Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Scott M. Colosi - Chief Financial Officer

G. J. Hart - President, Chief Executive Officer, Director

Analysts

Matt DiFrisco - Oppenheimer

John Glass - Morgan Stanley

Jason West - Deutsche Bank

Jeff Omohundro - Wachovia

Steven B. Rees - JPMorgan

Keith Siegner - Credit Suisse

Fitzhugh Taylor - Thomas Weisel Partners

Larry Miller - RBC Capital Markets

Greg Ruedy - Stephens Inc.

Charles Van Effler - Capital Option Management

Texas Roadhouse, Inc. (TXRH) F3Q08 Earnings Call October 27, 2008 5:00 PM ET

Operator

Good day and welcome, ladies and gentlemen. Thank you for standing by. Welcome to the Texas Roadhouse Incorporated third quarter 2008 earnings conference call. (Operator Instructions) Now at this time it’s my pleasure to turn the conference over to Scott Colosi, Chief Financial Officer of Texas Roadhouse. Please go ahead, sir.

Scott M. Colosi

Thank you very much, Corrine and good evening, everybody. By now, everyone should have access to our earnings announcement released this afternoon for the third quarter ended September 23, 2008. It may also be found on our website at texasroadhouse.com under the investor section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today may 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 recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Texas Roadhouse.

On the call with me today is G.J. Hart, our CEO. G.J. is going to provide some general comments on the business and then I’ll walk you through the financials, and then we’ll open it up for questions. G.J.

G. J. Hart

Thank you, Scott and good evening, everyone. The third quarter was a tough one for the industry and us. Diluted earnings per share were down 14% for the quarter and we are projecting that 2008 diluted earnings per share will be approximately flat with 2007, despite the extra week in 2008. Comparable restaurant sales decreased 3.2% for the third quarter and restaurant margins decreased 281 basis points. While our results were not terrible on a relative basis, we are not happy with being down in sales and profits.

In these unprecedented times, we simply have to focus on doing what we believe are the right things for the long-term, or we could end up damaging our brand. That would jeopardize the brand equity we’ve worked so hard to build and we just don’t see any reason to do that in favor of short-term gains.

We will remain focused on delivering value to every guest, every day with legendary food and legendary service and to do that while maintaining a conservative balance sheet and a conservative approach to our capital allocation.

I am going to talk to you in more detail about what we are doing and how we are looking at things, but first let me turn the call over to Scott for a review of the financials and a discussion of some of our guidance going forward. Scott.

Scott M. Colosi

All right, G.J. During my review of the third quarter, please note that many of the numbers I will mention are listed in a schedule of supplemental financial and operating data that was included in the press release. Starting at the top of our income statement for the third quarter of 2008, as compared to the same period in 2007, total revenue increased 15%, with company-owned restaurant sales increasing 15% as well. The growth in company-owned restaurant sales was driven by operating week growth as both comparable restaurant sales and average unit volumes were down from the prior year.

During the quarter, we opened seven new company-owned restaurant and in addition, we acquired nine previously franchised restaurants as of the beginning of our August period. With the opening of another three company-owned restaurants since quarter end, we now have open 26 company-owned restaurants thus far in 2008 and we are on track for 29 company openings for all of 2008.

As G.J. mentioned earlier, comparable restaurant sales at company-owned restaurants decreased 3.2% versus an increase of 2.5% last year. For the quarter, our average check increased 0.1% while traffic was down 3.3%.

Regarding check, net pricing was up 2.3% while mix was down just over 2% for the quarter, as we continue to see negative mix shift. For October, comparable restaurant sales were down approximately 4.5%. I will mention this was impacted by about a half-a-point due to us removing weekday lunch from the recently acquired franchise restaurants.

From a restaurant sales volume perspective, I’ll offer a little more color on average weekly sales. For the quarter, the 182 restaurants in our same-store sales base averaged $71,500 a week in sales. These restaurants have been open 18 months as of the beginning of the quarter. There were 33 restaurants that are in our average unit volume base but are not in the same-store sales base. These restaurants have been opened six to 18 months as of the beginning of the quarter and they average $65,600 a week in sales.

Our newest 23 restaurants, which have been opened sometime over the last nine months and thus are in neither our same-store nor average unit volume calculations, averaged $76,130 a week in sales during the quarter.

Franchise royalties and fees were $2 million, which was $600,000 lower than last year, primarily due to the acquisition of three franchise restaurants at the beginning of the second quarter this year and another nine during the third quarter.

In terms of margins, as a percentage of sales restaurant level margins were 281 basis points lower than last year. Thus for the year as a whole, we are now down 153 basis points versus last year. Let me touch briefly on the specific lines for the third quarter.

Cost of sales was up 38 basis points, and beef costs were favorable year over year but this was more than offset by just about everything else, including higher bread mix, shortening, oils, dairy, and produce costs. Labor costs were up 81 basis points. Labor costs were impacted by the result of deleveraging associated with negative same-store sales growth and continued pressure from increases in minimum and tipped wages.

