Texas Roadhouse Inc (TXRH) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome ladies and gentlemen. Thank you for standing by. Welcome to the Texas Roadhouse, Inc. first-quarter 2011 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 conference over to Mr. Scott Colosi, Chief Financial Officer of Texas Roadhouse. Please go ahead.

Thank you, Corrina, and good evening, everybody. By now everyone should have access to our earnings announcement for the first quarter ended March 29, 2011. It may also be found on our website at www.TexasRoadhouse.com in the Investors section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today will 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 with our recent filings with the SEC, for a more detailed discussion of the risks that could impact the future operating results and financial condition of Texas Roadhouse. In addition, we may refer to non-GAAP, measures and reconciliations to such measures can be found under the Investors section of our website.

On the call with me today, as usual is G. J. Hart, our Chief Executive Officer; and Price Cooper, our Vice President of Finance. G.J. will provide some insights about the performance and direction of our business, and Price will give you the financial update. And then all three of us will be here to help answer any questions that you have. Now I'd like to turn the call over to our Chief Executive Officer, G.J. Hart.

Thank you, Scott, and good evening, everyone. We are pleased that the sales momentum we discussed on our last quarterly call continued throughout the first quarter and into April. First quarter comps increased 4.6%, and the first four weeks of the second quarter has started off very strong, as well, with comps up 5.4%. Increased traffic has been the main driver, and we believe that's a result of continued market share gains. In addition, the pricing we took in March is flowing through, which is very encouraging.

Thanks to our comp sales performance, total sales came in higher than expected. However, higher than expected costs, primarily commodity related, put us about $0.01 below our EPS projections for the quarter. We now expect commodity inflation to be higher than we had originally anticipated, and believe it is prudent to slightly revise our EPS expectations for the year. Still, we remain very confident about our future prospects.

The overall competitive positioning of our business is very solid. Sales trends have been very good at our existing restaurants, as well as our new store openings. We are absolutely on track in accelerating our development plans for this year and for 2012. And we have a very strong balance sheet. So I am going to let Price walking you through the financials and I will talk more about where we are positioned for the future. Price?

Thank you, G.J. For the quarter, diluted earnings per share were flat with the prior year. While total revenues were up over 9% over the prior year, restaurant margin compression of 88 basis points prevented us from being able to drive diluted EPS growth over the first quarter of 2010. Starting with revenues, restaurant sales growth of 9.3% drove overall revenues, and included a 4.8% increase in average unit volumes, and a 4.6% increase in store weeks.

As has been the case for several quarters now, average unit volume growth of 4.8% surpassed comparable restaurant sales growth of 4.6%, due to the continued strong performance of our newer restaurants. For the quarter, the 254 restaurants in our same-stores sales base averaged $78,400 a week in sales. These restaurants have been open for at least 18 months as of the beginning of the first quarter of 2011.

The ten restaurants in our average unit volume base, that have been opened 6 to 18 months and, thus, are not in our same-stores sales base as of the beginning of the quarter, averaged $82,700 a week, $4,300 higher than our same-store sales base. Finally, our newest 12 restaurants opened sometime over the last nine months and, thus, not in our same-store or average unit volume calculations, averaged $85,600 a week in sales during the quarter.

Based on these sales levels, we are pleased with the returns we anticipate to make off these restaurants, especially factoring in the lower development costs from last year. With regard to comparable restaurant sales, traffic led the way being up 4.2% for the quarter. By month, comparable sales were up 3.3%, up 5.1%, and up 5% for January, February and March, respectively. Regarding the comp side of the P&L, restaurant margins were 88 basis points below prior year, and were below our expectations driven by a higher than expected cost of sales.

This resulted from produce cost increases that G.J. outlined, but more specifically potatoes and lettuce. For the quarter, commodity inflation was approximately 3%. Although we have seen some easing on some specific produce items, we are certainly anticipating these costs to be higher for the year than we originally forecasted. This is a driver behind us increasing our expectation for commodity inflation in 2011 from approximately 3% to approximately 4%. And, thus, are revising our diluted EPS expectations, as well.

A few other P&L items to mention, we lost some leverage on D&A this quarter despite 9%-plus revenue growth, due to the fact we had higher stock-based compensation expense. In total, stock compensation expense was up $960,000 over last year. About half of this related to certain grants to our Board of Directors, and half related to the way our executives' employment contracts are structured. As we move through 2011, we would expect stock-based compensation expense to be up about $600,000 per quarter on a year-over-year basis.

The next P&L item to mention is pre-opening. This amount was up $800,000 over the prior year. As we mentioned on the last call, we do anticipate this line being up significantly year-over-year. We are growing faster and our pipeline is larger as we are preparing to grow even more restaurants in 2012. The final P&L to mention is the tax rate which came in at 31.9% for the quarter, as a result of higher tax credits and the benefit of certain incentive stock options that were exercised by employees during the quarter. For the year, we are now anticipating our effective tax rate will be around 32%.

