Texas Roadhouse Inc (TXRH) 2017 Q1 法說會逐字稿

Good evening, and welcome to the Texas Roadhouse, Inc. First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions)

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

Thank you, Kevin, and good evening, everyone. By now, you should have access to our earnings release for the first quarter ended March 28, 2017. It may also be found on our website at texasroadhouse.com in the Investors section.

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

In addition, we may refer to non-GAAP measures. If applicable, reconciliations of the non-GAAP measures to the GAAP information can be found under the Investors section of our website.

On the call with me today is Kent Taylor, our Founder and CEO; and Tonya Robinson, our Vice President of Finance and Investor Relations. Following our remarks, we will open the call for questions.

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

Thanks, Scott. We are pleased with our top line momentum and operating performance in the first quarter with sales growth of 10.2% and comparable restaurant sales growth of 3.1%, including traffic growth of 2.7%. Diluted earnings per share decreased just over 4% this quarter, including the impact of the charge we took this quarter to defend and ultimately settle a legal matter. Tonya will have more on our results in a moment.

We are pleased that our sales momentum continued in the first 4 weeks of our second quarter with comps up 2.6% despite approximately 90 basis points of negative impact from Easter shifting from March to April. We will roll out new menus this week at all restaurants that will include calorie counts, along with some small changes to the menu. The changes include the company-wide rollout of 2 smaller portion entrées with the addition of a 5-ounce salmon and an 8-ounce New York strip. We will also be implementing a price increase of about 0.5% as part of the rollout.

On the development front, we have opened 7 company restaurants so far this year, and the remainder of our 2017 pipeline is in great shape. We have 13 restaurants currently under construction that are expected to open by the end of September. We continue to expect our 2017 development to include 24 Roadhouses and 6 Bubba's 33 openings. In addition, our franchise partners opened 2 restaurants this quarter, including our second location in the Philippines, bringing our total international presence to 14 locations.

In closing, I want to congratulate Paul Ashton of Sherman, Texas for being named our 2016 Managing Partner of the Year at our recent annual conference in Florida. It was great to be together with all of our operators and partners celebrating another successful year.

Now Tonya will walk you through our financial update.

Thanks, Kent, and good evening, everyone. For the first quarter of 2017, revenue growth of 10.1% was driven by an 8% increase in store weeks and a 2.3% increase in average unit volume. The strong top line growth, along with the impact of commodity deflation, was partially offset by continued wage rate inflation, which led to a 9% year-over-year increase in restaurant margin dollars to $112.3 million. Below restaurant margin, increased G&A cost, partially offset by a lower income tax rate, contributed to a 3.6% decrease to net income compared to the prior year period to $34.3 million or $0.48 per diluted share.

As Kent mentioned, our reported diluted earnings per share for the quarter was negatively impacted by approximately $0.13 due to a pretax charge of $14.9 million or $9.2 million after tax related to a legal matter and its settlement during the quarter. The negative impact of this charge was partially offset by the benefit of lapping a $5.5 million pretax charge recorded in the first quarter of 2016, which had a $0.05 impact on reported diluted earnings per share in that quarter.

Comparable restaurant sales for the quarter increased 3.1%, comprised of a 2.7% increase in traffic and a 0.4% increase in average check. Comparable sales during the quarter were negatively impacted by a net of approximately 30 basis points due to calendar shift. The impact -- the negative impact of Valentine's Day was partially offset by the benefit from Easter shifting to the second quarter this year.

By month, comparable sales were up 3.6%, down 0.7% and up 5.8% for our January, February and March periods, respectively. February comp sales were negatively impacted approximately 170 basis points from the calendar shift related to Valentine's Day, while March comp sales benefited by approximately 80 basis points from the shift of the Easter holiday from March to April.

For the quarter, restaurant margin decreased 21 basis points to 19.9% as a percentage of restaurant sales compared to the prior year period. Wage rate inflation of approximately 5.3%, including the impact from manager compensation changes made in December of last year, continue to drive higher labor costs and outpace the benefit of higher average unit volume and commodity deflation of approximately 2.4%.

Looking ahead, our expectation of mid-single-digit labor inflation and commodity deflation in the range of 1% to 2% for full year 2017 remains unchanged.

Moving below restaurant margin. G&A cost increased $10.2 million in the quarter or 126 basis points to 7.1% as a percentage of revenue, primarily due to the legal charges mentioned earlier. In addition, depreciation expense increased $3.1 million year-over-year to $22.6 million or by 19 basis points to 4% of revenue.

Finally, our tax rate for the quarter came in at 26.5%, which was lower than the 30% rate last year. The decrease in the rate was primarily due to the impact of new accounting rules related to share-based compensation, which went into effect at the beginning of 2017. As part of the new rules, we now recognize excess cash benefit and tax deficiencies from share-based compensation through the income statement rather than the balance sheet in the period in which the restricted shares vest. Because of the number of shares vesting in the first quarter, the accounting change had a 3.2% impact on the tax rate. Based on the expected vesting of restricted shares going forward, we do not project the impact to be as significant for the rest of the year. Thus, we continue to expect our tax rate to be 29% to 30% for the full year of 2017.

