Texas Roadhouse - Sneak Peek Research Report
Our fundamental analysis of Texas Roadhouse
“Legendary food, legendary service”
Texas Roadhouse
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Introduction of the company
History
The company
The business model
The sector and industry
The competitive advantage
The moat
1) Introduction to Texas Roadhouse
Steaks, stress, debt, and success
1.1 The history
To truly understand Texas Roadhouse (TXRH), we need to look back to the early days of its founder, Kent Taylor. This is because the company's culture, values, and strategy are deeply rooted in Taylor's experiences and beliefs, which have shaped its success.
In 1969, Kent Taylor, then 14 years old, started attending Ballard High School with dreams of becoming a professional American football player. However, his slim build (180 cm and 55 kg) made it challenging. After being rejected from football, he tried athletics but didn't excel there either. Despite these setbacks, Kent didn't give up. He trained harder than anyone else and eventually became a school, district, and state champion. He learned that hard work often trumps talent, a lesson he carried into his career.
“There is a perception we can’t do much about our weaknesses in life, so we should focus only on our strengths. I say bullsh*t. We can typically get better at something if we love it and are willing to put in the work. In some cases, we can even become outstanding. Weaknesses can become our strengths.” - Kent Taylor
Kent's parents also played a significant role in his life. He faced a lot of rejection, but his parents were always there to support him. Their home was filled with music, which later became an important element in Kent's life and his restaurants.
After graduating in 1977, Kent went back to his old job at a seafood restaurant instead of working for large companies. His passion for the restaurant industry grew every day. He worked at the restaurant during the day, did night shifts at a disco, and also had a day job at TGI Friday's. In 1981, Kent co-owned a pub called Mabel Murphy's. This experience taught him about the importance of reliable partners and proper documentation in business, even though it was a costly lesson. Kent didn't let these setbacks deter him from becoming a manager at Bennigan's restaurant chain in 1983. However, he didn't find the recognition and freedom he sought for his ideas and vision.
Determined to realize his own ideas, Kent came up with four different restaurant concepts: a Rocky Mountain ski lodge, a salad bar called Florida Salad Company, The Pelican Head Seafood Company, and a Texas-style steakhouse, which eventually became Texas Roadhouse.
Despite facing numerous rejections from investors, he persevered and learned valuable lessons about persistence, the importance of a positive environment, and staying true to his principles. These lessons became the foundation of his success as the CEO of Texas Roadhouse.
“Don’t be afraid of rejection. Ask for the moon, and now and then you might just get it.” - Kent Taylor
Kent's journey taught him that persistence is key to success, rejection isn't the end, and it's crucial to surround yourself with positive people, learn from your mistakes, and stay true to yourself. These lessons would later guide him as the CEO of Texas Roadhouse.
Determined to make his restaurant dream come true, Kent worked at Hooters and KFC after several disappointments. Eventually, he convinced John Y. Brown, former governor of Kentucky and founder of KFC, to transform a failing KFC restaurant into his idea, then known as Buckhead Grill & Bar. The sketch of the restaurant's name and logo, drawn by Kent's daughter, can be seen in the photo below (though it wasn't successful at first).
Years later, Kent's first restaurant took shape thanks to investments from three doctors, each contributing $100,000, plus an additional $250,000 loan. They agreed to Kent's plan and idea, which was still only drawn on a tissue. At that time, Kent's net worth was -$20,000 (unknown to the investors).
Kent worked tirelessly to build Texas Roadhouse, earning a 1% royalty on sales and 30% ownership of the restaurant. From the first day Texas Roadhouse opened, it was a financial success, a welcome change for Kent, who was on the brink of financial collapse. In his book "Made from Scratch," he describes how he used all his children's savings to buy food and had to move back in with his parents because he couldn't pay the rent. He also worked over 60 hours a week at a restaurant chain that was continuously losing money, where he was deeply unhappy.
The story in "Made from Scratch" is incredibly inspiring and highly recommended for those who want to learn more about the founder and the founding of Texas Roadhouse and Kent Taylor.
2) The company
Steaks, service & smiles: the successful revenue model
2.1 The revenue model
Texas Roadhouse's revenue model is pretty straightforward. The restaurant operates in the casual dining segment and, as of early 2024, has 741 locations in the U.S. and internationally. Outside the U.S., you'll find Texas Roadhouse in places like Bahrain, China, South Korea, Kuwait, Mexico, the Philippines, Qatar, Saudi Arabia, Taiwan, and the UAE. They manage three different concepts:
Texas Roadhouse (582 restaurants);
Bubba’s 33 (45 restaurants);
Jaggers (8 restaurants).
Texas Roadhouse generates the majority of its revenue from its namesake restaurants, with a smaller portion coming from its Bubba's 33 locations and a negligible contribution from its Jaggers brand.
