At Texas Roadhouse, sales keep rising, and so do costs

The chain continued a traffic tear, but rising wages and beef prices dragged down its margins again.
Texas Roadhouse earnings
Same-store sales rose 9% at Texas Roadhouse in the second quarter. | Photo courtesy of Texas Roadhouse

Consumers continue to flock to Texas Roadhouse.

In the second quarter ended June 27, same-store sales at the 661-unit steak chain rose 9% year over year on 4.7% traffic growth. That momentum continued into July, with comps up 10.7% year over year.

It continues a remarkable streak of same-store sales growth at the Louisville, Ky.-based chain. Over the previous four quarters, comps have risen 12.9%, 7.3%, 8.2% and 7.6% at company-owned stores. That includes results from the 41-unit Bubba’s 33 and seven-unit Jaggers brands. 

The secret? There really isn’t one, executives said.

“Our restaurants are open. They are well-staffed, and there's strong demand to come to them,” said Michael Bailen, head of investor relations, during an earnings call Thursday. “It's really as simple as that.”

The bottom line, however, is a bit more complicated. All those workers, and all those steaks, cost money. Labor costs were 7% higher in the period, and hours increased by 3.5%. Commodity inflation was 6%, driven largely by stubborn beef prices. That led to another period of shrinking restaurant-level margins, which fell 88 basis points, to 15.7%. Roadhouse’s margins have decreased every quarter for the past year, even as its total margin dollars grow. 

The chain has a goal of getting those margins up to 17% or 18%, a goal it still believes it can achieve. Standing in its way just happens to be its top-selling item. Widespread drought this summer has shrunk U.S. cattle herds to their lowest levels since 2015, driving beef prices to record highs.

“The commodity cycle is going to continue to be our challenge,” CEO Jerry Morgan said. “[We know that] one day the beef will start to slow down a little bit and give us a chance to catch up. But we really do believe that [17% to 18%] is a spot we can achieve.”

One analyst on the call asked whether Texas Roadhouse could ease its beef costs by broadening its menu or raising its prices more than it already has.

“We will consider some of those things,” Morgan said, though he emphasized that beef is an important part of the chain’s menu. “It is the cost of doing business right now.” For now, commodity prices remain in line with its expectations for the year.

Morgan also said the chain will be cautious with pricing to maintain its value proposition. Its prices in the second quarter were 5.6% higher than a year ago, and it will make another pricing decision in October.

“We will always look at several factors of what we could do,” Morgan said. “The question is, will we do that?”

Another issue is labor. Part of the reason Texas Roadhouse has performed so well is that it is well-staffed, and in fact continues to add more hours even as wages rise. It raised its annual labor cost forecast from 5%-6% inflation to 6%-7%. Another analyst wondered if the chain is looking at ways to boost productivity. 

Morgan said the investment is necessary to meet the high volumes Texas Roadhouse is seeing. “I feel real comfortable overall with where we're going,” he said. “I think we can improve, and we'll continue to look at ways to get better at that.”

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