Our balance sheet remains strong as we ended the quarter with $138 million in cash and $53 million in debt. During the quarter, we generated $94 million in cash flow from operations, incurred capital expenditures of $36 million, paid dividends of $13 million and spent $17 million to acquire 4 franchise restaurants. As a result, our cash balance increased $25 million compared to year-end. We continue to project full year capital expenditures of approximately $170 million, excluding any cash used for franchise acquisition.

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

Thanks, Tonya. We're pleased with the current momentum in our business as well as what the future holds for Texas Roadhouse. We believe our disciplined approach to running our business, combined with our long-term operational partnerships, will continue to drive our success.

Sales at our comparable restaurants as well as our -- at our newest restaurants opened less than 6 months continue to be strong with average weekly sales of over $100,000 in the quarter. The sales gap between our comp restaurants and our restaurants opened 6 to 18 months was again fairly wide with weekly sales at our 27 new restaurants averaging a bit over $87,000 a week. We remain comfortable with the overall returns that these restaurants are generating. However, we would like that gap to be smaller. In addition to our domestic growth, we continued to see progress on the international front. We expect to have as many as 6 new restaurant openings this year, including our first location in Mexico.

As Kent mentioned, we recently returned from our annual Managing Partner Conference in Orlando, Florida. It was a great time celebrating our 2016 accomplishments and our cultural partnership with our operators and vendor partners. In addition to congratulating Paul Ashton, our 2016 Managing Partner of the Year, I'll also give a big shout-out to our national meat cutter champion, Shawn Haynes of Palm Bay, Florida. Way to go, Shawn.

Overall, 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. We will continue to challenge ourselves to get stronger and create more value to our employees, our guests and our shareholders.

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

(Operator Instructions) And we'll take our first question from John Glass with Morgan Stanley.

First, just a couple of follow-ups on the -- on pricing in commodities. Just to level set, what is the effective pricing therefore going to be in the second quarter? I know you talked about a 50 basis point increase. What's the residual pricing? And what is total pricing around that?

Total pricing with the 0.5% that we're taking this week will put the quarter -- second quarter probably around 1.3% because we had 1, and then we'll have the 0.5% for a bit of the quarter, and then we'll be closer to the 1.5% in Q3 and Q4.

And then second detailed question on the commodities. You saw a little bit greater deflation for the full year. Does it flow roughly ratably through the balance of the year? Do you have visibility on if it gets lumpy quarter-to-quarter on the food costs in the coming quarters?

It doesn't really get very lumpy. I will tell you though in Q2, right now, we don't expect to see as much deflation as maybe we saw this quarter. Still deflationary but maybe just a little bit softer, primarily because we're making some assumptions on produce and things like that. There's been some adverse weather conditions in the West. And while we're not seeing a huge impact on that, it is making prices go up just a little bit on produce. So some of that will be coming into play in Q2. But other than that, it's not too lumpy, I would tell you, over the rest of the year.

That's great. And then just, Scott, finally, you've talked last quarter and you mentioned this quarter again about trying to get the cost of the box down, right? That's a place where I think you'd be more comfortable below -- I guess it's below -- I don't know what the current number is. I think you said it's $5 million, like to get lower. What are you specifically doing? There's a point in time where you're going to rethought the prototype and really squeeze some cost out of it. How do you manage down that cost specifically? And can you do it during this year? Are you really thinking about that for 2018?

Well, we -- John, probably the biggest thing is what sites we're going to develop, meaning how much site work risk we're willing to take on. Typically, the biggest variable has been site work risk. And it has been what's put us way above $5 million or way below $5 million. And getting in the deals, whether we've typically maybe been a little bit surprised to start off in that regard, and so we're just trying to be more careful in the sites we select and do the best we can to understand the site risk or lack thereof that involve, meaning how much work the landlord, if it's a landlord, is responsible for versus how much risk we're taking on if we decide to develop raw dirt or not.

And we will take our next question from Will Slabaugh with Stephens.

I wonder if you could give us the update on Bubba's, what's been going there with the existing stores and then the more recently opened ones, how you feel like those are coming along, both top and bottom line, if you would.

This is Scott. We've got 16 Bubba's open, I think as you guys know. Sales have been okay at Bubba's. I say okay, not bad, not great. Pretty close to Roadhouse overall, though there is a spread, obviously. In any number of restaurants, you've got some higher and lower, but the average is close to Roadhouse. Probably the biggest opportunity is just on the development cost side, and that's figuring out to rightsize the Bubba's prototype. And it's already shrunk it down from 2 big bars to 1 big bar. And Kent and the team are continuing to look at all the different features at Bubba's and all the construction components at Bubba's to see what else we can strip out without impacting the guest experience because we are getting solid repeat business of guests. Bubba's sales are well over $4 million a year in average, which is a pretty strong concept, brand new concept out of the gate. So we're pretty happy that. The margins are very good. It's really more of a fact that the development costs are the biggest opportunity for us.

This is Kent. Yes, we've taken -- probably we'll end it with about 1,400 less square feet. And then from a parking standpoint, we were up at about 220 parks, and we think now we can probably do about 180 parks and then be okay.

