Q3 2020 Texas Roadhouse Inc Earnings Call
[music].
Good evening and welcome to the Texas Roadhouse third 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.
That's fine if youd like to ask the question. Please I start thinking about why now on your choice on keypad.
Anyone need assistance at any time during the conference. Please press.
I started the ROE I think operator will assist you.
I'd now like to introduce Tonya Robinson, the Chief Financial Officer of Texas Smoke House, you May begin your conference.
Thank you Peter and good morning, Good evening, everyone by now you should have access to our earnings release for the third quarter ended September 29, 2020. It may also be found on our website at <unk> Dot com in the Investor section.
Before we begin our formal remarks I need to remind everyone that part of our discussion today will include forward looking statements.
They are.
They 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 FCC.
These documents provide a more detailed discussion of the relevant factors that could cause actual results to differ materially from these forward looking statements, including tax years related to the 19 outbreak. In addition, we may refer to non-GAAP measures. It's a pluggable reconciliations of the non-GAAP measures to the GAAP information can be found.
In our earnings release.
On the call with me today is Kent, Taylor, founder and Chief Executive Officer of Texas Roadhouse. Following our remarks, we will open the call for questions now I will turn the call over to Ken.
So now we are pleased with the topline improvement we saw in third quarter, which included clubs down only 6.3% and a.
Less than 10% decline in year over year traffic as Tony will discuss in more detail shortly sales improved consistently throughout the quarter and our sales recovery trend continued into October with comps turning slightly positive.
[noise], we grew sales in our Texas Roadhouse restaurants continue to climb and averaged approximately $100000 per week in October consumer demand to done inside our restaurants is strong and we are pleased to be holding on their most of our to go sales as well the recovery of brothers has also.
Been strong with positive comps in both the timber and not tobar deeper.
The results are great to see an hour [noise].
Are the efforts of our operators and our sports teams beginning in mid March we all have the choice to either accept the consequences of our dining room, shutting down or just and pivot and find new ways to serve our guests.
It has never been our style to sit back and be satisfied with a business as usual approach and we weren't going to sit back as we've based our biggest challenge ever except for maybe one three of the first five restaurants fail, but we won't go there right now our innovation began right away by Terry taking our offer patients outside.
I do our parking lots are offering to go curbside and efficient and safe manner.
With a business focused on off premise sales, we rolled out family packs and ready to grill steaks to meet the challenging needs of our guests. We also rapidly source protective equipment and put several programs in place to ensure that we are helping with the financial needs of our employees. In addition, we implemented electronic surveys.
Temperature checks for our employees and our restaurants and in early may as some of our dining room as we're preparing to reopen we began installing partitions around the booths at our restaurants and had this finished by early July now as almost all of our dining rooms have reopened in some capacity we are working on ways to serve you.
And more gas inside and outside of our restaurants and that same efficient and safe manner. This includes adding outdoor dining to some locations and testing the conversion of many of our.
Well to include to go curbside staging and pickup areas.
Our new mobile App for both Texas for Us and Bubbas recently rolled out with more features including the ability to accept gift cards as a method of payment.
And we are introducing a new two way texting system for our to go curbside guests to further improve the pickup process, while also potentially improving labor efficiency, where even testing drop through windows in a feud Texas Roadhouses.
Our fast casual brand jaggers has seen significant increase in sales and margin performance over the past six months later this year, we'll be opening our third jaggers location with a new prototype in Louisville, Kentucky, We will continue to evaluate our options for jaggers, which could include a franchise.
Model to allow for faster growth.
Innovation is taking place outside of our restaurants to during the shutdown our restaurant experience so demand from gas and looking to stock up on stakes at home as a result, we saw an opportunity to provide the same Texas roadhouse, hamker quality and value to our guests with our new online initiative.
Texas Roadhouse Butcher shop, we are also working on several retail opportunities and we will share more details with you on those in early 2021. These are low risk initiatives with minimal investment costs and the potential for attractive margins. Many things are happening at Texas.
Rode out.
But we are most excited about the job that our operators are doing to stay focused on serving every play in every to go container of food and legendary way.
With sales trends closer to historical levels, our managers have been able to spend more time, focusing on details such as food quality waste and labor efficiency, which will help our margins over the long run to assist with margin improvement. We are rolling out a menu price increase of approximately 1% effective this week.
With a positive mix trend mix trends that we are seeing from both our dine in and to go gas we feel comfortable moving forward with this increase which was originally scheduled for early April this year.
As we move into the last months of 2020, we are pleased to see strong cash flows from operations, which allows us to continue to invest in and grow our business.
The strength of our balance sheet sets us up well to face any challenges or opportunities in front of us I want to thank the entire Texas Roadhouse, Bubbas 33, and jaggers family for their commitment to taking care of our company and our guests throughout this unprecedented year I look forward to working with all of you to continue our current momentum and grow our.
Business going forward now to be able to take it away.
Thanks.
Comparable restaurant sales improved each month of the third quarter dining room restrictions, we send in some areas of the country and traffic decreases moderated.
Our restaurant sales for the third quarter declined 6.3% and by non comparable sales decreased 13%, 6.6% in 0.5% for July August and September periods, respectively, and as Kent mentioned, our sales momentum continued in October with a return to a positive comp a point.
8%.
Sales continue to benefit from an increased level of to go sales, which accounted for approximately 23% of sales in the third quarter and approximately 20% of sales in October we were pleased to see to go average weekly sales stay fairly consistent throughout the quarter, averaging approximately 21000 per restaurant.
Additionally, we estimate that outdoor sales contributed as much in Q2, and a half percent to our comp sales performance in the third quarter with approximately 35% of our restaurant offering some level of outdoor dining.
While outdoor dining may be restricted by winter weather in certain parts of the country. We believe it will be somewhat offset by locations in warmer climates picking it up.
Overall for the quarter total revenues declined 3% driven by a 7.2% decline in average weekly sales, partially offset by a 4.6% store week Chris.
