Texas Roadhouse Inc (TXRH) 2011 Q2 法說會逐字稿

Good day, and welcome ladies and gentlemen, thank you for standing by. Welcome to the Texas Roadhouse, Inc. second 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 and instructions will be provided at that time.

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

Thank you, Jessica, and good evening, everybody. By now, everyone should have access to our earnings announcement for the second quarter ending June 28, 2011. It may also be found on our website at TexasRoadhouse.com in the Investors section.

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

On the call with me today is G.J. Hart, our CEO, and Price Cooper, our V.P. of Finance. G.J. will provide some insight about the performance and direction of our business and Price will give you the financial update. Then, we will all be here to help answer any questions.

Now, I would like to turn the call over to our Chief Executive Officer, Mr. G.J. Hart.

Thank you, Scott, and good evening, everyone.

We are very pleased with the momentum we are seeing on the revenue side of our earnings equation. Revenues were up a solid 10% for the quarter, paving the way to a 9% increase for the first half of the year. Comparable sales increased 4.4% for the quarter, including a 3.1% increase in guest counts. In addition, our newer restaurants continue to outperform the system.

We have a strong pipeline of new restaurants and have committed to opening at least 25 new restaurants next year for a 25% increase in openings from 2011. We believe our sales results bode well for the future as they not only validate the operational execution from our teams, but also demonstrates the healthy demand for our existing and new Texas Roadhouse restaurants.

On the profit side of the equation, we are not as pleased with the results so far this year. While our earnings per share grew 7% in the second quarter, this was a bit less than our revenue growth as restaurant margins were almost 70 basis points lower than last year. As many of you know, our pricing actions to date have significantly lag the inflation that we've experienced this year.

Looking ahead, we recently took a modest price increase in the third quarter that we believe will help offset some of the pressures we are facing without sacrificing our value proposition. Still, inflation will continue to have a pretty significant impact on our margins throughout the second half of the year. While our traffic growth has been very good all year, it has not been good enough to offset the increased costs we are experiencing, and as a result, we decided to adjust our forecast to the lower end of our previous range.

I'm going to have Price walk you through a more detailed review of the financials, and then I'll talk to you more about our thoughts about our 2011 forecast, future menu pricing actions, and our positioning for the future. Price?

Thank you, G.J. For the quarter, diluted earnings per share increased 7% from the prior year. Total revenues were up 10% over the prior year, while restaurant margins decreased 69 basis points.

Starting with revenues, restaurant sales growth of 9.6% drove overall revenues and included a 5.1% increase in store weeks and a 4.6% increase in average unit volumes. Helped by the strength of our newer restaurants, average unit volume growth of 4.6% continued to outpace comparable restaurant sales growth of 4.4% for the quarter and we are pleased to see this trend continue.

A little detail on the sales performance of the different classes of restaurants. For the quarter, the 255 restaurants in our same store sales base averaged $76,400 a week in sales. These restaurants have been open for at least 18 months as of the beginning of the second quarter of 2011.

The 12 restaurants in our average unit volume base that have been open six to 18 months and thus are not in our same sales base as of the beginning of the quarter, averaged $79,000 a week, $2,600 higher than our same stores 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 $84,100 a week in sales during the quarter.

We continue to be encouraged with the performance of our new restaurants, especially in light of the lower development costs associated with these units. Traffic once again drove comparable restaurant sales growth, increasing 3.1% for the quarter. By month, comparable sales were up 5.4%, up 4.3%, and up 3.6% for April, May, and June, respectively.

Regarding the comp side of the P&L, restaurant margins were 69 basis points below prior year. As was the case with the first quarter, we experienced margin pressure and cost of sales and labor partially offset by leveraging other operating costs as a result of our strong comp sales growth. While we've recently taken an average of approximately 1% of additional pricing, we expect year-over-year restaurant margins to continue to be down for the third and fourth quarters.

Let me walk through a couple of the lines to help you understand why. With regards to cost of sales, food inflation has been running just under 3% for the first half of the year. For the back half of the year, we anticipate food cost inflation to run more around 5% on average based primarily on increases in cooking oil, butter, shortening, potatoes, and some beef items.

On the labor side of things, we have a few things creating a challenge. First, we have a mismatch as to how the higher exemption and higher tax credit are accounted for in our P&L compared to last year. In short, beginning in the second quarter of 2010, we paid lower payroll taxes on certain qualified employees, which was reflected as lower expenses and labor throughout 2010.

While the higher exemption ended in 2010, we now receive a higher tax credit on those employees still employed in 2011. So instead of showing up as a labor benefit as it did in 2010, we are now seeing the impact of a lower income tax rate in 2011. This mismatch negatively impacted labor comparability in the second quarter by approximately 18 basis points.