Got you. And then back on the Roadhouse side, I wonder if you could talk a little bit more about the sales trend during the quarter. Those clearly picked up, and it looks like your gap versus the industry widened a little bit in 1Q versus 4Q and definitely even from the start of 1Q. So curious if you could walk through kind of what you saw in January, February, March and then just any color you have around what's going on with the industry. I'd love to hear it.

Well, this is Tonya. I can tell you, there was just a lot of noise, I think, a lot of calendar shifts going on, really in all months. You even had a little bit in January with New Year's Eve. So there was just a lot of that going on. I know a lot of -- again, a lot of people speculated on tax refund delays and things like that. I mean, you can look at those numbers and think perhaps some of that was going on, too, if you're looking at February and March. But overall, when we're looking at dayparts and regions of the country and things like that, it was much of the same story as what we've been seeing in the past from that perspective.

Well, this is Scott. I think when you're looking at us versus the industry trends and the gap widening or narrowing, widening and narrowing, and it has happened over time, many, many years, we never really know why it narrows or widens to be honest. We just keep doing what we're doing, which is very protective of our food quality and our price points and our flavor standards, the same things you've heard forever. And we've kind of just stuck to that and continue to do that, and it's worked for us.

We'll go next to David Tarantino with Baird.

My first question is on the pricing and the margin outlook. I guess, Scott, in the past, you've sort of talked about getting to restaurant-level margin expansion this year might be difficult. And now that you've taken a little bit more pricing, can you talk about the dynamics around the margin outlook and whether it's more probable that you can show a little bit of margin percentage expansion this year if the traffic momentum continues?

Well, a lot of good things happen if your traffic momentum continues. I mean, that's always the case, typically. Labor inflation is still somewhat of a wildcard because it's still very high for us right now. And we projected that will likely continue through the rest of the year, which if it does, will make it tough for us to grow margins even with a little bit more pricing. Again, how much of the extra 0.5% of pricing will flow through in the form of check increase remains to be seen. But I wouldn't take any margin growth for granted at this point despite us taking a little bit more pricing.

Great. that's helpful. And then on the mix side, so it looked like in Q1, the mix was negative. If you can you talk about the dynamics of what caused that and whether that will continue. And then I think you mentioned that you're going to have smaller portion sized entrees added to this new menu, and I was wondering if you tested the impact of that and if that will have a measurable impact on the mix going forward.

David, it's Tonya. I can answer your mix question. Yes. We had about negative 68 basis points or so on negative mix in Q1. And really it was more a function of the calendar shifts and things like that, specifically on Valentine's Day. That one seemed to pop pretty big for whatever reason, whether it was related to alcohol or entrées. So if you kind of bake those out, it gets much more -- the mix gets much more consistent over the quarter and actually comes down to, I would say, call it, like, 30, 40 basis points. So hard to read a whole lot into that 60 basis points in Q1 because of all the calendar shifts.

And then I think on top of that, as Kent mentioned in his remarks, having a smaller-sized salmon and New York strip will probably no doubt have a little bit negative mix for us. But we think in the long term, in the marathon versus the sprint, having increased competitively price points on the menu plus a smaller portion sizes will be appealing to certain number of guests in today's world of being a little bit more relevant on the menu. And we think it will pay us -- over the long term will pay off. However, in the short term, it may be a little bit of negative mix for us.

We'll go next to Chris O'Cull with KeyBanc.

Scott, are the stores that have been open 6 to 18 months on track to average volumes that would be equal to or a little higher than their fully capitalized investments?

No. They would be probably 85% of their -- that's a rough number, of their fully capitalized investments. So that includes taking 10x their first year's rent plus adding all the preopening in, probably closer to that range.

And so when you say they're meeting your hurdle rates, are you thinking that their volumes will continue to improve? Or the margin is just pretty compelling and that's why you're generating the sufficient return?

Well, it's just that when you're doing 87 a week, that's still a pretty high number. And with the margins that we've got, I know relative to the total investment costs -- keep in mind, a lot of that investment costs, number one, it's 10x rent and then you've got preopening, which is all deductible and in time 0, if you will, from a cash flow perspective. So it's a pretty big number for us. So all of that factors into the returns. These returns aren't as strong as they were 3 or 4 years ago when our average investment costs were in the low 4s. So it's still a cautious time for us and one reason why we're doing 24 Texas Roadhouses and not 34 or 44. And we've always said it's probably going to get tougher once we get past each hundred of restaurant and now past 500, if you will. We know it's going to get a bit tougher and part of the rationale why we set our limit to probably 700 to 800 because the return equation just gets tougher and tougher.

As well, our building materials are up and the labor associated with electric HVAC and plumbing is up. So part of it is baked in there as well.

Should our expectation be that Bubba's will continue to increase in the number of units and Texas Roadhouse will continue to decline in terms of total number of units but the 30 will stay pretty constant going forward?

I think, Chris, it depends on how well Bubba's performs over time and if we're able to get the economics for the returns, I'll say, to a point that we're comfortable increasing the number of Bubba's that we build. I think as I mentioned earlier, we do need to do continued work on the investment costs. If we can grow sales, that's great. Margins are really good on the Bubba's side. I think the investment cost is the bigger opportunity for us. If we can continue to work on that, I would see us accelerate a number of others. Definitely the runway is there. There's no doubt for the food and the service that we're able to provide, there's a long runway for it. We just got to keep sharpening our pencils on the box of economics.

