Texas Roadhouse is in a tough spot but still delivering on everything it can control

Texas Roadhouse on Thursday evening reported a mixed third quarter as stubbornly high beef prices continued to weigh on profitability, overshadowing otherwise the year's highest quarterly revenue, same-store sales and traffic growth. Revenue rose 12.8% year over year to $1.44 billion in the quarter ended Sept. 30, beating the LSEG-compliant Wall Street consensus estimate of $1.43 billion. Earnings per share fell 1% year over year to $1.25, below expectations of $1.28, according to LSEG data. TXRH YTD mountain Texas Roadhouse YTD Texas Roadhouse shares fell slightly more than 1% in after-hours trading, putting them near their lowest level since April. Management's updated guidance on beef inflation could put further pressure on shares. The stock is down more than 11% year to date, compared to the S&P 500's gain of more than 14%. As a result, Texas Roadhouse has no problem attracting customers to its restaurant and spending money on quality food at affordable prices. Comparable restaurant sales rose 6.1% — the best quarterly result of the year — driven by a 4.3% increase in traffic and a 1.8% increase in the average check. Comparable sales, a key measure of the restaurant industry, rose 5% month over month in July, 7% in August and 6.1% in September. Comp growth continued with an increase of 5.4% in the first five weeks of the current fourth quarter, according to the company. While this is below Q4 estimates of 5.6%, it should be much better than feared because October was seen as a weak month for most things consumer-related. Between the longest government shutdown in history and layoffs last month hitting the highest level in October in 22 years, consumers are pulling back and becoming more selective. Additionally, the shift of Halloween from Thursday last year to Friday this year negatively impacted the first five-week comps by over 60 basis points. Fridays are a big night in the restaurant industry, and if many families were trick-or-treating they probably weren't going out to eat. Why we have it: Texas Roadhouse is a casual steak chain that offers quality food at affordable prices in a fun atmosphere, creating one of the most compelling value propositions for consumers in the full-service dining category. A significant majority of its stores are company-owned stores and only a small portion are franchise locations. Competitors: Darden (Olive Garden, LongHorn Steakhouse), Brinker (Chili's and Maggiano's), Bloomin' Brands (Outback, Carrabbas Italian Grill, BonefishGrill) Portfolio weight: 2.27% Last purchase: April 9, 2025 Start: February 4, 2025 Texas Roadhouse's business sales growth has been resilient despite the industry slowdown, but beef prices remain the problem. Commodity inflation once again weighed on quarterly results, and management's outlook for the remainder of the year and the first half of 2026 suggests the situation will continue to deteriorate slightly. In the restaurant industry, where profit margins are already tight, this leaves management with little room for maneuver. Management announced a 1.7% increase in menu prices at the beginning of the quarter, and in the earnings release the team said this did not result in any noticeable change in guests' behavior. Texas Roadhouse has operated surgically on price increases, aware of the delicate balance between protecting margins and risking alienating customers. We have seen too many full-service and quick-service restaurants damage their reputations by raising prices too much and too quickly. However, this position remains a dilemma for us in the Club portfolio. On the one hand, Texas Roadhouse consistently posts strong merchandise sales and is expanding its footprint with numerous new stores each year. The traffic increase shows that the value proposition is great. Beef, on the other hand, has been a big problem for the last few quarters, and it's not getting any better. Of course, live cattle prices have fallen 15% since hitting record highs in mid-October, and President Donald Trump has made noise recently about lowering beef prices. But the beef cycle hasn't turned yet. @LC.1 YTD mountain Live cattle prices YTD Once there is real relief in the beef market, Texas Roadhouse's numbers will rise - and when that happens, beef prices could quickly drop to more manageable levels - but the timing is hard to predict. That's why we downgraded the stock to 2 two weeks ago and are keeping it in stock. We are lowering our price target to $185 per share from $195 to reflect continued pressure from beef prices on earnings. Statement In the third quarter, Texas Roadhouse opened seven company-owned restaurants and two franchise restaurants, including two Bubba's 33 locations and one Jagger's. This brings the total for the first 39 weeks of the year to 19 company restaurants and three franchise restaurants, putting them on track to open 30 restaurants within the year. The company plans to open 35 company-owned restaurants by 2026, including 20 Texas Roadhouses, 10 Bubba's and up to five Jagger's. Additionally, management said that it completed the acquisition of three domestic franchise restaurants on the first day of the fourth quarter for $12.7 million. It also has agreements to acquire five more domestic restaurants at the beginning of fiscal 2026. Both of these moves were mentioned on the previous earnings call. The company buys back these franchise locations from time to time, and we generally think this is a good use of cash. Bringing franchised locations under the corporate umbrella gives management more control and often leads to stronger operating results. In terms of returning cash to shareholders, the company repurchased $40 million worth of shares in the quarter. That's a step up from the $9.8 million worth of shares repurchased in the second quarter. Guidance For the full year 2025, management now expects commodity inflation to be around 6%. This is higher than the 5 percent inflation guidance last quarter and the 4 percent inflation guidance two quarters ago. The rest of the look was repeated. The company expects positive restaurant sales growth, store week growth of 5%, wage and other labor inflation of approximately 4%, and total capital expenditures of $400 million. Texas Roadhouse also revealed its first look at 2026. The most followed item was commodity inflation, which was expected to be 7%; Inflation was higher in the first half of the year than in the second half. This is a difficult conclusion to digest, but the administration has left the door open to easing inflation in the event of a softening or change in inflation expectations. Other aspects of the 2026 forecast include positive comparable restaurant sales growth, including the benefits of 2025 menu pricing actions, 5% to 6% store week growth, 3% to 4% wage and other labor inflation, and $400 million in capital expenditures. Achieving these would be similar to what management is projecting for the full year 2025. (Jim Cramer's Charitable Trust is long TXRH. See here for a full list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation's portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trading alert before executing the trade. 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