The benefit grew throughout last year, so as a result, we anticipate the back half of the year will be negatively impacted by more like 30 basis points. The net of all this on an earnings growth basis is approximately zero. As for the full year on a year-over-year basis, the increase to labor costs will be offset by a reduction in income tax expense.

The second specific item impacting labor is that we have more restaurants now with -- more new restaurants now with the late development in 2010 and increased development this year. Our new restaurants, while running higher sales, also run higher costs, especially on the labor side of things and especially given the fact we are leaving trainers in the restaurants longer after opening. However, we believe that increased post-opening training is part of what is helping our new store volumes to outperform the system.

The third item impacting labor, which is more difficult to directly quantify, is that we are investing more labor hours in things like our local store marketing program, in our kitchen and service training programs. All of these programs continue gaining support and, in addition to helping drive our current business, also set us up for future growth. On top of these three main items, we are experiencing a little pressure from several other areas including higher insurance costs, both health and workers comp, as well as turnover, which, while still very low at just over 90% for hourly employees, is up a little bit from the prior year.

For the balance of the year, we anticipate continued de-leverage on the labor line, led by the fact that the exemption we received last year is now being effectively classified as a tax credit this year. Therefore, we are expecting a lower tax rate for 2011.

For the year, we anticipate our tax rate will be in the neighborhood of 30.7%, this is even lower than we'd originally thought due in large part to the increase in credits. Similar to the first quarter, pre-opening was up $900,000 compared with last year. For the year, we continue to anticipate a significant increase in pre-opening versus 2010, as we are on schedule to open 20 restaurants in 2011 and at least 25 restaurants in 2012.

Additionally, we are optimistic we could see 50% of our 2012 openings occur in the first half of the year, which would be very helpful from a store week growth prospective.

With regard to G&A, keep in mind that our Annual Managing Partner Conference occurred during the second quarter in both 2011 and 2010, so this does create a spike in expenditures in these quarters. During the second quarter of 2011, we spent $2.8 million in expense related to this, as compared to $3.2 million in the second quarter of last year.

In terms of our capital structure, our balance sheet position remains strong as we ended the quarter with $75 million in cash and $52 million in debt. We did not repurchase any stock during the quarter, so as of the end of the quarter, we had $24.8 million remaining on our share repurchase authorization. However, we continue to return capital to our shareholders as our Board declared our second quarterly dividend of $0.08 per share during the quarter.

For 2011, costs continue to run higher than we anticipated, thus margins remain our biggest challenge. As a result of this and slightly moderating the top end of our sales forecast, we lowered our anticipated diluted earnings per share growth for the year to approximately 5% from 5% to 10%.

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

Thank you, Price. Let me elaborate on what Price was saying and add some prospective.

Sales have been very strong for us this year. Margins have been the bigger challenge primarily driven by two things. First, as I touched on earlier, we have remained conservative in the amount and timing of our pricing actions. Being conservative is part of our positioning and part of who we are, and we believebeing conservative has been a large part of what has led to consistent traffic growth, which has served us well and is necessary for building a long-term sustainable brand.

In the short-term, however, being conservative has cost us on the bottom line as inflation has been a headwind for us and even more than we initially anticipated. We understand investor angst over that. We also understand pricing is sensitive, but then once you take it, you can't take it back, so let me update you on what we are doing.

In July, we took an average of approximately 1% of additional menu pricing, but we currently have a little over 2% in pricing in our menu. Additionally, during August, we will begin testing a 2% pricing test in 19 locations. We will not abandon our conservative philosophy as it pertains to pricing, but we do acknowledge that we need to be more proactive in dealing with inflationary environments.

While it is certainly too early to tell right now what inflation will be for 2012, there's no reason to think we will not experience some inflation next year. On a pricing prospective, our job is to make sure we are in a position to deal with it and that is what we are working towards.

Second item negatively impacting earnings is our decision to continue investing in the business, most notably in service initiatives. Some of the initiatives we have talked about before continue gain in incremental momentum. For instance, we have continued investing more time in local store marketing efforts, especially throughout the tougher economic times that we have been through over the last few years.

Additionally, we continue investing more in training and to insure great food and service execution, as well as to continue building our pipeline of people for increasing our growth of restaurants. While these service-related investments are costing us in the short-term, especially in conjunction with our conservative pricing, we believe service has been and will continue to be a huge driver of our sales performance and long-term success.

On the service side of things, we will continue investing in initiatives designed to enhance guest experience and drive traffic. Sales and in particular traffic counts have remained very strong and we are well-positioned from both a people and location prospective for increased growth yet again in 2012.

In addition, we remain in a great position to continue our share repurchases and dividends in what we believe is a very disciplined approach. In fact, during times like this where it's in the Company's best long-term interest to balance short-term growth and investment, we are pleased that our balance sheet and cash flow allow us to consistently return capital to shareholders.

