Texas Roadhouse Q3 2007 Earnings Call Transcript

Oct.29.07 | About: Texas Roadhouse, (TXRH)

Texas Roadhouse, Inc. (NASDAQ:TXRH)

Q3 2007 Earnings Call

October 29, 2007 5:00 pm ET

Executives

Scott Colosi - Chief Financial Officer

G.J. Hart - President and Chief Executive Officer

Analysts

Jeff Farmer - CIBC World Markets

David Tarantino - Robert W. Baird

Steven Rees - JPMorgan

Jeff Omohundro - Wachovia

Andrew Barish - Banc of America

A. J. Cowen - Cowen and Company

Matt Difrisco - Thomas Weisel Partners

Barry Stouffer - BB&T Capital Markets

Chris O’Cull - Suntrust

Destin Tompkins - Morgan Keegan

Bill Gilchrist - Westfield Capital Management

Kevin Wink - Paulinas Capital Management

Operator

Good day and welcome ladies and gentlemen. Thank you forstanding by. Welcome to the Texas Roadhouse Incorporated Third Quarter 2007Earnings Conference Call. Today's call is being recorded. At this time, allparticipants are in a listen-only mode. Following presentation, we will conducta question-and-answer session. Instructions will be provided at that time for youto queue up for questions.

I would now like to turn call over to Mr. Scott Colosi,Chief Financial Officer of Texas Roadhouse Incorporated.

Scott Colosi

Thank you Robbie and good evening everybody. By now everyoneshould have access to our earnings announcement released this afternoon for thethird quarter ended September 25th, 2007. It may also be found onour website at texasroadhouse.com under the investor section.

Before we begin our formal remarks, I need to remindeveryone that part of our discussion today may include forward-lookingstatements. These statements are not guarantees of future performance andtherefore undue reliance should not be placed up on them.

We refer all of you to our recent filings with the SEC formore detailed discussion of the risks that could impact the future operatingresults and financial condition of Texas Roadhouse.

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

G.J. Hart

Thank you, Scott and good evening everyone. The thirdquarter was another very good quarter for us as we were able to generateearnings 15% diluted earnings per share growth, despite a very challengingoverall environment. While, 15% is less than our long-term target of 20%, thequarter was impacted by a couple of unusual items.

First, our third quarter results included a $0.5 millioncharge relating to our most recent franchise acquisition. And second we lap the$1.9 million favorable insurance reserve adjustments from last year with$600,000 favorable adjustment this year. These two impacted our reported EPSgrowth by approximately 15%.

Year-to-date, however, our reported diluted earnings pershare is up 22%, and we remain on track to achieve our original goal of dilutedearnings per share growth of at least 20%, or at least $0.53 cents a share for2007.

Now let me touch on a couple of the highlights from thequarter. Comparable restaurant sales increased 2.5% with traffic countincreasing by 0.6% and our average check increasing 1.9%. We continue to giveup about a point of check to negative mix shift most of which continues to bealcohol related with some trade down on higher priced menu items.

We very much believe that consistent operational executionsupported by our solid value positioning is the best way to grow and sustainsales levels in the longer term. That said, we’re continuing to drive ourlocally driven community base marketing efforts throughout country.

Our gift card promotion begins in early November and runsthrough the end of the year. It is our biggest promotion of the year; and eventhough, we are in a tough consumer environment, we believe that gift cardscontinue to offer substantial sales growing opportunity for us.

On the pricing front, we just overlapped about 0.8% ofpricing from last year. We are currently testing a small price increase inselect markets, but to-date we have no definite plan regarding how much, wewill increase prices in 2008.

On the margin side of things, reported restaurant marginswere 61 basis points lower than last year year's third quarter. Almost all ofthis difference was attributable to the lap in insurance reserve adjustments Imentioned earlier.

On a year-to-year basis restaurant margins are 20 basispoints lower than the prior year. So our price has enabled us to pretty wellhold inline on restaurant margins this year. From a G&A perspective, wecontinue to leverage our base business as we had 27 basis points of leverage;despite, a non-cash franchisee acquisition charge of a $0.5 million, and with43 basis points of leverage year-to-date, we have been able to achieve theupper end of our leverage goal on G&A.

On the development side, we opened five new companyrestaurants during the quarter and are on schedule to open 31 to 32 companyrestaurants this year. 22 of those will open through the end of the thirdquarter and another three have opened since September 25. Our new restaurantscontinue to open with very healthy sales volumes.

So, with the first nine months of the year inline toslightly ahead of our internal plan, we’re reiterating our original 2007earnings guidance of at least $0.53. With October sales starting a littlesofter than our prior trends we’ve slightly moderated our comparable restaurantsales growth for the year from approximately 2% to 1.5% to 2% growth. And as Imentioned, our development plan is in solid shape and we do not foresee anyproblems hitting our plan of 31 to 32 company restaurant openings.

Now let's touch base on fiscal 2008. As we announced in ourpress release we expect to grow diluted earnings per share by approximately20%. This excludes the impact of the additional operating week from which wemay pick up $0.01 to $0.02 per share or two to four points of EPS growth.

As you are all aware with our model new restaurant growthdrives the largest part of our EPS growth. We've identified all of ourpotential sites for 2008 and expect to open a number of restaurants in thefirst quarter, similar to 2007. So combined with the nine restaurants weacquired earlier this year, we could see as much as 20% growth in company ownedrestaurant operating weeks in 2008.

In terms of sale and margins, right now we are still workingthrough our plans as it relates to primarily commodity cost and pricing. As Imentioned earlier we are currently testing a small price increase in selectedmarkets.

We do not take pricing for granted and would prefer not to takeany the reality is there are inflationary pressures out there. For example, weknow we are going to have some labor inflation.

We definitely believe that it will be less than what weexperienced in 2007, but we will be impacted by state and federally mandatedminimum wage increases. The most important thing here is as I mentioned beforewe are in no way asking or operators to cut back on labor hours to make up forthe difference.

On the commodity front, the picture is somewhat of a mixedbag from the visibility standpoint. As far as pork is concerned, those marketslook to be in reasonably good shape. Chicken, which only represents 4% of foodcosts will likely be up somewhat.

For beef our outlook is a little less certain. I can tellyou that we are not fully locked into our proteins for next year, but areevaluating the markets on a daily basis. The fact of the matter is that on beefthere is so much of a premium in the futures market right now that we may endup floating a portion of our beef cost as opposed to contracting out 100% ofour beef at a fixed rate. It just doesn’t make sense to pay up as much for thatfixed pricing right now.

From a G&A standpoint, we absolutely expect to achievesome leverage in 2008, probably 25 basis points to 30 basis points. Before Iturn the call over to Scott, I do want to mention that we continue to evaluatefranchise acquisitions.

We have told our franchisees that we would be willing to payin the neighborhood of five to six times EBITDA for their restaurants. Ofcourse they have a right to say, no to this offers. However, as many of youknow we also have a call option in most of our franchise agreements.

This call option gives us the right to acquire restaurant ata predetermined formula, which results in a certain number of shares. Giventhat our PE we have contracted quite a bit over the past year, executing thesecall options is beginning to look pretty appealing from the multiple of EBITDAstandpoint.

A year ago the formula would have resulted in us paying veryhigh acquisition multiples. Today these multiples would be much lower in a fourto six times range, depending in part on the share price at the time of theacquisition. In any event we will still only acquire restaurants when thereturns are commensurate with those of developing new restaurants. If and whenfuture deals do come under light we will let you know.

I will now turn the call over to Scott to review thefinancials. Scott?

Scott Colosi

Thanks G.J. During by review of the third quarter, pleasenote that many of the numbers I will mention are listed in the schedule ofsupplemented financial and operating data that was included in the pressrelease.

So starting at the top of our income statement for the thirdquarter of 2007 as compared to the same period in 2006, revenue increased justunder 28% while company owned restaurant sales increased over 28%. The growthin company-owned restaurant sales was primarily driven by operating weekgrowth.

As G.J. mentioned earlier comparable restaurant sales thecompany-owned restaurant increased 2.5% on top of a 2.3% increase last year.For the quarter traffic was positive 0.6% and our average check per personincreased 1.9%.

From a sales perspective I’ll offer a little more color onaverage weekly sales. For the quarter the average weekly sales for restaurantsopened during 2007 our newest group of restaurants was $78,000, which was about$2,000 higher than the overall company average.

For the year or year-to-date, average weekly sales atrestaurants opened during 2007 are running just over $5,000 higher than theoverall company average. And lately the 2007 restaurants are in various pointsof their honeymoon period that we are still encouraged with the new storevolumes.

