Texas Roadhouse, Inc. (NASDAQ:TXRH) Q2 2023 Earnings Call Transcript

Texas Roadhouse, Inc. (NASDAQ:TXRH) Q2 2023 Earnings Call Transcript July 27, 2023

Texas Roadhouse, Inc. misses on earnings expectations. Reported EPS is $1.07 EPS, expectations were $1.2.

Operator: Good evening and welcome to the Texas Roadhouse Second 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. [Operator instructions] I would now like to introduce Michael Bailen, Head of Investor Relations for Texas Roadhouse. You may begin.

Michael Bailen: Thank you, Emma. And good evening. By now, you should have access to our earnings release for the second quarter ended June 27, 2023. It may also be found on our website at texasroadhouse.com in the Investors section. I would like to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our earnings release and our recent filings with the SEC. These documents provide a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements. In addition, we may refer to non-GAAP measures.

If applicable, reconciliations of the non-GAAP measures to the GAAP information can be found in our earnings release. On the call with me today is Jerry Morgan, Chief Executive Officer of Texas Roadhouse; and Chris Monroe, our newly appointed Chief Financial Officer. Following the prepared remarks, we will be available to answer your questions. In order to accommodate everyone that would like to ask a question, we kindly ask analysts to please limit yourself to one question. Now, I’d like to turn the call over to Jerry.

Jerry Morgan: Thanks, Michael and good evening, everyone. Before we begin our formal remarks, I want to welcome Chris Monroe to Texas Roadhouse. I am thrilled to have Chris join the Texas Roadhouse family, and I look forward to working closely with him to make us bigger, faster and stronger. I am confident that Chris is going to add value to our leadership team, our finance department and our company. I also want to thank Keith Humpich and our amazing financial team for stepping up and ensuring that we did not miss a beat over the last six months. Moving on to our quarterly results. We are pleased with our strong sales and profit growth in the second quarter. Our sales momentum carried over from the first quarter as we averaged nearly $147,000 in weekly sales with comparable sales up over 9%.

There is no doubt that our guests continue to support our commitment to serving made from scratch food in a fun and friendly atmosphere. On the cost side, commodities have performed largely in line with our expectations, and beef remains the primary driver of inflation. On the labor front, we remain committed to ensuring we are properly staffed to provide a legendary experience for every guest. We are encouraged by our outlook for the remainder of the year as we continue to expect strong margin dollar growth, which is central to how we run our business. We will soon begin the normal process with our operators to determine the level of menu pricing to take in October. As is typical for us, our pricing decisions will focus on maintaining our value proposition while also looking to offset the impact of wage inflation, including any state-mandated wage increases.

On the development front, we opened two company-owned Texas Roadhouses and one Bubba’s 33 during the second quarter. In addition, our franchise partners opened three restaurants, including two international locations. For the full year, we expect to open as many as 28 company-owned Texas Roadhouse and Bubba’s 33 restaurants as well as three Jaggers. At this time, all remaining restaurants in the class of 2023 are under construction. Lastly, we expect our franchise partners to open as many as 13 international and domestic restaurants, including 3 Jaggers. Last week, I attended the opening of our first Jaggers franchise restaurant in Jacksonville, North Carolina. It was great to see the passion that our franchise partner has for the brand. And we look forward to seeing how they will build upon our foundation.

Finally, we continue to reinvest in the business through our new store pipeline, maintenance of our existing restaurant base and technology initiatives. We believe our capital investments will enable future growth and contribute to improved operating results. With a healthy balance sheet and an expectation of continued growth in cash flow, we will continue to focus on long-term, sustainable growth, which has enabled us to generate consistent total returns for our shareholders throughout our history. So Chris, you have been on the team for a month, mostly training in our restaurants, can you share your initial thoughts on what you have experienced?

Chris Monroe: Thanks, Jerry. I couldn’t be more excited about joining the company and the opportunities ahead of us. I have been well aware of and impressed by the Texas Roadhouse leadership team and the brand for quite some time. As Jerry mentioned, most of my time so far has been spent in a restaurant learning about our operations. After working alongside several of my fellow roadies and witnessing firsthand the commitment and discipline it takes to deliver on the promise of legendary food and legendary service. I now have an even greater appreciation for the brand and the passion of our people. I’m looking forward to bringing my experience to the company and helping to build upon its success for many years to come. And now Michael will provide the financial update.

