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Texas Roadhouse (NASDAQ:TXRH)

Q2 2013 Earnings Call

July 29, 2013 5:00 pm ET

Executives

George Price Cooper - Chief Financial Officer and Principal Accounting Officer

Wayne Kent Taylor - Founder, Chairman and Chief Executive Officer

Scott M. Colosi - President

Analysts

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

John S. Glass - Morgan Stanley, Research Division

Will Slabaugh - Stephens Inc., Research Division

Andrew Michael Charles - BofA Merrill Lynch, Research Division

Jonathan R. Komp - Robert W. Baird & Co. Incorporated, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Jeffrey F. Omohundro - Davenport & Company, LLC, Research Division

Andrew M. Barish - Jefferies LLC, Research Division

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Jason West - Deutsche Bank AG, Research Division

Conrad Lyon - B. Riley Caris, Research Division

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

David Carlson - KeyBanc Capital Markets Inc., Research Division

Peter Saleh - Telsey Advisory Group LLC

Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good day, and welcome to the Texas Roadhouse, Inc. Second Quarter 2013 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] I would now like to introduce Price Cooper, Chief Financial Officer. You may begin your conference.

George Price Cooper

Thank you, Elizabeth, and good evening, everyone. By now, everyone should have access to our earnings announcement for the second quarter ended June 25, 2013. It may also be found on our website at texasroadhouse.com in the Investors section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. We refer all of you to our earnings release and our recent filings with the SEC for a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements.

In addition, we may refer to non-GAAP measures. Reconciliations of the non-GAAP measures to the GAAP information can be found under the Investors section of our website.

On the call with me today is Kent Taylor, our founder and CEO; and Scott Colosi, our President. Kent is going to start the call off, after which I'll provide a financial update and then, Scott will provide some insights on our performance and business direction. Afterwards, we will all be available to answer any questions.

Now I'd like to turn the call over to our Chief Executive Officer, Kent Taylor.

Wayne Kent Taylor

Thanks, Price. How are you all doing? We are pleased with the momentum we continue to experience at Texas Roadhouse.

Revenues were up 10% for the second quarter, leading to a solid 10% increase for the first half of the year. Also comparable sales increased 4.5% for the quarter.

And while we grew restaurant-level profits, bottom line results for the quarter were impacted by our continued investment in our people. As most of you all know, in May, we celebrated our 20th anniversary by hosting our Managing Partner Conference in Hawaii. As we do every year, we recognized and rewarded the best of the best and came away reenergized regarding the future of Texas Roadhouse. I want to give a big shout out to a couple of very special people: Mike Smith, our Managing Partner of the Year from Corpus Christi, Texas; and Gustavo Jimenez, our National Meat Cutter of the Year from Pelham, Alabama. Congratulations to both of you all and deserved recognition for sure. And great blazes [ph], and thank you everyone who attended our conference this year, including our great vendor partners.

On the development side, we opened 7 restaurants this quarter, bringing our year-to-date total to 10, and we are on track to open approximately 18 more by the end of the year. Looking ahead at 2014, our development pipeline is shaping up very well. We are initially targeting to open 25 to 30 restaurants next year with most of those sites already selected and more front-end loaded than this year. To our operators, I look forward to seeing you all this fall as we make our way across the country, visiting with all our managing partners to share ideas and listen to feedback on how we can continue to be bigger, stronger and faster.

Now Price will walk you through our financial update.

George Price Cooper

Thanks, Kent. During the review of the quarter, many of the numbers I'll mention are included in the schedules, supplemental financial and operating information included in the press release.

For the second quarter of 2013, we earned $20 million, or $0.28 per diluted share. From a topline perspective, revenue increased 9.9% as a result of a 6.4% increase in store weeks and a 3.7% increase in average unit volumes. As has been the case over the last few years, our average unit volume growth was less than our comparable sales growth.

Our newer restaurants continue to open strong. However, as they move through the honeymoon period and their sales normalize, their sales typically settle in right around the system average before they began to comp positively. With that said, we are still very pleased with the overall returns that our new restaurants continue to generate.

Comp sales increased 4.5% in the quarter and were comprised of a 2.2% increase in traffic and a 2.3% increase in average check.

By month, comparable sales increased 5.7%, 4% and 3.7% for April, May and June periods, respectively. And as we reported on our release, July trends has softened, but remained positive with comps increasing 1.9%.

In terms of restaurant-level profitability, on a dollar basis, restaurant operating profit increased 7.2%, or $4.3 million for the quarter, compared to the prior year. On average, we continue to make more money on a per-store basis as the growth in restaurant operating profit dollars outpaced our store regrowth.

