Texas Roadhouse Inc (TXRH) 2016 Q1 法說會逐字稿

Good day and welcome to Texas Roadhouse first-quarter 2016 earnings conference call. Today's call is being recorded.

(Operator Instructions)

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

Thank you, Justin, and good evening, everybody. By now you should have access to our earnings release for the first quarter ended March 29, 2016. 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 also 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 Investors 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 I would like to turn the call over to Kent.

Thanks, Scott.

We're pleased with our operating performance this quarter. Continued sales momentum, new restaurant openings and commodity deflation contributed to an almost 10% increase in diluted earnings per share. Our sales momentum was driven by a 4.6% increase in comparable restaurant sales, on top of a healthy 8.9% increase in the first quarter of last year.

Our comp sales growth continues to be driven by increased traffic, which we believe is a result of our long-term focus on food and service at a great value for the guest. I am also pleased to add that for the first four weeks of our second quarter, comps have increased approximately 5.1% including the positive benefit from Easter shifting on the calendar.

During the first quarter, we opened seven Company-owned restaurants and one franchise restaurant. Additionally, we have opened three more Company-owned restaurants so far in the second quarter, along with our first franchise location in the Philippines.

Our development pipeline is in good shape, and we believe we are well on our way to opening 30 plus Company-owned restaurants this year. In addition to operating and developing progress, we also returned $16 million in capital to shareholders in the form of dividends and share repurchases. This continues to be a key part of our strategy to deliver long-term value over time.

Finally, I would like to say to our operators listening today how great it was to see you all a few weeks ago at our Annual Managing Partner conference. Your passion and commitment to our core values is the foundation for our continued success.

Now Tonya will walk you through our financial update.

Thanks, Kent, and good evening, everyone.

For the first quarter of 2016, net income increased 9.8% over the prior year to $35.6 million or $0.50 per diluted share. Our reported diluted earnings per share was negatively impacted by approximately $0.05 due to a pre-tax charge of $5.5 million or $3.4 million after-tax related to an agreed upon settlement of a wage and hour demand that is pending judicial approval.

Revenue growth of 12% during the quarter was driven by an 8.3% increase in store weeks, and a 4.1% increase in average unit volume. For the quarter, comparable restaurant sales increased 4.6% comprised of 3.2% traffic growth, and a 1.4% increase in average check.

Comps during the first quarter were negatively impacted by approximately 40 basis points, due to the shift of the Easter holiday from April last year to March this year. By month, comparable sales increased 4.1%, 6.2% and 3.6% for our January, February, and March periods respectively.

As Kent mentioned, comps for the first four weeks of 2016 were up approximately 5.1%. The Easter calendar shift had a negative impact of approximately 100 basis points in March, while the positive impact in April was approximately 150 basis points.

For the quarter, restaurant operating profit increased 18.9% or $16.4 million compared to the prior year, and restaurant margin dollars per store week were up 9.7%. Restaurant margin as a percentage of sales was 20.1%, which was 116 basis point increase over the prior-year period.

Now I will provide a little color on some of the expense lines for the first quarter as compared to the prior-year period. Cost of sales as a percentage of sales were 120 basis points lower during the quarter versus last year, due to lower food costs driven by beef.

Our food cost deflation for the quarter was approximately 1.1%. Labor costs as a percentage of sales were 6 basis points higher versus last year. While labor costs were impacted by wage rate inflation and higher turnover, these pressures were largely offset by average unit volume growth and the benefit of lower payroll taxes.

We continue to see core labor inflation in the 3% to 3.5% range in the first quarter. Other operating costs were flat compared to last year, as the benefit from average unit volume growth and lower utility costs were offset by higher gift card fees and higher general liability insurance. Below restaurant margins, depreciation expense increased $3.2 million in the quarter versus last year, and increased 24 basis points as a percentage of revenue to 3.8%.

G&A costs were up $8.3 million in the quarter, and increased 109 basis points as a percentage of revenue versus the same period last year. The driver here was the $5.5 million estimated settlement charge I mentioned earlier, excluding this charge, G&A as a percentage of revenue would have been essentially flat compared to last year.

Pre-opening costs increased $1 million on a year-over-year basis, primarily due to more restaurant openings this quarter compared to the prior-year period. Finally, our tax rate for the quarter came in at 30%, which was slightly lower than the 30.7% rate last year.

Our balance sheet remains strong as we ended the year with $96 million in cash and $51 million in debt. During the quarter, we generated $65 million in cash flow from operations, incurred capital expenditures of $34 million, and increased our debt by $25 million. We also used $12 million to pay dividends, and $4 million to repurchase stock. As a result, our cash balance was $37 million higher compared to year end.

With regards to 2016, our expectations have not changed since our last call in February. However, I will point out a few second-quarter housekeeping items.

While we continue to expect full-year commodity deflation of 1% to 2% on the cost of sales line, we expect deflation in the second quarter to be well above our full-year range given where beef costs were during the second quarter last year. Finally, on the G&A line, we currently expect costs associated with our Managing Partner conference this year to be up approximately $1 million in the second quarter compared to the same quarter last year.

Now I will turn the call over to Scott for final comments.

Thank you, Tonya.

