Texas Roadhouse Inc (TXRH) 2015 Q4 法說會逐字稿

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

(Operator Instructions)

I would now introduce Scott Colosi, President and Chief Financial Officer. You may begin your conference, sir.

Thank you, Don, and good evening, everyone. By now you should have access to our earnings release for the fourth quarter, ended December 29, 2015. It can also be found on our website at TexasRoadhouse.com in the investor section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance, and therefore undue reliance should not be placed upon them. We refer all of you to our earnings release and our recent filings with the SEC for a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements.

In addition, we may refer to non-GAAP measures. If applicable, 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, and Tonya Robinson, our Senior Director of Financial Reporting and Investor Relations. Following our remarks, we will open the call for questions. Now, it is my pleasure to turn the call over to our Founder, Mr. Kent Taylor.

Thanks, Scott. We're pleased to wrap up another year of double-digit sales and profit growth. Our operators continue to do a solid job, building sales, providing a legendary dining experience to our guests, and growing profits in the face of high beef and labor costs.

For the year, we increased comparable restaurant sales by 7.2%, which included a 5.4% increase in guest counts. Additionally, for the fourth quarter, we increased comp sales by 4.5%, bringing us to 24 consecutive quarters of positive comp sales growth. Heading into 2016, we have a lot to look forward to, including continued top line momentum, lower beef cost, and a strong development pipeline.

Our comp sales for the first seven weeks of 2016 are up approximately 4.4%, which is lapping an increase of approximately 12% for the same period last year. After several years of significant beef inflation, we look forward to some relief in 2016. We expect approximately 1% to 2% of food cost deflation, mostly driven by beef. Overall, we currently have fixed pricing on approximately 65% of all of our commodities for this year.

On the development front, we have assembled a substantial pipeline of new locations, and are on track to open approximately 30 company restaurants this year. Four of those locations are already open, 14 are currently under construction, and an additional seven are planned to start construction in the first quarter. I congratulate all of our operators on our outstanding results, and we look forward to seeing you all at the upcoming annual conference. Now, Tonya will walk you through our financial update.

Thanks, Kent, and good evening, everyone. For the fourth quarter of 2015, we earned $23 million or $0.32 per diluted share, which is a 23% increase over the prior year. Revenue growth of 12.3% during the quarter was driven by an 8.8% increase in store weeks, and a 4.3% increase in average unit volume.

For the quarter, comp sales increased 4.5%, comprised of 2.8% traffic growth, and a 1.7% increase in average check. By month, comparable sales increased 5%, 5.6%, and 3.1% for our October, November, and December periods respectively. Comps during the quarter were negatively affected by approximately 60 basis points, due to Christmas shifting from Thursday to Friday. As Kent mentioned comps were up approximately 4.4% for the first seven weeks of 2016.

For the quarter, restaurant operating profit increased 20% or $13.2 million compared to the prior year, and restaurant margin dollars per store week were up 10.3%. Restaurant margin as a percentage of sales was 17.6%, which was a 112 basis point increase over the prior year period.

Now, I will provide a little color on some of the expense lines for the fourth quarter, as compared to the same period last year. Cost of sales as a percentage of sales were 47 basis points lower during the quarter versus last year, primarily due to lower food inflation. For the quarter, our food cost inflation was approximately 1.6%, driven by beef costs.

Labor cost as a percentage of sales were 6 basis points higher versus last year, driven by wage inflation, higher turnover, and higher healthcare costs. These increases were almost entirely offset by average unit volume growth, and approximately $1.5 million of non-recurring items recorded during the quarter, related to health insurance reserves and payroll taxes. Other operating costs were 72 basis points lower during the quarter, primarily due to lower bonus expense and utilities expense, along with lower losses associated with a disposable asset -- disposal of assets versus the prior year.

Below restaurant margin, depreciation expense increased $3.2 million in the quarter versus last year, and increased 28 basis points as a percentage of revenue, to 4.1%. D&A costs were up $4.3 million in the quarter, and increased 39 basis points as a percentage of revenue versus the same period last year. Higher share-based compensation expense more than offset the benefit from average unit volume growth.