Restaurant margin as a percentage of total sales decreased 219 basis points to 14.5%.
Again this quarter, we were encouraged by the monthly trajectory of our margins given the increase in sales volume.
At current sales levels, we expect to generate mid teen restaurant margin over the coming months.
Expect margins to continue to be pressured by higher to dovetail labor and ongoing costs related to the 19.
Sued in beverage cost as a percentage of total sales increased 34 basis points to 32.1% in the third quarter. The main driver of the increase of commodity inflation of approximately 3% qoq, mostly by higher beef cost in July you get the lingering impact of the shutdown as many beef processing plant in the second quarter.
The other driver of the increase in the shift by some gas to entrees as higher menu prices, which also typically have higher food cost percentages.
Labor as a percentage of total sales increased 85 basis points to 34.7% in the third quarter labor dollars per store week were down 4.9% compared to the prior year period. The decrease includes 8.3% reduction in hours, partially offset by wage and other inflation.
In a 5.4%.
In addition, we had a 2% benefit primarily driven by a $4.5 million employee retention payroll tax credits.
Other onetime items. This quarter included sick pay an enhanced benefit expense of 1.8 million, which was largely offset by a 0.6 million insurance reserve benefit compared to a 1 million dollar charge last year.
Finally, other operating cost as a percentage of total sales was 16.4%, which was 83 basis points higher than last year, approximately 40 basis points of the increase relates to our quarterly reserve analysis for general liability insurance, which includes a $1.4 million charge. This year overlapping a one point.
$1 million credit from last year.
Other operating costs were also negatively impacted by the lower sales volume as well as the added expense of purchasing P. P E and renting items for outdoor dining years.
Moving below restaurant margins unit costs for the quarter decreased 9.3 million as compared to the prior year period. The primary drivers of the decrease were $3 million credit from the sale of a legal claim and $1.8 million reduction of cash and equity compensation and a $3.4 million reduction in travel and meeting expense.
Yeah.
On a housekeeping note I want to remind everyone that the fourth quarter 2019 was a 14 week period for US as you may recall, we estimated that the extra week positively impacted fourth quarter 2018 deluded earnings per share by 10 to 11 cents in fourth quarter restaurant margin as a percentage of total sales.
Estimated 60 basis points.
Moving to cash flow and development. We ended the third quarter with 329 million of cash which is up $46 million from the end of the quarter second quarter.
The increase was driven by 84 million of cash flow from operations with most of the effect coming from $36 million of capital expenditures.
On our schedule of new store openings for the remainder of this year and early 2021, we are projecting 40 to 45 million of Capex for the fourth quarter.
Through the third quarter, we have opened 13 company owned restaurants and expect to end the year with at least 20, New company owned location.
We currently expect to open as many as 10 restaurants in the first half of 2021.
The full year, we hope to return to our normal development target of 30 company owned opening.
That concludes our prepared remarks to Nader. Please open the line for questions.
At this time, if you would like to ask your question Paul Star and the number one on your telephone keypad.
So just a moment to compile to today's Oscar.
And your first question comes from Brian Bittner with company.
Yeah.
Hey, guys hope you're doing well.
Bernie branches have.
Just on the volumes you're seeing in your business.
Some of your peers.
Turning industry have suggested that sales volumes being seen in September and October.
Our probably been new steady state for a while and they're not expecting significant levels of improvement from here until capacity restraints are fully unlocked.
Do you guys share that view or do you see a Texas roadhouse, perhaps continued opportunities for volumes to.
Can you do improve even if the environment remains unchanged you talked about the outdoor dining out.
Element, but any color you can put on that would be helpful.
Others can't.
Well.
There are some stores, obviously up in Minnesota for.
Some of the northern states as we get colder.
We will lose.
Outdoor dining however in the summertime its.
Rainy and too hot and say, Florida, or Louisiana, or and very much too hot in Arizona. So you give up some of those northern states and then pick up some of those southern states.
But but obviously with the states and control of how many people we can put in our buildings is unknown at this point.
Yeah, and just to give you a little bit of color on volumes and kind of how we're looking at Q4, you know that in the next couple of months coming up I mean, you know.
First thing I would say it is hard to say because you know this whole summer and into the fall has been a little bit of an uncertain environment, but I.
I think we've continued to see our restaurants do really well, they're finding ways to onto to increase their sales volumes were seeing restaurants.
Getting comps positive comps in the first half of the as a week. So some of that Monday through Thursday, Daypart and we've recently started seeing stores getting back to flat sales and even a little positive on the weekend. So I think all in all if you look at key nine and Peter and September October.
We had over 50% of our restaurants had positive comps so I have confidence in our operators. They always continue to find ways to drive sales.
Even in tough environment like that I think we'll continue to see them working towards that.
You know and doing everything they can there can you just continue to drive those average weekly sales out.
Thanks, and one more before I hand, it off on the margins Tanya.
Would you expect mid teens margins under these type of volumes, which are approaching 100000 a week.
Generated mid teens margins in the third quarter.
On a lower volume than you're doing now so just to kind of clarify your margin expectations.
We expect margins under these values to be better than they were in the third quarter, but.
Youre kind of wanting to cap expectations in that kind of 16% range, which I guess would be the high end of mid teens debt are you want us to understand the margin dynamics here as your volumes clearly are improving coming out of the third quarter.
Yeah, you know I think that's fair, Brian and a lot of what happened in Q3 was July was particularly challenged from a labor perspective.
Margins were a bit lower in the month of July maybe than even what we expected. We saw those continue to increase throughout the quarter. In September you know is very it was very encouraging from that perspective, you know we don't want to get ahead of our head of ourselves from a margin perspective and that maybe we're being a little cautiously optimistic with the on.
That mid teen range, which you're right could be anywhere from 14% to 16%.
Operator, Stefano <unk> sales have been stabilizing as Kent mentioned, they're just continuing to find ways to be more profitable and more efficient from a labor perspective, so im assuming we kind of have status quo for allow from a restriction perspective. You know we were we would you know we would be very pleased to be seeing you know that mid teen up to 16% margin.
