Texas Roadhouse (TXRH)

Restaurant company Texas Roadhouse (NASDAQ:TXRH) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 9.6% year on year to $1.45 billion. Its GAAP profit of $1.70 per share was 3.4% below analysts’ consensus estimates.

Company Overview

With locations often featuring Western-inspired decor, Texas Roadhouse (NASDAQ:TXRH) is an American restaurant chain specializing in Southern-style cuisine and steaks.

Sit-down restaurants offer a complete dining experience with table service. These establishments span various cuisines and are renowned for their warm hospitality and welcoming ambiance, making them perfect for family gatherings, special occasions, or simply unwinding. Their extensive menus range from appetizers to indulgent desserts and wines and cocktails. This space is extremely fragmented and competition includes everything from publicly-traded companies owning multiple chains to single-location mom-and-pop restaurants.

Multi-brand full-service restaurant competitors include Bloomin’ Brands (NASDAQ:BLMN), Brinker International (NYSE:EAT), Darden Restaurants (NYSE:DRI), Dine Brands (NYSE:DIN), and The Cheesecake Factory (NASDAQ:CAKE).

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $5.5 billion in revenue over the past 12 months, Texas Roadhouse is one of the larger restaurant chains in the industry and benefits from a well-known brand that influences consumer purchasing decisions.

As you can see below, Texas Roadhouse’s 13.9% annualized revenue growth over the last six years (we compare to 2019 to normalize for COVID-19 impacts) was impressive as it opened new restaurants and increased sales at existing, established dining locations.

This quarter, Texas Roadhouse reported year-on-year revenue growth of 9.6%, and its $1.45 billion of revenue exceeded Wall Street’s estimates by 0.6%.

Looking ahead, sell-side analysts expect revenue to grow 8.1% over the next 12 months, a deceleration versus the last six years. Despite the slowdown, this projection is above the sector average and implies the market sees some success for its newer menu offerings.

Number of Restaurants

Texas Roadhouse sported 792 locations in the latest quarter. Over the last two years, it has opened new restaurants at a rapid clip by averaging 6.1% annual growth, among the fastest in the restaurant sector.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at restaurants open for at least a year.

Texas Roadhouse has been one of the most successful restaurant chains over the last two years thanks to skyrocketing demand within its existing dining locations. On average, the company has posted exceptional year-on-year same-store sales growth of 7.9%. This performance suggests its rollout of new restaurants is beneficial for shareholders. We like this backdrop because it gives Texas Roadhouse multiple ways to win: revenue growth can come from new restaurants or increased foot traffic and higher sales per customer at existing locations.

In the latest quarter, Texas Roadhouse’s same-store sales rose 3.5% year on year. This was a meaningful deceleration from its historical levels. We’ll be watching closely to see if Texas Roadhouse can reaccelerate growth.

Texas Roadhouse has bad unit economics for a restaurant company, signaling it operates in a competitive market and has little room for error if demand unexpectedly falls. As you can see below, it averaged a 16.9% gross margin over the last two years. Said differently, Texas Roadhouse had to pay a chunky $83.11 to its suppliers for every $100 in revenue.

Texas Roadhouse’s gross profit margin came in at 17% this quarter, in line with the same quarter last year. Zooming out, Texas Roadhouse’s full-year margin has been trending up over the past 12 months, increasing by 1.1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Texas Roadhouse has done a decent job managing its cost base over the last two years. The company has produced an average operating margin of 8.8%, higher than the broader restaurant sector.

Analyzing the trend in its profitability, Texas Roadhouse’s operating margin rose by 1.3 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, Texas Roadhouse generated an operating profit margin of 9.3%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Texas Roadhouse has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 6.4% over the last two years, better than the broader restaurant sector.

Taking a step back, we can see that Texas Roadhouse’s margin expanded by 1.7 percentage points over the last year. This is encouraging because it gives the company more optionality.

Texas Roadhouse’s free cash flow clocked in at $160.4 million in Q1, equivalent to a 11.1% margin. The company’s cash profitability regressed as it was 1.5 percentage points lower than in the same quarter last year, but it’s still above its two-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends trump temporary fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Texas Roadhouse’s five-year average ROIC was 18.7%, placing it among the best restaurant companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

Texas Roadhouse reported $221.1 million of cash and $877.6 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $716.1 million of EBITDA over the last 12 months, we view Texas Roadhouse’s 0.9× net-debt-to-EBITDA ratio as safe. We also see its $6.67 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Texas Roadhouse beat analysts’ EBITDA expectations this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates. On the other hand, its EPS missed. Overall, this print had some key positives. The stock traded up 1% to $174.50 immediately after reporting.

Updated: May 10, 2025 at 10:42 PM EDT

When considering an investment in Texas Roadhouse, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

There are multiple reasons why we think Texas Roadhouse is an amazing business. For starters, its revenue growth was good over the last six years. And while its gross margins make it more challenging to reach positive operating profits compared to other restaurant businesses, its marvelous same-store sales growth is on another level. Additionally, Texas Roadhouse’s new restaurant openings have increased its brand equity.

Texas Roadhouse’s P/E ratio based on the next 12 months is 25.6x. There’s some optimism reflected in this multiple, but we don’t mind owning a high-quality business, even if it’s slightly expensive. It’s often wise to hold investments like this for at least three to five years, as the power of long-term compounding negates short-term price swings that can accompany relatively high valuations.

Wall Street analysts have a consensus one-year price target of $184.23 on the company (compared to the current share price of $180).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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