This is Kent. Also on the people in front, too, we want to let our leaders at Bubba's get a little more experience before we push down the gas a little more as well.

Okay. And then just lastly, why does the company chose to leave so much cash on the balance sheet?

Well, we like looking at large numbers of cash on our balance sheet, basically. It's a risky world out there, and you'll never know what could happen. That's one thing. Second thing is we've got a lot of flexibility, obviously, when you've got that much cash on the balance sheet. Whether it's to buy back our stock, buy something else or part franchisees, whatever it is, at the end of the day, we'd like to have the flexibility. There's a limit of how much cash, I can't comment on what that limit is, that we would allow to pile up. But we definitely like seeing the flexibility that we have.

And we wanted to be very prudent on our stock buybacks as well.

We'll go next to David Palmer with RBC.

It looks like labor per restaurant was up 7% or so, maybe a little bit more. Given the mid-single-digit guidance for labor inflation, does that imply that you think that inflation will moderate in the upcoming quarters?

I would say we certainly hope so. I mean, you're right, it was up 7%. That's all in. And we saw hourly wage rate inflation was up about a little over 4%. We had that manager compensation change that we took early December. That's running about 1. And then obviously, the traffic, how much traffic you're running also comes into play as far as what your store week growth is. So I would -- so that's 7% store week growth. Just a little different than just wage rate inflation and the guidance that we're giving you on what we think the wage rate inflation would be.

I would tell you, too, we challenge our people, the staff, to grow sales. That's what we challenge them to do. And certainly, our folks get paid on the bottom line, so they have a natural incentive not to waste labor. But at the same time, they kind of get the sales is the path to making a lot of money. And they tend to be pretty comfortable being very well staffed. And over time is not necessarily a bad word. There's good overtime. There's bad overtime in any concept and we're not afraid to run some overtime. And that's part of the inflationary -- or part of the cost per store week of the labor increase that you're seeing as busy as we are. Particularly, first quarter is simply our busiest quarter of the year. So we're not too beat up over that, if you will. Sometimes with a healthy labor market comes a healthy revenue market as we've seen in our own tracker growth. And we know it hasn't always passed on to (inaudible) or casual diners, but I think the restaurant industry as a whole is growing. Many more people continue to open restaurants because of the opportunity that is there.

And just on your new store productivity, it looked like it improved across various ages of restaurants. To what do you attribute this improvement? And also just separately, calorie counts, do you think that that's going to have any change or any impact in your business? And why now for that?

This is Kent. We've been doing calorie counts for quite a while in New York and a couple of other places, and we've seen no change in the mix.

And there's -- right now, I think there's -- there were some rules out associated with some of the Affordable Healthcare Act that required calorie counts to go on in early May. I know there's some questions now as to if those are going to be implemented or not, but again, we were -- kind of had already started that process and didn't want to turn back on that. So we're going to go on and make that happen this week.

I think you had a question about performance of last year's and all the restaurants, and now our oldest group of restaurants continues to have very robust sales growth and has historically. I think it's just part of our -- the way we operate. Particularly, our local store marketing programs and building relationships in our various communities has always been a big plus for us.

We'll go next to Jeffrey Bernstein with Barclays.

My first question is sort of a follow-up on the pricing, I guess, you're taking this week. I was wondering how you determine that level. I think you said 50 bps. I'm not sure whether you -- is that based on serving of the operators? I mean, it sounds like your traffic is solidly positive, and it sounds like that pricing isn't necessarily enough to offset inflation. So I'm just wondering what the push and pull is in terms of how you arrive at that pricing? And I have one follow-up.

Yes, this is Kent. I had calls with all 50 of our area managers. And I would say of the stores that we are increasing, probably half of them had a labor increase on minimum wage in the various states. I would say that's probably half of it.

Was there any thought on taking pricing above the 50 basis points to better protect the margin against the outside inflation? Or at this point, you're concerned about not necessarily wanting to lose the traffic?

I would say the answer is no.

Yes, I think we're always going to be conservative when it comes to pricing and really being careful. Our operators would much rather drive traffic than take the chance on taking pricing up too much, and we just really want to make sure we're maintaining that value.

Got it. And then just on Bubba's and with 16 units already, and I know you said 6 this year, I mean, it sounds like you're making some tweaks to the size of the box and maybe the parking. But at this point, is it safe to say that you're confident at Bubba's as the second brand? Or are we not yet far enough along where we can make that kind of commitment just yet?

I am confident to tell you that is the second brand.

Great. My last thing was just any comment on Texas exposure. I know you mentioned something about regional trends, but I'm wondering whether Texas or any other regions were specific standouts.

Yes, Jeff, this is Tonya. Really, we didn't really see much of a change. I mean, Texas continues to perform well relative to the base of restaurants. We continue to see a little softness in the Northeast. That's really been that way for -- compared to the rest of the country. So really no changes from what we would normally see.

We'll go next to Jeff Farmer with Wells Fargo.

And sorry to harp on Bubba's, but definitely some follow-up questions on this one. So where do you guys stand with Bubba's management and development infrastructure? Meaning are there some sizeable incremental investments that will need to be made in '17 or '18? Are you guys still waiting to figure out when to make those investments?

