Texas Roadhouse Inc (TXRH) 2016 Q2 法說會逐字稿

Good evening, everyone, and welcome to the Texas Roadhouse second-quarter 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.

Thank you very much, Rebecca, and good evening, everybody. By now you should have access to our earnings release for the second quarter ended June 28, 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 Chief Executive Officer, and Tonya Robinson, our Head of Financial Reporting and Investor Relations. Following our remarks we will open the call for questions.

Now I'd like to turn the call over to Kent.

Thanks, Scott, and good evening, everyone. We are pleased with our results so far this year including double-digit revenue growth, higher restaurant margins and strong diluted earnings per share growth. For the second quarter of 2016, solid comparable restaurant sales growth and an increase in restaurant margins led to a 58% increase in diluted earnings per share.

Comparable sales growth of 4.5% and commodity deflation of approximately 6.8% paved the way for significant margin expansion compared to the prior year. Our top-line momentum continued in July with comparable sales up approximately 3.7%. While this is a bit of a slowdown from early 2016, we are encouraged to see continued positive traffic growth along with solid comp sales trends on a two- and three-year basis.

On the development front we have opened 14 Company-owned restaurants so far this year and we remain on track to open 16-plus restaurants on the back half of 2016. The 30 stores include at least 8 Bubbas 33s. We're also building our pipeline of openings for both 2017 and 2018.

Although it is too early to give specific guidance on 2017, we expect to experience continued food cost deflation again next year along with continued labor inflation. As always, we remain committed to protecting our everyday value positioning and will be conservative when it comes to taking any price increases. We will provide more specific information on these items on next quarter's call.

I want to say thank you all of our team members who make legendary food and legendary service happen in our restaurants each and every day. As always, our consistent execution on this front and our focus on keeping it simple will continue to drive our success.

We also continue to tell our folks to turn on their TV and Internet newsfeeds less so they continue to stay positive in this increasingly negative media world. So, if all of you all listening out there want to escape the negativity in the world, please visit us soon. You will leave with a happy belly and a smiling face.

Now Tonya will walk you through our financial updates.

Thanks, Kent, and good evening, everyone. For the second quarter of 2016 net income increased 59% over the prior year to $33.6 million or $0.47 per diluted share. Revenue growth of 11.9% during the quarter was driven by an 8.4% increase in store weeks and a 3.7% increase in average unit volume.

For the quarter, comparable restaurant sales increased 4.5%, comprised of 2.9% traffic growth and a 1.6% increase in average check. Comps during the second quarter were positively impacted by approximately 50 basis points due to the shift of the Easter holiday from April last year to March this year.

By month, comparable sales increased 5.3%, 6.4%, and 2% for our April, May and June periods, respectively. As Kent mentioned, comp sales for the first four weeks of the third quarter are up approximately 3.7%. This does include a benefit from the timing of the July 4 holiday as it fell on a Monday this year as compared to a Saturday in the prior year. We estimate the shift positively impacted July's 3.7% comp by 100 to 150 basis points.

We experienced another quarter of restaurant margin expansion, with margins increasing 302 basis points over the prior year period to 19.2%. Once again, cost of sales led our improvement as it was down 330 basis points, driven by the benefit of approximately 6.8% of food cost deflation.

Other operating costs were also lower by 13 basis points as the benefit from average unit volume growth, lower utility cost, and lower general liability insurance were partially offset by higher gift card fees. Partially offsetting the cost of sales and other operating cost decreases was a 42 basis point increase in labor driven by wage rate inflation of approximately 3.5%, along with higher turnover. The lower restaurant margin depreciation expense increased $3.4 million in the quarter versus last year and increased 28 basis points as a percentage of revenue to 4%.

G&A costs were up $3.1 million in the quarter and were essentially flat as a percentage of revenue versus the same period last year. Costs associated with our managing partner conference held in Miami in April were approximately $1 million higher than last year.

Pre-opening costs decreased $500,000 on a year-over-year basis primarily due to fewer restaurant openings this quarter compared to the prior-year period. And, finally, our tax rate for the quarter came in at 30.2% compared to 29.7% last year.

