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Edited Transcript of TXRH earnings conference call or presentation 29-Jul-19 9:00pm GMT

Q2 2019 Texas Roadhouse Inc Earnings Call

LOUISVILLE Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Texas Roadhouse Inc earnings conference call or presentation Monday, July 29, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Tonya R. Robinson

Texas Roadhouse, Inc. - CFO

* Wayne Kent Taylor

Texas Roadhouse, Inc. - Founder, President, Chairman & CEO

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Conference Call Participants

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* Andrew Strelzik

BMO Capital Markets Equity Research - Restaurants Analyst

* Brandon Patrick Sonnemaker

JP Morgan Chase & Co, Research Division - Research Analyst

* Brian M. Vaccaro

Raymond James & Associates, Inc., Research Division - VP

* Christopher Thomas O'Cull

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* David E. Tarantino

Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst

* David Sterling Palmer

Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst

* Dennis Geiger

UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants

* Jeffrey Andrew Bernstein

Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst

* Jeremy Carlson Scott

Mizuho Securities USA LLC, Research Division - Former Senior Restaurant and Protein Analyst

* John Stephenson Glass

Morgan Stanley, Research Division - MD

* Peter Mokhlis Saleh

BTIG, LLC, Research Division - MD and Senior Restaurant Analyst

* William Everett Slabaugh

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good evening and welcome to the Texas Roadhouse Second Quarter 2019 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.

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [2]

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Thank you, Kelly, and good evening, everyone.

By now you should have access to our earnings release for the second quarter ended June 25, 2019. 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. 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 Kent Taylor, Founder and 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 Kent.

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [3]

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Well, thanks, Tonya, and good evening, everyone. We maintained our top line momentum during the second quarter, highlighted by a comparable sales growth of 4.7%, including 1.7% traffic growth. The strong sales momentum has continued into the third quarter with comps increasing approximately 4.3% in July. We credit our top line strength to our operators who continue to keep the fundamentals of our business front and center. As you know, margins continue to be a challenge for us and labor inflation remains our biggest headwind. Most of the inflation that we have experienced this year has been driven by wage rate increases in both our front and back of the house. Low unemployment has led to a highly competitive labor market, which is the biggest factor driving wage rates.

Additionally, our focus over the last few years to increasing staffing level -- I'm sorry, additionally our focus over the last few years to increase staffing levels within our restaurants to maintain the highest levels of service to our guests has added to the pressure. While the additional investments create short-term pressure, we believe the long-term sales benefit is worth it. The menus increase that we implemented at the beginning of the second quarter appears to have been well received to-date, with the majority of the increase flowing through. This is helping to offset some of the inflationary pressure. In addition, our operators are focused on evaluating their restaurant operations to make sure they are doing everything possible to properly manage labor inflation without compromising our service levels.

On the development front, we have seen some delays in our pipeline due to a combination of permitting, site preparation holdups and bad weather this spring. As a result, we currently expect approximately 25 company restaurant openings this year with as many as 14 openings in the fourth quarter. Our newest Texas Roadhouse locations are generating targeted returns and performing well with the average weekly sales of over $115,000 in the second quarter. Also Bubba's 33 sales momentum has continued as well for the second quarter, the 20 Bubba's 33 restaurants in the comp base average more than $93,000 per week in sales and grew sales year-over-year by approximately 8.1%. This sales growth includes the benefit of testing weekday lunch in 5 only locations.

We will continue to evaluate the impact to weekly lunch before expanding our test to a few more locations. We still expect to open as many as 4 Bubba's 33s this year and will most likely open as many as 6 next year. Returns at the restaurants in previous class years also look good. Our analysis of the 2017 class of Roadhouse restaurants, which have now been open for at least 18 months, shows overall returns to be well in excess of our weighted average cost of capital.

Before I turn it over to Tonya, I want to thank Scott Colosi for his 17 years of service at Texas Roadhouse and congratulate him on his retirement. His contribution to the success of the company is immeasurable from taking us public in 2004 as our CFO to stepping into the role of President. As we move forward, I'm excited about my expanded role and increasing my level of involvement in areas of the business. I certainly won't be doing it alone as our current executive team has over 100 years of combined Texas Roadhouse and restaurant industry experience. They, along with all of our Roadies, have always been and will continue to be committed to our long-term success.

I finally want to give a big shout-out to Dwight Szabo of Louisville, Kentucky for being named our 2018 Managing Partner of the Year at our conference in Florida. Tonya will now [provide you] the financial update and then I'll provide some closing comments.

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [4]

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Thanks, Kent. For the second quarter of 2019, our revenues increased 9.6% as a result of a 5.2% increase in store weeks and a 4.4% increase in average unit volume. Restaurant margin dollars grew 6.5% to 128 -- $120.8 million and net income increased 1.4% to $44.8 million or $0.63 per diluted share.