Michael Bailen: Thanks, Chris. For the second quarter of 2023, revenue grew 14.3%, driven by an 8.7% increase an average unit volume and 5.6% store week growth. Restaurant margin dollars grew 8.3% to $182.8 million, while earnings per share increased 14.7% to $1.22 per diluted share. As Jerry mentioned, our stores averaged nearly $147,000 in weekly sales in the second quarter and to-go represented approximately $18,500 or 12.6% of the total weekly sales. The to-go sales were especially encouraging, given this was the first quarter since the reopening of our dining rooms that average weekly to-go sales dollars increased on a year-over-year basis. Comparable sales increased 9.1% in the second quarter, driven by 4.7% traffic growth and a 4.4% increase in average check.

By month, comparable sales grew 8.7%, 8.8% and 9.7% for our April, May and June periods respectively. And for the first four weeks of the third quarter, weekly sales averaged over $140,000 with comparable sales of 10.7%. I will point out that the four week comp number benefited by approximately 1.4% from the timing of the July 4 holiday. For the second quarter, restaurant margin dollars increased to nearly $23,000 per store week. Restaurant margin as a percentage of total sales decreased 88 basis points to 15.7%. Second quarter margins were negatively impacted by approximately 35 basis points from onetime adjustments, most of which I will detail in a moment. Food and beverage costs as a percentage of total sales were 34.5% for the second quarter.

This was 37 basis points higher than 2022 of driven by 6% commodity inflation. Overall, commodity costs were in line with our expectations for the first half of the year. With approximately 75% of the overall basket locked for Q3 and approximately 35% locked for Q4, we now expect full year commodity inflation to be on the higher end of our full year guidance range of 5% to 6%. Labor as a percentage of total sales, increased 90 basis points to 33.6% as compared to the second quarter of 2022. Labor dollars per store week increased 11.3% primarily due to wage and other labor inflation of 7% and growth in hours of 3.5%. Labor growth was also negatively impacted by of the $2.7 million net impact of unfavorable claims experience related to group insurance and workers’ comp.

This net impact includes $1.8 million of additional claims expense this year and the overlapping of a $0.8 million favorable adjustment in the prior year. Similar to commodities, we expect the level of labor inflation to moderate as we move through the year. That said, we have seen marginally more wage pressure in the first half of the year than we originally contemplated. As such, we have updated our full year 2023 guidance for wage and other labor inflation to between 6% and 7% of with current trends pointing towards the midpoint of that range. Other operating costs were 14.7% of sales, which was 29 basis points lower as compared to the second quarter of 2022. The year-over-year benefit of sales leverage was partially offset by the negative impact of a $1.6 million adjustment to our quarterly reserve for general liability insurance.

Moving below restaurant margin, G&A dollars grew year-over-year by 3.6% and came in at 4.4% of revenue. The primary driver of the $1.8 million year-over-year increase with higher compensation expense. Our effective tax rate for the quarter was 12.7% and we now expect a full year 2023 income tax rate of between 13% and 14%. Lastly, is with regards to cash flow, we ended the second quarter with $107 million of cash. Cash flow from operations was $99 million. This was more than offset by is of capital expenditures, $37 million of dividend payments and $23 million of share repurchases. We are increasing our expectation for full year 2023 capital expenditures to approximately $300 million. This increase is driven by several factors including the cost of new locations currently under construction and a higher than originally forecasted reinvestment at existing restaurants.

Now I will turn the call back over to Jerry, for final comments.

Jerry Morgan: Thanks, Michael. In a few months, we will start our annual fall tour, which is one of my favorite times each year. During the six-week tour, our senior leadership team visits with every managing partner to gather feedback and to hear what is top of mind for them. This is a great opportunity for us to listen and learn, how we can better serve and support our managing partners. I have no doubt that our operators will have some ideas to drive our business forward and enable us to continue generating strong shareholder value. That concludes our prepared remarks. Operator, please open the line for questions.

Q&A Session

Operator: Thank you. [Operator instructions] Your first question comes from the line of Brian Bittner with Oppenheimer. Your line is open. Mr. Bittner, your line is open.

Brian Bittner: Sorry, can you hear me?

Michael Bailen: Yes. Hello.

Brian Bittner: Sorry about that, guys. I wanted to ask a question about your sales trends. Your third quarter is obviously off to a fabulous start. Your headline same-store sales up over 10%, when we look back to last year, your comparisons got a lot more difficult in August and September versus July by around 700 basis points. And the question is, should we take that into account when modeling the rest of the quarter? I just kind of want to get, is all on the same page? Or should we focus on the fact that you’re average weekly sales are in that $140,000 range, which if we carry that forward, that suggests a continuation of very strong headline comps for the rest of the quarter.