I would like to start off by echoing Kent's comments regarding our conference. It was great to be together with all of our operators celebrating the year. Also, a special congratulations to Mark Hines from Fayetteville, North Carolina who is our 2015 Managing Partner of the Year.

2016 is off to a good start. Sales are up and restaurant margins are moving in the right direction, with food cost deflation for the first time in five years. And while we are pleased at our momentum, we understand the importance of maintaining our disciplined approach as it relates to consistency of food quality and the guest experience, as well as taking care of our employees.

As Kent mentioned, our development pipeline is strong and we see a healthy opportunity for growth ahead of us as we are already filling the pipeline for 2017 and beyond. Our solid performance in the quarter helped us generate over $30 million in free cash flow, which further strengthens our ability to enhance shareholder returns in the future.

In closing, we feel very good about the direction of our business and the depth of our teams, both in the field and in our support center. I do want to be clear that we do not take any future success for granted. We continue to challenge ourselves to improve every facet of our business and maintain a high level of discipline at managing our cash expenditures, whether they are infrastructure investments, capital spending projects, or share repurchases.

That concludes our prepared remarks, so, Justin, please open the line for questions.

Thank you.

(Operator instructions)

The first question comes from Brett Levy with Deutsche Bank.

Good afternoon. Just one point of clarification, and then a question. Did you say that the second-quarter beef will be significantly better deflation? I just wanted to make sure I heard that correctly.

Yes, that is correct. It will be above the 1% to 2% range that we have for the full year. So you take our second quarter, if you remember, we had such a high level because of cost inflation.

Should we assume something modestly better or approaching almost a reversal?

Approaching a reversal would probably be a little strong, but I can say it's going to be significantly above the high end of the range.

Okay. Have you noticed any competitive differences from players who are being additionally promotional or any changes out in the competitive landscape that you want to discuss?

Hi, Brett, this is Scott. We do not have any measure of competitive discounting or special offerings or any of that. We don't have a sense of that's increased, decreased, is the same. We just know we have not changed anything that we're doing.

I will let everyone else go into the queue. Thank you.

Moving on to Brian Bittner with Oppenheimer and Company.

Thanks, this is Mike Tannis on for Brian. So I just wanted one more quick clarification. Did you say that G&A in 2Q would be $1 million higher year over year? And then a follow-up question, thank you.

Yes, it would be $1 million higher just because of -- it's going to be up $1 million just because of conference expense. So conference expense for Q2 is coming in $1 million higher than it did last year.

That is because Miami has -- it's a little more expensive down there. So next year, we are in Orlando which is not quite as expensive.

Got you. Okay, perfect, thanks. And then the question is, you're still doing very strong comps in April, I think, up 3.6%, excluding the Easter benefit shift.

So is there anything you'd talk about -- it is a little bit slower than the first quarter? I think your peers are talking about similar type of trajectory. Can you talk about maybe what you think is going on, maybe there for you or for the industry? That would be helpful, thank you.

One thing I would point out, Mike, just on the April comp is that last year, April was up 8.1%. So if you look at that from that perspective as far as looking at the trend, what looks like a downward trend with the 3.6% number in April the adjusted number, if you look at it on a year-over-year, that might give you -- a two year stack it might give you a little bit different perspective.

All right. Thank you.

The next question comes from David Tarantino with Baird.

Good afternoon, and congrats on a good start to the year. I had a question maybe coming back to Bubba's 33.

I know that you're fairly early on in the development there. But I was wondering if you could give us a little more detail on how the first seven units, at least the ones that were open at the start of this year, are performing both from a top line, bottom line, and ROIC perspective if you're willing to share those details?

Actually we have nine open now, and a few more to open this year. Again, it is a relatively new concept and we are looking at our returns. I have got a smaller prototype that's going to be opening this summer to see how that one works out, but we are very encouraged by the results so far to continue opening more stores.

And if you're not willing to share specifics, could you talk maybe directionally about what you are seeing in returns relative to maybe what you have seen on your Texas Roadhouse locations?

Scott is really good at directional answers, so I will let him tell you.

Hi, David. I would tell you this, the sales picture, it has been pretty good so far for Bubba's comparable to Texas Roadhouse. The margins are substantially better than Texas Roadhouse. And of course, Texas Roadhouse is so heavy steak, high food cost item versus burgers and pizza, and then Bubba's has a much higher alcohol mix.

So Bubba's has a much lower food cost than Texas Roadhouse. And we need to have higher margins above us because the investment costs at Bubba's is roughly $1 million-ish greater than a Texas Roadhouse -- primarily buildings a little bit bigger, a little bit more equipment, more parking lot and so forth.

So as Kent mentioned, we are looking at different prototypes, primarily just to see how much smaller we can go on the Bubba's prototype and still bang out quite a bit of sales and maybe even increase the returns. So with the higher investment costs offset by the higher margins at Bubba's, I'd tell you the returns are pretty comparable to what we might expect out of a Texas Roadhouse.

Great. That is very helpful. If I could ask one clarification on the quarter itself.

If I look at the implied deflation it looks a little bit, in food costs that is, it looks a little bit higher than what you actually said, I think 1.1[%]. Are you still getting benefits from some efficiencies on the -- from an operator efficiency standpoint? If so, about how much of a benefit was that in the quarter and do you expect it to continue?

Yes, David, you are right. We are continuing to see some of those efficiencies, and it ran I believe about 30 basis points for Q1. So a little less than maybe what we have seen in the past, it's maybe a little too early to tell right now what the trend is going to be going forward.

I would expect that we're going to start lapping some of those as we continue on throughout the year. But there is no hard buttons that were pushed as far as switching them on, so we really couldn't say how we will be lapping that going forward. But I would imagine we will see that trending off a little bit here throughout the year.

Great. That is helpful, thank you.

Moving on to David Palmer with RBC Capital Markets.

Thanks, just to follow up on David's question about Bubba's. Do you foresee that the pace of development might accelerate because of Bubba's?

In the past, you have had a certain run rate and it looks like you are adding more Bubba's and it is causing the unit growth rate to creep up a little bit. I am wondering if you could see this continuing, particularly if you solve some investment hurdles that you're talking about in the future?

This is Scott. I would tell say that traditionally, we've been comfortable with opening 25 to 30 Company restaurants a year, plus some franchise restaurants, and of course that is beginning to grow via our international business.

But I could definitely see us going above 30, how far above 30 will be the big question for us. We still want to make sure we're making good real estate decisions. And we want to make sure we're making really good people decisions of who runs these high-volume, made from scratch, lots of employees, service-based restaurants. So we will see, but we are definitely comfortable getting above 30.

40, who knows? That would be a bigger question for us to get that high. At some point, I don't know if we would be able to bang out 25 Texas Roadhouses a year maybe, maybe not. And so we will just see where the future takes us, but we're going to stay disciplined on site selection and people for sure.

I guess my follow-up on that it is if you are at a point now where you are adding many of these Bubba's, often times within miles of your existing Texas Roadhouse footprint, what do you see the constraint being on ramping up that parallel track of Bubba's units? Is it a people resource thing? How do you think about that?

This is Kent. Since we're still tweaking with the Bubba's on every new opening -- a little bit here a little bit there, we want to keep it reasonable in the short term and then what happens in the long term we don't really know yet.

Thank you.

Next will be Keith Siegner with UBS

Thank you. My first question follows up on that a little bit. So if you think about the state of the asset base, some of these bump outs, some of the Star Bars, now maybe ramping up that unit growth a little bit, toying around with the Bubba's -- we have watched the CapEx run up from the low [$100,000] s to this [$175,000] -ish range.

Do you think -- could this also move up a little bit over the next couple years as you maybe scale up that unit growth like you've talked about? Is anything else we should be aware of, or is this a good run rate with some bias upward going forward?

Hi, Keith, this is Scott. I would say it could move up a little bit if we continue to open a higher number of restaurants each year. We have still got, I think many more restaurants we can bump out, and we still continue to have -- we probably are going to have one or two relocations a year going forward, as old as our system is.

On top of that, we have started buying more and more land for additional parking for our restaurants, which I guess is a good problem to have for us. So we have got plenty of things to spend money on.

And then lastly, our system, like any restaurant company, we continue to get older and you got to reinvest in the access base to keep things fresh and relevant for the guest. So I definitely don't see -- it is probably more likely that the capital spending numbers will only go up versus staying flat or coming down.

Perfect. And one other question, if I've got it right, I think you were one of the first concepts to test the tabletop tablets years ago. But it seems like you maybe took a pass on them as far as Texas Roadhouse goes.

I was just wondering, is it not right for the brand, is it not the right time? Are there any of these other tech tools that you think might make more sense for you folks? Some update on how you're thinking about watching all these other brands make some of these adjustments, which ones might work for you.

Well, the tablets just really weren't that friendly, and they did not do a good job of upselling our guests on other items. So that's my version. But Scott has probably got another one.

I would say with regards to tablets, it depends what you want them for. So if you want them to help the guest pay their bill. There is different technologies, and some of those involving the guest paying directly from their phone, for example. So we do not want to go out and have tablets in 500 restaurants times 60 tables a restaurant that we're dealing with, when people are going to pay from their phones, hypothetically.

So we wanted to see where things shake out. We are still going to have three table stations. We want to have servers very much straightforward in front of our guests taking their orders for them. We are in a service hospitality business, and we're going to stick to that model.

So we're absolutely looking at technology. We are about to start testing an app that other concepts do have, that would enable our guest to get on our call ahead list, that would enable our guest to pay their bill, and also order to go online.

So we will be testing that soon with some anticipated rollout probably sometime later this year or next year. But certainly, Keith, the pay at the table remains the most interesting piece of that whole dynamic for us at this moment.

All right, that's clear. Thank you.

The next question comes from Jason West with Credit Suisse.

Thanks, guys, just following up on Keith's question there. I guess on the to -go side, you guys have always deemphasized that, it feels like. Can you talk about where your mix is there, and if you feel like maybe there is an opportunity to be a little more focused on that locally?

This is Scott again. I would tell you, our mix traditionally has been very low and to go. Less than 5% of our sales are to go sales.

We've got a few stores that are higher than that. We just want to make sure we give the guest a good experience with to go, should they choose to want to pursue that.

Again, some of our restaurants do quite a bit of to go sales volume, and we want to be proud of the to go experience that we offer. At the same time, we much prefer our guests to dine in with us, because again, we're selling a lot of hospitality. We have a high service component in our business, and we would much rather the guest come in and dine with us than take the food home.

Okay. Just a separate question on the sales trends. Can you guys explain why the Easter shift was so much higher in terms of impact in April versus the March impact, and can you talk a bit about what you are seeing out there?

If there has been any change that you feel like in the underlying trend that some others in the restaurant industry have talked about. Whether there has been any weather headwinds in April, or any particular regional variances such as maybe Texas, oil markets, those types of things would be helpful.

Sure, Jason this is Tonya. The only reason for the difference on the March versus April is that March is a five-week period for us, and April is a four-week period. So that is really what's driving that difference.

Otherwise though, I would tell you we did not really see anything in April different than we have been seeing. Nothing regionally that we would point out.

Texas is much the same story, as we've talked about before, as far as there's a few stores in West Texas that see that impact from the economy. But other than that, Texas remains strong. So nothing that we would point out there.

Okay.

This is Scott. As far as overall sales trends goes, we just don't feel like we have experienced a weakening, if you will, in trends maybe like some other companies have. We also haven't changed our food, we haven't raised prices to the level of inflation and we haven't changed our basic labor standards.

If anything, we have ramped up our investments in some of these things, and improved our level of service or improved the quality of our food and stepped it up a notch. And had an increased level of investment in servicing our guests, and we think that is why we continue to generate the sales growth that we do.

Okay. Can I slip in one quick one on the balance sheet? Just curious why you guys drew down the revolver in the quarter? Didn't seem to really need the money, just didn't know if that's where you want to keep the cash balance at this level or was there any particular timing issue for that?

Jason, this is Tonya. There wasn't any particular timing issue. In Q4, we do get a lot of cash in the door with gift card sales which is what precipitated the paydown. So, we went on and drew that back down in Q1, nothing else driving that.

All right. Thanks.

Moving on to Jeff Farmer with Wells Fargo.

Great, thanks. Just another follow up on commodities, because it looks like it will impact your quarterly EPS growth cadence, if I have this modeled out right. But, Tonya, I think you said 1.1% deflation in Q1, I'm taking a guess here, but let's call it mid-single digit deflation in Q2. Even if I'm close, could that mean a flattish commodity basket in the back half of the year?

No, I don't think you would see flat necessarily. Q4 is probably where you get the closest to that just because of the amount of inflation we had in Q4 last year.

But right now, based on what we're seeing, we expect some deflation in Q3. Just the biggest piece of it is going to be in Q2, the biggest piece of deflation for the year. But we feel very comfortable with the range that we have out there the 1% to 2% range.

Okay, and then just one more of Bubba's. A lot of questions on this one today. But when it came to the decision to accelerate the development for that concept, what have you seen with Bubba's that going back five or six years ago that you didn't see with Aspen Creek? You guys just talked a lot about the financial metrics, but what exactly was it about Bubba's that Aspen Creek did not have?

This is Kent. What I like about Bubba's is that there is less intrusion to the sales of Texas Roadhouse because the menu is further away from Roadhouse than say Aspen Creek, and with burgers and heavy appetizers and kind of a sports theme. And we think we are little more well defined with Bubba's in a segment that has less competition, so that's why the choice was to go with Bubba's and [sell]Aspen Creek.

Thank you.

And next will be Jeffrey Bernstein with Barclays.

Great, thank you very much. Two questions, just one following up on the food cost side of things. I'm just wondering if you can give an update, I think you had said last quarter that you were 80% locked on beef, I think I was 65% for your overall basket.

I'm just wondering where that stands, and kind of tieing that in. We have heard some companies already start to talk about the broader the commodity deflation in 2016 might ease as we move through the year, or at least going into 2017 and turn back into inflation.

I would think you would be somewhat a little bit more insulated from that just because maybe the beef has the longer cycle. So I'm wondering whether you could comment on any reason to believe why beef would not continue to be a nice deflationary tailwind going through 2017 as well? And then I had a follow-up.

On the question on what were locked, it's still about 65% and 80% that you referenced, so 80% on beef, 65% on the overall basket is where we are on that side of things. As far as the beef outlook going forward, I would say we are probably hearing much the same that you are hearing.

I think a lot depends on the cut of beef you're talking about, what other things maybe look like as we head into the back half of the year. Not as impactful for us this year, just because we are locked up on so much of it, but heading into 2017 a lot will depend on exports and on other things going on.

Okay. And then just on the labor side of things, I think you said you were still comfortable with the labor basket up 2.5% to 3%. I just wanted to confirm that was the case.

And then, I know pricing is decision that's typically made at the very end of the year. Should we assume at this point that the high 1% range, that I think you've guided to in the past, is what we should expect for the next few quarters; and presumably some at least deleverage on the labor line for the next few quarters based on that?

Labor is definitely going to be a headwind. And actually, right now from inflation perspective, we saw about close to 3.5% on core labor inflation in Q1, so actually that is a bit of an uptick from where we were in Q4. Hourly turnover for us is up a little bit, I believe it was around 119% in Q1 and we're in March.

So we continue to see a tightening job market, we continue to hear that from our operators. We don't think that, that trend will change much as we head into the rest of 2016. From a pricing perspective, that is obviously a big part of the decision when it comes to pricing is what the labor inflation looks like and just what the noise is out there at that time on minimum, tipped wage increases, DOL regulations and all of that talk that everyone is hearing.

