Texas Roadhouse Inc (TXRH) 2022 Q4 法說會逐字稿

Good evening, everyone, and welcome to the Texas Roadhouse Fourth Quarter Earnings Conference Call. (Operator Instructions)

I would now like to introduce Mr. Keith Humpich, the Interim Chief Financial Officer for Texas Roadhouse Mr. Humpich, you may begin.

Thank you, Bo, and good evening. By now you should have access to our earnings release for the fourth quarter ended December 27, 2022. It may also be found on our website at texasroadhouse.com in the Investors section.

I would like to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

We refer all of you to our earnings release and our recent filings with the SEC. These documents provide 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 in our earnings release.

On the call with me today is Jerry Morgan, Chief Executive Officer of Texas Roadhouse; Gina Tobin, President of Texas Roadhouse; and Michael Bailen, Head of Investor Relations. Most of you know, Michael, so I have asked him to provide today's financial update. Following the prepared remarks, we will all be available to answer your questions.

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

Thanks, Keith, and good evening everyone. Before we begin our formal remarks, I want to thank Gina, Keith and Michael for joining me on the call today, and express my appreciation for them stepping into more visible roles. They are all veterans of Texas Roadhouse and I look-forward to seeing them further contribute to the growth of the company for years to come. I would also like to address the recent retirement of Tonya Robinson as CFO. I had the privilege of working with Tonya for 24 years. On behalf of Texas Roadhouse, I want to thank her for the contribution she made to the company and I wish her nothing, but the best.

Moving forward we're in the process of a national search for a permanent CFO. We appreciate Keith taking on an escalated leadership role as our Interim CFO, and we have the utmost confidence in him and the rest of our experienced financial team.

And now we will move on to our prepared remarks. There is no doubt that 2022 was a milestone year for Texas Roadhouse, with annual revenue surpassing $4 billion for the first time in our history. This is especially remarkable, as it was only 5 years ago that we exceeded $2 billion in revenue. By maintaining our long-term focus on -- of opening restaurants across all of our concepts, we see the potential to double our revenue again over the next decade.

In 2022, despite inflationary pressures throughout the business, our strong topline results helped us achieve significant growth in restaurant margin dollars, net income and earnings per share. We also returned over $120 million to our shareholders in the form of dividends, repaid $50 million of debt and repurchased over $210 million of stock. Additionally, during 2022 we acquired 8 franchise restaurants for $33 million, all these actions benefited our shareholders and we're pleased to have numerous levers at our disposal to create value.

Turning to 2023, we have been impressed by the strength of the consumer. We're pleased to see our sales momentum carryover from '22 into the beginning of this year. The demand to dine inside the restaurants has grown and we continue to hold on to a significant amount of our To-Go business. We also are encouraged by the potential for a slowing rate of inflation, even though the underlying costs for labor and commodities is still to remain escalated.

Looking long-term, we have no plans to lower our target margin percentage. Our margin dollars are strong and we believe margin percentages will improve over time as commodity and other operating costs pressures subside. As a result, we will continue to manage the business with a disciplined approach and focus on our long-term value proposition.

Speaking of value, we recently-completed menu pricing calls with our operators and will be taking a 2.2% menu price increase. We believe this level of pricing sets us up to achieve a solid year of sales and profit growth, while furthering our industry leading value, as many of you know this approach has consistently rewarded our guests and shareholders over the past 30 years.

Moving on to development, we opened 23 company restaurants across all concepts in 2022 and in 2023, we expect between 25 and 30 Texas Roadhouse and Bubbas company openings as well as 3 Jaggers. Our franchise partners opened 7 International Roadhouses in 2022 and we expect them to open as many as 12 international and domestic locations in 2023.

We will continue to maintain our long-term focus, when it comes to capital allocation and shareholder value creation. We believe the best and most strategic use of our cash is building new restaurants and taking care of our existing restaurants. Additionally, as I alluded to earlier, our balance sheet and strong operating cash flow will position us to consistently grow our dividend, acquire franchise restaurants and opportunistically repurchase shares and pay down the remainder of our debt.

Finally, I want to comment on Gina's promotion to President of Texas Roadhouse. When I joined Texas Roadhouse 26 years ago and asked people which Managing Partner I needed to learn from, Gina was always the first name mentioned. During her career at Texas Roadhouse, Gina has been a Managing Partner, a Market Partner, Head of our Training Department and most recently our Chief Learning and Culture Officer.

Gina, I could not be more excited to have you as my partner and taking a bigger role in the company. Why don't you share a few thoughts with everyone?

Thanks, Jerry. I am excited to have the opportunity to carry on the mission of keeping the Managing Partner at the center of our universe and ensuring that we always view the business with an operators mentality, which has been the key to our long-term success. I look-forward to partnering with all Roadies in maintaining our culture and serving our operators, each and every day. As many of you know, our unique culture, which has been shaped by our people, our past hardships, our successes and our values, provides us with a competitive advantage. And as Kent often said, we're a people-first company, that just happens to serve steak. It is my promise and commitment to always put our people at the forefront of my work, as President.

Now, Michael will provide you a financial update.

Thanks Gina. For the fourth quarter of 2022, we reported revenue growth of 12.7%, primarily driven by a 7.1% increase in average unit volume and store week growth of 5.5%. We also reported that net income increased 12.8% to $59.9 million and diluted earnings per share increased by 17.4% to $0.89. For the quarter, our restaurants averaged over $130,000 in weekly sales and To-Go represented approximately $16,400 or 12.6% of these total weekly sales. Comparable restaurant sales increased 7.3% in the fourth quarter, driven by 6.2% average check growth and a 1.1% increase in guest traffic. By month, comparable sales grew 8.3%, 7.3% and 6.5% for our October, November and December periods respectively.

Turning to 2023, weekly sales averaged over $146,000 for the first 7 weeks, with comparable sales up 15.8% as compared to the same period in 2022. We do not expect this level of comp growth to continue, as we move past the lapping of Omicron, and go up against higher traffic levels in the coming weeks. At the same time, we do not want to downplay the current results, as our restaurants averaged more guests over the past 7 weeks, than in any period in our history.

For the fourth quarter, restaurant margin dollars grew 3.4% to $145.6 million and were 14.5% as a percentage of total sales, down 132 basis points as compared to last year. Food and beverage costs as a percentage of total sales were 35.1% for the fourth quarter, up 4 basis points compared to 2021. This increase was primarily due to commodity inflation of 6.6% in the quarter, mostly offset by the benefit of menu pricing. Inflation for the fourth quarter was largely in line with expectations other than higher previous costs. As a result, our full year commodity inflation came in at 10.8%.

For 2023, our commodity inflation guidance remains unchanged at 5% to 6%. We also continue to expect that the majority of the inflation for 2023 will be driven by higher beef costs. We have approximately 60% of the commodity basket locked for the first half of the year, and based on current visibility, we expect inflation in the first half of the year will be above the top-end of our full-year guidance.

Labor as percentage of total sales increased 75 basis points to 33.4% as compared to the fourth quarter of 2021, while labor dollars per store week increased 9.3%. This increase in labor dollars per store week was driven by wage and other labor inflation of 7.8% and growth in hours of 1.9%. These increases were partially offset by the $1.1 million net benefit of adjustments to the reserves related to our workers' comp and group insurance programs. The reserve adjustments include a $0.3 million favorable adjustment this year and a $0.8 million unfavorable adjustment last year. For 2023, our guidance of wage and other inflation between 5% and 6% remains unchanged.

Other operating costs were 15.3% of sales, which was up 58 basis points as compared to the fourth quarter of 2021. The year-over-year benefit of sales leverage was more than offset by a continuation of the higher costs we're seeing in areas such as utilities, credit card charges and repair and maintenance expense.

Moving to our restaurant margin, G&A in the fourth quarter was 4% of revenue, with the overall expense down $2.3 million versus 2021. The primary drivers of the decreased year-over-year G&A spend or a $1.1 million benefit from one-time accrual adjustments and a $1 million decrease in total cash and equity compensation. Our effective tax rate was 11.5% for the fourth quarter and 13.6% for the full year, assuming no changes in the tax code, we now expect an income tax rate of approximately 14% for 2023.

With regards to the cash flow, we ended the year with $174 million of cash and $50 million of debt. Cash flow from operations for the fourth quarter was $117 million. This was offset by $72 million of capital expenditures, $31 million of dividend payments and $25 million of debt repayment. We continue to expect full year 2023 capital expenditures to be approximately $265 million.

And I will also mention that on the first day of fiscal 2023, we spent approximately $39 million on the acquisition of 8 domestic franchise restaurants. These restaurants are included in our expectation of at least 6% store week growth.

Finally, as announced today in our earnings release, our Board of Directors has authorized a 20% increase in our quarterly dividend payment, increasing it to $0.55 per share from $0.46 per share in 2022.

Now. I will turn the call-back over to Jerry for final comments.

Thanks, Michael. Our future success depends on staying focused on driving top line growth and providing a legendary experience to every guest. We will do that by keeping value at the centerpiece of the menu and taking care of our Roadies, who in turn will take care of our guests. Tomorrow marks the 30th anniversary of the opening of the first Texas Roadhouse. I look-forward to celebrating this anniversary at our annual conference, with over 700 Managing Partners, who represent the very best of what this company has become over the past 30 years.

That concludes our prepared remarks. Operator, please open the lines for questions.

(Operator Instructions). We'll take our first question this afternoon from Chris Carril of RBC Capital Markets.

So Jerry could you maybe expand a bit more on the brand commentary around the start of the year If my math is correct, the 3-year stack appears to have meaningfully accelerated in the first 7 weeks of '23 versus the 4Q and December in particular. So any additional detail would be helpful there?

Yes. I mean, we're very excited about the demand for our concept and we've seen the escalation, we softened a little bit in December, but it came roaring back in -- in January, this first part of February. So, I would just tell you I -- I think it's about our execution and about the quality of the product that we're putting on the plate and we will keep pushing that and I think that's what helps drive our topline sales.

Got it. And then on the long-term outlook, you mentioned in the prepared remarks, I think it was a doubling of revenue over the next 10 years. What are the underpinnings of that, maybe specifically around development across the 3 brands?

Yes. I mean, I think if we look back at the last 5 years and we have doubled from there, the way we see it with the growth of our existing restaurants and our continued sales escalations, we definitely feel like that is attainable with the 3 concepts and the trends that we currently can model out. Michael might have a couple of comments on how we get there.

Yes. Chris, it's really not that different than what you're seeing us doing right now, keeping Roadhouse development in that 20 to 25 restaurants, and obviously seeing Bubbas grow to maybe low double digits, and then on top of that Jaggers could see a little bit of growth. But the assumption of around 30 restaurants a year and some modest traffic and check growth is really the underlying assumption that gets you there.

Next now to Brian Harbour of Morgan Stanley.

