Texas Roadhouse, Inc. (TXRH) Q3 2024 Earnings Call Transcript

Good evening, and welcome to the Texas Roadhouse Third Quarter Earnings Conference Call. Today's call is being recorded. All participants are now in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. I would now like to introduce Michael Bailen, Head of Investor Relations for Texas Roadhouse. You may begin your conference.

Thank you, Rob, and good evening. By now, you should have access to our earnings release for the third quarter ended September 24, 2024. It may also be found on our website at texasroadhouse.com in the Investors section. I would like to remind everyone that part of our discussion today we 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. 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; and Chris Monroe, our Chief Financial Officer. Following the prepared remarks, we will be available to answer your questions. In order to accommodate everyone that would like to ask a question, could everyone please limit yourself to one question. Now I would like to turn the call over to Jerry.

Thanks, Michael, and good evening, everyone. We are pleased to report strong third quarter results, which were highlighted by 8.5% same-store sales growth and approximately $1.3 billion of revenue. These results are a testament to our operators continuing to create an environment where Roadies want to work and our guests want to dine. Since last quarter, I had the opportunity to visit with managers and Roadies at a number of our international franchise restaurants. Also, over the past five weeks, I have been traveling the country meeting with our managing partners during our annual fall tour. Both internationally and domestically, I can tell you the pride and passion our operators have for running their restaurants has never been higher. As always, the feedback we received from managing partners during these listening sessions is extremely beneficial as we learn what our owner-operators need to run their business. On the development front, we opened seven Texas Roadhouse company-owned locations in the third quarter. For the full year, we expect to open approximately 30 restaurants across all brands. Our franchise partners opened three international Texas Roadhouse restaurants during the quarter. This puts them on track for a total of 14 openings this year, including three Jaggers. I also want to call out the recent October opening of our first international Jaggers location on a U.S. military base in South Korea. This marks our fifth franchise restaurant location on a U.S. military base. Looking ahead to 2025, we are targeting approximately 30 company-owned restaurant openings across all brands. Additionally, we have a tentative agreement with one of our largest domestic franchisees to acquire 13 Texas Roadhouse restaurants at the beginning of 2025. Our international Texas Roadhouse franchise partners are currently expecting seven openings next year, while our domestic Jaggers franchise partners are targeting three new locations. During the third quarter, we also completed our normal review of menu pricing with our operators. As a result, we rolled out new menus at the beginning of the fourth quarter, which included a price increase of less than 1%. We remain proud of our everyday value proposition and believe this is the appropriate level of pricing. Also, our technology initiatives continue as planned and we remain encouraged by the positive feedback we are receiving with over 200 digital kitchen conversions completed so far this year. We feel confident in achieving our target of over 250 conversions by the end of this year. We also remain on track to convert nearly all of our restaurants to a digital kitchen by the end of 2025. Additionally, we are making progress on the upgrading of our restaurant guest management system. Finally, October has been a very rewarding month for our company. In addition to the fall tour, we had the privilege of celebrating 20 years as a public company by ringing the closing bell at NASDAQ. We are very proud of the growth we have seen as a public company. We have expanded from one brand to three. We have increased our footprint from just over 175 restaurants to nearly 775 and we have grown Roadie Nation from over 10,000 employees to nearly 100,000. Also, we were named the 2024 Brand Icon by Nation's Restaurant News. We are truly humbled to be the first casual dining restaurant to receive this award. All of these events were even more special because we were surrounded by the best operators and support team in the industry. Now Chris will provide some thoughts.

Thank you, Jerry. Fall tour is quickly becoming one of my favorite times of the year. The conversations with our operators have proven to be really important and help us all perform our best. And the NASDAQ bell ringing was such a special moment for all of us. It was especially meaningful that we had 50 of our managing partners on stage with us. We were able to demonstrate in a visible and tangible way just how important our managing partners are to the success of our company. Now moving to the third quarter. Weekly sales averaged $153,000 at Texas Roadhouse, $117,000 at Bubba's 33, and $72,000 at Jaggers, our quick-service brand. We were especially encouraged to see that all three brands delivered positive traffic and sales growth and this momentum has carried forward into the beginning of our fourth quarter. As we look forward to the remainder of this year and into next year, we believe the 0.9% menu price increase will allow us to maintain our value proposition and our traffic and mix levels. Additionally, we continue to see a steady to more positive outlook for inflation within commodities and labor. Commodity inflation driven by lower-than-forecasted beef costs was once again below our guidance in the third quarter. This has also resulted in an improvement in our outlook for fourth-quarter commodity inflation and factors into our initial expectations for next year's inflation. At this time, we are updating our full-year commodity inflation guidance to less than 1%. This adjustment reflects both the impact of lower-than-initially forecasted inflation in the third quarter and our current expectation of relatively flat commodity price levels in the fourth quarter. Also, we are establishing our initial 2025 commodity inflation guidance at 2% to 3%. Wage and other labor inflation during the third quarter remained in line with our guidance and we believe this trend will continue in the fourth quarter. We were also pleased to see that our labor hour growth relative to traffic growth remained well below our historical levels. As we approach the end of the year, we are narrowing our full-year 2024 labor inflation guidance to approximately 4.5%. For 2025, we are forecasting wage and other labor inflation of 4% to 5% with mandated increases representing as much as 1.5% of the increase. With regard to cash flow, we ended the third quarter with $189 million of cash. Cash flow from operations was $139 million, which was offset by $141 million of capital expenditures, dividend payments, and share repurchases. As Jerry mentioned, we do have a tentative agreement in place to acquire 13 franchised restaurants at the beginning of 2025, included in this acquisition will be seven restaurants in Indiana and Ohio and six in California. Our current expectation is to fund this acquisition through existing cash on hand. Finally, for 2025, we are establishing our initial capital expenditure guidance at approximately $400 million, excluding the aforementioned franchise restaurant acquisition costs. This should provide sufficient capital to build new restaurants, maintain, expand, or relocate our existing restaurants, and invest in our various technology initiatives. As always, we believe these investments are a great use of our capital and should result in further shareholder value creation. And now, Michael will walk us through the third quarter results.

Thanks, Chris. For the third quarter of 2024, we reported revenue growth of 13.5%, driven by a 7.5% increase in average unit volume and 5.8% store week growth. We also reported a restaurant margin dollar increase of 24.1% to $202 million and a diluted earnings per share increase of 32.5% to $1.26. Average weekly sales in the third quarter were $149,000 with to-go representing $19,000 or 12.7% of these total weekly sales. Comparable sales increased 8.5% in the third quarter, driven by 3.8% traffic growth and a 4.7% increase in average check. By month, comparable sales grew 8%, 8.1%, and 9.3% for our July, August, and September periods, respectively. And comparable sales for the first four weeks of the fourth quarter were up 8.3% with our restaurants averaging sales of over $151,000 per week during that period. In the third quarter, restaurant margin dollars per store week increased 17.3% to nearly $24,000. Restaurant margin as a percentage of total sales increased 137 basis points to 16%. The year-over-year improvement in the restaurant margin percentage was negatively impacted by approximately 30 basis points due to the change in our annual gift card breakage adjustment to $0.6 million this year from $3.7 million last year. Food and beverage costs as a percentage of total sales were 33.5% for the third quarter. The 107 basis point year-over-year improvement was primarily driven by the benefit of a 4.7% check increase, offsetting the 1.3% commodity inflation for the quarter. Labor as a percentage of total sales decreased 18 basis points to 33.8% as compared to the third quarter of 2023. Labor dollars per store week increased 6.7%, primarily due to wage and other labor inflation of 4.7% and growth in hours of 1.1%. The remaining 0.9% increase was due to the $3.5 million net impact from adjustments related to group insurance and workers' comp claims experience. This includes $2.2 million of unfavorable claims experienced this year and the lapping of last year's $1.3 million favorable claims adjustment. Other operating costs were 15.1% of sales, which was 8 basis points better than the third quarter of 2023. Higher operator bonuses as a percentage of sales resulting from increased year-over-year restaurant-level profitability had a 30 basis point negative impact. This was largely offset by the 23 basis point positive net year-over-year impact from general liability insurance reserve adjustments, which include a $0.4 million unfavorable adjustment this year and the lapping of a $2.9 million unfavorable adjustment from last year. Moving below restaurant margin, G&A dollars grew 15.6% year-over-year and came in at 4.3% of revenue for the third quarter. The majority of the year-over-year dollar increase was due to higher compensation and benefit expense, including the $2.1 million impact of the timing of our change from quarterly to annual equity grants. Our effective tax rate for the quarter was 16.7%. The higher tax rate was driven by an increase in our profitability outlook for the full year. Based on this outlook, we are updating the guidance for our full year 2024 income tax rate to approximately 15%. And our initial forecast for the full year 2025 income tax rate is between 15% and 16%. Finally, as a reminder, 2024 is a 53-week year for us. As such, the fourth quarter will have 14 weeks versus our normal 13 weeks. We estimate that the additional week could benefit full year 2024 earnings per share growth by approximately 4%. Now, I will turn the call back over to Jerry for final comments.

Thanks, Michael. There's no doubt that reflecting on 20 years as a public company fills us with great pride and gratitude. Speaking of 20 years, we also just celebrated our 20-year partnership with Homes For Our Troops, which provides custom-built homes for severely injured post-9/11 veterans. We recently had the privilege of funding their 400th home for Lance Corporal Alberto Flores in New Brownsville, Texas. Partnering with such a great organization is what Texas Roadhouse is all about as we strive to serve communities across America and the world. Finally, as I have said before, we will always honor our path, but our focus will remain on the future. At 31 years young, we are just getting started.

That concludes our prepared remarks. Please open the line for questions.

Okay. We will now begin the question-and-answer session. Your first question comes from the line of Sara Senatore from Bank of America. Your line is open.

Hi, good evening. Thank you. This is Katherine on for Sara. First question, just wanted to ask about the labor leverage in the quarter. Michael, you spoke a little bit about some of the claims and adjustments that were in that number. So just want to get a sense for how much longer we should be considering those adjustments in that labor line going forward. And is there a point at which they are no longer a headwind?

Yes. Hi, Katherine, it is Michael. A lot of those adjustments have to do with insurance and how those claims come in and so that's something that you really never know how they may affect us one way or another. But that is separate from the labor productivity that we are seeing, which I think can continue certainly through the end of this year.

And Katherine, this is Chris. I mean I think we're comfortable being self-insured and that's why we report those numbers every quarter. But also the productivity levels that we talked about have continued to improve. We were in terms of hours of labor versus traffic growth, we're well below our 50% historical averages. And again, in Q3, we were below 30%. So we've had five straight months of that metric improving.

Great. Okay. Thank you. And then just want to move to the commodity inflation guidance, which continues to surprise to the downside and it seems like next year's inflation assumption doesn't anticipate a real step-up in inflation despite concerns about the size of the beef herds. So can you talk about what you're seeing there? What's embedded in that inflation guidance?

Sure. I mean, obviously, our purchasing department has been hard at work and determining what levels of cost we're going to have in 2025 and why we're not going to get into the specifics of what may be fixed-price contracted versus not. It does include a combination of lock prices and assumptions. And the majority of that inflation guide is coming from beef, similar to this year.

Thank you.

Our next question comes from the line of Jake Bartlett from Truist Securities. Your line is open.

Great. Thanks for taking the question. Mine was another one on the commodity outlook and beef. One thing about the beef picture, it seems like when there's good news in one year, it can be bad news for the next. So supply has been a little less bad this year. And my impression was that means that supply next year kind of kicking the can down the road. So a little surprised to see two decent years in a row expected within beef costs. And so I guess the question is why, but also just if you could help us understand just what your beef inflation is expected to be in '24? And what's expected to be in '25? Just want to make sure I understand what the beef expectations are in those two years for the commodity guidance.

Beef constitutes about half of our overall basket, which significantly impacts commodity pricing. This year has been surprising as we didn't anticipate the level of inflation driven mainly by beef. There are various factors at play, including supply and demand dynamics. Ranchers are evaluating cattle prices against their raising costs. With decreasing interest rates, possibly more rainfall, and lower grain prices, there might be an incentive to increase breeding and rebuild herds. However, the beef sector is facing challenges. We have yet to witness a significant impact from demand this year or what we can foresee for 2025.

Jake, to your question of what kind of embedded in the '24 and '25 overall inflation from beef. And this year in 2024, everything and then some is coming from beef with other items being flat to deflationary. For 2025, beef is driving the majority of our assumed inflation with most other items flat to maybe a touch of inflation.

Okay. In terms of the other items, while we primarily focus on beef, there is a significant portion that's not beef. Do you have any insight into that portion? I assume there might be some potential to contract for that portion, but how confident are you about the flat expectations for the other half of your commodity needs?

There are certain items that we're probably more locked into than others. There's no one item that is a huge component of our overall basket. So certainly, there is a potential for those costs to be higher or lower than what we expected; they would have to really be dramatically different to play a big part in the numbers.

All right. Thank you very much.

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

Thanks. I wanted to ask a question about pricing into 2025 relative to your cost inflation. You took the 0.9% price increase in September. And I think that puts you at a pricing run-rate around 3.1% until you lap pricing from in late March. Please correct me if that's wrong, that's just my math. And you initiated guidance for commodity inflation of 2% to 3%, wage inflation of 4% to 5% for 2025. So how does that inform you about your pricing strategy next year relative to this kind of 3% run-rate you're taking into the new year? And how do you want us analysts thinking about pricing for 2025?

And I'll start off. Basically, we have the same process that we've used. We will again look at pricing and have conversations with all of our operators after the first of the year. And then as we kind of make that decision based on the environment that we're in at that time, we get feedback from our operators, we talk amongst ourselves and then we will decide on what we believe is the best long-term decision for the business. So I guess from a bigger-picture standpoint, it's still early to decide, but we will continue to use the process we've used for multiple years of evaluating, talking with our partners, and then making a decision based on that current event, which is many months from now.

And Brian, this is Michael. Your math is correct. We will have 3.1% pricing in the menu for the fourth quarter. We'll have that same 3.1% for the first quarter and then we would have 2.2% rolling off and we will go through our normal conversations to see what we may or may not do come the beginning of the second quarter.

Got it, got it. So when that 2.2% rolls off, for instance, you would have to take, say, 1.6% at that point to be at that 2.5% price range until you lap the 0.9% you just took, right, just confirming that math?

Yes. The once it combined with the 0.9% will give you 2.5%.

Okay. Great. Thanks, guys.

Thank you.

Your next question comes from the line of Eric Gonzalez from KeyBanc. Your line is open.

Hey, good evening, and thanks for taking my question. Maybe if you could help us sum all this up and think about the margin implications of what looks like a more conservative pricing strategy and a relatively benign food cost outlook for prior years. So your plan on taking another pricing mid-year, it seems that you're comfortable letting effective price take lower as commodity inflation moves in the right direction. So given these assumptions, can you help us understand what it means for still a little margin in '25?

Yes, Eric, it's Chris. We're always more focused on growing restaurant margin dollars rather than strictly aiming for a specific margin percentage. However, our goal of achieving 17% to 18% remains in sight, and we aim to reach it consistently. That said, this target is very sensitive to changes in traffic, pricing, and inflation, including both commodity and labor costs, which we've previously discussed regarding pricing having additional factors starting in the second quarter. Ultimately, it will depend on how all these elements align. We're pleased with our ability to expand the margin this year, but we will need to evaluate all these factors as they develop in 2025.

Thank you.

Your next question comes from the line of Jim Salera from Stephens. Your line is open.

Hey, guys. Thanks for taking our question. Maybe a two-part question on mix. It's part one, if you could just kind of give us an update on the mix contribution in the quarter and particularly on kind of alcohol versus the add-ons? And then part two is, if we think about where you took pricing across the menu, is it basically that 0.9% kind of evenly across? Or are there any particular parts of the menu, whether it's appetizers or desserts that saw a little bit more or less price? And just how you think about that as it impacts mix?

Yes, maybe I'll touch on the mix here to start. I'll tell you, our mix in the third quarter was very similar to what we had seen in the second quarter, still seeing positive entrée mix, positive soft beverage mix, and positive add-ons that alcohol mix is remaining negative. It hasn't gotten any worse, but it is really what's driving that slight negative mix. We're probably around 20 basis points of negative mix in the third quarter. So to me, we're seeing good results from our guests, not hearing of any pushback on the menu pricing that we have taken. So I believe we're still screaming value.

Yes, Jim, I will address the 0.9% increase across the board. I don't have the exact details right now, but generally, that’s how we arrived at that figure when we consider the overall menu. It's also challenging for me to provide a detailed breakdown at this stage, especially since we are five weeks into it. However, it is typically distributed throughout the menu.

Okay, great. I'll hop back in the queue.

Thank you very much.

Your next question comes from the line of Brian Harbour from Morgan Stanley. Your line is open.

Yes, thanks. Good afternoon, guys. I'll ask actually just about the kind of the technology things you mentioned, the digital kitchen and guest management system. I'm sure there's an aspect of that that sort of improves the employee experience, but do you think, is that starting to contribute to like some of the labor productivity you're seeing? Do you think it sort of helps table turns? Is it sort of showing in other ways that we might sort of observe from the outside?

Yes. I would say it is still a little early for that, but the indicators are good. And obviously, the number-one reason is the experience of our employee and our managers and really just the cadence that we use in the kitchen and the communication. I do believe that there are going to be some other benefits as we get more and more stores on the program and on the digital kitchen. So it's hard for me to quantify that at this time, but the indicators are showing that we should expect some of that return also.

Thank you.

You're welcome.

Your next question comes from the line of Dennis Geiger from UBS. Your line is open.

Great. Thanks, guys. Wondering if you could speak a little more to labor hours, perhaps into next year after another really strong quarter of managing hours this year. Anything to kind of give on how we should think about the labor hours dynamic heading into next year, again, relative to the gains that we saw this year? Thank you.

Hey, Dennis, it's Michael. As I mentioned earlier, I believe we have the chance to see the ratio of labor hours to traffic growth below 50% by the end of this year. Looking ahead to 2025, it seems we will be learning together as we operate a well-staffed restaurant with high volumes, while also reflecting on our experience as a well-staffed restaurant with increasing volumes. We are finding that 50% or even something lower is still a realistic expectation. Our operators will focus on what’s best for the restaurants, and they understand that being well-staffed drives growth. Additionally, our turnover is improving, which should facilitate training and increase tenure. More experience generally leads to better performance. So, we hope to keep improving our productivity, but much will be learned together in 2025.

Sounds good. Thanks, Michael. Congrats to the team.

Thank you.

Your next question comes from the line of David Tarantino from Baird. Your line is open.

Hi, good afternoon, and congratulations on achieving such impressive momentum in your business. I wanted to inquire about unit growth. I understand that the guidance for next year is 30 openings for company-operated units, which matches what you accomplished this year. As the numbers increase, you've previously mentioned a unit growth expectation of around 5%. As the foundation grows with those 30 openings, do you anticipate falling below that rate? I’m curious about your approach to unit growth as you consider even beyond 2025. Will you aim to maintain mid-single-digit growth or around 5%, or do you think that figure will decrease as the base expands?

David, this is Jerry. We haven't specifically targeted a percentage for openings. Our focus has always been on the number of openings for Texas Roadhouse, Bubba's, and now with Jaggers added to the mix, we're aiming for a balanced approach in our operations. We will keep assessing what the right number of openings is for us. To do this properly, we need to send out 25 trainers and hire over 200 people. We're starting with a high volume, and we believe that if we manage these openings correctly, they will maintain their sales and our operational focus. However, if we push too hard, it could jeopardize that. From my perspective, I'm comfortable aiming for around 30 openings and would like to see a slight increase, but I'm not focused on a specific percentage. My priority is to ensure we do what's best for our operators and guests, which aligns with our business philosophy.

And David, it's Chris, and always good to talk to you. Don't forget, we're adding 13 via acquisition this year. So it's a 43-unit increase this year.

Yes. Understood. Thank you very much.

Thank you for the kind words. We appreciate you.

Your next question comes from the line of Peter Saleh from BTIG. Your line is open.

Great. Thanks and congrats on another great quarter. Just maybe a question and then I have one clarification. Just on the question in terms of the same-store sales trajectory. September and into the beginning of October, there was some pretty nasty weather, but that doesn't seem to be at least in the Southeast, it doesn't seem to be reflected in your comp numbers. Did you guys see any impact on weather? I know you guys don't like to talk about it, but with 9.3% and 8.3% comps, just wondering if you had any sort of impact on weather at the end of September and beginning of October. And then I just had a quick follow-up.

Yes, it's Chris here. We did experience a number of storms, which led to some store closures for a couple of days. However, we managed to reopen most, if not all, of them quickly. Following this, we saw a bounce back in sales at those locations. Although there were some losses during the closure, we noticed an increase in customers, including first responders and community members wanting to dine with us. So while there was definitely an impact, it was somewhat hidden by the strong recovery we experienced in the weeks that followed.

Yes. I'll add that while it may not seem like it had an impact on a larger scale, for our owner-operators in affected communities, our thoughts are with them as they work hard to reopen their restaurants and support their neighborhoods. I want to express our gratitude to the operators and partners out there, as the situation did have a significant effect on many communities in that region, and we continue to keep them in mind and offer our support.

Great. And then just as a quick follow-up, I just want to understand the message on the labor hour growth into next year into 2025. Michael, I think you said potential to be 50% or below. Last, I think, a couple of quarters, you've been below that 50% hour growth versus traffic. I just want to make sure I understand that we're not talking about a situation where you're growing labor hours above 50%. Just trying to understand the message, maybe I'm missing something there. Thank you.

Yes, there isn't a specific message regarding labor. We don’t have a labor model that is enforced on the restaurants. They will determine their staffing levels based on what they believe is necessary, and they do not plan to use more hours than required. However, they understand that effective staffing contributes to their growth. This year, some benefits we are experiencing are due to the comparisons with the previous year, allowing us to be well-staffed against similar conditions and achieving higher volumes than ever before. Essentially, we are all learning what the optimal staffing ratio will be, and while we cannot provide a specific percentage today, we're also not suggesting it will exceed 50%. This is a dynamic that we will understand better over time.

Thank you very much.

Our next question comes from the line of Jeffrey Bernstein from Barclays. Your line is open.

Great. Thank you very much. Just a bigger picture question. Jerry, just wondering as you've kind of traveled the countryside and Chris, it sounds like you're along for the ride. I'm just wondering, you mentioned in the press release that from a macro perspective, it's an extremely competitive environment. Just wondering what you're seeing, or what you're learning from your operators. Maybe is there any response you guys implement when you see more aggressive competitive environment to protect your own share? Again, it doesn't seem like you're seeing much impact. So just curious in terms of some qualitative commentary behind what you're seeing in terms of an extremely competitive environment, whether it's in the state category, whether it's by maybe local operators? And is there anything we should make of the fact that the comp slowed from 9.3% in September to 8.3% in October? Is there anything to make of that, or is that more just comparisons and perhaps a little bit of weather? Just trying to clarify. Thank you.

Thank you very much for your question, Jeffrey. From our discussions with the operators, we believe that our focus on operational excellence, our environment, our fresh made food, and all our efforts are exactly what we need to maintain high performance. Our goal is to ensure that every great restaurant experience includes greeting guests, seating them promptly, making sure they enjoy their time here, and expressing gratitude for their support as a locally owned business. We continually strive to improve our efforts. We aim to create an experience that customers feel compelled to appreciate. On a broader scale, the discussions we're having with our partners involve various internal matters. However, when it comes to operations and enhancing the guest experience, we are keenly focused on our food, service, and community partnerships.

I agree with everything mentioned. Before Michael discusses the sequential performance, I want to add to Jerry's comment. When we address individual situations, I know you're aware that we have our local store marketing initiatives. We aim to be leaders in the communities we serve. So, when there’s specific competition or market events, the response comes directly from our operators in those areas. They don't wait for us to implement a program; they are proactive and compete daily within their communities.