In terms of our capital structure, our balance sheet position remains strong as we ended the quarter with $77 million in cash, and $52 million in debt. This was after repurchasing 1.5 million shares of stock, for a total purchase price of $25.3 million during the quarter. As of the end of the quarter, we had $24.8 million remaining on our share repurchase authorization. For 2011, we continue to estimate our capital expenditures will be $65 million to $70 million, which we anticipate will be more than covered by our cash flow from operations.

Additionally, assuming we pay out a consistent $0.08 per share in dividends per quarter, we would utilize another $22 million to $23 million. As far as share repurchases are concerned, our long-term goal is to at least buy the overhang created by our equity awards. However, we certainly have the capacity to capitalize on any opportunities to repurchase shares at favorable prices.

Now on to the remainder of 2011. The good news is our sales momentum has continued into the first four weeks of the second quarter, as comparable sales for this period are up 5.4%. And traffic continues to be the major driver, although we are also experiencing improvement in check, as our average check is running up a little over 1% after the increase we took back in March. Based on what we're seeing in terms of sales, we are comfortable assuming 3.5% to 5% comparable sales growth for the year, and combining this with operating week growth of little north of 5%, gets us close to 10% revenue growth for the year.

Margins remain our biggest challenge. We are anticipating that restaurant margins will be down this year, although it's too early to predict how much. This is primarily due to the commodity inflation, as I've mentioned. Netting the potential for better than originally anticipated comparable sales, with higher commodity costs, led us to moderate our estimated EPS growth for 2011 from approximately 10%, to 5% to 10%.

With that, let me turn the call back over to G.J.

Thank you, Price. We have been very pleased with our sales results and believe it's not by accident. Our operators have done a great job of maintaining focus on our guests and not sacrificing our food offerings and/or our service. In addition to our comparable store sales continuing to grow, sales performance at our newer restaurants continues to outperform our existing restaurant sales.

This, plus the cost reductions we saw in overall development costs last year further validates our decision to build more restaurants this year and in 2012. While this results in higher pre-opening costs, we understand that the key to creating long-term shareholder value is to invest capital in assets earning a higher rate of return than what that money costs. That is good for our shareholders and very good for our teams as growth creates opportunities, energy and excitement.

On the margin side, we are realistic about the challenges we are facing this year. After two years of commodity deflation, we are anticipating a decent amount of inflationary pressure this year. We did take a 1% price increase in the latter part of the first quarter, and we are pleased to see that the increase we took is flowing through.

In addition to taking some menu pricing, another thing we have done is roll out a new, higher-quality and, thus, higher priced steak, our bone-in ribeye. This has been very well received and we are working on rolling it out to more restaurants. We currently have it in about 25% of the system, and plan to have the product available in approximately 50% of the system by the end of June. With this, we are seeing some positive mix, but more importantly it is a quality bone-in product that we cut and prepare within the restaurant.

We continue to evaluate whether taking more pricing this year is appropriate, and if so, when to take that pricing. If you just looked at this year's inflation, you could say it certainly was necessary. However, as you know, we do not take pricing or price increases lightly and/or for granted. Our philosophy of balancing market share gains with preserving margin dollars, while maintaining, and even in a lot of cases, enhancing food quality and service standards, has served us very well. In fact, that has led to us more than doubling our revenues, earnings, and cash flow, over the last solid five years, while at the same time significantly deleveraging our balance sheet.

While there is certainly inflation for us right now, we also understand there is inflation for our guests in the form of higher energy prices. So, as we have done in the past, we will balance several factors as we determine whether and when to take any additional pricing this year. Additionally, we will be closely monitoring what we estimate food inflation might be for the next year, and the overall economic environment including unemployment, gas prices, et cetera. As for right now, we are very, very pleased with the traffic results we are seeing.

Shifting gears to the culture side of things, we just had our annual managing partner conference a few weeks ago. The excitement and energy that exists within Texas Roadhouse is definitely difficult for us to convey to others. We had over 1,300 participants, including managing partners, franchise partners, vendor partners and significant others. It was a fabulous time to celebrate, recognize and reward the best of the best operators.

We have a tremendous culture here at Texas Roadhouse, and are truly inspired about the opportunities that exist for our business. That rang through at last month's conference, for sure. A huge thank you, as always, to all of our team members across the country. Also, congratulations to Chris Blythe, our managing partner of the year, from Owensboro, Kentucky.

With that, operator, that concludes our prepared remarks. You can open the lines for questions.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions) And first, we'll go to Destin Tompkins with Morgan, Keegan.

Thank you. G.J., thank you for all the information on the menu pricing thoughts, and I guess, obviously, there is -- given the demand that you're seeing in your restaurants, and the commodity inflation you're feeling, it would seem logical that you would have plenty of pricing power.

And, I guess, as you talk through some of the gives and takes there, and you mentioned 2012, can you kind of walk us through kind of what you're trying to -- how you're thinking about 2012, and is it a situation where if you think there is going to be even more inflation, you want to get a good picture of that before deciding on how much incremental pricing you take later this year? Can you just give us a little bit more information on kind of what goes into the thought process?

Sure. Well, Destin, currently, the whole pricing question is something we talk about around here almost daily at this point. You are correct, we are trying to get a little bit more visibility about what 2012 might bring in addition to what some of the factors that have influenced our inflation or increased inflation from what we anticipated in 2011, mainly things like potato and lettuce, what that might do for the balance of the year.

I would also tell you that we never think about the fact that we necessarily have a lot of pricing power or ability, but we do recognize that we are very well positioned to potentially take additional price. All those things said, I think you said it well, is that we're trying to get some color and visibility around all of those things before we make some final decisions on pricing. Rest assured, we will update you as appropriate.

Okay. And then price, as you were going through the P&L, I guess, looking at G&A and labor, were two lines where maybe you didn't get as much leverage as we might have thought given the leverage of the same-store stores. Were both of those incentive comp related and what is the expectation going forward? Is that based on same-store sales, and so if same-store sales stay higher, maybe you'll see greater incentive comp, how should we think about that?

Yes. The D&A was definitely driven by the stock-based comp was up this year. Based on a 3.5% to 5% same-store sales, I think we can get a little leverage in D&A for the year, maybe. Is kind of the way we're looking at it. On the labor line, we didn't have the benefit of a full quarter's worth of pricing.

We took that pricing very late in the first quarter. It was one thing that kind of hurt us on the labor line. And in addition to that, we were pretty heavy back end loaded with our openings last year. We had several open in November, and even into December, as I think we had a little bit of inefficiencies carry over into January and part of February on a percentage basis on labor, because we did see that line get a little bit better throughout the quarter.

And then one thing going against us there, though, is our health insurance is up a little bit on the labor line, for sure. So net-net all that, I think we could gain, I don't think that deleverage on labor should be as bad as we move throughout the year. Don't know whether we'll leverage it or not (inaudible).

Hey, Destin, I want to just go back to your question about pricing. There was one thing I left out that is probably most significant, is that not only are we feeling inflation but, obviously, our guests are, as well. The last time we had $4 gas prices, a couple of years ago, you can remember what happened. We want to really understand and hopefully get a little better picture as to how our guests are going to be affected by what's going on. So that's another key part of our daily discussions as to what pricing we might take.

Thank you.

And next we'll go to Jeff Omohundro with Wells Fargo.

Thanks. On the pre-opening step-up in the quarter, is there much of a change in the pre-opening per unit and how are you thinking about that line evolving through the year? Thanks.

Hey, Jeff, it's Scott. I'll take that one. There has not been a substantial change in the pre-opening per unit, and thinking about it throughout the year, certainly as our pipeline of people continues to build for 2012, and 2012 we're much more ahead of the game than we were in 2011, meaning that the vast majority of our openings in 2011 will be in third and fourth quarters, whereas in 2012 it will be much more evenly spread.

It may be even weighted towards the first half of the year in 2012. So we'll see a pretty good ramp-up in our pre-opening because we are sticking to our guns, if you will, of making sure we're hiring people well out, well in advance of a restaurant opening. For example, managing partner, 12 months out, and so forth, so we're sticking to that. And so I don't see a big change per unit at the end of the day, but you will see a substantial increase in pre-opening overall as we continue to ramp up to 2012.

And the change in outlook on the guidance linked to, it sounds like, largely commodity costs. You are largely contracted so it is a shift, I guess, in the outlook of your uncontracted commodities. And as you mentioned, the produce factor should be rather short-lived. Maybe you could give a little bit more granularity on that?

Jeff, this is Scott, again. I think the length of certain produce issues is certainly up for debate. We have been paying quite a bit more for potatoes, specifically, now for quite a long time. So we don't know, again, how long that's going to last, and also sometimes you have spikes in other things that aren't that high today. A spike tomorrow. So those are all things that we think about.

We've also got a lot of [flow] in the dairy markets, and cheese, so there's other things beyond produce that do move around throughout the year. So we expected to have less inflation earlier in the year. We know we're going to have higher inflation second half of the year just based on the way some of our contracts are set up and the way they roll over year-to-year. Hopefully, it will be less than four as we've mentioned, but, again, we just think it is prudent to update everyone with the latest thought process.

Very good. Thanks.

And we'll now go to John Glass with Morgan Stanley.

Thanks very much. Just back on the labor question for a moment. Have there been any other factors that influence labor? I know you talked recently about this manager-at-the-door program. Maybe that traded comps for higher labor costs. Is there anything else at work or was it really just the things you mentioned, that is higher healthcare, and maybe a little bit of inefficiency due to new openings?

Hey, John, this is Price. I'll take that. It is really just what we mentioned. Healthcare costs are up a little bit for us. Maybe some inefficiencies there, not the benefit of pricing, but the whole leader at the door initiative. It has been in our system going on a year now. We're soon to be lapping that.

I don't think that's having a material effect cost-wise. And on the -- I should mention that from an average wage rate perspective, we're still seeing a little bit of inflation there. It is low, low-single-digit type inflation but still you're seeing some wage rate inflation there.

Okay. And then on the repurchase, $25 million worth of stock in the, I guess, what was it, 1.5 million shares, the share count still went up. Was that a function of when you bought it back in the quarter or is that just a function of the fact that you're getting higher grant awards now because performance is better? What is the dynamic there that doesn't allow better reduction in share count?

Yes, it's fully a function of when we bought it in the quarter. We bought it basically in the last month of the quarter, so we didn't get a full quarterly impact of having a million and a half less shares.

Got you.

And just, I mean, technically from a year-over-year perspective, our stock price being higher has made a big difference on the dilutive impact of outstanding options, in particular. There is a lot of options now that are in the money that aren't a year ago at this time. So that dilutive piece moves somewhat for every dollar movement in our stock price.

And just for modeling purposes and maybe make sure everyone is on the same page, and if you said this already I apologize, what is the absolute dollar amount that you expect the pre-opening to be this year, because I think in a year when you start to reaccelerate lot of things get pulled into a year that maybe we can't model as accurately on a per-store basis?

We haven't said and we're not going to get that specific with you to give you a targeted dollar amount, but suffice it to say that it is going to be substantially higher than last year, commensurate with at least $450,000 per unit that we open this year, plus some more because we've got a pretty good amount of 2012 management teams that we've already hired.

Okay. Great. Thank you.

Moving on to Barclays Capital with Jeffrey Bernstein.

Great. Thank you very much. Just a couple questions, first is a follow-up on the pricing and commodity front. On the pricing side, it sounds like you're not getting any push-back at least on the 1% you've taken already. I know you said when you're kind of considering the timing, and what not, is it a function of when you print the next menu?

I mean, what type of window do you have to take that pricing, and if the commodity inflation is at this level, what pricing would you need to actually neutralize the margin? I know you said you expect the margins to be down, but all else being equal, how much pricing would you need to take with inflation at these levels to neutralize? And then I had a follow-up. Thanks.

In terms of it's not a function of when we can print menus. We can pull that trigger as we see fit. It is just a matter of the time that it takes to get that done and into the system. It is really all of the factors I spoke about earlier in terms in terms of all the considerations in whether we take pricing and how much. And that's something, as I said, we continue to debate around here and talk about on a daily basis.

And I think the last point I made in terms of how the guests are being affected by inflation, again, we continue to want to be positioned as the value player in our space. And I think if history, we've proven that that's worked for us and our comps so far have proven that that's worked real well. The answer to your last part, it is really dependent on what happens with traffic.

Okay. Just on that commodity, I know at last quarter, or maybe at your Analysts Day, you mentioned that 65% of your needs for 2011 were contracted, which I think included like at least 80% of the beef. Just wondering whether you can give an update on where that 2011 basket stands at this point and you've mentioned, obviously, focused on 2012 and where that plays out. So at this point in early May, I mean, do you have any visibility on 2012 in terms of what you'd think from a basket standpoint relative to 2011?

This is Price. Let me take the first part of your question on where we stand with commodities that are locked for 2011. Right now we've got about 60% -- just over 65% to 70% of our commodities are locked for this year, and that includes some floors and ceilings on certain commodities. And within that, 90% of our beef is locked. We've also got some floor and ceiling arrangements on some of our beef deals. And I'll let G.J. tackle 2012.

Yes, I think it is still a little bit too early to have any clear visibility into 2012, but I would reiterate what I believe I said the last quarterly call, which is that the pendulum has swung pretty far in terms of the futures markets, particularly the cattle markets. And even of late you've seen those drop off pretty dramatically. I would tell you that -- I'm not going to tell you I'm optimistic, because I think we will see inflation in 2012. It's just not going to be as bad as people think it is going to be, is sort of where I see it today. But to give you any numbers around that, I wouldn't be prepared to do so.

Okay. And then just lastly you mentioned running a 4%, targeting comps of 3.5% to 5% but getting some margin deleverage. Are there any -- and we hear some companies talk about kind of incremental cost savings opportunities to mitigate the margin deleverage, obviously, with very strong comps, whether it be on the technology front or labor, or other, and whether there is any areas where you say there is potential without, obviously, [degradating] the customer experience to cut costs to help mitigate? Thanks.

Hey, Jeffrey, this is Scott. We are always looking at cost-saving opportunities. We continue to look at our theoretical food costs versus actual food costs. Our guys are very competitive in their restaurants.

We continue to challenge folks on the labor end, particularly how early people come into work to start their shifts, and when they leave, and try to match that up with the business. We've got a number of other expense items that we've contracted out and continue to redo contracts, whether that's electric or gas, waste management, phones, we're always looking at our purchasing power to see what we can do. But what we are not doing is coming up with a labor model that tells our managing partners that they can only schedule a certain number of hours like many companies do. We're not going there.

And we're telling our guys that heaping portions should be more heaping than ever, because it is a great opportunity for us right now to continue to steal share from folks that are maybe making some of those decisions to save a nickel here or there to try to maintain a certain level of margin. And so we're definitely not asking our folks to do that. We want to have more servers than ever on the floor, to turn tables and take care of our guests, and, again, we want to have hand-cut steaks and, again, made from scratch sides, and none of that stuff is changing, because that is what has worked for us.

And as G.J. mentioned earlier, when we look back over the past five or six years, we have been rewarded by staying focused on that particular strategy. And there may be some bumps in the road along the way, but we definitely take a very, very long-term approach to running the business.

Understood. Thank you.

And we'll now go to David Tarantino with Robert W. Baird.

Hi, good afternoon. Just, first, a quick clarification on the guidance for this year. Does the 5% to 10% EPS growth include any additional price increases?

David, this is Price. We weren't specific on whether it did or didn't. I'll tell you that to get to the upper end of that we would be hard pressed to get to the 10% side of that without any additional pricing within that 3.5% to 5% traffic.

Okay. And then maybe a follow-up question for G.J. on the pricing front. Basically, I understand the strategy that you're taking to maximize the share gains and it clearly seems to be playing out that way with your traffic trends running strong. But I guess what I'm not clear on is what is going to make you comfortable in taking a price increase? It seems like last time you tested pricing, you tested it at 2%, and it seemed to work well, yet you only took 1%. So I guess I'm wondering, what is it that you're looking for, what are you watching that is going to make you more comfortable to take more pricing?

I think that when we took the 1% pricing that is a system-wide pricing. There are stores that took more pricing, consistent with the test, and stores that we took less. We're closely monitoring what is going on with those stores, in addition to, as I indicated, what is going on with the consumer in terms of their overall expectations and what they're experiencing. And then the commodity piece. So as I said, we are not prepared today to tell you exactly what that pricing would be or when.

We do feel like we are well positioned to take additional pricing if we deem it necessary. And we've already indicated with the guidance to get to the upper end we are going to have to take some pricing. So all of those factors there, we certainly will keep you informed as to when we make a decision. But you look at kind of our business model and what has worked for us in past, we believe it will continue to work for us into the future and it has paid us dividends. And right now it is a very tricky time.

Just to assume that you can take pricing because the, quote, the economy is getting a little better. The fact is, the guests are experiencing this stuff, and we need to be very, very careful. We need to balance this whole approach and, hopefully, we've proven that we've done that in the past and, hopefully, you have some confidence that we'll do it in the future.

Okay. Thank you.

We'll now go to Jason West with Deutsche Bank.

Yes, thanks, guys. Just want to touch a bit more on the traffic trends and, certainly impressive to see accelerating traffic in this kind of environment on top of taking some price. So just wondering what your overall thoughts are there. I had a lot of people mentioning the issues around gas pricing and you guys don't seem to be feeling anything from that yet. If you can talk about why you don't think you've seen much of an impact from gas prices or is it is just a matter of time? Is there any geographic trends you can point to that, to kind of give us some color on how this plays out in the next few months?

It is G.J. In terms of how it's affected the consumer is exactly what I've said. We're not quite sure, yet. And we are very cautious as to what might happen. Yes, our traffic -- we are very, very happy with it. But that's where we're closely monitoring it.

I think there is some delayed reaction to this stuff, and we need to be very, very careful. No, we haven't really seen any geographic disparities in any of our traffic counts. Again, I think it's all wrapped up into, we have to take a balanced approach, and as I said to David's question, it's served us well to take a balanced approach. We've lagged behind others in pricing, and if you look at our numbers and how we've continued to gain share, it's continued to work. So we are just going to be very careful about it.

Okay. Thanks a lot.

We'll now go to Bryan Elliott with Raymond James.

Hi, good afternoon. I wanted to ask about your pricing -- no, excuse me, I misspoke. I don't want to talk about your pricing. I'm actually -- actually just a nitpicking model question and then a big picture question. Price, maybe you could help us all out with how to think about the share count in Q2, given, is there any -- obviously, the stock price determines the share base equivalents, but are there new grants or maybe some expirations in the second quarter that might impact our math on trying to come up with a decent Q2 share count?

Nothing out of the ordinary. I think the best thing I can help you with is assuming we didn't do anymore share repurchases, based on the timing that we did the 1.5 million, I would estimate that our share count would be up a little bit for the year. In general, our dilution impact is generally in the 1.5% to 2% range.

As you mentioned, it can vary a little, depending on the stock price. So based on the fact that we bought these 1 .5 million into the year, we're certainly not going to get a full year impact of that. So I would have us up a little bit for the year in share count assuming we did no more repurchases.

A little bit year-on-year or a little bit from Q1 reported?

A little bit year-on-year.

Yes, okay.

Over 2010's final number.

Right, right, okay. And then I'm intrigued with the bone-in ribeye comment. I wondered if you all could elaborate some more on that. Obviously, that would be a high price point, high penny profit, but low-margin item. And are you seeing maybe some higher-end customers come in? Sort of what's -- what -- give us a little more color on that? It is a very interesting little comment.

Sure. I'll be glad to. It is G.J. It is a 20-ounce product that we're cutting in-house. And it really is going to serve, hopefully, as a nice alternative to the T-bone or porterhouse steak that we do not cut in-house. It is the only steak we do not cut in-house. It is a higher price point.

I think it is a little too early to say exactly what type of guest is buying this product, but we are very pleased with what it is doing to our mix. We are pleased with the way it is positioned. It looks phenomenal on the plate. It is a great value. And we are very encouraged, obviously, with what we are seeing both from a quality perspective, as we'll as a [P mix] perspective and what that might bode for the future. Hence, why we're going out to 50% of our system and we would anticipate that it will likely go to our full system early next year.

And the price point, is it above the T-bone and the porterhouse, or kind of--

It is priced equivalent to our T-bone product.

Okay. Okay. And the delay on, if we go system-wide, it won't be until, I think, is it early next year, is there a supply constraint, or is that just -- there's some training or other kind of issues with it?

The real answer to it is some of the commitments we currently have because of where it is pulling from, which is mainly boneless ribeyes, so it is that combined with just being able to get additional quantities of the bone-in ribeye. Again, if we can do it faster and if we continue to see the success, we will do so.

All right. Great. Thanks.

We'll go to Conrad Lyon with B. Riley & Company.

Yes, thanks. Hey, let me play off that bone eye strategy. I like that. Might this be a tactic going forward, no more pricing questions here, but in lieu of pricing to try to really get mix, do some LTOs, things that really get people excited, come in, and that allows you not to deviate from your core menu? Might we see more of this, do you think?

I'll take that, Conrad. It is not that we're sitting here looking at menu engineering, per se, but we do believe that it fits a need that we have missing in our menu today. Having said that, there are some other things that we are doing that I did not mention. As an example, we have been in a small amount of stores testing an 8-ounce sirloin with shrimp, that seems to be doing, very, very well. In addition, we have some limited stores that have actually increased the size of the porterhouse to a 23-ounce porterhouse at a higher price.

And so we are seeing some positive things there. It could be that something I've been talking about for quite some time, the opening demographic of some higher-income folks coming and staying with us. I don't have any data yet to really back that up, but we feel very good about these moves, and the fact that they are getting us a [P mix] shift that is beneficial to us.

Got you. I like that direction. Clarification question real quick. The expectation for inflation, the ramp-up, was that predicated just on the produce prices moving up?

Yes.

Okay. Fair enough. Thanks.

We'll now go to Matthew DiFrisco with Lazard Capital Markets.

Thank you. Just one question and then, first, a clarification. The leader at the door new procedure, or that's been out there for a year, so not too new, as was explained to us, I thought that it was just a redirection of labor dollars and not an incremental employee. Is that correct?

That's absolutely correct, Matt.

Okay. And then also just, I know you said it was healthcare was the labor expense, can you comment on maybe what you're seeing as far as industry perspective as far as your brand as far as turnover? Has the slightly stronger labor market also caused the wait staff to turnover a little bit faster and get back to more historic norms than the lows that we've seen over the last couple of years?

Hey, Matt, this is Scott. Our turnover is up slightly but it's only up slightly. So we're still below 100% in our turnover and have been for some time. And we anticipated that with the economy getting stronger, our turnover might be up a little bit.

And, obviously, that's definitely -- may put some pressure on wage rates. We haven't seen that, yet. Our wage rates are up a little bit, but not very much. So we'll wait and see what happens.

Hopefully, if we do see much pressure in wage rate it's because the economy is really getting hot and our traffic is even that much better than it is now. It's kind of a double-edged sword there, I guess, in that regard. But same thing in management, too. We have very little increase in management turnover as well.

Okay. And then, I guess, if we were to see a continuation of a similar comp continuing here, and you're, obviously, taking share whether measured on a comp or just outpacing your peers on a square footage growth as well. What is the capacity that you could open at right now without seeing a meaningful step-up in G&A as far as your corporate infrastructure, what do you feel comfortable at growing store-count- wise versus, say, the low 20s that we're on pace for now this year?

I think certainly we could be easily in the 30s of opening restaurants with our current infrastructure. One position we would absolutely have to hire for that that hits our G&A is our market partners, that's for sure. But beyond market partners, our current real estate team, legal team, training team, we did over 30 restaurants three or four years ago, and we've got the same team that we had then, we have now. So we definitely have the capability to do it.

Obviously, we've got to have the returns there to do it. So if we can continue to keep inflation pretty low and what it costs us to get a restaurant open, and so far we're on track to do that in 2011 versus 2010, felt very good about where our construction costs are coming in, we're getting more bullish on increasing our pipeline in 2012, and hopefully more, once we get beyond that.

Great. Okay. Thank you very much.

The following question comes from Larry Miller with RBC.

Yes, thanks. Hey, G.J., I wanted to go back to a comment you made earlier which is, I think you said beef wouldn't be as bad as we all think. And it makes me think that maybe we're looking, as a market, at the wrong proxies for beef inflation because I think everyone has that expectation it's going to be pretty inflationary next year. Any recommendations on what we should look at that would be a better proxy for your costs?

Well, I don't know that I have an answer specifically as to what is a better proxy. I would tell you that when you start to get prices at the retail level, at supermarket level, that the consumer has to pay some of these prices that the futures markets have been indicating and some of those costs, there is going to be significant push-back and there are alternatives. That's always been the case and it will be the case, in my opinion, it will be the case again.

And if you look at where the future markets were on live cattle prices that would suggest that we would have significant inflation in 2012. And all I'm saying is that there will be some balancing of that and I don't think it will be as bad as indicated. That is all I'm saying.

Okay. Is there any historical perspective you might be able to provide relative to futures market pricing and -- futures market inflation -- in your pricing that we could use as a proxy?

No, no, I wouldn't be prepared to tell you that today.

Okay. Well, that's helpful. And then just one thing, can you guys remind me how the bonuses are structured for your employees?

Larry, this is Price. Are you talking about the managing partner and market partner bonuses?

Yes, I'm talking about anybody who might get some type of equity compensation or be tied to sales and profits. Is that a (inaudible) combination?

Sure, no, our bonuses for our operators, the managing partner makes generally 10% of the bottom line profit of that restaurant, and then the market partner who is -- which you guys would term an area director, I guess, can make anywhere, generally from 5% to 8% profit of the bottom line profit of the restaurants they supervise. It is all bottom line profit driven. We don't change it to sales this quarter, profitability next quarter, and flip-flop back and forth. It's all consistently bottom line driven.

Okay. And that's irrespective of any inflation. They just have to make money?

Yes, sir.

Thanks. Perfect. I appreciate it.

Next we'll go to Andy Barish with Jefferies.

Hey, guys, just a couple of quick questions on the customer behavior. I haven't heard you talk about historically a lot of changes in preference, yet you're seeing kind of a good response on the higher end. Are you seeing any leakage out of the bottom of the bucket, even though I think you've done the early dine option actually on the back of the menu now?

Hey, Andy, it is G.J. We don't have that on all of the menus. It was really driven, it was a market partner and managing partner choice on the back of the menu. And, no, we're not seeing any significant leakage on the bottom end at all.

And I would tell you that it is a little bit too early. We're pleased, very optimistic about what is going on with these higher end items, but it is a little too early to say that indication is going to carry out long term and for the whole system as we roll it out.

Okay. And just one quick follow-up on those higher end items, are they margin percentage neutral, or slightly degrade the margins, and you, obviously, make it up in penny profits?

Well, Andy, this is Scott. They would be produce and food costs but they would help us on every other line item. Because of the higher sales price point.

Yes. Thanks.

Moving on to John Ivankoe with JPMorgan.

Hi, thanks. This is [Amode Gallum] on for John. Obviously, your new unit volumes seem to continue to be trending well. I guess I was just wondering what the balance of the units you've opened in the past few quarters are in existing versus new markets, and how that will compare to the 20 units you expect going forward this year?

And what are the differences that you see in terms of the performance when you open a new versus existing market? Just trying to get a sense for the sustainability of these levels.

