Texas Roadhouse Inc (TXRH) 2007 Q1 法說會逐字稿

Good day, and welcome, ladies and gentlemen. Thank you for standing by. Welcome to today's TEXAS ROADHOUSE INC first quarter 2007 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. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Scott Colosi, Chief Financial Officer of TEXAS ROADHOUSE INC. Please go ahead, sir.

Thank you very much, and good evening everybody. By now, everyone should have access to our earnings announcement released this afternoon for the first quarter ended March 27, 2007. It may also be found on our website at TexasRoadhouse.com under the Investor 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 placed 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 result 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 then I'll walk you through the financials. Then we'll open up for questions. G.J.?

Thank you, Scott, and good evening, everyone. I'm happy to say we had a solid first quarter. Our EPS results were on track with our 2007 plan despite inclement weather in many parts of the country during the quarter and inflationary pressures that adversely affected many of us in the industry. On the surface, our EPS growth was significant, but some of the increase was due to year over year timing of our annual management partner conference. As we stated in the release, it was in the second quarter of this year as compared to the first quarter in fiscal 2006. Also, last year's first quarter included a noncash charge associated with the franchise acquisitions. However, taking into account timing issues and factoring out the noncash charge from the prior year, it was still a very healthy, solid quarter. Scott will walk you through all of our financial results in more detail in a minute. I just want to touch on a couple of the highlights.

From a revenue perspective, it was a challenging comparable sales environment industry-wide. We were affected as well, with our comparable restaurant sales up only 0.9%, which was lower than we had hoped for. A couple of things really drove this for us. First, there was more inclement weather this year. Secondly, we did not see as much of an increase in the average check as we had anticipated with the price increases we took. We experienced some lower alcoholic beverage mix as well as a little trade down on the menu. Finally, while gift card sales were up, they were not up as much incrementally for us as they have been in the past. Fortunately, we have seen some improvement in comparable restaurant sales, which were up 3.7% for the first four weeks of our second quarter.

While the quarter presented a challenging same store sales environment, I am very pleased to report that from a new store perspective, our sales were very impressive. In fact, the new stores we added during the quarter averaged just shy of $99,000 a week in sales. Which is well above our system average. Admittedly, these stores are in their honeymoon periods, so please don't extrapolate these results for the full year. That said, these numbers are very strong, giving us plenty of confidence that our model is built on sustainable growth. In addition to solid sales performance at our new stores, we also hit our internal development target of 10 openings during the quarter, which puts us in really good shape for hitting this year's target, as well as leading us into the start of 2008. In fact, we have increased our full year forecast for our new company-owned restaurant openings from 28 to 30, to 30 to 32.

From a margin perspective, restaurant margins came in 13 basis points better than the prior year's first quarter. We had both food and labor inflation, but the food inflation was more than offset by the pricing we took. However, as planned, we did not completely offset the labor inflation. Due to the minimum and/or tip wage increases in about 15 states where we operate, we continue to see pressure on the labor line. In our case, it is driven by four states in particular -- Arizona, Colorado, Ohio and North Carolina -- where the tip wage increase was in excess of $1 per hour. We told you on the last call that dealing with labor inflation was going to be our toughest task and that we would not be asking our operators to cut their labor cost or sacrifice service levels in any way whatsoever, nor would we be cutting back on our compensation programs and/or our training programs. This is still our position. Sure, it would be nice getting more check to help offset some of these increases costs, but we have a brand with a value proposition that resonates with our guests. Despite these pressures, we are not changing our outlook for at least 20% EPS growth for the year and we are very pleased with that. From a G&A perspective, we continue leveraging our base business. For the quarter, we did have mismatching with timing of our annual conference and the franchise related charge in the prior year which skews comparability. Scott will walk you through this, but I can tell you we continued getting G&A leverage to the tune of about 30 basis points for the quarter.

Now let me briefly touch on some things going forward. First off, development, which drives the largest part of our growth, is in great shape. Hitting our increased development forecast of 30 to 32 new company restaurants this year should not be a problem, and we are on pace to achieve operating week growth of at least 20%. In addition to the 30 to 32 company openings for the year, we are in talks with franchisees for the acquisition of up to nine stores. If this were to occur, these would likely be third quarter transactions. Also, as we discussed last quarter, we are looking at acquiring franchise restaurants at 5 to 6 times EBITDA as this would be commensurate with returns we generate from building new restaurants. In addition, we are looking at doing cash deals versus stock deals. We will keep you updated as things progress. But as of now, we are very optimistic the acquisitions will occur. Comparable restaurant sales have started in the second quarter much stronger than we ended the first. However, we still have a long way to go. So for right now, we are keeping our annual 2007 diluted earnings per share guidance of at least $0.53 per share unchanged. I know some of you might be saying wait a minute, you just beat the first quarter. So why are you keeping annual guidance the same? You are really taking the full year down. To that, I would respond that while we are aware we have exceeded consensus estimates, our EPS results were right in line with our internal plan, which gets us to at least 20% growth for the year. I will now turn the call back over to Scott to review the financials.

