Texas Roadhouse, Inc. (TXRH) Q3 2017 Earnings Report, Transcript and Summary

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. I would now like to introduce Scott Colosi, President and Chief Financial Officer. You may begin your conference.

Thank you, Rene, and good evening, everybody. By now you should have access to our earnings release for the third quarter ended September 26, 2017. 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 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 in 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 and applicable reconciliations of the non-GAAP measures to the GAAP information can be found under the Investor Relations section of our website. On the call with me today is Kent Taylor, our CEO; and Tonya Robinson, VP of Finance and Investor Relations. And following our remarks, we will open the call for questions. Now I'd like to turn the call over to Kent.

Thanks, Scott. I'd like to start off the call today by saying thanks to all of our Roadhouse team members who are impacted in the recent hurricanes. Many of our folks raised their hands to volunteer to help those who lost so much, even when facing their own losses. It is a true testament to our culture of our company and what our folks can accomplish when we come together and I'm very proud of everyone that stepped up to the challenge. Thankfully, as a company, our restaurants suffered minimal structural damage from the storms, and in most cases, our operators and team members were able to get the restaurants reopened quickly. Comparable sales for the third quarter were up 4.5%, including about 10 basis points of negative impact due to the storms. Sales momentum continued in October with comps for the first four weeks of the fourth quarter up 5.3%. Tonya will provide more detail on the storm's impact in a moment. Our strong top line performance during the quarter led to double-digit growth in both revenue and earnings per share. And with most of 2017 behind us, we are on track to deliver another solid year of results. As we look to 2018, the game plan is really the same, staying focused on growing sales through our commitment to legendary food and legendary service and maintaining our everyday value. We have not made a final decision on the amount of pricing we will take in the coming months, but we expect to take pricing in the fourth quarter in about 80 stores, primarily the ones that have upcoming state-mandated wage rate increases for 2018. We are still evaluating the timing and exact amount of any pricing actions for the remainder of the system and we'll provide further updates on our call in February. On the development front, we updated our full-year guidance to 26 or 27 company restaurant openings, with 21 company restaurants opened so far this year, including one to-date in the fourth quarter. Construction issues and additional delays related to the recent hurricanes have pushed two openings into early 2018 and one more store may shift into early next year. Our development pipeline for 2018 is in good shape with 22 of our expected 30 company openings currently either under construction or in permitting. I want to thank our operators most of whom I saw over the last several weeks on our annual fall tour for continuing to do a great job taking care of our employees and guests. Now, Tonya will walk you through our financial update.

Thanks, Kent, and good evening everyone. For the third quarter of 2017, net income increased 20.8% over the prior-year period to $31 million or $0.43 per diluted share on revenue growth of 12.2%. This was driven by an 8.1% increase in store weeks and a 3.9% increase in average unit volume. Strong top line growth and commodity deflation drove restaurant margin dollars up 10.4% year-over-year to $95.6 million. For the quarter, comparable restaurant sales increased 4.5%, comprised of 3.5% traffic growth and a 1% increase in average check. By month, comparable sales were up 4.6%, 4.3% and 4.7% for our July, August and September periods, respectively. Comps for September were negatively impacted by approximately 30 basis points from hurricanes Harvey and Irma whereas Kent mentioned approximately 10 basis points for the quarter. The weather impact includes the negative impact of store closures during the week of each hurricane, offset by the estimated positive impact of a post-storm sales bump as restaurants reopened. The sales bump continued in the first four weeks of the fourth quarter where we estimate that comparable sales growth of approximately 5.3% includes approximately 70 basis points of positive impact from the storms. Restaurant margin for the quarter decreased 31 basis points to 17.8% as a percentage of restaurant sales compared to the prior-year period. Cost of sales as a percentage of sales improved year-over-year by 99 basis points, benefiting from commodity deflation of approximately 2% driven by beef. Overall, total labor per store week grew 7.8% for the quarter compared to the prior-year period, while labor cost as a percentage of sales were up 115 basis points. Continued wage rate inflation of approximately 5.4%, as well as growth in labor hours because of front-of-house hiring initiatives rolled out during the quarter, drove most of the increase. However, the increase was partially offset by decreases of approximately $1.5 million in workers' comp expense and approximately $1 million in group health insurance expense related to our quarterly actuarial reserve analysis. Lastly, other operating costs as a percentage of sales were up 20 basis points, primarily due to lapping a credit of approximately $1.5 million recorded in Q3 of 2016 related to our quarterly actuarial reserve analysis for general liability insurance. For full year 2017 we are updating our guidance on commodity deflation to approximately 2% and updating our guidance on labor inflation to approximately 7% to 8%. Moving below restaurant margin, G&A as a percentage of revenue was 4.8% or 60 basis points better compared to the prior-year period. The improvement was primarily driven by overlapping a $1.2 million charge recorded in the third quarter of last year related to a legal settlement as well as lower expense this year associated with incentive and share-based compensation. Depreciation expense increased $2.6 million year-over-year to $23.5 million or 4.4% of revenue. Also pre-opening expense decreased $0.5 million on a year-over-year basis, driven by the timing of restaurant opening. Finally, our tax rate for the quarter came in at 28.8%, which was lower than the 29.8% rate last year. The decrease was primarily due to the impact in new accounting guidance related to share-based compensation, which went into effect at the beginning of 2017. As part of the new guidance, we now recognize excess tax benefits and tax deficiencies from share-based comp through the income statement rather than the balance sheet in the period in which the restricted shares vest. Our balance sheet remained strong as we ended the quarter with $114 million in cash and $52 million in debt. During the quarter, we generated $60 million in cash flow from operations, incurred capital expenditures of $43 million and paid dividends of $15 million, resulting in a $2 million increase in cash. As we close out 2017, I have a few upcoming calendar shift items to point out. In Q4, our Veteran's Day lunch giveaway will occur on Saturday, November 11 and could have a negative impact on comparable sales. In addition, in Q4, we expect Christmas Eve and Christmas Day to have a positive comparable sales impact of approximately 1% on the month of December, with the holidays shifting from Saturday and Sunday to Sunday and Monday. A similar positive impact is expected in early fiscal 2018 with the shift of New Year's Eve and New Year's Day. Looking ahead to 2018, our overall expectations include positive comparable sales growth and approximately 30 new store openings. This includes up to 7 Bubba's 33 restaurants, a few of which were pushed from 2017. In addition, with fixed prices on approximately 30% of our commodity basket, we currently expect an overall flat food cost environment, with beef deflation offset by inflation on other items in the basket. Mid single-digit labor inflation is expected to continue into 2018, primarily driven by wage rate inflation along with the impact of the hiring initiatives I mentioned earlier. Finally, our expectations also include an income tax rate of 28% to 29% and capital expenditures of approximately $175 million. Now I'll turn the call over to Scott for final comments.