So you're still going to happen throughout this code that it's still in the middle of the Panasonic were second absent challenges first of all from a labor perspective staffing on that going on you've got keep the expenses that you're incurring and you.
With a higher percentage of to go sales.
That's a little bit higher labor costs and things like that so we're just expecting that to continue to be a bit of pressure.
Okay. Thank you.
Mhm.
Your next question comes from Peter So me 18.
Thanks, Kevin.
Clearly you guys saw some benefit from having.
Our types of offerings.
For the consumer.
Rolling it out more aggressively now.
Size up the opportunity.
You want to start off.
If you're looking at.
Customer.
Assisting customers.
This won't cannibalize at all.
Yes.
Well, let me explain so so in the spring we were operating only in our parking lots.
And we would have.
We would sell the ready to grill steaks under those terms in our parking lots from display cases.
This is.
Third party through Amazon, where you would order your stakes and they would come from a supplier that we are partnering with that would send you. This speaks to your house directly frozen.
Similar to some of the guys that do it now like Omaha steaks. So it's very much different than what we did in the spring.
And Peter this is Tony I mean, you know.
We don't feel like it we feel like it's a different gas turn or maybe it is the same guest as the restaurant, but we don't feel like it's going to take away from that restaurant experience. So we see it as something we can you know that shouldn't impact the rest on.
Negatively if anything it brings more awareness to the brand.
With those with the stake that we're operating in the quality of the state. So thats kind of way, we're looking at it and we know that those guys typically do a lot of their sales.
In the month running up to six weeks running up to the Christmas holidays, and so we wanted to make sure that we took advantage by getting this done prior to the holiday.
Great very helpful.
Tom just on the outlook.
Ill look I'm not going to provide much color yet on 2021, but how do we start to think about.
The labor inflation going out to next year.
How you guys are thinking about commodity inflation next year should it look like this year or slightly different just trying to understand dynamics.
Finish off 2020.
Sure I you know a lot of it is going to depend on what the dining room restrictions look like I think you know as we head into 2021, so as long as we have those pretty significant restrictions in place I think the environment is probably going to be pretty similar to what we're doing right now hopefully see some easing of restrictions.
Yeah, we continue to see that happening, which obviously will help from sales perspective margin perspective, but you know just looking out from a commodity perspective, it's really cute seeing as how I mean, we continue to work with our suppliers and locking up some costs, but we're not locking up you know near what we would normally do and it really just.
It's pretty early overall supply seems good hearing that it could get maybe a little tougher in the back half of 2021 and hearing you know that demand is pretty high right now with wrap with retail and the amount of beef that they're buying and so there's a lot of puts and takes but on it's really tough to say Peter kind of commodity perspective.
We're gonna lands and on I would hope.
Hey, with it being pretty similar to this year labor, we're going to continue to make investments and do what we need to do from a staffing perspective, there to get us through the Panasonic and.
With that said I'll tell you our operators are doing a phenomenal job with scheduling and and using a lot of resources that we're we're sharing with them to find ways to get more efficient on that line, even with the challenges. They are facing from a staffing perspective. So I think we'll continue to see continue to see that helping on.
The wage inflation seems to be here to stay.
We are expecting to see you know state mandated increases next year, there's more states that we're hearing about that are getting ready to vote on those increases. So I would imagine wage pressure is going to be around next year Q.
All right very helpful. Thank you very much.
Next question comes from John Glass with Morgan Stanley.
Thanks very much.
Just wanted to come back to the capacity to ask the question talking about kind of where you were.
Stan.
Where are you in terms of utilization is available.
This is prepaid or you know.
80, or 90% of did that change over the quarter did you study the lower part now that you've got more capacity.
Steve you politicians and what are the trends through the quarter. What do you think is your total capacity utilization in the Wesco answers right now.
John that's really tough to say because it's just changing all the time I mean, we continue to watch wait times and things like that which are usually a better indication capacity restriction than anything else. Our wait times are changing you know aren't really changing a whole lot staying pretty consistent. So we think the demand is there and we continue to be able to.
No more stages, we get capacity restrictions lifted so that's kind of the way we look at it as you know we think our operators are doing a great job with those those capacity restrictions that they're facing and then the outdoor dining helps too and that's really what our focus is right now.
It's just you know they're focused on filling as many seats that they can they seem to be doing a great job of it and hopefully just keeping the status quo here from a restriction standpoint, and not seeing things go backwards anymore.
Got to remember as well that our to go business is still very robust and.
A lot of people might not just be buying their dinner for the evening. They might also be by then.
Items to go for their lunch the next couple of days.
And that's a good segue how do you intend to retain those to go sales right now there's a lot of demand for to go for a lot of these things you're thinking about the ways to attain those gas either.
EBITDA CRM program, where you can sort of content business. So those folks continue to revisit the to go business. How do you think about maintaining that level that strong sales in the to go business due to the experience in the future.
Well I'm sure you might have been by Chick Fil, a and C and how efficient those guys are.
So I think as you make picking up to go are going as a curbside more efficient and more easy for the guest and make sure that the food that's going home with those folks you know is really tasty and hot.
To me Thats, how you build your to go business.
Hi, good execution and we've definitely spent.
Quite a bit of money in training on how to best execute to go curbside as well and I think that is where we will continue to add a little strength in that area and then our app, we just redid our app as we just mentioned.
To make that easier transaction as well and we think that the app will not only provide.
Provide an easier way for people to pick up our to go but they are we've found that when people order on the app the checks a little bit stronger because we give them some options. They may not think about.
Thanks very much.
Your next question comes from Jeffrey Bernstein.
With Barclays.
Great. Thank.
Thank you very much.
Couple of questions.
First one being on following up on the capacity side of things I'm, just wondering if you're able to break down maybe by bucket, where your restaurants. It in terms of.
Maybe what percent or 50% capacity over 75 or 100, just in terms of geographic.
