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Texas Roadhouse, Inc. (NASDAQ:TXRH)

F1Q08 Earnings Call

April 28, 2008 5:00 pm ET

Executives

Scott M. Colosi - Chief Financial Officer

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

Analysts

Jason West - Deutsche Bank

John Glass - Morgan Stanley

Jeff Omohundro - Wachovia Securities

Matt DiFrisco - Oppenheimer

Destin Tompkins - Morgan Keegan

Larry Miller - RBC Capital Markets

Steven B. Rees - JPMorgan

David E. Tarantino - Robert W. Baird & Co.

Bryan Elliott - Raymond James & Associates

Paul Westra - Cowen & Co

Barry Stouffer - BB&T

Christopher O’Cull - SunTrust Robinson Humphrey

Keith Siegner - Credit Suisse

Operator

Good day and welcome, ladies and gentlemen. Thank you for standing by. Welcome to the Texas Roadhouse Incorporated first quarter 2008 earnings conference call. (Operator Instructions)

I would like to turn the call over to Mr. Scott Colosi, Chief Financial Officer of Texas Roadhouse Incorporated. Please go ahead, sir.

Scott M. Colosi

Thank you, Margaret and good evening, everybody. By now, everyone should have access to our earnings announcement released this afternoon for the first quarter ended March 25, 2008. It may also be found on our website at texasroadhouse.com under the investor section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Texas Roadhouse.

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

G. J. Hart

Thank you, Scott and good evening, everyone. Well, we had what I would call a respectable start to 2008, especially in light of the overall environment. When we last talked to you on our fourth quarter call a little over two months ago, we had just lived through two months of restaurant level inflation of around 4% year over year and on top of that, we saw the consumer environment get materially softer. Not a great combination for the bottom line.

As we analyzed the situation, we decided to do what we have always done and focus on our four-wall execution rather than a short-term emotional fix centered on price increases and/or heavy discounting. This dedication to delivering value through legendary food and legendary service has historically carried us through tougher times and further distances ourselves from the competition. And that is one of the greatest strengths of our ownership mentality system. It also provides the opportunity and the drive to do what is best for the overall business.

So let’s spend a few minutes talking about the first quarter, which I would say was characterized by consumer uncertainty and some degree of inflation in food, labor, and utilities. However, thanks to the experience and dedication of our great managing partners, we had a solid quarter.

For the quarter, diluted earnings per share increased 5% from the prior year to $0.17. I will point out that this included a $700,000 pretax charge relating to the closure of one location. Relative to our plan, earnings per share was right in line as the slightly better restaurant level margins offset slightly lower total sales.

With regard to sales, first quarter comparable restaurant sales decreased 1.2% with our average check basically flat at positive 0.1%. Therefore, traffic was down 1.3%. Sure, the weather may have been a little worse this year and we did see a negative effect from Easter being in our first quarter as compared to the second quarter last year. Regardless, I want to assure you that our goal is to always create positive traffic.

On the check side of things, we gave up just over a point due to negative mix shift. A little more than half of this is entrée driven with the remainder attributable to alcoholic beverages.

Regarding pricing, we currently have slightly more than 1% pricing in our menu, which will effectively be there for the remainder of 2008. On top of this, we are planning to take another 1% to 1.5% in pricing during the month of May, which unlike some of our previous increases, will be spread among more items.

In the past, we’ve tended to raise prices on higher end items versus lower end items, which has likely been a contributor to some of the negative mix shifts in the past.

On the margin side of things, restaurant margins were 97 basis points lower than last year’s first quarter, which was slightly better than we had anticipated due to the benefit resulting from floating a portion of our beef costs. We continued to float approximately 25% of these costs for the year. Right now, that’s a benefit compared to our long-term contract price but there is a lot of volatility in the commodity markets and so we’ll continue to see how this unfolds through the balance of the year.

On the development side, we opened six new company restaurants during the quarter and remain on track to open approximately 30 for the year. Overall, average weekly sales for this year’s openings continues to be strong, averaging in excess of $90,000 per week for the quarter.

Now let me touch briefly on our plans for the remainder of 2008. We are leaving our diluted earnings per share growth goal for the year unchanged at 5% to 15% based on flat to plus one comparable restaurant sales growth, as we recognize and acknowledge uncertainties in the market.

While inflation definitely remains a concern, we have been a little more fortunate here recently relative to the beginning of the year and the end of 2007. Overall food inflation has eased slightly with the benefit from floating beef I mentioned and year-over-year improvement in produce. However, there are question marks surrounding where commodities are heading, driven in large part by the corn and beef markets.

Labor inflation has not been quite what it was in 2007, although it was definitely there. One area of concern is utilities, where we are seeing steady increases. In general, the inflation picture changes daily and we encourage our operators to do what is right for the long-term as opposed to cutting corners and jeopardizing the guest experience.

