Texas Roadhouse Inc (TXRH) 2013 Q3 法說會逐字稿

Good day and welcome to the Texas Roadhouse, Incorporated third-quarter 2013 earnings conference call. Today's conference is being recorded.

(Operator Instructions)

I would now like to introduce Price Cooper, Chief Financial Officer. You may begin.

Thank you, Nancy, and good evening, everyone. By now everyone should have access to our earnings release for the third quarter ended September 24, 2013. I'd like to apologize for any inconvenience caused by our early release today. It was brought to our attention that a portion of the information had been inadvertently released, at which time we alerted NASDAQ who halted the trading in our stock until full details were disseminated. So again, we apologize and it is certainly not a change in our practice. The full release may be found under the investor portion of our website at texasroadhouse.com.

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. 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 the 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, Scott Colosi, our President. Kent is going to start the call off, afterwards I'll provide a financial update and then Scott will provide some insights on our performance and business direction. Afterwards, we'll be available to answer any questions. With that, I'd like to turn the call over to our CEO, Kent Taylor.

Thanks, Price. We are pleased to report another quarter of solid revenue growth highlighted by positive comparable sales including positive guest traffic growth. While we grew restaurant level profit dollars again this quarter, commodity cost inflation of just over 8% took its toll on the restaurant margins, and this combined with much higher pre-opening costs negatively impacted our diluted earnings per share growth. As we enter the fourth quarter, our top line momentum has continued with comparable sales growth of 3.4% for the first four weeks of the quarter. We are encouraged by these results and believe that our disciplined approach focused on consistent execution of legendary food and legendary service continues to drive our business forward, not to mention we have the best operators.

Looking ahead on the cost side of the business, it appears that food cost inflation will be in a low single-digit range in 2014 based on our current outlook. This is good news after battling through high single-digit commodity inflation for the last two years. Given this outlook, we expect to take a very moderate amount of pricing in December, although we are still working with our operators on the exact amount. Combining this with the overall momentum of our business, we expect positive comparable sales growth to continue in 2014.

On the development front, restaurant openings for 2013 remain on track and we are still targeting 25 to 30 restaurant openings next year with most of those sites already selected. By the way, we are excited to be opening in Alaska next year, a new state for us which will take Texas roadhouse to 49 states. Also it's worth noting, we expect our openings to be much more evenly weighted throughout the year.

Before I turn the call over to Price, I want to thank all of our operators who continue to do a great job of taking care of our guests and building our sales. It was great to see all of you all over the course of the last several weeks at our annual fall tour. Now Price will walk you through our financial update.

Thanks, Kent. For the third quarter of 2013, we earned $17 million, or $0.24 per diluted share, slightly less than prior year and as Kent mentioned was a result of significantly higher food cost along with higher pre-opening costs. While we had a $1.3 million benefit from favorable general liability insurance claims experienced in the quarter, there was not nearly enough to offset the impact from over 8% food inflation or the impact of $2.3 million and higher pre-opening costs year over year.

The top line growth was solid with revenue increasing 8.5% as a result of a 6.3% increase in store weeks, a 1.6% increase in average unit volumes and strong sales performance at our newest stores. Comp sales increased 2.6% during the quarter and were comprised of a 4/10 increase in traffic and a 2.2% increase in average check. By month, comparable sales increased 1.9%, 3% and 3% for our July, August and September periods respectively. And October trends remain positive with comps increasing 3.4%.

In terms of restaurant level profitability, on a dollar basis, restaurant operating profit increased 3.9%, or $2.1 million for the quarter compared to the prior year. As you may have seen in our press release, margin dollars per store week decreased 2.2% for the quarter. Food cost inflation of just over 8% during the quarter, the highest of the year, drove a third-quarter decrease.

Restaurant margin percents are down 45 basis points year to date. But given that we have been able to continue driving traffic, year-to-date margin dollars per store week are flat despite inflation of approximately 7%. While we would certainly prefer to be growing margin dollars, we will take the neutral performance giving the cost pressures we have faced this year. We expect the growing margin dollars on a per store week basis will be difficult for the balance of year, as food inflation will continue to be a sizable headwind for us through the fourth quarter. Specifically, we expect food inflation of approximately 7% for the fourth quarter.

Few other P&L items to mention. Pre-opening costs were up $2.3 million compared to the prior-year period, primarily due to having more stores in the pipeline. Our income tax rate for the quarter came in at 30.4%. We continue to expect our full-year rate will be 30% to 30.5%.

Lastly, recall that full year 2013 has 53 weeks, so we will have 14 weeks in the fourth quarter of 2013. We get a little extra leverage on rent and G&A bonuses as they're recorded on a monthly basis. Other than those items, we generally expect normal flow through on an extra week of sales. For example the benefit of the extra week of sales will be partially offset by the impact from an extra week of depreciation expense.

Moving to our balance sheet and cash flow. Our cash balance decreased $13 million in the third quarter to end at $87 million. The $13 million decrease in cash was driven by the fact that while we generated $30 million in operating cash flow for the quarter, we spent $43 million primarily on capital expenditures and continuing to pay our dividend. Year to date we have generated $28 million in free cash flow, all of which is being used to fund dividend payments. We expect to generate free cash flow for both the full year 2013 and 2014.

A couple of comments relating to 2014. First as Kent mentioned, we are targeting 25 to 30 restaurant openings and believe we should be able to get around half of these open in the first half of the year. Second, we expect to continue to drive comparable restaurant sales growth. Third, we expect food inflation to be much lower, likely in the low single-digit range primarily driven by lower protein costs. We also expect to continue to generate a few million dollars in savings from reducing non-guest interfacing type cost.

Partially offsetting these benefits, we anticipate labor cost will be negatively impacted by a few million dollars as we roll out expanded healthcare coverage. And lastly, we continue to be very focused on balancing short-term pressures with long-term positioning. As such, we are likely looking at implementing somewhere around a 1.5% menu price increase in December. With that said, I'd like to turn the call over to our President, Scott Colosi.

Thanks, Price, and good evening, everyone. We're definitely pleased with our current sales momentum and the overall direction of our business. And while sales started out softer in July, we saw an improvement in the trend throughout the quarter and that has continued into the first four weeks of the fourth quarter. This performance is directly attributable to our operators, and we certainly appreciate their continued commitment to legendary food and legendary service.

From the financial perspective, our balance sheet remains strong and we anticipate we will continue to generate significant free cash flow. In addition to evaluating new development opportunities, we plan to keep returning excess cash flow to our shareholders through consistent dividends and opportunistic share repurchases.

Our newer stores continue to perform well. And while our development costs have increased slightly, we are still very, very pleased with the returns they are generating. This will allow us to maintain steady growth with our third straight year of at least 25 restaurant openings.

Heading into 2014, we will remain focused on doing the right things for the long-term success of Texas Roadhouse. This includes finding the appropriate balance between pricing and inflationary pressures, growing new restaurants at a pace that works for us and deploying capital in a suitable manner.

In closing, we feel very good about the direction of our business and the depths of our teams in both in the field and in our support center. And we will continue to challenge ourselves to create more value for our employees, our guests and our shareholders. So Operator, you may now open the line up for questions.

(Operator Instructions)

Brian Bittner, Oppenheimer & Company.

A question on the COGS line going forward. Obviously single digit and low single-digit inflation is much better than what you've been dealing with over the past couple of years, but should we still should be expecting some COGS deleverage on that line item just because of the 1.5% price increase? And in the future, is it really going to take food cost deflation to get leverage back into that margin and get it back to where, somewhere where it's been historically?

Brian, it's Price. For the most part, it does take deflation to get it back to where it was. Now as far as specifically to 2014, if we do end up taking 1.5 points of pricing and we get good flow through on that, depending on where food inflation shakes out, you could see us hold that line potentially depending on -- because that would be in the realm of low single-digit inflation. We'll know more about that probably on the next quarter call. But in general, we continue to believe that putting good value on the plate is important and we're not looking at taking quality or value away from the guest.

