Texas Roadhouse continues to be an outlier among sit-down restaurants.
While others are struggling with declining sales or slow growth, Texas Roadhouse continues to report solid same-store sales numbers. Sales at company-owned Texas Roadhouses and at domestic franchisee-owned locations open for at least a year rose 3.4 percent and 3.3 percent, respectively, according to the company’s third-quarter earnings report.
In October, same-store sales have continued in a positive direction, with a 3.8 percent increase compared to a year earlier. The amount of consumer traffic also increased 2.5 percent, the company said.
“We see a lot of folks in casual dining with significant negative traffic. Our traffic’s positive, and our margins are up this year,” Scott Colosi, president of Texas Roadhouse, said during a call with analysts Tuesday. “So we are very pleased with the momentum that we have in our business, and we feel very good about heading into 2017.”
Still, the Louisville-based company, like many of others, is facing increasing labor costs. Texas Roadhouse’s senior director of investor relations Tonya Robinson predicts mid-single-digit labor cost inflation in 2017, after the company had a 3 percent to 3.5 percent rise in labor costs this year. (Shares of the company were trading down 2.7 percent, to $39.34, midday on the Nasdaq.)
The story with Texas Roadhouse typically is high food costs, but this year, the company has experienced 4.1 percent food cost deflation year-to-date and expects full-year food deflation to be around 3.5 percent, Robinson said.
To combat labor costs, Texas Roadhouse has opted to increase its menu prices by 1 percent this month, and it could raise prices again after the first quarter of 2017.
“We believe it is important to maintain our conservative approach on pricing at this time, given the competitive consumer environment,” Texas Roadhouse founder and CEO Kent Taylor told analysts. “We will have an opportunity to reevaluate our pricing actions in the first half of 2017.”
With its competitors reporting negative sales numbers, Taylor said, the company wants to see how consumers react to the 1 percent increase first before making a decision. A 1 percent increase or decrease in customer traffic equals about 6 percent in earnings per share growth, he added.
“So we’d like to see if our operators can make up that shortfall before we jump onto the second part of pricing,” he said. “As I discussed our pricing with all 50 of our market partners, I mean, they basically said to me, ‘This is all the pricing we want at this time, and we own it that we’re going to increase traffic and we’re not going to settle until we take care of that.’ So I have full faith in our people to take care of the traffic that we need to make up.”
Texas Roadhouse executives declined to say how much traffic would need to increase in order to stave off another menu price increase, but Colosi said the restaurants would need “a pretty good bit of traffic growth” to keep margins flat. His comments made it seem unlikely that Texas Roadhouse would meet the traffic goals it needs to hit.
The company will evaluate internal sales numbers, labor costs projections, commodity outlooks and legislation that possibly could impact the restaurant industry before making a final decision, he said.
“We will look at everything and take it at that time. I think what’s important is, we just don’t take any of our sales success for granted, and that’s why we take the position that we do on our pricing,” Colosi said.
Along with the pricing increase, Texas Roadhouse is testing new, smaller items that would coming in at a lower price point as a way to entice new and returning customers.
“We are testing a 5-ounce salmon and putting a salad version of that, which would both be a smaller portion size benefit for a guest, but also a lower price point for a guest,” Colosi said. Similar market testing is being done on a smaller portion of its New York strip steak.
While some experts have blamed dampened restaurant sales on more consumers eating at home, Colosi and Taylor said they didn’t believe that was a major contributing factor.
“I don’t buy into the food-at-home argument. I don’t think the price differences are that significant to what it costs to go out and eat today versus a year ago, relative to what it cost to go to the grocery store today versus a year ago,” Colosi said. “There may be other things that are impacting them.”
Taylor added that customers come to Texas Roadhouse for the friendly service, which they don’t get at home.
“I am kind of like, you want to sit at home and turn on the TV and be depressed, eat a mediocre meal, or come into our place and have a great meal, interact with our employees and kind of get energized and feel better about life,” he said. “That’s the way I look at it.”