Jeff, this is Scott. We've actually been making those investments. So 1.5 years or so ago, we've created a dedicated operational leadership position for Bubba's. We call it Regional Market Partner in Texas Roadhouse (inaudible), if you will. And he's gone out and hired a number of Market Partners. And those folks, in turn, have gone out and hired a number of potential or current managing partners, either to staff current restaurants or (inaudible) restaurants. So in essence, building the people pipeline. And on top of that, we've added similar support positions such as product coach, service coach that we have the Roadhouse side to the Bubba's side. So the Bubba's team is staffed, and they are getting in gear or have been getting in gear for some time now, as Kent mentioned, and are continuing to learn more about day-to-day operation of the concept, what the guest likes, what they like less and from all aspects of the quality of the food, the consistency of the food, the service experience, the asset, everything.

Yes, typically, we're hiring people 12 to 18 months ahead of when they get a store. So we would like to have some seasoned people with a relatively new brand.

And just again, a follow-up on that. So how are you handling the supply chain across the 2 concepts? Is there - is it shared supply chain? Is there efficiency there?

Not really much efficiency yet. I mean, the same purchasing department that does all the buying for Texas Roadhouse, for us, is also doing under all the buying for Bubba's. Ultimately, if we were to develop enough Bubba's, we would see more efficiencies. So there's some upside likely in food costs over time. But for now, the purchasing power is very minimal just given the smallness of the concept.

Okay. And then just final one again on Bubba's. So Scott, you were asked about the economics earlier, and I think you sort of said that you need to get clarity, figure out if that concept sort of merits the accelerated development. Is that decision when you have the, I guess, the feedback or all the information you need by the end of '17? Or is this something that sort of maybe you get into '18? When do you expect to have that clarity?

I think it's going to take us beyond '17 to ratchet out how far we can go on the development cost without sacrificing the experience of the guests in some way, shape or form, whether it's the overall vibe of the restaurant, whether it's our ability to crank out deflationary food, whatever those things are. We still got a little bit of ways to go to rightsize the whole thing. It's going to take us to fire a few more bullets, I think, out of the Bubba's gun just to figure that out.

(Operator Instructions) We'll go next to Andy Barish with Jefferies.

Just on the negative mix issue and the introduction of smaller entrées, I guess are you seeing -- I know you don't do sort of the real-time consumer behavior stuff, but do you think the consumer is changing? Or is it -- are you responding and trying to attract a new consumer to the brand with some of these smaller, lower price point entrées?

Andy, this is Kent. It's just some people don't like to eat as much and some people don't like to pay as much. It's kind of that simple, believe it or not.

Okay. And are consumers kind of figuring out the wait with early dine? Is that continued increase as well to try to avoid the wait time going on in a lot of restaurant?

Yes, exactly, I mean, early time -- not early time, early dine is up a little bit. Our carryout's up a little bit as well and has grown over the years without us really pushing it. It continues to go in part because of the ways that we have [inside the] 4 walls. And we've gone to more of an online to-go platform that's still rolling out along with our app on which you can order to-go in addition to get on our call ahead list and pay your bill. All those things are being rolled now. And when you have online to-go, typically you sell a little bit more to-go products. So all those are a little bit lower guest check occasions in that case. But I think people also figure out that our 5 or 6 and 8-ounce sirloins are really awesome. It's sort of like have you had our steak lately, and if you had, you kind of go wow, pretty good. And so that's part of our -- part of what's made us successful.

We'll go next to Karen Holthouse with Goldman Sachs.

One more Bubba's question for you. So there's a couple of units out that have been opened for a couple of years. Are those units -- if you were to look at sort of the Bubba's-only same store sales comp, are those units comping positively?

That's something that, I would tell you, is mixed. So we've got some that are up, and we've got some that are down. And that's part of us trying to figure out, sharpening our pencils on what is the guest liking about the concept, not liking about the concept. Is it us? Is it our operational execution, is it the menu? And again, all of the -- all of the older stores have the 2-bar prototypes, which are pretty large prototypes. And we're finding that in those 2-bar prototypes, sometimes the energy level can suffer a little bit depending upon the location, if the bars are less than full, meaning if you got 2 bars that are half full versus one bar that's full, and maybe that is not such a great experience. But we're still working on with the Bubba's team to try to understand the whys behind all that.

And then one quick modeling question. If you exclude the charges from this year and last year, G&A looks like it was actually down by about 30 basis points as a percent of sales. It's probably up, like, 5 -- 3, 4%, which is much kind of slower and less of an increase than what we've been seeing. Is there anything else in sort of noise in the incentive comp or something like that? Maybe I'm just want to think about where would be to extrapolate that trajectory forward.

Sure, Karen. This is Tonya. Yes, you're right. So bonuses, incentive compensation for the quarter did come in a bit lower in Q1 compared to last year due to the charge. So some of that is coming into play there. If you keep back just those charges out, you're going to see more of that bonus impact.

Okay. So then thinking about the growth rates going forward, would we expect that the year-over-year increases are accelerating? Or is 20 or 30 basis points of leverage reasonable for the rest of the year? It was a pretty stark departure in trend.

Yes, I think for the full year, we expect -- our goal is to keep G&A growth year-over-year below revenue growth. I mean, that's what we're shooting for. So I would say we definitely still expect, even baking out the charges, there to be some growth year-over-year on the G&A line.

