Inflation concerns remain, but customers continue to flock to the steakhouse brand, inside and outside restaurants.
Texas Roadhouse is a brand that doesn’t drift far from its principles. When the industry braced for third-party delivery’s rise, late CEO Kent Taylor once told investors he encouraged competitors “to do as much delivery as they can so they can deliver lukewarm food to their people that order it.” As wages climbed and labor hiked, it footed the bill to fully staff units. LTOs and menu updates. National marketing. You’d go gray waiting for either.
But that’s not to say COVID’s innovation cycle sailed Texas Roadhouse. The opposite happened. “We will continue to embrace technology and use it to enhance the guest experience,” CEO Jerry Morgan said Tuesday on a conference call, “while still emphasizing the importance of face-to-face interaction between our restaurant staff and our guests.”
The reality is, Texas Roadhouse is outpacing its pre-COVID self by a significant margin. And it continues to climb despite variants, external setbacks, and every other hurdle stalling the sector today.
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Same-store sales at company stores in Q4 upped 21.2 percent versus the comparable period in 2019 (18.8 percent for franchises). Average weekly sales were $121,976. In the seven days leading up to March 10, 2020, the number was $113,777.
The Q4 comp included 8.1 percent traffic growth and average check expansion of 13.1 percent, 5.3 percent of which was positive mix as guests traded up for higher-priced entrees and bought more appetizers and add-ons, like drinks. The rest (more on this later) leaned on price.
Q4 total revenue of $895.6 million was well ahead of 2020 ($638 million) and 2019 ($725.3 million).
For the full fiscal year in 2021, comps tracked 18.3 percent better than 2019 and average weekly sales clocked in at $120,706.
Yet arguably most noteworthy, Texas Roadhouse’s 2021 momentum has hardly hit the Omicron speed bump, which BTIG analyst Peter Saleh wrote Wednesday in a note is “bucking the trend” industry-wide. Comp sales are up 20.6 percent for the first seven weeks of the year compared to 2021. That pulls out to average weekly sales of $127,000 with to-go business north of $20,000 per store, or 15.9 percent of mix.
Morgan said Texas Roadhouse had a “historic year” in terms of the number of guests served and operating results generated. Naturally, the biggest separator is the to-go business, which represented 14.4 percent of sales in Q4 ($17,500) and 17.1 percent for the entire calendar. Pre-COVID, to-go generated only $8,741 of the $113,777 weekly figure mentioned before. Or about 7.6 percent. It’s more than offsetting the fact guest counts in dining rooms remain slightly down. Also, it points to further whitespace for the steakhouse if those in-store numbers tick up.
Returning to innovation, Texas Roadhouse has been busy marrying both sides of its business. Not just with off-premises improvements, but also understanding how the dining room has changed, and what guests expect and need from that experience.
All of it, however, was adopted to give guests an even greater visit, CFO Tonya Robinson said. A means to amplify Texas Roadhouse’s DNA rather than rework it.
There’s currently a kitchen display system test ongoing in Minnesota, which is allowing the brand to study more of its functionality and speed. Another store is converting in July.
Meanwhile, tablets are gaining popularity throughout the system. And so is what Morgan called “Roadhouse Pay,” where guests can pay at the table and leave at their own convenience, “and not really wait for us.”
“[That’s] really is a big win for us,” he said. “You do see other concepts going in that direction, too. And it’s definitely something we held off on, but we probably shouldn’t have. It really is an enhancement to that guest experience, especially when it comes to the end—what I call the check and change side of it.”
Texas Roadhouse continues to look at line setups and how to get more efficient. With the influx of to-go, it’s a constant revamp. The brand has a “display kitchen,” as well as what it refers to as a “straight line,” which allows tighter operations, Morgan said. Essentially, the ability for employees to get their jobs done with less movements.
Yet the largest shift is coming with simply learning how to operate a full-service, clearly busy, restaurant that also boast a 20 percent to-go model. Morgan said that’s the “one thing we really had to work on our traffic paths to make it where it really flows a little bit better.”
It could mean food going out a side door or the back of the kitchen. Texas Roadhouse’s four prototypes give operators flexibility to push food wherever makes the most sense. Several operators have also opted for drive-up windows. “It really is working,” Morgan said, “where people can place their order, they can sit in our parking lot, and we can text them. It’s not a drive-thru, but it is a drive-up window. And it really is functioning. The ability to text our guests and let them know their food is ready, whether they pick it up inside or at one of our walk-up windows, or this drive-up window, it is definitely exciting for our future.”
Morgan added Texas Roadhouse is jammed at peak hours, with long waits. While a great sign, it also presents opportunity in early dayparts and late, in addition to Saturday lunch. Additionally, using technology and new channels to help guests navigate Texas Roadhouse on their own timeline.
He shared a story of a guest who sent an email after Valentine’s Day. They went online and were able to see they could eat dinner two and half hours later. “So that technology piece that we talk about, to tell someone that you can come in on Valentine’s Day, this is the time you need to show up. We hit their quota, we hit their wait, we delivered on the food and service, and they took the initiative to write me a letter telling me how spectacular it was. So yes, I think we can still deliver on our sales growth,” Morgan said.
“We’ve improved so much over the last couple of years on the execution, the convenience, and whether it be the walk-up windows or curbside, the things we’re doing just allowed our guests to have a better experience on the to-go side,” he added. “I believe from an operations standpoint, we’ve made it more convenient. The communication piece that we use—the texting piece with the guest to let them know—and obviously the delivery of the product, when they get home, it’s right.”
Robinson said to-go pulses earlier in the week, Monday, Tuesday, Wednesday, as people grab food on their way home. But it’s also alleviating some of the pressure in the dining room for customers who don’t want to wait.
Inside, though, Morgan said, Texas Roadhouse wants all of its technology to complete the circle. To enable it to deliver the 55-minute experience it generally targets, yet also offer the ability to shave off minutes for those who want to get in and out. The pay-at-the-table option perhaps being the biggest unlock on the table turn to date.
Even with sales sizzling, commodity inflation, staffing challenges, and supply shortages are pressing Texas Roadhouse near-term.
The brand is finalizing plans for a mid-April menu price increase of about 3 percent. Thus far, Morgan said, it hasn’t seen a negative reaction from hikes added in May and November of 2021. The brand will be at close to 6 percent in Q1, 7 percent in Q2 and Q3, before moderating to 4 percent in Q4. “All indications are that our guests continue to view Texas Roadhouse as a great value because of the prices that we charge and the quality of food and service that we provide,” he said.” However, we will never take our guests for granted and know that we must earn their business each and every day.”
Even with supply challenges, Texas Roadhouse opened all 11 units it had scheduled in Q4, including nine Texas Roadhouses, a Bubba’s 33, and one Jaggers—the company’s fast casual.
The new fleet of Texas Roadhouses are averaging $142,000 in weekly sales so far this year. In 2022, the company is targeting 25 corporate restaurants, with up to four being Bubba’s. Franchise partners are expected to open another five Texas Roadhouses, too. The guidance is a bit muted compared to earlier projections due to permitting delays, Morgan said. Along with slower approval processes, some second half 2022 openings are getting pushed into 2023.
Morgan did call out Bubba’s potential. He said it could pop from its current four to seven openings per year rate to seven to 10 in the future, “and then go from there.”
“We’ve got to get through this year and get the ground and the foundation laid, but we are ramping up for more expansion there,” he said.
And with Jaggers, Texas Roadhouse signed two franchise partners last year and is in “serious negotiations” with a third and early stages with a fourth, Morgan said. The company will build corporate units in tandem.
“We do expect to continue to grow that brand and learn together with our franchise partners and go toe-to-toe with them for a little bit,” he said. “We'll see who leaves who in the dust.”
Food and beverage costs as a percentage of total sales were 35 percent in Q4—a 262 basis points lift from 2019 thanks to 17.6 percent commodity inflation compared to Q4 2020. Saleh called this the “highest inflation in decades, if not ever, for Texas Roadhouse.”
The chain, which posted Q4 margin of 15.8 percent, will likely be challenged getting to its target of 17–18 percent.
With about 50 percent of its commodity basket locked in for the first half of 2022, Texas Roadhouse expects about 17 percent inflation over that stretch. Robinson did note the brand projects inflation in the back half of the year to moderate (to 9 percent) due to beef and other prices lapping. Overall, it would result in 12–14 percent inflation across all of 2022. But even if inflation moderates, the underlying dollar costs for beef and other high-use items will likely still be higher, year-over-year and sequentially.
Labor as a percentage of sales improved 42 basis points to 32.5 percent versus Q4 2019 even as labor per store week upped 19.2 percent. The culprit there was wage and other labor inflation of 15.4 percent and growth in hours of 3.6 percent.
Staffing in Q4, with exclusions as employees faced Omicron conditions, and the setbacks that followed, took as much as 2 percent off Texas Roadhouse’s same-store sales in the period, Robinson said. Labor wage inflation is expected to be 7 percent for the year, higher in Q1 before easing on a percent basis as the year progresses.
“I think there is more applicant flow first of all, which is great,” Morgan said of improvements, noting employees are picking up more shifts. “We have really done some good initiatives in the third and fourth quarter to continue to attract more and more people. … I feel really good where we're at. I want to feel really great. I'd like to be 110 percent staffed—that gives us a lot of options and gives us ability to have fresh legs in strong people work in every shift. Our weekends are extremely busy. We don't like doubles, we really like folks focusing on one shift, doing extremely well, and knowing that they're going to have a little bit of a break, because 10 hours in a building, serving the volume that we're doing, that is definitely hard work there. They compensated really well, they make a lot of money, but they definitely earn it.”