Earnings Call Transcript - TXRH Q4 2022

Operator, Operator

Good evening, everyone, and welcome to the Texas Roadhouse Fourth Quarter Earnings Conference Call. This call is being recorded, and all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. I would now like to introduce Mr. Keith Humpich, the Interim Chief Financial Officer for Texas Roadhouse. Mr. Humpich, you may begin.

Keith Humpich, Interim CFO

Thank you, Bolt, and good evening. By now, you should have access to our earnings release for the fourth quarter ended December 27, 2022; it may also be found on our website at texasroadhouse.com in the Investors section. I'd like 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. 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; Regina Tobin, President of Texas Roadhouse; and Michael Bailen, Head of Investor Relations. Most of you know Michael, so I have asked him to provide today's financial update. Following the prepared remarks, we will all be available to answer your questions. Now, I'd like to turn the call over to Jerry.

Jerry Morgan, Chief Executive Officer

Thanks, Keith, and good evening, everyone. Before we begin our formal remarks, I want to thank Regina, Keith, and Michael for joining me on the call today and express my appreciation for them stepping into more visible roles. They are all veterans of Texas Roadhouse, and I look forward to seeing them further contribute to the growth of the company for years to come. I would also like to address the recent retirement of Tonya Robinson, as CFO. I had the privilege of working with Tonya for 24 years. On behalf of Texas Roadhouse, I want to thank her for the contribution she made to the company, and I wish her nothing but the best. Moving forward, we're in the process of a national search for a permanent CFO. We appreciate Keith taking on an escalated leadership role as our Interim CFO, and we have the utmost confidence in him and the rest of our experienced financial team. And now we will move on to our prepared remarks. There is no doubt that 2022 was a milestone year for Texas Roadhouse, with annual revenues surpassing $4 billion for the first time in our history. This is especially remarkable, as it was only five years ago that we exceeded $2 billion in revenue. By maintaining our long-term focus on opening restaurants across all of our concepts, we see the potential to double our revenue again over the next decade. In 2022, despite inflationary pressures throughout the business, our strong top-line results helped us achieve significant growth in restaurant margin dollars, net income and earnings per share. We also returned over $120 million to our shareholders in the form of dividends, repaid $50 million of debt, and repurchased over $210 million of stock. Additionally, during 2022, we acquired eight franchise restaurants for $33 million. All these actions benefited our shareholders, and we are pleased to have numerous levers at our disposal to create value. Turning to 2023, we have been impressed by the strength of the consumer. We are pleased to see our sales momentum carry over from 2022 into the beginning of this year. The demand to dine in restaurants has grown, and we continue to hold on to a significant amount of our Texas Roadhouse business. We are also encouraged by the potential for a slowing rate of inflation, even though the underlying costs for labor and commodities remain elevated. Looking long-term, we have no plans to lower our target margin percentage. Our margin dollars are strong, and we believe margin percentages will improve over time as commodity and other operating cost pressures subside. As a result, we will continue to manage the business with a disciplined approach focused on our long-term value proposition. Speaking of value, we recently completed menu pricing calls with our operators and will be taking a 2.2% menu price increase. We believe this level of pricing sets us up to achieve a solid year of sales and profit growth while furthering our industry-leading value. As many of you know, this approach has consistently rewarded our guests and shareholders over the past 30 years. Moving on to development, we opened 23 company restaurants across all concepts in 2022. In 2023, we expect between 25 and 30 Texas Roadhouse and Bubba's company openings, as well as three Jaggers. Our franchise partners opened seven international Roadhouses in 2022, and we expect them to open as many as 12 international and domestic locations in 2023. We will continue to maintain our long-term focus when it comes to capital allocation and shareholder value creation. We believe the best and most strategic use of our cash is building new restaurants and taking care of our existing restaurants. Additionally, as I alluded to earlier, our balance sheet and strong operating cash flow will position us to consistently grow our dividends, acquire franchise restaurants and opportunistically repurchase shares and pay down the remainder of our debt. Finally, I want to comment on Gina's promotion to president of Texas Roadhouse. When I joined Texas Roadhouse 26 years ago and asked people which managing partner I needed to learn from, Gina was always the first name mentioned. During her career at Texas Roadhouse, Gina has been a managing partner, a market partner, head of our Training Department, and most recently, our third Chief Learning and Culture Officer. Gina, I could not be more excited to have you as my partner in taking a bigger role in the company. Why don't you share a few thoughts with everyone?

Regina Tobin, President

Thanks, Jerry. I am excited to have the opportunity to carry on the mission of keeping the managing partner at the center of our universe and ensuring that we always view the business with an operator's mentality, which has been the key to our long-term success. I look forward to partnering with all roadies while maintaining our culture and serving our operators each and every day. As many of you know, our unique culture, which has been shaped by our people, our past hardships, our successes, and our values, provides us with a competitive advantage. It can often be said that we are a people-first company that just happens to serve steak. It is my promise and commitment to always put our people at the forefront of my work as president. Now, Michael will provide you with a financial update.