Can you just talk about the pricing decision a little bit? And are you still going to stick to kind of the 2x per year, if for example, beef becomes more inflationary in the second half, do you want to address that with pricing or do you think that there will still be kind of short-term volatility there and you're just more focused on kind of value proposition?

Hey Brian, it's Michael. I think we're committed to looking at menu pricing twice a year. We look at it with the intention of taking pricing in early April and sometime in October. You might remember that commodity inflation is something that we don't typically focus our menu pricing on. We view that as cyclical in nature. So we're more focused on the structural items, the labor component when we're determining what level of pricing we're going to take. Obviously, any pricing that we take to deal with labor pressures will also help the commodities and other lines. But we -- we're in this for the long-term and really don't kneejerk react to commodity costs being above or below what we might expect at one point, when we're factoring in our menu pricing.

Makes sense. And then, just on kind of uses of cash, you're running pretty low debt here, do you think it makes sense to pay down the rest of that. And then also I think you had repurchased some shares earlier in the year, it doesn't look like as much in the second half, but do you have an intent to return to that?

Yes, Brian, this is Keith. Yes, on our debt, we plan on paying all that back this year. We' probably even look to do that in the first quarter, but we'll be making that decision in the coming weeks. On share repurchases, we're really proud of our share repurchase program over the years and the value that we've created from that. And in the last 4 years, which includes some pandemic years, we repurchased over $400 million of our stock. And when we look to at this year, I'd say that we would definitely look to buyback dilution, and then anything after that, it was going to depend on our other capital allocation needs, what our cash balance is and really the market conditions, and then we're going to make whatever decisions we feel like we have to -- in the best interest of our shareholders and our company.

We go next to Brian Bittner of Oppenheimer.

I'd like to go back to the business trends you're seeing so far. In the first quarter you said comps are up about 16%. And based on your commentary last year, I think that implies average weekly sales are trending at that $147,000 level. Can you confirm that? Is the math correct there? Is that where the average weekly sales are trending in and is that how we should think about average weekly sales for the rest of the quarter? Or is there some reason why those are going to decelerate to a lower level for the full quarter?

Hey Brian, it's Michael. Your math is pretty spot on. Yes, we were 15.8% comp growth. And then in our remarks, I said we averaged $146,000 over the first 7 weeks. I would say, look, we don't know what the next 6 weeks of the quarter are going to bring. Certainly we were lapping Omicron, which would -- that helped with some of those -- some of that large growth that you're seeing. So, yes, sales you know, that percentage probably comes down from there, as we start to lap some more normalized numbers. But I think we still have opportunity to grow, whether that's a $146,000 something more around that range, we will see, but we've certainly shown that we're able to generate that level inside our restaurants and that's how our operators are going to continue to view the business.

Yes, and I would say, we've been very good on gift card redemption and there has been some driving forces with some great weather across our country and some enthusiasm out there. But I think there's a couple of reasons why it's being aggressive right now, which we're excited about, I don't know how long it will hold at that level.

Yes, sorry, sorry, Michael. I must have missed the call out on that $146,000 in the prepared remarks, I apologize for that. My follow-up is on the labor costs, the per operating week costs outpunch the inflation because of the hours that have been added in the fourth quarter. But the question is moving forward, you've given us this labor inflation guidance for '23, but how should we think about the per operating week costs in that labor line? Because with the type of comps you're seeing so far -- for '23, the question becomes how much operating leverage do you get off that, particularly on the labor line?

Yes, I mean -- I think there is -- yes there is something sort of to be determined there. Look, we're still obviously in the first quarter rebuilding the hours from the Omicron impact of last year. Staffing has gotten much stronger and it's getting to the levels we need. So the hours growth is probably going to come down and I think at some point, maybe in the back half of the year, we get back closer to our historical algorithm, for a lack of a better term as to how our traffic -- or hours grow in 50% of our traffic growth. We'll see if there is a new normal or something else.

But I think there is some -- there is no doubt going to be wage pressure throughout the year is our expectation. So maybe the midpoint of our guidance and anyway, healthy consumer, that labor line maybe holds fairly steady for the year, probably wouldn't surprise me to see some pressure earlier in the year and then maybe getting some benefit in the back half of the year.

We'll go next to David Palmer of Evercore ISI. And Mr. Palmer your line is open. We can't hear. You might want to check your mute function on your phone.

Can you hear me?

We can hear you now sir.

Okay. The inflation, 5% to 6%, the early -- you said it's going to be above that high end of the 5% to 6% in the first quarter, and that would be -- I assume it's going to be related to beef, but if you could just give us a sense of what sort of cadence of the inflation you're expecting and the breakdown of that between beef and other?

Yes. Hey David, it's Michael. We did say, yes, we expect the commodity inflation to be above the top end of the range, not just for the first quarter, but the first half of the year. And a lot of that is certainly driven by beef. Pretty much throughout the whole year, that's going to be the major pressure point, we believe in our commodity basket in 2023 is beef. So we were going to feel pressures in other areas. Some of that you're going to see maybe diminish as we move through the year. The first quarter of last year, hadn't really felt the impact from what's going on in the Ukraine as of yet, so we're still lapping some of that. That's some of the reason why you're going to feel higher inflation in the first quarter and second quarter, and then we start to lap some of those higher numbers. So beef pressure throughout the year and maybe moderation in other areas, as we move through the quarters.

And then, I was wondering if you wouldn't mind just giving a little color about Bubbas. We don't have them here in the Northeast and we'd love to get went up here. But, how are the returns of those units versus we can see that some of the stack comp numbers, they look pretty good, but how are the returns versus the Roadhouse on those units, and are you seeing a fairly even set of returns are they doing as well in the ones you're placing in the Midwest, as they do in the south and in Texas?