Thanks, G.J. During my review of the first quarter, please note that many of the numbers I will mention are listed in a schedule of supplemental and financial operating data that was included in the press release. Starting at the top of our income statement for the first quarter of 2007 as compared to the same period in 2006, total revenue increased 19% and company-owned restaurant sales increased 19.5%. The growth in company-owned restaurant sales was driven by operating week growth of 19.5%, as averaging of volumes were basically flat with the prior year or down 0.2%. Comparable restaurant sales at company-owned restaurants increased 0.9% on top of a very strong 6.4% increase last year. For the quarter, traffic was down about 1 point. One thing I will point out on our check is that based on pricing we have in our menu, we should be seeing about a 3% increase in our check averages. However, we are not seeing quite that much as our alcohol mix is down and we have seen some slight negative mix shift. So right now we are seeing on the order of a 2% increase in average check year over year.

From a sales perspective, I want to give you a little more color on average weekly sales, as G.J. mentioned how well our 2007 openings were performing. Average weekly sales at our same stores, which numbered 124, were about $81,500 for the quarter. Average weekly sales for 24 additional restaurants that have been open 6 to 18 months as of the beginning of the quarter and therefore are included in the AUV calculation -- those sales were about $76,500. The remaining 25 restaurants that have been open 6 months or less, including the 10 we have opened in 2007 averaged about $88,000 per week. Franchise royalties and fees were $2.9 million, up over $350,000 versus last year, due to the opening of new franchise restaurants, increased royalty rates in conjunction with the renewal of certain franchise agreements, and the impact of positive comparable sales growth. In terms of cost as a percentage of sales, restaurant operating costs were 13 basis points lower than last year. Lower costs of sales and other operating expenses were partially offset by higher labor costs. Specifically, cost of sales was down 33 basis points, and quite frankly had it not been for higher produce costs during the quarter, costs of sales would have been down even more based on the pricing we have. As a matter of fact, produce costs were up 30 basis points year over year. Restaurant labor costs were up 39 basis points. The largest portion of the increase was driven by front of house labor which is where we feel the impact in tip wages. We did see some increase in back of house labor as well, and these increases were partially offset by lower stock option expense. However, overall, as we have projected, wage rate inflation outpaced our pricing. Almost all the labor increase is concentrated in the four states where the tip wage was increased by more than $1 per hour.

Run expense was basically flat with the prior year. Other restaurant operating expenses were down about 16 basis points versus last year. Lower equipment rent and utilities were partially offset by higher credit card fees. We did buy out some equipment leases at the end of the fourth quarter, and net of this is that equipment rent will be lower all year and a partial offset to this will be in higher depreciation and interest expense. Pre opening expenses were over $1 million higher than a year ago. We opened 10 restaurants in Q1 this year versus only four last year, and as we have said previously, we have more restaurants in advanced stages of the development pipeline than we had a year ago.

Depreciation and amortization costs were 44 basis points higher than last year, primarily driven by new restaurants. G&A expenses, as a percentage of revenue, were about 225 basis points lower than last year. Keep in mind you will see the impact of our annual managing partner conference during this second quarter this year as compared to the first last year. This accounted for 142 basis points of the improvement for the first quarter. In addition during the prior year we incurred about an $800,000 charge related to the franchise acquisitions. This accounted for 53 basis points of the improvement. So the leverage in the base business, which like the restaurant labor line also included lower stock option expense, was on the order of 32 basis points. Our effective tax rates for the quarter was 36.2%, which was lower than last year's 40% rate, due to the nondeductibility of the $800,000 charge recorded in conjunction with the franchise acquisition in the prior year and a decrease in the nondeductible portion of incentive stock options related to share based compensation costs this year. For the year, we are still targeting about a 36% tax rate. And finally, our weighted average diluted share count was about $76.7 million, right in line with our fourth quarter, as the slightly lower average share price offset the impact of stock option exercises.

