Texas Roadhouse Continues to Defy the Restaurant Industry
Texas Roadhouse has drawn a line in the sand in regards to margin pressure. Mostly, this comes in the form of a 3.2 pricing increase set to unroll over a four-month period—the 555-unit steakhouse chain’s largest in the last 15 years. As has been the case for some time now, labor costs are the culprit. Texas Roadhouse saw an 8.8 percent growth in labor dollars per store week in the fourth quarter, announced February 19, thanks to wage and inflation of about 5 percent and growth in hours of 3.2 percent. Restaurant margin dropped 112 basis points to 15.9 percent as a percentage of total sales versus the prior-year period. The primary driver: a 23-basis point lift in cost of a sales and a 120-basis point jump in labor.
Texas Roadhouse president Scott Colosi said in a February 19 conference call that the chain expects labor pressures to continue in 2019. An additional 1.5 percent price increase, scheduled for early Q2, on top of a 1.7 percent uptick taken in November 2018 (for a total of 3.2 percent), “should help offset most of the margin pressure our operators are experiencing as a result of inflation,” Colosi said.
So here’s the headline question: Is this change affecting Texas Roadhouse’s traffic? The answer is where the chain takes another stand that separates it from the restaurant pack yet again.
With the sub-4 percent reality that is today’s unemployment climate, Texas Roadhouse won't compromise a long-term goal that carries short-term burden. Instead of being understaffed, it wants to achieve the opposite. And that comes with a cost Texas Roadhouse is happy to pay.
Firstly, as to whether the price increases deterred guests, Colosi said they didn’t. The reason being that Texas Roadhouse refuses to cut back where it matters most. Additionally, investing in employees and the customer experience stuck out as a competitive differentiator.
“Keep in mind, we're doing this all at the same time that we are more staffed than we've ever been. Our food is as good as it's ever been. Our sides are as heaping as they've ever been. Our hand-cut steaks are as good a quality and are as well cut and better than they've ever been,” he said.
“We're very much on offense, so we feel pretty good.”
The numbers emphatically back Colosi's claim. Texas Roadhouse rocked another top-line report in Q4 that closed out a stellar fiscal 2018. Same-store sales increased 5.6 percent at company-owned locations and 4.8 percent at domestic franchises. And this is stacked on Q4 2017 comps of 5.8 and 4.7 percent.
For the year, same-store sales climbed 5.4 percent and 4.3 percent, respectively, as Texas Roadhouse achieved 36 consecutive quarters of comps growth (it's approaching a decade-long run of segment-beating results). Impressively, the chain anchored results with a 3.9 percent increase in guest counts for the full year (3.2 percent in Q4). The company also opened 28 corporate restaurants in 2018, including five Bubba’s 33, and five international franchise restaurants.
Revenue was higher by 11 percent to $605.9 million in Q4 as well. Net income upped 6 percent for earnings per share of 42 cents. All the results topped Wall Street expectations.
Colosi said Texas Roadhouse has not been able to draw a definite correlation between pricing actions and traffic changes. Instead, it’s more a result of “unemployment over time when you look at the direction of unemployment getting worse or getting better.”
What that boils down to, essentially, is that Texas Roadhouse invested in the long-term health of its staffing pool, especially as it concerns turnover at the management level. For the past three years or so, Texas Roadhouse challenged its managing partner system to fully staff restaurants in an industry where the opposite is often true. And that’s a moving and growing target given the added volumes into its restaurants. In just this past year alone, Texas Roadhouse boosted average-unit volumes (at restaurants open for a full six months before the beginning of the period) 4.8 percent to $5.2 million from $4.97 million.
Many chains today, notably in the full-service arena, lament being understaffed due to triple-digit turnover rates. “And so we’re challenging the concept of what it means to be fully staffed on the hourly level,” Colosi said.
