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Texas Roadhouse’s profits slip on rising labor costs

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Texas Roadhouse’s contrarian tendencies cost the high-flying casual chain during the first quarter, with profits cut by its strategy of stepping up unit-level staffing at a time of soaring labor costs.  

Despite a 5.2% rise in the same-store sales of company-operated restaurants, the company’s net income slipped 7.6%, to $50.4 million. Management attributed the decline primarily to an 8.2% upswing in labor costs, with 3.1 points of that increase coming from the scheduling of more hours, particularly in the back of house. Wages for the period rose by 5.2% over the year-ago level. 

Roadhouse said the extra manpower was needed to handle stores’ rising volumes. Executives noted that stores averaged a 2.6% rise in traffic for the quarter.

But management told investors a quarter ago that it intended to increase its labor spending at a higher rate than traffic growth to deliver a competitive edge in customer service and employee job satisfaction. “We are building in some additional growth in hours above and beyond what traffic growth would maybe generate,” CFO Tonya Robinson said at the time.

President Scott Colosi said in the same mid-February conference call that the chain was purposely overscheduling to lessen the stress on managers and provide all team members with a shot at taking time off. With management, “The No. 1 reason why they leave us is just quality of life,” he said.  

The company’s labor expenses grew at a faster rate for the fourth quarter of 2018 than they did in Q1 of 2019, with an increase of 8.9% in labor dollars spent per store week during the October-through-December period. About 3.2% of that spike came from the scheduling of additional hours, management said in February. 

Net income for that quarter amounted to $30.3 million, a 6% year-over-year increase.

Roadhouse raised menu prices 1.5% at the beginning of the current quarter to offset the impact of higher labor expenses on margins. But “We may or may not be able to hold margins flat as a percentage of sales for the year,” Colosi said Monday afternoon. 

The chain is not the only powerhouse in casual dining to view increased investment in labor as a strategic advantage.  “That’s where I think the winners will be focused,” Gene Lee, CEO of archrival Darden Restaurants, said last September. He indicated at the time that his brands, including LongHorn Steakhouse, intended to step up their investment in labor as well. 

Roadhouse, perennially one of the top performers in casual dining, has proudly refused to follow some of the most pronounced trends in that segment. It has flatly refused, for instance, to consider the addition of delivery service. 

The company’s revenues for Q1 rose 10% to $690.6 million. It operates or franchises 588 restaurants; about 495 of them are corporately run. Included are 25 units of a secondary chain, Bubba’s 33.

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