TXRH | 3Q15 TRAFFIC GROWTH OF +5.2% DAMPENED BY LABOR PRESSURE

HEDGEYE COMMENTARY

Texas Roadhouse (TXRH) is on the Hedgeye Restaurants LONG bench. 

 

TXRH reported a strong quarter for 3Q15.  Top line growth is some of the best in the industry and the momentum continued into October.  If October is truly choppy, TXRH is not seeing it.  TXRH reported revenue growth of 13.7% driven by a 6.6% increase in average unit volume and a 7.7% increase in store weeks.  The flow through to EPS was limited, reporting only 8% EPS growth.

TXRH | 3Q15 TRAFFIC GROWTH OF +5.2% DAMPENED BY LABOR PRESSURE - CHART 1

TXRH | 3Q15 TRAFFIC GROWTH OF +5.2% DAMPENED BY LABOR PRESSURE - CHART 2

The guidance for 2016 looks to be calling for more of the same. Beef price declines will be a major driver of margin improvement in 2016, TXRH is looking to have LSD total commodity basket deflation. But there were a few questions on the potential impact lower prices could have on top line trends.

No change to our view.  We like the trends and the direction the company is headed in, just looking for an opportunity to get more aggressive.

MANAGEMENT COMMENTARY

  • Comps in the third quarter were up 6.9%, including traffic growth of 5.2%.
  • Momentum has continued into the fourth quarter with comps increasing approximately 5% in October.
  • TXRH expects low single-digit food cost deflation in 2016
  • The overall labor market continue to show signs of tightening expect ongoing labor inflation into 2016. “Kent and I just spent three weeks meeting with all of managing partners, and many were commenting on how wage rate competition has been intensifying”
  • TXRH plans to take approximately 1.7% of pricing in mid-November.
  • Expect positive comparable sales growth to continue in 2016.
  • On track to open approximately 30 company restaurants in 2015 with 27 restaurants opened so far
  • Franchise partners have opened three restaurants this year, including our third restaurant in Kuwait, which opened last week.
  • Targeting 25 to 30 restaurant openings in 2016 and sites have been selected for almost all these locations.
  • Development growth next year will continue to be focused on Texas Roadhouse restaurants, but plan to open at least five Bubba's 33 restaurants next year.
  • “In 2016, we'll remain focused on returning capital to our shareholders in the form of dividends and share buybacks and protecting the strength and flexibility of our balance sheet.”

FINANCIAL COMMENTARY

  • 3Q15 comp sales increased 6.9%, comprised of 5.2% traffic growth, and a 1.7% increase in average check.
  • By month, comparable sales increased 7.6%, 7.1% and 6.1% for our July, August and September periods respectively.
  • Comps were up approximately 5% in the October period.
  • Expect 4Q15 to be negatively affected by approximately 0.5 points, due to Christmas shifting from Thursday to Friday.
  • Restaurant operating profit increased 12.1% and restaurant margins percent decreased 22bps.
  • COGS were up 6bps as food inflation continued to outpace our menu pricing actions. For the quarter, our food cost inflation was approximately 3.4%, driven by beef, bringing the year-to-date increase to approximately 6%.
  • 2015 food cost inflation will be approximately 5%.
  • Labor costs were 32bps higher driven by wage rate inflation and higher healthcare costs.  Wage rate inflation to continue to be in the 2.5% to 3% range for the remainder of the year and into 2016.
  • G&A costs were up were essentially flat as a percentage of revenue
  • The tax rate for the quarter came in at 29.9% which was lower than the 31.4% rate last year due to higher FICA tip credits.
  • The quarter with $72.6 million in cash and $70.7 million in debt.
  • TXRH generated $35.1 million in cash flow from operations, spent $52.3 million on capital expenditures and $1.6 million on share repurchases.
  • 2015 capital expenditures are now expected to be $160 million driven by spending on new units

GUIDENCE

  • locked on approximately 75% of our beef needs for next year.
  • expect low single-digit food cost deflation in 2016.
  • Expect labor headwinds to continue due to ongoing wage inflation, along with state minimum and tipped wage rate increases.
  • Expect significant free cash flow generation after projected capital expenditures of $155 million to $165 million.

IMPORTANT COMMENTS FROM Q&A

  • And on the Bubba's front, we're still trying to figure everything out.
  • Those look like they're still coming in as expected, around $4.7 million.
  • $50 million of the Cap Ex will be for remodels
  • “no doubt if you're in New York State and your tip wage is going from $5 to $7.50, which is a 50% increase, you're going to be thinking in terms of a little bit more pricing. If you're in California where your tip wage was $8 two years ago and now it's going to be $10 in January 1, you're thinking in terms of a little bit higher pricing”
  • Star Bar Remodels  - “I want to say that the count is probably nearing 300. And, I think at some point we'll probably have all of them in the system done, maybe in the next 12 months.  Yeah. Our goal was to finish them up by 2016. It just kind of gives a fresh look to the bar area. And then, gives a few more TVs for people to look and at while they're in the bar area, it adds a little more energy. Some of the things we've kind of picked up at Bubba's. So we've kind of moved them over to Roadhouse.”
  • “in the few restaurants that we have that are West Texas, South Texas, you have seen more of an impact from the slowdown with that part, but most of Texas for us is just chugging right along, I would say unaffected. And we're pretty consistent across the country otherwise we're growing sales in every part of the country.”
  • “turnover is definitely up year-over-year. I guess 7% or 8% year-over-year is what we're up on an hourly basis. Our management turnover hasn't changed much. But on an hourly basis, it's definitely up and not unexpected as unemployment continues to fall. Usually that's what we've seen in the past, unemployment falls and our turnover tends to go up a little bit.”

Please call or e-mail with any questions.

Howard Penney

Managing Director

Shayne Laidlaw

Analyst