Texas Roadhouse Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.28.13 | About: Texas Roadhouse, (TXRH)

Texas Roadhouse (NASDAQ:TXRH)

Q3 2013 Earnings Call

October 28, 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

Courtney O'Brien - Morgan Stanley, Research Division

Alton K. Stump - Northcoast Research

Andrew Michael Charles - BofA Merrill Lynch, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Will Slabaugh - Stephens Inc., Research Division

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

Jeffrey D. Farmer - Jefferies LLC, Research Division

Jason West - Deutsche Bank AG, Research Division

Andrew M. Barish - Jefferies LLC, Research Division

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

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

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

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

Operator

Good day, and welcome to the Texas Roadhouse Inc. Third Quarter 2013 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions]

I would now like to introduce Price Cooper, Chief Financial Officer. You may begin.

George Price Cooper

Thank you, Nancy, and good evening, everyone. By now, everyone should have access to our earnings release for the third quarter ended September 24, 2013. I'd like to apologize for any inconvenience caused by our early release today. It was bought to our attention that a portion of the information had been inadvertently released at which time we alerted NASDAQ, who halted the trading in our stock until full details were disseminated. So again, we apologize, and it's certainly not a change in our practice.

The full release may be found under the investor portion of our website at texasroadhouse.com.

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; 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'll all be available to answer any questions.

With that, I'd like to turn the call over to our CEO, Kent Taylor.

Wayne Kent Taylor

Thanks, Price. We are pleased to report another quarter of solid revenue growth, highlighted by a positive comparable sales, including positive guest traffic growth. While we grew restaurant level profit dollars again this quarter, commodity cost inflation of just over 8% took its toll on the restaurant margins and this, combined with much higher preopening costs, negatively impacted our diluted earnings per share growth.

As we enter the fourth quarter, our top-line momentum has continued with comparable sales growth of 3.4% for the first 4 weeks of the quarter. We are encouraged by these results and believe that our disciplined approach, focused on consistent execution of Legendary Food and Legendary Service continues to drive our business forward, not to mention we have the best operators.

Looking ahead on the cost side of the business, it appears that food cost inflation will be in a low-single digit range in 2014, based on our current outlook. This is good news after battling through high single-digit commodity inflation for the last 2 years. Given this outlook, we expect to take a very moderate amount of pricing in December, although we are still working with our operators on the exact amount. Combining this with the overall momentum of our business, we expect positive comparable sales growth to continue in 2014.

On the development front, restaurant openings for 2013 remain on track, and we are still targeting 25 to 30 restaurant openings next year, with most of those sites already selected. By the way, we are excited to be opening in Alaska next year, a new state for us, which will take Texas Roadhouse to 49 states. Also, it's worth noting, we expect our openings to be much more evenly weighted throughout the year.

Before I turn the call over to Price, I want to thank all of our operators who continue to do a great job of taking care of our guests and are -- building our sales. It was great to see all of you all over the course of the last several weeks at our annual fall tour. Now, Price will walk you through our financial update.

George Price Cooper

Thanks, Kent. For the third quarter of 2013, we earned $17 million or $0.24 per diluted share, slightly less than prior year, and as Kent mentioned, was a result of significantly higher food costs, along with higher preopening costs. While we had a $1.3 million benefit from favorable general liability insurance claims experienced in the quarter, it was not nearly enough to offset the impact from over 8% food inflation or the impact of $2.3 million and higher preopening costs year-over-year.

The top line growth was solid, with revenue increasing 8.5%, as a result of a 6.3% increase in store weeks, a 1.6% increase in average unit volumes and strong sales performance at our newest stores. Comp sales increased 2.6% during the quarter, and were comprised of a 4/10 increase in traffic and a 2.2% increase in average check. By month, comparable sales increased 1.9%, 3% and 3% for our July, August and September periods, respectively.

And October trends remain positive, with comps increasing 3.4%. In terms of restaurant level profitability, on a dollar basis, restaurant operating profit increased 3.9% or $2.1 million for the quarter compared to the prior year. As you may have seen in our press release, margin dollars per store week decreased 2.2% for the quarter. Food cost inflation of just over 8% during the quarter, the highest of the year, drove the third quarter decrease. Restaurant margin percents are down 45 basis points year-to-date, but given that we have been able to continue driving traffic, year-to-date margin dollars per store week are flat despite inflation of approximately 7%. While we would certainly prefer to be growing margin dollars, we will take the neutral performance, given the cost pressures we have faced this year. We expect that growing margin dollars on a per store week basis will be difficult for the balance of this year as food inflation will continue to be a sizable headwind for us through the fourth quarter. Specifically, we expect food inflation of approximately 7% for the fourth quarter.