Michael Bailen, Head of Investor Relations

Thanks, Gina. So in the fourth quarter of 2022, we reported revenue growth of 12.7%, primarily driven by a 7.1% increase in average unit volume and store week growth of 5.5%. We also reported a net income increase of 12.8% to $59.9 million, with diluted earnings per share increasing by 17.4% to $0.89. For the quarter, our restaurants averaged over $130,000 in weekly sales, and To-Go represented approximately $16,400 or 12.6% of total weekly sales. Comparable restaurant sales increased by 7.3% in the fourth quarter, driven by 6.2% average check growth and a 1.1% increase in guest traffic. By month, comparable sales grew 8.3%, 7.3%, and 6.5% for October, November, and December, respectively. Turning to 2023, weekly sales averaged over $146,000 for the first seven weeks, with comparable sales of 15.8% compared to the same period in 2022. We do not expect this level of comp growth to continue as we move past the lapping of Omicron and go up against higher traffic levels in the coming weeks. At the same time, we do not want to downplay the current results, as our restaurants averaged more guests over the past seven weeks than in any period in our history. For the fourth quarter, restaurant margin dollars grew 3.4% to $145.6 million and were 14.5% as a percentage of total sales, down 132 basis points compared to last year. Food and beverage costs as a percentage of total sales were 35.1% for the fourth quarter, up 4 basis points compared to 2021. This increase was primarily due to commodity inflation of 6.6% in the quarter, mostly offset by the benefit of menu pricing. Inflation for the fourth quarter was largely in line with expectations, other than higher produce costs. As a result, our full-year commodity inflation came in at 10.8%. For 2023, our commodity inflation guidance remains unchanged at 5% to 6%. We also continue to expect that the majority of inflation for 2023 will be driven by higher beef costs. We have approximately 60% of the commodity basket locked for the first half of the year. Based on current visibility, we expect inflation in the first half of the year will be above the top end of our full-year guidance. Labor as a percentage of total sales increased 75 basis points to 33.4% compared to the fourth quarter of 2021, while labor dollars per store week increased 9.3%. This increase in labor dollars per store week was driven by wage and other labor inflation of 7.8% and growth in hours of 1.9%. These increases were partially offset by the $1.1 million net benefit of adjustments to the reserves related to our workers' compensation and group insurance programs. The reserve adjustments include a $0.3 million favorable adjustment this year and a $0.8 million unfavorable adjustment last year. For 2023, our guidance of wage and other inflation between 5% and 6% remains unchanged. Other operating costs were 15.3% of sales, which was up 58 basis points compared to the fourth quarter of 2021. The year-over-year benefit of sales leverage was more than offset by a continuation of the higher costs we're seeing in areas such as utilities, credit card charges, and repair and maintenance expenses. Moving below restaurant margin, G&A in the fourth quarter was 4% of revenue, with the overall expense down $2.3 million versus 2021. The primary drivers of the decrease in year-over-year G&A spend are a $1.1 million benefit from one-time accrual adjustments and a $1 million decrease in total cash and equity compensation. Our effective tax rate was 11.5% for the fourth quarter and 13.6% for the full year. Assuming no changes to the tax code, we now expect an income tax rate of approximately 14% for 2023. With regards to cash flow, we ended the year with $174 million in cash and $50 million in debt. Cash flow from operations for the fourth quarter was $117 million. This was offset by $72 million in capital expenditures, $31 million in dividend payments, and $25 million in debt repayment. We continue to expect full-year 2023 capital expenditures to be approximately $265 million. And I will also mention that on the first day of fiscal 2023, we spent approximately $39 million on the acquisition of eight domestic franchise restaurants. These restaurants are included in our expectation of at least 6% store week growth. Finally, as announced today in our earnings release, our board of directors has authorized a 20% increase in our quarterly dividend payment, increasing it to $0.55 per share from $0.46 per share in 2022. Now I will turn the call back over to Jerry for final comments.

Jerry Morgan, Chief Executive Officer

Thanks, Michael. Our future success depends on staying focused on driving top line growth and providing a legendary experience to every guest. We will do that by keeping value at the centerpiece of the menu and taking care of our roadies, who in turn will take care of our guests. Tomorrow marks the 30th anniversary of the opening of the first Texas Roadhouse. I look forward to celebrating this anniversary at our annual conference with over 700 managing partners, who represent the very best of what this company has become over the past 30 years. That concludes our prepared remarks. Operator, please open the lines for questions.

Operator, Operator

Thank you, Mr. Morgan. We'll take our first question this afternoon from Chris Carril of RBC Capital Markets.

Chris Carril, Analyst

Hi, thanks for the question. So Jerry, can you maybe expand a bit more on the demand commentary around the start of the year? If my math is correct, the three-year stack appears to be meaningfully accelerated in the first seven weeks of 2023 versus the fourth quarter in December in particular. So any additional detail will be helpful there?

Jerry Morgan, Chief Executive Officer

Yes, I mean, we're very excited about the demand for our concept. We've seen the escalation; we softened a little bit in December, but it came roaring back in January and this first part of February. So I will just tell you, I think it's about our execution and about the quality of the product that we're putting on the plate. We will keep pushing that, and I think that's what helped drive our top line sales.

Chris Carril, Analyst

Got it. And then, on the long-term outlook, you mentioned in the prepared remarks, I think it was a doubling of revenue over the next 10 years. But what are the underpinnings of that, maybe specifically around development across the three brands? Thanks.

Jerry Morgan, Chief Executive Officer

Yes, I think if we look back at the last five years, and we've doubled from there, the way we see it, with the gross growth of our existing restaurants and our continued sales escalations, we definitely feel like that is attainable with the three concepts and the trends that we currently can model out. Michael might have a couple of comments on how we get there.

Michael Bailen, Head of Investor Relations

Yeah, Chris, it's really not that different than what you're seeing us doing right now. Keeping Roadhouse development in that 20 to 25 restaurants, and obviously seeing Bubba's grow to maybe low double-digits. Then on top of that, you know, Jaggers could see a little bit of growth. But the assumption of those around 30-ish restaurants a year, with some modest traffic and check growth is really the underlying assumption that gets you there.

Chris Carril, Analyst

Got it. Thanks so much.

Jerry Morgan, Chief Executive Officer

Thank you.

Operator, Operator

Thank you. We go next now to Brian Harbour of Morgan Stanley.

Brian Harbour, Analyst

Yes, thank you very much. Can you just talk about the pricing decision a little bit? Are you still going to stick to kind of the two times per year? For example, if beef becomes more inflationary in the second half, do you want to address that with pricing, or do you think that there will still be kind of short-term volatility there, and you're just more focused on kind of value proposition?

