Texas Roadhouse Inc (TXRH) 2022 Q1 法說會逐字稿

Good evening, and welcome to Texas Roadhouse First Quarter Earnings Conference Call. Today's call is being recorded. (Operator Instructions) I would now like to introduce Tonya Robinson, the Chief Financial Officer of Texas Roadhouse. You may begin your conference.

Thank you, Savannah, and good evening, everyone. By now, you should have access to our earnings release for the first quarter ended March 29, 2022. It may also be found on our website at texasroadhouse.com in the Investors section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We 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, including factors related to the COVID-19 pandemic.

In addition, we may refer to non-GAAP measures as 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. Following our remarks, we will open the call for questions.

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

Thanks, Tonya, and good evening. We were pleased to see sales volumes accelerate as we move through the first quarter, resulting in average weekly sales of over $132,000 per restaurant. Our strong top line was the primary driver of earnings per share growth that approached 20% for the first quarter. These results are a testament to the hard work of each and every one of our Roadies. I would especially like to thank our operators and our staffing and procurement teams who have done an amazing job managing through a tough inflationary, purchasing and hiring environment.

Several weeks ago, we implemented our previously announced 3.2% menu increase. And to date, we have not seen a negative mix or traffic reaction. That said, we know the consumer is feeling inflationary pressures, so we are closely monitoring spending patterns. But at the end of the day, we are confident with our positioning in the market and our ability to provide unmatched value to our guest.

On the development front, during the first quarter, we opened 3 company-owned Texas Roadhouses, and our international franchise partners opened an additional 2. We also completed the acquisition of 7 franchise restaurants in Georgia and South Carolina at the beginning of the first quarter. At this time, we continue to expect approximately 25 company-owned Texas Roadhouse and Bubba's 33 openings in 2022 and an additional 7 Texas Roadhouse franchise locations. And later this year, we expect to open 2 company-owned Jaggers and our first Jaggers franchise restaurant.

In terms of 2023, we believe we can lower the impact of permitting and building approval delays. So we are optimistic that we will return to a higher level of openings. Our new restaurants, including those in smaller markets, are seeing strong sales performance, which leads us -- leads to continued healthy returns on our investments. This gives us the confidence that we will still have a long runway for new Texas Roadhouse locations.

Also, we are excited by the sales growth that we are seeing at Bubba's, and we have a team in place as we ramp up development for the coming years.

Beyond investing in new restaurants, another part of our capital allocation strategy is investing in technology that will enhance the guest experience while driving greater efficiencies up and down the P&L. Some of our current technology initiatives we are working on include Roadhouse Pay, kitchen display system and the new Jaggers mobile app, which also includes a loyalty program. We believe that the upgrades that we have made over the last several years are being widely accepted by our guest. Our Roadhouse mobile app has been downloaded more than 3.7 million times since the beginning of 2021. As a result, approximately 70% of our current to-go business is digital and many more of our guests are using the waitlist function.

Finally, as we think about creating value, our goal is to consistently return excess cash to our shareholders as a complement to our store growth investments. This includes a reliable quarterly dividend, which we have increased by an average of 17% per year since 2011 and share repurchases that have totaled over $500 million since we went public.

Before I pass it to Tonya, I want to congratulate Chad Noble of Fayetteville, North Carolina for being named our 2021 Managing Partner of the Year at our recent conference where the theme was Keeping the Magic. Chad is a 5-time MP of the Year finalist who is committed to his team and executing legendary food and legendary service each and every shift. It was great to finally be back together with all of our managing partners. I'm always inspired being face-to-face with our operators and seeing their passion for Texas Roadhouse. I can't wait to see what they accomplish over the rest of 2022 as they focus on keeping our winning ways.

Now Tonya will provide a financial update.

Thanks, Jerry. For the first quarter of 2022, we reported diluted earnings per share of $1.08, up 18.5%, driven by strong revenue and restaurant-level profit dollar growth along with a lower income tax rate. Revenue growth of 23.3% was driven by a 6.6% store week growth and a 16.7% increase in average unit volume. For the quarter, comparable restaurant sales increased 16%, including 7% traffic growth and average check growth of 9%. Check growth includes positive mix of 3% driven by year-over-year improvement in the percentage of guests choosing to dine in as well as all guests continuing to order higher-priced entrees.

For the first quarter, our restaurants averaged approximately $19,500 per week in to-go sales, which represented 14.8% of total sales. As expected, our to-go percentage declined as we move throughout the quarter but overall to-go sales volumes remain strong. We are pleased to see that the decline in year-over-year to-go guests during the quarter was more than offset by dining room traffic growth.

By month, comparable sales grew 17.5%, 25.4% and 8.8% for our January, February and March periods, respectively. As expected, the comp percentage dropped off from February to March as we lapped the reopening of dining rooms last year. From an average weekly sales perspective, sales by month grew approximately 124 -- grew from approximately $124,000 in January to over $138,000 in March. And comparable sales for the first 5 weeks of the second quarter were up 9.3% as compared to the same period in 2021.

During these 5 weeks, average weekly sales were nearly $135,000, with to-go sales approximately $18,000 per store or 13.3% of total sales.

For the first quarter, restaurant margin as a percentage of total sales was 16.4%, down 213 basis points as compared to the first quarter of 2021. We also focus on our restaurant margin dollars per store week, which were over $21,600, up 2.5% as compared to Q1 2021. Food and beverage costs as a percentage of total sales were 34.4% for the first quarter. This was 276 basis points higher than 2021, driven by 17% commodity inflation.

At this time, we have over 70% of our commodity basket secured for the second quarter and approximately 20% locked for the back half of the year. With our current visibility, we are maintaining our full year commodity inflation guidance of 12% to 14%. We continue to expect that year-over-year commodity inflation will moderate gradually as we move through the remaining 3 quarters of the year. But as we mentioned previously, even if inflation moderates, the underlying dollar cost for beef and other high-use items will likely still be higher, both year-over-year and sequentially.

Labor as a percentage of total sales increased 35 basis points to 32.8% as compared to Q1 '21, while labor dollars per store week increased 17%. This increase in labor dollars per store week was driven by wage and other labor inflation of 10.5% and growth in hours of 7.3%. These increases were partially offset by a $1.8 million net favorable adjustment to our quarterly reserves for group insurance. As expected, wage and other inflation for Q1 came in above current full year forecast of approximately 7% because we are lapping lower wage rates as they did not begin to significantly increase until the second quarter of 2021.

Other operating costs were 14.7% of sales, which was 83 basis points lower compared to Q1 2021. Most of the year-over-year benefit comes from sales leverage due to higher average unit volume.

Moving below restaurant margin, G&A grew year-over-year by 9.8% and came in at 4.1% of revenue. The $3.6 million growth in year-over-year G&A expense was driven by increased compensation expense and higher travel and meeting expense as we held several events in Q1 for the first time since the onset of COVID.

With regards to G&A, I want to mention that we just held our annual managing partner conference last week at a cost of approximately $8 million. Last year's event was delayed until the third quarter and cost approximately $3 million as it was abbreviated and limited in attendance due to COVID.

Our effective tax rate for the quarter was 14.2%, thanks to a higher-than-normal benefit from FICA tip credit. We continue to expect a full year 2022 rate of approximately 15%.

With regards to cash flow, we ended the first quarter with $326 million of cash, which is down $10 million from the end of the fourth quarter. Cash flow from operations was $188 million and was more than offset by $49 million of capital expenditures, $32 million of dividend payments and $85 million of share repurchases. We also acquired 7 franchise restaurants for $26 million. We continue to expect full year 2022 capital expenditures will be approximately $230 million.

In March, our Board refreshed our authorized stock repurchase program to $300 million. Through the first 5 weeks of our second quarter, we have repurchased just over 350,000 shares of our stock for $29.2 million. This, along with our Q1 buyback, leaves us with approximately $266 million remaining under our new program. Like Jerry, I was truly inspired by the passion of our partners at conference. It is always great to be together celebrating our successes. And I also want to give a special congratulations to Chad Noble for being named our Managing Partner of the Year.

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

Thanks, Tonya. While we are certainly aware of the challenges around the world as well as the inflation and supply chain issues here at home, we are confident in our market position and the unique quality and value proposition we offer our guest. This has helped Texas Roadhouse overcome any challenge or obstacle that has been thrown at us. And I can tell you with confidence that as an organization, we have the ability and agility to adjust to any challenge ahead. That said, our guests seem hungry for our concepts. We have a lot of momentum in the business right now, and our entire team is energized for what lies ahead.

As many of you know, the foundation of our success is pretty simple. It's our commitment to being a people-first company that just happens to serve steaks. Speaking of steaks, congratulations to our 2021 National Meat Cutting champion, Henry Berdugo, of South Austin, Texas. Great job, Henry, and congratulations to all of our award winners at conference. Thank you all for everything you do. Finally, I want to thank our support center Roadies for all they do behind the scenes to support our operators and keep the managing partners the center of our universe.

Savannah, please open the line for questions.

(Operator Instructions) Our first question will come from Chris O'Cull with Stifel.

So congrats on a solidly impressive quarter. I guess the key question here is, what do you attribute the sales strength to? I'm just trying to understand if you guys have taken any actions that may have driven the acceleration in the sales.

I don't know if we can pinpoint maybe one action that is kind of leading to that. I think just the focus that the operators have on getting things back up to speed in the dining room attributes to that. We had some Omicron impact early in -- late in last year and into January, and we had some calendar shifts in the quarter that benefited us a little bit, particularly in February with Valentine's Day and the Super Bowl. But I think it's just that focus on technology, all the things we put in place the last couple of years and the operator's focus on things. I think the guests definitely -- the big experience resonates with them, and that's helping us for sure.

Yes, I would agree. I really think it comes down to our ability to execute. Even when we're challenged by product and staffing, we're finding ways to win, and we're delivering on our promise of a legendary experience to our guests. And just hats off to our operators. They are absolutely out there getting the job done. And I think the guests are rewarding them for their execution.

