Texas Roadhouse to Raise Prices as Cost Battle Rages

This isn’t a unilateral move, though. Taylor and the team spent the past three weeks with its managing partners to discuss some of the directives and came up with a pricing plan that shifts by market. There are 20 or 30 different versions around the country, Taylor said. So it might be 2 percent-plus in some higher-wage states and as a little as 1 percent in others.

Texas Roadhouse president Scott Colosi said the second-half move would depend on a variety of factors. “What is the status of the economy, what is the competition doing? It’s really the typical things that we would look for in any type of price increase. But we’re only going to go so far so fast in any event in how much pricing we’re willing to take regardless of how much minimum wage goes up or doesn’t go up or how much wage pressure there is or isn’t. So we just kind of take it step by step, and we’ll see as we get into 2019 just kind of what the whole world looks like for us.”

Colosi said that for every percent of pricing Texas Roadhouse doesn’t take, it needs 2–4 percent traffic growth to make up, with “all other things being equal in the world.”

And it’s something that’s stressing the bottom line in regards to margin. Over the past 10 years, Texas Roadhouse has bounced around between 17–19 percent, and targets 18 percent as “feel-good number,” Colosi said. When it gets toward the 17 percent range on a full-year basis, “definitely the sense of urgency around taking a harder look at our pricing actions ratchets up internally,” he added.

“That’s not to say we wouldn’t ever let margins go below because you do take dollars to the bank obviously. But definitely it does put a lot more internal discussions in play,” Colosi said.

The question is, can the incremental price increase, given inflation in labor and commodities, stave off deleverage?

Taylor said it’s simply impossible to know at this point. “The big factor that we don’t know and you guys don’t know is we don’t know what our sales levels will be next year and how much we potentially will be up,” Taylor said.

But as Colosi noted, Texas Roadhouse has been here before. The chain has had multiple years where it’s taken more pricing than it has lately—years where it’s implemented more than 2 percent hikes multiple years in a row. The brand can’t go higher than 2.5 percent, he added.

“I wouldn’t say anything is off the table. … We just don’t take the next day’s sales for granted. And as Kent mentioned, we don’t know, sitting here today, what our sales momentum is going into next year and how that balances with inflation,” Colosi said. “Obviously, the higher amount of inflationary pressure and given where competitive pressures are and how we’re doing, we may take more pricing than you might suspect, but we won’t know until we get to that point.”

Peter Saleh, BTIG managing director, wrote in his analyst note Tuesday that Texas Roadhouse’s unique value proposition has been made possible by years of underpricing the competition and generating transaction growth through value on the plate.

“While 3Q earnings results widely missed estimates despite continued sales gains, the most significant takeaway was management’s commitment to this strategy and modest pricing outlook for the coming year. This likely disappoints investors who were expecting more aggressive pricing to defend margins and sets up another year of margin contraction given continued inflation,” Saleh wrote.

The labor war advances

One of the things that defines Texas Roadhouse is its commitment to staffing en route to targeted $6 million average-unit volumes. Taylor has said a plethora of times that Texas Roadhouse can’t attain its sales goals with fewer employees, despite the approach of some of its competitors. That remains the case. And it continues to be a challenging dynamic.

Here were Q2’s labor vitals: Labor as a percentage of total sales upped 93 basis points to 32 percent and labor dollars per store week were up 7.5 percent compared to the prior-year period.

Here’s what happened in Q3: Labor as a percentage of total sales increased 194 basis points to 33.5 percent, and labor dollars per store week were up 10.5 percent compared to the prior-year period.

Clearly, the issue isn’t letting up. The main drivers were wage and other inflation of approximately 5.3 percent, including the impact of increasing managing partner base pay and growth in hours of approximately 2.8 percent. The additional 2.4 percent of labor growth was driven by reserve adjustments associated with Texas Roadhouse’s group insurance claims development history and its workers’ compensation claims experience.

Despite the burden, Texas Roadhouse once again has no plans to cut staff. In fact, it has gotten its server level up about three compared to prior levels. Manger level is up about half a manager systemwide. Taylor said the hardest positions to recruit have been dishwashers, fry station, bussers, and hosts.

“We’re fighting two battles at the same time. One is finding people, and the other one is fighting turnover,” Colosi said.

“It’s very competitive in the industry, and you’re not only competing with other restaurants, you’re competing against a whole slew of other industries that are also having a tough time keeping staffing levels in place,” he added. “So it’s quite a challenge and everybody is trying to adjust to a new world of higher wage rates, more benefits, whatever it takes, bonuses, whatever it takes at different positions in your business to keep yourself staffed.”

Taylor said Texas Roadhouse expects mid-single digit labor inflation to continue into 2019 with unemployment rates at historically low levels along with the continuation of the chain’s hiring initiatives. “This includes adding more managers and hourly employees as we position ourselves for our target of $6 million in per unit sales. We view this as short-term pain in return for long-term sales gain,” he said.

On that commodity side, Texas Roadhouse sees 1–2 percent inflation in 2019 with the expectation of higher beef cost.

This cost-balance conversation isn’t loosening anytime soon. Hence, the need for price increases.

“Heading into 2019, we will remain focused on making the right decisions for the long-term success of Texas Roadhouse,” Colosi said. “In many ways, this is a continuation of our philosophy of never taking the next day sales for granted as we know we have to earn our guest’s repeat visits each and every day.

“We will continue to strive to find the appropriate balance between menu pricing and inflationary pressures, staff for continued sales growth, open new restaurants at a pace that works for us and deploy capital in a disciplined manner.”

The growth plan

In the third quarter, Texas Roadhouse opened three company-owned restaurants and one franchised unit. That brings the year-to-date total to 17 company-run stores, including four Bubba’s 33 units, and four international franchises.

For the year, Texas Roadhouse expects to open 27–28 total units, including five Bubba’s 33s. There are currently 24 Bubba’s 33 restaurants; 453 company-run Texas Roadhouse units; 70 domestic franchises; and 21 international franchises.