Amid Inflation and a Potential Recession, the Steakhouse Will Fight and Earn Every Customer, CEO Says.
Texas Roadhouse has begun to observe what no amount of survey data or industry synopsis could reveal—a view of what “normal” might actually look like on the backside of the pandemic. In the second quarter, which ended June 28, the steakhouse’s historical seasonal sales trends returned, which, for all its upward mobility and recovery the past two years, hasn’t happened until now. The result was a slight decline in year-over-year traffic as Texas Roadhouse’s increase in dine-in guest counts was offset by a decrease in to-go customers.
CEO Jerry Morgan said Q2 needs to be looked at through a lens of what’s to come, and how the landscape adjusted. It’s not, he said, a sign overall demand for the brand has changed. “Rather,” Morgan explained, “it appears that more people are getting back to their normal routines when it comes to dining habits, work schedules, and vacations.”
And based on what Texas Roadhouse recorded in the first four weeks of Q3, it’s a trend with legs.
Restaurants in Q2 (corporate) averaged weekly sales of $135,552, of which 13.1 percent were to-go. This time last year, the figures were $126,442 and 16.9 percent, respectively.
Dine-in guest counts at comparable stores remain above both 2021 and 2019 levels. In the week before COVID arrived, Texas Roadhouse generated $113,777, with to-go accounting for $8,741.
Essentially, Texas Roadhouse is doing more business within its four walls than pre-virus days, but with off-premises business (no delivery) sitting in the $17,800 range, per store—more than double prior levels.
This isn’t a fresh take for Texas Roadhouse, or the restaurant category from a higher view. In-store visits coupled with digital and takeout gains has been the story from the latter months of 2020 forward. But it’s starting to settle.
“While our to-go percentage declined throughout the quarter,” CFO Tonya Robinson said, “we are comfortable knowing that part of this decline was driven by a year-over-year increase in the number of guests dining in our restaurant.”
Texas Roadhouse’s revenues in Q2 bumped 14 percent, year-over-year, to $1.025 billion—the first time the chain has crossed $1 billion for a quarter in its history. Year-to-date, Texas Roadhouse is at $2.013 billion, which is 18.4 percent higher that 2021's comp. For perspective, the chain generated $898,788 and $1.699 billion in the same 2021 stretches.
The Q2 lift was primarily driven by store week growth of 6.4 percent and an increase in average-unit volume of 7.4 percent. Texas Roadhouse’s AUVs in 2021 were $6.364 million, well ahead of $4.649 in 2020 and $5.555 million in 2019. Going back, AUVs were $5.209 million, $4.973 million, and $4.805 million in 2018, 2017, and 2016, respectively.
For Q2, same-store sales increased 7.4 percent thanks to average check growth of 8.4 percent (more on this later) and a guest traffic decline of 0.8 percent. Dining room traffic, however, was 3.8 percent higher. The check growth included positive mix of 1 percent due to year-over-year improvement and the percentage of customers choosing dine-in (ordering drinks helped), as well as all guests continuing to dial up higher-priced entrees.
By month, comps grew 8.7, 9.6, and 5.2 percent across April, May, and June. And to Morgan’s point, for the first four weeks of Q3, they’re tracking 3.9 percent compared to the same period in 2021.
Texas Roadhouse’s comp percentages softened in June and July. Again, it’s a function of the guest count trends the brand was lacking from last year—a thought supported by Texas Roadhouse’s three-year same-store sales trends, which increased at a rate of about 30 percent throughout Q2 in July.
In sum, seasonal trends have returned to the restaurant industry. At the end of July, for instance, Texas Roadhouse generally gears up for people to shift routines as they prepare to go back to school. It’s doing so again.
“Are we completely back to normal? I wouldn’t say that,” Morgan said. “But it will be interesting to see as we go back to the school year this year with … I think most everybody 100 percent back in classroom, and will the consumers’ routines get back to more of a normal trend?”
“So it is to be determined, I guess, at this time,” he added. “But I do know that typically you see a softening of sales in August, September, October a little bit because of the school transition.”
