Texas Roadhouse, Inc. (TXRH) Q4 2015 Earnings Report, Transcript and Summary

Good day evening and welcome to the Texas Roadhouse Incorporated Fourth Quarter 2015 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 Scott Colosi, President and Chief Financial Officer. You may begin your conference, sir.

Thank you, Don, and good evening, everyone. By now, you should have accessed our earnings release for the fourth quarter ended December 29, 2015. 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 for 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 under the Investors section of our website. On the call with me today is Kent Taylor, our Founder and CEO, and Tonya Robinson, our Senior Director of Financial Reporting and Investor Relations. Following our remarks, we will open the call for questions. Now, it's my pleasure to turn the call over to our Founder, Mr. Kent Taylor.

Thanks, Scott. We are pleased to wrap up another year of double-digit sales and profit growth. Our operators continue to do a solid job building sales, providing legendary dining experience to our guest and growing profits in the face of high beef and labor cost. For the year we increased comparable restaurant sales by 7.2% which included a 5.4% increase in guest accounts. Additionally, for the fourth quarter we increased comp sales by 4.5% bringing us to 24 consecutive quarters of positive comp sales growth. Heading into 2016, we have a lot to look forward to including continued top line momentum, lower beef cost and a strong development pipeline. Our comp sales for the first seven weeks of 2016 are up approximately 4.4% which is lapping an increase of approximately 12% for the same period last year. After several years of significant beef inflation, we look forward to some relief in 2016. We expect approximately 1% to 2% of our food cost deflation mostly driven by beef. Overall, we currently have fixed pricing on approximately 65% of all of our commodities for this year. On the development front, we have assembled a substantial pipeline of new locations in our track to open approximately 30 company restaurants this year. Four of those locations are already open, 14 are currently under construction, and additional seven are planned to start construction in the first quarter. I congratulate all of our operators on their outstanding results and we look forward to seeing you all at the upcoming annual conference. Now Tony will walk you through our financial update.

Thanks, Kent, and good evening, everyone. For the fourth quarter of 2015, we earned $23 million or $0.32 per diluted share, which is a 23% increase over the prior year. Revenue growth of 12.3% during the quarter was driven by an 8.8% increase in store week and a 4.3% increase in average unit volume. For the quarter, comp sales increased 4.5%, comprised of 2.8% traffic growth and a 1.7% increase in average check. By month, comparable sales increased 5%, 5.6%, and 3.1% for our October, November and December periods, respectively. Comps during the quarter were negatively affected by approximately 60 basis points due to Christmas shifting from Thursday to Friday. As Kent mentioned, comps were up approximately 4.4% for the first seven week of 2016. For the quarter, restaurant operating profit increased 20% or $13.2 million compared to the prior year, and restaurant margin dollars per store week were up 10.3%. Restaurant margin as a percentage of sales was 17.6% which was a 112 basis points increase over the prior year period. Now I will provide a little color on some of the expense lines for the fourth quarter as compared to the same period last year. Cost of sales as a percentage of sales were 47 basis points lower during the quarter versus last year, primarily due to lower food inflation. For the quarter, our food cost inflation was approximately 1.6% driven by beef cost. Labor cost as a percentage of sales were six basis points higher versus last year driven by wage inflation, higher turnover and higher healthcare cost. These increases were almost entirely offset by averaging a volume growth and approximately $1.5 million of non-recurring items recorded during the quarter related to the health insurance reserves and payroll taxes. Other operating costs were 72 basis points lower during the quarter, primarily due to lower bonus expense and utilities expense, along with lower loses associated with the disposable asset, disposal of assets versus the prior year. The low restaurant margin depreciation expense increased $3.2 million in the quarter versus last year, an increase of 28 basis points as a percentage of revenue to 4.1%. D&A costs were up $4.3 million in the quarter, an increase of 39 basis points after percentage of revenue versus the same period last year. Higher share-based compensation expense more than offset the benefit from averaging a volume growth. Preopening cost decreased $1.1 million on a year-over-year basis, primarily due to fewer restaurants openings this quarter compared to the prior year period. Finally, our tax rate for the quarter came in at 28.5% which was slightly higher than the 27.7% rate last year. Our balance sheet remains strong as we ended the year with $59 million in cash and $26 million in debt. Once again, we generated positive free cash flow during the quarter bringing our total free cash flow for the year to $55 million. During 2015 we generated $228 million in cash flow from operation, incurred capital expenditures of $173 million, reduced our debt by $25 million and used $58 million to pay dividends and repurchase stock. As a result, our cash balance was $27 million lower than the prior year. Moving on to 2016, we updated several of our expectations since our last call. As Kent discussed, we are targeting approximately 30 company openings this year including approximately seven out of 33 restaurants and the timing of our 2016 development schedule is off to a very good start. We continue to expect positive comparable restaurant sales including approximately 1.9% of pricing action. On the cost side, we currently have fixed price arrangements on approximately 80% of our beef needs for this year, and as Kent mentioned approximately 65% of our overall cost of sale. As a result, we expect food cost deflation of 1% to 2% in 2016. In regards to labor, we expect headwinds to continue to the ongoing wage inflation along with state minimum and tip-to-wage rate increases. With a five-year extension of the work opportunity tax credit in December, we expect our tax rate to be approximately 30% in 2016. Finally, we expect significant free cash flow generation even after projected capital expenditures of $165 million to $175 million. Accordingly, we plan to continue returning capital to our shareholders through dividends and ongoing share repurchases. As we announced, our board authorized an increase in our quarterly dividend payment taking it to $0.19 per share from $0.17 per share last year which is an 11.8% increase. Now, I'll turn the call over to Scott for final comments.