Yes. That's great. Just a longer-term question. Jerry, in the past, the company has always targeted 25 to 30 units a year, but now that Bubba's is starting to show growth potential, are you preparing the company to open more than 30 units a year? And if so, what kind of investments or support services need to be added to make that happen?

Well, we definitely are committed to Bubba's growth. And like I said, we've got a team in place. We're ready. We have definitely been really focused these last 9 months on how do we get Bubba's to contribute more growth. And I believe that we are positioned there from a support standpoint, from a leadership standpoint. And I will tell you from a commitment standpoint of the company, we're ready. And so we are feeling really comfortable. I don't want to put too much out there yet, but there's no doubt, we expect it to pull its weight.

Yes. And I'll tell you, Chris, we're doing some work on the building. We just opened 1 in April that has some of the changes. We kind of want to wait and see how those look, and we have some other ideas to bring that building cost down a little bit. And I think that's just one of the things we're doing along with the team that Jerry has put in place to really get things up and running as soon as we can. So we've always kind of said 25 to 30 was the number. We feel comfortable being a little above 30. But don't want to do anything too fast. We want -- or just to open restaurants. We've said that in the past. We want to make sure we're doing it for the right reasons. We're making good choices on real estate, people, all of those things. But I know Bubba's that team, they're really excited to grow.

Our next question will come from John Glass of Morgan Stanley.

This is Brian actually on for John. First question, maybe just on staffing levels. Could you comment on kind of how that's evolved since we last spoke, if you think you're closer to adequately staffed now or what the hiring environment has been like?

Well, I'll tell you, we saw improvement in staffing levels, it seemed, across the quarter, throughout the quarter. You saw shifts that appear to be less impacted by staffing issues and the dining room guest counts continue to grow. So that gave us a lot of comfort and confidence that the staffing was improving. And you hear from operators that it does seem to be getting better. So we're still focused on it, though. It's still something the staffing team, all of us, the operators are very much focused on, given the volumes are running. So feel good about staffing compared to 2019 levels. Still some probably work out there sporadically across the country in different pockets to really handle the volume of sales that we have today.

Okay. Great. Maybe just a question on technology and maybe specifically kind of the wait list feature that you had mentioned. I think it's clear how that kind of helps the guest. But I'm curious if it's also advantageous for sales maybe in the sense that it helps fill shoulder periods better. Or what else do you see as kind of the advantage of that or any of the other kind of guest-facing tools that you've worked on?

Yes, I think the wait list definitely could be beneficial on the sales side, exactly for the reason you said. So when the guest knows that when they come in, they're going to get sat within 15, 20 minutes, even if you're giving them a time maybe later than they want to eat or earlier than they want to eat, they're more confident in being able to come in. And I think that probably does help. We've seen a bit of improvement in -- when you look at the dining room traffic, early dine-in guest counts going up, those power hours between 6:00 and 8:00 going up. So I think having that digital wait list, it does help. And just having the guests comfortable using it, using that technology helps us on all other initiatives, whether it's pay at the table. It's just everybody being comfortable with that. So it's really good.

And our next question will come from David Tarantino with Baird.

Congratulations on such a strong start here to the year. My -- I have two questions. One, a bigger picture question about traffic. And I was wondering if you could share how much the traffic in the restaurants is up versus pre-COVID levels. So I know you can calculate the 3-year same-store sales performance, but curious to know how much traffic is up. And maybe if you can comment on the dining room specifically, that would be helpful.

Yes. So in the dining room, the total dining guests, they grew each month versus the prior year. So they grew each month of the quarter and in April. So that was really great to see. And I think in April is really where we saw the dining room guest count surpass 2019. So that was very encouraging to see that happening.

You did see to-go come down throughout the quarter, too. But overall, a net impact that looks really good. So that was certainly encouraging versus two years ago.

Got it. And I think with the combination of traffic now being back above pre-pandemic levels and the to-go business also being elevated, can you maybe give us some perspective on how you're thinking about the capacity of the restaurants? I mean you've grown so much over the last 3 years. I guess how do you think about potentially taking it to another level over the next several years?

Yes. I think we're still targeting our earlier hours. Like Tonya mentioned, those power hours is really about execution and being able to get the folks in, the experience that they are craving and then get them moving on down the road, I guess. But on the same token, in that late, that last night hour, maybe even extending a little bit there. But it really comes down to us executing in the power hours and then really trying to drive some folks to the earlier hours and that last hour being able to hold and get that execution piece. So there's still some opportunity. I think we feel really, really good about how well these stores are executing, but we still know we got room.

Yes. And I think, too, David, when you think about traffic overall, the increase in the to-go traffic, I think that's what's going to be interesting versus what that does on the dining room. So while we were slightly ahead of dining room versus 2019, as we continue to move on throughout the year, what can that capacity be? Sometimes that comes down to what can happen in the kitchen and what -- any capacity restraints that might exist there.

So I think there's still a little bit to learn. It was positive to see that happening in April, but a little bit more to learn about what can the capacity maybe be in the dining room above and beyond what we're seeing today, given the big volume of to-go that we do now.