Rent expense was up 41 basis points from the prior year; 75% of the increase resulted from the previously discussed franchise acquisitions. These restaurants as a group have higher rent as a percentage of sales.

Other restaurant operating expenses were up 121 basis points versus last year. Over half of this was due to utilities, specifically electricity and natural gas. We did experience some deleveraging associated with negative same-store sales growth but we also incurred $250,000 associates with hurricane related costs and another $240,000 in costs associated with the remodels of two restaurants. These were partially offset by lower managing partner and market partner bonuses.

Pre-opening expenses were just over $300,000 more than the prior year. While we did open two more restaurants during the quarter, this year as compared to last year the timing of pre-opening costs can vary a little depending on the timing of the openings for the year, and note that we have fewer openings planned for next year at this point in time.

Depreciation and amortization costs were 10 basis points higher than last year, driven primarily by the cost of new restaurants. G&A expenses as a percentage of revenue were 32 basis points lower than last year. The decrease here was due to two big items -- first, G&A bonus expense was down as we are projecting lower-than-planned diluted earnings per share for the year. And second, the non-cash accounting charge incurred when we acquire franchise restaurants was over $350,000 less on this year’s third quarter acquisition as compared to last year’s acquisition.

Our effective tax rate for the quarter was an 31.1%, which was lower than anticipated due to various tax credits, primarily the FICA tip credit being projected to be a larger percentage of pretax income based on lower sales and margin expectations for the year. For the year, we are now projecting our income tax rate for 2008 to be approximately 34%.

Finally, our weighted average diluted share count was $73.3 million, which was $2.7 million lower than we were at the end of last quarter due to share repurchases. During the quarter, we repurchased 4.1 million shares of common stock at an average price of $9.17. Year-to-date through the third quarter, we’ve repurchased 5.7 million shares at an average price of $9.20. So as of the end of the third quarter, we had $22.5 million remaining on our $75 million share repurchase authorization. As I mentioned on the last call, one thing I want to reiterate today as it relates to share repurchases and our resulting capital structure that we plan to maintain a conservative balance sheet.

Now on to full year 2008 guidance -- as noted in our release, we are now projecting flat diluted EPS growth for 2008 as compared to our previous guidance of 5% to 15% growth. This does include the positive impact from the extra week in the fourth quarter of 2008. Our forecast includes the following three assumptions: first, we’ll open 29 company restaurants; second, comparable restaurant sales for the year will be down 2% to 2.5%; and third, based on reducing our same-store sales expectations and higher utility costs, we are now anticipating our restaurant margins will be down 150 to 175 basis points for the year. So overall, the big drivers of our reduced forecast are lower comp sales and correspondingly lower margins.

In addition to guidance for the 2008 year, we did announce in our release that based on our current environment -- based on the current environment, our preliminary expectation is that 2009 diluted earnings per share will be flat with our estimated diluted earnings per share for 2008. Additionally, we are reducing our company-owned location growth plans from 29 in 2008 to approximately 15 in 2009, although the openings in 2009 will be in existing markets.

There are a couple of things I do want to mention as it relates to 2009. First, we’ve not made final assumptions as it relates to pricing, inflation, or traffic among other items. Second, for comparability purposes, I will remind you that 2008 is a 53-week year for us as compared to 2009, which will contain 52 weeks.

Also, we are making some modifications to our managing partner bonus program for the benefit of our key operators. We anticipate this will result in a $1 million to $2 million higher managing partner bonus expense for 2009 versus 2008.

And third, we plan to maintain what we believe is a conservative capital structure. With the reduction in planned openings, we anticipate generating a much larger amount of free cash flow in 2009, and from a leverage perspective we look at things on a fully levered debt-to-EBITDAR basis. I can tell you we are currently at just over two times leverage and have approximately $100 million in capacity under our current credit facility, which is not scheduled to expire for 3.5 years.

As we look forward, I can see us managing our debt levels down in the near-term, given the overall state of the economy. However, we will continue reviewing this on an ongoing basis.

With that said, I would now like to turn the call back over to G.J. to talk more about our plans going forward.

G. J. Hart

Thank you, Scott. As I said earlier, it is tough out there and I suspect the fourth quarter will be no different. However, the current environment does not change how we look at the business long-term, and we believe that as bad as things are, they are temporary.

At the core, our business is still all about generating returns on capital, so we remain focused on getting returns on capital already invested while continuing to evaluate and modify as conditions warrant our allocation of capital among new restaurant development, franchise acquisitions, and returning capital to shareholders.

On the element of getting a return on capital we’ve already invested, it is about driving sales and managing our costs. From a sales perspective, we have increased the intensity of our local store marketing efforts and are creating more awareness on our everyday value price points.

We are not strong advocates of discounting as we believe the longer term negative will outweigh any short-term benefits. For us, it is about promoting the roughly 20 entrees we offer at $9.99 or less.

