Week after week, shares of Texas Roadhouse Inc. sunk, done in by a viral social media hoax that claimed discrimination was rampant at the chain.
Denials from the company — which called the claims that racist White waiters were tampering with Black customers’ food a “ baseless rumor ” — did little to stem the slide. By the end of September, the six-week selloff had surpassed 20%.
Now, with the stock finally showing signs of stabilizing, analysts on Wall Street see an opportunity to buy into a quality restaurant chain at an attractive discount.
Evercore ISI, which expects sales pressure from the “unfortunate” viral post to be temporary, was the first of two firms to upgrade the stock this week.
“This is a great opportunity to buy a long term grower with top-tier customer satisfaction,” Evercore analyst David Palmer said in an interview. He lifted his rating on the stock to outperform on Monday.
StoneX, which called Texas Roadhouse the “highest-quality operator in casual dining,” raised its recommendation to buy.
The “upgrades are a testament to our fundamentals of Legendary Food, Legendary Service, and our local community focus,” Texas Roadhouse said in a statement.
While analysts see long-term upside, the controversy has likely already done some damage. Todd Brooks at StoneX said traffic across Texas Roadhouse locations slipped in September from August due to the viral post. He expects the impact to “wane with time,” but reduced his third-quarter same-store sales estimate to 5.4% from 6.5%. Palmer also sees lower sales growth for the current quarter and cut his year-end earnings per share estimate to $2.52 from $2.92.
The restaurant industry is no stranger to controversy sparked in social-media circles. Cracker Barrel Old Country Store Inc. shares tumbled late last year after a logo change spurred pushback. McDonald’s Corp. Chief Executive Officer Chris Kempczinski was famously ridiculed on social media for taking a tiny bite of the chain’s new Big Arch burger.
Others in the sector have received a boost after a surge in publicity. Palmer pointed to companies like Brinker International Inc.’s Chili’s, where its Triple Dipper appetizer has been a fan-favorite for diners seeking value. Burger King, owned by Restaurant Brands International Inc., is winning back customers after a well-publicized revamp of its signature sandwich, the Whopper.
Restaurant stocks struggled recently as higher food costs and weak consumer sentiment weigh on the sector. An S&P gauge of the industry is down 10% this year versus a 14% gain for the S&P 500 Index. Even with the recent pullback, Texas Roadhouse’s stock is down just 1.5% this year.
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Analysts are mostly positive on Texas Roadhouse, which now has 17 buy-equivalent ratings, 12 holds and no sell recommendations, according to Bloomberg-compiled data. The average 12-month price target assumes a 33% jump from Tuesday’s close.
Despite the hoax hurdle, analysts’ optimism about Texas Roadhouse is rooted in the chain’s past performance. According to analysts at Evercore, the company has delivered positive comparable restaurant sales in nine of the past 10 years excluding the 2020 Covid-19 shutdown.
“Investors are not paying up for Texas Roadhouse today, you are buying it in-line with its historical multiple and being handed the margin recovery for free,” said Palmer.