Throughout recent quarters, as inflationary anchors—namely beef—soften margins at Texas Roadhouse, CEO Jerry Morgan has held to a firm position. “We focus on what we can control,” he said Thursday during the brand’s Q3 recap, “which is providing a legendary experience to each and every guest that visits our restaurant.”
This line is a well-worn one for the steakhouse chain over its history as a publicly traded brand, whether the backdrop was a recession, soaring labor costs, the pandemic, or any external force thrown at restaurants. Texas Roadhouse’s performance in Q3 felt familiar as well. It reported same-store sales growth of 8.2 percent, with traffic climbing 4.1 percent, and average check up a similar figure, including 5.1 percent price and negative 1 percent mix. By month, Texas Roadhouse’s comps lifted 10.7, 7.8. and 6.6 percent in July, August, and September, respectively, before rebounding to 9.2 percent in October (traffic of 3.4 percent). That latter hike was partly bumped by a price increase taken three weeks earlier than last year.
- Q3: 8.2 percent
- Q2: 9.1 percent
- Q1: 12.9 percent
- Q4 2022: 7.3 percent
- Q3 2022: 8.2 percent
- Q2 2022: 7.6 percent
- Q1 2022: 16 percent
Traffic has also reported positive for over a year now.
Q3 did provide a rocky snapshot into the present climate, although, as noted, not one foreign to Texas Roadhouse. Restaurant margins were 14.6 percent, down from 15.8 percent in Q2. The long-view goal has been to get back to 17 percent, yet that doesn’t appear within imminent reach. Although there were some isolated hits to account for the 80-basis-point drop quarter-over-quarter (general liability insurance, gift card breakage, which declined from $6.6 million last year to $3.7 million this year), making this period look worse than it truly was, the company shared it doesn’t expect inflation to moderate next year. At least not in regard to beef. It’s forecasting similar commodity inflation of 5–6 percent, driven nearly entirely by its hero product. Other items are projected flat to slightly deflationary. Executives believe wage inflation will be 4–5 percent, modestly below this year’s 6–7 percent rate, but still not to pre-COVID levels.
Texas Roadhouse raised prices 2.7 percent in early October, bringing it to 5.5 percent for Q4 (it had 6.9 percent pricing in the first three weeks of the quarter and will have 4.9 percent for the final 10 weeks).
Morgan was asked on the call if there’s been debate internally to raise prices higher or sacrifice some traffic growth to balance the fact stores are working harder for less in an operating climate where the cost of business is more than it used to be.
For some background, full-service menu price inflation in September was 5.1 percent, according to the BLS. So Texas Roadhouse’s above-historic price lifts remain just at line of offsetting pressures versus pushing past them, as some other brands have elected to do. A good deal of chains, especially in quick service, are double-digits up, year-over-year.
Morgan said “it is a conversation of depth often” for Texas Roadhouse. But being reactionary isn’t in its makeup. “We do believe at some point the beef deflation, maybe, somebody will help us in that direction,” he said. “I want to be careful. I want to be seen as a value concept, always, as we fight for that segment.”
“But, I think, overall, it is always on our mind in a conversation of how we can be more efficient, how we can be more effective on the profitability side,” he added. “But we have to do right by our employees, our guests, and our holders.”
As seen below, Texas Roadhouse, for its hurdles, isn’t struggling to generate visits relative to the field.
It’s a twofold push, from a directional standpoint. Morgan and the Texas Roadhouse team are nearly complete with the company’s annual fall tour where it visits over 700 operators across its three concepts (fast casual Jaggers being the third). “I believe our operator’s passion, dedication, and focus on the success of their restaurants is one of our biggest advantages,” Morgan said. “They remain committed to building sales and profits while sticking to our core values regardless of the pressures they face.”
Texas Roadhouse recently commissioned an independent guest attitude and usage study that showed it ranked atop casual dining in a host of categories, including guest satisfaction, food quality, and friendly service. The chain also topped the full-service pack in a third-party dive into the most-beloved brands in the country, coming behind only Chick-fil-A, Starbucks, and McDonald’s overall.
So, on one end, as long as guest satisfaction drives traffic—which it did each month in Q3 compared to the year prior—managing partners aren’t going to drift from the playbook. Conversely, Morgan said, consumers are weathering the same cost-heavy burdens in their daily lives. And yet, whether it’s inflation, student loan payments, etc., the Texas Roadhouse consumer remained resilient for a quality product and high level of value, service, and hospitality, Morgan said.
“We will never take for granted that guests give us two of their most valuable commodities,” he noted, “their time and their money.”
Texas Roadhouse stores average nearly $139,000 in weekly sales in Q3. A touch over 12 percent of that, or $17,000, flowed from to-go. It marked the second consecutive quarter of year-over-year growth in average weekly to-go sales (Texas Roadhouse does not do delivery). Michael Bailen, head of investor relations for the brand, said there was an opportunity to drive this corner of the business further, and it could aid margins. The chain continues to invest in existing sites with bump outs and expansions, like windows in certain spots, to ease pickup friction and improve speed. The other lever is labor. Dine-in growth requires staffing up. “If we grow to-go more than dine-in, maybe you don’t need as much labor as you would to serve more dine-in guests,” Bailen said.
However, while to-go could balance the line and prove accreditive, Texas Roadhouse’s core continues to run through its dine-in center. Morgan said Q3’s sales and traffic show the brand is well-positioned as long as it continues “to deliver on our food promise and our service and hospitality that we’re winning that fight.”
“Our food tastes great,” he said. “I think the consumer is telling us that they want our food from what we can see from our traffic. It hasn’t slowed down for us technically if you look at the rest of the industry. So we believe that the consumers is telling us to keep doing what we’re doing. We just need to be able to serve more of them all week long. And so that’s exciting, good news for us.”
Continued CFO Chris Monroe: “People are still coming out in spite of whatever has been in front of them. The consumer has come out and enjoyed our food and our experience and we’re expecting that to continue.”
Morgan added Texas Roadhouse has seen diners trade down from pricier sit-down occasions and trade up from counter service to get hospitality. It’s a desirable space to fit into.
And speaking of serving more guests, Texas Roadhouse has roughly 15 new units planned for the first half of 2024 compared to seven in 2023. That would suggest some 35 new locations over a 12-month stretch—the fastest development pace in company history. Also, well above its 27-unit outline this year. Capex is rising in tandem, up to $340 million from $300 million.
Texas Roadhouse opened nine company stores in Q3, including two Bubba’s 33 units. Bubba’s recently hired its first regional partner and is up to 43 locations, an increase of five, year-over-year. Additionally, four franchises hit the market, including three international restaurants, and the first Jaggers franchise (there are now eight total Jaggers in America). As many as 12 corporate stores could open in Q4. Texas Roadhouse closed Q3 with 573 domestic company and 54 franchised stores. There are 44 international franchises.
The company’s pipeline of new store openings over the past several years, including 2023, was heavily back-end loaded—a common turn as restaurants grapple with delays across multiple avenues. Texas Roadhouse expects a much more evenly distribution cadence during 2024 and into the future. “We wouldn’t just be opening restaurants for the sake of opening them,” Bailen said (the brand’s AUVs are up 40 percent over the last four years). “We want to make sure they’re doing high volumes and continue to generate great return on investment for us.”