Texas Roadhouse Inc (TXRH) 2012 Q1 法說會逐字稿

Good day, and welcome, ladies and gentlemen. Welcome to the Texas Roadhouse first-quarter 2012 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 your question. I would like to turn the conference over to Mr. Price Cooper, Chief Financial Officer of Texas Roadhouse Incorporated. Please go ahead, sir.

Thank you, Cynthia, and good evening, everyone. By now, everyone should have access to our earnings announcement for the first quarter ended March 27, 2012. It may also be found on our website at texasroadhouse.com in the Investor 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 earnings release and our recent filings with the SEC for a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements.

In addition, we may refer to non-GAAP measures. Reconciliations of the non-GAAP measures to GAAP information 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. Scott will then provide some insights on our performance and business direction. Afterwards, we will all be available to answer any questions. Now I would like to turn the call over to our Chief Executive Officer, Kent Taylor.

Thanks, Price. We are very pleased with our better-than-expected first quarter sales and restaurant margin performance. Our momentum continued, with comparable restaurant sales up 6% on top of a healthy 4.6% increase in the first quarter of last year. This led to higher profitability on a per-store basis, despite higher input costs. In addition to the sales and traffic growth at our existing restaurants, our newer restaurants continue to open and perform well. In fact, all 10 restaurants that have opened this year have exceeded $100,000 in sales during their first week of business, as did over half of the 20 restaurants we opened last year.

Our operators have done a great job, remaining focused on legendary food and legendary service, and taking it to the next level through various local store marketing and speed initiatives. We feel very good about the state of our business. However, we are facing short-term pressures in 2012, mainly 7% to 7.5% food inflation. As we discussed in the last call, we implemented an average price increase of 2.2% in February to help mitigate some of this pressure. This should allow margins to grow on a dollars per store a week basis, despite margin pressure on a percentage basis. And growing restaurant margin dollars is what creates value for both our operators and shareholders.

Beyond restaurant margins, we are looking at a very good year in terms of bottom-line earnings. Price will go through some of the details on a pricing front, but I will tell you we are pleased with the flow-through we are seeing from our February menu changes. In addition to the price increase, our menu rollout included something we have never done before at Texas Roadhouse -- we added a flap on the right side of the menu, with pictures of four entree items on one side. With the addition of pictures, we are seeing a number of guest trading up to these items, which is pretty cool.

I would like to say to our operators with me today how great it was to see you at our annual managing partner conference in Orlando a few weeks ago. Your passion and dedication to our core values is a foundation for our continued success, and I look forward to celebrating our 20th anniversary with you next year in Hawaii. Price will now walk you through our financial update, and then Scott will provide some additional comments.

Thanks, Kent. During my review of the first quarter, please note that many of the numbers I will mention are listed in the Schedule of Supplemental Financial and Operating Data that was included in the press release. For the first quarter of 2012, we reported net income of $18.9 million, or $0.29 per diluted share. Our reported diluted earnings per share of $0.27 was impacted by $0.04, due to a one-time, pretax charge of $5 million relating to the settlement of a Massachusetts wage and hour lawsuit. Hopefully, you have all had a chance to review our press release, which included a reconciliation of GAAP and non-GAAP information.

Excluding this charge, diluted earnings per share of $0.31 came in better than we anticipated, due to better sales and lower food cost inflation. Starting at the top of the income statement, both restaurant sales and total revenue grew 14.5%, as operating [lease] grew 7.9% and average unit volumes grew 5.7%. On top of this, as Kent mentioned, our newer restaurants continued to open with very strong sales volumes, with all of this year's openings generating over $100,000 a week in the first week of operations -- $100,000 of sales, rather.

Texas Roadhouse restaurants' average unit volume growth of 5.7% was less than our same-store sales growth of 6%. This was a function of the fact we had three slightly lower volume restaurants roll into our average unit volume base this quarter, that modestly affected the 13 stores in our base that have been open 6 to 18 months. While these stores are lower volume than the group, they are still averaging $65,000 to $70,000 per week in sales, and that is still hitting our hurdle rates. With regard to same-store sales, traffic increased 2.2% for the quarter, while average check was up 3.8%.

By month, comparable sales increased 5.9%, 8.7%, and 4% for January, February, and March, respectively; and comparable sales for the first four weeks in the second quarter are up 4.8%. For the first quarter, restaurant margins on a percentage basis were down 13 basis points versus the prior year, and were better than we had anticipated, due to strong comp sales during the quarter and lower-than-expected food costs. On a dollar basis, restaurant operating profit increased $7.4 million year over year, or 13.7% -- just slightly less than our revenue growth of 14.5%, as we were able to get good leverage on 6% comp sales to help offset some of the food inflation.

