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 then zero, and an operator will assist you. I'd now like to introduce Tonya Robinson, the Chief Financial Officer of Texas Roadhouse. You may begin.
Thank you, Holly, and good evening, everyone. By now, you should have access to our earnings release for the third quarter ended September 24th, 2019. 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 for a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements. 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'll open the call for questions. Now I'd like to turn the call over to Kent.
Thanks, Tonya. We are pleased to report strong third quarter results that included not only another quarter of strong revenue growth, but also solid restaurant margin performance and earnings per share growth. Our comps in the third quarter were up 4.4%, including traffic growth of 1.5%. Our sales momentum has continued into October, with comps increasing to 5.3%. The benefit of average unit volume growth, along with improvement in labor productivity, resulted in restaurant margin expansion of approximately 0.5% during the quarter. Tonya will give you more detail on the specific drivers in her financial update. I will say that our operators deserve all the credit for the improvement we saw throughout the quarter. Their focus on labor scheduling and efficiency while maintaining the right levels of staffing to execute at our high standards of food and service quality will continue to serve us well.
We continue to focus on growing guest counts with an increased emphasis on driving those sales through to the bottom line without sacrificing the guest or employee experience. Sales growth continued at Bubba's 33 this quarter, with 20 restaurants in the comp base generating growth of 8.8%. Our test of adding lunch in five Bubba locations, which began earlier this year, contributed 2.5% of that growth, aka 8.8 minus 2.5 equals 6.3% growth. Yee-haw. Construction and permitting delays continued to be a challenge in the third quarter, which pushed several more openings into early next year. With these delays, we now expect to have approximately 7.2% store growth in 2019, including the benefit of a 53rd week. Far in the fourth quarter, we have opened five restaurants and expect to open six more before year-end.
On a full year basis, that will give us 22 new restaurants in 2019, including three Bubba's 33 sites. Looking ahead at 2020, I am excited with how our development pipeline is coming together. We currently are targeting at least 30-plus company restaurant openings, including as many as eight Bubba's. We also look forward to opening two Jaggers next year, which are not included in our development outlook. From both a commodity and wage rate perspective, we expect 2020 to be another inflationary year. As a result, we plan to roll out a price increase of approximately 1.9% in late November to replace the menu pricing that will be rolling off.
Whether this pricing action will be enough to offset inflation and maintain restaurant margins in 2020 will depend on a number of factors, including traffic growth, the exact levels of inflation we experience, and continued improvement in our labor productivity. For those Roadhouse folks on the line, let me repeat, for the continued improvement in our labor productivity. Thank you. Finally, we spent the last month traveling the country meeting with our managing partners on our annual fall tour. I came away from those meetings confident about the direction of our business and our long-term growth opportunities. I want to thank our operators and the entire team for continuing to grow sales, take care of our guests and employees, and for never accepting average, as Gary Grimes likes to say. Now Tonya will walk you through our financial update.
Thanks, Kent. For the third quarter of 2019, revenue grew 9.4%, driven by 5% store week growth and a 4.4% increase in average unit volume. Restaurant margin dollars grew 12.7% to $108 million, while restaurant margin as a percentage of total sales increased 49 basis points to 16.7%. Additionally, net income increased 25.4% to $36.5 million or $0.52 per diluted share. Comparable restaurant sales increased 4.4% during the quarter, comprised of a 1.5% increase in traffic growth and a 2.9% increase in average check. By month, comparable sales increased 4.3%, 3.9%, and 5.1% for our July, August, and September periods respectively. As Kent mentioned, comparable sales increased 5.3% for our October period. Cost of sales as a percentage of total sales decreased 76 basis points compared to the prior year period.
The impact of approximately 0.8% commodity inflation was more than offset by the benefit of a higher average check. Based upon our expectation for inflation in the fourth quarter, we have updated our full year 2019 commodity inflation guidance to 1.5%-2%. Labor as a percentage of total sales increased 33 basis points to 33.8%, and labor dollars per store week were up 5.2% compared to the prior year period. The main drivers were wage and other inflation of 4.2% and growth in hours of 1.4%, which included the impact of higher guest counts. Labor per store week growth benefited by 0.4% due to adjustments to the reserves associated with our group health insurance claims, development history, and our workers' compensation claims experience. In total, these adjustments resulted in $1 million of expense this quarter compared to $1.8 million of expense in the prior year quarter.
We now expect labor dollars per store week growth for the full year 2019 to be between 6%-7%. Lastly, other operating costs as a percentage of total sales were essentially flat compared to the prior year period. We continue to see higher year-over-year insurance premiums. However, this increase was offset by favorable adjustments related to our quarterly actuarial reserve analysis for general liability insurance. These adjustments resulted in a $1.1 million credit this quarter compared to a $0.5 million credit in the prior year quarter. Moving below restaurant margin, G&A costs increased $0.2 million, and as a percentage of revenue, decreased 48 basis points to 5.4%. The primary drivers of the decrease were a lapping of an additional $1.4 million of incentive and equity compensation expenses from last year and $0.9 million in legal settlement expenses from last year.
Those benefits were partially offset by the expansion of our regional operations support structure, which impacted G&A by approximately $1 million. We currently expect that the regional operations expansion will have a negative impact on 2019's fourth quarter of approximately $0.7 million, as we will begin to lap the expansion which began during the fourth quarter last year. We continue to expect 2019 G&A costs to grow approximately 12% on a 53-week basis compared to the prior year. Depreciation expense increased $2.5 million to $28.3 million or 4.4% as a percentage of revenue, which is flat as compared to the prior year period. The increase included $1 million of additional accelerated depreciation, primarily related to restaurants expected to be relocated within the next nine months. We expect additional accelerated depreciation of approximately $0.2 million in the fourth quarter.
Our tax rate for the quarter came in at 15.1%, which is unchanged from our rate in the prior year period. Our full-year income tax rate guidance remains unchanged at 14%-15%. Our total share count was down on a year-over-year basis as a result of share repurchase activity. The impact of the 2.1 million shares repurchased in this year's second quarter, along with the 358,000 shares repurchased in the third quarter, benefited earnings per share growth by approximately 3.7%. We will continue to allocate our operating cash flow in a smart and balanced way, with a focus on disciplined growth of our brands, dividends, share repurchases, and franchise acquisitions. Our balance sheet remains strong as we ended the quarter with $100 million in cash.
During the quarter, we generated $55 million in cash flow from operations, incurred capital expenditures of $57 million, paid dividends of $21 million, and repurchased $19 million of stock. We have updated our projected 2019 capital expenditures to approximately $200 million. As we near the end of 2019, I want to remind everyone that the fourth quarter will have an extra week, which falls between Christmas and New Year's and is usually part of our January period. We estimate this extra week will benefit diluted earnings per share growth by approximately 4% for the full year 2019. Finally, due to the timing of our year-end on December 31st, the fourth quarter of this year will have two dividend payments. Looking ahead to 2020, our initial expectations include positive comparable sales growth and, as Kent mentioned, at least 30 new store openings, including as many as eight Bubba's 33 restaurants.
While we will be lapping the benefit of the 53rd week from 2019, we expect to grow restaurant store weeks by 3.5%-4.5%, with openings more evenly weighted throughout the year. We currently expect 1%-2% commodity inflation with fixed prices on approximately 30% of our commodity basket at this time. Our expectation for mid-single-digit labor expense growth per store week includes the impact of increases to mandated state wage rates, as well as the impact of ongoing market pressure and growth in labor hours due to traffic growth. Our 2020 expectations also include an income tax rate of 14%-15% and capital expenditures of $190 million-$200 million. That concludes our prepared remarks. Holly, please open the line for questions.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star then one on your telephone keypad. Again, that's star one to ask a question. Once again, press star one to ask a question. Our first question is going to come from the line of David Tarantino with Baird.
Hi, good afternoon. My question's on the restaurant margin performance you delivered in Q3. It does mark a pretty nice inflection point, relative to what you've been running. I wanted to ask, in particular, on the labor line, what exactly are you doing to drive some of the productivity enhancements that you mentioned, and how sustainable do you think those efforts are as you think about the fourth quarter in 2020? I have a follow-up.
Sure, David. Really, we saw those labor improvements kind of happen throughout Q3. We're still learning a bit. We've been talking a lot about labor. We've had some meetings with our market partners. We just came off fall tour. Of course, we haven't seen the impact of that yet. Really, we're talking to stores just about what their number is, what the number of hours they need to continue to grow restaurant sales, and meet their guest count, the guest counts that they have. That's really what we've been doing. If you remember back at the beginning of the year, we talked a little bit about the staffing initiatives we had. We felt like, a lot of people really did a great job of getting staffed properly where they maybe were understaffed in the past.
What we then said was there could have been some overcorrection, if you will, from some stores. I think some of what we're seeing right now is just a little bit of a balancing of that, kind of tweaking that a little bit, if you will, and just bringing that more in line. I think right now we expect that we will see that be sustainable. Too early to say Q4 will be a great indication of going forward what we will expect. We've built into our mid-single digit for 2020, our mid-single digit labor guidance, an expectation that those hours will start to be more in line with traffic growth and maybe even a little below traffic growth.
Part of that was we brought quite a few managers on to get geared up for doing 6 million, and a lot of those folks are now out of training and executing within the stores. I will tell you on fall tour, Doug Thompson did one heck of a class in labor productivity, and I was quite amazed to see people coming out of those meetings very energized and educated a little better.
Great. The follow-up I had was related to 2020, I know, Kent, you mentioned that you're taking a 1.9% price increase, I think that's replacing 1.7%. I guess in 2019, you took a second price increase in the spring to manage through the inflationary pressure. One question is that second price increase still something that you might consider for 2020? Generally, your philosophy around what you'd like to accomplish on restaurant margins in 2020, whether it's holding the line or increasing margins, just directionally, how are you thinking about it?
Well, as we went through, I meet with all 60 of our market partners, obviously, we probably in a lot of the higher wage states that had the bigger bumps, took a higher % than our one nine, then there were states that had no increase in state wage that we took less of a %. You can't really say it's an average. It depends on the state you're in. As far as next year, we didn't know at this point a year ago that we were going to do that additional bump, it's hard to tell.
Yeah, I think a lot's going to depend on how we see labor continue to trend, and we'll probably be having those conversations as that 1.5 rolls off at the end of March. Really too early right now to say whether we'll be doing that. I think maintaining restaurant margin is a good place to be in this kind of labor environment. If we can do that with traffic, driving traffic and maybe getting a little bit of help from a commodity inflation standpoint as far as being a little lower on that range we gave, I think that would be really positive.
Yeah, and the biggest thing she said is the traffic. We don't know our traffic numbers, say first quarter of 2020, and that's a big indicator of what we'll do or not do.
Great. Thank you very much.
Our next question is going to come from the line of Brian Bittner, Oppenheimer & Company.
Thank you. Question on the food cost inflation outlook for 2020. The 1%-2% for next year is pretty good, even potentially better than what you're operating in this year. Can you just talk a little bit more about what that outlook is exactly based on? Is it based on what you're currently contracting at with your suppliers now, or is it based on what you expect the floating rates to be at? Any commentary there would be helpful.
Well, Brian, it's really early on 2020 commodity inflation. We're locked, as we said, on about 30%-40% of the basket. We're making a lot of estimates, if you will, about what those floating prices might be on some items. That's what I would tell you. Right now, we feel like from the beef side of things, we're seeing a little bit of supply restriction, if you will, just on certain grades that we use on beef, some cuts of that happening right now, which is why we upped that overall guidance. We've kind of narrowed the range, to 1.5%-2% for the full year 2019. We may see some hangover of that into Q1. Again, a lot just remains to be seen. I would tell you that 1%-2% we're baking in. We've got some prices locked.
We're floating a lot of things. We're making some assumptions. Overall, we feel good about that range right now. The inflation in that number, it's spread across the basket. There isn't one item or one piece of the basket that I would really call out as being more of a driver. There are various things, some deflationary, some inflationary. We've got a little bit of pork inflation built in, not as much as we thought maybe we would have heading into 2020. That's really about all I could tell you.
Okay. Just quick follow-up, as we do approach the spring, when you did take price last year, I know you talked about labor and watching that, but is it safe to say you'd have to see food costs really surprise you above this range to really take price in the springtime? Is that probably something we should be gauging when we think about how you're thinking about the springtime price increase?
Well, maybe you could give us some outlook on what the tariffs will be at that time. That might help us.
Yeah.
I wish I had that smart, Kent.
Those ranges are pretty big, when we're looking at the commodity inflation guidance, the labor guidance we're given. I think like Kent said, a lot's going to depend on traffic trends, where we are there, what the labor productivity we're seeing, how that's coming out, the rest of this year and heading into next year, much the same way we were sitting here last year thinking about what would additional pricing might be. We'll be talking a lot more about that on the call in February.
Okay. Thank you.
Our next question will come from the line of John Glass, Morgan Stanley.
Hi. Thanks. First, maybe Tonya, or Kent, can you just go back to the G&A commentary? This quarter was flat year-on-year. There may have been some noise, but it sounded like, or it came in a lot less than I would've expected. Were there one-time items in this quarter that we would not expect to continue? How do you think about maybe the G&A number for next year, after you've stepped up in 2019 with some, I think those additional managing partners or area partners?
Sure, John. Just to tackle the first part of that question first. We had about $2.6 million of charges that we were lapping from last year. Between some extra incentive and equity compensation with tax reform, we paid out bonuses a little bit higher due to that. We had a legal settlement, some other things. That was about 7.5% of an offset to the growth we saw this quarter. Looking at 2019, really the biggest thing we saw was the expansion of that regional that we called out, that regional support structure, which was about $1.2 million. Again, that was about 18 basis points as a percentage of revenue. Overall, even if you bake all those things out, its growth on G&A was a reasonable number. As far as I'm concerned, it was below revenue growth. It felt good.
I think we're still very good with the 12% G&A growth on a full year basis. I'll remind everyone too, one of the reasons that G&A will bump up in Q4 is because we do have that extra week impact, which is about 2%, I think, on the full year, relating to G&A growth. You have that going on. As we look to 2020, my expectation would be that we should be able to get some leverage on G&A. Worst case, I think it's flattish, but feel like we have some opportunity to get a little bit of leverage there.
Well, I can tell you that the new president of Texas Roadhouse will be paid one crisp $100 bill next year, meaning me, for that role, so that might help a little bit.
Good to know. Just to be clear, Tonya, on the price increase, where does that leave the fourth quarter effective pricing and maybe first quarter effective pricing, given the increase you just talked about?
Sure. Q4 2019 will run about 3.2% because that 1.7 will roll off. Then we have about a week before we have the 1.9 rolling in, so we'll be at about 3.2%. Q1 of 2019 will be about 3.4. Then assuming that 1.5 rolls off and isn't replaced, you'll obviously drop down to the 1.9 the rest of the year. I think on a full year basis for 2020, that would get you about 2.1% pricing in the menu effective.
Got you. Okay. You said 1Q '19, but I assume you mean 1Q '20 is the 3.4.
Yes, I did. Thanks, John. Yeah.
Okay. Yeah.
Q1 2020.
Thank you.
Our next question will come from the line of Jeffrey Bernstein, Barclays.
Great. Thank you very much. As we look at the comp trends in the current quarter, it seems like a solid continuation of the momentum from the third quarter. I'm just looking at the compares to the rest of the year. Looks like they get sequentially more difficult in November and December. I didn't know if there's any unusuals or shifts or anything like that we should anticipate going into the remaining months of this year, or whether perhaps you don't look at it on a two-year basis because there's other things going on. Just trying to assess how you'd think the comp would play out for the rest of this quarter.
The only thing from a calendar shift perspective I'd call out would probably be in December. You got the benefit of that extra week, which I think adds, 8% in the quarter to store week growth. That typically it's a busier week, that week between Christmas and New Year's than the other weeks of December. You'll get a little bit of a help from that, in December.
We are going to be enjoying Christmas on a Wednesday and Christmas Eve on a Tuesday, which is a lot better than the weekend, as well as New Year's Eve on a Tuesday.
Yeah
that helps too.
Yeah, for sure.
Got it. Presumably, inflation will dictate whether you take another increase in early 2020, but I'm just wondering, as you now look back on the past many months of the second increase you took earlier this year, did you get the sense there was any pushback in terms of consumer sentiment or reason to believe that you might not want to take an increase even if inflation justified it because of maybe some response from the consumer? Is it really all flowing through in your mind?
Well, if you look at the last two months, the comps were pretty okay, right?
I think right now from a mix perspective, we're not really seeing anything that would indicate that the pricing isn't being accepted by the guests. It feels pretty good. It's always hard to tell when that really would show up, any pricing. I think it takes quite a bit longer to show itself, and at that point, you may not even realize that it's from pricing. Probably be looking at some other things. Right now, sitting here today, the pricing's flowing through pretty well. It feels fine.
Great. My last question, maybe just a clarification. I think you said you got 30 units going into next year and then a couple of Jaggers, so 32. This year, we're talking about low 20s. Yet the CapEx spend is very similar. I know you spend ahead of the openings, but I'm just trying to see if there's anything else going on there. Maybe the change in the cost to build Texas versus Bubba's or how that mix shift plays out. Seems like a big differential in terms of units with CapEx being the same.
Well, a lot of these units that were supposed to open in December will now open in January, maybe February. Most of the construction and people expenses to open those stores will have already been spent.
Yeah, that's definitely true. We're seeing that. We also are expanding the support center, which is about $20 million of the cost that we're seeing in that CapEx number this year. We took our two existing buildings that we're now filling up completely, built a building in between. We're just taking those and getting it where it needs to be to hold all the growth we've had.
We're doing eight floors in one year, and that's all the floors we got. It's like, let's get it over and done with and move on, and not have to deal with that next year.
Great. Thank you.
Our next question will come from the line of Brian Vaccaro, Raymond James.
Thank you. Good evening. Just back to the comps. The momentum accelerated through the quarter with obviously a pretty strong start to fourth quarter. I'm curious what you'd attribute that to, how much might be due to improved staffing and throughput versus some other dynamic. Anything worth calling out from a regional or day of the week standpoint?
Legendary food, legendary service. I'll let Tonya fill in the blanks.
Nothing from a regional perspective that I would point out any different than what we've seen. Day parts are all behaving similarly, nothing there that I would call out. I think it's just the strength of the brand, to Kent's point. We continue to execute really well, and I think that we're just seeing that momentum. That's great.
Okay. The acceleration, I guess, it's a modest acceleration, but a pretty solid acceleration. Was it concentrated in some set of stores where maybe you're seeing the fruit of that investment you were making in prior quarters or more broad-based?
I think it's more broad-based, Brian. I would tell you, it's more all across the country. We're seeing it across various dayparts. You're seeing a lot of it in early dine. We're seeing to-go continue to grow. That's certainly helping from a traffic perspective. That continues to be about 7% of our sales. Overall, we thought to go up 10% year-over-year. That continues to be definitely a contributor to the growth.
Okay. On Bubba's, with plans to re-accelerate the growth there. You mentioned the strong comps. Kent, I'm curious what's driving the comps? I think it's been pretty strong in the last few quarters now. Is it brand awareness that's breaking through? Are you hitting it on all cylinders on the store level execution or something else you'd point to there?
No, I would say you nailed it on both counts. I think the people we have in place have been there now one, two, maybe three years. That part's getting more stable. I think just people in these various markets where we're located are just trusting the brand more than we thought. That's a good thing.
Okay.
Okay.
I'm sorry, go ahead.
Oh, no. No, go ahead.
Last one, if I could. Back on Bubba's, could you just walk through the key components of the unit economic targets for the concept AUV store margin and investment? That's all for me. Thank you.
Sure. Right now, we really haven't given a whole lot of that data out there. I'll tell you, their sales growth's looking great again, 8.8% in the quarter. We continue to see that level of growth all year, which has been very encouraging. They continue to get improved restaurant margin. Those operators are really honing in on labor costs and different things as they dive into that, and that's certainly been encouraging, too. From a unit development cost standpoint, I think right now we're seeing those costs come in anywhere from $6 million-$6.5 million. That's taking out one store that we had that was much higher than that. We kind of baked that out. There were some other things going on there driving that out of the normal.
That includes rent at a 10 time.
Yeah, that includes rent at a 10 times factor as we usually do from a development cost standpoint.
All of the opening costs as well.
Also fully loaded for pre-opening. We expect to see mid-teen returns when we're modeling those new stores out, just like we do at Texas Roadhouse, is what we're looking for. Again, I think we've talked before that if we can get $85,000 a week in sales, if we can keep that building cost around $6 million, assuming a margin that's slightly better than a Texas Roadhouse because of the alcohol spend there and then the lower cost of sales. Those returns look good.
We do have three buildings that are slightly smaller, getting ready to open, that might provide some efficiencies and lower costs, but too early to tell since they're not open yet.
Yeah.
All right. That's helpful. Thank you.
Our next question will come from the line of Will Slabough with Stephens Inc.
Just had a question on labor. If there's anything different happening in the labor market that would point to any loosening of that market at all, or if the improvement that we're seeing in the P&L is purely a result of your productivity initiatives that you have going on.
It really looks to be more on hours growth than wage inflation. Wage inflation in Q3 did tick down just a little bit from where it was in Q2 2019. I don't know how sustainable that would be. I don't know if maybe we've done some catching up, and now we're going to see it moderate a little bit. We're not expecting that in our guidance. The hours is really where we saw the bigger turnaround in Q3 of 2019.
Got it. Just a quick follow-up on Bubba's, you mentioned the small box that you have opening up in a few stores here coming up. Can you remind us how much smaller that is and how much you're saving there? Then as you think about next year, how many of the potential eight stores do you expect to be smaller format box stores?
Well, as far as next year, it's just those three because you're always more than a year out. I want to say it's 450 sq ft smaller, something like that.
I believe that's right. I think it comes in at around $ a couple hundred thousand, maybe, lower cost.
At $250 was the target.
Got it. Thank you.
Our next question will come from the line of Chris O'Cull, Stifel.
Yeah, thanks. Good afternoon, guys. New stores have opened at really strong volumes the past few quarters. Is there anything the company's doing differently to generate these higher volume openings?
Yeah. We're locating in smaller towns. Go figure, huh?
Yeah. That's true. Other than that, there's really nothing we're doing differently. We are in six towns that are a little bit smaller than maybe we wouldn't have expected to be in before, and we are seeing just really great performance out of them, as Kent mentioned. Nothing that I could point out that we've really done differently from an execution standpoint.
How many stores next year are going to be in these smaller towns?
Boy, if I had the development report in front of me, I'll tell you. Let's see. Tonya, you want to answer something else while I look at it real quick?
I think you probably have it.
I do have a follow-up. I'll ask another one.
Okay. Well, go on and ask your follow-up then, we'll see then.
Just to back on the labor question. What portion of the store base do you think still has an opportunity to improve labor productivity? When did you really start to see the improvement this quarter?
It happened throughout the quarter, probably a little bit in a bigger way in September, I would tell you. It's really hard to say what opportunity each store, what opportunity they have because, to be honest, every store is different. We've been really, as we're talking about these labor productivity questions, challenging the stores to know their number and not giving them a target number or something that we feel like they should hit because we just don't have that labor model that we're going to push down from corporate. It's hard to say where that opportunity might be, but I feel pretty confident that we're going to continue to see them focused on that and continuing to find ways to make sure that they're hitting the number that works for them, so they can execute on guest experience and food quality for sure.
Nine towns.
Okay. Just something back on the beef. What are you hearing from your suppliers to make you think the beef inflation outlook could actually improve after the first quarter next year?
Well, I think some of what we're hearing, of course, again, we don't have a lot of transparency. We aren't locked on price on a lot of things. Some of what we're hearing, it's not as bad as maybe what the expectation was coming off of the discussion that's been going on all year on tariffs and the swine fever and how that would impact beef. It just doesn't seem to be there as much as we thought it would be. Now, again, there is some supply, a little bit from a supply perspective, just on the choice beef, just from a grading perspective. We've no concerns as far as the supply of beef for our restaurants, just overall in the industry, a little bit of a supply constriction, if you will. I think slaughter rates are down year-over-year, those types of things.
Again, using what we are locked on and then making some assumptions on the floating, we get comfortable with beef where it lies within that 1%-2% overall commodity inflation.
Great. Thanks, guys.
Our next question is going to come from the line of David Palmer, Evercore ISI.
Just to follow up on labor productivity. You mentioned mid-single digit labor inflation in 2020. Could you break down your assumption that goes into that same store traffic? You've obviously talked about productivity, perhaps managing hours better versus wage inflation. Any breakdown would be helpful, and I have a follow-up.
Sure. When we're thinking about that mid-single digit range, we're thinking you've got approximately 1%-1.5% that we know is just state mandated increases that are coming. Then probably another, I would call it 1.5%-2% of just continued market pressure. That would keep us pretty steady as far as the wage inflation we're seeing, along with the 1% we see on inflation on the other category, which is just taxes, group insurance, things like that. We think that'll continue. On the hours side of things, that one is where you get to a range, because you've got to make some assumptions on traffic. Without giving any of that away, we typically don't give traffic guidance. I'll tell you what we're hoping is we see hours growth come below traffic growth, is kind of what we anticipate happening.
Don't know if we'll get back to 50%, which is typically what we had been seeing, hours growing about 50% of traffic. Within that range, you have some scenarios where you at least see hours growth below traffic growth. That made us comfortable with that mid-single digit range, which you could call 4%-6%.
Thanks. That's helpful. Just a philosophical question. Kent, you made some comments in your opening remarks talking about labor productivity, and obviously, there's been a lot of talk about this. It seems like the focus is up on that area. You talked about some evolutionary things about how you had staffed up managers on that push to 6 million, but there's also that bigger question about why now and what triggered this for you from an organizational focus. Does some of it have to do with where the margins had gotten, where you think that they should be, or some other observations that you made about the business? Any color there would be helpful. Thanks.
Boy, I wish I could give you the specifics. I think we just evolved into that position, and I think we learned from some of our better operators that were managing labor more effectively, listened to them, and then basically, we've been out teaching our learnings from those folks. Nothing we've done unusual. It's just that we basically are sharing the best of the best ideas on various fronts, not just labor.
I think, too, David, when you think about just the overall pressure from a wage inflation standpoint, it does make you want to do everything you can on the other aspects of labor to really help from a cost perspective. We continue to see wage inflation stack up. As Kent said, really, the operators came forward with some great ideas, and that's just what we do best, share best practices, is really what our operators are great at.
Great. Thank you.
Our next question is going to come from the line of Dennis Geiger, UBS.
Great. Thank you. Just given where you're at now on labor inflation per store and considering the better labor scheduling and efficiencies, wondering if you could just talk about employee and customer satisfaction metrics, what you're seeing also on the throughput trends, maybe in the context of those more tightly managed stores, but then just broadly across the system.
When I go into stores, I'll look at the faces of our guests that are interacting with our people, and I continue to see smiles going back and forth. I think we're still keeping the staffing levels at the appropriate point to have those great guest-to-employee interactions. I don't really see anything new to report on.
Yeah, I think the strong traffic growth we're seeing, too, is a great indication from a customer experience that we're doing the right things.
Okay, maybe if you could just provide an update on where we stand with bump outs currently and the opportunity from here, either on an annual basis or in total for the system from where we sit right now. Thank you.
Sure. We've got about 250 of those done to date of the bump outs. I think we have 11 so far in 2019 completed. As usual, there's usually about anywhere from 25-35 of those in the pipeline at any point in time. We continue to feel like we continue to see stores meeting the hurdles that we expect internally to get approved for those bump outs. That's pretty exciting. I think from a Roadhouse perspective, I could see it being 90% of the units eventually being able to sustain a bump out like that. That's really encouraging to be seeing.
Thanks.
Our next question is going to come from the line of Andy Barish, Jefferies.
Hey, guys. Two questions. Just on the 53rd week this year and having the holidays, how should we think about the impact just starting out 2020 from that shift?
Yeah, we will see a little bit of a negative impact from that busier week falling in P12 versus being in P1. It won't be as much as the benefit we're going to see in Q4 because Q1 tends to be higher from a sales perspective, but we do think that that'll have a little bit of an offset. That's on the average weekly sales numbers, Andy, because from a comp sales base.
Sure
We'll be looking at 13 weeks over 13 weeks. It won't be a comp sales impact. It'll just have an impact on average weekly sales growth.
Okay. Just following up on the Bubba's work that's been going on. The lunch tests obviously seeming like they're driving incremental sales. How applicable is that to rolling out to the rest of the Bubba's stores at this point?
Like we do everything, we just move slow, and basically give something that we're testing six months. It's possible we'll add a few more stores next year, but not significant numbers.
Okay. Thank you.
Our next question is going to come from the line of Peter Saleh with BTIG.
Great, thanks. I just wanted to come back to the conversation around Bubba's. Is the reason for the smaller format, have you removed the service bar, and now you've just moved to just one bar? Is that the removal of the square footage and the cost savings?
Yeah. We did remove the service bar. We have a big party table that will be coming out of those three stores. With the bar, we lose a little square footage, and that's pretty much it.
And-
You also have the equipment that's in the bar that costs a lot of money. I think we took four TVs out as well, and a few speakers.
Got it. I think the last we spoke, you had mentioned that at one point you had tested co-marketing Bubba's with Roadhouse, and that kind of worked in your favor. Is that something you guys are still doing or considering to do?
Yeah. I was the guy that really was not in favor of that, I'll be honest with you. Then we had a few lower volume stores where we did a billboard in each market that kind of mentioned that we're connected, or did mention that we're connected, and that was very beneficial. Apparently, I was wrong, and we'll do that more in the future.
Any sort of magnitude impact on comp from the co-marketing?
It's hard to tell just because all the stores are up. I would say there is a little more benefit on those that had it than those that did not. Yes.
Great. Thank you very much.
Our next question will come from the line of John Ivankoe with J.P. Morgan.
Hi, thank you. Firstly, Tonya, as we look at the insurance and kind of think about fiscal 2020, how do you look at general liability and workers' comp in 2019? Was it an average year, a high year, or a low year as we think about potential lapse in fiscal 2020?
