Texas Roadhouse Inc (TXRH) 2006 Q3 法說會逐字稿

Good day, and welcome ladies and gentlemen. Thank you for standing by. Welcome to the Texas Roadhouse Incorporated third quarter 2006 earnings conference call. Today's call is being recorded. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session and instructions will be provided at that time.

I would now like to introduce today's moderator Mr. Scott Colosi, Chief Financial Officer of Texas Roadhouse Incorporated. Please, go ahead, sir.

Thank you and good evening, everybody. By now everyone should have access to our earnings announcement released this afternoon for the third quarter ended September 26th, 2006. They may also be found on our web site at texasroadhouse.com under the investor section. Before we begin our formal remarks, I'd 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 undo reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risk that could impact the future operating results and financial condition of Texas Roadhouse.

On the call with me today is G.J. Hart, our CEO. G.J.'s going to provide some general comments on the business and I'll walk you through the financials, including an update to our 2006 forecast and a first look at 2007, and then we'll open it up for questions. G.J.?

Thank you, Scott and good evening, everyone. I'm pleased to report that our sales momentum appears to be back. The quarter started on a relatively slow note as July and August comparable sales were both flat. In September our comparable sales grew about 6%. But, of course much of that increase relates to easier year-over-year comparison due to last year's hurricanes. In October our comparable sales increased by almost 4%, about 3% of which came from our guest counts. How much of this improvement come from moderating gas prices and interest rates it's hard to say but it is very likely that recent macro trends have given consumers added confidence.

Additionally, about a week and a half ago we rolled out a new menu that included a couple of new menu items and a small price increase of a little less than 1% which is intended to help offset general inflation. The new menu items include a country fried chicken and a grilled shrimp appetizer and entree. We also removed our southwest chicken and trout entrees to keep the size of our menu constant.

In terms of development, in the third quarter we opened 5Company restaurants and our franchise partners opened 3 restaurants. Q3 year-to-date, that makes 15 Company owned openings. These restaurants have performed very well thus far, and in Q3 they averaged about $84,000 per week in sales compared to about $74,000 a week for the restaurants in our comparable sales base. For the full year we still expect to open 25 Company restaurants and our 2007 development plan is in great shape. In fact, we already have 10 restaurants under construction for next year. We expect many of these will open sometime during the first quarter and this will be important to getting off on the right foot in the new fiscal year. An overwhelming majority of our openings in 2007 will be in markets where we already have a presence as the only new market for next year will be Minnesota.

On the franchise side our partners opened 5 restaurants this year and have no additional openings planned for 2006. For 2007 we expect our franchise partners to open 2 to 4 restaurants. On the franchise acquisition front, we announced that we are working on potentially acquiring 2 to 6 restaurants sometime within the next 90 days. Bear in mind that we have a lot of negotiating and due diligence left, so anything can happen at this point. From a 2006 earnings forecast perspective, as noted in our press release, we have left our annual guidance unchanged at $0.41 to $0.43 per share. Despite a strong start to Q4 we still have a long ways to go and a lot of things can happen with the elections and the holiday season approaching.

That said, I am very excited about our prospects for 2007. As I mentioned earlier, our development plan is in great shape and I feel very confident in our competitive positioning. Commodities, though, represent a bit of a wild card at this point. We've locked in pork and chicken for next year and done so with price reductions on both fronts. The beef markets on the other hand remain uncertain. Beef represents nearly 45% of our food cost, so it can really swing the numbers. Currently, we are in negotiations with our partners and expect to lock in our prices by the end of the year and so we'll keep you posted on that. Finally, a number of states have legislation in play to increase the minimum wage and we'll be watching this very closely. We expect to be adjusting our pricing strategy accordingly, but as always, we will way the competitive dynamics within each market at the appropriate time.

I will now turn the call over to Scott for a review of the financials.

Thanks, G.J. During my review of the third 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.

So starting at the top of our P&L for the third quarter 2006, as compared to the same period 2005, revenue increased 30% and Company owned restaurant sales increased 31%. The franchise acquisitions contributed about 9 points of growth with the balance primarily coming from restaurant development. Comparable restaurant sales at Company owned restaurants increased 2.3% on top of a 3.8% gain achieved last year. Of the 2.3% growth about 1.5 relates to price and mix while transactions grew a little less than 1%. Average volumes increased 1.4% year-over-year and weekly sales averaged just of $74,000. Franchise royalties and fees were $2.6 million. And this was down about 100,000 versus last year. Royalties lost via our franchise acquisitions earlier this year were slightly more than royalties generated from new franchise restaurants plus the impact of positive comparable sales growth.

