Texas Roadhouse Inc (TXRH) 2014 Q3 法說會逐字稿

Good day and welcome to the Texas Roadhouse, Incorporated Third Quarter 2014 Earnings Conference Call. Today's call is being recorded.

(Operator Instructions)

I would now like to introduce Tonya Robinson, Director of Financial Reporting and Investor Relations. You may begin your conference.

Thank you, Robert, and good evening, everyone. By now, you should have access to our earnings release for the third quarter ended September 30, 2014. 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 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 Scott Colosi, our President, and Price Cooper, our Chief Financial Officer. Kent is traveling to an international opening and will not be part of the call today. Following Scott's and Price's comments, we will open the call for questions. Now, I'd like to turn the call over to Scott.

Thanks, Tonya, and good evening, everybody. We're very pleased to report another quarter of solid results, highlighted by a combination of double-digit revenue and earnings per share growth. Our performance is directly attributable to our operators, who are simply doing a great job of driving traffic and our profitability. After seeing our comp sales increase 5.9% during the third quarter, our sales momentum has continued in the fourth quarter with our comparable restaurant sales increasing approximately 7% for October.

While sales trends are very strong, commodity inflation continues to be a headwind for us, particularly with beef costs. It's too early to give you specifics, but we do expect inflationary pressures to remain throughout 2015. Given this outlook, we expect to take approximately 1.8% of pricing in late November, which is a little earlier than usual. Switching over to development, we're on track to open a total of 25 Company restaurants during 2014.

That equates to 10 new restaurants in the fourth quarter and I'm pleased to note that six of these have already opened to date. Our new restaurants are performing well and although our average development costs have increased a bit, we continue to see very good returns. Our franchise partners have opened four restaurants so far this year, including our first restaurant in Taiwan, which opened just a few weeks ago.

I'd also like to note that our 2015 development pipeline is in great shape with 25 to 30 Company-owned restaurant openings planned for the year. We already have 24 of these locations either under construction or in permitting, which is the last step before construction begins. So we feel very good about hitting our development targets for next year. So now, I'd like to turn the call over to Price to provide the financial update.

Thanks, Scott, and thank you all for being on the call today. For the third quarter of 2014, we earned $18.8 million or $0.27 per diluted share, which is an 11.9% increase over the prior year. Overall strong revenue growth of 15.1% was partially offset by the impact of higher food inflation and the lapping of a $1.3 million benefit from favorable general liability insurance claims experienced in the prior-year quarter.

Despite these headwinds, we were able to grow both restaurant margin dollars and income from operations over 12% versus the third quarter of 2013. A higher income tax rate took away a couple points of growth, but that was mostly offset by a lower share count compared to the prior year, as a result of our share repurchase activity over the last 12 months.

15.1% revenue growth during the quarter was driven by a 9% increase in store weeks and a 5.7% increase in average unit volumes. In addition, we are seeing strong sales performance at our newest stores. Comp sales increased 5.9% during the quarter and were comprised of a 4.4% increase in traffic and a 1.5% increase in average check. By month, comparable sales increased 4%, 6.3%, and 7.2% for our July, August, and September periods, respectively.

As Scott mentioned, October trends remain positive with comps increasing approximately 7%. Our strong operating profit increased $7.1 million or 12.5% for the quarter compared to the prior year and on a per store week basis, restaurant margin dollars increased over 3% as a result of strong traffic growth. While restaurant margin dollars grew both in total and on a per store week basis, restaurant margin percentages decreased 40 basis points for the quarter compared to the prior year, driven by food cost inflation.

Food cost inflation actually came in higher than we had anticipated for the quarter, mostly driven by beef costs. While we expected to see prices pull back on some of our more heavily used cuts, as they typically do during the summer months, prices actually were counter-seasonal and continue to increase. In fact, food cost inflation was approximately 4.5% during the third quarter, the highest we've experienced this year.

For the first nine months of 2014, food cost inflation has been approximately 3% and we expect it to stay roughly in line with that through the rest of the year, as we will be overlapping higher beef costs from last year during the fourth quarter this year. On the labor line, strong average unit volume growth during the quarter more than offset the impact of higher healthcare costs, wage rate inflation, and reclassification of some costs from the other operating line.

We continued to gain leverage on the other operating line; however, higher general liability insurance costs caused the leverage this quarter to be a little lower. Depreciation costs were up $2.7 million this quarter compared to the prior year, primarily due to depreciation on new restaurants. In addition, we've seen an increase in maintenance CapEx spending at the restaurant level, as we continue to invest in keeping our asset base relevant and do things like adding seating capacity to help drive sales.