Thanks, Tonya. Well, we're certainly pleased with our sales momentum and overall results through the third quarter, particularly given a more challenging industry environment. And as we near the end of 2017, we've now achieved 31 consecutive quarters, or almost 8 years, of comparable restaurant sales growth. And over those eight years, we've definitely faced some headwinds, including most recently persistent and increasing labor inflation. In the face of these challenges, the long-term success of Texas Roadhouse has remained our top priority. And to us that means taking care of our employees and our guests and protecting the value of the food on the plate. Heading into 2018, our philosophy remains the same, and we will continue to be conservative with our approach to menu pricing and focus on driving sales through traffic growth. With that said, we will make what we believe are appropriate pricing decisions as inflationary pressures, primarily related to labor, become clear. On the technology front, we are pleased to have completed the rollout of our mobile app across the country, and in addition, we now have online ordering capabilities at our all Roadhouse locations, which we believe will make ordering to-go easier and more convenient for our guests. Before I close, I do want to echo a few of Kent's comments and thank all of our operators. You all have continued to do an incredible job of taking care of our employees and delivering a legendary experience to our guests. It was so great seeing so many of you on our recent fall tour. That concludes our prepared remarks. So, Rene, please open the line for questions.

Thank you. And we'll take our first question from John Glass with Morgan Stanley. John Glass - Morgan Stanley & Co. LLC: Thanks very much. Just a couple of questions on labor since that was one of the things you guys highlighted in the comments. Are you changing the way you look at labor inflation from wage inflation to a per-store basis? It sounds like now you're talking about 7% to 8%, but that's more like on per-store basis versus wage inflation. And you mentioned a hiring initiative is one of the causes. Maybe just describe what that is. When did it begin? When did it wrap up? And I've got one follow-up on labor.

Sure, John. I'll start off by just talking about the way we're looking at the labor inflation. And we are looking at it on a per-store week basis and that encompasses several inputs. One is the wage rate inflation, which is about 5.4% on our hourly labor, on a weighted basis, on all labor costs, it's actually a little lower than that. It runs about 4.6% of that total labor per-store week number. And then, you also that comes into play is the growth in hours. And some of that is because of traffic being higher; some of it is because of these initiatives that we talked about. So because there's just some moving parts in there, wanted to talk about that on a per-store week basis versus just talking about wage rate inflation. John Glass - Morgan Stanley & Co. LLC: And is that hire – that hiring initiative come into play as well? Maybe you could describe how long that's going on for. And then, maybe if you could talk about why you think it moderates in 2018. Is that because that hiring initiative ends, and, therefore, you'll normalize back to that mid-single you're seeing in wage rage? Or what's the dynamic in 2018 that's different?

Yeah. In Q3, we really saw more of an impact from the hiring initiatives than we've seen in the past. For initiatives that – anything that we put into place like that, it's kind of something that grows organically over time. There's not an on-and-off switch of when it starts and when we lap it. It's just add more market – managing partners hear about it and implement it to some degree, it starts to have an impact. So while we saw a little bit in Q2, it really picked up in Q3. And I expect to see that heading through the rest of this year and probably into 2018. If I were going to pick a time when we would be lapping it, I would probably say a little bit sometime probably at the end of Q2 next year. John Glass - Morgan Stanley & Co. LLC: Okay. And is that the only reason wages moderate next year is that you'll end up lapping that? Or why wouldn't they otherwise go up at a high-single-digit rate next year?

Well, that depends on what the state-mandated changes. So you get a little bit from just minimum wage and tipped wage going up in some states. That seems to be running about 1.5% to 2%. And then I think we just continue to see market pressure from the job – markets just being tighter and it being tougher to hiring employees. And actually, you hear more and more people talking about that even outside the restaurant industry. So that just indicates to us that maybe it's not ending. Maybe we just continue to see that stay similar. Hard to say when you would lap that number. So I guess, that's the biggest opportunity on the number for next year is when do you really – what you would say lap that market pressure number? When does that kind of subside?

Hey, John, this is Scott. And to Tonya's point, we just flew around the country on our fall tour and essentially met with every managing partner in our company. And all over the country, you hear how challenging it is with unemployment being so low to – you're competing for talent. And so you're having to pay almost in every position more than you did even a couple years ago, and every year it's got tougher as unemployment has continued to trickle down. So, in theory, if the economy remains pretty strong from an employment standpoint, there'd still be some at of pressure. Is it incremental to this year? We don't know. That's part of reason why we're watching it month to month and seeing if anything changes before we make any ongoing pricing decisions in most of the system. Because we could all of a sudden lap it, as you might say, and the inflation may slow down, or it may continue at the current rate. We really don't know, because it's all about the market forces that are driving it. John Glass - Morgan Stanley & Co. LLC: Got it. Okay. Thank you.

