Good evening, and welcome to the Texas Roadhouse Inc. 2nd Quarter 2018 Earnings Conference Call. Today's call is being recorded. All participants are now in a listen only mode. After the speakers' remarks, there will be a question and answer session.
I would now like to introduce Scott Colosi, President of Texas Roadhouse. You may begin your conference.
Thank you, James, and good evening, everyone. By now, you should have access to our earnings release for the Q2 ended June 26, 2018. 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. In addition, we may refer to non GAAP measures. If applicable, reconciliations of non GAAP measures to the GAAP information can be found in our earnings release. On the call with me today is Kent Taylor, our Founder and CEO and Tonya Robinson, our Chief Financial Officer. Following our remarks, we will open the call for questions.
Now I'd like to turn the call over to Kent Taylor.
Thanks, Scott. We are pleased to report another quarter of double digit sales growth driven by increasing guest counts and continued operating week growth. Comparable sales in the 2nd quarter were up 5.7% including traffic growth of 4.3%. Our strong sales momentum has continued into the 3rd quarter with comps increasing approximately 4.7% in July. While the benefit of tax reform led to almost 17% diluted earnings per share growth in the quarter, restaurant margins continue to be pressured by increasing labor costs.
We know we are battling labor inflation this year somewhat driven by our decision to make investments on that line. However, we also know that investments like those along with our focus on keeping menu prices low as we can are the right thing to do for the long term success of the business. On the development front, we have opened 14 company restaurants so far this year and we have an additional 14 restaurants currently under construction. Due to permitting issues, we pushed the opening of 2 Bubba 33 restaurants in the next year and updated our full year guidance to reflect our current expectation of 27 to 28 company restaurant openings. The remaining openings this year will be back end loaded with 3 expected in the 3rd quarter and the balance in the Q4.
Looking ahead to 2019, our development pipeline is shaping up nicely. As always, our target remains to open close to 30 company owned restaurants next year with most of those sites already selected. Finally, a big thank you to our operators. Our results so far this year show that their continued focus on their people and their business is paying off in the form of increased guest traffic and higher guest satisfaction. Now I will turn the call over to Tonya who will provide the financial update.
Thanks, Ken, and good evening, everyone. For the Q2 of 2018, net income increased 17.7% over the prior year period to $44,200,000 or $0.62 per diluted share. Revenue growth of 11.1% during the quarter was driven by a 6.4 increase in store weeks and a 5% increase in average unit volume. For the quarter, comparable restaurant sales increased 5.7% comprised of 4.3% traffic growth and a 1.4% increase in average check. By month, comparable sales increased 8.5%, 3 point 6% and 5% for our April, May June periods respectively.
As Kent mentioned, comparable sales increased 4 point 7% for our July period. At the beginning of 2018, we implemented the new revenue recognition accounting guidance, which resulted in the reclassification of certain expense and credits. The reclassifications had no impact on net income and the comparative financial information has not been restated. As a result of the reclassification during the quarter, we reduced sales by 1,500,000
dollars for gift card
fees, net of gift card
breakage income and increased other revenue $700,000 for franchise related items. Additionally, cost of sales decreased $1,100,000 or 10 basis points. Other operating costs decreased $700,000 or 8 basis points and G and A increased $1,000,000 or 17 basis points. No direct reclassifications were made in labor. However, the change in sales resulted in an increase of 7 basis points to labor as a percentage of total sales.
We currently expect the ongoing 2018 impact of the reclassifications related to the implementation to be similar as a percentage of total sales or as a percentage of total revenue to those just quantified. For the quarter, restaurant margin decreased 77 basis points to 18.2% as a percentage of total sales compared to the prior year period. Cost of sales as a percentage of total sales decreased 24 basis points compared to the prior year period. The impact of approximately 1% commodity inflation was more than offset by the benefit of average check and the impact of the reclassification. Labor as a percentage of total sales increased 93 basis points to 32% and labor dollars per store week were up 7.5% compared to the prior year period.