And our next question will come from David Palmer with Evercore ISI.

Wanted to ask about the commodity inflation outlook. Your outlook is very similar to what it was before. But I would imagine there's been some gives and takes with that, some costs that have come up during the course of at least since last quarter and grab some offsets. Could you give us some color about that?

Yes, sure. You're right. So we saw beef softening a little bit versus what we were expecting and that kind of got absorbed by increases on other line items, whether it was bread mix, oils, eggs, things like that. So we did see a bit of that other proteins happening, which really -- it's a big range, 12% to 14%, but we were able to stay within it in that dynamic. So that -- we did see some of that happening throughout the quarter.

And then it's easy for us to forget. I mean, back in January, I saw a data that 60% of Americans were comfortable eating out at a restaurant, or only 60%. I would imagine there have been certain parts of the country that were more comfortable than others earlier. What are you seeing out there regionally and even within your restaurants about the consumer comfort levels? And do you think that that's a role even now where people are getting more and more comfortable? And do you think that that's even having an impact on your labor as well? And I'll pass it on.

I would say so. I mean, if you look at our franchise comps, they're a bit higher in the quarter than the company comps and some of that is just driven by the geography of those franchise stores because there's a big California contingency there. So I think that kind of speaks to the consumer maybe being -- number one, they were probably a little more restricted last year on the dining room more in the quarter, but you probably did have that guest maybe a little hesitant to come out and you're seeing that change a bit here a year later.

Across the country, as far as -- I think it's kind of give and take, pushes and pulls. It doesn't seem really evident to us when you're looking at the data that that's a significant -- kind of a significant driver of things. But it certainly seems positive and probably is helping a bit on labor. It's hard to say or identify that, that was causing issues from a labor perspective, maybe folks not wanting to come in and work, but you could certainly surmise that, that could be happening.

Yes. I would say that all of the practices that were put in of cleanliness, of care and concern, even partitions are still up, I think we've still maintained a lot of those practices that ensure people are feeling comfortable about being in large groups in full areas. So I do believe a lot of that -- those practices are helping us at this current time.

And our next question will come from Dennis Geiger with UBS.

Another one on commodities and then maybe beef in particular. Just wondering if you could kind of touch on some of the considerations that maybe could drive some upside or downside into the back half outlook that -- recognizing it's a little bit of a crystal ball question, but are there any kind of key things that you would frame that could drive that outlook one way or the other based on where we sit today?

Yes, there's probably a number of things that we kind of watch and keep an eye on that could determine, upside or downside, what the retail markets are doing, what's happening in the grocery stores, things like that. How they are kind of marketing beef and things always seems to have a bit of an impact and can affect demand -- or supply a product to if they have a bigger demand for it. But -- so that's probably one. Anything going on with imports, exports can always be impactful one way or the other.

And I think it's just the supply. Obviously, weather -- we haven't really been talking about weather at all the last couple of years. We've been talking about other things. But weather could certainly play a part in that Q as it affects corn and corn prices, grain, things like that. So all of those things are things we're watching, supply of cattle, how that's working. It seems to be in a good spot right now, but there could be some uncertainty in the back half of the year that could change that.

Right now, as we indicated, we're a lot less locked on beef in the back half of the year. And so that leads -- that in itself lends itself to uncertainty. It's just a little tougher to get those deals done right now that far out. So something we're definitely continuing to talk to our packers, our suppliers on just how everything is feeling, what it's looking like. But could be some upside. On the rest of the commodity basket outside of beef, who knows how long some of these increases we're seeing will last? They're driven a little bit differently than maybe the beef is, and we'll just continue to keep an eye on things.

That's helpful. And then just on pricing, based on what you've seen or kind of the lack of resistance to the pricing. Maybe it's a bit early, but as you think about sort of back half of the year or rest of the year pricing decisions that you and the operators are considering, any color to kind of provide at this point given the importance of that long-term margin target, given you've got such strong traffic right now? Anything to share on the outlook there, Tonya?

Yes, I'll take that one. I think we're going to continue to use our same process. As we get a little closer to making that decision, we will gather that information from our operators and see what's going on in their particular markets and then make the best decision. We have to make a decision for our consumer and for our business. And we will study it, we will continue to try to be very conservative. And I know these last couple maybe didn't show that, but we are committed to taking care of both the business and the value to our guest. So we will study, do our due diligence and make the decision that we feel is best for all.

Our next question comes from Peter Saleh with BTIG.

Great. And congrats on the quarter. I know your numbers don't really reflect this at all with your mix numbers improving, but is there any evidence of trade down within your menu regionally or otherwise as gas prices went up through the quarter and into April? Have you seen any evidence of that? Or are consumers still continuing to trade up to those higher-priced steaks?

