This game of reopening the economy is already quietly depressing market returns

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Share prices of the steakhouse chain Texas Roadhouse (NASDAQ: TXRH) hit all-time highs again and have risen around 26% in the past twelve months. Many names in the hospitality industry are betting on the gradual reopening of the economy, but this chain is delivering the goods well before a full recovery.

Because of this, I’m still optimistic about my favorite restaurant stocks.

Suburbia loves steak

The big news in the final months of 2020, of course, was a new round of closings and dining room restrictions in many areas to slow the spread of the coronavirus. Kent Taylor, CEO of Texas Roadhouse, said on the conference call that about 90 dining rooms have been closed as of mid-November. Given that Texas Roadhouse had 537 domestic company-operated locations and an additional 69 domestic franchise locations as of year-end, the closings have been significant.

The result was a 12% decrease in revenue year over year to $ 638 million and a decrease in net income of 54% to $ 19.5 million. Together with the rest of the financials for the year, 2020 was indeed an unforgettable year for Roadhouse.

Metric

2020

2019

Change

revenue

$ 2.40 billion

$ 2.76 billion

(13%)

Net result

$ 31.3 million

$ 174 million

(82%)

Earnings per share

$ 0.45

$ 2.46

(82%)

Free cash flow

$ 65.5 million

$ 158 million

(58%)

Data source: Texas Roadhouse.

Given the ugly looking results, what explains the price gains? For one, there is optimism that the suburbs of America (where the Texas Roadhouse restaurants are located) will recover faster than the urban areas. The company even reported a return to year-over-year store growth (or comps, average traffic, and guest order size) in October prior to the second lockdown. Ninety-eight percent of the company’s restaurants are open again, and Taylor said the average weekly revenue for the first seven weeks of 2021 is $ 108,000 – compared to the average weekly revenue of $ 98,800 in October.

Image source: Getty Images.

It is clear that Texas Roadhouse outperforms many of its competitors in the restaurant industry, and it will begin to overtake the depressed financial results it released last spring at the start of the pandemic. Investing is all about the future, and this restaurant stock will see dramatic year-over-year growth in the coming quarters. With it the rapid rally and new all-time highs for the stock.

The race wins slowly and steadily

Of course, not everything at Roadhouse is peach-colored. The company has relied heavily on traditional table service in the past, and continuous interruption of this type of operation could be an ongoing problem for years to come if COVID-19 (or new variations of it) continues to cause problems. But Taylor and Co. have adapted.

To-go sales make up a much larger portion of Texas Roadhouse’s sales than before. Restaurants with open dining rooms will account for an average of almost a quarter of their takeaway sales in 2021. TexasRoadhouse is also developing a retail business. Last year it opened a butcher’s shop for guests who prefer to cook at home. More recently, the company signed license agreements for its margarita mix and a canned cocktail seltzer. Taylor said both of them require minimal investment and should deliver strong investment returns over time.

There is still a need for new locations to be opened. Roadhouse expects to open 25 to 30 new company-owned stores this year (including some 33 Bubba sports bars) and international franchise agreements to be signed. The Jagger’s fast-casual burger and chicken restaurant is also being refined and could have some domestic franchise and company-owned stores by next year.

At 82 times free cash flow in 2020, this seems like a high-priced stock. However, Roadhouse is well on its way to a return to growth and will beat last year’s weak financial results. We are broadening our perspective beyond the restaurant industry and moving from the cities to more suburban and rural areas, another plus for this expanding chain.

Armed with new to-go and retail stores, Texas Roadhouse remains my favorite restaurant stock as the economy re-opens.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.

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