Our balance sheet remains strong as we ended the quarter with $95 million in cash and $51 million in debt. For the first half of 2016 we have generated $114 million in cash flow from operations, incurred capital expenditures of $69 million, and increased our debt by $25 million. We also used $25 million to pay dividends of $4 million to repurchase stock. As a result our cash balances is $36 million higher compared to year-end 2015.

For the full-year 2016 we now expect commodity deflation of 2.5% to 3% compared to our original guidance of 1% to 2%. We are currently locked on price for approximately 70% of our commodity basket for the remainder of the year.

One housekeeping note, we do anticipate that December sales will be negatively impacted by Christmas Eve falling on a Saturday this year as compared to a Thursday in 2015.

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

Thanks, Tonya. We're pleased with our momentum through the first half of the year, particularly as it relates to restaurant margins. Commodity deflation has certainly been the biggest contributor in addition to the benefit of sales growth.

Looking at development, while our newer restaurants continue to open strong, their post-honeymoon sales are a bit below our existing restaurants. Historically this is more of the rule than the exception. And even with higher development costs our internal rates of return are still projected to be in the mid-teens range.

With regards to development cost and we're looking hard at both Texas Roadhouse and Bubba's to ensure we maintain our disciplined approach as it relates to new store development.

On the technology front we have started testing our new mobile app in our Houston market. This app includes the ability to get on our call ahead wait list, pay at the table, and order to go online. We are encouraged by the positive feedback so far and expect to see it in more markets as early as the end of 2016.

At the end of the day our continued focus on our four-wall execution and our commitment to balancing the short-term pressures and long-term positioning of the brand continues to serve us well. Combined with our commitment to returning excess capital to shareholders we remain very confident in our ability to create long-term shareholder value for many years to come.

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

(Operator Instructions)

Brett Levy, Deutsche Bank.

Good afternoon. If you could do us a favor and provide us a little bit more insight into what you are seeing on the competitive landscape whether that is versus your compares, what you're hearing from the customers, seeing from the customers. We'll start with that.

Hey, Brett, this is Scott. I think what we are seeing is a similar amount of competitive price point activity. We don't have a specific measure of that as it relates to all the markets that we operate in specifically.

There are some national report that talk about that but, of course, those don't necessarily line up with every single one of our restaurants. From our perspective we seem to be seeing just more of the same. I wouldn't necessarily say a demonstrable amount more nor a demonstrable amount less.

And could you provide us with any regionality, anything you are seeing in one region versus the other, whether it's from your perspective or what you are seeing from the competition? Thanks.

Our sales have been pretty consistent across the country. Like many concepts, we do have a few markets in Texas that seem to be underperforming relative to the oil markets. But beyond that we are generally pretty consistent almost all over the country.

Thank you.

Will Slabaugh, Stephens Inc.

Thanks, guys. I want to ask on Bubba's if you could give us an update on the latest and greatest of what you are seeing there in terms of volumes, profitability, anything you would be willing to share. I know you mentioned that the number of openings likely increases next year. I'm curious if there's anything else you can say around that. And, if not, if that might impact how many Texas Roadhouses you plan to open next year.

I will let Scott start with that and I will chime in afterwards.

From a sales perspective for Bubba's, the results have been a little bit mixed, meaning we have had a number of locations doing really strong sales, we have had some locations doing okay sales. No locations doing bad sales, so that's somewhat encouraging for us. The margin performance at Bubba's has been outstanding. And, so, the overall return picture for Bubba's looks pretty good.

From that standpoint, we opened store number 11 this past Monday. And I will turn it over to Kent to take it from there where we are going forward with Bubba's

Sure, this is Kent. The latest store r we opened in Clarksville was our new smaller prototype. it's 7,700 square feet versus the 8,900 square feet. And its sales are as strong as -- for one week only obviously -- we have had at some of our better stores. So, we are very encouraged with that, meaning that it's going to cost less money to build.

And we found that the kitchen can generate the same volume, too, so we are very pleased with that. As it relates to next year, I can say we will probably open more than we opened this year but we don't know that number yet.