The main drivers were wage and other inflation of approximately 4.3%, including the impact of increasing managing partner based pay and growth in hours of approximately 3.2%. The approximately 4.3 percent wage and other inflation includes a $700,000 or 0.3 percent benefit in our group health insurance expense due to a change in our claims development history. We continue to expect labor dollars per store to be in the mid single digit range, excluding the impact of higher guest counts. Our labor expectation includes an estimate of increases due to mandated state wage rates, ongoing market pressure, restaurant level compensation increases and growth in labor hours due to certain hiring initiatives. Lastly, other operating costs as a percentage of total sales increased 11 basis points compared to the prior year period.
The increase was primarily due to higher dining room supplies expense related to the new to go packaging rolled out in late 2017. The increase was partially offset by the impact of the reclassification. We currently expect other operating to be approximately $1,000,000 higher for the remainder of 2018, primarily in the Q3 due to changes in to go packaging. Moving below restaurant margin, G and A cost increased $6,800,000 to 5.6 percent as a percentage of revenue, which was a 58 basis point increase. Increase included $2,500,000 of additional costs for our 25th anniversary annual Managing Partner Conference, which was held in San Diego this year, as well as the impact of reclassifications discussed earlier.
Our 2019 conference will be in Florida, so costs are expected to be lower next year. We also recorded an additional $1,100,000 of costs related to incentive and equity compensation this quarter. Depreciation expense increased $2,100,000 year over year to $25,200,000 or 4% as a percentage of revenue, which was an 8 basis point decline. Preopening costs decreased by $900,000 year over year driven by the timing of opening. As Kent mentioned, our openings for the second half of the year are back end loaded.
So we currently expect 3rd quarter preopening costs to be lower compared to last year, while cost in the 4th quarter should be higher. Finally, our tax rate for the quarter came in at 15.6% compared to the 27.9% rate in the prior year period. We are updating our full year income tax rate guidance to 14% to 15% compared to previous guidance of 15% to 16%. Our balance sheet remains strong as we ended the quarter with $154,000,000 in cash. In April, at the beginning of the second quarter, we used some of our cash to pay off our outstanding credit facility balance of $50,000,000 For the first half of twenty eighteen, we generated $165,000,000 in cash flow from operations, incurred capital expenditures of $67,000,000 and paid dividends of $33,000,000 We continue to project capital expenditures of approximately $165,000,000 to $175,000,000 excluding any cash used for franchise acquisitions.
Now I'll turn the call over to Scott for final comments.
Thank you, Tanya. Well, we're very pleased with our top line performance for the first half of the year and especially with the traffic gains we've seen. As Kent mentioned earlier, our strong comparable sales growth validates our decision to keep menu prices low and invest in labor, especially given the benefit of tax reform on diluted earnings per share growth this year. However, in the short term, these decisions are tough on both restaurant margins and restaurant margin dollars per store week. Ultimately, providing a legendary experience to our guests and not taking anything for granted will always be our number one focus because we know it is the key to long term growth.
With respect to development returns, our newest Texas Roadhouse locations are performing well with average weekly sales over $105,000 In addition, positive sales momentum at Bubba's has continued through the Q2. 12 Bubba 33 restaurants in the comp sales base grew their sales by approximately 7.5% which is certainly encouraging. In addition around this time each year, we also look at the returns for restaurants we've opened in previous class years to evaluate their performance compared to initial projections. For example, this month we had our first look at our 2016 class year since all locations have been open at least 18 months. Our analysis shows overall returns to be well in excess of our weighted average cost of capital.
At the end of the day, we continue to be very excited about the direction of our business and we will remain focused on doing the right things for the long term benefit of our employees, our guests and our shareholders. Thank you to all of our operators for your continued commitment to legendary food and legendary service. And that concludes our prepared remarks. So James, please open the line for questions.
Thank you, Mr. Colosse. And our first question will come from Brian Bittner with Oppenheimer and
Company. Thanks. Hey, guys. First question, just on the cash balance, good problem to have 100 and $50,000,000 on the books. And you talked about the opportunity to purchase up to 60 Frans Pegg restaurants, at least I had that in my notes.
How like realistic is it that you would pursue something like that? Should we start to be thinking that franchise acquisitions are a real possibility moving forward here?
Hey, Brian, this is Tanya. I can tell you we do have one in the works that will happen before the end of the year. We are actively talking to a number of franchise partners about that. So we really hope to be making some moving ahead on that, maybe not into the back half of this year, but maybe into 2019.
Thanks. And just last question on the same store sales. Obviously, a very hot start to the quarter, and I guess it cooled a bit as the quarter went on. Anything you can tell us about the comps throughout the quarter to help us better understand how it looked? And what maybe you attribute the lower gap versus the industry in the last couple of months of the quarter too?
Brian, there isn't anything that I can think that I would really call out that stuck out to me. From a regional perspective, geography, across the country, it was very similar. Days of the week, dayparts, things like that, very similar. So nothing there that I would point out. I don't believe there are any holiday shifts that we would call out and no events like weather or anything like that.
So nothing that I could call out as pointing to any reason for that. I think on the GAAP to the industry numbers, we do have less pricing in our menu than maybe others do. So maybe looking I would caution to maybe look at traffic versus the same store sales gap.
Okay. Thanks, Tanya.
Next we'll hear from Will Slabaugh with Stephens Inc. Yes.
Thanks guys. I wanted to start on the Bubba's comment. That was great to on the 7.5% comp on those dozen that are in the base. I was curious if you could give us the update as well on what you've been seeing in some of your more recent openings. I know you've been working on either sides of the stores and different things operationally to test there.
So I was curious on just how those are performing so far?
This is Kent. Yes, we're really pleased with the progress of Bubba's. Our newest prototype that's a bit smaller is one of those stores that pushed in the Q1 of 2019. So we'll see how that works. But quite frankly, I've been tired of catching grief from Scott for quite a few years and I'm glad the team has stepped it up because it's getting old.
So we're very happy. Thank you.
Okay. Congrats on that. And I did want to ask one quick commodity question if I could. How far you locked out on beef? And do you have a percentage you can give us on this fiscal year?
Yes. We really haven't talked about specifically on beef where we're locked. We're still locked on about 60% of the remaining year for the whole commodity basket. And obviously, a big piece of that is the beef basket. Looking at it, I know we're starting to look into 2019.
We may be a little bit locked. I don't have exact numbers into 2019, but nothing to really nothing. It's so early right now. Nothing we could speak to on 2019, not enough to make any statements on that.
Got it. Thank you. Next we'll hear from Jeffrey Bernstein with Barclays.
Great. Thank you very much. Two questions. Just one, Scott, you mentioned the conservative approach on pricing and how that's prudent in driving traffic, which obviously seems to be the case. Just wondering, it seems like recently you've considered price increases maybe a couple of times a year.
I'm just wondering when you would next consider an increase. It does seem like you have the pricing power and obviously you have the cost pressure. So I'm just wondering with the frequency with which you evaluate it, when we should expect the potential next increase? And then I had one follow-up. Sure.
This is Kent. Yes, we believe it or not, just this week we had a meeting about our California stores where we've had significant increases in labor there. We're looking at our New York stores as well. But every year in the fall, I sit down with all 60 of our market partners and we reevaluate pricing as we look to November, December as usual as typically the time of year we would look at price increases.
Got it. And then in terms of the traffic, I know you talked about being pleased with the consistency. And I know it was mentioned earlier that maybe the industry is closing the gap a little bit if you think about the overall comp. But it seems like a lot of your peers are having some success with whether it's mobile or digital delivery, loyalty, things like that. I'm just wondering whether any of those things become top of mind as you're seeing some of the others in the industry have success with those, whether you might consider some of those other things to help with your throughput or to help drive sales?
This is Ken and I'll let somebody else jump on it as well. When I look back 4 years and see us up 22% versus some of our competitors that are not even a third of that, I think we kind of do it the old fashioned way primarily, but I'm sure somebody else in the room would like to add to it.
Hey, Jeff, this is Scott. With regards to our sales growth, we're very pleased with what we're seeing. And we're cognizant of sometimes the gap versus some of the industry stuff sometimes gets larger, sometimes it gets smaller. We don't really worry about that a whole lot. We worry about what we're doing.
And I was just looking at a lot of us look at 2 year stacks. I know you guys do and a lot of folks even look at 3 year stacks. And when I look at our 3 year stacks and I look at the 1st 7 months of the year, over 13, over 9, close to 15, just over 16, which was April, and then over 13, over 12 and over 13, those are pretty and when I look at it from that standpoint, those look like pretty consistently pretty strong growth numbers. So we kind of feel like we're pretty focused in doing a lot of the right things to keep our guests coming back and bring more guests in the door. So So, we're paying attention to the different trends in the industry, I'll tell you that.
But in some ways, we've seen some of these things before, which seem to work pretty well in the short term and then maybe don't work so well in the long term. And we're just careful in thinking very long term about our business, very protective of the guest experience in our business.
And this is Ken again. And we mentioned that we've had a little bit of a focus on labor and we're over 5,000,000 unit and we're trying to staff up to get us to 6,000,000
dollars Understood. Thank you.
We'll now hear from David Tarantino with Baird.
Hi, good afternoon. Tanya, I just had first a quick clarification question on the other operating line item. That line looks like it was up quite a bit in dollars per operating week, especially relative to what the trend was previous to this quarter. So can you talk about why that line delevered slightly this quarter after levering so much in the Q1?
Yes. A big piece of it, some of it has to do with the revenue reclassification. So you just kind of take those a little bit out of the picture and focus on the remaining kind of the core other operating. There's kind of a couple of things going on. So we're seeing credit card charges continue to be a bit higher than what we typically run.
Some of that is due to credit card transactions, more of those transactions being plastic versus cash. So that's one thing we saw this quarter. The other thing we continue to see is just higher gift card sales throughout the year, a lot of that with our 3rd party vendors. So we continue in Q2, we really saw that ramp up. That leads to a lot of gift card production costs as we supply cards to those 3rd party retailers.
So that's kind of what happened in Q2 that pushed that up a bit more than what we typically would see.
Great. And I guess is there any guidance you could offer for the back half of the year? Is it going to look more like Q1 did or more like Q2 did in the back half of the year in terms of year over year change?
Well, the other thing I would mention to you too is to go supplies. We talked about the specific changing of supplies was about $1,000,000 I believe, is what we said on Q2. We expect to see that again in Q3. And then to go, it's just being up, albeit just sales being up on to go causes those to go supplies to be up too. So I would expect that to continue somewhat, but you will see a fall off in Q4, specifically with the to go supply pricing kind of lapping that number, that $1,000,000 number each quarter.
But other than that, David, I would kind of expect it maybe to act similarly to Q2 outside of that to go supply falling off in Q4.
Got it. And then I guess one question on the restaurant margin line. I think Scott mentioned that the current philosophy on pricing is putting some pressure on restaurant dollars per operating week and we can see that. It looks like it's been flat year to date. So I guess, what's your confidence or maybe not confidence in sort of holding that line flat in the second half of the year since I know that's how a lot of the operators get paid?
And then I guess as a follow-up to that, if there is downward pressure on that line this year, how are the operators thinking about pricing as they head into these discussions you mentioned, Ken, heading into next year? Are they starting to think that they might want to get more aggressive heading into next year given the pressure they've seen this year? Thanks.
David, this is Scott. I mean, our a lot of our operators have been with us for a long time. And so they've enjoyed we've had quite a run-in dollars per store week that they've made and their profit sharing has gone up quite a bit over the years. When we go back and look at the last 10 to 15 years in our business. And there was a little bit of downturn during the big recession and pretty much since then it's been straight up.
And so for them, they recognize that. They also recognize a lot of that is supported by the great value that we have on the plate of which pricing is a big part of that. So they are pretty protective and they do think pretty long term and many of them are big believers that they'll gladly take on that challenge of driving more traffic to help offset whether it's inflation or investments in any particular line item. So, they're just as much of a party to keeping prices aggressive as any of us are in the room here. It's interesting to see certainly in some of those states where the minimum wage is going up quite a bit.
I wouldn't be surprised if some of those folks would request somewhat higher price increases and I wouldn't be surprised if we took prices up a little bit. We have historically in some of those states where minimum wage went up quite a bit. So, we'll see how that all shakes out. But just like we do at the more senior level, our operators, they also think very, very long term and are pretty patient.
Great. Thank you.
Next we'll hear from John Glass with Morgan Stanley.
Thanks. Good afternoon. On the product pipeline on the unit pipeline push out, first of all, why did it get as back loaded as it did this year? I don't think that's typical for you all. And your confidence level in getting those numbers or is there risk to slippage because you're planning some in December for example and weather or other permitting things could impact it?
This is Kent. Yes, they're all under all the ones that will open this year under construction. Unfortunately, we don't totally control the permitting process. And as we've seen over the years, it seems to be getting a little longer every year. It has never gotten shorter.
So typically our delays are related to permitting. So we're trying to get some more sites for next year in the pipeline so that if we do have slippage, we won't fall below 30.
Thanks for that. And then you don't talk much about you have an email list or people sign up and they get offers. How many customers are in that database? How have you used it? Has that changed at all?
And can you use it if you need to stimulate sales at some point in the future, maybe in the past, if you use that to do targeted offers to your consumer base?
Hey, John, this is Scott. We've got just over 6,000,000 names in our email database called Fishbowl. And we communicate quite regularly with the folks in that e mail database. As a matter of fact, our restaurants can do their own specific messaging to those folks. Typically, it might be recognition of certain special days of the year for us like Valentine's Day or Mother's Day or Father's Day, it could be their birthday, things like that.
What we don't do really is LTOs and through there. So we just we don't do that, but we do communicate with them quite frequently and we're extremely active on Twitter and Facebook and those avenues as well.
David Palmer with RBC has our next question.
Hey, thank you. Just a big picture question on margins. Just looking at your long term evolution of margins, it's interesting. Just picking 2013 as a random starting year, your labor costs are up over 300 basis points, but your food costs 2 50 basis points or so lower. So you're close to record levels for both, meaning record high levels in the case of labor and record low levels in the case of food.
And with your costs over index to beef and that beef cycle not even close to ending, you seem to have a runway to lower food costs for a while from now. So I guess the question is, do you see yourself philosophically, do you see yourself sort of harvesting food margin and plowing that back into what also seems like a runway for higher labor costs and just continuing to press against labor reinvestment as you get the benefit of the beef cycle?
Hey, David, this is Scott. I mean certainly, we've had a few years of a pretty significant food cost deflation, which helped us with some of the labor inflation that we did have. And of course this year we don't have that food deflation to help us with labor inflation, which has put some of the pressure on margins. Like you said, if you look over a large number of years, our margins have bounced around a little bit, probably average around 18% restaurant margin. And that's a good place for us.
Yes, we don't get too out of shape if it falls a little bit and nor do we want it to get too high just because maybe our prices are getting ahead of us, if you will, on the value side. So we keep watching it. Obviously, there's a difference between labor and food, meaning labor much less cyclical. Labor generally more permanent, wage rates go up, they generally don't come down whereas food goes up and down. So the labor is a bit more concerning, bit more challenging for us longer term.
And so, but we've dealt with that before and you go back to 2,007, federal minimum wage went $5.15 to $7.25 There were a lot of states that went from $2.13 to $5 or $4 or whatever it was on tip wage. So we've kind of been down this road before, but we're going to keep pushing ahead on legendary food and legendary service like we've always done, Keep asking ourselves what can we do that smart with regards to managing labor and food costs and other operating expenses and leverage our purchasing power wherever we can, those types of things that any reasonable company would do and get after it. So if we continue to do that and grow traffic in addition to limited pricing, we think we can keep our margins in a pretty healthy range.
Thank you.
We'll now hear from Karen Holthouse with Goldman Sachs.
One quick housekeeping question. Did you give the price in the quarter on the call already?
Did you say the pricing, Karen? Yes. Yes. The price in Q2 ran about 1.3%. You had about 0.8% in there that we took right at the end of March and then you have about 0.3% that we took in mid December of 2017.
So that's what's in there right now. You also had we had some about a half a point that rolled off in May, which is why you get a little bit more than that 1.1% in Q2. It came in at about 1.3%.
Okay. And then, how are you thinking about inflation just for the balance of this year on the commodity side?
Well, we're guiding to approximately 1% inflation. That does have a little bit of beef deflation built into it. And so I think we expect to continue to see that. We still have a bit of the basket that's floating that we typically do on produce and things like that. So I think in Q3, you may not see you may see a little bit less inflation than what Q4 to get to that one percent on a full year basis.
But for the most part, it will be pretty consistent across the rest of the year.
And then one other one on the sort of preliminary guidance for about 30 unit opens in 2019. How should we be thinking about that as kind of breakout of Texas Roadhouse versus Bob Bus?
