Texas Roadhouse Looks Like a Post-Pandemic Winner

The fourth quarter was tough on a lot of restaurant chains and Texas Roadhouse NASDAQ: TXRH was no exception. Coronavirus cases peaked, leading to a fresh round of restrictions; the colder weather made workarounds like outdoor dining less feasible than in the summer months.

But Texas Roadhouse shares continue setting all-time highs because the market is a forward-looking mechanism. The pandemic will be over sooner rather than later, and it’s clear that Texas Roadhouse will fare very well in a post-COVID world

Has all the upside been priced in? Or is this rally still in the early stages?

Let’s start by looking at the fourth quarter and full-year 2020 results, which were announced in February.

 Texas Roadhouse entered the fourth quarter with momentum. After struggled mightily over the first few months of the pandemic, comps were trending in the right direction; down 13%, 6.6%, and 0.5% in July, August, and September, respectively. On the Q3 earnings call, management said that October comps were up 0.8%.

But the restaurant chain was forced to close around 90 dining rooms starting in mid-November. With around 600 total locations, this was a major blow to Texas Roadhouse. November comps decreased 6.3% and December comps went down 18.2%.

Revenue went down 12% yoy for all of the fourth quarter to $638 million, while net income dipped 54% yoy to $19.5 million. The quarter capped off a year that Texas Roadhouse management would like to forget. Here are some of the highlights:

• Revenue down 13% yoy to $2.40 billion.
• Net income of $31.3 million was down 82% yoy.
• Free cash flow decreased 58% yoy to $65.5 million.

So, why are investors confident in Texas Roadhouse’s future?

Texas Roadhouse has outperformed its peers since the onset of the pandemic thanks to the following three things:

1. Booth-style seating, widespread partition installation, and temporary patios has bolstered capacity levels for Texas Roadhouse. Safely seating as many people as possible has been of the utmost importance for restaurants since March 2020.
2. Texas Roadhouse’s To-Go business has been accounting for around 20-25% of overall sales of late. This not only prevents sales from falling too far during the pandemic, but can act as another revenue stream post-pandemic.
3. The restaurant chain launched a butcher shop last year for customers that want to cook at home. On top of that, Texas Roadhouse signed licensing agreements for its margarita mix and canned cocktail seltzer. On the Q4 earnings call, CEO W. Kent Taylor said, “These initiatives together with our butcher shop business are low risk and require minimal investment. We believe over time they have the potential to generate strong returns.” Just what you want to hear.

A long-term tailwind that some may be overlooking is the migration from the cities to more suburban and rural areas. Texas Roadhouse has a strong presence in suburban and rural areas, which gives it a chance to acquire thousands of new customers in the coming years.

Although Texas Roadhouse only has around 600 restaurants, it plans to open 25-30 more in 2021. With such a small footprint, the company has a lot of room for expansion in 2022 and beyond.

The company’s pre-pandemic comp growth track record indicates that company-wide sales could surge over the next 3-5 years. At 39.1x 2021 earnings and 28.1x 2022 earnings, Texas Roadhouse’s valuation is actually reasonable.

How Should You Play Texas Roadhouse?

By now it should be clear that the Texas Roadhouse rally has not run its course; higher prices can definitely be supported by the fundamentals.

Pandemic-related restrictions will likely be in place through late 2021 or early 2022, but with millions of Americans getting vaccinated every week, those restrictions will likely be eased over the next couple of months. Texas Roadhouse has shown an ability to do well with mild restrictions, and to thrive with no restrictions.

You might want to pick up some TXRH shares before we get closer to the “old normal.”