Franchise, royalties and fees were $2.6 million, which wasthe same as last year. Increased royalty rates in conjunction with the renewalof certain franchise agreements and the impact of positive comparable salesgrowth offset us having seven less restaurant opened as result of theacquisition.

In terms of costs, as a percentage of sales, restaurantoperating costs were 61 basis points higher than last year, and as G.J.mentioned earlier the lapping of insurance reserve adjustments was the maindriver of this difference. But I’ll touch brief on a specific line items. Costof sales was up 10 basis points. Higher dairy costs more than offset thebenefit we've had earlier in the year via our price increases.

Labor costs were up 96 basis points, about half the increasewas a result of our worker’s compensation reserve, unfavorable adjustment ofapproximately $100,000 this year as compared to a favorable adjustment ofapproximately $600,000 last year.

And this accounted for 44 basis points of pressure on thisline. Much of the remaining difference was driven by way trade inflationoutpacing the benefit of pricing.

Other restaurant operating expenses were down 24 basispoints versus last. We continue seeing the benefit on this line resulting frombuying out some equipment leases over the last 10 months to 11 months. So wecontinue seeing lower equipment ampleness with the offset being an interest indepreciation.

This and other small decreases were partially offset by alower pickup on the general liability side of insurance. This year, we recordeda $700,000 favorable reserve adjustment to our general liability insuranceversus a $1.3 million favorable adjustment in the prior year and thisdifference negatively impacted the operating expense line by 55 buy sis points.

Preopening expenses were about $300,000 less than a year ago. And although, we are opening more restaurants now, with our 2007 openingschedule being front end loaded, we ended up having about the same number ofrestaurants at the same station development pipeline during the third quarterthis year as compared to the prior year.

As has been the case for several quarters, depreciation andamortization cost were 48 basis points higher than last year primarily drivenby the cost of new restaurants. G&A expenses as a percentage of revenuewere 27 basis points lower than last year due to the leveraging of our basebusiness and lower share base compensation expense.

These decreases were partially offset by a $512,000 chargerecorded the conjunction with the acquisition of the nine franchiserestaurants. But those of you that do not remember, when we acquire franchiserestaurants, we will typically have some amount of a non-cash charge that isbased on the difference between the market royalty and what the franchisee ispaying.

Our effective tax rate for the quarter was 35.4%, which isin line with last year 35.3% rate . For the year, we are targetingapproximately 35.8% for the tax rate. And finally, average diluted share countwas 76.8 million, slightly lower than last quarter due to a lower average stockprice for the quarter.

Now, on the full year 2007 guidance. As G.J. noted earlier,we reiterated our EPS guides for 2007 diluted EPS growth of at least 20% or atleast $0.53 cents per share that’s based on the following two assumptions.First, we’ll open 31 and 32 new company restaurants and franchise partners willopen two restaurants. Second we’ll generate comparable restaurants sales growthof 1.5% to 2% for the full year.

And as you saw on our press release and G.J. talked earlier,we also provide initial guidance for 2008. Our estimates for diluted earningsper share growth of approximately 20% prior to the impact of an extra week,which could add $0.01 to $0.02 per share or 2 to 4 points of EPS growth. Hereare the key two assumptions.

First, we’ll open approximately 35 company restaurants. Thetiming of these openings will likely be split somewhat evenly throughout theyear. And in addition, we may open in one new market next year that beingNevada. Second assumption is that we expect to generate approximately 2%, 3%comparable restaurant sales growth.

Now, I would like to turn the call back over to G.J.

G.J. Hart

Thanks, guys. Well, as it is continued to be tough time forthe industry, we have been very fortunate in that our results have continued toshow relative strength. Let me assureyou that no one at our company takes this for granted. We know it’s a battleout there and I want to specially thank all the Texas Roadhouse team membersfor their continuing commitment to offering legendary food and legendaryservice to each and every guest that walk in our door.

As I have said several times before, tough times give us theopportunity to take share from the competition and that is what we hope toachieve from our operations focused execution.

One final note before we open up the call for questions, Ido want to remind investors that we will be hosting our first Analyst Day inNew York City on December the 4. If anyone is interested and has not yetRSVPed, please let us know what space is limited and with that covers off aprepared remarks offered if you would, open the line for questions?

Question-and-Answer Session

Operator

(Operator Instructions) And we would go first to Jeff Farmerof CIBC World Markets.