And just a quick follow-up if you think that might impact the number of Roadhouses you plan to open next year.

This is Kent. I would say we are going to open as many roadhouses as we're going to open any way and the extra icing on the cake would be just opening a few more Bubba's.

Great, thank you.

David Tarantino, Baird.

Hi, good afternoon. I want to come back to the sales trends you have been seeing more recently in June and July. It seems like you have seen a slower same-store sales growth trend. So, I was just curious to know what you think is driving that forward trend in your business, and if you are seeing any changes in how consumers are using the brand that might explain what's going on in the most recent couple of months.

This is Kent. I will start it out and let Scott jump on. When you look at same-store sales for a two-year basis, knowing that we are rolling over some higher comps, we were 12.6% over two years in quarter two, 13.5% in quarter one. then you go back to quarter four, we were 11.5% and then before that 12.8%. So, I think a portion of that is just rolling over some strong comps. And I'll let Scot take it from here.

David, I think as far as if you are looking at the most recent two-year trends, or even the most recent one-year numbers for us, 2% in June and 3.7% in July is definitely lower for us from what we have been experiencing. We don't have the answer. We can only speculate.

I can tell you, in our case, we are not operating any differently. We've got the same labor staffing, we've got the same food quality, we've got the same aggressive price points. We are more focused and driven as ever on our local store marketing efforts. We continue to bump out restaurants. We continue to spend a lot of money on remodeling restaurants, refurbishing restaurants, buying extra parking. So, we are still growing traffic.

But I think anything about why as an industry or anybody specifically why sales might be tailing off I think is speculation. Everything from, is it related to there being a big shooting on TV every other day, it seems like, to the conventions, to the next thing we'll be talking about the Olympics coming up in Rio. I don't know but it's not making us think there is anything wrong with our model or that we need to do anything differently, at least currently.

That might change if there was really something different in the economy -- IE, unemployment started going up or something like that. But until we see something like that I think we are pretty confident we will continue to be able to grow a little bit of traffic.

And with our traffic down at 2% in June but yet up 3.7% in July, go figure.

Right. And just a follow up, Scott, I appreciate that you don't want to react to just a couple months of sales, and still pretty solid sales on a relative basis, but I think one of you made a comment about being conservative in your pricing approach. I was just wondering what the comment was supposed to be signaling and if that was a change versus your overall approach, because you have been pretty conservative in the past.

David, this is Scott. I would just tell you it says we don't take anything for granted in our business. We have had a lot of success in growing comp sales now. I think we are five or six years in a row or something like that, since the depths of the recession. And I think our thing is we just don't take anything for granted.

We are expecting to have more food cost deflation next year. We will have a certain amount of labor pressure, whether it be from just a general what we have seen tightening of the labor market, and inflation and wage rates in general, plus we will have some expense associated with the Department of Labor reg changes. We haven't got to a conclusion on that yet as far as exactly what we're going to do. We will know a lot more pretty soon on that but we're still debating the different options that we have with regards to those regulations specifically.

But we're just saying we will take some pricing, it just might not be as much as we have taken in maybe the last few years. And we're just going to continue to stay very aggressive at the price points that we offer throughout the menu. We have a great value whether you are at the lower end up the menu or even in the bigger steaks, we still want the bigger steaks to be a great value for that particular guest, as well.

By the way, Kent, when I said 2% and 3.5% traffic I actually meant sales. Sorry about that.

Makes sense. Thank you.

John Glass, Morgan Stanley.

Thanks very much. Scott, you had called out those 6- to 18-month old stores and volumes being a little lower than you had seen in the past. What do you attribute that to? How big is that cohort? And I think you said something about we will continue to watch development. You've been fairly bullish on development in past quarters. Are you more concerned about rate of growth in 2017 and beyond, or is that not the correct interpretation of that?

You know, John, I think we are just as bullish but certainly the gap between our newer stores and our system average has grown from what it was over the last few years. However, that gap is consistent with what it was six, seven, eight years ago and we still kept building restaurants. We just don't want it to get any wider. I would say that.