Based on the current rate of unit growth and the level of reinvestment in our assets, we expect depreciation costs to increase approximately $500,000 each quarter on a sequential basis. G&A costs were up $2.4 million in the quarter, primarily due to our ongoing investment in our infrastructure, specifically relating to food and service, as we continue to develop more restaurants. G&A costs were flat as a percentage of revenue.

The income tax rate for the third quarter came in at 31.4%, which was much higher than the 29.6% rate from last year, due to the expiration of the work opportunity tax credit at the end of 2013 and much higher stock option exercise activity last year. Year-to-date, our tax rate stands at 30.6% and we continue to expect our full-year rate to be 30% to 31%, which is up from the 2013 rate of 28.9% for the same reasons just mentioned.

Moving to the balance sheet and cash flow, we ended the quarter with $59 million in cash and $51 million of debt. Debt level was consistent with the end of the second quarter, while our cash balance decreased $18 million. As since, we used $36 million of cash flow from operations to fund capital expenditures during the quarter. Beyond that, we used approximately $19 million of cash to pay our regular quarterly dividend and repurchase stock.

During the last 12 months, we have repurchased just over 2 million shares of our common stock at an average price of just under $26 per share. Moving forward, recall the fourth quarter of 2013 had 14 weeks, so we will be overlapping the estimated $0.03 to $0.04 per share benefit in the fourth quarter of 2014. With regard to 2015, our plans are not yet final, but we can provide some general commentary.

First, as Scott mentioned, we are targeting 25 to 30 Company openings and expect to continue to drive positive comparable restaurant sales growth. On the cost side, beef continues to be a pressure point for us as supplies are down and expected to remain that way for now. As such, we currently anticipate low to mid-single-digit food cost inflation for 2015. On the labor cost front, we expect to continue experiencing some headwinds from ongoing state minimum and really, tip wage increases and further expansion of our healthcare coverage.

All said, some of these pressures, just as we have done for the last few years, we will remain focused on reducing costs in non-guest interfacing areas and believe we can save another couple of million dollars here. Given the net of all this, as Scott mentioned, we will be taking approximately 1.8% in menu pricing later this month. We will evaluate any further pricing actions as we monitor guest reaction to this increase and get better clarity around 2015 costs.

As always, we will focus on driving traffic in order to drive margin dollars since our managing partners, as well as our shareholders, are paid on dollar profits rather than percentages. Additionally, we expect to continue to generate significant free cash flow, even after the $110 million to $120 million of capital expenditures and thus, we plan to continue returning capital to our shareholders through dividends and ongoing share repurchases. With that said, I'd like to turn the call back over to Scott.

Thanks, Price. I'd like to end our prepared remarks today with a shout out to our operators. There's no question that inflation will be a challenge for us in 2015. Fortunately, we've been having a lot of success in driving top line sales, which is the best way to tackle inflation head on.

Many of you know, we don't add many new products and we're not on TV. Our business is all about how well we execute legendary food and service within the four walls of each restaurant. Our comp sales have been in positive territory for many consecutive quarters and these results are a direct reflection of the high levels of execution that our operators bring to Texas Roadhouse each and every day. I want to thank all of our operators for their legendary passion, leadership, and results. So with that, Robert, would you please open the line for questions?

(Operator Instructions)

Andrew Charles, Bank of America.

Great, thanks. Great sales results this quarter, guys. Just a quick clarification, what was beef inflation during the quarter?

For the quarter, it was very high single-digit inflation.

Okay. You've talked previously about food cost efficiencies you've been able to implement strategies and procurement and buying power, as well as cloud-based technology to help monitor food costs. So can you talk about how much this is expected to offset the COGS inflation next year? Are there any other supplements, also, you've been able to find in mitigating food costs that do not impact the guest experience?

Most of what we're seeing there, Andrew, this is Price, most of what we're experiencing there is on the supply chain and doing a better job of gaining purchasing power and particularly in areas such as produce and getting more consolidated purchasing power basically in that area. In addition, our operators are keenly focused on managing the waste side of the business and doing little things to increase operational efficiencies.

On the operational efficiencies, it's probably been somewhere on the order of 10 to 20 basis points worth of savings. So I think we'll continue to see some of that there. Part of that's just a function of the higher inflationary environment that we're operating in.

Okay. I'll leave it there. Thank you.

Brian Bittner, Oppenheimer & Co.

Thanks. This is [Mike Tamis] on for Brian. Just a quick clarification, you said D&A is going to be increasing $500,000 sequentially going forward?

