Good evening and welcome to the Texas Roadhouse Second Quarter Earnings Conference Call. Today’s call is being recorded. Operator instructions follow. I will now turn the call over. I would like to introduce Tonya Robinson, the Chief Financial Officer of Texas Roadhouse. You may begin your conference.

Thank you, Maria, and good evening everyone. By now, you should have access to our earnings release for the second quarter ended June 29, 2021. 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 pandemic. 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 Jerry Morgan, Chief Executive Officer of Texas Roadhouse. Following our remarks, we will open the call for questions. Now, I would like to turn the call over to Jerry.

Thanks, Tonya. We are very pleased with our results for the second quarter of 2021 hitting historical highs on both sales and net income. For our June period, average guest counts in our dining room were comparable to 2019 levels with the majority of the state-mandated capacity restrictions lifted. And at the same time, we were still serving approximately 2.5x the number of To-Go guests that we did in 2019. We have worked hard to support our operators since the start of the pandemic. And much of our success is due to their hard work and creativity. The dedication and passion that our restaurant management teams have shown during this time has strengthened our brand and expanded our base of loyal guests. Our top line focus along with strong consumer demand, have enabled us to grow our sales volume. With these higher volumes come challenges that may be magnified in the current business environment. Our top operational focus is supporting our managing partners and their management teams as they continue to hire and train new roadies. Most of our restaurants have made great strides in their staffing levels, while others have faced challenges reaching and holding their desired staffing levels on a consistent basis. Despite the challenges, we have not wavered on our expectations of delivering legendary food and legendary service to our guests. We also continue to exceed our initial 2021 expectations for commodity usage. This has required us to buy more products on the open market and outside the cost parameters of our original contracts. As a result, we are seeing our costs for most commodities, in particular beef, trending higher than anticipated, leading to an increased level of food inflation during the second quarter and in the back half of the year. Based on our updated outlook, we are raising our commodity inflation expectation to approximately 7% for the full year of 2021. Despite the cost pressures we are facing, we will continue to run our restaurants with a steady approach and a long-term focus. We will have our normal internal conversations with operators regarding menu pricing several weeks from now with the target of implementing any price increase in late October. We are also seeing some inflationary pressure on development costs for new store openings. However, strong cash flow at the store level leaves us confident that we will meet our return on investment expectations and continue to fund our growth internally. During the second quarter, we opened 8 company restaurants, including 2 Bubba’s 33 locations. Our current expectation is that by end of year, we will open 26 to 29 company restaurants, including 5 Bubba’s and 1 Jaggers. As we set our sights and attention on the back half of 2021 and continue to prepare for 2022 and beyond, I want to thank all of our managing partners, our managers and our roadies for their efforts. As your partner, I want you to know how much we appreciate you and that together, we will continue to make Texas Roadhouse bigger, faster, stronger. Let’s go Roadhouse. Now, Tonya will provide a financial update.

Thanks, Jerry. For the second quarter of 2021, we reported diluted earnings of $1.08 per share driven by $899 million of revenue and $158 million of restaurant level profit. Average weekly sales grew to over $126,000 as compared to approximately $70,000 in Q2 2020 and approximately $106,000 in Q2 2019. Throughout the quarter, our restaurants benefited from the continued easing of dining restrictions as average weekly sales were over $124,000 in our April period and over $127,000 in both our May and June periods. Comparable restaurant sales for the second quarter grew 80.2% versus 2020 comprised of 58.6% traffic growth and a 21.6% increase in average check. As compared to Q2 2019, comparable restaurant sales grew 21.3%, including 12.4% traffic growth and average check grew 8.9%, including positive mix of approximately 3.9% as guests move to higher priced entrées. By month, comparable restaurant sales versus 2019 grew 20.9%, 18.9% and 23.5% for our April, May and June periods respectively. Sales in our July period were also strong with comparable restaurant sales growth of 25.5% versus 2019. Average weekly sales were approximately $124,000, which were below June levels due to normal seasonality. As Jerry noted, we continue to benefit from elevated To-Go sales volumes. In the second quarter, our restaurants averaged over $21,000 per week in To-Go sales, which represented 16.9% of total sales. Over the course of the quarter, we saw gradual decline in To-Go sales as dine-in sales levels increased. In July, To-Go sales were over $17,500 per store week or 14.2% of total sales. Restaurant margins for the second quarter as a percentage of total sales improved year-over-year to 17.7%, largely due to the traffic recovery. Restaurant margin also benefited from a higher overall guest check driven by 2.8% menu pricing and 18.8% positive mix. Most of the positive mix comes from alcohol and soft beverage sales associated with the reopening of our dining rooms. Food and beverage cost, as a percentage of total sales, was 33.1% for the quarter, which was a 156 basis point improvement versus prior year despite commodity inflation of 6.5%. As Jerry mentioned, we updated our full year inflation expectation to approximately 7% due to higher than anticipated inflation in Q2 2021 and the expectation that inflation will remain elevated through the back half of the year. Based upon current sales volumes, we estimate that approximately 50% of our commodity basket is locked with a fixed price for the back half of 2021. Labor as a percentage of total sales decreased 885 basis points to 32.3% as compared to Q2 2020. However, we believe the second quarter of 2019 is a more relevant and beneficial comparison. As compared to Q2 2019, labor as a percentage of sales was 66 basis points better even as labor dollars per store week increased 16.5%. This increase in labor dollars per store week was driven by wage and other inflation of 14.2% and growth in hours of 0.5%. The remaining increase of 1.8% was due to one-time items consisting of $1.9 million of additional bonus and COVID-related payments to our restaurant employees and $0.8 million of additional reserve expense related to our workers’ comp and group health insurance program. We believe that labor pressures will remain a headwind going forward as we continue to attract and retain the best talent in the current competitive environment. Other operating costs were 369 basis points lower than the prior year period, primarily driven by sales leverage and overlapping approximately $3 million of expense for COVID-related supplies in the second quarter of 2020. Moving below restaurant margin, G&A costs for the quarter increased $7.2 million versus the prior year period, but decreased 211 basis points as a percentage of revenue to 4.1%. The increase in G&A dollars was primarily driven by an additional $8.2 million of cash and equity compensation and a $1.2 million increase in travel and meeting expense. These increases were partially offset by a $1.3 million reduction in legal settlements. I also want to point out that our second quarter benefited from an effective tax rate of 12.4%. This was primarily due to a higher benefit of FICA tip credits driven by the increase in our sales. Based on current sales trends, we expect our full year effective tax rate would be approximately 15%. With regards to cash flow, we ended the second quarter with $483 million of cash, which is down $13 million from the end of the first quarter. Cash flow from operations was strong at $119 million and was offset by $46 million of capital expenditures, $50 million of debt repayment and $28 million of dividend payments. In May, we entered into a new $300 million credit facility, which replaced our previous $200 million deal. With access to this additional liquidity and the strength of our balance sheet, we are well positioned for any future needs. Like Jerry, I want to thank the entire Texas Roadhouse family for continuing to deliver our legendary experience to our guests each and every day. We know that it continues to be a challenging work environment and to see the passion that you all bring to running restaurants is truly inspiring. Operator, please open the line for questions.