Michael Bailen, Head of Investor Relations

Hey, Brian, it's Michael. I think we are committed to looking at menu pricing twice a year. We look at it with the intention of taking pricing in early April and sometime in October. You might remember that commodity inflation is something that we don't typically focus our menu pricing on. We view that as cyclical in nature. So we're more focused on the structural items, the labor component, when we are determining what level of pricing we're going to take. Obviously, any pricing that we take to deal with labor pressures will also help the commodities and other lines, but we're in this for the long-term and really don't knee-jerk react to commodity costs being above or below what we might expect at one point when we're factoring in our menu pricing.

Brian Harbour, Analyst

Makes sense. Okay, thank you. And then just on kind of uses of cash. You’re running pretty low on debt here; do you think it makes sense to pay down the rest of that? And I also think you had repurchased some shares earlier in the year; it doesn't look like as much in the second half. But do you have an intent to return to that?

Keith Humpich, Interim CFO

Yeah, Brian, this is Keith. Thanks for the question. Yeah, on our debt, we plan on paying all that back this year. We'll probably even live to do that in the first quarter. But we'll be making that decision in the coming weeks. On share repurchases, we're really proud of our share repurchase program over the years and the value that we've created from that. In the last four years, which includes some pandemic years, we've repurchased over $400 million of our stock. And when I looked at this year, I'd say that we will definitely look to buy back dilution, and then anything after that is going to depend on our other capital allocation needs, but our cash balances and the market conditions, and then we're going to make whatever decisions we feel like we have to in the best interests of our shareholders and our company.

Brian Harbour, Analyst

Okay. Thank you.

Operator, Operator

Thank you. We go next now to Brian Bittner of Oppenheimer.

Brian Bittner, Analyst

Thanks. Hey, guys. I'd like to go back to the business trends you're seeing so far. In the first quarter, you said comps are up about 16%. And based on your commentary last year, I think that implies average weekly sales are trending at that $147,000 level. Can you confirm that? Is the math correct there? Is that where the average weekly sales are trending? And is that how we should think about average weekly sales for the rest of the quarter? Is there some reason why those are going to decelerate to a lower level for the full quarter?

Michael Bailen, Head of Investor Relations

Yeah. Hey, Brian, it's Michael again. Your math is pretty spot on. Yes, we were at 15.8% comp growth. In my remarks, I said we averaged $146,000 over the first seven weeks. I would say, look, we don't know what the next six weeks of the quarter are going to bring. Certainly, we were lapping Omicron, which was that helped with some of those large growth that you're seeing. So yes, sales that percentage probably comes down from there as we start to lap some more normalized numbers, but I think we still have opportunity to grow whether that's $146,000 or something more around that range we will see, but we've certainly shown that we're able to generate that level inside our restaurants. And that's how our operators are going to continue to do the business.

Jerry Morgan, Chief Executive Officer

Yeah. And I would say, we've been very good on gift card redemption, and there's been some driving forces with some great weather across the country and some enthusiasm out there. But I think there's a couple of reasons why it's being aggressive right now, which we're excited about, and how long it will hold at that level.

Brian Bittner, Analyst

Yeah, sorry, Michael, I must have missed the call out on that $146,000 in the prepared remarks, so I apologize for that. My follow-up is on the labor cost; the per operating week costs outpacing inflation because of the hours that have been added in the fourth quarter. But the question is, moving forward, you've given us this labor inflation guidance for 2023, but how should we think about the per operating week cost in that labor line? Because with the type of comps you're seeing so far, for 2023 the question becomes, how much operating leverage do you get off that particularly on the labor line?

Jerry Morgan, Chief Executive Officer

Yeah. I think there's something sort of to be determined there. We're still in the first quarter rebuilding the hours from the Omicron impact of last year, staffing has gotten much stronger and it's getting to the levels we need. So the hours growth is probably going to come down, and I think at some point maybe in the back half of the year, we get back or closer to our historical algorithm for lack of a better term as to how our traffic or hours grow in 50% of our traffic growth. We'll see if that's the new normal or something else. But I think there's no doubt going to be wage pressure throughout the year is our expectation. So maybe the midpoint of our guidance and a healthy consumer. That labor line you know, maybe holds fairly steady for the year probably wouldn't surprise me to see some pressure earlier in the year and then maybe getting some benefit in the back half of the year.

Brian Bittner, Analyst

Thank you.

Operator, Operator

Thank you. We'll go next now to David Palmer of Evercore ISI. Mr. Palmer, your line is open. We can't hear you. You might want to check your mute function on your phone.

David Palmer, Analyst

Can you hear me?

Operator, Operator

We can hear you now.

David Palmer, Analyst

Okay. Thank you. The inflation five to six - the early - you said it's going to be above that high end of the five to six in the first quarter. And that would be - I assume, it's going to be related to beef, but if you could just give us a sense of what sort of cadence of the inflation you're expecting and the breakdown of that between beef and other?

Michael Bailen, Head of Investor Relations

Yes, we do expect commodity inflation to exceed the upper limit of our initial estimate, not only in the first quarter but also for the first half of the year, primarily due to beef. We believe beef will be the main pressure point in our commodity costs throughout 2023. While there will be pressures in other areas, some of these might lessen as the year progresses. The first quarter of last year did not yet reflect the impact of events in Ukraine, so we are still comparing against that. This contributes to the higher inflation we anticipate in the first and second quarters. As the year advances, we will begin to compare against those elevated figures. Therefore, we expect continued pressure from beef, while there may be some moderation in other categories as we move through the quarters.

David Palmer, Analyst

And then I was wondering if you wouldn't mind just getting a little color about Bubba's, we don't have them here in the Northeast, and we'd love to get one up here. But how are the returns of those units versus we can see that some of the stack comp numbers, they look pretty good. But how are the returns versus the Roadhouse on those units? And are you seeing a fairly even set of returns? Are they doing as well in the ones you're placing in the Midwest as they do in the South and in Texas? Thanks.

Michael Bailen, Head of Investor Relations

Yes, David, it's Michael, again. I would say, look, we have 40 Bubba's right now, and we are surely very excited about the concept. We are very pleased with the returns on some of the more recent openings as well as some of the older ones. But when you have just 40, and you're learning, there are some in there that are underperforming that pull the overall number down. But we certainly believe in the concept, its ability to generate that mid-teen IRR that we are looking for, which is the same return that we're looking for at Roadhouse. We're seeing great acceptance of the brand in the South and Southwest, in really all the areas that we are opening them and are very excited. We think we'll get about five of those opened this year, and a long runway to go there.

David Palmer, Analyst

Thank you.

Operator, Operator

Thank you. We’ll go next now to David Tarantino with Baird.

David Tarantino, Analyst

Hi. Good afternoon. Jerry, you mentioned that you expect restaurant margin percentage to recover over time. And I guess my question is, is really about kind of the path to getting there. I think you said, using commodity costs and some other items like leverage on traffic, but if you could just clarify, how do you get to higher margin percentages over time? And then Michael, can you comment on whether you think progress on that front is possible this year in terms of margin percentage given all the puts and takes on the cost side?

Michael Bailen, Head of Investor Relations

Yes. Hey, David, it's Michael. I’ll start and then let Jerry add in. I do think let's use the midpoint of our guidance range and the assumption that the consumer remains healthy. We see modest growth moving to the year and what level of growth that's going to be is up to you guys to determine. But yes, I think you could see some margin improvement in 2023 on the percentage side. I think other operating is certainly maybe the easiest path forward for some of that margin improvement. Depending upon where we are within our guidance ranges on commodities and labor would factor into how much leverage we should get in those areas. Obviously, driving traffic is one way, and seeing the menu pricing flowing through is another way. The percentages are important to us, but maintaining that top line growth and maintaining those restaurant margin dollars is just as important, if not more important.

Jerry Morgan, Chief Executive Officer

Yes. And I would just say, as we continue to attack our top line sales and continue to watch inflation throughout our cost of goods, there's obviously that part of it. We do hope and do hear that maybe we're going to have some relief outside of protein. In other controllables, from that labor, obviously, as we've really emphasized getting staff this year, and making that investment so that we can handle the sales and the volume that we're doing. So hopefully, we have really added to our pot. We have 82,000 people. We are back above basically the pandemic levels to help handle the volume that we have. We really didn't want to utilize the tenure of our people now and the ability for them to handle the volume. There was a lot of ramping up to do the sales. I feel very comfortable going into this year that we should see some relief and even make some headway on those two categories for sure.

David Tarantino, Analyst

Great. And just a clarification, Michael, is there some level of traffic that you're thinking about that would, I guess, traffic growth that would lead to margin expansion? A break-even point that we should think about for the year?

Michael Bailen, Head of Investor Relations

I don't know necessarily if there's a break-even versus last year, probably, on top of what we've already generated some fairly modest traffic growth continuing through the year. Obviously, pricing drives margin percentages a lot more easily than does traffic, but you will probably need to continue to see traffic growth. Traffic growth is certainly going to benefit that labor line and the other operating line and help us get some leverage there.

David Tarantino, Analyst

Great. Thank you very much.

Operator, Operator

Thank you. We’ll go next now to Jeffrey Bernstein of Barclays.

Jeffrey Bernstein, Analyst

Thank you very much. Two questions. One, just on the unit side of things. I know this year you were originally talking about maybe 30 openings. Now, I think, you refer to 25 or 30. In the short term, just wondering whether there are any near-term headwinds that are still weighing on things, and that kind of ties into the 30 that Michael, I believe you mentioned, for many years to come. You guys can do 30 a year. I'm just wondering what the constraint would be to going well above 30, whether or not there's anything in particular or whether that's just your comfort zone to assume 30 per year? And then I had one follow-up.

Jerry Morgan, Chief Executive Officer

Yeah, Jeffrey, how are you doing, buddy? Listen, I do believe that we will continue to focus on the growth of Roadhouse at that low 20s. As we kick Bubba’s in also as we start working towards a double-digit number, and then you know, Jaggers is still a little bit early to see what we can put into the pipeline. I am excited about it. I do believe that it will continue to add to our portfolio. So I do believe that we can get to the high 20s and low 30s in the next couple of years is where our target focuses and our pipeline. I see it escalating from there. It will be incremental, but it's not going to be a big jump. But as we do get more aware of what we can do with Jaggers and Bubba’s, they will be there. But we're very comfortable with where Roadhouse is in the pipeline for the next three years, I would say, we could be at that number and the other two will be the driver to kick us up over into the 30s or higher. So that would be the thought there on my side.

Jeffrey Bernstein, Analyst

Got it. Is there any particular headwind in terms of this year or still ongoing delays and whatnot that would maybe temper that prior 30?

Jerry Morgan, Chief Executive Officer

Yeah, I believe there are some concerns on our part. Just still a couple of things, the transition of property between our landlords delays things when we're in a negotiation, we've seen a little bit of that. Permitting is getting better, but it's still a challenge by cities or municipality; so we're anticipating getting through all of that. We also have to be cautious of what we've seen in the last couple of years.

Michael Bailen, Head of Investor Relations

Yeah. And Jeff, this is Michael, if you want to mention that adjustment from the approximately 30 down to the 25 to 30, just with some of the movement we were seeing. It just felt like the right thing to update, but it really had no impact on our thoughts on the store week growth for the year. So it was deals that were already expected to be pretty late in the year, but just realistically look like they're going to slip into early next year, but again, would not really change that store week growth number.