And at the same time we have got some work to do on really watching some of the development cost and some of the deals that have surprised us and been a little more expensive, particularly on the site work side. We probably missed a couple deals there on that.

We still feel like we can build quite a few Roadhouses but we model them more conservatively, so we typically model the sales to be below the system average. We know it's just tougher when you are opening store 500 or 550 or 600 than it would have been at 100 and 150 and 200. We have always done it that way.

That's why when we do have sales that are a little bit below the system average we are still able to deliver on mid-teen internal rates of return. But if we have a particularly strong class year, like we did in 2013, for example, those internal rates of returns are more in the low 20%s, which is pretty good for a 22-year-old restaurant chain. We're just watching it closely and just communicating to you that we still take pride in having a lot of discipline in the sites that we approve, and we're still willing to say no and not have a lot of wishful thinking in our site selection.

And I will tell you as I look at 2017, yes, we're going to do less parking lots, we'll have more envelopes than we did in 2016 because I'm tired of Scott giving me a hard time.

All right. And then just same topic on the franchise side, I think average weekly sales grew slower or were down year on year. You haven't opened many stores on the franchise side so what would have driven that?

Those franchise stores include international. So, some of the countries we have gone into, those franchise restaurants, they typically do lower sales. They are good sales for that particular country but they are just lower sales overall than what we do in the US.

Most of the restaurants that we have opened on the franchise side have been international locations. So it's not that our US franchise restaurants are underperforming the US Company stores, they are actually not.

This is Kent. And a lot of these stores you might see are in the Philippines or Taiwan, they might be in an office building where we're only just over 4,000 square feet so you're not going to have as many seats.

Got you. That's very helpful. Thank you.

Brian Bittner, Oppenheimer

Thanks. Just a couple questions. First on the balance sheet and cash flow, when I look at that, your free cash flow is really strong despite that you're still opening a lot of stores. Your cash is real high, your debt is real low. So, would you guys ever look at accelerating capital returns, whether it be really stepping on the gas pedal on the share repurchases or some other method? Have you guys looked at that?

I will tell you, Brian, great question. I would say we today live in a very litigious and seemingly regulatory world. There is a cost to being in that world and we feel a lot more comfortable having some cash in the bank and not a lot of debt in living in that world.

We just like to have some cash for a rainy day. No, that said, we are very committed to our dividend payment and raising that dividend at a very healthy rate each year. And we are very prepared to be very opportunistic on share buybacks, and have no problem buying back a lot of stock, as we have done in the past.

Okay. And then on sales, on the July comps, did you see very low volume nights during the Republican and Democratic conventions? Because I guess that would make sense. And then would you see maybe a return of people on the weekends? Any color you can give maybe around those political events and maybe how that's impacting the industry would be helpful.

I can't tell you that specifically for the conventions. I can tell you for the quarter we didn't have any differences on days of the week. Our days of the week growth, we were very consistent throughout days of the week.

Okay. And then the last question is on your comments on continued food cost deflation in 2017. As you sit here today, is that mostly related to the beef market or would you categorize the food cost deflation outlook in 2017 as pretty broad-based across the basket?

A little bit of both. Certainly beef is a big part of it because it's over 40% of our food cost. In most years, as beef goes, so does the rest of our total food cost inflation or deflation. But there is more to it than just beef.

Okay. Can I sneak one more in real quick? I'm sorry. Just on the franchise company operating comps in the quarter, was this just geographical differences for the difference in trends or anything else you can point out?

Are you talking on franchise?

On the comps for the second quarter, the trends were different.

No, our comps are pretty consistent across the country. And I mentioned earlier there are a few markets in Texas that are exhibiting slower growth or negative growth in a few places that we think is due just to the whole oil related issues.

And then on the franchise side we've got quite a few stores in the Middle East and they are potentially affected a little bit by the price of oil.

Okay, thanks for the answers, guys.

Jason West, Credit Suisse.

Thanks. Tonya, can you just clarify exactly where you guys are on pricing? I think it was 2%. I just want to make sure you haven't made any changes there year to date

No, no changes there. We will see that consistently until November Q4, we will lap that pricing.

