Strong sales at Texas Roadhouse were tempered by rising costs for the chain's most important menu item: beef.
The Louisville, Ky.-based chain experienced commodity inflation of 13.9% during the third quarter ended Sept. 28, mostly tied to higher beef costs. In response, it raised menu prices 4.2% last week, a hike executives acknowledged is above its typical range.
"We came in a little bit higher just as we were thinking about how wage inflation is going to probably continue to grow, and we were learning more about this commodity inflation and the potential that it could be pretty impactful for a bit of time," said CFO Tonya Robinson during a call with analysts Thursday.
The chain expects commodity inflation in the high teens in the first half of next year and said it's possible that the problem will continue beyond that.
"A lot depends on how some things play out," Robinson said. "Staffing is definitely one of them for supply chain folks, transportation another, and then it’s just the ability to build up some product."
It's also predicting wage and other inflation of 6% in 2022. And labor remains a challenge. While most of its stores are staffed at 2019 levels, it needs more workers to keep up with rising sales.
"We're still hustling to find people," CEO Jerry Morgan said. "I still think there's a long way to go to get enough people out there that could supply all of us with our needs."
Asked whether the price hikes might scare off customers, Morgan said the chain remains committed to giving guests a high-quality experience. It will continue using the same beef supplier it has for 28 years and it will continue to cut those steaks in-house, for instance.
"If we do that, people will be OK with what we have to charge them because of some of the other pressures," he said.
Robinson added that historically the chain hasn't had issues when it takes pricing, "but we're definitely going to be keeping an eye out."
While the chain doesn't expect the hikes to have a negative impact, it warned that commodity inflation will make it harder to keep margins in its target range of 17% to 18% in the short-term.
Restaurant margins in the third quarter, for instance, were 15.7%, an increase of 111 basis points year over year. That number reflects both rising costs and strong sales: Comps at company-operated restaurants rose 22% on a two-year basis; sales at franchised stores were up 20%.
That is partially thanks to the continued strength of its to-go business, which accounted for 15% of sales in the quarter.
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