Analyst Insights

Citi Raises Texas Roadhouse Price Target Amid Strong Q2 Outlook

Citi revises Texas Roadhouse's price target up to $191, citing robust foot traffic and tech-driven growth strategy

By Harrison Wall

7/11, 13:24 EDT
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KEY FIGURES

Stock Rating: Buy
Revised Price Target: $191.00
Previous Price Target: $183.00
Stock Price (July 10, 2024): $166.88

Summary Points

  • Texas Roadhouse's Q2 outlook is strong, with potential for comp and margin upside driven by robust foot traffic.
  • Citi sets a new price target of $191 for TXRH, reflecting optimism about the company's growth strategy and market position.
  • TXRH's investments in customer and back-of-house tech upgrades are expected to drive sales growth and cost savings.

Strong Q2 Outlook for Texas Roadhouse

Citi's latest equity research report on Texas Roadhouse Inc (TXRH.O), titled "Setting the Table for 2Q24," centers around the company's upcoming second-quarter earnings release. The report highlights the potential for relative comp and margin upside, driven by strong foot traffic and a robust third-quarter outlook. The main takeaway is that Texas Roadhouse is well-positioned to outperform in the near term, thanks to its strategic initiatives and favorable market conditions.

Revised Price Target Reflects Optimism

Citi has set a new price target of $191 for Texas Roadhouse, based on a 16x multiple of the next twelve months (NTM) EBITDA estimate. This valuation is slightly ahead of the 10-year average, reflecting the company's solid traffic growth and market share gains. The stock is rated as a "Buy," with the analyst noting, "TXRH appears ready to lean into customer/BOH tech upgrades that could drive table turns/SSS and cost savings." This optimistic outlook is underpinned by the company's ability to manage beef cost risks and leverage its pricing power effectively.

Strategic Initiatives Drive Growth

Texas Roadhouse's growth strategy includes significant investments in technology upgrades aimed at improving customer experience and operational efficiency. These initiatives are expected to enhance table turnover rates and same-store sales (SSS), while also delivering cost savings. The company has historically managed to navigate beef market fluctuations effectively, and the current strategy aims to mitigate these risks further. The analyst emphasizes, "We also note that historically shares have bottomed before the beef market/COGS pain peak," suggesting that the company is well-prepared to handle commodity price volatility.

Additionally, Texas Roadhouse's focus on maintaining strong foot traffic and leveraging its latent pricing power are key drivers behind the positive outlook. The company's ability to attract and retain customers, even in a competitive casual dining landscape, positions it well for continued growth. The report also highlights that the company's shares have historically performed well ahead of beef market peaks, indicating a resilient business model.

Valuation and Market Dynamics

Citi's valuation of Texas Roadhouse at $191 per share is based on a 16x multiple of the NTM EBITDA, reflecting a relative multiple of approximately 1.1x versus the S&P 500. This premium is justified by the company's strong traffic growth and market share gains, although it is partially offset by ongoing beef cost risks. The underlying growth algorithm suggests that Texas Roadhouse could consistently drive rolling estimates and share prices higher, supported by robust sales flow-through.

However, there are risks to this valuation. The company could face challenges in meeting its domestic unit growth targets due to supply chain constraints, which would pressure shares. Additionally, commodity inflation, particularly beef prices, could impact sales if consumers shift away from higher-cost proteins. The company's decision to absorb incremental costs rather than pass them on to consumers could also affect store-level profits and margins. Lastly, the success of new technology initiatives remains uncertain, and any shortfall in expected returns or consumer response could negatively impact financial performance.

Analyst's Final Take

Citi remains optimistic about Texas Roadhouse's long-term growth potential, driven by strategic investments in technology and a strong focus on customer engagement. The company's ability to manage commodity price risks and leverage its pricing power effectively positions it well for future growth. "TXRH could consistently roll forward on its underlying growth algorithm and sales flow-through to drive rolling estimates and shares higher," says the Citi Analyst.