Sales are soaring at the steakhouse giant. But so are beef prices.

Texas Roadhouse raised menu prices roughly 4.2 percent last week. The steakhouse chain is hardly sitting solo at that table these days, with brands industry-wide—regardless of segment—hiking figures to offset pressures, be it labor, commodity inflation, both, or some alternate setback of a COVID-19 climate. In fact, full-service restaurant prices climbed 4.9 percent in August, per the Bureau of Labor Statistics. And it was even loftier in quick service, up 6.9 percent.

What’s at stake isn’t lost on Texas Roadhouse, CFO Tonya Robinson said Thursday. “We know that we have to earn it every day [from our guests],” she said. “If we are going to charge a little bit more, then we all know that we’ve got to ramp up that level of that experience, and that’s on our operations team.”

For Texas Roadhouse, this means sticking to the quality model. Steaks cut in-house. Food made from scratch. “We have to deliver on our legendary food and our legendary service experience every time,” Robinson said. “If we do that, people will be OK with what we have to charge them because of some of the other pressures.”

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In this point, however, surfaces a widespread obstacle—the fact many restaurants are being asked to walk a fragile line between charging more and delivering less due to labor challenges. Whether that’s reduced operating hours, smaller menus, or fewer/less-tenured servers trying to deliver an experience that justifies the check.

Texas Roadhouse’s restaurant margin in Q3 jumped 111 basis points to 15.7 percent compared to the prior year. Same-store sales at company stores leapt 30.2 percent and 22.3 percent versus 2020 and 2019, respectively. They rose 33.5 and 20.4 percent at franchises.

This sales boom lifted the lid on two realities pulling from opposite ends: elevated to-go sales sticking well past the COVID bottom; and higher food and beverage costs complicating the task of serving more business. On the latter, Texas Roadhouse faced commodity inflation of 13.9 percent, primarily tied to higher beef costs. Restaurant margin dollars hiked to $135.1 million from $91.1 million last year.

Commodity inflation was about 10, 15, and 16 percent across July, August, and September, respectively. Robinson credited “labor shortages at the processing plants” alongside higher consumer demand for driving beef prices up.

And based on this outlook, Texas Roadhouse expects high-teens inflation in Q4, which would bring the full-year result to about 10 percent. Robinson said commodity costs will likely remain elevated in 2022, and even higher in Q1.

Meanwhile, Texas Roadhouse forecasted wage and other inflation of 6 percent next year. This past period, labor per store week increased 19.3 percent (compared to 2019). Wage and other inflation contributed 15.1 percent of that, while growth in hours was 3.4 percent.

CEO Jerry Morgan said Texas Roadhouse is “feeling much better” about staffing in general after a solid summer of hiring. But the challenge tilted of late. It’s not only about getting back to 2019 levels now—which the chain mostly has—but about staffing up even higher to serve a more diverse business than ever.

Average weekly sales grew north of $120,000 in Q3, far above last year’s COVID-strapped $92,000. Yet it was also significantly higher than Q3 2019’s take of $99,000. Texas Roadhouse’s traffic was up 12.2 percent versus pre-COVID marks and average check 10.1 percent better. The check included positive mix of 4.3 percent thanks to guests moving to higher-priced entrees—perhaps a sign people are using dining out as a celebratory break more than usual, a point Darden CEO Gene Lee referenced in September.

By month, same-store sales versus 2019 climbed 25.5, 21.5, and 20.3 percent across July, August, and September, respectively. So this was hardly a flash event for Texas Roadhouse.

Restaurants in Q3 averaged about $18,000 per week in to-go sales, or 15.1 percent of total business. In October, stores appreciated more than $120,000 total, with to-go holding at $18,000. Essentially, even as to-go’s percentage of sales has slid in light of dine-in coming back, the dollar figure is sticking. For perspective, Texas Roadhouse units generated $113,777 in the week before COVID landed. And only $8,741 belonged to off-premises orders.

“And these cost pressures have been magnified for us as we need to buy even more beef for our restaurants, so they can continue to serve a significantly higher number of guests,” Robinson said.

The same is true of labor.

“Based on our sales growth, we still need some folks and just in different areas of the country and the front of the house and the back of the house and management,” Morgan said.

He added employees are “probably working a little more overtime” and clocking extra shifts. “And we’d really like to get them some fresh legs and some help, and we definitely need more people,” Morgan said.

Earlier this month, Texas Roadhouse added tuition reimbursement to its benefits lineup. The chain will now provide $5,250 in annual tuition for employees working more than 30 hours per week, as long as the individual earns at least a “C” average from an accredited institution. The reimbursement applies to both Texas Roadhouse and Bubba’s 33 employees and came ahead of a planned National Hiring Day push on October 25.

Overall, Morgan said, Texas Roadhouse feels solid about where it’s at. “We’d like to feel great,” Morgan said. “… We do have some closed sections at times and things because we are in pockets and areas. But overall, we feel very confident. I’d like to get really, really confident and back to 100 percent. We’re not there yet.”

The 4.2 percent menu uptick was designed to counter some of the structural cost pressures restaurants are facing. While above the brand’s typical range, it shouldn’t detour guest’s value perception of the brand, Morgan said. Texas Roadhouse will “definitely be keeping an eye out,” however.

“As much as the pricing, it’s the quality of the product, the quality of the food, the quality of the service that we’re delivering. That whole experience really comes into play,” Morgan said.

For Q4, the implied pricing will be about 5.3 percent when you factor a 1.75 percent raise from April 2020 and 1.4 percent in October 2020 that’s rolling off. At that point, it drops down to the 4.2 percent. Texas Roadhouse skipped one of its annual price increases in 2020, which gave the brand “more comfort” to do so now, Robinson said.

“We sat down with our operators, really talking to them about the things that we look at, how are the sales doing, how’s traffic behaving, how are they feeling about the competitive environment,” she said. “They’re looking closely at competitor pricing and things like that on the menu. And so, we did all of those things. And we came in a little bit higher just as we were thinking about how wage inflation is going to probably continue to grow, and we were learning more about this commodity inflation and the potential that it could be pretty impactful for a bit of time.”

As far as how long, Robinson can only guess. She said some people project 2023, others a few quarters. Plenty of factors remain volatile. “Staffing is definitely one of them, I think, for the supply chain folks,” she said. “Transportation, another. And then it’s just that ability to build up some inventory of product given the high demand of beef.”

“We’ve been buying the same product for 28 years,” Morgan added. “And our team has done a really good job. The meat is available. It’s just the pricing of it, obviously.”

Despite supply and equipment challenges, Texas Roadhouse continues to open restaurants. It brought seven corporate stores to life in Q3 and expects as many as 11 more in Q4 for a total of 29 this year. That includes five Bubba’s and one Jaggers, the brand’s fast casual that recently signed a 10-store deal with The Saxton Group. Franchisees are expected to open two Texas Roadhouses as well, which would bring the final 2021 count to four. Going forward, the chain expects to open 25–30 locations next year and has an agreement in place to acquire seven more restaurants from a franchisee at the beginning of 2022.

“As we get more staffed, as we continue to make sure that we’re delivering on our promise of legendary food and legendary service, our consumer is telling us to keep doing what we’re doing,” Morgan said. “Open our doors, create a great environment, deliver on our promise of the food and the service, and I don’t see that going away. We’re going to continue to operate at a very, very high level. It is important for us to have operational excellence, have a memorable experience, and develop our people.”

Casual Dining, Chain Restaurants, Feature, Finance, Texas Roadhouse