A few other P&L items to mention, preopening comps, were up $2.3 million compared to the prior-year period, primarily due to having more stores in the pipeline. Our income tax rate for the quarter came in at 30.4%. We continue to expect our full year rate will be 30% to 30.5%.

Lastly, recall that full year 2013 has 53 weeks, so we will have 14 weeks in the fourth quarter of 2013. We get a little extra leverage on rent and G&A bonuses as they are recorded on a monthly basis. Other than those items, we generally expect normal flow-through on an extra week of sales. For example, the benefit of the extra week of sales will be partially offset by the impact from an extra week of depreciation expense.

Moving to our balance sheet and cash flow, our cash balance decreased $13 million in the third quarter to end at $87 million. The $13 million decrease in cash was driven by the fact that while we generated $30 million in operating cash flow for the quarter, we spent $43 million primarily on capital expenditures and continuing to pay our dividend.

Year-to-date, we have generated $28 million in free cash flow, all of which has been used to fund dividend payments. We expect to generate free cash flow for both the full year 2013 and '14.

A couple of comments relating to 2014. First, as Kent mentioned, we are targeting 25 to 30 restaurant openings, and believe we should be able to get around half of these open in the first half of the year. Second, we expect to continue to drive comparable restaurant sales growth. Third, we expect food inflation to be much lower, likely in the low-single digit range, primarily driven by lower protein costs. We also expect to continue to generate a few million dollars in savings from reducing non-guest, interfacing-type costs. Partially offsetting these benefits, we anticipate labor costs will be negatively impacted by a few million dollars as we roll out expanded health care coverage. And lastly, we continue to be very focused on balancing short-term pressures with long-term positioning. As such, we are likely looking at implementing somewhere around a 1.5% menu price increase in December.

With that said, I'd like to turn the call over to our President, Scott Colosi.

Scott M. Colosi

Thanks, Price, and good evening, everybody. We're definitely pleased with our current sales momentum and the overall direction of our business. And while sales started out softer in July, we saw an improvement in the trend throughout the quarter and that has continued into the first 4 weeks of the fourth quarter. This performance is directly attributable to our operators, and we certainly appreciate their continued commitment to Legendary Food and Legendary Service.

From a financial perspective, our balance sheet remains strong, and we anticipate we will continue to generate significant free cash flow. In addition to evaluating new development opportunities, we plan to keep returning excess cash flow to our shareholders through consistent dividends and opportunistic share repurchases.

Our newer stores continue to perform well, and while our development costs have increased slightly, we are still very, very pleased with the returns they are generating. This will allow us to maintain steady growth with our third straight year of at least 25 restaurant openings.

Heading into 2014, we will remain focused on doing the right things for the long-term success of Texas Roadhouse. This includes finding the appropriate balance between pricing and inflationary pressures, growing new restaurants at a pace that works for us and deploying capital in a suitable manner.

In closing, we feel very good about the direction of our business and the depth of our teams, both in the field and in our Support Center. And we will continue to challenge ourselves to create more value for our employees, our guests and our shareholders. So operator, we -- you may now open the line up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Bruce (sic) [Brian] Bittner with Oppenheimer & Co.

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

Question on the COGS line, just going forward. Obviously, single digit and low single digit inflation is much better that what you've been dealing with over the past couple of years, but should we still be expecting some COGS de-leverage on that line item just because of the 1.5% price increase? And in the future, is it really going to take just food cost deflation to get leverage back into that margin and get back to where some -- somewhere where it's been historically?

George Price Cooper

Brian, it's Price. Yes, for the most part, it does take deflation to get it back to where it was. Now as far as specifically to 2014, if we do end up taking 1.5% of pricing and we get good flow-through on that, depending on where food inflation shakes out, you could see us hold that line potentially, depending on -- because that would be in the realm of low-single digit inflation. We'll know more about that probably on the next quarter call. But, in general, we continue to believe that putting good value on the plate is important, and we're not looking at taking quality or value away from the guest.

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

And perhaps on the traffic side, the traffic's been terrific and congratulations on that. You guys just really had some nice out-performance versus the industry. And you guys obviously have some natural momentum in the business, but can you just talk through a couple of the things, maybe over the next 12 months, that you guys will be doing that's very tangible, bottoms-up driven to try to continue to leverage that momentum going forward and keep growing traffic?

Wayne Kent Taylor

As always, we let our operators grow traffic and sales. That's what they do for a living.

Operator

The next question comes from John Glass with Morgan Stanley.

