Earnings Call Transcript
Texas Roadhouse, Inc. (TXRH)
Earnings Call Transcript - TXRH Q4 2021
Operator, Operator
Good evening, and welcome to the Texas Roadhouse Fourth 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 Brian, the operator. I would now like to introduce Tonya Robinson, the Chief Financial Officer of Texas Roadhouse. You may begin your conference.
Tonya Robinson, CFO
Thank you, Brian, and good evening everyone. By now, you should have access to our earnings release for the fourth quarter ended December 28th, 2021; it may also be found on our website at texasroadhouse.com in the Investors section. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our earnings release and our recent filings with the SEC. These documents provide a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements, including factors related to the COVID-19 pandemic. In addition, we may refer to non-GAAP measures. If applicable, reconciliations of the non-GAAP measures to the GAAP information can be found in our earnings release. On the call with me today is Jerry Morgan, Chief Executive Officer of Texas Roadhouse. Following our remarks, we will open the call for questions. Now, I'd like to turn the call over to Jerry.
Jerry Morgan, CEO
Thanks, Tonya, and good evening. We are pleased to finish 2021 with strong revenue and earnings growth versus both the prior year and 2019. Our operators continue to do a great job building sales, providing a legendary experience to our guests, and holding on to margin dollars in the face of high commodity costs. We ended the year with comp sales growth of 18.3% compared to 2019 and that positive momentum has continued into the new year with comp sales up 20.6% for the first seven weeks of this year, compared to 2021. We are excited about 2022 and the opportunities ahead of us, including another year of top-line growth, driven by our new store openings, franchise acquisitions and sales growth at our existing restaurants. We will continue to deal with many of the same issues that we faced last year, including commodity inflation, staffing challenges and supply shortages. However, in my experience as an operator, each year in the restaurant industry comes with its own set of challenges and opportunities. As usual, we will focus on what we can control and make the best decisions for the long-term benefit of our restaurants and our brands. We will stick to the fundamentals at Texas Roadhouse, we will continue to build operational excellence and name recognition at Bubba's 33 and we will refine our growth plan for Jaggers. We will continue to focus on our Roadies by ensuring that we are hiring, training and treating them right. And we will continue to embrace technology and use it to enhance the guest experience, while still emphasizing the importance of face-to-face interaction between our restaurant staff and our guests. We are finalizing plans for a mid-April menu price increase of approximately 3%. At this time, we have not seen a negative reaction from the price increases that we took in May and November of 2021. All indications are that our guests continue to view Texas Roadhouse as a great value because of the prices that we charge and the quality of food and service that we provide. However, we will never take our guests for granted and know that we must earn their business each and every day. On the development front, during the fourth quarter despite equipment supply challenges, we were able to open all 11 restaurants that were scheduled to open. These openings included nine Texas Roadhouse, one Bubba's 33 and one Jaggers. We remain very pleased with how our new restaurants are performing. To put that into perspective, for the first seven weeks of 2022, the 10 Texas Roadhouse and Bubba's 33 restaurants that opened in the fourth quarter averaged over $142,000 in weekly sales. For 2022, we are targeting 25 company-owned restaurants, including as many as four Bubba's 33 openings. We also expect our franchise partners to open as many as five Texas Roadhouse in 2022. The reduction in the number of expected openings in 2022 is due to continued delays in the initial permitting and building approval process. With this step taking longer than normal, we are pushing several second half 2022 openings into 2023. Going forward, we still believe that building new restaurants and taking care of our existing restaurants are the best uses of cash. At the same time, our strong balance sheet and operating cash flow allows us to also create value for our shareholders and our employees through dividends, share repurchases and franchise acquisitions. Finally, I want to thank all of our Roadies, our restaurant managers and everyone at our support center for their tremendous efforts in 2021. I also want to emphasize to each and every one of you that we will remain on offense in 2022. That means keeping our restaurants staffed with the best talent, serving smoking hot entrees and heaping sides and ice cold beverages. As your partner and head coach, I promise you that this is how we will continue our winning ways. Now Tonya will provide a financial update.
Tonya Robinson, CFO
Thanks, Jerry. As I begin, please note that most of the comparisons in my prepared remarks are versus 2019 in order to provide a clear understanding of our underlying performance. Please refer to our earnings release for a more detailed discussion of results versus 2020. Results versus 2019, unless otherwise noted, are unadjusted and include the negative impact of lapping an extra week in December of that year. For the fourth quarter of 2021, we reported diluted earnings per share of $0.76, up 24.1%, driven by strong revenue and restaurant-level profit growth along with the lower income tax rate. Revenue was up $170.3 million, driven by comparable restaurant sales growth of 21.2%, including 8.1% traffic growth and an average check growth of 13.1%. Check growth includes positive mix of 5.3% as guests have moved toward our higher-priced entrees and increased their frequency of purchasing appetizers and other add-on items. Traffic growth continues to be driven by strong-to-good sales, while guest counts in the dining room were down slightly. For the fourth quarter, our restaurants averaged approximately $17,500 per week in to-go sales, which represented 14.4% of total sales. Average weekly sales were relatively consistent throughout the quarter at nearly $122,000, compared to $101,000 in Q4 2019. By month, comparable sales grew 23.6%, 24.7% and 16.6% for our October, November and December periods respectively. We estimate that sales growth for December and the fourth quarter were negatively impacted by 7.1% and 2.8%, respectively, due to Christmas shifting from a Wednesday in 2019 to a Saturday in 2021. As Jerry mentioned, our sales momentum continued into the first seven weeks of 2022 with comparable sales up 20.6% as compared to the same period in 2021. During the seven weeks, average weekly sales were over $127,000 with to-go sales of just over $20,000 per store or 15.9% of total sales. For the fourth quarter, restaurant margin as a percentage of total sales was 15.8%, down 124 basis points as compared to the fourth quarter of 2019. We also focus on restaurant margin dollars per store week which were up 11.9% to over $19,300 as compared to Q4 2019. Food and beverage costs as a percentage of total sales were 35% for the fourth quarter. This was 262 basis points higher than 2019, driven by 17.6% commodity inflation, compared to the fourth quarter of 2020, which was in line with our forecast for high-teens inflation. Our beef outlook for the first half of 2022 has improved slightly, but we still expect overall commodity costs to remain elevated with approximately 50% of our commodity basket locked for the first half of 2022; we now expect approximately 17% inflation over that time period. For the back half of 2022, we have only a small portion of our basket locked, which makes it challenging to provide meaningful inflation guidance for this time period. However, based on our internal projections which we continuously review and update, we expect inflation in the back half of the year will moderate mostly due to beef and other prices that we will be lapping. Overall, this would result in 12% to 14% inflation for full year 2022. But keep in mind that even if inflation moderates in the back half of the year, the underlying dollar costs for beef and other high-use items will likely still be higher, both year-over-year and sequentially. Labor as a percentage of total sales improved 42 basis points to 32.6%, as compared to Q4 2019 even as labor dollars per store week increased 19.2%. This increase in labor dollars per store week was driven by wage and other labor inflation of 15.4% and growth in hours of 3.6%. The remaining increase of 0.2% was primarily due to a $0.8 million adjustment to our quarterly reserve for workers' comp. For 2022, we are forecasting wage and other labor inflation of approximately 7%, including the impact of enhanced benefits that we are offering to our previous expectation for wage and other labor inflation driven by wage trends as our managers continue to invest in their people. One thing to note here: we expect inflation will be above this level in the first quarter as wage rates did not begin to significantly increase until the second quarter of 2021. Other operating costs were 14.7% of sales, which was 84 basis points lower compared to Q4 2019. Approximately 10 basis points of the decrease relates to the benefit of a $0.8 million adjustment to our quarterly reserve for general liability insurance. Most of the remaining benefit comes from sales leverage. Moving to our restaurant margin. G&A came in at 4.8% of revenue, a $4.5 million increase versus 2019. Our effective tax rate for the quarter was 13.5%. Our tax rate continues to see a higher than normal benefit from FICA tip credits driven by the increase in our sales and a higher benefit related to our share-based compensation expense. For 2022, we expect an income tax rate of approximately 15%, assuming no changes to the federal tax code are enacted. With regards to cash flow, we ended the fourth quarter with $336 million of cash, which is down $101 million from the end of the third quarter. Cash flow from operations was $120 million and was more than offset by $62 million of capital expenditures, $28 million of dividend payments, $37 million of share repurchases and $90 million of debt repayment. We expect full year 2022 capital expenditures will be approximately $230 million, with the $30 million year-over-year increase primarily driven by the planned relocation of six Texas Roadhouse restaurants in 2022. I will also mention on the first day of fiscal 2022, we spent $27 million on the acquisition of seven domestic franchise restaurants. These restaurants are included in our expectation of 6.5% store week growth. Lastly, as announced today in our earnings release, our Board of Directors has authorized a 15% increase in our quarterly dividend payment, increasing it to $0.46 per share from $0.40 per share in 2021. Like Jerry, I want to thank everyone for their commitment to Texas Roadhouse and for their hard work, which has helped us achieve so much in 2021 and sets us up for a legendary 2022. Operator, please open the line for questions.
Operator, Operator
Your first question comes from the line of Brian Bittner with Oppenheimer. Your line is open.
Brian Bittner, Analyst
Thank you. Tonya, a question on your same-store sales trends and just how to think about the underlying trend, given the choppiness and comparisons. You obviously gave us average weekly sales that are trending, I think, you said a little above $127,000. But I'm assuming that maybe that includes a relatively depressed January. So is there any way to think about AWS more recently relative to that $127,000, just so we can understand how the underlying business is performing now that the Omicron headwinds seem to have subsided for the industry? And I have a follow-up.
Tonya Robinson, CFO
Sure, Brian. When you think about the first seven weeks and that $127,000, there is a bit of volatility throughout. You really have a couple of really big sales days with New Year's and Valentine's Day, which is really big for us and was really big for us this year. Those high sales days kind of offset a bit of the weather that you would think of as you consider that $127,000, because there was some weather negativity in those numbers. We were definitely closed some days during those first seven weeks. So it's hard to really peel it apart and give you specifics on what that means to that $127,000. But it isn’t hot; it may be slightly down a little bit, but that $127,000 I think is a pretty good number to think about as we continue to head throughout the quarter. And you're absolutely right. We are going to be lapping some pretty tough comparisons starting in March. March of 2021 was when we started seeing our average weekly sales climb above $120,000. So that's when comparisons will get a little bit tougher.
Brian Bittner, Analyst
Okay. And just a follow-up on the COGS inflation guidance, it implies that the second half is up 7% to 11% despite rolling over the double-digit inflation from the second half of '21. Is there some recent dynamic that you can talk to that's impacting that second half of the year outlook? And can you also help us understand what the pricing factor for the model will be once you do take this mid-April price increase of, I think you said 3%, so we can think about how that ultimately flows through versus inflation?
Tonya Robinson, CFO
Yeah, sure. The commodity issue in the back half of the year is primarily that we don't have a lot of costs locked up, particularly on beef. We're a little more locked on chicken in the back half of the year, not on pork. That makes it really tough to determine where those costs might land. We're looking at historical trends a bit, guidance on what the cattle supply could be, slaughter rates, and all of those things are coming into play. But it is really tough to make that call on what we think that number could be, and so we felt it was important to provide some guidance and transparency. That's where we landed for now. We'll continue to learn more about the back half of the year and hopefully, as we get closer, we see maybe a little more softness and can bring those numbers down. On the pricing side with that 3% in early April: we'll have 5.9% in Q1, close to 6%, and the 1.75% that we have from last year rolls off the year so it will be 7.2% in Q2—that's the 3% plus prior pricing—and then the 4.2% we took in November stays consistent in Q3. If there's no additional pricing in Q4, EPS is right around 4% with the roll off of Q4 last year and the 3% increase. So that's what we think the pricing cadence will look like for the year.
Brian Bittner, Analyst
Thank you so much.
Operator, Operator
Your next question is from the line of David Tarantino with Baird. Your line is open.
David Tarantino, Analyst
Hi, good afternoon. Tonya, I have a question on all the pieces and how they fit together to frame up the margin outlook. With the current level of pricing that you're planning and all of the cost inflation factors you mentioned, where do you think restaurant margin could shake out for the year?
Tonya Robinson, CFO
Yeah, that's a tough line. I don't think that it's impossible to get into that 17% to 18% range this year given the level of commodity inflation as it stands today, but it's going to be challenging. We'll continue to keep an eye on that. I think we can get some leverage on other operating expenses and labor could be a bit benign or neutral on a full-year basis perhaps, depending on how hours continue to grow. But with the 7% wage and other inflation in there, that's kind of where we land. A lot of it's going to depend, David, on traffic and where traffic lands after March. We know we're getting a big pop on comps here for the first eight weeks of the year and that's certainly going to set us up well for strong revenue growth for the year, but a lot will depend on where margin lands, how much traffic we get, and how commodity inflation shakes out in the back half of the year.
David Tarantino, Analyst
Got it. I guess just as a quick follow-up. If you extrapolate the run rate you're seeing in the business recently to the rest of the year, is it possible that you'd be able to hold margin flat for the year? Or are you thinking it's going to be down given all the factors that play?
Tonya Robinson, CFO
I think you could probably build a scenario where it's flat. Again, it depends on traffic and where that lands and what we're able to do. So you could build a scenario. We feel good about sales for the full year and we feel like we're holding on to to-go sales levels, and that's been promising. A lot will come down to how we're growing traffic in the dining room. Being able to staff so we don't see any impact from closed sections will definitely be a big benefit. So a lot depends on how that shapes up, but overall we feel confident about revenue growth and being able to get it down to the restaurant margin line.
David Tarantino, Analyst
Great. And then last quick one on this: when does that start to normalize, do you think?