Thank you. Our next question comes from Brian Bittner with Oppenheimer & Company. Michael Tamas - Oppenheimer & Co., Inc.: Hi. Great. Thanks. This is Mike Tamas on for Brian. Just quick question. You mentioned that commodities, you're about, I think, 30% locked or so for 2018. So just wondering how comfortable do you feel with that flattish type of inflation outlook? Seems to be a couple of different narratives going on around the industry, so just curious your thoughts on commodities in 2018. Thanks.

Well, to your point, with just 30% locked on the price rent, probably, not overly confident because anything could happen and change on that remaining 70% that's out there. So that's just, right now, it seems flat based on the assumptions we've made. And it's still really early to tell. But wanted to give you all an update as far as what we knew at this time.

I think we feel confident enough to give you all the estimates. With only being 30% locked and we've got a purchasing team that has enormous amount of experience both in beef, specifically, but also in everything that we buy. And so hopefully, we end up being pretty close so these numbers. But, again, with 70% still not locked, there's going be some flux in the number to the good or the bad side. Hopefully, whatever it is, is minimal Michael Tamas - Oppenheimer & Co., Inc.: Got you. Thanks. And then, just on the newer unit AUVs, is there anything that you can talk about maybe from this quarter? It seemed to be getting a little bit better over the last few quarters and maybe took a step back this quarter. So just any thoughts there. Thanks.

This is Scott. I'd tell you we don't really look at that way. We would tell you the gap is pretty similar to where it's been all year. And it just shows you that it's just more challenging to find locations that can come out of the gate after their honeymoon period, start with really big sales in Roadhouse parlance. It's just the sites we're looking at now. Either they've got more competition or they're in smaller towns with less people. They're just more challenging than they used to be and we model that way going in. So we're modeling these restaurants when we're doing our return pro forma is to do less than the system average and hopefully they'll just continue to grow from where they are now. Michael Tamas - Oppenheimer & Co., Inc.: Sure. Thank you very much.

Thank you. Our next question comes from David Tarantino from Robert W. Baird & Co. David E. Tarantino - Robert W. Baird & Co., Inc.: Hi. Good afternoon and congratulations on the top line strength you're seeing. My question's on the pricing philosophy heading into next year. I know over the years you've been very conservative on pricing and, Scott, I think in your prepared remarks, you mentioned that you would evaluate it closely and take the appropriate amount of pricing. So just wondering if this is a year with all the labor inflation you've absorbed and expect to absorb next year, if this is a year where you might lean in a little bit more on the pricing side to protect the margins.

David, it's going be more of the same for us. We're always going to err on the side of conservatism. In our case, certainly, though, we do try to keep up with a certain amount – or a certain percentage of inflation and we've always made bets that we're going to make up the difference in traffic. And that's the way it's worked historically for us and we're going to continue down that path. But unlike food costs where you may lock in, inflation for the year, if you guide inflation, labor doesn't necessarily work that way. So we just want to be awfully sure that on the labor side, really what we're seeing as we go into the year, so that could mean that we take pricing in January, it could be February, it could be March, it could be April. It just depends on what we're seeing and what we're comfortable with at the time. And, of course, we're always balancing competitive dynamics. Obviously, our competitors face the same labor pressures that we do and we know that which makes it a little bit easier to make some pricing decisions. But, at the same time, we're still going to, at the end of the day, end up in a more conservative stance. David E. Tarantino - Robert W. Baird & Co., Inc.: That's helpful. And is there a certain metric that you look at in terms of your economic model when you make those decisions? Is it – again, I know the managers are paid as a percentage of the operating profit of the restaurant. Is there certain way you approach that when you think about the pricing and the traffic you expect and how that all plays into the margin outlook?

Well, one of the things we do look at is just what kind of traffic growth would we need, given any kind of pricing decision and then inflation assumption. What kind of traffic do we need to either keep our margins flat in percentage terms, dollar terms; what are those numbers. And we share all those numbers with all the operators and then we kind of talk about it. But we're also going to look at what are our traffic trends in certain markets? And if in those markets we're doing very, very well, we may feel more comfortable taking some pricing. If we're negative traffic for some reason, it's definitely going to give us pause. And with how we're doing, either are we operationally strong enough to take a price increase or is the guest, for whatever reason, extra-sensitive. We're going to be looking at sort of those dynamics before we make any kind of final decision. David E. Tarantino - Robert W. Baird & Co., Inc.: Fair enough. Thank you very much.

Thank you. We'll take our next question from Brett Levy with Deutsche Bank.

Good afternoon. Given what's going on in the cost environment, can you share what you think same store sales leverage point would be to keep margins flat or maybe expand whether it's at a 1% pricing or a 2% effective pricing? Also, within your COGS outlook for next year, you said you've still a little bit of a benefit. In an order of magnitude, what kind of benefit do you think you're seeing – you're building into next year? Are we talking low-singles? Are we talking mid-singles? Are we talking just modestly positive? And then I have a question on Bubba's if I have a chance.

Hey, Brett. This is Scott. On the food cost question, we're not going get any more specific on beef, just really for competitive reasons, on the purchasing side on that I think. I'm sorry, what was the other part of your question?

I was trying to figure out what kind of -

Oh sales.

What kind of same store sales you feel you'd need at a 1% or at a 2% to start to generate some restaurant level margin expansion? Thank you.