Yes, David, it's Michael again. I would say, look we have 40 Bubbas right now and we're surely very excited about the concept. We're very pleased with the returns on some of the more recent openings, as well as some of the older ones. But when you have just 40 and you're learning, there are some in there that are underperforming that pull the overall number down. But we certainly believe in the concept, believe in its ability to generate that mid teen IRR that we we're looking for, which is the same return that we're looking for at Roadhouse and we're seeing great acceptance of the brand in the South, Southwest, in really all the areas that we're opening them and are very excited. We think we'll get about 5 of those open this year and long runway to go there.

We'll go next now to David Tarantino of Baird.

Jerry, you mentioned that you expect restaurant margin percentage to recover over time. And I guess my question is, is really about kind of the path to getting there. And I think you said, using commodity costs and some other items like leverage on traffic, but if you could just clarify, how do you get to higher margin percentages over time? And then Michael, can you comment on whether you think progress on that front is possible this year in terms of margin percentage, given all the puts and takes on the cost side?

Yes, hey, David, it's Michael. I'll start and then let Jerry add-in. I do think -- let's use the midpoint of our guidance range and the assumption that the consumer remains healthy and we see modest growth moving to the year, what level of growth that's going to be up to you guys to determine. But yes, I think you could see some -- on the percentage side, some margin improvement in 2023. I think other operating is certainly maybe the easiest path forward for some of that margin improvement, and then depending upon where we are within our guidance ranges on commodities and labor, and would factor into how much maybe leverage we could get in those areas.

And so, I think, obviously, driving traffic is one way, seeing the menu pricing flowing through is another way. But I'll tell you that the profit and percentages are important to us, but maintaining at that top line growth and maintain those restaurant margin dollars are just as important, if not more important.

Yes. And I would just say, as we continue to attack our top line sales and continue to watch inflation throughout our cost of goods, there's obviously that part of it. We do hope and do hear that maybe we're going to have some relief outside of [protein], and then other controllable from that labor, obviously as we really emphasized getting staff this year and making that investment, so that we can handle the sales and the volume that we're doing. So hopefully, we have really added to our part -- we have 82,000 people, so we're back above basically the pandemic levels and to handle the volume that we have.

So we really [didn't] want to utilize the tenure of our people now and the ability for them to handle the volume. There is a lot of ramping up to do these sales, so I feel very comfortable going into this year that we should see some relief and even make some headway on those 2 categories for sure.

Great. And just a clarification. Michael, is there some level of traffic that you're thinking about that would -- I guess traffic growth that would lead to margin expansion this year, is there a breakeven point that we should think about?

I don't know necessarily if there is a breakeven versus last year, probably on top of what we've already generated, some fairly modest traffic growth continuing through the year. Obviously pricing drives margin percents a lot more easily than does traffic, but you will probably need to continue to see traffic growth -- traffic growth is certainly going to benefit that labor line and the other operating line and help us get some leverage there.

The next now to Jeffrey Bernstein of Barclays.

2 questions. One, just on the unit side of things. I know this year you were originally talking about maybe 30 openings, now I think you referred to 25 or 30. In the short-term, just wondering whether there's any near-term headwinds that are kind of still weighing on things and that kind of ties into the 30 that Michael, I believe you mentioned for many years to come. You guys can do 30 a year. I'm just wondering now with potentially 3 concepts still humming along, just wondering what the constraint would be to going well above 30, whether or not there's anything in particular or whether that's just your comfort zone to assume 30 per year, and then I had 1 follow-up?

Yes, Jeffrey, how are you doing buddy? Listen, I do believe that we will continue to focus on the growth of Roadhouse at that low 20s and as we kick Bubbas in also, as we start working towards a double digit number. And then Jaggers is still a little bit early to see what we can put into the pipeline. I am excited about it. I do believe that it will continue to add to our portfolio.

So, I do believe that we can get to the high 20s and in low 30s in the next couple of years, is where our target focus is in our pipeline. And then I do see it escalating from there it will be incremental, but it's not going to be a big jump, but as we do get more aware of what we can do with Jaggers and Bubbas, they will be there. But we're very comfortable with where Roadhouse is in the pipeline for the next 3 years, I would say, and we could be at that number. And the other 2 will be the driver to kick us up over into the 30s or higher. So that would be the thought there on my side.

Got it. Is there any particular headwind in terms of this year or still ongoing delays and whatnot, that would maybe tamper it prior 30?

Yes, I believe there is some concerns on our part on just still a couple of things. The transition of property between our landlords delays things when we're in a negotiation and we've seen a little bit of that. Permitting is getting better, but it's still a challenge by city or municipality. So we're anticipating getting through all of that, but we also have to be cautious of what we've seen in the last couple of years.

Yes, Jeff, this is Michael I just want to mention, that adjustment from approximately 30 down to the 25 to 30, just with some of the movement that we were seeing, it just felt like the right thing to update, but really had no impact on our thoughts on the store week growth for the year. So it was deals that were already expected to be pretty late in the year, but just realistically look like they're going to slip into early next year, but again would not really change that store week growth number.

Got it. And my follow-up is just on the earlier question on beef. And I think you said the majority of your inflation is going to come from beef. I'm just wondering if you can share what you're currently contracted specifically for beef and maybe at what inflation rate that we're talking about? And then 1 of your larger peers reported earlier today and they talked about how they were 100% contracted for beef assuming mid single digit inflation. I'm just wondering how that compares, maybe it's different product, you're looking at different specs, but is the 100% something you would look to achieve or any color you can provide in terms of the outlook for beef specifically as we move through this year would be great?