Yes. We're not seeing that right now, Peter. It looks like mix is getting driven by a couple of components. One is just that move from to-go to dining room, which helps the mix. And then the other is we continue to see folks going to a little of the higher-priced entree. So that happened in Q1. I think we talked before that we start lapping that in April. And so that would be a little less impactful. The-higher priced entree, a thing like that, will be a little less impactful heading for the rest of the year. And probably the to-go and the to-go/dining room dynamic will be a little less, too, as those dining rooms, to-go kind of leveled out in April, May. So I think that will be a little less impactful also as you head into the rest of the year.

So mix, probably, you won't see the size of mix benefit the rest of the year. It will probably be a little more neutral as we continue throughout the year.

Great. And then just could you comment on -- I guess, just two unrelated questions. One, labor turnover. I know you said you've seen some improvement in hiring, but what are you seeing on labor turnover? And then just lastly, if you take no more price for the balance of the year, can you just give us what the pricing embedded in the comp will be for the remaining 3 quarters?

Sure, Peter. I'll give you the pricing first, and then we'll talk about on the turnover piece. So for Q1, that was about 6% pricing. Q2 will be 7.5% because you'll have the full effect -- or a partial effect actually of that 3.2%. Q3 will be 7.4%. And then Q4, without any additional pricing, would be 4.1%.

And then on the labor turnover -- yes, sure. On the turnover side, turnover continues to be high at the hourly level. I think that's just the dynamic we're probably going to live with for a little while. Staffing has gotten better. But the training costs, things like that, will probably stay up a little bit as we continue. We're very focused on the turnover as far as providing good training to our employees, development, holding on to them past that 90 days, which tends to sometimes be kind of the point that they leave.

And then on the management side, our turnover rate ticked up a little bit from our very low levels where we were. And I think we continue to see that kind of hang in, maybe be a little lower as we continue throughout. So not really any change on the turnover side, I would tell you, from kind of what we've done before.

Yes, I'd say we're pretty flat to where we were. We definitely haven't peaked or gone any higher. And I actually think it's starting to come down just a hair, but that's a good sign. So we're going to hope for the best on that. But people are settling in, staying put.

Our next question comes from Brett Levy with MKM Partners.

You started to say that you were getting optimistic about development, and it sounds like now that you have a little bit more skin in the game with Jaggers and Bubba's is showing momentum, how are you thinking about what a realistic next level is, we'll say, not just the next 3 years, but maybe the next 5 to 10 years? Where do you think you can go? You used to use a 7 50 number.

And then separately, with respect to all of the technology and equipment rollouts, can you give us a rundown in where you are in terms of what's been implemented and what you expect to see over the course of the year, both in implementation as well as any kind of cost or sales productivity?

Yes. Sure. On the technology side of things, the Roadhouse Pay we talked about, which we talked about before, that's in test being rolled out, not in a lot of stores right now. About 100, I think. And the goal would be to get that, for the most part, rolled out to all stores by the end of the year is kind of what we're targeting. So that test has been going really well.

We've done a test with handheld online -- handheld to order at the table. That's going a little bit slower being tested. We'll continue to keep an eye on that. On the KDS systems, we've implemented that in 1 new restaurant for Texas Roadhouse. And we have implementation in an existing restaurant coming up later this year. So going a little slow with that one, we'll see how that goes.

And then the Jaggers app has been pretty recent, the upgrade to that, which is really cool, and adding that loyalty program. So that's been implemented, rolled out, and we'll continue to see how that tracks forward. So the waitlist technology that we talked about, digital waitlist and the app with Texas Roadhouse, that's been rolled out for a while, it's been implemented. So it's good to see that data coming in and see that being very successful, for sure.

And then on the growth side, I believe that we are optimistic about some of the smaller towns that we've been able to go in and have success. So on the Roadhouse side, that gives us confidence that we can continue on the larger areas, but now we can also expand to maybe smaller communities that we would fit into and feel good about. Bubba's, obviously, we're committed to Bubba's and growing it and continuing to see success there with vision.

And then Jaggers is still very exciting. We really are confident we have the two franchise partners that are signed. One will get a store open this year. One should be very early next year. We continue to work on company stores to get that growth going. And so we are excited, we are behind them and really setting a lot of things up for them to contribute at a much bigger level than they are right now.

Our next question comes from Jeff Farmer with Gordon Haskett.

Just looking for a little bit of detail on the wage rates. Specifically, how does your wage rate inflation compare in the front of the house versus the back of the house?

Yes. So wage rates are going to be up a bit more in the back of the house. That's primarily where that wage inflation is going to live, simply because front of house here, for most of them are on a tip wage. So there is -- in states where you're seeing tip wages go up, that's impactful. But most of the time, you're looking at the minimum wage going up and that's definitely more impactful in the back of house than the front.

Overall, it was -- wage inflation was a bit higher in Q1, as expected, because of the volumes that -- the sales volume change and what we were lapping from Q1. We expect that now with a shift more from that to-go to dining room, it should moderate a little bit on the wage labor side throughout the year and -- or wage inflation side throughout the year is our expectation right now.

All right. That's helpful. And then just one more. So a lot of investor focus on your commodity basket. I think beef was roughly 50% of the spend or the basket cost in 2021. But then again, investors are looking to dive a little bit more deeply beyond that. So once you get past beef, what are the next 3 or 4 largest commodity exposures for Roadhouse? And can you help us understand how you contract or do not contract for those exposures?