Michael Bailen: Yes. Brian is Michael. Thanks for the question. I do think — I mean you are correct that our year-over-year trends did pick up — so — but I do think — the more important thing is to look at where we’re currently trending this year and how normal seasonality plays out year-over-year. So I think we are lined up for continued strong sales growth, and — but I will leave you all and others to determine what those copper cents might be, but I do think we with of seasonality is back in our business.

Brian Bittner: Okay, I’ll stick to one question. Thanks.

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

David Tarantino: Hi, good afternoon. Congratulations on the sales strength. My question relates to the margin outlook. As you think about the second half of the year, given the inflation outlook you just shared. I guess what’s your thoughts on your ability to grow restaurant margin percentage? I know you mentioned you’re set up to grow the margin dollars per week. But I guess, how are you thinking about the percentage on a year-over-year basis when you think about the next few quarters?

Michael Bailen: Yes, David its Michael I don’t think our — the way we’re looking at it is changed much with the guidance that we have out there. On the cost of sales side, it would imply that our commodity inflation would be at the lower end of our 5% to 6% range in Q3 and then below the low end of the range in Q4. And with the pricing that we have, that would probably imply that cost of sales is for the most part, fairly flat in Q3, and we should be able to get some leverage in the fourth quarter. That’s what the math would say. Rent and other operating, I would expect under the current trends that we see more of the same of what we saw in Q1 and Q2 of being able to get some leverage on that line. And labor is probably that one that still remains a headwind for us.

We’ll leave that to you, again, you all for modeling purposes. But certainly, third quarter would — could see that as a headwind and — and then maybe flattening out in the fourth quarter. So really, that leaves a lot of the potential restaurant margin expansion for Q4, that’s what our guidance would imply.

David Tarantino: Got it. And then, I guess, I wanted to revisit as a follow-up. You’ve talked about 17% to 18% of the long-term target. Clearly, this year, it looks like you’re going to be well below that. I guess, what’s your updated thoughts on how you get to 17% to 18%? Is it just a matter of the commodity cycle needing to go your way? Or is there some strategy or initiatives you have that are going to get you there regardless of the commodity cycle?

Jerry Morgan: Well, I mean, the commodity cycle is going to continue to be our challenge. We’re going to continue to focus on attacking the top-line sales and grow in the restaurant margin dollars. And then we will continue to see what we need to do to try to get back there. We do. It was going to take a little time for us to accomplish that. But we are — and as we adjust to the labor and to the commodity knowing that or expecting one day that the beef will start to slow down a little bit and give us a chance to catch up. But we really do believe that, that is a spot we can achieve. We’re just waiting for a few things to turn our way to help us there.

David Tarantino: Great. Thank you very much.

Jerry Morgan: Thank you. I appreciate the shout out, too.

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

Peter Saleh: Great. Thanks, And congrats, Chris on the new role. I just wanted to ask on the consumer overall. I think in the past, maybe a quarter or two. We were you were talking about seeing trade up into your brand or maybe even some trade down. Can you give us a little bit of color on what you’re seeing today, is there any change in behavior on the menu? What are you seeing on the value of entrée mix is that continue to tick up — any thoughts there would be helpful.

Michael Bailen: Yes, it’s Michael. I’d say, it’s really been a lot of the same of what we’ve seen. I mean, we continue to see strong consumer demand to come to Texas Roadhouse. The mix kind of trends have continued, where we’re seeing some alcohol negative mix and the rest is coming from the entree category. And with the strong guest counts that we’re seeing, it would appear to us that we are seeing people trading into Texas Roadhouse, but the value side of the menu, there could be certainly some people who are doing some check management as well and are trading down our menu, but we feel very good about the value proposition that we’re offering and continue to see very strong trends within our restaurants.

Peter Saleh: Great. And then just on the labor side. I know, it’s a modest increase in your outlook in terms of inflation for the year. Can you just elaborate a little bit on what changed versus your prior guidance? What are you seeing on the field that made you feel like you need to tick it up just slightly?