Tonya Robinson, CFO
I think it starts coming down a bit after these first two months of the year. It will start moderating. Our estimation is it probably gets to flat by mid-year and then it's kind of back to normal where we would see it slightly positive, but for the most part neutral in the back half of the year.
David Tarantino, Analyst
Great. Thank you very much.
Operator, Operator
Your next question is from the line of Dennis Geiger with UBS. Your line is open.
Dennis Geiger, Analyst
Great. Thanks for the question. Tonya or Jerry, wanted to ask a little bit more about the longer-term restaurant margin algorithm, that 17% to 18% target. Has anything changed there with respect to how you're thinking about that algorithm and any thoughts with respect to how quickly you can get there? Tonya, you said kind of base case but not to expect that this year. Any thoughts looking ahead to that or if anything has changed?
Jerry Morgan, CEO
Yeah. Our target is 17% to 18%. I think that's a very healthy spot for us. Looking at the last two quarters, we have learned how to manage with higher labor and commodity inflation. As we continue to hold sales in both to-go and dining room and have fewer exclusions as more people return to work, that will be important for us. I believe we've learned how to manage it and how to properly run it, and we will continue to improve. I feel really good about the direction we're going. If prices hold or drop a little, that would be very good for us. The exclusions have been a big part of the challenge; as staffing improves and exclusions decline, that will help. Of course, there is still uncertainty around COVID, but right now it looks very positive going into the rest of the year.
Dennis Geiger, Analyst
Appreciate that, Jerry. Just a quick follow-up: as we think about the staffing environment and the operating environment, how did that impact sales and margins in the fourth quarter and so far this year? How much of an impact has that had on the business? Where are you right now in terms of staffing, how much more do you need, and what kind of benefit might that provide going forward as you staff up?
Tonya Robinson, CFO
It's really hard to quantify precisely, but approximately 10% to 15% of our shifts were impacted by areas being closed in the dining room and having staffing challenges. If you extrapolate that across the quarter, I think it's as much as 2% in same-store sales that we probably lost due to those challenges across the quarter.
Dennis Geiger, Analyst
Thanks very much.
Operator, Operator
Your next question is from the line of Lauren Silberman with Credit Suisse. Your line is open.
Lauren Silberman, Analyst
Thank you. So regarding commodities, 50% of the food basket is locked in for the first half. Can you remind us how that compares to where you've been historically at this point in the year? And what's your overall sense of what's driving these elevated levels, given the expectation that you really don't expect to see these costs abate in the back half?
Tonya Robinson, CFO
It compares pretty similarly to 2020 as far as the percentage we've locked; they were pretty similar. Coming into the year pre-COVID, we may have been a little more locked, maybe closer to 60% or so. We feel good about 50% in the front half and it's similar to last year. As we think about commodity pressures in the back half, given the uncertainty across the industry with suppliers and packers and what demand and supply will look like, it gets really tough to lock those prices up in the back half at a price you're willing to accept. So we want to wait and see and continue to watch how things play out for the rest of the year on beef and pork.
Lauren Silberman, Analyst
Okay, thanks. And then just a follow-up on the longer-term restaurant margin: AUV is north of 20% above 2019, with more inflation in the model and underlying assumptions suggesting commodity costs on a dollar basis probably hold higher. What do you see as the path to get back to the 17% to 18% restaurant margin? How much is in your control versus the underlying macro environment?
Tonya Robinson, CFO
Commodity inflation is a bit out of our control; these are often cyclical and we expect prices to turn around at some point. On labor, we will continue investing in wages; at some point that moderates. Continuing to drive traffic and be efficient on costs will help; our operators do a great job. It's tougher in this environment and at high volumes because they have to make tradeoffs on operations. There may be some opportunity as things settle that you see more efficiency. There's no silver bullet—it's a combination of continuing to drive sales, control costs, and use technology. As Jerry mentioned in his prepared remarks, technology can improve the experience and let staff focus on service, which can help margins.
Lauren Silberman, Analyst
Thank you very much.
Operator, Operator
Your next question is from the line of Jeffrey Bernstein with Barclays. Your line is open.
Jeff Priester, Analyst
Thanks so much. This is Jeff Priester on for Jeff Bernstein. First, on the Bubba's brand: appreciate the additional color in the press release. How should we think about the long-term potential for this brand in terms of units and annual unit growth? For the past four or five years we've been in roughly 4 to 6 units per year—should we assume that or is there going to be a ramp-up in the coming years?
Jerry Morgan, CEO
I'm really confident; we've learned a lot in the last year. We expect Bubba's to deliver more. While the recent target may have been 4 to 7 units, I expect to ramp up to 7 to 10 and then go from there. We like our building costs, we're confident in our new leader for the concept who reports directly to me. By separating the concepts and having a dedicated VP-level leader focused on Bubba's, we're positioned to grow faster than before. Our sales are fantastic, the food is strong, and the financial model looks good. The future looks very bright for Bubba's 33. We have to get through this year to lay the foundation, but we are ramping up for more expansion.
Jeff Priester, Analyst
Great. And Tonya, on G&A, can you help with directional thoughts in terms of what we should expect, especially considering the cadence?
Tonya Robinson, CFO
As we look at G&A, our philosophy is still similar: we'd like those dollars to grow less than revenue and keep it as a percentage of sales. I'd like to keep it in the 4.5% range, maybe lower, and with high sales volumes we should get more leverage. The cadence across quarters will be a little more consistent. In 2022 we will have our NPD conference coming up in Q2, which we didn't have in Q2 of '21, so that will pop that number up a bit versus last year. Other than that, the growth should be under revenue growth.
Jeff Priester, Analyst
Great. Thanks so much.
Operator, Operator
Your next question is from the line of Chris O'Cull with Stifel. Your line is open.
Chris O'Cull, Analyst
Thanks. Jerry, could you provide an update on learnings from the KDS system test in Minnesota? Also, I know you mentioned testing some new kitchen equipment, perhaps fryers—any interesting opportunities uncovered there?
Jerry Morgan, CEO
Hey, Chris. I will tell you we are learning a lot from the KDS system in Minnesota. The efficiencies we're seeing are revealing things we didn't know prior to implementation. It's allowing us to study functionality and speed of execution more closely. From the KDS standpoint, we're still learning. We will convert an existing store in July to that same setup and continue to learn. Also, tablets continue to grow in popularity, and our Roadhouse Pay capability has gained strong momentum—enhancing the check and change experience. The ability for the guest to pay at the table and leave without waiting is a big win. Other concepts are going in that direction too; we probably should have adopted it sooner. It enhances the guest experience, especially at the end of the meal.
Chris O'Cull, Analyst
That's great. I know you put several marketing initiatives and some product innovation opportunities on hold during recovery. Can you give an update on how you're thinking about those opportunities this year?
Jerry Morgan, CEO
We're continuing to look at line setups and how to be more efficient. If you're referencing food line configurations, we've tested different setups—display kitchen versus straight line—to tighten motion and improve efficiencies. Our biggest work has been integrating a roughly 20% to-go model with a full dining room, improving traffic flow for to-go and dine-in items. That has been the main initiative: how to flow better, whether to-go comes out a side door or the back of the kitchen. Our four prototypes give operators flexibility on where to route to-go. We've also tested a type of drive-up pick-up where guests place orders, sit in the parking lot, and we text them when their food is ready; it's not a drive-through but a drive-up window concept and it has real efficiencies. These initiatives are ongoing. Regarding early-dinner opportunities, we have our early dine program: from opening until just before the dinner rush, we promote 15 items at a better price point. We'll promote that a bit stronger in 2022. Wild West Wednesday will be kicked back up—it's always been a big win for Wednesday evenings. Those initiatives are teed up and ready, but our sales are currently so strong I'm not sure how aggressively we'll push them yet.
Chris O'Cull, Analyst
Great. Thank you, guys.
Jerry Morgan, CEO
Thank you.
Tonya Robinson, CFO
Thanks, Chris.
Operator, Operator
Your next question is from the line of John Glass with Morgan Stanley. Your line is open.
John Glass, Analyst
Thanks very much. First, could you confirm your comment: is the dine-in business back to 2019 levels or about where you said? Where is it relative to 2019 levels, please?
Tonya Robinson, CFO
It is slightly below 2019 levels—just a little bit in Q4. In the first month of the quarter we were close, but then with the Omicron surge we saw a bit of a shift: an uptick in to-go and dining room came back down a little, which continued in January. We've seen it get close and then back off a bit due to those issues. With staffing and things getting back to normal, we expect to continue to push dining room traffic harder this year.
John Glass, Analyst
Following up on staffing: what do you assume labor hours grow in 2022? I know you talked about 7% for wage and other inflation—that was just wage, not hours, right?
Tonya Robinson, CFO
Yes, the 7% is just wage and other inflation. We don't give a specific hours growth number because it's tied to traffic expectations. Hours will grow a little bit and will continue to grow in 2022, dependent on traffic.
John Glass, Analyst
But you are fully excluding exclusions and so on—you're fully staffed now relative to 2019, is that fair?
