Texas Roadhouse Inc (TXRH) 2006 Q2 法說會逐字稿

Good day and welcome ladies and gentlemen. Thank you for standing by. Welcome to Texas Roadhouse Incorporated's Second Quarter 2006 Earnings Conference Call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Scott Colosi, Chief Financial Officer of Texas Roadhouse Incorporated. Please go ahead sir.

Thank you Justin and good evening everybody. By now everyone should have access to our earnings announcement released this afternoon for the second quarter ended June 27th 2006. It may also be found on our website at www.TexasRoadhouse.com under the 'Investors' section.

Before we begin our formal remarks I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be put upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Texas Roadhouse.

On the call with me today as always, is G.J. Hart our CEO. G.J. is going to provide some general comments on the business and then I'll walk you through the financials, including an update to our 2006 forecast and then we'll open it up for questions. G.J.?

Thank you Scott and good evening everyone. Our second quarter was much more of a challenge than the first quarter of the year as our same-store sales growth slowed from over 6% in the first quarter to just over 1% in Q2. In addition, our third quarter has begun on a similar note, as our July same-store sales growth was a little higher than 0.5%. Despite the recent slowing of our comparable sales growth trends, we are not considering any material changes to our current business strategy.

That said, as part of our normal course of business we are continuing to test a few new menu items; one or two of which may replace existing items later this year. These items include a chicken-fried strip steak; a pulled-pork sandwich and entrée and a couple of shrimp entrées.

In terms of pricing, we are considering a slight price increase of about 1% later this year. And while we are currently testing this increase, we are also weighing the potential effect on consumer sentiment. Should we decide to make this change, we'll still be positioned more on the value end of our competitive set, which has always been our goal.

In terms of development, in the second quarter we opened six company restaurants and our franchise partners opened one restaurant. Year-to-date that makes 10 company-owned openings and across the board all openings have been very strong. In fact, in July, these 10 restaurants averaged about $90,000 per week as compared to about $76,000 a week for our restaurants in our comparable sales base. Based on the condition of our 2006 pipeline we now expect to open 25 restaurants, which is a slight increase from our previous guidance of 23 to 24 restaurants. All of the remaining restaurants that we expect to open this year are currently under construction, with the exception for one location which we plan to start construction later this week.

Our 2007 Development plan is also in great shape from both a real estate and personnel standpoint and our real estate team is now working on 2008. Admittedly our pipeline is stronger than we had anticipated and the byproduct has been a significant increase in pre-opening expenses. The good news, however, is that we should be able to open more restaurants in early 2007 as compared to the same period in 2006.

On the franchise side we expect that our partners will open five restaurants in 2006. And on the franchise acquisition front we are continuing to review potential acquisitions, but have not put any specific deals in motion. Given the correction in our share price over the last few months, our franchise acquisition multiples have come down somewhat from where they were eight months ago.

From a 2006 earnings forecast perspective, as noted in our press release, we have lowered our annual guidance by $0.02 to $0.03 a share from $0.44 to $0.45 to $0.41 to $0.43 per share. One reason for the forecast change is the increase in pre-opening expenses, which I talked about earlier. The other relates to general uncertainty about the remainder of the year. While we are confident in the strength of our concept positioning and operations, we recognize there are several variables beyond our control that could affect our short-term results. All that said, just achieving the low end of our guidance could result in comparable earnings growth of approximately 20% for the year, which we are very pleased with. Regardless of the operating environment, however, we are always looking for ways to improve our connection with the guests. As a result we recently completed a thorough round of consumer research highlighted by an exhaustive attribute usage and market study. It reinforced many things for us, including our competitive set, the demographics and satisfaction levels. And I'd like to comment on a couple of insights from the study.

First, we found that once casual diners try the Texas Roadhouse experience, they find it - found it highly satisfying, which promotes guest loyalty and leads to repeat visits for us. Our awareness numbers while fairly high in markets we operate in, are still well below those of the big national chains. In addition a significant number of casual diners who are aware of Texas Roadhouse have not tried us. Make no mistake, this is a very big opportunity to continue to increase the number of loyal Texas Roadhouse guests. We believe our strategy of becoming the hometown favorite for our casual dining guests through a localized and community-based marketing approach is the most cost-effective way to promote both awareness and trial usage of our concept.

