Texas Roadhouse, Inc. (TXRH) Q4 2020 Earnings Call Transcript

Good evening, and welcome to the Texas Roadhouse Fourth Quarter Earnings Conference Call. This call is being recorded, and all participants are presently in a listen-only mode. Following the speakers’ remarks, there will be a question-and-answer session. I would now like to introduce Ms. Tonya Robinson, the Chief Financial Officer of Texas Roadhouse. You may begin your conference, ma'am.

Thank you, Annie, and good evening, everyone. By now, you should have access to our earnings release for the fourth quarter ended December 29, 2020. It may also be found on our website at texasroadhouse.com in the Investors section. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our earnings release and our recent filings with the SEC. These documents provide a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements, including factors related to the COVID-19 outbreak. In addition, we may refer to non-GAAP measures. If applicable, reconciliations of the non-GAAP measures to the GAAP information can be found in our earnings release. On the call with me today is Kent Taylor, Founder and Chief Executive Officer of Texas Roadhouse; and Jerry Morgan, President of Texas Roadhouse. Following our remarks, we will open the call for questions. Now, I'd like to turn the call over to Kent.

Thanks, Tonya, and thanks, everyone, for joining us. The challenges we faced in 2020 were unlike any other, and I'm very proud of how our operators worked through the uncertainty. The fourth quarter was another example of how we must stay on our toes, ready for the quick changes this pandemic throws our way. After a good start in October, our top and bottom-line results were impacted by the reclosure of approximately 90 of our dining rooms, along with increased capacity restrictions in many other of our restaurants starting in mid-November. More importantly, most of these dining rooms have reopened. And as of today, over 98% of our company-owned restaurants have some level of dining room capacity in place. Sales are benefiting from reopenings and the easing of restrictions as weekly sales in limited-capacity restaurants have averaged over $108,000 for the first 7 weeks of 2021. The last 11 months have shown us that the Texas Roadhouse brand is as strong as ever and consumer demand to dine inside our restaurants remains high. In addition, our To-Go sales continue to be a big part of our restaurant business. For restaurants with dining rooms open, To-Go sales averaged just over $25,000 per week, or approximately 23% of sales during the first 7 weeks of 2021. Our expectation is that To-Go sales will remain a significantly larger part of our business after capacity restrictions are lifted and our dining rooms fill up again. However, we are not simply waiting for everything to return to normal. We are in a growth mode. In 2020, we opened 22 new company-owned restaurants across our 3 concepts, and our franchise partners opened 4 restaurants, including 2 international locations in Korea and Taiwan. In addition, we signed several new development agreements in the back half of 2020 for Korea, Brazil, and Puerto Rico, which is providing a pipeline of locations for 2021 and beyond. Our 2021 development plan is shaping up nicely, and we plan to open between 25 and 30 company restaurants this year, including as many as 5 Bubba's 33 restaurants and one Jaggers restaurant. Speaking of Jaggers, our newest location opened in early December and continues to perform way above our expectations. We have a few more company-owned locations already in the works for 2022, and we will continue to explore potential franchise opportunities. Our retail business continues to expand with 2 recently signed licensing agreements. The first is for a bottled version of our margarita mix, while the second is for a canned cocktail seltzer that will be offered in a variety of Texas Roadhouse branded margarita flavors. Both are expected to be in retail locations sometime during 2021. These initiatives, together with our Butcher Shop business are low-risk and require minimal investment. We believe, over time, they have the potential to generate strong returns. We are excited about our growth opportunities. However, we remain focused on the operational challenges we continue to face due to the pandemic. Just like in 2020, the safety and well-being of our guests and employees remains our top priority this year. We are also feeling the impact of inflationary pressures throughout the business from commodities to wage rates to the cost of supplies and food packaging. Over the coming weeks, we will have conversations with our operators about menu pricing options. And based on their feedback, we could take some additional menu pricing as early as the middle of the second quarter, and we will be keeping a close eye on federal minimum and tip wage developments as any increases would factor into our pricing decision. While business is certainly not back to normal, we are encouraged by the direction of the business and our current financial position. We are committed to making the right decisions for the long-term benefit of the company, making the right decisions for the existing business while also focusing on the future growth that requires strong leadership. That is why I'm pleased about the recent addition of Jerry Morgan as President of Texas Roadhouse. Jerry shares my vision and has the same passion that our entire management team has. His experience and perspective will be a great addition to our leadership team. So Jerry, why don't you give us some of your thoughts?

Thanks, Kent. I appreciate that. This company has been a big part of my life starting back in 1997 when I joined as a managing partner at the first Texas location in Grand Prairie. I'm excited and honored to serve as President of this amazing company that Kent created in 1993. Over the last several weeks, I have been spending time with each and every person in our support center to understand ways I can better serve and set them up for success. As I become involved in new areas of the business, I look forward to working with Kent and our leadership team to build upon our success. And before I pass it back to Kent, I would like to give a shout-out to all of our folks dealing with the weather issues across the country. We are here if you need us. Thank you for all that you do and stay safe. Kent, back to you.

