Texas Roadhouse Inc (TXRH) 2011 Q3 法說會逐字稿

Good day, everyone and welcome. Thank you for standing by. Welcome to the Texas Roadhouse, Inc. Third 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. Instructions will be provided at that time for you to queue up for questions.

I would like to turn the call over to Mr. Price Cooper, Chief Financial Officer of Texas Roadhouse, Inc. Please go ahead, sir.

Thank you, Miranda, and good evening. By now, everyone should have access to our earnings announcement for the third quarter ended September 27th, 2011. It may also be found on our website at 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 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. Reconciliations to such measures can be found under the investor section of our website.

On the call with me today is Kent Taylor, our founder and CEO; and Scott Colosi, our President. Kent is going to start the call off, after which I will provide a financial update. Kent and Scott then will provide some insights on our performance and business direction, and we will all be here to answer any questions. Now I would like to turn the call over to our Chief Executive Officer, Kent Taylor.

Thank you, Price. Let me start by saying how pleased I am to be joining you today as CEO for the second time here at Texas Roadhouse. Needless to say, I have a lot of passion for the Company I founded 20 years ago, and although I turned over the CEO reins once we went public, I have remained actively involved with all the Company areas including culture, operations, real estate, menu, and pricing.

And now in my new role, I have become more involved in every aspect of the Company including international expansion, purchasing and marketing. I feel very fortunate and humble to be surrounded such a high-caliber team to guide Texas Roadhouse forward and am honored again to serve as CEO. Price, will you now walk us through the financial update.

Thanks, Kent. Our third quarter diluted earnings per share growth of 15% was better than we had anticipated. However, we do want to be clear that this was primarily driven by a few non-operating items. First, we booked a $600,000 credit relating to our workers' compensation expense.

As you may know, we are predominantly self-insured for both workers' comp and general liability insurance, and as part of our process, we adjust to actuarial numbers quarterly. This quarter's workers' comp adjustment happened to be higher than normal.

The second item helping third quarter earnings was a $400,000 one-time credit to property taxes. And lastly our tax rate of 27.7% was roughly 300 basis points lower than anticipated. Part of the reason is we expect to have less non-deductible officer compensation expense. The other part is our tax credits continue coming in higher than we had anticipated. These three items positively impacted third quarter diluted earnings-per-share by approximately $0.02.

Now let me walk you through some of the details for the quarter. Starting at the top of the income statement, total revenues were up 9.6% over the year-ago period. Driven by operating week growth of 5.6% and average unit volume growth of 3.9%. Average unit volume growth of 3.9% was essentially in line with our same-store sales growth of 4%.

With regard to same-store sales, traffic and check were each up approximately 2% as we continue to expand good flow through on our pricing actions. By month, comparable sales were up 3.9%, 3.4%, and 4.7% for July, August and September respectively. I should also mention that we have added information regarding the sales performance for specific classes of restaurants to the supplemental financial and operating information schedule included in our press release.

As you will see in the table, average weekly sales for our same-store base, those are stores open at least 18 months as of the beginning of the quarter, slightly outpaced our average unit volume growth -- group, which are newer stores that have been open for 6 to 18 months. In addition, our ten newest restaurants performed very well as they averaged $84,500 a week in sales for the quarter, giving us great comfort in being able to continue to develop very profitable restaurants.

On the cost side of the P&L, restaurant margins increased 9 basis points over the prior year. While we did have the benefit of a little more pricing and continued traffic growth, the workers' comp and property tax pickups I mentioned a minute ago greatly helped margins as well.

Now for a little color on some of the specific lines. While food inflation was not as bad as we anticipated for the quarter, cost of sales was up 83 basis points versus the prior year driven by food inflation of approximately 4.5% as compared to the 3% or so it had been running.

For 2011 we still expect food inflation to be approximately 4%.

Labor was up only 6 basis points versus the prior year; however, there are a few moving parts here with the lower workers' compensation insurance helping us during the quarter partially offset by a net decrease in payroll tax credit benefits. Overall, we were able to leverage our core labor costs, thanks in part to approximately 2% pricing for the quarter.

Looking ahead, labor expense in the fourth quarter will continue to be affected by the reclassification of higher tax credits from last year which are now being recorded as an offset to income taxes. While we expect to leverage core labor with 2% pricing and assuming a couple points of positive traffic, reported expenses could be up compared to last year as a result of the reclassification.

Other operating costs were down 96 basis points during the quarter. We benefited by $800,000 on this line due to lapping of a $400,000 hit we had in the third quarter of 2010 relating to last year's general liability insurance adjustment, and in addition, this is where the $400,000 credit I mentioned earlier relating to property taxes was recorded. We also continued to leverage several costs, in particular, utilities with solid comp sales growth and, as I mentioned on labor, more pricing.

