Texas Roadhouse, Inc. (TXRH) Q4 2022 Earnings Report, Transcript and Summary

Good evening, everyone, and welcome to the Texas Roadhouse Fourth Quarter Earnings Conference Call. Just a reminder, today’s call is being recorded. All participants are now in a listen-only mode. But after the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to introduce Mr. Keith Humpich, the Interim Chief Financial Officer for Texas Roadhouse. Mr. Humpich, you may begin.

Thank you, Bolt, and good evening. By now, you should have access to our earnings release for the fourth quarter ended December 27, 2022, it may also be found on our website at texasroadhouse.com in the Investors section. I'd like 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 Jerry Morgan, Chief Executive Officer of Texas Roadhouse; Regina Tobin, President of Texas Roadhouse; and Michael Bailen, Head, Investor Relations. Most of you know Michael, so I have asked him to provide today's financial update. Following the prepared remarks, we will all be available to answer your questions. Now, I'd like to turn the call over to Jerry.

Thanks, Keith, and good evening, everyone. Before we begin our formal remarks, I want to thank Regina, Keith and Michael for joining me on the call today, and express my appreciation for them stepping into more visible roles. They are all veterans of Texas Roadhouse, and I look forward to seeing them further contribute to the growth of the company for years to come. I would also like to address the recent retirement of Tonya Robinson, as CFO. I had the privilege of working with Tonya for 24 years. On behalf of Texas Roadhouse, I want to thank her for the contribution she made to the company, and I wish her nothing but the best. Moving forward, we're in the process of a national search for a permanent CFO. We appreciate Keith taken on an escalated leadership role as our Interim CFO, and we have the utmost confidence in him and the rest of our experienced financial team. And now we will move on to our prepared remarks. There is no doubt in 2022 was a milestone year for Texas Roadhouse, with annual revenues surpassing $4 billion for the first time in our history. This is especially remarkable, as it was only five years ago that we exceeded 2 billion in revenue. By maintaining our long term focus on of opening restaurants, across all of our concepts, we see the potential to double our revenue again over the next decade. In 2022, despite inflationary pressures throughout the business, our strong top line results helped us achieve significant growth in restaurant margin dollars, net income and earnings per share. We also returned over $120 million to our shareholders in the form of dividends, repaid $50 million of debt, and repurchased over $210 million of stock. Additionally, during 2022, we acquired eight franchise restaurants for $33 million. All these actions benefited our shareholders and we are pleased to have numerous levers at our disposal to create value. Turning to 2023, we have been impressed by the strength of the consumer. We are pleased to see our sales momentum carry over from 2022 into the beginning of this year. The demand to dine in restaurants has grown and we continue to hold on to a significant amount of our, to Roadhouse business. We also are encouraged by the potential for a slowing rate of inflation, even though the underlying costs for labour and commodities is still to remain escalated. Looking long-term we have no plans to lower our target margin percentage. Our margin dollars are strong. And we believe margin percentages will improve over time, as commodity and other operating costs pressures subside. As a result, we will continue to manage the business with a disciplined approach and he focused on our long-term value proposition. Speaking of value, we recently completed menu pricing calls with our operators and will be taken a 2.2% menu price increase. We believe this level of pricing sets us up to achieve a solid year of sales and profit growth, while furthering our industry leading value. As many of you know, this approach has consistently rewarded our guests and shareholders over the past 30 years. Moving on to development, we opened 23 company restaurants across all concepts in 2022. And in 2023, we expect between 25 and 30, Texas Roadhouse in Bubba's company openings, as well as three daggers. Our franchise partners open seven international Roadhouses in 2022, and we expect them to open as many as 12, International and Domestic locations in 2023. We will continue to maintain our long-term focus when it comes to capital allocation and shareholder value creation. We believe the best and most strategic use of our cash is building new restaurants and taking care of our existing restaurants. Additionally, as I alluded to earlier, our balance sheet and strong operating cash flow will position us to consistently grow our dividends, acquire franchise restaurants and opportunistically repurchase shares and pay down the remainder of our debt. Finally, I want to comment on Gina's promotion to president of Texas Roadhouse. When I joined Texas Roadhouse 26 years ago, and asked people, which managing partner I needed to learn from Gina, was always the first name mentioned. During her career, at Texas Roadhouse, Gina has been a managing partner, a market partner, head of our Training Department, and most recently, our third Chief Learning and Culture Officer. Gina could not be more excited to have you as my partner, and taking a bigger role in the company. Why don't you share a few thoughts with everyone?

Thanks, Jerry. I am excited to have the opportunity to carry on the mission of keeping the managing partner at the centre of our universe, and ensuring that we always view the business with an operator's mentality, which has been the key to our long-term success. I look forward to partnering with all roadies that maintaining our culture and serving our operators each and every day. As many of you know, our unique culture which has been shaped by our people, our past hardships, our successes, and our values provides us with a competitive advantage. And it can often said, we are a people first company that just happens to serve stake. It is my promise and commitment, to always put our people are at the forefront of my work as president. Now, Michael will provide you a financial update.