We'll go next to Jason West with Crédit Suisse.

Just a couple of things. On the beef outlook, it looks like these prices has started to come up again off the bottom here. I don't know if -- what you guys are seeing there, if you expect the bounce we've seen lately in cattle and beef prices to be sort of temporary and then which [tail end] sort of a downward trend. Or are we going to start seeing higher beef prices as soon as the back half of this year?

Don't know. I mean, really, I would tell you, we're floating a pretty significant amount of the beef, especially in the back half of the year. And there's some thought that waiting is maybe the better way to go. But who knows, at the end of the day, you're absolutely right, cattle futures are -- look pretty good right now. So who knows where that'll end up?

Seasonally, this is a higher time -- or seasonally, Q2 is higher normally for price of cattle and beef in general. So that's not necessarily that unusual. I still think the trend is in a pretty good direction. But we never expect or bank on any particular direction, to be honest, beyond the years out.

And can you comment what was the 1Q deflation in the full basket? And then if you get off what beef was in the quarter as well? I didn't catch that.

We didn't talk about beef on the full basket, but beef is deflation. But we did talk about the commodity basket was 2.4% deflation.

We don't typically give out beef by itself.

Okay. Got it. And then just want to understand on the labor outlook. The overtime real change you guys put in place in early December, that's kind of a onetime step-up that you would lap, I guess, going into next year or not lap, but it would sort of level off into next year and maybe takes a little bit of pressure off the labor line for next year?

Yes, you're absolutely right. We rolled that at the beginning of December '16. So we would see that -- we would start lapping that at the end of November this year.

We'll go next to Alton Stump with Longbow Research.

Just a quick question, actually a follow-up on a prior call asking about balance sheet, Scott, obviously, generating certainly more than enough core operating cash flow to fund your capital expenditures, which sounded like that can move up without any meaningful incoming years. So why not put your balance sheet more to work? You've got net cash position once again able to fund growth on your own. Just what's your thinking as far as whether it would be buybacks and/or dividends to potentially put your balance sheet to work?

Well, we continue to raise our dividend at pretty healthy rate each year. And we've done that and we'll continue to that. And having all that cash certainly helps protect our ability to do that. Again, we bought back 4 franchise stores at the beginning of the year, and you may see us do more of that in the coming years. We just like to have a lot of flexibility. We also like to just know we're able to weather any storm that might come our way because sometimes these things happen. I mean, the economy is starting to look pretty good now. Unemployment is pretty low, and all of a sudden, it's not. So we just have seen other companies have some tough times, and we just want to be prepared in case that happens to us for whatever reason. We've got a lot of cash on hand to take care of the day. But again, if the opportunity presents itself in some way to use that cash, we'll definitely put it to work if we feel the return is there.

Makes sense. And then just one follow-up, just also back to a prior question. I know there's a lot going on, as mentioned by Tonya, as far as, of course, holiday shifts, et cetera, during the quarter. But as far as the tax return impact, it would seem to me like that would be a pretty big deal. Just that's what the numbers were. How many people have their tax returns delayed. Was there any evidence you guys saw, whether it's the markets or population groups that were most heavily impacted by those delays on -- if it did indeed drive some of that traffic recovery from the first half to the back half of the quarter?

Yes, Alton, this is Tonya. I don't think there would be any possible way to read that into the numbers. I mean, there's just no way to isolate that. And you certainly can't ask people. It's just really hard to quantify what that could be. I mean, given the size of the tax delays that a lot of people were talking about, I mean, it's not unreasonable to think that, that was maybe doing some things there, but there'd be no way to quantify what that was from a comp perspective for us.

We'll go next to Peter Saleh with BTIG.

I just wanted to get your perspective on the industry dynamics, I guess, during the quarter. And maybe if we even take a step back a little bit into last quarter, are you seeing the promotional environment of discounting? Has that changed at all over the past couple of months? I guess what is your take on the overall promotional discounting environment today?

Peter, this is Scott. We don't have a specific measurement for that. It does seem like there are certain people that are discounting and then they stop and other people start discounting and then they stop. It just seems like there's always somebody out there with some level of discounting. But at the end of the day, we -- that's why we keep our prices very aggressive and competitive and why we only take -- you're only taking 0.5% versus any more. We never talk in terms of pricing power. And so it drives kind of what we do. We just don't have a measurement to tell you that the level of discounting or promotional activity is greater or less than what it was last week, last month or last year.

And then I think you mentioned your to-go sales grew during the quarter. Can you give us a sense of where to-go sales as a percentage of mix are today and how quickly they grew in the quarter?

Well, they're about 5% to 6% of our total sales today. I can't tell you how much they grew in the quarter. I can tell you, if you went back 5 years ago, they were 3% -- roughly 3% to 4% of our sales. So they've grown in a nice clip over the last 3 or 4 years.

We'll go next to John Zolidis with Buckingham.

A question on 2 separate topics. First one is a follow-up on the labor cost. You mentioned that it was up about 7% per store. And one of the explanations for that relative to the mid-single-digit guidance on labor inflation was the sales performance in the store. So my question is, is -- if there -- if we're assuming a 3 comp environment going forward, just theoretically, should we also then assume about a 7% per store labor increase?