Michael Bailen: Yes, it is a combination of the wage inflation, maybe just being a little bit stronger in the first and second quarter, which then compounds on itself throughout the year that adds a little bit to that overall wage pressure. And then the strong top line that we have delivered certainly has seen us growing our hours, which is a direct component of the wage and other inflation, but the payroll taxes that didn’t come with the higher wages and the more hours are the other component of that wage and other, and we’ve seen that tick up a little bit. So those two things combined just need is enough of where we felt the guidance did be updated.

Peter Saleh: Thank you very much.

Operator: Your next question comes from the line of Chris O’Cull with Stifel. Your line is open.

Unidentified Analyst: Thanks. Hey guys, this is Patrick on for Chris. Jerry I believe the company has historically targeted labor hour growth that’s roughly 50% to 55% of traffic growth. And it looks like this quarter remained quite a bit above that. So I’m just curious if you’re looking at ways to improve labor productivity? And if so, what actions do you believe you can take that can improve the flow through on your sales growth?

Jerry Morgan: Yes. Thanks, Patrick. I believe that, obviously, as we focus on our top line sales, and Michael and I were doing some reviewing, there is definitely an uptick in hours in the front of the house, in the back of the house. And I believe some of the hours that we might be seeing in our key employee side is probably purposely to give our managers a little quality of life. So I think there is some investment on our side in the labor pool to maybe try to identify ways to have quality of life, too. So that is an investment. But I believe to be able to attack our execution at the highest level right now, that’s costing us a few extra hours to be able to execute there with the escalated volume on the top line. But I feel real comfortable overall with where we’re going. I think we can improve, and we’ll continue to look at ways to get better at that.

Michael Bailen: Yes. Patrick, I would just add on to that, that again, I do think that historical algorithm is still maybe not at play that we are rebuilding from being understaffed last year. And so our labor hours are growing as we feel very good about our staffing now and those hours that were growing are just not exactly correlated right now to see the traffic growth we’re seeing and probably is seeing those hours growth even if traffic have been a little bit higher or lower than what we reported.

Unidentified Analyst: Got you. That’s helpful. Thanks.

Michael Bailen: Thank you.

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

Jeff Farmer: Thank you. Looks like the Texas Roadhouse concept put up a 9.4% comp with Bubba’s a little bit lower at 3.9%. But can you help us understand what’s going on there, is that traffic, menu pricing mix? What’s driving that pretty healthy spread between the core Roadhouse concept in Bubba’s as it relates to same-store sales?

Jerry Morgan: Yes. I mean, certainly, Roadhouse is leading the charge on the comp growth that we are seeing simply because of the size of the company. Yes. I mean, we feel very good with what we are seeing at Bubba’s overall, and the menu pricing can be a little bit different at the different — at each concept and the traffic trends can be a little bit different as well. But again, our new Bubba’s are opening well, and we’re feeling very good overall about their sales performance.

Jeff Farmer: Okay. And then just on — just one quick follow-up. The effect of menu pricing of the core Roadhouse in Q3, what are you thinking that’s going to be right now?

Jerry Morgan: Yes. 5.1% will be our third quarter pricing.

Jeff Farmer: Okay. Thank you.

Operator: Your next question comes from the line of Jake Bartlett with Truist Securities. Your line is open.

Jake Bartlett: Great. Thanks for taking the question. My question is about G&A. And trying to kind of just understand the correct run rate of G&A for the third and the fourth quarter. I believe that the second quarter would have had the conference costs in it, and maybe you correct me I’m wrong, but I think you — overall was much lower than we were expecting with — the Street was expecting, maybe that conference was less expensive. But any detail on how much of the conference was and then the right run rate for the next couple of quarters.

Jerry Morgan: Yes. I mean I would say we’re not going to get into the exact numbers on the conference expense. It was probably a little bit less than what we expected it to be, and that is one of the components that maybe helped G&A in the second quarter coming a little bit better than what we may have discussed on the on the last call and certainly our — we’re doing the best we can of managing those costs and making sure when we’re spending G&A dollars, is for something important. And to your question about looking through the remainder of the year, I think maybe starting with Q1 of this year, which was just under $50 million. And if you back out the onetime charge that we had talked about is about $2.4 million, that gets you to about $47.5 million.

That’s probably the best way we can give you is a starting point to look at where G&A may be in the third and fourth quarters of this year. Maybe we see a little bit of growth on top of that through the remainder of the year and depending upon how the year continues to progress. There can always be the need to take some more compensation expense. But I think starting with your Q1 of this year adjusted number is your starting point for looking at that G&A.

Jake Bartlett: Thank you.