If we have mid-single-digit labor inflation, probably we need at least 1% pricing. Probably. But it all comes down to traffic growth at the end of the day. And so that's why we're just going to take a pause. Now, of course, minimum wage throws in another wrench, and with minimum wage, you need a little bit more pricing certainly in those states overall to keep your margins flat. But it really just depends on where does overall inflation shake out. Of course, there's two big pieces in that. There's this labor piece, but there's also a food cost piece. And, again, we do have 70% of our items that haven't been locked yet. So that's another thing that we're looking at as we get into the rest of the year.

Do you think that you can post restaurant-level margin expansion with up to 3% to 5% comp, given this environment? And I'll turn it over to everyone else. Thanks.

I think it just depends, again, on what's the composition of that comp. And by the way, in addition to pricing, just what's the mix-shift change, if any, on our pricing as well, so it really just depends on all the different variables that we mentioned before. I think we're ready for the next question.

Thank you. We'll go to Will Slabaugh with Stephens.

Yeah. Thank you. I want to ask a follow-up on development. I know, it's modest that you're accelerating a little bit into next year. So I'm seeing if that's coming from a few more sites available than you saw at this time last year, or are you seeing something in the newer units it gives you just a little more confidence, or how you would describe that evolution.

Hey, Will. This is Scott. We would have liked to have opened 30 this year. We're not going to simply because of more sites push than we had expected. And so we're a little disappointed we didn't get up to 30. So a few of those sites, including a couple above us, did push into early next year. So we've said approximately 30 for next year. Because some of those sites pushed, it's possible we could get a little bit over 30. But again, the way permitting runs today and sometimes things do change and we end up maybe a little short of 30. But 30 has kind of been the last couple years what we're shooting for. That's why we said approximately. We could end up at 32, who knows, 31. I mean, we wouldn't not do 32 just because we're going – we wouldn't hold on to sites and let them drag into 2019 just to hit 30 and not get above that.

Yeah. This is Kent. We had some issues with the hurricanes and even the fires in California. Some of those guys pull off the job and go to those places where they can make more money, and then you have less people working on your site, and so that's been part of the issue as well.

Got you. And one more follow-up on the comment you made on the quarter-to-date period and the benefit you said, I think, was around 70 basis points. I was wondering if you could go into a little bit more detail there. Is this more or less Houston and then parts of Florida running pretty strong now at the first part of October? Or has that been a little bit more sustained? How would you describe those markets that have been most affected?

Yeah, Will, this is Tonya. A big piece of that benefit came from the donation day we had, where we're donating 100% of profits on one day. It was actually the first day of our October period. So a good portion of it came from that. So the offset to that will be down in the donation line in restaurant margin. Probably another operating cost. So that will be running through there. So a good portion of that 70 basis points related to that. But you did have some – and mostly you were looking at, yeah, the Texas, Florida areas. Some in Louisiana too. There was some of that going on. Nate had some impact in October and different things going on down there just with flooding. So we saw some of that happening. And a lot of bounce-back coming in October. Still coming off the storms from September too, so.

And how long it lasts is really restaurant and trade area-specific, and as it relates to how long are people out of their homes and that will vary tremendously depending upon where they are, what geographic area they are.

Last thing, if I could, I just want to, if I could follow up on Texas in general. It seems like that market has been firming up a little bit after being one of the more volatile for the past few years, for most restaurant concepts at least. So I'm curious in your thoughts there outside of the hurricane.

Texas, yeah, you're right. Texas has been good for us, quite frankly. And even in areas that like West Texas, for example, we've been doing quite well for some time now. So it seems like for the most part, we're beyond oil-related challenges that existed just a couple years ago.

Thank you.

Thank you. Our next question comes from Jeffrey Bernstein with Barclays.

Great. Thank you very much. Two questions. Just one, looking at Bubba's specifically, if you look back a couple years, I think you did nine unit openings in 2016. And then ultimately, this year if not for the units getting pushed, it would have been, I guess, six, which would really make next year if you're now talking seven but two of them were pushed from 2017 into 2018. It would just seem like there's maybe less openings in 2018 than there would have even been in 2017 all else being equal. So I'm just wondering how you balance the two brands you're dealing with here. How do you arrive at the pace of Bubba's and maybe what keeps you from going faster? Again, ex the storms would seem like 2018 will be slower than 2017 and 2017 was a little slower than 2016. Thanks. And then I had one follow-up.

Sure. This is Kent. We decided to not grow too fast when we haven't really identified the exact prototype we want, which I think we're real close on. We're just tweaking the last prototype, which has a single bar versus the old double bar. Plus, we've brought a lot of folks onboard to help us grow in the future. And I wanted to make sure that all those folks got a year under their belt of learning the concept and operating before they went out and took on their own stores. So it was very intentional to get us with a solid management team moving forward versus I've seen other concepts in the past where they grow so fast and bring people on too quick. And next thing you know they fall on their face. So it was very intentional to get a solid team in with experience to move forward in the future.

Well, it does seem like optically it's slowing. That's actually quite the opposite and the fact that you have greater confidence and you're just looking to build the teams. You don't make any mistakes in the early days. Is that a fair assessment?

No, that's very fair. I've watched other brands step on the accelerator too soon and end up blowing up. And I try to learn from people whether they may be good or bad.

Got you. And then my other question was just on the quarter-to-date comps, obviously, up very strong even if you exclude maybe the hurricane bounce-back. But, and I know your compares ease meaningfully for the rest of the quarter. So normally, I'd be thinking that you should see the comp accelerate from here. But I'm often reminded of just this time last year where things really fell off for the industry around the holidays. So just wondering your bigger picture thoughts on the consumer going into the holidays. I know you don't have a crystal ball. But do you think you or the industry is better insulated this year? Or is there reason to be concerned maybe in any data that you're seeing that we're going to see another fall-off of greater proportion as we go into the holidays this year?

Well, Scott's our futures expert. I'd just be full of BS. I'll let him answer that.

So, Jeff, I mean it's something that honestly we're not talking about here. We're just business as usual. So we're working just on the basics of staffing and making great food and making our guests feel great, and keeping our price points aggressive. And we're, as we might say internally, we're just loading up the grill and we expect to be very busy over the holiday season as we typically are. And certainly, you get into more weather-related challenges once you get into late fall and the wintertime, but we don't see anything out there that's for us that's dampening our enthusiasm for our current sales trends. So we're like full steam ahead. It's a big reason why we've even got a whole hiring initiative going because we're planning on continuing to grow traffic and we need a lot of people to help us manage all this traffic we got. So we're full steam ahead.

Great. Thank you very much.

Thank you. Our next question comes from Peter Saleh with BTIG.

Great. Thanks. Just wanted to ask about the cadence of new unit development for next year, given some of the units that are being pushed forward. Is it going to be materially different this year? Is it going to be more frontend-loaded? How should we be thinking about the cadence for next year in terms of development?

I would say it will be pretty close quarter-to-quarter-to-quarter with the exception of the first quarter when you'll have those two to three stores from this year push-in.

Okay. Great. And then, on your to-go sales, where do you stand today in terms of to-go as a percentage of sales? And what do you think the ultimate potential is? Are you guys pushing hard on to-go sales? Is that something you want to see grow? Or how are you thinking about your off-premise business?

Well, our current to-go sales are about 6% of sales – little more than 6% of sales. We'd much rather folks come in and dine inside the four walls and get that legendary experience that we think we offer our guests, including the legendary atmosphere. So we'd much rather do that. So we are not, like, pushing or advertising to-go. However, for those guests who do choose to do to-go with us we want them to have an easy time in accessing us, which is why the online platform is pretty important. And we would estimate that our to-go sales as a percentage of the total will continue to grow a little bit over time. Part of that's just because our waits are so long and some folks are going opt for the to-go aspect of it. But we've changed some of our to-go packaging. Stepped up a little bit there. And certainly the online platform enables us to operate a little more efficiently with servicing our to-go guests. But ultimately, we're not trying to build a lot of incrementality in our business longer term by pushing to-go. We want to build incremental sales primarily by getting people inside the four walls.

Great. And then, just lastly, on Bubba's, I'm not sure if you guys discussed this here, but how are the unit openings for the Bubba's that are being built? Have you – it sounds like you figured out the new prototype. How are we thinking about the margin profile here going forward for Bubba's?

This is Kent. Knowing that some of our competitors are on the call, I'll let Scott answer what he thinks we want to give out.

Well, we've got 20 Bubba's opened. And I would tell you that we're pretty pleased with at least three quarters of those openings. There's a quarter of them where we're a little disappointed, quite frankly, in where we are today and we're trying to better understand those sales levels in those Bubba's. Some of it we think is self-inflicted on our own part just operationally. No different than Texas Roadhouse, we sometimes have issues with our zone sales performance and we have turnover at the management level. So it's no different for Bubba's. But three quarters of the system, which includes most – a higher percentage of the recent openings, we're very pleased with the sales levels. We're still working, as Kent mentioned, on the prototype, and a lot of that's the cost of the prototype and everything from how big we want it to be, to how much big physically the building, how much equipment, how big the parking lot, all those kinds of things. And literally Kent and the team have been really been going at it. They've got a list of 75 different things that they're looking at, tweaking, or eliminating in the concept to get us a lower development cost overall. And 25 may seem like a big number, but there's hundreds of things that go into building a prototype for a full service restaurant that's over 7,000 square feet like Bubba's is.

Great. Thank you very much.

Thank you. We'll take our next question from Karen Holthouse with Goldman Sachs. Karen Holthouse - Goldman Sachs & Co. LLC: Hi. Another question on the labor front, are you seeing -helping maybe explain the differential and guidance for this year versus next year. Could a piece of that relate to outsized labor pressures in hurricane-affected areas? Just given the amount of obstruction in the workforce and/or is the way to think about the delta from this year to next year that next year you're embedding a lower traffic outlook than what you've seen year-to-date this year? Thanks.

Yeah, Karen, this is Tonya. I don't think you can read much into our labor inflation guidance regarding what we think traffic's going be next year. It's really just more of some of what you were talking about from the – there's always the impact from the hurricanes and what that can mean going forward, how long that impact could occur. But we started out last year – or 2017, saying mid-single-digit. We ended up on the high end of that range. And I think going into next year, it feels like the right number for us, just based on what – some of the things we're seeing. Maybe in 2018 we'll end up on the low end of the range. I think it just – it really depends on those market pressures and how that continues. But I think the thing for us that won't change is you'll continue to see a piece because we're going to focus on labor and focus on having the people on the floor and doing the right things in the restaurant and not taking that out of the formula. Make sure we're investing properly on that line for the growth of the restaurant. So I think that's the really important thing to make sure everybody knows we're not going to be taking those dollars out of the model just to hit some percentage or margin number.

Hey, Karen, this is Scott. One of the things that's been a trend for us forever is that our highest volume restaurants consistently had the better same-store sales growth quarter-in and quarter-out than our lower volume restaurants. And we know from analyzing our margins that our higher volume restaurants tend to be more heavily staffed versus whatever standard we have out there. And our lower volume restaurants, staffed tighter. And so we're really challenging our lower volume stores as part of our staffing initiative to really don't just staff for the sales you have today, staff for your next $10,000 a week in sales. That's the mentality which, traditionally, in the restaurant business, anybody can tell you running low volume can be really challenge because it is – everybody expects you to run tighter on everything, whether it's food cost, labor, et cetera. And we're really challenging our lower volume stores, who you would think have the higher amount of capacity to grow sales, but they haven't. And so we're really challenging them on the labor front to really make the investment. In some ways you might go backwards a step before you go forward two steps in this regard, but to really challenge yourselves on your staffing paradigm, your staffing philosophy to make even bigger impact on the guest. Let alone when you staff up, that gives you a lot more flexibility in your own labor scheduling which a lot of times makes your employees happier which can help you reduce your turnover as well. So there's multiple benefits when you're talking about staffing up other than simply the increase in training cost to bring more employees onto your business. Karen Holthouse - Goldman Sachs & Co. LLC: And then, one other quick one, and I apologize if I missed this, could you give what food inflation was in the quarter?

Yeah, we had food deflation of about 2%. Karen Holthouse - Goldman Sachs & Co. LLC: That's right, deflation, yes.

Yes. Karen Holthouse - Goldman Sachs & Co. LLC: Okay. Thank you.

Thank you. Our next question comes from Jeff Farmer with Wells Fargo.

Thanks. Just another one on labor. I'm curious if you guys can just – a lot of questions on the staffing initiative, but can you put that in context? How many hours a week are you talking about for these units that potentially need to staff up? And is this a quarter of your units, half of your units? How should we be thinking about this in big numbers?

Well, Jeff, we're not going get too specific on how many hours or how many people, but we're really challenging everybody. Irregardless of volume, we think there is a bigger opportunity maybe at our lower-volume restaurants, but we're really challenging everybody to look at the number of employees they have on their staff, which again gives them more flexibility in how they schedule, which hopefully reduces turnover and, of course, more people that are cross-trained and so forth in the restaurant. So we've definitely seen an increase in the number of people and an increase in the number of hours that we're running. Now, at the same time, we've got a pretty big increase in traffic growth in our company. So some of that's just traffic growth. We know we're going have more people on the floor and in the kitchen just from the standpoint of traffic growth. But, even beyond that, we're challenging our folks to get even stronger from both a flexibility standpoint and a tenure standpoint of their teams.

All right. That's helpful. On a very different topic, so I think Bubba's is running something close to 30% alcohol mix, roughly 3 times what you see at Roadhouse. Just again, curious here, so what's driving that huge mix? That elevated mix? Is that across all those 20 Bubba's units? And is that a sustainable mix? Do you guys expect to hold onto that 30% type level over the next several years, or does that sort of...

Yeah. This is Kent. It's ice cold beer. That's what's really driving that, I mean.

But you have that at Roadhouse as well, so...

Now we have colder beer at Bubba's. Scott got tempted.

Yeah, Jeff, I think if you were to go to Bubba's, one thing it does have, it has an awesome vibe to it. It's definitely more of a sports bar than Texas Roadhouse is. So there's definitely – Bubba's is the place you go to watch the games, whether it's the World Series, whether it's college football, pro football, NBA, whatever it is, hockey, whatever, it is definitely a great place to go watch a sporting event. Bubba's has a much bigger bar – period – than Texas Roadhouse does currently in the current prototypes, the current 20 prototypes. So it absolutely lends itself towards more folks going there to have a few beers or a few cocktails than Texas Roadhouse does. It's much more of a great place to hang out than a Texas Roadhouse, for sure. And because that environment, you're seeing the bar mix to be so much higher in Bubba's.

So just bottom line, that's – I'm not holding you to it, but it's a largely sustainable number, that close to 30%, in your mind?

Absolutely, given the way the current prototype is set up. If we deviated from that prototype, that might change things a little bit longer term. But with the bar the way it's structured, our garage doors, some cases, patios, it definitely is a great, come hangout, have some drinks type of occasion. Especially, on four and five-hour table turn days where you've got football games on all day, people are just hanging out and having a good time.

By the way, we do dinner only at Bubba's as well as Roadhouse. So you don't have lunch to mix in at Bubba's, taking your mix down.

All right. Thank you.

Thank you. Our next question comes from Andy Barish with Jefferies.

Hey, guys. The mix in your comp numbers has been negative for a year now. What are you seeing with consumer behavior there? And, I guess, how does that factor in? Obviously, you guys are driving phenomenal everyday value, but how does that factor into your pricing decisions if consumers are mixing down a little bit on the menu or using Early Dine a little bit more often?

Well, hey, Andy. This is Scott. It always factors in. And we're always assuming some type of negative mix in today's world. And it really varies depending upon what menu items we're touching or not touching and any pricing increase. And also if we know we're not putting new menu items on the menu that are higher priced. So a few years ago, we put the Bone-In Ribeye on and that gave us some positive mix. Well this year, we added two smaller portioned items and that we added the...

Five-ounce salmon.

Five-ounce salmon and the eight-ounce New York Strip. And we're selling a lot more strips. We're selling a lot more salmons, but at a lower price. So a little bit of it's self-inflected. However, we feel longer term that those items provide a much better value, overall value for the guest. And we think it's one of those smaller decisions that we make that may cost us a little bit in the short term, but still helps us maintain a significant number of very aggressive price points on our menu over the long term.

That would give you a little more money to spend on ice cold beer.

Always nice. And just one quick follow-up on – that's helpful – on the pure pricing. Have you done an analysis on the actual flow-through of pure menu price? Is it different today than maybe it was a couple years ago? Or is the research not clear on that?

Well, it's lower. It's lower this year than it was a couple years ago. However, this year's not that different from five years ago or eight years ago. So a couple years ago again, we were adding either at the Bone-In, the Ribeye, we might have a higher-priced combo, something in shrimp or something like that, that had some positive mix to it. When we added the extra, the fourth panel on our menu and we had pictures of some of those items, that drove some positive mix on those items, which were a little bit higher priced as well. So it goes in cycles, Andy. And we're in one of those cycles now where because of the actions we've done to make some long-term investments in the menu, it's cost us a little bit of negative mix. What's that flow-through percentage, gosh, it ranges everything from 80% to 50%. Basically it's been sort of the range over time.

Okay. Thank you very much.

Thank you. Our next question comes from Jason West with Credit Suisse. Jason West - Credit Suisse Securities (USA) LLC: Yeah. Thanks. Just one quick one to start. Tonya, you mentioned a couple one-time items, I think, in the labor line, the $1.5 million for workers' comp and another $1 million for insurance. You said those were benefits in the quarter?

Yes. They were benefits. Yes. Jason West - Credit Suisse Securities (USA) LLC: Okay. So I mean that's like another 50 basis points on top of the deleverage you saw in the quarter. It just seems like a pretty big number. Was there any other offsets on the negative side timing-wise, or maybe from the hurricanes, paying people when stores were closed, things like that, that would have hurt you at all?

No. Group insurance continues. If we're just talking about the labor line, group insurance is inflationary. It has been all year, net of that credit that we took in Q3. So I think if you look over group insurance and payroll taxes and things like that, maybe we're 1.5% of the store week. About 1.5% is part of that store week growth. And then you're right, these credits completely basically offset that, so, and kind of nullified that inflation. But other than that, not really anything I'd point out. From a perspective of the margin impact, I'd say just keep in mind that the GL, lapping that GL credit of 1.5% from last year basically makes that GL workers' comp thing a moot point from a margin perspective. Jason West - Credit Suisse Securities (USA) LLC: Okay. Got it. Got it. And then, going back to the pricing, sorry to hit this again, but just so we're clear, I think you rolled off or you're going to roll off about 1% pricing in December. At this point, your only plan is to take price in about 80 restaurants in December. Everything else is on hold or is it just you're probably going to take a system price increase. You just don't know how much yet. I'm trying to understand what the guidance is there.

This is Kent. Yes. We're still going have menu calls with our other restaurants. We have not had those yet. So we don't know what the answer is at this point. That's why we'll let you know in February.

Yes. I think it just shows you how good we feel about our business.

Right.

The momentum we have traffic growth-wise and how much we believe in what we're doing both from the labor side and everything from how much we're paying folks to how much we're staffing and how much of a strong proposition we think we have on our current menu today. We just feel very good about the momentum we have and so we're going to be very careful in protecting that momentum. As Kent mentioned, we still have all the calls that we normally have with all the operators coming up. Some right now with the minimum wage states, but later on in November, with all the other folks. So you could see us making some decisions in January, but it might not be until later in the year as well, again depending upon how we're feeling about overall inflation, food and labor both. Jason West - Credit Suisse Securities (USA) LLC: Okay. Got it. Thanks a lot, guys.

Thank you. We'll move next to Chris O'Cull with Stifel.

Hey, guys. I just had a couple of follow-up questions. One regarding labor. What percentage of the stores are fully staffed relative to their par levels?

Chris, we don't have that information of what fully staffed is at every restaurant because they would define it a little bit differently. And I say that because every restaurant's a little bit different in that if you just looked at number of employees, we'd have to look at how many of those employees are working 40 hours a week, 30 hours a week, 20 hours a week, 10 hours a week. And in all of those restaurants it's a little bit different. So their par levels are a little bit different. And so what we've done is we've just challenged them to look at where they are and ask themselves the question, are they in fact as staffed as they would like to be that gives them the most flexibility in taking care of their people and their scheduling demands, at the same time, putting them in a position that they did lose some people, they're still in a position of strength because they've got tons of people on the schedule that they could manage if somebody was to quit, to leave, and not show up, whatever it is, both from a just staffing perspective, but also from a cross-training and ability to function whether it's back-of-house or front-of-house perspective.

This is Kent. You also know that if they're running front-of-the-house over time and they're not properly staffed. So that's the first level to look at.

That's where I was going. I didn't know what type of overtime issues you guys may have. But is the front-of-the-house the big opportunity to improve staffing levels or is it back-of-the-house?

It's both. We've been probably talking a little more in the front-of-house piece of it. But it's essentially – our volumes and we've got 100% plus turnover in both front-of-house and back of house. We've got opportunities in both.

Okay. And then, Scott, only having, I think hedged – I think you said 30% of the commodity basket at this time. That's much lower than what you were last year at this time. Can you explain why you're hedging less at this point? And then also, did the company pay below market price – spot price for most of the beef cuts in 2017?

I can't comment on what we paid versus spot in 2017. And I'll just tell you, Chris, that ultimately, while we're locked only on 30%, typically, it's just whatever the premiums are that the suppliers are asking for, for locking are higher than what we'd prefer to pay. That's typically the reason why we wouldn't lock more. Typically, we'd like to be locked more unless our suppliers are asking for higher premiums again than we're comfortable paying. And we'll work it out.

Educate me. Can you educate me, why would the premiums be higher this time – or this year versus the last year?

Every year the market dynamics change. We're not the only customer for many of our suppliers and every commodity's a little bit different. Even when you're talking beef. Even the different steak cuts have different markets for those different cuts. So there's certainly supply dynamics and they're different by cut, but there's also different competitive dynamics by cut. And so we're just talking beef, let alone some other commodities that we might lock in like ribs or chicken or some other items. But it's not a linear equation. As much as we would like it to be, it's not a linear equation. Because every different ingredient has a different – its own supply and demand curve, I'd say.

Okay. Great. Thanks, guys.

Thank you. We move next to John Ivankoe with JP Morgan.

Hi. Thank you. Just the very quick follow-up, I think. On the comps – and I hate to ask for quarterly guidance, but I'm going in this case. There's such a material trend change in the fourth quarter of 2016, with December, I think, was one of your lowest comps in five years and that kind of came out of sequence for you guys until things normalized again. Should we think about this as a very, very easy comparison that you have a high likelihood of taking advantage of and showing a meaningful acceleration relative to October? Were there other factors in that month such as retail traffic in general, that just weren't cautioned? Because, as you know, a lot of us that would do two-year comp trends, we could run some very high expectations for you in the fourth quarter?

Hey, John. This is Scott. We would not automatically assume that that's the case, simply because we still struggle to understand and dissect what happened last year. We speculate that, oh, there's some weather or there's some difference in vacations for school kids or whatever the timing or whatever. That's all speculation. So...

A lot of it was that Christmas shift as well.

Well, Christmas hurt and Christmas is going to help us now for sure. But certainly, we don't know and so we would always caution just, looking at those numbers, just to extrapolate the current two-year trend. And you clearly get that on that point. But we're not going to give out any guidance or set any expectation. Other than we – obviously, given the trends we have, we feel like we're doing a lot of the right things for our guests and they keep coming back. So we're just hopeful that trend does continue the next couple months. Close out the year.

That's helpful. Thank you.

Thank you. Our next question comes from Andrew Strelzik with BMO Capital Markets.

Hey. Good afternoon. Thanks for taking the question. Two things. First on G&A, the dollar increases this year have been much less than they were the last couple years. So what's going on this year to limit the G&A dollar growth? And is that something you think could continue beyond this year?

Yes. Andy, this is Tonya. There's nothing really I would point out other than I'm sure you're baking out the impact of any legal settlements and things like that. So for us the focus is always just on just making sure we're growing. We want to grow G&A less than what revenue's growing. And that's what we really talk about and we talk about how we do that in a way we're still investing in the things we need to invest in, in making those decisions. So hard to say going forward. That philosophy is not changing going into 2018. So that's what I would tell you.

Some of it – we benefited a little bit from our conference this year was a little bit less than last year. Next year it will probably be a little bit more. It's our 25th anniversary. It'll be a little bit more and maybe a lot more. I don't know. But you've got that. And I think we're probably booking less incentive compensation expense this year in part because of the legal settlement that we had earlier this year. We don't add that stuff back for own compensation. It is what it is. And we get played off the bottom line without excluding anything. So that kind of – we're just taking that this year. So that's a couple things. But we're talking G&A a lot with our folks. They hear it all the time. They might be sick of hearing it, but we keep talking about it with them and the need for us to manage our G&A appropriately given the amount of growth that we have in our business.

That's very helpful. Thank you. And my last thing, just on the app that's now rolled out across the unit base, are you starting to see any traction with that? How are customers responding or using it? And what kind of opportunities do you think that opens up over the next 12 months or so for you guys? Thanks a lot.

Yeah. This is Scott again. We're very early in the process. And so we're still learning from our guests. Easily the biggest opportunity is getting on the wait list for us and to get guests to use the Call Ahead feature on the app to access our wait list versus calling us on the phone because a number of our stores, a high percentage of their guests on a Friday or Saturday night would definitely be Call Ahead. So if you can get them to use the app that is great. And we'll be able to do that online pretty soon as well with that. Probably, the most usage on the app has been getting on the Call Ahead list and the least amount of usage has actually been, I think, pay-at-the-table on the table, that functionality of it. But I think it's a slow growth in the app, meaning, that full service restaurant apps, traditionally, aren't used as much as, let's say, a coffee shops app where you're going there every day, you're more likely to keep that app on your phone and be used to using it every day or your gas station app or something like that. So we know that. And so our marketing folks are working on different ways to get folks to try different features of the app. But what we're not going to do, at least, at Roadhouse, is probably in the -- at the short term have some sort of loyalty program where if you buy 10 entrees, you get one free. We're already so value-priced that we think it's not appropriate for us to do that at this time.

Great. Thank you very much.

Thank you. We'll take our next question from Robert Derrington from Telsey Advisory.

Yeah. Thank you. Just a couple of quick bookkeeping questions, Scott, if I could. 53-week year, is that next year, the out year?

Yeah, it's actually in 2019.

Okay. All right. Terrific. And then, interest expense, even though your long-term borrowings didn't go up materially this past quarter, your interest expense did go up roughly about $120,000. Any color there?

Yeah, some of it is the rates going up a little bit. But some of it too is we did the amended credit facilities, so we have some write-off of costs associated with that, the old facility and putting in the new one. But some of the rates were up a little bit.

Got you. Okay. And then, Scott, don't we lap the new overtime wage rate that you all kicked in, I think, around December of last year? Don't we lap that soon?

Yes, we do. Yes, we lap that for the last five weeks of the year.

So theoretically, we'll get a year-over-year benefit beginning of the first quarter?

There will be a – you could argue, a stepdown in inflation for that particular amount, which maybe is 1%, maybe a little more than 1% inflation this year.

Okay. All right. Terrific. Thank you. Appreciate it.

You're welcome.

Thank you. Our next question comes from Stephen Anderson with Maxim Group.

Yes. Good afternoon. You answered most of my questions. But I do have one question. Now you haven't spoken about this in the last couple of quarters. It's about Jaggers. And I just wanted to ask if you see any kind of a future for that? You've been at those two locations and if you see any kind of expansion and opportunities for that? Or if not, do you see closing that down?

Ice cold beer. No, I'm just kidding. This is Kent. No, we are looking at doing another Jaggers at 2018.

All right. Thank you. And is that included in that 30 total? Or was that separate?

Yeah. That'd be in addition to.

It's separate. Yeah.

All right. Thank you.

Thank you. That concludes today's question-and-answer session. At this time, I'll turn the conference back to the management team for any additional or closing remarks.

Thanks, Rene. Thanks, everybody, for being on the call, and we look forward to talking with you soon. Have a good night.

Thank you. This does conclude today's presentation. We thank you for your participation.