Yes, that's been a good run rate for us, really, for the last several years is about $500,000 sequentially each quarter.

Okay. Great, thanks. The question is really on the pricing. You talked about 1.8% in November, so how does that look as we go through 2015? Maybe if you don't see much pushback from consumers on that 1.8% pricing you're taking in November, what's your ability or willingness to take more pricing, given if inflation kind of hits your low to mid-single-digit target? Thanks.

Yes, I'd say there'd be a couple things we'll look at. The first part of your answer is the last time we took pricing, we took a little over 1.5% the beginning of December of 2013. So as it stands right now, when we overlap that, then we'd have effectively totaled 1.8% in pricing in our menu. Our plan is to continue to get a better handle on exactly what we think commodity inflation will be for next year.

Of course, just as you mentioned, we'll evaluate the guest reaction to this pricing and the overall environment in helping us determine whether we take any additional pricing next year, before the end of next year.

Thank you.

Will Slabaugh, Stephens Inc.

Thanks, guys. Just curious on the sales pick up that you've seen in the past few months, if that's been across the board? Have you seen some geographies behave better than others? Also, did you see any changes in your mix versus recent quarters, as well?

Will, this is Price. Really the sales pick up has been pretty consistent if you look at it in terms of days of the week and/or regionally. It's been fairly consistent among both, I would say. In terms of mix, we're just seeing -- mix is neutral to down slightly right now, which is a very similar trend to really what we've experienced for the last 12 months.

Got you. Just one more quick follow-up on the price question, so as far as where pricing is going to be for 4Q, do you know what that weighted average is going to look like? If I heard you right, you said you had 1.5% that's going to roll off in December, is that correct? And you'll just be running 1.8% for the rest of 2015, assuming you don't take any additional pricing?

Yes, and really, it's about 1.6%, 1.7% rolling off. So for Q4, our weighted average as far as what we've guided menu pricing-wise will be in that 1.7% to 1.8% range, whereas as, as we mentioned earlier, our checks have been running up about 1.5%.

Got it. Thank you.

David Palmer, RBC Capital Markets.

Hey, guys. Congrats on those sales trends. I wanted to ask you about the food cost line, right now it feels like you're going to be perhaps blowing through the past peaks on food cost as a percent of sales. Do you think about that at all? Is that something that you think about a 35% or 36% food cost line and wow, we're giving a lot of food value to the consumer and perhaps that's even too much, you think about toggling a price to that and perhaps keeping that down. Even if that may mean more than 2% pricing, does that come into your thinking at all?

David, this is Scott. Certainly, when you're seeing it everyday, you're very aware of the food cost percentages and how high they're getting, relative to history. At the same time, you know that one day, they will eventually turn and that your food cost as a percent of sales will eventually come down, like it has historically. Most recent time would be 2009, 2010, I believe we were probably the 33% range, something like that, in food costs when cattle prices had fallen off a bit. So we expect that will happen.

It still may take a couple years for that to happen, but it will happen. So we don't want to be overly protective of food cost percentages in the short-term that potentially hurt our value in the long-term. We do look at guest counts. That's the number one, probably, figure we look at and those increasing guest counts pay for a lot. Also, at the same time, we have been making up some ground in other parts of the P&L.

All the things that Price mentioned in the last few calls about the purchasing opportunities that we've had on things beside food costs have really sort of helped us make up some of the ground we've lost on margins because food has had so much inflation over the last few years.

Great. Thank you.

David Tarantino, Robert W. Baird.

Hi, good afternoon. Scott or Price, I just wanted to ask the question on the pricing that you're putting in, in Q4,the 1.8%. How do you arrive at that level, especially when you consider that it looks like the inflation's running above that? So first, how do you arrive at the level of 1.8% versus something higher than that at this stage?

David, this is Scott. We just look at a lot of different data points -- everything from where is the competition at to what have we been successful with executing in the past, what do we think our guests can bear? At the end of the day, we're always going to be on the more conservative side relative to increases in our cost structure. We're going to be very protective of the value side of Texas Roadhouse.

That's been part of the recipe for getting us where we are at today and we just aren't forgetting where we came from, which was taking a very conservative stance on menu pricing. You always like to believe you're not using all of your pricing power and if you keep believing that, the guests keep coming back and you keep driving traffic.

So when we look at the traffic numbers that we've had, particularly over the last few years, it does give us confidence that we're working on a lot of the right things, including the pricing strategy. Again, we're in this for the long haul. Sometimes, in the short-term, you've got to eat a little bit of inflation, but typically you get that back and much more when that inflation turns a bit more in your favor.