As Kent mentioned, comparable restaurant sales increased 4.7% for the quarter. By month comparable sales increased 2.9%, 5.6% and 5.4% for our April, May and June periods, respectively. For the quarter, restaurant margin dollars on a per store week basis grew 1.2%, while restaurant margin as a percentage of total sales decreased 53 basis points to 17.6% compared to the prior-year period.

Cost of sales as a percentage of total sales decreased 37 basis points compared to the prior year. The benefit of a higher average check more than offset the impact of approximately 1.8% commodity inflation. Lower-than-expected beef costs led to inflation below our original 3% guidance for the quarter.

With prices in the back half of the year locked on approximately 50% of our basket, our guidance for full year inflation of 1% to 2% remains unchanged.

Labor as a percentage of total sales increased 96 basis points to 32.9%. Labor dollars per store week were up 7.4% compared to the prior-year period, including wage and other inflation of approximately 4.7% and growth in hours of approximately 2.8%, including the impact of higher guest counts.

The increase in labor during the quarter was partially offset by a onetime benefit of approximately $1.3 million related to payroll taxes and insurance. Labor cost in the prior year quarter also included a benefit of approximately $1 million related to our group health insurance benefits. As a result, the onetime items in each quarter had a small positive impact on year-over-year growth in labor costs.

Finally, other operating costs as a percentage of total sales were essentially flat with the prior-year period. Substantially all the benefit from average unit volume growth was offset by the impact of higher costs related to supplies, repairs and maintenance and general liability insurance. This includes the negative impact of $0.4 million quarterly actuarial reserve adjustment this year compared to a $0.1 million credit last year.

Moving below restaurant margin, G&A costs for the quarter increased $5 million or 14.2% compared to the prior-year period. The primary drivers of the increase were higher salaries and share-based compensation costs along with increased marketing expense. The expansion of our regional operations support structure impacted year-over-year growth and G&A by approximately $0.9 million.

We currently expect costs to be approximately $3.3 million higher for the full year of 2019 as a result of this expansion. Overall, we now expect 2019 G&A costs to grow approximately 12% on a 53-week basis compared to the prior year.

Depreciation expense increased $3.3 million to $28.5 million or 4.1% as a percentage of revenue, which was an increase of 13 basis points compared to the prior-year period. The increase this quarter included $1.5 million of accelerated depreciation primarily related to the restaurants expected to be relocated within the next 9 months. We expect additional accelerated depreciation of approximately $1.1 million in the third quarter and approximately $0.4 million in the fourth quarter.

Preopening costs increased $0.1 million year-over-year despite fewer openings in the second quarter this year versus last year. As Kent mentioned, our openings for the second half of the year are back-end loaded. So we currently expect third quarter preopening cost to be relatively flat compared to last year, while costs in the fourth quarter should be higher.

For the quarter, we had interest income of $0.7 million as compared to interest expense of $0.3 million in the comparable period last year. The change was primarily driven by higher earnings on our cash and cash equivalents as well as paying off outstanding -- paying off our outstanding credit facility in the second quarter of 2018.

Our tax rate for the quarter came in at 13.7% compared to the 15.6% rate in the prior year. The decrease was primarily due to lower nondeductible officer's compensation and high -- higher FICA tip credits, partially offset by lower excess tax benefits related to our share-based compensation program.

We now expect the full year 2019 rate of 14% to 15%. Finally, with the impact of the 2.1 million shares, we repurchased this quarter, our total share count was down on a year-over-year basis. We will continue to allocate a portion of our free cash flow towards share repurchases and expect to buy back dilution more consistently and regularly throughout the coming years.

As Kent mentioned, we updated our full year 2019 guidance to reflect our current expectation of approximately 25 company restaurant openings, which translates to store week growth of approximately 7.4%, including the benefit of the 53rd week.

As a result of the shift in restaurant openings in the back half of the year, we updated our guidance to approximately $210 million in capital expenditures for the full year.

Our balance sheet remains strong as we ended the quarter with $145 million in cash. For the first half of 2019, we generated $187 million in cash flow from operations. We spent $88 million on capital expenditures, $39 million on dividends and $112 million to repurchase shares of our common stock. Now I'll turn the call back to Kent.

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [5]

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Thanks, Tonya. I'm really excited about the direction of our business and our opportunities for future growth. We are certainly facing some pressures right now, but we will continue to challenge ourselves on ways to drive traffic, tighten G&A, improve execution, all while elevating the guest experience. We will start our normal menu pricing review later this quarter. And as usual, the discussion will be focused on many factors including inflation outlook on both commodities and labor. More importantly, we will stay focused on balancing the short-term pressures we're facing right now with our long-term positioning of the brand.

Fortunately, we continue to generate more than enough cash flow to provide for our new store growth and maintenance of our existing store base. Our development pipeline for 2020 is taking shape, and we are targeting 25 to 30 company openings, most of which have all been identified. In addition, we plan to continue to return excess cash flow to our shareholders through consistent dividends and share repurchases.