You gave some color on that last quarter, but I would assume that for the most part or markets have increased so just wondering if you have any kind of bucketing of those that would be helpful.
Sure I'm worried about 98% of our restaurants are our open with some type of dining room capacity and and the numbers I had good. This is going to be system wide not just company owned just doesn't include our franchise stores.
At the end of Pizza, and which would have been yesterday, we had about.
188 stores that were at a 100% capacity.
So I think that was about 32.5% of the total portfolio, we had about 111 at 75%.
And then the next biggest bucket would have been 50% bucket with about 234% so.
I'm sure you all are watching the headlines and seeing some of the states moving around a little bit I think Texas is one of our bigger and we we have a bigger presence can moved from kind of fit feet up a little bit. So were just continue to see that happening.
Got it in stores that are at 100% am I know you said the fifth restore the company positive, but there are 100% sure I assume.
But when you talk about to go being incremental to get that to go was like 20% of the total so although stores seeing outsized mix from to go or when you're sitting at 100% because it's like how do you. How do you view to go relative to when stores get back 200%.
So that to go mix doesn't change a whole lot based on where the stores are what capacity bucket there and we're seeing pretty consistent you know to go sales performance from from all the restaurants. So I think that just shows how the operators are out there even at a 100% there fighting for for you know even more sale, whether it's to go outdoor dining whatever that might be.
So that's what we're seeing so far seems like we're holding onto a good portion of that of the to go sale.
No that's great I guess my last question on Bubbas temp. It sounded like you were quite happy the way you ran the tune of positive comps for September and October.
And I know you talked about the brand still has limited recognition. So it's all the more impressive how do we think about the 21 and beyond in terms of the mix of buffers in terms of the tool rollout or maybe the 30 stores that you anticipate.
I will tell you that.
As I look into next year.
I'm trying to do the math here, 25% of our us store growth will be next year.
Yeah.
Great. Thank you.
Thanks, Jeff.
And your next question comes from.
Okay would you be.
[music].
Great. Thanks for the question.
I Wonder if you could talk a little bit more about the off premise margin EBITDA.
The off premise relative to the on premise currently and ultimately where where the all permits can go where the opportunities to generate narrow that gap I don't know if it's driving a higher average check growth trend with its doing something with the with the labor cost. There just wondering how you're thinking about the about that gap and where it could go.
Well, obviously, if your dining in our restaurants, you might have a very you might have Margarita you might have a soft drink that you typically are not getting when you pick up to go.
So.
The margins there would be a slightly less and then as far as watching a plate versus giving you had to go.
Utensils and whatnot. So it is definitely better margins inside.
Yeah.
Instead of it being kind of looking at ahead guidance.
No I'm sorry.
I was going to say you know some of the things like I mentioned earlier with the with the happen.
Some of those to go Corral are the corral staging areas. Some of those conversions that we're doing are ways that we're looking at getting more efficient the two way texting.
Trying to you know to have more of these calls coming or more this to go ordering coming in through the App, where online versus calling in to the to the restaurant is another thing that we're looking at and and seeing how that feels because that's the way again, just get more efficient maybe lower the costs a little bit.
That's great and then just the last question just on them kind of Golden Spike areas could spike.
Regions seeing anything there from a from a demand perspective, we time perspective, that's worth noting.
No nothing that I would point out any nothing that's surprising or seems different from what we've what we've seen I think on.
Again, if the dining rooms are open in some type of capacity, we have gas wanting to come in and dine in restaurants.
And that's happening across the country and hot spots and everywhere across the country, where that possible, so and I'm not hearing anything from operators or anything like that none of the data says hey, you see the gas may be slowing down.
The action not behavior.
Thank you.
Mhm.
Your next question comes from David Tarantino with Baird.
Hi, good afternoon, and congrats on the strong sales recovery.
Very impressive.
Hi, another question about the margin I.
Hi, guys.
I understand some of the factors that are leading to your mid teen.
Guidance on restaurant margin, but I was wondering if you could.
Elaborate on on the long term margin goals for the company I think in the past.
You talked about high teens call it 17% to 19%.
And just like the.
And I guess what is the.
Thats still the goal what are the factors that are going to take it from there.
Hi, Jane.
And.
Over the next whatever time horizon, you're on it.
Soft drinks beer Marguerite is take it away today.
In addition, it out yet absolutely no to seeing dining room restrictions, let's say more people able to get into the dining rooms on you get a higher check their sales increasing certainly certainly helps I will tell you that 17, 18% is historically kind of where we live on and that's kind of what's driving the goal that we that goal or target.
That we've had we still feel very comfortable with that.
I think as we get through this crisis and how you start to see restrictions lifted.
You know it gets easier to get back into that range.
As you are you know, you'll you'll see some of those costs going away maybe that we have right now hopefully from a staffing perspective things get a little bit easier on PC, you know a little bit of help there on the labor line.
And that's what we would envision and then all of the things we were talking about earlier from a to go perspective that we're focused on knowing that you do have about a $4 gap between dine in and to go and.
We think those things will start to you know kind of catch hold and have an impact so.
So those are the really the things we're watching to still get back to that but as long as we're in this crisis covert pay is something else you know as we continue to see that and and just speaking to those labor and staffing issues, but I think once we get through the worst of that storm I think 17, 18 would still be where we would want it where we wouldn't want to live for sure.
Got it.
And then.
No more question Jay I know.
This year look a little a lot lower than.
You run in the past from a dollar perspective.
And as Brian.
Wondering one if you could.
Yes.
Yes.
What a good starting point for 2021 might look like from a dollar perspective, given that this year.
I think you know heading into that 21, it's not going to be much different than what we're seeing right now in Q3, and probably we'll see in Q4, because I think you are still going to see some pressures on.
Travel is still going to be down, we're probably not going to be having as many meetings just like we're doing right. Now so it's assuming somewhat of a status quo from virus you know the impact of kind of that and things like that just on travel would be what I would kind of envision.
You got bonus comp kind of going in there that could be a little bit higher and.