Thank you, Tonya. Well, we are very pleased with our 2015 results. We achieved double-digit revenue and diluted earnings per share growth while opening 29 new company restaurants, reinvesting in, and taking care of our existing restaurants and returning over $57 million in capital to our shareholders through dividends and share repurchases. As Kent mentioned, we've also entered 2016 with strong topline momentum. As we overlap some of our toughest comparisons from 2015 with positive comp sales, we remain confident in our ability to drive positive comp sales going forward. And in addition to sales growth, food cost deflation provides the backdrop potential margin expansion this year. Our new Texas Roadhouse Restaurants continue to perform well. I'm pleased to say that over 80% of our 2015 openings had average weekly sales in excess of $100,000 per week in their first month. On the cost side, our average development cost last year for Texas Roadhouse restaurants was $4.7 million which is about the same as last year excluding two high development cost openings in Alaska and one in the New York City vicinity. For 2016, we do expect to see our development cost increase just slightly to approximately $4.8 million. Overall, we remain very comfortable with the financial returns we are seeing on new restaurants. In addition to Texas Roadhouse development, we opened four Bubba's 33 restaurants in 2015 bringing our total to seven at the end of the year. We're still on the early stages of Bubba's 33 development. Accordingly, we continue to fine tune the model both from the development cost and operations' perspective. While it's too early to talk about specific result at our existing locations, we are confident in where we are headed with Bubba's 33. In addition to domestic growth, we're excited about our international growth plans in 2016 and beyond. We currently have ten international franchise locations in four countries and expect to add four to five more stores this year including our first in the Philippines. We also recently signed a development agreement with a franchise partner in Mexico and look forward to openings there as early as 2017. Our number one goal has been and continues to be staying focused on doing the right things for the long term success of Texas Roadhouse. That includes keeping our nearly 500 managing partners at the center of our universe and creating value for our employees, our guests, our local communities and our shareholders. And speaking of 500, we're excited to be opening our 500th restaurant later this year. Before we open the line for questions, I do want to give a big shootout and thank you to all of our operators for a great 2015 and for continuing to drive Texas Roadhouse forward. No doubt our people are our biggest competitive advantage, and speaking of another competitive advantage, I also want to congratulate our own Chris Jacobson on his recent promotion to Chief Marketing Officer for Texas Roadhouse. Chris has been with us since 2003, most recently as our Vice President of Marketing, and he has taken our marketing efforts to a whole new level and his leadership will continue to be a very, very important part of our future success. That concludes our preferred remarks. So, Don, please open the line for questions.

