Shares of popular casual dining chain Texas Roadhouse (TXRH
61.27, -5.54, -8.29%) shed about 8.3% on Tuesday following a higher cost-driven third
quarter earnings miss and rising margins.
The stock fell to its worst levels in six months after Texas Roadhouse reported Q3 earnings per share (EPS) of $0.40 on revenue growth of 10.0% to about $594.6 mln. Management noted during its earnings conference call that sales momentum has continued into Q4. Comparable sales increased around 4% in October despite 70 basis points of negative impact that were taken on primarily as a result of overlapping the sales lift that followed a hurricane last year.
Comparable restaurant sales were better than expected, up 5.5% at company restaurants and 4.2% at domestic franchise restaurants. Meanwhile, restaurant margin, as a percentage of restaurant and other sales, decreased 157 basis points to 16.2%, mostly due to higher labor costs, including the impact of insurance reserve adjustments.
Labor as a percentage of total sales increased 194 basis points to 33.5%, and labor dollars per store week were up 10.5% compared to the prior-year period. The main drivers were wage and other inflation of about 5.3%, including the impact of increasing managing partner base pay and growth in hours of around 2.8%.
In total, insurance costs were negatively impacted by $1.8 mln of additional expense in Q3 along with the overlap of $2.5 mln of credits from the prior-year quarter. Overall, total wage inflation and growth in hours this quarter were in line with what the company experienced in the first half of the year. Texas Roadhouse continues to expect labor dollars per store week growth in Q4 2018 to be in the mid-single digit range, excluding the impact of higher guest counts.
The company expects mid-single digit labor inflation to continue into 2019, with unemployment rates at historically low levels along with the continuation of its hiring initiatives. This includes adding more managers and hourly employees as the company positions itself for its target of $6 mln in per unit sales.
What’s more, Texas Roadhouse believes that its commodity basket will experience about 1-2% inflation in 2019 with the expectation of higher beef cost. The company expects that the remainder of its basket will be impacted by modest inflationary pressure as well as higher freight cost.
In response to these expectations and the margin declines Texas Roadhouse has already experienced, the company plans to roll out a menu price increase of approximately 1.7% in mid-November. Depending on how much inflation TXRH experiences going forward, the company may take additional pricing measures during the first half of 2019.
Management also updated its capital expenditure guidance for 2018; the company now sees $160.0-165.0 mln in expenditures vs the prior $165.0-175.0 mln.
Looking into next year, which includes the impact of a 53rd week, the company gave expectations for positive comparable restaurant sales growth. Texas Roadhouse also anticipates opening 25-30 company restaurants, including the launch of four new Bubba's 33 restaurants. As mentioned, commodity cost inflation is expected to be approximately 1.0-2.0% in FY19 with mid-single digit growth in labor dollars per store week, excluding the impact of higher guest counts. Management also sees total capital expenditures of approximately $165.0-175.0 mln.
Investors obviously didn't expect such a poor showing on the bottom line, and even though comps and sales weren't too bad, the stock still got hit as the Street criticized the higher insurance costs and disappointing margins. After bumping into resistance in the 50-day simple moving average (68.50) yesterday, the stock fell harshly in after-hours action, ultimately opening under its 200-day (63.50) at the start of trading on Tuesday. Despite today's declines, though, shares still boast gains of about 16% on the year.
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