Texas Roadhouse remains cautious despite positive 2Q

Traffic, sales and margins were all positive for Texas Roadhouse Inc. in the second quarter, but executives told securities analysts during the brand’s earnings call that they want to keep things simple and continue to invest for more challenging times to come.

For the June 26-ended quarter, Texas Roadhouse’s net income jumped 26 percent to $20.3 million, or 28 cents per share, compared with $16 million, or 22 cents per share, a year earlier. Revenue rose 15 percent to $320.3 million, compared with $279.6 million a year earlier, reflecting same-store sales gains of 4.5 percent at company-owned restaurants and 4.8 percent at franchised locations, an increase in store weeks of 9.8 percent and an improvement in restaurant-level margins by nearly 1 percent.

Texas Roadhouse’s 4.5-percent increase in company-owned same-store sales comprised a 0.5-percent increase in traffic and a 4-percent lift in average check. The average price increase in the latter figure was 4.1 percent compared with a year earlier, and a slightly negative mix shift brought the average check down by 0.1 percent.

“One quarter does not have us rethink anything we’re doing,” president Scott Colosi said during the earnings call. “Some quarters your traffic’s up 2 percent, some flat or down 3 percent. But if we execute on our mission statement to provide legendary food and legendary service, we think we’ll get new people in the door and keep them coming back. We’re not going to mess around with the formula or deviate from it.”

Reinvesting for the long term

Texas Roadhouse officials plan to keep up investments in restaurant facilities and guest-facing operations programs like its “leader at the door” strategy to maintain conservative, consistent growth in the face of relatively flat traffic and increasing commodity pressure, they said.

Major overhauls, like opening for weekday lunch, are not being considered in the current slow-growth environment for casual dining, they said. Rather, Texas Roadhouse would continue to tweak a few parts of the menu, upgrade stores and look for a few more international openings.

Colosi said capital expenditures for maintenance would increase in the near term to meet the brand's goal of improving the restaurants’ looks and functionality. Managing partners would be encouraged to update everything from aging kitchen and computer equipment to landscaping and pavement for the parking lots.

“There’s not some larger-scale remodeling program coming, but that’s the idea,” he said. “We don’t want our guests to perceive us as tired or stale, so we budget this into all our agreements. We expect to spend the money, and we voice the need to our operators to spend the money.”

Price Cooper, chief financial officer, said the chain’s “bump-out” remodeling efforts to add between 25 and 35 seats have produced a mid-to-high-single-digit sales lift to those restaurants. The brand has completed 90 such remodels in the past three years and could hit as many as 35 this calendar year, he said.

“From a financial perspective,” Cooper said, “it’s a no-brainer as far as the return.”

The chain is on pace to open its projected 25 restaurants this year and is estimating at least as many new units next year.

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Playing with prices, not portions

Expecting no relief from this year’s 7-percent increase in its commodity basket, Texas Roadhouse will attempt to control food inflation in 2013 with a moderate price increase and by continuing its savings efforts that leveraged the chain’s labor and occupancy costs down slightly in the second quarter.

The brand is testing a 2-percent menu price increase, which broadly covers most of its menu categories, in 16 restaurants, founder and chief executive Kent Taylor noted.

“Historically, around that 2-percent level is what we’ve been comfortable with as a management team and with our operators taking,” Colosi said. “There have been exceptions in the past, like going higher when [we have to contend with] minimum-wage increases. We believe we’re still competitive in the marketplace with that 2-percent level.”

Company officials have very little visibility on how much commodity inflation to expect in 2013, but they will attempt to mitigate higher food costs by leveraging what they can on everything but their center-of-the-plate items, Colosi said.

“We’re protective of what we’ve got on the plate and challenge ourselves to increase that quality,” he said. “We’ll look at other lines on the P&L and the other things we buy a lot of that don’t affect the food. We want to put pressure on our competition and still give our managers the great value they need to provide to our guests.”

Fewer transactions for alcohol remain a headwind for Texas Roadhouse, as the trend has nagged the brand for about five years, Cooper said. But the chain is still realizing the benefit of last year’s rollout of its bone-in rib eye, as well as the effect of its 23-ounce porterhouse, which the brand introduced in February. As a result, menu mix pressure improved from a 0.3-percent negative effect in the first quarter to only a 0.1-percent effect in the second quarter.

The company is forecasting traffic for the second half of 2012 to rise only between zero and 1 percent, Cooper said. Texas Roadhouse slightly raised its 2012 guidance for earnings per share to between 98 cents and $1 per share, but narrowed its range for same-store sales to between 4 percent and 4.5 percent, from earlier estimates between 4 percent and 5 percent.

Same-store sales are expected to slow in the second half of the year as the chain rolls off menu price increases from 2011 and contend with a slightly higher effective tax rate.

Louisville, Ky.-based Texas Roadhouse operates 306 company-owned units and franchises another 72 locations in 47 states and the United Arab Emirates. The company also owns and operates three Aspen Creek restaurants.

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN