Texas Roadhouse Inc (TXRH) 2008 Q3 法說會逐字稿

Good day, and welcome, ladies and gentlemen. Thank you for standing by. Welcome to the Texas Roadhouse Inc. third quarter, 2008 Earnings Conference Call. Today's call is being recorded. (OPERATOR INSTRUCTIONS) Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time.

I would like to turn the conference over to Mr. Scott Colosi, Chief Financial Officer of Texas Roadhouse. Please, go ahead.

Thank you, very much, and good evening everybody. By now everyone should have access to our earnings announcement release this afternoon for the third quarter ended September 23rd, 2008. It may also be found on our website at Texas Roadhouse.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 statement 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 more details discussion of the risks 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. is going to provide general comments on the business and then I'll walk you through the financials and then we'll open it up for questions. G.J.

Thank you, Scott, and good everybody, everyone. The third quarter was a tough one for the industry and us. Diluted earnings per share were down 14% for the quarter and we are projecting that 2008 diluted earnings per share will be approximately flat with 2007 despite the extra week in 2008. Comparable restaurant sales decreased 3.2% for the third quarter and restaurant margins decreased 281 basis points.

While our results were not terrible on a relative basis, we are not happy with being down in sales and profits. In these unprecedented times, we simply have to focus on doing what we believe are the right things for the long term or we could end up damaging our brand. That would jeopardize the brand equity we've worked so hard to build and we just don't see any reason to do that in favor of short-term gains. We will remain focused on delivering value to every guest every day with legendary food and legendary service and to do that, while maintaining a conservative balance sheet and a conservative approach to our capital allocation.

I'm going to talk to you in more detail about what we're doing and how we are looking at things but first let me turn the call over to Scott for a review of the financials and a discussion of some of our guidance going forward. Scott.

All right, G.J. During our 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.

Starting at the top of our income statement for the third quarter of 2008, as compared to the same period in 2007, total revenue increased 15%, with Company-owned restaurant sales increasing 15% as well. The growth in Company-owned restaurant sales was driven by operating weak growth as both comparable restaurant sales and average unit volumes were down from the prior year.

During the quarter, we opened 7 new Company-owned restaurants. And in addition, we acquired 9 previously franchised restaurants as of the beginning of our August period. With the opening of another three Company-owned restaurants since quarter end, we now have opened 26 Company-owned restaurants thus far in 2008, and we are on track for 29 Company openings for all of 2008.

As G.J. mentioned earlier, comparable restaurant sales at Company-owned restaurants decreased 3.2% versus an increase of 2.5% last year. For the quarter our average check increased 0.1%, while traffic was down 3.3%.

Regarding check, net pricing was up 2.3%, while mix was down just over 2 percent for the quarter as we continue to see negative mix shift. For October, comparable restaurant sales were down approximately 4.5%. I will mention this was impacted by about 0.5 point due to us removing week day lunch from the recently acquired franchise restaurants.

From a restaurant sales volume perspective, I'll offer a little more color on average weekly sales. For the quarter, the 182 restaurants in our same-store sales base averaged $71,500 a week in sales. These restaurants have been open 18 months as of the beginning of the quarter. There were 33 restaurants that are in our average unit volume base but are not in the same-store sales base. These restaurant have been open 6 to 18 months as of the beginning of the quarter and they average $65,600 a week in sales. Our newest 23 restaurants which have been open sometime over the last nine months and thus are in neither our same store nor average unit volume calculations averaged $76,130 per week in the sales during the quarter.

Franchise royalties and fees were $2 million which was $600,000 lower than last year primarily due to the acquisition of three franchise restaurants at the beginning of the 2nd quarter this year and another 9 during the third quarter. In terms of margins as a percentage of sales, restaurant level margins were 281 basis points lower than last year. Thus, for the year as a whole, we are now down 153 basis points versus last year.

Let me touch briefly on the specific lines for the third quarter. Cost of sales was up 38 basis points. And beef costs were favorable year-over-year but this was more than offset by just about everything else, including higher bread mix, shortening, oils, dairy and produce costs. Labor costs were up 81 basis points. Labor costs were impacted by the result of deleveraging associated with negative same store sales growth and continued pressure from increases in minimum and tipped wages. Rent expense was up 41 basis points from the prior year. 75% of the increase resulted from the previously-discussed franchise acquisitions. These restaurants as a group have higher rent as a percentage of sales.

Other restaurant operating expenses were up 121 basis points versus last year. Over half of this was due to utilities, specifically electricity and natural gas. We did experience some deleveraging associated with negative same-store sales growth but we also incurred $250,000 associated with hurricane-related costs and another $240,000 in costs associated with the remodels of two restaurants. These were partially offset by lower managing partner and market partner bonuses. Preopening expenses were just over $300,000 more than the prior year.

While we did open two more restaurants during the quarter, this year as compared to last year, the timing of preopening costs can vary a little depending on the timing of the openings for the year. And note that we have fewer openings planned for next year at this point in time. Depreciation and amortization costs were 10 basis points higher than last year driven primarily by the cost of new restaurants.

G&A expenses as a percentage of revenue were 32 basis points lower than last year. The decrease here was due to two big items. First G&A bonus expense was down as we are projecting lower than planned diluted earnings per share for the year. And second the non-cash accounting charge incurred when we acquire franchise restaurants was over $350,000 less on this year's third quarter acquisition as compared to last year's acquisition.

Our affective tax rate for the quarter was 31.1%, which was lower than anticipated due to various tax credits primarily the FICA tip credit bing projected to be a larger percentage of pre-tax income, based on lower sales and margin expectations for the year. For the year, we are now projecting our income tax rate for 2008 to be approximately 34%. Finally our weighted average diluted share count was 73.3 million which was 2.7 million lower than we were at the end of last quarter, due to share repurchases.

During the quarter, we repurchased 4.1 million shares of common stock at an average price of $9.17. Year-to-date through the third quarter we repurchased 5.7 million shares at an average price of $9.20. So as of the end of the third quarter, we had $22.5 million remaining on our $75 million share repurchase authorization.

As I mentioned on the last call, one thing I want to reiterate today as it relates to share repurchases and our resulting capital structure is that we plan to maintain a conservative balance sheet.

Now on to full year 2008 guidance. As noted in our release, we are now projecting flat diluted EPS growth for 2008 as compared to our previous guidance of 5% to 15% growth. And this does include the positive impact from the extra week in the 4th quarter of 2008. Our forecast includes the following three assumptions.

First we'll open 29 Company restaurants. Second, comparable restaurant sales for the year will be down 2% to 2.5%. And third, based on reducing our same-store sales expectations and higher utility costs, we are now anticipating our restaurant margins will be down 150 to 175 basis points for the year. So overall, the big drivers of our reduced forecast are lower comp sales and correspondingly lower margins.

In addition to guidance for the 2008 year, we did announce in our release that based on the current environment, our preliminary expectation is that 2009 dilute earnings per share will be flat with our estimated diluted earnings per share for 2008. Additionally we are reducing our Company-owned location growth plans from 29 in 2008, to approximately 15 in 2009. All of the openings in 2009 will be in existing markets.

There are a couple of things I do want to mention as it relates to 2009. First, we've not made final assumptions as it relates to pricing, inflation, or traffic among other items. Second, for comparability purposes, I will remind you that 2008 is a 53 week year for us, as compared to 2009, which will contain 52 weeks. Also, we are making some modifications to our managing partner bonus program for the benefit of our key operators. We anticipate this will result in a $1 million to $2 million higher managing partner bonus expense for 2009 versus 2008. And third, we plan to maintain what we believe is a conservative capital structure.

With the reduction in planned openings we anticipate generating a much larger amount of free cash flow in 2009 and from a leverage perspective and we look at things on a fully-leveraged debt to EBITDAR basis. I can tell you we're currently at just over 2 times leverage and have approximately $100 million in capacity under our current credit facility which is not scheduled to expire for 3.5 years. As we look forward I could see us managing our debt levels down in the near time given the overall state of the economy. However we will continue reviewing this on an ongoing basis.

With that said, I would now like to turn the call back over to G.J. to talk more about our plans going forward.

Thank you, Scott. As I said earlier, it is tough out there and I suspect that the 4th quarter will be no different. However, the current environment does not change how we look at the business long-term and we believe as bad as things are, they are temporary. At the core, our business is still all about generating returns on capital. So we remain focused on getting returns on capital already invested while continuing to evaluate and modify as conditions warrant our allocation of capital among new restaurant development, franchise acquisitions and returning capital to shareholders.

On the element of getting a return on capital we've already invested, it is about driving sales and managing our costs. From a sales perspective we have increasing the intensity of our local store marketing efforts and are creating more awareness on our everyday value price points. We are not strong advocates of discounting as we believe the longer term negatives out-weigh any short-term benefits. For us it is about promoting the roughly 20 entrees we offer at $9.99 or less.

One thing we always have to remember is we have a tremendously loyal guest base which drives 70% of our business. So in our case it's really about taking care of them to drive traffic as opposed to spending large amounts of money in the form of advertising and/or discounting to attract new guests. In terms of costs, managing them has proven to be very difficult in the current environment.

As inflation has eaten into our restaurant level margins and while we have taken net pricing of 2.3% this year we have seen very little of that flow-through due to mix shifts. Year-to-date our restaurant level margins are down 153 basis points versus last year, primarily driven by labor and utility cost pressures. In addition to inflation in these areas, negative comparable sales have also added to the deleveraging. Therefore, we are focused on finding the pricing that balances our needs to offset inflation and keep our traffic.

As far as our expectations for margins going into 2009, it is very difficult to give you any specifics. I can tell you that I feel better about the inflationary side of food costs but less confident in the consumer environment. We'll offer more specific comments regarding 2009 margins on our 4th quarter call. Now let's talk about how we're looking at allocating our capital going forward. First off, we're pulling back on our restaurant development plan for 2009.

As such, we are targeting approximately 15 Company openings as compared to 29 this year. In addition to moderating our 2009 development plan, we continue exploring different development prototypes such as in-lines, conversions, and/or modifications on our existing footprint in an effort to reduce our capital investment. Fortunately we do have a brand that still generates a return on invested capital on excess of our cost to capital. However the gap between the two has gotten tighter and this is precisely why we are moderating development and evaluating opportunities to reduce our capital investment and grow the spread.

On the subject of franchise acquisitions, we did acquire 9 restaurants from a franchisee in Tennessee during the third quarter and another 1 restaurant from a franchisee in Florida. Going forward, we do not have imminent plans to acquire any others and this is not something we are actively pursuing at this time. While you might see us acquire a few here and there over time, we do not envision anything on a large scale in the near term.

The third prong of our capital allocation strategy is returning capital to shareholders. As Scott mentioned we did continue with our share repurchase program during the quarter and have bought back $52.5 million worth of stock through the third quarter. While we have $22.5 million remaining authorized by our Board for share repurchase, we will also be prudent as it relates to the leverage created by borrowing to acquire additional stock. We are fortunate to be at a time in our lifecycle where we are creating free cash flow and not straddled with a ton of leverage.

As Scott mentioned from a leverage perspective, we are just over two times debt to EBITDAR mark with $100 million in uptapped capacity available under our current credit facility. We like being conservative particularly right now and believe this approach has allowed us the flexibility to make what we believe are the right decisions for the long-term success for the business.

In summary, we are in unprecedented times. We remain focused on the what we believe are the keys to continue creating shareholder value. In addition, we understand that the root of our success is based on taking care of one guest at a time and not sacrificing any part of that guest experience. And as always, I want to thank all of our Texas Roadhouse team members for their continuing support, effort and commitment to offering legendary food and legendary service to each and every guest that walk through our doors.

With that, covers our prepared remarks, so operator if you would open the lines for questions.

Certainly sir. (OPERATOR INSTRUCTIONS) We'll take our first question from Matt DiFrisco from Oppenheimer.

Thank you. I have a couple of questions. One, looking at the rent expense, I understand there's deleverage occurring, but it looks as though the rent on an operating week basis, is that the 3,000 weeks, is that operating weeks or is that excluding the weeks closed from stores maybe lost during Texas because if I divide that 3,000 into your dollar amount spent on rent it comes up to a little over $1,400 per week which is a pretty sizable jump from the pace you were doing in the first and 2nd quarter and 20% higher than it was in the third quarter. I'm just trying to understand what happened in that line item.

Matt, this is Scott. I can't speak to the dollars per week. I can tell you that what is somewhat different about the restaurants we acquired, so it's 12 in total this year, in all 12 we're leasing both the land and the building, which is a much, much, much higher rent as a percent of sales versus our typical other lease that we have, which is typically just a ground lease.

Yes.

That may be part of the difference. I would have to sit down and look at the dollars per store week.

That's understandable. I also see it coming back a little bit then in the depreciation line. It looks like they carry a little bit less depreciation, obviously.

They have a lot less, yes.

Okay, and then also looking at your guidance for '09, I understand it's a time to be conservative and there's little things out there for us to give us guidance for '09, but with the slower growth, I would think you're having less preopening, less dilution from new stores or inefficient labor lines, etc., from those new stores. How come we wouldn't be getting at least maybe 50 to 60 basis points back to start off with in a head start and lower preopening? Where are you forecasting continued inflationary pressures or is it just being conservative in not knowing the end of negative comps and deleverage?

Matt, this is Scott. I think you're correct in saying that if we were to open 15 stores next year, we would have lower preopening costs. And we are lapping an extra week so we do have that going against us this year. But suffice to say given all of the turmoil in the market this year and we're sitting here at the end of the October, we just aren't prepared right now to get any more specific about what our assumptions might or might not be.

Okay. Okay, thank you.

And we'll take our next question from John Glass with Morgan Stanley.

Thanks. First just on beef. You didn't mention where you stood with '09, if you had some preliminary conversations or are you at all optimistic about beef pricing next year given demand might be lower.

John, it is G.J. We did not speak specifically about it because we do not have any contracts in place at this moment in time. I will tell you that I am cautiously optimistic in terms of where pricing will be in 2009 and if I look today at the current cash markets, I would be even more optimistic. But as we are in the middle of these negotiations it's just a little bit too early for us to totally comment.

Would you say generally though, up or flat, down, is there a direction at least you can give us.

Directionally I would tell you down.

And how long does it typically take when you see a reduction in the energy costs as we have, as least in the commodities market, to actually see a benefit in your utilities line. Do you, for example, have negotiated rates for specific utilities or might we see a benefit of lower utilities as early as the 4th quarter.

John, this is Scott. It's really all over the board. But if we see natural gas rates fall as they've fallen, we with expect some of our utility rates to fall commensurately with that. So I would suspect that would help us in the 4th quarter. The question now we have is, how long will all that stick? So we see oil at whatever it is, low $60s a barrel when it was $145 four months ago. So again, that's what we're wrestling with as far as just how long do some of these things stick or not. Keep in mind on the food side, and we were favorable in beef for this quarter, the third quarter, but everything else was worse. So that's also wrestling with us as well as far as the details behind the forecast.

Got you. And then on the pricing, you took pricing but you didn't realize almost any of the price increase in terms of the flow-through. Is there a way to price in a way that is, I won't say it's smarter, but in a way that fools the guest a little bit if terms of being able to trade down on certain items? Is there a way to price differently in order to keep pricing or do you look at this as a across the board price increase?

John, it's G.J. I would tell you that last price increases were not across the board, they were more specific. So I think it did telegraph some tradedown potential.

I think we mentioned in our last call that we have started some tests between 2% and 5% in pricing that we're currently doing right now. It's too early to tell results of that. But they are more particularly on the higher end of that, more across the board. So all of the items would be touched.

And I think it is our opinion, and again it's too early to comment on it, but that more of that would flow-through because of that.

Thank you.

And moving on to Jason West with Deutsche Bank.

Hi, thanks. I wanted to talk about a couple of things. One, the trend of comps through the quarter, if you have the monthly numbers there. And if there was anything specific in October that you may have seen change in terms of the competitive environment or regional differences or anything that you think may have caused the acceleration on the down side? And then the other question, I want to confirm what you said on the pricing. You said you're currently testing a price increase of a range of 2% to 5% and when you may implement something along those lines.

Jason, this is Scott. As far as the monthly comps, July down 2.9%, August down 2.7%, and September down 3.9%. As far as the trend being a little bit worse, we did have probably gas shock in July, Olympics in August, conventions and hurricanes in September. I don't know how much really the impact was from all of those, probably pretty small overall. And then of course you have the big credit cash in October -- or early October. So it's kind of been one thing after another which has impacted everybody on that. So again making it a challenge to forecast comps going forward.

As far as the pricing test, these prices have only been out for five or six weeks right now, so we are looking at the data each week. I think as G.J. mentioned and as far as when we might implement anything, thats up in the air at this point, given how uncertain things are in the environment, whether it's just the consumer health or just operating costs on our income statement.

Also Jason just as a final comment, the last few weeks as we mentioned earlier, we did have the acquisition of the franchise stores in Tennessee where we eliminated lunch which did affect us about a half a point during that period.

Okay. Thanks. And one other. On Capex for this year and next year, if you could just confirm where we're going to come out in '08 and any thoughts on '09 Capex? Should we just take the 15 fewer stores and multiply that by $3 million or are there other cuts that we can expect in '09? Obviously excluding the acquisitions.

Well, '08, I would say our guidance hasn't changed. I think we've said $100 million to $110 million for '08. And then '09 will, needless to say, be significantly less. You're probably not too far off with the numbers that you described. Some of the question marks will be, we've added some seats to 11 restaurants so far. We're going to do a couple more this year and depending upon how those turn out, we may do more of those next year. We'll have to see. But our Capex will be significantly less than it was this year. I'm not prepared right now to give us a specific guidance range.

Okay, thanks.

And moving on to our next question from Jeff Omohundro with Wachovia.

Thanks. I guess first you can maybe discuss a little bit more about the change in managing partner bonus program, its increase I guess expected next year. What's your thinking about that? Is there a retention issue or what's driving that?

Well Jeff, first of all, these are our number one operational leaders in the field for us, our managing partners. So they're at the heart of our whole system, if you will, and execution of our concept. So they're always top in mind for us. They get paid a relatively small salary and typically more than 50% of their compensation is bonus related. So certainly with number one, all the inflation we've had in our system, number two the increased cost of developing restaurants and a lot of those costs get charged back to the managing partners' income statement, they've taken quite a hit either today on their bonuses or looking ahead, guys will be taking hits in their bonus. So we kind of restructured the way some of the costs would be allocated to the managing partners and so therefore a number of folks will end up getting an increase in their bonus over time.

So there isn't a retention issue today. There isn't a recruiting issue today. We're just taking this as a very long-term getting ahead of it, sort of being proactive if you will, before things were to get interesting for us from those types of issues.

And could you talk a little bit more about the capital structure target? I understand your desire to keep a prudent leverage ratio. Is that target that was mentioned, the 2 times, is there a range on that and when you think about the reduction in the unit growth and the cash flow generation, how are you thinking about deploying cash when you're weighing share repurchase versus new units in that capital structure target?

Well Jeff, this is Scott. The first thing is the whole leverage piece of it and the two times is more or less the ceiling that we would like to maintain longer term. So we would like to be two times or lower. And I think we may allow ourselves to get up to two times if we feel there is opportunities to borrow some money to buy back stock if we think the prices are attractive levels or invest in something else that we think the returns are attractive.

When it comes to share buyback versus repurchases, we're actually looking at what we think the returns are, longer term, to our shareholders from going in between those two decisions. And obviously our preference is to develop restaurants, provided the returns are there, it's growth for the Company specifically our people, and growth is very healthy for your people in an organization. It gets everybody excited and so forth. So our preference would always be to develop restaurants.

That said, you can see we're slowing down now. If the return equation's not there, we can have that opportunity to buy back stock if it's only at prices that give us returns that would exceed or be higher than those that we would get from developing Company restaurants or buying back a franchisee or other alternatives.

Thank you.

And moving on to Steven Rees with J.P. Morgan.

Hi, thanks. G.J., we're seeing some pretty aggressive discounting out there by other casual diners on television and even in the state category, which historically has avoided it with price points closer to your everyday price points. I wondered if you think this discounting is hurting you, and if so what opportunities you see to better communicate your value to the guests in this environment.

Well you're right. There is a tremendous amount of panic out there, and a tremendous amount of discounting going on. And as I stated in my remarks earlier, we've chosen not to participate in that kind of actions.

What we are planning to do, as we said earlier, is to communicate the value position and where we are with 20 entrees under $10. In fact we're doing some things, I think we talked about it before, around the earlier day parts with our two-for program where you can get -- instead of two dinners for $14.99, $15.99, we're actually promoting that as for one at $7.99 for the 4:00 to 6:00 day part.

We are continuing to communicate in our permission base marketing. We have a million and a half people signed up to that we can communicate to. We currently have a program going on where they promote it to a friend and having some pretty good early success, promoting it in the sense that do you realize that Texas Roadhouse has some kind of value and so I think that is going to help us going forward.

Right now, I think we've got the value, we've got to continue to communicate it in every way possible. We are being much more aggressive out in the communities, things like our rip runs, running into radio stations where they'll talk about our products and what we have going on at Texas Roadhouse. We continue to retain and recruit and train better quality local store marketing reps and they're out there doing it day in and day out.

And as I said earlier 70% of our revenue is generated from guests that dine with us two plus times a month. So with that loyal guest base we need to get those folks communicating the value that we've got and that's what we continue to focus on.

Okay, great, and just on the mix friend which has been negative but got a little bit worse this quarter. How much of that do you think that is self-induced from some of the lower price points that you introduced on appetizers and what-not, versus just customers foregoing beverages.

In terms of things like the third slab of ribs.

Yes, the half-off them.

I would tell you that we probably don't have enough data that we can analyze because there's so many moving parts to our current mix changes. But just a gut feel to tell you there is probably some of that.

Okay. Great, thanks.

And moving on to Keith Siegner with Credit Suisse.

Thanks. So we've talked a little bit already about some of the adjustments that you've made this year to the model and how it sounds like it's just kind of sticking with those messages. But the one thing I was a little surprised that I wanted to ask you about was the decision to close the newly acquired units for lunch. Because if you could help us understand kind of why close them at lunch. Because honestly one thing I was going to ask about was what would be the decision framework behind opening for lunch at some is of the other units? If you could just help us understand that a little, it would be great.

Keith, this is Scott. I'll tell you, the average restaurant in our system that has lunch every day of the week has lower sales, overall sales than the restaurants that do not have lunch during the week. And we believe there is a big reason for that and a lot of it is just focus for that dinner day part. A simple example is when you're open every day of the week for lunch, a lot of times you're managing partner could be working the lunch day part and leaving right before dinner really gets going. A quality of life issue so to speak. Whereas if you don't have that lunch day part every day, they're working that main dinner day part for five days a week. So that's what you want out there in our particular concept. So it's something as simple as that.

And there are many other things. You've got food that you've prepared for your hour and a half lunch that you have to do something with the rest of the day or you're going to be wasting a lot of food. So lunch can be highly inefficient and it can actually be a drag on your dinner business if you're not careful. So that's why we feel so strongly about going to the dinner-only pretty much piece except for the weekend.

Could you potentially even see higher sales at the units after closing them for lunch?

Well that's the idea. I mean that's really why we made the move and talked to the operators by the way, and it was as much their decision as anybody's to go forward and go away from doing lunch every day to focus on that dinner day part and we believe longer term they're going to have higher sales and be much more profitable because it will be a much more efficient operation from a cost management standpoint.

G.J., just a last comment I'd make on that, we have done some of this historically and have in fact achieved better sales.

That's great. One other question then. About the 15 units that are currently kind of in the docket for 2009, I know you said they're in existing markets but could you give us a little bit more detail on maybe what regions, what types of trade areas, whether those Company-owned units are leased or owned. Just trying to get a sense of the returns on these stores that still made the cut?

Keith, this is Scott. Actually nine are already under construction. And two have actually already been permitted so we're really far along with these restaurants. They're all over the place. Their typical Texas Roadhouse trade areas. I think all but one are ground leases at the moment. So all but one of the planned approximately 15 are all lease except for one restaurant.

Okay. All right, thank you.

And the next question comes from [Brian Vadcrow] with Raymond James.

Thank you. All of mine have been asked already.

Thank you, Brian.

And moving on to Hugh Taylor with Thomas Weisel and partners.

Hi, guys. Most of mine have been taken care of. Scott, I didn't hear you mention the actuarial review that you talked about last quarter. Did that get done? Was that just an immaterial amount or has it not been taken care of yet?

It got done. It's always material to us, I'l tell you. We had a pretty big benefit in Q3 in the other operating expense line. It was about $800 something thousand which compares to $600,000, I think it was last year Q3. So year-over-year it wasn't a huge number but it was a pretty big number for us overall. Trends have been very good in general liability side. Workers' comp much less of an impact. And it's the labor line.

And then lastly, could you remind us real quick the 4th quarter '07 comps by month, if you have them handy.

4th quarter, October, positive 0.3, November, negative 0.2 and December negative 1.9.

Thank you very much.

(OPERATOR INSTRUCTIONS) We'll take a question from Matt DiFrisco with Oppenheimer.