Operator: Your next question comes from the line of Brian Harbor with Morgan Stanley. Your line is open.

Brian Harbor: Yes. Thanks. Good evening. I was just curious about the capital budget actually. How much of that was from new locations is some of that related more to 2024 units? And then, what is that reinvestment focused on? And I know that you’ve also talked about perhaps some technology initiatives. I don’t know if that’s part of it. Could you just elaborate on the capital budget?

Jerry Morgan: Yes. I mean, is a mixture of all of those things that you commented around. It’s the cost of the new buildings that we’re building this year, we’re seeing slightly higher cost in what we maybe originally forecasted for some of those, and that will factor into — as we start building later this year, is some of our 2024 class openings, we’ll see some expense from that. So that is a component. The technology initiatives as we continue to look at digital kitchens that can be a small component of it. But also really that maintenance CapEx has been elevated. And that goes to the better conditions that we’re seeing out there, the supply chain opening up, our ability to get more projects Jon will probably be. We’re targeting 20 bump outs this year, which we haven’t been able to do for quite a few years and getting some projects done in our restaurants, building out, doing some kitchen remodels and cooler additions giving these restaurants some more capacity to handle these high volumes, all great shareholder — great for my total return standpoint.

So we are excited that we are going to be able to invest this money and keep these restaurants fresh and ready to serve more guests.

Brian Harbor: Thank you.

Operator: Your next question comes from the line of Sara Senatore with Bank of America. Your line is open.

Sara Senatore: Thank you. Just a quick housekeeping and then a question, please, so, just to confirm, in terms of the amount of price you had on the second quarter, is it thought is 5.6%. I’m just trying to sort of think through the…

Jerry Morgan: That’s correct.

Sara Senatore: Negative. Okay. Thank you. So you had a little bit of negative mix in the second quarter, which we haven’t seen — we haven’t seen for a while now. And I was just curious, is that what you talked about with the value and the less attached? Or is there is something else going on there?

Jerry Morgan: Well, we actually haven’t seen that negative mix for a little while. I think we had about of 80 basis points of negative mix in the first quarter. It did step-up a little bit here in the second quarter to that 120 basis points of negative mix, is behind us. And the majority of that is coming from alcohol. So yes, we are seeing a little bit of negative mix. It does seem that it’s not necessarily because of the menu pricing we’ve taken given is alcohol and the remainder of it is in that entree category, which is part of why we think that some of our new guest traffic is coming from people trading up to us, but hitting the value side of the menu.

Sara Senatore: Got it. Thank you. And then the question was to follow up on the labor. You said you expect labor flatten out in 4Q. I think that’s sort of a wage rate comment. But as you talk about the idea of needing to staff up, at what point do the restaurants look fully staffed. I think like off-premise mix has been fairly stable. So from that perspective, your on-premise dining is more consistent of in the last couple of quarters. So when do you get to a point where the restaurants are fully staffed such that you could get back to that historical algorithm?

Jerry Morgan: Yes. So I do think we feel very good about our staffing levels right now, and it’s a matter of lapping the understaffing from last year. And throughout last year, we talked about each quarter, we felt better and better sequentially about those staffing levels. So theoretically, the hours growth should come down as we move through the year, and we talked about the level of wage inflation should come down as we move through the year because again, a lot of the wage pressure we’re feeling is from increases that you saw last year that you have to lap for a full 12 months. So the expectation is that you see the level of hours growth moderate as we continue to move through the year because — it should not be — require as many hours to get us to that level that we’re at right now.

Sara Senatore: So you sort of by the end of last year, had kind of been approaching being fully staffed is there of how to think about it?

Jerry Morgan: Yes, end of last year, early this year, we did have a little bit of — with the weather in late December last year, a little bit of a step back in late December. But other than that, yes, we were starting to feel pretty good about our staffing levels as we were exiting last year and entering this year.

Sara Senatore: Right. Thank you very much. Very helpful.

Operator: Your next question comes from the line of Andy Barish with Jefferies. Your line is open.

Andy Barish: Hi, guys. Good evening. Is there seems to be a growing view that beef may be higher for longer. I’m wondering, Jerry if you’ve kind of thought about the kind of the contingency plan, if that is the case, do you go to menu breast — do you use price a little bit more, is there something else we should be thinking about as we start to size of 2024, 205 is?

