Texas Roadhouse, Inc. (TXRH) Q3 2019 Earnings Report, Transcript and Summary

Good evening and welcome to the Texas Roadhouse Third Earnings Conference Call. Today’s call is being recorded. All participants are now in a listen-only mode. [Operator Instructions] I would now like to introduce Tonya Robinson, the Chief Financial Officer of Texas Roadhouse. You may begin.

Thank you, Holly, and good evening, everyone. By now you should have access to our earnings release for the third quarter ended September 24, 2019. It may also be found on our website at texasroadhouse.com in the Investors Section. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. We refer all of you to our earnings release and our recent filings with the SEC for a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements. In addition, we may refer to non-GAAP measures. If applicable, reconciliations of the non-GAAP measures to the GAAP information can be found in our earnings release. On the call with me today is Kent Taylor, Founder and Chief Executive Officer of Texas Roadhouse. Following our remarks, we will open the call for questions. Now I’d like to turn the call over to Kent.

Thanks, Tonya. We are pleased to report strong third quarter results that include not only another quarter of strong revenue growth but also solid restaurant margin performance and earnings per share growth. Our comps in the third quarter were up 4.4% including traffic growth of 1.5%. And our sales momentum has continued into October with comps increasing to 5.3%. The benefit of average unit volume growth along with improvement in labor productivity resulted in restaurant margin expansion of approximately 0.5% during the quarter. Tonya will give you more detail on the specific drivers in our financial update but I will say that our operators deserve all the credit for the improvement we saw throughout the quarter. Their focus on labor scheduling and efficiency while maintaining the right levels of staffing to execute at our highest standards of food and service quality will continue to serve us well. We continue to focus on growing guest counts with an increased emphasis on driving those sales through to the bottom line without satisfying the guest or employee experience. Sales growth continued at Bubba’s 33 this quarter with 20 restaurants in the comp base generating growth of 8.8%. Our test of adding lunch in five Bubba locations which began earlier this year contributed 2.5% of that growth, 8.8 minus 2.5 equals 6.3% growth. Construction and permitting delays continue to be a challenge in the third quarter which pushed several more opening into early next year. With these delays we now expect to have approximately 7.2% store growth in 2019 including the benefit of the 53rd week. So far in the fourth quarter, we have opened five restaurants and expect to open six more before year-end. On a full-year basis that will give us 22 new restaurants in 2019 including three Bubba 33 sites. Looking ahead at 2020, I’m excited with how our development pipeline is coming together. We currently are targeting at least 30 plus company restaurant openings, including as many as eight Bubba’s. We also look forward to opening two Jaggers next year, which are not included in our development outlook. From both a commodity and wage rate perspective, we expect 2020 to be another inflationary year. As a result, we plan to roll out a menu of price increase of approximately 1.9% in late November to replace the menu pricing that we’ll be rolling off. Whether this pricing action will be enough to offset inflation and maintain restaurant margins in 2020 will depend on a number of factors including traffic growth, the exact levels of inflation we experience and continued improvement in our labor productivity. For those Roadhouse folks on the line, let me repeat for the continued improvement in our labor productivity, thank you. Finally, we spent the last month traveling the country and meeting with our managing partners on our annual fall tour. I came away from those meetings confident about the direction of our business and our long-term growth opportunities. I want to thank our operators and the entire team for continuing to grow sales, take care of our guests and employees and for never accepting average as Gary Grimes likes to say. Now, Tonya will walk you through our financial update.

