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Texas Roadhouse Suffers an Earnings Setback

Texas Roadhouse location.

The restaurant industry has been extremely competitive recently, but one thing that steakhouse restaurant specialist Texas Roadhouse (NASDAQ: TXRH) has been able to do is to produce impressive growth. Even as many of its peers faced difficult conditions, Texas Roadhouse has used a combination of an attractive product and highly efficient business practices to outpace its competition. Coming into Tuesday's fourth-quarter financial report, Texas Roadhouse investors fully expected that approach to keep working, and so it was shocking when the company said that earnings fell from year-ago levels.

Let's take a closer look at Texas Roadhouse to see how it did and what's coming down the road in 2017.

Texas Roadhouse serves up a rare earnings miss

Texas Roadhouse's fourth-quarter results proved to be even worse than the troubling trend that investors had seen in recent quarters. The steakhouse chain's revenue growth slowed to just 7%, coming in at $484.7 million and falling well short of the nearly 10% growth that most had wanted to see. Net income was even more disappointing, falling 10% to $20.7 million. That produced earnings of $0.29 per share, which was $0.09 below the consensus forecast among those following the stock.

Texas Roadhouse location.

Image source: Texas Roadhouse.

Looking more closely at the numbers, Texas Roadhouse's comparable restaurant sales numbers showed the extent to which the steakhouse chain is facing a new challenge. Comps at company restaurants rose 1.2%, while franchise restaurants domestically had only a slightly higher 2% growth rate. That was even slower than in the third quarter of 2016, even when one takes into account a roughly 0.5-percentage-point hit from a shift in the day of the week on which the Christmas holiday fell.

Moreover, Texas Roadhouse wasn't able to deliver the cost controls that many investors have started taking for granted. Restaurant margin fell almost half a percentage point to 17.1%, and Texas Roadhouse blamed wage inflation, higher payroll tax costs, gift card fees, and insurance reserve adjustments for the boost in expenses. Only falling food costs helped to offset the impact on the restaurant company's bottom line.

One thing that didn't slow was the pace of Texas Roadhouse's expansion plans. The steakhouse specialist opened nine new company-owned restaurants during the quarter, four of which were Bubba's 33 locations. That mix was more heavily tilted toward Bubba's than we've seen in past quarters, showing an increasing comfort level with the restaurant concept.

CEO Kent Taylor put the results in the context of a solid 2016 performance. "We are pleased to deliver another strong year of results," Taylor said, which included earnings growth "driven by double-digit revenue growth and restaurant margin expansion." The CEO also pointed to its 28-quarter streak of consecutive rising comparable restaurant sales, which indeed is better than most of its competitors.

Will Texas Roadhouse return to earnings growth?

Texas Roadhouse has plenty of optimism about its future, with expectations for 30 more company-owned restaurant openings as well as seven franchise locations. In Taylor's words, "The strength of our brand continues to be our people and our operational focus on delivering legendary food and legendary service."

Yet Texas Roadhouse's expectations for 2017 seem somewhat modest. Food cost deflation shouldn't be quite as substantial as the restaurant chain had expected, with declines of 1% to 2% or so being less than the mid-single digit percentage drops Texas Roadhouse had initially anticipated. For the most part, though, the company left its initial guidance from last quarter unchanged, including calls for positive comparable restaurant sales growth and labor inflation in the mid-single digit percentage range.

Texas Roadhouse did reward dividend investors with a payout boost. The chain will now pay $0.21 per share on a quarterly basis, up 10.5% from its 2016 dividend level. The pace of that dividend growth was slower than the 17.5% annual average since Texas Roadhouse initiated its dividend in 2011, but it still demonstrates its commitment to shareholders.

Texas Roadhouse investors were not happy with the report, and the stock plunged more than 10% in after-hours trading following the announcement. As long-term investors adjust to the reality of slower growth and even occasional earnings setbacks, Texas Roadhouse will have to do its best to jump-start its engines to deliver the peer-beating performance that shareholders have gotten used to seeing from the steakhouse specialist.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Texas Roadhouse. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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