Before closing, I'd like to thank all of our operators around the country for their continued hard work and focus on driving traffic. That concludes our prepared remarks. Operator, please open the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of David Tarantino from Baird.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst [2]

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Kent, I just wanted to talk about the pricing philosophy entering 2020. And I think in the past, the company has talked about drawing a line in the sand on restaurant margins of around 17%. And I just wanted to understand if that is still a goal that you have in the near term or long term? And then you mentioned this most recent round of increases has seen very low resistance from consumers. Just wondering if that makes you a little bit more confident in protecting against inflation as you move into next year?

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [3]

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Well, as you know from past discussions, I call all 60 of our market partners, I usually call 50-or-so managing partners that run 1 store to get my information for what we do and what we do not increase. And then we also have about 30 different menu tiers. So we don't price evenly across the country. So you're asking me to make some decisions on the stuff I don't know yet. But yes, I do like the 17% and 18% margin number.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Co-Director of Research and Senior Research Analyst [4]

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Great. That's helpful. And then Tonya, just one clarification on your trends to date in the third quarter. I think a few other companies have called out a calendar issue around July Fourth, and I was just wondering if there was something similar in your business as you see it?

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [5]

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No. Nothing that we really saw jumped out at us regarding the July Fourth holiday. It shifted, I think, from a Wednesday to a Thursday. And so you just -- you naturally get some bounce back in the -- in front of that and then you get some downside in the back half of that as people may be taking longer weekends and things like that. So it just really kind of all balanced out. There wasn't anything that we saw that we thought was worthy of quantifying anything like that on that holiday.

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Operator [6]

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Your next question comes from the line of John Glass from Morgan Stanley.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [7]

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Can you -- just going back to labor, can you talk about turnover? And if that -- to what extent that is a factor in driving the labor inflation? And can you also mention talking to the partners about wage and control labor, if that's what you said? What does that mean? What are some of the things you're asking them? Or they're telling you that they can do to make labor ratios a little bit more favorable?

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [8]

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Sure, John. This is Tonya. On the turnover side, I think, turnover seemed pretty consistent with what we've seen from the labor perspective. It's running, I think, in the high 120s. And I think that does have an impact on labor inflation. I mean it certainly makes it more difficult when you're turning employees like that on the operator when they're out there looking for talent and having to hire that number of people. And as we grow, that continue -- and open more restaurants that continues to get a little tougher for them. So I think that's something that does play a part in that, and we've done a lot to try to just deal with that higher turnover. We've talked a lot about hiring right, training right, making sure we are allowing flexibility in the schedules, making sure we're paying a fair wage rate and that we can compete on that level. And that some of the labor inflation that we're seeing is to do those things from a late -- from that turnover perspective. So while we really haven't seen turnover necessarily come down, it hasn't gotten worse, especially given how low unemployment is. So I think that looks really -- from that standpoint, looks really good to us.

And before Kent adds any comments on the labor, I'll tell you when I'm talking to operators, they're looking at a lot of different things within their restaurants because we're talking about over 500 Texas Roadhouse restaurants. And so they all have a little bit different perspective on things. They're in different states, they have different wage rate pressures, menu pricing, different things like that, that they're seeing. And they have different volumes. Some of them running lower volumes, some of them way above the average when you think of the number of guests that they are putting through their restaurants. So they all deal with the labor inflation a little differently. But some of the things I hear them talking about they're looking at something -- really little easy things is clock-in and clock-out times. And have they done a good job of staying on top of those and just little things like that, that could add up to be pretty impactful. And they're looking at the way that they're hiring, they are making sure

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[they're doing the best they can.] So they're being a lot more upfront of explaining the job, how difficult the job is. We see a lot of turnover on our dish position, our dishwasher. So there -- they -- the operators have come up with some really great ways to improve that position and make it more likely that those folks will stay in those positions. And so our operators is normal -- normally -- as they normally do. They come up with ways to offset these pressures. And they're doing everything they can to add the labor where they need to, where they're -- where it's adding value to their restaurants and finding ways to mitigate some of that, that's not gap spacing.

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [9]

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And Tonya took all my notes, so I don't have anything to add.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [10]

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That's fine, that's helpful. Tonya what was the realized -- what was the commodity inflation actually this quarter? I think you said it was below your target. But what was it?

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [11]

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Yes, it came in at 1.8%. We initially had coming into the quarter when we talked to you all at the beginning of May, we expected it to be closer to 3% and really fees costs came in lower than we expected in May and June and that's what brought it down to about 1.8%.

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Operator [12]

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Your next question comes from the line of Dennis Geiger with UBS.

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Dennis Geiger, UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants [13]

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Within the context of labor and wages, just wondering if you could talk about the employee, and perhaps, the customer satisfaction metrics benefits that you're seeing from operations and throughput? And Kent, if you could just talk about where you are there? And if you're happy with the operations, with the level of satisfaction given the environment that we're in?