While restaurant margin dollars grew, restaurant margin percent decreased 47 basis points for the quarter, compared to the prior year.

We were able to leverage labor and other operating costs through a combination of traffic growth and a 2%-plus average check. However, it was not enough to offset the headwind from just under 6% food inflation during the quarter.

Throughout the balance of the year, we expect margin pressure from food cost to outweigh any leverage we are able to obtain from labor and other operating costs combined. In fact, restaurant margins in the back half of the year are likely to be under more pressure since we had -- since we had a higher average check and lower food cost inflation in the first half of the year versus what we expect for the remainder of 2013.

In addition, as Kent mentioned, we have about 18 more openings to go this year, so we will likely experience some margin inefficiencies, specifically relating to food cost and labor as a percentage of sales.

For 2013, we expect food cost inflation of 6.5% to 7% with the third quarter coming in at 7% to 8%, and the fourth quarter in a range of 6% to 7%. There's still some flux in these numbers, given the fact we are on the market for about 20% of our beef needs, as well as the majority of our produce and dairy needs. The good news is that while it appears we are weathering our second straight year of 6%-plus food inflation, we feel much better about 2014 at this time.

For next year, we do expect continued inflation. However, at this point, we do not expect it to be near the magnitude of what we are seeing this year. As we move through the balance of 2013, we will continue dialing in on what we believe is a realistic expectation for overall inflation. At the same time, we'll be testing a price increase to help determine what we might do pricing-wise later in the year as we get a handle on what the overall 2014 picture looks like.

Shifting back to the quarter. Below the restaurant margin line, we lost leverage on G&A in the quarter, driven by a $2.3 million increase in cost related to our Annual Managing Partner Conference Kent mentioned. We expect our 2014 conference cost to return to a more normalized level, which would be a couple of million dollars less than this year.

Preopening costs increased approximately $1.5 million, compared to the prior year. While we opened the same number of restaurants during both the second quarter of this year and last year, preopening was up as a result of having more stores in the pipeline and the fluctuation of the timing of openings. We continue to expect preopening costs in 2013 to increase at a greater rate than our 2013 development, primarily due to the fact we expect 2014 openings to be much more front-end loaded compared to this year.

The income tax rate for the quarter came in at 30.1%. We expect our full year rate to be 30% to 30.5%, just slightly lower than our previous estimate of approximately 31%.

Moving to our balance sheet and cash flow. We ended the quarter with over $100 million in cash, which is more than we had at year end and as of the end of the first quarter. This is partly due to the timing of our development, as well as the fact we did not repurchase any stock during the quarter.

For 2013, we anticipate spending $100 million to $105 million on capital expenditures. And based on our development time line, we expect this will be very back-end loaded. We also remain committed to returning capital to our shareholders in the form of dividends and share buybacks.

Finally, while there's nothing imminent at this point, we have spoken with some of our franchisees about potentially purchasing all the large portions of their businesses. We'll keep you updated to any further developments as we continue to explore productive means to deploy our excess capital.

At this time, I'd like to turn the call over to our President, Scott Colosi.

Scott M. Colosi

Thanks, Price, and good evening, everybody. We are pleased with our topline momentum through the first half of the year. And while the third quarter has started out a little softer, we are encouraged that our sales remained positive while overlapping one of our highest comp periods from last year as comp sales increased almost 6% in July of 2012. And more importantly, we are pleased that our operators continue running the business for the long term. And they do that by staying focused on our four-wall execution and by being fully committed to both our mission of Legendary Food and Legendary Service and our value proposition. We are truly blessed to have the best operations partners in the business.

As Kent mentioned earlier, our development pipeline for 2014 is in very good shape, not only from a site perspective, but also from a people perspective. In order to continue recruiting and retaining high-quality team members, we are always looking at opportunities for future growth. However, our chief goal is to grow our core brand of Texas Roadhouse restaurant, and that is what we continue to focus on each and every day.

All in, by echoing Kent's comments regarding our conference, the time spent with all of our operators and vendors solidifies our culture of partnership and passion for Texas Roadhouse, and I can assure you, the investment is well worth it. We have a ton of positive momentum in our business and are looking to the future with a lot of excitement and optimism.

So Elizabeth, you may now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Brian Bittner with Oppenheimer.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Just wanted to drill on the back half earnings growth or just EPS a little bit more. When you think about incorporating the extra week, which you can quantify if you'd like, but when you think about that and when you also kind of balance the potential restaurant margin pressure you're going to see, do you think you can grow EPS positively on a year-over-year basis in the next 6 months? And if so, what type of traffic number do we need to get there?

George Price Cooper

Brian, this is Price. We're not getting specific on guidance per se because it does depend on traffic in large part. And to a degree, it depends on what overall food inflation comes in at. But definitely, it gets tougher in the shorter term just with the margin pressures from having a little bit higher inflation than what we've experienced. And then, another thing to think about in the short term as well is we expect preopening to continue to be up on a year-over-year basis, which is a good thing long term because it means we're developing more restaurants. However, it hurts you a little bit from a year-over-year earnings growth perspective in the shorter term.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

And what was the pricing effect during the July 1.9% comp? And what's the pricing effect that we should expect in the third and fourth quarters?

George Price Cooper

Right now, our check is running just over 2%, and that would be the same, basically, through the middle part of December.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Okay. And then, the last one is you kind of mentioned in your prepared comments that 2014, just through the lense that you have today, is not going to be close to as bad as this year was from an inflationary standpoint. Is there any -- I'm not looking for a number or anything like that. I'm just trying to understand what is it that you guys are seeing? Is it just beef costs aren't going to be as bad as they were this year in 2014? Or is there anything -- what's exactly going on with that?

George Price Cooper

Yes, that's exactly -- sitting here today, we're not expecting beef costs to be quite as bad as they have been this year or last year, driven by the fact that, I think, demand has proven to be a little lighter than people would have thought headed into the year. And another factor on that is that corn prices have really pulled back from, say, where they were, say, about $7 here a year-or-so ago to where the futures are down, down below $5, which is a positive.

Operator

We'll take the next question from John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

I wonder if you could just maybe talk a little bit about what you think is going on with the sales environment right now. First of all, did July just sort of step down in as stated this 1.9% level, or is it kind of a deteriorating trend where it may be you're currently running below that now? And maybe why -- is there any way you can explain what's going on? Because it seems that we have experienced this, but there isn't any good explanation for what it really is tied to.

George Price Cooper

Yes, John. This is Price. Really, if you look at it from a traffic perspective, I would say May and June were very similar in traffic for us, up 1.5 points or a little more each of those months. And then, of course, July was down 1/10 or so in terms of traffic. So don't really know what it is specifically about July. Seems like it's been a consistent theme with a couple of folks anyway that have reported. There were a few headwinds, if you will. Gas prices spiked up in July. For us, the July 4 holiday negatively impacted us a little bit. But at the end of the day, it was just a little bit softer in July. Some of that, lastly, I would say milder weather, not as hot as last year, don't know if that played into us or any of the others. But for whatever reason, July was just a little bit softer than the trend had been.

John S. Glass - Morgan Stanley, Research Division

And Scott, you talked about the development pipeline being robust for '14, maybe more front-end loaded. Is there anything that's unusual about it? I mean there, are there new geographies, for example, that you're entering, or are there more urban or closer to urban markets? Or is there anything that's different, for example, in '14 than in the prior years?

Scott M. Colosi

No. It's similar type sites as to what you're accustomed to seeing from us, and it's just us continuing to work very hard on building the pipeline. So sometimes, there's like ebb and flows in the timing of when sites get opened. And sometimes, just some years are more back-end loaded, some years are more front-end loaded. It kind of varies. Just like comp sales sometimes bounces around a little bit as well like we're seeing maybe in July, and on that note, you go back to February, we had a negative month of February. And could that be weather related? I guess it could have been, but then we bounced back positive. So there's ebbs and flows in our business, and this development pipeline thing is just one of those.

Wayne Kent Taylor

We are opening 2 in Alaska next year, so that's a new state for us.

John S. Glass - Morgan Stanley, Research Division

All right. Awesome. The -- Price, just the last question just on the extra week, is there any expense side in that you accrue quarterly that you don't accrue either month -- or monthly that you wouldn't accrue weekly? For example, depreciation or interest, is there anything that levers more than an extra week of sales would provide?

George Price Cooper

Yes, John. The one item would be rent that -- they get accrued monthly.

John S. Glass - Morgan Stanley, Research Division

Okay. So occupancy gets leveraged, the rest of the P&L probably just gets the benefit of extra week?

George Price Cooper

Yes, so mathematically, the extra week is 2% -- it's roughly 2%. It's a little bit more than that when you get to leverage some rent.

Operator

Next, we'll hear from Will Slabaugh with Stephens.