Now on to full year 2007 guidance. As G.J. noted earlier, we have reiterated our EPS guidance for 2007 diluted EPS growth of at least 20% or $0.53 per share and this forecast excludes any impacts from any potential franchise acquisition. Our forecast does include the following two assumption. First, we'll open 30 to 32 company restaurants and our franchise partners will open two to three restaurants, and second we'll generate comparable restaurant sales growth of 2 to 3% for the full year. And to remind everyone one final time, our annual managing partner conference occurred in the second quarter of 2007. And this is a shift from the first quarter of 2006. Now I want to turn the call back over to G.J.

Thanks, Scott. Well, despite a challenging environment, we remain optimistic about our brand and our position as well as our growth strategy. Our development pipeline is in great shape and we are moving forward on franchise acquisitions. Shorter term, our comparable restaurant sales have improved somewhat in April and our new stores continue to perform very well. As we stated, wage related margin pressure still exists, but we do not see it as jeopardizing any of our bottom line goals. To sum things up, we still believe we are well positioned for a solid year in 2007.

I should also mention that about a month ago we had our annual managed partner conference and Scott and I both mentioned from an expense perspective. But from a team perspective and ultimately a revenue and profitability perspective, the conference was great. In fact it was and is a great opportunity to get the entire TEXAS ROADHOUSE family together to network, socialize, and reward the best of the best. All in all, it really helps drive the culture and the passion of our great managing partners, who are the ones at the end of the day that really make things happen each and every day. So I want to put a big thank you out to all of them for a job well done. It is no secret people are at the core of what we do, and achieving our long-term financial goals hinges on each team member finding ways to improve what they do. Fortunately, we have a culture and passion for focusing on the basics of running the business year in and year out -- and believe we can continue to simplify, intensify, and fortify our operations and our brand. We remain as focused as ever on investing our resources in the selection, the hiring and the training programs, so that we can keep the pipeline of great, well-trained operators going as we hold fast to the belief that investing in our people is the key to driving the future success and capitalizing on the exciting opportunities ahead for TEXAS ROADHOUSE. And that ends our prepared remarks. Operator, if you would, please open the lines for questions.

(OPERATOR INSTRUCTIONS) We'll go first to Jeff Farmer with CIBC World Markets.

Thank you. Now that you guys have a quarter under your belt to see how some of your price increases have offset some of your food and labor costs pressure, what do those lines look like for the full year on a percent of revenue basis moving forward?

Jeff, this is Scott. I would just say that restaurant margins overall, we would forecast them to be somewhere in the range of flat to down 50 basis points.

Okay. That helps. And in terms of your same store sales, are the comps you are seeing in your more developed markets like Texas and Ohio -- are they above, below, or in line with what you are seeing for the company average?

This is Scott, Jeff. Our comps were pretty comparable across the country and a little bit weaker in the Northeast.

Another question from me. On pre-opening expense, it would be helpful in terms of absolute dollars what that looks like for '07 right now in your forecast.

I would use somewhere in the neighborhood of about $450,000 per restaurant.

I guess my frustration is -- just in attempting to do that in the first quarter, we would have probably overestimated by about $1 million. So is there an absolute number you can provide?

I'm not going to give you an absolute number. But I can tell you in the course of opening 30 to 32 restaurants, I would use about $450,000 a store, recognizing that half our pre-opening is being spent on the 12 months before the store's getting open.

Okay. Thank you.

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

Hey, guys. Two questions related to those new unit opening volumes. If you'll look at the numbers you gave out, on the less than 6 months versus the 6 to 18 months, it's a drop off of about 13, 14%. Is that kind of what you've seen historically on a honeymoon basis? And then as a follow-up, just in terms of new units, on the D&A line -- is just the inflation we are seeing out there in development costs going to cause that line to creep up on a percentage of sales basis for this year?

Andy, on the honeymoon curve, yes. 13% is definitely within the relevant range for us from a honeymoon curve perspective. It does bounce around a little bit year to year. That is definitely in the relevant range, and there is a significant deviation between restaurants and their honeymoon curves individually. Some could be 25%, some could be zero, depending upon location. On the depreciation line, yes, you're right. Some of it is coming from the increased cost of construction. We're seeing also increased cost of equipment. We do expect, later this year and getting into 2008, we are going to start to have a lot of depreciation start to fall off the books. So we are going to have a lot of equipment packages that are becoming fully depreciated. So I think our depreciation line as a percent of revenue is going to start to level off next year.

Thank you.

We'll take our next question from Jason Whitmer with Cleveland Research Company.