That makes sense. Then I guess when you look at the inflation outlook for next year for food cost, low to mid-single-digits, I don't believe, Price, you gave us an estimate for the labor inflation or other inflation in the P&L. But what type of traffic growth might you need to see to hold onto the restaurant profit dollars, given the inflation that you know of right now?

Dave, this is Price. Part of that will depend on obviously where that lands -- food cost, in particular, lands in the low to mid-single digits. Because it doesn't sound like a big range, but the difference between, say, 2% and 5% in that case, it's a big difference from a P&L perspective. So that's why Scott and I both mentioned we'll continue to evaluate and dial-in on where that is.

If you're talking specifically on labor, we're probably looking at somewhere in the 2.5% to 3% inflation on labor. By the time you roll up the state minimum wage and tip wage changes for next year, as well as another, call it, $2 million or $3 million cost associated with health care coverage and the general wage rate inflation that we're experiencing right now, somewhere on the order of 1.5% or 2% of general wage rate inflation.

Great, that's helpful.

You definitely need positive traffic if your only going to take 1.8% pricing.

Great, makes sense. Just for my understanding, I would assume, if you're going to take, if you have 3% or so inflation through the P&L and only slightly less than 2% pricing, then you would need something on the order of sort of 2% to 3% traffic increased to hold the percentages and then maybe a little less from that.

That's probably fair to hold the percentages. Normally, it's going to be at least twice the level of pricing.

Got it. Okay. Makes sense. Thank you very much.

John Glass, Morgan Stanley.

Thank you very much. A couple of maybe just follow-up questions, one is, Price, how much do you know about food cost next year? What's contracted? It's a wide range, I know, but maybe, do you think it's -- from your gut, is it higher or lower than 2014's inflation?

Don't know. Tough question on if it's higher or lower sitting here in the early part of November. I'll tell you, what we do know is, yes, we have started contracting some items for next year. Without getting specific, yes, we have started contracting some proteins. Our belief is today that, on the protein side of the business, a lot of that is where we expect the pressure to come from on the protein side.

But in addition to that, we've begun locking in things such as shortening mixes, dairy products, some other commodities, as well, that we feel like we could see some relief on into next year. Including seafood, I might mention, as well. It's a small usage item, but our seafood cost should be down next year as well.

How do you think about the fourth quarter cost of goods? You ran 36% this quarter. I think it's almost easier to look at it sequentially than year-over-year. Would you start at 36% as the starting point and then you get a little more pricing, maybe a little back down from there? How do you think about the fourth quarter COGS ratios?

Hopefully, if we're right in the fact that the third quarter was our highest quarter at 4.5% food inflation, not sure that you would reach a 36% in the fourth quarter of this year.

But I mean, it inflates sequentially, right? You expect the prices to go down sequentially from the third to the fourth? I'm not talking about year-over-year now, but beef prices should decline relative to the third quarter in the fourth quarter?

Don't know if we want to get that specific on the call, but we do expect our year-over-year inflation to be less in the fourth quarter.

Just the last question is you mentioned labor inflation was a couple of points, 2.5, 3 or whatever it was. But when you look at the labor dollars per store, it grew more like 5% this quarter? What was that? Was that just like extras bonus accrual because the comps were stronger? Maybe my number's not right, looking externally, but what do you think labor dollars per store grew this quarter versus labor inflation, let's say?

Let's see, I don't have that right here, John, but it does look like it's growing a little more on like a per store week basis than the overall inflation of 2.5% to 3%. Part of that is because we're running 4.5% traffic.

Got it, right. So you were getting -- it's higher because you've got to pay more people or you've got to pay them bigger bonuses or a combination of those?

Or a combo of both. Because yes, you're certainly paying out more bonuses, plus some on the staffing side because you're doing a lot more traffic.

Got it. Okay. Thank you.

Then keep in mind that we've also got that, what is it -- I think it's a 20 basis point reclass of certain costs between that other operating costs line and labor line this year. So that's also factored into a little higher if you're looking at it on a per store week or per store basis.

And that goes away -- one more quarter and then next year it's lapped? Is that right?

That's right, fourth quarter.

All right. Thank you.

Jeffrey Bernstein, Barclays.

Great. Thank you very much. Two follow-up questions -- the first, just on the pricing topic, it seems like this year, 2014, you'll end up mid- to high 1% menu pricing and that seems like, at this point, that's what we're talking about for next year. But it seems safe to assume that there's risk the COGS inflation will be more and we know the labor and the Affordable Care Act is not going to be less, but likely more.

