Texas Roadhouse Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 19 speakers on the call.

Operator

Evening, and welcome to the Texas Roadhouse Second 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 Balan, Head of Investor Relations for Texas Roadhouse.

Operator

You may begin.

Speaker 1

Thank you, Emma, and good evening. By now, you should have access to our earnings release 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. 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.

Speaker 1

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 newly appointed Chief Financial Officer. Following the prepared remarks, we will be available to answer your questions. Now, I'd like to turn the call over to Jerry.

Speaker 2

Thanks, Michael, and good evening, everyone. Before we begin our formal remarks, I want to welcome Chris Monroe to Texas Roadhouse. I am thrilled to have Chris join the Texas Roadhouse family, And I look forward to working closely with him to make us bigger, faster and stronger. I am confident That Chris is going to add value to our leadership team, our finance department and our company. I also want to thank Keith Humpik and our amazing financial team for stepping up and ensuring that we did not miss a beat over the last 6 months.

Speaker 2

Moving on to our quarterly results. We are pleased with our strong sales and profits growth in the 2nd quarter. Our sales momentum carried over from the Q1 as we averaged nearly $147,000 in weekly sales With comparable sales up over 9%. There is no doubt that our guests continue to support our commitment to serving Made from scratch food in a fun and friendly atmosphere. On the cost side, commodities have performed largely in line with our expectations and beef remains the primary driver of inflation.

Speaker 2

On the labor front, we remain committed to ensuring we are properly staffed to provide a legendary experience for every guest. We are encouraged by our outlook for the remainder of the year as we continue to expect strong margin dollar growth, which is central to how we run our business. We will soon begin the normal process with our operators To determine the level of menu pricing to take in October, as is typical for us, Our pricing decisions will focus on maintaining our value proposition, while also looking to offset the impact of wage inflation, including any state mandated wage increases. On the development front, we opened 2 company owned Texas Roadhouses and 1 Bubba's 33 during the Q2. In addition, our franchise partners opened 3 restaurants, including 2 international locations.

Speaker 2

For the full year, we expect to open as many as 28 company owned Texas Roadhouse and Bubba's 33 restaurants as well as 3 Jaggers. At this time, all remaining restaurants in the Class of 2023 are under construction. Lastly, we expect our franchise partners to open as many as 13 international and domestic restaurants, including 3 Jaggers. Last week, I attended the opening of our first Jaggers franchise restaurant in Jacksonville, North Carolina. It was great to see the passion that our franchise partner has for the brand, and we look forward to seeing How they will build upon our foundation.

Speaker 2

Finally, we continue to reinvest in the business through our new store pipeline, Maintenance of our existing restaurant base and technology initiatives. We believe our capital investments We'll enable future growth and contribute to improved operating results. With a healthy balance sheet And an expectation of continued growth in cash flow, we will continue to focus on long term sustainable growth, Which has enabled us to generate consistent total returns for our shareholders throughout our history. So Chris, you have been on the team for a month, mostly training in our restaurants. Can you share your initial thoughts On what you have experienced?

Speaker 2

Thanks, Jerry.

Speaker 3

I couldn't be more excited about joining the company and the opportunities ahead of us. I have been well aware of and impressed by the Texas Roadhouse leadership team and the brand for quite some time. As Jerry mentioned, most of my time so far has been spent in a restaurant learning about our operations. After working alongside several of my fellow roadies And witnessing firsthand the commitment and discipline it takes to deliver on the promise of legendary food and legendary service, I now have an even greater appreciation for the brand and the passion of our people. I'm looking forward to bringing my And now, Michael will provide the financial update.

Speaker 1

Thanks, Chris. For the Q2 of 2023, revenue grew 14.3% driven by an 8.7% increase in average unit volume and 5.6% store week growth. Restaurant margin dollars grew 8.3 percent to $182,800,000 while earnings per share increased 14.7 percent to $1.22 per diluted share. As Jerry mentioned, our stores averaged nearly 147 dollars in weekly sales in the 2nd quarter and to go represented approximately $18,500 or 12.6 percent of the total weekly sales. The to go sales were especially encouraging given this was the 1st quarter Since the reopening of our dining rooms that average weekly to go sales dollars increased on a year over year basis.