Afternoon. G.J., what are some of your updated thoughts -- what seems to be more and more crowded restaurant space. Certainly you are having good success with your new restaurants and generally the pace of your comps relative to your peers, but what are some opportunities to win guests over from your competitors and maybe what's the best way to separate from the noise that's out there? Especially all those that keep spending more money on media when they tend to all look the same.

Jason, I would tell you that at the end of my comments, I really focused on the day-to-day basics to run our restaurants. We continue to give the same, consistent message to our operators. We're not going left, we're not going right. And it makes it very easy for those guys to stay focused on what they're doing. Therefore we treat every new guest that comes in the building as an absolute new guest, and we try to touch them and make sure that they understand we're there for them. And I think that, combined with our investment in our people and getting the best and doing the best training, really sets us apart. You know those that are doing media, I can't comment on that. In terms of what we're doing, we are very happy with the direction we're going. And again, our internal branding statement is to be the local hometown favorite, to appear one-on-one in that community.

Have you noticed any changes within some of the new restaurant opening of already-existing markets, new markets, or I think they are mostly existing markets but relative to the number of restaurants in your immediate area, either within a comparable steakhouse or bar and grill or else what?

Any time we open a new restaurant we do all that work -- to see how many competitors, what type of competitors, how many steak competitors, how many casual dining competitors, et cetera. To say there is anything standing out, there's not.

Okay. And Scott, I remember you saying a couple years back, when you were above 2% on pricing -- I think that was 2004 -- it made you a little uncomfortable. Now that we are kind of back in that environment, is that something that makes you nervous? Especially when you are not getting the full flowthrough at this point?

Yes, I think we are always nervous when we take price and certainly this year is the most we've taken. A lot of it is minimum wage driven. And I think to a certain extent the guest understands that piece of it. But absolutely, we have seen a little bit of trade down on our menu. And that does concern us.

And the only other housekeeping -- it looks like the franchise fees were up pretty significantly this quarter with not a lot of new units. Is that something that carries through the rest of the year? I think you mentioned something about higher royalties.

Yes, a lot of that will carry through the rest of the year.

Okay. Thank you.

And we'll go next to Destin Tompkins with Morgan Keegan.

Hey guys. Looking at the development schedule for 2007, the couple more units than what you previously were looking at -- is it still fair to say that most of those are going to be in existing markets versus new markets?

Yes.

Okay.

Again, what we would deem as an existing market is where we have a company market partner.

Right. Okay. Looking at the April same store sales, or the Q2 to date same store sales -- is there anything unusual driving that acceleration there in April versus Q1? Any reason that that strength wouldn't be sustainable?

Well, this is Scott. Comparisons were easier in April. A lot easier than they were in March. And so there is no particular reason why we couldn't, we're going against the same comparisons. And I think in May and June that we went against in April. So that is the way I look at it.

But no unusual shift maybe benefiting April?

No.

Let's see. I had one other question. I think previously you had talked about G&A leverage for the full year and you may have mentioned this earlier. I may have missed it. But can you give us what you expect in terms of G&A leverage for the full year?

I think G&A could be better by 25 to 50 basis points.

Great. Thank you.

We'll take our next question from Matt DiFrisco with Thomas Weisel Partners.

Thank you. I wanted to follow-up on the pre-opening questions there. Should we read into the 450 number as a little bit conservative here? Or is that just the way the balance is going to come out in maybe these first ten foreign markets where you had better synergies and maybe didn't have to get on the plane and travel as much and incur as much pre-opening. Because it looks like you did substantially better on a per unit basis.

I would hope the 450 is on the conservative side.

Okay. Can you help us with getting a better grasp as far as the leverage in the box and also in G&A on how much lower, or the dollar numbers you had embedded in the two items for equity-based compensation? G&A as well as labor?

How much lower were they year over year?

If you could give us the dollar numbers. I have your numbers from last year both around $900,000 and $1 million.

I can only tell you in total off the top of my head -- pre-tax was $800,000 lower. And on an EPS basis, $0.018 last year versus $0.01 this year.

Okay. Maybe I'll circle back to see that I'm doing the numbers right when I'm offline. And then as far as looking at the question prior on the comp, I guess you were doing about 2% through the first four weeks of last year in the quarter. So we shouldn't think that there is any benefit from having Easter come a little bit earlier this year, as far as helping out April maybe? Or is this a consistent pattern we should be able to see supported going forward?

No, I think we, there was a benefit week with Easter. And there was a lack of a benefit week from Easter. And I think that's been washed through.