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [14]

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Yes, as I've gone into a lot of our competitors' restaurants, I've realized that we hire all the cool people and they probably don't. So that's been very encouraging for me.

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [15]

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I think too -- I think when you look at the -- traffic, I think, at the end of the day is the biggest indicator to me of customer satisfaction. I mean we continue to drive traffic. Our employees -- we do a lot of staff scans. We do a lot of 360 development type things where we're getting feedback from our employees, and we want to make sure that we are addressing any concerns, meeting their needs, things like that. So it's been great to get that feedback and see how that's kind of played out. But traffic, again, I think is the bigger indicator of customer satisfaction.

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Dennis Geiger, UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants [16]

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Great. And then if I could just sneak one. Just on to-go, I was wondering if you could just touch a bit on that business. How it's trending? Where we sit right now? And I guess just the thoughts on the opportunity from here recognizing it's still relatively small in the grand scheme of things but just any thoughts and kind of what you're seeing there.

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [17]

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Yes. This is Kent. That's been a big focus for us. We're having our Market Partner meeting coming up in our 1.5 weeks, I think. And that's probably our #1 focus as we continue to have more and more demand for to-go and not only because of our app, but just people that don't want to wait as long to come in our restaurant. We're looking at how we can make that process more efficient for our guests and more appealing for our guests. We're doing quite a few remodels where we have an outside entrance for to-go. And we found that in the stores that we do with that to-go is increased quite a bit. We're also still very, very busy within our restaurants, so it's nice that our incremental sales haven't been too large at the moment, so we're able to handle it. But we are getting our arms around it and then we've got quite a few stores that are really embracing to-go and then we've seen quite a bit of sales increase because of that.

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [18]

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And that is what we've seen from a sales perspective, it isn't much different this quarter than what we've seen in the past. It's running about 7% of total sales and continues to be up close to 20%, I believe, is what we've seen in that 15% to 20% range. So I'm still seeing that trend continue.

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [19]

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And it's not just the increase from, say, 3% to 7% because our sales that used to be, say 80 a week or now significantly higher. So with the dollar increase over the last 10 years is very significant.

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Operator [20]

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Your next question comes from the line of Jeffrey Bernstein with Barclays.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [21]

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2 questions. One just on the comps, broadly. I'm wondering whether you get a sense of any change -- maybe underlying change in the consumer behavior, whether it's on your mix or traffic or geography. It seems like the 2-year comp trends as you break it out, maybe it slowed a little bit from the front half of the second quarter into the back and now maybe a little bit into the third. So I was wondering if there's anything you're seeing in a metric that might support or refute that idea that maybe trends have been slowing a little bit.

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [22]

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Again, this is Kent. It's back to dollars versus percentages. I mean if you look at our dollars compared to our competitors, even though the percentage is a little less because we're doing such high sales, the dollar -- I mean we're doing like 94 guests a week on average in our stores more than we did a year ago. I like that number.

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [23]

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Yes. And I can tell you just when we break it down the comp growth by daypart and we look at it regionally, Jeff, we're not seeing anything different than we've seen in the past. The growth is coming across the country, Northeast tends to be a little softer. We -- that's what we've seen pretty consistently. And then across the dayparts, we're seeing pretty decent growth for every daypart and every day of the week. So that definitely gives you a lot of confidence in kind of what the time looks like going forward. And I can't say that I've heard of anything really from the operators speaking to any changing consumer behavior or anything like that, that would indicate there's some shift there.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [24]

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Got you. And then my follow-up to an earlier question. Just in terms of the, I guess, the late first quarter or early second quarter price increase that you already took. You mentioned that the majority was flowing through, I was just wondering how you assess that whether there's been any consumer acknowledgment or maybe just investment community's concerns are overdone. And what would it take for further increase in the second half of '19? Or is that really not an option at this point?

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [25]

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I don't think that any additional pricing increases in 2019 are really on the table. As Kent mentioned, we're going to start those processes talking about anything we're going to do in the back half of Q4, probably in September as we usually do when that 1.7% we took last year rolls off, it's probably when you'd see any additional rolling back -- rolling on, so that nothing probably until then. I think when we talk about the flow-through of pricing, we're really talking more about the mix changes. We had about 20 basis points of negative mix in Q2. We've rolled through -- we had 4 quarters of positive mix with mainly coming from entrées and just been shifting around, I think a little bit as people move to a little bit higher priced steak. We've lapped that now, so we're kind of back to normal. We're still seeing positive mix on entrées just not to the degree we were seeing. So mix is about 20 basis points negative, as I said, that's pretty usual for us. And that gives us confidence on the pricing. And then seeing traffic growth, it gives us a lot of confidence too that we're not seeing anything from a pricing perspective that's resonating. I haven't heard from the operators any feedback that says they're hearing from the guests differently, that they're calling anything out that we did or saying, hey, this was more than what we thought it would be. So I haven't heard that from the operator, which is good to hear, too.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [26]

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Got you. And Kent, lastly you mentioned that you were going to test lunch in a few more Bubba's. I was just wondering what your feedback has been on lunch and whether that would ever lead you to consider during that at Texas. Or it's just a different brand that could maybe better justify the lunch daypart during the week?