Got it. But the fact that you were able to hold your labor line relatively flat in this first quarter would seem like that was surprisingly good considering the inflation you are seeing. I am assuming that you would expect to see more deleverage as we move through the rest of the year, based on the pricing we're talking about and the labor inflation you're talking about.

Yes, a lot will depend on traffic as far as what we will end up seeing. Check, we've got about 1.5% to 2% of check for the rest of the year. But a lot will depend on traffic, and if that 3% to 3.5% hold on labor inflation the rest of the year, we will see where the traffic trends come in, how much that helps.

Understood. Thank you.

Next will be John Glass with Morgan Stanley.

Thanks, just a few follow ups. First, did you guys say what pricing was this quarter? I know you still intending I think you said last quarter 1.9%. Is that still the intention for the year?

Traffic was around 2% -- or I'm sorry, pricing was about 2% in the quarter. Check was around 1.4%, so we did have a little bit more negative mix in Q1 that we typically see. Normally we run, I would say, in the 20 to 40 basis points range on negative mix.

But I think a lot of what was driving that, if you go back and Q1 last year, we actually had positive mix last year of about 30 basis points. That did not happen the rest of 2015, it actually went back to what we would call a normal range and that is what we are expecting here for the rest of 2016. We think that 75 basis points may be a bit of an anomaly, and we will see that come down a bit.

I'm sorry, pricing was 1.9% this quarter or what was it?

Pricing was around 1.92%

Got it, okay, thank you. And then a couple other questions. One is, do the overtime rules apply to you? I know we've talked about it and other retailers or restaurants haven't talked about it, but do you have an issue with overtime pay and is there a way to work around that?

Hi, John, this is Scott. The new Department of Labor regulations, from what we have heard, will have a potential impact on quite a few of our fellow roadies. Both folks in our restaurants, and folks here at our support center.

So we have been crunching a bunch of numbers and looking at various scenarios of how we might adjust or adapt to the new regulations. One thing that is different about us, than many, is we have a lot of incentive compensation at Texas Roadhouse.

So a number of folks get a littler bit lower base salary, but they get a lot of incentive compensation. And it doesn't sound like the Department of Labor is going to give us much credit for the incentive compensation that we pay, so we may have to change a few things with some of the folks, again, both here in our support center and also folks that run restaurants for us.

Which would mean increasing the base salary and decreasing the bonus piece.

So net-net though, you don't think it will impact of business, it's just a question of how you allocate the compensation?

No, I think there will be some impact. The question for us is just how much. That's the big question for us.

Right now, there will be some impact, we just haven't decided how far we're willing to go. When Kent says we will reduce somebody's incentive compensation, we have decisions to make. Will we reduce all the way to zero, will it be 25% of what they used to get, 50%, those kinds of decisions that we're going to have to talk about and make.

We will not reduce their overall compensation, we'll just shift from one basket to another.

Got you. And the $0.05 charge this quarter, is there any ongoing of implications for that or was that a just a one-time legal reserve and now it's all done?

What was your question, John, again?

The $0.05 charge that you took this quarter, is that just a one-time incident or was there any ongoing implications for that for the P&L?

Well if they closed all the law schools, it would probably be -- no, I'm just kidding. I would say that the $5.5 million is a settlement -- it represents an estimate of a settlement that we have reached, but it's still pending judicial approval.

So I can't really comment any more on it than that. Just to say that we did record a $5.5 million estimate for the settlement of this matter. That is one matter, nationwide class matter.

Thank you.

Moving on to Karen Holthouse with Goldman Sachs.

Thank you for taking the question. I actually wanted to clarify some of the commentary on the calendar shift, where it sounded like last quarter, the reverse was actually expected, that it was going to be a benefit in Q1 and a headwind then into the second quarter. So I'm just curious why that played out differently than anticipated.

No, Karen, we expected it to be a negative in March and then a benefit in April the way it played out. So it played out the way we expected it to.

Okay. And then also, it looks like there's a little bit bigger of a gap between the comp base average weekly sales and the AUV average weekly sales. I'm just curious if there's -- what's driving that or if that's impacted by different concepts being included in different sets of those or in those two different [bases].

I would tell you that, that is just Texas Roadhouse restaurants, so there's no other concepts in that number. A lot of it is the size of the group and the timing of the opening sometimes plays a part in what you are seeing. The difference between those two numbers.

But it is the biggest gap we have had in some time. And so absolutely we are watching this very, very closely. Again, with the disciplined approach we have to opening restaurants.

The volumes are still very good. So for that group to do $88,000 a week, that is still a very good volume and still good returns for us. But you're right, there is a gap there and we are looking at it, and talking about it and making sure it is not the trend going forward. But more of an anomaly, as Tonya mentioned, based on sometimes when we open stores and class years, they're all a little bit different, that kind of thing.

Thank you.

Next will be Chris O'Cull with KeyBanc.

Thanks, good afternoon, guys. Scott, have you guys seen any push back from guests in the markets where you raised the price of the entry-level sirloin above $10?

No, as a matter of fact we have been very -- say very surprised, but very happy with the results in those markets. And keep in mind, those markets are where you have had minimum wage go to $10, $9, 50% increase in the tip wage in New York State, that kind of thing. And we're still quite a bit below any relevant competitor for that particular item.