Jerry Morgan: Yes. Thanks, Andy. Good to hear it from you, but I would tell you, we’ll consider some of those things. Obviously, we still want to be very — we don’t know what’s going to happen in beef, obviously, as it continues. There is a lot of chatter out there. We will continue to monitor it. It’s a big part of our menu. It is the cost of doing business right now. We do need to be very cautious and careful on the pricing to make sure that we are continuing to drive our value component and then deliver on the experience. And I think in the long run, we will still win with that strategy. But – we will always look at several factors of what we could do. The question is will we do that. But we are going to continue to focus on the long-term run of taking great care of our guests and our business.

Andy Barish: Got you. Makes sense. Thank you.

Jerry Morgan: Thank you.

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

Brian Vaccaro: Hi, thanks and good evening. Is of a have asked, but I just was going to ask on the other operating cost line. It looks like cost per week is still running up in the 6s, which is an improvement versus closer to 10% in the first quarter, but is still up in the 6s. And I guess, could you remind us what percentage of that basket of cost is fixed versus variable these days? And are there any categories worth highlighting where there is some relief on the horizon? Or would you expect a pretty similar level of inflation in the second half as you’ve been recently seeing?

Michael Bailen: Hey Brian, it’s Michael. Yes, I’m not sure I have my fingertips what is fixed versus variable within there. And you could argue most things — that you could can go away. But I’ll tell you, I think we saw just what we expected to happen, happen that that level of operating dollars per store week did slow, as you said, from around 10% to a little over 6%. And I think the expectation is you probably see that continued slowdown of that rate of increase, it would on a year-over-year basis. And some of that is coming from the traffic growth and the menu pricing that we have, but it’s really that a lot of the items of that basket which were a lot of services being provided went up dramatically last year, now you’re seeing not a lot of — additional upward pressure on them.

They’ve just flattened out at these levels, and you’re able to get the leverage from the higher volumes right now. So other operating is a line all else being equal, that we should continue to hopefully see some leverage on as we move through the remainder of the year.

Brian Vaccaro: All right. Thanks very much. I’ll pass along.

Operator: Your next question comes from the line of Gregory Francfort with Guggenheim. Your line is open.

Gregory Francfort: Hey. Thanks for the question. Maybe just going back to the alcohol mix. I think you guys last year, actually is alcohol mix above where it was before COVID and a lot of your peers were down 1-point or 2 in mix. Do you have a sense of why that was and maybe just some of this is you’re giving that back versus some of your peers that maybe lost it over the last couple of years instead?

Jerry Morgan: Yes. I mean, don’t have the exact numbers right in front of me, but I do think over the last — of last year, you have what I would call that of consumer who was happy to be back out there who had some extra money in their pocket, whether that have been from stimulus or just not having other places to spend it. And they were maybe getting a drink that they were not historically getting or getting a second drink. And now, you’re maybe seeing a little bit more of a return to normalcy as far as what people or ordering from that alcohol standpoint. And again, obviously, with our to-go business being a bigger component of the overall sales versus pre-pandemic or alcohol sales are going to be a little bit lower. But in the dining rooms, I think we feel very good about where we are now. But yes, you are right, we are lapping probably that before consumer from last year.

Gregory Francfort: Thanks, Jerry. Appreciate it.

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

Dennis Geiger: Thank you. Could you bit a little bit more about the food inflation breakdown, perhaps? Any updates on the breakout between beef and non-beef inflation expected for the year? And then Jerry is gave some comments on of — is of is kind of been mentioned already, is there anything else to share kind of on beef consideration is looking ahead, seeing any kind of softness in demand out there at retail, et cetera, that might impact how you think about 2024? Thank you.

Michael Bailen: Hey Dennis. This is Michael. I’ll start and if Jerry wants to add anything, he can. I think — again, I’ll go back to our prepared remarks and we said the majority, if not all of the inflation that we expect to feel this year is coming from beef. So we have other items in the basket, pork, chicken that we would expect to be overall deflationary on a full year basis that are offsetting maybe still some pressure in some grocery items and some of the produce items. But for the full year, beef is driving the overall inflation. And I think that goes to that conversation about what the future might hold. Yes, is going — has the potential to be a pressure point again next year, it’s too soon to know what that means.

But we have another half of our basket of that could potentially offset some of that pressure. So, that’s why we aren’t going to overreact until we — at any point, but we don’t have a full picture yet of what 2024 might bring that might offset some of the continued beef supply constraints.

Dennis Geiger: Thanks, Michael. Appreciate it.