Looking at costs below restaurant margins, pre-openings continues to be higher year-over-year in conjunction with increased developments, both in 2011 and 2012. The G&A continued to run about flat as a percentage of total revenues compared to last year with higher marketing, legal and stock-based compensation expense offset the benefit of sales growth. I would remind you that in the fourth quarter we are lapping about $1 million of higher bonus payout in 2010 and some one-time payments to employees no longer with the Company. So we would expect to see some G&A leverage in the fourth quarter.

Our tax rate for the quarter came in at 27.7%, which was lower than expected. We are now anticipating the rate for 2011 to be approximately 29.8% as compared to our expectation of 30.7% as of the end of the second quarter. The lower anticipated tax rate is driven by a combination of lower non-deductible officer compensation and an increase in tax credits.

Regarding cash flow, we were free cash flow positive again for the third quarter bringing our total for the year to $29 million. We believe we have allocated it well as we have used this along with $27 million in excess cash from the end of 2010 to repurchase $46 million of stock and pay $11 million in dividends. Based on third quarter results which, again, contain some non-operational tail winds as I've mentioned, we increased our 2011 diluted earnings per share guidance to up 7% to 8% from up 5% off a reported diluted earnings per share base of $0.80 in 2010.

On the sales front, our fourth quarter is off to a very solid start with October comparable sales up 4.2%.

Regarding 2012, let me share some details on several of our assumptions. First, we expect a continuation of positive comparable restaurant sales. Second, we expect our 25 openings for 2012 to be much more evenly weighted between the front and back part of the year.

Third, we believe 7% to 9% food inflation is a reasonable assumption as we sit here today. We currently have fixed price arrangements in place for 40% to 45% of our overall cost of sales for 2012. We are comfortable with where we are in the process as compared to prior years and anticipate getting more clarity around all of this as we move throughout the remainder of 2011. Fourth, on the labor front, we will have some head winds from various state mandated increases in tip and minimum wage rates which we have not experienced for a few years. Specifically there are six states where we operate Company restaurants that have announced increases in tip wage rates ranging anywhere from $0.15 to $0.42 per hour.

Another head wind for us in 2012 is our income tax rate of 32.5% which is 270 basis points higher than our expected 2011 rate due to the scheduled expiration of certain federal tax credits at the end of 2011. And finally, we are expecting our diluted share count to be lower in 2012 due to share repurchases. As of the end of the third quarter, we had $53.6 million remaining on our share repurchase authorization.

And with that said, let me turn the call over to our President, Scott Colosi.

Thank you very much, Price, and good evening, everybody. At Texas Roadhouse, it's great to be looking at the prospect of increasing our full-year restaurant openings for the second year in a row.

If you recall, we pulled back on development in 2009 as our sales-to-investment ratio declined to below one times. Now after cutting $300,000 to $400,000 of costs out of the development side of the equation, we're back to growing at a higher rate. This is very exciting for our employees, our guests, and our shareholders.

Although we are giving back some margin in 2011 and likely in 2012, we still feel very good about the returns we are getting on our new restaurants and about growth prospects overall. Our sales results indicate there's a strong demand for the Texas Roadhouse experience, and we have the people, the product, and the potential sites to ramp up development as the economy slowly recovers. At the same time, we feel good about our ability to continue returning some of our excess capital to shareholders through dividends and share repurchases, an issue that is discussed frequently at the Board level.

This is an exciting time to be at Texas Roadhouse. Several of us recently spent just over three weeks traveling across the country meeting with all of our operators. Our partnership with them is a huge strategic advantage for us, and we remain committed to maintaining and enhancing that relationship as we continue to grow. And in my role as President, I'm particularly eager to strengthen our commitment to our managing partners and other operators throughout our system.

We will also maintain our unwavering focus on legendary food and legendary service even in times of economic volatility, as history tells us that's when we gain market share.

To that point, we believe we have some pricing power and plan to take a menu price increase at the beginning of 2012. At this time, we are still finalizing the amount and the menu items that will be affected. We have always strived to balance the needs of our shareholders and our operators with our long-term growth potential, and we are confident we will do that again in 2012.

Now I would like to turn the call back over to our CEO and founder, Mr. Kent Taylor.

Thanks, Scott. As you have just heard, Texas Roadhouse has solid momentum. Sales continue to be strong, our development pipeline is increasing, and we continue to attract great operators.

Additionally, we have recently gone international with our first franchise opening in Dubai, which is currently the highest volume restaurant in our entire system. On top of that, as Scott mentioned, we just finished our fall tour where we visited 17 cities in over three weeks and spent time with our managing partners and market partners.

We dedicate time each fall to ensure that we stay very connected with our operators just as we do at our annual spring conference. Our travels strengthen the notion that we are not just in the food business serving people; rather, we are in the people business serving food.

