Texas Roadhouse, Inc. (NASDAQ:TXRH) Q3 2023 Earnings Call Transcript October 26, 2023
Texas Roadhouse, Inc. misses on earnings expectations. Reported EPS is $0.95 EPS, expectations were $1.05.
Operator: Good evening and welcome to the Texas Roadhouse Third Quarter Earnings Conference Call. Today’s call is being recorded. All participants are now in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions]. I would now like to introduce Michael Bailen, Head of Investor Relations for Texas Roadhouse. You may begin your conference.
Michael Bailen: Thank you, Emma and good evening. By now, you should have access to our earnings release for the third quarter ended September 26, 2023. It may also be found on our website at texasroadhouse.com in the Investors section. I would like to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our earnings release and our recent filings with the SEC. These documents provide a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements. In addition, we may refer to non-GAAP measures.
If applicable, reconciliations of the non-GAAP measures to the GAAP information can be found in our earnings release. On the call with me today is Jerry Morgan, Chief Executive Officer of Texas Roadhouse, and Chris Monroe, our Chief Financial Officer. Following the prepared remarks, we will be available to answer your questions. In order to accommodate everyone that would like to ask a question, we kindly ask analysts to please limit yourself to one question. Now, I'd like to turn the call over to Jerry.
Jerry Morgan: Thanks, Michael and good evening, everyone. We have nearly completed our annual fall tour where we visit with more than 700 operators from all three concepts. As I mentioned last quarter, this is one of the highlights of my year as it gives us the opportunity to interact directly with all our managing partners across the country. At stop after stop, we get to see and hear not only the passion they have for our business, but also the ideas they have to make us better. The real-time feedback we receive is invaluable as we plan for how to continue to improve and take action to support and serve the needs of our managers and roadies. The hard work of our managing partners and their teams can once again be seen in our strong third quarter performance, which includes average weekly sales of approximately $139,000 and comparable sales growth at 8.2%.
I believe our operator's passion, dedication, and focus on the success of their restaurants is one of our biggest advantages. They remain committed to building sales and profits while sticking to our core values regardless of the pressures they face. Our top-line results continue to tell us that we are delivering on our promise of legendary food and legendary service. We recently completed an independent guest attitude and usage study, and we were the casual dining leader in many categories, including overall guest satisfaction, food quality, and friendly service. In the third quarter, guest satisfaction helped drive traffic each month compared to 2022. Moving on to development, the third quarter was productive with nine company store openings, including two Bubba's 33 locations.
We also opened four franchise restaurants, including three international locations, and our first Jaggers franchise restaurant. We expect to open as many as 12 additional company-owned restaurants in the fourth quarter, which would give us 27 company-owned Texas Roadhouse and Bubba's 33 openings, as well as three Jaggers openings for the full year. Looking ahead to 2024, we have a strong pipeline of new stores and are targeting approximately 30 company-owned Texas Roadhouse and Bubba's 33 openings, as well as three Jaggers. We also expect our franchise partners to open at least nine international and domestic locations in 2024, including four Jaggers. Finally, I would like to address increasing external concerns regarding the health of the consumer and the ability of restaurants to navigate uncertain economic times.
Whether it is commodity inflation, mandated wage increases, student loan payments, or other potential issues, the restaurant industry has always been full of challenges. However, we have seen the consumer has remained resilient in their desire to dine at restaurants, especially those like ours that offer a quality product with a high level of value, service, and hospitality. Our position remains simple. We focus on what we can control, which is providing a legendary experience to each and every guest that visits our restaurant. We will never take for granted that guests give us two of their most valuable commodities, their time and their money. Now Chris will provide some thoughts.
Chris Monroe: Thanks, Jerry. Let me start by echoing Jerry's comments regarding fall tour. Still being relatively new, it was a great experience for me to meet so many of our operational leaders and listen to their feedback on how to make our company even more legendary. The more opportunities I get to spend time with our managing partners, the more I understand how critical they are to our success. Before Michael provides the details update of our third quarter financial results and go forward assumptions, I would like to offer some color on our results, menu pricing, and our approach to capital allocation. We remain extremely pleased with our current top line trends, as well as the strength and consistency we have seen on a multi-year basis.
And with regard to profitability, our third quarter comparable results were negatively impacted by several adjustments, which Michael will detail. Despite this noise, we were able to continue margin dollars -- we were able to continue growing margin dollars per store week while also maintaining year-to-date double-digit EPS growth. At the beginning of the fourth quarter, we implemented a 2.7% menu price increase. This gives us an average 5.5% for the full quarter. As is typical for us, this pricing action is primarily meant to offset structural wage pressure, including the impact of upcoming state mandated wage increases. While costs remain elevated in the third quarter, they continue to perform largely in line with our expectations. The rate of year-over-year wage inflation continues to moderate as we lapse significant wage pressure from last year.
At the same time, the sequential pace of wage increases has stabilized, resulting in an expected return to more normalized and manageable rates of increase in 2024. It's a similar story regarding commodities this year. Beef remains the primary driver of this year's inflation, with pressure from the rest of the basket moderating or deflating as we have moved through the year. Inflation for the third quarter was slightly better than we had originally expected as our procurement team is doing a great job with the strategic timing of our contracting and purchasing. On capital allocation, we will maintain our balanced and disciplined long-term approach. While our pipeline of new store openings over the past several years, including 2023, has been heavily back-end loaded, we now expect 2024 openings will be much more evenly distributed throughout the year.