Will Slabaugh - Stephens Inc., Research Division

I wondered if you'd give us just a quick update on the recent new stores you've opened? And you mentioned some positive comments in your opening remarks about those, but just from a performance standpoint. And then, I know historically, you talked about maybe some of those returns initially might not quite have been what you wanted them to be. But it sounds like today, you're pleased with those. So just a little more color on that would be helpful.

George Price Cooper

Yes, it will be -- what we've seen going on with our new stores is, in general, they continue to open up at higher and higher average weekly sales for that first week. And that's been a consistent trend we've seen for the last 3 or 4 years. We've also seen that they're falling off in terms of their honeymoon sales, so the first 5 or 6 months where they start off higher initially and kind of fall off, if you will, over that 5- or 6-month period has been a little bit higher in terms of percentage. But it's -- they're settling in on similar dollar volumes after a 5- or 6-month period to the stores that are 1 or 2 years older than them. So when you combine that with the fact that development costs are down a couple $100,000 from, say, 2 years ago or 4 years ago, and the fact that we've been able to continue to grow margin dollars at the store level, that backs you into returns that are consistently good and within what we're comfortable developing stores at.

Will Slabaugh - Stephens Inc., Research Division

Got you, that makes sense. And just a quick clarification on a previous question to make sure I have this right. I was just kind of wondering what sort of comp you feel like you need to be able to get leverage on that restaurant-level margin in the back half of the year? I know you mentioned a number of things that are going to be some headwinds. But just kind of wondering how to think about that restaurant-level margin on the year-over-year basis as we move toward the back half of the year.

George Price Cooper

Yes, I think it's tough more and more. And we're not going to get specific on it. But in terms of percent, it's tough to see being able to leverage restaurant margin lines when you've got somewhere in the order of 6% to 8% food inflation in the back half of the year. That doesn't mean we couldn't potentially grow dollars, but it stops the leverage percent.

Operator

We'll take the next question from Andrew Charles with Bank of America Merrill Lynch.

Andrew Michael Charles - BofA Merrill Lynch, Research Division

Can you give us an update on speed of service and any new processes or technology you're utilizing to aid throughput?

Scott M. Colosi

Andrew, this is Scott. There's really no new technology that we're utilizing right now. We're sticking to our guns as far as a pretty labor-intensive business. So we continue to staff to win, whether it's our three-table station model, whether it's a lot of hosts, and bussers and food runners and so forth in our systems. So we continue to do that and turn tables and seat guests. And that's really what we're more focused on than we are on any particular technological system.

Andrew Michael Charles - BofA Merrill Lynch, Research Division

Okay. And can I also ask you about Bubba's 33. Where did the idea for a sports bar originate? And what have you learned from the first 2 months of being in operation?

Wayne Kent Taylor

Well, we had an Aspen Creek that wasn't doing so well in the location you're talking about. And so, we thought we would try something since we have -- we were stuck paying rent for the next 8 years, so we just gave it a shot. It's only been open a couple months. It's a restaurant sports bar with a varied menu featuring killer burgers, and food is made from scratch as usual. So it's hard to tell. We opened one Aspen Creek a few years ago in 2009, and we opened a couple more. Didn't really hit the numbers we looked for, and it didn't become a big deal. So it's too early to tell at this point.

Operator

We'll hear next from Jonathan Komp with Robert W. Baird.

Jonathan R. Komp - Robert W. Baird & Co. Incorporated, Research Division

Just going back to the question on the recent sales trends. It sounds like maybe you're at a little bit of hard-to-explain kind of a slowdown that you've seen in July or the slightly softer trend that you've seen. I guess, if you look at the next few months, is there anything that gives you confidence that comps can stay positive and maybe what your thoughts are there?

George Price Cooper

I would say, to phrase it, we're certainly not panicked. The thing that gives us confidence in our business longterm is that we have the best of the best operators out there. So I think those 2 are the most important things, and we are not panicked. We're not changing anything. It's 1 month. As Scott mentioned, we've had months before where things get softer. They bounced back or whatever. So we're still doing everything the same way we always have. It probably is worth mentioning that comparisons, for what it's worth, get much easier as we go into the back half of the year. July was a very strong month for us in terms of both comp sales, as well as traffic. So it does get a lot easier as you move throughout the year.

Jonathan R. Komp - Robert W. Baird & Co. Incorporated, Research Division

Okay. And maybe just a little different topic, but looking at the restaurant profit and the restaurant-level margin line for the back half. I know the question was asked about overall restaurant margin. But maybe just looking specifically at the labor in the operating lines and the operating costs, what type of traffic you might need to get any leverage on those 2 lines specifically?

