This Play on the Reopening Economy Is Already Quietly Crushing Market Returns

Share prices of steakhouse chain Texas Roadhouse (NASDAQ:TXRH) are back to hitting all-time highs and have advanced some 26% over the trailing-12-month stretch. Many names in the restaurant industry are a bet on the gradual reopening of the economy, but this chain is already delivering the goods long before a full recovery.

Here’s why I’m still bullish on my favorite restaurant stock.  

Suburbia loves steak

The big news during the final months of 2020 was of course a new round of shutdowns and dining room restrictions in many areas to try and slow the spread of the coronavirus. Texas Roadhouse CEO Kent Taylor said on the earnings call about 90 dining rooms were closed starting in mid-November. Given Texas Roadhouse had 537 domestic company-operated locations and another 69 domestic franchised locations at the end of the year, the closures were significant.

The result was a 12% year-over-year decrease in revenue to $638 million, and a 54% decrease in net income to $19.5 million. Paired with the rest of the year’s financials, 2020 was indeed a forgettable one for Roadhouse. 

Data source: Texas Roadhouse.  

Given the ugly-looking results, what explains the stock price gains? For one thing, there’s optimism that suburban America (where Texas Roadhouse restaurants are located) will rally more quickly than urban areas. The company actually reported a return to year-over-year comparable-store growth (or comps, an average of traffic and guest order size) in October before the second lockdown. Ninety-eight percent of the company’s restaurants are open again, and Taylor said average weekly sales are $108,000 through the first seven weeks of 2021 — compared to average weekly sales of $98,800 back in October.

Image source: Getty Images.

Clearly, Texas Roadhouse is outpacing many of its peers in the restaurant industry, and it’s going to start lapping the depressed financial results it posted last spring during the start of the pandemic. Investing is all about the future, and this restaurant stock is going to begin posting some dramatic year-over-year growth in the coming quarters. Thus the quick rally and new all-time highs for the stock.

Slow and steady wins the race

Of course, not everything is peachy at Roadhouse. The company has historically relied heavily on traditional sit-down table service, and continual disruption to this type of operation could be an ongoing problem in the years to come if COVID-19 (or new variants of it) continues causing problems. But Taylor and company have adapted. 

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To-go sales are a much larger part of Texas Roadhouse’s revenue makeup than before. Restaurants with dining rooms open are averaging nearly one-quarter of their sales for takeout so far in 2021. TexasRoadhouse is also developing a retail business. Last year it launched a butcher shop for guests who would rather cook at home. More recently, it has signed licensing agreements for its margarita mix and a canned cocktail seltzer. Taylor said both require minimal investment and should provide strong investment returns over time.  

There’s also still demand for new location openings. Roadhouse expects to open 25 to 30 new company-owned stores this year (including a few Bubba’s 33 sports bars) and international franchising agreements are being inked. The Jagger’s fast-casual burger and chicken restaurant is also being fine-tuned and could provide some domestic franchise and company-owned store opportunities by next year.

At 82 times 2020 free cash flow, this would appear to be a premium-priced stock. But Roadhouse is well on its way to a return to growth and will be lapping last year’s depressed financial results. Widening our perspective beyond the restaurant industry, Americans are migrating out of cities and into more suburban and rural areas, another positive for this expanding chain.

Armed with new to-go and retail businesses, Texas Roadhouse remains my favorite restaurant industry stock as the economy gradually reopens.  

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


View more information: https://www.fool.com/investing/2021/02/26/this-reopening-economy-play-crushing-returns/

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