One thing we always have to remember is we have a tremendously loyal guest base which drives 70% of our business. So in our case, it is really about taking care of them to drive traffic as opposed to spending large amounts of money in the form of advertising and/or discounting to attract new guests.

In terms of costs, managing them has proven to be very difficult in the current environment, as inflation has eaten into our restaurant level margins. And while we have taken net pricing of 2.3% this year, we have seen very little of that flow through due to mix shifts.

Year-to-date, our restaurant level margins are down 153 basis points versus last year, primarily driven by labor and utility cost pressures. In addition to inflation in these areas, negative comparable sales have also added to the deleveraging. Therefore, we are focused on finding the pricing that balances our needs to offset inflation and keep our traffic.

As far as our expectations for margins going into 2009, it is very difficult to give you any specifics. I can tell you that I feel better about the inflationary side of food costs but less confident in the consumer environment. We will offer more specific comments regarding 2009 margins on our fourth quarter call.

Now let’s talk about how we are looking at allocating our capital going forward. First off, we are pulling back on our restaurant development plan for 2009. As such, we are targeting approximately 15 company openings as compared to 29 this year. In addition to moderating our 2009 development plan, we continue exploring different development prototypes such as inlines, conversions, and/or modifications on our existing footprint in an effort to reduce our capital investment. Fortunately, we do have a brand that still generates a return on invested capital in excess of our cost of capital. However, the gap between the two has gotten tighter and this is precisely why we were moderating development and evaluating opportunities to reduce our capital investment and grow the spread.

On the subject of franchise acquisitions, we did acquire nine restaurants from a franchisee in Tennessee during the third quarter and another one restaurant from a franchisee in Florida. Going forward, we do not have imminent plans to acquire any others and this is not something we are actively pursuing at this time. While you might see us acquire a few here and there over time, we do not envision anything on a large scale in the near term.

The third prong of our capital allocation strategy is returning capital to shareholders. As Scott mentioned, we did continue with our share repurchase program during the quarter and have bought back $52.5 million worth of stock through the third quarter. While we have $22.5 million remaining authorized by our board for share repurchase, we will also be prudent as it relates to the leverage created by borrowing to acquire additional stock. We are fortunate to be at a time in our lifecycle where we are creating free cash flow and not straddled with a ton of leverage.

As Scott mentioned, from a leverage perspective we are just over two times debt-to-EBITDAR mark, with $100 million in untapped capacity available under our current credit facility. We like being conservative, particularly right now, and believe this approach has allowed us the flexibility to make what we believe are the right decisions for the long-term success of the business.

In summary, we are in unprecedented times. We remain focused on what we believe are the keys to continue creating shareholder value. In addition, we understand that the root of our success is based on taking care of one guest at a time and not sacrificing any part of that guest experience. And as always, I want to thank all of our Texas Roadhouse team members for their continuing support, effort, and commitment to offering legendary food and legendary service to each and every guest that walks through our doors.

With that, that covers our prepared remarks so Operator, if you would open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Matt DiFrisco from Oppenheimer.

Matt DiFrisco - Oppenheimer

Thank you. I’ve got a couple of questions -- one, looking at the rent expense, I understand there is deleverage obviously occurring but it looks as though the rent on an operating week basis, is that that 3,000 weeks -- is that operating weeks or is that excluding the weeks closed from stores maybe lost during Texas? Because if I divide that 3,000 into your dollar amount spent on rent, it comes up to a little over $1,400 per week, which is a pretty sizable jump from the pace you were doing in the first and second quarter, and about 20% higher than it was in the third quarter. I’m just trying to understand what happened in that line item.

Scott M. Colosi

I can’t speak to the dollars per week. I can tell you that what is somewhat different about the restaurants we acquired, so it’s 12 in total this year and all 12, we’re leasing both the land and the building, which is a much, much, much higher rent as a percent of sales versus our typical other lease that we have, which is typically just a ground lease. So that may be part of the difference. I’d have to sit down and look at the dollars per store week.

Matt DiFrisco - Oppenheimer

No, that’s understandable. I also see it coming back a little bit then in the depreciation line. It looks like they carry a little bit less depreciation, obviously.

Scott M. Colosi

They have a lot less, yeah.

Matt DiFrisco - Oppenheimer

Okay, and then also looking at your guidance for ’09, I understand it’s a time to be conservative and there’s little things out there for us to give us guidance for ’09 but with the slower growth, I would think you are having less pre-opening, less dilution from new stores or inefficient labor lines, et cetera, from those new stores. How come we wouldn’t be getting at least maybe 50 to 60 basis points back to start off with in a head start and lower pre-opening? Where are you forecasting continued inflationary pressures, or is it just being conservative and not knowing the end of negative comps and deleverage?

