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 speaker's remarks, there will be a question and answer session. At that time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Should anyone need assistance at any time during the conference, please press star zero, and an operator will assist you. I would now like to introduce Tonya Robinson, the Chief Financial Officer of Texas Roadhouse. You may begin your conference.
Thank you, Sunita. Good evening, everyone. By now, you should have access to our earnings release for the third quarter ended September 29th, 2020. It may also be found on our website at texasroadhouse.com in the Investors section. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements 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 SEC. These documents provide a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements, including factors related to the COVID-19 outbreak. We may refer to non-GAAP measures. If applicable, 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. I'll turn the call over to Kent.
Thanks, Tonya. We are pleased with the top-line improvement we saw in the third quarter, which included comps down only 6.3% and a less than 10% decline in year-over-year traffic. As Tonya will discuss in more detail shortly, sales improved consistently throughout the quarter, and our sales recovery trend continued in October with comps turning slightly positive. Weekly sales in our Texas Roadhouse restaurants continue to climb and averaged approximately $100,000 per week in October. Consumer demand to dine inside our restaurants is strong, and we are pleased to be holding onto most of our To-Go sales as well. The recovery at Bubba's has also been strong with positive comps in both September and October. The results are great to see and are due to the efforts of our operators and our support teams.
Beginning in mid-March, we all had the choice to either accept the consequences of our dining rooms shutting down or adjust 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 faced our biggest challenge ever, except for maybe when three of the first five restaurants failed, but we won't go there right now. Our innovation began right away by taking our operations outside to our parking lots and offering To-Go curbside in an efficient and safe manner. With a business focus 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 sourced protective equipment and put several programs in place to ensure that we were helping with the financial needs of our employees. In addition, we implemented electronic surveys and temperature checks for our employees in our restaurants. In early May, as some of our dining rooms were 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 even more guests inside and outside of our restaurants in that same efficient and safe manner. This includes adding outdoor dining to some locations and testing the conversion of many of our Corrals to include To-Go curbside staging and pickup areas.
Our new mobile app for both Texas Roadhouse and Bubba's recently rolled out with more features, including the ability to accept gift cards as a method of payment. 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. We're even testing drive-thru windows in a few 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 will 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, too. During the shutdown, our restaurants experienced a demand from guests looking to stock up on steaks at home.
As a result, we saw an opportunity to provide the same Texas Roadhouse hand-cut quality and value to our guests with our new online initiative, Texas Roadhouse Butcher Shop. We are also working on several retail opportunities, 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 Roadhouse, but we are most excited about the job that our operators are doing to stay focused on serving every plate and every To-Go container of food in a 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 the positive mix trends that we are seeing from both our dine-in and To-Go guests, 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, Bubba's 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, Tonya will take it away.
Thanks, guys. Comparable restaurant sales improved each month of the third quarter as dining room restrictions loosened in some areas of the country and traffic decreases moderated. Comparable restaurant sales for the third quarter declined 6.3%, and by month, comparable sales decreased 13%, 6.6%, and 0.5% for our July, August, and September periods respectively. As Kent mentioned, our sales momentum continued in October with a return to a positive comp of 0.8%. 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 $21,000 per restaurant.
Additionally, we estimate that outdoor sales contributed as much as 2%-2.5% to our comp sales performance in the third quarter, with approximately 35% of our restaurants 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 revenue declined 3%, driven by a 7.2% decline in average weekly sales, partially offset by a 4.6% store week growth. Restaurant margin as a percentage of total sales decreased 219 basis points to 14.5%. 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 margins over the coming months.
We expect margins to continue to be pressured by higher To-Go sales, labor, and ongoing costs related to COVID-19. Food and 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 was commodity inflation of approximately 3%, caused mostly by higher beef costs in July due to the lingering impact of the shutdown of many beef processing plants in the second quarter. The other driver of the increase is a shift by some guests to entrees with 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 an 8.3% reduction in hours, partially offset by wage and other inflation of 5.4%.
In addition, we had a 2% benefit, primarily driven by a $4.5 million employee retention payroll tax credit. Other one-time items this quarter included sick pay and enhanced benefit expense of $1.8 million, which was largely offset by a $0.6 million insurance reserve benefit compared to a $1 million charge last year. Finally, other operating costs 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 relate to our quarterly reserve analysis for general liability insurance, which includes a $1.4 million charge this year overlapping a $1.1 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 PPE and renting items for outdoor dining use.
Moving below restaurant margin, G&A costs for the quarter decreased $9.3 million as compared to the prior year period. The primary drivers of the decrease were a $3 million credit from the sale of a legal claim, a $1.8 million reduction of cash and equity compensation, and a $3.4 million reduction in travel and meeting expense. On a housekeeping note, I want to remind everyone that the fourth quarter of 2019 was a 14-week period for us. As you may recall, we estimated that the extra week positively impacted fourth quarter 2019 diluted earnings per share by $0.10- $0.11, and fourth quarter restaurant margin as a percentage of total sales by an 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 second quarter.
The increase was driven by $84 million of cash flow from operations, with most of the offset coming from $36 million of capital expenditures. Based on our schedule of new store openings for the remainder of this year and early 2021, we are projecting $40 million-$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 locations. We currently expect to open as many as 10 restaurants in the first half of 2021. For the full year, we hope to return to our normal development target of 30 company-owned openings. That concludes our prepared remarks. Operator, please open the line for questions.
At this time if you will like to ask a question. Press star and the number one on your telephone keypad. [Inaudible] to compile the Q&A roster. Your first question comes from Brian Bittner with Oppenheimer & Co.
Hey, guys. Hope you're doing well.
Hey, Brian.
First question I have is just on the volumes you're seeing in your business. Some of your peers in the dining industry have suggested that sales volumes being seen in September and October are probably the 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 at Texas Roadhouse, perhaps, continued opportunities for volumes to continue to improve even if the environment remains unchanged? You talked about the outdoor dining element, but any color you can put on that would be helpful.
Sure.
This is Kent. Well, there are some stores, obviously, up in Minnesota or some of the northern states, as we get colder, we will lose their outdoor dining. However, in the summertime, it's rainy and too hot in, say, Florida or Louisiana, and very much too hot in Arizona. You give up some of those northern states and then pick up some of those southern states. Obviously, with the states in control of how many people we can put in our buildings, it's unknown at this point.
Yeah, just to give you a little bit of color on volumes and how we're looking at Q4, so the next couple of months coming up. First thing I would say, it is hard to say. This whole summer and into the fall has been a little bit of an uncertain environment. I think we've continued to see our restaurants do really well. They're finding ways to increase their sales volumes. We're seeing restaurants getting positive comps in the first half of the week, so some of that Monday through Thursday day part. We've recently started seeing stores getting back to flat sales and even a little positive on the weekend. I think all in all, if you look at P9 and P10, September, October, we had over 50% of our restaurants had positive comps. I have confidence in our operators.
They always continue to find ways to drive sales. Even in tough environments like that, I think we'll continue to see them working towards that, and doing everything they can there to just continue to drive those average weekly sales up.
Thanks. One more before I hand it off on the margins, Tonya. You said you expect mid-teens margins under these type of volumes, which are approaching $100,000 a week. You just generated mid-teens margins in the third quarter on a lower volume than you're doing now. Just to clarify your margin expectations, do you expect margins under these volumes to be better than they were in the third quarter, but you're wanting to cap expectations in that 16% range, which I guess would be the high end of mid-teens? Is that how you want us to understand the margin dynamics here as your volumes clearly are improving coming out of the third quarter?
Yeah, I think that's fair, Brian. 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, but we saw those continue to increase throughout the quarter, and September was very encouraging from that perspective. We don't want to get ahead of ourselves from a margin perspective, and then maybe we're being a little cautiously optimistic with that mid-teen range, which you're right, could be anywhere from 14%-16%. The operators definitely, as sales have been stabilizing, as Kent mentioned, they're just continuing to find ways to be more profitable, be more efficient from a labor perspective.
Assuming we have status quo for a while from a restriction perspective, we would be very pleased to be seeing that mid-teen up to 16% margin, because we're still going to have some, throughout this COVID-19, still in the middle of this pandemic, we're still going to have some challenges. First of all, from a labor perspective, staffing, that going on. You've got PPE expenses that you're incurring and with a higher percentage of To-Go sales, that's a little bit higher labor cost and things like that. We're just expecting that to continue to be a bit of pressure.
Okay, thank you.
Your next question comes from Peter Saleh with BTIG.
Great. Thanks. Kent, clearly you guys saw some benefit in the spring from having the Butcher Shop or these types of offerings for the consumer, that you're rolling it out more aggressively now. Can you just size up the opportunity? Just give us a sense on if you feel like you're bringing in new customers or is this existing customers, and if this won't cannibalize at all your in-store sales?
Let me explain. In the spring, we were operating only in our parking lots, and we would sell the ready-to-grill steaks under those tents in our parking lots from display cases. This is a third party through Amazon, where you would order your steaks, and they would come from a supplier that we are partnering with that would send you the steaks to your house directly frozen, similar to some of the guys that do it now, like Omaha Steaks. It's very much different than what we did in the spring.
Yeah. Peter, this is Tonya. We feel like it's a different guest, 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. We see it as something that shouldn't impact the restaurants negatively. If anything, it brings more awareness to the brand with the steaks that we're offering and the quality of the steaks. That's kind of the way we're looking at it.
We know that those guys typically do a lot of their sales in the month running up to the six weeks running up to the Christmas holidays. We wanted to make sure that we took advantage by getting this done prior to the holidays.
Great. No, very helpful. Tonya, just on the outlook, I know you guys didn't provide much color yet on 2021. How do we start to think about the labor inflation going out into next year and how you guys are thinking about commodity inflation next year? Should it look like this year or slightly different? Just trying to understand the dynamics as we finish off 2020.
Sure. A lot of it is going to depend on what the dining room restrictions look like, I think, as we head into 2021. As long as we have those pretty significant restrictions in place, I think the environment's probably going to be pretty similar to what we're doing right now. Hopefully, you see some easing of restrictions. We continue to see that happening, which obviously will help from a sales perspective, margin perspective. Just looking out from a commodity perspective, it's really too soon to tell. We continue to work with our suppliers in locking up some costs, but we're not locking up near what we would normally do, and it really just is pretty early. Overall, supply seems good.
Hearing that it could get maybe a little tougher in the back half of 2021, hearing the demand is pretty high right now with retail and the amount of beef that they're buying. There's a lot of puts and takes, but it's really tough to say, Peter, from a commodity perspective, where we're going to land, and would hope be okay with it seeming 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 pandemic. With that said, though, I'll tell you, our operators are doing a phenomenal job with scheduling and using a lot of resources that we're sharing with them to find ways to get more efficient on that line, even with the challenges they're facing from a staffing perspective.
I think we'll continue to see that helping. The wage inflation seems to be here to stay. We're expecting to see state-mandated increases next year. There's more states that we're hearing about that are getting ready to vote on those increases. I would imagine wage pressure is going to be around next year, too.
All right. Very helpful. Thank you very much.
Next question comes from John Glass with Morgan Stanley.
Thanks very much. I just wanted to come back to the capacity question, the question talking about where you stand. Where are you in terms of utilization of available seats versus pre-COVID? Are you at 80% or 90%? Did that change over the quarter? Did you start at a lower part, and now that you've gotten more capacity because of the seats change, you put partitions in? What did it trend through the quarter, and what do you think your total capacity utilization in the restaurants is right now?
John, that's really tough to say because it's just changing all the time. We continue to watch wait times and things like that, which are usually a better indication of capacity restrictions than anything else. Our wait times aren't really changing a whole lot, staying pretty consistent. We think the demand is there, and we continue to be able to fill more seats as we get capacity restrictions lifted. That's kind of the way we look at it is, we think our operators are doing a great job with those capacity restrictions that they're facing. The outdoor dining helps, too, and that's really what our focus is right now is just they're focused on filling as many seats as they can. They seem to be doing a great job of it.
Hopefully, just keeping the status quo here from a restrictions standpoint and not seeing things go backwards anymore.
This is Kent. You got to remember as well that our To-Go business is still very robust. A lot of people might not just be buying their dinner for the evening. They might also be buying items to go for their lunch the next couple of days.
That's a good segue. How do you intend to retain those To-Go sales? I know right now there's a lot of demand for To-Go for a lot of reasons. Are there things you're thinking about in the ways to retain those guests through their, I won't use the word loyalty, but a CRM program where you can sort of contact those, make sure those folks continue to revisit and do the To-Go business? How do you think about maintaining that level, that strong average of the sales in the To-Go business as you're trying to experience through the future?
Well, I'm sure you might have been by a Chick-fil-A and seen how efficient those guys are. I think as you make picking up To-Go or going to the curbside more efficient and easier for the guest, and make sure that the food that's going home with those folks is really tasty and hot, to me, that's how you build your To-Go business.
All right. Thank you.
Through execution. We have definitely spent quite a bit of time, money, and 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. Then our app. We just redid our app, as we just mentioned, to make that an easier transaction as well. We think that the app will not only provide an easier way for people to pick up our To-Go, but we've found that when people order on the app, the check's 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 you very much. A couple of questions. The 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 sit in terms of maybe what percent are at 50% capacity versus 75% or 100%, just in terms of geographic. I think you gave some color on that last quarter, I would assume that for the most part, all markets have increased. Just wondering if you have any kind of bucketing of those that would be helpful.
Sure. We're at about 98% of our restaurants are open with some type of dining room capacity. The numbers I have, this is going to be system-wide, not just company-owned. This is going to include our franchise stores. At the end of P10, which would've been yesterday, we had about 188 stores that were at 100% capacity. I think that was about 32.5% of the total portfolio. We had about 111 stores at 75%. The next biggest bucket would've been the 50% bucket with about 234% . I'm sure you all are watching the headlines and seeing some of the states moving around a little bit. I think Texas, where we have a bigger presence, moved from 50% up a little bit, we just continue to see that happening.
Got it. The stores that are at 100%, and I know you said that half your stores are comp positive, but if they're at 100%, should I assume that, like when you talk about To-Go being incremental, I think you said To-Go is like 20% of the total. Are those stores seeing outsized mix from To-Go? When you're sitting at 100%, how do you view To-Go relative to when stores get back to 100%?
The To-Go mix doesn't change a whole lot based on where the stores are, what capacity buckets they're in. We're seeing pretty consistent To-Go sales performance from all the restaurants. I think that just shows how the operators are out there, even at 100%. They're fighting for even more sales, whether it's To-Go, outdoor dining, whatever that might be. That's what we're seeing so far. Seems like we're holding on to a good portion of the To-Go sale.
No, that's great. Just my last question on Bubba's. Can't pretend like you are quite happy the way you sang the tune of positive comps for September and October. I know you talked about how the brand still has limited recognition, so it's all the more impressive. How do we think about 2021 and beyond in terms of the mix of Bubba's, in terms of the total rollout of 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 store growth will be Bubba's next year.
Great. Thank you.
Thanks, Jeff.
Your next question comes from Dennis Geiger with UBS.
Great. Thanks for the question. Wonder if you could talk a little bit more about the off-premise margin and even the off-premise relative to the on-premise currently, and ultimately where the off-premise can go. Are there opportunities to narrow that gap? I don't know if it's driving a higher average check for off-prem, if it's doing something with the labor cost there. Just wondering how you're thinking about that gap and where it could go ultimately.
Well, obviously, if you're dining in our restaurants, you might have a beer, you might have a margarita, you might have a soft drink that you typically are not getting when you pick up To-Go. The margins would be slightly less, and then as far as washing a plate versus giving you a To-Go utensils and whatnot, so it's definitely better margins inside.
Yeah. Some of the things we're looking at. Go ahead, Dennis.
No, I'm sorry. Please Tonya.
I was just going to say some of the things like Kent mentioned earlier with the app and some of those To-Go Corral or 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 have more of this To-Go ordering coming in through the app or online versus calling into the restaurant is another thing that we're looking at and seeing how that feels, because that's a way, again, to just get more efficient, maybe lower the cost a little bit.
That's great. Just a last question, just on kind of COVID spike areas, COVID spike case regions. Seeing anything there from a demand perspective, wait time perspective that's worth noting?
No, nothing that I would point out. Nothing that's surprising or seems different from what we've seen. I think, again, if the dining rooms are open in some type of capacity, we have guests wanting to come in and dine in the restaurants. That's happening across the country in hotspots and everywhere across the country where that's possible. I'm not hearing of anything from operators or anything like that. None of the data says, "Hey, you see the guests maybe slowing down that action, that behavior.
Thank you.
Your next question comes from David Tarantino with Baird.
Hi, good afternoon. Congrats on the strong sales recovery. Very impressive. Tonya, I have a question about the margins. I understand some of the factors that are leading to your mid-teens guidance on restaurant margins, but I was wondering if you could elaborate on the long-term margin goals for the company. I think in the past, you've talked about high teens, call it 17%-19% is the range you'd like to see. If that's still the goal, what are the factors that are going to take it from the mid-teens to the high teens over the next whatever time horizon you want to choose?
Soft drinks, beer, and margaritas. Take it away, Tonya.
In addition to that, yeah, absolutely. Just seeing dining room restrictions lifting, more people are able to get into those dining rooms. You get a higher check there. Sales increasing certainly helps. I'll tell you, 17%-18% is historically where we've lived, and that's what's driven that goal or target that we've had. We still feel very comfortable with that. I think as we get through this crisis and you start to see restrictions lifted, it gets easier to get back into that range. 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. You see a little bit of help there on the labor line. That's what we would envision.
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. We think those things will start to catch hold and have an impact. Those are really the things we're watching to still get back to that. As long as we're in this crisis, COVID pay is something else, as we continue to see that, and just speaking to those labor and staffing issues. I think once we get through the worst of the storm, I think 17%-18% would still be where we would want to live for sure.
Got it. Yeah. That's helpful. Similar question on G&A. I know this year looks a lot lower than where you've run in the past from a dollar perspective. I was wondering, one, if you could give us an outlook as to what a good starting point for 2021 might look like from a dollar perspective, given that this year was so low.
I think heading into 2021, 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're still going to see some pressures. 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. It's assuming somewhat of a status quo from the impact of COVID-19 and things like that just on travel would be what I would envision. You've got bonus comp going in there. That could be a little bit higher depending on what the targets are for 2021. That could be a little bit higher out of the gate. Outside of that, I don't know that it would be too different really, David.
Then obviously as you head into the back half of the year, and hopefully we're getting through most of the restrictions and things like that, I think it gets a little more back to normal. I'll tell you, as a company, we're really focused on G&A. We've used this as an opportunity to really dive into spending and see where we have opportunity to save money. I'm hopeful that a lot of that sustains through the long term, and we continue to hold onto that even heading out of this into the back half of 2021. That's about all I could really give you from a detailed perspective. We'll see how things go.
Very helpful. Thank you very much.
Yep. Thank you.
Your next question comes from Chris O'Cull with Stifel.
Hi, good afternoon, guys. Tonya, just to follow up on that last question, do you have any color as to what we should expect G&A to look like in the fourth quarter?
I think the fourth quarter, I don't know that you're going to see a whole lot of difference. I think it might come in a little bit higher just with normal things that happen in Q4. We'll 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 making the assumption, and of course, we're one month into it. We only have two months left to go. Assuming we're not going to see anything changing materially that would lead us to be traveling more, spending more from that perspective, is where we are on that. Again, I don't think, Chris, that it'll be a whole lot different.
Okay. On the last call, the company indicated restaurant margin would 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 improved in a quarter and averaged a much better rate. Can you walk through or describe some of the cost surprises that prevented restaurant margin from being better than that targeted range given the comps were better?
Yeah. As I mentioned earlier, July was probably a little bit more of a headwind than we would have expected from a labor perspective. Just dealing with challenges on staffing and things like that in the restaurants. We were just getting into all the dining rooms being open. Everyone was kind of working through what it was going to look like, what those labor models look like. 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. For Q3, that was really more was that. You had the big food cost inflation in July. I think beef was maybe close to 6%.
It was a pretty big number, a pretty big headwind in July on the beef side, and then it tempered in August and September. Those were probably the bigger impacts I would tell you.
I would also say that with the payments to folks that were unemployed kind of rolling off, we had a lot of folks joining us, and then we had a lot of training happen right after that happened, that we don't necessarily have, say, in October or as much in September. With those people on board and not leaving us, then that gives us some positive look toward November, December.
As sales get better, I was just going to tell you one other thing, Chris. As sales get better, we've got more restaurants, more operators moving to bonuses being based on actual results. We 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 the managers in the restaurants. As things improve more and more, we're seeing more of them move to an actual bonus, and away from that guarantee. That's a little bit of a headwind earlier in the quarter versus later.
Just one last one. You mentioned COVID related costs as a pressure on margin. Can you quantify the impact of those costs?
No, it's really difficult to do. We're talking about PPE and gloves and just different things like that. Really couldn't quantify what that number is.
Okay. Thanks, guys.
Thanks, Chris.
Your next question comes from Lauren Silberman with Credit Suisse.
Thank you. Assuming off-premise volumes stay at these levels, you kind of touched on this, how do you think about the impact to operations as on-premise continues to build and you get to weekly sales levels above prior year levels, given how focused the team is on execution? Are there any changes necessary to the layout or incremental staff required?
I will answer that once I fully understand the question. Are you saying, are we having to make building improvements or changes, or what are you actually saying?
How are you thinking about execution, assuming that off-premise stays the same, on-premise continues to build, let's say, to prior year levels, you have average weekly sales well above last year? How are you thinking about how that impacts operations or execution?
Well, we've gotten very good at doing the To-Go curbside. 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, I guess.
Yeah. Lauren, I'll tell you, we have restaurants doing higher sales volumes right now, doing way better than the average. We've got a great example of how to execute that. We learned a lot from those stores that were doing high volumes of To-Go coming into the crisis, that were doing maybe close to 15% To-Go. We were able to learn a lot from them. We'll continue to do that to learn from those higher volume stores on how they do handle that capacity. It can have an impact on the kitchen, your operators get more and more efficient in the kitchen with that higher volume. They're able to manage the To-Go volume coming into the restaurant now.
Yeah. We're like triple what we were, call it in February.
Right.
We've had a lot of months to dial it in.
Yeah. We feel good about their ability to handle that additional capacity, wherever that might land.
Okay, thanks. Then just extending on David's prior question, assuming you fully return on-premise sales, maintain these off-premise sales, can you get restaurant margins above the historical 17%-18% level?
It really depends, Lauren, on what the inflationary environment looks like. It depends on what food costs are looking like, labor, things like that. We continue to see wages increasing across the country and those types of things. 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 would be to be in that 17%-18% range, and then we'll take another look at things and see what else we want to be doing or how else we want to be handling it.
With that said, a store that does $80,000 a week, their margins are typically less than a store that does $100,000 a week. That's way less than a store doing $140,000 a week. Obviously the higher sales, the better the margins.
Okay. Just last question to follow up on volumes. As you see capacity restrictions increase in a market, so 50%-75% or 100%, do you see a commensurate increase in sales?
Yeah, you do see an increase. Obviously they've got more capacity, more seats that they can fill, things like that. You do see a step up in dining room sales. You might see the To-Go come down a little bit. Again, they're still holding on to a good portion of those To-Go sales similar to other stores in the system. We are seeing the dining room sales, you know, tick up once that capacity, any capacity restrictions kind of are taken away.
Great. Thank you so much.
Thanks, Lauren.
Your next question comes from Jeff Farmer with Gordon Haskett.
Thanks, guys. Kent, this is for you. A lot of your casual dining peers have been asked about the prospect of potentially a $15 federal minimum wage and an end to the tipped minimum wage. Anything you have in terms of thoughts would be helpful on that one.
We are already dealing with that in California, Oregon, Washington, Nevada, a bunch of other states. That's why we have 14 different price tiers on our menu. As an example, when New York significantly raised theirs, over the course of a year, we had two price bumps, to basically take care of those increases. It's never 100% to take care of it. That's how we've reacted in the various states that have raised those wages over time.
Just as a follow-up to that, some of the South and Southeastern states would have the largest spread between their current minimum wage, and the tipped minimum wage and what could potentially happen. You just mentioned taking some price increases. In terms of thinking about the consumer pushback on those menu price increases, it sounds like you haven't seen too much pushback, or again, I don't want to put words in your mouth.
No, I would tell you some of our highest volume stores in the country are in California. I would say there is a short-term shock, and then long term, there's an adjustment, both on our side and the guest side.