Thanks, Gina. So the fourth quarter of 2022, we reported revenue growth of 12.7% primarily driven by a 7.1% increase in average unit volume and store week growth of 5.5%. We also reported a net income increased 12.8% to $59.9 million in diluted earnings per share increased by 17.4% to $0.89. For the quarter, our restaurants averaged over $130,000 in weekly sales and To-Go represented approximately $16,400 or 12.6% of these total weekly sales. Comparable restaurant sales increased 7.3% in the fourth quarter, driven by 6.2% average check growth and a 1.1% increase in guest traffic. By month, comparable sales grew 8.3%, 7.3% and 6.5% for our October, November and December period respectively. Turning to 2023, weekly sales averaged over $146,000 for the first seven weeks, with comparable sales of 15.8% as compared to the same period in 2022. We do not expect this level of comp growth to continue, as we move past the lapping of Omicron and go up against higher traffic levels in the coming weeks. At the same time, we do not want to downplay the current results, as our restaurants averaged more guests over the past seven weeks than in any period in our history. For the fourth quarter, restaurant margin dollars grew 3.4% to $145.6 million and were 14.5% as a percentage of total sales, down 132 basis points as compared to last year. Food and beverage costs as a percentage of total sales were 35.1% for the fourth quarter, up 4 basis points compared to 2021. This increase was primarily due to commodity inflation of 6.6% in the quarter, mostly offset by the benefit of menu pricing. Inflation for the fourth quarter was largely in line with expectations, other than higher produce costs. As a result, our full year commodity inflation came in at 10.8%. For 2023, our commodity inflation guidance remains unchanged at 5% to 6%. We also continue to expect that the majority of inflation for 2023 will be driven by higher beef costs. We have approximately 60% of the commodity basket locked for the first half of the year. And based on current visibility, we expect inflation in the first half of the year will be above the top end of our full year guidance. Labor as a percentage of total sales increased 75 basis points to 33.4% as compared to the fourth quarter of 2021, while labor dollars per store week increased 9.3%. This increase in labor dollars per store week was driven by wage and other labor inflation of 7.8% and growth in hours of 1.9%. These increases were partially offset by the $1.1 million net benefit of adjustments to the reserves related to our workers comp, and group insurance programs. The reserve adjustments include a $0.3 million favorable adjustment this year and a $0.8 million unfavorable adjustment last year. For 2023, our guidance of wage and other inflation between 5% and 6% remains unchanged. Other operating costs were 15.3% of sales, which was up 58 basis points as compared to the fourth quarter of 2021. The year-over-year benefit of sales leverage was more than offset by a continuation of the higher costs we're seeing in areas such as utilities, credit card charges, and repair and maintenance expense. Moving below restaurant margin G&A in the fourth quarter was 4% of revenue, with the overall expense down $2.3 million versus 2021. The primary drivers of the decrease year-over-year G&A spend or a $1.1 million benefit from one-time accrual adjustments and a $1 million decrease in total cash and equity compensation. Our effective tax rate was 11.5% for the fourth quarter, and 13.6% for the full year. Assuming no changes to the tax code, we now expect an income tax rate of approximately 14% for 2023. With regards to cash flow, we ended the year with $174 million of cash and $50 billion of debt. Cash flow from operations for the fourth quarter was $117 million. This was offset by $72 million of capital expenditures $31 billion of dividend payments, and $25 million of debt repayment. We continue to expect full year 2023 capital expenditures to be approximately $265 million. And I will also mention that on the first day of fiscal 2023, we spent approximately $39 million on the acquisition of eight domestic franchise restaurants. These restaurants are included in our expectation of at least 6% store week growth. Finally, as announced today in our earnings release, our board of directors has authorized a 20% increase in our quarterly dividend payment, increasing it to $0.55 per share from $0.46 per share in 2022. Now I will turn the call back over to Jerry for final comments.

Thanks, Michael. Our future success depends on staying focused on driving top line growth and providing a legendary experience to every guest. We will do that by keeping value at the centrepiece of the menu and taking care of our roadies, who in turn will take care of our guests. Tomorrow marks the 30th anniversary of the opening of the first Texas Roadhouse. I look forward to celebrating this anniversary at our annual conference with over 700 managing partner,s who represent the very best of what this company has become over the past 30 years. That concludes our prepared remarks. Operator, please open the lines for questions.

Thank you, Mr. Morgan. [Operator Instructions] We'll take our first question this afternoon from Chris Carril of RBC Capital Markets.

Hi, thanks for the question. So Jerry, can you maybe expand a bit more on the demand commentary around the start of the year if my math is correct, the three year stack appears to be meaningfully accelerated in the first seven weeks of 2023 versus the 4Q in December in particular. So any additional detail will be helpful there?

Yes, I mean, we're very excited about the demand for our concept. And, and we've seen the escalation, we softened a little bit in December, but it came roaring back in, in January, this first part of February, so I will just tell you, I think it's about our execution and about the quality of the product that we're putting on the plate. And, and we will keep pushing that. And I think that's what helped drives our top line sales.

Got it. And then, on the long-term outlook, you mentioned in the prepared remarks, I think it was a doubling of revenue over the next 10 years. But what are the underpinnings of that, maybe specifically around development across the three brands? Thanks.

Yes, I think if we look back at the last five years, and we've doubled from there, the way we see it, with the gross growth of our existing restaurants and our continued sales escalations, we definitely feel like that isn't attainable with the three concepts and the trends that we currently can model out. Michael, might have a couple of comments on how we get there.

Yeah, Chris, it's really not that different than what you're seeing us doing right now. Keep in Roadhouse development in that 20 to 25 restaurants and obviously seeing Bubba's grow to maybe low double-digits. And then on top of that, you know, Jagger's could see a little bit of growth. But the assumption of those around 30-ish restaurants a year and some modest traffic and check growth is really the underlying assumption that gets you there.

Got it. Thanks so much.

Thank you.

Thank you. We go next now to Brian Harbour of Morgan Stanley.

Yes, thank you very much. Can you just talk about the pricing decision a little bit. And, you know, are you still going to stick to kind of the two times per year if, for example, beef becomes more inflationary in the second half, do you want to address that with pricing, or do you think that there will still be kind of short-term volatility there, and you're just more focused on kind of value proposition?