Thanks, Kent. For the third quarter of 2019, revenue grew 9.4% driven by 5% store week growth and a 4.4% increase in average unit volume. Restaurant margin dollars grew 12.7% to $108 million, while restaurant margin as a percentage of total sales increased 49 basis points to 16.7%. Additionally, net income increased 25.4% to $36.5 million or $0.52 per diluted share. Comparable restaurant sales increased 4.4% during the quarter, comprised of 1.5% increase in traffic growth and a 2.9% increase in average check. By month, comparable sales increased 4.3%, 3.9% and 5.1% for our July, August and September periods respectively. And as Kent mentioned, comparable sales increased 5.3% for October period. Cost of sales as a percentage of total sales decreased 76 basis points compared to the prior year period. The impact of approximately 0.8% commodity inflation was more than offset by the benefit of a higher average check. Based upon our expectation for inflation in the fourth quarter, we have updated our full year 2019 commodity inflation guidance to 1.5% to 2%. Labor as a percentage of total sales increased 33 basis points to 33.8% and labor dollars per tore week were up 5.2% compared to the prior year period. The main drivers were wage and other inflation of 4.2% and growth in hours of 1.4% which included the impact of higher guest counts. Labor per store week growth benefited by 0.4% due to adjustments to the reserves associated with our group health insurance claims, development history, and our workers’ compensation claims experience. In total, these adjustments resulted in $1 million of expense this quarter, compared to $1.8 million of expense in the prior year quarter. We now expect labor dollars per store week growth for the full year 2019 to be between 6% to 7%. Lastly, other operating costs as a percentage of total sales were essentially flat compared to the prior year period. We continue to see higher year-over-year insurance premiums. However, this increase was offset by favorable adjustments related to our quarterly actuarial reserve analysis for general liability insurance. These adjustments resulted in a $1.1 million credit this quarter, compared to a $0.5 million credit in the prior year quarter. Moving to our restaurant margin, G&A costs increased $0.2 million and as a percentage of revenue decreased 48 basis points to 5.4%. The primary drivers of the decrease were lapping of an additional $1.4 million of incentives and equity compensation expenses from last year and $0.9 million in legal settlement expenses from last year. Those benefits were partially offset by the expansion of our regional operations support structure, which impacted G&A by approximately $1 million. But we currently expect that the regional operations expansion will have a negative impact on 2019’s fourth quarter of approximately $0.7 million as we will begin to lap the expansion which began during the fourth quarter last year. Overall, we continue to expect 2019 G&A cost to grow approximately 12% on a 53 week basis compared to the prior year. Depreciation expense increased $2.5 million to $28.3 million or 4.4% as a percentage of revenue which is flat as compared to the prior year period. The increase included $1 million of additional accelerated depreciation, primarily related to restaurants, expected to be relocated within the next nine months. We expect additional accelerated depreciation of approximately $0.2 million in the fourth quarter. Our tax rate for the quarter came in at 15.1%, which is unchanged from our rate in the prior year period. Our full year income tax rate guidance remains unchanged at 14% to 15%. Finally, our total share count was down on a year-over-year basis as a result of share repurchase activity. The impact of the 2.1 million shares repurchased in this year’s second quarter, along with the 358,000 shares repurchased in the third quarter benefited earnings per share growth by approximately 3.7%. We will continue to allocate our operating cash flow in a smart and balanced way with a focus on discipline growth of our brands, dividends, share repurchases and franchise acquisitions. Our balance sheet remains strong as we ended the quarter with $100 million in cash. During the quarter, we generated $55 million in cash flow from operations, incurred capital expenditures of $57 million, paid dividends of $21 million and repurchased 19 million of stock. We have updated our projected 2019 capital expenditures to approximately $200 million. As we near the end of 2019, I want to remind everyone that the fourth quarter we’ll have an extra week, which falls between Christmas and New Year, and it’s usually part of our January period. We estimate this extra week will benefit diluted earnings per share growth by approximately 4% for the full year 2019. Finally, due to the timing of our year-end on December 31, the fourth quarter of this year will have two dividend payments. Looking ahead to 2020, our initial expectations include positive comparable sales growth, and as Kent mentioned, at least 30 new store openings including as many as eight Bubba’s 33 restaurants. While we will be lapping the benefit of the 53rd week from 2019, we expect to grow restaurant store week by 3.5% to 4.5% with openings more evenly weighted throughout the year. We currently expect 1% to 2% commodity inflation with fixed prices on approximately 30% of our commodity basket at this time. Our expectation for mid single digit labor expense growth per store week includes the impact of increases to mandated state wage rates as well as the impact of ongoing market pressure and growth in labor hours due to traffic growth. Our 2020 expectations also include an income tax rate of 14% to 15% and capital expenditures of $190 million to $200 million. That concludes our prepared remarks. And Holly, please open the line for questions.

[Operator Instructions] Our first question is going to come from the line of David Tarantino with Baird.

Hi, good afternoon. My question is on the restaurant margin performance you delivered in Q3, it does mark a pretty nice inflection point relative to what you’ve been running. And I wanted to ask in particular on the labor line what exactly are you doing to drive some of the productivity enhancements that you mentioned and how sustainable do you think those efforts are as you think about the fourth quarter and 2020? And then I have a follow-up.

Sure, David. Really we saw those labor improvements kind of happen throughout Q3, so we’re still learning a bit, but we’ve been talking a lot about labor. We’ve had some meetings with our market partners. We just came off fall tour. Of course, that hasn’t really – we haven’t seen the impact of that yet. But really we’re talking to stores just about what their number is, what’s the number of hours they need to continue to grow restaurant sales and meet their guest counts, the guest counts that they have. So that’s really what we’ve been doing. Do you remember back at the beginning of the year? We talked a little bit about the staffing initiatives we had. We felt like a lot of people really did a great job of getting staffed properly, where they may be understaffed in the past. So, what we then said was there could’ve been some overcorrection if you will from some stores. So I think some of what we’re seeing right now is just a little bit of a balancing of that kind of tweaking that a little bit if you will, and just bringing that more in line. So I think it is – right now we expect that that we will see that be sustainable. Too early to say Q4 will be a great indication of going forward what we will expect. But we built into our mid single digit for 2020, our mid single digit labor guidance and expectation that those hours will start to be more in line with traffic growth and maybe even a little below traffic growth.

