“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.