Pre-opening costs decreased $1.1 million on a year-over-year basis, primarily due to fewer restaurant openings this quarter, compared to the prior-year period. Finally, our tax rate for the quarter came in at 28.5%, which was slightly higher than the 27.7% rate last year. Our balance sheet remains strong as we ended the year with $59 million in cash and $26 million in debt.

Once again, we generated positive free cash flow during the quarter, bringing our total free cash flow for the year to $55 million. During 2015, we generated $228 million in cash flow from operations, incurred capital expenditures of $173 million, reduced our debt by $25 million, and used $58 million to pay dividends in repurchase stock. As a result, our cash balance was $27 million lower than the prior year.

Moving onto 2016, we updated several of our expectations since our last call. As Kent discussed, we are targeting approximately 30 Company openings this year, including approximately 7 above the 33 restaurants, and the timing of our 2016 development schedule is off to a very good start. We continue to expect positive comparable restaurant sales, including approximately 1.9% of pricing actions.

On the cost side, we currently have fixed price arrangements on approximately 80% of our beef needs for this year, and as Kent mentioned, approximately 65% of our overall cost of sales. As a result, we expect food cost deflation of 1% to 2% in 2016.

In regards to labor, we expect headwinds to continue due to ongoing wage inflation, along with state minimum and tipped wage rate increases. With the five-year extension of the work opportunity tax credit in December, we expect our tax rate to be approximately 30% in 2016.

Finally, we expect significant free cash flow generation, even after projected capital expenditures of $165 million to $175 million. Accordingly, we plan to continue returning capital to our shareholders through dividends and ongoing share repurchases. As we announced, our Board authorized an increase in our quarterly dividend payment, taking it to $0.19 per share from $0.17 per share last year, which is in 11.8% increase. Now turn the call over to Scott for final comments.

Thank you, Tonya. We're very pleased with our 2015 results. We achieved double-digit revenue and diluted earnings per share growth, while opening 29 new Company restaurants, reinvesting in and taking care of our existing restaurants, and returning over $57 million in capital to our shareholders through dividends and share repurchases.

As Kent mentioned, we've also entered 2016 with strong top line momentum. As we overlap some of our toughest comparisons from 2015 with positive comp sales, we remain confident in our ability to drive positive comp sales going forward. In addition to sales growth, food cost deflation provides the backdrop for potential margin expansion this year.

Our new Texas Roadhouse restaurants continue to perform well, and I'm pleased to say that over 80% of our 2015 openings had average weekly sales in excess of $100,000 per week in their first month. On the cost side, our average development cost last year for Texas Roadhouse restaurants was $4.7 million, which is about the same as last year, excluding two high development cost openings in Alaska, and one in the New York City vicinity.

For 2016, we do expect to see our development cost increase just slightly to approximately $4.8 million. Overall we remain very comfortable with the financial returns we're seeing on new restaurants.

In addition to Texas Roadhouse development, we opened four Bubba's 33 restaurants in 2015, bringing our total to seven at the end of the year. We're still in the early stages of Bubba's 33 development. Accordingly, we continue to fine-tune the model, both from a development cost and operations perspective. While it's too early to talk about specific results at our existing locations, we are confident in where we're headed with Bubba's 33.

In addition to domestic growth, we're excited about our international growth plans in 2016 and beyond. We currently have 10 international franchise locations in four countries, and expect to add four to five more stores this year, including our first in the Philippines. We also recently signed a development agreement with a franchise partner in Mexico, and look forward to openings there, as early as 2017.

Our number-one goal has been and continues to be staying focused on doing the right things for the long-term success of Texas Roadhouse. That includes keeping our nearly 500 managing partners at the center of our universe, and creating value for our employees, our guests, our local communities, and our shareholders. Speaking of 500, we're excited to be opening our 500th restaurant later this year.

Before we open up the line for questions, I do want to give a big shout-out and thank you to all of our operators for a great 2015, and for continuing to drive Texas Roadhouse forward. No doubt, our people are our biggest competitive advantage.

Speaking of another competitive advantage, I also want to congratulate our own Chris Jacobson on his recent promotion to Chief Marketing Officer for Texas Roadhouse. Chris has been with us since 2003, most recently as our Vice President of Marketing. He has taken our marketing efforts to a whole new level, and his leadership will continue to be a very, very important part of our future success. That concludes our prepared remarks, so Don, please open the line for questions.

(Operator Instructions)

Keith Siegner, UBS.

Scott, can you talk a little bit about maybe where the traffic gains are coming from? It is impressive to see this trend continue this way, is this throughput at peak hours, is it shoulders, is it other nights and days? So at the Roadhouse brand, where are you seeing the traffic gains manifest most? Thanks.

Keith, it is a combination of a little bit of everything. Our traffic is at peak revenue hours, it is at off-peak hours, it is during the week, it is the weekends, it's every aspect of our business, and driven by many different things. First and foremost, our people, and just great operational execution.

But certainly, we continue to add seats, bump-outs to our restaurants. We continue to expand our third-party gift card sales, certainly lower gas prices helps, lowering unemployment helps, that is probably the number-one correlation that we see with our sales momentum is unemployment, and all those things all come together to drive sales.

On the Star Bars, can you give us an update there? How that pace is going, how customers are responding? Are they as excited as they were last update? Et cetera, thanks.

This is Kent, it just helps freshen up the building without spending a ton of money, so I don't know if you can really correlate sales growth to those, I think it just gives a fresher look when they are in the bar.

We have done over 300 of those so far, I think we did almost 200 in 2015.

Thank you.

Will Slabaugh, Stephens.

Congrats on the quarter. Wanted to ask a little bit more about Bubba's.

I know you said it is obviously early there, but I wanted to see if there is anything else you could add in terms of color of what you have seen so far, and then getting to why the increased number of units now? I know it's just two more than what you talked about last quarter, but obviously it seems like you're feeling a little more positive, so wondering where that is coming from.

This is Kent. I think the biggest thing is we wanted to make sure that we didn't get sales taken away from Texas Roadhouse, so all the stores that we opened last year were in direct competition with Texas Roadhouse, and we saw little effect on the sales at Texas Roadhouse. I think that was the biggest reason we slowed a little bit last year, and are picking up a little bit more this year.

If I could follow up on that a little bit, could you talk a little bit about where you want to position this brand in terms of maybe high level? And then also physically, so do you want to put Bubba's next to a lot of the more mature casual dining brands and take share there, or was there a different strategy, maybe you had for the brand?

We just find that when we go into markets where Texas Roadhouse tends to do a little better than average, that we find we have nice sales out of the Bubba's. That is pretty much it. It is not rocket science.

Fair enough, thanks.

David Palmer, RBC Capital Markets.

Just wanted to follow up on that comment about Bubba's. You were talking about opening up new units somewhat closer to existing Roadhouse locations. Did you say that the impaction or cannibalization of existing Roadhouses was less than you were expecting in those locations?

Way less than I would have expected, correct. The menu is very much different than Roadhouse, and I think that is a big piece of it, as well.

So that will feed the strategy going forward, that these will be fairly co-located if you will, going forward?

I would see them in the same towns, but they do not necessarily have to be next door to each other. I don't want to put them exactly next door, because then we get to fight over parking, and that is not always fun.

Got it, thank you.

David Tarantino, Robert W. Baird.

A couple of questions. First on the sales trends you're seeing so far in Q1, they look very strong relative to the comparison.

So I was wondering how you are viewing that? Are you thinking that this is an acceleration in the business, or is there something maybe about the comparison that is maybe less challenging on the surface?

I would say our people do a great job executing, and I wouldn't take it much beyond that, to be honest with you.

I guess the question is, do you think that your underlying momentum has accelerated here in the first quarter, or do you think maybe that -- I know the 12%, Tonya if I recall, included some calendar benefit last year, and then also might have been lapping a soft period in 2014. But overall, would you consider this stronger momentum, and if so, what are your thoughts on the factors that are driving that?

David, this is Scott. I wouldn't say that seven weeks of sales data for us is an indication one way or the other, that the multi-year sales trends are strengthening or not. We wouldn't view it as such.

We just view it as, our folks are very competitive, they are still paid a big percentage of the bottom line in their restaurants. They have a lot of ownership in their sales growth, and they are not waiting around for the next advertising campaign, to figure out how they're going to grow their business, and grow their sales. So they get after it, and that is a big reason why we continue to get more guests in the building.

David, this is Tonya. I can tell you, I think we did have some overlap last year with New Year's Eve shift, it think it may have been around 1% to 2%. This year, we don't really have any calendar shifts going on in the numbers for the seven weeks, so and in that, last year was on a quarterly basis, not the seven week basis.

Got it, and thank you very much for that clarification. Last question, I think last quarter, you mentioned labor inflation outlook roughly 3% inflation, it could be the run rate for this year. Is that still your outlook, or has that changed in any way?

No, that is still what we are expecting going forward. We saw about 2.9% wage inflation in Q4, so that trend seems to be holding.

Great, thank you very much.

Chris O'Cull, KeyBanc.

My question is just on the development front. Kent, is the Company in the position to open more than 30 units a year?

I guess we probably could, but we like to get the best people to open our units, and we like to train them correctly. So we are able to be a little bit tougher on our selection of people, and I think that we want to stay focused in that direction, and not just open stores to open stores.

Assuming the Bubba's openings work out as planned this year, and you feel like you can accelerate that, would the plan to be to keep the 30-unit openings a year, and then mix them between the Roadhouse and Bubba's, maybe more Bubba's fewer Roadhouses?

Chris, this is Scott. We could see our total number of openings going a little bit above 30, if that was to be the case. If there were more openings of Bubba's, we still have a long runway at Texas Roadhouse, so we wouldn't see that falling off, that far that quickly, so you could see us open more than 30 restaurants, again provided that Bubba's continues to perform.

Would we do 50 stores? Probably not. 40 stores?

Who knows. That would probably be a pretty big number for us, given everything that Kent just said about finding and training great people, and also making disciplined real estate decisions.

I am assuming today, you are using the Roadhouse opening teams and construction teams for the Bubba's. How many Bubba's do you need, before you have a dedicated team to that concept, where you have to start building an infrastructure to support that concept?

This is Kent. Currently, we are now the point where we're using a designated Bubba's team to open the restaurants, but yes we do use our Roadhouse folks on the real estate side and development side, to open the Bubba's.

Do think, do you ever imagine having a separate team for that, in terms of real estate or development, or any other department?

No, no, I think our folks, they're already going to these various cities, and they are already very familiar with the cities we are currently in, so I do not see that.

Last one, is there any meaningful change to the prototype for Bubba's this year for these seven openings? I know the ones I have visited, there's a couple of bars in them. Are you going to keep the two-bar prototype?

We are going to be testing two new prototypes this year, which both of them are smaller than the ones you have probably been in. And yes, one of them does not have two bars, it has one.

Okay, great. Thanks.

John Glass, Morgan Stanley.

First on the deflation comments, and 1% to 2%, I think before you had said low single digits, so that is the low end of low single digits, I guess you could say. Can you maybe just break it down?

Are you getting the amount of beef relief you thought, other things are offsetting it? Or maybe just a little context to us, given that this is going to be a big beef relief year. Maybe that's not as big as some people had expected.

I can tell you, we are, as we said 80%, locked in our beef needs for 2016, so that does give us a bit of visibility on it, and based on that, we're in that 1% to 2% range. Some of that 1% to 2% would be the floating piece of it, the 20% that we are floating on our beef needs, but I think we have pretty good visibility on that, and are comfortable with the 1% to 2%.

Hopefully, there is some upside there with the 20% we are floating and some of the other items. We may have not have locked up yet in the basket, but I would say currently, we feel good about that 1% to 2% deflation rate.

Are you willing to say how much beef is down within that?

No, I don't think we would be willing to say that right now.

One of the things you cited on the wages, the labor line was higher turnovers. Is there something to call out there, or is that just a modest tick-up, or what is the dynamic?

It is not too much of a pickup, it is running up around 113% on our hourly group, versus I think it was around 108% last year, so not a big uptick, but I think it is just an indication of the overall job market, and unemployment being low, the job market tightening. We're hearing that from our operators, that it is tougher to hire people, they are paying a little bit more. So I think that is just a general indication of that, nothing that we are overly concerned about.

Just want to make sure I heard you finally, labor line, was there a $1.5 million labor benefit this quarter that offset some of the inflation you were talking about; is that correct?

Yes, there was.

There is about $1 million related to our health insurance reserves, and that is just like our general liability and workers comp. We true up to actuarial reserves on a quarterly basis, so that was related to that. And then about $0.5 million year-over-year relating to payroll taxes.

Okay, thank you very much.

Jeffrey Bernstein, Barclays.

Couple of questions on the beef outlook, perhaps. One, I'm wondering if you are seeing any increase in competition.

It seems like a lot of people are talking about steak prices and beef prices easing, and maybe getting more aggressive on steak and beef side of things. I'm just wondering what you are seeing anything along those lines, or would you expect to see something like that, if beef was to ease?

Jeff, this is Scott. We haven't seen anything, I would say, different in the last few months, than we have the prior year, from level of discounting or level of LTOs related to steak.

It doesn't mean that they're not out there, we just haven't seen them. We certainly haven't felt them based on our sales trends, I would say, but we don't have a specific measurement that tells us that there's more beef discounting right now than there was six months ago.

Got it, and when you think about beef prices in general, just wondering, what do you think is the ideal scenario in terms of steak prices, both on an absolute level, and year-over-year inflation or deflation? There's always that debate as steak prices come in, maybe people start shopping and cooking more at home. So just wondering where you would like to see things play out, or where do you think the ideal scenario is, from that perspective?

Smaller cows and cheaper prices.

I think there is a lot more to the experience than just the price of the meat or of the steak in a supermarket, versus at a restaurant. A lot of -- we sell a lot of hospitality at Texas Roadhouse. We have a lot of very friendly people at Texas Roadhouse, number one.

Number two, we think we do a great job, our people do a great job cooking our steaks. You get a whole experience coming to Texas Roadhouse, and we think that is a large reason why we don't believe a decline in prices at supermarkets is going to lead a lot of people to all the sudden start cooking from home versus going out to restaurants like Texas Roadhouse. Maybe they will trade away from some other restaurants, but we don't think so much at us.

Understood. No, I would agree. Just the last question, just you talked a lot about the comp already, but just wondering, people are getting asked a lot about their regional trends, and obviously, you have some stores in Texas and the south central US. I'm just wondering whether you are seeing any disparity in terms of market by market?

What we're seeing across the region is pretty consistent with what we have always seen. Texas continues to perform very well, compared to the entire system.

There are some areas within Texas, if you focus on the West Texas area, where we have a couple of restaurants, you may see some variability there. But overall, Texas continues to be strong. We haven't really seen anything that says otherwise.

Good to know. Thank you very much.

(Operator Instructions)

Andy Barish, Jefferies.

Just a question on the D&A line. It has been creeping higher. Do you expect that to continue, or is there a remodel cycle, bump-out cycle that has been absorbing some capital, maybe getting closer to the end of that?

I don't know, I think we will see that continue for a little bit, Andy, into 2016, for sure. I think just the level of spending we are doing at existing restaurants with the Star Bars, the bump-outs, things like that, and those things typically have -- those type of additions typically have a five-to-seven year life on them. I think two, just a little more spending on some of the restaurants, in prior years, just keeps that number up a little bit in 2016.

Got you. And then quickly on capital allocation, the buyback was definitely throttled down a lot in 2015, as you balanced free cash flow and dividend, and all of that. Is there any additional thinking on ramping up buyback, and maybe the debt levels going up a little bit in 2016?

Andy, this is Scott. We keep our decision-making on buying back our stock pretty close to the vest, and what price we're willing to buy it at, and at what price we're not.

I would say, we don't have an aversion to borrowing a little bit of money, if the opportunity presented itself to buy back more stock. We don't have a great aversion to that, as much as our EBITDA has grown over the years, so our financial ratios are exceptionally strong for us. So again, we can afford to be very opportunistic and patient in our buyback strategy, and we are going to continue to do that.

Thanks much.

Jason West, Credit Suisse.

Tonya, did you say that pricing this year was going to be around 1.9%? Because I thought it had been a 1.7% increase you had taken.

Yes, we took a price increase in mid-November. It came in at about 1.8%, and then we had a little bit of alcohol pricing in December, that got it up to that 1.9% number.

So that will be more of the run rate for the full 2016 then?

Yes, it will.

On the margin side, it seems pretty clear, you are going to get some leverage on cost of goods sold with that pricing and the commodity outlook. Do you think you can leverage any of the other major line items in 2016?

I think like you said on cost of sales, you would think with deflation of that level, you would definitely see some margin expansion there. I think labor is going to be tough. With 3% wage inflation, a lot of people depend on traffic, but that one could be -- could definitely -- would be tougher to do.

Rent, I don't think, changes a whole lot. Other operating, we are expecting about a 2% inflation on that line for 2016, so a lot will depend on traffic, and what we think we can do there, but you may have a possibility there, just depending on traffic.

What about on G&A?

G&A, I think you'll probably -- I think it could be possible again, depending on what the traffic levels come in at. I think from a healthcare perspective, we had a pretty big pop on the healthcare in 2015.

We don't expect to see that in 2016, so we're going to continue just to reinvest in what we're doing. G&A, typically, what we like to see there is that we keep that growth below revenue growth, and that is really going to be our focus for 2016.

Thank you. Last thing, just on the Star Bars, that has been a pretty big initiative in 2015. Can you give us any statistics there, in terms of how much you spend to do those remodels, and maybe what sales lifts you may see before and after?

I really couldn't give you anything on sales lift, because it is really difficult to tell what that does at a restaurant. I think we do see something there, it is just very hard to quantify. I can tell you at Star Bar, just with the TVs and the bar remodel, is about $20,000, and then there are some other things that may take the cost up a little bit, to more like $30,000.

Sometimes at the same time, while people are in their building, will redo their bathrooms or add some more storage, so it is hard to tell specifically.

Got it. No, that's helpful. Thank you.

Paul Westra, Stifel.

Maybe to start off maybe follow up on your commentary about marketing efforts. I know Chris's promotion was a little bit more of a title change, but you mentioned some potential efforts there. Anything new you can comment on, and maybe talk a little bit about the year-over-year spend that you expect for 2016 versus 2015?

Paul, this is Scott. It's more of the same for Texas Roadhouse. Much of our marketing is very local store based, and we have an army of local store marketing folks that have been developed, and continue to be developed under Chris' leadership.

And just a few national promotions that we typically run like Valentine's Day, Mother's Day, Father's Day, our gift card promotion at the end of the year, our Rib Fest promotion, that kind of thing. Those are pretty much our annual marketing calendar big items, and those will be the same for 2016.

What was the rough [of] spend for 2015?

About 1% of sales, maybe a little bit less than that.

Great, thank you. And maybe a little follow-up. On the beef locking, if you don't lock anymore, will 20% float every quarter, or will the floating piece be back-end loaded?

It is pretty much the same across every quarter.

Maybe another follow-up on the G&A line. Obviously, you had some great performance, and great bonuses, and you mentioned some healthcare, but we didn't see a leverage in 2015 versus 2014 and really going back to 2010. Is there something in the G&A line, maybe the launch of Bubba's here, that made be mostly behind you now, and maybe as you look out to 2016 and beyond, maybe see some of that growth lower than the overall revenue number?

Paul, this is Scott. There's a number of things that we have been investing in. Bubba's is certainly one of those, some infrastructure for Bubba's, international infrastructure has been another one.

And our international group is now profitable on an annual basis, so that is very exciting to see that, but there has been G&A infrastructure investments there. We have also made some infrastructure investments on more people in the field supporting our restaurants in certain positions, and it has all been G&A spending, and we think it all contributes to increased consistency in raising the bar in execution in our restaurants. We have been more on offense than anything else.

So all those big investments, they are starting to tail off as far as incremental, and so, provided that we continue to grow revenues at a pretty good clip, longer-term, we should be able to get a couple of tenths of leverage on G&A. I wouldn't expect a lot more than that over the coming three to five years. But we should be able to get something.

That's helpful. Lastly, can you give us the details of what remains on the share repurchase plan as far as dollars are available?

I believe there is about $80 million remaining on that authorization, which doesn't expire.

Great, thank you. Congrats on the great quarter.

Andrew Strelzik, BMO Capital Markets.

In 2015, there was a lot of variability in terms of the food cost inflation from quarter to quarter. Can you help us understand the pacing, front half, back half, that kind of thing, on the year-over-year delta?

If I were going through the quarters, typically summer are the higher months for beef costs. So if you remember last year, we saw pretty significant inflation last year in those summer months.

So those will typically be a little bit higher deflationary periods for us this year, Q2, Q3. But I think right now what we expect to see is all deflationary quarters, Q4 probably being the lowest, just because we only had 1.6% inflation this year in Q4.

You mentioned at Bubba's, that you continue to tweak the model. Can you talk about maybe even in broad strokes which you are seeing there, that you would like to see improved, or where you are focusing those tweaks, just so we can get a sense for the changes that are going on?

Those tweaks don't really happen in stores that open until later this year, so I don't have an answer at this point.

Okay, and then, lastly on the bump-outs how many stores remain where you might target a bump-out, even if it is over the next couple of years?

This is Scott.

We are about up to 150, 160 bump-outs so far, out of 460 some-odd Texas Roadhouses. We could do a lot more of the bump-outs. We haven't internally said what that exact number is, but we still think we can do quite a bit more.

What we're seeing happening is a lot of our lower volume stores have grown a lot, and continue to grow a lot. And they, today, may not be on a bump-out list, but a year from now, two years from now, three years from now, they are doing the volumes, we will put them on a bump-out list. So that question could end up being hopefully the majority of our system add seats, just as it grows with their sales and guest counts.

Do you have a number in mind for this year?

We could do anywhere from 20 to 40 this year. It just depends on permitting, certain legal approvals, construction, and so forth. Parking requirements. We've got that many approved internally, and then how many will get done again will depend on all of the other factors.

And then you've got to negotiate with a landlord sometimes, so that takes a while.

Great, thank you very much.

Karen Holthouse, Goldman Sachs.

One quick housekeeping question. What -- is there anything that should be on our radar in terms of the calendar shift related to Easter between first quarter and second quarter this year?

There will be, we expect a little bit of a calendar shift because it is going to fall between Q1 and Q2, with different quarters year over year. It's not much is what we're currently estimating. It's maybe 10 or 20 basis points benefiting Q1, and then the opposite, it will go the other way in Q2.

One other quick clarification on calendar shifts. The calendar shift in the quarter-to-date comp trend from the first quarter and the quarter-to-date comp trend in 2015, is that something that would be benefiting a two-year stack as well, or does that reverse this year?

You don't see whole lot of it reverse this year no. It's hard to quantify when you're looking at it, because you do have a lot going on with New Year's Day and then weather at the same time, Valentine's Day, weather at the same time. So it is difficult to isolate just what New Year's Day shift versus a Valentine's shift, but really nothing we would point out or quantify.

Okay, thank you.

(Operator Instructions)

Steve Anderson, Maxim Group.

Quick question. One of your competitors recently cited the importance of gift cards, shifting some of these sales out of Q4 and into Q1. Is this something that you are seeing, and want to get your feel on gift cards overall, if they are increasing at a faster pace than overall sales?

This is Scott. We haven't expanded any selling efforts, if you will, into the first quarter of gift cards, from what we have done historically. What we have done is, we have added some additional retailers over the years on the third-party side, so the supermarkets and drugstores and that kind of thing.

So we have continued to look at that and analyzed that, and that has grown quite a bit over the last three years, I would say, each year incrementally. So we are selling more gift cards throughout the entire year, in addition to the holiday season itself.

Okay, thank you.

Brian Bittner, Oppenheimer.

This is Mike [Tamis] on for Brian. What was the pricing in the fourth quarter?

The pricing in the fourth quarter ran about 1.8%.

Okay, great. And so you did about 40 basis points of COGS leverage in the fourth quarter with food cost inflation, so what do you think you could do in 2016 with the deflation? How do you think about that number?

Are you talking about the operator efficiencies and things like that outside of check and inflation?

Balancing your 1.9% pricing against food cost deflation of 1% to 2%. Where do you think COGS margins come in for the year?

We don't give that sort of specific guidance on that. Certainly our COGS are going to be lower than they were in 2015, no doubt at this point. We're pretty confident in our deflationary estimates on food cost, so they will be down.

The question will be, besides inflation, are we a little more efficient in managing waste, do we have any kind of mix shift in our business that results in a different food cost per item? Is there a shift in liquor mix, that kind of thing, which could move food cost around a tenth here or there.

Got you, thank you.

Brian Vaccaro, Raymond James.

Just a couple from me. Wanted to follow up on the last one on gift cards. Can you share how much your gift card sales were up either in the fourth quarter or 2015?

That is not something we report to you, but they were up by a nice amount, both especially at a third-party level, but we continue to also sell more gift cards at the store, at the individual restaurant level. So that was a big concern of ours when we went the third-party route, is that we would lose some momentum in our restaurants, but we continue to sell a lot of gift cards directly out of our restaurants, which has been very encouraging for us.

What we don't know is with gift cards, third-party or otherwise, is what percentage of those are truly incremental sales, or simply people buying gift cards potentially at a discount, and just coming in and using them in the restaurant, because a lot of gift cards are sold at a discount these days.

Or they get points based on where they are shopping, and they're getting points for buying those cards.

In terms of the distribution via third-party retailers how has that grown over the years, and is there still opportunity to expand that, or are we pretty close to being to, call it, fully distributed?

This is Scott. I don't know how much or how many retailers of significance that we're not in. I am sure there are some.

There are some that we pulled back from and we will continue to explore the marketplace, and what each retailer offers, because they do offer different fees to put their gift cards in their particular establishments. And so we will keep looking for additional opportunities, but I can't tell you exactly.

I was in some stores in December and they were out of our gift cards on their racks, so hopefully they will do a better job supplying those next year.

That's helpful. Wanted to switch gears following up on the guest experience, and can you speak to what are seeing in terms of guest satisfaction scores in recent quarters?

Whether it be the overall experience, service, food quality. Is there a component or two that stand out particularly?

We just look at our sales reports every week, and that is our ultimate indication of if we're doing a good job or not. We have a very robust guest relations department, and very robust social media monitoring, so we're very attuned to the trends in those areas as well, and so we feel very good about what we're doing, and the experience that we are giving the guests.

Fair enough. That certainly is a good indicator, Scott, I agree on that. Last one for me, in terms of the technology, can you give a quick update on the tests for pay at the table and the text-ahead waitlist abilities?

We are still looking at it, there is no eminent rollout planned of text ahead or pay at the table at this point. We are still evaluating the different options.

At some point, you will see us roll something, you'll see us roll in app, like you have heard from other folks, that you'll be able to get on our wait list, and you'll be able to pay, and you'll be able to order to-go and all of those types of things. That is under development, and that will be coming at some point. We just continue to evaluate it, and we're watching very closely what other folks are doing, and learning from them, as well.

Okay, that's helpful. Thank you.

That concludes today's question and answer session. At this time would like to turn the conference over to Tonya Robinson for any final remarks.

We thank you all for joining us, and if you have any questions or follow up, please let us know, and have a great week. Thank you.

This does conclude today's conference. Thank you for your participation.