How so? By improving quality of life—the No. 1 reason people “leave us,” Colosi said. Being fully staffed is the leading cure, he added, which is why one of Texas Roadhouse’s top initiatives, despite all the cost pressure, remains adding hourly employees and managers.
Colosi said Texas Roadhouse tacked on managers in certain locations and is tracking toward near-mythical single-digit manager turnover rates (the chain is almost there, he said). This doesn’t concern managing partners; it’s kitchen managers, service managers, assistant service managers, assistant kitchen managers, and other employees that directly affect the guest-facing experience. Texas Roadhouse made progress and has room to grow in 2019, Colosi added. The initiative to fully staff created flexibility on labor schedules, which is a critical driver of employee satisfaction and that quality-of-life dynamic mentioned earlier. “When you've got management turnover getting down close to single digits, that is a huge competitive advantage for us as far as what it bodes for the future quality of the guest—what the guest is going to experience from us,” he said. “So we know that, and it's a big part of our traffic growth right now. And it's one of the things that makes us pretty confident about the future.”
The hourly challenge is more pressing, however. The chain’s turnover continues to slide upward year-over-year, Colosi said. Most of Texas Roadhouse’s hourly turnover takes place in the first 30–60 days of employment.
Another factor, Colosi said, is Texas Roadhouse’s managing partner model—a program akin to the model that helped Outback scale in its early days. So, for Texas Roadhouse, the conversation stretches out over a collection of nearly 600 individual restaurants and “600 different stories of where they are in their own staffing journey,” Colosi said.
But the positive kickback of that formula, given that every operator seeks a percentage of store profits, is that Texas Roadhouse, historically, has not been a short-term reactor when it comes to top-line trends and performance. “They're going to do what they need to do as far as making the right decisions for the long-term benefit of their business, because that's how they get paid,” Colosi said. “So they're not just going to hire people or give people hours unless they think it really adds value to their business. So ultimately, it's about doing the right thing for our guests and for our employees. And we trust that our operators are doing that.
Colosi shared a hypothetical of a customer driving up to a drive thru and seeing a closed sign (Texas Roadhouse doesn’t have any drive thrus, by the way). In response, the guest walks in and, naturally, asks what’s going on? The restaurant responds, “We don’t have enough people to open the drive thru at that location,” and suddenly the red flag flies. Or, dressed down, their customer experience came up short of expectations. That dilemma isn’t all that different from an understaffed full-service restaurant putting out a bad shift.
Eight, nine years ago, this issue wasn’t overly present, Colosi said. But today, workers can dial up a handful of different choices that pay $15 an hour if they’re unsatisfied. “… it’s a different world,” he said.
“When I hear about or go by places and you can see it in certain restaurants how understaffed they are and what it's doing to their guest experience or the loyalty that those guests have, it's kind of scary,” Colosi said. “So again, we just don't take anything for granted about our future success, which is why in part we're doing what we're doing.”
If you look at the past 15 years or so, Texas Roadhouse’s margins have been up about half the time and down the other half. One way or another, it usually figures out how to handle and deal with inflationary pressures stressing the industry. Continued same-store sales and traffic growth are currency Texas Roadhouse bets on.
And while it hasn’t always been easy, the brand approaches those challenges by guarding traits it refuses to cut back on: It won’t cheapen the guest experience and it won’t change the way it compensates employees. Menu wise, Texas Roadhouse churns the machine, year-after-year. It plans to introduce a new chicken sandwich in 2019, which would qualify as the biggest menu add in the last couple of years.
That 3.2 percent worth of pricing was reasonable, Colosi said, if you factor in all of these targets. It allows Texas Roadhouse to offset margin pressure without fracturing what it stands for.
“Again, without us having to cheapen anything for our guest, not get cute, we're playing offense, and that's part of the reason why our traffic growth is what it is. It's part of the reason why we had $5.2 million AUVs last year. And they were well below $3 million at the beginning of the decade,” he said. “So we're very happy about that. That's what's got us here in part so we're going to continue down that road.”