Texas Roadhouse Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 20 speakers on the call.

Operator

Good evening, and welcome to the Texas Roadhouse Third Quarter Earnings Conference Call. Today's call is being recorded. All participants are now in a listen only mode. After the speakers' remarks, there will be a question and answer session. I would now like to introduce Michael Bailin, Head of Investor Relations for Texas Roadhouse.

Operator

You may begin your conference.

Speaker 1

Thank you, Emma, and good evening. By now, you should have access to our earnings release for the Q3 ended September 26, 2023. It may also be found on our website at texasroadhouse.com in the Investors section. I would like to remind everyone that part of our discussion today will include forward looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

Speaker 1

We refer all of you to our earnings release in our recent filings with the SEC. These documents provide a more detailed discussion of the relevant factors That could cause actual results to differ materially from those forward looking statements. In addition, we may refer to non GAAP measures. If applicable, reconciliations of the non GAAP measures to the GAAP information can be found in our earnings release. On the call with me today is Jerry Morgan, Chief Executive Officer of Texas Roadhouse and Chris Monroe, our Chief Financial Officer.

Speaker 1

Following the prepared remarks, we will be available to answer your questions. In order to accommodate everyone that would like to ask a question, We kindly ask analysts to please limit yourself to one question. Now, I'd like to turn the call over to Jerry.

Speaker 2

Thanks, Michael, and good evening, everyone. We have nearly completed our annual fall tour where we visit with More than 700 operators from all three concepts. As I mentioned last quarter, this is one of the highlights of my year as it gives us the opportunity To interact directly with all our managing partners across the country. At Stop After Stop, we get to see and hear Not only the passion they have for our business, but also the ideas they have to make us better. The real time feedback we receive is invaluable as we The hard work of our managing partners and their teams can once again be seen in our strong third quarter performance, Which includes average weekly sales of approximately $139,000 and comparable sales growth At 8.2%.

Speaker 2

I believe our operators' passion, dedication and focus On the success of their restaurants is one of our biggest advantages. They remain committed to building sales and profits While sticking to our core values regardless of the pressures they face. Our top line results continue to tell us We are delivering on our promise of legendary food and legendary service. We recently completed an independent guest Attitude and usage study and we were the casual dining leader in many categories, including overall guest satisfaction, Food quality and friendly service. In the Q3, guest satisfaction helped drive traffic each month compared to 2022.

Speaker 2

Moving on to development. The 3rd quarter was productive with 9 company store openings, including 2 Bubba's 33 locations. We also opened 4 franchise restaurants, including 3 international locations and our 1st Jagger's franchise restaurant. We expect to open as many as 12 additional company owned restaurants in the Q4, which would give us 27 Company owned Texas Roadhouse and Bubba's 33 openings as well as 3 Jaggers openings for the full year. Looking ahead to 2024, we have a strong pipeline of new stores and are targeting approximately 30 Company owned Texas Roadhouse and Bubba's 33 openings as well as 3 Jaggers.

Speaker 2

We also expect our franchise partners to open at least 9 international and domestic locations in 2024, including 4 Jaggers. Finally, I would like to address increasing external concerns regarding the health of the consumer and the ability of restaurants to navigate Uncertain economic times. Whether it is commodity inflation, mandated wage increases, student loan payments For other potential issues, the restaurant industry has always been full of challenges. However, We have seen the consumer has remained resilient in their desire to dine at restaurants, especially those like ours That offer a quality product with a high level of value, service and hospitality. Our position remains simple.

Speaker 2

We focus on what we can control, which is providing a legendary experience to each and every guest that visits our restaurant. We will never take for granted that guests give us 2 of their most valuable commodities, their time and their money. Now, Chris We'll provide some thoughts. Thanks, Jerry.

Speaker 3

Let me start by echoing Jerry's comments regarding Fall Tour. Still being relatively new, it was a great experience for me to meet so many of our operational leaders and listen to their feedback On how to make our company even more legendary. The more opportunities I get to spend time with our managing partners, the more I understand How critical they are to our success? Before Michael provides the detailed update on our Q3 financial results and go forward assumptions, I would like to offer some color on our results, menu pricing and our approach to capital allocation. We remain extremely pleased with our current top line trends as well as the strength and consistency we have seen on a multiyear basis.

Speaker 3

And with regard to profitability, our 3rd quarter comparable results were negatively impacted by several adjustments, which Michael will detail. Despite this noise, we were able to continue margin dollars or we were able to continue growing margin dollars per store week, while also maintaining year to date double digit EPS growth. At the beginning of the 4th quarter, We implemented a 2.7% menu price increase. This gives us an average 5.5% for the full quarter. As is typical for us, this pricing action is primarily meant to offset structural wage pressure, including the impact of upcoming state mandated wage increases.

