Texas Roadhouse Inc (TXRH): Will Store Expansion Help This Restaurant Company Grow?

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Texas Roadhouse Inc (NASDAQ:TXRH)’s stock has grown by 46% in the last six months. This is quite a feat given the competition full service, casual dining restaurant companies are facing from their Quick Service Restaurant (QSR) peers. Texas Roadhouse Inc (NASDAQ:TXRH) has taken several initiatives that are expected to continue driving the company’s same store sales. In this article I discuss some of these initiatives in detail.

Texas Roadhouse Inc (NASDAQ:TXRH)

Store expansion plans will drive sales growth in the long term

Texas Roadhouse Inc (NASDAQ:TXRH) is expanding its store base to locations in 49 out of the 50 states. It has store growth plans in place and is looking to reach 700 to 800 stores in the future, up from its current 400 locations. It has opened three new company-owned units and two franchised units in the first quarter this fiscal year. It has store expansion plans for 28 stores this year, with most of the store openings taking place in the second half of the year. Productivity for the new stores is below system average sales, but unit volumes are strong. The company also plans to increase its store presence in the Middle East and will also be targeting Canada in the latter part of the year.

Price increase is likely to offset some effect of food inflation

Food inflation is on the rise and beef prices are expected to increase this year, which will in turn increase the cost of goods sold. Beef cost is 40% of the company’s food cost and is expected to increase more than the other commodities. Texas Roadhouse Inc (NASDAQ:TXRH) has contracted for 80% of the beef that it requires for the year, a factor that will reduce costs. The company tested menu price increases this summer and is expected to increase its menu price by 2% in the latter part of the year. This will not completely offset the inflation effect, but it will be helpful in maintaining margin levels.

Store-level initiatives will help same-restaurant sales increase

Texas Roadhouse Inc (NASDAQ:TXRH)’s store operators are taking some stores-level initiatives to attract new customers into their stores. They are running small remodeling programs and adding more seats at locations where demand is high at peak times. The remodeling of 100 stores is complete so far, and an additional 25 to 30 stores will be remodeled this year. Store operators are doing local store marketing and remain active in local communities. These initiatives have helped them to increase same-restaurant sales, with SRS growth of 3.5% being reported in the first quarter this fiscal year. This was above the consensus estimate of 2.2%.

Peer analysis

In casual dining restaurants, the other two major players are Darden Restaurants, Inc. (NYSE:DRI) and Brinker International, Inc. (NYSE:EAT). Darden is taking initiatives in regard to menu changes and promotional offers to attract customers to its two major brands, Olive Garden and Red Lobster. Olive Garden has expanded its “Italian Dinner” platform and added core menu products, while Red Lobster began offering “Seaside Express” service at some restaurants that offers some of the qualities of fast casual restaurants. The company will attempt to attract customers with value-based promotional offers such as “Buy One, Get One” and “2 for $25 seafood Fest” promotions. The company has growth potential, with a store expansion plan in place designed to add 150 to 170 stores in the next 4 to 5 years. These initiatives are expected to drive growth in the long term.

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