Thank you. [Operator Instructions] And we'll take our first question from Keith Signer with UBS.

Thank you very much. Hey Scott, can you talk a little bit about maybe where the traffic gains are coming from? I mean, it's impressive to see this trend continue this way. Is this true for the peak hours, or is it shoulders, is other nights and days? So after what Spring like, where are you seeing the traffic gains manifest most? Thanks.

It's a combination of a little bit of everything. So our traffic, it's at peak revenue hours, it's off revenue, off peak hours, it's during the week, it's the weekends, it's every aspect of our business, and driven by many different things. First and foremost our people and just great operational execution, but certainly we continue to add seats, bumped out into our restaurants, we continue to expand our third party gift card sales, certainly low gas prices helps. Lowering unemployment helps, that's probably the number one correlation that we see with our sales momentum is unemployment, and all those things all come together to drive sales.

And then on the Starbucks, can you give us an update there? How that place is going? How customers are responding? Are they as excited as they were last update, etc.? Thanks.

This is Kent. Just kind of helps freshen the building without spending a ton of money. So I don't know if you can really correlate sales growth to those, just kind of gives a fresher look when you're in the bar.

And we've done over 300 of those so far. I think we did almost 200 in 2015. [Cross Talks]

We'll take our next question from Will Slabaugh with Stephens.

Yes, thanks guys. Congrats on the quarter. I want to ask a little more about Bubba's. I know you said it's obviously early there. But wanted to kind of see if there's anything else you could add in terms of color of what you've seen so far and then kind of get into why the increase number of units now. I know it's just two more than what you talked about last quarter. But obviously it seems like you're feeling a little more positive. So just kind of wondering where that's coming from.

This is Kent. I think the biggest thing is we wanted to make sure that we didn't get sales taken away from Texas Roadhouse. So all the stores we opened last year were in direct competition with Texas Roadhouse and we saw little effect on the sales at Texas Roadhouse. I think that was the biggest reason we slowed a little bit last year and are picking up a little bit more this year.

And if I could follow up on that a little bit. Could you talk a little bit about where you want to position this brand in terms of maybe high level and then also physically? So do you want to put Bubba's next to a lot of the more mature casual dining brands and take share there, or is there a different strategy maybe you have for the brand?

We just find that when we go on the markets where Texas Roadhouse tends to do a little better than average that we find that we have nice sales out of the Bubba's. That's pretty much it. It's not rocket science.

Fair enough. Thanks.

We'll go next to David Palmer with RBC Capital Markets.

Thanks. I just want to follow-up on that comment about Bubba's -- you were talking about opening up new units close, somewhat closer to existing Roadhouse locations. Did you say that the impaction or cannibalization of existing Roadhouses was less than you were expecting in those locations?

Way less than I would have expected, correct. And the menu is very much different than Roadhouse, and I think that's a big piece of it as well.

Then, so that will feed the strategy going forward that these will be fairly co-located if you will go forward.

I would see them in the same towns but they don't necessarily have to be next door to each other. I mean, I don't want to put them exactly next door because then we get to fight over parking, and that's not always fun.

Got it. Thank you.

We'll go next to David Tarantino with Robert W. Baird.

Hi, good afternoon. Just a couple of questions. First on the sales trends or thing so far in Q1, they look very strong relative to the comparison. So I was just wondering how you're viewing that, are you thinking that this is an acceleration in the business or is there something maybe about the comparison that is maybe less challenging on the surface?

I would say our people do a great job executing and I wouldn't take it much be on that, to be honest with you.

Okay. But I guess, the question is do you think that your underlying momentum has accelerated here in the first quarter or do you think maybe that, I know the 12%, Tonya, if I recall included some calendar benefit last year and then also might have been softening at -- laughing at soft period in 2014 but I guess overall would you consider stronger momentum, and if so I guess what are your thoughts on the factors that are driving that?

David, this is Scott. I wouldn't say that seven weeks of sale of data. For us is an indication one way or the other that the multiyear sales trends are strengthening or not, we wouldn't view it as such. We just view it as our folks are very competitive. They're still paid a big percentage of the bottom line in their restaurants. They have a lot of ownership in their sales growth, and they're not waiting around for the next advertising campaign to figure out how they're going to grow their business and grow their sales, and so they get after it and that's a big reason why we continue to get more guests in the building.

And David, this is Tonya. I can tell you, I think we did have some overlap last year with New Year's Eve shift. I think it may have been around 1% to 2%. This year we don't really have any calendar shifts going on in the numbers for the seven weeks. So, and that last year was on a quarterly basis, not the seven-week basis.

Got it. Thank you very much for that clarification. And last question, I think last quarter you mentioned labor inflation outlook roughly 3% inflation, could be the run rate for this year. Is that still your outlook or is that changed in any way?

No, that's still what we're expecting going forward. We saw about 2.9% wage inflation in Q4, so that trend seems to be holding.

Great. Thank you very much.

We'll take our next question from Christopher O'Cull with KeyBanc.

Thanks. Good afternoon guys. My question is just on the development front, can -- is the company in a position to open more than 30 units a year?

I guess we probably could but we like to get the best people to open our units and we like to train them correctly. So we're able to be a little bit tougher on our selection of people and I think that we want to stay focused on that direction and not just open stores, open stores.

I'm assuming that Bubba is opening workout as planned this year and you feel like you could accelerate that. Would the plan be to keep the 30 -- kind of 30 unit's openings a year and then just mix them between the Roadhouse and the Bubba's? Maybe more Bubba's to your Roadhouses?

Chris, this is Scott. We could see our total number of openings going a little bit above 30. If that was to be the case, if there were more openings of Bubba's, we'd still have a long runway at Texas Roadhouse. So we wouldn't see that falling off that far that quickly. So you could see us open more than 30 restaurants, again provided, Bubba's continues to perform. Would we do 50 stores, probably not, 40 stores, who knows? That would probably could be a pretty big number for us given everything that can't just said about finding, training great people, and also making disciplined real estate decisions.

I'm using today you're using the Roadhouse opening teams and construction teams for the Bubba's, how many Bubba's do you need before you have a dedicated team to that concept or you have to check building in infrastructure to support that concept?

This is Kent. Currently we are now at a point where we are using a designated Bubba's team to open the restaurants, but yes, we do use our Roadhouse folks on the real estate side and development side to open the Bubba's.

Do you think you ever imagined having a separate team for that in terms of real estate or development or any other department?

No, no. I think our folks, they are already going to these various cities and they are already very familiar with the cities we're currently in. So I did not see that.

I mean, then just last one. Is there any meaningful change to the prototype for Bubba's this year for the seven openings, I know the ones I've visited, there is a couple of bars in them, are you going to keep the two bar prototype?

We are going to be testing to new prototypes this year which both have more smaller than the ones you've probably been in. And yes, one of them does not have two bars, it has one.

Okay, great. Thanks guys.

We'll go next to John Glass with Morgan Stanley.

Thanks very much. First on the deflation comments in one to two I think before you said low single digits, that's where the low end of single digits, I guess you could say -- can we just break it down? Are you getting the amount of beef relief you thought, other things are offsetting it or maybe just a little context as to given that this is going to be a big beef relief year, maybe that's not as big as something people expected?

I can tell you as we said 80% loss on our beef needs for 2016, so that does give us a bit of visibility on it. And based on that we're in that 1% to 2% range but that 1% to 2% would be the floating piece of it, the 20% that we are floating on our beef needs but I think we have pretty good visibility on that and are comfortable with 1% to 2%. Hopefully there is some upside there with the 20% we're floating and some of the other items, we may have not locked up yet in the basket but I would say currently we feel good about that 1% to 2% deflation rate.

Are you willing to say how much beef is down within that?

No, I don't think we'd be the one to say that right now.

Part of one of the things you stated on the wages with the labor line was higher turnover. Is there something to call out there or is that just a modest pick up or what's the dynamic?

It's not too much of a pickup, it's running around a 113% on our hourly group versus I think it was around 108% last year but not a big uptick but I think it's just indication of the overall job market, and unemployment being low, the job market tightening, we're hearing that from our operators that it's tougher to hire people, they are paying a little bit more. So I think that should -- it's a general indication of that and I think that we're overly concerned about.

I just want to make sure I heard you finally labor line, was there $1.5 million benefit this quarter that offset some of the inflation you're talking about, is that correct?

Yes, there was about a million related for our health insurance reserves, I mean that's just like our general liability and workers comp, we true up to actuarial reserves on a quarterly basis so that was just related to that. And then about $0.5 million year-over-year relating to payroll taxes.

Are those -- okay, thank you very much.

We'll go next to Jeffrey Bernstein with Barclays.

Great. Thank you very much. Couple of questions on the -- from the beef outlook perhaps. One, I'm just wondering if you're seeing any increase in competition? It seems like a lot of people are talking about steak prices and beef prices easing and maybe getting more aggressive on the steak and beef side of things. I'm just wondering whether you're ceding anything along those lines or would you expect to see something like that if beef was to kind of ease?

Jeff, this is Scott. We haven't seen anything, I would say different in the last few months than we have the prior year from level of discounting or LTOs related to steak. It doesn't mean that they are not out there, we just haven't seen them. We certainly haven't felt them based on our sales trends I would say but we have -- we don't have a specific measurement that tells us that there is more beef discounting right now than there was six months ago.

Got it. And then when you think about just beef prices in general, I'm just wondering what do you think of the ideal scenario in terms of steak prices, both on just an absolute level and year-over-year inflation or deflation, it's always that debate is -- take pressures come in, maybe if you will start shopping and cooking more at home. So just wondering where you would like to see things play out or where do you think the ideal scenario is from that perspective.

More cows and cheaper prices.

I think there is a lot more to the experience than just the price of the meat or of the steak in a supermarket versus at a restaurant. A lot of -- we sell a lot of hospitality at Texas Roadhouse, we have a lot of very friendly people at Texas Roadhouse, number one; and number two, we think we do a great job, our people do a great job cooking our steaks. And so you get a whole experience coming to Texas Roadhouse and we think that's a large reason why we don't believe a decline in prices at supermarket is going to lead a lot of people all of sudden start cooking from home or just going after restaurants like Texas Roadhouse. Maybe it will trade away from some other restaurants but we don't think so much.

Understood. No, I would agree. And just the last question, you talked a lot about the comp already, but just wondering people are getting asked a lot about their regional trends and obviously some stores in Texas and the South Central U.S., I'm just wondering whether you're seeing any disparity in terms of market-by-market?

Well we're seeing across the region, it's pretty consistent with what we've always seen. I think sectors continue to perform very well compared to the entire system. I mean there are some areas within Texas if you focus on, the West Texas area where we have a couple of restaurants, you may see some variability there. But overall, Texas continues to be strong, we haven't really seen anything that's otherwise.

Good to know. Thank you very much.

[Operator Instructions] And we'll go next to Andy Barish with Jefferies.

Hey guys, just a question on the DNA line, it's been kind of creeping higher. Do you expect that to continue or is there a sort of remodel cycle bump out cycle that's been absorbing some capital, maybe getting closer to the end of that?

I don't know, I think we'll see that continue for a little bit Andy in the 2016 for sure. I think just the level of spending we're doing at existing restaurants with the Star Bars, the bump outs, things like that, I mean those things typically have those type of additions typically have a five to seven year life on them. I think two, just little bit more spending on some of the restaurants, at prior years kind of keep that number up a little bit in 2016.

Got you. And then quickly on capital allocation, the buyback was definitely throttled down a lot in '15 as we've kind of balanced free cash flow and dividend and all that. Is there any additional thinking on ramping up buyback and maybe the debt levels going up a little bit in '16?

Andy, this is Scott. We kind of keep our decision making on buying back our stock pretty close to divest and what price we're buying it and what prices we're not. But I would say we don't have a version to buy in a little bit of money. If the opportunity presented itself to buyback more stock, we don't have a greater version to that as much as our EBITDA is growing over the year. So our financial ratios are exceptionally strong for us. Again, we just can afford to be very opportunistic and patient in our buyback strategy and we're going to continue to do that.

Thanks so much.

And we'll take our next question from Jason West with Credit Suisse.

Yes, thanks guys. Tonya, did you say the pricing this year was going to be around 1.9% because I'd thought it had been 1.7% increase you guys are taking?

Yes, we took a price increase in mid-November, it came in at about 1.8%. And then we had a little bit of alcohol pricing in December that got it up to that 1.9% number.

Okay. So that will become more of the run rate for the full '16?

Yes, it will.

Okay. And then on the margin side, it seems pretty clear you guys are going to get some leverage on cost of goods sold with that pricing and the commodity outlook. But do you think you can leverage any of the other major line items in '16?

I think like you said on cost-to-sales, you would think with deflation at that level, you would definitely see some large expansion there. I think labor is going to be tough with 3% wage inflation, a lot will depend on traffic but that one could be -- could definitely is going to be tougher to do. Ren [ph], I don't think changes a whole lot, other operating, we're expecting about 2% inflation on that line for 2016. So a lot will depend on traffic and what we think we can do there but that -- you may have a possibility there just depending on traffic.

And what about our G&A?

G&A I think you'll probably -- I think it could be possible dependent -- again, depending on what the traffic levels coming it. I think from a healthcare perspective, we had a pretty big pop on the healthcare in 2015. We don't expect to see that in 2016. So we're going to continue to just reinvest in what we're doing. So G&A typically, what we like to see there is that we keep that growth below revenue growth and that's really going to be our focus for 2016.

Thank you. And then last thing, just on the Star Bars, that's been a pretty big initiative in 2015. Can you give us any statistics there in terms of how much you spend to do those remodels and maybe what kind of sales lifts you may see before and after?

I really can't give you anything on sales lift because it's really difficult to tell what that does at a restaurant. I think we do see something there, it's just very hard to quantify. I can tell you Star Bar, just with the TVs and the bar remodel is about 20,000. And then there is some other things that may take that cost up a little to more like 30,000.

Yes, sometimes guys will read at the same time while people are in their building and we'll redo their bathrooms or add some more storage, so it's hard to tell specifically.

Got it, that's helpful. Thank you, guys.

We'll take our next question from Paul Westra with Stifel.

Great. Thanks, and good afternoon. Maybe just to start off, maybe follow-up on your commentary about marketing efforts, I know some off -- I guess Chris's [ph] promotion a little bit more of a title change but you mentioned some potential efforts there. Anything new you can comment on, and maybe talk a little bit about the year-over-year spend that you expect for '16 versus '15?

Paul, this is Scott. It's more of the same for Texas Roadhouse. Much of our marketing, it's very local store based and we have an army of local store marketing folks that have been developed and continue to be developed under Chris's leadership. And just a few national promotions that we technically run, like Valentine's Day, Mother's Day, Father's Day, our gift card promotion. At the end of the year, our promotion that kind of thing, those are pretty much our annual marketing calendar big items and those will be the same for 2016.

And what was the roughest spend for '15?

About 1% of sales, maybe a little bit less than that.

Great, thank you. And maybe just a little follow up on the beef locking in, if you don't lock anymore will 20% float every quarter, or will the flow any piece, the backend loaded.

It's pretty much the same across every quarter.

Okay. Then maybe another follow-up on the G&A line. I mean, obviously you had some great performance, great bonuses and just some health care. But we didn't see a leverage in 15 versus 14 and really going back to 2010. Is there something in the G&A line, maybe the launch of Bubba's here that maybe, mostly be behind you now and maybe look as you look at 16 and beyond, maybe you see some of that growth lower than the overall revenue number?