Speaker 3

While costs remain elevated in the 3rd quarter, They continue to perform largely in line with our expectations. The rate of year over year wage inflation continues to moderate As we lap significant wage pressure from last year, at the same time, the sequential pace of wage increases has stabilized, resulting in an expected return to more normalized and manageable rates of increase in 2024. It's a similar story regarding commodities this year. Beef remains the primary driver of this year's inflation With pressure from the rest of the basket moderating or deflating as we have moved through the year. Inflation for the Q3 was slightly better On capital allocation, we will maintain our balanced and disciplined long term approach.

Speaker 3

While our pipeline of new store openings over Past several years, including 2023, has been heavily back end loaded. We now expect 2024 openings We'll be much more evenly distributed throughout the year. And going forward, it's our expectation that we will maintain a more balanced opening schedule. We will also continue to invest in our existing stores so that they can continue to grow and generate strong profits. Additionally, we will continue to pursue franchise acquisitions when those opportunities arise and ensure that we have a deliberate approach All of our capital allocation decisions are made through the lens of creating strong shareholder returns for our investors.

Speaker 3

We believe that the combination of organic growth and returning capital through dividends and repurchases will allow us to continue to deliver robust Shareholder returns as we have consistently done throughout our history. And now Michael will provide the financial update.

Speaker 1

Thanks, Chris. For the Q3 of 2023, revenue grew 12.9%, driven primarily by a 7.8% increase in average unit volume and 5.7% store week growth. Restaurant margin dollars grew 7.1 percent to $163,000,000 while earnings were $0.95 Per diluted share EPS growth of 2.6% for the quarter was significantly impacted by several adjustments In both the current and prior year, I will provide more detail on these adjustments in a moment. As mentioned, our Stores averaged nearly $139,000 in weekly sales in the 3rd quarter and to go represented approximately $17,000 Or 12.3 percent of these total weekly sales. We have now had 2 consecutive quarters of year over year growth in average weekly to go sales and believe there is an opportunity to further build upon this business going forward.

Speaker 1

For the Q3, comparable sales increased 8.2%, driven by 4.1% traffic growth and a 4.1% increase in average check. By month, comparable sales grew 10.7%, 7.8% and 6.6% for our July, August and September periods, respectively, And sales and traffic trends have remained strong into our Q4. For the 1st 4 weeks of Q4, Average weekly sales were over $141,000 driven by 9.2% same store sales growth, which includes a 3.4% traffic increase. Restaurant margin dollars in the 3rd quarter Increased to over $20,000 per store week and restaurant margin as a percentage of total sales decreased 80 basis points to 14.6 percent. The decline in the 3rd quarter margin percentage is primarily due to the approximately 70 basis point impact of adjustments to our general liability insurance reserves this year and last year, As well as an approximately 30 basis point impact from our gift card breakage adjustment declining from $6,600,000 Last year to $3,700,000 this year.

Speaker 1

Food and beverage costs as a percentage of total sales We're 34.6 percent for the 3rd quarter. This was 3 basis points better than last year as 4.2% commodity inflation Q4, we continue to expect full year commodity inflation to be at the higher end of our full year guidance range 5% to 6%. Looking ahead to next year, we are projecting commodity inflation of 5% to 6% with beef the primary driver. Labor as a percentage of total sales increased 51 basis points to 34% as compared to the Q3 of 2022. Labor dollars per Store Week increased 8.5%, primarily due to wage and other labor inflation of 5.6% And growth in hours of 3.3%.

Speaker 1

Labor growth benefited from the $1,300,000 impact remains unchanged at between 6% 7% with current trends continuing to point towards the midpoint of that range. For 2024, we are forecasting wage and other labor inflation of 4% to 5% with upcoming state mandated increases representing approximately 1% of the increase. Other operating costs were 15.2% of sales, which was 38 basis points higher than the Q3 of 2022. Included in the year over year change is an approximately 70 basis point negative impact from the aforementioned adjustments to our quarterly reserve for general liability insurance. These adjustments include $2,900,000 of additional expense this year and a $4,400,000 credit last year.

Speaker 1

Moving below restaurant margin, G and A dollars grew year over year by 11.4% and came in at 4.3% of revenue. The year over year increase includes the impact of lapping a $2,500,000 credit in 2022 related to last year's Managing Partner Conference. Our effective tax rate for the quarter was 11.9% And we now expect a full year 2023 income tax rate of approximately 13% And our initial forecast for the full year 2024 income tax rate is between 14% 15%. With regards to cash flow, we ended the 3rd quarter with $69,000,000 of cash. Cash flow from operations was $103,000,000 Which was more than offset by $89,000,000 of capital expenditures, dollars 37,000,000 of dividend payments And $12,000,000 of share repurchases.

Speaker 1

At this time, we are raising our full year 2023 Capital expenditure guidance to approximately $340,000,000 As Chris mentioned, this increase allows us to accelerate The timing of new store openings in 2024. We now expect to open approximately 15 restaurants in the first half of twenty twenty four On top of the 12 restaurants opening in the Q4 of 2023, this high level of construction activity We'll require a higher than previously planned capital expenditures during the Q4 of 2023. Additionally, we are establishing our initial 2024 capital expenditure guidance at between 340 And $350,000,000 This amount contemplates a continuation of a balanced opening pipeline going forward. Finally, as a reminder, 2024 will be a 53 week year for us. As such, the Q4 of 2024 We'll have 14 weeks versus our normal 13 weeks.

Speaker 1

We estimate that the additional week could benefit full year 2024 earnings per share growth by approximately 4%. Now, I will turn the call back over to Jerry for final comments.

Speaker 2

Thanks, Michael. Whether it's in our restaurants or at our support center, Texas Roadhouse's people first culture is second to none. I'm very proud to announce that we were recently named 1 of America's Greatest Workplaces by Newsweek. This award came with additional recognition in the following categories: Great Workplace for Women, Diversity and Job Starters. This recognition is a testament to the passion, partnership, integrity and fund that makes Texas Roadhouse such a legendary place To work and dine.

Speaker 2

I am proud to be a partner to all roadies as we continue to build for our future. That concludes our prepared remarks. Operator, please open the line for questions.

Operator

Thank Your first question comes from the line of Chris Courell with RBC Capital Markets. Your line is open.

Speaker 4

Hi. Thanks for taking the question and thanks for the initial 2024 outlook. My question is on the commodity outlook specifically for 2024. You expand a bit more on what you're seeing there? Maybe what's specifically driving the 5% to 6% inflation outlook, even as it looks like Inflation right now is currently running below those levels?

Speaker 4

Thanks.

Speaker 1

Yes. Hi, Chris, it's Michael. Thanks for the question. Yes. I mean, really, as I mentioned, the inflation for 2024 is all being pressured My beef and the rest of the basket is flat to deflationary.

Speaker 1

So beef is the driving force of our

Operator

Your next question comes from the line of David Palmer with Evercore. Your line is open.

Speaker 5

Thanks. Wanted to get your thoughts on how you're thinking about pricing in this environment. It's kind of a Mixed bag out there. A lot of people will be looking at the consumer environment and be cautious about pricing. But In the past, you've talked about your relative value proposition versus peers and looking at wage inflation, which As you've noted, it remains mid single digits into 2024.

Speaker 5

So what are the primary governors about how you're thinking about Pricing going into this type of environment?

Speaker 3

Hi, David. Go ahead, Jerry. David, it's Chris. I just was going to jump in and talk about the fact that we do have we're carrying this 5.5% Increase that I talked about earlier and then we do really want to focus on the core Wage pressures that are out there and those are mitigating. And so we'll be mindful of that, but there is Also this beef inflation that we have to consider as well.

Speaker 3

So our price increases though have typically been focused on the core keeping up with wages And that's likely how we'll focus in the future.

Speaker 5

Got it. And in the past, long term Rule of thumb has been that labor hour growth can be about 50% of traffic growth. Do you think at times it's not been like that, but Is that a good rule of thumb coming into this year? Or could you find a lot of companies coming out of COVID? There's been inefficiencies that have happened in terms of The number of workers and the amount of hours per worker is getting better now.

Speaker 5

And so with that efficiencies and whatnot, I'm wondering if you can find maybe another gear in terms of a labor efficiency beyond that rule of thumb.

Speaker 1

Hey, David, it's Michael. Yes, I think that's something we will be looking at going into next year. Obviously, this year, Labor hours are operating separately than our traffic growth. And I think going into next year, we may see I return to that normal algorithm that you referred to or we may also see that with people staying in their jobs longer That productivity improves and maybe there's an opportunity, as you said, to get some efficiencies in there and Maybe it doesn't grow at that 50% level. We've never been in this situation before coming out of a pandemic, coming out of a labor shortage Now to a staffing level that we feel very good with, with the growing traffic that we have.

Speaker 1

And So we'll just have to wait and see what happens, but I think we're optimistic.

Speaker 5

Thank you.

Operator

Your next question comes from the line of Andy Barish with Jefferies. Your line is open.

Speaker 6

Hey, guys. Just one quick follow-up and then a second one. On the beef side of things, do you have Anything contracted at this point or is it still too early given the some of the premiums out there?

Speaker 1

Yes. Hey, Andy, it's Michael. We do have some of our beef locked into 2024, Not surprisingly, not a huge amount of packers are nervous to get too far out there. We certainly have a lot of our Supply locked up, which we think is very important at this point. But as far as fixed price contracts, We do have some.

Speaker 1

I'm not going to get into the specifics. They are for competitive reasons. But our purchasing department Has done a great job where appropriate to lock in prices while also making sure we have the supply. Got it. And then just in terms of thinking about 24

Speaker 6

and some of the drivers other than obviously the things you guys do really well And then, on the tech implementation in terms of Roadhouse Pay, is there something there that you can get More out of or is it really kind of getting you a faster table turn, which is enough to help drive more traffic through the restaurants? Hey, Andy, it's Jerry.