Scott M. Colosi

I think you are correct in saying that if we were to open 15 stores next year, we would have lower pre-opening costs and we are lapping an extra week, so we do have that going against us this year but I think suffice it to say, given all the turmoil in the market today and we are sitting here at the end of October, you know, we just aren’t prepared right now to get anymore specific about what our assumptions might or might not be.

Matt DiFrisco - Oppenheimer

Okay. Thank you.

Operator

We’ll take our next question from John Glass with Morgan Stanley.

John Glass - Morgan Stanley

First just on beef, you didn’t mention where you stood with ’09, if you had some preliminary conversations -- are you at all optimistic about beef pricing next year, given demand might be lower?

G. J. Hart

We did not speak specifically about it because we do not have any contracts in place at this moment in time. I will tell you that I am cautiously optimistic in terms of where pricing will be in 2009 and if I look today at the current cash markets, I would be even more optimistic. But as we are in the middle of these negotiations, it’s just a little bit too early for us to totally comment.

John Glass - Morgan Stanley

Would you say generally though up or flat, down -- is there directionally at least you can give us?

G. J. Hart

Directionally I would tell you down.

John Glass - Morgan Stanley

Okay and how long does it typically take when you see a reduction in the energy costs as we have, at least in the commodities market to actually see a benefit in your utilities line? Do you for example have negotiated rates for specific utilities or might we see a benefit of lower utilities as early as the fourth quarter?

Scott M. Colosi

It’s really all over the board but yes, if we see natural gas rates fall as they have fallen, we would expect some of our utility rates to fall commensurately with that. So I would suspect that will help us in the fourth quarter.

You know, the question that we have is how long will all that stick? So you know, we see oil at whatever it is, low 60s a barrel when it was $145 four months ago, so again that’s what we are wrestling with, as well as just how long do some of these things stick or not.

Keep in mind on the food side, we were favorable in beef for this quarter, for the third quarter, but it’s everything else was worse. So that’s also what we are wrestling with as well as far as the details behind the forecast.

John Glass - Morgan Stanley

And then just on the pricing, you took pricing but you didn’t realize almost any of the price increase in terms of the flow through. How do you think -- is there a way to maybe price in a way that is -- I won’t say it’s smarter but in a way that maybe doesn’t -- it fools the guests a little bit in terms of being able to trade down on certain items? Is there a way to price differently in order to keep pricing or do you just look at this as sort of an across-the-board price increase?

G. J. Hart

I would tell you that the last price increases were not across the board. They were more specific, so I think it did telegraph some trade-down potential. I think we mentioned in our last call that we have started some tests between 2% and 5% in pricing that we are currently doing right now. It’s too early to tell the results of that but they are more -- particularly on the higher end of that, more across the board so all the items would be touched. And I think it is our opinion -- and again, it is too early to comment on it -- but that more of that would flow through because of that.

John Glass - Morgan Stanley

Thank you.

Operator

Moving on to Jason West with Deutsche Bank.

Jason West - Deutsche Bank

Thanks. I was hoping we could talk about a couple of things -- one, the trend of comps through the quarter, if you have the monthly numbers there, and if there was anything specific in October that you may have seen change in terms of the competitive environment or regional differences or anything that you think may have caused the acceleration on the downside. And then the other question, I want to confirm what you just said on the pricing -- you said you are currently testing a price increase of a range of 2% to 5%, and when you may implement something along those lines.

Scott M. Colosi

As far as the monthly comps, July, down 2.9; August, down 2.7; and September, down 3.9. You know, as far as the trend being a little bit worse, I mean, we did have probably gas shock in July, Olympics in August, conventions and hurricanes in September. I don’t know how much really the impact was from all of those, probably pretty small overall but -- and then of course you had the big credit crash in October, or early October. So it’s kind of been one thing after another which of course has impacted everybody on that. So again, making it a challenge to forecast comps going forward.

As far the pricing test, these prices have only been out for five or six weeks right now, so you are looking at the data each week. I think as G.J. mentioned, and as far as when we might implement anything, that’s really up in the air at this point, given how uncertain things are in the environment, whether it’s just the consumer health or also just operating costs on our income statement.

G. J. Hart

Also, Jason, just as a final comment, those last few weeks as we mentioned earlier, we did have the acquisition of the franchise stores in Tennessee where we eliminated lunch, which did affect us about half a point during that period.

Jason West - Deutsche Bank

Okay. Thanks, and one other one on CapEx for this year, next year, if you could just confirm where we are going to come out in ’08 and then any thoughts on ’09 CapEx? I mean, should we just take the 15 fewer stores and multiply that by $3 million, or are there other cuts that we could expect in ’09, obviously excluding the acquisitions?

Scott M. Colosi

Well, ’08 I would say our guidance really hasn’t changed. I think we said $100 million to $110 million for ’08, and then ’09 will, needless to say, be significantly less. You are probably not too far off with the numbers that you described. You know, some of the question marks will be we’ve added some seats to 11 restaurants so far. We are going to do a couple more this year and depending upon how those turn out, we may do more of those next year, we’ll have to see. But our CapEx will be significantly less than it was this year. I’m not prepared right now to give a specific guidance range.