I look forward to challenging our team on what it takes to get bigger, stronger, and faster, focusing on the following initiatives. First, ensure we maintain and enhance our culture. Second, engage, listen, and act on the comments of our operators who are the true backbone of our concept. Third, drive the continued growth of Texas Roadhouse both domestically and internationally with a focus on returns, and overall determine how we can create significant value for our employees, our guests, and our shareholders.

Needless to say, it is a tremendous time for me to be in the lead position at Texas Roadhouse, and we are fired to bring Texas Roadhouse up to the next level. Are you guys, ready? Scott, you ready? Price, you ready? All right.

I would also like to give a big thank you to our managing partners and other operators of Texas Roadhouse who are listening today. It was great to see you guys over the last few weeks, and we definitely expect big results from you guys each and every day. With that, operator, we have concluded our prepared remarks. You can open the lines for questions.

Thank you. (Operator Instructions). And we'll pause for just one moment.

(Operator Instructions). We'll go first to Destin Tompkins with Morgan Keegan.

Thank you. Good afternoon. Guys, just obviously the 7 to 8 -- or 7% to 9% commodity inflation in 2012. I just wanted to see if I could get you to maybe quantify the amount of COGS pressure you would expect. It seems like, depending on the pricing, it could be a pretty healthy amount of pressure. Any kind of framework you can give us there?

Yes. Hi, Destin, Price. It will depend on the pricing we ultimately take, so we definitely expect to feel -- I would anticipate a little more pressure on food costs next year, obviously, than this year, with that kind of inflation rate; but it will all come down to just how much it is will depend on where we land on the pricing front.

On the pricing --

Destin, it's Scott. Currently we're testing a 2% price increase, and we have been since around August. We're going to have some pricing, about 0.5% rolling over from this year's pricing actions that we took in the summer, and then we may take a little bit more pricing in those few states that Price mentioned earlier that are having some significant tip wage inflation next year.

So we don't have the final exact numbers, but that's kind of the picture as it looks today. And so we've got to balance those pricing actions with the 7% to 9% food cost inflation, and I think you can do the math and get to maybe what a range of outcomes might be for cost of sales.

Sure. And on that, Scott, can you remind us what kind of the -- what you will carry through into 2012 from, I think there you took a percent of pricing early in the second quarter and maybe early in the third quarter or something like that and so you should have some of that carrying into the first quarter and second quarter of 2012; is that right?

Well, for the -- on average for the year, we think it will be about 0.5% to 0.6% of net pricing for next year that carries forward from what we did over the summer and back in March.

Okay. And then, lastly, I know you guys like to keep the menu pretty consistent and words like menu engineering typically probably aren't what you want to talk about, but are there any opportunities to maybe add new things to the menu that do carry a more favorable cost or that allow you to, I guess, be less of a negative impact on your cost of sales that you can kind of tweak the menu a little bit?

Destin, this is Kent. Yes, we've introduced bone-in rib eye to our menu at a price point of $21.99. It's in about 85% of our stores. We expect it to be in almost all of our stores next year. We also have a Porterhouse steak that we have introduced from $22.95 to $23.99 and it's in about, I think, we're testing it in 20 stores, and it should be in about 100 to 110 stores next year.

Okay.

So it's helped our check average.

Thanks. That's helpful.

We'll go next to Jeffrey Bernstein with Barclays Capital.

Great. Thank you very much. Couple of questions. First, it seems like the guidance for 2012 from a comp perspective is somewhat ambiguous, just obviously from a "positive" perspective. I'm just wondering what you are seeing in terms of current trends.

Are you seeing anything that would give you any sign of concern? I mean it seems like the absolute comp is still running very strong. I'm just wondering if you can talk to the average check and mix expectation and again, whether you are seeing any kind of sign of concern going into 2012 from the very strong sales we're seeing now?

Yes. Hey, Jeff, it's Price. No. We've continued to experience very, very positive trends. Our check continues right now, we're running up a little bit over 2% in terms of average check and then we've got a couple points of traffic.

Generally speaking, as we look out into next year and every year, we target a couple of points in traffic year-on-year and then as, I think, Scott mentioned earlier, we've got about 0.6% in check carrying over. So then on top of that then, whatever pricing actions we take at the beginning the year then that would give you a range of what we would expect sales loss.

Got you. Then for the pricing that you talked about before, it sounds like maybe you're testing a couple points of price. I think in the past, you had mentioned that you don't usually take the maximum amount. I am just wondering whether you are getting any push-back on the pricing you've been testing lately or perhaps better yet, what type of pricing would you need to mitigate the margin pressure and come out with a flat margin. I mean, what is the magnitude of the price you would need and what's the potential in terms of what you would take?