George Price Cooper

Yes, we're just not going to get specific on lines. We've been able -- I think we've provided some directional comments. What you've seen on us with drug [ph] being able, on the front half, to drive a little bit of traffic. We've been able to get a little bit of leverage on both of those lines. So I hope that -- I know it can be frustrating, but I hope the directional comments are informative and helpful, but just not going to get specific on individual lines.

Jonathan R. Komp - Robert W. Baird & Co. Incorporated, Research Division

Okay, understood. And then, just last question, broader on the unit development outlook for 2014, I think if you reach 25 to 30 next year -- I understand it's early still today -- but that would be the third year in a row that you're kind of in the 25 to 30 mark in terms of new company units. So is there anything about that level, specifically, that you think is a cap at maybe on the number of unit openings that is prudent? Or can you just provide some broader thoughts on why 25 to 30 is the right number for next year?

Wayne Kent Taylor

Yes, I think 25 -- this is Kent, by the way. I think 25 to 30 is a good number for us based on the people pipeline more than the real estate. And we don't want to mess up on the people side, as well as we don't want to mess up on the real estate side. So I absolutely want to have sites that I can still turn down and not really feel the pressure to accept mediocre sites, and actually grow stores in an area where we don't have people yet.

Operator

We'll take the next question from Jeffrey Bernstein with Barclays.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

A couple of questions. Just first, in terms of the food cost. Obviously, sounds promising that, I think, you said the cost inflation might not be near the magnitude that you saw in '13, which I guess, were in that 6.5% to 7% range. And you kind of followed that with comments about testing pricing. Just wondering, as you go to the back half of the year, if that inflation basket was -- well, I guess, below that 6.5% to 7%, would that imply that maybe you'd consider less pricing under 2% when you think about the current traffic environment? Or are we not supposed to read into that comment?

George Price Cooper

No, I think that's fair. I'll tell you right now, we're testing about a 1.5% price increase. So I think you're in line with our thoughts. If inflation can stay lower, we'd always rather take less pricing than more.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

And the pricing of 1.5% that you're testing, I know in years past, you've tested 2% or 3%. And you've historically said, "We usually don't take as much as we test." So if the basket of commodity stays where you're seeing it now, it's possible you'd only take maybe 1% for next year, which might help aid the traffic softening, I believe?

George Price Cooper

Yes, yes, it could be possible. It's way too early. We just started testing. In addition to what we see from the price tests itself as well as inflation, there will be other things that come into play like -- not the least of which being, what kind of shape is the overall economy in? But yes, you're exactly right. It could be lower.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

But that's driven by the steak, which I know this year was up like 15%. Is that -- is 15% the right number for this year? And would that imply next year, maybe, steak isn't up double digits?

George Price Cooper

Yes. Yes, to both.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Got it. And then, just to follow up the comment you made in the prepared remarks about looking to buy units from franchise -- or remaining units from franchisees. I know in the past, that's been discussed and it seemed like franchisees are very happy doing what they're doing and making the money they're making, so there was really no interest in selling. I don't know if anything's changed, why now they might be interested or what you might be willing to pay, or like what you're willing to do to be willing -- to get them to want to sell these units now versus a year or 2 ago.

George Price Cooper

I'd say in some cases, that's still the case. Everything is always evolving. You've got some people that, at some point, want to move closer towards some form of retirement or scaling down. So with us sitting in a type of balance sheet position we're in, we're having more of those conversations with them.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

That doesn't sound like you're going to change anything on your end. It's just more of a regular conversation that you're having that you probably had last year and the year before.

Wayne Kent Taylor

That's probably fair.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Okay. So we shouldn't expect the likelihood of all of a sudden you being able to buy all these franchise units, if you weren't able to do it last year without some sort of special incentive, is the likelihood of that high?

Wayne Kent Taylor

I don't -- Yes, I don't see us coming back to you next quarter and saying, we bought in 70 franchises.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Got it. I won't bet on that then. Just lastly, is there anything -- because in the past, you've kind of downplayed competitive environment in terms of steak and whatnot. We're seeing your very many peers get more aggressive on steak. Is there any reason to believe they might have an impact on your trend of late, or you don't see that shift from yourself to peer?

Scott M. Colosi

I don't really see any big changes. We're one of the few people that cuts their own steaks in-house, and I don't see a lot of our competitors doing that.

Operator

We'll hear next from Jeff Omohundro with Davenport & Company.