Jeffrey Bernstein, Analyst

Got it? My follow-up is from the earlier question on beef. You know, I think you said the majority of your inflation is going to come from beef. Just wondering if you can share what you're currently contracted specifically for beef? And maybe at what inflation rate that we're talking about. I know one of your larger peers reported earlier today, and they talked about how they were 100% contracted for beef, assuming mid-single-digit inflation. I'm just wondering how that compares; maybe it's different products you're looking at a different spec, but it's 100%, something you would look to achieve, or any color you can provide in terms of, you know, the outlets of beef, specifically, as we move through this year would be great? Thank you.

Jerry Morgan, Chief Executive Officer

Yeah, we're not going to get into what percent of our beef is locked for the year. Obviously, we have more of a locked in the first quarter into the second quarter than we do in the back half of the year. With it being almost half of our baskets, if we're 60% locked on the overall basket, beef has to be kind of in that same general range. I did state in our remarks that the majority, and I think you could call that 80-ish percent of our commodity inflation for the year is expected to come from beef. Again, if you just for easier math, took the bottom end of our range of 5% commodity inflation, that would imply that you're going to have beef inflation in high single digits or low double-digit expectations embedded in that expectation. We cannot really comment on how others are doing. I can just tell you with the way we buy our beef, where we buy our beef from, the fact that we age it and cut it in our restaurants requires us to maybe do something a little bit different than what others do. We have no problem locking in when we think it's appropriate. But we're also, you know, we have some pretty smart people in our procurement department who know when is the right time to buy and when's the right time to wait. They will make those decisions on what they think will result in the best cost for us. Obviously, if locking in can be done, we certainly will do that.

Jeffrey Bernstein, Analyst

Understood. Thank you.

Michael Bailen, Head of Investor Relations

Thank you.

Operator, Operator

Thank you. We’ll go next now to Peter Saleh at BTIG.

Peter Saleh, Analyst

Great. Thanks for taking my question. I want to come back to the sales performance so far this year in the first seven weeks. I noticed you saw a pretty sizable increase in average weekly sales, $146,000, and the fourth quarter was about $130,000. Can you talk about is that increase really mostly that you're seeing? Is that mostly traffic? Are you seeing any change in behavior in terms of what consumers are spending on? Is the check going up? Just anything when you look under the hood in those first seven weeks, just trying to understand consumer behavior?

Michael Bailen, Head of Investor Relations

Yeah. Hey, Peter, it's Michael. Of that 15.8%, we've mentioned on the last call that we were going to be about 6% pricing. In the first quarter, we're seeing most of that flowing through. So I would say the traffic is just a tick over 10% of that 15.8%. The rest of it is check growth.

Regina Tobin, President

Hey, Peter, this is Gina. I'll tell you that overall, right now, we are very happy with our current staffing numbers; we've seen an increase in that. Our turnover is definitely going down. We know that quality of people hired and retention is going to increase our productivity. That’s going to help to drive down the labor percentage, which is what we are currently working on right now. So tenure matters, and connections to our people to create that culture and reduce that turnover amount will continue to be worked on.

Peter Saleh, Analyst

Thank you very much.

Operator, Operator

Thank you. We take our next question now from Sara Senatore of Bank of America.

Sara Senatore, Analyst

Hi, thank you. I want to revisit the question about unit growth. You mentioned that we might see some units targeted for the upcoming year from January to December. However, I noticed that the CapEx forecast remains unchanged. Are you still experiencing relatively high inflation and construction costs, or is your spending more focused on maintenance and updates? Was any of that spending postponed during the pandemic? Additionally, you mentioned that other operating expenses, such as repair and maintenance, are high. Is that related to the overall elevated costs we are seeing? I'm trying to understand whether the strong volumes are leading to higher marginal returns as expected, or if the increase in construction costs is offsetting some of those gains.

Michael Bailen, Head of Investor Relations

Yes. Hey, Sara, it’s Michael. I say, first on the CapEx question. We're still going to be building those restaurants that are going to open late this year. So the main reason, like the CapEx number didn't change isn't because of the increase in our assumption for the cost. It's just simply that, even though our store may not open till January or February of next year, it'll probably be for the most part builds by the end of this year. So the CapEx number did not need to move. As far as other operating, we continue to feel those pressures in there. A lot of services go into the other operating part of their business, a lot of supplies, the utilities continue to be a pressure point, and repair and maintenance are still elevated. There are also other new fees that go in there that we really haven't talked a lot about in the future and aren't huge driving forces. But when we roll out new technology, there are costs associated with that. Whether that's running equipment or paying for installations, there are some costs that continue to pressure that line. With the growth in our volumes, we're certainly seeing more use of those different other operating items. But we're also seeing some new items introduced into that area. I'm optimistic that we won't see it grow the way it has and I'm hopeful that we won't see it grow on $1 per store weeks the way we have and have more potential on that line for some leverage in 2023. But we will wait and see exactly how that all plays out.

Sara Senatore, Analyst

Thank you. Could you provide some insight on the capital expenditures? It seems that most of the work is completed before the opening. How has inflation impacted build costs compared to pre-COVID levels? This would help me understand the current situation relative to a couple of years ago.

Michael Bailen, Head of Investor Relations

Yes. Several factors contribute to that. Building costs, rents, and other expenses are all involved. It's important to note that you can't simply compare total costs directly, as the timing of restaurant openings can influence building costs and rents. Generally, you might observe increases of around 10% to 15% in the cost of building a restaurant. Additionally, we are constructing larger restaurants than before, which complicates the ability to separate these two factors.

Sara Senatore, Analyst

Understood. Thank you.

Operator, Operator

We'll take our next question now from Dennis Geiger of UBS.