So we're content with the results so far. But it is still early I would say. It hasn't been that long, and we would not be claiming victory in breaking the $9.99 price point barrier.

Are these stores actually seeing some mix benefit, maybe people trading up to the bigger portion steak?

Hard to tell at this point, it is just too early to tell because there's other things going on in the menu. As Tonya mentioned, we had negative mix overall just quarter to quarter. So we will probably have a better sense of it probably three to six months from now where we're really shaken out.

I believe you guys added some new combo items to some of the stores, are those in all the Company stores?

Yes, they are in all the Company stores now.

And part of that was adding some smaller steaks on the combos which could have potentially affected our mix a little bit.

Okay, so the combos could have actually been a -- are they intended to create more value, which could have hurt the check a little bit?

Actually right now, it is really -- like Scott said, it's really hard to read into those numbers right now because of the anomaly of when you're looking at last year. So I am little hesitant to even comment too much on it because it is hard to say, but the combos look like they are helping a bit on mix.

So flat to helping a little bit. So we are not seeing anything from the addition of those that causes us to think anything differently. But I think Q2 will be a little better picture of things once we get into a normal year-over-year comparison.

Okay. Were the combos added during the first quarter?

Yes, they were added in November when we took the price increase.

Okay, great. Thanks, guys.

Next will be Will Slabaugh with Stephens Inc.

Thanks, guys. I just wanted to follow up on the food costs, and I understand you're rolling over a much easier comparison from last year in the second quarter. But if I look at your food costs from what you just saw in the first quarter versus what you expect going forward, should we expect that, that cost of sales percentage should hang around the range we just saw? Or are there maybe some things to think about as we work through the year seasonally or otherwise that I'm not thinking about?

I would expect that you may see a little bit of an uptick there just with the level of deflation we could expect to see in Q2. I would not be surprised to see a little -- I'm talking about cost of sales as a percentage of sales.

Right, that's helpful. And then lastly, just any quantifiable impact this quarter from the bump outs, and then any update you may have as far as how far along you are versus the potential there?

We have had about -- as of the beginning of the year, 40 or so that have been approved and we have approved probably 10 more since the beginning of the year. I don't know for sure exactly how many we will get done this year. I think we only got done, I think it was 15 last year, so sometimes it takes longer than we think for permitting and legal approvals, and third parties, and all that stuff.

So, I would probably say close to 20, 25 maybe this year. And I think just given where our same-store sales have continued to grow to, it continues to enlargen the pool of potential bump-out candidates.

So a lot of our managing partners they want to get bump outs. We talk to them about it, and we say hey, you need to be at a certain guest count levels or sales levels to qualify for a bump out and they go out and get after it; and if those guys keep qualifying for it we will keep approving bump outs. So we may get to the majority, the vast majority, of our system one day down the road, of course it will take us a number of years going at a pace of 20 or 25 a year.

Great. And lastly, anything to speak to geographically that may have changed? Or have you saw anything get in Texas or elsewhere that may have been stronger or weaker than maybe what you've seen historically?

For the most part, we really have not seen anything dramatic. The Northeast has been a little bit better than it has the last couple years in comparison to the rest of the country. And as Tonya mentioned, there is a few places in Texas, West Texas specifically, a little bit South Texas where there's a little bit of weakness, but there's other parts of Texas for us that are still very strong and we don't view it as a big deal.

And sometimes they might have before had a t-bone or a bone-in rib eye and maybe they're ordering a smaller steak, but they're still coming in.

Great. Thanks guys.

(Operator instructions)

The next question will come from John Ivankoe with JPMorgan.

Hello, thank you. I'm sorry, I have to ask a follow up on the very last question on COGS. Tonya, in terms of the second quarter of 2016 relative to the first quarter of 2016, did you say that we should maybe expect a slight increase relative to the 33.9[%] posted in the first quarter ignoring the second quarter of 2015? If you could be more specific in guidance than usual on that line since it's so important.

Sure, no problem. You may see a slight uptick, but I don't think you're going to see anything that is very different on that line. I think the bigger thing in Q2, again, is just going to be the amount of deflation we're going to see in Q2 because we are overlapping such a high inflation number.

And Q2 typically is our highest quarter of beef costs, and it definitely was last year. So I think that is the bigger driver of anything that's going to happen in Q2, and I think we're very comfortable with that 1% to 2% deflation number, 1% to 2% deflation range for 2016.

John, this is Scott. It's really hard to say because on one hand we are locked on a lot of our food cost basket, but on the other hand there's a certain percentage that we are not. And so it's moving around, and to the extent it moves up or down a little bit and beef is -- 80% locked on beef, so we still have some beef exposure, if you will.

And then of course, if there was to be some mix shifts, or continued mix shifts, that could impact us a little bit to the good or to the bad depending upon what items we're talking about. So my best guess would be close to Q1, you would hope within a few tenths of Q1, but depending upon what happens, all the variables I mentioned, it could swing a little bit more to either side of that.

And lastly, just to add onto that, John, I would say what we were talking about earlier with the efficiencies and what your assumption there is on how those roll off over the course of 2016, if they roll off could play a pretty big part too in the impact on that percentage.

Okay, I understand. And also, relative to a previous question a while back, in terms of the average weekly sales relative to same-store sales. The detail that you guys so nicely provide in your release, the average weekly sales class was down both for units open 6 to 18 months and units open less than 6 months. So it's actually a pretty big chunk of units across both classes of stores open less than 18 months.

And I know, Scott, you did mention that you guys are looking at it. But considering that I don't think we have seen a negative year-on-year change of both of those store classes in a while, is there any more type of market analysis, market penetration type of market that you can provide other than just things like timing and location size?

When we look at the specific stores, there's sometimes a story on the stores we opened, where we opened them at, what types of markets. Were they in the northern US and you're talking the wintertime, or were they out West in very small towns. So sometimes it depends where we are opening them.

The other thing is, last year, we opened two stores in Alaska. They opened with pretty high volumes out of the gate. So we're lapping some of that, but yes, we look at specific stores and we ask ourselves, okay, is there an issue?

Some of the stores where we've got lower sales that are impacting those numbers had lower investment costs as well. So the returns are still pretty good, despite the sales being a little bit lower.

Is it your impression that those store classes stabilize year on year as we go throughout 2016, or should we model declines as we finish the year?

I am looking at the sales sheet here, and I feel pretty good about a few of these stores coming up. So I wouldn't do that.

The stores we have opened this year have started off pretty strong. But you don't know because sometimes we have smaller honeymoon curves, sometimes we have bigger honeymoon curves. So you don't know.

But every class year is a little bit different, and having been here a long time we've had some years that were better than others. But like I said, we look at each individual store to gauge, are we okay with what these sales are settling in at or not. And if we weren't okay, trust me, we would slow down the number of Texas Roadhouses we would open.

Understood. Thank you.

Our next question comes from Andrew Strelzik with BMO Capital Markets.

Good afternoon, everyone. My first question I wanted to ask about real estate. On one hand, you seem like you were emphasizing from a development perspective that you were well into 2017 and beyond, so I was thinking maybe you might be further out than normal from a development pipeline.

And then on the other hand, you mentioned a couple times how closely you're looking at the real estate and the importance of the real estate. So I'm just wondering, what are you seeing from that perspective? Have you seen a change, are you indeed farther out than you normally would be this time of year, just trying to flip the two sides of the coin there?

Yes, this is Kent. Yes, we're a bit more into 2017 than we, say, were a year ago in 2016. It ebbs and flows over time, so it's nothing significant.

Okay. And then one more question on beef. Just conceptually, and I understand the uncertainties with regard to 2017, but if we wanted to take a more optimistic view.

If you were to see a meaningful level of deflation above and beyond what you were able to lock in this year, does it change at all how you think about managing your exposures to beef? Is it harder to lock in, are you more apt to float more, or maybe if there's a period in history that you can compare that to, or was it really all the same?

This is Scott. I would tell you say back, I think it was maybe 2009, 2010, there were pretty big declines in beef prices and we locked in virtually all of our beef, I believe back then. We may have not had it all locked in by January 1, but maybe by March 31 we did.

And I think we'd much prefer to have our beef prices locked in for the year and have that stability for our system. We'd much prefer to go that route. So that's all I can tell you right now.

Okay, great. That's helpful, thank you.

And next will be Paul Westra with Stifel.

Great, thanks. Just two quick ones here. Comment or a question on the depreciation line, it just seems to be creeping up high single digits on a weekly operating basis. Can you talk about maybe what's driving that number up on a per store or a per week basis?

Paul, this is Tonya. A lot of it is just our ongoing investment/reinvestment in our stores that has been taking place probably over -- probably as many as the last five years we have seen an increase in that.

So if you look at it on average, it is probably -- we're spending about, call it, $125,000 per store per year just on existing restaurants. And I think the depreciation creeping up is just a manifestation of that increased spending and as we are writing those assets off. So I think we continue to see that because I feel like the [$123,000] per store per year, that is going to be where we stay, if not even go up a little bit as we continue to have older stores in the system and things like that.

And you also have in addition, everything Tonya just said, you have with Bubba's, albeit small, but you've got a lot of shorter-term depreciation when you've got 65 televisions, and the sound system, and the whole bit, you've got a lot of asset spending that's depreciated over a very short period of time relative to a Texas Roadhouse. And then with both concepts, the development costs are quite a bit higher than they were just a few years ago.

And then you've got add the bump outs on top of that, and the Star Bars.

So we've just been spending a lot of money, and of course our sales have been pretty good. I think in partly as a result, so we're comfortable with the depreciation going up to a point. I will say to a point.

Okay, that's helpful. And then lastly, where has the check creep come from within the menu or is there something going on regionally perhaps? I know you talked about the slight negative normality of it, or is it because just a calculation when these stores enter the comp basis don't they?

Are you talking negative mix?

Negative mix, I'm sorry, I meant mix, yes.

Really the biggest negative mix item has been alcohol for us, and the second negative mix item I would say is soft drinks. So entree mix is actually pretty small.

Negative mix is pretty small for us, we've lost a little bit in the appetizer line but the biggest piece has been alcohol. Again, we do not know if that something that is going to stay or is a one-time thing or a short-term thing. So again, we're also watching that as well.

Okay, thank you.

Part of that could be with more families dining with us, so it could be that as well.

Okay.

Next will be Brian Vaccaro with Raymond James.

Thanks and good evening. Just a few quick ones if I could. Scott, just circling back on the new unit or the unit economics, can you remind us what you are expecting in 2016 in terms of your average fully capitalized investment cost?

Around $4.8 million-ish fully capitalized including pre-opening expense. So with pre-opening running $600,000 to $700,000, and that includes 10 times the first year's rent.

Okay. All right, that's helpful. And quickly back to the first quarter comps, the spread between Company and franchise widened out a little. Anything you'd call out that you attribute that to? Is that just regional differences or anything in terms of initiatives, et cetera that might be driving that?

Nothing I would call out between the franchise and the Company-owned units.

All right. And then just the last one, wanted to ask about the Star Bars program. How impactful has that been to your business, and how many are planned for 2016? Thank you.

I would say it's got to be close to 100 planned for 2016. The impact, we don't know quite yet. We have not done a full in-depth study of the Star Bars, we are going to be able to do that pretty soon because we would have had enough history behind the Star Bars.

It is tough to isolate just the Star Bar change because many times we're Star Barring at the same time we're bumping out a restaurant. We may also be reskinning, retinting buildings, reconstructing parking lots, a whole bunch of stuff at the same time we're doing Star Bars. So it is a little bit tough to isolate the Star Bar.

Anecdotally, I would tell you, it certainly seems like there's a lot more guests eating at the bar than what I have seen historically. That could be another reason for some challenging alcohol compares since, because they're eating more versus drinking more a the bar, but again, that's just anecdotal. We haven't done a full index study on it.

We do believe that the Star Bar itself is a big part of keeping our concept and brand relevant in 2015 and fresh for 2015. So the bar is center of the energy universe within a Texas Roadhouse, so we knew we needed to take it up quite a bit from the original design over 20 years ago.

If you've had the same haircut for 20 years, you might want to mix it up a little bit.

Understood. All right, thanks guys.

Next will be Matthew DiFrisco with Guggenheim Securities.

Some of us can't change our haircut though, nature prevents us from. So perfect segue way right into my question. Guys, great quarter, I just was curious, quick and easy here.

On the bump outs, I guess it looks like also you're doing -- would it be correct to assume that you're also getting a little bit more efficient on the execution of the store as far as you're not adding as much labor as you are potentially are adding out on the bump out on sales there? I guess there was a question earlier on the call about the surprising amount of leverage you had on labor despite the wage pressure you are seeing out there.

Is that also indicative of the bump outs? And is that something we could expect going forward that the bump outs with capacity coming on, don't necessarily have a whole lot of operating costs in there, including labor, which produces some pretty good efficiencies?

You need more servers if you have additional seats, and then the kitchen maybe is not affected as much as the front of the house.

It helps, but the number of bump outs we have been doing the impact is very, very small to the system as a whole. So I would not say it has much of a discernible impact on our labor productivity.

Our guys get paid 10% of the bottom line still, so they have an incentive to do the best job they can in managing their cost structure and while balancing that with staying on offense from a guest experience perspective. They are also very competitive with each other, and they share a lot of best practices with each other on how they staff and schedule their restaurants.

Okay. And then just a follow up on -- I think John had a question with respect to the overtime legislation. And I'm just curious of how many employees on average do you have in your store that is that salaried employee making between that $24,000 and $50,000 right now that might not be overtime eligible that will be overtime eligible once this is now going forward.

We probably have anywhere from four to six or maybe three to six managers in our restaurants that would be impacted in some way by the new regs. It really depends on sales volume which impacts the number of managers we might have.

Our Managing Partners started out making a base salary of $45,000 a year. So technically, they would be under the what's been at least told to us so far that the salary threshold might be $50,000; technically they would be under it unless we change something in the way they're paid.

Right, that's back to our earlier comment where we could shift some of the bonus dollars that we currently have today over to the base, so we will see.

Okay. So when you say those -- are the Managing Partners included when you said the three to six in your stores?

Yes, because some of them are at $45,000, and technically would be -- we'd have to do something.

And their base is typically more than the $45,000, or I mean their bonus, I'm sorry.

We will see.

Okay. Thank you, gentlemen.

Moving on to Steve Anderson with Maxim Group.

I noticed in a few of your states that you already bumped up the early dine to a $9.99 in New York and California. We're talking about some of the wage cost pressure, is this something you're looking to expand to additional markets?

Certainly that could happen over time, it just really depends on what those pressures end up being. And it's probably an inevitability that there's going to be some raising of the federal minimum wage, and more states are going to get more active in minimum wage and it's going to happen.

And it's not a matter of if, it's just a matter of when. But certainly, we're getting a good learning from what we're having to do in the states that you mentioned.

And with that said, we already have experience in California and New York where they have already jumped ahead.

Has there been any resistance to that?

I'm sorry we couldn't hear your question.

Sorry, has there been any customer resistance to these increases?

No.

Thank you.

That does conclude the question-and-answer session. I will now turn the conference back over to management team for any additional or closing remarks.

I just want to thank you all for being with us tonight. If you have any other questions, please let us know and have a good evening thanks.

Thank you, and that does conclude today's conference call. We do thank you for your participation today.