And going forward, it's our expectation that we will maintain a more balanced opening schedule. We will also continue to invest in our existing stores so that they can continue to grow and generate strong profits. Additionally, we will continue to pursue franchise acquisitions when those opportunities arise and ensure that we have a deliberate approach to dividend growth. Beyond that, excess cash will be directed toward the repurchase of shares as appropriate. All of our capital allocation decisions are made through the lens of creating strong shareholder returns for our investors. We believe that the combination of organic growth and returning capital through dividends and repurchases will allow us to continue to deliver robust shareholder returns as we have consistently done throughout our history.
And now, Michael will provide the financial update.
Michael Bailen: Thanks, Chris. For the third quarter of 2023, revenue grew 12.9%, driven primarily by a 7.8% increase in average unit volume and 5.7% store week growth. Restaurant margin dollars grew 7.1% to $163 million while earnings were $0.95 per diluted share. EPS growth of 2.6% for the quarter was significantly impacted by several adjustments in both the current and prior year. I will provide more detail on these adjustments in a moment. As mentioned, our stores averaged nearly $139,000 in weekly sales in the third quarter and to-go represented approximately $17,000 or 12.3% of these total weekly sales. We have now had two consecutive quarters of year-over-year growth in average weekly to-go sales and believe there is an opportunity to further build upon this business going forward.
For the third quarter, comparable sales increased 8.2%, driven by 4.1% traffic growth and a 4.1% increase in average check. By month, comparable sales grew 10.7%, 7.8%, and 6.6% for our July, August, and September periods respectively, and sales and traffic trends have remained strong into our fourth quarter. For the first four weeks of Q4, average weekly sales were over $141,000, driven by 9.2% same-store sales growth, which includes a 3.4% traffic increase. Restaurant margin dollars in the third quarter increased to over $20,000 per store week and restaurant margin as a percentage of total sales decreased 80 basis points to 14.6%. The decline in the third quarter margin percentage is primarily due to the approximately 70 basis point impact of adjustments to our general liability insurance reserves this year and last year, as well as an approximately 30 basis point impact from our gift card breakage adjustment declining from $6.6 million last year to $3.7 million this year.
Food and beverage costs as a percentage of total sales were 34.6% for the third quarter. This was three basis points better than last year, as 4.2% commodity inflation for the quarter was offset by the benefit of a 4.1% check increase. With approximately 75% of the overall basket loss for Q4, we continue to expect full-year commodity inflation to be at the higher end of our full-year guidance range of 5% to 6%. Looking ahead to next year, we are projecting commodity inflation of 5% to 6% with beef, the primary driver. Labor as a percentage of total sales increased 51 basis points to 34% as compared to the third quarter of 2022. Labor dollars for store week increased 8.5% primarily due to wage and other labor inflation of 5.6% and growth in hours of 3.3%.
Labor growth benefited from the $1.3 million impact of favorable claims experience related to group insurance and workers comp. Our full-year 2023 guidance for wage and other labor inflation remains unchanged at between 6% and 7% with current trends continuing to point towards the midpoint of that range. For 2024, we are forecasting wage and other labor inflation of 4% to 5% with upcoming state mandated increases representing approximately 1% of the increase. Other operating costs were 15.2% of sales, which was 38 basis points higher than the third quarter of 2022. Included in the year-over-year change is an approximately 70 basis point negative impact from the aforementioned adjustments to our quarterly reserve for general liability insurance.
These adjustments include $2.9 million of additional expense this year and a $4.4 million credit last year. Moving below restaurant margin, G&A dollars grew year-over-year by 11.4% and came in at 4.3% of revenue. The year-over-year increase includes the impact of lapping a $2.5 million credit in 2022 related to last year's managing partner conference. Our effective tax rate for the quarter was 11.9% and we now expect a full-year 2023 income tax rate of approximately 13%. And our initial forecast for the full-year 2024 income tax rate is between 14% and 15%. With regards to cash flow, we ended the third quarter with $69 million of cash. Cash flow from operations was $103 million, which was more than offset by $89 million of capital expenditures, $37 million of dividend payments, and $12 million of share repurchases.
At this time, we are raising our full-year 2023 capital expenditure guidance to approximately $340 million. As Chris mentioned, this increase allows us to accelerate the timing of new store openings in 2024. We now expect to open approximately 15 restaurants in the first half of 2024 on top of the 12 restaurants opening in the fourth quarter of 2023. This high level of construction activity will require a higher than previously planned capital expenditure during the fourth quarter of 2023. Additionally, we are establishing our initial 2024 capital expenditure guidance at between $340 million and $350 million. This amount contemplates a continuation of a balanced opening pipeline going forward. Finally, as a reminder, 2024 will be a 53-week year for us.
As such, the fourth quarter of 2024 will have 14 weeks versus our normal 13 weeks. We estimate that the additional week could benefit full-year 2024 earnings per share growth by approximately 4%. Now I will turn the call back over to Jerry for final comments.
Jerry Morgan: Thanks, Michael. Whether it's in our restaurants or at our support center, Texas Roadhouse's People First Culture is second to none. I'm very proud to announce that we were recently named one of America's greatest workplaces by Newsweek. This award came with additional recognition in the following categories. Great workplace for women, diversity, and job starters. This recognition is a testament to the passion, partnership, integrity, and fun that makes Texas Roadhouse such a legendary place to work and dine. I am proud to be a partner to all roadies as we continue to build for our future. That concludes our prepared remarks. Operator, please open the line for questions.
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