Speaker 2

Yes, I think all of those are factors in our continued growth on the revenue side. Bump offs, we continue to look at. Investments in our current and existing buildings to be able to with expansions and different things, driving our to go business and continuing to focus on That ease of pickup has always been a factor as we continue to get better at it. So I think all of those factors getting Speed at the host stand and getting our table turns and like you said, all of that stuff, we just got to keep hustling to drive those top line sales and

Operator

Question comes from the line of Gregory Francfort with Guggenheim. Your line is open.

Speaker 7

Hey, thanks. I had two questions. The first was just, I know it gets talked a lot, but just this question of getting back to 17% margins and something in that range. I think over the last 4 years, your development costs were maybe 25%. Your AUVs are up 40%.

Speaker 7

Do you want to do you target a margin percentage or do you target a return? I mean, I guess, I would think that you could get to similar returns on lower margins. And I'm just wondering how you're thinking about that. Thanks.

Speaker 1

Yes. Hey, Greg, it's Michael. Yes, you are right. Our investment costs have gone up and as have Our sales both on from a pricing standpoint and number of guests served, so we do target a mid teen IRR when we're looking at new stores and we are still achieving and really Beating that goal on our openings even with the higher investment costs and with the Where margins and where profitability is today. So we feel very good about our opening pipeline.

Speaker 1

We wouldn't just be opening restaurants The sake of opening them, we want to make sure they're doing high volumes and continue to generate great return on investment for us.

Speaker 7

And the goal of getting back to 17 plus on the margin side, how important is it to show some Traction on that over the next 12 to 18 months, do you guys view that as an important component of the story?

Speaker 2

Yes. I mean, we've been talking about that Absolutely, if beef turns and helps us out, that will be a huge piece of it as we continue to protect those Top line sales and target that move in that direction. We need a little bit of help on the beef side, but I think from our sales and all the other controllables that we have in place,

Operator

Your next question comes from the line of Jeff Farmer with Gordon Haskett. Your line is open. Hi, Jeff.

Speaker 8

Thank you. Just a quick clarification and a question. First up on the clarification, I think you said you're running with roughly 5.5% menu pricing in Q4. But what would pricing be in Q1 and Q2 with no additional price increases?

Speaker 1

Yes. Hey, Jeff, it's Michael. Yes, Q1 will be 4.8%, Q2 and Q3 will be 2.7%. Okay.

Speaker 8

That's helpful. And then bigger picture question, the main question here is that you shared with us Your thoughts on the casual dining consumer on last call, sort of some of the pushes and pulls you were seeing in terms of average check and maybe some trade down from Other concepts into the Roadhouse concept, but what is your updated thinking on the casual dining consumer Demand backdrop, what have you seen in terms of either check management at Roadhouse or potentially customers from other concepts Trading down to a better price value at Texas Roadhouse?

Speaker 2

Yes. I'll tell you we're very happy with Our sales and the traffic and the sales overall, so we feel like we're very well positioned if we continue to deliver on our food promise And our service and hospitality that we're winning that fight. Our food tastes great. I think the consumer is telling us that they want our food from what we can see from our traffic. It hasn't slowed down for us technically if you look at the rest of the industry.

Speaker 2

So we believe that the consumer is telling us to keep doing what we're doing. We just need to be able to serve more of them all week long. And so that's exciting good news for us. And We have people that trade down and we I actually believe that we have a lot of people that trade up from that hospitality side of the business. So We're positioned very well to continue to maintain those sales.

Speaker 1

Hi, Jeff. It's Michael. From a mix standpoint, we actually probably saw a little bit of sequential improvement From Q2 to Q3, we had about a full percentage point of negative mix in Q3 versus about 1.2% Thank you, too. Most of that negative mix, the majority of it is still coming from the alcohol category, probably think that will be with us through the end of the year.

Speaker 5

All right. Thank you.

Operator

Your next question comes from the line of Chris O'Cull with Stifel. Your line is open.

Speaker 9

Thanks. Good afternoon, guys. My question is about the trade off between traffic and profitability. And I understand that there were some one time costs this But the current flow through rate, I guess, has been lower than prior years and the price increase, I think, you guys took in October here seems like it's at a level That will probably have a minimal impact on traffic, but also not really provide the margin benefit to get back to that historic level. So I'm just wondering, Jerry, if there Has been a debate internally or consideration for kind of raising prices more or sacrificing some traffic growth because it would seem The flow the low flow through rate would also be frustrating for operators who appear to be working harder for us.

Speaker 2

Yes. I mean, that's a great question. We do internally think about that. The protection of the top line is always a key component. It's a little more expensive to do business.