Paul, this is Scott. There is a number of things that we've been investing and Bubba's just certainly one of those, some infrastructure for Bubba's. International infrastructure has been another one. And our international group is now profitable on an annual basis, so that's very exciting to see that. But there has been G&A infrastructure investments there. We've also made some infrastructure investments on just more people on the field supporting our restaurants at certain positions, and it's all been G&A spending. And we think it all contributes to increased consistency and raising the bar and execution in our restaurants. So we've just been more on offense than anything else. So all those big investment they are starting to tail off as far as incremental, and so provided that we continue to grow revenues at a pretty good clip, longer term, we should be able to get a couple tens of leverage on G&A. I wouldn't expect a lot more than that over the coming three to five years. But we should be able to get something.

That's helpful. And last, can you give us the details on what remains on the share repurchase plan as far as dollars are available?

I believe there's about 80 million remaining on that authorization which doesn't expire.

Great, thank you. Congrats on a great quarter.

Thank you, Paul.

We'll take the next question from Andrew Strelzik with BMO Capital Markets.

Good afternoon, everyone. In 2015 there is a lot of variability in terms of the food cost inflation from quarter to quarter. Can you help us understand the pacing, front half, back half, that kind of thing on any of your Delta?

If I were going through the quarters, typically summer are the higher months for beef costs. So if you remember last year we saw a pretty significant inflation last year in those summer months. So those will typically be a little bit higher deflationary periods for it this year, Q2, Q3, but I think right now what we expect to see is for all deflationary quarters, Q4 probably being the lowest just because we only had 1.6% inflation this year in Q4.

Okay, great. And then, you mentioned that Bubba's, that you continue to tweak the model. Can you talk about maybe even just in broad strokes, kind of what you're seeing there that you'd like to see improve or where are your folks in those tweaks just so we can kind of get a sense for the changes that are going on?

Those tweaks don't really happen in stores that opened 'til later this year so I don't have an answer at this point.

Okay. And then lastly, on the bump outs. How many stores remain where you might target a bump out even if it's over the next couple of years?

This is Scott. We're about up to 150, 160 bump outs so far out of 460 some of our Texas Roadhouse, we could do a lot more bump outs. We haven't internally said what that exact number is, but we still think we could do quite a bit more, and what we're seeing happening is one of our lower line stores have grown a lot and continue to grow a lot. And they today may not be on the bump out list, but a year from now, two years from now, three years from now, they're doing the volumes, we will put them on the bump out list. So, that question could end up being, hopefully the majority of our system add seats just as it grows with their sales and guest counts.

Do you have a number in mind for this year?

We could do anywhere from 20 to 40 this year, it just depends on permitting, certainly legal approvals, construction and so forth. I mean [Cross Talks] we've got that many approved internally, and then how many will get done, again, will depend on all those other factors

And then you got to negotiate with the landlords sometimes, so that takes a while.

Great. Thank you very much.

We'll go next to Karen Holthouse with Goldman Sachs.

Hi, just one quick housekeeping question. What is -- is there anything that should be on our radar in terms of a calendar shift related to Easter between first quarter and second quarter this year?

Yes, there will be, we expect a little bit of a calendar shift because it is going to fall between Q1 and Q2, with different quarters here every year. It's not much as what we're currently estimating. It's maybe 10 or 20 basis points benefitting Q1 and then the offset, it will go the other in Q2.

And then one other quick clarification on calendar shift, the calendar shift in the quarter today comp trend from the first quarter and the quarter comp trend in 2015. Is that something that would be benefitting a two-year stock as well, or does that reverse this year?

You don't see a whole lot of a reverse this year. No, it's kind of hard to quantify when you're looking at it because there is, you just have a lot going on with New Year's Day and then weather at the same time, Valentine's Day, weather at the same time. So it's difficult to kind of isolate just what New Year's Day shift versus that or Valentine's shift but really nothing that we would point out or quantify.

Okay, thank you.

[Operator Instructions] We'll go next to Steve Anderson with Maxim Group.

Good afternoon. Just a quick question though. One of your competitors recently cited the importance of gift cards, shifting some of the sales out of Q4 and into Q1. Is this something that you are seeing and just want to get your feel on gift cards overall, if they're increasing at a faster pace and overall sales?