Jeffrey F. Omohundro - Davenport & Company, LLC, Research Division

Bit of a follow-up to Jeff's question relating to the level of promotional activity out there and declining trends in NAP check in the industry. I know you've moderated the check growth, but it's still about double where NAP is now. And we are seeing significant price-driven promotional activity in the category. I'm just wondering, given your traditional position of everyday low pricing with limited promotions, the Early Dine special, for example, I'm just wondering, if this environment continues, would you consider exploring something on the promo side?

Wayne Kent Taylor

This is Kent. I would say the answer would be no.

Jeffrey F. Omohundro - Davenport & Company, LLC, Research Division

And then, Price, on the preopening step-up, I think you're running around 4 50 [ph] a unit. I'm just wondering, in thinking conceptually about the magnitude of extra spending in Q4, I wonder if you'd quantify a little bit in terms of are you going to be pre-spending on 1 or 2 units for 2014 that we'll see in Q4? Just any more granularity on that would be helpful.

George Price Cooper

Yes, I would tell you Q4 will probably be our highest preopening spend for the year because, as Kent mentioned, we do have 18 more openings this year. Those are heavily weighted towards the fourth quarter itself. So when you combine that with the fact that, as you mentioned, Jeff, we will be opening more units earlier in '14, when you combine those 2 facts, I think it leads us to thinking that Q4 will be our highest preopening quarter.

Operator

Our next question comes from Andy Barish with Jefferies.

Andrew M. Barish - Jefferies LLC, Research Division

So on the pricing, I mean, I guess it's -- you're anticipating not doing anything until you lap last year's December price increase. Is that a reasonable assumption?

Wayne Kent Taylor

That is a reasonable assumption.

Andrew M. Barish - Jefferies LLC, Research Division

And then, what was going on with the buyback in the quarter other than, I guess, the stock price? Or was that really the answer?

Wayne Kent Taylor

Yes, that's really the answer. Nothing prohibits us from buying back any stock. We still have over $70 million authorized.

Andrew M. Barish - Jefferies LLC, Research Division

Okay. And then, just finally on the international, can you give us a quick update there? You -- is that business fully built out in terms of overhead where it's -- I don't know if it's making money. Obviously, it's a small number of units. But just how you see that progressing over the next year or so?

Wayne Kent Taylor

No, we feel good about it. We definitely will be opening some more units in the Middle East next year. And we're in discussions with 2 other -- or 3 other countries right now that we don't want to discuss at this point, that could come to fruition next year or the year after.

Operator

We'll hear next from Jeff Farmer with Wells Fargo.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Just following up on some of the promotional environment questions. Last week, we did receive -- it looked to be like a 2 for $19.99 email offer from -- looked like from 1 of the Boston Road House units. I'm just really curious how that works. Meaning, if those offers are sent from national, or is it a market-by-market situation at the discretion of the market partner? How should we think about how that promotional effort works?

Wayne Kent Taylor

I would say that's a rogue store in our system, and that if you could tell me who it is, I'd like to make a phone call after this discussion.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Fair enough. And then, one more quick follow-up on margins, and you guys touched on it. But with the accelerated pace of unit openings, I'm just curious if you could ballpark, if you've looked at yourself the, sort of quantifying the margin headwind that you're seeing from new restaurant inefficiencies in coming quarters and what you've seen in recent quarters, is that a material number?

George Price Cooper

No, it's not a material number, Jeff. But it is a little bit against us in the back part of the year.

Operator

We'll hear next from John Ivankoe with JPMorgan.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

It does sound like that you -- you'd like to take in some of your franchisees, you know, buy in some of your franchisees. So I just wanted to just strategically kind of understand how franchising plays into your strategic thinking. And I ask this question on a couple different contexts. Kent, you mentioned opening in Alaska. I mean, that seems like that might be a perfect market for a franchisee to open and operate it just from a logistical managerial perspective. So I mean, we don't have to talk about that market specifically. But let's talk about franchisees opening in, what might be considered broadly in the industry as kind of non-core, difficult to do business in markets. And if I may, in this context of franchising, talk about either increased franchising or decreased franchising, as the case may be, as it might influence your decisions on the balance sheet. I mean, rates have backed up a little bit. But you're a free cash flow generative company without really any on-balance-sheet debt. So talk about whether you can begin to use that part of the balance sheet to drive equity returns at some point.

Wayne Kent Taylor

Yes, as far as franchising, the only area we're really growing franchise stores at the moment is California. And then, we're looking at franchising international locations. That's pretty much the only areas we are looking at, at this point.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And in terms -- are there more markets other than just California that are difficult to do business in, whether regulatory or just the costs of doing business, what have you? What's the thought of not using that vehicle more aggressively? I assume that there would be many operators that would love to be associated with your brand.