Speaker 2

Again, we do believe at some point the deflation maybe someday will help us in that direction. I want to be careful. I want us to be seen as a value concept as always as we fight for that segment. But I think overall, It is always on our mind and a conversation of how can we be more efficient, how can we be more effective on that profitability side, but we have to do right

Operator

Your next question comes from the line of Jeff Bernstein with Barclays. Your line is open.

Speaker 10

Thanks. This is Praful on for Jeff. Just wanted to pivot to Bubba's. Jerry, how would you assess the current status of the brand? And How do you think about the growth in the future?

Speaker 10

Is there confidence internally about accelerating? And if Bubbles is perhaps Not the second concept in your portfolio, would you ever consider M and A for future growth? Thanks.

Speaker 2

Well, we're definitely excited about Bubba's future and we are absolutely committed to its growth. We do view it as our 2nd brand. We have the right operators. I've done a lot of work in the last 24 months to put The head of a concept and supporting people around that leader, we just added our 1st regional partner to the team. We're very excited about what we're doing on the food and the service environment and the leadership.

Speaker 2

So we are definitely Committed to Bubba's, the sales are continuing to show through. It is producing the revenue that we're looking for and We know it has the ability to turn the profit that we want. So yes, we're very excited about the Bubba's concept. And The other question I really can't answer at this time. We're focused on our brands and we'll see what happens in the future.

Speaker 10

Appreciate the color. Thanks so much.

Speaker 5

Thank you.

Operator

Your next question comes from the line of Andrew Drelzik with BMO Capital Markets. Your line is open.

Speaker 3

Hey, good afternoon. Thanks for taking the questions. I guess my question is, I was hoping you could talk a little bit more about the broader unit growth environment. It's certainly encouraging to see you accelerate The development pipeline into next year, but in terms of things like supply chain and delays and permitting and build costs, could you give us

Speaker 2

The supply chain is continuing to stabilize, I would say, overall. From that, the permitting, we've kind of learned and adjusted Our timelines to how it takes it and part of the plan to spread it out through the year helps us With that, and it's taken a significant effort to get to where we can open more restaurants all throughout the year versus Kind of jammed up in the beginning and the end. So yes, there's been some planning around that. But overall, we've got a real strong pipeline for 24 and into 25 and we're continuing to look beyond that. And we're excited about if we look at what we're doing right now and what we've got On the books for over a 12 month period, it's very exciting.

Speaker 11

Great. Thanks a lot. Thank you.

Operator

Your next question comes from the line of Joshua Long with Stephens. Your line is open.

Speaker 12

Great. Thank you for taking the questions. Jerry, when thinking about the unit development environment, I imagine that it's nice to hear that the supply chain side is starting to normalize or continuing to normalize rather. But you talk about some of the friction points that you are seeing? Is that still on the permitting side?

Speaker 12

Is it equipment? Just anything else that you could share in terms of just Yes. What drives the ebbs and flows of unit development as you think about what is otherwise a relatively strong pipeline going out into the out years for your brand?

Speaker 2

I mean, I think we're doing good. The trades maybe, again, just working out the timeline of what's happened in the last couple of years. And I think we've done a really good job to get projects lined up and now we know a little bit better of the timeline to get the trade set up to get the jobs going and done. So A lot of work there. I feel very comfortable.

Speaker 2

There are a few things that get a little bit tight on some of the parts. Some of the bigger equipment ice machines, things like that, we get a little bit Concerned about, but I think right now we've got enough inventory to accomplish all of that. Even our mill works, which is our furniture It can be a little tight at sometimes with this many openings. So we've been working really hard with our vendor partners to make sure we have the materials and the equipment And the trades to do the job to get these stores open and obviously maintain our existing buildings. We've definitely seen Some service challenges and even parts, but I think we're working through that.

Speaker 2

Like I said, maybe sometimes we have to buy a little more equipment and repair, but Whatever we got to do to make sure the operators can get their businesses open or we have options and we try to execute it at every level on whatever we need.

Speaker 13

Thank you.

Speaker 11

Thank you.

Operator

Your next question comes from the line of Sara Senatore with Bank of America. Your line is open.

Speaker 14

Great. Thank you. And I know we spent a lot of time talking about margins, but I do have a few just two follow ups. The first is on You mentioned, your purchasing department doing really well with locking in prices. Could you give a little more color like what that was?

Speaker 14

I know beef is Typically harder to lock in. Were the benefits from some of the other commodities in your basket? And then, the second question is, could you just talk a little bit about the margin structure for off premise or to go versus dine in? It looks like your mix of to go was pretty stable year over year. And I think part of what has Maybe upward pressure on labor hours has been shifting back to more dine in.

Speaker 14

But to the extent that that wasn't the case, Is there anything you can kind of talk to about what a stable mix might mean going forward in terms of labor hours or, just margin structure overall?