Yes, we're not going to be given to you, what percent of our beef is locked for the year. Obviously, we have more of a locked in the first quarter into the second quarter than we do in the back half of the year. And with it being almost half of our basket, if we're 60% locked on the overall basket, beef has to be kind of that same general range. I did -- in our remarks stated, the majority -- and I think you could call that 80-ish percent of our commodity inflation for the year is expected to come from beef.

So again, if you just for easier math took the bottom end of our range of 5% commodity inflation, that would imply that you -- you're going to have beef inflation in your high single digits or low double digit is what is kind of embedded in that expectation. And again, we -- I can't really comment on how other -- what others are doing.

I can just tell you, with the way we buy our beef, where we buy our beef from, the fact that we age it and cut it in our restaurants, it does require us to maybe do something a little bit different than what others do. We have no problem locking in, when we think it's appropriate. But we're also -- we have some pretty smart people in our procurement department, who no -- wins -- when is the right time to be buying and when is the right time to wait and they will -- they will make those decisions on what they think will result in the best cost for us. And obviously if locking in can be done, we certainly will do that.

We'll go next now to Peter Saleh at BTIG.

Great. I wanted to come back to these sales performance. So far this year in the first 7 weeks, I know you saw a pretty sizable increase in average weekly sales of $146,000 and the fourth quarter was about $130,000, can you talk about -- is that increase really mostly that you're seeing, is that mostly traffic? Are you seeing any change in behavior in terms of what consumers are spending on? Is the check going up? Just anything when you look under the hood in those first 7 weeks, just trying to understand that consumer behavior there?

Yes, hey, Peter, it's Michael. Of that 15.8%, we have mentioned on the last call that we were going to have about 6% pricing. In the first quarter, we're seeing most of that flowing through. So, I would say, the traffic is just a tick over 10% of that 15.8% and the rest of it is check growth.

Great. And just on the -- staying on average weekly sales for a second. Given how high it is and it's pricing, maybe the highest that you guys have seen, how do you feel about staffing levels with average weekly sales at this level? Do you feel like you need to step-up? Do you feel like you're appropriately staffed? Should we expect the labor hours to increase from here, just any help with that would be appreciated?

Hey, Peter, this is Gina. I'll tell you that overall right now, we're very happy with our current staffing numbers. We've seen an increase in that. Our turnover is definitely going down. And we know that quality of people hired and retention is going to increase our productivity and that's going to help to drive down the labor percent, which is what we're currently working on right now. So, 10-year matters and connections to our people to create that culture and reduce that turnover amount will continue to be worked on.

We take our next question now from Sara Senatore of Bank of America.

I just want to kind of go back to the unit growth question, I think you said just sort of on the margin, maybe we'll see some of the units sort of in the following year in January to December. I noticed though the CapEx guide is unchanged and I guess -- I wanted to ask on that, are you still seeing relatively high inflation in build cost? Or is there sort of more repair or I should say I'd like updating maintenance CapEx that you're spending on or was any of that kind of deferred during the pandemic? And on a related note, the other operating expenses, like you said, repair and maintenance were high, so is that also kind of part and parcel of what we're seeing broadly, which is kind of some of these elevated -- still elevated costs? Just trying to understand, given how strong the volumes are, whether or not it's sort of marginal returns are higher, as you think they should be or maybe the cost of building has gone up sufficiently that it's offsetting some of that?

Hey, Sara, it's Michael. I'd say, first on the CapEx question, we're still going to be building those restaurants that -- that aren't going to open late this year. So the main reason, like the CapEx number didn't change, isn't because of an increase in our assumption for the cost, it's just simply that even though a store may not open until January or February of next year, it will probably be for the most part built by the end of this year. So the CapEx number did not need to move.

As far as other operating, we continue to feel those pressures in there, and a lot of services go into the other operating part of their -- part of the business, lot of supplies. The utilities continue to be a pressure point and repair and maintenance are still elevated. There's also other new piece that just -- that go in there that we really haven't talked a lot about in the future and aren't huge driving forces. But when we rollout new technology there, there are costs associated with that and whether that's running equipment or paying for installations, there are some costs that continue to pressure that line.

So with the growth in our volumes, we're certainly seeing more use of those different other operating items, but we're also seeing some new items introduced into that area. I'm optimistic that we won't see it grow the way it has or I'm hopeful that we won't see it grow on a dollar per store week the way we have and have more potential on that line for some leverage in 2023, but we will -- we will wait and see exactly how that all plays out.

Okay. And then just if you can give me a little bit of sense on the CapEx. I know it makes sense that the opening most of the work is being done before it opens, how much have -- inflation have you seen on build cost, let's say versus pre-COVID, just so I can get a sense of like where things stand versus maybe they were a couple of years ago?

Yes, there's a few things that go into that. There's obviously, the building costs there is the rents and everything else. But we've probably seen and you can't just look at the total costs and do the math one over the other, because again where the restaurants open 1 year versus the next, can have an impact on building costs and rents. But you probably have seen your ballpark 10% to 15% increases in the cost of building a restaurant. But we're also -- embedded in that, is we're building a bigger restaurant than we have in the past. So it's hard to separate those 2 items out.

We'll take our next question now from Dennis Geiger of UBS.