Yes, sure. Yes, beef is just a little over -- it's depending on that 45% to 50% range is where that lands, a little closer to 50%. Your other proteins, so pork, chicken, seafood, you're getting around 15% of the commodity basket. And then grocery, which is your bread mixes, oils, things like that, include soft bev, that runs, call it, another 10% to 12%. Produce is about 8% of the basket, and dairy another 5%. I think all those add up, Jeff, I hope, or getting pretty darn close to the total 100%. But that's kind of how we are there.

On the other proteins, I believe we have quite a bit of those locked up. I mean, primarily, you're looking at pork and chicken. Seafood is a little bit smaller piece of that basket. So that's something we treat very similar to beef. We like to be as locked as we can on those prices and on supply.

Grocery, in a sense, will be locked on some of those items. Oil, bacon, we kind of put that in that grocery bucket. Produce, not as much. We don't lock up as much of our produce from a price perspective. So we focus on locking up supply, but not as much on price. So that's really kind of the way we look at it, the entire commodity basket from that perspective. I hope that's kind of what you were looking for.

And our next question will come from Andy Barish from Jefferies.

Just two follow-ups. The cadence of commodities, I mean, is it kind of a steady decline down from these first quarter levels given what you know today and what the laps were from last year?

Yes. I would say it's pretty steady. I mean the 17% for Q1 came in a bit softer than we expected. As you all remember, we were guiding to 17% for the first half of the year. So our expectation would be that Q2 would be a bit lower, and then you would see even a bit lower than that in Q3, 4 because that's when we start lapping the higher costs last year, really started the beginning of Q3. So that would kind of be how we build out to get to that 12% to 14% in that range.

Got you. And then can you just help us, Tonya, on the seasonality of the business over the next couple of months just as we go into the slower summer? I mean the $135,000 a week in April is still phenomenal. But does May and June typically slow down a little bit?

Yes, it does typically slow down a little bit. And it's interesting that last year, you didn't see that slowdown. If you look back at average weekly sales throughout the year, we didn't really see as much seasonality on the period. But Mother's Day is in May, that's usually a big time for us. And you do see some softening in the summer months, and then it kind of picks back up again in Q4.

Yes. And then we've got Father's Day, obviously, in June. And we have seen an interesting -- a lot of times, when the school season or session is in, but we really -- we were -- you would slow up during Monday through Thursday and be busier on the weekend. So I guess, with some of the kids still not completely schools wide open, that we're probably not seeing that same slowdown during the week, and we're really continuing to see that progress through the weekend. And then in the summertime, we really do get busier during the week and maybe the weekend slow up a little bit when the weather is good, but it can hold mostly and probably until we get back to the school season in late August and September when it really softens.

Yes. I would imagine, Jerry, those special occasions have been -- and holidays have been really strong as well, I would think, compared to historical levels.

Yes. We -- as we are here in Louisville, anticipating these kickoff of the triple crown, we kind of -- in the restaurant world, we call Valentine's Day, Mother's Day and Father's Day our triple crown. So we not only get to do the first leg here in Louisville, and then we get to do the second leg in the restaurant because Mother's Day is Sunday. Don't you all forget that. You better get her a gift card to Texas Roadhouse or take her there yourselves personally would be awesome.

And then the Derby on Saturday.

Yes, what a weekend it's going to be.

Our next question will come from James Sanderson with Northcoast Research.

Congratulations on a great quarter. Just wanted a little bit of help on understanding how historically the U.S. consumers reacted during really intensely inflationary times. I'm looking at higher gas prices, higher food costs, higher mortgage expense, rental expense. Just how does -- based on your experience in the past, how do you expect the consumer to navigate all of this and continue to dine out at Texas Roadhouse?

Well, what we can look back on was probably '08, '09. And I think our commitment to heaping sides and keeping our portions strong and making sure that, that food that we deliver on that plate is our reputation and not wavering from any portion sizes, not wavering from any execution and just continue, that's what really -- and when we look back and discuss how do you get through difficult times, you deliver on your promise.

And I think that we are committed to that. We're going to continue to put every portion that we have on that plate. Our heaping sides, our smoking hot steaks. And just everything that we do, we believe that that's what will carry us through because we don't know how difficult it's going to be. But what we want the consumer to rely on is our ability to consistently deliver on what they want when they come in that door. So that's really what we can live on is just do the best that we can at what we do.

Understood. And just a quick follow-up question. I think you mentioned your to-go sales had declined slightly. But I'm wondering if that's primarily consumers swapping to-go order for a dine-in order and if your delivery portion of those to-go sales are relatively stable. If you can kind of speak to how that delivery portion has held up or not.

Yes. Well, we don't do any delivery per se. The guest comes to the restaurant to get -- yes, to get the food. So really don't have that piece. I think we see sales very stable, over $18,000 a week, and that gives us a lot of confidence that those to-go sales continue to be sticky. Even though the percent of sales comes down, we actually like that because that means the dining room's filling up, and that's a good thing. So all of that continues to look good, even though you are seeing a little of that as we lap all of the restrictions from last year and things like that.