Speaker 1

Sarah, it's Michael. I can touch on those. So certainly from a Purchasing standpoint, it's largely around beef, but it is everything. It's Knowing when to lock in and knowing when to be buying on a formula basis and What weeks to maybe go a little bit heavier into the buying, so just the fact that they have their fingers on the pulse of what's going on there and Doing everything they can to time that as best they can with the knowledge of how busy we are and making sure that the supply is there 1st and foremost, but that goes for all items in the basket and just having those long term relationships with our vendors, Treating them right, being good partners with them through COVID really pays off now when it comes to making sure we have what we need Going forward, and as far as margins in the restaurant dine in versus to go, I can take the expenses and allocate them to different areas and give you different answers. The easiest way to go about that is, If I look at a Texas Roadhouse with a busy dining room and look at it with to go levels pre COVID or today's Higher volumes, the margin dollars, it's a no brainer, are much higher and then the margin percentage It's slightly higher.

Speaker 1

So we did a benefit from a margin percent to have these higher to go volumes. You're getting leverage in different areas. You are right that as we see more of our traffic Over the last year shifting back into the dining room, there is a labor component to that and where you have to be You have a staff to serve those guests. And so that also plays into what labor may look like going forward. If we grow To go more than dine in, maybe you don't need as much labor as you would to So those are the things that we again, we look at and every restaurant is going to be a little bit different as far as What opportunities they have and the impact of growth on them.

Speaker 14

Thank you so much.

Operator

Your next question comes from the line of Dennis Geiger with UBS. Your line is open.

Speaker 15

Great. Thank you. Recognizing it may be early here, but curious if you could comment at all on 24 restaurant margins directionally at least Relative to 'twenty three, I know you shared some of those comments as we've gone through the year for this year. So curious if any comments there or even specifically The COGS piece in 2024, thinking about that relative to 2023, anything to help sort of level set us at this point? Thank you.

Speaker 1

Yes. Hey, Dennis, it's Michael. It's a hard one to fully answer. There's a lot of things at play. What side of the ranges on our Inflationary guidance is that where we might land and what type of pricing we take.

Speaker 1

But if you want to take an assumption of moderate pricing Going along with what we already have in a positive macro environment, I think the math would play out For some opportunity for overall leverage in restaurant margin percent and the dollars continuing Should grow certainly, but the percent moving in the right direction and whether that's every line or We shall state again going back to what level, where are those inflationary ranges we might fall.

Speaker 15

Appreciate the color. Thanks, Michael.

Operator

Your next question comes from the line of Brian Harbour with Morgan Stanley. Your line is open.

Speaker 16

Yes. Thank you. Maybe just to follow-up And that also, as you think about G and A next year, you probably don't have a budget yet, but any should we expect kind of normal in that line, any kind of special projects you think will add to that or just any high level comments on that part?

Speaker 1

Yes, Brian, it's Michael. Yes, you are right. That's still that's a process that we continue to go through of setting those G and A budgets for the year. But I do think it's a continuation of our normal plan of wanting those G and A dollars to grow at a lesser Our revenue is growing and so you continue to get a little bit of leverage on that G and A as a percent of revenue, maybe Not a dramatic change. We've obviously seen a G and A percentage come down quite a bit and that could continue in the 24 as well.

Speaker 16

Okay, great. The commodity inflation outlook you laid out for next year, how Would you characterize that as conservative at this stage? How much do you think you have visibility on, especially the beef side? I realize the kind of the wildcard in the beef market is just demand and how that plays out, but how would Characterize your visibility relative to maybe prior years?

Speaker 1

Yes. I mean, I think we're taking a middle of the road, conservative look at it or realistic look at what is going on. I think certainly, Again, our beef experts are giving us their best thoughts on where things will be. But you're right, there are a lot of puts and takes They can move things where retail demand comes in. I think it's very much clear that supply is moving Down, we'll just see where the demand goes.

Speaker 1

So there is a lot that can move around, but we've given you our best realistic thoughts at this time.

Speaker 7

Okay. Thank you.

Operator

Your next question comes from the line of Jon Tower with Citi. Your line is open. Mr. Tower, your line is now open. Your next question comes from the line of Brian Vaccaro with Raymond James.

Operator

Your line is open.

Speaker 2

Thanks. Good evening. Just back to the sales performance, you obviously mentioned The strong comps and they've moderated through the quarter, but then they picked up pretty nicely in October. Just curious, is there anything to glean from your data That could shed light on what's driving that improvement, any outside strength, weekend, weekday or regional Or any changes in consumer behavior you might be picking up?

Speaker 1

Yes, Brian, it's Michael. I'll tell you, when I look at The data for the Q3 and in October, it is very consistent whether I look at it by region of the country, day of the week, Hours within the day, older stores, newer stores, high volume, average stores, it was very consistent As it has been for a while. So that makes us feel very good about the trends that we're seeing right now. We continue to do what we do and the guests continue to reward us for that.