Well, yes, when we were talking about the 7%, that was on a per store week basis. Typically, I can -- it's a hard question to answer. Typically, I can tell you when we're looking at that, we would assume you're going to probably lose the benefit about 50% of the traffic when you're looking at labor as a percentage on a store week basis as far as they're growing. So you don't get the full impact of that traffic flowing through. You're going to lose probably about 50% of that. But that number can be different. It just depends on the productivity of the restaurant, how well they're staffing, different things like that. It could be more. It could be less. But just when we're kind of looking out over the long term, that's kind of the number we use.

So just to clarify, on a 3% comp, is -- the 7% labor per store week could be higher or lower than that going forward?

Yes, yes. Part of it depends on just you've got multiple pieces that define labor inflation. You've got just inflation in hourly wage rates of just hourly positions in the restaurant. And some of those are influenced by the labor markets, some influenced by minimum wage. You've got other piece influenced by just our traffic counts and how much we staff in our restaurants to manage our traffic. And then you've got, of course, the impact from the -- at what time -- it was called the Department of Labor changes. And so all those are slightly moving pieces. And so the comp growth piece is only one part that. So a 3% comp for the whole year could result in 7% labor per store week inflation. But it could be higher, it could be lower than that depending upon what these other 2 pieces do, meaning just inflation and just normal hourly wage rates plus the Department of Labor stuff and where that ends up being for the rest of the year.

And a lot depends on what -- how much of that 3% comp is traffic versus pricing. It's pricing you're going to get the benefit of.

Right, that makes a lot of sense. Okay. And then on a different topic, I wanted to ask about the purchase of the franchisees. I know it's 4 locations, but you mentioned you might do some additional locations. So first, just from a modeling standpoint, are those in addition to the 30 openings that were previously guided for the year? And then separately, can you talk about how you price and decide whether or not to purchase franchisees and what your return hurdle rates are, if those are similar versus you opening up a store on its own? Or do you use a different criteria?

So the 4 franchise stores are in -- that we purchased are in addition to the 30 openings that we've mentioned for 2017. To your point, there'd be roughly 34 additional company restaurants at the end of the year. Actually, 2 of the 4 are actually going to be joint ventures where we're buying a majority -- or we bought a majority portion of those restaurants. So typically, when we buy franchise store, we've got minimum return thresholds that we're shooting for. We're comfortable if those are a little bit below our return thresholds on a new restaurant most importantly because we already know what the sales are of the franchise restaurant. They already have a sales history, which takes a significant part of the risk and volatility out of the whole equation of knowing what's going to happen in a restaurant. So new store, no one's really that great at predicting sales in new restaurants. There's a certain amount of fluctuation there to it. Buying a franchise restaurant, you've already got a track record that you're buying. So you can afford to pay a little bit more for that, albeit it has a little bit lower return. (inaudible).

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

So I wanted to follow up on the to-go sales. As you mentioned, growing nicely, making some changes on the digital side. But there really hasn't been much of a focus in pushing that piece of the business. So can you just talk about conceptually your thought process behind to-go? What role does it play over time in the business? Is there any thought to really putting some more push behind it?

We like to have people come into our restaurants. Our mission statement is legendary -- through legendary service. Legendary service is a big part of it. The energy in our restaurants. We want to serve guests we want to spend an hour with them in our restaurant. That's what we love to do, is run restaurants. And we think it's a strength of ours. For those folks that prefer to take the food home, we want to do a great job with that. We want the food to be great. We want them to get great service with us. But ultimately, we want them to spend time with us inside the 4 walls. So we want to be very careful about pushing our guests into a carryout-type occasion and not coming in and spending time with us. Previously, some other concepts have gone that route. And while they may have been seeing carryout was incremental or it's getting to this level, it seemed like the reality was their dine in business was going down. And once your dining business starts going down, your restaurant gets a little more emptier, you lose a lot of energy, and it just ends up being maybe a tiny bit incremental in the short term but more detrimental in the long term. So we're just very careful about how we talk about carryout -- the carryout opportunity.

That's helpful. I also wanted to circle back on something I think you mentioned last call, which was making some investments in the back of the house to kind of ease up some capacity. Where are you on the thought process as it relates to that? And is there a percentage of the company-owned stores that you think might need that type of investment?

I'm not sure -- the only thing you're talking about is making our kitchens bigger. We really haven't gone that route in a big way yet. We've just been experimenting with various plans on what would it mean cost-wise to expand the back of house to support adding additional seats, but there's also the part of how food flows through the kitchen and certain bottlenecks in the kitchen that we have to resolve. Otherwise, not to have inordinate cook times. It will just make our guests be upset. So we're still playing around with different plans, but we haven't pulled any triggers on really kitchen expansion at this point.

And next, we'll go to John Ivankoe with JPMorgan.

Just a couple of quick ones, if I may. Scott, in your prepared remarks, you mentioned not being happy with or I guess wanting the newer average weekly sales volumes at 87,000 to be closer to your existing units of 100, 87% just the way those numbers work out perfectly. Is there a specific plan of looking at that newer class to get in sales volumes? I mean, are you doing anything from a marketing or operational perspective? Or was that just like a broad comment that you wish they were higher?