Okay, thanks. And on the traffic side, the traffic has been terrific and congratulations on that, you guys really have some nice out performance verse the industry. And you got -- obviously it's a natural momentum in the business. But can you talk through a couple of the things maybe over the next 12 months that you guys will be doing to keep very tangible bottoms up driven to try to continue to leverage that momentum going forward and keep growing traffic?

As always we let our operators grow traffic and sales, that's what they do for a living.

Okay, thanks.

John Glass, Morgan Stanley.

Hi, this is [Courtney] on for John Glass. Can you talk to us a little bit about your unit growth? It seemed like you're obviously very back end loaded this year and pushing some more into the fourth quarter? Can you talk about the pace for next year, I think you had originally said it was going to be more front end loaded and now you're saying it's going to be more equally weighted? And if you can give us any guidance on how to model pre-opening cost for that?

Yes, it's definitely going to be more evenly weighted. We have a few sites that pushed back, but we fully intend to hit our 25 to 30 stores.

In terms of modeling pre-opening cost, that's a tough line to predict with any level of certainty. We are running about $500,000 or a little more than that right now in terms of average per unit. The challenge with getting it dialed in with any type of precision is we start incurring those cost up to 12 months before we open a restaurant. But I tell you in general we're running about $0.5 million per store right now on that.

Yes I can also tell you we have at least 10 stores that are in permitting or under construction, so if that gives you any confidence.

That 's for the fourth quarter or for next year?

For next year.

Okay, great. Thank you.

Alton Stump, Northcoast Research.

Had a quick question, I think you mentioned a month by month breakdown, certainly things got better over the last two months of the quarter and then through its early part the fourth quarter. Is there anything that in your mind drove that or is it just that July was a bit soft overall or any color on as how things have improved over the last few months period here?

Alton this is Price. Really July was softer for us. And you're talking the improvement, we continue to be able to maintain positive traffic since then anywhere from call it 0.5 point to 1 point in traffic. So I think for us it's just as Kent alluded to, it's our operators continue banging it out and doing a great job.

Okay, thanks. And one quick follow up, on the share repurchase, it's been a couple quarters since your last buy back. Any plan that'd be different from your long-term strategy over the next maybe 6, 12 months here as share buyback activity?

We may over a longer term, we've talked about being a little more flexible anyway with what we're willing to pay in terms of -- to cover the dilution or the overhang. So that's one thing that we're having a lot of discussion around. I'd leave it at that.

Okay. Great, thanks, guys.

Andrew Charles, Bank of America Merrill Lynch.

Can you talk a little more about the components of the commodity inflation next year specifically your expectation for beef? How much beef is contracted and what's giving you confidence that the uncontracted portions well controlled?

I'm not going to get into, this is Price, I'm not going to get into specifics on what we have contracted yet. We're in a lot of those discussions right now. But in general, we feel like the whole protein basket will be lower next year. Part of that specifically on the beef side is demand this year hasn't proven out to be necessarily what they thought it would. And we locked in actually about 70% or 80% of our pricing for this year.

So the fact that demand hasn't proven out to be what it was and you got a really good corn crop this year is helping the base, if you will, of the prices that you're coming off of. But there's some other proteins that'll help as well. For instance, pork next year we expect that to be a benefit for us.

Okay. And then Scott, it looks like the delta between new and comparable store average weekly sales is pretty minimal. And it seems this is caused by new stores continuing to open at higher and higher AWSs which all fall off pretty quickly post honeymoon. My thinking about this quickly and what else are you working on to improve new unit sales volumes?

Well our new stores typically open up with pretty big volumes. And so our challenge is to minimize the amount of sales that fall off from their initial honeymoon period which can last six months, can last even longer than that. And we're studying that quite closely.

The honeymoon has grown a little bit over the years, though of course we're opening at higher volumes that we use to. So we're settling in at sales volumes that are fairly consistent of where we settled in typically over past years. Meaning once our stores settle in, they're still doing $3.9 million, $4 million average unit volumes which are very good and they're very good for our returns overall. So we have the problem of sometimes when you open such at a high volume, in our case the waits are so long, that can turn off some guests in the short term. And so our challenge is to better manage those super high volumes that we open with and we're talking about a number of things internally to deal with that, manage that.