Jeff Farmer - CIBC World Markets

Great. Thank you. The majority of your national barn drillcompetitors have been on national television over the last few months, heavilypromoting their low price point offerings. Obviously, this is not sustainablefor them but I’ just m curious what you guys can do, if anything over the nextseveral quarter to help hold on to some of the market share while thiscontinues?

G.J. Hart

Well, Jeff, I would just comment, this is G.J. I would justcomment that a lot of these different promotions have gone on all year along.And quite frankly, as you know, we continue to just stay focused on the basicsto running the restaurant and we’re going to continue to do that. And we thinkthat our value positioning that’s continue to strengthen overtime. And so Iwould just tell you that we’ve continuing to stay focus.

Jeff Farmer - CIBC World Markets

Okay. I guess itsrelates to 2 October of ’07, the comparison got a little bit more challenging andI guess relative to the third quarter but was there anything that you couldpoint to from a competitive standpoint that would sort of point to or drivethat a slow down and traffic for you guys in October?

G.J. Hart

No.

Jeff Farmer - CIBC World Markets

Okay. And then just quickly, you obviously, gave us guidanceon the ’08 unit growth. It’s basically, right in the middle that’s 16% to 18%long-term range for the company. Do you think you will be able to maintain thatrate as we get out to 2009, 2010? You’re looking hold on to that 16% to 18%unit growth rate?

Scott Colosi

Jeff, this is Scott. I think that’s definitely the plan atleast for the next few years.

Jeff Farmer - CIBC World Markets

Okay. And final question. Just on the interest expense, itobviously jumped a bit and you basically gave us some warning that wouldhappen. But, as you look out into 2008, what’s the ballpark interest expensenumber for the full year assuming no change on the cap structure for you guys?

Scott Colosi

Well, I would say something similar to what we expense inthe third quarter.

Jeff Farmer - CIBC World Markets

Okay.

Scott Colosi

Probably it would be a pretty good run rate for us for thenext five quarters or so.

Jeff Farmer - CIBC World Markets

Okay. Thank you.

Operator

Thank you. We will go next to David Tarantino with Robert W.Baird.

David Tarantino - Robert W. Baird

Hi, good afternoon. G.J. you mentioned that you are notfully contracted on proteins for next year, which might imply you havecontracted some of the proteins or at least a percentage of your needs. Am Ireading that correctly and if so, could you give us an idea of what has beenlocked to date?

G.J. Hart

Yeah, David. I will tell you, we have locked in a smallportion of our products for next year. And I will just tell you that there is alot of moving parts right now specifically in the beef industry.

We have seen the futures markets continue to falter here latelyand we don't negotiate on a daily basis.

David Tarantino - Robert W. Baird

Okay. And just a follow up to that, if the spot prices thatyou are seeing today hold, could you give us an idea what kind of inflation youmight see as you move out if you were to let it float in ‘08?

G.J. Hart

That’s really tough to say. And I don't really think I couldeven venture a guess on that at this point.

David Tarantino - Robert W. Baird

Okay. And Scott, could you remind us what type of laborinflation you are expecting in ‘08 and how that compares to 2007?

Scott Colosi

We had approximately around 5.5 this year and I would tellyou its will probably going to be about 60% of that next year, so probablyaround 3% or 2.5% to 3.5% is probably a good range to assume at this point.

David Tarantino - Robert W. Baird

Okay. Thank you very much.

Operator

We will go next to Steven Rees with JPMorgan.

Steven Rees - JPMorgan

Hi, thanks. Just on the 35 company owned restaurants thatyou planned for 2008, can you talk about what you are expected increase if atall in investment costs are for those units and then what you’re modeling interms of sales in the new units next year?

Scott Colosi

Hi, Steve this is Scott. I would tell you that, our averagecost per unit this year is somewhere between $3.5 and $4 million.

Steven Rees - JPMorgan

Okay.

Scott Colosi

And I would expect next year, probably a good assumptionwould be assume this about a 100,000 higher.

Steven Rees - JPMorgan

Okay.

Scott Colosi

As kind of what we’ve tracked about this year versus 2006.So inflation has definitely slowed down.

Steven Rees - JPMorgan

Okay.

Scott Colosi

But definitely we’re not seeing a reduction in constructioncosts.

Steven Rees - JPMorgan

Okay. And then onthe sales are you expecting the new units to open in line with the systemaverage or despite premium discount?

Scott Colosi

Well, they are opening, typically they are opening wellabove the system average. And then once they get out with honeymoon they end upcoming into our sort of a average unit line store base, $2, $3, $4000 below thecompany average and then they kind of start on their growth curve from there.

Steven Rees - JPMorgan

Okay. And then just in terms of a total CapEx estimate for‘08, both growth and maintenance if have that?

Scott Colosi

Probably roughly about $120 million would be sort of firststab number at that. Maintenance CapEx out of that would probably be around $10million.

Steven Rees - JPMorgan

Okay. Great. Thank you very much.

Operator

Thank you. We will go next to Jeff Omohundro with Wachovia.

Jeff Omohundro - Wachovia

Hi, thanks. I guess, because I wonder if you could update usa bit on some of your true put initiatives in particular around technology suchas the table management system it has now, what kind of opportunities you mightsee with that?

Scott Colosi

Hi Jeff, this is Scott. We sort of have three, I will callmain systems in play right now. One is a peer radical food costing system,which has been out nation-wide or pretty much nationwide for about 24 monthsand we are starting to and our guys are talking about it more than ever as faras the results from that system.

And I think our guys are still getting their feet wet, so tospeak and part as because we are also focused on just executing our food andservice aspects of our business. We are still getting into that.

The second piece is we just rolled the labor modules thatgoes with that. peer radical full piece and there are better reporting that ourguys are going to get as far as overtime and when people are clocking in andthen clocking out that kind of thing better enforcement of our labor schedulesand so forth, that could help us a lot on the labor line.

And yes you are right about we are testing a tablemanagement system, which certainly could make it lot easier for our host folksto execute, because they’ve got caller hit list, they’ve got a walking list.They could help us better seek folks at the table, so for example not putting afour person check at a six top table, that kind of thing as well. So we arevery excited about all of those. And we are making a lot of progress on them.

Jeff Omohundro - Wachovia

And then, I guess as a bit of a follow up on this start tothe Q4 period, I am just wondering what is your current thinking about pursuingsome sort of traffic building initiatives?

How much weight are you giving to that?

G.J. Hart

Jeff its G. J. I would tell you that we've just completeddoing about, I think it's 21-city tour of really intensifying our local storemarketing efforts, really getting out to address the folks that we may not bereaching. We continue to build on our permission based marketing program, whichis we've got well in excess of a million names now that we can tap into, andit's been very successful for us.

And our Call Ahead program, we recognize -- we need to reachout to the folks that may not come into a Texas Roadhouse largely because ofour long waits, and we're going to continue to focus on efforts, particularlylocally-driven around that. So really, all of it is consistent with what we'vedone in the past and that is the local effort, ultimately gaining that guestloyalty.

Jeff Omohundro - Wachovia

Very good. Thanks.

Operator

Thank you. Next we will go Andrew Barish with Banc OfAmerica.

Andrew Barish - Banc of America

Hey, guys, nice job. Do you have the monthlies in front ofyou, Scott, just for last year? I'm just trying to gather the pick up for therest of the fourth quarter. The comparisons going to be easier or are you justlooking at maybe a little bit more normal spending in the holiday season as itapproaches?

Scott Colosi

You talking about the fourth quarter comparisons?

Andrew Barish - Banc of America

Yes.

Scott Colosi

About 3.9 in October, 2.2 in November, and 3.7 December.

Andrew Barish - Banc of America

Excellent. And on food costs, I know there is a lot of --obviously, are two big moving pieces, commodities and pricing right now, whichwe don't know about, but this year you were able to keep food costs flattish.

Were new menu items that you introduced a benefit or justnot big enough on the mix to really help overall, was more the pricing you wereable to push through?

Scott Colosi

Not big enough on the mix, Andy. And the biggest thing wouldbe shrimp for us. It was rolled out in the fourth quarter last year. It's donewell, but it's still a small mix item, and it wouldn't have a material impacton food costs.

Essentially, we've got almost 3% pricing. So that goes alongways to cover inflation, and I'll tag the dairy piece is a big number, becausethat number by itself is 55 basis points.

Andrew Barish - Banc of America

Okay. Thank you very much.

Operator

Next, we'll go Paul Westra with Cowen and Company.

A. J. Cowen - Cowen and Company

Hi. It's A. J. Cowen (ph) calling in for Paul. I had just aquestion on the beef and the scenario that you do right to spot. Would you beable to lock in later in the year or progressively lock in parts of yourcommitment for the year?

G.J. Hart

Hey, Cowen. It's G.J. Yes, we could do all of the above. Wecould lock in if it seems appropriate or we could -- and do it progressively.And we're really, really just working on that on a daily basis right now.

A. J. Cowen - Cowen and Company

And could you lock in for a smaller time than a year so nextyear at this time you'd look to sign a year contract? Is that flexible or --?

G.J. Hart

Yes, it is.

A. J. Cowen - Cowen and Company

Okay. Then how would you -- you gave 2% to 3% comp guidancefor next year I guess. And then just looking at pricing, if you are riding aspot, will you be re-evaluating pricing more often or how would you handlethat?

G.J. Hart

Cowen (ph), you know what, that's yet to be determined. Wereally have some things to figure out first before we look at the whole pricingscenario.

A. J. Cowen - Cowen and Company

Okay. Thank you.

Operator

Thank you. Next, we'll go Matt Difrisco with Thomas WeiselPartners.

Matt Difrisco - Thomas Weisel Partners

Hi. Can you -- I might have missed this in the pricing. Ithink you said the quarter was 2.9, correct?

G.J. Hart

That's right.

Matt Difrisco - Thomas Weisel Partners

And then you said you're about -- you just cycled off 0.8?

G.J. Hart

That's right

Matt Difrisco - Thomas Weisel Partners

So I presume we're running at -- that 0.3 you're sayingquarter-to-date is only getting a 2.1 benefit from price and probably the samenegative mix effect?

Scott Colosi

The 0.8 drop off throughout the month, so you're probablylooking at more like it was 0.4 or less or probably 2.5% pricing for the mostof month of October.

Matt Difrisco - Thomas Weisel Partners

Okay. But going ahead to interpret what I guess, underlyingtraffic trends, we shouldn't -- I just don't want to over-exaggerate thetraffic slow down if you do have a price fall off pretty meaningful 0.08 --

Scott Colosi

Yes. Our check in October I think, was only up like 1.3,something like that. Our traffic was down one.

Matt Difrisco - Thomas Weisel Partners

Okay. Traffic was down one though. Okay. And you're getting-- going forward, you're going to though -- though you don't know what you'retake incrementally, you expect to maintain 2.1 over price increase?

Scott Colosi

Well, that would at least flow through the end of the year.

Matt Difrisco - Thomas Weisel Partners

And then, you mentioned a little bit about the bar mix beinga little bit of a by-product of the economy or spilling (ph) a little bit. Whatdo you mean by the bar mix? Is it a guy sitting down at the table and having adinner and he's trading down or opting out of the beer? Do you have thatgranularity or are you seeing the exact weakness sort of at the day parts thatare bar-driven like happy hour and after hours?

Scott Colossi

It's all across the board, Matt, and it's more of the guyeither coming in and not ordering a beer or a margarita or some other liquordrink or ordering less. So, instead ordering two beers, ordering one beer andwe haven't got to that level of granularity yet. It's been very consistent allyear, the slower pace of alcohol sales that we've seen, it really hasn'tchanged at all here.

Matt Difrisco - Thomas Weisel Partners

Okay. And then, looking at your confidence level in your'08, it sounds like you're pretty confident, that you have that all booked upand they're all in the pipeline, the 35. Some of your peers, whether on theupper scale steak houses, or more broader guys like cheesecake or Bistro, theyseem to be either delaying or slowing some of the development for '08.

What do you think there is a difference there? And that thebrand you guys are doing, or is it your locations that you are not as dependenton your surrounding malls? Or just wondering how, it seems like that you areone of the few concepts out there still growing your square footage.

And I am just wondering what could be the differentiatingfeatures, is it something regionally that you are growing in? Your regionalpositioning or is it also you are just looking for a different trade centersthen they might be?

G.J. Hart

Hi Matt it's G. J. I would tell you a couple of things.First of all just by the method of the way we grow, which is really peopledriven, we are growing all over the country, so it is nothing regionally.

Number two is that we tend to have the ability to have someflexibility on our real estate give the fact that we are not open for lunch andso in many cases we can get a little closer to the rooftops.

We know that 80 plus percent of our people go home first andso in some cases that does give us some flexibility and some opportunity to getsome additional sites.

Matt Difrisco - Thomas Weisel Partners

Excellent. Okay. Thank you very much.

Operator

Thank you. Next we will go to Barry Stouffer, BB&TCapital Markets.

Barry Stouffer - BB&T Capital Markets

Good afternoon, gentlemen. I've just two question. Where wasthe acquisition charge recorded and then also could you give us the debtbalance at the end of the quarter?

Scott Colosi

Barry, its Scott. The acquisition charge was recorded inG&A.

Barry Stouffer - BB&T Capital Markets

Okay.

Scott Colosi

And the debt balance at the end of the quarter was $75 million.

Barry Stouffer - BB&T Capital Markets

Thank you.

Operator

Next we will go to Chris O’Cull with Suntrust.

Chris O’Cull - Suntrust

Yes. Good afternoon. My question is regarding pricing. G. J.I know you guys evaluate the competitive set when you considered pricing. Areyou seeing competitors like Logans or Al Packers some of the guys that havegone private changed their strategies in this environment?

G.J. Hart

No. We really aren't. At this point we have not seen anythingsignificant.

Chris O’Cull - Suntrust

Okay. And then just when you consider pricing for 2008,would the objective be to offset the margin dollar impact of the higher costinflation, or do you expect to try to offset the margin percent impact?

Scott Colosi

Chris this is Scott. Absolutely we will look at the dollars.

Chris O’Cull - Suntrust

Okay.

Scott Colosi

And we look at both. Realistically we would take dollars tothe bank not percentages sold. That is what we look at.

Chris O’Cull - Suntrust

Okay. And then just a quick question on the menu mix. Is thenegative mix shift, are you seeing that in certain markets or states, or isthat happening pretty much across the system?

Scott Colosi

It is very much across the system.

Chris O’Cull - Suntrust

Okay. Okay, great. Thanks guys.

Operator

(Operator Instructions) And we'll take our next questionfrom Destin Tompkins with Morgan Keegan.

Destin Tompkins - Morgan Keegan

Thanks. Good afternoon, guys. I wanted to ask a question.G.J you talked about the menu-pricing test you have a small test in placecurrently. What are you looking for from that test? Are you hoping that theaverage check moves up in line with the price increase? If you see a little bitof a push back, would you still consider it as a success? What do you thinkwould qualify as a success?

G.J. Hart

Well, that’s all those things you just said. First andforemost we want to see what we will look all through on the pricing where wecapture it all and what kind of resistance is out there to that pricing and youneed to have it out there long enough, so you really get that good feedback.

And based on that we would evaluate, whether we do thatparticular price test or actually we have a couple of price tests going on andwe find what balance seems to be working for us.

Destin Tompkins - Morgan Keegan

Okay, great. And Scott, you mentioned the sales expectationfor the year of 1.5% to 2%. Did you say whether that assumes a flat trend fromthe October results or if you are projecting a pick up in November and Decemberfrom the point three in October?

Scott Colosi

It assumes a slight pick up from October to November andDecember.

Destin Tompkins - Morgan Keegan

Okay. And then Scott, can you just update us on what yourthoughts would be on potentially tapping in the balance sheet for some moreshare repurchases?

Scott Colosi

I think we are talking about it. We have to have a lot ofdiscussions about it. We have, changed our credit facility. We increased it by$100 million back in the summer and also eliminated one of the covenants whichnow allows to us buy back stock if we wanted to borrow money to do that.

We are wrestling with, we are using all of our free cashflow now to develop restaurants and we think that is where we get the bestreturn developing restaurants. We don't see that changing. Meaning we think in2008, we will probably be close to self-funding if not a little bit negative oncash flow maybe a few million.

Probably the same thing in 2009 and 2010 if we continue toadd 16%, 18% coupled with restaurants. So, the question then becomes is howcomfortable are we with taking on debt to buyback stock?

And I can tell you I think we'd like to maintain arelatively conservative balance sheet overall. So I think whatever we do, weare going to try to make sure that our balance sheet is relatively conservativegoing forward.

Destin Tompkins - Morgan Keegan

Great. Thank you.

Operator

We will go next to Bill Gilchrist with Westfield CapitalManagement

Bill Gilchrist - Westfield CapitalManagement

Thank you for being the call. G.J could you tell me howyou're looking at the future prices for beef? Where they are too high? What arethey factoring in that you guys disagree with? Any color there would behelpful.

G.J. Hart

Sure. Well, I will just tell you that the futures markets,which I think are largely impacted by a lot of financial players. Not just thepacking companies, and the disparity between that and the spot prices is justvery large right now. In the last week or so, particularly at the end of lastweek, you've seen the futures markets come down pretty significantly.

We think there is opportunity maybe that in the next coupleof few weeks there might be continued weakness. And I will just tell you that,disparity just is too high from what we've seen in previous years and we lockin for the year.

Bill Gilchrist - Westfield Capital Management

Okay. Thanks a lot.

Operator

Thank you. Next we'll go to Kevin Wink with Paulinas CapitalManagement.

Kevin Wink - Paulinas Capital Management

The comp goal for '08 was mentioned 2% to 3%. Maybe you cangive us more color as to how much of that is traffic? How much of that ischeck? How much of that is pricing? It seemed like you didn't want to answerpricing questions earlier in the call, so I respect that.

But, and then, of the overall color behind the comp goal,what parts do you feel more confident about at this point and what parts mightyou feel less confident about?

Scott Colosi

Well, this is Scott. We've assumed about 1.5% pricing goinginto next year, so that would imply and we think we'll capture the majoritythat in checks. So that would imply guest comps up 1.5ish in that range. If wetake less pricing, obviously that changes some dynamics for that. But chancesare we'd only take less pricing, if there was less inflation.

So that would change some of our cost assumption, so that’sreally kind of where we are now. We're fairly confident about our compassumptions because we think our guide positioning is as strong as ever, andcontinues to get stronger because we've kind of held back on the pricing frontas long as we can.

Can we continue to execute, we believe at a pretty highlevel because even as the times have gotten tougher, we haven't attempted totake any shortcuts or if you will become more productive in our restaurants,which usually means somehow the guest is getting less of an experience. So, wesort of stay pretty focused on doing what we always do, and running thebusiness.

Kevin Wink - Paulinas Capital Management

Okay. And then what opportunities do you think there maybefor further acquisitions of franchisees in 2008? And the CapEx comments forpossible 2008 CapEx that of course is exclusive of any possible acquisitions?

Scott Colosi

Yeah. That excludes any acquisitions; the franchiseacquisition sort of really depends on two fronts, kind of where we feel likeour stock price maybe over given time frame. If we want to execute the role-upagreement, that’s in our franchise agreements.

If we continue on the negotiating path of five to six timesEBITDA that will be very opportunistic and very hit or miss, depending upon thenegotiations with every specific franchisee. We are talking to people, and wecontinue to have dialogue with different folks, and something's may happen butit's really, we aren't in a position right now the way to comment any further.

Kevin Wink - Paulinas Capital Management

Well, as you noted yourself, you're probably approachingcash flow breakeven with the current CapEx plan for next year. And so withborrowing to buyout franchisees, did you feel any constraints in doing that orare you happy to borrow as much as you can depending upon the opportunities?

Scott Colosi

We're pretty happy to borrow, what we need to buybackfranchisees?

Kevin Wink - Paulinas Capital Management

Then one more general question. You've got a company withsuperior growth characteristics, great unit economics. But in a current stockmarket environment, where people apparently are focusing on what they think arenegatives instead of companies positives. What in your opinion are the largermisunderstandings about the company at this point in the investment community?

G.J. Hart

This is G.J. Well, I would share some of that, those issues;we certainly get a little frustrated that we've continued to outperform what wesaid we would do, in light of this tough environment. And what I think thatpeople miss the biggest part of Texas Roadhouse is just the quality of the foodand how much food you get and for dollars that we're asking you to pay, and theexperience in the overall.

And that's why we continue to stay so focused on ouroperational objectives and we know this is a marathon, not a 100-yard sprint;we've got a long run way to go. And we believe sooner or later people willrecognize us for the performance that we've achieved.

Kevin Wink - Paulinas Capital Management

Okay. Bye Thanks for your help.

Operator

Thank you. And at this time, we have no further questions.I'd like to turn the call back over the Mr. Hart for additional or closingcomments.

G.J. Hart

All right, thank you very much. We appreciate you're hearingus out today. We look forward to sharing with you our year-end results inFebruary. Thank you.

Operator

That does conclude today's call. You may disconnect your linesat this time.

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