Now, for a little color on some of the specific lines for the first quarter of 2012, as compared to the same period last year. Cost of sales increased 80 basis points versus the prior year, primarily driven by 7.5% food inflation. The inflation was actually a little lower than we expected, due to lower produce costs. And in addition, we are seeing some benefit from the addition of pictures to the menu, as the items listed run a slightly lower food cost as a percentage of sales than other items within the categories. Labor was down 42 basis points versus the prior year, due to the benefit of comparable restaurant sales growth, and in particular, the average check being up 3.8% during the quarter.

Other operating costs were down 19 basis points versus the prior year. In addition to the leveraging of the 6% increase in comparable restaurant sales, we benefited from lower utility and credit card costs during the quarter. These benefits were partially offset by higher general liability insurance costs, based on our claims experience and higher managing and market partner bonuses as a percentage of sales, with profit dollars per restaurant being up. Looking at costs below the restaurant margins, pre-opening expenses continued to be higher year over year, in conjunction with increased development and the timing of openings.

We expect pre-opening costs to be higher year over year in the second quarter as well, with 13 to 15 new openings targeted for the first half of 2012, versus five in 2011. With regard to G&A, excluding the charge we discussed, G&A would have decreased by approximately 30 basis points during the first quarter. For the year, we anticipate being able to leverage G&A, just due to the one-time charge. Our tax rate for the quarter came in at 32.5%; and for the year, we continue to expect our tax rate will be in the range of 32.5% to 33%. And as we discussed on last quarter's call, it was up considerably from 2011, due to the expiration of the higher credit and the work opportunity tax credit.

As a reminder, we anticipate that the higher tax rate will have a $0.04 impact on diluted earnings per share for the full year. From a balance sheet perspective, we finished the quarter in a net cash position, with $77 million in cash and $52 million in debt. We generated $16 million in free cash flow in the quarter, using $10 million to pay down on the credit facility and $5.5 million to pay dividends. We did not repurchase any stock during the quarter, and as of the end of the quarter, we have $100 million remaining on our Board authorization. And we will continue to evaluate future opportunities to repurchase our stock.

Now, on to the remainder of 2012. As previously mentioned, comparable sales for the first four weeks in the second quarter are up 4.8%. Our year-to-date comparable sales are up 5.8% through our April period. We continue to base our full-year earnings guidance on 4% to 5% comp sales growth for the year, as we are projecting our cash -- our check growth to be less in the back part of the year as we overlap last year's pricing actions. On the inflation side of things, we did slightly modify our outlook for 2012 food cost inflation to 7% to 7.5%, versus approximately 8%, primarily as a result of produce costs coming in much lower than anticipated during the first part of the year.

So, netting the impact of better-than-expected first-quarter results with the impact of the one-time $5 million charge, led us to update our GAAP diluted earnings per share estimate for 2012 from $0.91 to $0.93. However, it is worth mentioning that if you exclude the impact of the one-time, $5 million charge this quarter, and the fact that our tax rate is -- we are taking a big hit this year from our tax rate, we would be looking at double-digit diluted earnings per share growth in 2012. And lastly, a little housekeeping, 2013 will be a 53-week year for us. So, as such, the fourth quarter of 2013 will have 14 weeks, versus our normal 13. And with that, I would like to turn the call over to our President, Scott Colosi.

Thank you, Price. And good evening, everybody. I would like to start off by echoing Kent's comments regarding our conference. It was great to be together with all of our operators celebrating the year, and we look forward to celebrating many more. And congratulations to Mitch Hauber, 2011 Managing Partner of the Year, from Wichita, Kansas -- or, as we now refer to it, Mitchita, Kansas. We are very pleased with our momentum, as well as what the future holds for Texas Roadhouse. Sales are up, and we are growing more and creating more value for our employees and shareholders. And going forward, we will continue to maintain a balanced, disciplined approach, particularly as it relates to growth.

We increased development in 2011 and 2012, so we are optimistic that 2013 restaurant growth will be up, as well. However, we will not grow purely for the sake of growing. When we moderated our expansion plans back in 2009, the result was better real estate decisions, and thus, better returns on our investment. Even with increased growth, we anticipate that we will continue returning excess free cash flow to our shareholders through dividends and share repurchases.