Thanks, Jerry. I look forward to working closely with you in your new role. With your guidance at the support center, as well as partnering with Doug Thompson, our COO, and our strong regional partners on restaurant operations, I'll have even more time to focus on new ideas. For example, I've had a lot of fun in the past 6 months working on new retail initiatives and fine-tuning Jaggers, which sets us up for future growth over the next decade. We've been very successful in the full-service world, so why not retail and fast food, too? I want to end with a big thank you to our operators and support center staff. 2020 was a year filled with challenges and you all did not hesitate in your efforts to tackle and overcome them. Without your efforts, Texas Roadhouse would not be as strong as it is and ready to get back on track in 2021. Now, Tonya, take it away.

Thanks, Kent. Over 9.5% decline in average weekly sales and a 3% decline in-store weeks. This is a 7.6% negative impact of lapping the extra week in the fourth quarter of 2019. Comparable restaurant sales for the fourth quarter declined 8.9%. By month, comparable sales increased 0.8% and decreased 6.3% and decreased 18.2% for our October, November, and December periods, respectively. Comparable sales for the first 7 weeks of 2021 are down only 2% as more dining rooms reopened in January and February. To-Go sales accounted for slightly over $20,000 per week or approximately 21% of sales at our limited capacity restaurants in the fourth quarter. As Kent mentioned, To-Go sales have grown to over $25,000 per week per restaurant and approximately 23% of sales at our limited capacity restaurants during the first 7 weeks of 2021. This growth is great to see, given sales volumes inside our dining rooms are also increasing. And as we think about what sales could look like in the future, we are encouraged to see that our higher capacity restaurants, those who can use 75% or more of their dining room seats, have averaged slightly under $23,000 per week of To-Go sales so far this year. This represents approximately 20% of their total sales. So to date, we are seeing minimal drop-off in To-Go sales as indoor dining capacity increases. Restaurant margin as a percentage of total sales decreased 380 basis points to 13.3%, with approximately 60 basis points of the decline due to overlapping the benefit of the extra week in the fourth quarter of 2019. Margins were below our initial mid-teen expectation because of increased dining room closures in November and December, which led to lower sales volumes and the larger-than-expected percentage of sales coming from lower-margin To-Go transactions. Food and beverage costs as a percentage of total sales were essentially flat versus last year, remaining at 32.4% in the fourth quarter. Commodity inflation of approximately 1.5% and the impact of guests shifting to less profitable entrees was offset by the benefit of menu pricing and a higher overall guest check. For 2021, we currently expect commodity inflation of approximately 3%, driven by higher prices on beef, pork, and oil-based products. Labor as a percentage of total sales increased 213 basis points to 35.2% in the fourth quarter. Labor dollars per store week were down 3.5% compared to the prior year period. The decrease includes an 8.6% reduction in hours, partially offset by wage and other inflation of 4.6%. In addition, one-time items had a 0.5% negative impact on labor dollars per store week. This was driven by a $1.6 million insurance reserve charge this quarter compared to a $1 million charge last year. It also includes $0.5 million of cost incurred this quarter for release pay and enhanced benefits for hourly restaurant employees, net of employee retention payroll tax credits. Finally, on other operating costs, as a percentage of total sales was 16.9%, which was 134 basis points higher than last year. Other operating costs were negatively impacted by lower sales volumes as well as the added expense of purchasing PPE, To-Go supplies, and other COVID-related costs. Moving below restaurant margin, G&A costs for the quarter decreased $7.2 million as compared to the prior year period. The primary drivers of the decrease were a $4.1 million reduction of cash and equity compensation and a $2.2 million reduction in travel and meeting expense. In addition, the benefit from overlapping the expense of the extra week from the fourth quarter of 2019 was $2.2 million. With regards to cash flow, we ended the fourth quarter with $363 million of cash, which is up $35 million from the end of the third quarter. The increase was driven by $84 million of cash flow from operations, with most of the offset coming from $37 million of capital expenditures and the acquisition of 2 franchise locations. Based on our schedule of new store openings for 2021, we are projecting $210 million to $220 million of CapEx for full year 2021. We expect these new stores, along with the 22 we opened in 2020, will lead to store week growth of 4% to 5% in 2021. These expectations assume we continue to see positive sales momentum from the continued easing of dining room restrictions. For 2021, we believe 15% to 16% restaurant margins are attainable given the current sales and cost environment. Margins should continue to improve as sales grow, but will remain pressured from lower dining room sales, wage rate inflation, and ongoing cost pressures related to supplies. The timing of a return to pre-pandemic restaurant margins will depend on the lifting of capacity restrictions, the mix of dining room and To-Go sales, and the easing of COVID-related costs. Finally, I'll conclude our prepared remarks by reiterating earlier comments on the strength of our business and financial position. With a net cash position of $123 million and continued improvement of cash flow generation, we believe we will be well positioned to return to our usual uses of free cash flow later this year. Operator, please open the line for questions.

We have our first question from Jake Bartlett at Truist Securities.

My question is just to understand the first 7 weeks of the quarter, same-store sales were down 2%. But in January, they were down less. And just to confirm, is that relating to weather? Or are there any other factors there that would have had a deceleration in the last 3 weeks?

Sure. Hey, Jake, this is Tonya. Yes, when we're looking at the sales, what you had going on in January, we got some benefit from the calendar shift related to New Year's Eve. We think that was probably about a 1.3% benefit to January. And then on the 7 weeks, you obviously get a little bit less benefit there, but also what comes into play is Valentine's Day and weather, which are both negative impacts on those sales for the 3 weeks of February. And we estimate that on a total 7-week number, that's probably about 1%, 1.3% of a negative impact on the total 7 weeks.

Great. That's helpful. And it's obviously surprising and encouraging to see the in-store dining increasing as we start 2021 as well as the off-premise. So how do you square that? I mean, people are coming more for off-premise as they come more for dine-in. Anything that you're doing to kind of promote that? Or just maybe help explain why you think that's happening?

Hey, Jerry, you just came from operations. Why don’t you give him a little color on how we do well on the go?

Yes. Thanks, Kent. I would just say that, number one, as people get more confidence and get out and about, it's going to drive our To-Go and our dining room sales. And as the capacities get lifted, people still want our amazing food, and they want to experience that service. And we feel people are anxious to be served. So the convenience of the windows that we've installed in our corrals and in our outdoor waiting areas makes it a lot easier. And we've done some things from a technology standpoint with 2-way texting to be able to communicate with our guests to make it very easy for them to check in and then to be communicated with when their food is ready for them to come pick it up. So many, many things will be driving not only the experience, but the ease of the pickup.

Great. For the last question, Tonya, you mentioned the guidance of 15% to 16% restaurant-level margins, which assumes a negative impact from sales. It seems like you're only experiencing a slight negative impact now. Do you expect sales to recover to 2019 levels? What margin levels do you think could be achieved at that point? I'm trying to understand if there are any temporary costs unique to 2021 that you anticipate bearing.

I don't think there's anything significant that differs from what we discussed. Much of it really depends on how soon we see the dining room restrictions lifted in 2021, as that will influence our sales. If we can return the dining room sales to historic levels or even higher while retaining our To-Go sales, that's when we could see margins returning to normal or possibly even improving. However, if dining room sales do not reach those historical levels, and we continue to see high levels of To-Go sales, that could put some pressure on our margins because To-Go transactions tend to be less profitable. That's how we perceive the situation. We anticipate ongoing COVID-related costs throughout 2021, including expenses for PPE, supplies, and other items, and we are uncertain as to when we might see those costs diminish.

We do have another question from the line of Dennis Geiger from UBS.

First off, I was just wondering if you could speak to kind of the G&A spend and the opportunity for investment. Maybe just looking out over the next couple of years, particularly as digital becomes a bigger focus and then some other opportunities that you folks just commented on, just wondering if you could kind of help frame up what that might look like or at least directionally? Or any kind of commentary on some of that investment behind some of these initiatives?

We will continue to make investments that could affect our general and administrative expenses over time. The impact largely depends on the types of investments we are making, such as whether they are in software and hard assets or in services. It's crucial for us to stay current with technology, and one positive aspect of the recent changes is that we've swiftly implemented some technology improvements in response to increased To-Go volumes. I expect this trend to persist. In terms of G&A, we saw a substantial decrease in 2020 primarily due to the circumstances we encountered, including reduced travel and meetings. A significant factor in G&A is equity and cash compensation, which will play a larger role in 2021. Our objective for this year is to keep G&A spending around 5% of revenue, although I expect it will exceed 2019 levels due to equity compensation linked to share price. Additionally, in 2021, we will see the return of various costs, such as those associated with conferences. Performance-based compensation also decreased significantly in 2020, but those expenses will reemerge in 2021. These are just a few key points to keep in mind.

That's super helpful. And maybe, Tonya, just 1 more, if I could, on just kind of that upside framework to the 17 to 18, and I think you gave a lot of detail and framed it well in talking about the puts and takes. But I guess, just going back to the point on if the dining rooms fully come back and the off-prem remains elevated, maybe some upside to that historical margin over time, does that contemplate improving the off-prem margins? Or is that not even part of the consideration there? And just based on the sales piece that you kind of framed, you could see upside to that 17 to 18 potentially from that scenario alone, if that makes sense?

Yes, we are working on improving profitability, but there isn't anything specifically built for that at the moment. Regarding the digital app, we transitioned to a new platform in October. We have noticed an increase in digital downloads for both Bubba's and Texas Roadhouse, and a larger share of digital and online orders in our overall To-Go sales. We’ve been discussing how to enhance the To-Go transaction, increase efficiency, and support operators with the growing To-Go volume. This remains a topic of conversation, but it isn't currently integrated into our plans. I believe there is potential upside when considering those 17% margins or possibly even higher.