There's several questions there. I will try and answer them. On the testing that we've been doing so part roughly, we've been testing for about two and a half months now. We haven't seen anything materially negative, I would say, out of that thus far. Either traffic wise or from a T-mix perspective.

As far as the pricing that we would need to have next year, next year it's going to be pretty hard to hold margins flat percentage wise. Just given the amount of inflation we're talking about with the 7% to 9% and a couple points inflation on labor, then a couple points elsewhere on the P&L. I think realistically it's tough -- it depends on traffic ultimately, but I think, realistically, it's tough to assume that we could hold margin percentages next year. Sitting here today.

Got you. And then just lastly, what's the potential benefit from the share purchase? I'm not sure how much further that authorization lasts, but what would be the benefit to 2012 EPS just from the repo you've done in 2011, and would you exhaust the full authorization in 2012?

Jeff, this is Scott. You know, we've got $54 million left -- $56 million I'm sorry on the authorization that's left. You know, we're pretty committed to at least buying back the diluted impact of our share compensation programs. Obviously, with the amount we have bought back this year it will have some benefit to us next year and if we have the opportunity, we've got plenty of room left on the current authorization. You know, we may buy back some more stock. We'll see. But that's as much guidance as I think we're going to give currently.

Great. Thank you very much.

We'll go next to Jonathon Komp with Robert W. Baird.

Hi. Thank you. Price, just a clarification question on the guidance for 2011, the EPS guidance. You know, absent a few of the non-operating items that you called out during Q3, is there any other change to the underlying outlook for the core operating profit for the year?

Not materially. We did a little better. Our food costs came in a little better during the quarter driven specifically by potatoes but the main reason for the increase in guidance were those non-operating items of a couple cents.

Okay. That's helpful. And then, looking forward to 2012, I know in the past you've been willing to give some indication of at least some scenarios where potential EPS growth for the forward year or so. I'm just wondering given all the cost head winds that you are facing, is there any help you can provide thinking about the earnings growth next year. Any type of color you could give there would be helpful.

Yes. No. I appreciate the question. It's just a little too early in our minds given where we are in the commodity front. You know, again, we feel very good where we are in the time process, but 7% to 9% is a big range on the inflation side there and, not having finalized our decisions regarding pricing we just think it's a little too early to give any hard range.

Okay. That's helpful. And then lastly, just one more question for next year. You kind of touched on some of these pieces already, but given the commodity inflation outlook and some of the commentary around labor, can you help provide -- maybe if you look at the overall cost basket across all line items how much inflation you might expect to see for the year?

Well, based on the 7% to 9% food, you're looking somewhere in the mid-single-digit range for overall inflation. For 2012.

Okay. Thank you. That's very helpful.

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

Good afternoon. You're talking about 2% on the average ticket. Has there been any measurable lift on mix. I know you mentioned the $21.95 bone-in rib eye. Can you quantify how much mix has been a contribution over the last few quarters? Thank you.

Okay. Steve, this is Price. Out of the bone-in rib eye, we have gotten a couple of tenths of positive mix out of that, and so what we have seen there is our -- overall, our mix has stayed about flat because we got a little bit of a lift from the more expensive bone-in rib eye. At the same time we have given up a little on the lower end as more of our stores have been participating in early dine. You know, a program we have to specifically target and drive traffic from that 4 PM to 6 PM window.

Okay. And looking at -- how have your alcoholic beverage or overall beverage sales changed lately? Because I know from a couple of the bar and grill players that they have talked about an increase in alcohol beverage sales. What are you seeing on your end?

On our end, we're seeing our alcohol staying about flat. I mean, we have seen that pretty consistent for the last several months and soft beverages are down slightly. Very, very little.

Thank you.

Thanks.

We'll go next to Peter Saleh with Telsey Advisory Group.

Great. Thanks. Just wondering if you have a percentage of price that rolls off next March, and another percent that would roll off in the summer time. I know it's still a little early but would you consider replacing those two in terms of the percentages -- in terms of additional price beyond the 2% that you are already testing?

You know, right now don't -- have not looked out past the beginning of 2012 as it relates to pricing. So we're still aligning what exactly our plans are as it relates to the beginning of 2012. So as we continue to get clarity into 2012 and probably look out into -- at that point have some idea of 2013, some early idea. Not to rule it out, but we haven't made any decision one way or the other on that.

Peter this is Scott. You know, we're going to take our time assuming we do something here very early in January and see what's going on in the economy, our results, our inflation, see what our competition is doing, you know, a number of our competitors are still out there being pretty aggressive in the deals that they're selling on TV, et cetera, et cetera. So I think, we've got to still be very, very careful in the actions that we take going forward.

In terms of the commodity inflation for next year, should we be thinking about it more as front-half heavy or back-half heavy?

I think it should be pretty evenly throughout the year.

