Texas Roadhouse Inc (TXRH) 2015 Q1 法說會逐字稿

Good day, and welcome to the Texas Roadhouse, Incorporated, first-quarter 2015 earnings conference call. Today's call is being recorded.

(Operator Instructions)

I would now like to introduce Scott Colosi, President and CFO. Please go ahead, sir.

Thank you, Melissa, and good evening, everybody. By now you should have access to our earnings release for the first quarter ended March 31, 2015. 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 a 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 investors section of our website.

On the call with me today is our Founder and CEO, Mr. Kent Taylor, and Tonya Robinson, our Senior Director of Financial Reporting and Investor Relations. Following our remarks, we will open the call for questions. Now I'd like to turn the call over to Kent.

Thanks, Scott. We were pleased that the sales momentum we discussed in our last quarterly call has continued to the first quarter and into April. First-quarter comps increased 8.9%, and the first four weeks of the second quarter has started off very strong as well, with comps up 8.4%.

Increased traffic has been the main driver, which we believe is the result of our continued focus of offering our guests legendary food and legendary service at a decent price. Our operators have done a groovy job in the face of continued commodity pressure, and I want to thank them big time for kicking some serious butt.

On the development front, we have opened six company restaurants so far this year, including one Bubba's 33 restaurant. The remainder of our 2015 pipeline is in great shape, with 17 restaurants currently under construction and expected to be open by the end of September. At this time, we are set to hit a high end of our range of 25 to 30 company restaurant openings for 2015. We also expect our franchise partners to open four to six restaurants this year.

In closing, I want to congratulate Pat Ryan of Thornton, Colorado, for being named our 2014 Managing Partner of the Year at our recent conference in Arizona. Pat's win was very well deserved. As always, it has been great to be together with all of our operators celebrating another successful year. Now Tonya will provide the financial update.

Thanks, Kent. For the first quarter of 2015, net income increased 23% over the prior year to $32.3 million, or $0.46 per diluted share. Overall revenue growth of 15.9%, along with lower G&A and pre-opening costs, more than offset the impact of higher food cost inflation. Revenue growth during the first quarter was driven by a 9% increase in average unit volume, along with a 7.4% increase in store weeks.

For the quarter, comp sales increased 8.9%, comprised of 6.9% traffic growth and a 2% increase in average check. By month, comparable sales increased 14.8%, 6.5%, and 6.6% for our January, February, and March periods, respectively. We did have some positive benefit in January due to the New Year's Eve calendar shift, and as Kent mentioned, comps were up 8.4% in April.

Restaurant operating profit increased 14.6%, or $11 million for the quarter, compared to the prior year. This was slightly below our sales growth, as restaurant-level margins decreased 20 basis points. While strong average unit volume growth during the quarter more than offset the impact of higher healthcare costs and wage rate inflation, food cost inflation of 5.2% outpaced our pricing action.

Looking ahead, our full-year expectation for food cost inflation remains the same at 3% to 4%, primarily driven by beef. We currently anticipate that we will have our highest inflation of the year in the second quarter, implying lower inflation in the back half of the year, to hit the midpoint of our full-year range.

Below restaurant margins, G&A costs were $21.8 million, up $1.6 million versus last year. $1 million of the increase in the quarter was due to higher share-based compensation costs related to the renewal of our Officer and Board contracts at the beginning of 2015. As a percentage of revenue, G&A decreased approximately 35 basis points to 4.7%.

Depreciation expense increased $2.3 million to $16.3 million versus the prior year, and was flat as a percentage of revenue at 3.5%. We continue to expect depreciation and amortization expense to be higher in 2015 as a percentage of revenue, due to the increase in our capitalized cost on new restaurants as well as an increase in the level of reinvestment on our existing assets.

Pre-opening costs decreased $500,000 on a year-over-year basis, primarily due to fewer restaurant openings this quarter compared to last year. The decrease was somewhat offset by pre-opening costs incurred in the quarter that relate to future openings.

Our tax rate for the quarter came in at 30.7%, which was in line with the rate last year. We continue to expect our full-year rate to be 30% to 31%, depending on the reinstatement of the Work Opportunity Tax Credit in 2015.

We ended the quarter with $98.5 million in cash, which was $12.4 million higher than our year-end balance. We generated $57.7 million in cash flow from operations and spent $45.3 million, primarily on capital expenditures and dividends, and had no share repurchases during the quarter. Our expectation for 2015 capital expenditures remains the same at $135 million to $145 million. Now I will turn the call over to Scott for final comments.

Thank you, Tonya. We're very encouraged by our current sales momentum, and with 20 straight quarters of traffic growth, we believe our disciplined focus on sales and the consistency of our food quality and guest experience will continue to drive success. I do want to point out that we'll start lapping higher comps in the back half of the year, which could make it more difficult to maintain the comp levels we've seen so far this year.

Our new stores continue to perform well, and we're pleased with the returns we are seeing. Solid sales growth at existing restaurants, along with solid performance at our new restaurants, helped us generate over $24 million in free cash flow during the first quarter, giving us more flexibility to enhance shareholder return in the future.

As Kent mentioned, we recently returned from our annual Managing Partner conference in Phoenix. It was a great time with our Operators and our vendor partners, celebrating our 2014 accomplishments and our culture of partnership. I would like to add on to Kent's congratulations to Pat Ryan, our 2014 Managing Partner of the Year, and also give a big shout-out to our National Meat Cutter Champion, Alex Marroquin of Bedford, Texas. Congratulations, Alex.

And with that, Melissa, please open the line for questions.

Thank you.

(Operator Instructions)

And our first question will come from Joseph Buckley with Bank of America.

Hi, thank you. Two questions. Obviously, very, very strong same store sales, and most of it traffic. Are you seeing anything noteworthy in the way consumers are spending within the restaurants in terms of mix, or alcohol, or side items or anything of that sort that would suggest maybe a little better consumer spending environment?

Yes, this is Kent. No real change in our sales mix.

Okay.

People are ordering the same items as they were before.

Then just one more question just on labor. Could you just talk about wage rate inflation, what you're seeing, or is there any signs of that beginning to pick up as well?

Right now, we continue to see about 1.5% to 2%, in the range of what we were expecting. So we haven't seen anything more than what we've expected so far this year.

Thank you.

Joe, this is Scott. I would add one more thing to that. No doubt, we're seeing inflation pick up a little bit. We've seen our turnover pick up a little bit as well, things that we would expect to see with unemployment continuing to tick down.

And I think unemployment by itself is probably one of the biggest drivers of sales in our industry, just by having that benefit. It's very highly correlated to our sales momentum over the years, to the good or to the bad. Right now, of course, it's to the good as we've seen unemployment continue to drop.

Okay. Thank you.

And next we will go to John Glass with Morgan Stanley.

Thanks very much. If could I just first follow up on the wage question, your labor dollars per store grew something like 7% this quarter, and you were saying underlying wage inflation is less than that. So is it right to assume that that increases the variable costs associated with better comp, or is there some other element? What I'm trying to answer the question of is, if comps were to decelerate, would you expect labor cost per store to decelerate, or is that more of a structural increase that you are seeing in the first quarter?

I would say we do have the $5 million to $6 million of additional healthcare costs that we mentioned on the last call. So on top of that 1.5% to 2% wage inflation, that healthcare probably takes it up to 3% overall from an inflation standpoint on a full-year basis.

Okay. Just remind us, does that healthcare carry through to the balance of -- is that something you lap, or is that something that's with you the whole year?

It will be with us the whole year. It is going to be incurred pretty evenly over the course of the year.

So John, two years ago, we went to 35 hours and up in offering healthcare, and then this year, we went to 30 hours and up. So it was another step on top of the step from the prior year, which is why we have it throughout the whole entire year.

Got it. I appreciate the reminder. Just on food inflation, this quarter, the first quarter was supposed to be the peak, and then it was supposed to get better. Now the second quarter is the peak. What's the difference in that, and are things like beef or anything else you haven't contracted more inflationary than you expected, or how do you explain that?

Well, I think we typically see Q2 as being the highest inflationary quarter of the year. That didn't happen last year. It was a little counter seasonal, or counter cyclical, if you will. We actually saw higher inflation in Q3 and Q4. We feel -- we expect to return to the normal trend that we've seen before, where Q2 is the highest level of inflation for the year, and that is driven by beef.

Okay. Thank you.

We'll now take a question from Jeffrey Bernstein with Barclays.

Great. Thank you very much. Two questions. One, just a follow-up on that. When you think about beef, I think you guys are now refraining from sharing what percentage is locked versus floating, but if not the case, by all means, love to know what percentage is locked versus floating.

But otherwise, what are you hearing from your suppliers in terms of the outlook going into next year? Seems like we're hearing from some that confidence is building, you could actually see whether it's inflation neutralized or actually turned favorable year on year when you look into 2016. What are you hearing thus far?

This is Scott. I would tell you that end of the day, we really don't know. So there's so many variables that go into the price for beef, well beyond just corn and supply of cattle, that we don't know -- we don't think our prices will be substantially higher than this year, but of course we've all been wanting to be able to know we're going to get relief in pricing.

And we're still hopeful that eventually, and the key word is eventually, there will be relief in cattle prices, and certainly some of that will be supported by continued lower corn. Some of that will be supported by hopefully an eventual pickup in cattle supplies, but there are other factors. And so we really don't have a level of confidence to tell you one direction or the other what we think prices will do in 2016, or 2017 for that matter.

Okay. Appreciate that. And then separately, just in terms of the Company/franchise balance here, I'm just wondering whether there's interest in buying in units from franchisees, or the other way around, whether there's a potential thought to sell some stores to franchisees, or is that just opportunistic and there's no key directional strategy one way or the other?

We're very much an operations-driven company at Texas Roadhouse. We like to run restaurants here. And we love our franchisees.

As you notice, we got plenty of money in the bank. We would like to buy some of our franchisees out. However, a lot of our franchisees are very much enjoying being a part of Texas Roadhouse and doing a great job. So we're comfortable where we're at, but any such change in that will be very opportunistic in nature.

Got you. Lastly, there was a lot of positive commentary last quarter on Bubba's. Any change in trend there? Or it seems like results are still exceeding expectation?

This is Kent. Results are still very appealing. However, we still only have four restaurants open. So I would say by the next quarter -- we'll open three more before our next quarterly report. I think we'll have more information at that point.

Great. Thank you.

And next we'll go to David Palmer with RBC Capital Markets.

Thanks. Question on throughput. Your dinner hour sales productivity has to be darn near the industry peak, and you had pushing at 7% traffic growth number. Were you doing anything -- were you focusing on any particular throughput initiatives during the quarter and in this year? And does it concern you where you're getting to on sales productivity, particularly at the dinner hour, being able to keep this up?

This is Kent. I think Scott might tag in behind. But we've got stores that do a lot more than our average. So we've got stores over $5 million, so I think we've got a lot more room in the building for productivity.

As far as why the comps are so great, I'm not going to question them. I'm just hoping they keep going.

There's no doubt it's something that we talk about, yet our highest-volume restaurants continue to grow traffic as good or better than our middle-volume or even our lower-volume restaurants.

One of the things we do, certainly, we've added seats to a lot of our restaurants. And certainly, it helps when you add seats, but a lot of our restaurants where they may be hitting a theoretical capacity on a Friday or Saturday, they seem to be able to push the waits out into Sunday and Thursday and Wednesday, and some stores Monday and Tuesday. So it's pretty remarkable. And as Kent said, we get out of the way and let them do their thing, and they continue to find ways to increase the productivity within their four walls.

Yes, in the last year, we've had a bit of focus on reducing the amount of time that a table sits empty after somebody leaves and we reseat somebody, so that might be part of it.

Then just a follow-up on Bubba's 33. Are there any early learnings about how that brand interacts with Texas Roadhouse? I assume that you designed it to occupy a different space in terms of the choice set. But have you found any impaction or interaction with the two brands, cannibalization?

No, I will tell you that in all four of the current restaurants, we are within typically a mile, at the most two miles, from a Texas Roadhouse, and we've not seen any negative sales associated with an opening of a Bubba's with a Texas Roadhouse. And the next three restaurants are all three within a quarter mile of a Texas Roadhouse, so we'll know more then.

Thank you.

(Operator Instructions)

And our next question will come from Will Slabaugh with Stephens Incorporated.

Can you walk us through how the quarter played out month by month, if you would? It didn't seem like you guys saw the deceleration in the quarter, or the quarter-to-date period for that matter, that most did. I'm just curious if there were any differences geographically or anything else you might be able to call out regarding weather, et cetera, whatever may have played out during the quarter.

Yes, January sales were 14.7%, and we did see benefit there of about 3%, 3.5% with the benefit from the New Year's Eve shift on the month of January. Then rolling into February, sales were 6.5%; March was 6.6%. Really nothing in those months I would call out. Overall, January might have seen some negative weather, but overall for the quarter, we really don't feel like there was any weather there to mention one way or the other.

Got it. Thanks. And just one quick follow-up, if I could, on pricing. Where were you in this quarter on pricing, and what are your plans for the remainder of the year?

Well, I can tell that you we were at 1.8% on pricing, which is what we took in early December of 2014. That's where we expect to be at least through December of 2015.

Got it. Thanks, Tonya.

And next we'll go to Sam Beres with Robert W. Baird.

Thanks for taking the question. Just in terms of the same store sales outlook, obviously, a lot difficult comparisons coming up here. How should we maybe think about holding the two-year trend line that you saw in April, or maybe what's the best way to frame up how to think about the comps as we enter the back half of the year?

This is Scott. Sometimes looking two-year comparisons is good. Sometimes looking at three-year comparisons is good. Sometimes neither one are good. So it really -- no two months are the same.

What I mean by that is, life changes, unemployment changes, gas prices change, what competitors do changes. The environment just changes. And so our system, our partnership-based system that rewards our operators based on the profitability of their restaurant certainly encourages them to find ways to continue to grow sales, and grow traffic specifically.

And our prices are going to be very competitive. We're very much on offense with regards to taking care of the guests and being very active in our community. I think we've got a great opportunity to certainly lap some of these tougher numbers, but whether it's more tied with two-year or three-year number, that's anybody's guess.

Thanks. And in terms of the restaurant-level margin outlook, I think before you had mentioned you think you needed a mid-single-digit comp to be able to hold margin percentage flat year over year. Is there anything in terms of the inflation outlook that's changed that would make you think that that mid-single-digit comp is any different than before?

No, Sam. This is Tonya. I don't think so. We're still comfortable with our 3% to 4% inflation guidance. So that's really the biggest variable, if you will. So I think we would still say that's true on the mid-single comp for flat margins.

Thanks. And then maybe lastly, just really quickly, how are you thinking about G&A for the whole year? And is that a line you think you can get leverage on for the full year 2015?

I think on G&A, it could be tough to get leverage. We will have an additional $4 million in costs on that line. We saw about $1 million of it this quarter related to the additional RSU expense I mentioned.

A lot is going to depend on traffic. We did get good leverage on that line this quarter. A lot of that was driven by the higher averaging of volume.

Also, we did some timing of expenses, and things like that also helped out a little bit. But I think there really isn't anything significantly different the rest of the year. A lot will just depend on comps and personnel, salaries, things like that as we continue throughout the year.

This is Scott. Certainly, the strong start to the year helps a lot with our ability to leverage G&A for the whole entire year. So certainly, with the kind of comps and sales we've had for the first quarter, that goes a long ways towards getting us there for sure.

Great. Thank you.

And next, we'll take a question from Keith Siegner with UBS.

Thanks. Scott, if I could ask a question about same store margin dollars and how that's trending. Obviously, there's a lot of cost pressures, but great same store sales as well. When these guys are running these boxes, what are same store margin dollars looking like year over year?

I don't have in that front of me. Let's see here. Margins per store week, well, they are up. Looks like they are up about 7% for the first quarter. So despite pretty high food inflation, it's pretty good increase in their compensation.

So if I step back and think about that, 7% increase in same store margin dollars year over year. The business is going really well; everybody is happy. It seems to me like those guys wouldn't be too concerned about whether or not they need to really add more pricing to the mix now. Would that be somewhat a safe assumption?

Sure. They'd be less likely to be overly concerned about price. Certainly, you have variations on that. What I mean by that is minimum wage related. So if the guys are in certain states where maybe they're making minimum wage changes, might be feeling a little more pain than other folks, so it does vary.

But no doubt, they're pretty happy right now. But again, we had a pretty good quarter with traffic being a pretty high number for this first quarter. And things could change second half of the year. And second half of the year, margins are certainly -- the margins per store week or dollars per store week get a little tighter. You might have guys having more pricing conversations.

Thanks a lot.

Our next question comes from John Ivankoe with JPMorgan.

Hi, thank you. New unit volumes were obviously very strong in 2014 and continued to be strong in the first quarter of 2015, with some variability around the same store sales. What's the multiyear outlook of sustaining that new unit volume?

In other words, when you look at the development pipeline over the next couple of years, are the sites that you're seeing have the same volume potential of what you've done the past couple of years and relative to the average? And I guess, Scott, I ask this maybe a little bit in the context of, I think, something that I've heard from you in the past, that the second 400 units that you open might not be as highly profitable, maybe from a sales perspective or an ROI perspective, as the first 400 units. Considering what the current trends are, is there any rethinking of that logic?

This is Kent. I think Scott will tag on. But I'm the one that approves the sites, and I'm already getting close to the end of 2016, and I'm still seeing some pretty nice sites out there. So I'm not too worried, at least in the next two years. After that, we'll see.

John, this is Scott. I would say a couple of things. One is, when we're doing our financial models on these, we definitely take a more conservative approach on the sales. We don't have a lot of wishful thinking, at least the financial people, on the sales of these restaurants because we do believe the second 400 will probably be tougher than the first 400.

That said, we may have a little bit of an advantage over maybe some of those who have gone before us, just because we're not doing that many relative to what we could be doing. I think we've talked about this many times where we might open -- well, we've said 25 to 30 restaurants this year, and a handful of those will be Bubba's, so let's figure 25 Roadhouses. We could be doing 50 financially, but we consciously choose not to.

One of those is not outgrow our people, our supply of great, talented people. But the other part is just making better real estate decisions. We continue to hope that that strategy continues to pay off for us, and we're just more careful about where we're willing to spend the money.

Thank you.

(Operator Instructions)

And next we'll go to Andrew Strelzik with BMO Capital Markets.

Good afternoon, everyone. If I could just ask about the other operating cost line, on a per-store basis, it took the biggest step up, or it was at the highest level that we've seen in several years. So I'm just wondering what is driving that, and should we expect that same level of increase going forward?

Hey, Andrew, it's Tonya. I would tell you that we did get a lot of benefit from the higher average unit volumes this quarter. And we also saw some lower utility costs, too. But with that said, I would tell you, gift card fees were up year over year. We continue to sell more gift cards in Q4. We continue to see a lot of redemptions in Q1. So we continue to see higher gift card fees.

And then also, I would tell you that things such as bonus, credit card fees, things like that, with higher comps, those are a little more variable expenses, so we are going to see those go up pretty substantially when we have comps like we do. So those are just a few of the things I can think of off the top of my head.

Okay, that's helpful. And I was also wondering if you could talk about the pace of unit openings for the year. First quarter was a little bit lighter than I would have thought, so I was just wondering what the rest of the year will look like in terms of pacing.

Well, I think we -- Kent mentioned we do have 17 right now, 17 units that are under construction. We expect those to open by the end of September. And then to get to that 25 to 30 range, you can back into what Q4 looks like. But I think right now, we feel like we're set up to hit the high end of that range on a full-year basis.

Great. Thank you.

And at this time I show no further questions in the queue. I would like to turn the --

I see one from Joe Wang with Fortune 50 Investments. Oh, he just kicked off. Sorry. Never mind.

No problem.

Go ahead.

That's okay. I'll turn the conference back over to the Management Team for any additional or closing remarks.

Just want to thank everyone for being on the call this evening, and we look forward to talking to you soon. Thanks a lot.

Thanks a lot.

That does conclude our conference for today. Thank you for your participation.