Operator instructions. And your first question comes from Jeffrey Bernstein from Barclays. Your line is open.

Great. Thank you very much. Two questions. First question, just on the To-Go business, Jerry, I know that Kent has not been a big fan of To-Go until it was really necessary through COVID thinking about a degraded experience. I’m just wondering your thoughts there, whether there is a thought on reducing emphasis or whether you really think it’s a permanent addition to the experience? I think you mentioned the To-Go mix fell from 17% in the second quarter. It’s now down to 14% in July. Just wondering your thoughts on that business and maybe where that percentage settled in markets that have been open the longest? And then I had one follow-up.

Yes. I would say good afternoon and we are very excited about what we have learned on how we can execute on the To-Go side. And we feel very confident that we are delivering a much better experience to our guests and we are absolutely committed to making it legendary. So, it’s new to us at this volume, but we made the big adjustment and feel very good and we will continue to provide a great experience so that that margin will hold. We would like it to hold and we are going to earn it.

Yes. And Jeff, I would add too, just as we are looking ahead, we focus a little bit more on the dollars versus the percent, because as those dining rooms are reopened, capacity restrictions become easier, those percentages are going to come down. So our goal, we talked about it last quarter and even earlier, was really targeting $20,000 a week in To-Go sales and that continues to be what we focus on and our operators focus on. It dipped down a little bit below that $20,000. Like I said, July came in at $17,500, but still in a very good range. We feel very good about it. And it’s tough to kind of look at the stores, because so many of them have been through different levels of capacity restrictions and such and get a good feel, but there are some stores out there who do very, very well on the To-Go side of the business. And you have got a lot of operators who definitely see the benefit, have learned a lot through 2020. And like Jerry said, they are just focused on keeping it.

Understood. And then just my follow-up is on the restaurant margin, if the inflation pressures remain outsized, which it sounds like that’s your expectation. I am just wondering how you think about profitability at least theoretically whether you prefer to take a hit to the margin in the short-term just to maintain obviously the very strong traffic? What do you think there maybe incremental cost savings or you are confident taking incremental pricing? Just wondering how high you potentially take the pricing or do you have any color on the restaurant margin for the back half of the year? Thank you.

Yes, sure. We have always said we feel very confident in the 17% to 18% range as far as restaurant margin. And so, we were happy with the margin that we were able to produce this quarter and it didn’t surprise us too much and we did see some higher costs on the commodity side than we expected, particularly later in the quarter. But the mix of sales, the strong dining room sales and knowing that we want that investment in the labor side of the business — we want to make sure we are staffed. We were feeling really good about that 17.7% that we were able to produce this quarter. I think when you look out to the rest of the year, we still feel very comfortable in that 17% to 18% range on a full year basis. The inflation on commodities does get tougher in the back half of the year, there is no doubt. But with what we are driving from a traffic perspective, the positive mix that we are seeing and the check that — the other pricing that’s in that check growth, we still feel good about being able to hit those targets for the back half of the year.

Understood. Thank you.

And your next question comes from James Rutherford from Stephens. Your line is open.

Hey, thank you. I just wanted to follow-up on the question around commodities. Am I right in my math here that the 7% for the full year implies around 10% commodity inflation for the third and the fourth quarter? And kind of as an additional part to that, what are you expecting for mix as we progress through the year given it was kind of a strange lap here this quarter?

Yes, you’re right, James, that would imply around that 10% range on the inflation side of things. And so that would be the expectation. I think are you — when you say the expects on the mix, are you talking about the sales mix or where that is placed in ‘22?

Just that mix had a pretty big — was a pretty big driver to the 1 year comp here this quarter. I am curious how that trends for the rest of the year?

Sure. Our expectation is that we hold on to that positive sales mix for the rest of the year. We kind of really started seeing that ramp up a bit in late Q4 and really hit the stride more in Q1. So, we think the rest of the year, we should see that benefit. Now that a lot depends on consumer behavior and things like that, that’s what’s driving it. We are seeing our guests go more towards bigger steaks, more expensive entrees. They are adding apps at the beginning of that meal. They are looking for that great experience as they get in that dining room. And then also the alcohol and the soft beverage side of things, as you are moving those To-Go sales back into the — some of that’s moving back into the dining room, you do get a lift on those dining room sales, because they are $4 more on PPA. So, that certainly helps too from that perspective.