As Kent and Price mentioned earlier, our new restaurants continue to perform very well sales-wise, and we have been able to keep development costs at these restaurants about $300,000 lower than they were two years ago. As a result, we are comfortable projecting sales-to-investment ratios in excess of 1 to 1. This typically translates into a mid- to high teens internal rate of return, which bodes very well for us. In addition to our domestic growth, we are excited about our international opportunities, particularly after the opening of our first international franchise location in Dubai last year. In fact, we could see another couple of openings this year in the Middle East, which would be in addition to our planned 25 domestic, Company-owned openings.

We are also working on deals in both Canada and Mexico that could result in restaurant openings in each of these countries in 2013. In closing, we feel very good about the direction of our business and the depth of our teams, both in the field and at our support center. We do not take our recent sales momentum for granted, and we will continue to challenge ourselves, the Company, to get bigger, faster, and stronger and create more value for our employees, our guests, and our shareholders. With that, Cynthia, we would like to open the call up for questions.

Thank you. (Operator Instructions) David Tarantino, Robert W. Baird.

Congratulations on a good start to the year. Just a couple of clarification questions on the check growth and the new menu introduction -- could you maybe clarify how much pricing component was in the first quarter? I might have missed that, relative to maybe the next benefit you got from that menu change?

Yes, David, it's Price. We had just over 4% in pricing in our menu for the first quarter, and a couple [tints] negative mix netted us to a 3.8% increase in check.

And so, Price, perhaps maybe you can explain the positives and negatives on the mix side. It seems like maybe the new menu insert or the pictures that you mentioned are helping mix. But there must be some offsets if it's still running slightly negative. But, so, can you reconcile those two for us?

Yes, definitely. The negative part is really -- continues to be driven from the alcohol side. We -- that has been a factor for us for a couple years now, where we are just losing -- right now, about one-half a point on the alcoholic beverage side. And we are picking up a little bit from these pictures. Of course, the pictures were not out there all quarter, but we are picking up some from that. And additionally, we continue to pick up a little bit of positive mix from our bone-in ribeyes that we rolled out last year, as well as the addition of the porterhouse that we added in about one-third of our restaurants.

Great, that is helpful. And then, Scott, you mentioned very positive commentary about the unit growth outlook. Could you maybe elaborate on what the pipeline looks like for 2013? And how much of a step up in the growth might be possible, as you see it today?

Yes, David, our pipeline looks really, really strong for 2013. Kent and the real estate team are, again, well into the year, as far as picking the sites and finalizing what we are going to do in 2013. When you are sitting here in April, certainly the second half of '13, you are more in preliminary negotiations for leases and property purchases and such. So, there is still a little ways to go, but we have a lot of restaurants in our pipeline already that are pretty definitive for next year. So, we feel very, very good about what we have on the plate.

Yes, I would say at least half of our restaurants for next year will occur in the first half of the year.

Okay, and then -- just to be clear, the growth rate and the unit growth next year, you are expecting that to be higher in 2013 than in 2012?

All I will say, David, is that what we have said publicly is that we would do at least 25 restaurants next year, at a minimum. So, I would suspect it's going to be higher than that, but we haven't got that specific yet.

Okay, thank you very much.

Keith Siegner, Credit Suisse.

So, clearly very strong traffic -- and I know you talked a little bit about the pictures. But just wondering if you could talk a little bit more about how you feel about the menu now. What is really driving the comp? Is it steaks? Is there another category that is strong? Is there anything you feel like you want to tweak, either down or up? And along those lines, could you also tell us a little bit about which items you picked to put in the pictures?

Keith, this is Price. I will start off with a -- from a menu perspective. We are seeing a little bit of an increase in preference for the four items that we added to there; there is a grilled barbecued chicken, 11-ounce sirloin, a barbecued chicken and ribs combo, and the 8-ounce sirloin and grilled shrimp. So, we are seeing a little bit of trade out of those categories into those items. But other than that, our menu mix has stayed pretty constant. I think I mentioned we are continuing to get a little bit of benefit from porterhouse and the bone-in, but I wouldn't say any material menu preference shifts.

Okay. And then, one follow-up question -- I think last quarter there was a brief mention of a little bit of price competition from steak; and if that has happened, have you seen any impact of that at all?

Explain price competition on steak.

Just some others launching pretty aggressive entree deals, for sirloin under $10, things like that.

I would love to see our competitors put steak on their TV commercials, because that reminds people that they might want to go out and have steak. And of course, if they want a better quality steak, where do they go? Texas Roadhouse.

All right, enough said.

Will Slabaugh, Stephens.

On pricing, I wonder if you could remind us how that is slated to play out by quarter, assuming you don't have any additional pricing throughout the year?

