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Texas Roadhouse Hopes to Produce Texas-Sized Earnings Growth

Image source: Texas Roadhouse.

Steakhouse chain Texas Roadhouse (NASDAQ: TXRH) has done a good job of capitalizing on the American appetite for beef, and over time, shareholders have benefited from the restaurant chain's ability to expand steadily even in the face of competition from many different fronts. As investors prepare for its second-quarter financial report on Aug. 1, Texas Roadhouse shareholders want to see the steakhouse chain continue to produce the extremely strong growth that has helped propel the stock higher over its history. Let's take an early look at Texas Roadhouse and what investors should expect from the company this quarter.

Stats on Texas Roadhouse

Expected EPS Growth

50%

Expected Revenue Growth

12.1%

Forward Earnings Multiple

22.9

Expected 5-Year Annualized Growth Rate

19.2%

Data source: Yahoo! Finance.

Can Texas Roadhouse keep its earnings sizzling?

In recent months, investors have boosted their views on Texas Roadhouse earnings, increasing their second-quarter estimates by almost 10% and making upward revisions of about a nickel per share to their full-year 2016 and 2017 projections. The stock has risen as well, climbing nearly 8% since mid-April.

Some of the gains from Texas Roadhouse over the past quarter came from its first-quarter results in early May. The steakhouse chain managed to grow revenue by 12%, with comparable-restaurant sales among company-owned locations of 4.6%. Net income only rose by about a tenth, but improved cost management boosted restaurant margin figures, and expansion continued with seven new company-owned restaurants during the quarter. Even stronger comps to begin the second quarter were encouraging, and reiterated guidance looked for continued lower food costs and positive comps going forward.

Texas Roadhouse has had such strong sales growth that it has found itself near the top of the industry. In the most recent list of top casual dining chains from Nation's Restaurant News, Texas Roadhouse finished in the No. 2 position for growth in systemwide sales last year, posting 12.8% gains. Large portions at affordable prices have helped it stand out as a pure play in steak compared to other restaurant chain conglomerates in the industry, and the preponderance of company-owned stores in its network has helped Texas Roadhouse stay connected to the business conditions that most of its locations face.

How Texas Roadhouse has kept investors happy

One piece of negative news did come out for Texas Roadhouse, which lost the leadership position in the American Customer Satisfaction Index for full-service restaurants. After leading the way in 2015, Texas Roadhouse saw its rating fall by a point to 82, which put the steakhouse chain in second place. It took a three-point gain from Cracker Barrel Old Country Store to supplant Texas Roadhouse, but even with the decline, the steak specialist is still above the average for full-service restaurants overall.

Interestingly, Texas Roadhouse has managed to balance the need to reinvest capital into restaurant expansion with the desire to reward shareholders. The company started paying a dividend to shareholders back in 2011, and over the past five years, the payout has more than doubled. Texas Roadhouse now pays investors $0.19 per share on a quarterly basis, and that works out to a dividend yield of about 1.6%. That's not a huge amount, but for a fast-growing company with capital needs, the healthy payout shows a commitment to shareholder-friendly initiatives that can make investors feel more comfortable with the company.

In the Texas Roadhouse earnings report, investors should look closely to see how the company's efforts to bolster its Bubba's 33 concept are progressing. Many of those who are following the stock have high hopes for Bubba's, which has higher margins and a greater alcohol mix in terms of revenue than the namesake Texas Roadhouse locations. If Bubba's can start taking off despite the higher costs of initial development, then Texas Roadhouse could see even faster growth in the years ahead.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and 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.