A lot of it depends too on just how those increases come to play. I would imagine 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 things.
All right. That's helpful. Unrelated, this is sort of going back to a question that several people have asked, in terms of just thinking about the best and worst performing same-store-sales restaurants, some of the common themes it sounds like are just some of these operators' ability to do a good job with outdoor dining, pushing some consumers to maybe sort of softer week parts or day parts. Beyond those things, are there common themes of your best and worst performing same-store-sales restaurants that are worth noting?
Sure. Well, whether you know or don't know, I don't know, but when you come to run one of our restaurants, you have to give us $25,000, and then you get 10% of the bottom line. We really have partners, more so than say, employees. Typically, an operator can make a huge difference depending on their talent level and the ability that they have to put a team together. I would say that's the biggest reason that stores do extremely well versus stores maybe don't do quite as well. We've got some really long-tenured studs and studettes that work at our company, and we're very glad that they're still with us, and they're still performing way beyond a lot of our expectations, and we're very proud of them.
Thank you. Appreciate it.
Your next question comes from David Palmer with Evercore ISI.
Thanks. Congrats on the result. 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 you are 100 basis points or more below the year ago, and you're doing positive comps, is the biggest contributor to some of that gap, is it that To-Go business and the higher labor component of that? I ask partly with the idea that you're going from 7%-20% mix. It seems like not that big of a mix change to have over 100 basis points of margin impact. I have a follow-up.
Sure, David. Yeah, a piece of it is the labor on the To-Go. It does take fewer hours on the To-Go versus dine-in experience, but it is a higher wage rate. That's something that is impactful and it can be a big deal. I think our hope is that we can see those margins be above that mid-teen range. I think we're going to be cautiously optimistic on that. Again, as I mentioned, we saw some great results in September that really give us a lot of confidence on that. I think also in this environment, with everything going on every day, every week changes, staffing continues to be a bit of a challenge. We're really encouraging operators to make sure they're well-staffed to handle any exclusions, people that aren't able to work because they're sick, just different things like that.
That's an investment we want to make sure we're making throughout this deal. That's probably a bigger deal part of it than even the to-go side of things. It's just assuming that we're going to continue to make those investments as we want the operators to do that. That would probably be it.
Just on the seating capacity follow-up there, you mentioned some of the number of stores that are at 50%, 75%, 100%. Some 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 of those restrictions lifted, the lift is less and less, simply because other social distancing regulations start to kick in or the consumer pushes back. Can you talk to the step-up in maybe comps or sales lift you get at each of those steps that you see out there?
Yeah, it would be really tough to quantify because there's just so many other pieces playing a part in it, just beyond the restrictions. You've got outdoor dining and just different things like that, the number of seats they have there. It would be really tough, David, to break it down like that. I think, again, the operators are just working hard to fill every seat they possibly can and get the outdoor dining they can and push to go. That's really their focus, and they seem to be doing a great job of it.
Right. There's really no average. You might have one store doing 15% to go and another one doing 30%, 35%. 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 are you thinking about now in terms of where you want to be? How you have to change the boxes? I know you've talked about, say, changing in the Corral with the 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? I guess that's both a Texas and a Bubba's question.
Sure. This is Kent. We've got how do we push to go, how do we deliver it to the guest? How do we push it to the kitchen? We've got three different things we're looking at and testing. How do we push it to the guests? We also have three different things where we're making some conversions on and changing in new stores. As far as outdoor seating, covered patios and whatnot, we've already had that at Bubba's. We're testing that at some Roadhouses as well. Where we might have done a bump out before, that's fully enclosed, it's possible we've got some bump outs coming up that are covered patios so people can be outside.
Of course, in the winter, as the weather gets colder, so basically entering the winter and coming out of the winter, you can do the plastic wraps around those as well. Yeah, we're thinking quite differently about how we're designing our buildings, and we're trying various things to get learnings so we're not stuck on one thing, in other words.
Has the dynamic that's gone around the country changed where you're targeting, whether it's urban versus suburban, whether it's southern versus northern versus Midwest?
Sure. The answer is no. We've always kind of been out in the medium sized towns in America, I would say of our 20 stores that will open this year, six were in towns of, say, 40,000- 60,000 that I wouldn't even look at five years ago, call it. Of our mix of stores next year, I mentioned the 25% Bubba's, I would say 50% of the remaining of stores would be in those smaller markets versus the mid-size markets. As far as urban markets, I think we've got maybe two. Like two in our 600 stores, zero planned for next year.
Sure. When you said you have about a third of your units right now that are offering outdoor dining. As we move into the winter months, what do you foresee that being in terms of number of units that will be able to or are currently pursuing that as an option? Thank you.
I would say that, I'm just making this up, but I'm not far off. Say we had maybe 200 stores offering the outdoor seating this summer, but again, you could not do that in, say, Florida with the bugs and the hot weather. In Arizona, it's super hot, Southern Texas. I would say, the 200 stores this winter becomes slightly over 100 stores. 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 wintertime.
Thank you.
Your next question comes from Andrew Strelzik with BMO.