Second, our research shows that variety is still a significant piece of the consumer decision matrix. Most casual diners, whether they use us or not, lump Texas Roadhouse in with the pure steakhouse category despite the fact that 50% of our sales come from non-steak entrées. The opportunity presented here is to better communicate our variety to our occasional, light and non-users. Overall, the research supports our current strategy and belief that we are focused on many of the right things to drive long-term guest satisfaction. In other words, we should continue to stay focused on what we've been doing day-in and day-out and that's providing legendary food and legendary service to each and every guest. That said, I'll turn it over to Scott to review the financials. Scott?

Thanks G.J. During my review of the second quarter, please note that many of the numbers I will mention are listed in the schedule of supplemental financial and operating data that was included in the press release. We've also included additional supplemental schedules in the release which focus on providing you with detail regarding non-comparable items, which include the expensing of stock options, the timing of our annual conference and the franchise acquisitions completed earlier this year.

So starting at the top of our P&L for the second quarter of 2006, as compared to 2005, total revenue increased 27% and company owned restaurant sales also increased 27%. The franchise acquisitions contributed about 9 points of this growth, with the balance about 18%, primarily coming from new restaurant development. As G.J. noted earlier, comparable restaurant sales at company owned restaurants increased 1.2% on top of the 6.8% gain achieved last year. Of the 1.2% growth, 1% relates to price, while transactions grew 0.2%. Average unit volumes were down slightly year-over-year and weekly sales averaged just over $77,000.

Franchise royalties and fees were flat year-over-year at just over $2.6 million. Royalties from new franchise restaurants opened over the past year offset royalties lost to the - our franchise acquisitions earlier this year. In terms of restaurant costs, as a percentage of sales, restaurant operating costs were 78 basis points higher than last year. Stock optioning expensing accounted for 60 basis points, while the operating costs attributable to the base business were 23 basis points higher than last year. Food costs were down 26 basis points, with the primary driver being the 1% price increase we took in January. Restaurant labor costs were up 104 basis points over last year. Stock options accounted for 60 basis points of the increase. The acquisitions added another 7 basis points with the remainder, about 37 basis points, attributable to the base business. Most of the base business increase was attributable to the 10 restaurants we opened earlier this year. Six of these restaurants were opened in the month of June.

Now, our labor costs are typically much higher during the first few months after the opening of a new restaurant. Rent expense was 16 basis points better than last year primarily due to the 11 restaurants we acquired back in December, as only two of the 11 restaurants have ground leases associated with them. Other restaurant operating expenses were up 16 basis points all in. There were a lot of plusses and minuses, but utilities alone were higher by 30 basis points.

Pre-opening expenses were $1.6 million higher than a year ago. A big part of this increase relates to the higher number of openings this year versus last during the quarter. We opened four additional restaurants in Q2 of this year versus last year. And in addition, we have many more restaurants than anticipated in advanced stages of the development pipeline. This means that we are on track to open more restaurants in 2007 earlier in the year than we had previously been projecting. Depreciation and amortization costs were 51 basis points higher than last year, driven by new restaurants.

G&A expenses has a percentage of revenue or about 127 basis points lower than last year. Stock options added about 60 basis points year-over-year, but this was more than offset by a 60 basis point improvement from the base business and a 120 basis point benefit from the timing shift of our annual conference. Our effective tax rate for the quarter was 37.5% or 220 basis points over last year. Almost all of this increase was attributable to the non-deductibility of certain stock options. And finally our weighted average diluted share count was about $76.5 million, a little below our forecast primarily due to a lower average stock price for the quarter.

Now on the to the full-year 2006 guidance. As G.J. noted earlier, we've lowered our EPS forecast for 2006 by $0.02 to $0.03 to $0.41 to $0.43 a share. This change is principally driven by the higher costs - pre-opening costs - associated with an increase in our development pipeline but it also incorporates recent trends. Some of the key full-year assumptions in this guidance include we'll open 25 company restaurants and our franchisees will open five restaurants. On the company side this is an increase of one to two restaurants from previous guidance.