Great. Congrats to everyone on your promotions and expanded roles. I wanted to ask on G&A, you called out a couple of items contributing to the G&A levels in the fourth quarter, but curious if you could provide any thoughts on G&A in '23? Anything on investment there, whether it's as a percentage of sales G&A or maybe growth year-over-year, any color on what to expect this year?

Yes. Thanks Dennis, this is Keith. Yes, for G&A, you know, we always target to keep G&A growth lower than our revenue growth. And I think '23, might be a year where we get a little bit of that leverage back. We have a couple of G&A growth challenges in '23. 1 of those, as we talked about this is our 30 year anniversary and we're getting ready to have our Annual Managing Partner Conference. And with it being our 30th anniversary it's going to be quite the event and so I think you can definitely look to see us having elevated conference costs this year, and then that will be a big driver, some of it.

We also have a new human capital management system that's going in. So we're going to have several non-capitalizable costs that we'll be incurring this year, so that's going to be a very big factor. And then the other piece is really going to be with the pandemic slowdown, we've kind of been gradually recovering on a lot of things, but I think this is going to be the year where you're going to see us fully recovering, and even in some cases, catching up on things like travel and training and really investing in our people too. So I think those are going to be your main drivers this year.

Appreciate that color, Keith. 1 more quick one, just as it relates to pricing, as it relates to the current levels and the way you're taking in March, could you just help kind of level set us on what the effective pricing by quarter maybe looks like over the next couple of quarters given the moves there?

Yes, this is Michael, I can help you with that. So, first quarter -- with the 2.2% and assuming we don't take any pricing in October, we will have about 5.9% pricing for the first quarter, 5.6% in the second quarter, 5.1% in the third quarter and then 2.9% in the fourth quarter. And again we will be looking at menu pricing and most likely taking something in October, but that's the cadence without any additional pricing.

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

Hey, good afternoon. I had 2. The first one, I believe you said that you're pretty comfortable with the pipeline for new stores over the next 3 years. But it does feel like, we hear from almost everyone that they're looking to accelerate unit growth even, the ones that don't really grow units. I'm curious as you're building that pipeline further out, do you see that show up at all, more competition, higher costs, any of those types of things would be the first question? The second question is just on the acquired franchise units, any color around volumes and margins and any potential investments to get us where you want to be, relative to your -- to you system average?

I'll take the first part and I think Michael will grab that second part. Yes, I do. Obviously there is competition out there and I think there are -- but we have our targeted markets and states in growth areas and we've been working on this plan for quite a while, and it's been very successful for us for Roadhouse and Bubbas. And then obviously, as we're incorporating our strategy on how to grow Jaggers systematically, probably keeping it a little closer to here in the Kentucky Basin or the Heartland and knowing that around it.

But there is -- there is always competition and there is real estate that we had out there. I'm not sure what others are doing, but we're very focused on our strategy and our focus on how to continue to do it right. We do have some relocations that we're also incorporating into the system and which is really helping us in a different way. But that also adds to us looking for more real estate other than new store openings, but be able to take a store relocated, put a bigger parking spot in, in a bigger restaurant which we need for our volume, whether it'd be cooler expansions or bump outs or extra dining rooms as we look forward to it. We're excited about some opportunities to do some things little bigger, as they say in Texas, going forward.

Yes, Andrew, on those franchise acquisitions, I would say those are pretty average performing stores from a sales and profit standpoint. So I don't think you're going to see any kind of movement in our overall company numbers because of that. And from a CapEx requirement, there is some CapEx needed and that's built into our $265 million estimate for the year.

We'll go next now to Joshua Long of Stephens.

Great. First of all, I wanted to see if you might be able to provide a little bit more color on some of the underlying trends? I understand the strong trends here in the first part of the year, In the sort of context you provide as we think about Omicron impact from January. I believe there is also a calendar shift last year from Valentine's Day and Super Bowl, just sort of trying to get at the underlying trend here for the first part of the year would be my first one?

And then secondarily, it sounds like human capital is in a solid spot and then also just thinking about the growth and all the work you've done to maintain that gap between other peers in the industry since everyone is really focused on the human capital aspect going forward as the key pillar for how they're going to get out their growth, you've done that really well, historically. Just curious how you think about human capital and investments into that Roadie culture over the next 2, 3, 4, 5, 10 years kind of that next chapter to get at doubling of revenue that you talked about earlier in the call?

Hey Josh, it's Michael. Maybe I'll start with the first question about the first 7 weeks. We really don't have a lot of numbers to call out for you. I'll tell you, there's always a lot of different things going on, whether it be the lapping of Omicron and winter weather this year or winter weather last year, or the timing of Valentine's or Super Bowl. I'll tell you, we are seeing strength throughout the 7 weeks of the year. So there is really not any kind of number, I would call out and say, we do adjust it upwards or downwards because of something. I think it would be unfair to take -- to have you all add something to without backing something off and like I said -- I'd say, it's been a pretty consistent least strong performance throughout the 7 weeks.

And on the staffing side, I would tell you that I think in the last 18 months, on the human capital side -- or is that, (inaudible), or that part of it? No. So on the staffing side, no, we have been very aggressive over the last 18 months and we feel really good about our position on the people side in our restaurants in the front of the house, in the back of the house in our management team. So that piece of it has been a big investment. So we're hoping obviously this year as we settle in, and we reduce our turnover and we really focus on keeping our folks and connecting with our folks, that will be -- that will be an investment that we see a return on this year would be our hope.

We'll go next now to Andy Barish of Jefferies.

Hey guys. 2 quick ones from me. Just on the margin performance in the 4Q, can you help us level set -- I mean, it's unusual to see margins kind of go down from the 3Q to 4Q? Was there something about December flow-through that wasn't quite what you expected, or any help there just as we look to build off of that 14.5% restaurant level margin?