Got it. That’s helpful. And as a follow-up on the commodity piece, you mentioned you have, I think 50% of the basket locked for the remainder of the year and it sounds like commodities really started to move toward the end of this quarter. So, what kind of visibility do you have into that 10% inflation for the back half of the year and kind of what are you baking in? Are you baking in sort of quarter end prices or like how are you coming to that number, I guess?

Sure. It’s not easy given the uncertainty that’s sort of out there right now. But yes, we do have some visibility as far as the contracts we have in place, the fixed pricing that we have. But we are buying with the demands that we are seeing, the sales levels we are seeing, we are buying quite a bit on the spot market and so that you are kind of susceptible then to just the market swings that are happening. So we are a little more conservative building some of that in as far as what our expectation is on different cuts of beef and things like that. And it’s primarily on beef. You see it on pork also, a little on chicken. And then oils and fats, we are seeing a little bit of it there too. And some of it is just knowing you have got the demand side. You also have the — some of the issues the suppliers are facing right now and it’s just difficult. They are facing similar labor issues, transportation things like that and they are starting to pass those costs on that they are feeling. So some of it is how long does that last, as we kind of all feel there is bit of supply tightening and things like that, just across everything.

Very helpful. Thanks for the color, Tonya.

And your next question comes from Peter Saleh from BTIG. Your line is open.

Great. Thanks. Tonya, I just wanted to come back to the conversation around commodity inflation. I think the last time you guys had commodity inflation anywhere near this amount was in 2015. And then you had 2 consecutive years after that of commodity deflation. So I am just wondering if you have any sense on how transitory you think this inflation is? And if your suppliers are giving you any sense on when some of the prices might roll off a little bit from where we are today?

Yes, it’s a great question. And I think we will be learning more about that as we get further into Q3. Typically, we start having conversations with our suppliers and things like that towards the end of the quarter heading into the year. So I think we will get more clarity on that. I am sure they would say, when they can get some clarity right on where prices are going and cost of doing business and labor and things like that, that they are being impacted by right now. So, I think it’s going to be tough to know that for a bit. And then potentially, as you head into 2022, there is just all the normal commodity inflation inputs right as far as supplies of cattle, flatter rates, things like that, that could cause some noise in ‘22. So we are kind of teeing up to expect some commodity inflation for a bit through this year and potentially into 2022 is the way we are looking at it.

Okay. And given that situation, how are you thinking about menu pricing. I know Jerry commented on potentially some more pricing maybe sometime in October. Can you give us an update on what pricing level you are running in the third quarter and in the fourth quarter and what you may expect to take in the back end of the year?

Yes, happy to do that. So pricing today, we had about 2.8% total pricing in the quarter. That’s made up of that 1.75% that we took at the beginning of May. So we didn’t get the benefit of that the whole quarter. We will for the rest of the year. And then you had about 1.4% that was in there throughout the back half of 2020, but for the most part, it was — most of it happened in October. So that’s about when that roll-off will occur on that. So Q3 looks like it would come in at about 2.9% or so pricing. Q4, assuming no additional pricing just with what we have right now, would be about 2% in Q4. And as Jerry mentioned, we are going to be having those conversations with our operators to see how they are feeling things, how the consumer feels to them. And as usual, we have always been a little slower to take pricing when it comes to commodity inflation because of the temporariness of that, the cycle that goes through, a little more likely to take pricing to help on labor as it’s more permanent. That philosophy has not changed. That’s something we still very much believe in. So, that’s the approach we will be taking as we have those conversations with them. But I can tell you just from — it certainly seems like we will take some pricing in October. The levels will remain to be seen, but it feels like there is some pricing there to be taken.

Yes. And I would just say that as we gather with all of our market partners and MPs and look at their local areas and what they might need in different parts of the country, we will still be rather conservative, I would assume. But we are also looking at some menu items that might help. We had a lot of success with a 5-ounce salmon and a smaller portion that kept our value side. We do — we are very excited that our guest is going for the high dollar right now a little bit. But we also want to make sure that we keep that value side there and keep it very much part of who we are. But we obviously will listen to our operators and see what they need so that they can get the margins that would be balanced and responsible.

Thank you very much.

And your next question comes from David Tarantino from Baird. Your line is open.

Hi, good afternoon. Tonya, I just want to come back to the discussion about margins and the outlook for the second half of the year. I just want to clarify one comment. So, you mentioned 17% to 18%. Was that a comment about the full year or was that a comment about the back half specifically?

Kind of both. Q1 came in a higher percentage. I think we were over 18% and still strong in Q2. So, I think both for the back half and the full year, we still feel confident being in that range. Of course a lot will depend on sales trends, the mix of sales, what pricing we take and things like that, but we can see a scenario where we can still hit that target.

Got it. And then on labor, I wanted to ask about — I think you mentioned that hours were up 0.5% versus 2019 and traffic I think was up 12%. So I guess, how are you able to accomplish that labor model with such big traffic growth over the last 2 years. And is that, I guess, a function that maybe you are understaffed and need to catch up? Or is it some efficiencies that you have gained over the past couple of years?

I mean it would definitely imply that there were some staffing issues throughout the quarter. But I will tell you, when you look at the hours broken — the growth in hours broken down by month, we saw that trend up throughout the quarter. So, coming in after our conversation on Q1 in April and things like that, we were putting a lot of initiatives in place, things like that to help on the staffing side for folks. And I think what we see in the numbers is that that’s working and staffing is becoming a bit easier with that growth in hours getting a little bit bigger in June. So, that was certainly good to see from that perspective, because you are absolutely right, David. You would expect at that traffic level to be a bit — to have that growth in hours be a bit higher. You also have to keep in mind, you do have that To-Go — higher To-Go business, which typically is going to be a bit less on the labor side because you don’t have the servers, the front-of-house labor on that piece. So, that does kind of mitigate that a little bit.

Great. Thank you very much.

