Texas Roadhouse: A Good Buy for 2014

Texas Roadhouse: A Good Buy for 2014

Texas Roadhouse will be a good investment in the casual-dining sector in the coming year. The restaurant chain started grilling in 1993 and currently operates more than 410 restaurants systemwide in 48 states and two foreign countries.

Texas Roadhouse's third-quarter and 2014 outlook
The casual-steakhouse chain had a tough third quarter as earnings per share dropped by 5% to $0.024. While overall sales were up by 8%, same-store sales grew by 2.6%, and franchise sales rose 4%. Texas Roadhouse attributed the earnings decline to food-cost inflation (slightly more than 8% mostly due to the spike in beef costs).

In addition, because of the food-cost spike, the steak chain's margin was trimmed a bit by 75 basis points to 17.2% However, CEO Kent Taylor believes food-cost inflation will slow in the coming year.

"We continue to be challenged by high single-digit commodity cost inflation and higher pre-opening costs this quarter," Taylor said. "Looking ahead, we are encouraged by expectations of much lower commodity cost inflation in 2014."

He also expects same-store sales to continue rising as the steak chain opens additional restaurants. The restaurant expects a total of 28 new joints by the end of this year and another 25 to 30 to be cooking in 2014.

In short if Texas Roadhouse is accurate in its assumptions of "low single digit food-cost inflation" in 2014, the outfit is poised for solid growth in the coming year. The potential addition of 30 more restaurants, along with higher menu prices to offset food cost inflation, should restore earnings going forward. The caveat here is the way consumers will respond if the overdue economic recovery fails to kick in and whether the unemployment rate (currently 7.3%) will abate.

That said, investors should also be satisfied with the steak chain's gravy, as its directors recently authorized the payment of a cash dividend of $0.12 per share of common stock that will be distributed on Dec. 27.

Texas Roadhouse's competition
The other challenge facing Texas Roadhouse is similar steak chains that are also good buys. Its main competitors in the casual steak cook-off are Ruth's Hospitality Group and Bloomin' Brands .

Ruth's Hospitality Group owns and operates Ruth's Chris Steak House and Mitchell's Fish Market. For the third quarter, Ruth's reported same-store sales increased 4.2% for the steak chain while the Fish Market's same-store sales were off by 1.4%.

Ruth's CEO attributed the same-store sales rise at the steak place to a four-year sales and traffic trend combined with "bottom line performance." These factors have fed earnings growth since 2010. And while he contends food and beef inflation have been "moderate," the chain also contracts about 70% of its beef in advance, which may have offset the 8% spike.

Finally, Bloomin' Brands reported third-quarter revenue was up 1.5% to $967.6 million compared with the third quarter of 2012. Furthermore, adjusted earnings per share were $0.10 compared to $0.07 and same-store sales across the company's four restaurant chains experienced an overall decline of 0.3%.

Bloomin' owns and operates Outback Steakhouse, Carrabba's Italian Grill, and Bonefish Grill. These restaurants all experienced declines in same-store sales during the quarter. But another prime steakhouse in Bloomin's basket, Fleming's, smoked with a 4.2% increase following a previously reported 3.8% increase in the second quarter. While the summer was "challenging" for casual dining, Bloomin's CEO Elizabeth Smith noted the number of guests dining at Fleming's increased by more than 3%, and that these guests also spent more.

The last course
The casual-dining sector looks to be a good buy for investors with a long-term view. These restaurants offer customers table service, modest prices, and better menu options than so-called "fast-casual" joints. Of course, future growth depends on consumer behavior in an economy that continues to struggle. Consumers and investors alike should shop around. But in the final analysis, Texas Roadhouse's growth strategy makes this casual steak chain primed for good returns in the coming year.

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The article Texas Roadhouse: A Good Buy for 2014 originally appeared on Fool.com.

Fool contributor Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends Texas Roadhouse. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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