Jason West - Deutsche Bank

Okay, thanks.

Operator

Moving on to our next question from Jeff Omohundro with Wachovia.

Jeff Omohundro - Wachovia

I guess first, could you maybe discuss a little bit more about the change in the management partner bonus program, the increase I guess expected next year? What’s your thinking about that? Is there a retention issue or what’s driving that?

Scott M. Colosi

First of all, these are our number one operational leaders in the field for us, our managing partners, so they are at the heart of our whole system, if you will, in execution of our concept so they are always top of mind for us and they get paid a relatively small salary and typically more than 50% of their compensation is bonus related, so certainly with number one, all the inflation we’ve had in our system; number two, the increased cost of developing restaurants, and a lot of those costs get charged back to the managing partners income statement. You know, they’ve taken quite a hit either today on their bonuses or looking ahead, guys will be taking hits in their bonus, so we kind of restructured the way some of the costs would be allocated to the managing partners and so therefore a number of folks will end up getting an increase in their bonus over time.

So there isn't a retention issue today, there isn't a recruiting issue today -- we are just taking this as a very long-term, getting ahead of it, so we are being proactive, if you will, before things were to get interesting for us from those types of issues.

Jeff Omohundro - Wachovia

And could you talk a little bit more about the capital structure target? I understand your desire to keep a prudent leverage ratio. Maybe let us -- is that target that was mentioned, the two times, is there a range on that? And when you think about the reduction in the unit growth and the cash flow generation, how are you thinking about deploying cash when you are weighing share repurchase versus new units and that capital structure target?

Scott M. Colosi

The first thing is the whole leverage piece of it and the two times is more or less the ceiling that we would like to maintain longer term, so we would like to be two times or lower. And I think we may allow ourselves to get to two times if we feel there’s opportunities to borrow some money to buy back stock and we think the prices are at attractive levels, or invest in something else so we think the returns are attractive. When it comes to share buy-back versus repurchases, we are absolutely looking at what we think the returns are longer term to our shareholders from going in-between those two decisions and obviously our preference is to develop restaurants, provided the returns are there. It’s growth for the company, specifically our people, and growth is very healthy for your people in an organization. It gets everybody excited and so forth, so our preference would always be to develop restaurants. That said, and you’ve seen we’re slowing down now, if the return equation is not there, we again have that opportunity to buy back stock if it’s only at prices that give us returns that would exceed or be higher than those that we would get from developing company restaurants or buying back a franchisee or other alternatives.

Jeff Omohundro - Wachovia

Thank you.

Operator

Moving on to Steven Rees with JPMorgan.

Steven B. Rees - JPMorgan

Thanks. G.J., we’re seeing some pretty aggressive discounting out there by other casual diners on television and even in the steak category, which historically has avoided it, with price points closer to your everyday price points. I wonder if you think this discounting is hurting you and if so, what opportunities you see to better communicate your value to your guests in this environment?

G. J. Hart

Well, you are right -- there is a tremendous amount of panic out there and a tremendous amount of discounting going on and as I stated in my remarks earlier, we’re not -- we’ve chosen not to participate in that kind of actions. What we are planning to do, as we said earlier, is to communicate the value position and where we are with 20 entrees under $10. In fact, we are doing some things, I think we’ve talked about it before, around the earlier day parts with our two-fer program, where you can actually get instead of two dinners for call it $14.99, $15.99, we’re actually promoting that as for one at $7.99 for that four to six day part. We are continuing to communicate on our permission-based marketing program. We’ve got 1.5 million people that have signed up that we can communicate to. We currently have a program going on where they promote it to a friend and having some pretty good early success, really promoting it in the sense that hey, do you realize that Texas Roadhouse has this kind of value? And so I think that is going to help us going forward.

Right now, I think we’ve got the value, we’ve got to continue to communicate it in every way possible. We are being much more aggressive out in the communities in things like our [rip runs], running into radio stations where they will talk about our products and what we’ve got going on at Texas Roadhouse. We continue to retain and recruit and train better quality local store marketing reps and they are out there doing it day-in and day-out.

As I said earlier, 70% of our revenue is generated from guests that dine with us two-plus times a month. So with that loyal guest base, we just need to get those folks communicating the value that we’ve got and that’s what we continue to focus on.

Steven B. Rees - JPMorgan

Okay, great. And then just on the mix trend, which has been negative for a while but got a little bit worse this quarter, I mean, how much of that do you think is sort of self-induced with some of your lower price points that you introduced on appetizers and what not versus just customers foregoing beverages?

G. J. Hart

In terms of things like the third slab of ribs and --

Steven B. Rees - JPMorgan

Yeah, and the half blossom.

G. J. Hart

You know, I would tell you that we probably don’t have all or really enough data that we can analyze because there’s so many moving parts to our current mix changes. But just a gut feel would tell you there is probably some of that.