Texas Roadhouse’s same-store sales rose 21.3 percent versus 2019 this time last year (80.2 percent above 2020’s downturn).
“I think the big number for the average weekly sales [this was $126,442 in Q2 2021] tells us a lot,” he said. “More importantly, as there’s a huge demand, we just got to live up to the expectation.”
Becoming an even better chain
Speaking to Morgan’s latter point, Texas Roadhouse continues to work on its to-go systems. At this stage, it’s a solid bet the off-premises trend-line will stick far higher than 2019 and never slide all the way back.
Texas Roadhouse’s U.S. openings this year thus far (eight company stores), were built with a similar number of seats as old builds, but with more storage and cooler space in the kitchen, as well as a dedicated to-go area. So while some brands are slimming footprints, Texas Roadhouse is actually getting bigger.
Morgan said the majority of future openings will be larger buildings. “This will better support the volumes and the mix of business that we expect going forward,” he said. “While the added square footage is pushing development costs higher, our returns remain comfortably above our target due to the strong sales of these restaurants.”
All summer, Texas Roadhouse worked on what it’s calling, “Mission Statement University.” It’s rolled out an online ordering switchboard system that helps integrate dining room orders or to-go orders, whether it’s a walk-in, a phone or an online purchase. The process provides a smoother transition into the kitchen.
“We believe that this software and the education of our operators will allow us with confidence to be able to take more orders in every 15 minutes segment,” Morgan said.
Texas Roadhouse also continues to evolve units, namely with pickup windows in select stores. The brand can text guests and let them know their food is ready, either for pickup inside, curbside, or if they walk to pull up to one of the drive-up windows.
“Mission Statement University” has been going on for about the last eight weeks. Texas Roadhouse deployed a “product coach team” and “service experts” into the field.
“The host area is one of the significant changes that we made, more of what we’re doing is the flow of our To-Go food to get to the packers, where they pack that food up so that we can become more accurate and make sure that you know it’s critical that when that guest gets home, they have everything that they expect or wanted,” Morgan said.
Meanwhile, inside stores, the chain’s “Roadhouse Pay,” where customers can check out at the table through Ziosk’s Cloud Commerce program and hardware, “Ziosk Mini,” has spread to more than 300 stores. At those units, there’s been an 82 percent usage in the concept. It’s helping restaurants turn tables quicker. In early pilots of the device, which is a portrait version of Ziosk’s tabletop tablet, some venues reported adoption rates as high as 95 percent. Of those, 47 percent were NFC transactions as guests used either tap to pay with mobile wallet or an NFC enabled credit card.
Texas Roadhouse’s “Digital Kitchen,” or new kitchen display system, is live at a new store in Shakopee, Minnesota, and a conversion in Austin, Texas. Morgan said the feedback has been “very positive,” from food quality to kicking times to no lost tickets and easier-to-train employees.
“There is definitely some demand for the Digital Kitchen. We also, again, as we talked about the online ordering switchboard, that we’re out there training in the restaurants right now, we have all of our market partners coming to town next week, and we’ll be doing a training session on that,” Morgan said. “We want to be able to execute To-Go not only for our guests, but we want to have tools that are available to our operators that not only give them confidence to take more orders, but to execute at a high level. So, anytime we can use technology to enhance the guest experience.”
The state of the consumer
Morgan was also asked by investors how today’s inflationary climate could affect the brand’s trajectory. According to a June study from Revenue Management Solutions, consumer perception of restaurant inflation stabilized at 68 percent and perception of grocery inflation dropped for the first time since RMS started tracking the metric.
Seventy-eight percent of respondents said they felt grocery prices were higher in Q2, compared to 83 percent in Q1. In truth, food-at-home and food-away-from home prices remain at all-time highs.
When asked why they were getting less value from restaurants, 73 percent pointed to higher prices; 45 percent cited portion size (shrinkflation); and 13 percent lamented poor service, which was up from 8 percent in Q1.
This particular data set is something Morgan is running a neon highlighter through.
To date, he said, Texas Roadhouse has not seen any sign of guest pushback or negative mix from price increases the brand took over the last 12 months. There’s been about 7.3 percent pricing in the menu throughout Q3. “This menu price acceptance by the guest is important, because our value proposition has been and always will be one of our key differentiators,” he said. “So, we expect to be cautious when it comes to menu pricing, especially at a time when the consumer is feeling inflationary pressures.”
Morgan added the brand is “fully aware” discretionary spending is being impacted by higher prices overall. It’s a world Texas Roadhouse knows how to thrive in, however.
RMS found plenty of evidence of broader dynamics, with 45 percent of people managing restaurant spend “trading out” (ordering less often) and the percentages of those trading down growing.
Morgan said this generally doesn’t dent Texas Roadhouse like it might some others. The reason being it actively avoids those pitfalls mentioned by respondents. “History shows that during times like these, Texas Roadhouse’s incredible value positions us to come through this period with increased guest satisfaction, and a larger and more loyal following,” Morgan said.
Simply, Texas Roadhouse won’t cut back on quality or quantity, or staffing for that matter.
The last time the brand navigated a recession, Morgan was a market partner running a dozen restaurants in Texas. He heard the same message from the top he’s now cascading down to operators—stay true to the made from scratch, heaping sides, and friendly service that’s part of the chain’s DNA.
It’s what Texas Roadhouse “was born to do,” he said.
“That is to provide every guest who walks through our door with the best value, the best plate of food, the friendliest place, and an experience that they will feel good about,” Morgan said. “And that’s when you really have to earn their business—when things are tough. Because when the money’s tight, they’re really thinking about where to spend their money.”
For Texas Roadhouse, it won’t be a race to the bottom to lure consumers with deals and price points. How the brand’s core guest measures value, Morgan said, isn’t always based on what they pay.
“We really have to over deliver on the experience so that it’s worth it to them,” he said. “And I think our strategy will always be to exceed our guests' expectations. … We’ll just continue to do the things that we do and try to over deliver on the promise. But you know I don’t want to get into any kind of shrinkage or reduction of our plate.” Texas Roadhouse does have value dinners embedded into its menu, as it always is. If need be, it can push those harder, Morgan said.
“We will fight and we will earn the business from our consumer,” he said.
Robinson added, the last time Texas Roadhouse faced a recession, it saw some of “that trading into our restaurants from the higher-end guests maybe who was used to paying more of a higher PPA.”
“And I think when they tried us, they realized how good the food was, and they didn’t leave,” she said. “And that really is what helped us with that 10-year traffic growth trend that we had. And so, we still believe that is possible and that happens.”
In regard to employees, Texas Roadhouse’s turnover levels are walking back to pre-COVID marks. The hourly number had crept to 140 percent or so during the pandemic. It’s now closer to 130, high 120 percent.
“On the management side of things, you know you continue to see improvement there to returning I think we’ve actually have gotten back to pre-COVID levels, from a manager turnover perspective,” she said. “And most of that isn’t at the MP level. Usually that we’re seeing that more at that service manager, kitchen manager level.”
“With our turnover lowering that means that our people are getting more experience,” Morgan added. “So they’re able to do more, which is great.”
In Q2, restaurant margin as a percentage of total sales was 16.6 percent, down 116 basis points year-over-year. Restaurant margin dollars per store week were about $22,400.
Food and beverage costs as a percentage of total sales chimed in at 34.1 percent for Q2, up 98 basis points over 2021. Commodity inflation of 11.8 percent was the primary driver of the increase, although better than Texas Roadhouse expected, Robinson said, due to lower beef prices later in the quarter. Texas Roadhouse’s now expects full-year commodity inflation of about 12 percent, with roughly 75 and 30 percent of its commodity basket secured with fixed prices for the third and fourth quarters, respectively.
Labor as a percentage of total sales in Q2 increased 43 basis points to 32.7 percent versus Q2 2021, while labor dollars per store week hiked to 8.7 percent. This increase was driven by wage and other labor inflation of 7.7 percent and growth in hours of 2.3 percent.