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [27]

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Yes. Yes, I mean Bubba's, we have pizza, hamburgers, sandwiches unlike our dinner items at Roadhouse. So I see no change on the horizon at all for Texas Roadhouse. We do have a few stores that are in more lunch locations at Bubba's, so that's why we did the test. But I would say easily half of (inaudible) at Bubba's are in locations that are not great lunch locations and I do not intend to do lunch at those.

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Operator [28]

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Your next question comes from the line of Will Slabaugh with Stephens Inc.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [29]

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Just a beef question on the follow-up on your comments. I didn't hear you say if you did, how much you're locked in on your basket of commodities for this year, so if you could update there? And then anything you're hearing about beef and inflationary expectations as we get closer to 2020 would be helpful as well.

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [30]

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Sure, Will. We're 50% locked on prices on a commodity basket in the back half of the year. So not a lot of transparency there. We're floating quite a bit more than what we maybe usually would. Some of that just speaks to some of the uncertainty out there, I think, from a beef perspective in answer to your question on what it looks like getting closer to 2020. But overall, I would tell you, I mean supply seems good on beef, demand is definitely good on beef. We're hearing a little bit -- probably the same thing you all are hearing that some of this tariff activity and things like that may negatively impact beef prices going forward. Don't know if that will happen or on what cuts that will happen. We're really not expecting much of that to impact us, just because we don't use those cuts. And then from a seed perspective, we're hearing a little bit on corn crops that given the rain -- the heavy rains and that may impact some of the corn production in the back -- as we get towards, more towards harvest time maybe that has some impact. Don't know what that will do, but we'll see as we head into the back half of the year. But overall, supply seems good and on demand also.

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [31]

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Yes. A lot of the cuts that head to China are the lower price cuts, not the middle meats.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [32]

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Got you. And just a follow-up on Bubba's, if I could. Is the -- the only governor on you not opening up more Bubba's next year, is that people? Or is there still more around the concept that you feel like you need to prove out before you hit the accelerator?

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [33]

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Well, I've got 2 prototypical changes that will be delivering the back half of this year. And then once we kind of make those final decisions, then that would lead us to growing more Bubba's next year and the year after than we did this year.

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Operator [34]

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Your next question comes from the line of Chris O'Cull with Stifel.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [35]

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Just a follow-up on that, Kent. What changes are you making at Bubba's prototype? And how long do you think it would take you to assess whether it's going to work going forward?

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [36]

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Hey, Chris. You cut out right at the beginning of that question, could you repeat that?

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [37]

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Yes. Sorry about that. The question was, just as a follow-up, what changes are you making to Bubba's -- that prototype of Bubba's? And then just how long do you think it would take you to assess whether it would work?

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [38]

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Sure. Sure. The biggest change we've got some opening coming up that have no service bar in the kitchen as we don't at Texas Roadhouse. Of course, we're a 30% mix at Bubba's; 10, 11 at Roadhouse, but that would be a square footage saving as well as quite a bit of equipment and only one beer system versus 2. So those are big savings if that test goes well, so that would be the main thing that we're looking at. And the other one is some minor changes to some seating in the bar area, making it either less friendly to families or more friendly. And those are the 2 things that I'm looking at, at the moment.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [39]

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So the first one is more operational, I would think. So you feel that you -- could you...

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [40]

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No, the first one is both operational and saving money.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [41]

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Right. So the assessment could be pretty quick with that first -- with the first change, is that fair?

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [42]

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No. I would tell you about first quarter of next year, I'll have both answers answered.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [43]

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Okay. Perfect. And then Kent, what do you think is the biggest area of improvement to ensure that you guys continue to drive traffic?

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [44]

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In Roadhouse or Bubba's?

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [45]

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Roadhouse, sorry.

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [46]

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I think it's just nailing to-go, to be honest with you, getting more efficient and making it easier on the guests as we see the stores that are really doing quite well. With to-go, we have found some unique things to do to make it more streamlined. And so we're basically learning from our operators that are doing some crazy and good things to increase the flow through the kitchen.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [47]

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Okay. That's helpful. And Tonya, you guys purchased a lot of stock this quarter. Do you have a time line for how quickly you'd would like to complete the authorization? Have you considered using debt to be more aggressive buying back stock?

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [48]

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No. We really haven't considered that at this point. I think our goal going forward is to really just, again, be more consistent on dilution. So that's anywhere from 400,000 to 450,000 shares a year, so maybe putting a plan in place going forward that just does that very consistently as more of what we would be focused on. And then being opportunistic outside of that and the light comes down to -- the discounted cash flow and the value that we assign to those share buybacks. It's kind of what we look at from a -- just above and beyond dilution. So right now, I think the focus is dilution. You may see us do a little bit more on the back half of the year to get a head start on 2020. Just a lot depends but nothing more outside of that right now.