And part of that was we brought quite a few managers on to get geared up for doing $6 million and a lot of those folks are now out of training and executing within the stores. And then I will tell you on fall tour Doug Thompson did one heck of a class in labor productivity. And I was quite amazed to see people coming out of those meetings very energized and educated a little better.

Great. And then the follow-up I had was related to 2020. And I know Kent you just mentioned that you’re taking a 1.9% price increase and I think that’s replacing 1.7%, but I guess in 2019 you took a second price increase in the spring to manage through the inflationary pressure. So one question is, is that second price increase still something that you might consider for 2020? And then generally or philosophy around what you’d like to accomplish on restaurant margins in 2020 whether it’s holding the line or increasing margins? Just directionally, how are we thinking about it?

Well, as we went through, I meet with all 60 of our market partners and obviously we probably in a lot of the higher weight states that had the bigger bucks, took a higher percentage than our 1.9% and then there were states that had no increase in late state wage that we took less of a percentage. So you can’t really say it’s an average, it depends on the state you’re in. As far as next year, we didn’t know at this point a year ago that we were going to do that additional bump. So it’s hard to tell.

Yes. I think that’s going to depend on how we see labor continue to trend. And we’ll probably be having those conversations as that 1.5% rolls off at the end of March. They’re really too early right now to say whether we’ll be doing that. I think maintaining restaurant margin is a good place to be in this kind of labor environment. If we can do that with traffic, driving traffic and maybe getting a little bit of help from a commodity inflation standpoint as far as being a little lower on that range we gave, I think that would be really positive.

Yes. The biggest thing she said is the traffic, we don’t know our traffic numbers say first quarter of 2020 and that’s a big indicator of what we’ll do or not do.

Great. Thank you very much.

And our next question is going to come from the line of Brian Bittner, Oppenheimer and Company.

Thank you. Question on the food cost inflation outlook for 2020, the 1% to 2%. For next year it’s pretty good, even potentially better than what you’re operating in this year. Can you just talk a little bit more about what that outlook is exactly based on? Is it based on what you’re currently contracting yet with your suppliers now? Or is it based on what you expect the floating rates to be at? Any commentary there would be helpful.

Sure. Well, Brian it’s really early on 2020 inflation, commodity inflation. And we’re locked as we said on about 30%, 40% of the basket. So it’s – we’re making a lot of estimates if you will, about what those floating prices might be on some items. So that’s what I would tell you. Right now, we feel like from the beef side of things, we’re seeing a little bit of supply restriction if you will, just on certain – the grades that we use on beefs, some cuts of that happening right now, which is why are we up to that overall guidance. We’ve kind of narrowed the range to 1.5% to 2% for the full year of 2019. We may see some hangover that into Q1. Again, a lot of this remains to be seen, but I would tell you that 1% to 2% we’re baking in, we’ve got some prices locked, we’re floating a lot of things, we’re making some assumptions, but overall we feel good about that range right now. The inflation in that number, it spread across the basket. There isn’t one item that I or one piece of the basket that I would really call out as being more of a driver. There are various things, some deflationary, some inflationary. We’ve got a little bit of pork inflation built in, not as much as we thought maybe we would have heading into 2020, and that’s really all about – that’s all I could tell you.

Okay. And just a quick follow-up, as we do approach the spring when you did take price last year, I know you talked about labor and watching that, but is it safe to say you’d have to see food costs really surprise you above this range to really take price in the springtime? Is that probably something we should be gauging when we think about how you’re thinking about the springtime price increase?

Well, maybe you could give us some outlook on what the tariffs will be at that time that might help us.

Yes, I mean it’s just…

That’s smart, Kent.

Those ranges are pretty big. I mean, when we’re looking into the commodity inflation guidance, the labor guidance were given. So, I think like Kent said, a lot’s going to depend on traffic trends, where we are there, what the labor productivity we’re seeing, how that’s coming out, and the rest of this year and heading into next year. So much, much to the same way we were sitting here last year thinking about what would additional pricing might be. So we’ll be talking a lot more about that on the call in February.

Okay, thank you.

Our next question will come from the line of John Glass, Morgan Stanley.

Hi. Thanks. First, maybe Tonya or Kent, can you just go back to the G&A commentary? This quarter was flat year-on-year. There may have been some noise, but it sounded like or came in a lot less than I would have expected. So were there onetime items in this quarter that we would not expect to continue? And how do you think about maybe the G&A number for next year now that after you’ve stepped up in 2019 with some – I think of those additional managing partners or area partners.

Sure, John. Just to tackle the first part of that question first, yes, we had about $2.6 million of charges that we were lacking from last year. So, between some extra incentive and equity compensation with tax reform, we paid off bonuses a little bit higher due to that, we had a legal settlement, some other things. So that was about 7.5% of an offset to the growth we saw this quarter. And then looking at 2019, really the biggest thing we saw was the expansion of that regional, that we call that the regional support structure, which was about $1.2 million. Again, that was about 18 basis points as a percentage of revenue. So, overall, even if you’ve kind of take all those things out, growth on G&A was reasonable, a reasonable number as far as I’m concerned, it was below revenue growth. It felt good. I think we’re still very good with the 12% G&A growth on a full year basis. And I’ll remind everyone too, we do – one of the reasons that G&A will bump up in Q4 is because we do have that extra weekend packed, which is about 2%, I think on the full year relating to G&A growth, so you have that going on. But as we look to 2020, my expectation would be that we should be able to get some leverage on G&A. So, worst case, I think it’s flattish, but feel like we have some opportunity to get a little bit of leverage there.

Well, I can tell you that the new person of Texas Roadhouse will be paid one crisp, $100 bill next year, meaning, me for that role. So that might help a little bit.

Good to know. And then just to be clear, Tonya, on the price increase, where does that leave the fourth quarter effective pricing, maybe first quarter effective pricing given the increase you just talked about?

Sure. Q4 2019 will run about 3.2% because that 1.7% will roll off and then we have about a week before we have the 1.9% rolling in. So we’ll be at about 3.2%. Q1 of 2019 will be about 3.4%. And then assuming that 1.5% rolls off and as it replace, you’ll obviously drop down to the 1.9% the rest of the year. So I think on the full year basis for 2020 that would get you about 2.1% pricing in the menu effective.

Got you. Okay. You said 1Q 2019, but I assume you mean 1Q 2020 is the 3.4%?

Yes, I did. Thanks, John. Yes, Q1 2020.

Our next question will come from the line of Jeffrey Bernstein, Barclays.

Great, thank you very much. As we look at the comp trends in the current quarter, seems like a solid continuation of momentum from the third quarter. I’m just looking at compared to the rest of the year. It looks like we get sequentially more difficult in November and December. I don’t know if there’s any unusuals or shifts or anything like that that we should anticipate going into the remaining months of this year or whether perhaps you don’t look at it on a two-year basis because there’s other things going on, just trying to assess how you’d think the comp would play out for the rest of this quarter.

The only thing from a calendar shift perspective I call out would probably be in December. I mean, you got the benefit of that extra week, which I think adds like 8% quarter to store week growth. And then that typically is one of our biggest – it’s a busier week that week between Christmas and New Year than the other weeks of December, so you’ll get a little bit of a help from that in December.

We are going to be enjoying Christmas on a Wednesday and Christmas Eve on a Tuesday, which is a lot better than the weekend, as well as New Year’s Eve on a Tuesday. So, that helps.

Yes, for sure.

Got it. And then is there any, I mean, presumably inflation will dictate whether you take another increase in early 2020? But I’m just wondering as you look back on the past many months of the second increase you took earlier this year, did you get the sense there was any push back in terms of consumer sentiment or reason to believe that you might not want to take an increase even if inflation justified it because of maybe some response from the consumer? Or is it really all flowing through in your mind?

Look at the last two months, the comps were pretty okay, right?

Yes. And I think right now from a niche perspective, we’re not really seeing anything that would indicate that the pricing isn’t being accepted by the guest. It feels pretty good. I mean, it’s always hard to tell when that really would show up, any pricing. I think it takes quite a bit longer to kind of show itself. And at that point you may not even realize that it’s from pricing, probably be looking at some other things. But at this right now sitting here today, I can – if the pricing is pulling through pretty well, it feels fine.

Great. My last question maybe just a clarification, I think you said you got 30 units going into next year and then a couple of Jaggers of 32, and this year you were talking about low 20s. But you have the CapEx spend very similar. So I mean, I know there’s – you spend ahead of the openings, but I’m just trying to see if there’s anything else going on there, maybe the change in the cost to build Texas versus Bubba, or how that mix shift plays out, just seems like a big differential in terms of units with CapEx being the same.

Well, one of these units that were supposed to open in December will now open in like January, maybe February. So most of the construction and people expenses to open those stores will have already been spent.

