Texas Roadhouse (TXRH) is trading sharply higher (+9%) this morning to a new 52-week high after reporting a strong Q1 earnings report last night. In case you're not familiar, Texas Roadhouse is a casual dining restaurant chain. Its founder and CEO W. Kent Taylor started the business in 1993 with the opening of the first Texas Roadhouse restaurant in Clarksville, Indiana. Since then, TXRH has grown to more than 525 restaurants. Its operating strategy is position each restaurant as the local hometown favorite for a broad segment of consumers.
Texas Roadhouse is a moderately priced, full-service, casual dining restaurant concept offering an assortment of specially seasoned and aged steaks hand-cut daily on the premises and cooked to order over open grills. In addition to steaks, TXRH also offers a selection of ribs, fish, seafood, chicken, pork chops, pulled pork and vegetable plates, and an assortment of hamburgers, salads and sandwiches. The majority of its entrees include two made-from-scratch side items, and it offers all customers a free unlimited supply of roasted in-shell peanuts and fresh baked yeast rolls. TXRH also operates Bubba's 33, a family-friendly, sports restaurant concept offering an assortment of wings, sandwiches, pizza and burgers, including its signature 33% bacon grind patty.
In a high percentage of its restaurants, TXRH limits its operating hours to dinner-only during the weekdays with about one half of restaurants offering lunch on Friday. By focusing on dinner, its restaurant teams have to prepare for and manage only one shift per day during the week. This allows for more consistent food and service. In addition, the dinner focus provides a better "quality-of-life" for its management teams and, therefore, is a key ingredient in attracting and retaining personnel.
Turning to the Q1 results, Texas Roadhouse reported non-GAAP EPS of $0.61, excluding a legal settlement charge. Revenue rose 10.1% year/year to $567.7 mln. Both results were better than market expectations. Comparable restaurant sales increased +3.1% at company restaurants and +3.8% at domestic franchise restaurants. Restaurant margin, as a percentage of restaurant sales, decreased 21 basis points to 19.9%, primarily driven by wage rate inflation, partially offset by the benefit of lower food costs.
In addition to the Q1 comps, TXRH says it's pleased that its sales momentum has continued in the first four weeks of Q2 at +2.6%, despite approximately 90 basis points of negative impact from Easter shifting from March to April. TXRH will roll-out new menus this week at all restaurants that will include calorie counts, along with some small changes to the menu. The changes include the companywide roll-out of two smaller portion entrées with the addition of a 5- ounce salmon and an 8-ounce New York strip. TXRH will also be implementing a price increase of about 0.5% as part of the roll-out.
On the development front, TXRH has opened seven company restaurants so far this year, and the remainder of its 2017 pipeline is in great shape. It has 13 restaurants currently under construction that are expected to open by the end of September. TXRH continues to expect its 2017 development to include 24 Roadhouses and 6 Bubba's 33 openings.
In sum, the upside Q1 result was a nice change from a sizable miss in Q4 which caused the stock to gap lower in mid-February. This restaurant chain does not provide guidance so its earnings can be difficult to predict. However, these were solid results with good comps.