I'm just wondering whether something like that sets an unusual precedent where you might justify more than that 2 points of price? Maybe said a different way, I know you guys test a range of pricing outcomes in your different markets, can you talk about the range that you've tested and how high you'd consider going before you reach a point where you say, no, we would never increase it more than 3% or whatever the percentage might be?

Yes, Jeff, we don't have any hard number that we're either targeting and/or a cap on that. I think that we're looking at the same stuff you are as far as the low to mid-single digits right now on food inflation is a wide range and we'll continue to dial-in on that. The comment I would mention on the labor side is labor inflation for next year shouldn't be that dissimilar to this year, because, if you all recall, at the beginning of this year, we rolled out some expanded healthcare coverage already to a large number of our hourly employees and that's about a $2.5 million cost that we're loading into our P&L, if you will, for this year.

That's about the range of what we're talking about if you're talking $2 million to $3 million for next year. So I think if you're just talking labor, inflation should be very similar between the two years. Food cost inflation could turn out being similar between the two years. We'll continue to dial that in. We didn't test any specific menu price increases this year, so that's where we talked about we'll evaluate what we see after the rollout of our menu price increase, we will see the guest reaction.

We'll evaluate that and see if we can determine anything one way or another from that. Also, just see what's going on in the overall environment and see if it makes sense, at that point, to take any more pricing, maybe sometime throughout 2015.

I got you. So you have the opportunity to raise prices at some point in the first half of 2015 if the feedback necessitates it?

Sure. I think it would be dictated by more than just what happens with this rollout. I think those other factors would be a large part of the equation. That being what inflation looks like for 2015, how long you expect it to be there and the overall economic backdrop, I think, would also play a big part.

Got it. Just the other question, on the unit growth side, I know you mentioned last quarter that a few units rolled into early 2015, which was why this year kind of came in at the 25 number. I'm just wondering, for 2015, any thoughts around openings by quarter or what we should assume from the franchisees on top of your 25 and whether or not you still think you can achieve that one to one? I think you mentioned that the cost to open was continuing to rise, but do you still expect to exceed the 1 to 1 sales to investment ratio?

Jeff, this is Scott. Regarding the timing of the 2015 openings, as I mentioned earlier, we do have a lot of stores under construction or in permitting, so we could get close to half our openings in the first half of the year. That is a very possible achievable for us, sitting here today, at that point. Of course, only time will tell, but we're in, I think, really good shape to get close to the top end of our 25 to 30 range, given where we're at today on that.

As far as the economics, the 1 to 1 ratio, we're a little bit below that right now. Our average cost of construction all-in is closer to $4.5 million to $4.6 million, but our sales continue to go higher as well. Our average unit volumes continue to go up. So that equation still gets us to mid-teens IRRs even being slightly below the 1 to 1 ratio and our sales are doing so well, they may end up being 1 to 1 once the stores get past their honeymoon curves and so forth.

We've opened with such strong sales and we'll just see. We are building stores a little bit bigger with more seats. That's part of the reason why the costs are up. That's also part of the reason why the sales are higher. So we're very encouraged by the strength of our openings, I will say that, and bullish on 2015's openings as well.

And the franchisees, do you know how many they might give you on top of the 25 to 30?

Franchisees in the US, typically it will be one to two a year. It was one this year, it could be two next year. On the international side, we're kind of up to about a handful a year. That's about what we'll do this year. It looks like we'll do that next year. International's definitely starting to build some momentum.

We did mention we opened in Taiwan a couple weeks ago. Kent's over there right now. He is very active internationally, as well as in the US, of course, but there's a lot of things that are in the works internationally for us.

Understood. Thank you.

Andy Barish, Jefferies.

Just wondering, on the traffic acceleration, is there anything you would kind of point to externally? I know you don't look at a lot of the macro stuff. Was it simply gas prices coming down, do you think, gave your consumer a little bit more disposable income?

Andy, I would say number one, we don't know. We don't have any specific data on macro-type things and the correlation to traffic, but I'm sure gas prices coming down didn't hurt. Another thing, you never really know -- we're talking a lot about beef inflation. It's inflating us, as well as at the grocery store level.

So does that have some benefit for us the fact that it costs a lot more to buy beef at the grocery store versus -- or those prices have increased a lot more on a percentage basis than probably at us and other restaurants. Maybe that doesn't hurt.

Thanks. Congrats to Kent and the whole Texas Roadhouse team on Operator of the Year. Very impressive, well-deserved.

Thanks, Andy.

(Operator Instructions)

Chris O'Cull, KeyBanc.