Thank you. Just a quick question. The $1 million to $2 million you mentioned in '09. That is incremental? Is there an offset to that anywhere, or is that just incremental? And where would that be, is the 100% of that $1 million to $2 million going to fall into other operating expenses, with other in-store manager bonuses?

Yes, Matt, this is Scott. Essentially there's no offset to it, except longer-term sales and profit growth in our concept. But that will all be spread throughout the year in other operating expenses.

And that's a fully cash bonus?

Fully cash.

Okay. Thank you.

And we'll take our next question from Mr. Miller with RBC Capital Markets.

I actually had just two questions guys. I'm thinking about how you think about pricing as you get into '09. I know you've had a lot of discussion internally about it and if beef is directionally down, it looks like pork would be pretty favorable and just your whole entire basket of commodities is not quite as inflationary as everyone else is seeing or as inflationary as you might expect, how would you think about pricing in that environment and then I have a follow-up on the consumer?

Well I think as know, Larry, we've continued to lag behind from a pricing perspective and made it up in sales historically. And while that's moderated some, I think it's really too early for me to even comment. Obviously directionally with us having testing out there between 2% and 5%, we're thinking we do need to take some price given the fact that our value position continues to strengthen as compared to our competitors'. So that said, it is a tough decision and over the last three years, we have definitely fallen behind and we need to take a long, hard look at that in the long term. So I think it's just a little bit too early to completely comment any more than what I've just said.

That makes great sense, G.J. And as I'm talking to some companies out there, I think a lot of you folks are seeing unprecedented day-to-day sales volatility, and have you been seeing that as of late, incredible unpredictability and how your managing that from a operational perspective, and you can talk about that. And then finally, G.J., you mentioned 70% of the base are the loyal guests, Joe the plumber folks, are you seeing the trade down to the white-collar folks sitting next to him more or less? What is the makeup of the Texas Roadhouse consumer today?

Well the first question, if I understood you right, you mean the volatility in daily sales or weekly sales?

Daily sales. I guess it's been very volatile. Is that not the case for you guys?

I wouldn't say it's volatile, no. I would tell you that the earlier parts of the week have fallen off more than the weekends, for sure.

And then the composition of your guests, how are they coming in and spending.

I think it depends on the region of the country. If you take some markets, even the market we're sitting in, in Louisville, I think you see more of that higher income folks give us a shot. But I think it's all over the board. And I continue to maintain that we are seeing those folks give us an opportunity to dine with us and it gives us an opportunity to open our demographic. And during times like this we still see it, albeit it's unprecedented times right now, we still see it as an opportunity long-term because we are focused on those fundamentals and focused on value and I think people give us that shot, they see that. And I think you know this, but we have about a 90% intent to return for new guests. So if we can continue to execute on that promise, when these things do turn around it will be good for us.

That's great. Hey, Scott, can I ask one more question, if I may.

Sure.

I was understanding that some of the companies out there are starting to see fuel charges come back down, but its part and parcel I guess, the fuel charges are a little bit behind, from the distribution center and going back to the suppliers. But from the distribution center to you folks, you're starting to see that work through. Has that kind of been your experience as well or are you not seeing any kind of fuel charge rebate at this point?

Larry, it's G.J. Are you talking about fuel surcharges from our distributors?

Yes

Yes, we've seen those start to come down.

Okay. Thanks.

And moving on to Greg Reudy with Stephens Inc.

Good afternoon. You mentioned you're being proactive with respect to reworking the comp for your managing partners. Just wondering how in these times how that might trickle down to the servers given they're probably walking home with less cash at the end of the night. Do you take your seasoned servers, maybe give them an extra table, or how do your managing partners think about that?

We haven't changed our labor structure in our restaurants so our servers still wait on three tables at a time. First of all, a lot of our servers are getting minimum wage increases every year because a lot of the states, the tip wage goes up every year. And it goes up at least with the consumer price index. So they've been getting increases in a number of states every year. Part two of that is to the extent that we have any price increases that stick or we build any traffic, our servers are turning more tables are getting a higher average check potentially longer term which of course can add into higher tips for them.

All right. You mentioned you're up to 11 of the units where you've completed seat expansion. Can you maybe give us some insight into next year in terms of the magnitude of maybe completing out with some more units.