Tonya Robinson, CFO
I think that's fair generally. We're getting there; it depends week to week. Many stores across the country are fully staffed with no issues; others are still struggling a bit. In Q4 we examined stores to understand dining room sales moderation and saw wait times in restaurants, suggesting staffing was more of the issue. Many operators told us they feel much better about staffing after recent weeks, though some still have work to do.
John Glass, Analyst
Got it. Thank you.
Operator, Operator
Your next question is from the line of Brian Mullan with Deutsche Bank. Your line is open.
Brian Mullan, Analyst
Hey, thank you. On the balance sheet: net cash is still elevated relative to history even with repurchases in the last two quarters, appearing a bit unique after reductions to CapEx and dividends during COVID. Is there anything that would prohibit or make you cautious about stepping up repurchases, perhaps temporarily, rather than permanently?
Tonya Robinson, CFO
No, I don't think there's anything that would make me hesitant. We prioritize franchise acquisition opportunities first; we were in conversations with franchise partners and completed one acquisition at the beginning of the year. Growing restaurants and CapEx spend remain priorities. We're guiding to 25 restaurants this year—though we hoped for more, and our real estate team is working to add openings. I wouldn't be opposed to doing more share repurchases; right now we're focused on dilution and we'll revisit repurchases in the back half of the year.
Brian Mullan, Analyst
Okay, thanks. And a follow-up on Jaggers: you entered your first area development agreement late last year. Are you currently looking for more of those agreements? How much attention or resources are being devoted to Jaggers; where does it sit on the priority list and how are you thinking about that longer-term opportunity?
Jerry Morgan, CEO
We signed two franchise partners last year and are in serious discussions with additional partners. There's clear excitement and enthusiasm for the brand. We're confident in the structure we've built and excited about our partners. We expect to continue to grow Jaggers, learning with our franchise partners as we go. There's momentum and we plan to expand thoughtfully.
Brian Mullan, Analyst
Thank you.
Tonya Robinson, CFO
Thanks.
Operator, Operator
Your next question is from the line of Brett Levy with MKM Partners. Your line is open.
Brett Levy, Analyst
Great, thanks. If we try to delve deeper on margin and cohorts of unit classes: over the last few years are you seeing anything different on restaurant-level margins by class years '18, '19, '20? Anything across different regions? And how are you thinking about total addressable market domestically and total potential number of units?
Tonya Robinson, CFO
There really isn't anything notable by class year from a margin perspective—it's more state-mandated minimum wage increases or tipped wage changes that impact labor costs. Those states can have higher labor percentage and need additional pricing, but we remain careful on pricing. There's not a lot of geographic difference; we have strength across the country with strong sales growth across regions and dayparts. Regarding addressable market, our team continues to explore opportunities: our prototypes and efficiencies allow us to consider both metro and smaller rural communities, which is encouraging for expanding the future growth pipeline.
Jerry Morgan, CEO
Our recent testing and prototypes have impressed us and allow us to look more broadly at real estate, including smaller, more rural communities where we previously might not have gone. That is encouraging for continuing to expand our growth pipeline.
Operator, Operator
Your next question is from the line of Andrew Strelzik with BMO. Your line is open.
Andrew Strelzik, Analyst
Hey, good afternoon. Two items: clarification on the delay in unit openings—does that push out the entire development pipeline into future years or is there eventually a bumper year when things normalize? And on locking in beef prices: is it also the case in the first half where visibility is a bit better that distributors are asking for big premiums? What would need to happen for that premium situation to converge?
Jerry Morgan, CEO
Some delays are due to permitting and approval process timing, which slowed and we believe will correct quickly as processes accelerate again. We are working aggressively to hit our numbers in 2023 and will build timelines assuming some delays. The team is actively working on the pipeline to get back on track.
Tonya Robinson, CFO
On commodities: it's a little unfair to categorize all of what's 'locked' because much of our buying is formula pricing where we know more about short-term pricing. We don't include those short-term protections in 'locked' numbers. Our purchasing team feels good about what they're doing in the short-term and will lock anything that provides benefit. Often the locking is for shorter durations—90 days—rather than six to nine months right now given the uncertainty.
Andrew Strelzik, Analyst
Great. Thank you very much.
Operator, Operator
Your next question is from the line of John Ivankoe with JP Morgan. Your line is open.
John Ivankoe, Analyst
Hi, thank you. Can you explain what's going on with the various steak cuts—Sirloin, Tenderloin, Ribeye, Strip—since they seem to have different trajectories at different times? Is this normal or is there unusual noise in the market? And do you have flexibility on the menu—sizes or featured items—to protect margin while offering value?
Tonya Robinson, CFO
Yes, there is a bit more noise across different cuts than we'd normally expect. I hear more chatter such as 'Ribeye went this way and top sirloin that way.' Some of it seems driven by retail promotions and what grocery stores and big-box retailers are doing with certain cuts. It appears more retail-driven at the moment. Exports haven't been as much of a driver recently in my view. So, it's noisier than normal on the cut side.