Hey, Brian, it's Michael. I think we are committed to looking at menu pricing twice a year. We look at it with the intention of taking pricing in early April and sometime in October. You might remember that commodity inflation is something that we don't typically focus our menu pricing on. We view that as cyclical in nature. So we're more focused on the structural items, the labor component, when we are determining what level of pricing we're going to take. Obviously, any pricing that we take to deal with labor pressures will also help the commodities and other lines, but we were in this for the long-term and really don't knee-jerk react to commodity costs being above or below what we might expect at one point when we're factoring in our menu pricing.

Makes sense. Okay, thank you. And then just on kind of uses of cash. Do you – you're running pretty low on debt here, do you think it makes sense to pay down the rest of that? And then also, I think you had repurchased some shares earlier in the year, it doesn't look like as much in the second half. But do you have an intent to return to that?

Yeah, Brian, this is Keith. Thanks for the question. Yeah, on our debt, we plan on paying all that back this year. We'll probably even live to do that in the first quarter. But we'll be making that decision in the coming weeks. On share repurchases, we're really proud of our share repurchase program over the years, and the value that we've created from that. And the last four years, which includes some pandemic years, we've repurchased over 400 million of our stock. And when I looked at this year, I'd say that we will definitely look to buy back dilution, and then anything after that it was gong to depend on our other capital allocation needs, but our cash balances, and really the market conditions and then we're going to make whatever decisions we feel like we have to in the best interests of our shareholders and our company.

Okay. Thank you.

Thank you. We go next now to Brian Bittner of Oppenheimer.

Thanks. Hey, guys. I'd like to go back to the business trends you're seeing so far. In the first quarter, you said comps are up about 16%. And based on your commentary last year, I think that implies average weekly sales are trending at that $147,000 level. Can you confirm that? Is the math correct there? Is that where the average weekly sales are trending? And is that how we should think about average weekly sales for the rest of the quarter? Is there some reason why those are going to decelerate to a lower level for the full quarter?

Yeah. Hey, Brian, it's Michael again. Your math is pretty spot on. Yes, we were 15.8% comp growth. And then in my remarks I said we average 146,000 over the first seven weeks. I would say look we don't know what the next six weeks of the quarter are going to bring? Certainly, we were lapping Omicron, which was -- that helped with some of those large growth that you're seeing. So yes, sales that percentage probably comes down from there, as we start to lap some more normalized numbers, but I think we still have opportunity to grow whether that's 146,000, something more around that range we will see, but we've certainly shown that we're able to generate that level inside our restaurants. And that's how our operators are going to continue to do the business.

Yeah. And I would say, we've been very good on gift card redemption, and there's been some driving forces with some great weather across the country and some enthusiasm out there. But I think there's a couple of reasons why it's being aggressive right now, which we're excited about, how long it will hold at that level.

Yeah, sorry, Michael, I must have missed the call out on that 146,000 in the prepared remarks, so I apologize for that. My follow-up is on the labor cost, the per operating week costs out punch the inflation because of the hours that have been added in the fourth quarter. But the question is, moving forward, you've given us this labor inflation guidance for 2023, but how should we think about the per operating week cost in that labor line? Because with the type of comps you're seeing so far, for 2023 the question becomes, how much operating leverage do you get off that particularly on the labor line?

Yeah. I think there's something sort of to be determined there. We're still obviously in the first quarter rebuilding the hours from the Omicron impact of last year, staffing has gotten much stronger and it's getting to a levels we need. So the hours growth is probably going to come down and I think at some point maybe in the back half of the year, we get back or closer to our historical algorithm for lack of a better term as to how our traffic or hours grow in 50% of our traffic growth. We'll see if that's the new normal or something else. But I think there's some -- there's no doubt going to be wage pressure throughout the years is our expectation, so maybe the midpoint of our guidance and a healthy consumer. That labor line you know, maybe holds fairly steady for the year probably wouldn't surprise me to see some pressure earlier in the year and then maybe getting some benefit in the back half of the year.

Thank you

Thank you. We'll go next now to David Palmer of Evercore ISI. Mr. Palmer, your line is open. We can't hear you. you might want to check your mute function on your phone.

Can you hear me?

We can hear you now.

Okay. Thank you. The inflation five to six -- the early -- you said it's going to be above that high end of the five to six in the first quarter. And that would be -- I assume it's going to be related to beef, but if you could just give us a sense of what sort of cadence of the inflation you're expecting and the breakdown of that between beef and other?

Yes. Hey David, its Michael. We did say -- yes, we expect the commodity inflation to be above the top end of the range, not just for the first quarter, but the first half of the year and a lot of that is certainly driven by beef. Pretty much throughout the whole year, that's going to be the major pressure point, we believe in our commodity basket in 2023 -- is beef. So, we're going to feel pressures in other areas, some of that you're going to see, maybe diminish as we move to the year. The first quarter of last year hadn't really felt the impact from what's going on in the Ukraine as of yet. So, we're still lapping some of that. That's some of the reason why you're going to feel higher inflation in the first quarter and second quarter. And then we start to lap some of those higher numbers. So, beef pressure throughout the year and maybe moderation in other areas as we move through the quarters.

And then I was wondering if you wouldn't mind just getting a little color about Bubba's, we don't have them here in the Northeast, and we'd love to get one up here. But how are the returns of those units versus we can see that some of the stack comp numbers, they look pretty good. But how are the returns versus the Roadhouse on those units? And are you seeing a fairly even set of returns? Are they doing as well in the ones you're placing in the Midwest as they do in the South and in Texas? Thanks.