Our next question comes from Jon Tower with Citi.

Just a few, if I may. First, Jerry, you mentioned the idea that you're having success penetrating these smaller towns with the Texas brand. And I'm curious to know, are you doing anything to the footprint of the stores to accommodate potentially smaller volumes or perhaps even reconfiguring the kitchens at all such that the overall footprint of the store might remain the same, but you're getting a little bit more square footage in the dining rooms at all? Anything you're doing that way with these stores in the smaller markets?

Yes. We haven't changed our footprint. We tried that once, and we called it a small town prototype. And within 1.5 years, we had to do two add-ons to it. So we feel like -- that our prototype, we just need to execute and know that we're going to satisfy the consumer in those markets because a lot of those times, they're coming from other counties. They will drive a little further to get to some place that they feel very confident in. And fortunate for our reputation, people will drive. And even if we look back at one of our very early restaurants, Ashland, Kentucky, it's one of our highest volume stores forever, and a town of 40,000 people, but they come from all over just because of that reputation. So maybe Ashland taught us 28 years ago that we could go to small towns as long as we execute and deliver on our promise of legendary food and legendary service, they will come find us.

Got it. And then thinking about -- you made the comment earlier about lower permitting issues such that growth next year may improve. Can you give us a read on how you're doing that, what specifically you're doing to ensure that the speed of opening these stores is picking up?

Well, we're hopeful from what our real estate team is telling us that permitting has been a little delayed recently, or I'd say the last couple of quarters. And it does look like they are starting to process things a little quicker. So we're optimistic that we're going to -- we're a little ahead of the game, knowing that they're running a little behind, so we're actually being a little more aggressive in the front than we normally would be to ensure that we're not having deals pushed because of delays in permitting and some of that side of it. So I guess we're anticipating a little better and actually being a little more proactive, which is giving us a little confidence that we'll be able to get these things done closer to on time. Nothing seems to be completely on time right now, but we're getting closer.

And some of it, too, Jon, is just building the pipeline out a little bit more, so you have some choices and can be flexible. If you do have something push, you can replace it with a different deal and things like that. So some of it is that, too.

Okay. Makes sense. And then just lastly for me. On pricing power, obviously, demand for your brand is phenomenal right now, and it doesn't sound like, so far, there's any pushback on recent pricing. So can you discuss how you look at pricing power for the brand in that? Are you looking against competitors, the at-home occasion? How you really index your pricing power? And then really, when thinking about the check sizes, how much more pricing power do you think you have as a brand and if and when you feel necessary to take it?

Yes, Jon, I can tell you, just since -- we really don't talk about pricing power or talk about it in terms of pricing power. We talk about what kind of pricing do we have to take given the inflationary environment, what's going on, what -- as Jerry mentioned earlier, what's the right thing for the operator and the guest, trying to take as little pricing as we have to, regardless of what pricing power really kind of is.

I think that's really worked to our benefit recently as we've, with the inflationary environment, had to go a little bit higher than normal because we allowed ourselves to be able to do that a little bit more because we have been so disciplined on what we've taken. So -- but we absolutely -- when we talk about pricing with the operators, we're looking at competitors. We want to make sure we're maintaining a good gap. We're understanding that in each and every market. It's really important in the process, for sure.

Great. And do you look at home steak prices at all, what you're seeing in the retail channel, as also a niche market?

Not a whole lot because that changes fast. So we just don't tend to really watch that one too much for that reason.

Our next question comes from Brian Vaccaro with Raymond James.

I was hoping to start with a quick follow-up on commodity inflation. And I just wanted to confirm, you're up 12% to 14% annual inflation outlook. I understand you're less locked on beef in the second half, but you penciled in, is it right, that you penciled in a year-on-year increase on beef in the second half within that annual guidance?

Yes. That is true. Yes, because you sequentially continue to see beef prices go up, and they're going up versus what we saw last year, not to the same trend that we've been seeing, not the same level of increase, but still increasing at this time is kind of the -- is the expectation.

Okay. And then on labor, I know you said hours are up 7% year-on-year, I believe, and I think that might be up 1%, 1.5%, something like that, if my math is right, versus 2019 levels, if it's relevant to measure against that anymore. But I assume there's some impact of Omicron within your hours for the quarter. But could you just give us a sense of where hours are trending more recently in March, April, maybe versus '19 or however you'd like to compare that and then just the degree to which you see hours building as traffic continues to recover?

Sure, Brian. It's really tough to say kind of what the expectation is going to be on that because a lot just depends on what traffic levels are as far as what those growth in hours are. But you're absolutely right, I mean the numbers should be coming down. I can't speak to April and May, what we're seeing today. But our expectation would be that growth in hours probably comes down a little bit, more driven by the mix change between to-go and dining room because the to-go is a higher cost, higher wage cost, but a lower hours amount on the to-go. So that's kind of how that -- we probably would think about that changing.