A year ago, we were averaging between 7,000 and 8,000 in To-Go sales before the COVID experience, and now we're averaging over 23,000, even with dining rooms generally at less than half capacity. As we look forward to later this summer, it’s important to note that many customers who previously didn't order To-Go or preferred dining in are now placing To-Go orders. As we create more seating inside, it’s clear that the potential for sales growth is significant.

We do have another question from the line of Peter Saleh from BTIG.

Tonya, can you just give us a sense on the commodity inflation? I know you talked about 3% this year. Give us a sense on the cadence on how that plays out through the year?

Sure, Peter. It’s going to be a bit challenging to predict. We have more certainty regarding the beginning of the year compared to the latter part. Therefore, we may have less clarity about the second half of the year. However, I can say that it appears to be fairly consistent throughout the year. Last year in Q2 and Q3, we experienced higher inflation levels, which may indicate a lower inflation rate in 2021. Other than that, there’s nothing significant to note in terms of trends.

Great. It seems like you are anticipating some additional labor inflation this year. Could you talk about the current labor environment and what you're observing today? Also, how much labor inflation do you expect in 2021, considering the overall situation with high unemployment and the pricing strategies you may be implementing?

Yes. It's really tough to say. I mean, obviously, this year, we continue to see some decent inflation and some of that was due to changes we made entering into the pandemic in March. When we went to that high level of To-Go business with dining rooms shutdown, we made the decision to take those employees working at To-Go to minimum wage versus tipped wage. So we've kept that in place so far. Through 2020, we'll continue to sort of evaluate that. But that's a good piece of why we're seeing labor higher in 2020 and still in '21. Still expect your normal state-mandated increases, we think that could drive about 1.5% or so of inflation in '21 and still expect market pressure and just a little bit more difficult of the hiring environment that we're seeing today and whether that's going to be due to just the COVID impact as folks maybe still are a little nervous about coming out to work, whatever it might be, we're just anticipating that those staffing, that still stays a pretty challenging thing to do in '21. So that's something we're definitely focused on. But I think you'll see growth in hours, get back to normal, continue to see growth in hours, with sales being higher and dining rooms filling up, things like that, that will take that labor dollar, that percentage labor dollar per store week growth up.

We have another question from the line of David Tarantino from Baird.

Tonya, I had a question about a comment you made about the cohort of restaurants that has 75% or more of the capacity open. I think you said that To-Go sales are running around 23,000 a week, and that's 20% of the sales. So can you confirm that I heard that correctly?

Yes, that's correct, David. I believe there are about 165 stores in that group within the 75% to 100% capacity range. They showed positive comparable sales for the first 7 weeks. While 7 weeks is still a limited timeframe to draw strong conclusions, it does provide some reassurance that these stores are performing well, posting positive comps and sustaining their To-Go sales levels.

Yes, that was going to be my follow-up. So I guess, would that imply they're achieving around $115,000 in average weekly sales, which is about 7 percent higher than what you experienced in Q1 of 2019 for the system? I was just curious if that’s a fair way to assess how those restaurants are performing, with comparable sales growth in the mid- to high single digits. Do you believe this could be an indicator of what we might observe once the rest of the system reaches those capacity levels?

Yes, you're absolutely right. That's how the math works for that group of stores. Of course, it's 165 restaurants. I think it gives us some comfort to see them performing at that level when we try to extrapolate what that means for the rest of the restaurants in the system when they can reach that capacity. However, we never take that for granted, and we’re not going to assume that's going to happen. We'll see how things continue to play out, but it's definitely good to see those stores doing that well. The last question is if you separate those stores, what kind of margin structure are they operating with? Are they in the 17% to 18% range when adjusted for the market? Are they performing above or below that? Any insight you could provide on the margin side once those volumes come in would be appreciated. I don’t have the detailed data right now, but I would guess there’s likely a range of outcomes regarding margins. It largely depends on the states involved and their labor conditions. Generally, cost of sales remains consistent nationwide, but labor costs vary by geography. Therefore, it's possible to have stores in that group performing above 17%, while others may fall slightly below that threshold.

And then I guess I do have 1 more. On the margin guidance for this year, do you expect Q1 to be the low point for restaurant margin and that to build in the second half of the year as you get more capacity? Or how would you encourage us to think about the sequence of margins?

We are optimistic that conditions will improve over the year. However, much depends on external factors, as we observed in November when a spike prompted some states to retract their progress, which certainly affects our expectations. We do anticipate that Q1 will typically be a stronger quarter for sales due to seasonal trends, and we hope to see improvements as the year progresses.

So just to be clear, so would you expect Q1 to be inside that range or below that range?

I would expect Q1 probably to be inside that range.

We do have another question from the line of Lauren Silberman from Credit Suisse.

Just a quick follow-up on the 165 restaurants or so operating at 75% to 100% capacity. It looks like implied on-premise sales are down about 10% relative to on-premise in the prior year. Is that correct? And then is that all a function of capacity restrictions or also demand?