Texas Roadhouse (below) is a casual dining spot with reasonable prices and full service. They serve steaks, ribs, seafood, and more, along with unlimited free peanuts and freshly baked bread for all guests.
Bubba's 33 (below) is similar to Texas Roadhouse but with a rock 'n' roll vibe, serving burgers, pizza, and wings. It feels more like a sports bar than a restaurant.
Jaggers (below) is their latest concept focused on burgers, chicken dishes, and fresh salads with homemade sauces.
Kent Taylor, the founder and former CEO, established the core values on which the operational strategy is based:
High-quality, freshly prepared food
A cozy, comfortable atmosphere with great service
Performance-based rewards for managers
Fair prices
A focus on dining
Most of the Texas Roadhouse locations are company-owned, with only 106 franchised restaurants. Around 98% of all revenue comes from company-owned restaurants. Franchise revenue has only increased by $5 million since 2019. The company prefers to own its restaurants to maintain its unique atmosphere and quality. They use franchises mainly for cheaper international expansion and often buy them back later. This is mentioned in their 2023 annual report.
Understanding Kent Taylor's history helps explain why certain aspects are part of Texas Roadhouse's strategy. The key elements include:
Offering high-quality, freshly prepared food. Texas Roadhouse has unique recipes to ensure consistent quality and taste across all locations. A manager checks each dish before it leaves the kitchen for quality, portion size, appearance, and presentation. Kitchen trainers provide ongoing training about recipes, preparation methods, food safety, and overall quality. Every restaurant has certified chefs, bakers, and butchers to maintain these standards. The bakers make fresh bread daily, and the butchers prepare meat that is displayed in glass cabinets.
Creating a pleasant atmosphere and personal touch with a focus on high-quality service.They maintain a low ratio between tables and waiters (1:3) so servers can focus on their guests. Other fast-food chains often have a ratio of around 1:10, which is cheaper but loses the personal touch. Texas Roadhouse servers are expected to know customers' names, adding a personal connection.
Offering performance-based remuneration for managers. Texas Roadhouse offers a performance-based compensation program for managers, with a base salary plus a bonus based on their restaurant's profits. The concept of Managing Partners, who own 10% of the restaurant, creates a partnership rather than a traditional employer-employee relationship. This "skin in the game" principle fosters strong commitment and motivation.
Offering fair prices. Texas Roadhouse carefully evaluates menu prices to balance affordability and quality. Prices are tailored to each region and kept comparable or lower than competitors. They sometimes opt for very low margins on certain products, compensating with others or in richer areas.
Focus on dinner. Unlike many chains, Texas Roadhouse focuses on dinner, opening most restaurants from 3:00 PM to 10:00 PM during the week and expanding to lunch on Fridays. This allows staff to prepare optimally for busy evening service, resulting in more efficient operations and less waste. Shorter shifts keep employees more energetic, leading to better service and a unique atmosphere.
Although these limited hours make the spread of fixed costs, such as rent, less effective as there are fewer operating hours to cover these costs, Texas Roadhouse compensates for this potential disadvantage in several ways. The focus on peak hours provides apparent higher productivity per employee and possibly higher customer spending per visit. In addition, the short opening hours ensure less waste of food and resources and a working environment in which employees remain more motivated, which indirectly contributes to higher revenue per hour opened. As a result, Texas Roadhouse appears to have found a balance, with a focus on quality and efficiency during peak hours effectively managing higher fixed costs per hour. There are, of course, still many opportunities and possibilities here.
2.2 The culture
In the analysis of Chipotle Mexican Grill, I have discussed the sector and industry in detail. This is little different from Texas Roadhouse, which has a similar business model and size. I have therefore paid extra attention to the culture within Texas Roadhouse, because this is what makes them unique.
Texas Roadhouse's success is rooted in a company culture where employees genuinely love their work. Taylor focused on creating a fun and stimulating workplace with country music, sports on TVs, and unique birthday traditions. The strategy of having servers handle fewer tables (three per server) allows them to provide more personal attention to guests, which is crucial for guest satisfaction. This personal contact not only helps provide better service but also ensures more sales of higher-margin products like drinks and cocktails. This is beneficial for sales and strengthens the company's moat.
Consistency and freedom are key within the organization. Branch managers and regional managers are given a lot of freedom within clear guidelines. They must know regular guests by name, a personal touch that is rare in our digital age. Employees can choose between two different T-shirts: a standard Texas Roadhouse T-shirt or an "I Love My Job" T-shirt. An employee at Southwest Airlines saw something similar and was the source of Kent Taylor's inspiration for this idea. Kent enthusiastically embraced it after seeing a prototype that the employee had created. Nowadays, the 'I Love My Job' T-shirt is the most popular choice among employees, highlighting job satisfaction and atmosphere. This shows how much Texas Roadhouse values and appreciates its employees and customers, an approach Kent himself experienced for many years.
