Since July 2021, the S&P 500 has delivered a total return of 68.9%. But one standout stock has nearly doubled the market - over the past five years, Texas Roadhouse has surged 124% to $206.33 per share. Its momentum hasn’t stopped as it’s also gained 14.7% in the last six months, beating the S&P by 7.6%.
Is now still a good time to buy TXRH? Or are investors being too optimistic? Find out in our full research report, it’s free.
Why Does Texas Roadhouse Spark Debate?
With locations often featuring Western-inspired decor, Texas Roadhouse (NASDAQ: TXRH) is an American restaurant chain specializing in Southern-style cuisine and steaks.
Two Things to Like:
1. Restaurant Growth Signals an Offensive Strategy
The number of dining locations a restaurant chain operates is a critical driver of how quickly company-level sales can grow.
Texas Roadhouse operated 822 locations in the latest quarter. It has opened new restaurants at a rapid clip over the last two years, averaging 5.3% annual growth, much faster than the broader restaurant sector.
When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.
2. Surging Same-Store Sales Show Increasing Demand
Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Texas Roadhouse has been one of the most successful restaurant chains over the last two years thanks to skyrocketing demand within its existing dining locations. On average, the company has posted exceptional year-on-year same-store sales growth of 6.5%.
One Reason to Be Careful:
Low Gross Margin Reveals Weak Structural Profitability
We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate pricing power and differentiation, whether it be the dining experience or quality and taste of food.
Texas Roadhouse has bad unit economics for a restaurant company, signaling it operates in a competitive market and has little room for error if demand unexpectedly falls. As you can see below, it averaged a 16.6% gross margin over the last two years. Said differently, Texas Roadhouse had to pay a chunky $83.40 to its suppliers for every $100 in revenue.
Final Judgment
Texas Roadhouse’s positive characteristics outweigh the negatives, and with its shares beating the market recently, the stock trades at 30.5× forward P/E (or $206.33 per share). Is now a good time to initiate a position? See for yourself in our in-depth research report, it’s free.
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