Yes. And Jeff, this is Michael. With regards to that comp from September to October, I think what you're maybe not fully contemplating is the amount of pricing we had in the menu. In September, we still had 4.9%, October 3.1%. So our traffic actually accelerated from something in the mid-4% range in September to in the mid-5% range in October. So we actually saw an acceleration in our traffic trends from September to October.

Incredible. I didn't fully appreciate that. Thank you. And just to clarify the 30 units that you talked about for next year, first of all, I guess that the three Jaggers are incremental to that. So it's all about 30 core units of Texas and Bubba's. And if that's the case, I'm just wondering roughly how many Texas and how many Bubba's would you think within that 30 for next year? Thank you.

Yes, that number could change a bit, but I would estimate around the mid 20s for Roadhouse, with the remainder being from Bubba's and Jaggers.

Yes, Jeff, to clarify, we have set up around 30 restaurants across all brands. The three Jaggers mentioned are franchise locations, so you might see a few Jaggers. As Jerry indicated, there will likely be around 20 Roadhouse locations and between 6 to 8 Bubba's included in that total.

Thank you.

Thank you.

Your next question comes from the line of Lauren Silberman from Deutsche Bank. Your line is open.

Thank you and congrats. I wanted to ask about comp. The 8.5% is incredibly impressive. Have you seen any changes in consumer behavior, differences across regions, dayparts, anything to unpack there? And then a follow-up on the quarter-to-date acceleration. It seems like traffic, I guess, is closer to 5%, which is better than you guys have done all year. What do you think is driving that momentum building?

Hey, Lauren, it's Michael. Regarding the third quarter and any regional differences, we experienced strong comparable performance across all areas—North, South, East, West—with no significant disparities between them. Performance was robust not just regionally but also by day of the week and by shift. In October, our comparable sales included over 5% traffic growth, which seems like a slight acceleration. This reflects our operators' ongoing commitment to delivering a legendary experience, being well-staffed, appropriately priced, and consistently fulfilling our promises. We're seeing the benefits of that consistency.

Great. Do you think there's anything we should consider in terms of compares getting tougher through the fourth quarter?

I mean, we'll see how it all plays out. The comparisons are strong for November and December, but whether we look at one year or multiple years to determine the right trend is something I'll leave up to you. However, we are ready to serve our guests, and we believe there is significant demand for our product.

Great. Thank you, guys, so much.

Your next question comes from the line of Jeff Farmer from Gordon Haskett. Your line is open.

Thank you. Just following up on Jeff's managing partner tour question, I'm curious what were some of the more interesting or I guess, unexpected things you guys heard from managers and specifically as it relates to pricing power, which you touched on, but also demand across the customer income levels?

Our conversations have been focused on a few internal adjustments we are making on the system side. We have already discussed pricing, and so far, we haven't encountered any negative feedback regarding the 0.9% change we implemented at the end or the beginning of the fourth quarter. Most of the discussions have been positive lately, likely because we're experiencing real success, which is exciting to share with the operators. They appreciate what they're doing and are eager to improve further.

Okay. Thank you.

You're welcome. Thank you.

Your next question comes from the line of Jon Tower from Citi. Your line is open.

Hey, thanks for taking the question. I appreciate it. Maybe just on the inflation outlook for labor next year. Chris, I think you had mentioned that the state-mandated increase is going to add about 1.5% to that of the 4% to 5% that you outlined for '25. Just curious if you could get into what the balance of that will be driven by and specifically in the context of looking across the landscape, it seems as if maybe starting wage rates have inflation in that has maybe come down a little bit certainly versus what we've been seeing in recent years. So just kind of curious if you could flesh out what is driving the balance of that increase?

Yes. Hey, Jon, it's Michael. I can maybe do a little bit there. And yes, I mean, there is certainly still an expectation that we will see underlying wage pressure, and as a people-first company, we're going to want to make sure that we are paying our people well and compensating them for the hard work they are doing. And we'll see whether new hire rates change. But again, you want to reward your performers. And so we factored that into the numbers. Obviously, we talked about the mandated increases. The acquisition will add a little bit of pressure with adding some California stores into the mix there. And those are probably up the lion's share of what we're expecting there.

Okay, cool. And maybe just pivoting to CapEx, the number for next year, the number of stores sitting similar to this year at roughly 30 and I think you're going to have more of the KDS development. So is that kind of the difference between the $360 million, $370 million this year, and the $400 million you're targeting next year?

Hey, Jon, it's Chris. Yes, you have it right there. We're focused on investing in our stores. Some of them are getting older, and we want to ensure they look fresh, are inviting to our guests, and are great places to work. As we discussed in previous quarters, we're investing in bump outs, kitchen expansions, and other improvements that will add value. These investments are in stores that are performing well, allowing us to expand in locations where we already have a strong business and create additional capacity. We believe this increase makes a lot of sense.

