When asked about the state of the Texas Roadhouse employee, chief executive Kent Taylor said Monday, “As I’ve gone into a lot of our competitors’ restaurants, I’ve realized that we hire all the cool people and they probably don’t.”

While a light comment, it was Texas Roadhouse to a tee. The steakhouse chain continues to guard an unshakable labor philosophy, even as it absorbs bottom-line lumps in the short term. Wage pressures and inflation are stressing margins, but Texas Roadhouse isn’t sacrificing its traffic-focused strategy, executives said Monday, and that simply takes added hours as more customers flood into restaurants—nearly 100 extra per week, on average, than this time a year ago. Few brands not bouncing off the guest-count bottom have seen that kind of growth in full service.

READ MORE:

Texas Roadhouse has the most satisfied customers, report says

Guests name Texas Roadhouse America’s No. 1 casual-dining brand

The labor topic once again dominated conversation during Texas Roadhouse’s second-quarter report. And, like usual, it played out amid a backdrop of industry-fronting same-store sales and positive traffic. Texas Roadhouse’s comps climbed 4.7 percent at company-owned locations and 4.3 percent at domestic franchises, year-over-year. Guest counts rose 1.7 percent. Revenue was also higher by nearly 10 percent from 2018 levels to $689.8 million. Net income lifted 1.4 percent to $44.8 million.

To start fiscal 2019, Texas Roadhouse’s same-store sales have hiked 5.2 and 4.7 percent (corporate), respectively. It marks consistent performance, too, as the results built off comparable periods of 4.9 and 5.7 percent. In Q2 2018, traffic boosted 4.3 percent.

The challenge for Texas Roadhouse lately, though, has reared in regards to restaurant margin, which incorporates labor and other costs. Figures declined more than half a percentage point to 17.6 percent. Labor as a percentage of total sales upped 96 basis points in Q2 to 32.9 percent. Labor dollars per store week increased 7.4 percent compared to the prior-year period, including wage and other inflation of about 4.7 percent and growth in hours of roughly 2.8 percent, including the impact of higher guest counts.

Last quarter, the margin figure was 17.9 percent and net income declined 8 percent, with operating income falling 7 percent in response. Pricing has helped Texas Roadhouse offset some of the inflationary pressure, Taylor said. Texas Roadhouse took an additional 1.5 percent, on average, in pricing at the beginning of last quarter, to build off the previous year’s 1.7 percent figure.

Labor is really a three-pronged challenge at Texas Roadhouse currently. Most of the inflation has been driven by wage rate increases in the front and back of the house. Low unemployment has led to a highly competitive labor market for all restaurants—the biggest factor driving wage rates, Taylor said. Additionally, and this is really where the issue expands for Texas Roadhouse over other competitors, the brand has placed heavy focus over the last few years on increasing staffing levels as it tracks toward $6 million average-unit volumes. Over the last decade, Texas Roadhouse moved from about $3.6 million AUVs to $5.2 million. And its restaurants witnessed an increase in labor hours around the 3 percent mark over the past few years.

But, again, Texas Roadhouse doesn’t view staffing as a negotiable brand strength.

“While the additional investments create short-term pressure, we believe the long-term sales benefit is worth it,” Taylor said simply.

The Texas Roadhouse equation: Balance near-term challenges with long-term positioning. And protect that fiercely.

“From a single-store perspective … if you’re fully staffed, then if you have a couple of servers that you’re really not pleased with their performance, then you can make the call when you’re fully staffed versus understaffed. And then from an overtime perspective, you can eliminate some of that overtime and have fresher people waiting on your guests.” — Kent Taylor, Texas Roadhouse CEO.

CFO Tonya Robinson said Texas Roadhouse is trying to stem turnover rates, which are in the high 120s. “We’ve talked a lot about hiring right, training right, making sure we are allowing flexibility in the schedules, making sure we’re paying a fair wage rate and we can compete on that level,” she said.

Texas Roadhouse hasn’t seen turnover come down necessarily, Robinson added, but it hasn’t gotten worse, either. That’s a win in today’s constricted labor climate.

While the issues vary by operator and market across the 541-unit system (domestic), Robinson outlined a few success practices. Monitoring clock-in and clock-out times. Being upfront and explaining the job to new employees. Texas Roadhouse appreciates a lot of turnover with its dishwashers. So some restaurants have devised ways to improve the position. “[Our operators] come up with ways to offset these pressures,” Robinson said. “And they’re doing everything can to add the labor where they need to, where its adding value to their restaurants, and finding ways to mitigate some of that.”

Texas Roadhouse does a lot of “staff scans,”—360 development-type things to glean feedback from workers and address concerns quickly. This strategy is directly related to positive traffic, Robinson said. “Traffic, I think, at the end of the day is the biggest indicator to me of customer satisfaction.”