Operator: Your next question comes from the line of Jeffrey Bernstein with Barclays. Your line is open.

Anisha Datt: Hi, this is Anisha Datt on for Jeffrey Bernstein. I wanted to ask of you to give some more color on recent trends at Bubba’s relative to the Texas Roadhouse brand, do they move in tandem? Or is one better positioned in a selling macro? And perhaps if you could provide an update on your confidence in Bubba’s new unit openings showing the ultimate slowdown of Texas Roadhouse?

Jerry Morgan: You start.

Michael Bailen: Yes. Thanks for the question. I mean I think — from a standpoint of openings, again, we feel very good about our opportunity to get some Bubba’s open this year, we’ve talked about this year, probably see five Bubba’s openings. And in the next couple of years, want to be in that five to seven Bubba’s opening is with a maybe next goal after that getting closer to 10 openings. Again, the slowdown in our number of openings for this year has nothing to do from anything on our side of our excitement for any of our concepts. It is more of an issue of things that are out of our control, getting permanent power to a restaurant site and the timing of work getting done. So we are excited about getting all — getting restaurants open from all of our concepts at this point.

And our overall trends in the different concepts are also very strong. We think we are set up for great success across all the brands. And certainly, Bubba’s with less of a focus on stakes is not feeling the level of inflation that a Roadhouse is. So everyone has different things going on that makes us feel very good about what the future holds for each concept.

Anisha Datt: Awesome. Thank you.

Operator: Your next question comes from the line of Jon Tower with Citigroup. Your line is open.

Jon Tower: Great. Thanks. Just, I guess, circling back of the pricing thoughts again. I’m just curious if you can elaborate on what sort of tools the managing partners have at their stores in terms of thinking about overall pricing in general. Are they considering what — obviously, the market competitive set is doing, but also what’s happening at the grocery store when it comes to beef prices and then how they weave that into labor in their distinct market? Like can you help us just walk through how they build up to a labor expectation an inflation expectation for the year to come and then, therefore, the decision on pricing.

Jerry Morgan: Yes. So our pricing process is very similar. We ask the managing partners for inputs on what’s going on in their local area from a competition standpoint, from a retail grocery and they share that with us. And then we obviously talk to the multi-units that kind of share a bigger picture of what might be going on in their — in their markets. Obviously, state by state, we all — on our side, we know a lot more of the details overall on some mandates. So it’s an extensive process that we go through to try to get it right for every store, but also by market and by region and company. And so it’s a complicated formula for sure. But there is a lot of thought put into it on every level so that with the inputs from our operators and from the knowledge that we have from the company stand.

We try to make the absolute best decision literally by store, by market, by state and for the company and the overall number rolls up to it. But those conversations that we have with our partners are valuable in the decision-making process.

Jon Tower: Got it. Thank you. And then just, I guess, Chris you’re coming in with a fresh set of eyes to the company. Obviously, it’s been a very successful company for a very long time. But I’m curious to get your perspective, perhaps with this fresh set of eyes, do you see anything that you feel like could be a new opportunity for the brand or perhaps areas where you believe there could be improvement on the business?

Chris Monroe: Well, thank you, John, for the question. And these are — these are early days, I must say. And so it’s probably not time for me to opine on any sort of changes that we might consider. But there is a great tradition here. There is a very successful brand that’s nationwide and it’s doing very well. And of course, we’ll be reviewing a number of things, along with Jerry and the rest of the team here. But pretty early for me to opine on some sort of change process.

Jon Tower: Got it. Thanks for taking the questions.

Operator: Your next question comes from the line of Andrew Strelzik with BMO. Your line is open.

Andrew Strelzik: Hey, thanks for taking the question. I just wanted to ask about the unit openings for the rest of the year. How should we think about the cadence between 3Q and 4Q? And do you think there is risk that some of those get pushed further into next year. And then to the extent that some have gotten pushed or more due, do we think about next year is a makeup year? Or do you think you’ll stick to kind of your normal framework of openings and the entire kind of time line gets pushed?

Jerry Morgan: Thanks, Andrew, it’s Jerry. Like I said, we have every store that is scheduled to open this year under construction. We do know there is a couple in December that a little concerned about. We have had some utility issues, but we’re monitoring it closely. We’re pretty confident we’ll be at that number are extremely close, and if not, then it will push into next year and go from there. But our pipeline for next year will be very consistent to what we’ve done in the past. We have a strong pipeline. We will continue to stay focused on the growth and development of all three brands pretty much as we have in the past. And really focused on doing it right and doing it well as we go through there. So still a little early in the year to be concerned yet, but — they’re under construction. We are moving forward, and we’ll keep monitoring throughout the year and give you an update on the next go round.

