Texas Roadhouse analyst raises concerns about labor impact on sales

The Louisville company has consistently performed well quarter after quarter. | Courtesy of Texas Roadhouse

Despite reporting positive sales for the first half of 2017, one analyst says Louisville-based Texas Roadhouse could start to see sales slip as the cost of labor continues to rise.

The steakhouse chain reported Monday that its net income increased 12 percent, to $37.6 million, during the second quarter of 2017 compared to the same period in 2016.

Same-store sales at company-owned stores rose 4 percent, the majority of which is a result of increased traffic and the rest from an increase in the average check, according to Texas Roadhouse executives. (Same-store sales are sales at locations open at least a year.)

“Our continued focus on consistent execution, providing everyday value to our guests and keeping it simple is a huge part of our success,” said Scott Colosi, president of Texas Roadhouse.

While other casual dining concepts have experienced sales declines and a few like Logan’s Roadhouse have been forced to operate under bankruptcy protection, Texas Roadhouse has continued to report steady growth. The chain’s net income rose 4 percent, to $71.9 million, when comparing the first six month of this year to last year, and same-stores sales for the first four weeks of the third quarter are up 4.6 percent.

The company hasn’t noticed “any meaningful negative reaction from adding calorie counts to the menu,” Colosi said, but it did take a little hit from adding two smaller and less expensive entree options to the menu. A new menu with calorie counts, the new entrees and a 0.5-percent price increase were introduced in restaurants during the second quarter.

However, Texas Roadhouse’s sales growth has been stifled some by rising labor costs. The company expects mid-single-digit labor inflation in 2017. Part of that increase is attributable to changes Texas Roadhouse made to how it pays its managers in order to avoid negative impact from new overtime regulations.

In a report issued early Tuesday, global investment banking firm Jeffries rates Texas Roadhouse as “underperforming,” noting that commodity deflation in 2017 is unlikely to offset increasing labor costs and could create a “downside surprise.”

“While we think Texas Roadhouse is a leader in the challenging casual dining sector, we are concerned that unit growth and same-store sales could slow,” Andy Barish, market analyst for Jeffries, said in the report.

Texas Roadhouse executives revised their new restaurant openings outlook. Rather than 30 new restaurants opening, the company expects to open 27 to 29, and Colosi noted that a few additional store openings also could get pushed into early 2018 because of “construction issues.”

Bubba’s 33 could help the company’s growth, Barish wrote, but the concept is still in its early stages.

Texas Roadhouse executives have been focused on measured growth when it comes to the burger chain, looking at ways to cut opening costs without impacting revenue as the company adds more locations. So far this year, two new Bubba’s 33 have opened, and two more are expected to open before the end of the year.

Texas Roadhouse’s shares were up 3.7 percent at $49.05 a share in midmorning trading. Diluted earnings per share for the first half of the year came in at $1.01 per share, up 3 percent from the prior year.