Great, thank you. Good afternoon. I have two quick consumer behavior questions and then an unrelated follow-up. To start, you mentioned in the prepared remarks about mixed benefits. How are you seeing customers use the menu differently? On the off-premise side, since you've seen the big step-up, I presume there's a number of new To-Go customers to the brand. Is there a discernible difference in frequency between a To-Go customer and a dining customer?
Well, I can take that first part of that question. What we're seeing on the mix, it seems like folks are moving a little bit more to the bigger steaks, some of the combo meals, things like that. As we mentioned earlier, a little bit of higher priced items. You see a little more activity on apps. You see the check going up a little bit. I think you see a little more attachment from an alcohol perspective, soft beverage perspective, kind of what you would expect as people are getting used to be excited to get back out into the dining rooms, things like that is what we're seeing from a dining room perspective. I think on the To-Go side, and I'll let Kent offer his thoughts, I don't really know
If we have much detail or data at this point on what the recurrences of those To-Go guests, Kent can give his opinion on that too.
I will tell you that the more that folks use our app, the more frequency and the higher the check. As we've changed our app this past month and improved our app and added some of these ways to suggestively sell certain items, we have seen some positive check on those instances. We are very happy that we've got a new app and look forward to seeing how it performs as we move forward.
Okay. Thank you for that. My other question was just some of your peers and some of the data would suggest that the unfortunate consequence of the pandemic and potential independent closures has been slow to materialize to this point. I know in some ways, your markets can be different than some others. I guess I just wanted to hear, is there any color you can share on what you're seeing on that in some of your key markets?
Are you saying about competitors closing? I'm not sure I understand the question.
Correct. In particular, on the independent side.
We're in so many markets, it's really hard to discern. Just from traveling around a bit, yeah, there has been some closures that I have noticed that of 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.
Your next question comes from John Ivankoe with JP Morgan.
Hi. Thank you. The question is on, I guess December specifically. You kind of give the period around holiday specifically and maybe even some of the higher volume days as we get into 2021 versus 2019. With current capacity restrictions as you kind of understand them to be, can you hold onto this positive comps presumably that you are going to be going over some higher average weekly sales types of weeks in December, for example, where your restaurants are probably very close to 100% basically utilized kind of across the store base during certain days, months like December and also into the next year?
This is Kent. If you'd have asked me in July where we were - $13 million, and if you'd have said, "Would you be positive in October?" I would have said probably not. Here we are positive in October, which just basically tells me that our operators, as usual, are exceeding our expectations. 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 surprised.
Well, let me ask you this.
Yeah, I.
Sorry. Go ahead, Tonya.
Oh, no. I was just going to say I totally agree with Kent. I'll tell you just from a technical perspective, you do have some holiday shifts going on. You've got Christmas Eve, Christmas day, going from a Tuesday, Wednesday to a Thursday, Friday. That tends to be a little more negative when you get into that back into that day part. To Kent's point, who knows how things are going to play out. We've seen a lot of differences as we've come through this crisis as far as periods maybe that would have been a little bit softer. Our expectation would have been a little softer that have proven to not be. We'll see. Typically, we would expect that to be a little negative, just that holiday shift.
I don't know if I asked the question in the right way or not, I'm going to take a slightly different stab at it. If, for example, in 2019, you were utilizing 95% of your effective capacity, and this year, just to have a number, you're at 90% of your seats are available, it would just be hard math to kind of lap. Just again, just using numbers just for discussion's sake. I just wanted to get your thought on that. Secondly, when you talk about your operators, are you in a significant fashion adding hours to the stores that wasn't necessarily in place in 2019, which is a way to add capacity just by more store hours in any given week?
I answer your first question and let Tonya do the hours thing. When you say 95% capacity, say, into the first quarter with 8% to go and then down to 90% and now we're at 20% to go, well, that sure makes up for that 5%, doesn't it?
Well, definitely. Well, I didn't think my 95% number was necessarily right. I was just using that just as a for example. Yes, you're absolutely right. Again, if my 95% and 90% is right, then I got lucky with those numbers. Yes to you.
Right. No, all I'm saying is that I've been pleasantly surprised at what they're doing inside, and I've been more than pleasantly surprised what they're doing outside the building. There were some levers that we pulled back in March and April that we're not pulling today that we could always go back to as an example. Meaning like our family packs that we're not pushing today that we could always add if we felt like it.
I think.
I saw a lot of that myself in May. Yes. You guys did an incredible job of executing that. Every store had its own approach. I give credit to your operators.
Yeah, absolutely. You're right from an hours perspective. Even pre-COVID, we were seeing some stores that had the demand opening maybe a little bit earlier or maybe more so that than staying open a little bit later. We definitely do see that happen. I would expect to continue to see that happen in stores that need that. I think you've got a lot of stores out there, even pre-COVID, the comp growth that we would see surprisingly would continue to come from stores with the highest volume. They just, again, they continue to find ways to do it. I think one of the things you'll see out of COVID is that a lot of your lower comping stores, they're learning a lot, and they're going to find ways to continue to grow those sales and find opportunity where maybe they weren't before.
I think that's where the difference will be and, again, the stores just continue to find ways to grow those sales.
Sure. With these new retail initiatives we got, we have no idea how they could maybe fill in some of that gap.
Thanks so much.
Yeah. Thanks, John.
Your next question comes from Jon Tower with Wells Fargo.
Great. Thanks for taking the question. Making the time. I'll try and make them quick. I think, Kent, you hit on this just a second ago, but the online offering, or excuse me, the To-Go offering now versus, say, the height of the pandemic, aside from the family packs, is there anything else that's different now versus then?
No, we're actually offering less than we did then. 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. Now that we've gotten really good at inside, our employment base is stabilized, and we've gotten really good at doing the outside, now those folks definitely have the capacity and ability to execute a little more creative outside stuff, if we so choose to pull that lever, as I said earlier.
Okay. Just in terms of thinking about your overall menu, I think a handful of your competitors have taken advantage of the weaker sales environment to slim things down and improve the operation. It doesn't seem like you guys actually have done that at all. Perhaps aside from the off-premise channel that has obviously turned into a nice piece for you, are there any other areas of the menu where you feel like you can improve the offering through either additional options or perhaps adding combos that weren't in place prior to the crisis?
We have a few items in tests right now that I don't want to speak to at this moment. Yeah, we are testing a few things just to see. Yeah.
Are those proteins, like center of the plate stuff, or is it more add-ons?
I bet you if you're on this call in February, we'll let you know.
There we go. I hope to be. Then just lastly on bookkeeping, one for Tonya, in terms of price mix traffic, any chance you could break that down for us in the quarter, please?
Sure. With the 6.3% comp, 3% of it was check. About 2.5% of that was pricing, almost 2.5% pricing. Then you had the 9.3% on traffic. That is how you build that out. Yep.
Okay. Thank you very much, and congrats on the quarter.
Thanks, Jon.
Your next question comes from Brian Vaccaro with Raymond James. Brian, your line is open. Please go ahead.
Sorry, still learning the mute button. Major phone issue. I might have missed it, I apologize. On the store margins, I think you said July margins were more pressured. If that's right, could you comment on where P9 or P10 store margins currently are running?
We didn't really want to give a lot of detail, not wanting to give a lot of detail on the months. I'll tell you though, September did get the benefit of that $4.5 million payroll tax credit. That did benefit the margins, I believe by about 70 basis points. If I'm remembering correctly, and that fell into September. You adjust out for those kind of one-time items. Again, we felt very good about where we landed and 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 remains to be seen, kind of where that'll land. Didn't really want to get into details specifically on the months just because there's more noise, a lot of noise on the months.
Sure. Okay. Well, that's helpful. On Bubba's growth, with Bubba's growth continuing to ramp, and I know, Kent, you've been working on optimizing the prototype for the model. Could you just revisit your latest thinking on the unit economic targets moving forward?
So you're talking about development costs, Brian, kind of how we think those development costs.
Yeah. Where your expectations are on AUV and margins for that concept, et cetera? Yep.
Well, as we saw over the last two months, AUVs are heading north. As it relates to the cost, I'll let Tonya handle that.
Yeah, from a cost perspective, are you speaking specifically to Bubba's? You're speaking to Bubba's, right?
Bubba's. Yep.
Yeah. We haven't seen a whole lot of a change there. As you would expect, restaurants that we're opening right now, we've seen a little bit of an increase in cost just from inflation. Contractors are dealing with labor issues. We're seeing material costs climb up a bit. We always talk a little bit about when we talk development costs, we talk all in, including pre-opening. Given some of the delays that we've had, we've seen a bit of an uptick in those pre-opening costs, just as we're carrying staff and things like that until we can get the restaurant open. We think those will be just a little bit higher maybe than what we had been running on average. I'll tell you, Bubba's has done just a great job. We have a number of stores in the Bubba's portfolio that are running positive comps.
They also ran positive in P9 and P10. It's very encouraging what we're seeing on that side. They're certainly working hard on driving sales and improving profitability, which has been great to see.
All right. That's helpful. Thank you.
Your next question comes from James Rutherford with Stephens Inc.
Hey. Yeah. Thanks for taking the question. A lot's been discussed on 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 any of sort of the revenue or margin potential, just so we don't kind of get ahead of ourselves and just level-set the goalpost for that, please. Thank you.
I would like to talk, but I've been told to let Tonya answer it, so I will.
I'll tell you, James, it's still really early to say, but obviously, going into this business, we did it knowing that we feel like those margins are very attractive. We think from a margin perspective, it would be in line slightly better than what we're seeing at the store level right now, 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 to assume there's going to be any material benefit there. That's kind of the way we're looking at it. From a margin perspective, it's very appealing. I'm sure we'll have more to say.
Okay. Thank you very much.
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.
Okay. At this time, there are no further questions.
Well, thanks everybody for joining us tonight. We really appreciate it. Hope everyone's doing well and look forward to talking to you soon. Have a great night.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.