Right now, I would say it's probably similar, maybe a handful above the 33 restaurants and the rest predominantly all the rest being Texas Roadhouse. Great. Thank you.
Next we'll hear from Andrew Spirosyk with BMO Capital Markets. Thanks for taking the question. This is actually Ryan Royce on for Andrew. Just one question from me. It was helpful to hear the color on your 2016 store class and how that's been performing.
Can you give any additional details as to how that's performed relative to your internal targets or prior store classes?
Yes, this is Scott. Our internal targets are basically mid teens IRRs. I mean that's what we're shooting for. And depending upon sometimes the state that we're in and so forth. But we kind of track the last 4 class years and we're definitely right in that mix.
The one exception would be 2013 is quite a bit higher. The investment costs were quite a bit lower. 2013, that's like the biggest driver of that. But we're very happy with the most recent class years. They're right on the number for us.
So time will tell if they stay there. Hopefully, it will even get better on my 2013 is done. But we don't have a lot of wishful thinking, I'll say that in our modeling. And so it's one of the reasons why you see us only open 25, 26, 24 roadhouses in a year. It is tougher as big as we are now to find the quality sites and real estate that you're looking for.
So, we're very protective of again how we invest our cash.
Great. Thank you very much. We'll hear from Stephen Anderson with Maxim Group.
Good afternoon. Just a couple of questions. First, I want to touch on your capital structure. It looks like on your credit facility, the $50,000,000 you paid that off during the quarter. But in the past, you talked about maintaining about $50,000,000 dollars on your balance sheet just as sort of like a just have that reserve there.
Is that something you wish to consider going forward?
Is that Steven, are you saying $50,000,000 on the debt or?
The $50,000,000 debt, I should say.
Yes. I think when we looked at the $50,000,000 outstanding, there is a cost to that, albeit it is somewhat low, but it's still about a 1% interest cost. So given the cash level we had, it just seemed to make sense to go on and pay that off, knowing that we have access to that facility anytime we need it, if something does come up, whether it's franchise acquisition, share buyback or anything like that. So I don't think we necessarily have a debt balance that we want to maintain. I think we're okay being kind of fluid on that, knowing that,
Yes, we
Yes, we do. We do have unused commitment fees that we pay. But obviously, those are a little less than what we would be paying had we been had any amount outstanding.
Yes. Second question completely different direction. I know we just in past quarters have asked about JAGGERS and you're looking to open a third location sometime this year. Is that still on your schedule?
Hey, Steven, this is Scott. Yes, we're still working towards the third one. The first two are doing really well, growing sales quite a bit and we're kind of staying very patient when it comes to JAGR's. We're not sure exactly the timing of JAGR's number 3. But by taking our time and we it sort of has changed a little bit of our thinking about what the number 3 might look like prototype wise and how big it might be or how small it might be and that kind of thing.
So not to give too much away, but we got a lot of momentum, great food, great service and so forth. And so we'll get there at number 3 pretty soon.
Scott, this is Ken.
Do you think it's possible we
could get one open next year?
I don't know Kent. We'll take our time on it.
We'll hear from Chris O'Cull with Stifel.
Thanks. Good afternoon. Scott, I know managing partner turnover is extremely low, but how has the SM and Kilometers turnover trended the past several months?
Yes, it continues to move down and are very happy with the we are not all the way where we want to be on Kilometers and SM turnover. So we would like to get it down really in the single digits would be ideal. We're just above that. But we're talking about it. It's one of the things we're talking about every day, especially as our restaurants have gotten busier and busier, those jobs have gotten bigger and bigger and tougher and tougher.
And so those folks just like Manji Partners, anybody else, they're fighting hard for us. And so, they're very, very important part of our business and kind of meeting goes by where we don't talk about those positions. I will tell you on the subject, our hourly turnover has continued to tick up a little bit, albeit at a slower rate than what it had been previously. So hopefully we're seeing that starting to tail off. Hopefully we're starting to see some of the benefits of staffing up more particularly in the front of house starting to pay off.
But as you know, unemployment is very low, labor market is very tight. You see tons of businesses talking about how hard it is to hire people and the kinds of benefit packages and wages that they're offering people, it is extremely competitive right now and very challenging across the board.