Dennis Geiger, Analyst

Great, and thanks, and congrats to everyone on your promotions and expanded roles. I want to ask on G&A; you called out a couple of items contributing to the G&A levels in the fourth quarter. But curious, if you could provide any thoughts on G&A in 2023; anything on investment there? Whether it's as a percentage of sales G&A or going to be growth year-over-year, any color on what to expect this year?

Keith Humpich, Interim CFO

Yeah. Thanks, Dennis, this is Keith. Yeah, for G&A, we always target to keep G&A growth lower than our revenue growth. I think in 2023 might be a year where we get a little bit of that leverage back. We have a couple of G&A growth challenges in 2023, one of those, as we talked about this as our 30 year anniversary, and we're getting ready to have our annual Managing Partner Conference. With that being our 30th anniversary, it's going to be quite the event. I think you can definitely look to see us having elevated conference costs this year. That will be a big driver of some of that. We also have a new human capital management system that's going in. We're going to have several non-capitalizable costs that we've been incurring this year; this is going to be a factor. The other piece is really going to be with the pandemic slowdown. We've gradually been recovering on a lot of things. I think this is going to be the year where you're going to see us fully recovering and even in some cases catching up on things like travel and training and really investing in our people too. So I think those are going to be your main drivers this year.

Dennis Geiger, Analyst

Appreciate that color, Keith. One more quick one, just as it relates to pricing, as it relates to the current levels and what you're taking in March, just curious kind of level that off and on what the effective pricing by quarter maybe looks like over the next couple of quarters given the moves there? Thanks very much.

Michael Bailen, Head of Investor Relations

Yeah. This is Michael I can help you with that. So first-quarter, with a 2.2%, assuming we don't take any pricing in October, we will have about 5.9% pricing for the first quarter, 5.6% in the second quarter, 5.1% in the third quarter, and then 2.9% in the fourth quarter. Again, we will be looking at menu pricing, and most likely taking something in October, but that's the cadence without any additional pricing.

Dennis Geiger, Analyst

Thanks, Michael. Appreciate it.

Operator, Operator

Thank you. We go next now to Andrew Strelzik at BMO Capital Markets.

Andrew Strelzik, Analyst

Hey, good afternoon. Thanks for taking the questions. I have two. The first one, I believe you said that you're pretty comfortable with the pipeline for new stores over the next three years. But it does feel like we hear from almost everyone that they're looking to accelerate unit growth, even those that don't really grow units. I'm curious, as you're building that pipeline farther out, do you see that show up at all more competition, higher costs, any of those types of things would be the first question? The second question is just acquired franchise units; any color around volumes or margins or potential investments to get this where you want to be relative to your peers' system average? Thanks.

Jerry Morgan, Chief Executive Officer

I'll take that first part. I think Michael can grab that second part. Yeah, I do. Obviously, there's competition out there. I think there are, but we have our targeted markets and states and growth areas. We've been working this plan for quite a while, and it's been successful for us for Roadhouse and Bubba's. As we're incorporating our strategy on how to grow Jaggers systematically, probably keeping it a little closer to here in the Kentucky basin or the heartland and no one that around it, but there's always competition. There’s real estate to be had out there, I think, well, I'm not sure what others are doing. But we are very focused on our strategy and on our focus on how to continue to do it right. We do have some relocations that we are also incorporating into the system which is really helping us in a different way. That also adds to us looking for more real estate other than new store openings but be able to take a store relocated, put a bigger parking spot in and a bigger restaurant which we need for our volume whether it be cooler expansions or bump outs or extra dining rooms as we look forward to it. We're excited about some opportunities to do some things a little bigger, as they say in Texas, going forward.

Keith Humpich, Interim CFO

Yeah, Andrew, on those franchise acquisitions, I would say those are pretty average performing stores from a sales and profit standpoint. So I don't think you're going to see any kind of movement in our overall company numbers because of that. From a CapEx requirement, there is some CapEx needed and that's built into our $265 million estimate for the year.

Andrew Strelzik, Analyst

Great. Thank you very much.

Operator, Operator

We'll go next now to Joshua Long of Stephens.

Joshua Long, Analyst

Thank you for taking my question. First, I would like to know if you can give more insight into the underlying trends driving the strong performance in the early part of the year. Specifically, considering the impact of Omicron in January and the calendar shifts from last year, such as Valentine's Day and the Super Bowl, I am trying to understand the foundational trends for this period. Secondly, it seems that your human capital is in a good position, but I would like to hear your thoughts on the growth and efforts made to maintain your advantage over competitors in the industry. As everyone is focusing on human capital as a key factor for growth, you've historically managed this well. I'm interested in your perspective on human capital and investments in your company culture over the next several years as you aim for the revenue expansion you mentioned earlier in the call.

Michael Bailen, Head of Investor Relations

Hey, Josh, it's Michael. I’ll begin with the first question about the first seven weeks. I don’t have many specific numbers to share. There are always various factors at play, like the impact of Omicron, the winter weather this year compared to last year, and timing events like Valentine's Day and the Super Bowl. We've noticed consistent strength throughout the first seven weeks, so I wouldn’t suggest adjusting any expectations based on any particular factor. It wouldn't be fair to have you change anything without sufficient justification. Overall, I think we've had a solid performance during this period.

Keith Humpich, Interim CFO

On the staffing side, I will tell you that I think in the last 18 months on the human capital, so we are very pleased. Our staffing side has been very aggressive in the last 18 months and we feel really good about our position on the people side in our restaurants, in the front of the house, in the back of the house, in our management team. So that piece of it has been a big investment. We're hoping obviously this year, as we settle in, we reduce our turnover, and we really focus on keeping our folks and connecting with our folks. That will be an investment that we see a return on this year, would be our hope.

Joshua Long, Analyst

Thank you.