Wayne Kent Taylor

We're pretty heavy in 48 states as far as our growth that's coming up in the future. So really, other than our Northern California stores and some international locations, we really couldn't offer that many locations for a franchisee.

George Price Cooper

Yes, and John, it kind of bleeds over -- this is Price. I think it kind of bleeds over into your balance sheet question as well because we are in a fortunate position where we do generate solid cash flows. We have money, and we are very comfortable owning and operating restaurants. So to the extent we can get comfortable, we like investing in restaurants and owning them and generating a good return on those. If you're asking -- it falls a little bit on your question on leverage, I think you'll continue to see us stay more on the conservative side from a balance sheet perspective because of just that. Because today, we recognize that we have an 80% company-owned system. And inherently, within owning restaurants comes more leverage, although it may not be on your balance sheet per se, but you've got leverage in terms of changes in sales or changes in margins for that matter on any 1 year. So I think you'll continue to see us err on the side of being a little more conservative than not in terms of balance sheet.

Operator

We'll hear next from Jason West with Deutsche Bank.

Jason West - Deutsche Bank AG, Research Division

I just want to clarify a few things. One, Price, you mentioned the check growth in the quarter. Was that -- was mix neutral in that? Or was there any mix up or down?

George Price Cooper

Mix was roughly neutral or down just barely, like 1/10.

Jason West - Deutsche Bank AG, Research Division

Okay, got it. And then, did you say, Price, that you are unlikely to get labor leverage in the second half? Or did I mishear you on that one?

George Price Cooper

We said we were unlikely to be able to overcome the food impact with the higher inflation through the leverage we get on labor and others.

Jason West - Deutsche Bank AG, Research Division

Okay. But you weren't commenting whether labor would be up or down, I guess, in the back half?

George Price Cooper

Not directly. But I guess, indirectly, we did because we said we wouldn't be able -- we were expecting to get some leverage on those lines, but not enough to offset the food.

Jason West - Deutsche Bank AG, Research Division

Right, okay. And then, the preopening, it's a little tough for us to model that without knowing how much of the costs is coming from next year's stores. And we don't have all the timing yet on that. So would you be able to provide a little bit more of a point estimate or a range on that number for the year, whether it's $15 million, $16 million or some kind of ballpark there for us?

George Price Cooper

I guess something within that area is reasonable for the year.

Jason West - Deutsche Bank AG, Research Division

Okay. And then, lastly, did July...

Wayne Kent Taylor

Yes, best guess today.

Jason West - Deutsche Bank AG, Research Division

Right. And then, the July 4 impact in the month, could you quantify that at all?

George Price Cooper

I don't know that I have any...

Wayne Kent Taylor

We haven't quantified it, how much it is.

George Price Cooper

Yes, I don't know.

Jason West - Deutsche Bank AG, Research Division

Okay. But...

George Price Cooper

It was a little bit of impact -- probably a couple -- I don't know exactly how much it was. It wasn't several points by any means.

Operator

Our next question comes from Conrad Lyon with B. Riley and Company.

Conrad Lyon - B. Riley Caris, Research Division

Just a question about G&A. As we go into, say, next year and let's say you open up the same number of units you do this year, do you think you'd be more efficient with G&A given your experience?

George Price Cooper

I don't think it really changes what we're spending in terms of preopening and G&A. And that's what's tied more to opening the restaurants. Right now, we're making a little bit of investment in G&A and areas like international as we continue to grow that business a little bit.

Conrad Lyon - B. Riley Caris, Research Division

Okay. Any color on what you think the Managing Partner Conference will be in the next year? I mean, should we expect the same level of spend this year, next year?

Wayne Kent Taylor

Not at all. No. It will be every bit $2 million less. It will be more in line with what we spent in Orlando the year before.

Conrad Lyon - B. Riley Caris, Research Division

Got you. Okay. And then, in terms of the growth of people, I think Kent just mentioned something about the fact that you're more concerned from a personnel standpoint. Is that because of the talent out there, that there's not as much talent, or is that just the facilities that you have for training?

Wayne Kent Taylor

I think we've got a great talent base. We've got a lot of great service managers, kitchen managers. And we were able to get a lot of folks from other restaurant chains. Maybe they're looking our way. We just don't want to give our, say, market partners too many stores in 1 year to where they're not able to focus on the 1 or 2 stores they're opening.