Appreciate the color. Thank you.

Jeffrey Bernstein, Barclays.

Two questions, first if you looked at the Company operated system, 330 plus stores, wondering if you guys book at those or how you can maybe talk to us about which stores you'd say are capacity constrained? Obviously you're somewhat unique still driving positive traffic but can you talk to us about what percentage of those stores are constrained and perhaps the top couple of throughput initiatives that you see that would help that? I know in the past you talk about building of some of the patios or some advance technology, or things like that, trying to size the percentage of the system and how you address it.

I would say we've got stores that are due north of $7 million, and we've got a lot of stores obviously that don't do $7 million. So we know our buildings can handle up to $7 million. And then the bump outs I would say, Price how many have we done versus what we have left to do?

Yeah, we've done 120 to date and we're doing those at a rate of somewhere around 25 to 35 a year, Jeff, which in those instances is adding anywhere in the neighborhood of 7% to 12% capacity on those stores.

And Jeff this is Scott. I think that in our system, those managing partners that run those stores that do $6 million, $7 million or even higher than that, they don't believe their stores are capacity constrained. They're still growing sales. And they're still finding ways to turn tables and maybe upsell appetizers or loadeds or smothers or maybe they do some catering, whatever, they're figuring out ways to continue to grow their business.

Got it. And then the follow up in terms of the unit openings, it seems like at this point we're looking at 14 openings in the fourth quarter. I'm wondering how many perhaps you've already opened, it seems like that's a whole lot for the system? And separately, should we still assume that the franchise side of things still does [$5 million] for the full year?

So Jeff, this is Price. On how many we've opened, I think we've just opened one so far this fourth quarter. So you are right, that's a larger number than is typical for us, certainly during the fourth quarter. And I would say franchise wise, you're looking at somewhere on the order of this year and next year probably [$3 million] to [$5 million] each of those years, something in that range.

Got it.

Those sites international, the franchise piece, Jeff.

Yeah, we have two stores internationally opening in the fourth quarter as well.

But is there any -- I know you said it's difficult to forecast pre-opening, but with so many stores and then obviously some stores that you're opening in the first quarter, any ballpark on what should expect pre-open to be in the fourth quarter?

No, it'll be considerably higher than it has been running in the fourth quarter with that many openings.

Got it, thank you.

(Operator Instructions)

David Tarantino, Robert W. Baird.

First question is about restaurant level margin and Price, if you could help us frame up how you're thinking about how that could trend next year in the various scenarios that you have with the pricing that you have in place? I think normally in the past you've talked about maybe taking a little less pricing than you need to hold the margins flat and then look to drive traffic to make up for the difference. Is that how you're thinking of next year or do think your pricing will be enough to hold the margins where they are on a flat traffic type of number?

David, it really depends, I think we could be pretty close to holding margins with a little bit of traffic if we consider -- if we assume we can still grow in the low, low single-digit range, maybe that's one-ish or a little bit more than that. Depending on exactly where our food inflation comes in, we are optimistic about that. And then part of that will depend too, is when we take our pricing, how much of that do we see flow through to the bottom line? Do we lose any mix on it or not? But if we can get about 1.5 points in pricing with a little bit of traffic growth, you could paint a scenario where you could hold margin percents.

Okay, great. That's helpful. And then Scott, I wanted to ask a question about the returns you're getting on the new units, I think you mentioned that the development costs are starting to creep up. Could you maybe elaborate on what you're seeing on the cost side and then how that translates to the returns you're seeing overall for the new units?

Well Dave I can tell you that the average cost is starting to get close to $4 million and may end up being a little bit above $4 million this year. Of course we were above $4 million five years ago or six years ago at that point, so we feel pretty good that even at $4 million we feel like we're doing a pretty good job controlling our development cost.

And with the sales we're getting on our new stores, we're hitting our pro forma target and that gets us right into the mid teens internal rate of return. So we feel very, very good about the returns we're getting with the development costs creeping up to $4 million.