Jerry Morgan, CEO
I don't know that we'd change much on the menu. We have a great offering with four sizes on our Sirloin. Ribeye, especially the Bone-in Ribeye, has become extremely popular. The 8-ounce Ribeye has become very popular and we continue to balance big steaks with value offerings. Our 6-ounce and 8-ounce Sirloins and the 8-ounce strip are popular. We might look at sizing, but nothing immediate. We will continue to monitor guest preferences.
John Ivankoe, Analyst
Thanks. A question on acquiring franchisees: the seven-unit acquisition for $27 million—optically that doesn't look like a high number for established restaurants. Anything different or unusual about that market that allowed you to buy at that price? And remind me about the roll-up option in the franchise agreement—do you plan to exercise options and accelerate company ownership of Texas Roadhouse restaurants?
Tonya Robinson, CFO
We do have a roll-up formula in the franchise agreement that was structured historically as a stock deal, but we haven't done those in some time because they're not always great from a tax perspective and holding period. More recently, deals have been cash deals which work well. The seven-store acquisition was a long-time franchise partner and a great portfolio of restaurants. The $27 million was a solid number for the EBITDA and sales profile of those stores. It's been a tough couple of years, but sales have been strong and our franchise partners generally like being part of Texas Roadhouse. We continue to have conversations and structure deals that benefit both parties; some may happen sooner, others later.
John Ivankoe, Analyst
Thank you.
Operator, Operator
Your next question is from the line of Peter Saleh with BTIG. Your line is open.
Peter Saleh, Analyst
Thanks for taking my question. Tonya, you reduced the target for this year by a few units—yet CapEx guidance remained the same. Are you seeing more inflation in build-out costs or are these units simply to be built but not opening in time to count in 2022? Any thoughts around that?
Tonya Robinson, CFO
You're right. Many construction projects will still start in 2022, and we hope many of those restaurants will open early in 2023—much depends on timing. Some stores scheduled to open later in the year might not have had all CapEx items yet, so we still spend that money even if the unit opens in 2023. Relocations (we discussed six this year) are also a piece of the CapEx increase. We're also doing projects to support higher levels of to-go, such as corral conversions in waiting areas and bump-outs to accommodate to-go flow. Those projects contribute to the CapEx number.
Peter Saleh, Analyst
Okay. And lastly, you mentioned some operators are seeing relief in staffing—what are they attributing that improvement to?
Jerry Morgan, CEO
There is more applicant flow, which is great. We've done initiatives in Q3 and Q4 to attract more people. Exclusions have reduced, allowing fuller staffing. Operators are seeing more applicants and more people picking up hours. We're building the bench. Week-to-week some stores are better than others, but the trend is positive. Our weekends are extremely busy and we prefer people to work single focused shifts rather than doubles. We're seeing improvement, but I'd like to be even stronger on staffing to give stores flexibility and fresh legs for busy shifts.
Peter Saleh, Analyst
Thank you very much.
Tonya Robinson, CFO
Thanks, Peter.
Operator, Operator
Your next question is from the line of David Palmer with Evercore ISI. Your line is open.
David Palmer, Analyst
Thanks. I'm thinking about capacity at the restaurant level. The industry is down significantly in traffic, particularly on-premise, but your dining-room traffic is only slightly below 2019 levels and those levels were industry-leading in productivity. How are you thinking about traffic upside from here given that you're already at a high level of productivity? Could the average Texas Roadhouse handle 10% to 15% more visits, especially if to-go mix holds?
Jerry Morgan, CEO
Yes, I do think there's room to grow. Americans want great made-from-scratch food and our offering—fast, fun, friendly—continues to resonate. There are peak hours where we're jammed with long waits, so opportunities exist in early dinner, late-in, and Saturday lunch. We need to help guests navigate times with shorter waits. Technology helps—texting guests with accurate wait times allowed a Valentine's Day guest to show up at the correct time; we met their wait, delivered the food and service, and they had a great experience. So yes, we can deliver more sales and continue to grow.
David Palmer, Analyst
Thanks, Jerry. Regarding your inflation forecast: does the expectation of high-single-digit-ish in the second half assume key inputs remain near today's levels? If supplies ease, would that benefit your forecasting and margins versus current assumptions?
Tonya Robinson, CFO
If supply pressure eases, it would be a benefit. We forecast each line separately, looking at demand and sourcing and build projections about when costs hit the P&L. Transportation and delivery costs factor in too. Right now there's not a lot of motivation to forecast much lower given current observations, but if things ease, it would come through positively in the model.