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Operator [49]

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Your next question comes from the line of Andrew Strelzik from BMO Capital Markets.

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Andrew Strelzik, BMO Capital Markets Equity Research - Restaurants Analyst [50]

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In the past, you've spoken a little bit about some labor efficiency opportunities, maybe in some of those stores that could be overstaffed. Do you still see that as an opportunity? And can you kind of frame the potential magnitude or time line to which you might be able to implement some changes there? And related, do you still believe that 17% margins holding that level is realistic for this year?

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [51]

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Yes. On the labor initiative, Andrew, I can tell you -- I mean we're looking at those right now. I mean we started looking at those on -- and -- after Q1 and our operators are out there right now just evaluating the restaurant operations and seeing maybe where they have some opportunity. I think it's important to note, I mean they're paid on the bottom line results of their restaurant. So when they add this labor they're not going to add anything that doesn't add value and it doesn't, in their mind, help them drive sales in the long term. So as we mentioned in Q1, we think maybe there's some opportunity there. Anytime you do an initiative like that, you're going to have a little bit of overcorrection, a little bit of overinvestment. We -- we're looking at that now.

I think from of timing perspective, it's probably going to be a little further out. That's why we stuck with that 7% to 8% labor growth per store week guidance full year. It would probably be more heading in the Q -- back into Q3 into Q4 and really that's the way we want it. Because it took us a little while to get here, and we certainly don't want to be overly ambitious about undoing that. We want to make sure anything we're doing, we're doing for the right reasons and really make sure we're looking to grow the brand long term and not making some short term, kind of, goofs from that perspective. So I expect it to be, take a little bit longer. But our operators, anytime we've asked them to look at stuff like this, and they take that challenge seriously, and they certainly have always been successful finding ways whether -- as I said earlier, it's just looking at clock-in, clock-out times, whether it's looking at better ways to reduce turnover, anything like that. They're going to be thinking about it for sure.

And then on the 17% -- sorry, I was just -- I remembered you had a second part of the question on the 17% margin. We're always interested in keeping that -- keeping margins up. Margin percents are definitely important, and we know that.

Growing restaurant margin dollars as important, if not more, in restaurant dollars per store week because that's how our operators are compensated. So we definitely take that into consideration for sure. So I think when we look at 17%, heading into 2020, looking at the margin levels, we're going to really take a hard look at what we think our inflation outlook is for next year. And as Kent mentioned, we're going go through those conversations with our operators on pricing and see where we land. And a lot just depends on where the pressure is coming from, if it's more commodity, how much of it is labor, different things like that. That's what we're going to be looking at in the short -- just to make those decisions as we get to the back end of the year.

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Operator [52]

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Your next question comes from the line of Peter Saleh with BTIG.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [53]

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It sounds like you were -- the conversation around to-go, you seem a little bit more bullish about that than you have been maybe in the past. So maybe can you just tell us, maybe, what's changed? Or do you feel like you'll need to make some investments maybe in the packaging? Or is delivery now something that is on the table for you at Texas Roadhouse?

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [54]

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I would say, number one, we're not looking at delivery at all. And then the guests are basically, I guess, as we improve our ability to get to-go food out and make it less painful, we're getting more and more guests that are coming and picking up their food; plus, number two is we're so busy in the restaurants, a lot of people don't want to wait. And so they instead of going to a competitor, they actually get the food to-go and eat it at home because they want their Texas Roadhouse fix and we're happy that they want that.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [55]

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Great. And then Tonya, I think you mentioned in the quarter there was some higher marketing expenses in the G&A. Can you give us a little bit more color on that? How much that was on a year-over-year basis? Is that something we should expect to continue?

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [56]

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Yes. Peter, we haven't really quantify that, and it's -- it really is our reclassification, if you will, kind of between other operating and G&A. So from a dollars perspective, it's not a huge dollar amount. It's kind of a holdover from some of the stuff we had to do last year with the revenue recognition. So after this quarter, we actually won't have to talk about it anymore, it just kind of lasted through -- we were overlapping that through Q2. And then on -- it won't be an impact for the rest of the year.

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Operator [57]

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Your next question comes from the line of David Palmer from Evercore ISI.

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David Sterling Palmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [58]

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Another question on labor costs. I think they were up 7.4% per restaurant week. The 4% wage inflation, that sounds similar to what we hear in the industry for U.S. market levels but every market is different. Would your market partners agree that your wage inflation that you're seeing in your stores and you're paying is similar to competitors in their vicinity?

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [59]

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David, they may actually even see that -- say they're feeling more of the pressure, I think. When we talk about 4.7% wage and other inflation, that other is about 1.5% of that 4.7% number. So really from a wage perspective, we're seeing inflation at about 3.2%. And that's pretty in line with what we've been seeing. And actually, we've been seeing that for -- we're in the third year of seeing those levels of wage inflation. So I think our operator -- operators would maybe say they're feeling it even a little bit more than some of the competitors are.