Steven B. Rees - JPMorgan

Okay, great. Thanks.

Operator

Moving on to Keith Siegner with Credit Suisse.

Keith Siegner - Credit Suisse

So we’ve talked a little bit already about some of the adjustments that you made this year to the model and how it sounds like it is just kind of sticking with those messages but the one thing I was a little surprised about that I wanted to ask about was the decision to close the newly acquired units for lunch because -- I mean, if you could just help us understand kind of why close them at lunch? Because honestly one thing I was going to ask about was what would be the decision framework behind opening for lunch at some of the other units? If you could just help us understand that, that will be great.

Scott M. Colosi

I’ll tell you -- I mean, the average restaurant in our system that has lunch every day of the week has lower sales, overall sales than the restaurants that do not have lunch during the week. And we believe there’s a big reason for that and a lot of it is just focus for that dinner day part. A simple example is when you are open every day of the week for lunch, a lot of times your managing partner could be working the lunch day part and leaving right before dinner really gets going. I mean, a quality of life issue, so to speak, whereas if you don’t have that lunch day part every day, you know, they are working that main dinner day part five days a week, so that’s what you want out there in our particular concept.

So it’s something as simple as that, and there are many other things. You know, you’ve got food that you have prepared for your 1.5 hour lunch that you’ve got to do something with the rest of the day, or you are going to be wasting a lot of food. So lunch can be highly inefficient and it can actually be a drag on your dinner business if you are not careful. So that’s why we feel so strongly about going to the dinner only pretty much piece, except for the weekend.

Keith Siegner - Credit Suisse

But could you potentially even see higher sales at the units after closing them for lunch?

Scott M. Colosi

That’s the idea. I mean, that’s really why we made the move and talked to the operators, by the way, and it was as much their decision as anybody’s to go forward and go away from doing lunch every day to focus on that dinner day part and we believe longer term, they are going to have higher sales and be much more profitable because it will be a much more efficient operation from a cost management standpoint.

G. J. Hart

Last comment I’d make on that, we have done some of this historically and have in fact achieved better sales.

Keith Siegner - Credit Suisse

That’s great. One other question then -- about the 15 units that are currently kind of in the docket for 2009, I know you said they were in existing markets but could you just give us a little bit more detail on maybe what regions, what types of trade areas, whether those company-owned units are leased or owned -- just trying to get a sense of the returns on these stores that still made the cut.

Scott M. Colosi

Actually, nine are already under construction and two have actually already been permitted, so we are really far along with these restaurants. They are all over the place. They are typical Texas Roadhouse trade areas. I think all but one are ground leases at the moment, so -- all but one of the planned approximately 15 are all leased except for one restaurant.

Keith Siegner - Credit Suisse

Okay. All right. Thank you.

Operator

The next question comes from Bryan [Delcro] with Raymond James.

Bryan Delcro - Raymond James

Thanks. All of mine have been answered already. Thank you.

Operator

Moving on to Fitzhugh Taylor with Thomas Weisel Partners.

Fitzhugh Taylor - Thomas Weisel Partners

Most of mine have been taken care of, just Scott, I didn’t hear you mention the actuarial review that you talked about last quarter -- did that get done, that was just an immaterial amount or has it not been taken care of yet?

Scott M. Colosi

It got done. It’s always material to us, I’ll tell you. We had a pretty big benefit in Q3. In the other operating expense line, it was about $800,000 something, which compares to $600,000 I think it was last year in Q3, so year over year, it wasn’t a huge number but it was still a pretty big number for us overall. Trends have been very good on the general liability side. Workers’ comp, much less of an impact and that hits the labor line.

Fitzhugh Taylor - Thomas Weisel Partners

Okay, and then lastly, could you just remind us real quick, the fourth quarter ’07 comps by month, if you have them handy?

Scott M. Colosi

Fourth quarter -- October, positive 0.3; November, negative 0.2; and December, negative 1.9.

Fitzhugh Taylor - Thomas Weisel Partners

Thank you very much.

Operator

(Operator Instructions) We’ll take a question from Matt DiFrisco with Oppenheimer.

Matt DiFrisco - Oppenheimer

Thank you. Just a quick question -- the $1 million to $2 million that you mentioned in ’09, that is incremental. Is there an offset to that anywhere or is that just incremental? And where would that be? Is 100% of that $1 million to $2 million going to fall into other operating expenses with other in-store manager bonuses?

Scott M. Colosi

Yes, Matt. Essentially there’s no offset to it, except longer term sales and profit growth in our concept. But that will all be spread throughout the year in other operating expenses.

Matt DiFrisco - Oppenheimer

And that’s a fully cash bonus?

Scott M. Colosi

Fully cash.

Matt DiFrisco - Oppenheimer

Okay. Thank you.

Operator

We’ll take our next question from Mr. Miller with RBC Capital Markets.

