Here's Why Texas Roadhouse is Cooking the Competition
Texas Roadhouse isn’t immune to some of the crunches facing casual dining. The 527-unit brand stared down labor inflation in 2017 and raised prices about 0.3 percent across its U.S. system. But, as chief executive officer Kent Taylor put it Tuesday afternoon during a conference call, Texas Roadhouse is “feeling some very cool vibes for 2018.” It’s hard not to when you glance at sales figures that are nearly mythical in this corner of the industry.
Texas Roadhouse closed out an impressive fiscal year with hearty sales numbers, reporting comparable same-store sales growth of 5.8 percent at company restaurants and 4.7 percent at domestic franchised units. For the year, the brand saw same-store sales rise 4.5 percent and 4.2 percent in those segments, respectively. This result gave Texas Roadhouse its 32nd consecutive quarter of positive comparable restaurant sales growth. For fiscal 2018 so far, comps are up 4.7 percent.
Perhaps most impressive: Texas Roadhouse didn’t get there via value promotions or significant check lifts. The brand saw its guest count increase 3.6 percent for the year. In the fourth quarter, traffic was up 4.7 percent, year-over-year. Taken against the landscape of the restaurant industry, TDn2K’s Black Box data showed that the top 25 percent of restaurants, based on comp sales performance in 2017, witnessed traffic declines of 0.8 percent. The middle 50 percent reported traffic down 3.3 percent and the bottom 25 percent saw a 7 percent traffic drop versus the prior-year period. “Traffic growth continues to drive our top-line momentum,” Taylor said. How many restaurants right now can share that sentiment?
Another factor on the books for Texas Roadhouse: The chain will celebrate its 25th anniversary in April. “Trust me, it’s going to be huge,” Taylor said, injecting some levity into the call.
As in past reports, Texas Roadhouse recapped its performance by talking about what it’s getting right and how it plans to keep doing so, not so much about face-lifting the organization. However, there are some changes being made to align with evolving trends. Texas Roadhouse just isn’t sacrificing its core at the expense of those maneuvers. For instance, one topic that has recurred in past months is delivery and take-out.
From December 2015 to December 2017, casual dining has seen off-premise sales growth of 2.9 percent across the industry, according to TDn2K. That number is the same for family dining (it’s 1.7 percent for upscale dining, the other full-service segment measured).
Even though Texas Roadhouse has not advertised or promoted this category much—Taylor once told competitors to “to do as much delivery as they can so they can deliver lukewarm food to their people that order it”—Texas Roadhouse has reported similar growth. Scott Colosi, Texas Roadhouse’s president and chief financial officer, said in the call that the chain’s to-go business as a percentage of sales has doubled in the past five years, from about 3 percent to roughly 6 percent. He said Texas Roadhouse believes it could be a function of the long waits for dine-in guests and the chain would still “much rather have people come in and eat,” so customers can soak up an experiential-dining atmosphere it believes separates it from the crowded pack.
Yet, Texas Roadhouse doesn’t have its head in the sand on this issue, either, as Colosi explained. The brand is looking at containers to keep food hotter and make its to-go packaging more environmentally friendly. Texas Roadhouse also nationally rolled out an online platform to order to-go, and a mobile app where the option is available as well. This helped cut down on the phone calls for busy restaurants and led to an uptick in sales, Colosi said.
But, again, Texas Roadhouse is unique in this conversation for its stance. There is zero shift in attention from the company’s perspective of catering to the core guest. “We are not chasing delivery or anything. We just want to make sure that our experience when people do come in and get to-go is the best that it can be,” Taylor said.
“At the end of the day, we know our best chance for success lies in staying focused on driving top-line growth by providing a legendary dining experience to our guests,” Colosi added. “We do that by maintaining our value on the menu and taking care of our people, who in turn take care of our guests.
In the fourth quarter, Texas Roadhouse’s diluted earnings per share increased 37 percent to 40 cents from 29 cents in the prior-year period, driven mostly by restaurant margin performance and a lower income tax rate. Margin dollars grew 11.9 percent to $99.2 million from $82.4 million and margin, as a percentage of restaurant sales, decreased 11 basis points to 17 percent thanks mainly to labor inflation partially offset by lower food costs. The tax rate decreased to 19.8 percent from 28.8 percent.
Another common theme in 2017 that appears to be carrying over is restaurant growth. Texas Roadhouse opened seven company restaurants in the fourth quarter and two international franchise units. For the year, the brand opened 27 company stores, four Bubba’s 33s, and five franchised restaurants, including four international.
Taylor said Texas Roadhouse is on target to open about 30 company restaurants in 2018, including up to seven Bubba’s 33s. The brand is looking at as many as six new international locations this year, including its first unit in Mexico.
Colosi added that the company would continue reinvesting in existing sites as well this coming year, even as average development cost goes up. In 2017, the cost to build a Texas Roadhouse upped to $5.3 million due to higher building cost, he said.
He also noted that Texas Roadhouse would use some of its tax savings to divert resources to employee compensation and benefits-related programs, but wouldn’t provide details just yet. Some of it would go to protecting pricing and “ultimately result in us taking probably less pricing than we might otherwise would have,” he said. The exact details are being kept close to the vest for now.
On the pricing note, at the end of March, Texas Roadhouse plans to increase menu prices an additional 0.8 percent at the rest of its company restaurants.
Colosi said the increases have resonated just fine with guests to date.
“We never really talk in terms of price elasticity internally. Certainly there is always debate, do you leave some money on the table? We'd rather leave some money on the table and know we're protecting our [brand] because we're in this thing for the long term,” he said. “We treat it like a marathon, not a sprint, is the best way I can say it. And so, we are going to continue to do that.”