When the Great Recession tightened wallets, casual dining was among the harshest hit sectors. It triggered years of negative traffic growth and the rationalization of brands nationwide. Texas Roadhouse was embroiled, too. The brand reported negative traffic in 2008 and 2009. But one thing it didn’t do was drift. It held staffing, maintained portion sizes, and focused on service and experience. And 10 consecutive years of positive traffic growth followed.
It’s really during this stretch Texas Roadhouse emerged as an outlier. In the 10-year period from January 2010 to December 2019, Texas Roadhouse’s shares on the stock market appreciated by more than 400 percent, well ahead of increases achieved by the S&P 500 as a whole.
“Through tough times you make adjustments, but you still deliver on your promise,” CEO Jerry Morgan said Thursday during the company’s Q3 review. “And that’s what led us into a great 10-year run.”
What Texas Roadhouse realized, CFO Tonya Robinson added, was consistency ranked atop its customers’ wish list. “And so really, maybe it’s more about the things we wouldn’t do,” she says, “as far as taking labor off the floor or cheapening the experience. We’re going to continue to give the guests a great experience. We know that’s what matters.”
Not surprisingly, the same approach carried Texas Roadhouse through COVID’s early clamp and into its recovery, when the brand went from averaging $8,741 per store outside the four walls to nearly $42,000 in less than a month. To-go would rise to $48,815 in early April, $51,650 the ensuing week, and $62,852 the following.
Meanwhile, Texas Roadhouse kept things simple and forked the bill on labor, taking margin erosion where necessary to guard experience. This has held amid inflationary pressures as well. “I think the key component for us is that if we have to adjust to the volume, we are prepared and ready, but the delivery on the experience for whatever the consumer is coming in the door has got to be there,” Morgan said, speaking about a potential recession.
While there’s plenty of uncertainty in the market going forward, Texas Roadhouse’s stability has held. In Q3, announced Thursday afternoon, the chain posted same-store sales growth of 8.2 percent, year-over-year, driven by 7.7 percent average check expansion. Texas Roadhouse took a 2.9 percent menu price increase in late October. Come Q4, pricing will clock in at about 6.3 percent, with 4.1 percent rolling off in November. At that point, the chain will be looking at 3.2 percent taken in April, along with the recent 2.9 percent bump. So for Q1, Texas Roadhouse would be at about 5.9 percent.
But notably and against the grain, guest traffic was up half a point overall with the dining room 3.3 percent higher than a year ago. Texas Roadhouse locations averaged more than $129,000 in weekly sales in Q3, with to-go settling at $16,300 or 12.6 percent of total sales. By month, comps grew 3.9, 9.9, and 10.4 percent in July, August, and September, respectively. And for the opening four weeks of Q4, weekly sales averaged $130,000 with comps 8.3 percent better than the prior-year period.
“I know the other competitors are having some success also,” Morgan said. “They are maybe not doing the volume that we’re doing. So that to me tells me maybe whatever we’re doing works a little better from a value standpoint. So staying focused on that piece of it, our offerings, our consistency, our disciplines to the routines of the experience, I think, will all help drive that.”
“Our food is made from scratch and we put a lot of time and effort into it,” he continued. “And I think it really plays out in the taste buds of our consumers. We’re winning that battle. And I think we will continue to win it as we fight for it.”
Looking back, Texas Roadhouse’s Q2 same-store sales were 30 percent higher on a three-year stack. Q3 was 32 percent. For traffic, those quarters were 10 and 11 percent above, respectively.
It’s been a constant theme for Texas Roadhouse over the past couple of years. As dining room guests returned, to-go stuck about double what it was pre-COVID. Robinson said the brand picked up a lot of guests in 2020 and 2021 who weren’t familiar with Texas Roadhouse. They ordered to-go and returned for dine-in.
Guests also traded up to higher-priced entrees during the pandemic rebound, which was a phenomenon observed industry-wide as consumers turned pent-up demand into celebratory occasions. That’s maintained, too, Robinson said. “Maybe that speaks to some trade down from a higher guest check,” she said. “But overall, I just think it’s the consistency again of what we offer and keeping the guests coming in the door.”
Positive mix was driven by year-over-year improvement in the percentage of guests choosing to dine in (versus to-go, where there’s less beverage attachment) as well as those ordering more premium-priced offerings.
This latter point has given the brand confidence it’s not outpricing its loyal diner. “Obviously, it’s always a little too soon to think about pricing and the flow through. It seems good right now,” Robinson said. “We aren’t seeing anything that raises any red flags.” And business could be in line for an added seasonal jolt as gift card sales enter the picture for the holidays.
All of these trends have Texas Roadhouse broadening its horizon. In the past, the brand outlined 700–800 units as a long-term view (there are 607 domestic units today and 36 international). Morgan now believes there could ultimately be 900 Roadhouses.
Also fueling the projection is the brand’s shift toward smaller-market openings. Morgan said those are enjoying “tremendous success.”
“We’re going to continue to find a good spot for us, which when we look at the landscape, that means that we have the opportunity. If we continue to do it right and all the world works with us, we think that we can get to that number,” he said.
The chain is on track to open 23 Texas Roadhouse and Bubba’s 33 locations this year—14 have opened thus far alongside six international franchises. A fifth outpost of Texas Roadhouse’s fast casual, Jaggers, opened in October. The company expects to ramp up to 30 openings next year, as well as three Jaggers. And it has a tentative agreement in place with a domestic franchisee to acquire eight locations at the beginning of next year. Franchisees (62 of Texas Roadhouse’s domestic locations are franchise run) will likely open 12 units in 2023, domestic and abroad.
Texas Roadhouse is earmarking $265 for CapEx development, including $150 million for new stores. About $30 million will go toward relocations.
Texas Roadhouse top-line momentum led to nearly 24 percent earnings per share growth, despite cost pressures. Q3 net income increased 18.5 percent to $62.3 million. Revenue upped 14.3 percent, primarily driven by a 7.9 percent jump in average-unit volume and store week growth of 6.1 percent.
Restaurant margin dollars grew 12.5 percent to $152 million and were 15.4 percent as a slice of total sales, down 26 basis points as compared to last year.
Food and beverage costs as a percentage of total sales were 34.7 percent in Q3, up nine basis points compared to 2021. This increase was mostly a result of commodity inflation of 8.8 percent and offset by the benefit of menu pricing. With roughly 70 percent of its Q4 commodity baskets secured with fixed prices, Texas Roadhouse lowered its full-year commodity inflation expectation to roughly 10.5 percent.
Robinson said the brand expects commodity inflation of 5–6 percent in 2023 (beef is carrying the burden). Labor as a percentage of total sales increased 24 basis points to 33.5 percent, while labor dollars per store week increased 8.6 percent. The culprit: wage and other labor inflation of 7.7 percent and growth in hours of 1.8 percent. With stand mandated increases contributing 2 percent, Texas Roadhouse believes wage and other inflation will rise 5–6 percent next year.
Morgan noted applicant flow picked up through the summer. “We really have gotten to a point where we feel very comfortable with our staffing,” he said. “And again, we’re going to continue to pad that and add some superstars and we get the chance.”
Turnover has improved as well. Management and hourly settled and reduced and Morgan said the brand has done a better job of “connecting and really painting the picture of where the company is going.”
“I think people are starting to settle in to the routine going into the fall, back-to-school, all of that and they’re settling in,” he added. “So, I definitely see us being staffed completely, maybe still a little bit of a challenge in the back of the house, but overall management, very solid. Hourlies are there and with the reduction of turnover, we feel very good about that, having a little bit more of an experienced workforce out there running the shift.”
As far as further price, Morgan said Texas Roadhouse will revisit in February and March. “I’ll tell you the goal isn’t necessarily to offset inflation,” Robinson noted. “We want to make sure that we’re really, again, thinking of that value proposition as we usually do. So that’s going to be the more of the focus for us than trying to increase our margins on a short-term basis.”