I know the company has made several investments this year to increase staffing levels and to improve retention of employee base. What happens if the turnover continues to rise maybe on the hourly side or the KMSM turnover doesn't come down like you expect? Should we expect another year of investments to try to improve those metrics?
I wouldn't say so much on the Kilometers and Kitchen Manager and Service Manager side. Certainly, we continue to challenge ourselves on compensations also if you're a long time kitchen manager, service manager, what other opportunities do you have in our company for developing your career and whatnot, because you've got some that have been around for quite a long time. I think on the hourly side, time will tell, Chris. I mean, when you make decisions like we're doing, a lot of times you don't see the results maybe as quick as you'd like, almost like anything you do in the restaurant business. Not all your guests show up every week.
A lot of them come more intermittently. So when you make any change in your business, it's not fully felt for a long time. This is similar to that when you're changing your staffing levels and you're showing your folks you've given them more flexibility in their schedule, which is a big benefit when you do staff up. Of course, at the same time when you staff up, you can maybe have higher standards on certain things that you're asking for from your employees. So sometimes you may have a little bit higher turnover in the short term simply because you're being towing the line more on your standards and we're getting a lower turnover in the longer term.
So it's again one of those things where it's a marathon not a sprint for us and we're going to focus on what's the right long term decisions for the business. And if it goes into next year or the year after that, so be it. We're going to keep at it.
Okay, great. Thanks guys.
Next we'll hear from Robert Derrington with Telsey Advisory.
Yes, thank you. Scott, if you
could help us for a second, you mentioned briefly that there's the prospect of a possible acquisition of a franchise, ER stores later this year. Can you give us any kind of range of estimates of either timing or number of units?
Well, I think Tanya mentioned it might be one restaurant. You mentioned, yes, it might be one restaurant. I mean we are we pretty much talk to all of our franchisees every year. And one challenge we have is that our business has been performing pretty well and their business has been performing pretty well. So they're pretty happy.
We're kind of in many ways one system in Texas Roadhouse and our franchisees participate and right there with us
on all the stuff that we're doing. So and
they're great partners with us
and they've done a great job of running their restaurants and many of them spent quite a bit of money, in remodeling their restaurants and keeping them current. So we value those partnerships and we respect what they're trying to do and the success that they've had and we're a pretty fun company to be around and they enjoy that part too. So we'll do our best to acquire folks and but we will see what happens.
That's helpful. And then another quick question on the same store sales trend for your franchisees. The domestic, it looks as though the domestic group is doing a little bit better. What can you tell us about the drag from international that brought the number down to 1.9 versus the 3.9 domestic?
Well, international, particularly in the Middle East, the Middle East, those restaurants, Bob, have been those economies there, they've really taken a pretty big hit. Our Middle Eastern franchisee though continues to build Texas Roadhouses. I think they're very happy with what they're getting from the Texas Roadhouse brand and they've been a fantastic partner for us in so many facets. But it is just tough sledding with oil prices and just you've seen some of it in the news with some of the folks that are trying to change some of the things in their countries in the Middle East because of the economic challenges that they have. So that's just impacting our business as well.
This is Ken. And yes, part of that too is the European economy kind of drives the tourism, specifically in Dubai, and there's a little bit of that. With that said, though, we are getting ready to open in Shanghai and in South Korea coming up. So we're very excited about that.
That's great. And then one last question. I think next year is a 53 week year with I assume the extra week coming in the Q4. Any kind of color you can provide us on either what that week may be worth in the way of an earnings contribution or how we should think about where the leverage would show up at the restaurant level?
Hey, Bob, this is Tanya. You're absolutely right. There is a 53rd week next year in Q4. Our year end, I think, actually will be, I think, on December 31 next year, if I'm remembering correctly. So, we'll definitely be talking more about that impact, on the call on the next call.
Nothing I can really tell you right now on what that could be. Obviously, it's an extra week in sales. There is a bit of a pickup, I believe, on rent because your 12 months of rent, that week doesn't impact that. But all the other line items are pretty impacted, maybe some things in the other operating line. So, just off the top of my head, from remembering from 6 years ago, the last time we did this, that's what I would say.
So we'll definitely be giving more color on that on the next call.
Terrific. Thank you.
We'd like to thank everybody for being on the call and I think that wraps things up.
Thanks everybody. Let us know if you have any other questions. Thank you.