Depending on what the targets are for 2021 that could be a little bit higher out of the gate, but outside of that I don't know that it would be two different really David and and then obviously as you head into the back half of the year and hopefully were getting through.
Much of the restrictions and things like that I think it gets a little more back to normal now I'll tell you that the company. We're really focused on DNA. We view this as an opportunity to really guidance is spending and see where we have opportunity to save money and I'm hopeful that a lot of that is sustained through the long term and we continue to hold on.
To that even heading out of this into the back half of 21. So that's that's not all I can really give you from a detailed perspective, we'll see we'll see how things go.
Very helpful. Thank you very much.
Thank you.
And your next question comes from Chris Ocull with Stifel.
Hi, good afternoon guys.
Can you just to follow up on that last question do you have any color as to what we should expect you need it looked like in the fourth quarter.
I think the fourth quarter I don't know that you're going to see you know.
A whole lot of difference I think it might be you know they might come in a little bit higher to.
Just with normal things that happened in Q4 will be truing up bonuses and things like that but I really don't know that it's going to be too different from what we're seeing right now again, I'm I'm, making the assumption and of course, we're one month into it Ray we only a few months left to go so assuming we're not going to see anything changing materially that would lead us to be traveling more spending more.
From that perspective.
It's kind of where we are on that so and I don't think that it will be you know a whole lot different.
Okay, and then on the last call the company indicated restaurant margin to be in the low to mid teens and that was based on I think at the time current sales levels, which were running down low double digits comps, obviously improve during the quarter and averaged a much better rates. So could you can you walk through or describe some of the call surprises that prevented restaurant margin from being better.
In the targeted range given the comps are better.
Yes, as I mentioned earlier in July was probably a little bit more of a headwind than we would have expected from a labor perspective, so just dealing with challenges from a staffing on staffing and things like that in the restaurants.
You know we were just getting into you know all the dining rooms being open everyone was kind of working through what it was going to look like what the labor model supply and so coming out of July we really focused on staffing.
Talked a lot about scheduling and things like that with the operators. They did a great job of really getting that a little bit more in line in August and September we saw better improvements there so.
For Q Q3 that was really more was that and then you had the big.
Cost inflation in July I believe I think beef was maybe close to 6%. So it was a pretty big number a pretty big headwind in July on the beef side and then it tempered in July and August and September. So that was really more of those were probably the bigger impact I would tell you.
I would also say that with the.
With the payments.
The folks that were unemployed kind of rolling off.
We have a lot of folks for joining us and then we had a lot of training happen right. After that happened that we don't necessarily have.
Hey.
Tobar or as much in September and then with those people on board and not leaving US then that gives us some positive look toward November December.
And then it sounds good pattern I was just going to tell you one other thing because the sales get better you know, we've got more restaurants more operators meeting to actual bonuses being based on actual results.
You know the.
Came into this whole pandemic with our compensation the way it is being so bonus heavy making sure we were taking care of the operators and managers and their restaurants and but.
But as things improve more and more we're seeing more of that move to an actual bonus.
Away from from that guarantee so thats, a little bit of a headwind earlier in the quarter versus later.
Just one last one you mentioned cobot related cost as a pressure on margins can you quantify the impact of those cost.
No, it's really difficult to deal or talking about PE, and globs and different things like that.
Really couldn't quantify what that number is.
Okay. Thanks, guys.
Thanks, Chris.
Your next question comes from.
Once a woman with credit Suisse.
Thank you so assuming all this volume.
Hello.
Touched on this but how do you think about the impact the operation as on time is continues to build and you can see that level above prior year levels given hospital.
Season are there any changes necessary layout or incremental staff acquired.
I'll answer that or whats I fully understand the question.
So are you, saying are we having to make building improvements or changes or what are you actually saying.
How are you thinking about execution driving that.
All kinds of things are saying on time is can you fill that funding at prior year levels. You have average weekly sales well above last year, how are you thinking about how that.
Execution.
Well, we've gotten very good at doing that to go curbside.
And we're making some changes within our buildings and how the flow works within our buildings to accommodate a greater number of outside the building to go sales.
If that's what you're going for you Dan Moore and I'll tell you any we have restaurants doing higher sales volumes right now doing in a way better than the average. So we've got a great example of how to execute that we kind of what we learned a lot from the stores that were doing high volumes of to go coming into the crisis. You know that we are doing maybe close to 15% to go we were able to learn a lot from.
And so.
Well, we continue to do that to learn from those higher volume stores on how they do handle that capacity could.
Because they can have an impact on the kitchen, you know you've got your operators get more and more efficient in the kitchen with that higher volume, they're able to manage that to go volume coming into worldwide Triple what we were.
Call. It in February right. So we do have a lot of months too.
Well then yes, we feel good about their ability to handle that additional capacity wherever that might land.
Okay. Thanks, and then just depending on the prior question assuming you fully return on premise sales maintained on itself can you get a restaurant margins above historical 17, 18% level.
It really depends Laurent on kind of what inflation, what the inflationary environment look like it depends on you know what drew koester looking like labor and things like that on you know, we continue to see wages increasing across the country and those types of things. So we would be taking a look at that point at what pricing could look like different things like that.
I think right now our goal.
B would be to be in that 17, 18% range and then we'll we'll take another look at things and see what else, we want to be doing or how if we want to be handling it but right now that's what.
That said a store that does 80000, a week the margins are typically less than a store that does 100000, a week that's way less than the store doing a 140000 or so so obviously the higher sales the better the margin.
Okay, and just last follow up on.
Volumes as we see capacity or certain increase in a market, so 50% to 75% or 100% you see a commensurate increase in Val.
Yeah, you do see an increase I mean, obviously, they've got more capacity more seats that they can fill things like that BDC, a step up in dining room sales.
You might see that to go come down a little bit up but again, there is still holding on to a good portion of those to go sales similar to other other stores in that system. So.
We are seeing the dining room sales.
Pick up once that capacity any capacity restrictions kind of go are taken away.