This is Scott. We haven't expanded any selling efforts if you will into the first quarter of gift cards from what we've done historically. What we have done is we have added some additional retailers of the years on the third party side. So the supermarkets and drug stores and that kind of thing, and so we have continued to look at that and analyze that, and that has grown quite a bit over the last three years I would say, each year incrementally. And so we are selling more gift cards throughout the entire year in addition to the holiday season itself.

Okay, thank you.

We'll go next to Brian Bittner with Oppenheimer.

Great, thanks. This is Mike [ph] for Brian. Just a quick question. What was the pricing in the fourth quarter?

The pricing in the fourth quarter ran about 1.8%.

Okay, great. And then, so you did about 40 basis points of COGS leverage in the fourth quarter with food cost inflation. So, what do you think you could do in 2016 with the deflation? How do you think about that number? [Cross Talks].

Operator efficiencies and things like that outside of check and inflation...

No, maybe balancing 1.9% pricing against food cost deflation of 1% to 2%. Where do you think COGS margins kind of come in for the year?

We don't get that sort of specific guidance on that, certainly our COGS are going to be lower than they were in 2015, no doubt at this point. We're pretty confident in our deflation areas and then some food cost. So they'll be down. The question will be, besides inflation are we a little more efficient in managing ways? Do we have any kind of makeshift in our business that results in a different food cost per items? Is there a shift in liquor mix, that kind of thing which could move food cost around a time, here or there?

Got you. Thank you.

We'll go to Brian [ph] for our next question.

Thank you and good evening. Just a couple for me. Wanted to follow up on the last one on gift card, and can you share how much your gift card sales were up either in the fourth quarter or 2015?

That's not something we report to you. But they're up by nice amount, both, especially at a third party level. But we continue also to sell more gift cards at the store, at individual restaurant level. So that was a big concern of ours when we went the third party route is that we would lose some momentum in our restaurants, but we continue to sell a lot of gift cards directly out of our restaurants which has been very encouraging for us. [Cross Talks] Sorry go ahead.

What we don't know is with gift cards, third party or otherwise is what percentage of those are truly incremental sales or simply people buying gift cards potentially at a discount and then just coming in and using them in the restaurant, 'cause a lot of gift cards are sold at a discount these days.

[Cross Talks] Based on where they're shopping and they're getting points for buying these cards

And in terms of the distribution via third party retailers, how has that grown over the years and is there still opportunity to expand that or we're pretty close to being, if you want to call it, fully distributed?

This is Scott. I don't know how much or how many retailers have significance that were not in. I'm sure there are some that we pulled back from and we'll continue to explore the marketplace and what each retailer offers because they do offer different fees to put their gift cards in their particular establishments, and so we'll keep looking for additional opportunities, and I can't say exactly [Cross Talks] And then also I was in some stores in December and they were out of our gift cards on their racks. So hopefully they'll do a better job supplying those next year.

Okay. All right, that's helpful. I wanted to switch gears following up on the guest experience, and can you speak to what you're seeing in terms of guest satisfaction scores in recent quarters, sort of whether be the overall experience, service, food quality, is there a component or two that stand out particularly?

We just look at our sales reports every week, and that's our ultimate indication of, if we're doing a good job or not. We have a very robust Guest Relations Department and very robust Social Media Monitoring so we're very attuned to the trends in those areas as well. And so we just feel very good about what we're doing and the experience that were given the guests.

All right, fair enough. That certainly is a good indicator. Scott, I agree on that. I guess last one for me, just topically. In terms of the technology, can you give a quick update on the test for pay at the table and the text ahead waitlist capabilities?

Well we're still looking at it. There's no imminent roll out planned of text ahead or pay at the table at this point. We're still evaluating the different options. At some point you will see us roll something, you'll see us roll an app, like you've heard from other folks that you'll be able to get on our wait list and you'll be able to pay and you'll be able to order to-go and all those types of things. That's under development and that will be coming at some point. We just continue to evaluate, and we're kind of watching very closely what other folks are doing and learning from them as well.

Okay, that's helpful. Thank you.

That concludes today's question-and-answer session. This time I'd like to turn the conference over to Tonya Robinson for any final remarks.

We thank you all for joining us, and if you have any questions, follow ups, please let us know, and have a great week. Thank you.