Texas Roadhouse has treaded an interesting line with labor lately. In Q2, labor hours were up 2.8 percent, outpacing traffic growth of 1.7 percent. That scale was weighted the same direction last quarter.

As Evercore ISI senior managing director David Palmer brought up in Monday’s call, labor is often referred to as a semi-variable cost for restaurants. It can grow less than traffic, especially if operators are trying to get their labor paid more and keep employees around. One way to do that is to allow those hours to leverage. In other terms, brands can stabilize labor hours on purpose to keep turnover down.

Starting in Q4 of 2018, Texas Roadhouse witnessed this gap tighten, with labor growth in hours surpassing traffic growth. “And we’ve also seen it in our manager levels,” she said. “And we’ve been taking a hard look at the number of managers in the restaurants and the type of manager labor hours that we have. So that’s a piece of it.”

“I think going forward,” she added, “we would hope to see those growth in hours moderate a bit and [come] back to normal where we see them growing less than traffic growth, and there’s some benefit of traffic growth on the labor line. But right now, we’re not seeing that.”

Texas Roadhouse, though, won’t stray from this following practice, and this captures the real story: It often looks at the sales growth in units with higher staffing levels. It will then intentionally increase the restaurants that don’t have those staffing levels up to those numbers—a cost it’s willing to take to generate transactions. “So that we would,” Taylor said, “hopefully, see traffic improve.” That’s usually a 6- to 12-month process for Texas Roadhouse.

Texas Roadhouse keeps staffing up to generate traffic.

The chain is investing in growth of hours to accompany increasing volumes, Robinson said. Taylor said Texas Roadhouse is serving about 94 more guests per week, on average, in stores than it did a year ago.

And perhaps wage inflation will moderate a bit, too. Heading into 2020, Texas Roadhouse has more than 200 restaurants in states that are going to see minimum wage increases and tip wage increases.

“And from a single-store perspective … if you’re fully staffed, then if you have a couple of servers that you’re really not pleased with their performance, then you can make the call when you’re fully staffed versus understaffed,” Taylor said. “And then from an overtime perspective, you can eliminate some of that overtime and have fresher people waiting on your guests.”

Pricing hasn’t dampened the performance. Robinson said Texas Roadhouse doesn’t expect any additional increases in 2019. It will likely start looking at next year’s plan in the back half of Q4—a process that involves Taylor calling operators throughout the system to gauge their thoughts. Considering the flow through of pricing, Texas Roadhouse had about 20 basis points of negative mix in Q2. It rolled through four quarters of positive mix mainly coming from entrees. It’s shifted around as people move to a higher-priced steak, Robinson said. The brand is still seeing positive mix on entrees, just not to the degree it was, which is pretty typical for Texas Roadhouse. Importantly, it gives the brand confidence on pricing. Coupled with traffic growth, it proves a satisfied customer.

“I haven’t heard form the operates any feedback that says they’re hearing from the guests differently—that they’re calling anything out that we did or saying, ‘hey, this was more than what we thought it would be.’”

Growth and to-go chances

Texas Roadhouse has a lot of expansion remaining in 2019. The company plans to finish the year with about 25 company openings, with as many as 14 coming in the fourth quarter. Taylor said new locations are pushing average weekly sales north of $115,000. That back-half shift led to Texas Roadhouse updating its guidance to about $210 million in capital expenditures for the full year.

The brand is targeting 25–30 corporate openings in 2020—most of which have been identified, Taylor said.

Although Texas Roadhouse still has no interest in delivery, as Taylor reiterated Monday, to-go is a big focus. He went as far as calling it the chain’s No. 1 directive headed into its upcoming market partner meeting in a week and a half. “We’re looking at how we can make that process more efficient for our guests and more appealing for our guests,” Taylor said.

Texas Roadhouse has done “quite a few” remodels where it’s put an outside entrance for to-go. In those units, off-premises sales jumped.

“We’re also still very, very busy within our restaurants, so it’s nice that our incremental sales haven’t been too large at the moment, so we’re able to handle it,” he added. “But we are getting our arms around it and then we’ve got quite a few stores that are really embracing to-go and then we’ve seen quite a bit of sales increase because of that.

To-go is running about 7 percent of total sales for Texas Roadhouse and has grow about 20 percent, year-over-year. “And it’s not just the increase from, say, 3 to 7 percent,” Taylor said. “Because our sales that used to be, say 80 a week, are now significantly higher. So with the dollar increase over the last 10 years is very significant.”

Taylor said the in-store traffic has aided to-go business. “We’re so busy in restaurants,” he said. “A lot of people don’t want to wait. And so, instead of going to a competitor. they actually get the food to-go and eat it at home because they want their Texas Roadhouse fix. And we’re happy they want that.”