Texas Roadhouse contends with challenging food costs

Despite stiff commodities headwinds, Texas Roadhouse saw net income and revenue rise in its second quarter ended July 1.

Kent Taylor, founder, chairman and CEO of the Louisville, Ky.-based casual-dining operator, credited revenue and same-store sales growth to his team’s commitment to the basics of great service and food.

“We generated solid profit growth, which is pretty cool, especially in this environment,” Taylor said. “It is evident to me that our team’s commitment to our guests and their passion for Texas Roadhouse continues to make us even stronger.”

However, in addition to the competitive casual-dining segment, rising food costs remain a significant challenge, CFO Price Cooper said. The company’s food costs increased 3.8 percent for the period, outpacing a 1.4-percent rise in average check.

“Our food inflation in the second quarter as compared to the first quarter was driven by beef, dairy and produce costs being higher year over year,” Cooper said. He expects that Texas Roadhouse has seen its highest food prices for the year, but “we continue to expect low-single-digit food inflation for the rest of 2014.”

Texas Roadhouse reported Monday net income of $23.1 million, or 33 cents a share, an increase from $19.9 million, or 28 cents per share, in the same quarter last year. Revenue rose to $395.4 million, from $352.1 million in the same period in 2013. Same-store sales rose 2.9 percent at company-owned units and 3.6 percent at franchised locations.

During its quarterly earnings call Monday, Cooper said the company’s average unit volume grew 2.4 percent from April to June. He credited the same-store sales increase to a nearly even split between traffic growth, of 1.5 percent, and check increases, of 1.4 percent.

Labor and health care costs are increasing in step with the chain’s average check increases, collectively adding to the operator’s ongoing struggles with margin compression, Cooper said. Those challenges are expected to remain steady for the foreseeable future, he added. The company raised menu prices about 1.5 percent overall last December, and has not planned an increase for 2014.

Texas Roadhouse anticipates capital spending to top out at $110 million for the full year, which includes expenses tied to a total of 25 new unit openings. The company hoped to open as many as 30 restaurants in 2014, but “we have had a few deals slip back into early 2015. We are in good shape to open 25 to 30 units in 2015 and our international pipeline, though small overall, continues to build,” Cooper said, adding that the chain also has seen pre-opening costs on a per-unit basis increase slightly this year.

Texas Roadhouse president Scott Colosi credited some of the quarter’s high notes to its ongoing plan of increasing seats at existing properties.

“We’re up to about 130 restaurants where we’ve added seating capacity, which is helping out a little bit on the sales front,” he said. “…A lot of [that sales growth] is intense focus on the operational side of the business.”

Texas Roadhouse also continues to streamline operations using technology, Colosi said. The company is “dipping a little toe in the water” by auditioning a handheld ordering device and testing online ordering for carryout. It has experimented with pay-at-the-table devices, but not extensively.

“We’re watching what other folks are doing and attempting to learn from the experiences of some of our competitors in the business,” Colosi said.

It is expanding the use of a guest management and seating system to about 65 percent of its restaurants, a tool Colosi said greatly helps traffic flow.

But while tech advances are helpful, Colosi said human service is key to meeting guests’ needs according to Texas Roadhouse standards, and that good table-turn times will continue to help top-line sales.

“I feel very comforted by the fact that we still have the same staffing levels we’ve had for a long time,” Colosi said. “You keep growing traffic … with a lot of folks who give both friendly service and fast service.”

Texas Roadhouse was founded in 1993 and has 433 restaurants throughout the U.S. and the Middle East.