Got it. And then just lastly, curious if you could provide any color on how the bun and butter rollout is going at Walmart so far?

Thanks for the question. It's still quite early to tell, but it seems to be surpassing our expectations. The retail business primarily aims to raise awareness of our brands, engage with customers, and assess consumer demand. We've gained valuable insights since entering this segment over the past few years, but it remains relatively new. It's encouraging to witness continued interest in products inspired by Texas Roadhouse.

Awesome. Thanks for the questions.

Thank you.

Your next question comes from the line of David Palmer from Evercore ISI. Your line is open.

Thanks, guys, and congrats. I wanted to ask you about pricing versus wages and how you're thinking about that. In recent years, I was beginning to think that you would generally price towards wages rather than towards food inflation cycles that you would sort of price to the consumer that would be sort of represented by the type of wages that you'd be paying your own people. This next year, it feels like we're navigating towards the twos type of price increases and your wage rate will be going up roughly twice that level. So I'm wondering if you're consciously thinking that way that you're either making an investment in labor right now that ways that you think are appropriate or maybe opportunistic, or are you making investments in value to the consumer that reflects some realities that you see out there? I'm just wondering how you're thinking about that.

Yes. Hey, David, it's Michael. I think you captured it perfectly at the end. We are definitely focusing on investing in our guests. It would be inaccurate to link the pricing adjustments we're making directly to any commodity pressures we might be experiencing. These discussions about pricing began long before we had a clear outlook for 2025. The pricing reflects our collective insights with our operators about what is suitable for the business right now, ensuring that we continue to uphold the value proposition that has been crucial to us for over 30 years.

Yes, part of the reason I'm asking about that is in the past, call it, seven to 10 years, there have been eras where you were either investing in hours and I think a little bit before COVID and then you were started also doing some wage adjustments that you thought appropriate in the business too. So you guys have been very thoughtful in certain areas about your investments in things and maybe there's something opportunistic. I mean, your hours are so efficient versus year-over-year basis, there's maybe something of a good timing in terms of the wages outpacing what is typically what we're seeing out there elsewhere. So I'm wondering how you're thinking about that?

Yes, again, we're just running the business the way we always have. Really no change. We're going to do what's right for the operators, what's right for the restaurants, and what's right for our guests. And if that means adding people, we want them adding people, but we're going to always be very careful on that on the pricing side and airing on the side and making sure we're screaming value.

Thanks, guys.

Your next question comes from the line of Chris O'Cull from Stifel. Your line is open.

Hey guys, thanks for taking the question. Jerry, it looks like the newer Bubba locations are running at significantly higher volumes than the older store cohorts. I realize you only have three stores open in the last six months, but is there something special about those stores or are higher volumes from new units something we can expect from Bubba's?

Well, thank you for noticing. We appreciate that. I think it could be somewhat of where they're opening at, but we are very happy with the success that we've had in our new-store openings over the last 18 months and it does seem to be elevating. And again, as we continue to look at opening these stores with the right amount of support and with operational excellence in mind that could be is that we're executing at a higher level. There's definitely a demand when we open the stores. So the more efficient that we can be at getting folks in and getting them taken care of and having a memorable experience could be rewarding us from that side of it. So it just tells me we need to continue to put the effort into getting these openings done and executing at a high level because the demand is there. And so that's very exciting news from our standpoint.

Great. Thanks, guys.

Thank you.

Your next question comes from the line of Andrew Strelzik from BMO Capital. Your line is open.

Hey, good afternoon. Thanks for taking the questions. Just two quick ones for me. Can you share how the volumes and margins of the stores that you're acquired for the franchisee, how those compared to the rest of the company's stores? And then my second question and I feel a little silly asking this, I think I know the answer. But we've seen most of the delivery holdouts, I guess, have evolved their thinking around third-party and found structures that work for them. Has your thinking evolved at all or do you think there's ever a structure that you could find that might make sense for your brand? Thanks.

Hey, Andrew, it's Michael. I'll address the first one and then I'll let Jerry chime in on the delivery. As far as those acquisition stores, they actually will drive some nice volume increases for us. Our average weekly sales, as you're modeling that for 2025, you probably want to add about 0.5% evenly mix between traffic and check growth coming from what those 13 stores will deliver volume-wise and they're probably about neutral to margins, maybe a slight increase in margin dollars coming from them.

And then on the third-party, we do utilize it at Jaggers. We also have it in most of our Bubba's stores in one Roadhouse in New York City that it does make sense in. So I think our stance is still the same. We will continue to evaluate if it will at this time, add any value to the business. We're comfortable where we're at now and we are paying attention to what's going on out there at all levels of third-party involvement. But right now, I feel very comfortable with us not having to rely on that to grow sales. We really like to try to do it through our dining room and through our to-go business first.

Great. Thank you very much.

Thank you.

Your next question comes from the line of Rahul Krotthapalli from JPMorgan. Your line is open.