This is Scott. The vast majority of our openings are in, we would call existing markets. Now some folks might have a different definition of what they consider to be an existing market or a new market. Generally, if we're in the state, we more or less consider it to be an existing market, even though there may be 100 miles difference between an existing location and the new location, we still think it's an existing market. So it's all in how you define it.

But our opening strategies really haven't changed, meaning that the 14 stores we opened last year were pretty spread out all over the country. The 17 before that were spread out all over the country. This year, the 20 that we're going to open are spread out all over the country. Now we are going to go into two markets that we would say are new markets for us. One is we're going into Washington state, and then the other one is we're going into Southern California, which we would say is a new market even though we have four franchise restaurants up in Northern California.

Essentially, we've done very well in existing markets and we've done very well when we've opened in new markets, and we have no brand identity in those markets. So there really hasn't been one direction or the other. Usually it comes down to the quality of operations, of course, and how we run the restaurant, and the quality of the real estate decision that we make, and usually if we get those two things right, the food and the price points take care of themselves, and we quickly build up a really, really strong business.

If we mess up one or the other, real estate, or the people side, generally that's when we have problems irrespective of where we open. One of the things that we have done differently over the last year or so, is we've held more folks around after a restaurant opens. So we have substantial training teams that help us get restaurants opened. They used to split after a couple weeks and now we're keeping them much longer to help us deal with the huge honeymoons that we typically open up with being a new restaurant in town, and we simply have been retaining a higher percentage of the sales from the honeymoon period than we were over the last few years, or so.

So we're very, very optimistic that we're on the right track with the way we're opening our stores, both from bringing the management teams on very early in the process, getting them used to running restaurants that have substantial volumes, particularly the amount of guest traffic we do is as high as almost anybody in casual dining. And if you recall, we're primarily a dinner-only concept. So we're doing a lot of traffic in a 4 to 10 shift, more so than anybody else that we compete with. So when we hire people, they've got to have a lot of experience running such high-volume shifts. Lastly, on the training piece and keeping the trainers around longer, that is a substantial help for the management teams that are running the restaurants, again, during such high honeymoon periods.

Okay. And then in terms of your ability to get in on commodities for 2012, when do you typically start contracting, especially for things like beef?

There is no such thing as -- typical, I don't think. It could be anywhere from now to the end of the year. Obviously, we're going to be opportunistic and try to evaluate all of the factors that we always do. And we're starting to analyze where we need to be headed and we're starting discussions now with our major vendor partners.

Okay. Great. Thanks.

We'll now go to Steve Anderson with Miller Tabak.

Thank you. I noticed on the last -- at the Analysts Day you had mentioned about alcohol sales and trying to drive sales to beers and margaritas. But what I wanted to ask you in the last quarter, if you have seen any change in the mix from that, if it has it gone down, gone up, and are you still making a full court press in that area? Thank you.

Steve, this is Price. Excuse me, as far as mix is concerned, we're seeing a little, still seeing a little slippage on alcohol beverage, not a whole lot, I mean, we're talking a tenth or two in terms of [P mix] year-over-year.

This is G.J. Let me add on to that, as well, yes, we are continuing down our path on looking at overall beverage. We typically do a beverage promotion and we are doing it again this summer. Last year we had a $0.06 bump while we did that, and we have that upcoming and we're very excited about what that might bring us. It is very consistent with our message at the Analysts Day.

Thank you.

Our final question will come from Paul Westra with Cowen and Company.

Great. Thanks, good afternoon. Just maybe one last stab on the -- maybe where you're seeing the strength on the consumer. I know, historically, you talked about maybe 25% -- can you hear me?

Yes, we can hear you, Paul.

Oh, sorry about that, guys. I was wondering. You talked about drawing maybe 25% of your customers trading up and 50% coming over from same guest check competitors and 25% trading down. Is there any way you can tell if that has shifted of late and you're drawing from one bucket to the other, perhaps looking at the total guest check of maybe over $50 versus $125 or something?

No, Paul, we really don't have any data that would suggest that that has changed at all. A lot of this stuff, it could be that as you go into Texas Roadhouses, an I have been saying this for a while, you do see some different type profiles from what our core guest is. But, again, I don't think there is anything we could point to at this point to say this is a long-term trend, or anything specific as to why we're seeing the benefit of these higher-end items.

Great. Okay. That's the important question. I'll talk to you guys off-line. Thanks.

And we have no further questions at this time. With that, I'd like to turn the call back over to management with any additional or closing remarks.

Well, thank you, everyone, for joining us tonight and your support in Texas Roadhouse and we look forward to talking to you again at our next quarterly call. Good evening.

Once again, this does conclude today's conference. We do thank you all for joining us.