Right, got it. Okay. And then, Scott, you had touched on the overtime rules change and you guys are looking at different options there. Can you just provide a little more, without being too specific yet, but just how many employees or what percentage of your base may be impacted by those rule changes and some of the options you are looking at?

In our system we are heavily incentive compensation based, which means that many of the managers that work in our restaurants, a big piece of their compensation is profit-sharing, or bonus, in effect. So, they typically get a little bit lower on the salary side but a lot more on the incentive compensation side.

We have got more, probably, assistant managers than most concepts that their salaries are below the new federal thresholds. So, we've got some decisions to make about how we're going to manage to it. And then we've got some other support positions that also have some salaries. Again, they are heavily incentive compensation based and their salaries are below the threshold for the government, as well.

So, we're looking at a variety of options, but at the end of the day we are a people-based company and our folks are going to end up making more money than they were making before. We're not going to get cute with them. We're going to be very straightforward with them and they are going to end up making some more money. And we will let you know once we know more.

Okay. And can you remind us how many managers and assistant managers you have in a typical restaurant, just the breakdown there?

Probably the average restaurant would have four to five managers. Out of those four to five managers, of course one is the managing partner, and typically you have a kitchen manager and a service manager.

And then after that there is quite a variety. There is assistant kitchen and assistant service managers, but there is also what we call a key hourly position, and it is very different across the board. Some of our highest-performing restaurants actually have two kitchen managers and two service manager. When you multiply those numbers times 500 restaurants, approximately, you are talking well over 1,000 people.

That's helpful. Thanks a lot.

Chris O'Cull, KeyBanc.

I have a follow-up regarding the food cost deflation outlook for 2017. Scott, have you entered into contracts for beef for the out year yet?

Chris, I can't comment on, just for competitive reasons, what we have done and haven't done so far. But I will tell you we feel pretty good about our prospects for next year. And the timing couldn't be better just given where the labor markets are today, just with normal wage inflation plus the DOL reg. So, it's pretty fortuitous, I think, for us at this point in time.

Okay, fair enough. And then how much of the gap in average weekly sales for comp stores versus post-honeymoon stores can be explained by opening more smaller market locations? Because I know they are lower cost. But is that a meaningful impact on this average weekly sales comparison?

There is definitely some pretty small towns in there, no doubt. And no doubt we would expect those restaurants to do some lower volumes. That is part of the equation. Sometimes we build in places that developments are just very new, as well. So, they may not be the cheapest deals but longer term, once the rest of the development gets done and there's more housing built and so forth, as we have seen this many times before, you start a little bit slow but then you are really killing it a few years down the road. So, that's some of that, as well.

But at the end of the day we're still looking for a certain return and we will keep building if we get the returns, and we won't if we don't. But there is a story and the story does change depending upon site. Typically whether it's smaller town or whether it's more of a newer, the outskirts of a larger city type of development.

Okay, that's helpful. And then, lastly, can you remind us what the functionality will be available with the new mobile app, and maybe what your expectations are for downloads? Or will there be a mobile website that also allows the functionality you have on the op?

With the app itself, you can get on our call ahead waitlist, in effect, through the app. So, like a number of folks in the restaurant industry, you register on the app and you will be able to see what the current wait time is for that particular restaurant. You will be able to pay your bill at the restaurant by using the app and you will be able to order to go through the app.

All that same functionality eventually will be on the web, as well. It doesn't exist today. The online to go part exists today but getting on the call ahead waitlist does not exist today, but it will in the future. And that app's been in development in some time. It looks great, at least to us, and we have had quite a number of people download that app so far. So, we are just very encouraged by the start.

Great. Thank you.

Jeffrey Bernstein, Barclays.

Great, thank you very much. Actually just following up on a couple of those cost questions, I think you said up 2.5% to 3% for food for full-year 2016. I know in this quarter it was down close to 7%. So, I'm just wondering your outlook specifically, the lumpiness in the back half of the year.