Great. And then just any last updates -- do you guys have any updates on the pay-at-the-table program? How has that been going?

Hey Peter, this is Scott. Tests going okay. We've gone through a couple iterations of hardware and software in our test. We've had it in two stores, and so we're kind of looking to go to the next step as far as equipment and software and so forth. We've had a lot of learnings, a lot of good learnings, some not so good; and right now nothing is imminent as far as any kind of rollout at any kind of larger scale.

Great. Thank you.

We'll go next to Jeff Omohundro with Wells Fargo Securities.

Thanks. First on the tax rate guidance, the 270 basis points, is there anything in there other than the federal program expiration such as WOTC if these programs were renewed, you would be flattish?

Jeff, the two big drivers of that are WOTC, as you mentioned, is one driver. The larger driver is actually the higher ticker credit, that expense we talked about that has been re-classed from labor down to income tax expense. That's about two-thirds of the driver there is really the higher credit. So if WOTC -- there is probably -- seems to be sitting here today that there is a higher likelihood that WOTC could be extended, but that would be the smaller part of it. You're talking maybe 60 to 70 basis points impact.

Okay. And then on the labor front, in looking at the labor guidance other than the increase in tip wages in those six states, what are your thoughts about? Is it more of a normal inflation environment, do you think? Are you pleased where staffing levels and turnover are now and any thoughts on incremental health care or other drivers impacting that?

Yes. We're pleased. Turnover is running just over -- on the hourly basis, turnover is running just over 90%, so it's up a little bit from last year but all in all, at a very good level. You know, the rest of labor, I would assume a normal environment. You know, a couple percent on the rest of labor excluding those items you mentioned. Not really expecting any material hit from the -- from any healthcare in the near-term -- into 2012, so I think you're talking 2% to 2.5% range on labor.

Jeff, this is Scott. We've gone to a self-insured type of program on our health insurance, and that so far has been favorable for us. It remains to be seen how much that will carry through over the years, but we'll hopeful that it will be. Typically it is when you go the self-insured route. It's been very successful for us on the workers' comp and general liability side.

So that's a good thing. I think, the other side is just payroll taxes. Anything to do with states. I think we've had a lot of increases like a lot of restaurant companies over the years with regards to certain state unemployment type taxes, and I imagine we'll still have continued pressure on that front in some way, shape, or form.

Thanks.

We'll go next to John Ivankoe with JPMorgan.

Hi. Thanks. This is Amod Gautam on for John. I guess outside of pricing, I know at your Analyst Day you kind of dismissed it to some extent, but can you talk a little bit about maybe if your focus on sort of operational initiatives perhaps labor scheduling, for instance, might have changed given the fact that the commodity environment and labor environment is expected to be more inflationary now in 2012.

This is Scott. On the labor front, we challenge our folks all the time on not leaving low-hanging fruit out there, if you will, to use sort of a cliche. So we want to make sure we're not bringing people in too early, not sending them home too late, those kinds of things. Saving money.

On the other hand, we have an opportunity because we have such long waits to increase the speed in which we're turning tables and getting guests through our restaurants, and sometimes, it makes sense for us to add labor to help us reduce our kitchen times, and sometimes to add labor in the front of house to help us minimize the times that we have open tables in our restaurant.

So we're pushing hard on our folks to make sure they're spending money in the right places with regards to labor to make sure that we can continue to manage our waits and to increase our guest counts, and that's kind of what we've been doing. We're not rolling out any kind of new labor model. There's no plan to do it, which would result in fewer labor hours for our people.

On the food side, we do have a theoretical food costing system, and we continue to refine our recipes and talk about that throughout our system as well. So our folks in the field, they have a lot of tools that they can use to help them drive a little more profitability to the bottom line, but I say that with a caveat that our overwhelmingly number one focus is to drive sales. Period.

Okay. And then just in terms of some of the smaller prototypes, could you talk a little bit about -- I don't think you have a lot of them, but just the results so far? Maybe the mix of units next year that might be these smaller versions and more generally how you think it kind of contributes to a potential further acceleration of unit growth into 2013.

Yes. This is Kent. We've tested. I guess we now have three stores with the smaller prototype. We know that they can do $100,000+ so we know the kitchen can generates the volume through there, and we have gone into some smaller towns this year that we have not looked at before and the results are very exciting. So we definitely anticipate being able to go down into towns of populations of, say, 50,000 in the future.

And is it going to be -- some of the units that you open next year, are they going to be the smaller prototypes?

As I'm looking at my sheet I would say probably four to six.

What we're finding is that we need more seats. You know, because the demand is there, and our kitchens can handle more seats than the smaller prototype offers and to be able again to manage the demand that we have for the product, we're probably going to end up with more of the larger prototypes. And our folks have done a really good job of reducing the cost of even getting a larger prototype open for us, and so it's really increased our confidence that we can get the returns that we want and also serve the number of guests that we need to make everything work.