Yes, David, it's Michael, again. I would say look we have 40 Bubba's right now and we are surely very excited about the concept. We are very pleased with the returns on some of the more recent openings as well, some of the older ones, but when you have just 40, and you're learning, there are some in there that are underperforming that pull the overall number down. But we certainly believe in the concept, belief in its ability to generate that mid-teen IRR that we are looking for, which is the same return that we're looking for at Roadhouse. And we're seeing great acceptance of the brand in the South and Southwest, in really all the areas that we are opening them and are very excited. We think we'll get about five of those opened this year, and long runway to go there.

Thank you.

Thank you. We’ll go next now to David Tarantino with Baird.

Hi. Good afternoon. Jerry, you mentioned that you expect restaurant margin percentage to recover over time. And I guess my question is, is really about kind of the path to getting there. And I think you said, using commodity costs and some other items like leverage on traffic, but if you could just clarify, how do you get to higher margin percentages over time? And then Michael, can you comment on whether you think progress on that front is possible this year in terms of margin percentage give it all the puts and takes on the cost side?

Yes. Hey, David, it's Michael. I’ll start and then let Jerry add in. I do think let's use the midpoint of our guidance range and the assumption that the consumer remains healthy. And we see modest growth moving to the year and what level of growth that's going to be up to you guys to determine. But yes, I think you could see some -- on the percentage side some margin improvement in 2023. I think other operating is certainly maybe the easiest path forward for some of that margin improvement. And then depending upon where we are, within our guidance ranges on commodities and labor would factor into how much maybe leverage we should get in those areas. And so I think, obviously, driving traffic is one way, seeing the menu pricing flowing through is another way, but I'll tell you that the percentages are important to us, but maintain that top line growth and maintain those restaurant margin dollars are just as important if not more important.

Yes. And I would just say, as we continue to attack our top line sales and continue to watch inflation throughout our cost of goods, there's obviously that part of it, we do hope and do here that maybe we're going to have some relief outside of protein. And then in other controllables, from that labor, obviously, as we've really emphasized getting staff this year, and making that investment, so that we can handle the sales and the volume that we're doing. So hopefully, we have really added to our pot, we have 82,000 people. So we are back above, basically the pandemic levels and to handle the volume that we have. So we really didn't want to utilize the tenure of our people now. And the ability for them to handle that the volume, there was a lot of ramping up to do the sales. So I feel very comfortable going into this year that we should see some relief and even make some headway on those two categories for sure.

Great. And just a clarification, Michael, is there some level of traffic that you're thinking about that would, I guess, traffic growth that would lead to margin expansion the shares or a break even point that we should think about for the year?

I don't know necessarily if there's a break even versus last year, probably, on top of what we've already generated some fairly modest traffic growth continuing through the year. Obviously, pricing drives margin percents a lot more easily than does traffic, but you will probably need to continue to see traffic growth. Traffic growth is certainly going to benefit that labor line and the other operating line and help us get some leverage there.

Great. Thank you very much.

Thank you. We’ll go next now to Jeffrey Bernstein of Barclays.

Thank you very much. Two questions. One, just on the unit side of things. I know this year, you were originally talking about maybe 30 openings. Now, I think, you refer to 25 or 30. In the short term, just wondering whether there's any near-term headwinds that are kind of still weighing on things and that kind of ties into the 30 that Michael, I believe you mentioned, for the many years to come, you guys can do 30 a year. I'm just wondering, now with potentially three concepts still humming along, just wondering what the constraint would be to, you know, going well above 30, whether or not there's anything in particular or whether that's just your comfort zone to assume 30 per year? And then I had one follow up.

Yeah, Jeffrey, how are you doing, buddy? Listen, I do believe that we will continue to focus on the growth of Roadhouse at that low-20s. And as we kick Bubba’s in also as we start working towards a double-digit number, and then you know, Jaggers is still a little bit early to see what we can put into the pipeline. I am excited about it. I do believe that it will continue to add to our portfolio. So I do believe that we can get to the high-20s and low-30s in the next couple of years is where our target focuses and our pipeline. And then I do see it escalating from there. It will be incremental, but it's not going to be a big jump. But as we do get more aware of what we can do with Jaggers and Bubba’s, they will be there. But we're very comfortable with where Roadhouse is in the pipeline for the next three years, I would say, we could be at that number and the other two will be the driver to kick us up over into the 30s or higher. So that would be the thought there on my side.

Got it. Is there any particular headwind in terms of this year or still ongoing delays and whatnot that would maybe temper that prior 30?

Yeah, I believe there is some concerns on our part. Just still a couple of things, the transition of property between our landlords delays things when we're in a negotiation, we've seen a little bit of that. Permitting is getting better. But it's still a challenge by cities or municipality. So we're anticipating getting through all of that. We also have to be cautious of what we've in seen the last couple of years.

Yeah. And Jeff, this is Michael, if you want to mention that adjustment from the approximately 30 down to the 25 to 30, just with some of the movement we were seeing. It just felt like the right thing to update, but really had no impact on our thoughts on the store week growth for the year. So it was you know, deals that were already expected to be pretty late in the year, but just realistically look like they're going to slip into early next year, but again, would not really change that store week growth number.

Got it? Might I follow up is from the earlier question on beef. You know, I think you said the majority of your inflation is going to come from Beef. Just wondering if you can share what you're currently contracted specifically for Beef? And maybe at what inflation rate that we're talking about. I know one of your larger peers reported earlier today, and they talked about how they were 100% contracted for Beef, assuming mid single-digit inflation. I'm just wondering how that compares, maybe it's different product, you're looking at a different specs, but it's 100%, something you would look to achieve or any color you can provide in terms of, you know, the outlets of beef, specifically, as we move through this year would be great? Thank you.

Yeah, we're not going to get into what percent of our Beef is locked for the year, obviously, we have more of a locked in the first quarter into the second quarter than we do in the back half of the year. And with it being almost half of our baskets, if we're 60% locked on the overall basket, beef has to be kind of in that same general range. And, you know, I did, you know, in our in our remarks say that the majority, and I think you could call that, 80-ish percent of our commodity inflation for the year is expected to come from Beef. So, again, if you just for the easier math took the bottom end of our range of 5% commodity inflation, that would imply that you're going to have beef inflation in high single digits or low double digit is what's embedded in that expectation. And yeah, we, I can't really comment on how other -- what others are doing, I can just tell you with the way we buy our beef, where we buy our beef from, the fact that we age it and cut it in our restaurants, it does require us to maybe do something a little bit different than what others do. We have no problem locking in when we think it's appropriate. But we're also, you know, we have some pretty smart people in our procurement department, who know when is the right time to be buy and when's the right time to wait, and they will make those decisions on what they think will result in the best cost for us. And, obviously, if locking in can be done, we certainly will do that.

Understood. Thank you.

Thank you.

Thank you. We’ll go next now to Peter Saleh at BTIG.

Great. Thanks for taking my question. I want to come back to the sales performance, so far this year in the first seven weeks, I noticed you saw a pretty sizable increase in average weekly sales 146,000 and the fourth quarter was about 130,000. Can you talk about is that increase really mostly that you're seeing? Is that mostly traffic? Are you seeing any change in behavior in terms of what consumers are spending on, is the check going up? Just anything when you look under the hood in those first seven weeks, just trying to understand the consumer behavior there?

Yeah. Hey, Peter, it's Michael. Of that 15.8%, we've mentioned on the last call that we were going to be about 6% pricing, in the first quarter we're seeing most of that flowing through. So I would say the traffic is just a tick over 10% of that 15.8%. And the rest of it is check growth.

Great. And just on that, say on the average weekly sales for a second, given how high it is and surprising maybe the highest that you guys have seen. How do you feel about staffing levels with average weekly sales at this level? Do you feel like you need to step up? Do you feel like you're appropriately staffed? Should we expect the labor hours to increase from here just any help with that would be appreciated?

Hey, Peter, this is Gina. I'll tell you that overall, right now, we are very happy with our current staffing numbers; we've seen an increase in that, our turnover is definitely going down. And we know that quality of people hired and retention is going to increase our productivity. And that's going to help to drive down the labor percent, which is what we are currently working on right now. So tenure matters and connections to our people to create that culture and reduce that turnover amount will continue to be worked on.

Thank you very much.

Thank you. We take our next question now from Sara Senatore of Bank of America.

Hi, thank you. I just want to go back to the unit growth question. I think you said just, sort of, on the margin. Maybe we'll see some of the units target in the following year in January to December. I noticed, though the CapEx guide is unchanged. And I guess I wanted to ask on that, are you still seeing relatively high inflation and build costs, or is there sort of a more repair or I should say like, updating maintenance CapEx that you're spending on was any of that kind of deferred during the pandemic? And are related note, the other operating expenses, like you said, repair maintenance were high. So, is that also kind of part and parcel of what we're seeing broadly, which is kind of some of these elevated -- still elevated costs? Just trying to understand, given how strong the volumes are, whether or not it's sort of the marginal returns are higher as you would think they should be, or maybe the cost of building has gone up sufficiently that it's offsetting some of that.

Yes. Hey Sara, it’s Michael. I say, first on the CapEx question. We're still going to be building those restaurants that are going to open late this year. So the main reason, like the CapEx number didn't change isn't because of increase in our assumption for the cost. It's just simply that, even though our store may not open till January or February of next year, it'll probably be for the most part builds by the end of this year. So the CapEx number did not at need to move. As far as other operating, we continue to feel those pressures in there, a lot of services go into the other operating, part of their -- part of the business, a lot supplies, the utilities continued to be a pressure point, and repair and maintenance are still elevated. And, there's also other new fees that go in there that we really haven't talked a lot about in the future, and aren't huge driving forces. But, when we roll out new technology there, there are costs associated with that. And whether that's running equipment or paying for installations, there are some costs that continue to pressure that line. So, with the growth in our volumes, we're certainly seeing more use of those different other operating items. But we're also seeing some new items introduced into that area. I'm optimistic that we won't see it grow the way it has and I'm hopeful that we won't see it grow on $1 per store weeks the way we have and have more potential on that line for some leverage in 2023. But we will wait and see exactly how that all plays out.

Okay. Thanks. And then, just if you can give me a little bit of sense on the CapEx, I know, it makes sense that the opening -- most of the work is being done before it opened. How much inflation have you seen on build costs, let's say versus pre-COVID? Just so I can get a sense of like, where things stand versus maybe they were a couple years ago?

Yes. There's a few things that go into that. There's obviously the building cost. There's the rents and everything else, but we've probably seen -- you can't just look at the total costs and do the math one over the other because, again, where the restaurants open one year versus the next can have an impact on building costs and rents. But you probably have seen -- your ballpark 10% to 15% increases in the cost of building a restaurant. But we're also embedded in that is, we're building a bigger restaurant than we have in the past. So, it's hard to separate those two items out.

Understood. Thank you.

We'll take our next question now from Dennis Geiger of UBS.

Great, and thanks, and congrats to everyone on your promotions and expanded roles. I want to ask on G&A you called out a couple of items contributing to the G&A levels in the fourth quarter. But curious, if you could provide any thoughts on G&A in 2023, anything on investment there? Whether it's as a percentage of sales G&A or going to be growth year-over-year any color on what to expect this year?

Yeah. Thanks, Dennis, this is Keith. Yeah, for G&A, we always target to keep G&A growth, lower than our revenue growth. And I think in 2023, might be a year where we get a little bit of that leverage back. We have a couple of G&A growth challenges in 2023, one of those, as we talked about this as our 30 year anniversary, and we're getting ready to have our annual Managing Partner Conference. And with that being our 30th anniversary, it's going to be quite the event. And so I think you can definitely look to see us having elevated conference cost this year. And then that will be a big driver of some of that, we also have a new human capital management system that's going in. So we're going to have several non-capitalize able costs that we've been incurring this year. So that's going to be a factor. And then the other piece is really going to be with the pandemic slowdown. We've kind of been gradually recovering on a lot of things. But I think this is going to be the year where you're going to see us fully recovering and even in some cases catching up on things like travel and training and really investing in our people to. So I think those are going to be your main driver this year.

Appreciate that color, Keith. One more quick one, just as it relates to pricing, as it relates to the current levels and what you're taking in March just curious kind of level that off and on what the effective pricing by quarter maybe looks like over the next couple of quarters given the moves there? Thanks very much.

Yeah. This is Michael I can – I can help you with that. So first quarter, with a 2.2% and assuming, we don't take any pricing in October, we will have about 5.9% pricing for the first quarter 5.6% in the second quarter, 5.1% in the third quarter, and then 2.9% in the fourth quarter. And again, we will be looking at menu pricing. And, most likely taking something in October, but that's the cadence without any additional pricing.

Thanks, Michael. Appreciate it.

Thank you. We go next now to Andrew Strelzik at BMO Capital Markets.

Hey, good afternoon. Thanks for taking the questions. I have two. The first one, I believe you said that, you're pretty comfortable with the pipeline for new stores over the next three years. But it does feel like we hear from almost everyone that they're looking to accelerate unit growth, even those that don't really grow units. I'm curious, as you're building that pipeline farther out. Do you see that show up at all more competition, higher costs any of those types of things would be the first question? The second question is just acquired franchise units, any color around volumes or margins or potential investments to get this where you want to be relative to your peers system average? Thanks.

I'll take that first part. And I think Michael, grab that second part. Yeah, I do. Obviously, there's competition out there. And I think there are, but we have our targeted markets and states, and growth areas. And we've been working this plan for quite a while, and it's been very successful for us for Roadhouse and Bubba's. And then obviously, as we're incorporating our strategy on how to grow Jaggers systematically, probably keeping it a little closer to here and the Kentucky basin or the heartland and no one that around it, but there is -- there's always competition. And there's real estate to be had out there. I think, well, I'm not sure what others are doing. But we are very focused on our strategy. And in our focus on how to continue to do it, right. We do have some relocations that we are also incorporating into the system and which is really helping us in a different way. But that also adds to us looking for more real estate, other than new store openings, but be able to take a store relocated, put a bigger parking spot in and in a bigger restaurant, which we need for our volume, whether it be cooler expansions or bump outs or extra dining rooms, as we look forward to it. We're excited about some opportunities to do some things a little bigger, as they say in Texas, going forward.

Yeah, Andrew, on those franchise acquisitions, I would say those are pretty average performing stores from a sales and profit standpoint. So I don't think you're going to see any kind of movement in our overall company numbers, because of that. And from a CapEx requirement, there is some CapEx needed and that's built into our $265 million estimate for the year.

Great. Thank you very much.

We'll go next now to Joshua Long of Stephens.

Great, thank you for taking my question. First one, I wanted to see if you might be able to provide a little bit more color on some of the underlying trends that are seeing the strong trends here in the first part of the year. In sort of context, you can provide -- if you think about Omicron impact from January leaves there's also a calendar shift last year from Valentine's Day in Super Bowl just sort of trying to get at the underlying trends here for the first part of the year would be my first one. And then secondarily, it sounds like good human capital is in a solid spot, but then also just thinking about the growth and all the work you've done to maintain that gap between other peers in the industry, because everyone is really focused on the human capital aspect going forward as the key pillar for how they're going to get out there growth. You've done that really well, historically. Just curious, how you think about human capital and investments into that roadie culture over the next two, three, four, five, 10 years kind of that next chapter to get out some of that doubling of revenue that you talked about earlier in the call.

Hey, Josh, it's Michael, maybe I'll start with the first question about the first seven weeks, and really don't have a lot of numbers to call out for you. I’ll say, there's always a lot of different things going on, whether it be the lapping of Omicron. And winter weather this year or winter weather last year, the timing of Valentine's a Super Bowl. I'll tell you, we've seen this. We've seen strength throughout the seven weeks of the year. So there's really not any kind of number I would call out and say, hey, you need to adjust it upwards or downwards, because of something. I think, it'd be unfair to take -- to have you all, add something to it without backing something off. And like I said, I'd say it's been a pretty consistently strong performance throughout the seven weeks.

And on the staffing side, I will tell you that I think in the last 18 months on the human capital, so we are [indiscernible]. We're all that part of it. No. So on a staffing side, no, we have been very aggressive the last 18 months and we feel really good about our position on the people side in our restaurants in the front of the house, in the back of the house, in our management team. So, that piece of it has been a big investment. So we're hoping obviously this year, as we settle in. We reduce our turnover, and we really focus on keeping our folks and connecting with our folks. That will be -- that will be an investment that we see a return on this year would be our hope.

Thank you. A – Jerry Morgan: Thank you.

We'll go next now to Andy Barish of Jefferies.

Hi, guys, thanks. Two quick ones for me, just on the margin performance in the 4Q, can you help us level set? I mean, it's unusual to see margins kind of go down from the 3Q to the 4Q, was there something about December flow through that wasn't quite what you expected or any help there just as we, you know, we look to build off of -- that 14.5% restaurant level margin.

