Pressures on food costs and customer traffic are expected to be the biggest challenges for Texas Roadhouse for the rest of 2012 and into next year, but officials for the 385-unit chain readily identified pricing and cost-saving actions to grow sales and revenue in spite of them, as the brand did in its third quarter.
Though commodity inflation for Texas Roadhouse eased slightly in the Sept. 25-ended third quarter, it should still fall at or just below its expected level of 7 percent for the full year and will rise again between 5 percent and 8 percent next year, chief financial officer Price Cooper said.
He added that narrowing that range of commodity inflation would be difficult because the chain is not locked in on next year’s prices for beef, which represent slightly more than 40 percent of its food costs. Given that uncertainty, Texas Roadhouse is readying a 2-percent menu increase and several cost-saving initiatives in its restaurants to allow for further growth and long-term investment in the brand, Cooper said.
“To help offset inflation, we’ll stay focused on driving traffic and trying to gain some benefit from these cost-saving initiatives as well," he said. "So it’s really tough to say exactly what food cost would end up being next year at this point.”
Managing through commodity volatility
Texas Roadhouse’s third-quarter net income rose 14 percent to $18.1 million, or 25 cents per share, compared with $15.8 million, or 22 cents per share, a year earlier.
Revenue grew 15 percent to $308.7 million, reflecting same-store sales gains of 3.6 percent at company-owned restaurants and 4.9 percent at franchised locations.
Cooper said Texas Roadhouse’s slight decrease in restaurant margins during the quarter resulted from food inflation outpacing the restaurant’s pricing action. Commodity costs rose 5.4 percent, while Texas Roadhouse’s average check grew only 2.9 percent, with relatively flat traffic.
However, produce and dairy costs came in lower than expected in the third quarter, causing Texas Roadhouse to moderate its commodity inflation outlook for 2012 slightly to a range between 6.5 percent and 7 percent, down from approximately 7 percent.
Since the chain remains on pace for 25 net restaurant openings and same-store sales growth between 4 percent and 4.5 percent for the year, Cooper said, the tiny easing of commodity pressure gave Texas Roadhouse confidence that it would hit the high end of its full-year earnings per share guidance of 94 cents to 96 cents, compared with full-year earnings of 88 cents for fiscal 2011.
Pricing is part of the solution
Texas Roadhouse shared two other major assumptions aside from the commodity inflation forecast informing its preliminary guidance for 2013. Officials expect same-store sales to be positive again next year, as the brand will take further pricing actions before the end of calendar 2012. In addition, unit openings are projected to increase to 28 locations from 25 new restaurants this year.
Texas Roadhouse is considering a menu price increase of about 2 percent some time in December, which lags far behind expected commodity inflation forecasted for 2013, but should still protect traffic growth, possibly at the expense of some restaurant margin, Cooper said. The change has been tested at 16 restaurants for several months, with little discernable customer pushback, he said.
President Scott Colosi said the menu price increase would be spread broadly through the menu, adding that Texas Roadhouse does not think about the move in terms of being able to take price.
“We’re kind of like, ‘OK, we’re dealing with inflation, so we’re going to do something in reaction to that,’” he said. “We’re always striving to protect some of our key value price points, but you’ve got to take a certain amount of pricing throughout the menu to have a certain amount of the flow-through to your menu.”
But Cooper added that Texas Roadhouse was “taking an active stand toward inflation” to try bridging the gap between price hikes and commodity inflation. The initiatives to which he referred include non-guest-facing ways to manage expenses, which would increase in 2013.
“We’re not sitting here focused on re-engineering the plate or trying to figure out how to take labor out of the restaurants,” he said. “So most of these items do deal with things like supplies, chemicals and some equipment.”
Staying actively invested
Texas Roadhouse is forecasting increased capital expenditures next year between $100 million and $110 million, up from about $90 million in fiscal 2012. Officials said that investment acceleration likely would outpace unit development growth — going from 25 openings this year to only 28 next year — due to a back-end-loaded opening schedule and increased spending for maintenance and store remodels.
“Hopefully, it will be in a situation where we’re opening more than 30 percent or 40 percent of our 2014 stores in the first half of that year,” Cooper said. “We could be in a situation where the 25 percent to 30 percent will be what we’ll spend [in 2013] on kind of maintenance and remodeling. We continue partnering with and challenging our operators to invest in their restaurants, so we can certainly see that continue to increase as we’re continuing to add stores to the base of our restaurants.”
The brand is on pace to complete about 40 store remodels that include adding seats to the dining room, Colosi said, and its goal for next year would be between 20 and 25 capacity expansions.
Beyond some franchise growth in California and perhaps three or four international openings next year, most of the expansion would come on the company side, executives said.
“We’re still getting really good returns on opening company restaurants,” Colosi said. “So to the extent that continues, we’re going to keep putting a lot of our cash flow in the company restaurants. We’re an operations-driven company; we like to run stores. We find it to be a strength of our business.”
Louisville, Ky.-based Texas Roadhouse operates 312 company-owned restaurants and franchises another 72 locations in the United States, and has another franchised unit in Dubai, United Arab Emirates.