Jerry Morgan, Chief Executive Officer

Thank you.

Operator, Operator

We'll go next now to Andy Barish of Jefferies.

Andy Barish, Analyst

Hi, guys, thanks. Two quick ones for me, just on the margin performance in the fourth quarter, can you help us level set? I mean, it's unusual to see margins kind of go down from the third quarter to the fourth quarter. Was there something about December flow through that wasn't quite what you expected or any help there just as we, you know, we look to build off of that 14.5% restaurant level margin.

Michael Bailen, Head of Investor Relations

Yes, hi, it's Michael. It's actually more related to the third quarter. If you recall, during our third quarter earnings, we highlighted a $6.6 million breakage benefit that we received in our other sales, along with a $4.4 million benefit from adjustments to our general liability reserve. These two contributions have likely provided a 1% to 1.1% boost to our Q3 restaurant margin. Therefore, on an adjusted basis, we expect our margin to increase from 14.3% in Q3 to 14.5% in Q4. It is primarily a result of those beneficial items from the last quarter.

Andy Barish, Analyst

Thank you for that information. Regarding traffic growth and these volume numbers, Jerry or Regina, it's impressive; however, executing can be a bit more challenging. Legendary Food and Legendary Service remain our core strengths, but are there additional factors we should consider? You've mentioned aspects like Roadhouse pay or the remodeling improvements—anything specific to highlight as we look to understand traffic growth for 2023 and beyond?

Regina Tobin, President

We are continuously focused on improving speed in our restaurants. Recently, we introduced Roadhouse pay, which allows guests to pay quickly and helps us turn tables faster. Additionally, we are implementing KDS in some kitchens to enhance ticket times. We evaluate technology that can enhance the speed of our operations, leading to increased traffic growth. As our staffing levels have improved and our team members gain more experience, productivity increases and they become more efficient in their roles. All these factors contribute to stronger traffic.

Jerry Morgan, Chief Executive Officer

I’ll elaborate on our digital kitchen initiative. We now have nearly 615 Roadhouse pay locations, which was a significant achievement last year. We are still experimenting with tablets for mobile handheld ordering. We are improving our software to ensure it’s flawless before launch. With respect to the Digital Kitchen, we have converted two of our restaurants, opened two new locations, and are planning to transition around 30 restaurants this year, which is very exciting. We recently opened a relocated, high-volume restaurant that has been performing exceptionally well, and our operators are enthusiastic about it. We are eager to invest in this area and are already seeing tangible benefits as we proceed. This year will be pivotal for us as we look to open new locations with the Digital Kitchen and convert some existing ones. We will definitely leverage technology to enhance our speed and want to integrate it with our service.

Andy Barish, Analyst

Very helpful. Appreciate it.

Operator, Operator

We'll go next up to John Ivankoe of JPMorgan.

John Ivankoe, Analyst

250 Texas Roadhouses over the next 10 years round numbers, I suppose. But is your site profile changing? Are you seeing new areas where Texas Roadhouse can be successful, maybe even closer to some of the major cities that may come at a higher cost but maybe also much higher sales, just how the overall site profile is emerging or evolving for the next chapter?

Keith Humpich, Interim CFO

Yes, I would say we'll probably stay true to our philosophy of focusing on the suburbs. However, we do have a restaurant in New Rochelle, New York, that we've been considering. We're starting to explore urban areas or locations with higher foot traffic. We are expanding a bit and have seen success in some smaller communities or areas with lower populations where we can establish a presence. We have a broad vision and are examining every possibility. As a company of our size and with our objectives, we need to remain consistent, but we also need to experiment with new options that could benefit us. For Bubba's and Jaggers, we're likely expanding and looking at locations that could support all three brands. Our real estate team understands our goals with all three brands. We have broadened our criteria for potential locations and are eager to see how these new ventures perform.

John Ivankoe, Analyst

That's great. Thank you. And secondly, and related, I suppose on development, are there still significant bump-out opportunities for the chain, or have you done basically what you can do at this point? You've mentioned relocations; how significant of an opportunity is relocations for the Texas Roadhouse brand?

Keith Humpich, Interim CFO

We like them; they have proven out pretty well. I would say that over the last five years, we probably have a dozen, and everyone of them has proven to see a real bump in sales. That's exciting. As people turn out on their 20-year lease, that's when we start looking at what is our opportunity to reinvest or to maybe relocate if the energy moved or some. That's a smart strategy from a business standpoint. And as far as bumped out, Michael, I think has a couple of stats on that.

Michael Bailen, Head of Investor Relations

Yes, John, I believe there are still opportunities for bump outs, and each year new restaurants become potential candidates for us. These could be ones that have increased their sales enough or have been operating long enough. For 2023, I wouldn't be surprised if we bump out 10 to 12 restaurants, and we have over 20 more already in the pipeline for 2024 and beyond. Some may require more legal work to obtain the necessary approvals, but we certainly have a strong interest from many restaurants, along with new ones qualifying each year for consideration.

John Ivankoe, Analyst

Thank you.

Operator, Operator

Thank you. Thank you. We'll go next now to Jon Tower of Citigroup.

Jon Tower, Analyst

Great. Thanks for taking the question, and I’ll try and make a quick. In previous quarters, you talked about a nice little mix up in the menu. This quarter looks like mix was flat. I’m kind of curious to get your perspective; are you just not seeing as much trade up on the menu? Is there anything else going on perhaps in the fourth quarter?