So besides continuing our focus on four-wall execution, what else are we doing given this environment?

First, in response to the continued inflation we are experiencing, we are rolling out a menu in late May that we estimate will have 1% to 1.5% of pricing. Secondly, in response to the continued inflation our guests are experiencing, we are including a couple of value-oriented items on our menu. We are adding a one-third slab rib entrée that is served with two sides, a smaller version of our cactus blossom appetizer, and a couple of our combo entrees around our pulled pork.

Much of this has been a test for over the last few months in one form or another and we have received positive guest feedback. Also, this approach is in line with our long-term strategy of having high quality value-oriented food offerings. We are very proud of the fact that effective with this menu release, we will have 19 entrées excluding burgers and sandwiches priced below $10 in the vast majority of our markets. I don’t believe there are many in our industry offering a similar level of food and overall experience that can say the same.

Lastly before turning the call over to Scott, I want to give you a quick update on capital allocation for 2008. Our plan remains to open approximately 30 new restaurants and with this we are projecting positive free cash flow. In addition, as we discussed last quarter, our board has authorized a $25 million stock repurchase plan as a means for us to return some capital to our stockholders.

As you saw in our release, we repurchased over 0.5 million shares of stock this quarter and will continue to be opportunistic as it relates to these repurchases. On top of this, we continue to talk with various franchisees about acquiring restaurants. We recently announced that at the beginning of the second quarter, we acquired three restaurants for approximately $8.7 million.

We believe this continues to be a good use of our capital for our stockholders and given the internal rates of return, we are also comfortable taking on some debt to acquire restaurants from franchisees.

I will now turn the call over to Scott to review the financials. Scott.

Scott M. Colosi

Thank you, G.J. During my review of the first quarter, please note that many of the numbers I will mention are listed in a schedule of supplemental financial and operating data that was included in the press release. So starting at the top of our income statement for the first quarter of 2008 as compared to the same period in 2007, total revenue increased 18% with company-owned restaurant sales increasing 19%. The growth in company-owned restaurant sales was driven by operating week growth as both comparable restaurant sales and average unit volumes were down.

As G.J. mentioned earlier, comparable restaurant sales at company-owned restaurants decreased 1.2% versus an increase of 0.9% last year. For the quarter, our average check increased 0.1% while traffic was down 1.3%.

From a restaurant sales perspective, I will offer a little more color on average weekly sales. For the quarter, the 156 restaurants in our same-store sales base averaged just below $80,000 per week in sales, while the 32 restaurants that are in our average unit volume base but not in the same-store sales base averaged just over $72,000 a week in sales.

The 21 restaurants that have been opened over the last nine months and thus are in neither our same-store nor average unit volume calculations averaged just over $77,000 per week in sales during the quarter. And while our newer restaurants are averaging less than our older ones in terms of volumes as a group, as a group we anticipate the returns will still be well in excess of our cost of capital.

Franchise royalties and fees were $2.6 million, which was $300,000 lower than last year primarily due to the acquisition of nine franchise restaurants during the third quarter of 2007.

In terms of margins, we continue to get back a little; however, not quite as much as during the fourth quarter. As a percentage of sales, restaurant margins were 97 basis points lower than last year for the first quarter. Let me touch briefly on the specific lines.

Cost of sales was up 45 basis points. During the quarter, the benefit provided by floating a portion of our beef cost was more than offset by higher dairy and non-protein related food costs. As G.J. mentioned, we continue benefiting from floating a portion of our beef and we are cautiously optimistic this will be the case for the year. Dairy costs were high last quarter and have continued on that trend.

On the non-protein related food items, such as bread mix, shortening, and frying oils, the costs remain up for us.

Restaurant labor costs were up 49 basis points. While negative same-store sales growth certainly did not help, we continue to feel some pressure on labor, resulting from some state mandated increases in minimum and tipped wages. We expected to continue to experience wage rate inflationary pressures, although not to the extent we saw in 2007.

Rent expense was essentially flat with the prior year.

Other operating expenses were also basically flat, up four basis points versus last year. With sales and margins being down year over year, we saw lower manager and market partner bonuses as a percentage of restaurant sales. Offsetting this was increased utilities, supplies, and other costs due to inflation and the deleveraging associated with negative comp sales.

Pre-opening expenses were about $750,000 less than last year due to four less restaurants being open during the first quarter this year as compared to last. Depreciation and amortization costs were 32 basis points higher than last year, driven primarily by the cost of new restaurants.

With regard to impairment and closing costs, we incurred a $703,000 charge relating to closing a restaurant during the quarter. The largest part of this cost was a non-cash charge recorded in conjunction with setting up a lease reserve for the restaurant we closed during the quarter. Although we currently do not have plans to close any additional restaurants, given the size of our system we do anticipate we will have some more of these costs as we proactively manage our real estate portfolio.

G&A expenses as a percentage of revenue were flat with last year. While we did have higher share-based compensation costs resulting from restricted stock unit awards for our officers and board members, negative 2.8% average unit volume growth prevented us from achieving leverage on this line.

Our effective tax rate for the quarter was 35.0%, which was lower than last year due to higher tax credits, primarily the FICA tip credit, which is higher partially due to the increased tip wage in numerous states. For 2008, we estimate our income tax rate will be approximately 35%.

And finally, our weighted average diluted share count was 76.4 million, which was 300,000 lower than the fourth quarter due to the almost 530,000 shares of common stock we repurchased at an average price of $9.24 during the quarter.

Now on to full year 2008 guidance, as noted in our release and as G.J. mentioned earlier, our 2008 guidance is unchanged at diluted EPS growth of 5% to 15%, which includes the positive impact from the extra week we will have during the fourth quarter of 2008.

Our forecast continues to include the following two assumptions; first, we’ll open approximately 30 company restaurants which, when combined with 2007’s openings and acquisitions, we estimate will result in over 20% operating week growth. And second, we’ll generate comparable restaurant sales growth of flat to up 1% for the full year.

Before I turn the call over to G.J., I want to make a couple more comments regarding our forecast. G.J. and I both recognize that the 5% to 15% range is a rather wide range and I have a couple of comments around that. First, I think everybody knows there’s a lot of general uncertainties in the marketplace. Just look at $120 oil -- who would have thought at this point today? Secondly, I’ll walk you through a couple of the key variables in our forecast, starting with sales and show you the differences between the 5% case and what might make up the 15% case.

If we take the sales assumption where we are saying comps of flat to up 1% for the year, it would kind of break down in this case. Our pricing assumption -- we are estimating that we are going to have average pricing for the year of about 2% and that’s both in the 5% case and the 15% case.

We believe we are going to have negative mix shift, and we’ve been trending about negative 1 and we think that’s going to continue, whether we’d be in the 5% case or the 15% case.

So that kind of leaves you with traffic as the key variable. And on the lower end of the spectrum, we would expect to see traffic down about 1% and for us to get to the higher end of the range, we would need traffic to at least be flat for the year.

So you add up 2% pricing, negative 1% mix shift, and then traffic being flat or down 1, that’s how you get to a sales growth assumption, a comp sales growth assumption of 0 to plus 1.

On the restaurant margin side, we think on the high end of the range we might be able to get to a point where margins are down only 50 basis points for the year. On the low end of the range, we’re talking more like 80 to 100 basis points for the year, and keep in mind that we were basically 100 basis points down year over year in the first quarter.

The key factors that influenced that, obviously sales deleveraging or leveraging sales growth and just floating beef, and also floating dairy and produce costs. There is still a ton of uncertainty and we’ve got eight months left in the year.

And finally, if we incur or do not incur any additional impairment or closure charges the rest of the year, that will help us get to the higher end of the spectrum from the earnings perspective and then if we do incur some impairment or closure cost, that would be something that would lend us more towards the lower end of the range.

So with that, I will turn the call back over to G.J. for some closing comments.

G. J. Hart

Okay, thanks, Scott. It continues to be a tough environment for restaurant operators but we remain committed to doing what is right for the long-term success of the business. We believe this has paid and will continue paying huge dividends as we work towards 2009 and beyond, and I can tell you from spending time with our operators that they are as committed as ever to growing this great brand. In fact, we just had our annual managing partner conference in Florida last week where over 1,000 of us, including spouses and vendor partners all got together, spent time together reminiscing about where we’ve been, celebrated achievements, and talked about our future.

In general, we celebrated that fact that the Texas Roadhouse brand has now completed 15 years and we talked about what it will take to complete another 15 legendary years.

As always, our managing partner conferences are a great forum to gauge the pulse of our operators. Fortunately for our shareholders, they are an experienced group and I can tell you they are fired up and committed to delivering another 15-plus year of legendary food and legendary service. And at the end of the day, that’s what wins.

So as each managing partner does his or her job every day, we will do ours to provide the support they need to run great operations and we will also direct the allocation of capital to develop great locations, evaluate the purchase of franchise restaurants where appropriate, and continue to evaluate opportunistically repurchasing shares.

Before opening the call up for questions, I want to once again take the time to thank all the Texas Roadhouse team members for their continuing support, effort, and commitment to offering legendary food and legendary service to each and every guest that walk through our doors. It was great to see all of you last week and I hope you are carrying the excitement back to your restaurants.

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

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Jason West, Deutsche Bank.

Jason West - Deutsche Bank

Thanks a lot, guys. I was wanting just to talk about the development plan a little bit. First of all in ’08, the 30 -- is that a net or a gross number? And then if you are -- how you guys are thinking about ’09 now, given the environment and maybe longer term as well?

Scott M. Colosi

The 30 is a gross number, so we will open 30 restaurants. So if you subtract that one that we’ve closed, that would be a net of 29. And then if you add back the three that we acquired, that would be a net of 32, would be additional company stores by the end of the year.

As far as 2009, we are not prepared to say anything about 2009 at this point.

Jason West - Deutsche Bank

Okay, thanks.

Operator

We’ll go next to John Glass, Morgan Stanley.

John Glass - Morgan Stanley

Given your comments on the inflationary environment, have you thought about ways you could take out costs of building new units as a way to maybe improve returns over time?

G. J. Hart

In terms of just taking cost out of the building --

John Glass - Morgan Stanley

Yeah, lowering the capital cost of building, because I am assuming those costs are going up at the time as well and the volumes have come down slightly.

G. J. Hart

Every year we get together and take a look at everything related to our development costs and see what we can do and this was the first year -- I think we mentioned it on the last call, that we actually got a little bit of cost out of the building. It wasn’t significant. But we continue to evaluate those alternatives all the time.

In terms of anything relative to our prototype, we have not done anything at this point.

John Glass - Morgan Stanley

Okay, and then Scott, you mentioned a worst case I think of a minus 1% traffic in the guidance, which would presume I guess traffic would get better from here, so maybe you could explain -- is it a comparison issue, is it -- what is it or is it maybe your current run-rate of traffic that gives you confidence that it gets better?

Scott M. Colosi

You mean to end up with flat traffic versus down 1?

John Glass - Morgan Stanley

I think down 1 was your worst case, right?

Scott M. Colosi

Down 1 we think is the lower end of what we are going to see. I think G.J. talked a little bit about weather and some other issues that we had, certainly had -- Easter, the timing of Easter a little bit. So I think we are a little more optimistic that we can get closer to flat. But again, flat is the upper end of the range, so somewhere in between I think is where we are most comfortable.

John Glass - Morgan Stanley

Okay. Thank you.

Operator

We’ll go next to Jeff Omohundro, Wachovia Securities.

Jeff Omohundro - Wachovia Securities

Thanks. Just got a couple; first, maybe you can talk a little bit more about the May menu, about the development process and who much of the menu really is going to be new and how much testing behind those items?

G. J. Hart

In terms of -- we always have ongoing tests on the menu, so the items that we are talking about have been in test over the last several months, particularly the third slab of ribs and the baby blossom, if you will. The pulled pork and the variety around the entrées, or sorry the combos, is something -- we put the pulled pork on a while back so this is a natural progression to hit some value price points, those price points being to put it with a combo of chicken at $10.99, you know, basically $10.99 and if you put it with ribs, it would be $12.99 -- again, just trying to achieve some real value on our menu.

Jeff Omohundro - Wachovia Securities

And do you think there will be much of an average check move as a result of that?

G. J. Hart

We don’t know, is the real short answer.

Jeff Omohundro - Wachovia Securities

Okay, and you touched a little bit on the beef situation and we see cattle on feed numbers dropping and futures contract pricing up. I just wondered if you could talk a little bit about what this means maybe as we go into the end of this year and next year and how you might manage through a perhaps more challenging beef environment.

G. J. Hart

Well, I think that the other side of that coin is what I’ve talked about in the past and that’s the demand side of it. Currently there is quite a bit of pork out there. There is still quite a bit of chicken out there so from a protein perspective, there is plenty of product available. And that combined with the macroeconomic environment I think is going to continue to hamper demand, at least at those high lofty price levels, and we’ve seen some of that.

So I think that balances itself out at least in the near-term from here to the rest of the year. That said, you are correct. The numbers are going down and we’ll have to see but don’t lose sight of the fact that the food service industry in general is going through a challenge, and then retail in terms of retail consumer is going through a challenge.

So how that all balances out is unknown but I think that at least through the balance of this year, we feel like our 25% floating was a good decision.

Jeff Omohundro - Wachovia Securities

Last question is on store development, and just wondering, has there been any shift in really around the timing of the expected openings this year? It seems like it’s being weighted a little bit to the back half. I thought it would be a little more balanced.

Scott M. Colosi

Actually, it’s going to be pretty spread out across the year, so we are going to have pretty much half of our stores opened by the end of the second quarter. I think we are at nine right now and 15 already under construction, I believe, and we’ve only got six to go to finalize the permitting on. So we feel very, very good about the development plans this year.

Jeff Omohundro - Wachovia Securities

Very good. Thanks.

Operator

We’ll go next to Matt DiFrisco, Oppenheimer.

Matt DiFrisco - Oppenheimer

Thank you. Could you help us see how the trend went throughout the quarter on --

G. J. Hart

Matt, we can’t hear you.

Matt DiFrisco - Oppenheimer

Can you hear me now?

G. J. Hart

Yes, we can.

Matt DiFrisco - Oppenheimer

Okay. Can you help us look at how the trend was on the comp throughout the quarter? And I know you sometimes give a statistic of the first six weeks of the quarter as well, of this current quarter. Just in particular looking back, it looked as though you had a headier comparison towards the back half of this quarter. I was just curious how your comp was trending in relation to that.

Scott M. Colosi

Well, January was down five-tenths, February was down 1.7, and March was down 1.3. And we were lapping a 1.8, a 0.8, and a 0.1.

Matt DiFrisco - Oppenheimer

And then the first six weeks of this quarter?

Scott M. Colosi

First six weeks of this quarter -- I think it’s four weeks. Four weeks of this quarter was down 0.2, and that was on top of a three point deposit, 3.7.

Matt DiFrisco - Oppenheimer

Okay, so you are seeing on a two-year basis there it looks like an improvement coming into this month.

Scott M. Colosi

I guess technically you could say that. I don’t know how much stock to put into that, to be honest with you, but you are right technically.

Matt DiFrisco - Oppenheimer

Okay, and then on the labor line, can you help us think about how that looks going into the next couple of quarters? I noticed on a volume basis, on an average weekly sales basis, it looks as though 2Q and 1Q were pretty close, so I would think your relative labor costs should be somewhat in line with what you are running at right now versus the sequential jump or deleverage that you had last year that you experienced, despite having a stronger comp in 2Q than you did in 1Q. Is that correct to think about it, that the range f the relative cost of labor in 1Q could be maintained or within that range into 2Q?

Scott M. Colosi

Well, I want to -- before I answer that question, I want to stress again -- we are not really prepared to give out specific line item guidance except for what I gave earlier on the total sort of margin line. You know, in theory you are right -- our sales volumes are pretty close first quarter, second quarter. Of course, there are other things that impact the labor line. The biggest one is workers’ comp and so we do get an actual report every quarter and to the extent that we are favorable or unfavorable, given what we currently have reserved, we have to book up to that or book down to that number, so that can sway the numbers a little bit. I believe we had an adjustment for this last quarter on the workers’ comp line but it is something that can sway the numbers a little bit. And that’s for every quarter.

Matt DiFrisco - Oppenheimer

Okay, that’s what I was -- I guess what I was indirectly asking was, was there a favorable thing in 1Q that might have helped you get down to the --

Scott M. Colosi

No, no.

Matt DiFrisco - Oppenheimer

Okay. Thank you.

Operator

Our next question comes from Destin Tompkins, Morgan Keegan.

Destin Tompkins - Morgan Keegan

Good afternoon. G.J., I thought I noticed that one of the local Texas Roadhouse restaurants was now opening for lunch on Fridays. Is that something new and have you -- are you testing something with lunch?

G. J. Hart

No, we are not testing anything with lunch. The Friday lunch option is something that’s been around for the last few years and the Tennessee market has traditionally been a franchise market and that market is one of the few markets that we do have lunch available, and so there are some variations in that particular marketplace. We’ve got a handful of these restaurants that are opened for lunch, so given where you are, that would be my suspicion there.

Destin Tompkins - Morgan Keegan

Okay, great. Thank you. And then Scott, if you could help us on depreciation, it looks like depreciation was flat sequentially with Q4. Any help in terms of where we should expect that to continue for the rest of the year?

Scott M. Colosi

I will tell you that as a percent of revenue -- well, we’ve got 53 weeks over 52 this year, that’s one thing. So you are going to have that increase for it. It’s going to continue to grow a little bit just because of the amount of capital we are putting on the books. At the same time, it won’t grow as fast as it’s been growing because we are starting to have more depreciation fall off the books, more equipment packages reach their depreciable life and fall off the books. So I suspect depreciation will be up slightly as a percentage of revenue by the end of the year, year over year.

Destin Tompkins - Morgan Keegan

Great. Thank you.

Operator

We’ll go next to Larry Miller, RBC Capital Markets.

Larry Miller - RBC Capital Markets

A couple of my questions have been answered but I just want to clarify something -- you guys are contracted on all the other commodities other than the 25% of beef, dairy, and produce, is that right?

Scott M. Colosi

We are not contracted on produce. We have a floor and ceiling on potatoes. We are not contracted on dairy. We are on butter and margarine but we are not on cheese. That’s the big one, on cheese. Almost everything else we’ve got some form of contract on except for the beef piece.

Larry Miller - RBC Capital Markets

How about some of the -- you know, flour and some stuff that you would use for the rolls?

Scott M. Colosi

Yes, we are contracted on wheat, on bread mix products, yeah.

Larry Miller - RBC Capital Markets

Great, and then I was a little confused because I think at one point you said check was flat and then you said check was down 1%. Did I mishear you guys? I know your guidance would assume that so I wasn’t sure --

Scott M. Colosi

We said check was flat, pricing was up 1%, 1.1% but we had negative mix shift --

Larry Miller - RBC Capital Markets

I got you, okay.

Scott M. Colosi

-- the same number.

Larry Miller - RBC Capital Markets

Yeah, no, that makes sense. And then finally, can you guys give us sort of an update on where you are with some of those technological initiatives that you are working on with the host stand and the waiting coral and some of the call ahead -- I might have missed that but I don’t know that you mentioned it.

Scott M. Colosi

Well, on the guest manager system I believe is what you are talking about with regard to the host stand, that is still in test. We are expanding that test. I think we are very excited about the potential of that system but we’ve still got a ways to go on that one and I think our expanded test is going to be in 10 restaurants here and very, very soon. That’s probably the biggest thing we have going on right now. We finished rolling out our labor product back in the fourth quarter and a lot of our guys are still getting started on that piece of it. That’s pretty much it at the moment.

Larry Miller - RBC Capital Markets

And the theoretical food costs, that’s all done too, right?

Scott M. Colosi

Theoretical food cost has been out for a couple of years now.

Larry Miller - RBC Capital Markets

Okay, right. That’s what I thought. Okay, thanks, guys.

Operator

Next is Steven Rees, J.P. Morgan.

Steven B. Rees - JPMorgan

I appreciate the color on the new unit average weekly sales but I did want to ask if you are seeing any sort of discrepancy between new units and newer markets that are less penetrated versus some of the units that you are adding in your more mature markets.

Scott M. Colosi

No, there really hasn’t been a statistically relevant I would say difference between new markets or existing markets relative to stores doing higher or lower than average volumes.

Steven B. Rees - JPMorgan

Okay, that’s helpful and then, I know you guys have spent a lot of time testing price increases recently -- can you just talk about what you’ve learned and how price sensitive you think your customers today versus a couple of years ago?

G. J. Hart

I’ll take this one. The testing that we’ve done around the country quite frankly, even with surveying our servers, we haven’t seen any negative responses -- I mean, almost to a restaurant, there might have been one complaint. Now is that always the best gauge? I’m not sure but from the extent of where we came down at the 1% to 1.5%, we feel very comfortable based on the different tests we have going.

Having said that, how elastic is our pricing -- I will tell you that our standard answer is we want to give the guest the absolute best experience and the best value that we can and pricing is the last resort for us and it will continue to be so, and so we are very sensitive that given this macro environment, we need to be very careful as to what we do and under no uncertain terms will we decrease our value compared to our competition.

Steven B. Rees - JPMorgan

Okay, and then just finally, you’ve talked about polling from a pretty broad diner base. I think about 25% coming out from lower end family dining, about 50% coming from midscale, traditional, casual and another 25% coming down from the higher end concepts. I mean, have you seen any evidence of a shift in this sort of mix, and perhaps you are drawing from a wider range of customers, given the overall situation?

G. J. Hart

Other than to the extent if you walk into Texas Roadhouses today around the country, I would suggest to you that you will see more folks in coats and ties and the like, so we make that assumption. But other than that, that would be it.

Steven B. Rees - JPMorgan

Okay, great. Thank you very much.

Operator

Our next question comes from David Tarantino, Robert W. Baird.

David E. Tarantino - Robert W. Baird & Co.

Good afternoon. A question on the price increase, G.J., how confident are you that you will be able to get the full benefit of that price increase this time around without seeing the negative mix shift?

G. J. Hart

I think we feel relatively confident, or cautiously optimistic, I like to say, largely because we did take the increase over a much broader base than we typically have done and so we feel like in the previous ones we may have telegraphed a little bit more to the guest as to how to trade down, if you will. We feel a little more comfortable -- we do feel more comfortable that that’s the case in this pricing, that we are a little better positioned than we were in the past. So having said that, I would tell you we are cautiously optimistic.

David E. Tarantino - Robert W. Baird & Co.

Great, that’s helpful. And Scott, just a question on the guidance. It seems like you might be able to do a little bit better on the restaurant level margin side, given what you did in the first quarter and given that you will have a little bit more pricing going forward. Is there something about the cost comparison that I’m missing for the balance of the year, or could you just help understand that?

Scott M. Colosi

Last year third quarter I think we had another favorable insurance adjustment, so we are lapping that. At the same time, I think as G.J. talked about, we are rolling out some lower priced items, the four-bone rib slab below $10. You’ve got the baby blossom very aggressively priced. You know, some of those items, while we all believe they are great value for the guest, they may eat into our margin a little bit depending upon what they cannibalize or don’t cannibalize. So there are still some question marks out there about where our margins are going to shake out. And we always talk about we take dollars to the bank and not margins, so we are looking at the best return that we can get from a dollars perspective.

David E. Tarantino - Robert W. Baird & Co.

Okay, that’s helpful and the last question I think on the last call you mentioned you were working on an initiative to sharpen specifications on some of your cuts of rib eyes. Could you give an update on that initiative?

Scott M. Colosi

Yes, the real benefit or lack thereof, if you will, or any benefit is yet to be seen because quite frankly, we didn’t even get our beef once it was aged into our system until February, mostly late February. So I think it is still a little bit early to tell. Having said that, having been in many restaurants in the last quarter, the product itself looks terrific. So I’m again cautiously optimistic that we are going to see that benefit.

David E. Tarantino - Robert W. Baird & Co.

Great. Thank you.

Operator

We’ll go to Bryan Elliott, Raymond James.

Bryan Elliott - Raymond James & Associates

Good evening. Just a couple of follow-up questions. First, Scott, on the labor cost, did you indicate that there was a positive swing in the workers’ comp this quarter?

Scott M. Colosi

There was not.

Bryan Elliott - Raymond James & Associates

Okay. What was wage inflation roughly?

Scott M. Colosi

Wage inflation was about 4% for the quarter.

Bryan Elliott - Raymond James & Associates

Okay. Was there a big swing in -- well, the manager bonus stuff is down in other operating, right? If this labor looks -- you know, labor per store week was down meaningfully.

Scott M. Colosi

Essentially our guys were a little bit more productive Q1 this year than they were last year.

Bryan Elliott - Raymond James & Associates

Would that like be the tools you gave them or the labor scheduling that you mentioned or --

Scott M. Colosi

I think it’s more just their focus as the economy continues to get tougher. They are looking at everything in their business at all angles and just making sure that they are being as controlled as they can without impacting the guest, and I want to reiterate the message from G.J. and I is not -- we’re not sending out a bunch of reports telling these guys they need to cut labor or under-portion food or anything like that, but I think it is our guys taking it upon themselves to be good business partners and managing labor as tight as they can.

Bryan Elliott - Raymond James & Associates

All right, part of the whole package. You also mentioned if I heard it right, Scott, you expect to be free cash flow positive this year after CapEx and pre-acquisition?

Scott M. Colosi

After CapEx, pre-acquisition, and pre-share repurchase.

Bryan Elliott - Raymond James & Associates

Okay. Is the capital budget still 100, 105? Is that still a good number?

Scott M. Colosi

Yes.

Bryan Elliott - Raymond James & Associates

Okay. All right. That’s all I had. Thanks a lot.

Operator

Next is Paul Westra, Cowen & Company.

Paul Westra - Cowen & Co.

Great, thanks. Good afternoon. Most of my questions were already answered but I’m curious if you can give some maybe geographic color on your traffic -- clearly April trends at least look so far a little bit better. Has that been broad-based and are your weaker markets of the past still weak? Or are we seeing any areas that may even be weaker and offset by a bounce in your weaker markets?

Scott M. Colosi

I would tell you that we remain a little bit weaker up in the Northeast and the South, is our two weakest markets. A little bit stronger in the Southwest.

Paul Westra - Cowen & Co.

Those sound like -- just like the first quarters or fourth quarters, though. If you saw a slight improvement in traffic here in the last four to eight weeks or so, that means it was a little bit more broad-based?

Scott M. Colosi

Yeah, our changes have been generally pretty broad-based and we’ve had changes in traffic throughout the system.

Paul Westra - Cowen & Co.

And just maybe another question on the beef outlook -- clearly obviously you are happy with your 25% on spot. It doesn’t look like you want to change that anytime soon but are the suppliers even willing to talk at this moment? So should we expect that if you were going to make a decision, that it could happen sooner? Or is it just so uncertain now that nobody wants to lock in on either side?

Scott M. Colosi

Paul, you mean lock in for 2009?

Paul Westra - Cowen & Co.

Yeah, for the remainder of 2008 or for 2009.

Scott M. Colosi

You mean the remainder of the 25% that’s floating?

Paul Westra - Cowen & Co.

That’s right.

Scott M. Colosi

At this point, we are watching that very closely and I don’t think the time is right this minute.

Paul Westra - Cowen & Co.

And then another follow-up maybe on the mix question -- you have your three or four new products you mentioned. Were all three or four of those in a single market test before and have you had a chance to look at again the mix number? Are you seeing more add-ons, maybe for the baby blossom and some trade-downs on the other entrées, both kind of a push?

Scott M. Colosi

I would tell you that the test was done in numerous markets and I would also tell you that based on the categories in terms of the ribs and the blossoms, the total category in total went up but I wouldn’t be prepared to tell you how it was split out.

Paul Westra - Cowen & Co.

Okay, great. Thanks.

Operator

Our next question comes from Barry Stouffer, BB&T Capital Markets.

Barry Stouffer - BB&T

Good afternoon. Can you quantify the impact of Easter on the comps for April in the first quarter?

Scott M. Colosi

I would tell you that we thought you know, maybe Easter was worth a point in March but that’s as far as we would go.

Barry Stouffer - BB&T

And so you got a benefit so far in the second quarter of a similar amount?

Scott M. Colosi

We really haven’t done the math on it. We did the math for March but yeah, I guess you could say that’s the case.

Barry Stouffer - BB&T

And what is your effective interest rate on your outstanding debt balance?

Scott M. Colosi

On our credit facility it’s just over 3%, which is 95% of our debt.

Barry Stouffer - BB&T

Okay, and were you trying to say that your overall beef costs are lower in the first quarter because of the 25% you are buying on spot or just that that portion is favorable?

Scott M. Colosi

It’s that portion is favorable to what we would have been paying and we contracted all that beef out.

Barry Stouffer - BB&T

So your overall beef costs are actually higher than last year?

Scott M. Colosi

Hang on. We’re looking it up. Our cost of meat is lower. Our cost of meat is lower but that includes other things besides beef. I would guess it is probably a little bit lower.

Barry Stouffer - BB&T

Okay. Thank you.

Operator

We’ll go next to Chris O’Cull, SunTrust.

Christopher O’Cull - SunTrust Robinson Humphrey

Scott, just a follow-up to that; could you quantify the year-over-year benefit of the floating beef?

Scott M. Colosi

You know, we are not going to give out those numbers in part just for competitive reasons and we keep what we are contracting at close to the vest, whatever price we are contracting at. So we’d rather not get into that but we are pretty happy so far with the benefit that we’ve gotten.

Christopher O’Cull - SunTrust Robinson Humphrey

Is my read on the spot market correct -- I mean, we should expect a similar kind of trend in the second quarter from that portion of the beef?

Scott M. Colosi

I think that’s uncertain at the moment. If you look trendwise, historically that would not be the case. Typically you will see it lower first quarter, go up in the second quarter, typically dip lower from the second quarter into the third and balance out in the fourth.

Christopher O’Cull - SunTrust Robinson Humphrey

Okay.

Scott M. Colosi

This year is not a typical year so again, that’s why I would tell you it is uncertain.

Christopher O’Cull - SunTrust Robinson Humphrey

Okay, and then just turning to new unit performance, I was wondering if you are seeing smaller or shorter honeymoons for new units as a result of just a difficult environment.

Scott M. Colosi

Actually, it’s been the opposite -- the honeymoons have gotten a little bit larger. You know, we started opening stores over time at a little bit higher volumes than we had three, four years ago. But the honeymoons have also grown a little bit. It used to be 10%, 15% -- now we are kind of seeing more 15% to 20%. But it is a very wide range. I mean, everything from zero to 30, so it really is a very, very wide range. Very location specific on that.

Christopher O’Cull - SunTrust Robinson Humphrey

Okay. And then lastly, just regard to management turnover, could you guys update us on the trends you have seen in turnover, including managers in training?

G. J. Hart

Manager turnover this year is slightly better than what it was at this point last year.

Christopher O’Cull - SunTrust Robinson Humphrey

Great. Thanks, guys.

Operator

(Operator Instructions) We’ll go to Keith Siegner, Credit Suisse.

Keith Siegner - Credit Suisse

Just one quick follow-up question; in the past, you’ve always had a policy of one item on the menu, one item off to keep the menu nice and simple. With the new items that are coming on, can you tell us a little bit more about what’s coming off?

G. J. Hart

Well, actually that’s a great point and the way we looked at this is if you look at what we’ve done in these items, the blossom essentially, from an operational perspective, it’s smaller. We can get actually one more, two more in the fryer and so we look at it as sort of the same item just presented a little differently. On the ribs, that would be the similar case because basically we pre-portion those ribs and so it’s the same item. And then on the combo or combos, we’ve already got the pulled pork, we already have the chicken, we already have the ribs. So we don’t look at that as new menu items, per se.

Keith Siegner - Credit Suisse

Okay, so there actually will be more line items on the menu then?

G. J. Hart

That’s correct.

Keith Siegner - Credit Suisse

Okay. That’s it.

Operator

Mr. Colosi, we have no further questions at this time. I would like to turn it back to you for any further or closing remarks.

Scott M. Colosi

Well, thanks everybody for being on the call. We very much look forward to seeing you after the next quarter.

Operator

Ladies and gentlemen, that does conclude today’s conference. You may now disconnect.

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Source: Texas Roadhouse F1Q08 (Qtr End 3/25/08) Earnings Call Transcript
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