David Palmer, Analyst
Understood. Thank you.
Tonya Robinson, CFO
Sure.
Operator, Operator
Your next question is from the line of Jared Garber with Goldman Sachs. Your line is open.
Jared Garber, Analyst
Hi. Given very strong average weekly sales levels, can you talk about what you're seeing on a customer basis? Are customers using the channels differently—are they the same customers that dine-in previously? Are you seeing higher off-premise business during the week, or are these new customers who hadn't dined in before? Any color on what's driving and sustaining that high level of volume out the door?
Tonya Robinson, CFO
We're starting to collect more guest data and learning more, but it's still early to draw definitive conclusions. It feels like multiple things are happening: some guests use us for both dine-in and to-go and may be increasing frequency; new guests may try us via to-go. Operators have reported that. To-go seems sticky—above 65% of to-go is through online transactions, which is great. Guests like the convenience and ability to order online and pick up on the way home. We see more to-go in earlier dayparts and early week, but also on weekends as guests balance schedules and sometimes opt for to-go instead of waiting for a table.
Jerry Morgan, CEO
Execution has improved. The convenience and communication improvements—texting guests, walk-up windows, curbside, and better pick-up workflows—have driven the growth. Technology and operational focus have made the experience more convenient for guests, which is a driver of the sticky to-go business.
Jared Garber, Analyst
Good. Thanks for that color.
Jerry Morgan, CEO
Thank you.
Operator, Operator
Your next question comes from the line of Brian Vaccaro with Raymond James. Your line is open.
Brian Vaccaro, Analyst
Thanks, and good evening. I had a phone glitch early, so circling back on quarter-to-date: you mentioned $127,000 for the seven weeks—could you help ballpark what that looks like in January versus more recent weeks? Also remind us of normal seasonality in Q1—how March compares to January?
Jerry Morgan, CEO
March and April are typically higher AWS months for us. May and June are strong around Mother's and Father's Day. Week one of the seven-week period was a bit higher due to New Year's Day effects. Weeks two, three and four tapered off a bit during Omicron and staffing exclusions. Things picked up significantly in week five and Valentine's Day added materially—about $2,000 on top of average weekly sales for that week. So for the seven weeks, the mix of big sales days and some weather-related closures produced the $127,000 average. That gives some color on the cadence; weather and Omicron impacted some mid-weeks.
Brian Vaccaro, Analyst
That's helpful. And on the 'other operating costs' line, inflationary pressure seems to be easing with close to 100 basis points of leverage compared to pre-COVID levels. Can you comment on underlying inflation and moving pieces in that line? With your additional pricing, is it reasonable to assume continued solid leverage through 2022?
Tonya Robinson, CFO
We expect some leverage in other operating costs as dining room becomes a larger piece of sales compared to the pandemic mix that had higher to-go supply costs. Normally we think of a 2% range for inflation in that line; the 3% pricing helps. Utility and bonus dynamics can vary: bonuses for market partners can move with profitability. Overall, there are opportunities to get a bit of leverage on that line in 2022 as sales grow.
Brian Vaccaro, Analyst
All right. Thanks very much. I'll pass it along.
Tonya Robinson, CFO
Thanks, Brian.
Operator, Operator
Your next question comes from the line of James Rutherford with Stephens, Inc. Your line is open.
James Rutherford, Analyst
Hey, good afternoon. Jerry, curious on capacity: have you seen any change to average table turns today versus a couple years ago? Are there things you can do or are working on to improve table turns?
Jerry Morgan, CEO
Table turns have improved a bit with tablets and Roadhouse Pay, which shave minutes off the experience. KDS is still early to assess for a new store, but tablets and pay-at-table have improved speed. We aim for roughly a 55-minute experience—a target we like so guests have a memorable hour. When guests get sat, that experience is pretty consistent. There are a couple initiatives that could shave minutes further, enabling faster turns for guests in a hurry while maintaining quality for those who want the full experience.
James Rutherford, Analyst
Thanks, Jerry. Tonya, one more: were there any one-time COVID-related costs in the fourth quarter—exclusions, higher overtime, or similar—that we should expect to fall off?
Tonya Robinson, CFO
No, nothing significant in the fourth quarter that we would call out as a meaningful one-time item.
James Rutherford, Analyst
Okay, perfect. Thanks so much.
Operator, Operator
There are no further questions at this time. I will now turn the call back over to Tonya Robinson.
Tonya Robinson, CFO
Thanks, Brent. And thanks, everybody, for joining us tonight. It was great to hear from you. If you have any other questions, don't hesitate to reach out. Everybody have a great rest of the week.
Jerry Morgan, CEO
Thank you all very much. Appreciate it.