Great. Thank you so much.
Brian.
Your next question comes from Jeff Farmer with Gordon Haskett.
Thanks, guys. Tony This is for you saw a lot of because again, there's been asked about the prospect of.
Potentially a $15 federal minimum wage and two the chips minimum wage.
Do you have in terms of thoughts would be helpful.
Well, we're already dealing with that and.
California, Oregon, Washington, Nevada bunch other states. So that's why we have like 14, dibrom price tiers on our menu.
So as an example, when new York significantly raise there as we had the.
Over the course of a year, we had to price bobs.
To basically take care of those increases it's never 100% to take care of it.
But that does that's how we've reacted in the various states sort of raise those wages overtime.
Then just as a follow up to that so some of the south and southeastern States would have the larger spread between your current.
Minimum wage.
And it's a minimum wage or what could potentially happen. So you just mentioned, taking some price increases but.
In terms of thinking about the consumer push back.
On those menu price increases it sounds like.
I haven't seen too much push back or.
We're talking about.
I would tell you is some of our highest volume stores in the guidance for your in California.
So.
I would say there is a short term.
Okay, and then long term there is an adjustment both on our side and they get.
And a lot of it depends on just how those increases kind of play I would I would imagine they would be any any increases like that typically are stair stepped in over a number of years, which does give the consumer a little more time to kind of get used to thing. So that's.
That's helpful and then unrelated it's the sort of going back to a question that several people have asked but in terms of just thinking about you.
It's been worst performing soon fulfills restaurants, some of the common themes it sounds like or just the ability. Some of these operators ability to do a good job with outdoor dining all pushing some consumers to maybe sort of softer reports or day parts.
But beyond those things are there common themes of your best and worst performance and for sales milestones.
But that are worth noting.
Sure.
Whether you know or don't know I don't know, but when we come to run one of our restaurants, you have to give us $25000 and then you get 10% of the bottom line.
So we really have partners more so than say employees and typically and operator can make a huge difference depending on their talent level and the ability they have to put a team together.
So I would say that the biggest.
Reason that stores do extremely well versus stores, maybe don't do quite as well.
And we've got some really long tenured studs and that's the work at our company.
And we're very very glad that they are still with us and they are still performing way beyond a lot of our expectations and we're very proud of them.
Thank you appreciate it.
[laughter].
And your next question comes from David Palmer at Evercore ISI.
Thanks, Congrats on the results just to follow up on the margin stuff, we were talking about before last year, 17% restaurant level margin, you're talking about mid teens, if youre 100 basis points or more.
Hello, you're going you're doing positive comps.
Is the biggest contributor to some of that gap is it to go business in that.
Hired labor component of that and I guess, partly with the idea that you.
Youre going from 7% to 20% mix. It it seems like not that big of a mix change to have.
Well over 100 basis points of margin impact and I have a follow up.
Sure David Yes piece of it is the labor on the to go I mean, it is it does take fewer hours on the on it to go versus dining experience, but it is a higher wage rate.
So that's something that is impactful and.
You know.
It can be a big deal I think you know our hope is that we can see those margins be above that mid teen range.
I think you know where we're going to be cautiously optimistic on that again as I mentioned, we saw some great results in September. Thank you.
Really give us a lot of confidence on that but I think also in this environment that I read with everything going on every day every week changes staffing continues to be a bit of a CNS. We have made a bit of a challenge.
And so we're really encouraging operators and to make sure they're well staffed to handle any exclusions people that are able to work because they're sick just different things like that and Thats an investment we want to make sure we're making.
Throughout throughout this deal. So that's that's probably a bigger deal as part of that and even the to go side of things is just.
Assuming that we're going to continue to make those investments as we want those options the operators to do that so that would probably be at.
And then just on the seating capacity follow up there you mentioned some of the number of stores that are 50%, 75%, 100% from other operators have said as the number of seats that gets open or at least is not regulated out of being used as you get more and more there's restrictions lifted the lift is less and less something.
Cause other social distancing regulations start to kick in where the consumer pushes back can you talk to the step up in maybe comps were sales lift you get at each of those steps you see out there.
Yeah, I would be really tough to quantify because there's just so many other pieces playing a part in it.
Just beyond that the restrictions I mean, you guys outdoor dining and just different things like that the number of seats. They have there. So it would be really tough David you break it down like that I think again that the operators are just working hard to fill every seat they possibly can.
At the outdoor dining they can and push to go thats really their focus and and they seem to be doing a great job of it right and there is really no average you might have one store doing 15% to go and another one doing 30, 35%. So it's hard to put them all in one basket yeah.
Got it thank you.
Thank you.
Your next question comes from Brett Levy with MKM partners.
Great Good afternoon, and thanks for taking my call.
When you think about your development plans.
I guess.
What.
What do you see that now in terms of where you want to be.
How you have to.
The boxes I know you've talked about the change in the corralled with existing infrastructure.
What else do you need to do to the existing boxes and how are you thinking about what you might change on the go forward prototypes and I guess Thats, both Texas and above this question.
Sure. This is Ken so we've got.
How do we push to go ahead.
How do we deliver it to the guest so how do we push it through the kitchen, we've got three different things, we're looking at and testing how do we push it to the gas. We also have three different things. We're we're we're making some conversions on and changing and new stores.
And then as far as outdoor seating covered patios and whatnot, we've already have added Bubba as well.
Testing that at some roadhouses as well, so where we might have done a bump out before that.
Thats fully enclosed its possible weve got some bump outs coming up that.
Our covered patios.
So people can be outside of course in the winter as well as the weather gets colder so basically entering the winter in coming out of the winter you can do the plastic wrap.
Wraps around those as well so yeah, we're thinking.
Quite differently about how were designing our buildings and were trying various things to get learnings. So were not stuck on one thing in other words.
And it has.
This has the dynamic that's going around the country.
Change, where you're targeting whether it's urban versus suburban whether its southern versus northern versus Midwest.
And then.
