While Texas Roadhouse’s sales remained strong in the second quarter, margin pressures prompted company executives to moderate the brand’s earnings growth expectations to 5 percent for the full year, down from a range between 5 percent and 10 percent stated earlier.
The 350-unit casual-dining chain’s same-store sales rose 4.4 percent in the period, comprising a 3.1-percent lift in traffic and a 1.3-percent uptick in the average check.
Revenue for the quarter rose 10 percent to $279.6 million, and net income grew 7 percent to $16.1 million. However, margins will continue to face pressure from both food and labor costs for the rest of the year and into 2012, said chief executive G.J. Hart.
“On the profit side of the equation, we are not as pleased with the results so far this year,” Hart said in a call to analysts. “While our earnings per share grew 7 percent in the second quarter, this was a bit less than our revenue growth, as restaurant margins were almost 70 basis points lower than last year. As many of you know, our pricing actions to date have significantly lagged the inflation that we’ve experienced this year.”
That is beginning to change, however, as Texas Roadhouse took another 1-percent average price increase in July and now is testing a 2-percent increase in 19 stores, which would be implemented in early 2012 if the results prove satisfactory, Hart said.
The conservative pricing actions should mitigate some of the food and labor cost pressures without sacrificing Texas Roadhouse’s value proposition, Hart said. But, he added, “Inflation will continue to have a pretty significant impact on our margins throughout the second half of the year.”
Price Cooper, vice president of finance, said commodity inflation would run just under 5 percent for the rest of 2011, driven by higher costs for beef, oil, butter and shortening. He added that Texas Roadhouse’s labor costs would continue running higher compared with a year earlier due to investments related to newer restaurants, including more labor hours, more on-site kitchen and service training and increased local-store marketing spending.
Pricing actions to remain conservative
The chain’s first price increase of 1 percent in March of this year was lower than a 2-percent increase tested in 2010, and officials said the smaller price hike was made to ensure Texas Roadhouse maintained its value proposition to keep growing its market share. The second 1-percent average increase and another probable increase early next year are meant to keep the chain’s options open as inflation persists, officials said.
Even with the 1-percent price increase in effect during the second quarter, the average check slightly exceeded the figure, as customers not only accepted the increase but also took advantage of other options on the high and low end of the price spectrum, officials said. Hart pointed to the $7.99 Early Dine combo as a value-conscious complement to a more premium bone-in rib eye, which he believes is attracting higher-income consumers from more expensive restaurants.
“We are still encouraged that we’re seeing some help from the bone-in rib eye and the combos, which is why we have gotten through 1.2 percent to 1.3 percent of what was an average price increase of 1 percent from March,” Hart said.
Further menu price hikes would be considered carefully, he added.
“We are not taking the strategy that we want to necessarily enhance margins off our pricing actions,” he said. “What we’re saying is we want to hold our margins steady and then we’ll continue to leverage around our service and food quality initiatives. It’s not a shift in strategy, but we have a lot more pressure than anticipated, and we’re going to react accordingly going into 2012.”
A labor of love
Investments in labor cost, especially in newer restaurants with much higher average weekly sales, would remain a necessary initiative for Texas Roadhouse, even as they put downward pressure on systemwide margins and the bottom line for managing partners, who pocket a percentage of profits as part of their compensation.
“While these initiatives are costing us in the short term, especially in conjunction with our conservative pricing, we believe service has been and will continue to be a huge driver of our sales performance and long-term success,” Hart said. “On the service side, we’ll continue investing in initiatives designed to enhance the guest experience and drive traffic,” such as the “leader at the door” program in which general managers greet guests, or the “heaping portions” of side dishes for which Texas Roadhouse is known.
Managing partners will be encouraged to continue running their businesses with an eye toward long-term profitability, Hart said.
“They know to invest in the labor and heaping portions and that kind of thing,” Hart said. “Our managing partners aren’t on their own pulling back on their labor hours, because they want their sales to get to the $100,000 a week level, because that’s where the big money is.”
Cooper reported that Texas Roadhouse’s 12 newest restaurants are averaging $84,100 in sales per week, compared with an average of $79,000 per week for the 12 units opened in the past six to 18 months and $76,400 in average weekly sales for the 255 locations open for more than 18 months.
Louisville, Ky.-based Texas Roadhouse operates 279 locations and franchises another 71 restaurants in 46 states. Its first international unit is set to open at the end of August in Dubai, United Arab Emirates.