Texas Roadhouse is Producing Results, Not Excuses
Each quarter, it feels like Texas Roadhouse stomps on another restaurant buzzword. This time, the 540-unit-plus chain dismissed the notion of a loyalty program, saying it would be “inappropriate” for the brand to explore it at this time. Delivery? Texas Roadhouse knocked the idea in July, encouraging its competitors to “to do as much delivery as they can so they can deliver lukewarm food to their people that order it.”
What’s becoming clear, however, is that Texas Roadhouse’s no-nonsense approach to the restaurant business is writing a blueprint for struggling brands across the country. In the third quarter, the chain reported comparable same-store sales growth of 4.5 percent at company-owned units, year-over-year, and 4.7 percent at domestic franchised outlets. Those numbers rose 4 and 3.6 percent, respectively, in the previous quarter. Texas Roadhouse’s momentum is something executives said they’re not just coveting, but protecting at all costs. This conversation isn’t a complicated tale of what’s changing; it’s about keeping the machine running. Texas Roadhouse has now achieved 31 consecutive quarters, or almost eight years, of comparable restaurant sales growth.
“We just feel very good about the momentum we have. And so we're going to be very careful in protecting that momentum,” Scott Colosi, Texas Roadhouse’s president and chief financial officer, said in a conference call.
In the third quarter, diluted earnings per share grew 19.9 percent to 43 cents from 36 cents in the prior year. Seven company-owned restaurants opened, including two Bubba’s 33 Restaurants, and one franchised unit. Texas Roadhouse posted revenue of $540.5 million in the period, beating Street forecasts. Shares have surged 26 percent in the past 12 months on the stock market.
If there was one pinch it was the labor front. Margins as a percent of sales dropped 31 basis points to 17.8 percent thanks to higher wages. The company also increased its outlook for labor inflation to 7–8 percent from its original forecast in the mid-single digits.
Tonya Robinson, the brand’s vice president of finance and investor relations, said there are several factors at play. A growth of hours, wage inflation, increased traffic, and company initiatives are all playing a role.
“In Q3, we really saw more of an impact from the hiring initiatives than we've seen in the past,” Robinson said in the call, referring to anything Texas Roadhouse puts in place that grows organically over time. “There's not an on-and-off switch of when it starts and when we lap it. It's just, as more market—managing partners hear about it and implement it to some degree, it starts to have an impact.”
“I think we just continue to see market pressure from the job market just being tighter, and it being tougher to hire employees,” she added later. “And actually, you hear more and more people talking about that, even outside the restaurant industry.
The Texas Roadhouse team said it flew around the country on a fall tour to meet with every managing partner and discuss the challenges.
“All over the country, you hear how challenging it is with unemployment being so low to—you're competing for talent,” Colosi said. “And so you're having to pay in almost every position more than you did even a couple of years ago, and every year has gotten tougher as unemployment has continued to trickle down. So in theory, if the economy remains pretty strong from an employment standpoint, there'd still be some amount of pressure. Is it incremental to this year? We don't know.”
The company’s increased hiring initiatives, however, are another sign of its brand health, Colosi said. The fact is Texas Roadhouse continues to grow, in size, and in regards to traffic at the unit level.
“It's a big reason why we've even got a whole hiring initiative going, because we're planning on continuing to grow traffic, and we need a lot of people to help us manage all this traffic we got. So we're full steam ahead,” he said.
Texas Roadhouse is already off to a sizzling start in the fourth quarter. The company said same-store sales are up 5.3 percent in the first four weeks. They expect to open 26 or 27 company restaurants in 2017, including four Bubba’s 33 locations. In 2018, Texas Roadhouse plans to open 30 company restaurants.
“As we look to 2018, the game plan is really the same,” said Kent Taylor, Texas Roadhouse’s CEO. “[We are] staying focused on growing sales through our commitment to legendary food and legendary service and maintaining our everyday value.”
Texas Roadhouse announced during the call that its mobile app is fully rolled out across the country now. Additionally, online ordering capabilities are live at every location.
Yet, the chain remained steadfast on where it wants to direct guests: to the four walls of its actual restaurants.
To-go sales are accounting for about 6 percent of sales, Colosi said, but Texas Roadhouse would “much rather folks come in and dine inside the four walls and get that legendary experience that we think we offer our guests, including the legendary atmosphere.”
In response, Texas Roadhouse isn’t pushing to-go through any sort of advertising campaign. The company does, however, recognize it can’t ignore it. The to-go packaging has been changed up and the online platform makes it much easier for guests who do elect for the service to take out meals.
“But ultimately, we're not trying to build a lot of incrementality in our business longer term by pushing to-go,” he said. “We want to build incremental sales primarily by getting people inside the four walls.”