And maybe Scott, I think in the past, maybe it's not the right metric to think about anymore but you talked about sales to investment ratio being near one or over one as your criteria. Is that something you're still looking at, because it think we're getting pretty close to that now? So wondering if there's maybe some thoughts around either looking for ways to reduce the development cost side of the equation, more so than what you've done in the past. I know you've done a good job there but wondering how to think about how close the margin of safety is there on the new units?

Well we feel pretty good about that ratio actually. We're still -- think we can be at 1 to 1 or slightly higher than that, which makes it much easier decisions to develop sites. Our -- we look back at our clash year as we've only have had one clash year out of the last 13 or so, going back to 2000 that wasn't at 1 to 1 or above that level. So we feel pretty good right now at the rate that we're growing at 25 to 30 stores that we can continue to see that happen, continue to have that 1 to 1 sales investment ratio. Keep in mind I think our average unit volumes will be over $4.1 million this year maybe closer to $4.2 million this year. So for our average store, that's quite a bit above a $4 million average investment. So we feel pretty good but again, it's part of us keeping our rate of growth to a rate that's right for us by sticking to that 25 to 30 store level.

Great, that makes sense. Thank you very much.

Will Slabaugh, Stephens Inc.

Price wanted to ask you about labor real quickly if I could. Can you talk a little bit more about how you see that playing out next year and whether that few million dollars you referenced earlier in healthcare cost may keep that line from gaining leverage next year?

Yeah, Will, it could. Part of that will depend on how many folks sign up for insurance. But in addition to that, specific to labor line, we're seeing about 2% inflationary pressures from a wage rate perspective. We do expect that the cost of the insurance that we paid for and provide will continue to go up. So if you're looking specific at that line from a leverageability perspective, if you will, you've got to overcome 2% plus probably closer to 3%--ish percentage type inflation. So if you have got 1.5 points or so in price, you'd have to drive about twice that remaining difference as a general rule of thumb in terms of traffic to overcome that line. So a lot of it will depend on what ends up happening on the health insurance side.

Got it. And flipping over to sales if I could, could you speak to the day part strength that you've seen recently? Some of your peers have been talking about slower weekend lunch, et cetera. I didn't know if you'd seen anything like that or any comments in general you might have around that or weekday dinner, weekend dinner as well?

Keep in mind, you bring up, we only do weekend lunch. But we haven't seen any real disparity between days of the week or even day parts on our weekends have been pretty consistent. Nothing that really stands out in terms of day parts for us.

Great, thanks.

Jeff Farmer, Wells Fargo.

Going back to your continued same-store sales out performance relative to the peer group, I'm curious what your internal research is telling you about your customer base? I guess more specifically, do you guys think you're reaching a broader demographic? Are you seeing increased frequency from existing customers? Where are you guys exactly stealing some of these customers from? Any color would be helpful.

Hey, Jeff, this is Scott. Yeah, we don't really have that research that's current on the makeup of our guests. We do a research project every three years or so that's pretty detailed. We haven't done it in some time.

I think as Kent mentioned earlier, we keep pounding away at running the business, making great food and serving it with a high sense of urgency and keeping our prices low and building relationships in our communities. That's what we do and that's what we're focused on. Really have an intense focus on that and I can't tell you we're too -- we spent too much time calculating guest frequency at any given moment.

Okay and then two more quick ones, I think Price I heard you mention, and I don't know if you gave the detail, but the non consumer facing cost savings, what was the detail on that?

I did give the detail as in we're on track for somewhere in the neighborhood of $2.5 million, call it $2 million to $3 million in savings for this year and think we can get a couple million dollars worth of savings out of it next year. And that's on things like a lot of it is supplies or chemicals, small wares, utility management, contract area, a laundry list of different areas, but predominantly non food, non labor-related items.

And then final question on your non protein basket commodities, what does that look like for 2014 or what's the early outlook there in terms of again your non beef commodities?

Don't know specifically. For us about 15% to 20% of our food cost is produce and dairy. So those are little more volatile month to month type items. So don't really have a big swing factored in one way or the other on those as of now.

Okay, thank you.

Jason West, Deutsche Bank.