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David Sterling Palmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [60]

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And then the second related question that is, that labor hours are up 2.8%, the traffic is up 1.7%. And often in restaurants, we hear labor as a semi-variable cost, meaning it can grow less than traffic, particularly, if you're trying to get your labor paid more and keep them around -- one way to do that, of course, is to allow that -- those hours to leverage. So could you talk a little bit about your labor hours? And do you see labor hours stabilizing in the coming quarters, and maybe on purpose as you try to keep turnover down?

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [61]

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Yes. It's interesting. Typically -- exactly what you described is what we would see. Typically, you would see labor hours be some percentage of traffic growth, labor hour growth be some percentage of traffic growth. And starting -- I think it was in Q4 of '18, we saw -- we have been seeing that gap tighten. And we saw traffic -- our labor growth in hours -- labor, yes, labor growth in hours actually surpassed traffic growth, and it has continued to do that into Q1 and Q2. One of the little bit of differences in Q2, though, is that April traffic was basically flat, and we still saw about 2.6% -- I think, 2.8% growth in hours. So obviously, when traffic is down a little bit, you're not going to see that hour -- those hours stay in line. But it's something we're definitely taking a look at, and we've seen it in back of -- in our back of the house and our front of the house. And we've also seen it in our manager levels. And we've been talking a hard look at the number of managers in the restaurants and the type of manager labor hour that we have. So that's a piece of it. I think going forward, we would hope to see those growth in hours moderate a bit and back to normal where we see them growing less than traffic growth, and there's some benefit of traffic growth on the labor line. But right now, we're not seeing that.

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [62]

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And as we've stated on previous calls, we've looked at the sales growth in stores that had higher staffing levels, and so we intentionally increased the stores that didn't have those staffing levels up to those levels, so that we would, hopefully, see traffic improve. So that's usually a 6- to 12-month process, it doesn't happen immediately.

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Operator [63]

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(Operator Instructions) Your next question comes from the line of Brandon Sonnemaker from JPMorgan.

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Brandon Patrick Sonnemaker, JP Morgan Chase & Co, Research Division - Research Analyst [64]

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With the $112 million of share repo in the quarter, obviously you still have the dividend. But could you just rank order capital allocation priorities? Is share repo more attractive than franchisee acquisitions at this point? And then secondly, could you discuss franchisees' willingness to sell the restaurants, perhaps, in the context of a year or 2 ago?

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [65]

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Sure. I think -- we're always talking to our franchisees about potential acquisitions. It's something we do actively, and we've been doing that for the last couple of years. And as the labor markets tighten, they certainly feel the pressure that, too. Their costs go up. And you want to talk to them about maybe some opportunities there because that labor is going to continue to be a pressure and all the headlines point to that. So it definitely provides a little bit of an opportunity to have those discussions with them and we are. We're also talking about different ways to do that. Maybe it's not buying them out at the 100%, maybe buying a majority interest or something like that and letting them stay in a joint venture setup. So that's been appealing to some of them too, as we've talked about that. So I'm hoping that we'll continue to have those discussions and maybe be able to pull the trigger on a few of those in 2020 and maybe some even in the back half of '19, we'll see.

I think when you talk about priorities from capital -- from a capital allocation perspective use of cash, I mean it's always going to be in building restaurants. And whether it's Roadhouse or Bubba's, so we'll continue to do that and investing in our existing assets and making sure we're spending the money we need to maintain those assets. And then right now, we just had some opportunity from a share buyback perspective, and we're able to take advantage of that. Again, as I mentioned, we'll continue to do that in spite of dilutions concern and still be opportunistic if it allows or when the time allows. Dividends, we're always interested in growth. That's a big program for us. Our board of directors are very committed to it. We've taken some pretty big increases the last couple of years in our dividend program. So I think that's something that will remain important to us in the coming years. And you may see a little bit more of the free cash flow allocated to the dividend program or share repurchases. And then franchise acquisitions, always -- we're always going to take advantage of those as the opportunity allows.

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Brandon Patrick Sonnemaker, JP Morgan Chase & Co, Research Division - Research Analyst [66]

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Okay. That's helpful. And if I could just circle back on Palmer's question. Prior to Scott's retirement, he made a comment about staffing for the next 10,000 a week in sales as opposed to the next 20,000, which you're currently doing. Even giving cost per week up high singles now, I mean if the growth in hours moderates from the 3% range that it is today to, say, flattish, will traffic also moderate?

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [67]

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No. No, I don't think it will. I think right now, we're just investing in those growth in hours, investing a little above and beyond what, maybe, the traffic would say is necessary. And that was kind of the comment we made in Q1 regarding some maybe staffing a little more for the 20,000 a week versus the 10,000 a week in sales for that increase. So that's really what we're taking a look at right now and we're asking our operators about. But we want to make the right investments for the long-term success of the business, for those sales coming forward. And I think what we would like to see is growth in hours moderate a little bit more back to normal, where you see it growing below traffic growth. And it would be great to see wage inflation moderate a bit, too. I mean we know heading into 2020, we've got over 200 restaurants in states that are going to see minimum wage increases and tip wage increases. So we know we still have that pressure. It's probably going to be about 0.5, maybe a little more than that. And so the opportunity is really to see the market pressure abate a little bit from the wage perspective. We get there as far as the wage rates we think we need to pay to be competitive. I think that's what we would hope to see happening in the coming years and that's what we're working towards.

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [68]

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And from a single-store perspective, to your question, if you're fully staffed, then if you have a couple of servers that you're really not pleased with their performance, then you can make the call when you're fully staffed versus understaffed. And then from an overtime perspective, you can eliminate some of that overtime and have fresher people waiting on your guests.

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Operator [69]

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Your next question comes from the line of Jeremy Scott with Mizuho.

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Jeremy Carlson Scott, Mizuho Securities USA LLC, Research Division - Former Senior Restaurant and Protein Analyst [70]

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Just on the other development delays and the limitations of construction labor. It seems to be a universal problem, and this is the second straight year where we've had 3 to 4 stores embedded in the guidance pushed into the next year. So I'm guessing, as we think about the environment today, how confident are you with it in the high end of that 25, 30 pace that you expect for Roadhouse?

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [71]

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This is Kent. I am actually looking at my report right now. And so as I look at it for 2020, stores in permitting or in due diligence, it is 18 at this point. So that's a bit ahead of last year. So we have realized that we need to get more stripes in the hopper, knowing that more things tend to happen these days. So I am quite confident in hitting those numbers because we're just going to assume from now on that, like, 5 deals are going to go south. So we need to pad the group more than we have in the past.

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Jeremy Carlson Scott, Mizuho Securities USA LLC, Research Division - Former Senior Restaurant and Protein Analyst [72]

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Make sense. And then in the last couple of quarters, you've been testing some nonsteak entrées, I believe, the chicken sandwich was a launch you had been most excited about. Can you talk about how those have performed? And if there's any motivation now to expand or diversify the menu?

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [73]

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Yes. The chicken actually was -- we eliminated our half chicken, and we went with a chicken breast that uses the same seasonings and that chicken has performed extremely well, actually, outperforming our old chicken item. So -- and then we actually had a market partner, his daughter sent me a book that -- commenting on our mac & cheese, and so thanks to her not so great comments, we're actually testing a made from scratch mac & cheese versus the prepackaged mac & cheese. So if there's any of our operators out there that their kids don't like another item, just have them send me a book.

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Operator [74]

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Your next question comes from the line of Brian Vaccaro from Raymond James.

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Brian M. Vaccaro, Raymond James & Associates, Inc., Research Division - VP [75]

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Just wanted to circle back to the Bubba's unit economics. I think you said, it was doing about $93,000 a week and annualizing that would get you to kind of little bit below $5 million annually. Tonya, could you remind us where the store margins are? And kind of where the fully-loaded ROI or cash-on-cash ROI selling out on those units? And then Kent, I think the online investment has been, sort of, in the mid-6s the last couple of years. How much money would you be able to save from the changes that you mentioned early in the call?

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [76]

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I'll let Tonya go first, and then I'll go next.

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [77]

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Yes, Brian. When we look at the Bubba's 33 restaurants, typically, what we're seeing now is we're seeing some restaurants come in with lower development cost, which has been really great to see. So while the average is still high, it's running about $6.2 million, as you mentioned. We are seeing some restaurants that are coming in a little bit below that. And when we can get that development cost down like a little bit, and we can see $85,000 a week in sales. And we can hit those 15% mid-teen IRRs that we're looking for, very similar to what we look for at a -- with a new Texas Roadhouse restaurant. So that's certainly encouraging, and I think we would like to see more consistency overall on the development cost. That gets tough to do sometimes with some sites when you want to pick a certain site and there's just some additional costs associated with it, whether it's site cost, land cost, wherever it may be. But we are seeing some indications when we get those development costs down, and we see sales in the ranges they are that we can get decent returns.

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Wayne Kent Taylor, Texas Roadhouse, Inc. - Founder, President, Chairman & CEO [78]

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Yes. We're eliminating the service bar and not quite as many TVs as we used to have, maybe not quite as many speakers. So if we get $250,000 out that will be nice.

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Operator [79]

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And there is no further questions at this time. I will now turn the call back to Tonya Robinson for closing comments.

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Tonya R. Robinson, Texas Roadhouse, Inc. - CFO [80]

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Thanks, everybody, for joining us tonight. If you have any additional questions, please reach out and let us know. Have a great night.

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Operator [81]

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This concludes today's conference call. You may now disconnect.