Yes, Lauren, that's the correct way to interpret those numbers. We see it as an issue of capacity restrictions rather than demand. We believe that as restrictions are lifted, even at 100% capacity, it doesn't guarantee full utilization because they may still need to manage seating arrangements and other factors. Additionally, longer wait times can still occur due to these capacity management needs. Therefore, it is primarily a capacity restriction issue rather than a demand issue.

This is Kent. I'd also say that we have a computer system in our kitchen and there are times when people call in on To-Go and because our kitchen is getting slammed so hard we have to kind of push their time back on when we can get their To-Go. Maybe, Jerry, you want to explain that in a little more detail?

Well, it's basically how we control so that our kitchens can maintain it. So depending on how many orders that we expect coming in or how many people we have in the dining room and how many To-Go orders are coming in. So I think as we continue to improve that process, and be able to handle more, that will definitely help our execution and our sales, too. And again, as we find out each restaurant and their ability, most of them execute very, very well. There's a few that are just outstanding, and they probably have a bigger capacity window accepting orders. So I hope that explains it a little bit, Kent.

I understand it. I just don't know, they do, we'll see.

One more about labor reform. So given the Roadhouse teams are what I'd consider a competitive advantage for the company, how do you think labor reform could change the employee proposition in the industry and specific to tip credit, and then as well as just $15 minimum wage, as presumably, menu prices will have to increase, limiting upside to tips. Or how do you expect to manage through that, should that pass?

Well, we're kind of doing some of that already in a lot of places across the country. We already run those higher wage rates. California, specifically, we've seen that movement in Colorado, Arizona, Minnesota doesn't have a tipped wage, just there's a handful of states across the country that are already operating without a tipped wage. So we see that working. And I can tell you, Lauren, I mean, in general, and I'm sure Jerry could chime in from what he sees out in the field. But we don't really see an impact to tips for those servers in those higher wage states. They continue to get tip well and their overall average wage is pretty high. Jerry, I don't know if you want to jump in on any color you're seeing there out in the field?

I agree, Tonya, from that perspective. It's uncertain whether people's tipping habits will change knowing that some individuals are earning significantly more than they are now. As this shift occurs, we will adapt our business model to ensure that our service remains exceptional and that we maintain a great guest experience. I believe this focus on service will remain a priority regardless of the pay levels within our establishment.

Our next question comes from the line of Brian Bittner from Oppenheimer.

Tonya, could you provide us with more information about the indoor capacity for the portfolio in January and February that has contributed to the average weekly sales? You've mentioned the stores with 75% capacity or more, but could you also give us an average for the entire portfolio year-to-date?

Sure. Many of our stores are currently operating at around 50% capacity. In January, we had more than 250 restaurants in that capacity range. While I don't have specifics on their sales, our operators are continuously working to find ways to optimize their operations. They are gaining valuable insights on seating utilization and are effectively using the text-to-page system to manage customer flow, since we no longer have waiting rooms and everyone waits in their cars. These strategies are helping them maximize their potential given the circumstances. Additionally, we have about 50 restaurants at 25% capacity, and we're down to just 8 restaurants that still have no dining room capacity. The rest are mainly operating at either 50%, 75%, or 100% capacity. I hope this information is helpful.

No, it does. That's perfect. I'm going to ask another question about margins. The average weekly sales so far this year are quite similar to what you experienced in the first half of 2019, where you were nearing an 18% margin. It seems that the difference between the 15%, 16%, and close to 18% margins is primarily due to the lower mix of To-Go orders. Can you elaborate on the margin structure between To-Go and in-store sales? I understand this might be challenging, but as we consider this elevated mix, it would be helpful to know what portion of your business contributes to the overall margin.

Sure. Yes, you're right. It does get pretty complicated because a lot of times, it just depends on how you're allocating those costs to the buckets as far as do you allocate anything from rent, do you allocate any of those fixed costs over into that To-Go side of things. So it does get a little hard to break that out. I can tell you from a PPA perspective, those To-Go, there's about a $4 gap between dining room and To-Go on PPA. And then, of course, you layer in, you'll probably have a little bit higher labor cost on To-Go. Again, you could probably split that 50 different ways to Sunday to get a different answer. And you have the higher To-Go supplies. Now, there's some other costs you don't have on the To-Go transaction that might offset some of that. So it’s really that PPA difference, but not having that alcohol attachment is really what drives the bigger piece of that difference. And that's something we're focused on offering beverage items on To-Go, and areas where we can do alcohol To-Go and what's our opportunity there. So those are just some of the things we're looking at there. But really, to your point, what it comes down to is, when the dining rooms are full, that To-Go impact does become more neutral to margins. And that's really kind of how the equation works.

We do have another question from the line of John Glass from Morgan Stanley.

Could you provide some insight on pricing? You mentioned considering pricing adjustments. What impact is there on pricing currently? Given the pressures from labor or commodities, and with demand returning, do you see this as an opportunity to implement a price increase that exceeds the average? Additionally, regarding the To-Go aspect, have you considered a service charge or another method to offset some of those costs? Or do you believe these pressures are temporary and not worth pursuing?

I'll start and then hand the baton to Tonya. No, we're not interested in doing a service charge at this time. And we have probably 30 different separate menus with different pricing around the country. So it usually changes per state and what the wages are in those specific states and then the other costs that might be more expensive like New York or California, and then I'll hand the baton to Tonya.

Yes, that's exactly what I was going to say. A lot depends on our ability to adjust pricing, and we'll be engaging with our operators to understand their perspectives in their specific locations regarding consumer sentiment. It certainly seems like demand is strong, and consumers feel positive. However, we want to ensure we maintain as much value in our menu as possible. We'll be assessing opportunities and gathering insights from operators nationwide. Currently, we have about 1.4% pricing on the menu, with approximately 40 basis points of that rolling off in September due to beverage and alcohol pricing changes implemented in September of 2020. The remaining 1% will come off in November.

We do have another question from the line of Jeffrey Bernstein from Barclays.

2 questions. One, as we think about the unit openings, glad you were able to narrow that down, I guess, to the 25 to 30 in this year, it looks like that's pretty much in line with historical kind of starting of the year. But now seemingly, you have 2 or sounds like you're excited about Jaggers, so maybe you have 3 brands going forward. I'm wondering if there's potential upside, whether there's any insight on maybe you're seeing independent closures or better real estate availability? Any color on what you've seen lately from a real estate perspective that would allow you to increase that number? And then 1 follow-up.

This is Kent. We've found that we're performing exceptionally well in some of the smaller markets we previously considered. While some businesses have closed, providing us with additional locations, construction costs continue to rise. Any savings we might gain in rent are somewhat neutralized by increases in construction costs, particularly for materials like concrete and lumber, as well as trades such as plumbing, HVAC, and electrical work. Additionally, if we decide to pursue the franchise model for Jaggers, that could lead to more sales without the costs associated with developing new sites. Tonya, would you like to add anything?

Yes, I think that looking at the timing of the 25 to 30 openings throughout the year, it is a bit more weighted towards the latter part of the year, which does introduce some additional risk. However, we are optimistic about our pipeline. We have restaurants currently under construction and they are progressing well, with contractors managing to complete the work and labor availability being satisfactory. Kent accurately noted the increased costs. In 2020, our development cost for Texas Roadhouse was approximately $6.1 million, which was slightly higher than in 2019. Many of the factors Kent highlighted are certainly contributing to those increased building costs. We expect those costs to decrease in 2021. Based on the information from our bids, we anticipate some reductions, but we will remain vigilant.

Understood. And then the follow-up question was a little bit more broad, but a question for Jerry. I mean it seems like Kent holds you in high regards. I'm wondering maybe from your perspective, what you think you bring to the table, what are the biggest opportunities that you've seen at the restaurant level, maybe best practices that you can share with the broader system, just wondering what your initial take is on what you can bring to help the broader system?

I believe my experience over the past 24 years as a managing partner at Roadhouse has equipped me with valuable insights. I've successfully run a restaurant and opened around 20 locations as a market partner, which has given me a deep understanding of our execution and goals within the restaurants. Our primary aim is to create a supportive environment for our team and provide a memorable experience for our guests while upholding the standards and expectations of our company. I feel my strength lies in my grasp of the hospitality side of the business. As I join the team in Louisville, I will focus on representing that understanding and valuing the contributions of our team members who support us from the center. We want to maintain a service-oriented mindset, take care of our staff, and uphold the highest standards for food and service in our facilities.

This is Kent. I’d also like to throw in that Doug Thompson did a stellar job during the COVID year really leading our operations and as regionals all of them have come from operations and are all homegrown. As a matter of fact, our new regional, Mike Smith, started as a butcher for us, some 27 years ago. And then Neil Nicholas, another one of our regionals, one of our most successful units and actually was the father of line dancing. So we are very operationally driven and have a lot of experience with the people that run our operations in the field.

Our next question comes from the line of Brett Levy from MKM Partners.

Could you share some insights on two topics: first, the margin, and second, the To-Go customer? Focusing on the To-Go customer, what trends are you noticing regarding new customers to the brand? How many of them have switched from dining in to exclusively ordering To-Go? Additionally, what patterns are you observing among customers who utilize both options? Are there any notable differences in their spending habits or frequency of orders between the two?

This is Kent, before Tonya attacks that. We do lose the beverage sales typically and the cocktail sales in the restaurant. So when people are ordering To-Go, even though we do sell iced tea To-Go. And in some markets, we're allowed to sell margaritas by the court To-Go. So Jerry, any comments on that from that question?

Yes, I believe we're seeing a mix of factors. Some states are still somewhat restricted. At the beginning of December, we had 100 restaurants operating as To-Go only, and now, 2.5 months later, that number has dropped to around 8. This has been a positive development. However, many people remain cautious about venturing into public spaces, which continues to boost our To-Go sales. Our improvements in app convenience, the installation of windows, and adjustments in how we execute To-Go orders at a consistent weekly dollar amount have all contributed to sales growth. Ultimately, when customers take our food home and unpack it at their dining room table, we aim to recreate the dining experience they would have had in our restaurant. We've put effort into ensuring that our food travels well and looks appealing when enjoyed at home, aiming for a legendary experience with Texas Roadhouse food.

Yes. And Brett, this is Tonya. I'll tell you, just from an online ordering perspective, the digital side of things, we've seen that increase. I think it's as much as 55% of total To-Go sales today. And that's been climbing over the course of 2020. And one of the phenomenon you see there is that digital PPA is higher than your normal To-Go PPA, and I think that's just the nature of when you get on that app, you see pictures, you're getting prompted for choices. If you pick something, we give you, hey, you might like this too and different things like that. So we had a tremendous amount of downloads on those apps in January. So I think we're starting to see the guests get more and more comfortable using those apps and that really gives us a great way to communicate with them that maybe you don't have if they're calling into the restaurants. So I think all of us would say that's pretty exciting to see that opportunity. And then just on the margin front, obviously, sales will cure many woes, but you've taken some cuts, you've made some refinements. If you could walk us through just how you're thinking about what won't return, what will return? Where are the real puts and takes regardless of what happens in the sales level? Sure. I'll give that a try. From a margin perspective, as I mentioned earlier, COVID-related expenses are likely to persist. We have COVID pay available for employees who contract or are exposed to the virus, and I expect that will continue for some time into 2021. Additionally, the costs associated with PPE and similar supplies are probably here to stay. Another factor that has increased costs as a percentage of total sales is the rise in compensation. Most of our operators' pay is linked to restaurant performance. In 2020, we implemented guaranteed bonuses to ensure their financial stability. We're progressively transitioning back to performance-based bonuses, but some guaranteed pay will likely remain in place for a while in 2021 before it is phased out completely. These are just a few considerations from my perspective. The cost structure will also depend on our To-Go sales volume, which will influence expenses related to To-Go supplies and labor. I hope that clarifies things.

We do have another question from the line of Jeff Farmer from Gordon Haskett.

Tonya, I have a couple of clarifications for you. Regarding the 15% to 16% restaurant-level margin for 2021, does that assume the price increase in spring 2021 will happen? Or would that be beneficial to achieving that 15% to 16% restaurant-level margin?

Yes, Jeff, just as a placeholder in our models. We are assuming a little bit of pricing in mid Q2. Not a big amount at all, but it does assume a little bit as a placeholder. Yes. Other than that, we're not assuming a second price increase or anything like that later on in the year, not making any assumptions there.

That's helpful. And then just a clarification and probably a little bit more detail on G&A. So I think you were indicating that 2021 G&A dollars would be higher. I think you said 2019 dollars. So just want to clarify that you did mean 2019 rather than 2020, which I assume you did. And if so, if we're talking about 2019, what G&A dollar number are you using? Because I think there were some one-time expenses in there that some of us might have pulled out?

Yes. I'm looking at the reported general and administrative expenses for 2019, which is just over $149 million. I want to clarify that perspective. You're right that the additional cost from the extra week in 2019 is a one-time expense that I recall, and it is included in that figure.

Okay. So just to be clear, 2021, you're thinking at least right now, high level will probably be at least at that level of that $149 million?

Yes. And a big piece of that again is that equity compensation, part of our compensation that's based on performance involves PSUs, performance shares, which are based on the grant-age share price. So we did that. We had a grant on those in January, early January this year. So that's a big piece of what's driving that additional cost up.

Another question from the line of Andrew Strelzik from BMO.

I just had a question on the unit growth. And I believe last quarter, you said you hope to get back to that 30% kind of typical company-owned unit openings. And this year, now you're guiding slightly below that. But I'm just curious, is that really a function of the construction costs that you talked about? Or is there something other nuance in there that's impacting that number? And then as we think kind of more broadly, obviously, a lot of optimism around Jaggers and Bubba's and international as well, some positive commentary there. I know some of that would be franchise locations, but I'm just curious where you think the unit opening numbers could go kind of over time if we think several years out?

This is Kent. I believe based on those smaller accounts that we can continue this page for the next quite a few years. I give you a more exact number, but I think, Tonya, you might spank me. So I'll back off.

When we entered 2020, we aimed to open 30 restaurants. We are proud to have opened 22 during a global pandemic. However, we were prepared to move forward with the goal of 30. The target of 25 to 30 for 2021 is not due to increased costs, but rather the state of our pipeline and the ongoing pandemic. We're adjusting our plans accordingly, as securing locations and managing teams are critical. We already have a pipeline set through 2022 and 2023. Finding the right people and management teams is essential for the success of each new restaurant, so we focus heavily on that, rather than on development costs.

We do have another question from the line of Andy Barish from Jefferies.