Lower next year, did you mean less inflationary or actually down year over year on some of the big proteins?

Jason, I apologize, you cut out on the first part of your question there.

Sorry, can you hear me now?

Yes.

Okay so earlier you said you expect proteins to be lower next year. Want to clarify if you meant down year over year or if you meant just less inflationary as a basket?

Talking less inflationary as a basket.

Okay. But still -- do you still expect beef to be up just not as much?

Yes.

Okay. And then it doesn't sound like you would have much contracted at this point, this time of year, but is it normal that if you're having this conversation right now that those numbers tend to be fairly predictable this time of year even if they're not under contract or can things change a lot the next couple months?

Things can always change and we've been pretty flexible over the last few years regarding our timing of when we've actually gone under contract.

Okay. And then one on the pre-opening, I think the last call you had pointed to something in the $15 million, $16 million range for the year. Would this quarter -- timing shifted on that a little bit, I don't know if that's still a good number for 2013 or if you think it's going to be well above $16 million now?

Yes, that's probably no longer a good number and that's why we're not going to get as specific on that number going forward.

Okay and is that going up because of this year stores are more expensive or are you talking about you're working on more 14 stores and that's pulling numbers into this year? Or are you saying that the pre-opening as a rule is going up in new stores?

I would say it's a combo of all of the above. It is on costs that we're incurring on next years stores and our pre-opening costs are running a little bit higher on a per store basis right now.

Okay, gotcha. And then last thing on the pricing, you said 1.5% in December, I think you're rolling off the full pricing at the same time from last year, the 2%, want to make sure that's right. So the pricing basically goes from 2% to 1.5% starting in December?

Yes it goes from a little over 2% is what we took last year and then yes, whatever we end up doing this year likely somewhere around that 1.5%. But yes you're exactly right as far as the timing.

Gotcha. Thanks a lot.

Andy Barish, Jefferies.

Hey, guys, did you get a little bit of mix here in the quarter to help the check average if you're running roughly 2% on the menu price?

Mix was basically neutral. We're actually -- menu wise we're just over 2%, more like 2.2%. So mix was about flat for the quarter.

Okay. And anything we should be thinking about with the holidays and the extra week as it pertains to the reported comps or the December period or anything to give us the heads up on that?

No. We do have an extra week in the period but from a comp basis we'll be comparing 14 versus 14 weeks, so we'll be comparing the same number of days, if you will. Other than that, I wouldn't say anything material from a calendar shift basis.

And thoughts on why or what are the gating factors in unit development not going up a little bit next year?

Andy this is Scott. We're comfortable in that 25 to 30 range and so our numbers may move around a little bit based on the timing of openings. And you have to have a lot more than 25 or 30 deals in the hopper to hit 25 to 30 because sometimes things fall out. A lot of times it's not us, it may be a developer that ends up not completing their side. So you got to have a certain amount of contingencies and we feel that that range for us from where we are today is a nice sweet spot for us.

Thanks, guys.

John Ivankoe, JPMorgan.

A couple of follow ups for me. If firstly, as you to consider processing transactions and maybe in a way that the guest might appreciate it, have you considered some technology whether to order or pay to sit on the table, would that be inconsistent with your brand?

John, this is Scott. We've tested actually something in the past, but we weren't that jazzed about it. And so we've got our eyes open and we're paying attention to what other people are doing. And we're just going to keep going down the road and see how things developed before we go further in our case.

We are rolling out, I wouldn't say a new back office, but a more up to date back office package this year, cloud-based package that we're very excited about. And we've been moving forward on expanding a guest management system that we use at the host area to many more of our stores this year. It's probably going to be in half of our stores now, something like that by the end of this year. So we're moving on some things like that, other things like pay at the table, we're more of a wait and see how things develop as we go a long.

And can I follow up on what you just said, what has been the experience with the guest management system? Have you seen less lapse on unoccupied tables, if that's the right terminology? And what kind of benefits are you expecting from that back office system that you're updating?