So other than that, it was hard to -- it's really -- that's a tough one to nail down, to pin down. Right now, as you all saw, growth in hours was 7%, pretty much in line with traffic for Q1, but that would not be our expectation maybe even through the rest of the year. You do have training hours in there, too, that kind of help elevate that a little bit, just depending on what staffing levels need to be. But otherwise, it's going to depend on traffic and that dining room/to-go mix and things like that.

Understood. Okay. And then I also just wanted to touch on the other operating cost line in the quarter. It looked like cost picked up a bit versus the last few quarters. Is that just broader inflation creeping in? Or perhaps there were some temporary pressures in there we should be aware of?

No. I don't think there's anything in there that I would call out on a temporary or onetime basis. Really, what we're seeing is just that inflationary pressure continue on supplies and utilities, things like that, laundry and linen, those types of categories.

Our next question comes from with Rahul Kro (sic) [Rahul Krotthapalli] with JPMorgan.

This is Rahul on for John Ivankoe. I just have a quick question on the inflation regarding the construction costs. Like so far into the year, can you give us some color on what you have been seeing? I mean the last year, I've seen the numbers in your report around like $6 million for Texas Roadhouse or like $7.5 million for Jaggers. I'm just trying to understand, like going forward, like if you're seeing any inflationary pressures affecting your overall cost, like not just '22, but like going forward. Any color there would be helpful.

Yes. I mean you always have a little bit of inflation on the building costs. Obviously, we're seeing it a bit more here in '22, for sure. And whether -- how long that lasts or is that a base of it in the future, I think that's going to be really hard to tell when that might happen. So we're looking -- when we look at the cost increase on Roadhouse that we're expecting between '22 and '21, a portion of it is driven by building and site works, really not as much on the furniture and equipment, things like that.

And then you see a little bit of it just on the rent being up just a touch. So that's kind of what we're seeing. And the same thing is happening at Bubba's, although we're saying those costs probably remain flat '22 to '21. So that is really just the nature of some of the deals we did in '21. But we are beginning to, as I mentioned earlier, implement some savings there on the building side with Bubba's. So I think that we'll continue to keep an eye on that and see what's happening. But definitely seeing inflation on the building cost side of things.

Got it. That's helpful. And just a quick follow-up on the labor side. Regarding the turnover, you guys said like you did see some higher turnover recently. I'm just curious if there are any specific initiatives you guys are planning to mitigate that or even like, say, do something better, what -- like the industry hasn't done before. Like I'm just curious if you have any thoughts to share there.

Well, on the turnover side, the increase really hasn't been as recent. It's been over the last couple of years through the pandemic and everything that we've seen a bit more of that. And we've made a lot of investments from a benefit side for folks. And a lot of it is just inside the 4 walls of the restaurant, helping the operator when it comes to hire rate, train right, treat right. So providing development opportunities, talking about really great training, providing great training to our employees. Because going in to work for Texas Roadhouse is a little different than maybe other restaurants because it's so busy, the volumes are so high. So it just requires a little more training from that perspective for them to kind of understand how that -- just how to execute that.

And our next question is from Lauren Silberman with Credit Suisse.

I wanted to ask about just the steak segment more broadly. It's had a lot -- very strong performance. And clearly, you've consistently outperformed. But any thoughts on why you think the steak segment is so strong and outperforming sort of broader full service just as we think about the resiliency of the category in any consumer environment?

Well, I can only speak for us, but I do believe that our made-from-scratch philosophy, we work a little harder to make sure that, that plate that we delivered to you has got really good flavor, and it served us very well. Everybody that's out there, I'm sure, is trying to fight for some reason for the consumer to pick them. Our made-from-scratch philosophy has served us very well. We will continue to do that.

But I think the steak is a big part of our menu, but we have a lot of other offerings that are very popular also. But I really do think it is about the consumer wanting a quality product at a reasonable price, and that's what really has driven our success. And the ability for us to execute. Our people are amazing.

Great. And then just another one. As we think of beef cost over the next few years, any expectations on the herd side and willingness for ranchers to increase supply? Just trying to sort of think about the puts and takes there.

I mean that would certainly be the hope, is there is some motivation for them to continue to grow to add to the herd sizes and things like that. There's so many inputs that go into that though, Lauren, with the cost of grain and the prices that they're getting with the packers. So we would hope to see that happening. Don't really have any insight into if that will happen or when it could happen.

I remember back when we saw such a -- we went through such a big cycle of beef inflation for about 5 years or so. And that was driven by a really big drop in the supply of cattle. I mean I don't know even today that we are back at the same levels of cattle supplies as we were back then. So something we feel -- I just say that from the standpoint it's something we feel we can manage for sure and manage through, but I don't know how that will play out here over the next couple of years.

And that will conclude today's question-and-answer session. I'd now like to turn the call back over to Tonya Robinson for closing comments.

All right. I just want to say thank you guys for joining us. I hope everyone is doing well. If you have any additional questions, feel free to reach out to us. Have a great night.

Thank you all.

And this will conclude today's conference. Thank you for your participation, and you may now disconnect.