We're now expecting slightly lower comparable restaurant sales growth of approximately 2 to 3%, reflecting our sales trends through July and our current outlook. We expect capital spending to be $80 to $90 million which is a $15 million increase from our prior forecast. The primary driver here is the increase in our 2006 development forecast plus the strength of our 2007 development pipeline, again in that we are on track to open more restaurants earlier in the year than we had previously anticipated. Most to all of the increase in capital spending will likely be financed with our credit facility. And with that I'd like to turn the call back over to G.J.

G.J. Hart. Thanks Scott. We certainly can't control many of the variables that are affecting the current consumer environment but we can control the experience that we provide each and every guest. In fact we believe that times like this always offer an opportunity to create broader awareness of our value proposition and that plays into our long-term approach of making sure that new and existing guests are with Texas Roadhouse for the long haul. And that strategy should position our concept to continue to achieve significant earnings growth. That covers our prepared remarks, so operator if you would, please open the lines for questions.

Thank you. [OPERATOR INSTRUCTION] The first question comes from Jeff Omohundro with Wachovia.

Thanks. I guess, first, just a housekeeping item. You mentioned the first four weeks of the current period. What is that comparison like in the prior year?

Jeff, it was about 6%.

Okay. And then on the new menu items that were referenced, where do you see the menu going in terms of price value and check?

I don't see any of these items really changing our overall PPA at all. It depends on where it ends up on mix. But what the items that they would be replacing are similar price points.

Okay. And then it sounds like a pretty strong performance on your new units. Anything different in sight selection strategy or opening teams behind that?

Well - hey Jeff, this is G.J. I - I think as always we continue to improve on our site selections and, as you know, Ken, our founder, continues to approve every site, so I think that's part of it. But I think the other part of it is something we've been talking about for a while, which is just investing in our training; keeping our managers in the system longer before they get their restaurants. And I think we're starting to see some of those benefits.

Great. Thank you very much.

This question is from Paul Westra from Cowen & Co.

Hi this is actually [Colin Gaheen] for Paul. One question just on the kind of the macro deceleration comp in your concept. Historically we've talked about 25% of your customers trading down, about 50% making a lateral move and 25% trading up. Have you seen any kind of shift in that due to this recent deceleration in comp?

Hey Colin, this is G.J. You know what? We really haven't. We've just completed this research study and really validated the very thing that you're just recalling and that's the way we position our competitive set. So we really haven't. If anything you probably have the more frequent diner maybe dining a little bit less and you have more of the opportunity to get some of those higher incomes to try us. At least that would be our guess at this point.

Okay. And maybe for Scott - just can you remind us what pre-opening costs per unit you target? I know the accounting changes have affected that.

Well with everything - given the - our new way of looking at it, we would target $350 to $400,000.

Okay. And --

And a lot of the fluctuation depends quite frankly on rent.

Okay. And safe to assume that if I break up the decrease in guidance about $0.02 is due to the pre-opening change? Or would it be the -- ?

Most of the change in guidance is due to pre-opening.

Yes. One other question for G.J, I guess is, beef cost outlook as we're getting closer and closer to '07?

I think in -- the current situation is that beef prices are pretty high. The live cattle markets haven't really moved much. I think they were down a little today. I think that the market one way or the other is going to break here shortly. So I would tell you that we're still cautiously optimistic into '07 but it's too early to really tell.

Thank you very much.

Moving on to Jeff Farmer of CIBC World Markets.

Good afternoon Scott and G.J. Scott, I have handful of modeling questions for you. I think in late February you guided to a 50 basis points decrease in restaurant level operating costs. I think that was excluding stock-based comp and any acquisition impact. So with the new same-store sales guidance and what you're seeing out there in the current environment, where does that restaurant level margin guidance stand right now for the full year?

Yes, it's somewhat less than that now I would say. Probably around between 10 and 30 basis points.

Okay. And then this was touched on earlier but in terms of pre-opening an easier way to do this is for the full-year, what are you looking for pre-opening? Not really per unit because that can be easily impacted by when you're opening, your'07 costs, but the full-year pre-opening expectation?