Yes, hi, it's Michael. It's actually more to do with the third quarter. If you may or may not recall when we -- on our third quarter earnings, we called out the $6.6 million a breakage benefit that we that we received in our other sales as well as a $4.4 million benefit to our other operating for a general liability reserve adjustments. So those two numbers and the benefit of those in the third quarter have caught up probably 1% to 1.1% benefit to our Q3 restaurant margin. So really on an adjusted basis we will go out from a mark of 14.3% in Q3 up to that 14.5% in Q4. So it really had more to do with those beneficial items last quarter.

Okay, thank you appreciate that. And then on traffic growth that these kind of volume numbers I mean, Jerry maybe and or Regina, I mean it's phenomenal it obviously gets a little tougher and execution -- Legendary -- Food Legendary Service continues to be the hallmark but are there other things we should be thinking about? You know, as you've mentioned crack a few times or Roadhouse pay or remodeled bump out -- anything you'd like to call out, as we tried to figure out traffic growth for 2023 and beyond. A – Regina Tobin: Yes, well, we are – we are absolutely, always looking at speed in our restaurants and Roadhouse pay is one of those items that we've recently put in where the guests can pay it there -- in a timely manner, and we can turn our tables faster, which is what we've seen. We are putting KDS in some of our kitchens, which helps our ticket times. So we really look at from a technology standpoint, any piece that can help the speed of our restaurants which obviously increases the traffic growth. So we look at that. And there may be some other -- as our operators, we've said this -- as our staffing levels have come up, and we've gotten staffed and we get the tenure in our restaurants and people are more experienced, obviously, the productivity goes up, and they become more efficient and faster in their roles. So all of that leads to stronger traffic. A – Jerry Morgan: And I'll just expand on that digital kitchen a little bit. Roadhouse pay we have been almost 615 stores now has been a huge win last year, we are still testing tablets, so that we can do a mobile handheld ordering piece of it, we're working on our software. As we go, we want to make sure it's perfect when we get it out there to execute and then as far as a Digital Kitchen, we have converted two of our restaurants and opened two new stores, and are probably committed to 30 restaurants this year moving to the Digital Kitchen, which is obviously very exciting. We are -- we just opened one restaurant, a high-volume store that we relocated, and it has been very successful. The operators are excited about it. So, we're excited to invest in the -- and seeing some real rewards as we move forward. This will be a big year for us when it comes to opening new stores with a Digital Kitchen, and even converting some existing stores. So, kind of, definitely going to be leaning on some technology to help us get faster and really, we want to complement our service with technology.

Very helpful. Appreciate it.

We'll go next up to John Ivankoe of JPMorgan.

--250 Texas Roadhouses over the next 10 years round numbers, I suppose. But is your site profile changing? Are you seeing new areas, where Texas Roadhouse can be successful, maybe even closer to some of the major cities, maybe would come at a higher cost, but maybe also much higher sales, just how the overall site profile is emerging or evolving for the next chapter?

Yes, I would say we'll probably stay pretty tried and true to our philosophy of the suburbs. But we do have a restaurant in New York City in New Rochelle that we've looked at. We are starting to look a little bit more in a city area or higher traffic, which could be -- so we've got a couple of those. So, we are expanding a little bit, we've had some success in some smaller communities or lower-populated areas that we can go into. So, we've got a broad scope in a mind and at looking at every option. And I think at a company our size and what we want to accomplish, we got to stay true. But we have to test and try some new things that might help us. And because we're looking at Bubba's, and we're looking at Jagger's, we're probably expanding and are looking at areas that would help all three brands. So, I think our real estate team clearly understands what we're trying to do with all three. But we have opened the scope of where we will go and what we will try, so that we can expand and have a lot of success in that side of it. So, there's a couple of things that we're working on, that are a little different than what we've done in the past and we're excited to see how they turn out for us.

That's great. Thank you. And secondly, and related, I suppose on development, are there still significant bump out opportunities for the chain or have you done basically what you can do at this point? You've mentioned relocations, how significant of an opportunity is relocations for the Texas Roadhouse brand?

We like them, they're so far proven out pretty well. I would say that over the last five years, we probably have a dozen, and every one of them have proven to see a real bump in sales. So, that's exciting. And as people turn out on their 20-year lease, that's when we start looking at what is our opportunity to reinvest or to maybe relocate if the energy moved or some. So, I think that's a smart strategy from a business standpoint. And so from that, as far as bumped out, Michael, I think has a couple of stats on that.

Yes, John, I think I bumped out. I'd say there still is opportunity and really, every year there's new restaurants that kind of start to qualify as potentials -- potential ones for us and look at either they've grown their volumes enough to be considered or they've been open long enough. For 2023, I wouldn't be surprised to see us open 10 -- or bump out 10 to 12 restaurants and we probably have on top of that, another 20 plus that are already in the pipeline for 2024 and beyond. Sometimes they take a little – little bit more work on the legal side of getting all the approvals to get them done. But we definitely have a lot of restaurants still interested in them and new ones kind of every, every year that kind of qualify and get on our radar to be considered for a month out.

Thank you.

Thank you. We go next now to Jon Tower of Citigroup.

Great. Thanks for taking the question and I’ll try and make a quick. In previous quarters, you talked about a nice little mix up in the menu. This quarter looks like mix was flat. Kind of curious to get your perspective, are you just not seeing as much trade up on the menu? Is there anything else going on perhaps in the fourth quarter?