Andrew Strelzik: Great. I look forward to it. Thanks.

Jerry Morgan: Thank you.

Operator: Your next question comes from the line of Elliott Simon with Evercore. Your line is open.

Elliott Simon: Hey, guys. Thanks for the question. On the prepared remarks, you mentioned pricing decisions are based on wages as well as the value proposition. Clearly, the wage side is given you a green light to take some price in October. But how do you characterize the value proposition today is that different like your price gaps? The stake peers as well as other casual dining peers outside of the state segment, which may not have faced as much inflation. When you say they are narrower, the same or wider than historical levels?

Jerry Morgan: Yes, that’s a great question, Elliot. Thank you. I believe that we focus on — we watch it very closely, and to see knowing where our gap is at. I think it has changed a little bit. It probably has gotten a little tighter. But I think in general, we try to focus on what we’re doing and what’s right for our business, and others have to make their own decisions. So if we look at labor or look at any other costs that are part of our decision making, we try to encompass all of the information and really try to make a decision that we feel is right for our business going forward to protect our value and to protect our menu that’s built in with that value to our consumer. And to really protect those top line sales. So there is a lot of work put into it. And we’ve been conservative. We probably will stay in that direction, but we also have proven if we need to, we can use that leverage.

Elliott Simon: Great. Thanks. And just a quick follow-up, I mean, as you talked about protecting the top line. I’m curious, Jerry, if you can kind of boil down the secret sauce of one or two things that really differentiate yourself is competitors, is what is the big value proposition, the service you provide or something else?

Jerry Morgan: Well, I think it’s all of it, to be honest with you. I think we work really, really hard to present an environment are made from scratch food or handmade, all of that adds value. When you walk into that restaurant and you smell that fresh baked bread and you know that we’re cooking that stake to order for you, and we’ve got this friendly individually. We’re still hungry to serve people at an extremely high-level. And when I look at the lines that are waiting at our restaurants, it tells me that we need to continue to focus on doing the things that we do. And they’re loving, the food, they’re loving the service. We need to be able to execute to get them in the restaurant, provide them with an experience thank them for coming to our business because it’s still important for us to serve them at a high-level.

And we’re trying to earn their business every single day. Somebody woke up this morning thinking about where they were going to dinner, and I want them thinking about Texas Roadhouse, Bubba’s 33 and Jaggers all day long to choose to walk through our doors. So we’re hungry for it. Sorry dude got me excited.

Elliott Simon: No, no, no. I really appreciate it. Thanks, guys and best of luck.

Jerry Morgan: Thank you very much.

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

Jim Sanderson: Yes. Thank you for the question. Just wanted to follow-up a little bit more on capital expenditures, I think that went up to $300 million from $265 million, if I’m not mistaken. Just wondering, if that elevated level is causing fundamental or permanent changes in returns on store development or if that’s causing you to rethink the cadence of development over the next three to four quarters?

Jerry Morgan: Yes. Hey Jim thanks for the question. No, it really is not changing any of our thought. I mean there is a piece of it that is related to new store development. But our internal models are still generating returns above our target levels. So we still feel very comfortable with the ability to open restaurants and have no plans to slow that down at this time.

Jim Sanderson: All right. Thank you.

Operator: Your next question comes from the line of Jon Park with Wells Fargo. Your line is open.

Jerry Morgan: Hey, Jon.

Jon Park: Hey. Good evening, guys. Just on the quarter-to-date acceleration, you spoke to the calendar benefit and is potentially getting a little bit better. But I guess is there anything else to point to that’s kind of driving that acceleration you’re seeing?

Jerry Morgan: I would say the only other thing is the continued improvement in our staffing levels and our ability to serve the demand that is out there. So our restaurants are open. They are well staffed, and there is strong demand to come to them, and it’s really as simple as that.

Jon Park: Got it. Thanks a lot, guys.

Jerry Morgan: Thank you very much.

Operator: There are no further questions at this time. I will now turn the call back over to Jerry Morgan.

Jerry Morgan: Thank you all very much for your time today, and we wish you the best of the weeks coming to finish your summer, and thank you.

Operator: This concludes today’s conference call. Thank you for attending. You may…