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Texas Roadhouse: Beef costs to remain a concern

Officials expect 2013 to be another year of mid-single-digit inflation for Texas Roadhouse’s commodity costs.

Texas RoadhouseTexas Roadhouse managed to increase sales and profits despite high beef prices that caused food cost inflation of 6.5 percent for fiscal 2012, and officials said similar pressures and potential remedies would remain this year.

“Challenges, whether consumer- or inflation-driven, have and will always exist to some degree,” Scott Colosi, president of Louisville, Ky.-based Texas Roadhouse Inc., said in a fourth-quarter earnings call. “We will continue to deal with them head on as we have done in the past.”

Officials expected 2013 to be another year of mid-single-digit inflation for Texas Roadhouse’s commodity costs, driven by an increase of about 15 percent in the cost of beef, founder and chief executive Kent Taylor said. However, the chain has locked in about 80 percent of beef purchases for the coming year, and about two-thirds of its remaining non-beef cost of goods sold.

Because the brand was able to contract out so much of its beef needs, said chief financial officer Price Cooper, Texas Roadhouse was able to narrow its range of expected food cost inflation for 2013 to between 6 percent and 7 percent, from a previous guidance of 5 percent to 8 percent.

The chain took a 2-percent menu price increase at the end of December and rolled out its higher-priced 23-ounce porterhouse steak to the remaining two-thirds of its system that did not yet carry the item.

With beef inflation not expected to abate this year or next, he added, Texas Roadhouse would be cautious with further pricing actions and try to manage through those pressures on the food cost line with better in-restaurant execution.

“Under our model, when you’ve got 15-percent beef inflation, [for example], we’re not going to fully price to deflate inflation generally,” Cooper said. “On the flip side, when we’ve got some commodity deflation, we’re generally not going to be reducing prices. … In general, you’d love an economy that’s growing at a couple percent a year, and consumers are making more money and spending more and that is consistent. Unfortunately, that doesn’t always happen.”

Texas Roadhouse officials acknowledge that careful planning will also help the company mitigate costs related to health care mandates.  

Colosi said Texas Roadhouse has modeled several scenarios for covering employees under new requirements mandated by the Patient Protection and Affordable Care Act. The chain’s liabilities could vary, he added, because some employees would be eligible for the expanded Medicaid program, some could remain on parents’ plans and others might opt to pay a $95 penalty rather than pay premiums and deductibles.

“We’ve got an internal range of potential impacts for us that we’ve developed, and it’s not that big of a deal for us, especially when you start comparing it to beef inflation that we had last year or this year,” Colosi said. “We’ll just deal with it and kind of move on.”

He added, “We’re not touching anybody’s hours,” and any planned price increases for the end of 2013 or in 2014 likely would have more to do with competitive pressures and commodity inflation than with health care costs’ effects on margins.

Sales, profits rise amid challenges

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For the Dec. 25, 2012-ended fourth quarter, Texas Roadhouse’s net income rose 13 percent to $13.9 million, or 19 cents per share, compared with $12.3 million, or 17 cents per share, a year earlier.

Revenue climbed 12 percent to $309.5 million, reflecting same-store sales gains of 4.4 percent at company-owned locations and 4.5 percent at franchised restaurants.

Full-year net income rose 11 percent to $71.2 million, or $1 per share, compared with $64 million, or 88 cents per share, a year earlier.

Revenue increased 14 percent in fiscal 2012, powered by same-store sales increases of 4.7 percent at company-owned units and 5.3 percent at franchised locations, as well as the opening of 25 corporate restaurants and two franchise locations.

Company officials noted that same-store sales are expected to remain positive in 2013. Year-to-date in 2013, same-store sales have increased 2.2 percent, which comprises a dip in guest traffic of slightly more than 1 percent. Traffic and sales had been “choppy,” Cooper said, with a strong January and sluggish February due to inclement weather.

Texas Roadhouse also plans to open an additional 28 corporate restaurants in 2013 while investing in international growth and sales-driving upgrades to its restaurants.

The company has remodeled about 100 units to add about 10–12 percent more seating capacity, as well as to fit new kitchens that speed up throughput and host stands that seat guests faster. Taylor said the company has planned another 30 remodels for 2013.

“We can do a couple hundred more, as we feel the sales justify doing so,” Taylor added.

Also in the fourth quarter, Texas Roadhouse spent $4.3 million to acquire two locations in Illinois that had been franchised.

Cooper said the brand does not plan any further franchise acquisitions in 2013, but it would remain open to the move down the road as a way to spend its free cash flow beneficially.

“We will look for opportunities where we can negotiate deals with franchisees,” he said. “One, we think it’s a good deployment of excess capital when we can make what we feel like are good overall returns on it. Plus, sometimes it can help us from the people and growth side of things as well.”

As of the end of the fourth quarter, Texas Roadhouse operated or franchised more than 390 restaurants in 47 states and two foreign countries.

Contact Mark Brandau at [email protected] [7].
Follow him on Twitter: @Mark_from_NRN [8]