Okay. And then lastly can you talk about other operating expenses? What was the major source of leverage there? Typically when a restaurant opens up meaningfully more stores in a quarter versus a year ago, that is when the line items that's toughest to manage as far as on the new store basis. So I was a little surprised in the amount of leverage there. Is that something that's sustainable and what was that?

Well, we talked about -- on other operating expenses we talked about we had lower equipment rent, which is partially driven by the fact that we bought out a number of equipment leases at the end of last year. So we essentially moved equipment rent into depreciation and interest expense.

Got it. Nothing else out there as far as --

We have had lower utility costs. Utilities were about 20 basis points lower by themselves. So that was offset somewhat by higher credit card fees as we continued to see our credit card mix as a percent of total transactions increase over time.

And then, last question. One of your competitors -- I think it was Longhorn -- mentioned they started to see on a store by store basis of Outback and Lone Star closing down some stores, but nothing tangible towards the comp yet. But are you seeing certain stores, perhaps in the Midwest, where you are seeing some Outback closings or Lone Star closings getting a benefit and you are the ones left standing taking the sales.

I can tell you we haven't studied it.

Okay. Thank you.

We'll take our next question from Paul Westra with Cowen and Company.

Thanks. Good afternoon. G.J., I was hoping maybe you would give us a little more color on some of the franchise acquisition conversations -- obviously in general comments. Are your goals still the same to acquire significant number? And are you finding the number of win/win transactions in line to what you expected?

Hey, Paul. You know our goals are still the same. I think with us coming back and saying we're going to evaluate these more commensurate with new store openings and that seems to be about 5 to 6 times EBITDA. We have had some people raise their hands and those discussions are going fine. So I guess I would tell you that absolutely our goals are still the same and we're moving ahead.

And you know we had 11 last year. Looks like we'll have at least 9 this year. Is that sort of what the pace we should expect going forward? As far as the pace of any franchise acquisitions on an annual basis?

Paul, we're going to take these deal by deal and I really can't comment on that at this point.

One last question for Scott. How do you expect to finance this transaction? I know obviously you have fielded questions before on your balance sheet leverage. I wonder if you can update us on your --

In the immediate time frame, it would be through our credit facility.

And are you still -- I know you commented that you are looking to optimize your financial structure. Any updates on what you are looking at?

We're still looking at things. But we are not in a position really to discuss it any further.

Okay. A separate question. I know you mentioned the timing -- I guess a little more specific on the timing of openings, you mentioned most of the stores will be front end loaded. Will we expect to see almost the same openings here in the second quarter we saw in the first?

I would still say we are probably going to be close to 50% the first half of the year, 50% the second half of the year. There is a chance it might be 55% in the first half. But I probably would be modeling it 50/50 right now.

Great. Thank you.

We'll take our next question from Jeff Omohundro with Wachovia.

Just want to retouch the pricing resistance issue in the consumer. Just maybe your thinking going forward about any changes you might pursue if this environment doesn't really change. And can you really get through the noise in the quarter of the weather to get a sense of what might really be going on? Also is there any other issue, any competitive issue that you noticed?

Jeff, it's G.J. How are you? First of all, I would tell you that you are right. There was a lot of noise in the quarter with weather. And also, gasoline prices consistently went up during the quarter. There is a whole lot of moving parts. So I think it's a little too early to say what's causing this and what might we do in the future. Rest assured we're going to continue to track it and move accordingly. I just think it's too early.

Okay. And just one other. On the gift card growth, and the sense that perhaps it wasn't as strong as you had hoped. What was going on with that? Any change with how you market them? Or just the environment also?

No. I would tell you that on a comparable store basis we did well. But we didn't do as well as we thought we would do. And yet on an overall basis, because we have more stores, we did significantly better. I think is there anything different? I don't think so. I think it was a more difficult environment this Christmas than the year before and a lot more people selling gift cards.

Fair enough. Thanks.

Our next question from Steven Rees with J.P. Morgan.

Can you just remind us where you stand on your key commodity contracts for fiscal '07? I think you have pretty much everything locked in? Have you had a chance to extend anything into '08 at this point?

This is G.J. I think you asked about a commodity update and how long we were out for?

Yes.

I could barely hear you. Right now all our major commodity contracts are through the end of 2007. We will start to begin talks and looking at 2008 pricing later this summer. But we do not have any contracts currently extended into 2008.

Okay, and then do you care to quantify the exact dollar amount of the conference? I think it was $1.6 million last year. You took about $200,000 in the first quarter -- is that math about right?