Sure sure. They have the answer is no we've always kind of been out on the.
Medium sized towns in America, and I would say.
Of our 20 stores that will open this year six were entails of say 40 to 60000 that I wouldn't even look at.
Five years ago call it.
And our mix of stores next year I mentioned the 25%.
Bubba is and I would say 50% of the remaining.
Of stores would be in those smaller markets versus the mid size markets and as far as urban markets I think we've got maybe two.
Slide two in our 600 stores, but zero plan for next year sure and then when you said you have about a third of your units right now that are offering outdoor dining as we move into the into the winter months.
What do you see that being in terms of.
Number of units that will be able to or will or currently pursuing that as an option.
Thank you I would say, yes, I would say that let's just I'm, just making this up but I am not far off say we had.
Maybe 200 stores offering the outdoor seating this summer.
But again could not do that and say, Florida with the bugs in the other.
The hot weather, Arizona Super Hot.
Southern Texas, So I would say the 200 this winter becomes slightly over 100, so you do lose a little bit.
But you're not losing a lot because we do pick up those states.
That enjoy the nice weather in the winter time.
Thank you.
And your next question comes from and can still stick with B and.
Okay, great. Thank you good afternoon two quick.
Soon with any of your questions and then.
Unrelated follow up so to start.
Mentioned in the prepared remarks about mix benefits how are you seeing customers use the menu differently and then.
On the side since you've seen the big step up of design wins number.
Getting customers to the brand is.
Is there any discernible difference in frequency between the two go customer.
Got it.
Well I can kind of take that first part of that question you know what we're seeing on the next it seems like spectrum it in a little bit more to the bigger stakes.
Some of the combo meals things like that as we mentioned early a little bit higher priced items, you see a little more activity on apps.
See the check going up a little bit I think you'll see a little more attachment from an alcohol perspective stopped that perspective kind of what you would expect as people are getting used to be you know paddy to get back out into the dining room and things like that is what we're seeing.
Dining room perspective, I think on the to go side and all I can offer his thoughts I don't really know if.
If we have much detail or data at this point on what the recurrences of our to go guests.
Okay, you don't get to the penny on that too.
I will tell you that the more that folks use our app.
The more frequency and the higher the check and as as we've changed our App This past month.
And improved our App and added some of these phase.
Phase the kind of suggestively selling certain items.
We have seen some positive check on those instances. So we are very happy that we've got our new App and look forward to seeing outperforms as we move forward.
Great. Thank you for that and then my other question was just some of your peers and some of the data would suggest that.
The unfortunate consequence of looking to undergo.
But then it goes this has been slow to materialize to this point I know in some ways.
Your markets can be different than.
There's been some others. So I guess I just wanted to hear is any color you can share on what you're seeing on that.
Are you, saying about like competitors closing I'm not sure I understand the question.
Correct and in particular on the independent side.
We're in so many markets, it's really hard discern, but just from traveling around a bit yes. There has been some closures that I have notice that some stores that had been there for quite a few years that you're a little bit surprised that are no longer there.
Okay, great. Thank you very much.
And your next question comes from John I can cool cheeky Morgan.
Hi, Thank you.
My question is on I guess December specifically and you kind of give the period around holiday specifically, maybe even some of the higher volume days as we kind of get into 21 versus 19 with current capacity restrictions as you kind of understand them to be you can you hold onto this positive.
Presumably that you are going to be going over some higher average weekly sales.
So weeks in December for example, your restaurants are probably very.
Very close to 100% you basically utilized.
Cost of store base during certain days.
It's like December and also into the next year.
Just curious if you'd asked me in July where we were a negative 13.
And.
Then you would view to said would you be positive in October I would have said probably not.
And here we were positive in October with it's just basically.
Tells me that.
Operators as usual are exceeding our expectations. So.
I can't give you a solid answer I, just know that I keep being surprised by our operators and I look forward to continue being surprise.
Hello, I May ask you does it sorry go ahead Tanya.
Oh, no I was just going to say I totally agree with Ken I'll tell you just from a technical perspective, you do have some holiday shifts going on you've got Christmas.
The C. Christmas day going from a on Tuesday, Wednesday to a Thursday Friday that tends to be a little more negative when you get into that back into that Daypart Kent's point, who knows how things are going to kind of play out I mean, we've seen a lot of differences as weve.
Come through this crisis as far as on period.
Curious maybe that would have been a little bit softer our expectation would have been a little softer that has proven to not be so we'll see but typically we would expect that to be a little negative just that holiday shift.
Well I don't know if I ask the question in the right way or not so we take a slightly different stab at it but if for example in 19 utilizing 95% of your effective capacity and this year just to have a number of years, 90% of your seats are available, we'll just be hard math to kind of lap. Let me just again just using.
Using numbers just for discussion takes I just wanted to get your thoughts on that and secondly, when you you kind of talk about your operators are you adding.
Are you speaking to in a significant fashion, adding hours to the stores that that wasn't necessarily in place to 19, which is kind of way to.
Add capacity just by more store hours in any given any given week.
So I'll answer your first question your lead time to do the hours thing. So so when you say, 95% capacity say.
Into the first quarter with 8% to go and then down to 90% and our 20% to go well.
Sure It makes up for that 5%.
Well, we would definitely well I Didnt think my 95 number was necessarily right I was just using that this is on for example, but.
Yes, you're right, you're absolutely right, but again I mean, if I my 95% 90 is right then I got lucky with those numbers, but yes.
Good day and has that been.
Pleasantly surprised at what they're doing inside and I've been more than pleasantly surprise, what they're doing outside the building.
And there were some levers that we pulled.
Back in March and April that we're not pulling today that we could all always go back to as an example.
Nothing like our family packs that were not pushing today that we can always add if we felt like it.
And I think a lot of that myself and made yes, you get you guys Didnt incredible job of executing that in every store was kind of had its own approach. So I give credit to your operators.
Yes, absolutely in a part of your right from an average perspective, I mean, you do even pre coded we were seeing some stores that had the demand opening maybe a little bit earlier or maybe more so that's insane staying open a little bit later, so we definitely see that happen and I would expect to continue to see that happen in stores that.
Hey that and I think you've got a lot of stores out there even pre coated the comp growth that we would see surprisingly it would continue to come from stores with the highest volume today just again they continue to find ways to do it and I think one of the things you will see on a code that is that a lot of your lower performing stores, they're learning a lot and they're going to find ways to.
We need to grow those sales and find opportunity.
Where maybe they weren't before so I think thats, where that difference will be in.
Again, the story should continue to find ways to grow the sales sure and then.
These new retail initiatives, we got we have no idea how they could maybe fill in some of that gap.
Thanks, so much.
Yes, Thanks John.
Your next question comes from John Powell with Wells Fargo.
Great. Thanks for taking the question, making the time I'll try and make a quick just I think you hit on just a second ago, but the online offerings.
Go offering now versus say the high did a fantastic aside from the family pack is there anything else, but different now versus then.
No, we're actually offering less than than we did then because remember we were not open inside so we wanted to simplify our outside offerings. So that we could.
Get more focus back on opening up inside but now that we've gotten really good at inside our our employment our employment base is stabilized.
We've gotten really good at doing the outside then the now those folks are definitely a heavy capacity and ability to execute a little more creative outside stuff. If we so choose to pull that lever as I said earlier.
Okay, and then just in terms of thinking about Eurone overall menu.
But would be competitors, taking advantage of the weaker sales environment, that's when things down and.
For the operation It doesn't seem like you guys actually done that at all so perhaps aside from the off premise channel that has obviously turn into a nice piece for you are there other areas of the menu, where you feel like you can improve the offering through either additional options or perhaps adding combos that werent in place prior to the great.
Yes.
We have a few items in test right now the.
Don't want to speak to at this moment, but yes, we are testing a few things just to see.
And there are those.
You mean like center of the plate step or is it more add ons.
I'll bet you if you're on this call in February we'll let you know.
And we go I hope to be and then perfect.
Lastly on on bookkeeping, one for Tanya in terms of price mix traffic and tends to break that down for us in the quarter.
Sure. So we went to 6.3 comp.
3% of it was check.
About 2.5% of that with pricing almost 2.5% pricing and you had to 9.3% on traffic hi.
Hi, kind of built out yet.
Okay. Thank you very much and congrats on the quarter.
Based on.
And your next question comes from Blaine coal Raymond James.
And Brian Your line is open. Please go ahead.
Sorry go learn and the mute button made.
Major phone issue, so I might have missed it I apologize, but on the store margin.
July margins were more pressured if that's right can you comment on where Pmnine are P. 10 store margins currently are running.
And we didn't really want to give a lot of detail not wanting to get a lot of detail on them, but I will tell you, though you know September did get the benefit of that four and a half million dollar payroll tax credit on.
Did that did benefit the margins I believe by about 70 basis points. So if I if I'm remembering correctly I mean, that's selling to September you adjust out for those those kind of one time items and again here, we felt very good about where we landed and.
And you feel good about that mid teen recommendation very possible to be in the higher end of the range of that maybe even getting a little closer to the 17 it'll it remains to be seen so on kind of where that will land, but on didn't really want to get into details on specifically on the month depends there's more noise a lot of noise on them on.
Sure. Okay Thats helpful. And then on Bubbas grossly brothers were continuing to ramp I know that you've been working on optimizing the prototype model could you just revisit your latest thinking on the unit economic targets moving forward.
But you are talking about development cost, Brian kind of how we think those development costs yeah on.
What were your expectations are on the margins for that concept et cetera, yes.
Well as we saw over the last two months.
These are heading north as it relates to the cost.
Tony handle that yeah.
From a cost perspective are you speaking specifically to pop you're sticking to buy that's right Bob Yes.
Yeah, Yeah, Yeah, we haven't seen a whole lot of change there I mean as you would expect restaurants that were opening right now I mean, we've seen a little bit of an increasing cost is from inflation contractors are dealing with labor issues are seeing material cost climb a bit and we always talk a little bit about when we talked about on a coffee talk all in including Preopening and then just given some good.
In some of the delays that we had we've seen a bit of an uptick in that pre opening cost I'm.
This is where you know carrying on staff and things like that until we can get the restaurant open. So we think those will be just a little bit higher maybe than what we had been running on average, but I'll tell you Bob This is Don.
Just a great job on we have a number of stores in the broadest portfolio that are running positive comps.
They also ran positive and P. nine and 10.
So you know, it's very encouraging what we're seeing on that side. There are certainly working hard on driving sales and in improving profitability has been great to see.
All right that's helpful. Thank you.
Mhm.
And your next question comes from James.
Steven.
Hey, Thanks for taking the question a lots been discussed in the call I just wanted to circle back to the Butcher shop, offering and just learn if possible some of the financial mechanics around that offering and then if you can help frame and you sort of the.
Revenue or margin potential just so we don't get ahead of ourselves and just like level set the goal post for that thank you.
I would like to talk but I've been told to let Tony answer I will I.
I'll tell you James I mean, it's still really early to say, but you know obviously you know going into this business. We did it knowing that we feel like those margins are very attractive we think from a margin perspective on it would be in line or slightly better than what we're seeing at store level right now.
You know, which is definitely very attractive for us to get into I think from a modeling perspective, I would be careful to really put anything in the model right. Now. It's very early on you know to assume there's going to be any material benefit there.
So that's kind of the way we're looking at it but from a margin perspective things. So you know, it's very very appealing.
And I'm sure like having wondering okay. Yeah in February after the holiday season, we'll have a lot more information, we'll be able to share give a little more clarity on it.
We look forward to it.
Yes.
And at this time there are no further questions.
All right well, thanks, everybody for joining us today, we really appreciate it I hope everyone is doing well and look forward to talking to you then have a great night.
Ladies and gentlemen, this concludes today's conference call. Thank.
Thank you for participating you may now disconnect.