Texas Roadhouse, Inc. (TXRH) Earnings Call Transcript & Summary

Good evening, and welcome to the Texas Roadhouse Second Quarter Earnings Conference Call. Today's call is being recorded. [Operator Instructions] I would now like to introduce Michael Bailen, Head of Investor Relations for Texas Roadhouse. You may begin.

Thank you, Emma, and good evening. By now, you should have access to our earnings release for the second quarter ended June 27, 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. We refer all of you to our earnings release and 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 newly appointed Chief Financial Officer. 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 1 question. Now I'd like to turn the call over to Jerry.

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 Humpich and our amazing financial team for stepping up and ensuring that we did not miss a beat over the last 6 months. Moving on to our quarterly results. We are pleased with our strong sales and profits growth in the second quarter. Our sales momentum carried over from the first quarter 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. 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 second quarter. In addition, our franchise partners opened 3 restaurants, including 2 international locations. 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. 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 will 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?

Thanks, Jerry. 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 experience to the company and helping to build upon its success for many years to come. And now Michael will provide the financial update.

Thanks, Chris. For the second quarter 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% to $182.8 million, while earnings per share increased 14.7% to $1.22 per diluted share. As Jerry mentioned, our stores averaged nearly $147,000 in weekly sales in the second quarter and to-go represented approximately $18,500 or 12.6% of the total weekly sales. The to-go sales were especially encouraging given this was the first quarter since the reopening of our dining rooms that average weekly to-go sales dollars increased on a year-over-year basis. Comparable sales increased 9.1% in the second 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 first 4 weeks of the third quarter, weekly sales averaged over $140,000 with comparable sales up 10.7%. I will point out that the 4-week comp number benefited by approximately 1.4% from the timing of the July 4 holiday. For the second quarter, 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%. Second quarter margins were negatively impacted by approximately 35 basis points from onetime 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 second 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%. Labor as a percentage of total sales, increased 90 basis points to 33.6% as compared to the second quarter 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 $2.7 million net impact of unfavorable claims experience related to group insurance and workers' comp. This net impact includes $1.8 million of additional claims expense this year and the overlapping of a $0.8 million 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. As such, we have updated our full year 2023 guidance for wage and other labor inflation to between 6% and 7%, with current trends pointing towards the midpoint of that range. Other operating costs were 14.7% of sales, which was 29 basis points lower as compared to the second quarter of 2022. The year-over-year benefit of sales leverage was partially offset by the negative impact of a $1.6 million adjustment to our quarterly reserve for general liability insurance. Moving below restaurant margin, G&A dollars grew year-over-year by 3.6% and came in at 4.4% of revenue. The primary driver of the $1.8 million year-over-year increase was higher compensation expense. Our effective tax rate for the quarter was 12.7% and we now expect a full year 2023 income tax rate of between 13% and 14%. Lastly, with regards to cash flow, we ended the second quarter with $107 million of cash. Cash flow from operations was $99 million. This was more than offset by $88 million of capital expenditures, $37 million of dividend payments and $23 million of share repurchases. We are increasing our expectation for full year 2023 capital expenditures to approximately $300 million. 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.

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 to continue generating strong shareholder value. That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] The first question comes from the line of Brian Bittner with Oppenheimer. Mr. Bittner, your line is open.

Sorry, can you hear me?

Yes.

Sorry about that, guys. I wanted to ask a question about your sales trends. Your third quarter 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 and 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? I just kind of 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?

Yes, 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. 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 to you all and others to determine what those comp percents might be, but I do think, we would think that seasonality is back in our business.

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

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?

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 fourth quarter, that's what the math would say. Rents 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, third quarter would -- could see that as a headwind, and we're -- and then maybe flattening out in the fourth quarter. So really, that leaves a lot of the potential restaurant margin expansion for Q4, that's what our guidance would imply.

Got it. And then I guess I wanted to revisit as a follow-up. You've talked about 17% to 18% of the 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?

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.

Great.

Thank you, appreciate the shout out, too.

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

Great. And congrats, Chris, on the new role. I just wanted to ask on the consumer overall. I think in the past, maybe a 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? 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.

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 of -- 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 who 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.

Great. And then just on the labor side. I know there's a modest increase in your outlook in terms of inflation for the year. 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 tick it up just slightly?

Yes, it is a combination of the wage inflation, maybe just being a little bit stronger in the first and second quarter, which then compounds on itself throughout the year that adds a little bit to an 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 inflation, 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 2 things combined just moved enough to where we felt the guidance did need to be updated.

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

This is Patrick on for Chris. Jerry, I believe the company has historically targeted labor hour growth that's roughly 50% to 55% of traffic growth. And it looks like this quarter remained quite a bit above that. So I'm just curious if you're looking at ways to improve labor productivity? And if so, what actions do you believe you can take that can improve the flow through on your sales growth?

Yes. Thanks, Patrick. I believe that, obviously, as we focus on our top line sales, and Michael and I were doing some reviewing. There is definitely an uptick in hours in the front of the house, in the back of the house. And I believe some of the hours that we might be seeing in our key employee side is, there's probably purposely to give our managers a little quality of life. So 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 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 those hours that were growing are just not exactly correlating right now to the traffic growth we're seeing and probably would have seen those hours growth even if traffic have been a little bit higher or lower than what we reported.

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

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 to same-store sales?

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 at Bubba's overall, and the menu pricing can be a little bit different -- at each concept and the traffic trend 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.

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?

Yes. 5.1% will be our third quarter pricing.

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

My question is about G&A. And trying to kind of just understand the correct run rate of G&A for the third and the fourth quarter. I believe that the second quarter would have had the conference costs in it, and maybe you 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.

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&A in the second quarter coming 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&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 million. And if you back out the onetime charge that we had talked about of that $2.4 million, that gets you to about $47.5 million. That's probably the best way we can give you as a starting point to look at where G&A may be in the third and fourth quarters of this year. Maybe we see a little bit of 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&A.

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

I was just curious about the capital budget actually. How much of that was from new locations is some of that related more to 2024 units? And then what is that reinvestment focused on? And I know that you've also talked about perhaps some technology initiatives. I don't know if that's part of it. Could you just elaborate on the capital budget?

Yes. I mean it's 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 in what we've 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 kitchens, that can be a small component of it but also really that maintenance CapEx has been elevated. And that goes to the better conditions that we're seeing out there, the supply chain opening up, our ability to get more projects done. 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 my 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.

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

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%? I'm just trying to sort of think through the negative...

That's correct.

Okay. So you had a little bit of negative mix in the second quarter, which we haven't seen for a while now. And I was just curious, is that what you talked about with the value and less attached? Or is there's something else going on there?