Certainly if you take where we are year-to-date and you double it --

Okay.

-- and then you add a little bit to that, just because our pipeline continues to grow, that will probably get you pretty close to the number.

Okay. And then the last question. I might have missed this but I was - I know that in your first quarter you had some interest - it looks like you were paying off a few high interest rate notes and you incurred some pre-payment penalties, but interest expense looked a little bit low to me. Is that a good run rate, $125,000 for the rest of the year per quarter? Again I know that you did see --

That's probably a good run rate. A lot of it will depend on how much money we have to borrow Jeff --

Okay.

-- to fund the capital spending. But most of our interest right now is amortization of loan fees, stuff like that, versus actual interest payments.

All right. Thank you.

[OPERATOR INSTRUCTIONS] We have a question from Matt DiFrisco with Thomas Weisel Partners.

Hi. With respect to the comparison to the year ago comp, you said 6% for the first four or five weeks in the quarter. When did that drop out -- down to the 3% pace that you booked it for the full quarter? Was that just right around Katrina?

Yes. Matt, this is Scott. We were 6% in July, 6% in August and 0 in September.

Okay. And then also can you give us a corresponding margin impact from Katrina in that quarter?

I can't say off the top of my head. But it was pretty dramatic for the month of September, simply because of all of the restaurants we had closed either for the whole month or at least for partial days.

Okay. And then, with respect to pre-opening, can you just give us, I guess, somewhat of a range on the full-year dollar number that you're expecting this year in '06 now? I think you were around the 10 to 11 million range before?

I don't know if I'm prepared to give you a range but I would just say it's probably safe to say double where we are year-to-date and add some amount of monies to that, just again as our pipeline continues to grow.

Okay and the last question, given the reference to the earlier start to '07 or the weightier first half of an opening schedule in '07, should we also presume then that there's the opportunity to exceed the growth -- to accelerate the growth rate, not only in numbers but in -- as far as the pace?

Certainly from an operating weeks perspective, we could see a sizeable increase next year simply by getting many more stores open earlier in the year, just based on where we're tracking now and what we know is either already under construction or soon to be going under construction in the system. So the company store base may grow in our 16 to 18% range, but the operating week growth may be a bit above that.

Okay. And then actually just one last question now that I thought of it, you mentioned something, I think it was regarding the -- your acquisition multiple is now not as attractive since your stock price is down. Does that infer then that if you were going to do an acquisition again that you have not -- you would still use stock as the primary source of funds to make that acquisition?

Well I think you meant to say the multiple is more attractive now because the stock price is lower.

Right. It's cheaper for you to buy, but it's not as nice for them.

So that's not necessarily the case. I mean, we're still looking at all the options, if you will, because the multiples are still on the rich side, even where our stock price is today for doing a deal. So we're exploring all the options with that.

Okay, thank you.

This question is from Aimee Marcel with Jeffries & Company.

Thank you. One quick guidance question. Can we get any share count guidance for the rest of the year?

Share count for the rest of the year will probably be a few hundred thousand shares from where we finished the quarter at on average for the rest of the year.

Like 400,000 a share -- a quarter?

I would say we'll probably average out between 76.5 and 77 million.

Okay.

For the full year.

Okay, that sounds good. Now did you see any geographic weakness in the quarter or was it just across-the-board?

It's pretty much across-the-board from where we were at the first quarter.

Okay. Your float seems to be improving, is there any update on that?

Did you say our float?

Yes.

I don't have any update for you on that at all.

Okay. That's it for me, thanks.

Okay, Aimee.

Thanks.

This question is from Steven Rees with J.P. Morgan.

Thanks. You mentioned that one of the biggest take aways from the consumer research study was the opportunity to increase the brand awareness and I just wanted to know how you plan on doing this through the local store marketing efforts?

This is G.J. The research really just -- first of all the numbers we're talking about are fairly high in the markets that we're currently in. And our current strategy of local store marketing and really being an ambassador, every single person being an ambassador for the brand is going to continue to get stronger, we're going to continue to do additional training for each one of our folks in each restaurant to continue to drive that. So really our strategy hasn't changed, it just tells us that we have an untapped opportunity here and we're going to continue to drive it through that process.

Okay thanks. And then just on the mix, did you see any change in the way that the customer used the concept throughout the quarter, perhaps as you moved into July with perhaps weaker beverage sales or appetizer sales?

Actually from a [P-Mix] perspective, we may have seen -- we have seen a little bit more towards the steak area, although not significant. But I think in terms of how people are using the concept, I would tell you that our business was softer in the beginning of the week and our business on the weekends has continued to be very strong.

Okay great. That's helpful.

[OPERATOR INSTRUCTIONS] The next question is from [Laird Beeger] with Bearing Capital.

Yes hi, everyone. A couple questions for you if I could. First off, Scott, can you tell us what the comps were in 2005 for -- by month for October, November and December of Q4?

We were up 3-ish in October, 4.5 November and 4, or between 3 and 4 in December.

Got you. And the second question, I know you qualify when you put your average unit volumes in the release that includes units that were open six months prior to the reporting period. But if you were to do average unit volumes including all units, would it be better than the 0.3% that you're showing?

Oh yes, it absolutely would be better. But again these newer stores haven't come all the way through their honeymoon curve.

Right, okay. That's all I had. Thanks.

Moving on to Destin Tompkins with Morgan Keegan.

Now Scott, I guess this would be more directed towards you. As we look at I guess pricing and you guys mentioned the potential price increase later in the year, we hear things like minimum wage rate increases -- I think the House approved an increase to $7.25 for the Federal rate -- and it sounds like beef prices remain high. How much pricing do you think you need to take to kind of maintain margins, assuming relatively flat traffic trends?

I would tell you, if the traffic is flat, I probably need 2% pricing on average. Obviously, if minimum wage goes up that changes all the dynamics behind that, but I think my wage rates have been growing at about 1.5% annually, which has stayed pretty consistent. And then I think a 2% price kind of encapsulates inflation in food costs and also the other expenses, principally utilities, R&M, that kind of thing.

Is that about the range you're looking at with the price increase?

Well, we already have 1% in our number today and we've been looking at something similar to that. That's what we're testing going forward.

And you said about 1% in Q1, is that right?

That's right, in January.

And then looking at the cash flow previous I guess on your -- before you increased the rate of development you were talking about, I guess, CapEx being funded through cash flow from operations. What's the differential there between CapEx and cash flows from operations that we're looking at for '07 - or '06 at this point?

Right now I'd say it's probably going to be about 15 million, maybe as high as 20 but more likely about 15.

Okay great, thank you.

You're welcome.

This comes from Matt DiFrisco, Thomas Weisel Partners.

I guess just as a little bit of a follow-up, I'm trying to also look at the model in the back half of the year on the Katrina comment about the margins. With respect to comp being around 2 to 3 you said for the guidance and the stores now looking a little bit more apples-to-apples as far as opening schedule year-over-year, seven versus probably 7 or 8 I would expect in the third quarter, are you now looking then for the labor pressure that you saw in the second half to be more comparable if not even get some leverage in the back half?

I would certainly hope that we'd have a stronger margin performance in the third quarter, sort of all things being equal. Now that said, if I've got 1% comps, which is effectively 1% pricing, I do have a little uphill climb to make, given that inflation is higher than 1%.

So -- I'm sorry, you said 2 to 3 then is your guidance for the full year?

That's full year guidance.

And you're implying around a 1% then for the third quarter?

Well it implies -- I'm already, for July I'm already at half of 1%, so that guidance implies -- at the upper end of the end of the range it implies roughly 3, 2.5 to 3 for the balance of the year. At the lower end of the range it implies flattish to one.

Okay. And again you had a zero in September?

Had a zero in last September, that's right.

Okay great, thanks.

You're welcome.

Moving on to Laing, Matthew with Avondale Partners.

Yes hi, I was hoping to just get some quick clarifications on the labor expense. I think you guys had a reclassification recently where some of the labor expense is pre-opening expense for stores that haven't been opened yet. I was hoping you could quantify that. And also I guess with more pressure coming through on the labor line with the accelerated store opening schedule, I think Scott you've told me in the past you should be able to leverage the underlying labor rate on a 3% comp, and I'm wondering if maybe you kind of give me an update there? And also maybe an update if -- you know I know you guys are tinkering with labor scheduling, if there are any opportunities that maybe can help offset some of this pressure?

Okay I'll try to answer your question in multiple parts here. But on the first part, the reclassification, the reclassification was from G&A to pre-opening.

Oh okay.

And when we hire managers, we're hiring them up to a year out, sometimes more from when the restaurant's going to open, we used to put that in G&A and felt it was more appropriate to be in pre-opening because they are hired to open the restaurant, or open a new restaurant. So that's the shift that we're talking about. Now there is a reality of, if we are having more managers in our system who are in training, and part of the time they're in training they're working in restaurants, and certainly -- but their salaries, their wages are being charged to a pre-opening account, not to the labor in that particular restaurant that they're working in.

Okay, I see.

So that's where there is some benefit to the labor line potentially. If wage rates are going up 1.5% and we've got 1% pricing, with 2 to 3% comps we should be able to run flat labor as a percent of sales in a given restaurant year-over-year.

Okay. I mean any thoughts on the labor scheduling system about -- I mean is that still a variant in the infancy here? Or any opportunity there?

It's somewhat likely we will roll out our labor module that we've been testing in the fourth quarter of this year, second half of this year. We're still working on some things there. Principally where that really benefits us is controlling when employees can clock in and clock out, helping us better manage overtime and make-up pay and those types of things. We're not targeting a labor model that is going to tell our guys that they have to schedule 10 or 20 fewer hours a week of labor. Our guys make 10% of net income as their compensation, our Managers Partners do, so they already have a natural incentive to sort of manage labor as tightly as they can.

Okay, thank you.

The next question comes from Barry Stouffer with BB&T Capital Markets.

Good afternoon, gentlemen. Scott, I didn't understand why depreciation and amortization would be up about 50 basis points just as you have new restaurants unless the investment cost is going way up, is that what is happening here?

Yes, Barry, that's certainly -- a lot of it is just the cost of the buildings and our equipment costs have both risen over time and that's what you're seeing in the depreciation numbers. And one thing that's probably going to change for us more so than it has historically is that we're going to have depreciation start to fall off the books because we're now running into -- most of our equipment is on a seven-year life and sort of the first year we built a lot of restaurants was 1999. So a lot of those restaurants are hitting their seven-year lives and we're going to see some of the depreciation that we've been incurring fall off the books. That should help at least level out the depreciation as a percent of revenue that change over time.

Okay. And can you share with us any thoughts on the food cost outlook for 2007, other than beef?

Food cost outlook for 2007.

Yes we could barely hear you there, Barry, it's G.J. I think you're question really centered around outlook on commodities ex-beef?

Yes, for '07.

Ah, there you go. Again, I think it's a little bit too early to tell. I think we potentially have a little bit of leverage on the pork side but probably not much. And chicken is really a wild card and an unknown.

Okay that's all I had. Thank you.

Moving on to [Sahil Connor] with SAC Capital.

Hey guys, congratulations on reporting a good quarter under pretty difficult circumstances as far as macro environment goes. My question is, have you baked in the potential for future price increases in your same-store sales guidance?

No.

So any of that will be incremental?

Yes it could potentially be incremental.

Okay. And the second question is, are you focusing any particular markets or regions for your new unit development?

Our development is typically -- we have 28 to 30 market partners around the country and we allow those market partners to add one or maybe two restaurants a year. So because we do it that way, by definition that spreads our development around the country so there really isn't any region of the country that we're opening more restaurants than anywhere else for that matter.

Got it. Thanks.

That concludes the question-and-answer session. I will now turn the conference back over to you.

Okay, thank you very much. Just one final comment here. Just -- despite the macro environment and its effect on the current 90-day period, we're still very confident in our development plan and our ability to drive comparable EPS at a rate of 20%-plus. We continue to be positioned very well competitively and every time that we've experienced a downturn period like this we've come back stronger than before. We don't expect this to be any different. Thanks for listening today and we look forward to addressing you all in the fall.

That concludes today's conference. Thank you for your participation.