By the way, with that said, our smaller prototype has more seats than our old prototype that was 7,000 square feet. It has 240 seats versus the 275 seats in our larger prototypes.

Got it. Okay, Thanks, guys.

We'll go next to John Glass with Morgan Stanley.

Thanks. Can you talk about specifically which commodities you have contracted for next year, and can you talk about what your expectation for specifically beef is? Beef inflation?

Hey, John, it's Price. We're not going to get into specifics on what commodities we have or have not contracted. I will tell you that, but I will also tell you that we have locked in a portion -- at least a portion of all our major proteins for next year.

Are you not going to talk about what you think beef inflation is going to be next year?

Not specific to beef. At this point, no. I will tell you that the vast majority of our inflation for 2012, we do expect, will be driven by our protein side of things, whereas if you compare that to 2011, our protein drove only about 30% of our 4% inflation. I will tell you that next year, our expectations for protein basket overall would be that that would drive somewhere on the order of three quarters of our 7% to 9% inflation.

Okay. And how much -- when you're estimating the 60% or so you haven't contracted right now, are you basing the 7% to 9% on current spot rates or are you assuming that they will come down at a certain rate or go up at a certain rate? What are you assuming that you haven't contracted in that 7% to 9%?

First off, for what we haven't contracted, I think it's important for everybody to remember that 20% to 25% of those costs, we are subject to market every year on so then the -- then the remaining 20% or 30% -- 30%, 40% that we haven't contracted then, we're assuming rates that we think are reasonable. There's not to say that if we went out and locked today, would they be higher? Maybe in some cases.

I guess (multiple speakers) --

I'm sorry?

Oh, I'm sorry. When you say reasonable are you assuming that they are higher than current spot prices or lower or the same as current spot prices? What's a reasonable assumption?

It varies. It varies but, in general, if we had to book today we would be definitely on the upper end of that range I think is the best way to put that.

Okay. So in other words, you're assuming maybe a slight bit of commodity deflation relative to today's rates on (multiple speakers) --

Well, (multiple speakers) not necessarily deflation as it relates to spot prices. But some of that obviously has some time premium built into it.

Okay. And I just want to go back to the margin math. Others were trying to. This year if fourth quarter comes in where the commodity inflation has been, you're having about 70 basis points pressure on COGS with 4% inflation and about 1.3% of pricing. Is that a fair assumption or -- or summary?

For fourth quarter?

No. The full year 2011, COGS are going to be up about 70 basis points on 4% commodity inflation with about 1.3% pricing average throughout the year.

Okay. Okay.

Is that correct first of all? And if that is, we're going to double the inflation rate, but we're also going to take pricing up, maybe not double, so maybe instead of 70 basis points of pressure it's 100 basis points of, say, 2% pricing? Is that the right way to think about it?

We're just not going to give any more guidance on that. I think -- I think you guys can do the math on that, and we're just not going to say any more.

Okay. Thank you.

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

Hey. Afternoon. Just a quick clarification first and then my question. Price, the 7% to 8%, I think, EPS guidance, the little bump from 5%, that included -- that includes the $0.22, the full -- with the extra benefits in Q3, right?

Correct.

Yes. Okay. All right. And I didn't get a chance to go back and check my notes but this question is about the re-class of tax credits from labor into tax expense. Is that something that started this quarter?

No. It started in the second quarter of 2010.

2010. Okay. So year-on-year this year at least third quarter here, that's not an issue? That's a clean comparison --

No. Third quarter, it is. It's an issue for this year from a comparison standpoint.

Right. A full year but not third quarter because we did it starting Q2 of 2010?

No. It's an issue for Q2 of 2010 because we had it as a credit in labor (multiple speakers). We had it as a credit in labor in Q2 -- or Q3 of 2010 and as a credit in labor of Q4 of 2010. And all those quarters in 2011, it's been a credit to income tax expense.

Taxes. Okay. And have you discussed this in previous calls and I'm forgetting it?

Yes.

Okay. I'll check my notes then. All right. And last question: When you talk about the labor inflation being in the 2% to 2.5% range next year, I assume you're referring to a cost per restaurant? Per restaurant week?

Yes. And that's -- you know, he was asking about core inflation outside of the minimum wage increases. (Multiple speakers). It will be a little bit higher with the minimum tip wage impact.

Oh, okay. So let me just make sure I understand the message then. So we're looking at core labor in the 2%-ish, 2.5% range, plus we're going to have some impact from the minimum wage in several states, and that's -- we should think about something maybe like 2.5%-ish to 3%-ish? Or will it (multiple speakers)

Yes, that's obviously a broad range. A good estimate would be something 2% to 3%. I mean it's really hard to tell sitting here today.