Speaker 2

Okay. And then just a quick follow-up if I could on technology. And I wanted to ask about Roadie Pay in particular. I guess how much time is that trimming off the typical transaction? And have you seen any quantifiable impact in Table turns or throughput that you might be able to share?

Speaker 2

Yes, I will tell you that we're system wide. It's a big win for the consumer. We believe it's hard to quantify the exact amount whether it's a minute or 2 or that. I think Some people when they're ready to pay, I mean that option being right there on the table, we believe absolutely that it is a quicker way of going. So I believe that it's been positive for us.

Speaker 2

It's been very good feedback, not only from our restaurants and our servers, but from the consumer. So Yes, that was a really big win, but I do believe it does make us faster. All right. I'll pass it along. Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Jon Tower with Citi. Your line is now open.

Speaker 17

Hey, just one quick one. Can you clarify or I think I have the pricing waterfall

Speaker 1

In the Q3 of 2023.

Speaker 17

And then, thinking about price into 2024, Is there a way to kind of put guardrails around the earliest that we might see some additional pricing coming through?

Speaker 1

We typically take pricing in early part of the second quarter and the early part of The Q4, so I would imagine we will stay true to what we have done in the past years and stay with that schedule.

Speaker 14

Great. Thank you. That's all for me.

Operator

Your next question comes from the line of Drew North with Baird. Your line is now open.

Speaker 18

Thanks. I had a follow-up question on one that was asked earlier related to the 2024 margin outlook. Thank you for the perspective on pricing and I recognize the uncertainty on where you may land in the various inflation ranges. But I guess is there a breakeven level on Traffic in the positive macro scenario you mentioned that you're thinking about to hold or expand margins next year. I know you're often focused on growing the margin dollars per week, but how are you thinking about the margin percentage on a year over year basis in that positive macro scenario

Speaker 1

Drew, it's Michael. I mean that is Unfortunately, a very tough one, one really you can't answer because again, there's just too many moving parts. The level of traffic versus the level of pricing That you need to grow margins and how much you're growing margins. So certainly traffic Always helps, but the pricing flow through, whatever additional pricing we take, plays in a lot. I don't think you need I think, along with everything else, modest traffic, along with modest pricing, middle of the road guidance should lead, the math should Play out to show you restaurant margin expansion on a percentage basis into 24.

Speaker 18

Okay. That's helpful. And then one more from me. Just looking out to 2024 and beyond, do you see opportunity to push that 30 gross openings range higher and maintain a kind of store regrowth in that 6% level for the next several years or How should we be thinking about that? I'm just trying to frame up the opportunity to push the number of openings higher

Speaker 2

We are going to stay focused on building the right number for us. I think we target that high 20s to low 30s On the two concepts of Roadhouse and Bubba's, that works very well for us and we can efficiently do that not only for our operators, but just the execution For the guests that are coming in at the beginning, but yes, we feel good about the pipeline. We'll stay very true to that same number for the two concepts And target that as we continue to move forward.

Speaker 11

Thank you. Thank you.

Operator

Your next question comes from the line of Jim Sanderson with Northcoast Research. Your line is open.

Speaker 13

Hello. Thanks for the question. I wanted to focus a little bit more on the issue of mix. I think you reported a little bit of progress on mix from 2nd to 3rd quarter. Seems to me that your mix could be flattish or almost positive in October.

Speaker 13

Is that the right way to look at it Based on the pricing and comp you reported in October?

Speaker 1

Now With the comp so our pricing while we have we're going to have 5.5% pricing for the 4th quarter. Our pricing action this year occurred 3 weeks earlier than it did last year. So we had 6.9% pricing in the 1st 3 weeks of the quarter and we'll have 4.9% pricing in the last 10 weeks Of the quarter. So while mix probably still is moving in the right direction, it wasn't that different than what you were seeing The last several months.

Speaker 13

Very good. And just a follow-up question on the pricing you took. Any feedback on how your competitors either reacted or was this You're reacting to potentially peers in the steakhouse category already having taken their prices up. Just a little bit of texture on the competitive context.

Speaker 1

Yes, Jim, I can't tell you necessarily what our competitors Have done in reaction to it. I mean, we have our pricing conversations several months before we actually take The pricing, it's a process you have to go through and we certainly evaluate the health of our business, how Our stores are doing and where we're priced relative to some of our peers. So we take those things Into account when we're doing it, but as far as others reaction to that, that I don't know.

Speaker 13

All right. I'll pass it on. Thank you very much.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Lauren Silverman with Deutsche Bank. Your line is open. Thank you very much. I just had to clarify on the October trends. To what extent did you benefit from price Taking being taken earlier this year, is it about the 200 basis points just as we think about underlying trends and extrapolate it?

Speaker 1

I mean, I think that's certainly, we got the benefit of that pricing for 3 more So instead of having where we'll have 4.9% the rest of the quarter, Yes. So there's a 60 basis point benefit on our overall pricing for the quarter.