And your next question comes from Dennis Geiger from UBS. Your line is open.

Great. Thanks for the question. Tonya and Jerry, the first one, I just wanted to ask a bit more on the margins as it relates to the other OpEx line. Tonya, you spoke to it to some extent. But just wondering what else in the quarter, any other commentary you can add there against those sales volumes are just the cost of everything up, is insurance if it runs through their equipment or gloves, other supplies. Were you just seeing a lot of inflation through that line dollar wise as well? Is that a fair characterization or anything else sort of one-time in nature?

Yes, Dennis, you definitely are on point. I mean, if you look at other operating costs as a percentage of sales 2019 versus 2021, it was flat at 15.2%. So, that would imply any check benefit was offset by higher cost more usage because of the To-Go piece of the business, so more To-Go supplies. You are still looking at PPE costs. Glove costs have been elevated, different things like that. Insurance absolutely runs through those lines and credit card charges, things like that as you see more credit card usage and all of those things. So, definitely seeing a bit of inflation on that line which offsets that — any of that check benefit on a 2-year stack.

Got it. That’s helpful. And then one more, I think you just spoke to it to some extent, but just wanted to clarify, as far as hours from here. I guess it feels generally like you are in a pretty good spot hours relative to traffic. And I guess if I caught that loosely correctly given where you are in June, dine-in wise, not a significant amount of incremental labor hours from where you are at now. Is that a fair characterization or summary of how you just described it Tonya?

I guess what I was making the point about was that growth in hours became higher throughout the quarter. And I think that’s a piece of dining room sales growing. So, you began to see more hours used in the restaurant. And so to see that improvement, that’s good, because we like to see that staffing level increase and hours in the restaurant increase from the levels we were in. So, that’s a piece of it, for sure.

And I would just say that we added 5,000 employees in the second quarter. So, we made up a lot of progress on getting fully staffed. So, that was a big win. We had a great national hiring day, which really brought us a lot of folks. So, as we were training them and bringing them back and our average weekly sales continued to climb. I think we are positioning ourselves for the back half of the year as we fought staffing in the first quarter, I think we have had a lot of success in the second quarter and a lot of momentum going into the third quarter. Unknown is how school goes back and does it change our trend, it typically does. I don’t know that it will this year. So, we are anxious to see how this next couple of months goes as kids get back to school and are we really going to get back to some normal. But I — we made a lot of gains on the success of getting staffed across the country to be able to continue to provide a great service to our guests.

Great. Thanks guys.

Your next question comes from Lauren Silberman from Credit Suisse. Your line is open.

Thank you. So, I appreciate all the commentary on the staffing. Just a follow-up there. Are you still looking to increase staffing at these sales levels? And then just with respect to training and overtime, are you at normalized levels or are you seeing any elevation there just as you bring on more people?

Yes. We are going to continue to get staffed. We have a great team. We call it ninja staffing. So, we are really — we know which stores need help specifically. And we are really focused on that as a team. Our regional market partners, our managing partners at the store level and our support center here. We have a very dynamic team that is focused to support our restaurants as we know, as we continue to get more staffing, we will be able to provide even probably higher comp sales and a little better service to our guests. So, we are going to continue a full court press on getting properly staffed across the country, especially where a lot of them are there. But there is still a lot that need some help, and we are absolutely all hands on deck to help support that.

And Lauren, on the overtime question you had, we did see a bit more on the overtime, nothing too significant. It didn’t drive a lot of that wage inflation. But there was — as you would expect, you have folks working more hours. And so there was a little bit of an uptick on that overtime versus last year.

Great. And just on the sales. For on-premise sales, while the — pre-COVID, can you talk about where your on-premise transactions are versus prior levels? And how you are getting more capacity in the box? And then just how do you think about capacity to expand on-premise from here? Thank you.

Sure. I can tell you, Lauren, on Q2, that 12.4% overall, dining room was down 3.2%. And then we had To-Go traffic that was up 15.6%. Those are the components of that 12.4% growth. And as I mentioned, though — as Jerry mentioned on the call, we saw that negative dining room traffic gets better and better over the course of the quarter and ended up slightly positive in June, and July even better, even more positive. And so that’s really a function of dining room capacity being lifted across the country. Stores, we still have stores in the quarter that had some pretty significant restrictions in place and things like that. So, they continue to find ways to — right now, they are just focused on meeting the demand that they have. We do — our wait times are long, especially on the weekends, every day part of the week looks really good. And across the geography looks really good. Across the country, the comp sales look great, so nothing that we would call out from a constraint perspective. We feel like we still have quite a bit of capacity within the restaurants to grow traffic and things like that. So, that’s going to be the focus for us for sure the rest of the year.

Great. Thanks so much.

And your next question comes from John Glass from Morgan Stanley. Your line is open.

Hi. Thanks very much. First, Jerry, Tonya, you mentioned development costs are also going up. How much are they going up? And how close are you getting to return hurdles not being satisfactory? Is this still really good, just going to maybe a little bit less good and it doesn’t impact how you think about development over the next 12 months or 18 months?

Sure, John. I mean actually, we expect 2021 costs to be lower than 2020 because 2020, we are a bit more pressured with the delays pre-openings in that number and things like that. So, that caused 2020 to be a bit higher. We expect 2021 to be lower. But you can’t really — it’s hard to quantify exactly what those dollars are. We are still seeing them come in as we continue to get restaurants open and built. You certainly hear from contractors saying it’s difficult on the labor side for them. Sometimes they have some issues on materials. We are very lucky. So far, we have had no issues on anything that has caused us to have concern on meeting our pipeline, any openings or anything like that, haven’t had to think about slowing anything down. And that’s been really good to see. My personal opinion, we might see costs pop a little bit more in 2022, as we are getting those bids put together, you might see some of those more of those costs being passed on, but still remains to be seen a little bit how that ends up. So, nothing right now that gives us concern.

I would say too that we are having a lot of success with our new store openings and our contractors that we are working with. We are meeting with and just identifying if there is going to be, but it does seem like the supply chain is coming through pretty successfully right now on their side. And then on our side, as Tonya mentioned, our pipeline is very strong and very solid. We are as excited about 2022 as we were about 2021, and all the concepts are continuing to have a lot of success in the new store openings, Bubba’s, Texas Roadhouse. So, we are covering those costs, I believe. And we are getting it done on time, which is really hats-off to our contractors for hitting those commitments.

And returns continue to look good especially with those sales volumes, no issue on the return side of things.

Okay. Thank you. And then just on pricing, does this experience change in any way your view on maybe how scientifically you look at pricing? I know in the past and maybe even now you are sort of its bubble up from the operators and you get their opinions. But do you think about more frequency and sort of on the loan faster to sort of about this do you think about or maybe you have tools that are more surgical location by location or item by item. How do you do it, I guess? And is that changing at all or do you think the way you do it is sort of the right way to approach pricing going forward?

We have got a good historical data on everything that we have done for the last 5 years, I would say. If we had to move fast, we could, and I believe our operators would trust us enough if for some reason, we were forced to do that. But I would prefer just to continue to pay attention to what’s going on in our stores, in our certain regions and make adjustments accordingly with their opinions. But we could move if we had to, for some crazy reason.

And we do get pretty surgical on the line, the numbers, the menus by store. So, all stores live in a pricing grid with other stores similar to them as far as labor costs and things like that are parts of the country. And when we sit down with folks, we are going menu line — menu item line by line, really understanding the mix and gaps and things like that. So, it is a pretty detailed discussion that we currently have today, and that’s the way it’s been since the beginning.

Okay. Thank you.

And your next question comes from Brett Levy from MKM Partners. Your line is open.

Great. Thank you for taking the call. I guess if we could start on labor. What did you need to do on the incenting on the benefit side as you were doing these hirings? And what do you think is a fair way to assess what your inflation is going to be in the back half of the year? And also, as we have seen the enhanced benefits roll off, have you seen any pockets of the country where you immediately saw influxes of applicants or ease and hiring start to pick up?

So, I will kind of start off a little bit and let Jerry talk about what the operators have done and things like that. But the labor inflation for the back half of the year, I feel like it’s going to be pretty consistent with what we have seen so far. We look at it, Brett, a little bit more on a 2-year stack to looking at comparing back to 2019. And we feel like that inflation range that we are in is probably what’s going to hold for the rest of the year. Now that has a couple of components in it. So, you have wage inflation in there. Wage rates over time, all of those things that are impacting it, along with group insurance, payroll taxes, all of those components of things that go into that, too. But I feel think it will be pretty similar. And then I know our operators have been very creative and really all over the hiring piece of it. I know Jerry will have some examples on that.

I think they have got a strategy of being aggressive in their own markets to identify what their needs are. And if they need help in an area on a larger scale, we are there for them. We have great plans for our local marketing and which drives a lot of communication and partnership out there. So, I think each store has its strategy, but we are being aggressive. We have always known that if we are properly staffed, we will grow the business and we can execute legendary more consistently.

Have you had to — have they been more in the upfront camp or has it been elevated wages and more of a higher back-end guarantee of what people are going to make or is it just that you are able to go with the incentives? And then just before I jump off. On the development front, you talked about excitement about the pipeline for 2022 as well, but you also talked about elevated costs. What’s your appetite for taking on growing that pipeline as we are seeing these elevated costs. And as you said, some of them may not be transitory, you are talking about commodities still going into 2022, labor — still going into 2022, labor still going in. How do you feel about accelerating the pipeline versus just maintaining it? Thanks.

Well, I think they are all doing a little bit of different things, whether it would be from that standpoint of incentivizing people using referral programs. So from the staffing side, I think depending on where you are at, it’s easier in some parts of the country than others. So, we have a more aggressive approach, obviously, where they need it. So, we do exactly what we have to do to get properly staffed in the front of the house and in the back of the house. I think our operators know that they can make those decisions to hire great people, train them right, pay them right and then let’s keep them as a part of our family. As far as the pipeline, I feel really good right now. We like our number where we have been for many, many years we have to be able to open and operate a business successfully. And openings take a lot of manpower. It takes a lot of work not only on our construction side, but our training teams and our management teams. So, you have got to do it right. You only get one chance to do it right. It doesn’t make a lot of sense for us to stretch ourselves. Every restaurant we open is a new opportunity for us to be successful. We have to put every effort into getting it done right without starting — looking forward to the next opening and maybe not get that one done as well. So, we like — we are kind of in our comfort spot of that 28 to 30 restaurants a year successfully. And so we will probably hold that number until we feel different.

And Brett, on the development costs, I think it still remains to be seen on 2022 what those development costs do. Right now, we are getting bids on those projects, depending on where they land in the year. So, I think much remains to be seen. If the development cost does creep up, I mean, it all comes down to sales and what you feel like you can do from a sales perspective and that justifies the deal. So, that’s what we will be looking at. We run returns on all of those models to see kind of are we in the bandwidth of where we want to be in that, still with that mid-teen IRR focus, for sure.

And your next question comes from Jeff Farmer from Gordon Haskett. Your line is open.

Admittedly, it’s early, but I am just curious if you guys have seen a change in consumer behavior in some of those markets with the quickly rising case counts that the Florida’s, Missouri’s, Oklahoma’s of the world?

Hi Jeff. Not that I have seen anything that makes you kind of raise your eyebrow or anything that — it’s like, okay, yes, that makes sense. Everything seems to be pretty normal. You might find some stores maybe those stores have a little bit higher To-Go mix than dining room. But even in the dining room, like I said earlier, we have wait times, and there are still people that are very comfortable coming into the dining rooms to eat. So, even in those areas like that. So, nothing that I have seen in the numbers.

Right now, obviously, we are paying very close attention daily. Our operators know that we are here if they need us from that standpoint. They have to protect their employees and their guests and their business. So obviously, we are paying very close attention to what’s happening out there. And we are just ready to help. And we have got everything needed in case anything changes.

Alright. And then just one more unrelated question, I believe this might have been asked in the last couple of calls, but your cash balance is getting up there. I think it’s almost 3x your normal level. So, how are you thinking about that excess cash balance as you move forward?

Well, we are still carrying about $190 million in debt. So, that’s a piece of it. And liabilities that are a bit higher just — as we were able to defer some tax payments and things like that through COVID. So, we definitely take that into consideration when we are looking at it. We did turn the dividend back on last quarter. So, that’s really great to see and a great use of cash. The development pipeline as we are looking at spending more on restaurants. They need to do bump out, things like that, great use of cash. One other thing that we will be doing for the back half of the year is training the share repurchase program back online. As you all know, our philosophy has been to pick up dilution and on a consistent basis. And that’s still the same philosophy we have today heading into the back half of the year. So, we will start taking a look at that now versus we had to put that on hold last March. So, we will see how that continues. But having a little extra cash in an environment like this doesn’t feel too bad, actually feels like a good place to be.

Alright. I appreciate it. Thank you.

And your next question comes from Jared Garber from Goldman Sachs. Your line is open.

Hi. Thanks for taking the question. I just wanted to know if you guys could talk about what you are doing, especially as we move into a somewhat more normalized environment to retain the higher level of off-premise sales that you have seen sort of accelerate throughout the pandemic. Obviously, as dining rooms have opened, those numbers have come down slightly. And I think you noted a little bit below that sort of $20,000 goal that you had kind of set out or talked about. So, can you talk about some of maybe the digital enhancements you have made and/or maybe some of the operational enhancements that you have made and/or are going to make to help retain some of that sales level? Thanks.

We’ve really — I think our app, we made such great progress, not only towards the end of last year, but even this year, all the windows that we put in, it does come about convenience and ease of getting the product. So the windows that we put in, in the front of our restaurants even the drive-up windows that we’ve tested in a couple of stores have been very successful, the ability to communicate by text with the guests. So our ability to communicate with the guests has really strengthened our ability to get them the product, whether it’s curbside or whether it’s them picking it up the window. I think those are all very strategic moves that are going to help continue as we move forward to hold our To-Go business.

And then as we see dining room sales increase, the logistics within the building on how they manage those higher To-Go sales really being proactive on that is so important with just how we manage that. So that’s been great to see.

Great. That’s really helpful. And then just one kind of follow-up on that, is there anything you’re seeing in the data in terms of the consumer behavior that would suggest maybe sort of different usage for To-Go versus dining in the restaurants? Maybe is it a different customer or is it a different daypart or weekend versus weekday, it would suggest some level of incrementality from some of your guests? Thanks.

Just to get through, nothing that I would really call out. You see To-Go high usage just about every day of the week. You see it in what we call the power hours kind of that 6 to 8 time frame when we’re the busiest in the dining rooms. It seems like people are coming in after work to pick food up, maybe they come and call in a little later to pick it up. But nothing really — anything I would call out. That’s pretty much what we’ve been seeing.

Great. Thanks.

And your next question comes from Nick Setyan from Wedbush. Your line is open.

Thank you. Just wanted to circle back on the labor in the second half, I think you said pretty consistent inflation, Q2 6.5% over Q2 2019 in terms of labor per operating week. 6.5%, is that kind of fair for the second half in terms of growth over second half of 2019? Or could we see that pick up as the hours pick up?

Yes. I think it is possible, Nick, to see that tick up as the hours tick up. The question is what will that wage inflation do? But I do think our expectation with guest counts behave a bit more like what we saw in June. And continue to see some growth in hours versus 2019, especially as dining room guest counts are higher than 2019. So that would be our hope, to see that.

Great. Thank you.

And your next question comes from Andrew Strelzik from BMO. Your line is open.

Hi. Great, thanks. I was hoping, first, you could provide an update on Bubba’s and Jaggers, just how those brands are doing from a comp and margin perspective in this environment and in the context of your commentary on development costs, just kind of how things are evolving for those two brands right now?

Yes. I’ll give you some of the comps and let Jerry comment on some of the performance side. Comps look really good. They are very strong on both those brands versus 2019. Q2 Bubba’s was up about 20%, Jaggers over 30%. So we are very — we feel very good about that, and they continue to focus on margins seem to gain brand awareness. So, from that perspective, really positive.

The two Bubba’s that we opened in the second quarter really did unbelievably fantastic. And so we are very excited as they have continued to gain momentum operationally. We’ve got strength there. So we’re very excited. I think we’ve got 35 Bubba’s at this time and have a couple of more to get this year. And Jaggers is coming along great. We’ve got one coming out of the ground. And then we’ve got several in the pipeline for next year. So we’re very excited about the Jaggers here in Louisville and the success that it’s having and holding its sales. The food is just unbelievably fantastic. So I will tell you, I have a lot of excitement for Bubba’s 33 and Jaggers. And we are all on board of continuing to invest in Bubba’s. And we are building some strength around the team to grow Jaggers.

That’s great to hear the enthusiasm behind those. And then my other question was, and I apologize if you already mentioned this and I missed it. I know you were working on some efficiency opportunities in the To-Go business. Where are the To-Go margins now relative to dine-in? And as kind of you’ve evolved through this environment, would that growing To-Go business? Have you been able to find additional opportunities that maybe are not in place yet? Thank you.