Taylor also wanted to create a positive and fun working environment where employees feel valued, seen, and heard. He introduced various activities like line dancing (also an idea from an employee) and relaxed the dress code. For example, ties and suits are 'forbidden' at the head office (Kent hated them because those types always rejected him and didn't believe in his ideas). He thought it was important to be yourself and decide what to wear.
But there is more. Here are other things that make Texas Roadhouse's culture different from competitors:
No national TV advertising. Kent always said, “Most restaurants pay 4% on advertising. We invest the 4% in free unlimited peanuts and bread for our customers.” Yes, unlimited peanuts and freshly baked rolls.
Community giving. Kent felt it was important to give back to the community. Every day, all food scraps are given to local charities. This creates goodwill among the local community, making them come back more often. Win-win.
Personal visits. Every spring, for six weeks, Kent Taylor visited all his Texas Roadhouse restaurants. He talked to managing partners, customers, and employees. He wanted to know what went well and what could be improved. The current CEO still does this!
In-house baker and butcher. Every Texas Roadhouse restaurant has a qualified baker and butcher. The baker is responsible for making fresh free rolls, and the butcher ensures that the meat is always as fresh as possible. Meat is never frozen; it's made from scratch.
Quality checks. A quality manager checks every meal for freshness, taste, and visual appeal. Only meals that meet high standards are served. Quality over quantity.
Waiting list. To eat at Texas Roadhouse, you must get on a waiting list. It's so busy that you can only reserve a place via the website. If there’s no room, you'll be put on a waiting list. Nowadays, you can always order to-go, which is a fairly new concept. The crowds say a lot about the quality and popularity of the restaurant.
3) The competitive advantage
What protects the steak from mold?
3.1 The moat
In the tough world of business, a strong moat is crucial for long-term success. This moat symbolizes the unique advantages a company has over competitors, allowing it to defend against attacks and maintain market share. In the restaurant sector, however, creating a deep moat is extremely difficult. The relatively low barriers to entry and abundance of chains make it hard to stand out. Imitation is easy, and customers are often price-sensitive, making loyalty scarce.
As you might know, the gross profit margin and return on invested capital (ROIC) are good indicators of a company's moat. Chart 1 shows that ROIC and gross margin are correlated. This means that both metrics are useful for evaluation. If ROIC increases, it’s likely because gross margins are increasing and vice versa. With an ROIC of 16.9%, Texas Roadhouse has a very solid performance. At first glance, Texas Roadhouse seems to be an exception, with an average ROIC of 14.6% over the past 10 years. The chain has a loyal following thanks to their unique atmosphere, consistent quality, and competitive prices. Their focus on authentic American dishes, prepared with fresh ingredients by real bakers and butchers, sets them apart from the crowd. Their unique corporate culture, centered on hospitality, personal touch, and conviviality, enhances the dining experience.
Still, the question is whether the "moat" of Texas Roadhouse is deep enough to withstand the test of time. Competition in the restaurant sector is fierce, and new trends can emerge quickly. When we compare gross margins to competitors like Chipotle and Shake Shack, we can see Texas Roadhouse is quite similar to Chipotle. Chipotle has higher margins and has surpassed Texas Roadhouse in 2024.
Constantly innovating and responding to changing consumer demands is crucial to maintaining their unique position. For example, consider the shift in meat consumption. Europe is rapidly moving towards vegetarian alternatives, and the Texas Roadhouse menu currently features no vegetarian dishes (aside from salads or potato dishes).
The coming decades will show whether Texas Roadhouse can strengthen its moat and continue its successful path. In any case, the company has built a strong brand with a loyal customer base. They also invest heavily in innovation and technology to work more efficiently. Customers who use the app order more frequently and spend more, and Texas Roadhouse seems to be aware of this trend and wants to capitalize on it. We will explore this more later.
So, does Texas Roadhouse have a moat? Yes, but a narrow one. They have a strong brand name with loyal customers, and as they grow, slight economies of scale may arise. However, I wouldn't call it an unbreakable competitive advantage at this point.
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H4 - Management
The seasonings of Texas Roadhouse
4.1 Incentives
4.2 Skin in the game
H5 - The finances
Roadhouse's juicy numbers
5.1 Financial performance
5.2 Debts
5.3 KPI’s
H6 - The valuation
6.1 Ratio’s
6.2 Scenario analysis
H7 - Risks and opportunities
7.1 Opportunities
7.2 Risks
H8 - Conclusion
8.1 Conclusion
8.2 Score
Thanks for this write-up. This stock has popped up in screens that I run. It has performed well and may continue to do so. Surely the only possible moat would be to generate economies of scale through bulk discounts on procurement, negotiating more favorable lease terms, scaling HQ costs over an expanding revenue base, etc. There are a handful of exceptions but consumers typically don't stay loyal to restaurants over a multi-year period.