Right. Well, but I guess this -- how much is the impact of that -- those -- the minimum wage increases on a state basis? Maybe 25-ish?

You know, Bryan, I don't have that --

A quarter point or so?

I don't know. I don't have that sitting in front of us. I don't have that.

Okay.

We're comfortable telling you labor inflation is 2% to 3%.

Okay. Fair enough. All right. Great. Thanks.

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

Yes. Thanks, guys. Just a couple things.

First of all, on the pricing outlook, I think the last call, you guys seemed a little more focused on staying ahead of the curve or catching up a bit from a pricing standpoint and now you seem to be backing off a little bit at least in terms of what you're going to commit to for next year. Just wondering strategically kind of how you guys are thinking about price now versus maybe last quarter, if anything has really changed there?

Well, this is Scott, I don't consider that we're backing off when we just took pricing in July in a lot of our stores and we're talking about taking more here at the beginning of January. That's more aggressive for us than is typical for us.

Absolutely, the rate of food inflation is concerning to say the least, but I think at the same time, we do have to be careful of how much and how often we change our menu pricing in protecting the value that we're giving the guests day in and day out and, again, a lot of our competition is out there screaming value and we acknowledge that and we're just going to continue to go down a road that we think is reasonable and practical for us.

Is it possible that it could be more than 2% in the beginning of the year or is that really about as much as you would be willing to do in any one move?

No comment. We'll tell you after we -- or next earnings call. We'll give you more detail on that.

Okay. Then last thing just on the EPS guidance, just to be clear, you guys are going to be providing guidance on the next call or are you kind of getting away from the practice of giving a range on EPS?

We're not going away from the practice of that. We just want to have assumptions that are fairly tight and that we are more comfortable giving you a range of outcomes.

Okay.

Right now, the range of outcomes is just pretty wide given the inflation numbers we talked about and just where things are economically.

Okay. Got you. Thanks, Scott.

We'll go next to Chris O'Cull with SunTrust Robinson Humphrey.

Thanks. Good afternoon. Kent, what measurements will be used to incentivize senior management next year?

The same measurements we've been using since day one in our stores. Where our operators -- oh, senior management or are you talking about the store management?

Senior management.

Senior management. I would say they're probably going to change a little bit as we have talked about at our Board -- our last Board meeting, and we intend to finalize those measurements at our next Board meeting in two weeks.

This is Scott. Historically, they've been earnings-per-share growth-based, and that will continue to be a very large part of how senior executives are compensated in Texas Roadhouse, in addition to stock.

Okay. That's helpful. Thank you. And then, Scott, a few years ago you guys slowed development because you weren't pleased with the sales/investment ratio but now it appears you've fixed that issue, but the concern, I guess, is you're running the risk of maybe seeing returns soften again because of margin performance. Could you talk a little bit about the margin performance of new units?

Well, our margin performance as well as sales performance of new restaurants has been very good. You're right in saying the margin challenges we've had this year and presumably next year are a concern. However, we feel strongly that the returns that we get even if we have lower margins next year are still very good, still in the mid-teens plus IRR range even if we had a slight downward tick in margins.

So we still feel very good about that. Our sales results have been really good in our new stores, and so we're just very bullish on development overall. I mean, the costs that we're seeing for next year's deals looks to be in the $3.7 million, $3.8 million range and so our sales-to-investment ratio if current trends continue, we may get a little bit over one-to-one, and when we get over one-to-one we can bear a little bit of margin change and still have very, very good returns.

Okay. That's great. And then, Kent, how many stores plan to open in -- that you plan to open in 2012 will be under construction in 2011?

We have nine stores currently under construction, ten are in permitting. We expect to open two-thirds of our stores next year in the first half of the year.

Okay. Great. Thanks.

We'll go next to Bart Glenn with D.A. Davidson.

Thank you. I just had one last question on pricing. You know, it sounds like there's been very little pushback in your testing. When thinking about price increases for next year, to what degree are you measuring the competition, whether it might be other steak houses or just other casual diners? Thank you.

Well, this is Scott. I mean, we look at everything when we're looking at our pricing, and one thing to think about is we've had our price test going for three months. And three months, you're only going to learn so much. So even though today we may not see a lot in our data that says not to take a price increase, we still take it conservatively because sometimes you don't feel the full impact of changes in your business for six months, 12 months, 18 months, sometimes when you're changing things, so you have to be careful of that.

But when we're comparing our menu prices to others, it's other steak houses, it's other casual diners, both mid-scale -- we compare our pricing to the buffet folks. Literally across the spectrum in casual dining and in other places. So we're very diligent in that regard.

Thank you.

We'll go next to Keith Siegner with Credit Suisse.