We received the As at the end, I suppose. I wanted to follow up regarding pricing. As far as I remember, you typically address this around this time in the middle of the first quarter. Is there any particular reason, besides the uncertainty caused by the pandemic, that is leading you to delay this decision by a few months?

No, this is Tonya. There's nothing going on other than what you mentioned. In November and December, we faced a lot of uncertainty regarding when the restaurants would reopen, and this affects our pricing process as we engage in discussions with the operators, adding some time to completing that process. Additionally, coordinating the rollout with menu printing and other factors contributes to the delay. Typically, we would aim to finalize everything in March, usually later in the month. So, yes, it could potentially be about 1.5 months, and we are looking at a 2-month delay, largely dependent on the operators and their feedback.

Excellent. And then on the year-to-date numbers, just a couple of quick questions on that. Holiday gift cards. I know it's obviously a weird year, but you guys had rolled out the ability with the new app to use gift cards through the app. Did you see some benefit from that? And then on the other side, this week's weather, I assume, is not in the first 7 week data? Or is it?

Yes. Well, the 7-week number would have been through Tuesday. So it does have some of that weekend weather we saw over the Valentine's Day weekend. And that's why it's kind of hard to quantify Valentine's Day separately from the weather impact. We think that the negative impact is a mix of the shifting of Valentine's Day and the weather impact. So a little bit of both is kind of what we're looking at there from that perspective. And then I'm sorry, if there was another piece of that question that I didn't answer, I apologize.

Just as you observed with holiday gift cards last year, we typically see a nice increase this year as well.

Yes, gift card season is significant for us during the eight weeks leading up to the end of the year, and our operators performed exceptionally well. Our gift card targets were ambitious, and although we fell slightly short, the results were impressive considering the challenges we faced. The ability to use and redeem gift cards through the app has greatly contributed to increased redemptions. These redemptions had decreased throughout 2020 due to the lack of this functionality, but we have seen a positive change since the mobile app was launched in October, and this trend is ongoing.

We do have another question from the line of Jared Garber from Goldman Sachs.

Just wanted to ask a question about kitchen capacity. And Jerry, maybe this is a good question for you as you talked a little bit about it earlier in terms of throttling some of those online or To-Go orders. But in an environment where knock on wood, things get back to normal and dining rooms are essentially full again, how are you thinking about managing the kitchen capacity to sustain those higher level of To-Go orders?

Yes. I think we'll just approach this on a day-to-day basis and focus on managing our capacity, especially during peak hours, to ensure that execution is not compromised. We can adjust that capacity as needed. The operator has some control over the restaurant, which includes the ability to adjust service times to catch up when necessary. We still have a lot to learn about this, especially during busy times like the holidays, as we experienced on Valentine's Day and New Year's Eve. Our operators are very eager to maximize sales and are not used to limiting their service, which could lead to lost revenue. I have complete confidence in Doug, the regionals, and our excellent managing partners to maximize every 15 minutes that orders come in. This tool will help us become more accustomed to our operational needs and maintain our excellence moving forward.

We have another question from the line of Brian Vaccaro from Raymond James.

I guess in the spirit of keeping an eye on the relationship between traffic and hours and maybe for old time's sake as well. Tonya, can you give what the 4Q traffic and check dynamics were in your company units?

Sure. So in that 8.9% decrease on comp sales, 3.2% increase in check as part of that number. So you've got 1% of that is positive mix, and then the remainder is pricing, the 2.2% pricing. Yes.

And I guess circling back on store margins. I think you said that your quarter-to-date store margins are in that 15% to 16% range. I guess, first, did I hear that correctly? And then if so, can you give some more color on how your team members are bringing certain costs back as you've seen sales accelerate into that $105 million range maybe help us with sort of labor cost per week in the quarter-to-date period? Or maybe there are some other costs in the other OpEx line that you're bringing back online that were cut during 2020, just some perspective there?

Sure, Brian. I want to be cautious because, as I mentioned earlier, seven weeks of data is a small sample size. It's better to evaluate it over a 13-week period. I want to emphasize this as a word of caution. Regarding the 165 restaurants performing well, those with margins in the 75% to 100% range are doing fine, but there are still stores facing numerous restrictions, which will affect the overall numbers. If we look at the potential for margins to reach 15% to 16% with increased sales, we can expect some improvement in labor costs. You'll likely see an increase in hours used in the dining area, even if those aren't completely positive, and higher sales should help reduce labor costs as a percentage. I believe that's where the most significant impact will occur. Cost of sales shouldn’t change much, although other operating expenses might fluctuate. As sales increase, you should also see some benefits in other operating expenses and rent. Beyond that, I don’t have any additional points to highlight.

Thank you, sir. There are no further questions at this time. I would like to turn the call back to management for closing remarks.

Yes. Thank you, Annie, and thanks, everyone, for joining us tonight. I hope everyone is staying safe with all of this crazy weather going on across the country. If you need any other information, don't hesitate to reach out to us. Thanks so much. Have a good night.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you for participating. You have a good day.