Yes, that’s definitely true, we’re seeing that. And then we also are expanding the support center, which is about $20 million of the costs that we’re seeing in that CapEx number this year. We took our two existing buildings that we’re now filling up, completely, built a building in between. So we’re taking – just taking those in and getting it where it needs to be to unhold all the growth we’ve had.

And we’re doing eight floors in one year. So a lot of that – and that’s all the floors we got. So it’s like let’s get it over and done with and move on and not have to deal with that next year.

Great. Thank you.

And our next question will come from the line of Brian Vaccaro, Raymond James.

Thank you. Good evening. Just back to the comps, the momentum accelerated through the quarter was obviously a pretty strong start to fourth quarter. I’m curious what you’d attribute that to, how much might be due to improve staffing in throughput versus some other dynamic, anything worth calling out from a retail or a day of the week standpoint?

Legendary food, legendary service, I’ll let Tonya fill in the blanks.

Nothing from a regional perspective that I would point out any different than what we’ve seen. Day parts are all behaving similarly, so nothing there that I would call out. So, I think it’s just the strength of the brand to Kent’s point. We continue to execute really well and I think that, we’re just seeing that momentum, so that’s great.

Okay. And the acceleration, I guess, or the amount of the acceleration, that pretty solid acceleration was it concentrated in some set of stores where maybe you’re seeing the fruit of that investment you were making in prior quarters or pretty low or more broad based?

I think it’s more broad based, Brian. I would tell you it’s more across all across the country. We’re seeing it across various day parts. And even among that, you’re seeing a lot of the early signs we’re seeing to go continue to grow. That’s certainly helping from a traffic perspective. So that continues to be about 7% of our sales. And overall we thought to go up 10% year-over-year. So that continues to be definitely a contributor to the growth.

Okay. And then the on above is with plans to reaccelerate the growth there. And you mentioned the strong COGS. Kind of curious what’s driving the costs, I think it has been pretty strong in the last few quarters now. Is it brand awareness it’s breaking through or you’re hitting it on all cylinders on the store level execution or something else you point to that?

No I would say you’ve nailed it on both counts. I think our people, the people we have in place have been there now one, two, maybe three years. So, that part is getting more stable. And then I think just people in these various markets were relocated or just trusting the brand more than we thought. And so that’s a good thing.

Okay. And I’m sorry, go ahead.

No, go ahead.

Last one, if I could, could you just walk through the key components of the unit economic targets for the concept AUV store margin and investment. And that’s all for me. Thank you.

Sure. Right now we really haven’t given a whole lot of that data out there. I’ll tell you, their sales growth is looking great again, 8.8% in the quarter. We continue to see that level of growth all year, which has been very encouraging. They continue to get improved restaurant margin. So they’re really, those operators are really honing in on labor costs and different things as they dive in at. And that’s certainly been encouraging too. From a unit development and development cost standpoint, I think right now we’re seeing those costs come in anywhere from, I would tell you from, $6 million to $6.5 million. That’s taking out one store that we had that was much higher than that. So, we kind of baked that out. There was some other things going on there driving that.

That is rent at a 10 times.

Yes, that includes, yes that includes rent at a 10 times factor as we usually do from a development cost standpoint. Yes. And also fully loaded for pre-opening, so we expect to see mid-teen returns when we’re modeling those new stores out. Just like we do at Texas Roadhouse is what we’re looking for. So again, I think we’ve talked before that if we can get 85,000 a week in sales, if we can keep that building cost around $6 million, assuming you want margin that’s slightly better than a in Texas Roadhouse, because of the alcohol spend there and then the lower cost of sales those returns look good. So…

And we do have three buildings that are slightly smaller getting ready to open that might provide some efficiencies at lower costs, but too early to tell since they’re not open yet.

Yes.

All right. That’s helpful. Thank you.

And our next question will come from the line of Will Slabaugh with Stephens Incorporated.

I just had a question on labor, if there’s anything different happening in the labor market that would point to any loosening of that market at all, or if the improvement that we’re seeing in the P&L is purely result of your productivity initiatives that you have going on?

Will it really looks to be more on hours growth than wage inflation. I mean, wage inflation in Q3 did tick down just a little bit from where it was in Q2 2019. I don’t know how sustainable that would be. I don’t know it maybe we’re just, we’ve done some catching up and now we’re going to see it kind of moderate a little bit. We’re not expecting that kind of in our guidance. But the hours is really where we saw the bigger turnaround in Q3 of 2019.

Got it. Just a quick follow-up on Bubbas. As you mentioned, the small box that you have opening up in a few stores you are coming up. Can you remind us how much smaller that is and how much you’re saving there? And then if you think about next year, how many of the potential eight stores do you expect to be smaller format box stores?