Yes, Will, this is Price. For this quarter, we would expect to have -- for the second-quarter, expect to have somewhere around 3.8% to 4% in pricing in our menu. And then, as we move into the back half of the year, we will start overlapping last year, to where it will be around 3% for the third quarter and about 2.5% in pricing in the fourth quarter, as we overlap last year's pricing.

Okay, great. And then, also, on labor -- last quarter you mentioned you would likely see that higher this year on a percentage basis, just on tip wage increases, things like that. Do you think that is still the case? Or do you think you will be able to continue to leverage that as we saw this quarter?

Yes, I think we will be able -- are hoping for the year to be able to get a little bit of leverage on the labor line. Of course, it will be tougher, as we talked about just a minute ago, from the fact that we have less check as we move further into the year. But even with those six or seven states going up in their minimum and/or tip wages, hopefully if we are able to run the 4% to 5% in total comp sales, we will be able to translate that into a little bit of leverage on the labor line for the year.

Okay, great. Thanks.

Jeffrey Bernstein, Barclays.

Couple of questions, first on the comp trends -- it looks like it slowed a little bit in March, but obviously, we know that the broader industry slowed there. So, I am wondering, in your view, whether the -- perhaps the deceleration in the absolute number you talked about in March was due to more industry trend, or was there a specific on your comparisons through the quarter? And similarly, as we look at the second quarter, my understanding is, from a monthly comparison standpoint, that comparisons get easier as we move through that second quarter. So, just looking for sequential trends for the first and second quarter. And then, I had a follow-up.

Okay. It did seem to be like -- there was nothing specific that we noticed in March. As you mentioned, it certainly was an industry trend. I think the industry had its first negative month in comp sales in over a year in March, because the traffic was down over 3%. So, we participated in that a little bit, if you will. We were fortunate to see it bounce back in April. And the numbers we were overlapping from last year -- in January last year, we were up 3.3%; in February, we were up 5.1%; in March, we were up 5%. So, as you mentioned, this does get a little lighter as we move throughout this quarter, where we were up or 4.3%, 3.6%, and then 3.9%.

Got it.

Does that answer your question there?

That is very helpful. I didn't know whether internally you guys had a view on -- people are talking a lot about weather and gas prices. Do you have any sense, whether you survey consumers or get a feel for the next three or six months, whether you have confidence in the underlying trend getting better [ex those rules unusual], or is there a little bit more skepticism or concern?

Like I said, we definitely feel good that it bounced back in April. Don't know exactly what drove March, but it did seem like it was an industry-wide deal.

Yes.

Okay. And then, just otherwise, as you look to the related pricing, I'm just wondering whether you have any insights, when you think about beef being such a big exposure for you. As we look out to the rest of this year and maybe into '13, what your experts are talking about; and would you consider taking price, when you lapped that couple of points this summer, if you thought that that was necessary? Or are you more cautious that the consumer might push back on all that pricing?

Yes, right now we are very fortunate in the fact that we have pricing arrangements in place in 2012 for well over 90% of our beef. We will begin more talks with our packers as we get into the summer months, as far as it relates to 2013. And at that time, as we get more clarity around that -- one, we will be able to provide you guys, hopefully, a little more insight on our next call; and then, secondly, that is when we would start to evaluate potential pricing actions later this year or into next year for next year's inflation.

Okay. But to date, it doesn't seem like you are seeing much pushback on the 4% price that you are running at this point in time?

No, we are not seeing anything -- from a mix perspective, we are not seeing any pushback.

Great, helpful. Thank you.

Brian Bittner, Oppenheimer & Co.

When I look at your new units running at average unit volumes that are a good 14%, 15% above the comparable base, I think it's somewhat of a decent representation of the sales slack that you still do have in many of your stores. So, I was wondering if you could talk about how you think about the potential sales slack across your comparable base. What do you think potential peak averaging of volumes there could be? And maybe if you could parse out and tell us what really are the major differences accounting for this gap between the sales volumes of the new units and comparable units, so maybe we can get a better idea of how you can continue to possibly grow the average unit volumes of these comparable units, going forward, for the next couple of years?

Hi, Brian, this is Scott. We have stores doing $6 million a year, same number of seats, same boxes, as our average restaurant doing just shy of $4 million. So, absolutely, we believe we have the capacity to grow sales in our existing stores. And typically, what happens is -- the peak periods become longer, so instead of going from 6.00 PM to 9.00 PM, they go from 5.00 PM to 9.30 PM and 4.30 PM to 10.00 PM. That is one way, of course, to grow sales.