Hey, John, it's Michael. Yes, it's a interesting question or one that we've been looking at. I'd say, so far this year, we're seeing this tremendous traffic growth. But you are right, we are seeing a little bit of negative mix coming in. And what we don't know is we certainly lapped the move up to a higher check that our guest has chosen to do. And even with this little bit of negative mix that we're now seeing, we're still well above where we were pre-pandemic. But what we're still looking at and trying to determine is what is driving a little bit of negative entree mix that we're seeing right now, because we're not seeing it in appetizers. We're not seeing it in other add-ons, we're not seeing it in soft beverage. But we're seeing a little bit in that in that entree. And it could be some of our – some customers trading down a little bit. But honestly, it could also be a somebody trading up to us that, now sees the relative value of a Texas Roadhouse as compared to going to a fast casual restaurant for a very similar price they can be seated and waited upon. And so maybe some of those people are now coming in and driving some of this traffic growth. But maybe they are coming in at some of our lower price points on the menu. So it's something we're watching. But it's the unique thing over the last handful of weeks is we're seeing it, just a little bit in the entree category. But not in the rest of the menu. We are still seeing a little bit on the alcohol mix. But we were already seeing that, that maybe people moving from alcohol to soft bev, because we are seeing that soft bev mix move up a little bit.

Got it. I appreciate that color. And then just lastly for me, I think you tapped in on this maybe earlier in the call, but new sort of productivity of that Roadhouse has been phenomenal. I think it's up – the average weekly sale of 8% versus the comp store base in 2022. And maybe you answered this earlier in the form of building bigger stores. But is there anything else going on that would be driving that acceleration you're seeing in new store productivity versus the past?

Yes. Nothing -- it's Michael. Nothing that I can think of that would be driving that. I don't know. Gina, if there's anything you would do there?

Not. No, not, nothing I can think of.

All right. Thank you.

Thank you. We'll go next now to Brian Vaccaro of Raymond James.

Hi, thanks. Good evening. Just two quick ones. First, on labor, Gina, where is hourly turnover sort of trending over the last few quarters? Can you just ballpark that for us? And maybe give us some perspective on how that compares to pre-COVID levels?

Yes, sure. I will tell you that we are seeing the turnover number going down consistently over quarter-over-quarter. We are seeing more application flow, which is good for us. And as we, like I said before, it's the quality of people that really makes a difference. And once we get those quality of people in with the experience, we can keep them longer. And that really helps with that turnover piece. So we continue to see it go down which is which is really promising.

Yes. And Brian, this is Michael. I can just put up some numbers to that. Our -- and again, remember, every company maybe calculates turnover a little bit differently. But we've seen our number which we look at over a last 12-month period. So it's a slow moving number, but we're down in the high 120s right now, middle of 2022, we were in the mid 130s. So we've definitely seen that come down and I would say pre-pandemic. We were somewhere probably in that 105 to 110, right. So we still have a lot of room to go, but we're getting better.

Okay, great. That's helpful. And then just last one, on just sort of near term store margin expectations and just sort of in the spirit of getting everyone on the same page in an environment where sales are so strong in the first quarter, it can be a little disorienting. So I guess, could you provide any guardrails on first quarter store margin expectation? Is there a historical perspective, maybe versus Q4? I think it's usually up about 200 bps. Is that reasonable, or maybe there's something in the current environment where that wouldn't be the case this year?

Yes. Hey, Brian, it’s Michael. I’m not going to too deep into that one. But I don't -- I think what you spelled out is certainly possible that our margin percents are certainly typically at their highest in Q1 and Q2, because our sales volumes are typically at their highest. So yeah, what you're talking about, something that's magnitude could be the case. I'm not going to say whether it's a 200 basis point move or not, but we would expect to see some higher margins in the first half of the year, just as we saw higher margins in the first half of last year. And we said, hey, there's a potential to see some overall margin improvement year-over-year, so you would kind of need something like that to happen.

Okay. All right. Fair enough. Thank you very much.

Thank you. And our final question will come from Nick Setyan at Wedbush.

Thank you. Just a couple of questions for me. I just want to walk through maybe just the current dynamic in Q4 and perhaps in Q1. And if we assume, similar commodity inflation in Q1 as we sign Q4, that's off of the lower base in Q1 of 2022. So presumably, sequentially, the cost percentage should be down from Q4 to Q1. Is that fair?

From Q4 to Q1?

Yes.

Is that what you said actually?

Yes.

I can see it being fairly similar. Whether it's up or down again, it depends on where within our numbers, but they probably are going to be in the same ballpark as each other, given the numbers that we've called out and where our costs or underlying cost structures are.

Okay, fair enough. And then just remind us historically, in terms of seasonality, what March looks like in terms of average sales versus January and February?

Yeah, March tend to be a very strong month for us. If we were to go back and maybe look at 2019, give me a second to pull that up, January period wanting to were both around 105,000 in weekly sales and our March period were 110,000, 111,000 weekly sales. So we do tend to see a little bit of a increase in that March period.

Great. Thank you very much.

Thank you. That does concludes our question and answer session this afternoon. Mr. Morgan, I'd like to turn things back to you for any closing comments you may have.

Yeah. Thank you very much. I just want to say 30 years ago, tomorrow, we opened our very first Texas Roadhouse and I couldn't be more excited and proud of what this company has accomplished as we're over 700 restaurants and three concepts. And we appreciate everyone's support and partnership throughout this journey, but it's very exciting to see what this company has accomplished. I couldn't be more proud to celebrate with all of our folks here in Louisville tomorrow and our partners when we have our conference in April. So thank you all for your support and partnership. We will continue to perform at a high level.

Thank you, Mr. Morgan. Ladies and gentlemen, that will conclude today's Texas Roadhouse, fourth quarter earnings conference call. Again I'd like to thank you all so much for joining us and wish you all a great evening. Thank you very much.