Well, as far as next year, it’s just those three because, you’re always a more than a year out. I want to say it’s 450 square feet smaller, something like that.

I believe that’s right. And I think it comes in and around a couple of hundred thousand maybe lower costs.

At 250 was the target.

Got it, thank you.

Our next question will come from the line of Chris O’Cull of Stifel. Chris O’Cull: Good, thanks. Good afternoon guys. New stores have opened at really strong volumes the past few quarter, is there anything the company is doing differently to generate these higher volume openings?

Yes, we’re located in smaller towns. Go figure, huh?

Yes, if that’s true. Other than that, I mean there’s really nothing we’re doing differently. We are in six towns that are a little bit smaller than maybe we wouldn’t have expected to be in before. And we are seeing just really great performance out of them as Kent mentioned. So nothing that I could point out that we’ve really done differently from an execution standpoint. Chris O’Cull: How many stores next year are going to be in these smaller towns?

Oh boy, if I had the development report in front of me, I’ll tell you. Let’s see, Tonya you want to answer something else?

I think [indiscernible] Chris O’Cull: I’ll ask another one.

Well go on and ask your follow-up then we’ll do that. Chris O’Cull: Just to back on the labor question, what portion of the store base do you think still has an opportunity to improve labor productivity and when did you really start to see the improvement this quarter?

Well, it kind of happened throughout the quarter, probably a little bit in a bigger way in September. I would tell you, but it’s really hard to say what opportunity each store has, what opportunities they have because to be honest, every store is different. And we’ve been really, as we’re talking about these labor productivity questions challenging the stores to know their number and not giving them a target number or something that we feel like they should hit, because we just don’t have that labor model that we’re going to push down from corporate. So, it’s hard to say where that opportunity might be. But I feel pretty confident that we’re going to continue to see that focused on that and continuing to find ways to make sure that they’re hitting the number that works for them. So they can execute on guest experience and food quality for sure.

On nine towns. Chris O’Cull: Okay. And then just going back on the beef, what are you hearing from your suppliers to make you think the beef inflation outlook could actually improve after the first quarter next year?

Well, I think some of what we’re hearing is of course, again, we’re not that, they don’t have a lot of transparency. We aren’t locked up, a locked on price on a lot of things. So some of what we’re hearing is just, maybe it wasn’t, it’s not as bad as maybe what the expectation was kind of coming off of the discussion that’s been going on all year on tariffs and the swine fever and how that would impact beef. So it just doesn’t seem to be there as much as we thought it would be. Now again, we varied some supply, a little bit from a supply perspective just on the choice beef, just from a grading perspective, we’ve no concerns as far as the supply of beef for our restaurants but just overall in the industry, a little bit of a supply constriction if you will. I think slaughter rates are down year-over-year, those types of things. So again, using what we are locked-on and then making some assumptions on the floating, we get comfortable with beef where it lies within that 1% to 2% overall commodity inflation. Chris O’Cull: Great. Thanks guys.

And our next question is going to come from the line of David Palmer, Evercore ISI.

Just to follow-up on labor productivity, you mentioned mid-single digit labor inflation in 2020. Could you break down kind of your assumption on – that goes into that in a same store traffic, you’ve obviously talked about productivity, perhaps managing hours better versus wage inflation any breakdown would be helpful and I have a follow-up.

Sure, it is someone. We’re thinking about that mid single digit range, we’re thinking you’ve got approximately 1% to 1.5% that we know is just state mandated increases that are coming. And then probably another, I would call it 1.5% to 2.5%. I’ve just continued market pressure. So that would keep us pretty steady as far as the wage inflation we’re seeing along with the 1% we see on inflation on the other category, which is just taxes, group insurance, things like that. We think that will continue. On the, hour side of things that one get is kind of where you get to a range, right? Because you’ve got to make some assumptions on traffic. So without kind of giving any of that away, we typically don’t give traffic guidance. I’ll tell you what we’re hoping is we see hours growth come one you know, below traffic, below traffic growth is kind of what we anticipate happening. Don’t know if we’ll get back to 50%, which is typically what we had been seeing. Hours growing about 50% of traffic, but within that range you have some scenarios where you at least see traffic or hours growth below traffic growth. So, that made us comfortable with that mid-single digit range, which you could call 4% to 6%.

Thanks. That’s helpful. And just a philosophical question, can you, you made some comments in your opening remarks talking about labor productivity and obviously there’s been a lot of talk about this. It seems like the focus is up on that area. You talked about some evolutionary things about how you had staffed up managers when that pushed the $6 million, but there’s also that bigger question about why now and what triggered this for you from an organizational focus. Is it something it had to do with where the margins had gotten, where you think that they should be or some other observations that you made about the business. Any color there would be helpful. Thanks.