In closing, 2011 is certainly shaping up to be a tougher year than we originally thought, as inflation continues to pressure us and we continue to invest into our future. However, our operators continue doing a great job running our business day-to-day and positioning us for future growth through their commitment to training and development programs. We are all very excited to be growing the concept through opening more restaurants and remain very bullish on the long-term prospects for Texas Roadhouse.

That covers our prepared remarks, so, operator, if you would, open the line for questions.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). And we'll take our first question from John Glass with Morgan Stanley.

Thanks, very much. I'd like to just dive right in to the labor question. I appreciate the detail on some of the pressure the higher acts created some year on year dissimilarities, but I guess it gets washed out with tax rate and then you have on top of that some incremental inefficiency from newer stores. So can you talk about what is the labor percentages look like in your more established stores where you're not putting this pressure on, and how much pressure is just coming from some of the things, G.J., you talked about like the marketing, are you getting leveraged just a little less than you would normally get or are you actually seeing de-leveraging even washing out the hire act in some of the newer stores?

It's Price. Let me start on that, John. The impact from the newer stores and running a little bit higher labor costs is about 10 basis points of the impact on the leverage line itself. In addition to that, from some of the programs we've talked about, you know, more training hours, more local store marketing, where we see that more showing up is really in the hours worked in the stores, which are up as you would expect with sales being up, but they're even up more than you would expect with our increased traffic, and we estimate that to be around 15 basis points.

So when you combine that with our payroll taxes being up, a large part really being driven by the higher tax credit that I laid out, all that adds up to more de-leverage than what we're showing. I think to get to the root of your question, we are seeing leverage on kind of that same store sale, that core business from increased sales. We're certainly seeing leverage there, it's just being eat up in some of these other areas.

And when do -- when does this end? Because you're accelerating store openings you may you talk about in 2012, accelerating again in 2013, which should be a benefit to the top line, but is this going to be a persistent cycle or do you define this as there's a limited amount of time you're willing to invest incrementally and then there's a point in which you let it flow through, in other words. When do investors get the benefit of your strong comps and all of the good things you're doing to drive traffic into your stores?

John, it's G.J. Let me take this. You know, I think what we're saying in this conference call is, look, we've been slow to take some of these pricing actions and we recognize that, and what I tried to position here is that we are positioning ourselves to be in much better shape to be able to get ahead of that curve, and quite frankly, that's ultimately what's going to drive this; that's how we're going to get leverage on the labor line, that's how we're going to get leverage through some of these other areas. We've tried to really signal that hey, we get it, and that's why we're starting this 2% price test now, and we have much more (inaudible) understanding what we're up against as we move forward.

And just the last question is, when does -- the price test is in August, so is that a 2012 price increase or is that a price increase that may actually take place later this year?

Right now, it's our intent to try to get that done in the very early part of 2012.

Thank you.

Our next question comes from Destin Tompkins from Morgan Keegan.

Thanks. I guess my first question is just follow-up on the labor. Does the dynamic with the change in how labor is accounted for, will it be apples-to-apples in 2012 or would it go back to the same way it was before?

It would be apples-to-apples in 2012.

Okay. And then on the -- I guess as you -- G.J. as you look at the commodityoutlook and we look into 2012, I believe last year at this time you were already beginning to lock in some prices for the next fiscal year. Have you begun to look at that for 2012 and kind of what are your initial thoughts on what that might look like?

Yes, we have started to look at 2012. In fact, we've had most of our major protein vendors in and we'll continue this week to have them in, and really start to look at what things might be in 2012. I think it's a little too early for us to really indicate what we're thinking, although I would say that we do feel pretty assured that we will have increased inflationary pressures, particularly around proteins as we go into 2012.

Can you give us any sense of, I mean, do you think it will be dramatically worse, similar, any kind of color you can give us on directional guidance around inflation?

Yeah, Destin, you know what, I think I commented on this last quarter, that it's never as bad as it seems and it's never as good as it seems, so I think there will be moderation. But it's really too early. We'll be prepared to talk about this in our third quarter call.

Great. And then lastly, on the price increase that was just taken, was it across the board or was it concentrated on a few items?

It was pretty much across the board, but please understand, and I think I mentioned this before, when we tested 2% last year, when we implemented the March price increase, we took what averaged out to be 1%, when in fact, we had many stores take 2% and many more stores to take from 0% to 2% to get to 1%. So this price increase in July really gets the rest of those stores up to approximately 2%, and that was pretty across the board.

Thanks.

And we'll now go to Jeffrey Bernstein from Barclays Capital.

Great, thank you. Couple of questions. First, from a comp prospective, you know, it seems like based on the monthlies, the trends decelerated through the quarter. I don't know whether that was a little concerning or whether you kind of view that based on comparisons that perhaps they didn't decelerate for the quarter on a two-year basis, if you could give some color on that.