It's more of a broad comment to wish they were higher, John. Again, as we've mentioned before, we know it's tougher. And so when you're looking at the individual locations, you kind of knew going in, this one, smaller town; or this one, more competition; or this one, more on the outskirts of a particular city. So you knew you were taking a little bit more risk and it might be a longer road to get to a more higher sales volume, meaning that either you've got to let the pocket (inaudible) catch up to where you build, you got to wait out somebody else to -- competition to close or you know you just are taking some chances with some smaller towns and you got to accept a little bit lower sales and therefore a little bit lower return that you're okay with as long as it's above your cost of capital. And so that's just part of that.

Let me take the bait on what you just said. Wait for some competition to close. Are you beginning to see competition closing have a positive impact on your business even in specific trade areas?

Yes. I mean, if you've got -- I think we had 25 Logan's closed recently. We've got Logan's that closed just near us. Typically, that's going to -- some of those folks are going to drift over to us or any other concept that has a similar menu to ours, and that's going to be a help to us. So sometimes, we know that can happen and that can be a benefit for us. And we treat it like a marathon, not a sprint, so -- and we do these deals, and a lot of times, that can happen and will happen.

Okay. And you're asked about your cash balance a number of different times on the call. And I think you used a word acquire something else at one point in one of the answers. What would that be? I mean, would that be casual dining brand, a casual dining value brand? Would you potentially do an asset deal and do conversions to Texas Roadhouse? I mean, what's that strategic planning at this point in terms of maybe you guys doing something additive or transformational? Or what makes sense for the company at this point?

This is Kent. It would be called buying back more franchisees.

All right. Sorry for putting words in your mouth. I didn't mean to do that. So is an acquisition off the table at this point for anything that you currently you don't own?

You got somebody in mind?

Sure, I don't -- not officially, there's a lot of cool independent stuff that's out there, as you know, but it's probably not the venue to draw out names.

I'll have your people call our people.

Well, I can't know about that. So we have to stop talking about that.

Yes. I can't -- I would tell you this, John, I would say that I would never say never in that. We don't have our heads in the sand, I'll tell you that. Highly unlikely we would buy something of a large size that somebody pitched to us for G&A efficiencies or even large-scale conversion for Texas Roadhouse locations or even Bubba's location. That happened in the past. Usually, if it's some 50, 100, 200 store restaurant chain, we like through the sites. Nobody's going to say through the sites. So I don't see us doing anything in a big way. If anything, it would be really small to your point, some small independent or something. And that's a big if, but I would never say never.

And we'll take our final question with Steve Anderson with Maxim Group.

Most of my questions have been answered, but I do want to ask about geography. I know you said the units on those. Anything, any wild swings in between regions? But we're hearing from some of the operators that some of the Midwestern operators have seen better sales relative to a year ago. They think weather might have played a role in the easier comparisons. I just want to get your thoughts on that.

Yes, I mean, you always have the potential for some weather shifts. You'll just never know year-over-year. We really don't pay a whole lot of attention to weather or what impact it's having. I can't think of anything. There was nothing that we would call out that was significantly different or driving anything.

We don't measure it. And our Midwest region wasn't that much different than our other regions say for, as Tonya mentioned earlier, the Northeast was a little bit softer, but not that much different. So I wouldn't say that there's something there today.

And we'll take our final question from Brett Levy with Deutsche Bank.

Will you be able to share a little bit more color on how you're thinking about technology, what's going on with your test in Houston? And just in general, are they customer-facing at the store level or are there areas where you might have additional capacity improvements?

Well, Brett, this is Scott. I mean, right, so we started our app test in Houston and we've expanded to Dallas. And then now we're probably encrypted at maybe 100 restaurants now with the app, pretty soon to be 100 restaurants. And I imagine by the end of the year, it will be most of country that will have the app. But again on our app, you can get on our call ahead list, you can pay your bill and you can also order to-go. It will be slow going, meaning there will be some people will download the app, some people won't. Our marketing folks are working on various incentives to get people to establish a profile and download the app and use the app in various ways, but there'll still be plenty of need for us to have numerous phone lines and be prepared to answer the phone and be prepared to deal with an online platform as well in addition to the mobile platform. That's probably the biggest technological thing we have. We don't have any plans for table-side tablets at this point. At some point, I'm sure there will be some probably pay-at-the-table thing that we will do, but that technology continues to evolve. So not sure where we will end up on that or where the laws will take us, meaning will it be illegal for us to even touch your credit card 5 years from now? I don't know. But something will happen there and we will act accordingly with that. But actually, the biggest thing technology-wise that we've got, we've got our gifts management system in place that we're very happy with. We've got our back office system, which helps us better understand our food costs, P&L and look at labor and so forth, which we are very happy with. So we don't have plans at least in the Roadhouse brand to do a kitchen display system like you see at other concepts. Bubba's has it. But we don't think today, it's something that's needed at Texas Roadhouse. So we feel pretty good where we're at right now technology-wise.

This is Kent. We have been pleased with our to-go sales with people online and using the app. So hopefully, that will be a nice add for us.

I'd like to turn the conference back over to management for closing comments.

Yes. Thanks to everybody for joining us, and have a great week. Thanks.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation.