Texas Roadhouse, Inc. (TXRH) Q4 2018 Earnings Report, Transcript and Summary

Good evening, and welcome to the Texas Roadhouse Fourth Quarter Earnings Conference Call. Today's call is being recorded. [Operator Instructions]. I would now like to introduce Tonya Robinson, the Chief Financial Officer of Texas Roadhouse. You may begin your conference.

Thank you, Rob, and good evening, everyone. By now you should have access to our earnings release for the fourth quarter ended December 25, 2018. 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. These documents provide a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements. In addition, we may refer to non-GAAP measures. If applicable, reconciliations of the non-GAAP measures to the GAAP information can be found in our earnings release. On the call with me today is Scott Colosi, President of Texas Roadhouse; Kent Taylor, our CEO and Founder, is currently out of the country and unable to join us on today's call. Following our remarks, we will open the call for questions. Now I'd like to turn the call over to Scott.

Thank you, Tonya, and good evening, everybody. 2018 ended on a very strong note for us with double-digit revenue growth in the fourth quarter driven by increasing guest counts and operating week growth. Comparable restaurant sales were up 5.6%, which included traffic growth of 3.2%, and that gave us our 36th consecutive quarter of same-store sales growth. For the full year, comparable restaurant sales were up 5.4%, of which included a 3.9% increase in guest counts. While sales were very strong, we did experience significant restaurant margin pressure in 2018. A highly competitive labor market and our own focus to increase staffing levels within our restaurants drove most of the margin pressure. Our initiatives, which include adding hourly employees and managers, reflect our long-term commitment to the employee and guest experience. Heading into 2019, we do expect labor pressures to continue along with some ongoing commodity inflation. In response, we're in the process of finalizing an additional menu price increase of approximately 1.5%, which will go into effect at the beginning of our second quarter. We continue to view our business from the perspective of our nearly 600 managing partners in the restaurants they operate. And as such, we understand the unprecedented labor pressure that most of our operators are facing across the country. Combined with the 1.7% increase we took in November of 2018, this upcoming increase should help offset most of the margin pressure our operators are experiencing as a result of inflation. Looking ahead to development, our new restaurant -- our new Roadhouse company restaurants continue to open with strong sales volumes that overall are on track to deliver very good financial returns for us. For 2019, we are targeting a total of 25 to 30 company restaurant openings, including as many as four Bubba's 33 restaurants. And we expect our franchise partners to open as many as eight restaurants, primarily in international markets. And this includes our first location on a military base at Camp Humphreys in South Korea that just opened last month. While we expect our company openings to be more back-end loaded this year, we currently have 10 restaurants already under construction and additional 20 either fully approved or in the permitting process. We also plan to relocate as many as six of our company restaurants in 2019. Over the last several years, we have relocated a handful of restaurants, which allows us to update them to our current prototypical designed and/or obtain more favorable lease terms. With strong top line momentum and continued focus on the fundamentals, 2019 is shaping up to be a very solid year for Texas Roadhouse. As always, we do not take anything for granted and know that our operational execution is always the key to our continued success. On behalf of Kent and myself, I do want to thank all of our operators and partners for another great year and we look forward to seeing everyone at our upcoming annual conference. And now Tonya will walk you through the financial update.

Thanks, Scott. For the fourth quarter of 2018, revenue growth of 11.2% was driven by 6% store week growth and a 4.8% increase in average unit volume. Restaurant margin dollars grew 3.7% to $95.6 million and net income increased 6% to $30.3 million or $0.42 per diluted share. As Scott mentioned, comparable restaurant sales for the quarter increased 5.6% comprised of a 3.2% traffic growth and a 2.4% increase in average check. Q4 comparable sales saw a 30 basis points benefit from the positive impact of the calendar shift of the Christmas holiday, net of the negative impact of overlapping the post hurricane sales bump we had in 2017. By month, comparable sales increased 4%, 5.3% and 7.1% for October, November and December periods, respectively. For the first 54 days of 2019, comparable sales increased approximately 6%, including approximately 1.3% of positive impact from the calendar shift of the New Year's holiday. At the beginning of 2018, we implemented the new revenue recognition accounting guidance, which resulted in the reclassification of certain expenses and credits. The reclassification had no impact on net income and the comparative financial information has not been restated. As a result of the reclassifications in the quarter, we reduced sales by $0.7 million for gift card fees, net of gift card breakage income, and increased other revenue $0.5 million for franchise-related items. Additionally, cost of sales decreased $1.5 million or 21 basis point. Other operating costs decreased $0.9 million or 15 basis points and G&A increased $2.3 million or 39 basis points. No direct reclassifications were made in labor. However, the change in sales resulted in an increase of 4 basis points to labor as a percentage of total sales. For the quarter, restaurant margin decreased 112 basis points to 15.9% as a percentage of total sales compared to prior year period. The change in margin was primarily driven by an increase of 23 basis points in cost of sales and an increase of 120 basis points in labor, partially offset by a decrease of 33 basis points in other operating costs as a percentage of total sales. For cost of sales, the benefit of average check and the impact of the reclassifications previously mentioned was more than offset by the impact of approximately 3% commodity inflation. Inflation for the quarter was above expectation due to higher beef prices in the back half of the quarter. As a result, commodity inflation for full year 2018 was 1.4%. On the labor line, the main drivers of the 8.9% growth in labor dollars per store week were wage and other inflation of approximately 5% and growth in hours of approximately 3.2%. For full year 2018, labor dollars per store week grew 8.8%. Finally, the improvement in other operating costs compared to the prior year period was primarily due to the reclassifications previously mentioned, along with the benefit of lapping a $0.5 million donation made in the fourth quarter of 2017 related to hurricane relief. For the full year 2018, restaurant margins were 17.4%, down 104 basis points compared to 2017. Moving below restaurant margin, G&A cost for the quarter increased $7.3 million to 5.9% as a percentage of revenue, which was a 67 basis points increase compared to the prior year period. The primary driver of the increase was the $2.3 million or 39 basis point impact of reclassifications. In addition, we recorded onetime costs of approximately $0.5 million or 10 basis points during the quarter. Finally, higher costs related to share-based compensation, marketing expense, training materials and legal fees also contributed to the increase. Depreciation expense increased $1.5 million to $25.7 million or 4.2% as a percentage of revenue, which was a decline of 21 basis points compared to the prior year period. The improvement was driven by a onetime favorable adjustment of $0.5 million. Finally, our tax rate for the quarter came in at 5.8% compared to the 19.8% rate in the prior year period. The tax rate benefited from an additional $1.9 million adjustment related to tax reform that we recorded in the fourth quarter in conjunction with the filing of our 2017 tax return, which lowered the rate by approximately 5.5%. Moving to the balance sheet. We ended the year with $210 million in cash, up $59 million compared to last year. During 2018, we generated $353 million in cash flow from operations, incurred capital expenditures of $156 million, paid dividends of $69 million, repaid debt of $50 million and spent approximately $2 million to acquire one franchise restaurant. Moving forward to 2019, as announced in our press release, our Board of Directors authorized an increase in our quarterly dividend payment, increasing it by 20% to $0.30 per share from $0.25 in 2018. 2019 will also be a 53-week year for us. As such, the fourth quarter of 2019 will have 14 weeks versus our normal 13 weeks. We estimate that the additional week could benefit full year earnings per share growth by approximately 3.5%. We continue to expect approximately 1% to 2% commodity inflation with fixed prices on approximately 45% of our commodity basket at this time and mid-single-digit labor inflation for the year. On the G&A front, we expect 2019 costs to grow 12% to 13% on a 53-week basis compared to the prior year. The more significant drivers of the increase include investments in our regional operations support structure and higher executive share-based compensation costs. In addition, we now expect the cost of our 2019 managing partner conference, which will be held in Marco Island, Florida in late April, to be in line with 2018 costs. As a result of higher interest rates and a higher cash balance, we expect to generate net interest income of approximately $2 million to $3 million in 2019 depending on our uses of cash throughout the year. And our 2019 income tax rate is expected to be approximately 15%. We now expect to incur capital expenditures of approximately $210 million to $220 million. The increase in capital expenditures in 2019 is being primarily driven by the timing of openings during the year and as many as six restaurant relocations. That concludes our prepared remarks. Rob, please open the line for questions.

[Operator Instructions]. And your first question comes from the line of John Glass from Morgan Stanley.

First, Tonya, just on the labor line. What's your assumption -- as you talk about pricing in more of the inflation in 2019, what's your assumption on the underlying labor dollars per store? I understand wages are up 5%. Are you still building in the incremental hours or does that taper off in 2019?

We are expecting that. That's built into that mid-single-digit inflation number for 2019. And that's part of the reason for the -- updated the range also as far as how much will that be, will we see it taper off as we hedge the back end of 2019, but we are building in some additional growth in hours above and beyond what traffic growth would maybe generate.

Hey, John, this is Scott. Just to elaborate a little bit more. So there's two parts of the hours. I mean, one is just strictly related to just traffic growth. We're going to have some percentage of our traffic growth related to just -- increasing hours related to traffic growth. The other part is the staffing initiatives themselves. And there's two parts to that. One is on the management side where we have been adding managers to certain restaurants for a number of reasons. One is to support the volumes that we're doing. Two is for quality of life for those managers. And so our management turnover continues to improve dramatically. And we're almost at the single-digit level for management turnover. That's excluding managing partners. So that's our kitchen managers, service managers, assistant service managers, assistant kitchen managers, that kind of thing, which is amazing. And we think we can still make some progress there. On the hourly side, we haven't made as much progress. Our turnover still continues to be up slightly where we were a year ago on the hourly side. And that's still a journey to figure out all the things that we can do in a 3% unemployment environment of how to hire the right people because most of our turnover is in the first 30 to 60 days and have them stay with us longer in a pretty busy environment that Texas Roadhouse has. So we haven't polled all of our 500 restaurants to ask them exactly where they are in that journey. We know some of them have hired or staffed up quite a bit, and they have more flexibility on their labor schedules. Some are moving a little bit at a slower pace. Some have even gone backwards just because of their own turnover and the nature of their competitive dynamics in their particular market for talent. And then some have just decided they're at a good place already and aren't going to do much of anything. But we haven't polled everybody specifically so we don't have an exact answer of how much there is left. We do think at some point in the year will probably level off as far as that particular initiative, increasing overall hours for us.

And then just on the G&A increase. What would it be on a 52-week basis? Just so we understand what the underlying G&A increase is. And maybe just breakdown, you said there's going to some higher staffing in the field levels. I know exec comp is exec comp, but how much of it is restaffing or upstaffing of the field? And how much is it if you have a G&A growth on a 52-week basis?

Yes. On the 50 -- the extra week, the 53rd week, we estimate that's probably about $2.5 million. So I think that calculates that to about 2% of the growth. And then the additional regional support structure that we're building -- that we built out starting in Q4 probably has another $3 million of cost. So that's a little more than 2%. So those two items alone, you back those off, you do get to your point to a little more reasonable G&A normalized, if you will, G&A growth number.

This is Scott, again, and I'll elaborate sort of on the regional investment piece of it. So way, way back in the day, probably going 8 or 9 years ago, we had four regions. We went down to three. One of our regionals departed for another company. And we stuck at three regions for a long time. And part of that was to help manage and limit our growth of G&A over time. And 200 restaurants later, we finally decided to pull the trigger. And instead of just adding a fourth, we decided to go all the way to a fifth region and add two regions worth of folks, which we hope keeps us for a long, long time, going forward, on the Roadhouse side. And in each of those regions, you do have a regional market partner, but you also have a human resources person, people partner, you have a marketing person, a training person, a product coach or food person as well. So you've got a whole structure there that supports roughly 125 restaurants right now. And that number will grow over time because again, we think going to the fifth regional keeps us in a good spot for many years to come.

And your next question comes from the line of David Tarantino from Baird.

A question on, I guess, the margin outlook. Scott, you mentioned that the pricing that you're planning to take will offset most of the inflation, which maybe implies that it's not going to offset all of it. So can you confirm that, that distinction is accurate? And then I guess, secondly, does that imply that you do need to see some traffic growth to hold the margin structure flat even with the pricing that you're planning?

So one is, that statement is accurate when I say most of the margin. To the extent that, it depends. So a couple of things, one is, remember, we're not taking the 1.5% until the beginning of the second quarter so we only have it for three quarters of the year. So if you net that against the 1.7% which we'll have pretty much all year, you get a little bit less than 3% for the year. So then it becomes, okay, what's our inflation? So we've given a range on everything with regards to inflation. So if we were at the lower end of that range, we would have margin expansion probably just based on the pricing actions. On the other hand if we're at the higher end of that inflationary range, without some traffic growth, it might be a little tough to keep those margin percentages flat for the year -- at least for this year. It definitely won't fall near as much as last year. So it's really, where does that inflation shake out as the course of the year wears on.

That makes sense. And on the price increase that you decided to take. I guess, can you maybe elaborate on why that amount was chosen and not something more or less? And then I guess relatedly, you did take 1.7%, which is a little higher than normal in the fourth quarter. Can you talk about how that's flowing through so far and what you're seeing in response to that price increase?

So the 1.7% is flowing through great. We've had actually positive mix now for a while, probably a good year, I would say, or so or six months, at least. The 1.5% that we are taking, a lot of that is focused on certain parts of the menu, combos, some of our fillets, some salads. So we don't know. Could be a little bit of negative mix there or probably pretty slight. We have taken a number of stores up on the Early Dine program. We did a lot also back in November, but we are doing more here in April on that. So could have a little bit of negative mix. I don't anticipate it'd be very much, but it could be some there. I will tell you, if you add 1.7% to 1.5%, you get 3.2%. So that 3.2% of pricing that we're taking in roughly four months. Why isn't it higher? Well, just historically, that's the second-highest amount of pricing we've taken in the last 15 years. So we took a little bit more than that 2012. We took close to that back in 2007 when you had really big changes in minimum wage, both on the federal and state level. For us to go from 2017 of roughly 1.3% and 1.5% in 2018 to 3.2% back to back, that's a pretty big jump for us. So it shows though that we are very serious and committed on the margin percent part of the business. Hopefully, that sends a message to investors on that point. And I wouldn't rule anything out down the road as far as when we might take additional pricing, whether it's later this year, early next year, whatever it is, depending upon, again, what the world's doing and what our inflation estimates are and how we're growing traffic and whatnot with the economy, the unemployment and all that stuff is who knows. But hopefully, 3.2% in a matter of four months shows we're pretty committed to drawing some lines in the sand on our margin percentages.

And one of the things we did, David, we did a similar process to what we do at the end of the year when we took the 1.7%. We sent out information to all of our market partners, kind of showed them what their restaurants look like, how inflation would be impactful, things like that. And really I called with them over the course of a day to see where they landed. And we talked before giving them kind of three options showing them what that looks like. And so the number we came to was very much a part of them being part of that process. And they bring to the table a lot of information as usual about the competitiveness in their market, pricing, different things like that, too.

Your next question comes from the line of Will Slabaugh from Stephens Inc.

Just sticking with the pricing question. First, can you go back to when you did take a little bit higher pricing back in 2012. I believe that's when beef was highly inflationary. Did you see any traffic impact then or mix impact then that made you second-guess this decision or did that flow through easily back then as well?

Yes. It flowed through pretty well. I mean, we didn't see anything that would have said, hey, maybe that wasn't the way to go. So I mean, historically, anytime you look at mix for us, it tends to go anywhere from 40 or 50 basis points one way or the other so and not much more than that. So I would say, historically, we felt good about the increases we've taken from that perspective.

And Will, I would tell you, on the traffic side, we really haven't been able to draw a definite correlation between our pricing actions and traffic changes. And it's more so driven by unemployment over time when you look at the direction of unemployment getting worse or getting better. Hard to say we have all this elasticity in pricing or we never have believed that. So these price changes aren't that dramatic relative to what they could be in certain areas. But we feel very good about the strength of our business, the momentum of our business, talking to our operators who are talking to our guests when these changes are going through and what they're hearing from them. So we're very confident. We feel very good about what we're doing. And keep in mind, we're doing this all at the same time that we are more staffed than we've ever been. Our food is as good as it's ever been. Our sides are as heaping as they've ever been. Our hand-cut steaks are as good a quality and is well cut, better than they've ever been. We're very much on offense so we feel pretty good.

Got it. And just a follow-up on labor output as well. What extent are those internal labor initiatives you talked about are going to be active in...

They're active right now. I mean, we've been doing this thing for three years now where we've been challenging our folks to, in restaurant terms, are you fully staffed? A lot of restaurant people would say, I've never been fully staffed because of the turnover. And so we're challenging the concept of what it means to be fully staffed on the hourly level. And even to a point where maybe even be a little more so to where you've got more flexibility in your ability to schedule labor and give people the time off that they want. And then secondarily on the management side, quality of life for them, giving them some weekends off, having to close every day or open every day, just more flexibility. And that's the number one reason why they leave us is just quality of life when they do leave. And when you've got management turnover getting down close to single digits, that is a huge competitive advantage for us as far as what it bodes for the future quality of the guest -- what the guest is going to experience from us. So we know that, and it's a big part of our, I think, our traffic growth right now. And it's one of the things that makes us pretty confident about the future.

And your next question comes from the line of Jeffrey Bernstein from Barclays.

Two questions. One, looking past against the pricing, just had a question on Bubba's. I know you were testing a smaller prototype and you've been doing other tweaks to the brand. I'm just wondering, what keeps you from accelerating that today? It would seem like this year you're taking maybe a slightly more cautious view. I know you said up to four units. Last time, it seemed like it was definitely four. So I'm just wondering, as you think about '19, '20, '21, what keeps you from accelerating that growth sooner rather than later?

So one of the things that the one restaurant that is the smallest prototype still hasn't opened yet, won't open until later this year, and there were some development -- not Texas Roadhouse -- Bubba's development, but other development-related challenges on the site where it's at. And so that has pushed certain elements back to get that store open. We're ready to go. So when we get that open, we'll know more about how some of the changes in size of that prototype have influenced the operational execution of that prototype. And that will help us determine where we're going to go forward. Overall on Bubba's, Bubba's had a great sales year last year from the same-store sales perspective, and they've had a very strong first quarter. So for the stores that have been open a while, a lot of sales momentum, doing very well. The other side of it is, some of the stores that we've opened the last couple of years, the opening volumes just haven't been that great. Some have been really good. Some haven't been that great. We're not sure exactly why. We're trying to figure out and understand why. Every restaurant is cash flow positive. That part is good. We're just trying to understand why some of the openings, again, haven't done as well. It could be just like in the old Roadhouse days, we opened somewhere very, very far away from where there's any other Bubba's. And so people just don't know us and certain elements of it just don't resonate at this point with folks where we've opened. But other places where we've had a little bit of history, we're seeing a lot of sales growth. It's very exciting. The team's very excited. So we're going to keep plugging along and hopefully, we'll figure some of these things out. If you said, well, what are you doing about it? Here's some of the things that we're doing. So one is just being patient because we've sort of been down this road before with Texas Roadhouse and in a lot of markets we started slow and you would never know it today by the huge volumes that we do. And it also gives us a chance just to get our execution just better and better, making pizza, making hamburgers, our service model in Bubba's, which is a little bit different than Texas Roadhouse, just better and better, and we continue to do so. Local store marketing to help drive awareness of the concept in the communities that we're in, working on that. We've got a pretty big consumer research project plan where we're going into those communities and just asking folks what they know about the Bubba's concept and the pluses and minuses. We've already done this once before a couple of years ago in some of our older Bubba's locations and more of those folks are more familiar with the concept. So a lot of time has passed since then so we think it's a good time to do it again. We are exploring the role of lunch. So last year we did add lunch to one of the Bubba's locations. Out of the 25 that are open, two have lunch every day. And lunch may, longer term, play a bigger role. We do plan to add lunch to a couple more locations later this year. We'll see how that goes. And lastly, on the development front, we're committed to more of the development being closer together. What I mean by that is, for the most part, we've done the Roadhouse strategy which is, store 1 was in Indiana, store two was in Florida, store three it was like in Colorado and four in Texas, all over the place. We've kind of done that with Bubba's. And so we kind of recognize that may be a little bit longer road than anybody would like and so for the majority of our development kind of going forward, you're probably going to see us build more Bubba's a little bit closer together. So where we've got one in Houston already, in Pasadena. We'll probably build a couple more in Houston. We're going to open in Wesley Chapel, Florida, which is Tampa. Probably open a couple more in the Tampa DMA, close to the same time. And Charlotte, that kind of thing, opened three in the Charlotte area versus just one in Charlotte, one somewhere else. So you'll probably see that over time from us as a little bit change departure from the traditional Roadhouse strategy. So those are a number of things that we're doing at Bubba's. But again, we're very excited about the momentum in the stores that have been around awhile and the guests are starting to figure us out. And hopefully, we'll get over this hump on some of the newer restaurants just starting a little bit slower than we'd like.

Understood. And separately, can you just comment on the international? I know you mentioned Kent is traveling internationally, as we speak, I think most of your franchise openings in '19 are going to be international. But it does seem like using the data in the supplemental section that the international comps are running negative. So I'm just wondering whether it's just certain markets that are just weighing down the average or what's your range of strongest, weakest or how should we think about the international performance?

Well, the Middle East by far. So we've got the most restaurants in the Middle East. The Middle East is really hurting. A lot of that is oil-related, economic-related. The interesting thing though is that it's a franchise business in the Middle East. And our franchisee in the Middle East is going to open three restaurants there next year. So they really love the Texas Roadhouse brand. They're very committed to growing the brand. They understand some of the economic cycles that can occur outside the United States, but it's particularly tough in the Middle East, fewer folks traveling there. Again, the oil is tough there. So eventually, they'll get turned around and going in the right direction. But it's exciting to see that with all that going on that our franchise partners still opening three restaurants there.

And your next question comes from the line of Peter Saleh from BTIG.

I just wanted to come back to the CapEx increase. I mean, it looks like a pretty sizable increase, about $45 million or so. Can you just elaborate a little bit on why the increase? Is it really related to the relocations or is it related to something else?

There's a couple of things going on, on that line. So if you look at 2018, it came in a little bit lower than we would have forecasted it to. Typically, we would have expected more spending on 2019 openings in the back half of 2018 anywhere from another $15 million to $20 million. So it's kind of the timing between 2018 and 2019. And then you do have the six relocations that adds probably another $15 million or $20 million to that number. So those two things alone are really the biggest reasons for the increase in 2019. And then at the Support Center here in Louisville, we're doing some remodels and getting some more space and things like that in our existing site. So we're seeing a little bit of an increase in 2019 that we typically would not have in a year, a little bit more than what we would normally see.

Got it. That's very helpful. And then on -- I think, Scott, you mentioned a little bit more back-end loaded in terms of development this year. Can you just give us a sense of the cadence on the development this year and why a little bit more back-end loaded versus 2018?

I can give you a little bit of the -- just the cadence of that. We expect one opening in Q1. That's probably the bigger difference between this year, '19 and '18. Q4 is going to be a lot more loaded front -- a lot more loaded up, just like it was this year. So right now I think the cadence looks like one in Q1, 7 in Q2 and three and then about 15 to hit that 30. That's just kind of what we have in the pipeline. So definitely a little more back-end loaded. Kind of similar to what it was in 2018, to be honest. And we always assume that things are going to -- even though we might have them on the development report a little earlier, we always from a forecasting perspective kind of assume they're going to push a little bit just because you always kind of get some hair on the deals from permitting or just different things that go on that cause them to move a little bit, weather, things like that. So we've made that assumption again to this year.

And your next question comes from the line of John Ivankoe from JPMorgan.

I was hoping for some insight on the cattle cycle or the beef cycle at this point because obviously, there have been at least some signs that the years of decline might be over. But I was wondering if you're seeing some of the increases might be short term in nature or maybe as we kind of think about the overall supply-demand environment over the next couple of years, if you're preparing for an uptick in prices and if there's anything that you're doing specifically to prepare for that?

Yes. I mean, right now, it certainly seems like demand is really good and supply is good, too. So from that standpoint, that's kind of the way it's been. We did see an uptick, as I mentioned, in Q4 on inflation that we didn't really see in the tea leaves, if you will. And really related to tenderloins and rib eye, we saw a spike in those in the back half of the quarter. Live cattle was up in the back half of the quarter. So one of the differences we're seeing now is, heading into '19, it's a little tougher to lock prices more than 6 or 9 months out. So we're much more locked on beef in the front half of the year than we are in the back half. And that the premium is just really high to get out any further than 6 or 9 months. So that we're seeing that more on beef than any other protein. So that's one of the reasons, too, for the 1% to 2% guidance. The 1% to 2% range is just knowing there potentially could be some volatility there in the back of the year. But some of the things too that we're hearing a lot -- some of the -- the imports and exports, China, the tariffs some of the issues maybe they're feeling over there with some of the swine flu and things like that, that are happening could be impactful in the back half of the year. We don't know. Just as far as what's getting -- what needs to be exported and things like that. So I think that's causing a little uncertainty too for 2019.

John, this is Scott. I'll tell you, living in this world for a long time, you never know. And there's tons of speculation up or down all the time or there's tons of speculation up, up, up, but it never happens or down, down, down and it doesn't happen for until three years after you think it's supposed to happen. We're kind of used to living in that world. So again, we're a pretty patient bunch. It's, again, more of a marathon, not a sprint. And if the prices do go up for next year, we'll deal with it. We're not going to get rid of steaks or cut our steaks smaller, anything crazy like that. Not those kinds of efficiencies or productivity or anything like that, that you may hear about. But we'll just stick to what we know how to do and what the guest wants and get after it. But I've just learned not to listen to too much until you get much closer to the end of the year. That's sort of when reality becomes reality.

And your next question comes from the line of Chris O'Cull from Stifel.

Scott, I'm trying to understand if the staffing investment is really just a new flow-through rate for traffic growth in a tighter labor market and whether we should assume it's not going to slow until we see maybe some more slack in the labor market?

Possible, I think when -- and here's the thing, Chris. I mean, every single restaurant is its own situation. So that's where when we're trying to forecast or we're looking at the business, it's a collection of 600 individual restaurants and there's 600 different stories of where they are in their own staffing journey, again, both on the hourly side and there could be differences between front and back of house and management and all of the above. So we are guesstimating, part of it based on history and part of it just based on talking to some of our operators and where we think it may all shake out. You could be right on that, I do think. You got to remember, we got this partnership program that we've had since Day 1. So our managing partners are still paid. Their livelihood is based on a percentage of the profits in their restaurant. So they're going to do what they need to do as far as making the right decisions for the long-term benefit of their business, but that's how they get paid. So they're not just going to hire people or give people hours unless they think it really adds value to their business. So ultimately, it's about doing the right thing for our guests and for our employees. And we trust that our operators are doing that.

Just to be clear, the mid-single-digit growth you're guiding to for labor cost per operating week, that does reflect some investment, if you will, in staffing?

Yes.

Yes. I mean, we are assuming again that we don't see the normal flow through that we would see on traffic. To your point, whether that's from these initiatives or just the pressure on the labor line, don't know. But it really doesn't seem like the market -- the labor market pressure is getting any better. I mean, you continue to hear more and more states talking about taking minimum wage to $15 and doing away with the tipped wage and things like that over the course of the next several years. So we did build that into the mid-single range.

Chris, one thing that kind of is scary out there is that we will hear stories where someone may drive up to a drive-thru and the drive-thru is closed. And they'll go in and they'll say, what's going on? And they'll say, well, we don't have enough people to open the drive-thru at a particular location, not us obviously, we don't have drive-thrus. But you hear stories like that. And so if you're not really careful you could have a lot of bad shifts because you are understaffed because that turnover -- that hourly turnover if it's anywhere near 100 can really, really impact you very fast if you're not staying on top of just staffing, staffing, staffing in today's world. Easier 8, 9 years ago when everybody's turnover was quite a bit lower, but in today's world with so many choices, the ability to get a good job the next day paying $15 an hour somewhere, it's a different world. So when I hear about or go by places and you can see it in certain restaurants how understaffed they are and what it's going to their guest experience or the loyalty that those guests have, it's kind of scary. So again, we just don't take anything for granted about our future success, which is why in part we're doing what we're doing.

Okay. That's helpful. And then, Tonya, can you talk about what you've embedded in the 1% to 2% commodity inflation guidance for beef inflation? And then maybe just the cadence of the commodity inflation you're expecting this year?

Yes. We don't really get too much into pulling those numbers apart on the beef side, but I can tell you from a cadence perspective, it's pretty evenly spread across the quarters. Obviously, with the spike we saw in the back half of Q4, there is an opportunity perhaps to have a little bit less pressure in Q4 of 2019. But right now, the way it looks, every quarter is inflationary and there's not that big of a spread amongst any quarter. And really, Chris, I'll tell you, it's not just -- it's really not just beef, I mean, we're seeing it in a lot of different areas, whether it's sweet potatoes, alcohol, soft bev, different things like that. So it's a mix. It's kind of all across the commodity basket. And if you look at the proteins altogether, they're actually a little bit deflationary.

And your next question comes from the line of Andrew Strelzik from BMO Capital.

Two questions for me. The first, you're talking about how the labor environment isn't getting any better and potentially the favorable beef cycle and some of the other commodities being behind you. So I guess if we assume that the environment from an inflationary perspective does not change, are you comfortable continuing to run three plus percent price over the next several years or whatever the time frame is? And the second question, just wondering if for 2019 there's any plans to do anything with the menu? I know those are infrequent for you guys, but just with the pricing maybe that gives you an excuse. I'm just wondering what the menu plans are.

So Andrew, this is Scott. We're never comfortable taking pricing, I'll tell you that, but we're more apt to take pricing if there are inflationary pressures that are certainly impacting everybody in the industry. So I will tell you that to a point. But we don't know -- all this stuff is speculation. And so when I go back and look at the past 15 years of our performance, I think almost half the years, our margins were up. And the other half, they were down. And so one way or another, we kind of figure out -- like a lot of restaurant companies do, you figure out your way of how to handle and deal with the different inflationary pressures. And so I'm confident that we will, in our way, continue to figure that out without cheapening the experience for our guests or changing the way we pay our people, cheapening that, if you will. So I think we'll figure it out, but we're never comfortable with it. On the menu side, looks like we're going to roll out a new chicken sandwich. That may be our big new menu item in the last couple of years for Texas Roadhouse. So not a super game changer, but something that's been in test for a while. And that's pretty much it for the menu. There isn't anything currently that I would tell you is a dramatic change today.

Your next question comes from the line of Brian Bittner from Oppenheimer.

Most of my questions have been answered, but I'll just ask just tying kind of it up in a bow on the pricing margin topic that we've been on all call. I mean, should we think about this line in the sand, Scott, that you kind of mentioned as you're kind of willing to keep margins at 17% or above. You really don't want to see them slip below those levels and you're willing to do what it takes to do that. And just secondarily, Tonya, you talked about the G&A in '19 and there is some things impacting G&A this year clearly. But when we think about your ability to manage the overhead cost structure of this company moving forward, how should we think about once we get past some of these investments how G&A looks on a growth basis?

Sure. I can tackle that G&A question first. I think when we look at it, we've always talked about our long-term goal being that we grow G&A, we keep it below revenue growth. I think when we look at it as a percentage of revenue, I mean, we'd like to see it be closer to 5%. At the same time, we know these investments are important to the operational unit, to the business and how it operates and we know that we need to make those. So it really is a balance of those things. And so 2019, I don't -- when you bake in the 53rd week and these investments we're making, we probably won't be able to do that, get to 5%. But I think over the long term, that's what we would like to see happen.

So on the margin -- pricing, margin question and line in the sand, yes, I mean, I think, for us, again, to take 3.2% worth of pricing in four months is a huge number for us to take. So I think that's a big part of that answer. Now does that mean if we had to take 5% pricing next year would we do that? I don't know about that if that was the case, but we may give up a little bit in that scenario. But who knows, depending upon the way the world works. But we had a lot of conversation starting six months ago on this subject of, hey, what kind of line in the sand are we going to draw with relation to our margin percentages. And we always talk about, you take dollars to the bank, no doubt, but your percentages do get important at some point. And so just looking at our history and seeing how they've bounced around a little bit, that 17% number is one that we'd like to stay north of that number as long as we think it's reasonable to be there. And I think right now we still think it's reasonable to be there. And we felt like the 3.2% worth of pricing was reasonable for us in the position that our business is in today. So again, without us having to cheapen anything for our guest, not get cute, again, we're playing offense, and that's part of the reason why our traffic growth is what it is. It's part of the reason why we had $5.2 million AUVs last year. And they were well below $3 million at the beginning of the decade. So we're very happy about that. That's what's got us here in part so we're going to continue down that road.

I think one of the things too that's important to remember is, as we were sitting in December of 2017 heading into '18, we knew tax reform was coming, we took about 0.3% pricing in December of '17, took another 0.8% at the end of March of '18. So really not a lot of pricing even though we had a lot of labor inflation in '17 and knew that was probably on the horizon again in '18. But with the tax reform, we took that as an opportunity to see how the labor was going to play out, not take a lot of pricing to offset that knowing that, that tax reform was going to be such a big benefit in '18. So we knew margins were going to take a little bit of a dip in '18 because of that since that's on the net income -- down to the net income not on the margin. And I think now seeing how the labor has played out pretty consistently across '18, we think that could continue into '19 led us to say, hey, let's look at those margins now and kind of see where we are.

And your next question comes from the line of Jon Tower from Wells Fargo.

Just to go back to the pricing piece because that's the favorite topic of the day. I'm just curious to hear your thoughts on, if you do get some pushback from customers in the form of lower traffic tied to the higher prices, how do you see yourselves responding to that? Meaning, would you perhaps highlight value options through a menu insert or do you plan on just absorbing some of the traffic hiccups if they were to come? And then separately, I was hoping you could comment on the relocations of six that you're doing this year? How does that compare to recent history? Seems like a step-up. So if so, why now? And historically, what sort of lifts have you seen from a sales standpoint on these relocations?

Yes. On pushback from pricing, I think we -- if our traffic momentum slowed, we'd be looking at our own execution within our four walls. We wouldn't be blaming it on pricing for these price changes. For the most part, they're not just that substantial. And we've had similar price increases before and haven't seen that much of an overreaction. So that's one thing. Second thing is, you look at our competition. And we have value pricing every day on our menu. We have our Early Dine menu that's very aggressively priced. We have a couple other programs that are very aggressively priced. But our basic six and eight ounce sirloin meals, you still get a big old baked potato, a nice sized salad in an ice-cold bowl at Texas Roadhouse. A lot of concepts now you just get one side for a price that's more than us. If you want that second side, you got to pay another $1.99 or $2.99. So we're like already every day extreme value on a good part of our menu. And because we're staffed and because we're friendly and because we're so high-quality food and making it all from scratch and working hard, we're -- at these levels right now, if our guest counts went down, we'd be looking at ourselves first before we blame it on menu pricing. We would be saying, well, maybe we're not as staffed as well as we should be, maybe the food is not as good as it should be, maybe we got some execution-related issues or it's something else in the economy before we would ever blame it on menu pricing for this degree.

Yes. And on the relocations, we had two in 2018. And I think we've had a couple. Maybe for the last couple of years, we've done a couple of those. So typically, on the flow through, I would say a lot depends on the volume of the restaurant that was relocated. So a higher-volume restaurant maybe has a little less flow through than one that's maybe at the average, but I would say it's probably 20% or more depending on that volume of that restaurant.

And by the way, these relos, they're kind of -- there are number of different reasons. So some of them, you've got -- where some of our older, older, older restaurants were conversions of something else. And you go and you walk in, in the day you're not super proud of the size of the kitchen, how small it is and you have so many employees and they're all on top of each other. And then even the front of house is all cut up and chopped up. And so some of that is getting out of that situation and getting to a better location all around for both the employees and the guest. We have one that's condemnation of our property. So we're relocating a store because the city is taking over our property. And they're compensating us for it, but we got to move. So there's all different reasons why you have these relocations. We just have a bunch coming in the same year, but we are at the same time aggressively talking to our operators about our whole portfolio. So we don't want to be in a position where we've got a stale, if you will, portfolio and all of a sudden we've got this huge amount of catching up to do to kind of right that ship, both on our asset image or just the viability of locations, particularly some trade areas do change over time. And especially, we're 26 years into this thing now. So we got a lot of restaurants that are 20 years old. Sometimes trade areas change in such a way where traffic patterns have changed, whatever it is, and it does make sense to relocate and avoid a lot of capital spending, let's say, get a better lease deal and ultimately, do a lot better sales longer term, even well beyond the 20% bump you might get. Less about the 20% bump, let's say, it's more about the 10 years from now where you're going to be or 15 years from now where you're going to be longer term, that's what really drives these deals.

So is it too early to guesstimate whether or not this will be the stepped up level of relocations to six more foreseeable in the future here?

No, no, no. It will be lower than that. I mean, there won't be that many. I think six is a very much unusually high number.

And your next question comes from the line of Karen Holthouse from Goldman Sachs.

Just one final one on the pricing or going back to your answer to a few questions ago. I wanted to...

Karen, you're breaking up on us. Karen, you're breaking up on us. We can't hear you.

Sorry, just a little bit.

Going back to the pricing question from a couple or pricing question from a couple of questions ago. I just want to make sure I heard that correctly that there wouldn't be necessarily outright opposition to continuing a higher level of price beyond the 3.2% that you'd be running for a couple of quarters this year depending on your sense of the consumer, the competitive -- consumer competition and then just also the inflationary environment?

Karen, this is Scott. I mean, it's doubtful we would do anything probably for the rest of the year being we're already at above 3%. However, depending upon what happens with minimum wage especially, there's a number of states that have passed new legislation in addition to the ones that are already going up a lot every year, depending upon just what that kind of pressure is, we're not just going to sit and do nothing with that. So depending upon how that all shakes out, I could see us doing something at the beginning of the year to help deal with that. If there is more stuff on top of that, commodity-related, we'll have to see which commodities it is and again, how our business is doing. But we know inflation is more likely than not an ongoing reality in the world we're in right now unless something dramatically changes in the economy, i.e. recession. So we have to expect to continue to take more pricing as I expect most other people would as well.

And your next question comes from the line of Stephen Anderson from Maxim Group.

Going back to the relocation question, two more question. First, as you look at the remodels, do you see any opportunities in some of those markets to potentially add lunch since you have that in some of your locations even if it's just a Friday lunch? And the second question is, do you see construction costs for those locations above where you have projected maybe even a quarter ago?

Steve, this is Scott. Our construction cost inflation hasn't changed from a quarter ago, at least for us or for our projections. Though it continues to be inflationary given the healthy economy, if you will, and the cost of construction labor, let alone the cost of real estate. So that's still -- there's still inflation there. By the way, a couple of relos are actually -- we're calling them relos, but literally, they're really like in the same parking lot. We're just knocking the old store down and building a new one basically in the same parking lot. So we're calling something a relo that may be a rebuild and so forth. I just want to clarify that piece of it. But from a major remodel perspective, no, we are not considering weekday lunch. We do have a lot of stores do for Friday lunch, but we are not -- there is no initiative to do weekday lunch, not happening.

And there are no further questions at this time. I will turn the call back over to our presenters for some closing remarks.

Thanks, Rob. Thanks everybody for joining us. We look forward to taking any questions. If you all have any, please feel free to give us a call. Thanks and have a great night.

This concludes today's conference call. You may now disconnect.