Boy, I wish I could give you this specifics. I think we just kind of evolved into that position and I think we learned from some of our better operators that we’re managing labor more effectively, listen to them. And then basically we’ve been out teaching our learnings from those folks. So nothing we’ve done unusual. It’s just that we basically are sharing the best of the best ideas on various fronts, not just labor.

I think to David, when you think about just the overall pressure from a wage inflation standpoint, it does make you want to see, do everything you can on the other assets of labor to really, help from a cost perspective. And we continue to see wage inflation stack up. And so as Kent said, really the operators came forward with some great ideas and that’s just what we do best share best practices is really what our operators are great at.

Great. Thank you.

Our next question is going to come from the line of Dennis Geiger, UBS.

Thank you. Just given where you’re at now on labor inflation per store and considering the better labor scheduling and efficiencies? Wondering if you could just talk about employee and customer satisfaction metrics, kind of what you’re seeing also on the throughput trends, maybe in the context of those more tightly managed stores but then just broadly across the system?

When I go into the stores, I’ll look at the faces of our guests that are interacting with our people and I continue to see smiles going back and forth. So I think we’re still keeping the staff in levels at the appropriate point to have those great guests to employee interactions. So I don’t really see anything new to report on.

Yes. And I think traffic – the strong traffic growth we’re seeing too is a great indication from customer experience that we are doing the right things.

Okay. And then maybe just if you could just provide an update on where we stand with bump-outs currently and the opportunity from here either on an annual basis or kind of in total for the system from where we sit right now? Thank you.

Sure. So we’ve got about 250 of those done to-date at the bump-outs. And I think we have 11 so far in 2019 completed. So as usual – there’s usually about anywhere from 25 to 35 of those in the pipeline at any point in time. And we continue to feel like we continue to see stores meeting the hurdles that we kind of expect internally to get approved for those bump-outs. So that’s pretty exciting. I mean, I think from a Roadhouse perspective, I could see it being 90% of the units eventually being able to sustain a bump-out like that. So that’s really encouraging to be seeing.

Thanks.

Our next question is going to come from the line of Andy Barish, Jefferies.

Hey guys. Two questions, just on the 53rd week this year and having the holidays, how should we think about the impact just starting out 2020 from that shift?

Yes. So we will see a little bit of a negative impact from that busier week falling in P12 versus being in P1. It won’t be as much as the benefit we’re going to see in Q4 because Q1 tends to be higher from a sales perspective. But we do think that that’ll have a little bit of an offset. Comps that’s on the average weekly sales numbers, Andy because from a comp sales space, it’ll be – we’ll be looking at, for 13 weeks over 13 weeks so it won’t be a comp sales impact. It’ll just have an impact on average weekly sales group.

Okay. And then just following up on the Bubba’s work that’s been going on, the lunch tests obviously seeming like you’re driving incremental sales, how applicable is that to kind of rolling out to the rest of the Bubba stores at this point?

Like we knew everything, we just kind of move slow and basically give something that we’re testing like six months. So I don’t – it’s possible to lay out a few more stores next year, but not significant numbers.

Okay. Thank you.

Our next question is going to come from the line of Peter Saleh with BTIG.

Great. Thanks. I just want to come back to the conversation around Bubba’s, the smaller format, because the reason for the smaller format, have you removed the surface bar, now you’ve just moved to just one bar is that the removal square footage and the cost savings?

Yes, it’s we did remove the service bar. We have a big party table that will be coming out of those three stores. So with the bar, we lose a little square footage. And that’s pretty much it. But you also have the equipment that’s in the bar that costs a lot of money. Then I think we took like four TVs out as well and a few speakers.

And then I think the last time we spoke, you had mentioned, at one point you touched co-marketing Bubba’s with Roadhouse and that kind of worked in your favor, is that something that you guys are still doing or are considering to do?

Yes, I was the guy that really was not in favor of that. I’ll be honest with you. And then we had a few lower volume stores where we did a billboard in each market that kind of mentioned that were connected or did mention that were connected and that was a very beneficial. So apparently I was wrong and we’ll do that more in the future.

Any sort of magnitude at the top from marketing?

It’s hard to tell just because all those stores are up. So – but I would say, there is a little more benefit on those that had than those that did not, so yes.

Great. Thank you very much.

And our next question will come from the line of John Ivankoe with JPMorgan.

Hi, thank you. Firstly Tonya, as we look at the insurance and kind of think about fiscal 2020, how do you look at general liability and workers’ comp in 2019? Was it an average year or high year or low year as we think about potential laps in fiscal 2020?