Price, is the amount of pricing you're taking expected to offset the dollar impact of the food cost inflation?

We'd have to derive some traffic. With the other inflation we're expecting through the P&L, we'd have to drive some traffic. It's definitely been our MO, if you will, for the last several years to go back and look. Over the last four years or so, we've averaged somewhere on the order of 8% beef cost inflation and probably 5% or so overall food cost inflation.

But yet, to your point, we've been able to drive those margin dollars 2.5% to 3%. At the end of the day, our model works really, really well if we can drive those margin dollars on a store week basis in that 2% to 3% range.

Okay. Scott, I think if I remember right, in 2012, you guys were pretty aggressive with pricing. What would cause you to be more aggressive with pricing again?

Chris, the only thing that would really make us be more aggressive than a 1.5% to 2% change would be really big changes in minimum wage. That affects everybody across the board at the same time. That would probably be -- and that usually it's permanent. The minimum wage goes up, it doesn't come back down. Beef prices go up, chances are they'll come back down. The minimum wage doesn't.

Back in 2007, I believe, we had a number of states where there were significant increases at the state level minimum wage and we raised prices in some of those states 3%. But again, it was every restaurant in the state impacted the same way or with the same minimum wage deal, unlike this, where it's principally beef-related, which obviously doesn't impact everybody in the restaurant business the same way.

I do want to point out to everybody, we're growing traffic. We believe one of the reasons we continue to grow traffic is because we have stayed on offense, meaning we've kept our prices very aggressive. We've kept our restaurants well-staffed. We haven't messed with our food or our staffing standards. We've stayed very aggressive and we're going to continue to do that because we think longer-term, that's what makes the most sense for us. We're very confident that we'll continue to grow traffic next year and in future years.

So barring some sort of permanent step up in your cost structure, this kind 1.5% to 2% pricing in the latter part of the year, November/December, is kind of what we should expect from you guys going forward?

My guess is that would probably be all we would do for the year, unless there was really something abnormal occurred, like a minimum wage change that was to occur we would probably go back and rethink our pricing. Beyond that I don't know -- I don't see us really changing our menu prices.

Okay. Great. Thanks, guys.

John Ivankoe, JPMorgan.

Great, thanks. I also would like just one more try in pricing, if I may. You mentioned that you would take market pricing if minimum wage or some cost increased in that specific market, but my question is whether you fully explored market by market or even four corner pricing in your restaurant? Is it still a case that you take maybe a little bit more of a national approach to pricing versus pricing each individual restaurant relative to each individual trade area?

John, we have many menu tiers, so we look at it, literally, market by market and we have essentially 50 markets now in the country. Kent, personally, has phone calls with every one of those 50 markets and walks through the pricing strategy for each one of those markets. Those in turn, market partners are talking to their managing partners about what would they like to do and we give them various options.

Typically, maybe a low option, a medium, and a high option and the guys will have a lot of input with Kent on where they'd like to be and a lot of our operators are also very conservative in pricing. They've been at other concepts where maybe they felt those concepts raised the prices too much too fast, especially to try to hit some target in the short-term and maybe it ended up turning the guest off in that concept.

So they're, by nature, pretty conservative and many, many, many of our operators have had a lot of success over the years of driving traffic in their stores. If you go back 10 years ago, our average unit volumes were about $3.3 million, something like that, and today, they're about $4.3 million. So a $1 million difference, I don't think there are many concepts where that's been the case, certainly ones of our size. So a lot of that, we attribute to keeping our prices at a very aggressive level that's worked for us and hopefully, years down the road, we'll be talking about $5 million, $5.3 million average.

That's great color. So it's true, then, even within those 50 markets that each individual store's operating partner can kind of choose different pricing at an individual store level, not just at a market level?

They'll try to keep it consistent by market and certainly, Kent is very close to the pricing and he will -- he's the final say. Certainly what our folks in the field give him as far as feedback, he takes that very much to heart, but he's also the ultimate protector of our menu pricing and he will tweak individual items here and there and he has tons of data that he's looking at, ultimately, in making the final decisions. When you have the guy doing it who's been doing it since day one and has a philosophy that's worked for us, we're going to continue down that same philosophy.

Is there any lesson to be learned about your new unit volumes being as high as they are? I think it's been third quarter was a really good quarter in terms of what you've been achieving. Is that beginning to maybe change your impression of how many units, how many Texas Roadhouse units, there could be? Or maybe has the slight profile changed a little bit in 2014 relative to previous years because the more penetrated you get, the better the comps, the better the new unit volumes are. Is it just to get a little bit more sense on the real estate side?

I think we feel we're at a good rate of growth at a 25 to 30 restaurant level. It does mean that we have to develop higher, what have you, 25 to 30 new management teams and that's just in new stores. In the existing business, you do have turnover, so you have that new management teams to deal with your turnover.

There's only so many people that we're going to allow to run this high traffic volume Texas Roadhouse because remember, most of our stores aren't open for lunch except on Saturday and Sunday, so we do an enormous amount of traffic in a very short period of time, 4 to 10 or really, 5 to 9:30. So it takes a special person to be able to manage that restaurant where all the food's made from scratch and you've got 100 employees.

So we're going to keep our growth under control, not only for the real estate piece to make sure we're picking great sites, but also from the people piece to make sure that we're just allowing great management teams to take over at Texas Roadhouse.

Thank you.

Steve Anderson, Miller Tabak.

Good afternoon. Just wanted to go on to the labor, just general restaurant-level expenses and you talk about some fluctuations with regard to your liability insurance. Is this something, I know this was a credit last year. Do you know of any other fluctuations you anticipate in the next couple of quarters?

Steve, this is Price. Nothing material jumps out to me. The third quarter, our insurance year runs on an October to September year end, so a lot of times, we'll have a true up, if you will, for that current calendar year of insurance that hits us in the third quarter. Below the restaurant level line, of course, we had, in the fourth quarter of last year, we had a $1.8 million gain in the fourth quarter of last year that we'll be overlapping this year.

Okay. Thank you.

Andrew Strelzik, BMO Capital Markets.

Good afternoon, everyone. I'm just wondering, with traffic growing the way it is, do you see any capacity constraints or are the bump-outs that you've been doing enough? If we roll the story forward and you continue to see this type of traffic growth, do you see yourselves getting there and is there anything else you can do?

Andrew, this is Price. I would start off by telling you that, in addition to continuing to see traffic gains across regions and across days of the week, we continue to see it pretty consistent among different volumes of restaurants. Our higher volume restaurants continue, really, quarter after quarter and year after year to drive more and more traffic and more and more throughput.

The difference you see is the expanse throughout more days of the week, if you will. As you mentioned, we have done some bump-outs. We've done that at about 130, 140 locations and that's been a great addition and a great way to continue to drive traffic through existing restaurants. I would mention also, we've got existing restaurants that do $7 million-plus in sales and they continue to grow sales year in and year out, so we think that we've still got plenty of capacity in the overall system.

Okay, great. Then with wholesale beef prices or spot beef prices, the inflation being greater in the third quarter and potentially also in the fourth quarter than it was in the first half, I'm wondering if you've seen any change in competitive promotional activity in terms of either depth or frequency or anything like that?

You know, we haven't. That's not to say that there isn't. We're probably not as tuned into that and watching that as closely as we are to, as Scott mentioned, focused on running our business and legendary food, legendary service at Texas Roadhouse.

Great. Thank you.

Paul Westra, Stifel.

Great. Thanks, good afternoon. Just one more follow-up question on the cost of goods sold line, I guess I'm trying to deduce from some of the comments you've already made, Price, it sounds to me that if you expect fourth quarter cost of goods sold inflation to be a little bit less than the third quarter, as you're looking for some number, you may be slightly below 36%.

If you did that for 2015, it looks like that's the number we should be staring at, which is a cost of goods sold of 2015 of 35.8% to 36% would kind of deduce 2 points of price and maybe 4 points of inflation. I just want to make sure that mentally, it sounds like, from a sequential standpoint, you're looking for any increased sequential inflation once we get through the end of this year?

I think the range of numbers you are talking about -- that's within the range of numbers that we've talked about. So from a low to mid-single digits 1.8% in pricing, you could get into that range that you're talking about for food cost. Now, we don't know what it'll end up being, but you can certainly get there with what you're talking about.

Great. So you are seeing, obviously, some offsetting inflation on some of the protein sides and some pulls and takes on that number to offset some of the beef inflation?

Yes, on other commodity items, yes.

Great. Last question, maybe just on the G&A outlook for next year, you had a pretty -- is the goal still to grow that slower than overall revenues?

We're, right now, in the middle of our G&A budgeting process for next year. So we've got a lot of things going on and we continue to invest in our business, but we continue to challenge ourselves to be more efficient in how we use our resources, just like we do in the restaurant to get more efficient. So we don't have any specific guidance to give you, but it'll be up for sure because we're growing, but we'll probably give you more thoughts on that on our next call.