In terms of cost as a percentage of sales, restaurant operating costs were 105 basis points lower than last year. Three items pretty much added up to the 105 basis point favorability for the quarter. First ,we built a big credit to workers' compensation and general liability insurance expense based on our most recent [indiscernible] report. Most of this credit related to the reduction of estimates made for the 2005/2006 insurance fiscal year which ended September 30th. Year-over-year insurance expense was favorable for the quarter by 102 basis points. The second item that effected restaurant cost was credit card expense. This year we were lacking an adjustment we made during the prior year which resulted in us booking an extra months worth of credit card fees in the third quarter of last year. This lapping effect benefited our cost by 51 basis points. In the third item the stock option expense which unfavorably impacted our margins by 48 basis points.

On the specific line item basis, cost of sales were down 10 basis points. The benefit of the 1% price increase we took in January was partially offset by commodity inflation primarily from produce. Restaurant labor costs were up 26 basis points year-over-year. Stock option expense accounted for 48 basis point of the increase and the acquisitions added another 6 basis points. Our workers' compensation credit benefited labor cost by 38 basis points. And that left us with a net 10 basis point increase related to the business. Rent expense was 11 basis points better than last year primarily due to the 11 restaurants we acquired back in December.

Other restaurant operating expenses were down 110 basis points versus last year. The key drivers were the insurance credit we earned on the general liability side and the credit card fee favorability that I reviewed earlier. Preopening expenses were $650,000 higher than a year ago. As we said previously, the driver here is that we have more restaurants in the advanced stages of the development pipeline than we had a year ago. Depreciation and amortization costs were 42 basis points higher than last year driven by new restaurants.

G&A expenses as a percentage of revenue were about 29 basis points higher than last year. Stock options added about 54 basis points but this was partially offset by 25 basis points of G&A leverage on the base business. Our effective tax rate for the quarter was 35.3%, which was equal to last year but a bit lower than our forecast of 37.5 to 38%. Essentially, we had higher than forecasted worker opportunity tax credits in Louisiana post Hurricane Katrina and higher FICA tax credits related to employee tips, which combined, offset increase attributable to the non-deductibility of certain stock options. We expect our tax rate to be about 35.5% for the fourth quarter as well. And, finally, our weighted average diluted share count was about 76.3 million, a little below last quarter primarily due to a lower average stock price for the quarter.

Now on to full year 2006 guidance. As G.J. noted earlier, we've left our EPS guidance unchanged at $0.41 to $0.43 per share for the full year. In addition, we've announced we're working on an potential acquisition of 2 to 6 franchise restaurants. Our current forecast excludes any impacts from these acquisitions. Our forecast does include the following two assumptions; First, we'll open 25 Company restaurants by the end of the year for the full year. And second, we'll generate comparable restaurant sales growth of 2 to 3% for the full year.

Regarding a first look at 2007, we're comfortable with a forecast that result in earnings per share growth of at least 20%. This forecast includes the following assumptions; First, we'll open 28 to 30 Company restaurants and our franchise partners will open 2 to 4 restaurants. Second, comparable restaurant sales growth will be 2 to 3%. Third, we've not assumed any P&L impacts from the acquisitions that we're currently working on. One final note regarding our 2007 forecast is that our annual managed partner conference will occur in the second quarter of 2007. And this is a shift from the first quarter of 2006.

Now I'd like to turn the call back over to G.J.

Thanks, Scott. As I mentioned earlier, we are excited about the recent increase in our sales growth momentum, particularly in October. We've always said that when times get tough for the consumer, we view it as an opportunity to create a broader awareness of our value proposition. We're also hopeful to have a strong gift card season in December which would help drive additional growth in early 2007.

That said, that covers our prepared remarks, so operator, please open the line for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Paul Westra with Cohen and Company.

I just want to double-check that in your '06 EPS guidance, you are using a $0.12 number for the third quarter, so you applying $0.06 to $0.08 for the fourth quarter?

That's correct, Paul.

With that said, I know you're-- it just sounds like from your prepared remarks you're assuming a flattish comp to get the 2.5 for the year. Even with the flattish comp you're looking for pretty much 0 net income growth versus '05 and '04's fourth quarter, excluding the [inaudible] stock option expense, is there anything else in there other than the conservative comp assumption that might make that a strange comparison?

Actually, Paul, I think we're at full $0.34 year-to-date. Hitting the middle of our range, our $0.41 to $0.43 range would be $0.08. I believe if you add back stock option expense of that $0.08. And if we had sort of normalized growth in preopening, I believe that would get you to earnings growth of over 20% year-over-year.

Okay, we'll work through that a little bit. Maybe some other questions I have. On the pricing, you said you took a 1%, G.J., is that rolling over 1%, so the effective is remaining at 1% as we speak?

It's a little less than 1%, Paul. For the year effectively be 0.8%.

Okay. Then last question. On your gift card comment, can you talk a little about what your program is and what kind of, I guess, budget or goal you're looking to gain year-over-year gift card sales?

Paul, it's G.J. We're not going to give you the specific goals that we've got. Just suffice it to say that we're growing our gift card sales substantially and that's combined in terms of just growth in the existing restaurants as well as the ones that come on line. Clearly it is a big program for us, it's one of the biggest of the year that we do, and the program will be very consistent with what we've done in the last 5 or 6 years.

No other incremental channels through retailers, mostly it's all in store?

Correct.

We'll go next to Andrew Barish with Banc of America Securities.

Question on, I think the consumer, you guys did a big consumer study kind of mid year, and one of the opportunities you have is trial. I think we've heard you talk about some early week stuff where, obviously, you and most other restaurant companies have a little bit of excess capacity. Do you have any specific plans on sort of addressing that early week traffic opportunity?

Andy, hi, it's G.J., let me tackle that one. First and foremost, the comps, the way they've come back-- have come back pretty evenly across all days of the week. Number one. Number two, in terms of initiatives around the early parts of the week, we did do a program that is locally driven, as everything is in our case, which is, as you know, the local hometown favorite which centered around a family day. It was pretty successful for us. It was an opt in program by restaurants, so they could chose to do it or not do it locally. We had the majority of our restaurants participate. And really, we're staying focused, like we always have, on driving that whole local hometown favorite and continuing to give back to the communities and continuing to really drive that whole local market effort. So I will not sit here and tell you that we've done anything significantly different than what we've done in the past.

Okay, thank you.

Our next question comes from Jeff Omohundro with Wachovia.

Just a follow-up first. The family day promo you mentioned, when did you kick that off?

We did that September the 26th.

Any way to tell how much that might have benefited the comps going into October? How much is that versus the gas price and consumer environment?

I'm sorry, say that again.

Any idea how much that contributed versus the improved environment?

No, we really don't.

The other question is the lower tax rate that helped in Q3 and I guess also in Q4. Should we expect that to continue into 2007?

Jeff, this is Scott. No, I would say our tax rate for 2007 will be in the mid 37 range, 37, 37.5. Primarily because of the stock option [inaudible] ability of our [ISIS] stock options.

Very good. Thanks.

We'll go next to Jeff Farmer with CIBC World Markets.

Historically you haven't really relied on New Food News as a [indiscernible] for a sales driver. Have the early results from your most recent new menu item introductions changed this strategy for you in any way, especially in the current environment?

Hi, Jeff, it's G.J. First of all, it's only been a week and a half, so it's too early to tell, but, no, it has not changed our strategy at all. We look at menu changes about once a year. We look to keep our menu size consistent. So, one on, one off.

Got it. And, in terms of-- Scott, in early read on restaurant level margins in '07, I know it's going down quite a bitt, but, better or worse early read on that?

I would tell you this, Jeff, we're not really prepared at this time to give specific guidance on restaurant margins in part because we haven't finished our beef negotiations yet, which obviously is a big deal as G.J. mentioned. That may dictate some of our pricing strategy or not.

That's fair. And then, one final question, I apologize if you touched on this but, the CapEx in '07, what's that looking like with 28 to 30 Company units?

CapEx will probably be similar to this year, roughly 80 to 90 million, even though we're opening a few more restaurants, it's the timing of when those restaurants are physically built drives our capital spending. What I mean by that is, for example, we're going to open 25 restaurants this year, but we're actually going to construct 33. A lot of what we're going to open in the first quarter, we're building today.

Did you touch on the cadence of those 28 to 30 in terms of across quarters? Is it back, back [H] '07 weighted?

It's a little more front end loaded than it was this year, particularly in the first quarter.

Okay. Thank you.

We'll go next to Marsha [Shelton] with Jefferies & Company.

Quick question regarding the managing partner conference, I noticed that in 1Q '06 somewhere in the neighborhood of about $2.5 million set aside for that, Is that a reasonable amount to build in for Q2 '07?