And similarly on labor. I think that was up 3.5% in the second quarter. I'm wondering what your full-year 2016 outlook is for labor. And then whether you thought either of those would be directionally higher or lower in 2017. I know you said same side of the fence for each one of them but directionally if either one would be more or less versus this year.

Sure. On the labor side I think, Jeff, that 3.5%, we expect to see that continue throughout the year. I don't think we expect to see much change from that. Now, into 2017, I think a lot's going to depend, as Scott got mentioned, with the DOL regulations, how those get implemented, what that looks like. So that remains to be seen. It could be that that maybe is a little bit higher just from the impact of that.

On the cost of sales, yes, 2.5% to 3% deflation on a full-year basis. So, back half of the year we expect to see some deflation in Q3 and not as much in Q4, where we are right now.

And then for 2017 on the food cost side, might it be more deflation than the 2.5% to 3% you're looking this year?

I think it's probably really too early to tell what we're going to see for 2017. I think when you look at cattle futures and see what the government estimates look like, I think deflation definitely looks like a possibility / But I don't think we could even begin to speculate how much it could be.

Got it. And then my other question was just on throughput. I know you talk about the app, which seems like it would be a net positive across the board. But I'm wondering if you could size up maybe what percentage of the system you think there is, just broad capacity constraint, and whether there are any other initiatives to ease that pressure besides the app, whether it's the handheld device for the servers or tablets at the table, or anything else you might be dabbling with on the technology front to help with that throughput.

This is Kent. I'll just give my two cents. Specifically with younger people that prefer to just do a quick thing on their phone and not talk to people, I think the app on getting on our waitlist and for to go ordering is really going to help. And pay at the table, I would tell you that everybody that has invested in those kiosks on the table will probably be pulling those away in the next two years because I think everybody is going to switch to phone applications.

And the percentage of the system, if you were to size it up, does the entire system have throughput constraints or is it really more select markets?

I think we've got a lot of stores doing huge volumes and a lot of stores that aren't doing those huge volumes but they have the same kitchens. So, I think we have capacity for sure.

Jeff, based on sales we don't know what our capacity is just because even our highest volume restaurants continue to grow sales. To Kent's point, certainly there is only so much room in the kitchen to only produce so much food per hour and store it all. And we might experiment with doing some kitchen bump-outs at some point. But our restaurants that are doing the highest volumes continue to grow sales. We're not really sure how many of our restaurants are truly capacity constrained.

Good to know. Thank you.

Andy Barish.

Hey, guys, most of mine have been asked and answered. On mix shift, it looked like it went negative this quarter. Anything to point to there?

Andy, this is Scott. Most of our negative mix is related to really three areas. Two of those are beverages -- soft beverage and alcohol -- and then on the appetizer side. So, it's a little piece from each one. That's pretty much the big driver of the mix.

Hard to say why. Alcohol, is it because the prices continue to rise for alcohol relative to the cost of entrees? Is it because of DUIs or people being more careful? We don't know.

And same thing on soft beverage. Is it because the prices continue to rise for those items? Or negative news on soft drinks in general? We really don't know the answer to that. But, again, you are talking relatively small changes relative to the size.

Same thing with apps. Apps are very small change in mix but all of those things added together make up that difference.

Yes, I think in-bev needs a little more money from us to pay for all their debts for their recent merger. But that's my opinion.

And then any reason that Houston was selected as the initial test on the app, that market?

I think those guys just volunteered, and they are a pretty close in market, at least geographically. So, a combination of the two. Easy for us to keep the guests, I guess you could say, contained, and who has got the app and who doesn't in that particular market. And they were more than willing to help us test it because any time you test something like that there's inevitably some bumps along the road, along the way, so they were kind enough to let us work with them on that.

I thought they put a blindfold on Scott and he threw a dart at the map. So, I'm now educated, as well.

Thank you, guys.

Jeff Farmer, Wells Fargo.

Just following up on some of the top-line questions. Last week one of your peers pointed to the widening gap between consumer confidence levels for younger and older consumers. Just curious what does your most recent data tell you about the demographic makeup of the Roadhouse customer base as we stand here today?

I would tell you, Jeff -- this is Scott -- I have no idea on the demographic makeup of our guests.

