. the American steakhouse chain has returned to its longtime market-beating ways.

How did the casual dining restaurant chain pull it off, and is it too late to buy now? Let's take a closer look.

TXRH Total Return Level Chart

Data by YCharts.

"Boring" works really well in the restaurant industry

High-flying, fast-growing restaurant brands tend to capture the spotlight, but Texas Roadhouse takes a far more boring approach. I'll admit, after owning shares for years, I'm only taking a look at what Texas Roadhouse is up to once a year and then forgetting about it (my last full write-up was, indeed, March 2023, almost a year ago).

But Roadhouse does quite well taking a "boring" approach, sidestepping any aspirations at restaurant world domination, instead focusing on slow-but-steady profitable returns.

TXRH Net Income (TTM) Chart

Data by YCharts. TTM = trailing 12 months.

That didn't change in 2023 -- 44 net new locations were opened, bringing its total across company-owned and franchised stores to 741 (a 6% increase from 2022) at the end of the year. In 2024, management expects 30 new company-owned locations and 14 franchisee locations to open, which would also represent about a 6% increase in store count.

Given this pedestrian pace of expansion, what has Texas Roadhouse stock flying high?

Cost discipline is starting to pay off again

Roadhouse restaurants tend to be busy places, but the company keeps finding new ways to fit more folks inside them. In 2023, comparable store sales (or comps) at existing locations (a combination of menu price increases and foot traffic) increased 10.1% at company-owned stores and 9.8% at franchised ones. CEO Gerald Morgan said that more than half of those comp increases were from higher foot traffic, not just raising the menu price.

Higher comps at existing stores are the easiest way to increase revenue and profitability, as it doesn't require the more costly endeavor of constructing new buildings. This disciplined cost structure looks like it could continue to yield results in 2024 as inflationary forces continue to moderate.

Food and materials inflation is expected to be about 5% this next year, down from 5.6% in 2023. And after wage and labor expenses increased 6.6% in 2023, the rate of growth in that line item is expected to moderate to 4% to 5% in 2024.

But at some point, room will run out at those restaurants, right? To keep capacity at its stores on the rise, Roadhouse will invest in "digital kitchen" equipment for about 200 locations this year. To-go orders were practically not a thing for this chain pre-pandemic, but it settled in at about 12.5% of restaurant sales last year. Management sees growth in this area as yet another way to boost traffic and crank out more steady profit increases going forward. A new larger-footprint store that can facilitate more to-go and digital guest orders is also ready to go.

Shares of Texas Roadhouse now trade for 32 times trailing-12-month earnings per share but 26 times expected 2024 earnings -- implying anticipation for another mid-teens-percentage increase in profitability this coming year. It's a premium price tag, but such is the norm for this "boring" restaurant stock. I'm happy to continue holding this stock for the long term.

Should you invest $1,000 in Texas Roadhouse right now?

Before you buy stock in Texas Roadhouse, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Texas Roadhouse wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of February 20, 2024

Nick Rossolillo and his clients have positions in Texas Roadhouse. The Motley Fool has positions in and recommends Texas Roadhouse. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

More from The Globe