Well, I mean, they were up, workers’ GL probably more than workers’ comp, I would tell you, we expect to see insurance increasing in 2020, again, I think it’s something we can absorb and within the other operating lines, but there will be some definite inflation on that line as we continue to see some lines of insurance, just kind of contract if you will, they get a little tighter and things like that. So, insurance seems to creep up a little bit every year. And I think we’ll continue to see that’s happening a little bit on 2020. Now that’s just from a premium perspective, John, on the actuarial adjustments and things like that based on claims experience, that’s one, you just really never know for sure of how that’s going to work or how that’s going happen and whether it’s going to be a put or a take in any given quarter.

Okay. Thank you. And there’s some news on the tape today on just delivery in general, third-party delivery. Have you seen even on a very temporary basis in any stores – any types of competitive impact around any type of free delivery promotions that some of your competitors, you may have run in, as I’m sure many have tried to come into your office to give you their best pitch. Is there an idea at this point that at least in certain markets, maybe certain even locations within certain markets or any of your managing partners reaching out to, do you say, hey, listen third-party delivery may – excuse me, might make more sense, that was a tongue twister, in terms of adding delivery to the road store.

Sure.

We love third-party delivery for our competitors that drives more to go into our stores.

Yes. And I’ll tell you, it’s just coming off to our – we talked about a lot of things to go with a big topic. As we see volumes – to go volumes grow in a lot of our restaurants. So delivery was not part of the conversation. Doing delivery was not part of the conversation. I think they feel like they’ve got enough to handle with just to go volume we’re seeing in so no changes there.

And we also love when our state competitors advertise on TV because that helps drive more people into our stores.

Thank you.

Thanks.

Our next question comes from the line of Andrew Strelzik, BMO Capital Markets.

Hey, good afternoon. Thanks for taking the questions. First for me, in the past couple of quarters you’ve talked about turnover creeping higher so I’m wondering how that’s been trending. Did an improvement there maybe contribute to any of the better labor in the quarter and how important is improving those metrics to kind of holding onto some of the labor productivity?

Sure. I mean, from a turnover standpoint, we didn’t see too much of a change. I think hourlies were down slightly versus what we saw last year.

Management turnover is also down.

Yes, management turnover. We’ve been really seeing management turnover come down for quite some time now. A lot of that has to do with some of the things we did on compensation about two years ago. Some of the things we’ve been doing from quality of life standpoint. So we continue to see that just be impactful, which is really good. So overall that, from a turnover perspective, I mean, we would always like to see those turnover numbers come down. We really work hard on making sure we are hiring right, we’re doing the right things by our employees. We’re paying correctly, just all those things being collectible with schedule is another huge one to retaining employees. So we talked about that quite a bit with the operators.

And we think the fact that we’ve added more servers in the stores and more managers, means it’s easier for our servers to get a night off to go to that concert. And our managers might get a little more time off maybe if he can every once in a while off because we now have additional managers in each store, hopefully.

Great. That’s very helpful. And my second question, just kind of more broadly at the industry level, we’ve heard a lot throughout the quarter about maybe some restraint on consumer spending and your comps are obviously quite healthy, but the traffic did slow sequentially. I guess just to touch. Now talking about things maybe reaccelerating, how are you viewing the consumer? Have you seen any pull back or loosening of the purse strings at all? Just kind of a broader view of the consumer spending environment would be great.

Sure. Andrew, I mean, I would tell you just hearing from our operators, we don’t hear that. The consumer seems to be in a really good – in really good shape and a really good place. So I think people continue to want to eat out. They want to have that experience and because of the execution levels we have, they continue to choose us because they know that they’re going to get a great value and great products so great service. I think that’s really where our focus is and what is very important but nothing that I would point to from a consumer standpoint.

Yummy for their tummy, that’s what we do.

Great. Thank you very much.

Our next question will come from the line of Jon Tower, Wells Fargo.

Great, thanks. Just with – plan to stick another round of pricing. What are you doing to ensure that value on the menu remains front and center for the consumer? Are you doing any menu alterations or inserts or perhaps any new product additions?

This is Kent. No, pretty much the same. And like I had mentioned before, more of the increase happens in the states that are really increasing minimum wage like California, Oregon, Washington and New York. And I think the consumers in those states kind of see that everywhere, not just in our restaurant.

All right. That’s it for me. Thank you.

Thanks Jon.

At this time, we have no further questions. I’d like to turn the call back over to the management team for any final remarks.

Thanks Holly. And thanks everyone for joining us tonight. If you have any other questions, please feel free to reach out to us at a later date. Have a great night. Thanks.

Once again, we’d like to thank you for participating in today’s Texas Roadhouse, Incorporated third quarter 2019 earnings conference call. You may now disconnect.