Michael Bailen, Head of Investor Relations

Hey, John, it's Michael. Yes, it’s an interesting question or one that we've been looking at. I'd say, so far this year, we're seeing this tremendous traffic growth. But you are right, we are seeing a little bit of negative mix coming in. What we don't know is we certainly lapped the move up to a higher check that our guests have chosen to do. Even with this little bit of negative mix that we're now seeing, we're still well above where we were pre-pandemic. We're still looking at and trying to determine what is driving a little bit of negative entree mix that we're seeing right now because we're not seeing it in appetizers. We're not seeing it in other add-ons; we're not seeing it in soft beverages. We're seeing a little bit in that entree. It could be some of our customers trading down a little bit, but honestly, it could also be somebody trading up to us who now sees the relative value of a Texas Roadhouse compared to going to a fast casual restaurant for a very similar price to be seated and waited upon. So maybe some of those people are now coming in and driving some of this traffic growth. They are coming in at some of our lower price points on the menu. It’s something we're watching, but it's unique over the last handful of weeks, we're seeing it just a little bit in the entree category but not in the rest of the menu. We are still seeing a little bit on the alcohol mix, but we were already seeing that, that maybe people moving from alcohol to soft beverages because we are seeing that soft beverage mix move up a little bit.

Jon Tower, Analyst

Got it. I appreciate that color. And then just lastly for me, I think you tapped in on this maybe earlier in the call, but new sort of productivity of that Roadhouse has been phenomenal. I think it's up – the average weekly sales of 8% versus the comp store base in 2022. Maybe you answered this earlier in the form of building bigger stores. Is there anything else going on that would be driving that acceleration you're seeing in new store productivity versus the past?

Michael Bailen, Head of Investor Relations

Yes, it's Michael. I can't think of anything that would be causing that. Gina, is there anything you would add?

Regina Tobin, President

Not, no, not nothing I can think of.

Jon Tower, Analyst

All right. Thank you.

Operator, Operator

Thank you. We'll go next now to Brian Vaccaro of Raymond James.

Brian Vaccaro, Analyst

Hi, thanks. Good evening. Just two quick ones. First, on labor, Gina, where is hourly turnover sort of trending over the last few quarters? Can you just ballpark that for us? And maybe give us some perspective on how that compares to pre-COVID levels?

Regina Tobin, President

Yes, sure. I will tell you that we are seeing the turnover number going down consistently over quarter-over-quarter. We are seeing more application flow, which is good for us. As we, like I said before, it's the quality of people that really makes a difference. Once we get those quality of people in with the experience, we can keep them longer, and that really helps with that turnover piece. We continue to see it go down, which is really promising.

Michael Bailen, Head of Investor Relations

Yes, Brian, this is Michael. I can provide some numbers related to that. Every company may calculate turnover differently. Our figure, which we evaluate over the last 12 months, is currently in the high 120s. In the middle of 2022, we were in the mid-130s. We've definitely seen a decrease, and I would say pre-pandemic, our range was probably around 105 to 110. We still have a lot of room for improvement, but we are making progress.

Brian Vaccaro, Analyst

Okay, great. That's helpful. And then just last one on just sort of near-term store margin expectations and just sort of in the spirit of getting everyone on the same page in an environment where sales are so strong in the first quarter, it can be a little disorienting. I guess could you provide any guardrails on first-quarter store margin expectation? Is there a historical perspective, maybe versus Q4? I think it's usually up about 200 bps. Is that reasonable, or maybe there's something in the current environment where that wouldn't be the case this year?

Michael Bailen, Head of Investor Relations

Yes. Hey, Brian, it’s Michael. I’m not going to too deep into that one. But I don't think what you spelled out is certainly possible that our margin percents are typically at their highest in Q1 and Q2, because our sales volumes are typically at their highest. So yeah, what you're talking about, something of that magnitude could be the case. I'm not going to say whether it's a 200 basis point move or not, but we would expect to see some higher margins in the first half of the year, just as we saw higher margins in the first half of last year. We've said there's a potential to see some overall margin improvement year-over-year, so you would kind of need something like that to happen.

Brian Vaccaro, Analyst

Okay. All right. Fair enough. Thank you very much.

Operator, Operator

Thank you. And our final question will come from Nick Setyan at Wedbush.

Nick Setyan, Analyst

Thank you. Just a couple of questions for me. I just want to walk through maybe just the current dynamic in Q4 and perhaps in Q1. If we assume similar commodity inflation in Q1 as we signed Q4, that's off of the lower base in Q1 of 2022. So presumably, sequentially, the cost percentage should be down from Q4 to Q1. Is that fair?

Keith Humpich, Interim CFO

From Q4 to Q1? I can see it being fairly similar. Whether it's up or down again, it depends on where within our numbers, but they probably are going to be in the same ballpark as each other, given the numbers that we've called out and where our costs or underlying cost structures are.

Nick Setyan, Analyst

Okay, fair enough. And then just remind us historically, in terms of seasonality, what March looks like in terms of average sales versus January and February?

Keith Humpich, Interim CFO

Yeah, March tends to be a very strong month for us. If we were to go back and maybe look at 2019, give me a second to pull that up, January period wanting to were both around $105,000 in weekly sales, and our March period were $110,000, $111,000 in weekly sales. We do tend to see a little bit of an increase in that March period.

Nick Setyan, Analyst

Great. Thank you very much.

Jerry Morgan, Chief Executive Officer

Thank you very much. I just want to say 30 years ago, tomorrow, we opened our very first Texas Roadhouse, and I couldn't be more excited and proud of what this company has accomplished as we're over 700 restaurants and three concepts. We appreciate everyone's support and partnership throughout this journey, but it's very exciting to see what this company has accomplished. I couldn't be more proud to celebrate with all of our folks here in Louisville tomorrow and our partners when we have our conference in April. So thank you all for your support and partnership. We will continue to perform at a high level.

Operator, Operator

Thank you, Mr. Morgan. Ladies and gentlemen, that will conclude today's Texas Roadhouse fourth quarter earnings conference call. Again, I'd like to thank you all so much for joining us, and wish you all a great evening. Thank you very much.