Texas Roadhouse Grapples With Rising Food Prices

High commodity costs will make sustaining success in 2012 difficult, Texas Roadhouse Inc. officials said after reporting positive third-quarter results.

Officials of the casual-dining chain said same-store sales, net income and earnings per share all rose in the quarter ended Sept. 27.

Food costs rose approximately 4.5 percent during the period, said chief financial officer Price Cooper. He also projected that they would rise from 7 percent to 9 percent in 2012.

"I would expect to feel more pressure on food costs next year, obviously, than we had this year," Cooper said. "Just how much pressure that is all comes down to where we land on the pricing front."

Texas Roadhouse plans to raise menu prices at the beginning of 2012, president Scott Colosi said, but added that the company still is determining how much to raise prices and for which menu items. Texas Roadhouse has been testing a 2-percent price increase since August, and may raise prices in some states additionally next year. No pushback from customer traffic or menu mix has arisen during the test, he said.

"We're going to take our time after early January and see what's going on with the economy and see what our competition is doing," Colosi said. "A lot of our competitors are staying very aggressive in the deals they're selling on TV, so we're going to be very careful in the actions that we take."

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Texas Roadhouse founder and chief executive Kent Taylor said some menu items with more favorable food costs have helped the chain mitigate food inflation, and would continue to be an option for the brand next year.

"We've introduced a bone-in rib eye in our restaurants at a price point of $21.99, and it's in 85 percent of stores and expected to be in all stores next year," Taylor said. "We also have a porterhouse steak from $22.95 that we're testing in 20 stores, and it should be in 100 to 110 stores next year. They both help our check average."

Taylor added that the brand's value proposition on the lower end of the price spectrum has strengthened this year because more Texas Roadhouse locations are participating in the Early Dine value program from 4 p.m. to 6 p.m.

Average check amounts are currently about 2-percent higher compared with a year earlier, Cooper said. The brand is expecting a small gain in traffic next year as well, he said.

Projecting growth in turbulent 2012

Same-store sales at company-owned restaurants in the first four weeks of the fourth quarter increased 4.2 percent, compared with a year earlier, executives said. That momentum, strengthened by further pricing actions and menu development, would enable increased unit count and sales growth next year.

In addition to food cost inflation of up to 9 percent, Texas Roadhouse also is projecting higher labor costs due to increases in minimum and tip wages in six states where 20 percent of its company-owned units are located.

New prototypes are expected to allow the brand to open restaurants faster and cheaper, while still increasing throughput, Colosi said. The chain plans to open 25 restaurants next year.

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"After cutting $300,000 to $400,000 out of the development side of the equation, we're back to growing at a higher rate," Colosi said. "Although we're giving back some margin in 2011 and likely in 2012, we still feel very good about returns we're getting on our new restaurants and growth plans overall."

The brand has tested three units of a smaller prototype, entering some smaller towns than it has previously, Taylor said. About four to six of those units will open next year, he added.

The smaller prototypes have more seats, about 240 per location, than Texas Roadhouse's old model, Taylor said. However, Colosi projected the majority of openings next year would be of another larger prototype that seats 275 customers.

"We'll probably end up with more of the larger prototypes, because we're finding we need the seats," Colosi said. "Our folks have done a really good job of reducing the cost of even getting a larger prototype open, so it's increased our confidence that we can serve the number of guests needed to make it work."

Sales and margins are favorable at newer units, executives said. The 10 newest corporate restaurants averaged weekly sales of $84,500, compared with the average weekly sales of $73,098 at the 260 company-owned restaurants open for at least 18 months.

"Margin challenges we've had this year and presumably next year are a concern," Colosi said. "However, we feel strongly that the returns we get next year, even if we have lower margins, are still very good. Our sales results have been really good in new stores, so we're very bullish on development overall next year.

"If trends continue, our sales-to-investment ratio will rise to over 1-to-1, and when we get above that level we can bear a little margin change," he said.

Louisville, Ky.-based Texas Roadhouse operates 284 restaurants and franchises another 72 units in 46 states.

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN