Texas Roadhouse (NASDAQ: TXRH) Looks Appetizing Ahead of Earnings

Texas Roadhouse NASDAQ: TXRH is set to report its Q3 earnings tomorrow. Shares of the restaurant chain actually set all-time highs last Thursday, though they’ve dipped more than 6% over the past two sessions.

The past two sessions notwithstanding, Texas Roadhouse has significantly outperformed its peers since the onset of the pandemic. And unlike restaurant outperformers like Chipotle NYSE: CMG and Domino’s NYSE: DPZ, it hasn’t done it by building a digital empire.

So, how has Texas Roadhouse pulled it off? And should you expect the company to beat expectations tomorrow?

Higher Capacity and To-Go Business Have Mitigated Pandemic Impact

Capacity has been one of the biggest obstacles for restaurants since March, and Texas Roadhouse is no exception. But TXRH has done something about it – or a few things about it – installing partitions, building temporary patios, and utilizing its booth-style seating.

Like I said, TXRH is no digital powerhouse, but To-Go sales have been a big piece of the company’s recent outperformance. In June, To-Go sales accounted for around 25% of sales in Texas Roadhouse’s 499 restaurants operating under a limited capacity dine-in model.

Simply put, Texas Roadhouse has a lot of happy customers; prior to Q1 2020, after all, the company had recorded 40 consecutive quarters of comparable sales growth. And 2021 comp growth is expected to rebound to 17.9%. As long as they feel safe, people are going to dine at Texas Roadhouse.

Will Texas Roadhouse Beat in Q3?

Texas Roadhouse is expected to record Q3 revenues of $615.63 million, down 5.4% yoy. EPS is expected to be 19 cents per share, down 63.5% yoy. The positive EPS is a welcome sight, however, after the company dealt with a cash burn of around $5 million per week back in May.

TXRH’s comps have consistently outperformed the sales for all food services and drinking places compiled by the US Census Bureau since the pandemic started. In July, for example, Texas Roadhouse’s comps decreased 13% yoy. The US Census Bureau numbers were down 19.3% yoy in July. In August and September, the yoy numbers have improved from July levels, down 15.7% and 14.4%, respectively.

Of course, this is all far from an exact science, and the numbers aren’t apples-to-apples, but I think the 5.4% revenue decrease is a reasonable expectation for TXRH in Q3.

While I’m not banking on a Q3 beat, I think better guidance is a solid possibility, and continued outperformance is very likely.

The Future Looks Bright

Looking to Q4, the ability to safely accommodate high numbers of people is going to be increasingly important. The winter weather will make outdoor dining a challenge in many areas – that’s a fact. What is more uncertain is whether surging numbers of coronavirus cases will lead to new restrictions.

If new restrictions do come to fruition, few restaurant chains are better positioned to handle them than Texas Roadhouse.

Looking long-term, Texas Roadhouse still has a lot of room for expansion. The company was originally planning to add 30 restaurants in 2020, but the pandemic forced TXRH to put its expansion plans on hold. Now that the business is getting healthier and the operating environment is less uncertain, I could see Texas Roadhouse talking about the resumption of its expansion.

And the thing is, it has a lot of room for expansion. TXRH currently has around 600 restaurants. With how successful the company has been, it could expand well into the 2020s. On top of that, there’s a great chance that, post-pandemic, Texas Roadhouse will start another long streak of comp growth.

Wall Street is a Little Behind

A lot of firms have increased their price targets this month, but many of them are still below TXRH’s current share price. Running down the list:

• Wedbush increased from $71 to $82.
• Raymond James NYSE: RJF from $67.50 to $80.
• Morgan Stanley NYSE: MS from $56 to $67.
• JPMorgan NYSE: JPM from $60 to $67.
• Barclays from $52 to $63.
• Goldman Sachs NYSE: GS from $45 to $51.

If Texas Roadhouse’s Q3 numbers or guidance are better than expected, we might see a bunch of upgrades and raised price targets in short order.

The Final Word

All things considered, there’s more to gain than to lose by getting into Texas Roadhouse ahead of its Q3 earnings. The restaurant chain has a lot of room for growth, and it’s only a matter of time before the expansion resumes.