Let me ask an easier question then. Do you think you skew younger than most of your casual dining peers? Is that fair, or not?

This is Kent. I don't really see a huge difference in what I see in our restaurants as far as both young and older folks. Older folks typically come in a little earlier in the evening, maybe take advantage of our early bird deals from 4 to 6. And then you will see a little bit younger audience later in the night. And the fact that our traffic and sales are up, I don't think we are losing either one.

Okay. And then just sticking with the top-line discussion, again, your peers led a discussion about loyalty programs. I'm not quite sure if the VIP program qualifies as one. But I am curious where you stand in terms of members, how the VIP program has grown, and how are you using it to drive traffic?

I think we're over 6 million, I want to say, names in our email program. And our restaurants can do individualize communications to the folks in their respective trade areas. I wouldn't say it's a big driver of our sales.

I would tell you -- and it's always been this way since day one -- operations is our best marketing at Texas Roadhouse. We are an operations driven company. We focus as much on the guest getting a great experience, not getting cute with messing that up, and supporting that with very relationship-driven local store marketing.

That's one reason why we don't have a traditional loyalty program that involves discounting our food and so forth after a certain number of meals or whatever. We think we give people a great deal every day they come visit our restaurant.

Okay, that's helpful. And just one final one -- I think for the last few years, Scott, you've appointed to G&A growth below revenue growth, which I think you've delivered at least the last three years. So, I'm just curious, is that still the current expectation for full-year 2016, G&A growth below revenue growth?

That's probably not going to happen in 2016 because we had a wage and hour settlement deal that hit our G&A line. I think with without that we might have a chance to see a little bit of leverage on G&A. But on a reported basis probably not.

Okay, thank you.

Karen Holthouse, Goldman Sachs.

Following up on some of the development questions, when you're thinking about options if sales do settle in at a little bit lower lever, how much flexibility do you think you have for a more maybe dramatic reengineering into a smaller footprint or smaller footprint box or something else that would be a way to take -- versus nickel and diming the cost structure, a bigger chunk out of it?

This is Kent. We actually currently have three different prototypes for Roadhouse. So, we already choose A, B or C depending on the market. And, like I said with Bubba's, we just experimented with a smaller prototype there. So, we're actually already doing that.

All right, thank you.

(Operator Instructions)

Peter Saleh, BTIG.

Great, thanks. I just wanted to ask about labor turnover. I think it was mentioned earlier in the call. Where do we stand on the labor turnover today versus historical? And how much do you think that is pressuring the labor line?

This is Scott. It's just short of 120% on the hourly basis, which we are absolutely not happy with. And that's quite a bit higher, 20% higher than we were three or four years ago. We can make all sorts of excuses -- tightening labor market, lower unemployment, so forth and so on -- but, at the end of the day, it's just unacceptable. And we're definitely talking about it internally and challenging ourselves as being a great place and the best place to work amongst our restaurant peers, and looking at ourselves in the mirror. So, we've got some work to do on that.

And with that kind of turnover change, absolutely positively that impacts our labor costs. Just the number of employees we do have and the amount of time we spend in training, which is longer than many folks, that's a pretty big cost to us.

And just, lastly, on the top line, can you remind us historically, have you seen any slowdown during the Olympics, during the election cycles? Do the customers tend to stay home during those type of events?

I can't recall from the last Olympics. My guess is probably more people stay home to watch the Olympic games because it is once every four years. And maybe because it's in Rio, more of the stuff is prime live, if you will -- you are seeing it live.

So, I don't know, but, fortunately the Olympics are only for a couple of weeks, if they do impact your sales, and it's only every four years and not every year. So, I guess we can look at it that way. And if it does we just get to lap it next year and get to tell you guys we had better comps because we lapped the Olympics.

This is Kent. I will tell you, our sales were a bit stronger in July than they were in June, and the Democratic and Republican conventions were in July, so go figure.

Thank you very much.

Andrew Strelzik, BMO Capital Markets.

