This American group was born in 1993 from the desire of its founder, W. Kent Taylor, to create a "Colorado"-themed restaurant. It was born in Clarksville, Indiana. Thirty years later, the group owns an eponymous restaurant chain specializing in Texan cuisine, present in 49 American states and ten foreign countries. Texas cuisine means meat: beef steak, fried chicken, pulled pork... If betting on the future success of a restaurant chain whose concept is primarily based on meat can worryIf betting on the future success of a restaurant chain whose concept is primarily based on meat may worry many, it seems to us that Texas and Florida, the group's main locations, will surely be among the last regions of the globe to give in to the rhetoric of moderation towards the consumption of animal proteins...

More recently, the group has developed the Bubba's 33 and Jaggers chains, which are more focused on fast food - burgers, pizza & chicken wings etc. - than on animal protein. In short, the concepts remain as basic as possible - meats and American foods - which in no way prevents Texas Roadhouse Inc from being a hit on the stock market and in the dining room.

A fleet of 652 restaurants

As of February 16, 2023, the chain operated, under its own name or via a franchise system, some 652 Texas Roadhouse restaurants, 40 Bubba's 33 and 5 Jaggers. More recently, the group has been pursuing a policy of buying out its franchises. This is one of the reasons for the stagnation of revenues in this item, but we'll come back to this later. To complement its domestic market, Texas Roadhouse has invested internationally, and now boasts a fleet of some forty restaurants.

Margins (much) lower than the sector's giants

In terms of results, revenues are growing steadily and show no signs of slowing down. Sales have risen from $1,423 million in 2013 to $4,015 million in 2022. Operating margins are stagnating at around 9%, with extremely little volatility. Admittedly decent, these margins should be seen in the context of the sector as a whole. McDonald's operates at around 40%, Domino's Pizza at 17% and Restaurants Brands International at 35%. This difference is mainly due to the nature of Texas Roadhouse's business model. Around three quarters of the chain's premises are leased. Also, being more akin to a brewery than a fast-food restaurant, staff costs are much higher - around 35% of sales versus 10% for McDonald's - which, coupled with raw material costs - also 35% of sales versus 10% for McDonald's - means that margins are considerably lower.

Free cash flow margins, meanwhile, flirt with 5%, also well below the industry average.

The structure of Texas Roadhouse's cost base makes it highly sensitive to inflation, which has been raging for several quarters. Year-on-year, inflation on commodities and wages reached 7.4%. Like all companies, of course, but not all companies spend 34% and 33% of their sales respectively on wages and food and beverage purchases.

A robust balance sheet

To take a quick look at the balance sheet, the Group has shareholders' equity of $1,082 million and debt, consisting solely of operating leases, of around $712 million. In other words, no debt worries on the horizon.

It also means that acquisitions are paid for in cash. An acquisition policy made possible by the $107 million in cash on hand. Although this amount is declining as a result of major share buy-backs and revolving credit line repayments, it can rapidly regain momentum, given the company's substantial free cash flow.

For those of you in the know, since 2009 - with the exception of 2020 - the Group's return on invested capital has been consistently higher than the returns required by lenders, averaging around 3.5% over the last 14 years - including 2020. In other words, the money is skilfully invested/used by management.

Ten very shareholder-friendly years

In the first six months of 2023, 10 restaurants were opened and 11 franchises acquired. These figures fall short of expectations, since at the end of last year, management had announced annual targets corresponding to 30 Texas Roadhouse and Bubba's 33 restaurant openings in 12 months.

Over the past 10 years, operating cash flow has amounted to $3,223 million. Of this sum, around 50% is used for CapEx expenditure, 20% for dividend distribution and 15% for share buy-backs. Texas Roadhouse therefore pursues a strong policy of return to shareholders, which is also reflected in a dividend that has been rising steadily since 2011, the year of the Group's first dividend payment. This excludes the post-pandemic year 2020, when the dividend was reduced from $1.20 to $0.36 per share. At the same time, the share price has risen sharply. To stay on the same time scale, the share price gained 353%, representing an annual increase of around 13.44%.

Chart Texas Roadhouse, Inc.

The bottom line

In conclusion, the American group is structurally less profitable than its fast-food rivals, with whom it is often wrongly compared. However, its profitability is outstanding in terms of the ratio of profit to capital invested, and this over a very favourable period. The development of the Jaggers restaurants, and to a lesser extent Bubba's 33, should boost the Group's average profitability. Will this be enough to keep the stock rising on the Nasdaq 400 Composite?