Courtney O'Brien - Morgan Stanley, Research Division

This is Courtney on for John Glass. Can you just talk to us a little bit about your unit growth? It seems like you're obviously very back-end loaded this year and pushing some more into fourth quarter. Can you just talk about the pace for next year? I think you had originally thought it was going to be more front-end loaded, and now you're saying it's going to be more equally weighted. And if you can just give us any guidance on how to model preopening costs for that?

Wayne Kent Taylor

Yes, it's definitely going to be more evenly weighted. We have a few sites that kind of push back, but we fully intend to hit our 25 to 30 stores.

George Price Cooper

Yes, in terms of modeling preopening costs, that's a tough line to predict with any level of certainty. We are running about $500,000 or a little more than that right now on -- in terms of average per unit. The challenge with getting that dialed in with any kind of a precision is we start incurring those costs up to 12 months before we open a restaurant. But I'll tell you in general, we're running about $0.5 million per store right now on that.

Wayne Kent Taylor

Yes, I can also tell you, we have at least 10 stores that are in permitting or under construction. So if that gives you any confidence.

Courtney O'Brien - Morgan Stanley, Research Division

That's for the fourth quarter or for next year?

Wayne Kent Taylor

For next year.

Operator

We'll go next to Alton Stump with Northcoast Research.

Alton K. Stump - Northcoast Research

Just had a quick question. I think you mentioned a like month-on-month breakdown, certainly things got better over the last 2 months of the quarter, and if true, that's early part -- it's fourth quarter. Is there anything that, in your mind, drove that? Or is it just that July was -- if it's softer overall or any color as to how things have improved over the last 3 months' period here?

George Price Cooper

Alton, this is Price. Really, July was just softer for us. And you're talking the improvement, we've continued to be able to maintain positive traffic since then, anywhere from, call it, 0.5 to 1 point in traffic. So I think for us, it's just, as Kent alluded to, it's just our operators continue banging it out and doing a great job.

Alton K. Stump - Northcoast Research

Okay. And then just one more quick follow-up. On the share repurchase front, it's been a couple of quarters since your last buyback. Any plans that might be different from your long-term strategy over the next, maybe 6, 12 months here, as to your buyback activity?

George Price Cooper

We may over a longer term, we've talked about being a little more flexible, anyway, with what we're willing to pay in terms of -- to cover the dilution or the overhang. So that's one thing that's -- that we're having a lot of discussion around. I'd leave it at that.

Operator

We'll move next to Andrew Charles with Bank of America Merrill Lynch.

Andrew Michael Charles - BofA Merrill Lynch, Research Division

Can you talk a little more about the components of the commodity inflation next year, specifically your expectation for beef? How much beef is contracted? And what's giving you confidence that the uncontracted portion is well controlled?

George Price Cooper

I'm not going to get into -- this is Price. We're not going to get into specifics on what we've contracted yet. We're in a lot of those discussions right now. But, in general, we feel like the whole protein basket will be lower next year. Part of that, specifically on the beef side, is demand this year hasn't proven out to be necessarily what they thought it would. And we locked in actually about 70% or 80% of our pricing for this year. So the fact that demand hasn't proven out to be what it was, and you've got a really good corn crop this year just kind of helping the base, if you will, of the prices that you're coming off of. But there's some other proteins that will help as well. For instance, pork next year, we expect that to be a benefit for us.

Andrew Michael Charles - BofA Merrill Lynch, Research Division

Okay. And then Scott, it looks like the delta between new and comparable store average weekly sales was pretty minimal, and it seems this is caused by new stores continuing to open at higher and higher AWSs, which all fall off pretty quickly, post-honeymoon. Am I thinking about this correctly? And what else are you working on to improve new unit sale volumes?

Scott M. Colosi

Well, our new stores typically open up with pretty big volumes, and so our challenge is to minimize the amount of sales that fall off from their initial honeymoon period, which -- it can last 6 months. It can last even longer than that and we're studying that quite closely. It's -- the honeymoon's grown a little bit over the years, so, of course, we're opening at higher volumes than we used to. So we're settling in at sales volumes that are fairly consistent at where we settled in, typically over past years, meaning once our stores settle in, they're still doing $3.9 million, $4 million average unit volumes, which are very good and are very good for our returns, overall. So we have the problem of, sometimes when you open at such a high volume, in our case, the waits are so long, that can turn off some guests in the short-term. And so our challenge is to better manage those super high volumes that we open with, and we're talking about a number of things internally to deal with that, to manage that.

Operator

We'll go next to Jeffrey Bernstein with Barclays.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Just 2 questions. First, if you looked at the company operating system, 330-plus stores, I guess. I'm just wondering if you guys bucket those, or how you can maybe talk to us about which stores you'd say are capacity constrained? Obviously, you're somewhat unique, still driving positive traffic, but can you talk to us about what percentage or -- of those stores have constrain and perhaps the top couple of throughput initiatives that you'd see that would help that? I know in the past you talked about building out some of the patios or some advance technology or things like that, just trying to size up the percentage of the system and how do you address it.

Wayne Kent Taylor

I would say we've got stores that are doing north of $7 million and we've got a lot of stores, obviously, that don't do $7 million, so we know our buildings can handle up to $7 million. And then the bump outs, I would say, Price, how many have we done, versus what we have left to do?

George Price Cooper

We've done 120 to-date, and we're doing those at a rate of somewhere around 25 to 35 a year. You have what you -- in those instances is adding anywhere in the neighborhood of 7% to 12% capacity on those stores.

Scott M. Colosi

And Jeff, this is Scott. I think that in our system, those managing partners that run those stores that do $6 million, $7 million or even higher than that, they don't believe their stores are capacity constrained. They are still growing sales, and they're still finding ways to turn tables and maybe upsell appetizers or loadeds or smothereds, or maybe they do some catering, whatever. They're figuring out ways to continue to grow their business.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

And just a follow-up in terms of the unit openings, it seems like at this point, we're looking at 14 openings in the fourth quarter. I'm just wondering, how many perhaps you've already opened? It just seems like that's a whole lot for the system. And separately, should we still assume that the franchise side of things still does 5 for the full year?

George Price Cooper

Jeff, it's Price. On how many we've opened, I think we've just opened one so far this fourth quarter. So you are right, that's a larger number than is typical for us, certainly during the fourth quarter. And I would say, franchise-wise, you're looking at somewhere on the order of this year or next year, probably 3 to 5, each of those years, something in that range. Most of that's international, the franchise piece.

Wayne Kent Taylor

Yes, we have 2 stores internationally opening in the fourth quarter as well.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

But is there any -- I know you said it's difficult to forecast preopening, but just with so many stores and then obviously some stores that you're opening in the first quarter, any ballpark in what we should expect pre-open to be in the fourth quarter?

George Price Cooper

No, it'll be considerably higher than it has been running, in the fourth quarter, without any openings.

Operator

[Operator Instructions] We'll move next to David Tarantino with Robert W. Baird.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

The first question is about restaurant-level margin. And Price, if you could help us kind of frame up how you're thinking about how that could trend next year in the various scenarios that you have with the pricing that you have in place? I think normally in the past, you've talked about maybe taking a little less pricing than you need to hold the margins flat and then -- and look to drive traffic to sort of make up for the difference. Is that how you're thinking of next year? Or do you think your pricing will be enough to hold the margins where they are on a flat traffic-type of number?

George Price Cooper

David, it really depends. I think we could be pretty close to holding margins with a little bit of traffic. If we consider -- if we assume we can still grow in the low, low-single-digit range, maybe that's 1-ish or a little more than that. Depending on exactly where our food inflation comes in, we are optimistic about that. And then, part of that will depend too, is when we take our pricing, how much of that do we see flow through to the bottom line? Do we lose any mix on it or not? But if we can get about 1.5 in pricing, with a little bit of traffic growth, you could paint a scenario where you could hold margin percents.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Okay, great, that's helpful. And then Scott, I wanted ask you a question about the returns you're getting on the new units. I think you mentioned that the development costs are starting to creep up. Could you maybe elaborate on what you're seeing on the cost side, and then how that translates to the returns you're seeing overall for the new units?

Scott M. Colosi

Well, Dave, I can tell you that the average cost is starting to get close to $4 million and may end up being a little bit above $4 million this year. Of course, we were above $4 million, 5 years ago or 6 years ago at that point, so we feel pretty good that even at $4 million, we feel like we're doing a pretty good job controlling our development costs. And with the sales we're getting on our new stores, we're hitting our pro forma targets, and that gets us right into a mid-teens internal rate of return. So we feel very, very good about the returns we're getting, even with development costs creeping up to $4 million.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

And maybe Scott, I think in the past, maybe it's not the right metric to think about anymore, but you talked about sales to investment ratio being near 1, or over 1 as your criteria. Is that something you still looking at? Because I think we're getting pretty close to that now. So I was just wondering if there's maybe some thoughts around either looking for ways to reduce the development cost side of the equation, kind of more so than what you've done in the past. I know you've done a good job there, but just wondering how to think about how close the margin of safety is there on the new units?

Scott M. Colosi

Well, we feel pretty good about that ratio. Actually, we're still -- think we can be at 1:1 or slightly higher than that, which makes it a much easier decision to develop sites. Our -- we look back at our clash year, as we've only had 1 clash year out of the last 13 or so, going back to 2000, that it wasn't at 1:1 or above that level. So we feel pretty good right now at the rate that we're growing, at 25 to 30 stores, that we can continue to see that happen, continue to have that 1:1 sales investment ratio. Keep in mind, I think our average unit volumes will be over $4.1 million this year, maybe closer to $4.2 million this year. So for our average store, that's quite a bit above a $4 million average investment. So we feel pretty good. But, again, it's part of us keeping our rate of growth to a rate that's right for us by sticking to that 25 to 30 store level.

Operator

The next question comes from Will Slabaugh with Stephens Inc.

Will Slabaugh - Stephens Inc., Research Division

Price, can I ask you about labor real quickly, if I could? Can you talk a little bit more about how you see that playing out next year, and whether that few million dollars you referenced earlier in health care costs may keep that line from gaining leverage next year?

George Price Cooper

Yes, well, it could. A part of that will depend on how many folks sign up for insurance but -- in addition to that, specific to labor line, we're seeing about 2% inflationary pressures from a wage rate perspective. We do expect that the cost of the insurance that we paid for and provide will continue to go up. So if you look in specific at that line from a leverage-ability perspective, if you will, you've got to overcome 2 plus, probably closer to 3-ish percent-type inflation. So if you've got a 1.5% or so in price, you'd have to drive about twice that remaining difference as a general rule of thumb in terms of traffic, to our overcome that line. But a lot of that will depend on what ends up happening on the health insurance side.

Will Slabaugh - Stephens Inc., Research Division

Got it. And just flipping over to sales, if I could. Can you speak to the day part strength that you've seen recently? Some of your peers have been talking about slower weekend lunch, et cetera. I don't know if you've seen anything like that or just any comments, in general, you might have around that or weekday dinner, weekend dinner as well?

George Price Cooper

Keep in mind, you're bringing up -- we only do weekend lunch. But we haven't seen any real disparity between days of the week, or even day parts on our weekends have been pretty consistent, nothing that really that stands out in terms of day parts for us.

Operator

We'll move next to Jeff Farmer with Wells Fargo.

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

Just going back to your continued same-store sales out-performance, relative to the peer group. I'm just curious, what's your internal research is telling you about your customer base? I guess more specifically, do you guys think you're reaching a broader demographic? Are you seeing increased frequency from existing customers? Where are you guys exactly stealing some of these customers from? Any color would be helpful.

Scott M. Colosi

Hey Jeff, this is Scott. We don't really have that research that's current on the makeup of our guests. We do a research project every 3 years or so, that's pretty detailed. We haven't done it in some time. Yes, I think karma [ph] is sort of, as Kent mentioned earlier, we just kind of keep pounding away at running the business, making great food and serving it with a high a sense of urgency, and keeping our prices low and building relationships in our communities. That's kind of what we do. And that's what we're focused on, really have an intense focus on that. And I can't tell you we're too -- we spent too much time calculating guest frequency any given moment.

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

Okay. And then just 2 more quick ones. I think, Price, I heard you mention -- and I don't know if you gave the detail, but the nonconsumer facing cost savings. What was the detail on that?

George Price Cooper

I didn't give the details, other than we're on track for somewhere in the neighborhood of $2.5 million -- call it, $2 million to $3 million in savings for this year. I think we can get a couple of million dollars worth of savings out of it next year. And that's on things like -- a lot of its supplies or chemicals, small wares, utility management, contract area; just a laundry list of different areas but dominantly, nonfood, nonlabor related items.

Jeffrey D. Farmer - Jefferies LLC, Research Division

And then final question on your nonprotein basket commodities. What does that look like for '14? And what's the early, sort of, outlook there in terms of, again, your non-beef commodities?

George Price Cooper

We don't know, specifically. For us, about 15% to 20% of our food cost is produce and dairy. So those are a little more volatile month-to-month type items. So don't really have a big swing factored in one way or the other on those, as of now.

Operator

We'll take the next question from Jason West with Deutsche Bank.

Jason West - Deutsche Bank AG, Research Division

Things will be lower next year. Did you mean less inflationary or actually down year-over-year on some of the big proteins?

George Price Cooper

Jason, I apologize, you cut out on the first part of your question there.

Jason West - Deutsche Bank AG, Research Division

So earlier you had said you expect proteins to be lower next year. Just want to clarify, if you meant down year-over-year, or if you meant just less inflationary, as a basket?

George Price Cooper

Talking less inflationary as a basket.

Jason West - Deutsche Bank AG, Research Division

Okay, but still -- do you still expect beef to be up, just not as much?

George Price Cooper

Yes.

Jason West - Deutsche Bank AG, Research Division

Okay. And then, I guess it doesn't sound like you would have much contracted at this point, this time of year, but is it normal that, if you're having these conversations right now, that those numbers tend to be fairly predictable this time of year, even if they're not under contract? Or can things change a lot the next couple of months?

George Price Cooper

Things can always change. And we've been pretty flexible over the last few years regarding our timing of when we've actually gone under contract.

Jason West - Deutsche Bank AG, Research Division

Okay. And then just one on the preopening. I think the last call, you had pointed to something in the $15 million, $16 million range for the year. With this quarter, kind of, timing shifted on that a little bit. I don't know if that's still a good number for 2013, or if you think it's going to be well above $16 million now?

George Price Cooper

Yes, that's probably no longer good a number. And that's why we're not going to get as specific on that number, going forward.

Jason West - Deutsche Bank AG, Research Division

Okay, and is that going up because of this year's stores are more expensive? Or are you talking about just -- you're working on more '14 stores and that's pulling numbers into this year? Or are you saying that the preopening, as a rule, is going up in new stores?

George Price Cooper

I would say, it's a combo of all the above. It is on costs that we're incurring on next year's stores, and our preopening costs are running a little bit higher on a per store basis right now.

Jason West - Deutsche Bank AG, Research Division

Okay, got you. And then last thing, just on the pricing, you said 1.5% in December. I think you're rolling off the full pricing at the same time, from last year, the 2%. Just want to make sure that's right. So the pricing basically goes from 2% to 1.5%, starting in December?

George Price Cooper

Yes. It goes from a little over 2%, as what we took last year, and then, yes, whatever we end up doing this year, likely somewhere around that 1.5%. But yes, you're exactly right as far as the timing.

Operator

We'll move next to Andy Barish with Jefferies.

Andrew M. Barish - Jefferies LLC, Research Division

Did you get a little bit of a mix here in the quarter to help the check average if you're running roughly 2% on the menu price?

George Price Cooper

Mix was basically neutral. We're actually -- menu-wise, we're just over 2%, more like 2.2%. So mix was about flat for the quarter.

Andrew M. Barish - Jefferies LLC, Research Division

Okay. And anything we should be thinking about with the holidays and the extra week, as it pertains to just the reported comps or the December period or just anything to give us the heads up on that?

George Price Cooper

No. We do have an extra week in the period. But from a comp basis, we'll be comparing 14 versus 14 weeks, but we'll be comparing the same number of days, if you will. Other than that, I wouldn't say anything material from a counter shift basis.

Andrew M. Barish - Jefferies LLC, Research Division

Okay. And kind of thoughts on why or what are the gating factors in unit development not going up a little bit next year?

Scott M. Colosi

Andy, this is Scott. We're just comfortable in that 25 to 30 range. And so our numbers may move around a little bit, just based on the timing of openings and you have to have a lot of more than 25 to 30 deals in the hopper to hit 25 to 30, because sometimes things fall out. A lot of times, it's not us. It might be a developer that ends up not completing their side. So you've got to have a certain amount of contingencies and we kind of feel that, that range for us, from where we are today, is a nice sweet spot for us.

Operator

And the next question comes from John Ivankoe with JPMorgan.

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

I think a couple of follow-ups for me. Firstly, as you do consider just processing transactions and maybe in a way that the guest might appreciate it, have you considered some technology whether to order or pay to sit on the table, would that be consistent with your brand?

Scott M. Colosi

John, this is Scott. We've tested, actually, something in the past that we weren't that jazzed about it. And so we've got our eyes open, and we're paying attention to what other people are doing. And we're just going to keep going down that road, and kind of see how things develop before we go further in our case. We are rolling out a, not to say a new back office, but a more up-to-date back office package this year, a cloud-based package that we're very excited about. And we've been moving forward on expanding a guest management system that we used at host area to many more of our stores this year. It's probably going to be in half our stores now, something like that, by the end of this year. So we're moving on some things like that. Other things like pay at the table, we're kind of in more of a wait-and-see how things kind of develop as we go along.

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

And can I follow up just on what you just said. I mean, what has been the experience with the guest management system? I mean, have you seen -- I mean, well, I guess, less lapse in occupied tables, if that's the right terminology? And what kind of benefits are you expecting from that back office system that you're updating?

Scott M. Colosi

Well, certainly it helps a lot with just communication. And we have so many guests coming, so that communication piece is so important throughout the restaurant and also to all the guests that are waiting, whether they're inside the restaurant or standing outside the restaurant. So from a communication standpoint, that guest management system is very, very effective for us to minimize the times that any table would be open, even when...

Wayne Kent Taylor

It also helps us manage the large parties a little better as well.

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

And so are you seeing, like, a quick quantified lift or a difference in experience and comps in the stores that have it versus the stores that don't?

Scott M. Colosi

We haven't measured that at this point, John. We just know that our -- the operators that are doing it are very much -- like using the system, and usually that's a good indicator for us that it's pretty effective for them.

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

And in terms of the back office, is that -- what might be the expected benefits out of that, that you're currently not getting?

Scott M. Colosi

Well, there could be everything from some food management stuff, to some labor management stuff as well. So those are probably the 2 biggest pieces of that system, which is typical of a back office system. So we still don't have an official Texas Roadhouse labor model that exists, but there are certain reports and whatnot that the operators can use, whether it relates to over time, whether it relates to when people are clocking in and clocking out, those types of things that can help us manage our labor a little bit better.

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

Okay, and then one final thing, I wasn't expecting all that color, so thank you for that. Just, you give such great data on your average weekly sales for your -- the newest stores, the newer stores and obviously for the overall comp base. But if I could focus on, probably the one negative out of that piece, is the newer stores have soared up in 6 to 18 months and I think there are 25 of them. It's a pretty low number for you in the third quarter, on an average weekday sales basis. So is there anything about that class of stores that kind of depresses it, relative to what it will be in the future? And I guess you can, maybe conversely, do you think there's a big opportunity for these stores to comp very well when they enter the comp base and they kind of recover some of their lost volumes?

Scott M. Colosi

John, this is Scott. I would say the gap's a bigger gap than we've had, certainly in the last couple of years. So that's got our attention. On the other hand, the sales are still pretty good for us. And as I mentioned earlier, they're still hitting our pro forma returns. So we definitely get pretty conservative when we're modeling out these new stores, because we know it's tougher when you're opening the second 400 stores in the continent versus the first 400. That said, we're not overly concerned about it because we're still getting good volumes and we're confident those stores -- the sales in those stores will grow over time, as we've seen from prior clash years historically.

Operator

[Operator Instructions] And we'll move next to Chris O'Cull with KeyBanc.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Scott, just as a follow-up to that question John just asked around new store productivity. It looks like the stores are having really large openings, but then coming off their honeymoons at a greater pace. What do you think's causing that? And do you think -- could there be any risk that they're not getting good experience the first 6 months of the opening and that's causing less frequency?

Scott M. Colosi

We don't believe that to be the case because they're still settling in at pretty strong volumes overall. So we do believe they're getting a good experience. There are some things that we're talking about internally, which we won't go into on this call today. One thing that sometimes can influence the honeymoon curve is when the store is open. So if we do have a lot of stores that open in the first quarter time frame, when our stores have the highest sales of the year, and then if you look 6, 7 months later, they're likely to have a larger honeymoon fall off just because of the seasonal nature of our business. Because yes, you have your lowest sales in the third quarter of the year. So some of that can relate to when we open the stores, but I will tell you, we've been studying this very hard. Certainly you get pretty excited when you see these huge volumes that you open with and you want to retain those sales as much as possible. So we are challenging ourselves internally to get a better result out of that. And there are a number of things that we've discussed internally and that we're working on.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Okay. And then 13 store openings the last 2 months of the year, that seems like quite a few. Is there -- I mean, the training team's all in place? Or do you guys expect to hire additional teams to help open all these stores and...

Scott M. Colosi

Well, fortunately for us, if doing 13 openings when we only had 100 stores in the ground, that would have been a mighty task in 2 months. But given we're 400 stores now, we've got a pretty big training team. We've got a lot of trainers that can support the effort. So we're very confident that all those openings are going to be very good openings for us.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Okay. And then, Price, I think this was the first time in several quarters that store profits per operating week was down year-over-year. Guest counts are, I guess, were up, what 40, 50 bps, and profits per operating week fell 2%. So what level of guest count gains do you need to see flat restaurant profit per store week?

George Price Cooper

Well, the reason it was down this quarter was a little over 8% food inflation. So unfortunately this quarter it would've taken a -- I don't know the exact number, but it would have taken a little more guest traffic, given this is our highest inflation -- food inflation I'm talking about, that we've experienced this year.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Did I hear you right, that the fourth quarter should be down on a per operating week basis as well?

George Price Cooper

Yes, could be down as well, given the fact, again, we've got 7% there. Part of that will depend on what does -- what is traffic, and what do we end up taking pricing-wise in December. And then, also with those openings in the fourth quarter, what type of profits or inefficiencies do we have because, as you pointed out, we do have a large number of openings specifically in that fourth quarter.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

What kind of pricing are you running over in -- when will you be lapping price increases in 2014? Can you remind us?

George Price Cooper

Well, we're lapping what we took last year. We took a little over 2% in early December of 2012. So that's when we're targeting, taking some this year as well.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division

Okay, and then the pricing you took this year, did you take any this summer?

George Price Cooper

No, that was the last time we took any.

Operator

The next question will come from Bryan Elliott with Raymond James.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Just a bit of a nitpick about price. The general liability one-timer that you called out, is that a change in accrual? Or is that just a one-time catch up of some...

George Price Cooper

Most of that's a one-time catch up. We're heavily self-insured on our general liability. And our policy year runs on October through September fiscal year, if you will, on that.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Okay. So, even though we had to do a reserve top off, we aren't going to have to raise the accrual for next year measurably, noticeably?

George Price Cooper

I don't know that. That will depend on what our experience proves out to be. Typically, the way the actuaries work is they'll kind of true-up your development factor at the end of that insurance year.

Wayne Kent Taylor

Usually that's a good sign though, when you get to book a credit for your recent claim activity, even though some of this goes back a number of years. But usually it's a good sign, going forward, that some of your development factors might get lowered a little bit. And to your point, Bryan, you may have less inflation in your accruals the next year.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Well, it was so long ago, I forgot that it was a credit. I was thinking that it was actually a cost.

Operator

We'll move next to Steve Anderson with Miller Tabak.

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

It's Steve Anderson. Just wanted to ask you, in your testing for different menu price increases, and I know that you typically do that for a quarter or 2 before you decide on something. Did you encounter any particular resistance in markets where you decided to do, maybe, a 2% increase?

George Price Cooper

Steve, most of our markets, we tested somewhere between a 1% and 1.5% increase, something in that range. And no, we didn't see anything that spooked us, if you will, or a cause for concern.

Operator

And we'll move next to Paul Westra with Stifel.

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

A quick question on the -- a follow-up question, related to -- maybe an open-ended question, really, on this last one, what you saw beyond the consumer, the competitive environment and, specifically, what you might need to be seen, maybe throughout 2014...

Wayne Kent Taylor

Paul, I'm sorry to interrupt you. We're having a very difficult time hearing you. I apologize to interrupt you.

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

My apologies, too. I was just asking a question on the consumer, what you might be needing to see, either on the consumer side or the competitive environment side as we maybe roll out the next to 6 to 12 months to be more aggressive, either on the pricing side or maybe even on the mix/average check side, as you just tie into -- because clearly, you're internal fundamentals are so strong. And obviously returns were down this year, despite a spectacular performance. And what you might need in the macro environment to maybe claw back and get some excess for your -- first on profit growth, cash back and get those returns on capital a little higher.

Scott M. Colosi

Paul, this is Scott. I don't see us getting more aggressive on the pricing front in any circumstance that I can think of. I do think that as the economy continues to slowly improve, I mean, unemployment continues to trickle a little bit better. And I think that can create a positive force for us, from a traffic perspective. It's just been that way historically. And so that's the one thing that I look at is, where's the U.S. economy going. Consumer confidence also continues to trickle upwards, still not where it was 5 years ago before the recession, but it does continue to trickle upward. So between consumer confidence and unemployment, I think those are both things that we know we put a good deal out on the plate for the guest, and more of them will show up more often if the economic -- economy's a little bit stronger.

Wayne Kent Taylor

Paul, it's Kent. I think as long as we stick to what we do from a service standpoint and the quality of food and the portion sizes, I think that's helping us differentiate ourselves from some of our competitors or that maybe are messing with some of those things.

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

That's fair. And how about, maybe, just talking -- how about media or marketing efforts? And anything maybe you have waiting for a better environment or maybe, or...

Scott M. Colosi

I mean, we're very much into marketing, for sure. We've got a whole army of marketers in our company, it's just focused on a more local store approach to it. So we don't really see anything from a media perspective, coming down the pipe.

Wayne Kent Taylor

We did assist CNN and Willie Nelson on getting his armadillo back, though. We thought that was a big win for us this quarter.

Operator

We have no further questions at this time. I'd like to turn the conference back over to management for any additional or closing remarks.

George Price Cooper

All right, well thank you all for joining this evening. If you've got any questions, please give us a call. Thank you.

Operator

That concludes today's presentation. Thank you for your participation.

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Texas Roadhouse (TXRH): Q3 EPS of $0.24 misses by $0.01. Revenue of $334.77M (+8% Y/Y) misses by $3.86M. (PR)