Well certainly it helps a lot with communication and we have so many guests coming through that communication piece is so important throughout the restaurant and also to all the guests that are waiting, whether they're inside the restaurant or standing outside the restaurant. So from a communication standpoint, that guest management system is very, very effective for us to minimize the times that any table would be open.

It also helps us manage the large parties a little better as well.

So are you seeing a quantified lift for a difference in experience and comps in the stores that have it versus the stores that don't?

We haven't measured that at this point, John. We just know that are -- that the operators that are doing it are very much -- very much like using the system and usually that's a good indicator for us that it's pretty effective for them.

And in terms of the back office, is that -- what might be the expected benefits out of that that you're currently not getting?

Well there could be everything from some food management stuff to some labor management stuff as well. So those are probably the two biggest pieces of that system.

Which is typical of back office system. So we still don't have an official Texas Roadhouse labor model that exists, but there are certain reports and one that the operators can use whether it relates to overtime, whether relates to when people are clocking in and clocking out, those types of things that can help us manage our labor a little bit better.

Okay and one final thing, I wasn't expecting all of that color, so thank you for that.

You give such great data on your average weekly sales for the newest stores, the newer stores and obviously for the overall comp base. But if I could focus on probably the one negative out of that piece is the newer stores, the stores opened 6 to 18 months, and I think there are 25 of them. It's a pretty low number for you in the third quarter on an average weekly sales basis. So is there anything about that class of stores that depresses it relative to what it will be in the future? And maybe conversely, do you think there's a big opportunity for these stores to comp very well when they enter the comp base and they recover some of their lost volumes?

John, this is Scott. I would say, the gaps a bigger than we've had certainly in the last couple years, so that's got our attention. On the other hand, the sales are still pretty good for us. And as I mentioned earlier, they're still hitting our pro forma returns. So definitely get pretty conservative and we're modeling out these new stores because we know it's tougher when you're opening the second 400 stores in the concept verse the first 400. That said, we're not overly concerned about it because we're still getting good volumes and we're confident that those stores -- the sales in those stores will grow over time as we've seen from prior clash years historically.

Okay, great. Thank you very much.

(Operator Instructions)

Chris O'Cull, KeyBanc.

Scott, as a follow up to that question John just asked around new store productivity, it looks like the stores are having really large openings but then coming off their honeymoons at a greater pace. What do you thinks causing that and do you think, could there be any risk that they're not getting good experience the first six months of the opening and that's causing less frequency?

We don't believe that to be the case because they're still settling in at pretty strong volumes overall. So we do believe they're getting a good experience. There are some things that we're talking about internally which we won't go into on this call today.

One thing that sometimes can influence the honeymoon curve is when the stores open. So if we do have a lot of stores that open in the first quarter timeframe when our stores have the highest sales of the year, and then if you look six, seven months later, they're likely to have a larger honeymoon fall off just because of the seasonal nature of our business because you have your lowest sales in the third quarter of the year. So some of that can relate to when we open the stores.

But I will tell you we've been studying this it very hard, certainly you get pretty excited when you see these huge volumes that you open with and you want to retain those sales as much as possible. So we are challenging ourselves internally to get a better result out of that. And there are a number of things that we've discussed internally and that we're working on.

Okay. And then 13 store openings the last two months of the year, that seems like quite a few. Is there -- the training teams all in place, or do you guys expect to hire additional teams to help open all these stores and -- ?

Well fortunately for us, doing 13 openings when we only had 100 stores on the ground, that would have been a mighty task in two months. But given we're 400 stores now, we've got a pretty big training team. We've got a lot of trainers that can support the efforts. So we're very confident that all of those openings are going to be very good openings for us.

Okay. And then Price I think this was the first time in several quarters that store profits per operating week was down year over year. Guest counts were up what 40, 50 bips and profits per operating week fell 2%. So what level of guest count gains do you need to see flat restaurant profit per store week?

Well the reason it was down this quarter was a little over 8% food inflation. So unfortunately this quarter would have taken, I don't know the exact number, but it would have taken a little more guest traffic given this is our highest food inflation I'm talking about that we've experienced this year.

Okay, did I hear you read that the fourth quarter should be down on a per operating week basis as well?