Good afternoon everyone. I have two get questions. The first one, we have heard a couple of your large competitors talk about shifting away from these real value price point promotions. I am wondering if you think, bigger picture -- I know the focus has been on near-term slowdown -- but do you think that that actually works in conjunction with your less pricing to really solidify that value message in the position you guys hold in the segment, and that could actually be a net benefit for you over time?

This is Kent. I like what you are saying and why not? I will let Scott have a more serious answer.

I agree with that. I think if folks do move away -- and there is a material difference in what moving away means from price point advertising and discounting -- absolutely I think it strengthens our value proposition overall.

Okay. And then one last one on the change in the food cost guidance. How much of that is actually driven by a change in the back-half outlook? Or was it more driven by greater deflation than you expected in this quarter? I'm just trying to judge what was the reason for the change.

More of that, Andrew, was probably related to the quarter Q2 versus expectations on the back half. But any expectations we have for the back half is built into the new guidance. But we did see a bit more deflation on that floating, the 20% beef we were floating. We saw a little bit more on cheese which we are floating. So, that played a part for sure.

Great. Thank you very much.

John Ivankoe, JPMorgan.

Hi, thank you. The question is on pricing. And I certainly heard you guys say, I think, a few times on the call that you will be conservative around pricing going forward, as I think you generally always are. But in the previous economic cycles that you have lived through, is it easier to take pricing when labor costs are higher, meaning your customer presumably has more money to spend, or take pricing when the commodity costs like beef is higher, where I think some pricing has been taken before in direct response to that?

Hey, John, this is Scott. I would tell you I think it's easier for us when it's minimum wage related and that's impacting everybody in the same way. We have typically taken a little bit more pricing.

It's a little tougher when it's commodities because those impact everybody differently. Some years for some concepts they had very little inflation and we may have a ton of inflation if it's all beef related versus wheat or some other commodity item. So, I think it just varies.

And then the Department of Labor reg stuff will vary depending upon what approach you take. And you can definitely take approaches to absolutely minimize the impact. There are different things that you can do. Or you could take an approach and show a little bit more love to your folks and what-not. I think if we're taking a little bit more love for our folks, we may not just use that as an excuse to take pricing because a lot of our competitors may not take the same approach, if you will.

So, to make a long answer a little bit shorter, minimum wage, probably a little easier to take pricing. Commodity inflation, I would tell you a little bit tougher.

So, it would only seem, following that logic, that 2017 could even be an above average for year for pricing, not a below average year for pricing.

It could be based on the labor pressure that we have. However, we will always take advantage of an environment if you've got food cost deflation because, again, people talk about pricing power. We never assume we have per se pricing power because you just cannot take anything for granted.

And, as you know, from being on all the other calls, all the other competitors in the industry, nobody is standing still, and everybody is pulling different triggers and doing different things in their respective chains, whether it's reinvesting in their food quality, their labor standards, remodeling, and so forth. So, you just can't take your competitive positioning for granted. You've got to continue to act like you cannot take any individual guest for granted and treat your pricing actions as such.

Thank you.

Stephen Anderson, Maxim Group.

Good evening. I wanted to talk about pricing. I know it may be a little bit early for you to discuss that. You mentioned on the last call about how you adjusted some of the pricing on the early dine program. I know you raised it in Connecticut, New York, California. Do you think with the Department of Labor regulations beginning to shift, do you see the need at this time to maybe consider some additional markets for a price increase?

I don't think our Department of Labor changes will influence our pricing decisions. I think those will be more influenced by just other wage rate inflationary items, whether it's the overall strength of the market from the hourly perspective, that's where the bigger dollars are, and then specific state minimum wage actions is also where the bigger dollars are. And depending upon how much of all of that is offset by food cost deflation, will have a greater impact on where we take menu pricing actions and what specific items we touch or don't touch.

Thank you.

And ladies and gentlemen, that does conclude today's question-and-answer session. At this time I'd like to turn the conference back over to Tonya Robinson for any additional or concluding remarks.

We thank you all for being with us this evening, and have a great night. Thank you.

And more happy faces. Anyways, thanks.

Ladies and gentlemen, that does conclude today's presentation. And we thank everyone for your participation.