Well, they were up. GL probably more than workers' comp, I would tell you. We expect to see insurance increasing in 2020 again. I think it's something we can absorb and within the other operating line. There will be some definite inflation on that line as we continue to see some lines of insurance just kind of contract, if you will. They get a little tighter, things like that. Insurance seems to creep up a little bit every year, and I think we'll continue to see that happening a little bit on 2020. That's just from a premium perspective, John. On actuarial adjustments and things like that based on claims experience, that's one you just really never know for sure how that's going to work or how that's going to happen and whether it's going to be a put or a take in any given quarter.
There's some news on the tape today on just delivery in general, third-party delivery. Have you seen, even on a very temporary basis in any stores at all, any type of competitive impact around any type of free delivery promotions that some of your competitors may have run? I'm sure many have tried to come into your office to give you their best pitch. Is there an idea at this point that, at least in certain markets, maybe certain even locations within certain markets, are any of your managing partners reaching out to you say, "Hey, listen, third-party delivery might make more sense," that was a tongue twister, "in terms of adding delivery to their own store?
Sure.
We love third party delivery for our competitors that drives more to-go into our stores.
Yeah. I'll tell you, just coming off fall tour, we talked about a lot of things. To-go was a big topic, as we see to-go volumes grow in a lot of our restaurants. Delivery was not part of the conversation. Doing delivery was not part of the conversation. I think they feel like they've got enough to handle with just the to-go volume we're seeing, no changes there.
We also love when our steak competitors advertise on TV because that helps drive more people into our stores.
Thank you.
Thanks.
Our next question is going to come from the line of Andrew Strelzik, BMO Capital Markets.
Hey, good afternoon. Thanks for taking the questions. First for me, in the past couple of quarters, you've talked about turnover creeping higher. I'm wondering how that's been trending. Did an improvement there maybe contribute to any of the better labor in the quarter? How important is improving those metrics to kind of holding on to some of the labor productivity?
Sure. From a turnover standpoint, we didn't see too much of a change. I think hourlies were down slightly, versus what we saw last year.
Management turnover is also down.
Yeah, management turnover. We've been really seeing management turnover come down for quite some time now. A lot of that has to do with some of the things we did on compensation about two years ago, some of the things we've been doing from quality of life standpoint. We continue to see that just be impactful, which is really good. Overall, from a turnover perspective, we would always like to see those turnover numbers come down. We really work hard on making sure we're hiring right, we're doing the right things by our employees, we're paying correctly. Just all those things. Being flexible with schedule is another huge one to retaining employees. We talk about that quite a bit with the operators.
We think the fact that we've added more servers in the stores and more managers means it's easier for our servers to get a night off to go to that concert, and our managers might get a little more time off, maybe a weekend every once in a while off, because we now have additional managers in each store, hopefully.
Great. That's very helpful. My second question, just more broadly at the industry level, we've heard a lot throughout the quarter about maybe some restraint on consumer spending, your comps were obviously quite healthy, but the traffic did slow sequentially, I guess, just a touch. Talking about things maybe re-accelerating, how are you viewing the consumer? Have you seen any pullback or loosening of the purse strings at all? Just a broader view of the consumer spending environment would be great.
Sure, Andrew. I would tell you, just hearing from our operators, we don't hear that. The consumer seems to be in really good shape and a really good place. I think people continue to want to eat out. They want to have that experience. Because of the execution levels we have, they continue to choose us because they know they're going to get a great value and great product, so great service. I think that's really where our focus is and what is very important, but nothing that I would point to from a consumer standpoint.
Yummy for their tummy. That's what we do.
Great. Thank you very much.
Our next question will come from the line of Jon Tower, Wells Fargo.
Great. Thanks. Just with plans to take another round of pricing, what are you doing to ensure that value on the menu remains front and center for the consumer? Are you doing any menu alterations or inserts or perhaps any new product additions?
This is Kent. No, pretty much the same. Like I had mentioned before, more of the increase happens in the states that are really increasing minimum wage, like California, Oregon, Washington, New York. I think the consumers in those states kind of see that everywhere, not just at our restaurant.
All right. That's it for me. Thank you.
Thanks, John.
At this time, we have no further questions. I'd like to turn the call back over to the management team for any final remarks.
Thanks, Holly, and thanks everyone for joining us tonight. If you have any other questions, please feel free to reach out to us at a later date. Have a great night. Thanks.
Once again, we'd like to thank you for participating in today's Texas Roadhouse, Inc. third quarter 2019 earnings conference call. You may now disconnect.