Yes. It could be down as well given the fact again we've got 7% there. Part of that'll depend on what does -- what is traffic and what do we end up taking pricing wise in December? And then also with those openings in the fourth quarter, what type of profits or inefficiencies do we have, because as you pointed out we do have a large number of openings specifically in that fourth quarter.

What kind of pricing are you running over in -- when will you be lapping price increases in 2014, can you remind us?

Well we're lapping what we took last year, we took a little over 2% in early December of 2012. So that's when we're targeting taking some this year as well.

Okay and then the pricing you took this year, did you take any this summer?

No. That was the last time we took any.

Okay, great. Thanks, guys.

Bryan Elliott, Raymond James.

A bit of a nitpick about price, the general liability one timer that you called out, is that a change in accrual or is that just a one time catch up of --

Most of that's a onetime catch up. We're heavily self-insured on our general liability and our policy year runs in October through September fiscal year if you will on that.

Okay so even though we had to do a reserve top off, we aren't going to raise the accrual for next year measurably, noticeably?

I don't know that. That'll depend on what our experience proves out to be. Typically the way the actuaries work is they'll true up your development factor at the end of that insurance year.

Usually that's a good sign though when you get to book a credit for your recent claim activity even though some of this goes back a number of years. But usually it's a good sign going forward that some of your development factors might get lowered a little bit. And to your point, Bryan, you may have less inflation in your accruals the next year.

Well thanks for that reminder, it was so long ago I forgot that it was a credit. I was thinking it was actually a cost, but yes, thanks for clarifying that for me. All right, that's all I got, thanks.

Steve Anderson, Miller Tabak.

Wanted to ask you, in your testing for different menu price increases, these typically do that for a quarter or two before you sign on something. Did you encounter any particular resistance in markets where you decided to do maybe a 2% increase?

Most of our markets, we tested somewhere in between a 1% and 1.5% increase, something in that range. And no we didn't see anything that spooked us, if you will, or caused for concern.

Okay, thank you.

Paul Westra, Stifel.

The question I have a follow up question, maybe an open-ended question (inaudible) consumer, the competitive environment and typically what you might be used to seeing maybe throughout 2014.

Hey, Paul, I'm sorry to interrupt you, we're having a very difficult time hearing you. I apologize to interrupt you.

No problem, my apologies too.

There was a question on the consumer, what you might be needing to see either on the consumer side or the competitive environment side as you maybe roll out the next 6 to 12 months to be more aggressive either on the pricing side or maybe even on the mix/average check side, as you can tie into. Clearly your internal fundamentals are so strong and obviously returns were down this year despite the [spectacular] performance and what you might need in the macro environment to maybe call it back and get some excess personal profit growth cash back and get those returns on capital a little higher.

Hey, Paul this is Scott. I don't see us getting more aggressive on the pricing front under any circumstance that I can think of. I do think that as the economy continues to slowly improve, unemployment continues to trickle a little bit better and I think that can create a positive force for us from a traffic perspective. It's been that way historically.

And so that's one thing that I look at is where is the US economy going. Consumer confidence also continues to trickle upward, still not where it was five years ago before the recession, but it does continue to trickle upward. So between consumer confidence and unemployment, I think those are both things that we know we put a good deal out on the plate for the guest and more of them will show up more often if the economic -- economy is a little bit stronger.

Hey, Paul this is Kent. I think as long as we stick to what we do from a service standpoint and the quality of food and the portion sizes, I think that's helping us differentiate ourself from some of our competitors that maybe are messing with some of those things.

That's fair. And how about media or marketing efforts and anything maybe you have waiting for a better environment or -- ?

We're very much into marketing for sure. We got a whole army of marketers in our Company, it's just focused on a more local store approach to it. So we don't really see anything from a media perspective coming down the pike.

Okay, great.

We did assist CNN and Willie Nelson getting his armadillo back though. We thought that was a big win for us this quarter.

(Inaudible) good job.

We have no further questions at this time. I'd like to turn the conference back over to Management for any additional or closing remarks.

All right, well thank you all for joining this evening and if you got any questions, please give us a call. Thank you.

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