Operator

Okay. And it looks like CompareZE through the quarter with December the easiest lap year over year. Is there anything we should consider in terms of cadence in the 4th quarter as we think about the lap?

Speaker 1

Yes. I mean nothing too much to really point out. We did talk about last year that Late in December of our December period last year, there was that cold weather that impacted much of the U. S. And That caused things to slow down.

Speaker 1

So depending upon what happens this year, that could be an opportunity For us and there is also maybe a slight benefit coming at the end of the year from Christmas moving from Saturday, Sunday to Sunday, Monday, you could get a little bit of a benefit of that. In December, it shouldn't be A huge benefit, but it is a positive.

Operator

Okay, great. And then just another follow-up on the restaurant margin expectation for 20 It sounds like the base case, all else equal, is for margin expansion in 2024. Can you just talk a little bit more about the puts and takes Across the P and L, it just says 5% to 6% commodity inflation, where are you seeing the opportunity for leverage?

Speaker 1

Again, I think it goes to when you talk about the level of pricing we have and Guiding to 4% to 5% wage inflation and maybe hours don't Grows dramatically, maybe there's some opportunity in labor and then the other operating, I think always again, you get some benefit From that menu pricing in an environment where a lot of those costs in there are service based costs and it seems like a lot of those have Plate towed and so you can get some leverage there as well. So labor and then rent always Seems to give us a little bit of leverage as well. So pretty much in all areas, I think that cost of sales is a little bit of the X factor.

Operator

Great. Thank you so much. Your next question comes from the line of Jake Bartlett with Truist. Your line is open.

Speaker 19

Hello. Thank you so much for taking the question. Mine was about your labor and your approach to labor. And this builds on, I think, an earlier question as well about your focus on Traffic over efficiencies and driving margins. But labor for operating week has been growing a little bit less than traffic, but still growing really strong.

Speaker 19

Is there a point where you feel like you're going Caught up, have the staffing levels that you need, so that you can get more leverage, maybe Leverage the incremental sales a little bit more going forward. Should we think of the labor performance Over the last year and we've been 2 years as being more of a catch up on the number of people in the stores and we should get more labor Leverage going forward.

Speaker 3

Yes, I think this is Chris. I do think that Michael's kind of addressed that a couple of times that we think there's an And our turnover is down. It's to pre pandemic levels and so we feel good about that. We're staffing up. We have the right staff levels and we should be able to get some opportunity there.

Speaker 19

Okay. And then as I look at your inflation, your guidance for 24%, 4% to 5%, I try to marry that with the Certain macro background and maybe even I'm sorry I jumped on the call a little bit late, but does that imply it seems to me it would imply a pretty Strong macro environment in 2024, is that kind of how you're thinking about, I mean, what's the kind of the macro backdrop that you're kind of Presenting this guidance from?

Speaker 3

This is Chris again. I think Jerry spoke to that just In his comments, so you may have missed that. But basically, yes, we're not calling for a recession. We're not seeing anything like that in the future. This would be a rather benign situation and people are still coming out in spite of whatever has been in front of The consumer has come out and enjoyed our food and our experience and we're expecting that to continue.

Speaker 3

And Michael, you may have some color.

Speaker 1

Yes, Jake, this is Michael. We did say 1% of that is state mandated increases, but also keep in mind any wage increases that have occurred That occurred throughout 2023, we do have to lap those for a full 12 months. You do feel an impact in the next year in 2024 from Things that you've done this year. So maybe the rate of sequential growth continues to decline in wage rates, but you So feel raises that you're giving today for the next 12 months.

Speaker 19

Okay. And last Question and I'm sorry if it was answered, my first two were. But it really is more about early 2024. And as we think about It compares and I think investors are trying to kind of figure out the impact of 1 year versus looking for over longer time periods to get an underlying trend. But obviously, the first half of twenty twenty three was very strong, specifically the Q1 boosted by lapping Omicron.

Speaker 19

But in terms of how you view early 2024 lapping what was going on in early 2023, Do you view that as a difficult compare or not? I guess there's some kind of concern that Claims could be much lower than expected in the Q1 just because of what you're lapping against?

Speaker 1

Yes, Jake, again, that is a hard one to fully answer. I mean, our operators are going to take the mindset of continuing to serve more guests. They're going to be well staffed. They're going to have the product they need to serve their guests and we will do everything we can to continue To grow, that's the mindset we go into any year with and we will see what happens As that happens. And we're getting store weeks too from the stores that

Speaker 3

are opening in the Q4 and then we talked about a number of stores opening in the Q1.

Speaker 19

Great. Thank you so

Speaker 11

much. Thank you.

Operator

This concludes our Q and A session for today. I would like to turn the call back to Jerry Morgan.

Speaker 2

Thank you all for joining us tonight. We appreciate your time and have a great evening.

Operator

This concludes today's conference call. Thank you for attending. You may now disconnect.

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Earnings Conference Call
Texas Roadhouse Q3 2023
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