Larry Miller - RBC Capital Markets

I actually have just two questions, guys -- I’m thinking about how you think about pricing as you get into ’09. I know you have had a lot of discussion internally about it and if beef is directionally down, and it looks like pork would be pretty favorable and maybe say just your whole entire basket of commodities is not quite as inflationary as you’ve -- as everyone else is seeing or as inflationary as you might expect. Would you -- how would you think about pricing in that environment? And I had a follow-up on the consumer.

G. J. Hart

Well, I think as you know, Larry, we have continued to lag behind from a pricing perspective and made it up in sales historically, and while that’s moderated some, I think it’s really too early for me to even comment. I mean, obviously directionally with us having testing out there between 2% and 5%, we’re thinking we do need to take some price, given the fact that our value position continues to strengthen as compared to our competitors.

So that said, it is a tough decision and over the last three years, we have definitely fallen behind and we need to take a long hard look at that in the long-term. So I think it’s just a little bit too early to completely comment anymore than what I just said.

Larry Miller - RBC Capital Markets

That makes great sense, actually, G.J. And then as I’m talking to some companies out there, I think a lot of you folks are seeing unprecedented day-to-day sales volatility and I just wanted to see, have you been seeing that of late, you know, incredible unpredictability and how you are managing that from an operational perspective? Can you guys talk about that? And then finally G.J., you mentioned 70% of your base are kind of those loyal guests, those Joe the Plumber folks -- are you seeing the trade down, the white collar folks that you said were sitting next to him more or less? I mean, what’s the makeup of the Texas Roadhouse consumer today? Thanks.

G. J. Hart

Well, the first question, if I understood you right, you mean the volatility in daily sales, weekly sales?

Larry Miller - RBC Capital Markets

Daily sales -- I guess it’s been very volatile. Is that not the case for you guys?

G. J. Hart

I wouldn’t say that it’s volatile, no. I would tell you that the earlier parts of the week have fallen off more than the weekends, for sure.

Larry Miller - RBC Capital Markets

Okay, and then the composition sort of of your guests, are you seeing -- how are they coming in and how are they spending --

G. J. Hart

I think it depends on the region of the country. If you take some markets, even the market we are sitting in in Louisville, I think you see more of that higher income folks give us a shot. But I do think it’s all over the board and I continue to maintain that we are seeing those folks give us an opportunity to dine with us and it gives us an opportunity to open our demographic. And during times like this, we still see it, albeit it’s unprecedented times right now, we still see it as an opportunity long-term because we are focused on those fundamentals and focused on value and I think people give us that shot, they see that and I think you know this but we have about a 90% intent to return for new guests, so if we can continue to execute on that promise, when these things do turn around, it’s going to be good for us.

Larry Miller - RBC Capital Markets

Can I ask one more question, if I may? I was understanding that some of the companies out there are starting to see fuel charges come back down but it’s part and parcel, I guess, the fuel charges are a little bit behind from a distribution center and going back to the supplier, but from the distribution center to you folks, you are starting to see that work through. Has that kind of been your experience as well or are you not seeing any kind of fuel charge rebate at this point?

G. J. Hart

Are you just talking about fuel surcharges from our distributors?

Larry Miller - RBC Capital Markets

Yes.

G. J. Hart

Yeah, we’ve already seen those start to come down.

Larry Miller - RBC Capital Markets

Okay. Okay, thanks.

Operator

Moving on to Greg Ruedy with Stephens Inc.

Greg Ruedy - Stephens Inc.

You mentioned that you are being proactive with respect to re-working the comp for your managing partners -- just wondering in these times how that might trickle down to the servers, given that they are probably walking home with less cash at the end of the night. Do you take your seasoned servers and maybe give them an extra table or how do your managing partners think about that?

G. J. Hart

We haven’t changed our labor structure in our restaurants, so our servers still wait on three tables at a time. First of all, a lot of our servers are getting minimum wage increases every year because a lot of the states, the tip wage goes up every year and it goes up at least with the consumer price index, so they have been getting increases in a number of states every year.

Part two of that is to the extent that we have any price increases that stick or we build any traffic, our servers end up turning more tables or getting a higher average check, potentially longer term which of course can add into higher tips for them.

Greg Ruedy - Stephens Inc.

You mentioned you are up to 11 of the units where you’ve completed seat expansion. Can you maybe give us some insight into next year in terms of the magnitude of maybe completing that with some more units?

G. J. Hart

I will tell you that so far, we are pleased with the direction that we see coming out of the 11 stores we’ve done, thought admittedly it is still early to evaluate those and I think we are going to really wait and give these restaurants a number of months more to see what the data tells us to see operationally, what the operators are telling us about our ability to pump out the food to an extra 30-odd seats in our restaurants before we make any decisions about how many more we might do next year.

Greg Ruedy - Stephens Inc.

That’s fair. Thank you.

Operator

We’ll take our next question from Charles [Van Effler] with Capital Option Management.

Charles Van Effler - Capital Option Management

Good evening, gentlemen. Obviously the economy has been pretty precarious in here but fortunately from a consumer standpoint, the gas prices have come down dramatically in the last month and with fingers crossed, it appears like they are going to come lower. I know that’s been an ongoing problem for the industry for years now. Would it be premature, foolish, whatever be the word, to be optimistic that that’s going to start to translate into better comps, perhaps? Could you talk about that a little?

Scott M. Colosi

Well, we have talked about gas prices in the past and there’s no question that is a part of the equation that will help folks like ourselves. The big question for us is what happens to unemployment, so on one hand, you have fallen gas prices. On the other hand, you have rising unemployment and so we are really somewhat unsure as to how it overall shakes out.

To be optimistic I think is definitely being positive. I would tell you that we are still cautious.

Charles Van Effler - Capital Option Management

I appreciate that. Last thing, if I could, and you kind of referenced that a minute ago -- without speaking specifically of a competitor, and you talked earlier about how some of them are doing some discounting, things of that sort, I guess my bottom line is do we have some pretty good reason to believe that you are going to pick up market share when the economy picks up? I presume that’s the intention actually, or whatever. Could you talk a little bit more about that or what’s going there?

G. J. Hart

Well, I think if you see -- well, if you would say we are in a recession, although they haven’t come out and said that yet, if you look back at the last recession, it absolutely positioned us. As long as we continue to execute that we’ll come out of this with a wider demographic and it will be good for us as we take the curve up, the real question is can we continue to execute and meet or exceed the guests’ expectations because in an environment like this, what you find is the guests expect way more for less. And while we are delivering what we believe is great value, we need to scream it more, we need to make sure we are telling them about it, and giving them that legendary experience. That’s why we are making some of these proactive moves with our managing partner program, with the way that we are continuing to execute labor within the restaurants, our food quality has not changed. If anything, we are looking to continually improve that. So all those things said, we think we are well-positioned as things turn.

Charles Van Effler - Capital Option Management

I thank you very much.

Operator

(Operator Instructions) We’ll move on to Steven Rees with JPMorgan.

Steven B. Rees - JPMorgan

Thanks. I just had a quick follow-up -- is your weekend business still holding up better than your weekday business on a relative basis?

G. J. Hart

Yes.

Steven B. Rees - JPMorgan

Okay, and then on the -- you mentioned non-traditional sites rebuild and in-line. How much of the ’09 development could potentially be non-traditional?

G. J. Hart

Maybe a couple of sites.

Steven B. Rees - JPMorgan

Okay, and any update on just the overall inflation that you are seeing in construction costs?

G. J. Hart

Our average development cost has been higher this year versus last year, I can tell you that. I mean, every project is different. A lot of the difference is right to site work and the amount of work we have to do on the site, just to prepare to get the building built. But I would tell you in almost everything, we continue to see a little bit of inflation, whether it’s equipment package or whether it’s just building the building itself.

Steven B. Rees - JPMorgan

Okay, and then just finally on the unit openings in ’09, how should we think about that, maybe first half versus second half? It sounds like a lot already --

G. J. Hart

-- all of our construction, I think it probably at least is going to be half in the first half of the year, could be one more than that first half of the year.

Steven B. Rees - JPMorgan

Okay. Great, thank you very much.

Operator

We’ll take our next question from Jason West with Deutsche Bank.

Jason West - Deutsche Bank

I just have a quick follow-up on the marketing front, you had mentioned that a few times. I was wondering, are you thinking about raising absolute marketing dollars in the next -- in the current quarter or in coming quarters to go after that opportunity or are you just talking about changing the message with the same amount of dollars?

G. J. Hart

It’s essentially intensifying the message on value, about the differentiation that we have with the same amount of dollars.

Jason West - Deutsche Bank

Okay.

G. J. Hart

I mean, that said, I mean, there may be a little bit more but relatively speaking, we are just intensifying our efforts, not spending a lot more money.

Jason West - Deutsche Bank

Okay, and then bigger picture on the cost side -- G&A with less unit openings next year, do you expect the absolute dollars there to grow in ’09 or would you see some opportunity to take that down into ’09?

G. J. Hart

Dollars will absolutely grow in ’09. They will grow at a slower rate, for sure. We are still going to add stores and we are still going to add a few people organizationally but that said, it will be at a much slower rate than it’s been.

Jason West - Deutsche Bank

Okay, thanks, guys.

Operator

There are no further questions in the queue at this time. Mr. Hart, I will turn the call back over to you for any closing remarks.

G. J. Hart

Well thank you very much for joining us this evening. We look forward to visiting with you again at our fourth quarter call and appreciate your time and effort tonight. Good night.

Operator

Again, ladies and gentlemen, that does conclude today’s conference. Thank you for your participation and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Texas Roadhouse F3Q08 (Qtr End 9/23/08) Earnings Call Transcript
This Transcript
All Transcripts