Great. Okay. Thanks and congrats.

Thanks, Paul.

Bryan Elliott, Raymond James.

Thanks, good afternoon. Just a couple questions, one, as I look at prices, I look at the COGS through this year and thinking about next year, first quarter of 2014 was kind of an outlier to the downside. You reported just 0.5 point of inflation overall and beef was actually down year on year, probably more speaking to what happened in 2013 than in 2014. But as we think about the flow-through, the cadence of food cost for 2014, should we look for the biggest pressure to be in Q1, from a COGS ratio standpoint?

I don't necessarily know about that, Bryan. A lot of that reason for last year had to do with the timing of when we rolled off some of our beef contracts the year before with the aging process. That was the biggest reason for that. Don't really have a lot of clarity or detail, if you will, to offer you kind of on the cadence between the quarters for 2015 because a lot of that will depend on, ultimately, do we end up under more fixed-price contracts? Do we lock up the commodity itself, could be subject to more market prices on the commodity. So those are all the kind of things we are working through in the back half of this year.

I guess I misspoke using the word cadence, I just was focusing on Q1 and whether it will be an outlier again this year like it was last year or this year, rather. Next year will be an outlier similar to 2014 and it could be, I guess, no visibility yet on your end, which is fine.

Generally, if so, not as much as an outlier I would say.

Okay, all right. That's helpful. Then a subject that hasn't been brought up yet, pricing, in the past, you all have talked a lot about a very detailed and systematic testing of potential price increases. I'm kind of surprised I didn't hear that commentary here with so much focus on this call and on the outlook. Have you changed your procedures there or has the testing given you less confidence that you've expressed during past periods? Can you flush that out please?

Bryan, this is Scott. We've actually, in a way, have testing going on all the time because we got to such a high number of different menu tiers that we were able to use those menu tiers to look at a good proxy for what different price changes might lead to. So last year, last December, when we made our 1.5% price increase, that affected different tiers in different ways, just the average was 1.5%.

So, we had a good track record coming into the fall of what those different price increases might lead to, whether it's mix changes, traffic changes, or whatever. So the value added from having a specific test, which in many ways was just another tier, another representation of what we were already doing, wasn't adding a tremendous amount of value to us.

Okay. That's quite helpful. Understood. Would it be fair to characterize the commentary today from you all as maybe to summarize you're happy, obviously thrilled, with the traffic and you're willing to trade off margin for traffic from a strategic standpoint, given that the beef situation is what it is and is going to self-correct. Is that a fair summary?

I think in the short-term, yes. We'll be very protective of the traffic and we want to stay on offense and keep growing traffic and expect that in the long-term, when the beef thing does turn, we're going to be in a very strong position.

Great. Thanks much. Appreciate it. Congrats.

Thanks.

(Operator Instructions).

David Palmer, RBC Capital Markets.

Great. Thanks for the follow-up. I know Texas Roadhouse is not a company with a lot of top-down initiatives, but I know there's a spirit of continuous improvement and you try to ensure that best practices are shared. Are there areas of improvement, things that you would highlight that you're seeing in your meetings with the market partners, the managing partners, that are perhaps areas that could be areas of improvement into 2015 that we should focus on?

David, this is Price. I would say there's nothing glaringly that's material. I would say just like other aspects of our business, we continue to evolve in that. That's where a lot of our non-guest interfacing cost savings that we've talked about come into play. Most of those, if not all, are suggestions from our operators and that's what you get in a very partnership-based model.

So we would expect that we would continue to get those types of ideas and we believe our job is to help facilitate the sharing and the implementation of those things versus as you say, not be a top-down type enforcer.

My fishing there is more directed at the labor line because clearly, if you are getting to high food costs, that value should generate some traffic and sustaining traffic into next year. That's an opportunity if you're trying to value-engineer your business, you could leverage that labor line perhaps and find ways to, as you ride out this commodity issue, perhaps you can find ways to leverage that line a little bit more. That was where I was fishing.

Yes, in terms of that, not only is the food side of our business very important, but the service part is as well. So if we can leverage it through being able to drive more throughput or do things like add seats in our restaurants, great. Certainly, not looking for ways to leverage that through reducing service. What Scott's been saying, we're definitely trying to continue to stay on offense and to keep the momentum behind this traffic going.

Thank you.

Thanks, Dave.

This does conclude today's Q&A session. I will turn the call back to Tonya Robinson for closing remarks.

I just want to thank you all for being with us on the call with us tonight and have a great night. Thanks.

This does conclude today's conference call. Thank you, again, for your participation and have a wonderful day.