From farm to table, high beef prices squeeze margins. How our steakhouse stock is balancing costs
The serious increase in beef prices is felt by everyone. For example, Tyson Foods last month announced plans to close its beef plant in Lexington, Nebraska. About 3,200 workers will lose their jobs at the business that has long been the region’s largest employer. The Wall Street Journal published a thought-provoking report on Tuesday about the ripple effect of next month’s closure after two decades of operation. In its Nov. 21 announcement, Tyson said it would close the Lexington plant as part of a plan to “right-size its beef business” in the face of historically low cattle herds in the United States. The company said it would increase production at other beef facilities “by optimizing volumes across our network.” During Tyson’s Nov. 10 earnings call, management said it expects losses of up to $600 million from beef production in the next fiscal year as cattle acquisition costs soar. “Beef is up a lot,” Jim Cramer said on Tuesday’s Morning Meeting, pointing out that live cattle futures are up about 18% year to date and are trading around $2.29 per pound. To put that in perspective, cattle prices have skyrocketed nearly 170% from a Covid-era low of 92 cents to an all-time high of about $2.48 per pound in mid-October. After falling 16% to about $2.18 towards the end of November, cattle prices began to rise again, rising almost 5% in December alone. Even if prices continued to fall, they would still be much higher than they were at around $1.20 per pound in late December 2019, before the pandemic shut down the world three months later. Sticker shock is being felt by shoppers at supermarkets and even Costco, which is known for its low prices. Texas Roadhouse and other casual chains are struggling to reduce steep prices through cost-cutting and small menu increases while keeping wary customers coming through their doors. “It was a new realization that if you’re in beef you’re not going to make any money,” Jim said. Margins are shrinking at every opportunity. In the third quarter reported last month, Texas Roadhouse’s restaurant margin, a measure of operating efficiency, was 14.3%, down 1.68 percentage points from the same period a year earlier, due to commodity and wage inflation. It was the third quarter in a row that restaurant margins fell year over year. Texas Roadhouse, which is also the parent company of Bubba’s 33 and Jaggers, has been determined to absorb costs and keep menu prices low. To maintain strong traffic trends, it announced only a 1.4% increase in menu prices at the beginning of the second quarter and a 1.7% increase in the fourth quarter. Balancing costs keeps diners from coming through the doors. Comparable restaurant sales rose 6.1% in the third quarter. This was the best quarterly result this year, driven by a 4.3% increase in traffic and a 1.8% increase in average checks. It’s further proof that the company’s reputation for value still resonates. Looking ahead, in November management once again raised its commodity inflation forecast for full-year 2025 to 6%; This shows how the problem has worsened this year, compared to the initial outlook of 3% to 4% presented in February. In addition, management projects 7% commodity inflation in 2026. We’ll see how Texas Roadhouse can navigate fiscal 2025 fourth-quarter beef inflation in its next earnings report, expected in February. Against this backdrop, the stock has remained under pressure, down 15% from its 52-week high of around $200 in May. Shares hit a record close of $205 in November 2024. TXRH YTD mountain Texas Roadhouse YTD Texas Roadhouse was one of seven out-of-favor stocks that Jim highlighted as names he wanted to buy at his Monthly Meeting in December. Wells Fargo analysts agreed with Jim’s optimistic but dissenting view on Texas Roadhouse and upgraded their rating on the stock to buy-equivalent overweight on December 17 and raised their price target to $195 from $170. That same day, we followed Wells Fargo by raising our buy rating to 1 and buying more shares. Jeff Marks, the club’s director of portfolio analysis, wrote in our trade alert: “Texas Roadhouse consistently delivers some of the best comparable sales in the restaurant category as it largely holds the line in price despite fluctuations in the cost of beef. But [Jim] He thinks the 2026 cost inflation forecast the administration presented last quarter will be overturned next year, creating upside opportunities if beef prices decline.” Of course, the broader backdrop for beef prices remains challenging. The cattle herd is at historic lows due to years of regional droughts, which has led to limited feed supplies that are forcing farmers to sell cows they can no longer afford. Another challenge is the projected three-year cattle production cycle, which limits how quickly the herd can recover. The White House has issued multiple reports recently. Last month, President Donald Trump signed an order to cut tariffs by 40% on Brazilian food products, including beef and coffee, as well as trade deals with Latin American countries like Argentina to increase beef import quotas, and his 2026 cattle price forecast will take into account the Tyson plant closure and a tariff cut on imported Brazilian beef, Don Close, senior protein analyst at cattle research and forecasting firm Terrain, told CNBC on Tuesday. still, prices are up 5% year over year, the agency said. “Pause or delay expansion plans that could further extend this.” (Jim Cramer’s Charitable Trust is long TXRH. See here for a full list of stocks.) When you subscribe to the CNBC Investment Club with Jim Cramer, after sending a trade alert, Jim waits 45 minutes before buying or selling a stock in his charitable trust’s portfolio. 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