Yes. Hey, Andy, it's Michael. It's actually more to do with the third quarter. If you may or may not recall, when we -- on our third quarter earnings, we called out the $6.6 million breakage benefit that we received in our other sales, as well as a $4.4 million benefit to our other operating for a general liability reserve adjustment. So those 2 numbers and the benefit of those in the third quarter, had call it probably a 1% to 1.1% benefit to our Q3 restaurant margin. So really on an adjusted basis, we would go on from more like a 14.3% in Q3, up to that 14.5% in Q4. So really more to do with those beneficial items last quarter.

Okay, appreciate that. And then on traffic growth at these kind of volume numbers, I mean, Jerry maybe and/or Gina, I mean it's phenomenal, it obviously gets a little tougher in execution. Legendary food, legendary service continues to be the hallmark. But are there other things we should be thinking about, as you mentioned [tech] a few times or Roadhouse Pay or remodels, bump outs, anything you'd like to call out as we try to figure out traffic growth for '23 and beyond?

Yes, well we're absolutely, always looking at speed in our restaurants and Roadhouse Pay is one of those items that we've recently put in, where the guests can pay in a timely manner, and we can turn our tables faster, which is what we've seen. We're putting KDS in some in our kitchens, which helps our ticket times. So we really look at from a technology standpoint, any piece that can help the speed of our restaurants, which obviously increases the traffic growth. So we look at that.

And there may be some other -- as our operators, we've said this, as our staffing levels have come up and we've gotten staffed and we get the tenure in our restaurants and people are more experienced, obviously, the productivity goes up and they become more efficient and faster in their role. So all of that leads to stronger traffic.

And I'll just expand on that digital kitchen a little bit, Roadhouse pay, we have an almost 615 stores now. It has been a huge win last year. We're still testing tablets, so that we can do mobile hand-held ordering piece of it. We're working on our software as we go. We want to make sure it's perfect when we get it out there to execute. And then as far a digital kitchen, we have converted 2 of our restaurants and opened 2 new stores, and are probably committed to 30 restaurants this year, moving to the digital kitchen, which is obviously very exciting.

We're -- we just opened 1 restaurant, a high volume store that we relocated and it has been very successful. The operators are excited about it. So we're excited to invest in and seeing some real rewards as we move forward. This will be a big year for us when it comes to opening new stores with a digital kitchen and even converting some existing stores. So kind of definitely going to be leaning on some technology to help us get faster, and really, we want to complement our service with technology.

We'll go next up to John Ivankoe of J.P. Morgan.

250 Texas Roadhouses over the next 10 years, round numbers, I suppose, but is your site profile changing? Are you seeing new areas where Texas Roadhouse can be successful, maybe even closer to some of the major cities, maybe it would come at a higher cost, but maybe also much higher sales? Just how the overall site profile is emerging or evolving for the next chapter?

Yes. I will tell you, we'll probably stay pretty tried and true to our philosophy of the suburbs, but we do have a restaurant in New York City in New Rochelle that we've looked at. We're starting to look a little bit more in a city area or higher traffic, which could be -- so we've got a couple of those. So we're expanding a little bit. We've had some success in some smaller communities or lower populated areas that we can go into. So we've got a broad scope and a mind and looking at every option. And I think at a company our size and what we want to accomplish, we got to stay true, but we have to test and try some new things that might help us. And because we're looking at Bubbas and we're looking at Jaggers, we're probably expanding our -- looking at areas that would help all 3 brands.

So, I think our real estate team clearly understands what we're trying to do with all 3, but we have opened the scope of where we will go and what we will try, so that we can expand and have a lot of success in that side of it. So there is a couple of things that we're working on, that are a little different than what we've done in the past and we're excited to see how they turn out for us.

That's great. And secondly, and related I suppose on development, are there still significant bump out opportunities for the chain or have you done basically, what you can do at this point? You've mentioned relocations, how significant of an opportunity is relocations for the Texas Roadhouse brand?

Well, we like them. They're so far proven out pretty well. I would say that over the last 5 years, we probably have a dozen and every 1 of them have proven to see a real bump in sales. So that's exciting as people turn out on their 20-year lease, that's when we start looking at what is our opportunity to reinvest or to maybe relocate, if the entity moved or something. So I think that's a smart strategy from a business standpoint and so -- from that as far as bump outs, Michael, I think has a couple of stats on that.

Yes, John. I think on bump outs, I'd say there still is opportunity in really every year, but new restaurants kind of start to qualify as potential ones for us to look at it. I mean, they've grown their volumes enough should be considered or they've been open long enough. For 2023, I wouldn't be surprised to see us open -- or bump out 10 to 12 restaurants, and we probably have on top of that, another 20 plus that are already in the pipeline for 2024 and beyond. Sometimes they take a little bit more work on the legal side of getting all the approvals to get them done, but we definitely have a lot of restaurants still interested in them and new ones kind of every year that kind of qualifying it on our radar to be considered for a bump out.

We go next now to Jon Tower of Citigroup.

Great. I'll try and make it quick. In previous quarters, you've talked about sort of mixed up in the menu. This quarter, it looks like mix was flat. Kind of curious to get your perspective, are you just not seeing as much trade up on the menu, is there anything else going on perhaps in the fourth quarter?