And then, instead of running peak sales, long waits on Friday, Saturday, and Sunday, it becomes Wednesday, Thursday, Friday, Saturday, Sunday, then the only slow time is Monday and Tuesday. So, that is the way that our highest-volume stores are able to grow sales. Certainly, it's a combination of -- it starts with the people, the quality of the operation, the involvement of the local community, the quality of the real estate. Sometimes it's number of competitors, sometimes it's density of population, if there is a lot of competition.

It's really a variety of factors that come together. And a lot of times, it's just doing the same things consistent over and over, and eventually word of mouth, which is really the strongest bit of advertising we have, as almost -- most businesses have. Once that picks up some steam, you have this snowball effect that really cranks out more guests coming in the door for us. And typically, once we get the guest in the door, we can do a pretty good job of getting them to come back.

Can you talk about what you are doing incremental in 2012, versus 2011, on a local marketing perspective? I know -- am pretty familiar with what was going on last year, but is there anything different this year that you are potentially doing?

Not really. We really just keep sharpening our pencils, and getting better at what the basic programs are in our local store marketing package. So, building relationships with various constituencies in our communities, doing bread runs, rib runs -- it's really basic blocking and tackling. And over the years, we have built up a local store marketing army that is out executing for us every day, in addition to our managing partners. And they continue to get better and better at executing the programs that we have in our system. And it's really just driving that consistency.

And as Scott said before, they are getting bigger, stronger, and faster, so watch out the other guys.

And last question, is there anything you could help us on the disclosure front, as far as trying to parse out underperforming versus -- outperforming stores? For instance, is there are a certain percentage of stores you would be willing to tell us that are performing in that $4 million range? I'm sorry -- yes, $4 million average unit volume range, or under $4.5 million, anything like that?

We have a pretty normal distribution curve, so you have a somewhat of a bell curve, around $4 million being the average. And of course, it tails off when you get up above $5 million and close to $6 million, and it tails off when you get down below $3 million. We don't have any cash flow losers in the system, I can tell you that. We haven't had any for a few quarters now. So, we feel very good about the strength of our portfolio across the country, and we have been pretty disciplined in our real estate decisions. We had a great opportunity to strengthen that process when we slowed down development a few years ago. And we feel pretty confident, in that the sites we are picking, we are making good, sound decisions.

Great, thank you.

Howard Penney, Hedgeye Risk Management.

I think you answered this question in response to one of Jeff's questions, but I wanted to confirm that the difference that you are seeing in current trends in this quarter, relative to the first quarter, was traffic and not how the customer is using the menu?

Howard, this is Price. That is exactly right. We have been down a couple [tenants] in menu mix, so it is all traffic, is the difference.

Thank you.

(Operator Instructions) David Dorfman, Morgan Stanley.

I just wanted to go back to the pricing issue as it relates to leverage, particularly on labor. And it seems like this quarter you had 4% pricing, and we saw some leverage on labor, versus other periods with strong comps but maybe it's less pricing. So, is this the sort of pricing level -- is 4% where you think, longer term, you have to be if you are going to see leverage on this line? Or is there something else that may move there? And is that a pricing level that you would consider taking, especially in terms of maintaining your value gap to peers over the medium term? Lastly, if you go back a year ago, it seems like your operators at the store level had some initial resistance to taking pricing, even that first 1%; and now, we are in round three and it just keeps going. Is this a different understanding on their part? Or is there more pressure coming from corporate to get them on board? Thank you.

This is Scott. Let me answer a part of your question. I think when you are talking about last year, the 1% we took early in the year last year was really 2% at some of our stores, zero at others of our stores. And then, in the summer, you had the reverse, where we had the stores that took zero in March took 2% in the summertime, and the other stores took zero. So, it wasn't pricing on top of pricing, and then coming into this year, more pricing for those stores. So, most of our stores really only had two menu price increases in the last two years. And given that we have had a lot of food inflation in both years, that gets them to a point where they feel like they need to do something, they just want to do it in a very conservative manner and really protect the value for the guests.

And on your questions, as far as level of pricing to leverage labor -- looking at it long-term, sitting here today, I don't necessarily think that we have to take 4% a year to get leverage on labor, year in and year out. Now, that can change, as states change their philosophy towards wage rates, in certain states. But in general, I would say at 4%, we ought to get some leverage, and wouldn't necessarily need that much of pricing to leverage labor going forward.

Thanks, guys.

(Operator Instructions) There are no further questions at this time. I would like to turn it back over to Management for any closing or additional remarks.

All right, thank you all very much for being on the call. We will see you next quarter.

And this does conclude our conference call for today. We would like to thank you for your participation.