Good afternoon, guys. Thanks for all the color today. I wanted to touch back on the steak consumption trends. It was discussed the demand side of the equation was one of the factors for beef inflation outlook. How do you internally think about the risk of grocery pricing or discounting for beef products in this environment and in case at the margin, if it becomes more attractive for consumers to cook steak at home? And I have a follow-up.

Yes. Hey, Rahul, it's Chris, and I'll take the first before you get to your follow-up. That's absolutely what I was talking about. There is a retail demand element to this that just wasn't there at least so far this year. And part of that is we haven't seen the discounting that we might have seen in previous years from some of the major retailers, particularly on cuts of steak that would compete with where we are. So yes, that's a risk. If they were to start that, then that would bring demand up from that cohort and that is something we would have to think through.

Perfect. And I do understand that you guys don't advertise on TV, but just from a presidential election year or a typical disruption in trends seen across casual diners, anything you guys noted in the past cycles when it comes to foot traffic trends, November, December. And then also this year, there is a shorter holiday period gap between Thanksgiving and Christmas. Is there any positive or negative impact we should be thinking about from these factors? Thank you.

Yes. First regarding the election, the trends from 2020 won't be very useful for our analysis, but looking at 2016 and 2012, I don't recall any significant impact from the election cycle. We also reviewed the shorter period between Thanksgiving and Christmas, with 2019 being the last comparable year. Although there was some variability during that time, I didn't identify any significant issues that would indicate problems in that timeframe.

Perfect. Thanks for the update, guys.

Thank you.

Your next question comes from the line of Brian Vaccaro from Raymond James. Your line is open.

Hi, thanks. Just two quick ones for me, if I could. On that labor question and just thinking about the hours next year, can you help us frame what you're seeing currently from an hourly turnover or retention perspective, kind of any perspective on the absolute levels or how that might compare to whatever you view as a normal level? And what other dynamics beyond retention and turnover sort of might cause that relationship to move higher into next year versus what you saw in '24?

Yes. Hey, Brian, it's Michael. I can tell you that we don’t disclose our turnover number because it varies in calculation. We do analyze it over a 12-month period, and it continues to improve, remaining below historical averages, particularly at your historical low levels. We are very pleased with this trend as it reflects our commitment to providing a positive experience for our employees. By offering them the hours they seek and creating a calmer environment in the kitchen, we are encouraging them to stay with us. Regarding potential changes in 2025, I unfortunately don’t have anything substantial to add at this time.

Okay. Okay. Well, fair enough. That's helpful. And I guess one, just following up on the commodity outlook next year. Do you expect much of a difference in your year-on-year inflation in the first half versus second half at this point?

Yes, Brian, it's Michael again. Maybe a little bit more commodity inflation in the back half of the year, probably just from the standpoint of what we're lapping this year versus last year, but nothing at this point that would say it's dramatically different in the back half of the year than the first half.

All right. Thanks very much.

Thank you.

Our next question comes from the line of Gregory Francfort from Guggenheim Securities. Your line is open.

Hey guys, thanks for the question. Maybe just the franchise acquisition that happened, how did that come about? And I guess as you think about the rest of your franchise base, is that something you're looking to do more of?

Yes, thanks for the question. Yes, we talk to our franchise partners regularly and they've been with us a very long time and we started this conversation a few years back and we were able to get a deal done through a lot of partnership and hard work and we're very excited. And in a lot of these cases, it was always kind of the intention 20, 25 years ago when these groups came with us. So we were able to get the terms. We were able to get a heck of a deal for them and for us and it just the timing worked out perfectly and how we like to see it roll out at the start of '25. And so it's a very exciting transaction for us at Roadhouse. And we will continue to talk to others that are out there. If anything ever comes to fruition, we'll keep you guys posted.

Thank you, guys. Appreciate it.

Thank you.

Your next question comes from the line of Jim Sanderson from Northcoast Research. Your line is open.

Hey, thanks for the question. I had a couple of quick follow-ups on capital expenditures. What do you expect build-out costs to be in 2025? Are they relatively stable or any type of relief, so to speak, relative to past inflationary years?

Yes. I think they're relatively stable. I think you're just looking at a normal kind of a year in terms of build-out of the buildings.

All right. And for the fourth quarter, I don't know if you track this or not, but any feedback on whether your advanced bookings on holiday parties or special bank events in the fourth quarter or where they should be, where you would expect, or potentially any pickup in demand that you could comment on?

Hey, Jim, it's Chris here. And we don't really play in that game. So that's not going to be something that we see.

All right. Thank you very much.

And that concludes our question-and-answer session. I will now turn the call back over to Jerry Morgan for closing remarks.

Thank you very much. Appreciate all your time and being with us tonight and thank you for all of those that spoke out on our positive quarter. So with Roadie enthusiasm, I bid you a good night. Let's go Roadhouse.

This concludes today's conference call. Thank you for your participation. You may now disconnect.