Yes, Jon, it's Michael. It's an interesting question, the one that we've been looking at. I'd say, so far this year, we're seeing this tremendous traffic growth, but you are right, we're seeing a little bit of negative mix coming in. And what we don't know, we certainly lapped the move up to a higher check that our guest has chosen to do. And even with just a little bit of negative mix that we're now seeing, we're still well above where we were pre-pandemic. But what we're still looking at and trying to determine is, what is driving a little bit of negative entree mix that we're seeing right now. Because we're not seeing it in appetizers, we're not seeing it in other add-ons, we're not seeing it in soft beverage, we're seeing a little bit in that entree.

It could be some customers trading down a little bit. But honestly, it could also be somebody trading up to us, that now sees the relative value of a Texas Roadhouse as compared to going to fast casual restaurants for a very similar price they can be seated and waited upon. And so maybe some of those people are now coming in and driving some of this traffic growth, but maybe they are coming in at some of our lower price points on the menu.

So it's something we're watching, but it's the unique thing over the last handful of weeks is, we're seeing it, just a little bit in entree category, but not the rest of the menu. We're still seeing a little bit on the alcohol mix, but we were already seeing that. That may be people moving from alcohol to soft bev, because we're seeing that soft bev mix move up a little bit.

Got it. I appreciate that color. And then just lastly for me, I think you touched on this maybe earlier in the call, but new store productivity of the Roadhouse has been phenomenal. I think it's up -- the average weekly sale up 8% versus the comp store base in '22. And maybe you answered this earlier in the form of building bigger stores, but is there anything else going on that will be driving that acceleration you're seeing in new store productivity versus the past?

Yes, nothing -- it's Michael, nothing that I can think of, that would be driving that. I don't know, Gina, if there's anything you would see there?

No, nothing I can think of.

We'll go next now to Brian Vaccaro of Raymond James.

Hi. Good evening. Just 2 quick ones. First on labor, Gina, where is hourly turnover sort of trending over the last few quarters? Could you just ballpark that for us and maybe could give us some perspective on how that compares to pre-COVID levels?

Yes, sure. I will tell you that we're seeing the turnover number going down consistently quarter-over-quarter. We're seeing more application flow, which is good for us. And as -- like I said before, it's the quality of people that really makes a difference, and once we get those quality of people in with the experience, we can keep them longer, and that really helps with that turnover piece. So we continue to see it go down, which is really promising.

Yes. And Brian, this is Michael, I can just put a few numbers to that. And again remember, every company maybe calculates turnover a little bit differently, but we've seen our number, which we look at over last 12-month period, so it's a slow-moving number. But we're down in the high 120s right now, middle of '22, we were in the mid-130s. So we've definitely seen that come down. And I would say pre-pandemic, we were somewhere probably in that 105 to 110 range. So we saw a little bit of room to go, but we're getting better.

Okay. Great. That's helpful. And then just last 1, on just sort of near-term store margin expectation and just sort of in the spirit of getting everyone on the same page, in an environment where sales are so strong in the first quarter, it can be a little disorienting. So I guess, could you provide any guardrails on first quarter store margin expectations? Is there a historical perspective, maybe versus Q4, I think it's usually up about 200 bps? Is that reasonable or maybe there is something in the current environment where that wouldn't be the case this year?

Hey Brian, it's Michael. Not going to get too deep into that one Brian. I think what you spelled out is certainly possible that our margin percents are certainly typically at their highest in Q1 and Q2, because our sales volumes are typically at their highest. So yes, what you're talking about something to that magnitude, could be the case. I'm not going to say, whether it's a 200 basis point move or not, but we would expect to see some higher margins in the first half of the year. Just as we saw higher margins in the first half of last year and we said, hey there is a potential to see some overall margin improvement year-over-year. So you would kind of need something like that to happen.

And our final question will come from Nick Setyan at Wedbush.

Just a couple of questions from me. I just want to walk through, maybe just the COGS dynamic in Q4 and perhaps in Q1. And if we assume similar commodity inflation in Q1 as we saw in Q4, that's off of a bit lower base in Q1 of '22. So presumably -- sequentially the COGS percentage should be down from Q4 to Q1, is that fair?

From Q4 to Q1?

Yes.

Is that what you said, sequentially?

Yes.

I can see it being clearly similar, whether it's up or down, again it depends on where within our numbers, but they are probably are going to be in the same ballpark of each other, given the numbers that we've called out and where our costs -- our underlying cost structures are.

Okay, fair enough. And then just remind us historically in terms of seasonality, what March looks like in terms of average weekly sales versus January and February?

Yes, March tends to be a very strong month for us. If we were to go back and maybe look at on the 2019 -- give me a second to pull that up in front of me, to any -- period 1 and 2, they both ran 105,000 in weekly sales and our March period were 110,000, 111,000 of weekly sales. So we do tend to see a little bit of a increase in that March period.

Thank you. That does conclude our question-and-answer session this afternoon. Mr. Morgan, I'd like to turn things back to you for any closing comments you may have.

Yes, thank you very much. I just want to say, 30 years ago, tomorrow, we opened our very first Texas Roadhouse and I couldn't be more excited and proud of what this company has accomplished as we're over 700 restaurants in 3 concepts. We appreciate everyone's support and partnership throughout this journey, but it's very exciting to see what this company has accomplished. I couldn't be more proud to celebrate with all of our folks here in Louisville tomorrow and our partners when we have our conference in April.

So thank you all for your support and partnership. We will continue to perform at a high level.

Thank you Mr. Morgan. Ladies and gentlemen that will conclude today's Texas Roadhouse fourth quarter earnings conference call. Again like to thank you all so much for joining us and wish you all a great evening. Thank you very much.