And as you compare yourself to the broader industry, no matter how you want to look at it, it seemed like the broader industry was relatively stable over the past number of months, but perhaps the gap versus the industry has narrowed a little bit. Just wondering if you have thoughts on that or is it possible that your peers took the more aggressive pricing and didn't see the negative impact on the traffic and that's part of the reason why they GAAP is narrowing? And then I have a follow-up.

Yeah, okay. Hey, Jeff, it's Price. I'll start off on the first part of the question on two-year comps. Our comps certainly accelerated throughout 2010, last year, so on a two-year basis, we actually saw some improvement throughout the quarter, and in particularly into July was better than even the quarter was on the two-year basis.

Do we know -- can you give us what the July, August, and September were from last year?

July, August, and September of last year, we were up 3.1% and then we were up 4.7% and then up 4.7%. Up 4.7% basically in both August and September.

Any thoughts on the dynamic of kind of the broader industry and perhaps the gap narrowing a little bit? I didn't know whether peers took that price and now it seems like that price drove that narrowing of the gap. I know a lot of people were anticipating some negative impact on traffic for the peers that your gap would remain, but any thoughts on the broader industry dynamic and from sales prospective?

I think, Jeff, that gap on traffic has actually stayed relatively stable if I'm looking at the trend on Knapp-Track that just came out versus ours. Yes, it actually increased a little bit, our spread.

Stripping out the pricing based on what you're seeing throughout the quarter, the gap actually widened in terms of traffic specific?

A little bit, yes, sir.

Got it. And then I think you had said in your last comment just something about moderation on inflation. You thought perhaps into 2012, the idea being this year the full basket is up 4% and next year you think is going to up as well, but it might be up somewhere slightly below that 4%? Is that a broad brush look? How much is based on any beef visibility at all?

Jeff, this is G.J. I really don't think we're prepared to comment on that at this point. I'll definitely be prepared to comment on it on the third quarter.

Okay. And then just lastly, the share purchase front, it seems like you didn't do any this quarter and they had to re-ramp it up last quarter. What's kind of the decisive factor that drives if and when you do it and by how much?

Jeff, it's Price. You know, our number one goal is each year to buying at least the overhang that's created from our stock comp programs and that runs anywhere around 1.5% call it, anywhere from 1.3% to 1.8%, I guess, if you will. We've done that for this year. So what we would be looking at now is to go ahead and potentially get an early start on next year's dilution and then above that, just look for opportunities where we think it's a value for us long-term. We've got the balance sheet strength and we've got the cash flow, as well as the authorization to be opportunistic should we choose to even beyond that dilution mark.

Great, thank you very much.

And we'll now go to Larry Miller from Royal Bank of Canada.

Yes, thanks. Just one question for me. There's been a lot of noise in the media about all of the ongoings with our US government, also the economic situation in Europe. I'm curious to get your read on a consumer, and specifically some of the behaviors you might be seeing change over the last few weeks.

I think it's pretty tough, Larry, to answer that question over the last couple of weeks. I really don't know what metrically we'd look at to even start to answer that question. We see what sales have been, our traffic has been, we report it her for the first four weeks of the third quarter. I don't think there's anything certainly they we could point to that has changed at all.

Maybe even broader than a few weeks, just throughout the quarter changes in consumer behavior or anything. It sounds like it's been relatively stable and that clearly would be a good thing.

Yeah, I think that's true. I don't think there's any question about that.

Larry, this is Price. We haven't seen any falloff; all of our pricing flowing through. We're not seeing any negative mix, net-net. We're seeing just over 2% in pricing that we've got out there right now. We saw it throughout the quarter. We saw just over 1% in pricing falling through. To G.J.'s point, we haven't seen anything discernible from it.

Okay, that's great. Thanks, guys.

We'll now go to Jeff Omohundro from Wells Fargo.

Thanks. First, I wonder if you could elaborate on the decision to accelerate unit openings into 2012, particularly around ROI given the new unit sales performance combined with the results of your efforts on managing unit development costs.

Jeff, it's Scott. We've been very pleased with the results of the restaurants we've opened over the last 12 to 18 months. We had a good year last year with managing our development costs, we're on track to have another good year this year, and relatively controlling our development costs, meaning keeping it below $4 million in our case, and looking at the deals that we have in place for 2012, which just about done with that whole pipeline.

I'm very encouraged by what both the costs are coming in at and what kind of sales and margins we need to do to generate mid-teens plus IORs, which is what we look at when we're looking at these deals. So it's been very encouraging for us and our real estate guys have done a great job bringing us sites that don't have a lot of hair on them, if you will, and really meet our cost parameters.

Then as a follow-up on development. Maybe just an update on the whole international efforts. I believe you're going to be opening Dubai Mall this month. Just maybe give us some color around that.

Hey, Jeff, it's G.J. Yes, we are planning to open up the Dubai Mall location at the end of the month. We are working with our partner in the Middle East in terms of what our next development will be, but we will be opening something in the first half of 2012 more than likely, and then we'll see how these two go and how fast they'll ramp up on their development schedule.

In Mexico, we've sort of put that project currently on temporary hold given that our first location was destined to be in Monterey and there's some big securities issues there, so we're going to re-look at where we might go in Mexico first, so that's a little bit slower to get off the ground. And then in the China market, as I've indicated before, we'll be relatively careful and conservative about growth and we don't have anything in the pipeline at this point for a Texas Roadhouse unit.

Thanks a lot.

And our next question comes from David Tarantino from Robert W. Baird.

Hi, good afternoon. G.J., just a follow-up on your philosophy related to pricing and how you're envisioning the business as you look out over the next couple of years. It looks like in the past you've taken very little pricing and relied on making up for that with traffic growth to protect your margins, and I'm just wondering if your comments earlier shift in the overall strategy maybe you'll take more pricing now to protect margins and allow the traffic growth to flow through to margin expansion. Just if you could reconcile that, then maybe comment specifically on how you're thinking about 2012 if you're looking to protect margins or improve margins versus the expected 2011 level.

Yes, sure, let me give that all a shot. Over the last five or six years, you know, we haven't seen this kind of an inflationary environment, so it's been a little easier to manage the traffic gains versus the pricing actions that we have taken, that's one. Two, when you look at what we have been through as an economy over the last 24 months, it is clearly very uncertain and we are very sensitive that our guests feel the very same thing that we're all feeling, so we've been very careful to look at that and say, "What's the right thing do here?"

So when you balance that out, clearly we're seeing look, we've lagged behind and we've lagged behind for several years, and that gap has widened compared to our competitors and also in the terms of the value proposition. We are not taken the strategy that we want to necessarily enhance margins off of our pricing actions. What we're saying is we want to be able to try to hold our margins steady, and then we will continue to leverage through our actions around our service initiatives, our food quality initiatives, all the things that are value proposition to continue to gain sales and traffic count growth.

So I don't think you're hearing any shift in strategy per se. What you do hear us saying is, hey, we had a lot more pressure than we anticipated and we're going to react accordingly and be prepared as we go into 2012.

That's helpful, thank you. And then Price or Scott, just a quick follow-up on your July comp comments. Is the full 2% of pricing in that number or did you take that somewhere in the middle to late part of the month?

Yeah. Hey, David, it's Price. We took that throughout the month. Exactly right, the middle to late part of the month, so the pricing in July is just over -- effectively is just over a point and a half in July.

Thank you.

Our next question comes from Will Slabaugh from Stephens.

Thanks. Just on the check, on the 1Q call, you mentioned the check was running just over 1% in the first few weeks of the second quarter, so I'm wondering how that trended throughout the quarter. And then outside of that 1% price taken in March, what the drivers were there if there's any mix shift benefit or anything throughout the quarter?

Hey, will, it's Price. For the quarter, the check basically finished up where it started. It was up 1.2%, 1.3%, in that range for the second quarter as a whole, which was exactly what it was running up as of that point in time. So basically, we're seeing all of the pricing actions we took flow through.

Great. Also wondering if you can touch on the initial successes or benefits you're seeing on some of your higher priced items that you're testing out there, the bone-in ribeye, larger porterhouse, and what that kind of says to you about your demographic you serve and how they're faring?

We continue to be optimistic around the bone-in ribeye. It continues to help us with the check, and we feel very, very hopeful and positive about that. In addition to that, the combos, I think I mentioned before, continue to grow, as well. Again, I think it does show that we are continuing, and this is my personal belief, that we are continuing to get a little bit of those higher income folks, continue to come back and frequent us, opening up that demographic some. Again, I would say that we're optimistic that that will continue because it is good for us.

Great. Lastly, you mentioned a month or so ago back how you've been seeing the weekend pick up a little bit faster than the middle of the week, so I'm just wondering if that's still the case and if there's a lag there that you expect before you'd see the weekdays sort of pick back up in a similar way?

Will, this is Price. You know, things have been pretty consistent throughout days of the week for us, and it's been that way really for quite some time. It's been pretty consistent for days of the week. We haven't seen big ups or big downs on any of them.

Okay, thanks.

And we'll now go to Keith Siegner from Credit Suisse.

Thanks. Scott and Price, I apologize in advance for asking this question, but I just want to make sure I'm understanding this right. So this is not a year-over-year question, it's just about guidance from last quarter to the updated guidance this year, so we've got an unchanged comp outlook but with a little more pricing in it, same commodity cost inflation, no major change from the higher act stuff because it shifted from one item to the other, so the lower EPS to 5% from 5% to 10%, is this mostly like the investments in service in local store marketing? Between the last guidance and this guidance, what was the biggest moving piece?

Keith, this is Price, let me see if I can help out on it. There are really two differences, the main drivers between last guidance and this guidance. First of which, you are right in the fact that our inflation is still approximately 4%. We're on the higher side. Anything with a product mix has got some range in it. We are on the higher side of 4% now. So that accounts for a good part of it versus last time.

Additionally, we did at least take the high end of our sales range kind of off the table, if you will. Our last sales range guidance for the year was 3.5% to 5% versus 4% to 4.5%. I know it's not a big difference but when you combine those two together, it equals a couple of points of EPS growth for the year. I think if I recall correctly, we mentioned last time that to get to that 10%, you know, we definitely have to be on the higher end of that sales range.

Okay, that's fair. One last quick question on the commodities and I'll ask it a little bit different. Instead of asking what you things where they're going to so, how about this?If you look at the current contract prices you have versus spot, are there any things that you can call out for us that are either well-below or well-above current spot, please?

Let me answer it this way. I don't want to answer that because we wouldn't do it that way. I will just tell you that if you look over the last couple of years, the amount of premium built into the cattle futures markets has not been actualized, meaning that when they come to market, those cattle prices are not what those future prices would have indicated, so there's been a premium built-in which I would suggest is probably the financial players in this space and, therefore, those prices come back. And I'm sorry, I really can't comment yet because it's way too early. If I could, I would. If I had some indication, I would do that.

That's okay. Thank you very much.

I will now go to Phillip Huang from BMO Capital Markets.

Hi, it's Phillip Juhan, guys. Just looking at the G&A line for a bit, I was expecting a bit of leverage on that line this quarter particularly given the elevated spend last year for the managing partners meeting, but it looks like, however, you guys spent roughly $3 million last year, we're expecting more like $2 million this year, came in closer to $3 million at $2.8 million. Is there -- so maybe you could talk about that a bit and was there anything else that sort of pressured G&A during the quarter? Thanks.

Hey, Phillip. It's Price here. You are right, the conference ended up coming in $100,000 higher than we had anticipated last year at this time. You know, the good thing that drove that is attendance was up quite a bit higher than we anticipated. We had a good turnout from our vendors.

In addition, we also spent more on our humanitarian efforts on our conference, so really those two things kind of drove our conference expenditures up a little bit higher year-over-year than we anticipated. Beyond that, there really wasn't anything on the negative side impacting G&A on a year-over-year basis.

Okay. Thanks, Price.

And we'll now take a question from Jason West of Deutsche Bank.

Yeah, thanks, guys. Just on the tax rate outlook, Price, it looks like the 30.7% for the year implies about 32% in the back half versus 28% in the second quarter. Just want to clarify that. It seems like a sort of normalized number, even though you're saying you're getting some tax benefit in the back half.

We should be at 30.7% year-to-date, so we should be approximately that same range for the balance of the year by quarter.

Okay, maybe it's just the math in my model then. I'll go through that again. And then, G.J., just on the, and not to beat a dead cow, but the beef price outlook, have you historically seen beef prices eventually catch up with cattle futures or do your beef purchases not necessarily, you know, match what's going on in the cattle markets and you're doing more one off sort of agreements and we really shouldn't use those prices as a indicator?

Well, what I said earlier really speaks to that issue is that there has been a built-in premium in the futures markets that is not being received when the cattle comes to market, and that's something that's really been a fairly new issue to deal with over the last two or three years. And all I'm saying is that typically when you contract prices, if you do the combination of contract, cash, purchases, you will not have to ultimately pay what that premium built is into the cattle futures. I don't know if that makes sense, but that premium is not being actualized by the packers.

Okay, that's helpful, thank you.

Real quick. Let me circle back on the first part of your question because I see where you're coming from now with the income statement on the press release, and let me clear up something on the tax rate. To calculate what our tax rate is, you have to essentially take income before taxes, back out minority interest, then you get $51,000,745, and then divide the income taxes into that. So year-to-date we are at that 30.7%, but I certainly see how it looks like we're at 30%.

Okay, I see what you mean. I had been doing it straight off of the income statement. Okay, got it.

And we'll now go to Andy Barish from Jefferies.

Hey, guys. I think every line item's been covered, so I'll go all the way down to the franchise comps, and those have been lagging after leading kind of in the recovery last year. Are they -- I know it's a smaller sample size, but is there nothing geographic there or did they get out in front of you guys on pricing last year? Sort of what's going on with the difference in terms of the lagging franchise comps right now?

Hey, Andy, this is Price. I don't know anything specifically that's driving that. You know, we can look into it more. I know they are half a point to a point lower. I can't sit here and tell you now that it's anything geographically or pricing because, unfortunately, I just don't know sitting right here.

No problem.

Sorry.

And we'll now go to Conrad Lyon from B. Riley & Company.

Hi. I think it was G.J. who said there might be an additional 2% pricing taken in August for 19 stores. Is that correct, and is that just something that's more opportunistic that you're looking at?

That is correct. And what we're saying is we're testing price to consider taking pricing actions into 2012.

Okay. Let's say you do take some action going into 2012, would that occur necessarily with the bulk of the pricing in the back half of this year, and would there be a material impact on your earnings guidance?

Well, it wouldn't have an impact on -- for 19 stores, it wouldn't impact our guidance for 2011. What we are saying is that we're preparing ourselves to be more reactive or more proactive relative to pricing initiatives into 2012 than we were in 2011.

Okay. Price, just remind me about what you said about pre-opening for this year.

That it would continue to run up for the year-over-year in the back half of the year.

Okay, and that's related to 2012, as well?

Yes, 2011 and 2012. You know, our 2011 openings are backend loaded this year as we've opened five of the 20 restaurants so far. That combined with -- hopefully we'll be much more front-end loaded on 2012.

Okay, great. Thanks.

And now we'll go to Steve Anderson from Miller Tabak.

Good afternoon. Going back to the SG&A line, I know you talk about the spike in the second quarter that tends to normalize in the back half of the year. Do you anticipate any kind of spike due to share-based compensation with one of your peers?

This is Price, Steve. Nothing out of the ordinary -- no out of ordinary spikes for share-based compensation this year. Our share-based compensation is running up year-over-year, but it has been doing that for first and second quarters, so no unusual spikes.

Thanks.

And we'll know go to John Ivankoe from JPMorgan.

Hi, thank you. The question is on your general managers at the store level. Obviously, they've been asked to spend some more presumably their own money on service initiatives and local store marketing.

I'm curious if the decrease in margins that we're seeing at the corporate level are affecting their compensation and whether they're kind of coming to you saying, hey, we have opportunities to save costs in these other places that aren't going to affect the customer or employee negatively to allow an improvement in margins. In other words, since you do have a very manager-driven culture at the store level, if there's any movement that's happening at the store level that suggests you might be able to save costs in other places.

Well, are you right, we are driven by the managing partner, and what really happens here, it's a sharing of best practices. It's what works, what doesn't work, and it behooves these guys to continue to take any initiative around costs that doesn't affect the guests and/or our food quality. But it also behooves them to invest in local store marketing initiatives, leader-to-door, all the things that we're doing because that drives traffic. That is not something that we're unilaterally giving them direction as to what they do.

It's something that we all talk about and make decisions, and these guys are still -- or still have some independence on what they do within their individual stores. The first part of what you said is are they being effected negative. Well, yeah, they getting 10% of the bottom line. So if the margins are being impacted, they are in fact being (inaudible). It behooves them to look at every single line item to do what makes sense.

And is there anything, G.J., that is kind of percolating that, that might be, you know, initiative that is taken across best practices system-wide in the next six to 12 months?

Hey, John, this is Scott. I will tell you there isn't any specific silver bullet cost reduction initiative that we're looking at. We're always looking at efficiencies in the business. For example, we have a theoretical food cost program and a lot of guys will compare labor schedules and talk about when they bring people in to start prepping food, when they send people home. We've got contracts on utilities of varied types.

We've got a lot of programs that relate to our insurance costs, both on the guest general liability side and also the workers comp side -- workers comp example Shoes for Crews. A lot of our folks used that and it really helps us limit our slips and falls in our restaurants. I will tell you that in our culture, it is a very, very competitive margin and sales culture. There's a lot of competition between the various operators and a lot of pride with growing sales, of course, but also running a certain margin. And I will tell you that our guys are very, very focused on watching every dollar that they spend.

At the same time, many of our managers have come from other concepts in which the labor standards changed or the food standards changed, and that resulted in sales declines over time at some of those concepts. And so a lot of our guys have been in the business a long time and they see the value of making those investments, let's say in local store marketing, making sure our food is as good as it can be and heaping size or heaping sides, and they see the value of that over the long-term. And they're willing to take a few hits like some of the guys are this year because they know they're going to be that much better off years down the road.

That's really the day-to-day mentality of the operators. Many times, Kent specifically will ask the operators, "Hey, what kind of pricing do you guys want to do?" and a lot of guys will say, "I don't want to take price right now," and that's the route typically that we may take. So that's kind of the mentality of the Company.

Thank you.

Well now go to Bryan Elliot from Raymond James.

Hey, good afternoon. Just a couple of clarifications here to finish up the modeling part of this. So the tax credits on the higher end. I understand you did a great job, Price, of breaking that out. So we have tax credits now in the tax rate line for 2011. Do we expect those tax credits to continue into 2012 or do they sunset at this point, or they might get extended but Congress has to act?

Right now, they're set to expire at the end of this year. (Inaudible) out there, but nothing definitive yet.

Okay. If they did, what would that mean for tax rates, 50 bits next year or more than that?

It would mean increase dollar-wise something in the neighborhood of $1.5 million -- $1.8 million, $2 million.

Okay. I think you addressed this earlier, but just to clarify. When you tested the price that we just put in and now that it's gone in, you've been able to confirm that basically it's all flowing through. There's been no real mix change or other traffic indication that there's been a behavior change because of this most recent pricing, both in the test of it prior to it being rolled and subsequent to the roll? Did I hear that right?

Yes, that's right. Let me clear up exactly what the role of the additional pricing was. A lot of this was when we took the pricing back in the spring and March, we went up 2% on a lot of restaurants, just not all of the restaurants. We went up anywhere from may half a point to even 2.5% on a lot of restaurants, but a lot of restaurants were very close to upper 1% or 2%. That averaged out to be just over 1%.

So on this last increase, what it was is it wasn't just taking another point on what we had already done, in a lot of cases, it was taking 2% on those restaurants where we hadn't done anything in the spring.

Okay.

But you are right in the fact that so far what we've seen is we've seen all of the pricing flow through.

Bryan, the only thing I would add is that we are still encouraged, as I indicated earlier, that we're seeing some help from the bone-in ribeye and the combos that we mentioned earlier, which is why, as Price mentioned, we have flown or gotten through 1.2% to 1.3% of what was an average 1% from March.

Yes, that's what I was going to ask, where the mix shift actually is coming from, so it's coming from those higher ticket sort of the barbell is working?

That's what we think.

Yep, okay. All right, and I really quick nitty question for Price, just because he's had such a fun afternoon.

No problem.

So, if I look at Q2 G&A, $16.2 million, I take the spending out for the conference and is there any reason to assume that that's not a fair base run rate for Q3?It was last year. Seasonality on that line can sometimes look but you've had a lot of changes obviously with the slow down in growth, now it's gearing back up again.

That is fair. The one thing I would mention for the back half of the year is we are below -- our bonuses came in lower for the second quarter in G&A, and they could be the case for the back half of the year, as well.

Okay, very good. Thanks.

And we'll now go to Chris O'Cull from SunTrust Bank.

Thanks, good afternoon. G.J., I had a related question regarding the managing partner program. I know the Company has always prided itself on the program and you share the profits to incentivize managers to operate more efficiency, but when you calculate the potential compensation benefit to a manager from let's say running better labor productivity, it's not that significant on a monthly basis. And I'm just wondering if the managing partners -- if the managing partner program is the right incentive to improve labor productivity and maybe some of the theoretical food cost initiatives or if there's other mechanisms that you guys look at to try to incentivize managers to make some year-over-year improvements.

Well, the managing partner program is one that I believe has the managing partner look at as an overall business, and that's a balanced approach to what is a very, very difficult business to execute on a day-in and day-out basis. And so in that balanced approach, which is certainly something that we talk about all the time here, and staying very focused on the same core beliefs that have gotten us there to date and will continue to get us there in the future, I will tell you that I think it is the right approach.

If we were just to bonus these guys just on labor actions or lowering food costs and all of a sudden things start to get, in my opinion, start to get out of balance pretty quickly. So I think net-net we have the right strategy.

Hey, Chris, it's Scott. I think where -- you're right when you talk about if the guy nickels and dimes his labor or his food costs, doesn't put a lot of money in his pocket, where he or she puts a lot of money in their pocket, is taking the store doing $60,000 and going to $80,000 a week in sales or doing a store from $80,000 a week to $100,000 a week in sale. And, you know, the managers that are doing a $100,000 a week in sales, they're making big money in our concept.

And so 99% of our managing partners know that's the road to take if the road was sales, and so that's why for those folks, they know to think, "Hey, I've got to invest in the labor, I've got to invest in keeping portions, and that kind of thing because ultimately that is going to bring me the sales and that's how I make money." So they get that, so that's one reason why you don't see our labor having that much leverage on it right now because our managing partners aren't on their own pulling back on their labor hours.

They're saying, "Hey, I still need to spend the labor because ultimately I want my sales to get to that $80,000 a week, $90,000 a week, $100,000 a week," because they know that's where the big compensation money is.

I appreciate that. And I wasn't suggesting to get rid of a profit-sharing program. I was thinking more of other stores that kind pull capacity where they may not have that incremental dollar on the top line to gain other levers to pull, incentives to create to improve through put or flow through at the store level?

I don't think that we've proven that any single one of our restaurants is at capacity.

Okay, that's fair enough. One other question, and this is more of modeling a question. What was the hourly wage rate inflation during quarter?

During the quarter, Chris, it was around 1%, so relatively benign.

Okay, great.

And that is all of the time we have for questions. I'll now turn the conference back over to management for any additional or closing remarks.

Thank you all for joining us tonight. We look forward to speaking to you again with our third quarter results. Good evening.

This concludes today's presentation. Thank you for your participation.