Operator

We'll hear next from Steve Anderson with Miller Tabak.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Looking at your commodity costs structure, are you looking for food cost actually to accelerate in the second half of the year before it actually -- things start to level off in 2014? What do you think are the commodities -- I mean, besides beef costs, that have caused the most margin pressure to you recently?

George Price Cooper

Well, I'd say as we get into the back half of the year -- is that what you're asking about, what's going to cause it to accelerate a little bit?

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Exactly.

George Price Cooper

We've extended our chicken and seafood contracts, but they don't run on a calendar year. They're off of the calendar year, and they're up a little but from what they were. And also, we are floating on about 20% of our remaining beef needs for the year. And seasonally, that tends to get a little higher in the back half of the year.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

So seasonal. In terms of seafood, is it mostly catfish?

George Price Cooper

We sell catfish and shrimp.

Wayne Kent Taylor

And a little bit of salmon.

Operator

[Operator Instructions] We'll take our next question from David Carlson with KeyBanc.

David Carlson - KeyBanc Capital Markets Inc., Research Division

Just a real quick question. On the -- do you guys have a level in mind in terms of average weekly sales for justifying new store development, especially as you guys start to look to open more stores in higher labor cost markets?

Scott M. Colosi

Well, this is Scott. Yes, absolutely, we do, and our new stores continue to exceed those levels. We don't give out those numbers publicly. But typically, it's going to be close to what we're currently running from an average unit volume perspective. So we're running just about 4 million average unit volumes. So we know we've got to do close to that. We don't have to do it that level to support, from a return perspective, the deals that we're opening. But it's going to be fairly close to what we're doing on average.

Operator

We'll take the next question from Peter Saleh with Telsey Advisory Group.

Peter Saleh - Telsey Advisory Group LLC

Just a quick question. If you talk about the bump-out, the seat additions you've been doing? Where do we stand with those? And how many do you plan to finish this year and in 2014?

George Price Cooper

Sure, Peter. This is Price. We've done just over 110 so far in total. So this time, we've done 11 so far this year, and we plan to do maybe another 20 or 25 this year. And then, we're continuing to evaluate just how deep into the system will we go with that. So I would imagine we'd do another slew of restaurants next year, and then, continue to evaluate it on a go-forward basis just where does the volume make sense to do it at. Maybe at some point, it makes sense to do it in half of our restaurants or so, but we'll continue to see.

Operator

We'll go next to Paul Westra with Stifel.

Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division

Couple more follow-ups. Just one, maybe specific question on the near-term environment. Can you recall from last year if the Olympics caused much disruption in your sort of monthly trend? Maybe if not here directly, maybe some of your competitors, maybe if the industry falls [ph], maybe had some of the [indiscernible].

Wayne Kent Taylor

Sure, the Olympics were in August, I believe, last year?

George Price Cooper

Yes, Paul, this is Price. I don't recall being able to identify any change in trends associated with the Olympics or -- it's always tough with the Olympics or promotional activity or this and that. There's always so much stuff going on out there that it's really tough to identify anything along those lines.

Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then, I have one more follow-up on the franchise. Could you just give us an idea again of the character, I guess, the average stores per franchisee? I know 4 or 5 years ago, you bought about 1-year or 2-year period seems to be [ph] do 1 to 2 to 3 transactions. Is that roughly what we should be thinking about in terms of anticipating [ph] a little more pickup in activity?

Wayne Kent Taylor

Yes, I think our franchisees there is between 4 and 8 per operator.

George Price Cooper

Yes, and at this point, I think we've said in our prepared remarks that we don't have any imminent deals. So to speculate on how many could be done this year or even next year, we're just not in a position to be able to do that.

Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division

Last one I have, the pricing of those transactions, somewhat predetermined the [indiscernible] was it...

Wayne Kent Taylor

The pricing that we would offer the franchisees was his question.

George Price Cooper

I'm sorry, Paul, what was it? Was it a question on the pricing?

Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division

Yes, the pricing that you would offer a franchisee?

George Price Cooper

Typically, we'd pay them on a multiple of EBITDA, and every deal's negotiated. But we would set them very much in line with how we do new store returns, and make sure that we're getting a return on the capital that we're deploying.

Operator

And with no questions remaining, I'd like to turn the call back over to management for any additional or closing comments.

Wayne Kent Taylor

All right. Well, thank you, all, for joining us this evening. If you have any questions, please reach out to us. Thanks. Have a great night.

George Price Cooper

Thank you.

Operator

That does conclude today's conference. We thank you for your participation.

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