Speaker 1

Comparable sales increased 9.1% in the 2nd quarter, driven by 4.7% traffic growth And a 4.4% increase in average check. By month, comparable sales grew 8.7%, 8.8% and 9.7% for our April, May and June periods respectively. And for the 1st 4 weeks of the Q3, weekly sales averaged over $140,000 With comparable sales up 10.7 percent, I will point out that the 4 week comp number benefited by approximately 1.4% from the timing of the July 4th holiday. For the Q2, restaurant margin dollars Increased to nearly $23,000 per store week. Restaurant margin as a percentage of total sales Decreased 88 basis points to 15.7%.

Speaker 1

2nd quarter margins were negatively impacted by approximately 35 basis points from one time adjustments, most of which I will detail in a moment. Food and beverage costs as a percentage of total sales were 34.5% for the 2nd quarter. This was 37 basis points higher than 2022 driven by 6% commodity inflation. Overall, commodity costs were in line with our expectations for the first half of the year. With approximately 75% of the overall basket locked for Q3 and approximately 35% locked for Q4, We now expect full year commodity inflation to be on the higher end of our full year guidance range of 5% to 6%.

Speaker 1

Labor as a percentage of total sales increased 90 basis points to 33.6% As compared to the Q2 of 2022, labor dollars per store week increased 11.3%, primarily due to wage and other labor inflation of 7% and growth in hours of 3.5%. Labor growth was also negatively impacted by the $2,700,000 net impact of unfavorable claims experience related to group insurance and workers' comp. This net impact includes $1,800,000 of additional claims expense this year and the overlapping of a $800,000 Favorable adjustment in the prior year. Similar to commodities, we expect the level of labor inflation to moderate as we move through the year. That said, we have seen marginally more wage pressure in the first half of the year than we originally contemplated.

Speaker 1

As such, we have updated our full year 2023 guidance for wage and other labor inflation to between 6% 7% with current trends pointing towards the midpoint of that range. Other operating costs were 14.7 percent of sales, which was 29 basis points lower as compared to the Q2 of 2022. The year over year benefit of sales leverage Was partially offset by the negative impact of a $1,600,000 adjustment to our quarterly reserve for general liability insurance. Moving below restaurant margin, G and A dollars grew year over year by 3.6% and came in at 4.4% of revenue. The primary driver of the $1,800,000 year over year increase was higher compensation expense.

Speaker 1

Our effective tax rate for the quarter was 12.7 percent and we now expect a full year 2023 income tax rate of between 13% 14%. Lastly, with regards to cash flow, we ended the 2nd quarter with $107,000,000 of cash. Cash flow from operations was $99,000,000 This was more than offset by $88,000,000 of capital expenditures, $37,000,000 of dividend payments $23,000,000 of share repurchases. We are increasing our expectation For full year 2023 capital expenditures to approximately $300,000,000 This increase is driven by several factors, including the cost of new locations currently under construction and a higher than originally forecasted Reinvestment at existing restaurants. Now I will turn the call back over to Jerry for final comments.

Speaker 2

Thanks, Michael. In a few months, we will start our annual fall tour, which is one of my favorite times each year. During the 6 week tour, our senior leadership team visits with every managing partner to gather feedback And to hear what is top of mind for them. This is a great opportunity for us to listen and learn how we can better serve and support Our managing partners, I have no doubt that our operators will have some ideas to drive our business forward and enable us That concludes our prepared remarks. Operator,

Operator

Your first question comes from the line of Brian Bittner with Oppenheimer. Your line is open. Mr. Bittner, your line is open.

Speaker 4

Sorry, can you hear me?

Speaker 5

Yes. Hello?

Speaker 4

Sorry about that guys. I wanted to ask a question about your sales trends. Your Q3 is obviously off to a fabulous start. Your headline Same store sales up over 10%. When we look back to last year, your comparisons got a lot more difficult in August September versus July by Around 700 basis points and the question is should we take that into account when modeling the rest of the quarter?

Speaker 4

I just I want to get us all on the same page or should we focus on the fact that your average weekly sales are in that $140,000 range, which if we carry that forward, That suggests a continuation of very strong headline comps for the rest of the quarter.