I will tell you that so far we're pleased with the direction that we see coming out of the 11 stores we've done. Though admittedly it is still early to evacuate those and I think we're going to really wait and give these restaurants a number of months more to see what the data tells us to see operationally, what the operators are telling us about our ability to pump out the food to an extra 30 odd seats in our restaurant before we make any decisions about how many more we might do next year.

That's fair. Thank you.

And we'll take our next question from [Charles Van Esler] with [Capital Option Management].

Yes. Good evening, gentlemen. Obviously, the economy's been pretty precarious in here, but fortunately from the consumer's standpoint, the gas prices have come done dramatically in the last month and with fingers crossed, it appears like they're going to come lower.

I know that's been an on going problem for the industry for years now. Would it be premature, foolish, whatever be the word, to be optimistic that that's going to start to translate into better comps perhaps. Could you talk about that a little.

Well we have talked about gas prices in the past and there is no question that is a part of the equation that will help folks like ourselves. The big question for us is what happens to unemployment. So on one hand you have falling gas prices and on the other hand you have rising unemployment and so we're really somewhat unsure as to how it overall shakes out. To be optimistic, I think it's definitely being positive, I would tell you that we're still cautious.

I appreciate that. Last thing if I could, and you kind of referenced that a minute ago, without speaking specifically of a competitor, and you talked earlier about how some of them are doing discounting and things of that sort, I guess my bottom line is, do we have some pretty good reason to believe that you're going to pick up market share when the economy picks up? I presume that's the intention, actually. Could you talk a little bit more about that and what is going on there?

Well if would you say we're in a recession, although they haven't come out and said that yet, if you look back at the last recession, it absolutely positioned out. As long as we continue to execute that we'll come out of this with a wider demographic and it will be good for us as we take the curve up.

The real question is can we continue to execute and meet our exceed the guests' expectations because in an environment like this, when you find is the guests expect way more for less. And while we're delivering what we believe is great value, we need to scream it more, make sure we're telling them about it and giving them that legendary experience. That's why we're making some of these proactive moves with our managing partner program, with the way that we're continuing to execute labor within the restaurants, our food quality has not changed, if anything we're looking to continually improve that. So all of those things said, we think we are well positioned as things turn.

Thank you very much.

(OPERATOR INSTRUCTIONS) And we'll move on to Steven Rees with J.P. Morgan.

Thanks. I just had a quick follow-up. Is your weekend business still holding up better than your weekday business on a relative basis.

Yes.

Okay. And then on the nontraditional sites rebuild and in-line. How much of the '09 development could potentially be nontraditional?

Maybe a couple sites.

Okay. And any update on just the overall inflation you're seeing in construction costs?

Our average development costs has been higher this year versus last year, I can tell you that. Every project is different. A lot of differences relate to site work and the amount of work we have to do on the site to get the building built. But I will tell you, in almost everything, we continue to see a little bit of inflation whether it's equipment package or whether it's just building the building itself.

Okay. And then just finally on the unit openings in '09, how should we think about that first half versus second half. It sounds like a lot already.

We have a lot under construction. I think it at least is going to behalf in the first half of the year. Could be one more than that, first half of the year.

Okay. Great. Thank you very much.

And we'll take our next question from Jason West with Deutsche Bank.

Thanks guys. I had a quick follow-up on the marketing front. You mentioned that a few times. Are you think about raising absolute marketing dollars in the current quarter or in coming quarters to go after that opportunity or are you just talking about changing the message with the same amount of dollars?

It's essentially intensifying the message on value, about the differentiation that we have with the same amount of dollars.

Okay.

That said, there may be a little bit more, but relatively speaking we're just intensifying our efforts, not spending a lot more money.

Okay. And then bigger picture on the cost side. G&A, with less unit openings next year, do you expect the absolute dollars there to grow in '09 or would you see some opportunity to take that down into '09?

Dollars will actually grow in '09. They'll grow at a slower rate for sure. We're still going to add stores and we're still going to add a few people, organizationally, but that said it will be at a much lower rate than it's been.

Okay. Thanks, guys.

And there are no further questions in the cue at this time. Mr. Hart, I'll turn the call back over to you for any closing remarks.

Well thank you very much for joining us this evening. We look forward to visiting with you again at our 4th quarter call and appreciate your time and effort tonight. Good night.

And again, ladies and gentlemen, that does conclude today's conference. Thank you for your participation and have a wonderful day.