That's probably a pretty good number for 2007.

I also noticed in a few select markets that you all had a pulled pork dinner sandwich still-- I'm sorry, pulled pork dinner, on some of your menus in select markets. Are you all still testing that or is that just -- what's the-- is there an update on that front?

Yes, Martha, this is G.J. We are still testing that in about 10 restaurants. We tend to test things all year long. This happens to be an item that there's a lot of keen interest from our guests and or operators. So we are going to continue to test that.

Okay. And then another thing I noticed, just when I was taking a look at one of your menus was, and this could go along with the price increase that you all announced, is that the 6oz choice sirloin, which used to be $7.99 is now $8.99 in a few markets. I assume that just goes in with the price increase that you all referenced?

That's correct.

Okay. Thank you all very much.

We'll go next to Matthew Difrisco with Thomas Weisel Partners.

Could you give us a little bit of guidance also on the stock option compensation in the fourth quarter? It looks like it jumps up seasonally and last year was nearly $0.04 diluted. Is that the same estimation in the fourth quarter for '06 as well or is it going to be more like the third quarter dilution?

I would say the dilution, this is Scott, I would say the dilution is going to be slightly lower in the fourth quarter than it will be in the third quarter.

Okay, so it's going to be less than the $0.02 that you just incurred in the third quarter?

It still may round it to but it'll be probably a little bit less.

Can you also -- if I look back on your prior year-- or prior year's notes, I think you did a 4% comp in November and a 4% comp in December of last year, and I estimate a 2% in October, is that correct?

We don't give out monthly comps, so I think we're 3.5 for the quarter. It was pretty evenly spread, so you're probably not too far off.

Well the 3.6 in your transcript from last year you said November and December were 4% and you did 3.6 for the quarter, so I'm just wondering if within your guidance, you are lapping a positive comp in the month of October than when you put up the year-to-date-- or the quarter to date 3.9 number?

Absolutely.

Lastly, can you help us with also what you're forecasting for preopening in the fourth quarter given that you'll have 10 fourth quarter openings and potentially 8 to 10 in the first quarter of '07? It's a big jump from what you did in 4Q '05 and 1Q '06.

We're not going to give you a specific guidance on preopening for the fourth quarter, but I will tell you that certainly we would expect higher expense in the fourth quarter given the number of openings. But just bear in mind that a lot of our expense relates to restaurants that are going to open next year because we've already hired the management teams for those restaurants. It will be higher, but I'm not prepared to give you an exact guidance number.

Can you give us the restated number for 4Q '05 with the reallocation from G&A into preopening?

I don't have that number, but I can get it for you.

Great, thank you.

We'll go next to Destin Tompkins with Morgan, Keegan.

Scott, speaking of stock options expense, can you give us any sense for '07 relative to '06 for stock options expense?

I would expect that for 2007 stock option expense will be fairly close to what it was in '06.

On an absolute basis?

Yes.

And G.J., you mentioned the minimum wage increases in several states, can you give us a sense of kind of what your strategy would be if those increases come into place?

I will tell you that, as I said in my prepared remarks, that it's something that we will analyze based on what the competitive environment is. Typically and last year, we did not price to the total amount of minimum wage increase. Specifically in Illinois and Florida we priced about 1.5%. So I think, sort of in our makeup, we would look very, very hard at what that price increase would be. That's about as far as I would be willing to tell you at this point.

Okay, great, thanks.

Our next question comes from Steven Rees with J. P. Morgan. Mr. Rees, your line is open.

Hi, can you hear me?

We can.

I just wanted to ask quickly about the beef cost. Could you remind us what your contract looked like in 2006? And then I know it's still early but, if you had to lock in today, what sort of price levels would you face next year?

Well, first of all, commenting on if we had to book today, what would it be, we wouldn't book today, so we don't really have those numbers specific. The markets, as I said, are very, very uncertain and it's just too early at this point. Last year's overall inflation on beef, if I recall, was just at 2%.

Okay so up slightly. And then, just a question for G.J., you've talked in the past about increasing the overall brand awareness and broadening appeal. How do you plan to do this going forward? Do you think it's more a necessity to expressively communicate the value to the guest or do you plan on focusing more on the brands variety?

It's a little bit of both. Again, I would tell you that specifically our focus has not changed in terms of being driven by local store market efforts, by getting out to be in the communities and getting the word of mouth out there. Absolutely, the value proposition, as well as our variety, I think I even mentioned in the last call, we do get lumped into sort of the steak house catagory even though our mix is about 48% steaks as a percentage of entrees. If you look at our new menu you'll see that, on the right hand side, we have now split out sort of chicken specialties, which we've never done before and sort of that's driving at that just saying, Hey, we've got this variety. That's one way that we're doing it. Again, our focus has not changed one bit in terms of the local store marketing effort. The only thing that I would tell you is that it's much more intense than it's ever been.

Okay, great. That's helpful.

Our next question comes from Larry Miller with RBC.

I just wondered if you could talk about your philosophy for franchise acquisitions? And, what's the range of multiples you're comfortable paying? And how might these latest two to six acquisitions fit into that range?

Well, Larry, let me start. It's G.J., and I'll let Scott take over after I just make a couple of comments. Typically, as we said in the past, our strategy around franchise acquisitions has been acquiring areas that we have potential development opportunities, people, and/or brand protection. That's really how we've continued to develop a strategy around those acquisitions. You want to take --

Well, on the multiple question, I'll tell you for these particular deals, you're looking at multiples in the eight times area.

Okay, is that sort of normal range for you guys? Is that accretive at that level?

It's accretive for us.

Okay, thanks.

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

I wanted to revisit the fourth quarter guidance issue. Can you tell us what is different about the fourth quarter verses the third quarter other than the $0.02 insurance credit?

Hey, Barry, this is Scott. I'd say one of the biggest things is that in the fourth quarter our sales volumes were lower, our average weekly sales are lower in the fourth quarter than they are in the third quarter. So that by itself is one big one. Particularly because you've got Thanksgiving and Christmas and Christmas eve. I would say secondly, that's a big part of it, the other piece is this preopening and that we are going to open a lot of restaurants and we forecast our preopening is going to be a lot higher in the fourth quarter than it is the third quarter.

Okay. What was your wage rate inflation in the third quarter?

It was between 1.5 to 2%.

Are you seeing any upticks in turnover rates?

Our turnover has been very consistent.

Can you comment on what utilities did during the quarter and also if you're expecting continued pressure next year?

Utilities were only slightly higher as a percent of sales basis. And I'm still predicting to have a little bit of utilities inflation next year.

Okay, that's all I had. Thank you.

You're welcome.

Our next question comes from Paul Westra with Cohen and Company.

Hi, sorry, just a follow-up question. You may have been asked again, I may have missed it. You comment that chicken and pork contracts were down every year. Can you quantify how much they were going to be down?

Paul, it's G.J. At this moment, given that we haven't completed all of our commodity contracts, we aren't prepared to comment on both of those at this point.

Great. and my last follow-up would be, can you talk a little bit, you spoke about in the past about maybe using some debt, either uses cash to purchase franchisees or potentially accelerated share repurchase plan, can you comment on that?

Hi, Paul, this is Scott. Absolutely we may very well use cash, cash/debt to buy these franchise restaurants, should it come to that. And I think from a share repurchase perspective, we don't have any plans, imminent plans to do anything, but we do, from time to time, look at things like a share repurchase with our Senior Management Team and our Board.

Great, thank you.

This is G.J. Let me just comment additionally on to that. I think in terms of these two to six acquisitions, they are nowhere near, any where new from being done at this point. We've still got due diligence, negotiations and board approval to acquire, so there's a long, long way to go.

Great. Thank you.

[OPERATOR INSTRUCTIONS] And we'll go next to Matthew Difrisco with Thomas Weisel partners.

Hi. Can you tell us where those three franchise stores opened in the quarter?

Yes, I can tell you that. One of them was Fargo, North Dakota. One of them was Tracy, California. And the other one was Naperville, Illinois.

Okay. And can you specifically tell us where that benefit from workers' compensation, was it in one line item? And I think you said it was restaurant operating expenses or was there a portion broken out into labor as well?

he workers' comp-- the insurance, there's two pieces, one is workers' compensation one's general liability. And a piece, one piece was in the workers' compensation. I'm sorry, that hit the labor line, restaurant labor line. And the other piece, the general liability piece, hits the other, other operating expense line.

Can you just help us with how much of the [1, 9], how that breaks out?

About 550,000 was workers' compensation and the rest was general liability.

Perfect, thank you very much.

This does conclude today's Q and A session. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you all very much for joining us tonight. And we will look forward to talking to you at the end of next quarter.

This does conclude today's teleconference. Thank you for your participation. You may now disconnect.