Speaker 1

Yes. Hi, Brian. It's Michael. Thanks for the question. I do think, I mean, you are correct that our Year over year trends did pick up.

Speaker 1

So I but I do think the more important thing is to look at where we're currently trending This year and how normal seasonality plays out year over year. So I think we are Lined up for continued strong sales growth and but I will leave it to you all and others to determine what those comp percents You might be, but I do think we would think well seasonality is back in our business.

Speaker 4

Okay. I'll stick to one question. Thanks.

Operator

Your next question comes from the line of David Tarantino with Baird. Your line is open.

Speaker 6

Hi, good afternoon. Congratulations on the sales strength. My Question relates to the margin outlook. As you think about the second half of the year given the inflation outlook you just shared, I guess, what's your thoughts on your ability to grow restaurant margin percentage? I know you mentioned You're set up to grow the margin dollars per week, but I guess how are you thinking about the percentage on a year over year basis When you think about the next few quarters?

Speaker 1

Hey, David, it's Michael. I don't think our the way we're looking at it has changed much With the guidance that we have out there, on the cost of sales side, it would imply that our Commodity inflation would be at the lower end of our 5% to 6% range in Q3 and then below The low end of the range in Q4 and with the pricing that we have, that would probably imply That cost of sales is for the most part fairly flat in Q3 and we should be able to get some leverage in the Q4. That's what the math would say. Rent and other operating, I would expect under the current trends that we see more of the same of what we saw in Q1 and Q2 of Being able to get some leverage on that line and labor is probably that one that still remains a headwind for us. We'll leave that to you again, you all for modeling purposes, but certainly Q3 would could see that as a headwind and And then maybe flattening out in the Q4, so really that leaves a lot of the potential Restaurant margin expansion for Q4, that's what our guidance would imply.

Speaker 6

Got it. And then I guess I wanted to revisit as a follow-up. You've talked about 17% to 10% is a long term target. Clearly, this year, it looks like you're going to be well below that. I guess, what's your updated Thoughts on how you get to 17% to 18%, is it just a matter of the commodity cycle needing to go your way or is there some Strategy or initiatives you have that are going to get you there regardless of the commodity cycle?

Speaker 2

Well, I mean, the commodity cycle is going to continue to be our challenge. We're going to continue to focus on attacking the top line sales And growing the restaurant margin dollars and then we will continue to see what we need to do to try to get back there. We knew it was going to take a little time for us to accomplish that, But we are and as we adjust to the labor and to the commodity, knowing that or expecting one day that the beef will Start to slow down a little bit and give us a chance to catch up, but we really do believe that that is a spot we can achieve. We're just Waiting for a few things to turn our way to help us there.

Speaker 7

Great. Thank you very much.

Speaker 2

Thank you. Appreciate the shout out too.

Operator

Your next question comes from the line of Peter Saleh with BTIG. Your line is open.

Speaker 8

Great. Thanks and congrats Chris on the new role. I just wanted to ask on the consumer overall. I think in the past, maybe quarter or 2, you were talking about seeing trade up Into your brand or maybe even some trade down. Can you give us a little bit of color on what you're seeing today?

Speaker 8

Is there any change in behavior on the menu? What are you seeing on the value entree mix? Does that continue to tick up? Any thoughts there would be helpful.

Speaker 1

Yes, it's Michael. I'd say it's really been a lot of the same of what we've seen. I mean, continue to see strong consumer demand to come to Texas Roadhouse. The mix kind of trends have continued where we're seeing some alcohol negative mix and The rest is coming from the entree category and with the strong guest counts that we're seeing, It would appear to us that we are seeing people trading into Texas Roadhouse, but the value side of the menu, there could be certainly some people are doing some check management as well and are trading down our menu, but we feel very good about the value proposition that we're offering And continue to see very strong trends within our restaurants.

Speaker 8

Great. And then just on the labor side, I know it's a modest increase in your outlook in terms of inflation for the year. Can Can you just elaborate a little bit on what changed versus your prior guidance? What are you seeing on the field that made you feel like you need to take it up just slightly?

Speaker 1

Yes, it is a combination of the wage inflation maybe just being a little bit stronger in the To that overall wage pressure and then the strong top line that we have Delivered, certainly has seen us growing our hours, Which isn't a direct component of the wage and other information, but the payroll taxes that didn't come with the higher wages and the more hours Are the other component of that wage and other and we've seen that tick up a little bit. So those two things combined just moved enough that where we felt

Operator

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

Speaker 5

Great. Thanks. Hey, guys. This is Patrick on for Chris. Jerry, I believe the company has historically targeted labor hour growth that's Roughly 50% to 55 percent of traffic growth and it looks like this quarter remained quite a bit above that.

Speaker 5

So I'm just curious if you're looking at ways to

Speaker 2

Yes. Thanks, Patrick. I believe that obviously as we focus on our top line sales And Michael and I, we're doing some reviewing. There are definitely an uptick in hours in the front of the house and the back of the house. And I believe some of the hours that we might be seeing in our key employee side is probably purposely to give our managers a little quality of life.

Speaker 2

I think there is some investment on our side in the labor pool to maybe try to identify ways To have quality of life too, so that is an investment. But I believe to be able to attack our execution at the highest level Right now,

Speaker 1

that's costing us a few extra hours to be able to execute there with the, escalated volume on the top line. But I feel real comfortable overall with where we're going. I think we can improve and we'll continue to look at ways to get better at that. Yes, Patrick, and I would just add on to that that Again, I do think that historical algorithm is still maybe not at play that we are rebuilding from being understaffed last year. And So our labor hours are growing, as we feel very good about our staffing now and that those hours that were growing Are just not exactly correlated right now to the traffic growth we're seeing and probably would have seen those hours growth even if traffic had been a little bit higher or lower than what Reported.

Speaker 5

Got you. That's helpful. Thanks.

Speaker 2

Thank you.

Operator

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

Speaker 9

Thank you. Looks like the Texas Roadhouse concept put up a 9.4% comp with Bubba's, a little bit lower at 3.9%. But can you help us understand What's going on there? Is that traffic, menu pricing, mix? What's driving that pretty healthy spread between the core Roadhouse concept and Bubba's as it relates

Speaker 1

Yes. I mean, certainly Roadhouse is leading the charge on The comp growth that we are seeing simply because of the size of the company, yes, I mean, we feel very good with what We are seeing above us overall and the menu pricing can be a little bit different at the different at each concept And the traffic trends can be a little bit different as well. But again, Our new Bubba's are opening well and we're feeling very good overall about their sales performance.

Speaker 9

Okay. And just one quick follow-up, The effective menu pricing at the Core Roadhouse in Q3, what are you thinking that's going to be right now?

Speaker 1

Yes, 5.1% will be our 3rd quarter pricing.

Speaker 5

Okay. Thank you.

Operator

Your next question comes from the line of Jake Bartlett with Truist Securities. Your line is open.

Speaker 10

Great. Thanks for taking the question. My question is about G and A. And trying to kind of just understand the correct run rate of G and A for The 3rd and the 4th quarter, I believe that the second quarter would have had the conference costs in it, maybe correct me if I'm wrong, but I think you overall was much lower than we were expecting what the Street was expecting, maybe that conference was less expensive. But Any detail on how much the conference was and then the right run rate for the next couple of quarters?

Speaker 1

Yes. I mean, I would say we're not going to get into the exact numbers on the conference expense. It was probably a little bit less than We expected it to be and that was one of the components that maybe helped G and A in the second quarter, coming in a little bit better than what we may have discussed On the last call and certainly are we're doing the best we can of managing those costs and making sure when we're spending G and A dollars, it's for something important. And to your question about looking through the remainder of the year, I think maybe starting with Q1 of this year, which was just under $50,000,000 And if you back out The one time charge that we had talked about of about $2,400,000 that gets you to about $47,500,000 That's probably The best way we can give you as a starting point to look at where G and A maybe in the 3rd and 4th quarters of this year, maybe we see a little bit Growth on top of that through the remainder of the year and depending upon how the year continues to progress, there can always be The need to take some more compensation expense, but I think starting with your Q1 of this year adjusted number Is your starting point for looking at that G and A.

Speaker 10

Thank you.

Operator

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

Speaker 6

Yes, thanks. Good evening. I was just curious about the capital budget actually. How much of that was from new locations? Is Some of that related more to 20 24 units.

Speaker 6

And then what is that reinvestment focused on? And I know that you've also You know, talked about perhaps some technology initiatives. I don't know if that's part of it. Could you just elaborate on the capital budget?

Speaker 11

Yes. I mean, it's

Speaker 1

a mixture of all those things that you commented on. It's the cost of the New buildings that we're building this year, we're seeing slightly higher cost What we maybe originally forecasted for some of those and that will factor into as we start building later this year some of our 2024 class openings, we'll see some expense from that. So that is a component. The technology initiatives as we continue to look at digital kitchen that can be a small component of it, But also really that maintenance CapEx has been elevated and that goes The better conditions that we're seeing out there, the supply chain opening up, our ability to get more projects Don, we'll probably be we're targeting 20 bump outs this year, which we haven't been able to do for quite a few years and Getting some projects done in our restaurants, building out doing some kitchen remodels and cooler additions, giving these restaurants some more Capacity to handle these high volumes, all great shareholder great from a total return standpoint. So we are excited that we are going to be able to Invest this money and keep these restaurants fresh and ready to serve more guests.

Speaker 11

Thank you.

Operator

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

Speaker 12

Thank you. Just a quick housekeeping and then a question, please. So just to confirm, in terms of the amount of price you had on the second quarter, Is it was 5.6 percent? I'm just trying to sort of think through the negative okay, thank you. So you had a little bit of negative mix in the Q2, which we haven't seen for a while now.

Speaker 12

And I was just curious, is that what you talked about with the value and less attached or is there something else going on there?

Speaker 1

We actually have been seeing that negative mix For a little while, I think we had about 80 basis points of negative mix in the Q1. It did step up a little bit here In the Q2 to that 120 basis points of negative mix, I'll tell you, we saw it start to Come down a little bit here in June July. So it does seem like maybe be worse than some of that negative mix is behind us. And the majority of that is coming from alcohol. So yes, we are seeing a little bit of negative mix.

Speaker 1

It does seem It's not necessarily because of the menu pricing we've taken given that it's alcohol and the remainder of it is in that entree category, Which is part of why we think that some of our new guest traffic is coming from people trading up To us, but hitting the value side of the menu.

Speaker 12

Got it. Thank you. And then the question was to follow-up on the labor. You said you expect labor flatten out in 4Q. I think that's sort of a wage rate comment.

Speaker 12

But as You talk about the idea of needing to staff up. At what point does the do the restaurants look fully staffed? I think like Off premise mix has been fairly stable. So from that perspective, your on premise dining Has more consistent over in the last couple of quarters. So when do you get to a point where the restaurants are fully staffed, so you could get back to that historical algorithm.

Speaker 1

Yes. Sir, I do think we feel very good about our staffing levels Right now, and it's a matter of lapping the understaffing from last year. And Throughout last year, we talked about each quarter, we felt better and better sequentially about those staffing levels. So theoretically, The hours growth should come down as we move through the year and we talked about the level of wage inflation Should come down as we move through the year because again a lot of the wage pressure we're feeling is from increases that we saw last year that you have to lap for a full 12 months. So, the expectation is that you see the level of hours Growth moderate as we continue to move through the year because it should not be require as many hours to get us to That level that we're at right now.

Speaker 12

So you sort of by the end of last year Had kind of been approaching being fully staffed, is there how to think about it?

Speaker 1

Yes. End of last year or early this year, we did have a little bit of a with the weather In late December last year, a little bit of a step back in late December, but other than that, yes, we were starting to feel pretty good about Our staffing levels as we were exiting last year and entering this year.

Speaker 12

Great. Thank you very much. Very helpful.

Operator

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

Speaker 11

Hey, guys. Good evening. There seems to be a growing view that beef may be higher I'm wondering, Gerry, if you've kind of thought about the Kind of the contingency plan, if that is the case, do you go to menu breath? Do you use price a little bit more? Is there something else We should be thinking about, as we start to size up 24, 25?

Speaker 2

Yes. Thanks, Andy. Good to hear from you, Budd. I would tell you, we will consider Some of those things, obviously, we still want to be very we don't know what's going to happen in beef, obviously, as it continues. There's a lot of chatter out there.

Speaker 2

We will continue to monitor it. It's a big part of our menu. It is the cost of doing business right now. We do need to be very cautious And careful on the pricing to make sure that we are continuing to drive our value component and then deliver on the experience. And I think in the long run, We will still win with that strategy, but we will always look at several factors of what we could do.

Speaker 2

The question is, will we do that? But we are going to continue to focus on the long term run and taking great care of our guests and our business.

Speaker 11

Got you. Makes sense. Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Brian Vaccaro with Raymond James. Your line is open.

Speaker 13

Hi, thanks and good evening. Most of mine have asked, but I just was going to ask on the other operating cost line. It looks like cost per week is still running up in the 6s, which is An improvement versus closer to 10% in the Q1, but still up in the 6% s. And I guess, could you remind us what percentage of that basket of cost is fixed And are there any categories worth highlighting where there's some relief on the horizon? Or Would you expect a pretty similar level of inflation in the second half as you've been recently seeing?

Speaker 1

Hey, Brian, it's Michael. Yes, I'm not sure I have at my fingertips what is fixed versus variable within there and You could argue most things, if they had you, could can go away. But I'll tell you, I think We saw just what we expected to happen, happen that level of operating dollars per store week Did slow, as you said, from around 10% to a little over 6%. And I think the expectation is you probably see that continued Slow down of that rate of increase, it would on a year over year basis. And again, some of that is coming from The traffic growth and the menu pricing that we have, but it's really that a lot of the items in that basket, Which were a lot of services being provided went up dramatically last year.

Speaker 1

Now you're seeing Not a lot of additional upward pressure on them. They've just flattened out at these levels And you're able to get the leverage from the higher volumes right now. So other operating is aligned, all else being equal that we should continue to hopefully see Some leverage on as we move through the remainder of the year.

Speaker 13

All right. Thanks very much. I'll pass along.

Operator

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

Speaker 5

Hey, thanks for the question. Maybe just going back to

Speaker 14

the alcohol mix, I think you guys last year actually had alcohol mix above where

Speaker 5

it was before COVID and a

Speaker 15

lot of Peers were down a point

Speaker 5

or 2 in mix. Do you

Speaker 15

have a sense for why that was? And maybe just some of this you giving that back versus some

Speaker 5

of your peers that maybe Lost it over the last couple of years instead?

Speaker 1

Yes. I mean, don't have the exact numbers right in front of me, but I do think Over the last year, you have what I would call that euphoric consumer who was happy to be Back out there who had some extra money in their pocket, whether that have been from stimulus or just not having other places to spend it. And they were maybe getting a drink that they were not historically getting or getting a second drink. And now you're maybe seeing a little bit more of a return To normalcy, as far as what people are ordering from that alcohol standpoint. And again, obviously, with our To go business being a bigger component of the overall sales versus pre pandemic or alcohol Sales are going to be a little bit lower, but in the dining rooms, I think we still feel very good about where we are now.

Speaker 1

Yes, you are right. We are lapping probably that euphoric consumer from last year.

Speaker 5

Okay. Thanks, Jerry. Appreciate it.

Operator

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

Speaker 5

Thank you. Could you please talk a little bit more about the food inflation breakdown perhaps? Any updates on the breakout between beef And non beef inflation expected for the year. And then Jerry, I just gave some comments on beef. On what's kind of been mentioned already, is there anything else to Kind of on beef consideration with looking ahead, seeing any kind of softness in demand out there at retail, etcetera, that might impact how you think about 24, thank you.

Speaker 1

Hey, this is Michael. I'll start and if Jerry wants to add anything, he can I think, again, I'll go back to Our prepared remarks and we said the majority, if not all of the inflation that we expect to feel this year is coming from beef? So We have other items in the basket, pork, chicken that we would expect to be overall deflationary on a full year basis that are offsetting maybe still some pressure And some grocery items and some of the produce items, but for the full year, beef is driving The overall inflation and I think that goes to that conversation about what the future might hold. Yes, beef It is going has the potential to be a pressure point again next year, too soon to know what that means, but we have another half of our basket That could potentially offset some of that pressure. And so that's why we aren't going to overreact Until we at any point, but we don't have a full picture yet of what 2024 might bring outside That might offset some of the continued beef supply constraints.

Speaker 5

Thanks, Michael. Appreciate it.

Speaker 7

Sure.

Operator

Your next question comes from the line of Jeffrey Bernstein with Barclays. Your line is open. Hi. This is Anisha Datt on for Jeffrey Bernstein. I wanted to ask if you could give some more color on recent trends at Bubba's relative to the Texas Roadhouse brand.

Operator

Openings showing the ultimate slowdown at Texas Roadhouse.

Speaker 5

You start.

Speaker 1

Yes. Thanks for the question. I mean, I think from From a standpoint of openings, again, we feel very good about our opportunity to get some Bubba's open this year. We've talked about This year, probably see 5 Bubba's openings and the next couple of years want to be in that 5 to 7 Bob has openings with a maybe next goal after that getting closer to 10 openings. Again, The slowdown in our number of openings for this year has nothing to do from anything on our side of our excitement for any of our concepts.

Speaker 1

It It is more of an issue of things that are out of our control, getting permanent power to a restaurant site and The timing of work getting done. So we are excited about getting restaurants open from all of our concepts At this point and our overall trends in the different concepts are also very strong. We think We are set up for great success across all the brands and certainly Bubba's with less of a focus on stakes It's not feeling the level of inflation that a roadhouse is. So everyone has different things going on that makes us feel very good about What the future holds for each concept.

Operator

Awesome. Thank you. Your next question comes from the line of Jon Tower with Citigroup. Your line is open.

Speaker 7

Great. Thanks. Just I guess circling back to the pricing thoughts again. I'm just curious if you can elaborate on what sort of tools The managing partners have at their stores in terms of thinking about overall pricing in general, are they considering what Obviously, the market competitive set is doing, but also what's happening at the grocery store when it comes to beef prices and then how they weave that into Labor in their distinct market, like can you help us just walk through how they build up to a labor Excuse me, an inflation expectation for the year to come and then therefore the decision on pricing?

Speaker 2

Yes. So our pricing process is very similar. We ask the managing partners for Puts on what's going on in their local area from a competition standpoint, from a retail grocery, and they share that with us. And then we obviously talk to the multi units that kind of share a bigger picture of what might be going on in their turf in their markets. Obviously, state by state, we all on our side, we know a lot more of the details overall on some mandates.

Speaker 2

So It's an extensive process that we go through to try to get it right for every store, but also by market and by region and company. And so it's a complicated formula for sure, but there's a lot of thought put into it on every level So that with the inputs from our operators and from the knowledge that we have from the company stand, we try to make the absolute best decision Literally by store, by market, by state and for the company and the overall number rolls up to it. But those conversations that we have With our partners are valuable in the decision making process.

Speaker 7

Got it. Thanks, Jerry. And then just, I guess, Chris, you're coming in with a fresh set of eyes to the company. Obviously, it's been a very successful company for a very long time. But I'm curious to get your perspective Perhaps with this fresh set of eyes, do you see anything that you feel like could be a new opportunity for the brand or Perhaps areas where you believe there could be improvement on the business?

Speaker 3

Well, thank you, John, for the question. And These are early days, I must say, and so it's probably not time for me to opine on any sort of changes that We might consider, but there is a great tradition here. There is a very successful brand That's nationwide and it's doing very well. And of course, we'll be reviewing a number of things along with Jerry and the rest of the team here. But pretty early for me to opine on some sort of change process.

Speaker 7

Got it. Thanks for taking the questions.

Operator

Your next question comes from the line of Andrew Strelzik with BMO. Your line is open.

Speaker 7

Hey, thanks for taking

Speaker 16

the question. I just wanted to ask about the unit openings for the rest of the year. How should we think about the cadence between 3Q and And do you think there's risk that some of those get pushed further into next year? And then to the extent that some have gotten pushed or more due, do we Think about next year as a makeup year or do you think you'll stick to kind of your normal framework of openings and the entire kind of timeline gets pushed?

Speaker 2

Hey, thanks Andrew. It's Jerry. Like I said, we have every store that's scheduled to open this year under construction. We do know there's a couple in December that a little concerned about. We have had some utility issues, but We're monitoring it closely.

Speaker 2

We're pretty confident we'll be at that number or extremely close. And if not, then it'll push into next year and go from there. But our Pipeline for next year will be very consistent to what we've done in the past. We have a strong pipeline. We will continue to stay focused on the growth and development Of all three brands, pretty much as we have in the past and really focused on doing it right and doing it well as we go through there.

Speaker 2

So Still a little early in the year to be concerned yet, but they're under construction. We are moving forward and we'll keep monitoring throughout

Operator

Your next question comes from the line of Elliot Simon with Evercore. Your line is open.

Speaker 17

Hey, guys. Thanks for the question. On the prepared remarks, You mentioned pricing decisions are based on wages as well as the value proposition. Clearly, the wage side has given you a green light to take some price In October, how do you characterize the value proposition today that different like your price gaps, the steak peers as well as other casual dining peers outside the steak segment, Which may not have faced as much inflation. Would you say they are narrower, the same or wider than historical levels?

Speaker 2

Yes, that's a great question, Elliot. Thank you. I believe that we focus on we watch it very closely And to see knowing where our gap is at, I think it has changed a little bit. It probably has gotten a little tighter. But I think in general, we try to focus on what we're doing and what's right for our business and others have to make their own decisions.

Speaker 2

So if we look at labor or look at any other Costs that are part of our decision making, we try to encompass all of the information and really try to make A decision that we feel is right for our business going forward to protect our value and to protect our menu that's built in with that value And to really protect those top line sales. So there's a lot of work put into it and we've been conservative. We probably will stay in that direction, but we also have proven if we need to, we can use that leverage.

Speaker 17

Great. Thanks. And just a quick follow-up, I mean, as you talked about protecting the top line. I'm curious, Jerry, if you can kind of boil down the secret sauce 1 or 2 things that really differentiate yourself as competitors, what would it be? The value proposition, the service you provide or something else?

Speaker 2

Well, I think it's all of it to be honest with you. I think we work really, really hard to Present an environment are made from scratch food or handmade, all of that adds value. When you walk into that restaurant and you smell that fresh Baked bread and you know that we're cooking that steak to order for you and we've got this friendly individually. We're still Hungry to serve people at an extremely high level. And when I look at the lines that are waiting at our restaurants, it tells me that We need to continue to focus on doing the things that we do and they're loving the food, they're loving the service.

Speaker 2

We need to be able to execute to get them in the restaurant, Provide them with an experience, thank them for coming to our business because it's still important for us to serve them at a high level and we're trying to earn their business Every single day, somebody woke up this morning thinking about where they were going to dinner and I want them thinking about Texas Roadhouse, Bub is 33 in Jaggers all day long to choose to walk through our doors. So we're hungry for it. Sorry, dude, got me excited.

Speaker 17

No, no, no. I really appreciate it. Thanks, guys, and best of luck.

Speaker 2

Thank you very much.

Operator

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

Speaker 18

Thank you for the question. Just wanted to follow-up a little bit more on capital expenditures. I think that went up to $300,000,000 from 265, if I'm not mistaken. Just wondering if that elevated level is causing fundamental or permanent changes in Returns on store development, if that's causing you to rethink the cadence of development over the next 3 to 4 quarters?

Speaker 1

Hey, Jim. Thanks for the question. No, it really is not changing any of our thought. I mean, there is a piece of it That is related to new store development, but our internal models are still Generating returns above our target level. So we still feel very comfortable With the ability to open restaurants and have no plans to slow that down at this time.

Speaker 18

All right. Thank you.

Operator

Your next question comes from the line of John Park with Wells Fargo. Your line is open.

Speaker 11

Hey, good evening, guys. Just on the quarter to date acceleration, you spoke to the calendar benefit and mix potentially getting a little bit better. But I guess, is there anything else to point to that

Speaker 1

Segment improvement in our staffing levels and our ability to serve the demand that is out there. So Our restaurants are open. They are well staffed and there's strong demand to come to them and it's Really as simple as that.

Speaker 11

Got it. Best of luck, guys.

Speaker 2

Thank you very much.

Operator

There are no further questions at this time. I will now turn the call back over to Jerry Morgan.

Speaker 2

Thank you all very much for your time today, And we wish you the best of the weeks coming to finish your summer. And thank you.

Operator

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

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Earnings Conference Call
Texas Roadhouse Q2 2023
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