I apologize, guys. I am going to ask one more question to belabor the point a little bit. Sometimes, companies will talk about we're going to price to offset margin -- inflation in terms of margin percent, sometimes we're going to price to offset margin dollars. In this case from all your midpoints, it sounds like actually a little less than either of those but with more than 50% of the cost blow exposed, I'm just wondering if it comes in meaningfully below or above that range of 7% to 9%, how do you react?

I get the impression, let's say it came in at 4%, that you would still take the full 2% price plus a little bit in the specific markets, but what if it comes in at 11% or 12%? If it starts coming in a lot higher on the part you're still exposed on, at what point do you start to price to offset the percent or -- or the dollars or even the percent? How do you approach it if it's far off the 7% to 9%?

It really depends on what the circumstances are. The environment, the economy, our own business and so forth. So, you can't assume that if food inflation was 11%, that we would take more pricing. Maybe we would, maybe we wouldn't. You know, likewise, if it was lower, based on what we know today so -- even though we've got only 40% to 45% with fixed prices, if you will, locked in, we still have an idea from a number of other folks that we have yet to contract with what their range of outcomes is.

So we feel pretty good that the range is 7% to 9%, and 7% to 9% is a pretty wide range. It's one of the reasons why we haven't given out more specific guidance, and so we think we can end up within 7% to 9%. If we miss that, I don't see us missing much below 7% or much above 9%. I think at the end of the day. Certainly if something really drastically changed in the economy and you saw produce, for example, just go through the roof, all bets are off kind of at that point, but I feel pretty confident we will be close to that 7% to 9% range.

Okay. Thank you.

(Operator Instructions). We'll go next to Brian Bitner with Oppenheimer.

Thank you very much. My questions have actually all been answered. Thank you.

Thanks, Brian.

We'll go next to Will Slabaugh with Stephens Investment.

Hi, guys. Thanks for taking my question. Just quickly wanted to get your take broadly on the consumer. We have seen a couple of your peers speak cautiously around that $50,000 to $60,000 high-end, annual income crowd recently. Didn't know if you had any comments around that considering how well you guys have fared or if it's just too difficult to really break that down.

Yes. I don't know what comment you heard.

Yes. I think from where we sit, Brian, it's really too difficult to break that down. You know, we've been fortunate in the fact that from our perspective we've seen consistent sales performance, we've seen both driven by traffic as well as on the check side of things. But we just don't have that granular of look at things.

Okay. And then just lastly sort of to beat a dead horse here on the guidance but just given the strength you've shown in traffic trends and potential from 1% to 2% pricing of, say, your testing for next year, should we view the guidance for positive same-store sales as remaining conservative or just it's too early to be more specific? Which of those would you say is more relevant here?

I would say it's too early to be more specific.

Got you. Thanks guys.

Thank you.

Matthew DiFrisco with Lazard.

Thank you. I just wondered, Price -- or Scott if you can give us a little bit of background, and also just looking back on prior years when we had beef increases like this, what competitors did? I guess looking back at 2004 and 2005 and those years we had some spikes moving around on the prices of beef and you had some COGS head winds, but it seems like you managed your margins pretty well. You're getting a pretty big comp there. I presume, are you seeing less competition from the shoulders competition, whether that would be the bar and grille guys? Do you expect that in the year ahead?

If they're trying to offer price and value, I would think they're going to be talking chicken on Father's Day than beef. Is that pretty much the projection that you guys have in there, and there could be some less competition for the beef occasion out there, and we could see maybe some mid-single-digit type comps?

Well I'm not really sure.

Matt, this is Scott, yes. I mean I've seen even recently, I've seen people offer up a number of meals for -- I see a lot of lunch stuff actually is what I see in a lot of folks' marketing and -- I see folks including steak, value, small steak deals in their advertisements. I would suppose that would continue for folks offering variety. They probably need to have some kind of steak item to go along with chicken and pasta and so forth.

So I kind of see that continuing, but I think it's still going to be very, very competitive out there. A lot of folks are fighting hard for market share, and I think we're going to continue to see that well into next year, particularly if we have got 9% unemployment and that continues to stick. So nobody is saying that's going to change any time soon, and so I think everybody's going to continue to talk a lot about value on their menus.

Without too much marketing is there anything out there that you guys are doing as far as trying to introduce or keep that lower end income customer in on a lower price point? I know you obviously do your everyday values on the steaks, but I'm thinking starters and half orders and things like that at lower price points to keep that early dinner customer coming in if he's little income drained.

We've got quite a few more stores participating in our early-dine program this year than we had in previous years and so yes, you are correct. We are seeing some more traction on the early dining.

Great. Thank you.

And we have no further questions at this time. I will turn the conference back over to our speakers.

Okay. Well, we thank all of you for joining us and please feel free to call us with any questions. We will look forward to talking to you next quarter.

Thanks.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We would like to thank you all for your participation.