Texas Roadhouse’s mixed results capture the conundrum this stock has become
Texas Roadhouse on Thursday evening reported mixed second-quarter results as elevated beef prices weighed on profitability. Still, the company posted strong comparable sales and said the ongoing third quarter was off to a great start, offsetting some fears around higher input prices. Revenue in the quarter ended July 1 increased 12.8% year over year to $1.51 billion, exceeding the LSEG-complied Wall Street consensus estimate of $1.50 billion. Earnings per share (EPS) increased 4% on an annual basis to $1.86, missing expectations of $1.91, LSEG data showed. Shares were down a little more than 1% in extended trading Thursday. The stock has been drifting lower this summer, closing the regular session down 7.4% from its late May high of the year. Bottom line Texas Roadhouse is executing on what it can control – creating an enjoyable environment and offering full menus at affordable prices – and it’s showing within the results. When the restaurant chain reported Q1 results in early May, management said same-store sales growth for the second quarter were tracking at 5%. This is key restaurant industry metric is also called comparable sales, or comps. We were pleased to see that the 5% growth rate not only sustained through the quarter, but improved a little further. What a difference the weather can make. By month, comparable sales, a key restaurant industry metric, increased 4.3% in April, 7.2% in May, and 5.8% in June. Companywide, same-store sales increased 5.8% in the quarter, mostly driven by an increase in customer traffic — a good sign. This result beat the consensus of 5.3%, according to FactSet. Even better, these positive trends continued early into the third quarter, with comparable sales up 5.3% through the first five weeks, beating the consensus estimate of about 5%. This strong rate includes a negative 60 basis point pressure from the calendar shift of the Fourth of July. Texas Roadhouse Why we own it: Texas Roadhouse is a fast-casual steak chain that offers quality food at an affordable price in a fun atmosphere, creating one of the more compelling value propositions for consumers in the full-service dining category. A substantial majority company’s stores are company-owned stores, with only a small proportion as franchise locations. Competitors: Darden (Olive Garden, LongHorn Steakhouse), Brinker (Chili’s and Maggiano’s), Bloomin’ Brands (Outback, Carrabbas Italian Grill, BonefishGrill) Portfolio weighting: 2.3% Most recent buy: April 9, 2025 Initiated: Feb. 4, 2025 Usually, strong traffic and comparable sales performance translate to operating leverage, margin expansion, and earnings per share growth. But out of the company’s control is beef inflation. This headwind weighed on the second-quarter results and is expected to be even worse in the third quarter. The company has some counterbalances in its disposal, including raising menu prices and labor inflation is coming in a little bit better than expected. On the call, CEO Jerry Morgan said the company plans to raise prices by 1.7% at the beginning of the fourth quarter. “We feel confident this is the right level of pricing to maintain our everyday value while offsetting some of the inflationary pressures we are facing,” he said. We are once again torn on Texas Roadhouse. The continued traffic-driven comps are proof that the brand is loved and the concept works wherever they open up a new location – and the company is doing plenty of it. The consumer may get more “picky” and “choosy” in the back half of the year, but Texas Roadhouse is a sensible place to flock to get great bang for one’s buck. However, beef prices are everything for this steakhouse chain, and even with the strong comps, we probably won’t see the big stock breakout we’ve been waiting for until prices fall. Tight cattle supplies in the U.S. have driven beef costs up in recent years. On Thursday, cattle futures traded on the Chicago Mercantile Exchange hit another record high. That’s our current view. We remain optimistic about the future, supported by strong traffic trends, ongoing franchise acquisitions, and growth from new store openings. However, commodity pressures remain a headwind, which is why we’re maintaining our hold-equivalent 2 rating and refraining from buying the stock until we see a more attractive entry point. Commentary The better than expected comparable sales growth of 5.8% was driven by a 4% increase in traffic and a 1.8% increase in the average check. Management spent some time on the earnings call walking through some of the mix dynamics— an industry term for the items sold — impacting check levels. The alcohol category continues to be a drag, a sign that people are drinking less when they are dining out. This is a society-wide trend. Introducing nonalcoholic cocktails, often called mocktails, to the menu has been one way the company has addressed the weakness in alcohol. On the entree side, management called out guests trading up to either bigger steaks or ordering steak more often as opposed to other dishes like chicken. During the quarter, Texas Roadhouse opened four-company owned restaurants, including two Bubba’s 33 locations, and one franchise restaurant. Management said it’s on track to open approximately 30 company-owned restaurants this year and could do a little more than that next year due to plans to step up growth for Bubba’s 33, its sports-bar chain with 52 locations currently. Additionally, Texas Roadhouse completed the acquisition of three franchise restaurants, bringing its year-to-date total to 17. Texas Roadhouse said it has plans in place to acquire eight domestic franchise restaurants in the coming quarters, including its five remaining franchised locations in California. The company buys back these franchised locations from time to time, and we generally think these are a good use of cash. Bringing franchised locations under the corporate umbrella gives the company more control over everything in its restaurants and typically leads to stronger operating results. As for cash returns to shareholders, the company bought back $9.8 million worth of stock in the quarter. That’s a step down from the $50.2 million worth of shares repurchased in the first quarter. Guidance As mentioned earlier, Texas Roadhouse comparable sales at company-owned restaurants increased 5.3% year over year through the first five weeks of the third quarter. For 2025, management reaffirmed most of its outlook. It continues to expect positive comp sales growth, including the benefit of menu price actions. It also continues to expect capital expenditures totaling $400 million and so-called store week growth of 5% Store week growth is a way to measure both new store openings and franchise acquisitions. However, the company now expects commodity cost inflation to be approximately 5%, which is up from last quarter’s view of 4%. This is obviously disappointing to see but it’s not a complete surprise since beef prices are on the rise. Partially offsetting the worsening commodity costs is a better view on wage and labor inflation. Management now sees that increasing 4%, which is the low end of its previous guidance range of 4% to 5%. Management also lowered its expected effective income tax rate to 15% from a range of 15% to 16%. (Jim Cramer’s Charitable Trust is long TXRH. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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