Sure, Andrew. I don’t know that there has been as much focus on measuring what that To-Go margin looks like because it’s really hard to do because you’ve got to have some — you’ve got to make some calls on how do you divide up rent, how do you divide up certain other costs to really see, you could build a case different cases for what those margins look like. I think just anecdotally, we feel really good about what the stores have been doing and the efficiencies they have been finding. And I’ll tell you, I think they are going to continue to do it simply because of how we’re structured on compensation. So higher To-Go sales, they want that margin to be good on those transactions. And that’s a piece of compensation. So as they are making a percentage of the bottom line restaurant. So we feel like that’s naturally built into the model for them to manage it and do it well. We’re helping them, as Jerry mentioned, from a technology side of really — give them every resource we can, helping them from the building perspective, of how they structure the building, their corals, all of those things around their To-Go volumes and feel really good about continuing to see good returns and performance on that To-Go transaction.

Great. Makes a lot of sense. Thank you very much.

And your next question comes from Chris O’Cull from Stifel. Your line is open.

Hey, thanks. Good afternoon guys. I apologize if I missed this, Tonya, but you mentioned last quarter that you expected G&A to be closer to 2019 levels, but you ran quite a bit lower than that this quarter, especially if you exclude the stock-based comp. Has anything changed in terms of your G&A outlook for the year?

No, I don’t think so. Some of it is — we ran a bit lower as we continue to see meetings and things like that be a bit lower, travel be a bit lower. So I think on a full year basis, with the margins that we’re running, obviously, you get quite a bit of leverage there on that G&A as a percentage of revenue. And I think we continue to expect it’s going to be — we believe G&A for 2021 will be higher than 2019, just given some of the cost around equity compensation, bonuses, things like that, that you’re going to add to those costs from 2019. And then Q3, we will have some additional costs that we don’t haven’t had so far this year related to their conference-related expenses. So it will probably be around $4 million that we will see in Q3. And — but otherwise, we feel really good about the G&A spend and the trend that we’re on.

Okay. That’s helpful. And then I understand you aren’t prepared to provide a beef inflation outlook for next year. But I was wondering if the team has a view as to whether the company might contract a higher or lower percentage of its expected needs next year than it normally would?

I think it just depends. Talking with our purchasing team, I think they are very open to contracting more if suppliers are open to that and that the premium isn’t too high, sometimes the suppliers are going to be building in some of this uncertainty that they are feeling right now. And if that’s the case, and we feel like we would be better waiting on to see how the costs develop then we might not lock up as much of it. So I think that’s kind of their look at it and how they are feeling about it. And like I said, they are going to be having some more of those conversations coming up here soon with suppliers and kind of getting a feel for how everybody — what they think about the environment.

Okay, thank you.

And your next question comes from Andy Barish from Jefferies. Your line is open.

Hey guys, excuse me. Traditionally — I mean, I know nothing’s traditional anymore, but the 3Q is usually kind of a seasonally slower quarter and thus, margins are lower. And you just mentioned that a couple of other factors obviously ramping for the second half before the potential for price in October. I mean should we kind of think of the 3Q as being lower and then the bounce back in the 4Q, assuming volumes do normal seasonal things?

I mean I think that is a very reasonable expectation. We saw it in July. Those volumes normalize a bit, come down a bit, which is normal seasonality for us, and that continues through October and then you kind of see that bounce back in November, December and heading into the next year. And a lot will depend on that menu pricing that we do end up, where we end up on that and will help to play a bit of a part in that, too.

And thanks, Tonya. On the 14% wages, can you kind of break that out as you have in the past, just in terms of the actual wage growth versus other items? And was there a significant amount of incremental training costs just given that 5,000 employee hiring number that Jerry mentioned that rolled into that?

Yes. I think that would be very fair to say that there is some incremental costs there associated with — as we’re hiring, Jerry mentioned, over 5,000 additional employees and the hiring data we had and things like that. The 14% breaks down, it’s about just under 11% related to wage. And then the remainder is just other inflation on other line items. So I can’t really give you a breakdown as far as how much of that’s training, but I would say there is some there.

Okay, thank you.

And your next question comes from Jon Tower from Wells Fargo. Your line is open.

Hi. This is Karen Holthouse on for John. Just one more on the labor front, maybe another way to try and get at modeling the second half would be in an ideal world, if we were looking at that kind of relationship between traffic and hours versus 2019 would you want hours to be growing at 50% of what traffic is, 70% of what traffic is or alternatively give us some color on where that kind of hours was running versus 2019 in June when you thought you were kind of catching up to staffing levels?

Sure. So the month of June, we had total traffic growth of about 14% in the month of June. And we had 0.5 point of growth in hours. A lot of that — a good portion of that traffic growth was — almost all of it was To-Go. And so that’s a little bit different when you’re thinking about hours growth, right? It doesn’t behave necessarily the same as it would in the dining room. So historically, pre-COVID, we would tell you, hey, we like to see a growth in hours be in that 50%, 75% range as far as percentage of total traffic growth. We ran 50% for quite some time. It ticked up a bit in recent years, and that felt like a good place. But that was with 7% To-Go sales. So it’s quite a different business with double To-Go sales. And don’t expect that maybe that 50% might not be as big as that now. But I think we’re still waiting to see because, again, we just had so much dining rooms reopening, shifting, things like that happening in Q2, that we will be watching that really closely in Q3 to see in a more normal environment, how that behaves. So, more to come definitely on that, how that’s trending.

Great. Thank you.

And your next question comes from Brian Vaccaro from Raymond James. Your line is open.

Thanks and good evening. A couple on the margins front, if I could. And just back to your second half comment. I think you said 17% to 18%. And I was hoping maybe we can compare that to the second quarter where you were 17.7%. And trying to just square we’ve got higher inflation. So I would think that the COGS ratio is moving higher sequentially. So can you help me understand what costs you expect to come down sequentially? Or where you’d expect flow-through to improve sort of allowing you to hold that 17% to 18% range? Is there a way to dimensionalize that?