I would use $2.5 million as a number for the second quarter of '07.

Pre-tax or after tax?

Pre-tax.

Great. Thanks.

We'll go next to Larry Miller with RBC.

Most of my questions were asked. I would like to follow-up on them. The 3 7 comp in April -- presumably your mix is still down. I see that is what you are saying, so your traffic has improved -- is that correct, and is that in line with your plan at this point?

Larry, this is Scott. Our check was up 2% in April and our traffic was up 1.8%.

Have you seen that reversal then from that Q1 -- oh yes, 2%. That's exactly right. I got you. Is there any rule of thumb that you can give us in terms of acquisitions? How accretive they are?

I will tell you this. Essentially, no. Because every acquisition is different. In some cases we are getting the real estate, in some cases we are paying a lot of rent. And we are not paying much for the stores then, but we are not getting a lot of earnings at the same time. So every deal is different, and unfortunately until we get one down on paper, we really can't give you any guidance on that. You do have to remember that with all these acquisitions in the current year, we're going to have to take a charge, more likely than not for this EITF 04-1. If the franchisees has any stores with royalty rates that are different than our current 4% royalty rate. So in the current year they may not be accretive, be accretive in the following year.

Okay. Thanks.

And we'll go next to Barry Stouffer with BB&T Capital Markets.

Good afternoon, gentlemen. Did you quantify the weather impact on same store sales in the first quarter?

Barry, we have made absolutely no attempt to quantify it. So I can't tell you what it was.

Okay. Do you have any initial thoughts about the commodity cost outlook for '08 at this point?

Barry, it's G.J. We don't. I think it is too early to tell. There is so many moving parts in each one of these commodities. Markets opened overseas -- one market today in the beef market. So I think it's just too early.

Okay. I wanted to revisit the depreciation and amortization, just see if we could get a little more color on that increase. It was up 35% year over year. Unit count was up 21% But it was also up about 15% sequentially. Some of that is the buyout of equipment leases, I assume. Can you quantify that?

I don't want to quantify it specifically. But you know the equipment leases could be in the range of a couple hundred thousand dollars quarterly, increased to depreciation for this year.

Is there anything else unusual in that number at all or all a reflection of the new unit openings over the last year?

For the most part, reflections of the new unit openings. They cost quite a bit more than they have in prior years. Particularly on the building side -- site work side.

That's all I have. Thank you.

We'll go next to David Tarantino with Robert W. Baird.

Good afternoon. Scott, on the comps plan for the year, it looks like that came down slightly to 2 to 3, and before you had been saying 3% plus. Was that strictly related to what happened in Q1? Or have you changed your assumptions for Q2 to Q4?

Strictly related to Q1.

Great. On the pricing front, what are you seeing your competitors doing in the markets where you've had the biggest increases? I guess what I'm trying to get at is -- has your relative price position changed versus some of your primary competitors?

David, this is Scott again. It really varies by market and by competitor. So some have said that they haven't taken much price, if any, in some of the more severely impacted minimum wage markets. Some have taken much higher pricing than we have. So it really is across-the-board.

Okay. Thanks. And then finally, on the cost front -- is it fair to assume, based on your comments related to produce costs, that you might see the costs of sales line improve further? Or more than the 33 basis points that you saw in Q1 for the rest of the year?

It certainly is possible. But we need produce costs to go down. And they don't seem to be going down very much, at least at this point. But we'll see what happens.

Okay. Great. Thanks a lot.

(OPERATOR INSTRUCTIONS)

We have a follow-up question from Andrew Barish with Banc of America Securities. Hey, guys. I'm interested in the consumer behavior at your concept. I mean, given the price value proposition has always been among if not the best -- have you guys ever seen trade down? Or negative mix like this? And maybe promotionally are you doing anything? Are you doing the Texas Two-Fers a little bit more in some markets or anything like that?

Andy, this is Scott. I haven't seen as much mix shift as we've experienced here in the first quarter. But again, it's been essentially four months. So I'd say we're still early in the whole life of this price change and minimum wage and everything that's gone along with it and gas prices and so forth. So yes, we're doing a little bit more Texas Two-Fers. But I wouldn't say in a material way that would impact the mix to the extent we are talking about. And there is no other promotions that we're doing differently than any other year.

Okay. Thank you.

And that is the final question we have today. At this time, I'd like to turn the call back over to Mr. Hart for any closing comments.

We appreciate you being with us and we look forward to seeing you on the next call for our second quarter results. Good evening.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.