Casual-dining brands to take action on margins

Recent fluctuations in commodity prices played prominently in the second-quarter earnings performance for the Texas Roadhouse, Famous Dave's and Buffalo Wild Wings casual-dining chains, which discussed plans for managing margins for the rest of 2013 and next year.

Louisville, Ky.-based Texas Roadhouse’s second-quarter restaurant margins slipped 0.5 percent due to persistent inflation for beef. That decline contributed to a 1.7-percent decrease in net income despite higher revenue and same-store sales growth of 4.5 percent. Traffic rose 2.2 percent for the brand and average check increased 2.3 percent, chief financial officer Price Cooper said, but “it was not enough to offset the headwind from just under 6-percent food inflation during the quarter.”

“Throughout the balance of the year, we expect margin pressure from food cost to outweigh any leverage we are able to obtain from labor and other operating costs combined,” Cooper said during Texas Roadhouse’s earnings call. “In fact, restaurant margins in the back half of the year are likely to be under more pressure since we had a higher average check and lower food cost inflation in the first half of the year versus what we expect for the remainder of 2013.”

The 405-unit casual-dining chain now projects full-year commodity inflation between 6.5 percent and 7 percent. While Texas Roadhouse expects continued inflation in 2014, “we do not expect it to be near the magnitude of what we are seeing this year,” Cooper said.

Meanwhile, Buffalo Wild Wings and Famous Dave’s benefited somewhat from commodity fluctuation in the second quarter, as their main proteins of chicken wings and pork, respectively, saw moderating prices.

For the first time in eight quarters, Minneapolis-based Buffalo Wild Wings’ cost of goods sold decreased compared with a year earlier, moderating 1.2 percent to 30.4 percent of sales. The cost of traditional chicken wings fell 15 percent to $1.61 per pound compared with the second quarter of 2012, chief financial officer Mary Twinem said.

She added that boneless wings’ sales mix grew to 20 percent of sales, surpassing that of traditional wings and accounting for 19 percent of sales, for the first time.

“We are pleased with this trend, as boneless wings have a higher gross margin than traditional, and we have contracted our boneless and other chicken breast products at flat pricing through March of 2015,” Twinem said.

The 930-plus-unit brand’s food-cost benefit, combined with robust unit growth and increased same-store sales, drove a second-quarter increase of 41.4 percent in net profit to $16.5 million.

Famous Dave’s, also based in Minneapolis, improved its food costs by 0.9 percent in the second quarter to a level of 30.1 percent of sales. The 189-unit chain drove a 10.5-percent increase in second-quarter net income.

“Our food contract continued to perform as expected for the second quarter, with the exception of brisket purchases,” chief financial officer Diana Purcel said during Famous Dave’s earnings call. “A higher-than-anticipated demand for our Burnt Ends product — frankly a good thing — resulted in a fairly significant increase in brisket purchase volume, and while these sales were incremental, they were at a higher food cost than most of our other core proteins.”

However, Famous Dave’s now projects a full-year decline in food costs for 2013, which will fall between 1.5 percent and 2 percent year over year. The brand has its pork needs locked in at a 1.3-percent decrease in cost for the rest of 2013.

Plans ahead

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Even though Texas Roadhouse’s food cost inflation is expected to decelerate in 2014 — with increases for steaks likely to moderate into the high-single-digit range from its 15-percent inflation in 2013 — it still would produce a margin headwind, executives said.

President Scott Colosi said during the company’s earnings call that the brand is “sticking to our guns as far as a pretty labor-intensive business” and would not try to regain significant amounts of the margin loss through the labor line. Founder and chief executive Kent Taylor added that Texas Roadhouse would not start running aggressive price-value promotions or discounts either.

The brand is in the early stages of testing a 1.5-percent menu price increase, Cooper said. Executives hinted that any systemwide price increase likely would not be put into effect until it could roll over a similar price increase enacted last December.

Buffalo Wild Wings took a small price increase to its menu July 15 when it rolled out a new menu that included a pay-by-portion format for selling wings and its Game Changer craft beer. Its cumulative menu price increases taken in the past 12 months ran about 4.7 percent in the second quarter.

The brand anticipates higher labor costs this year for some training around selling the new menu, as well as an ongoing test of its “Guest Experience” service style currently in 130 company-owned units. But the new menu format that sells wings in sizes of “snack,” “small,” “medium” and “large,” rather than by number of wings, is expected to improve food costs by 0.3 percent to 0.4 percent, Twinem said.

Chief executive Sally Smith was also optimistic about the Game Changer beer’s margin-building opportunity. “What we like about Game Changer is that it is a premium beer that fits really nicely between domestics and craft, and it’s a nice value for our guests,” Smith said. “They get a craft-quality beer at a mid price, which we think will drive back some of the margin dollars that we have lost in the last couple of years due to price increases that some of the large brewers have taken.”

Famous Dave’s disclosed plans to further improve margins in the face of commodity cost relief for 2013 and 2014, including strategic menu promotions, “opportunistic commodity purchases” and a 1.5-percent menu price increase to be taken in September when its fall menu rolls out.

“We’ve just executed an exciting, opportunistic protein buy that will allow us to introduce a brand-new, high-profit protein product center-of-the plate and for permanent inclusion on our menu,” chief executive John Gilbert said, without divulging specifics. “We have just completed the rollout of our new beverage strategy, which features craft beer selections optimized to local stores.”

He credited the Burnt Ends menu item for driving positive traffic at Famous Dave’s during the second quarter and cited it as an example for the kind of margin improvement through the menu the brand hopes to replicate moving forward.

“We got a nice lift in traffic because of the new product, and [it] was essentially an appetizer,” he said. “Probably the biggest single contributor to the quarter was the ticket increase associated with Burnt Ends that prevailed for the entire quarter.”

Contact Mark Brandau at [email protected].
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