Sure. So, one piece of it is the dining room versus To-Go traffic because you’re picking up that PPA on the dining room. And if dining room is going to continue to grow with restrictions lifted then you are getting some benefit there on that, along with the positive mix continuing as it did in Q2. And then specifically on cost of sales, you’re applying that 10% inflation to a lower percentage cost of sales as a percentage of sales to last year, Q3 and Q4. So if I remember, Q3 and Q4 last year, cost of sales were in the low 32% ranges versus 34% in Q2 of 2020. So you’ve got that dynamic going on, too. So that 10% inflation is on a smaller number that makes it a little bit different as far as how it plays out on the margins for the back half of the year.

Okay. And in the release, I guess, you have referenced restaurant margins pressured by pandemic-related costs, kind of higher pandemic costs. I heard the — I think it was close to $2 million in the labor line of COVID pay. Can you help frame what other COVID costs or pandemic-related costs are in Q2 I am sure there is a lot of different things and a lot of dimensions on that, whether it be retraining or gloves, etcetera, etcetera. But is there a way to maybe catch all there on what those costs look like in addition to the 1.8, 1.9?

Yes. So on the other operating line, really, we had a $3 million last — this time last year, Q2 last year that we incurred that we’re lapping, not seeing the same levels on the PPE in Q2 this year versus what we were doing last year. So that’s a little different. But we still definitely are seeing the cost of PPE in the numbers in Q2. Glove specifically is what I called out just as materials have gotten very expensive when it comes to making gloves, costs were definitely — we were seeing those increasing definitely over the quarter. I think those have started maybe to come down little bit now, but they did peak there quite a bit. So really, that would be more of what I would tell you is living in other operating. Obviously, you have the higher To-Go supplies, that some or less payment, which is I think you mentioned that $1.8 million in labor and along with just other benefits on that labor line. But that’s really, Brian, I think that’s all I could really call out specifically.

Okay, thank you.

And our next question comes from John Ivankoe from JPMorgan. Your line is open.

Hi. Obviously, over the past 12 to 18 months, we talked a lot about the contraction in industry supply and certainly understand a lot of that is urban, a lot of that is in-line shopping centers. But what are you seeing in terms of freestanding pads that may exist in trade areas that you would want to be? I mean have you seen a significant number of properties that have come on board? And if so, I mean, I guess, what would be preventing you from taking them? Is it the size of the lot, the cost, the time to kind of get permits, what have you, do you have a preference here for greenfield, just to give us kind of a sense of your ability to absorb some of the supply that’s recently come out of the marketplace. Thank you.

Well, I think we’re looking at it. There is no doubt as we look at our development team and where we’re going where our pipeline is say we’re probably mostly looking at late 2022 now where everything else is booked and ready. And as we start looking at 2023, what will be available. There are some buyers out there, but there are some others that are giving up their properties. So we — I think we’re being very aggressive at looking at what our options are and what are our best deals in front of us that we can continue to add to. Our pipeline for 2022, 2023, 2024 on all three concepts — and we’re probably looking a lot at Jaggers right now, too. So there is a lot to look at. But we feel very good where we’re positioned, and we will be very aggressive if a great deal comes along. If not, we will hold our course and be very strategic in where we want to be, and so that we can continue to grow all three successfully.

And so I should interpret that comment as those types of development opportunities would be upside to what you currently guided, not necessarily that you need them to basically fill your guidance, especially in 2022, correct?

Correct.

Thank you so much.

And our last question comes from Jake Bartlett from Truist Securities. Your line is open.

Great. Thanks for squeezing me in here. My question was about the staffing and the thin staffing that you’ve had, how did that manifest itself? In other words, if you’re fully staffed closer to how you seem to be staffed here in July, would sales have been higher? Was that a constraint to rebuilding your in-store dining in the quarter?

I would say it had some impact, obviously, as we came through the To-Go in the capacity side pretty quickly, a lot of the states started turning that on very fast and for us to try to catch up. And then the labor — the supply of employees out there was very tight. Obviously, everybody was fighting the same fight to try to grab the best people out there and get them on board and trained and ready to rock and roll. So it definitely had a factor. Like I said, I think we’ve really made a lot of gains in progress in getting properly staffed all across the country. Lots of top places are. We still have some that we need to support and help. And of course, yes, it would have — if you look at our sales, obviously, was unbelievable, which is fantastic. Our operators — we’re really hustling in that second quarter, and you can see it in our average weekly sales. And had we been able to get them more help, we probably would have had more. But blessed what they did, that’s for sure.

Great. Great. And then just last question. As we look at your target of having $20,000 a week in off-premise sales below that in July at about 17.6% is what I’m getting. Is July — and I know there is — you guys have more limited experience with this. But I would — is July a meaningfully seasonally low month for off-premise sales? I mean, — how should we kind of look at the July performance and how that fits into your target of $20,000 a week.

I mean July historically there is seasonality there, just overall total sales. You’re going to see them down, and we saw that in July just being just over $124,000. Harder to say on To-Go because, again, we’re doing twice the business that we’re used to doing pre pandemic. So I think we’re going to learn a little bit about that. I think the dining rooms ramping up more and getting more open creates just that demand of folks wanting to be in the dining room again. Maybe that had a little bit of an impact on To-Go sales, things like that. But we will just continue to watch it and see how it goes. We still feel good about being able to get closer to that $20,000 week average.

Great. I appreciate it. Thank you.

Thank you.

And that is our final question. I would like to turn the call over to Tonya Robinson for closing remarks.

I just want to say thank you guys for joining us. We appreciate it. I hope everybody has a good night and reach out if you have any additional questions. Thanks so much.

And that concludes today’s conference call. Thank you for participating. You may now disconnect your lines.