Scott Matthew Colosi - President & Chief Financial Officer Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer Tonya Robinson - Senior Director of Investor Relations and Financial Reporting.

Brett Levy - Deutsche Bank Securities, Inc. Michael Tamas - Oppenheimer & Co., Inc. (Broker) David E. Tarantino - Robert W. Baird & Co., Inc. (Broker) David Palmer - RBC Capital Markets LLC Keith R. Siegner - UBS Securities LLC Jason West - Credit Suisse Securities (USA) LLC (Broker) Jeff D.

Farmer - Wells Fargo Securities LLC Jeffrey Bernstein - Barclays Capital, Inc. John Glass - Morgan Stanley & Co. LLC Karen Holthouse - Goldman Sachs & Co. Chris O'Cull - KeyBanc Capital Markets, Inc. Will Slabaugh - Stephens, Inc.

John William Ivankoe - JPMorgan Securities LLC Andrew Strelzik - BMO Capital Markets (United States) Paul Westra - Stifel, Nicolaus & Co., Inc. Brian M. Vaccaro - Raymond James & Associates, Inc. Matthew DiFrisco - Guggenheim Securities LLC Stephen Anderson - Maxim Group LLC.

Good day and welcome to Texas Roadhouse First Quarter 2016 Earnings Conference Call. Today's call is being recorded. All participants are now in listen-only mode. After the speakers' remarks, there will be a question-and-answer session. I would now like to introduce Scott Colosi, President and Chief Financial Officer. You may begin your conference..

Thank you, Justin, and good evening, everybody. By now you should have access to our earnings release for the first quarter ended March 29, 2016. It may also be found on our website at texasroadhouse.com in the Investor section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

We also 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 the non-GAAP measures to the GAAP information can be found under the Investor section of our website. On the call with me today is Kent Taylor, our Founder and CEO; and Tonya Robinson, our Senior Director of Financial Reporting and Investor Relations.

Following our remarks, we will open the call for questions and now I'd like to turn the call over to Kent..

Thanks, Scott. We are pleased with our operating performance this quarter, continued sales momentum, new restaurant openings and commodity deflation contributed to an almost 10% increase in diluted earnings per share.

Our sales momentum was driven by a 4.6% increase in comparable restaurant sales on top of a healthy 8.9% increase in the first quarter of last year. Our comp sales growth continues to be driven by increased traffic, which we believe is a result of our long-term focus on food and service at a great value for the guest.

I'm also pleased to add that for the first four weeks of our second quarter, comps have increased approximately 5.1% including the positive benefit from Easter shifting on the calendar. During the first quarter, we opened seven company-owned restaurants and one franchise restaurant.

Additionally, we have opened three more company-owned restaurants so far in the second quarter along with our first franchise location in the Philippines. Our development pipeline is in good shape and we believe we are well on our way to opening 30-plus company-owned restaurants this year.

In addition to operating and developing progress, we also returned $16 million in capital to shareholders in the form of dividends and share repurchases. This continues to be a key part of our strategy to deliver long-term value over time.

Finally, I would like to say to our operators listening today how great it was to see you all a few weeks ago at our annual managing partner conference. Your passion and commitment to our core values is the foundation for our continued success. Now, Tonya will walk you through our financial update..

Thanks, Kent, and good evening, everyone. For the first quarter of 2016, net income increased 9.8% over the prior year to $35.6 million or $0.50 per diluted share.

Our reported diluted earnings per share was negatively impacted by approximately $0.05 due to a pre-tax charge of $5.5 million or $3.4 million after tax related to an agreed-upon settlement of a wage-an-hour demand that is pending judicial approval.

Revenue growth of 12% during the quarter was driven by an 8.3% increase in store weeks and a 4.1% increase in average unit volume. For the quarter, comparable restaurant sales increased 4.6%, comprised of 3.2% traffic growth and a 1.4% increase in average checks.

Comps during the first quarter were negatively impacted by approximately 40 basis points due to the shift of the Easter holiday from April last year to March this year. By month, comparable sales increased 4.1%, 6.2% and 3.6% for our January, February and March periods respectively.

As Kent mentioned, comps for the first four weeks of 2016 were up approximately 5.1%. The Easter calendar shift had a negative impact of approximately 100 basis points in March while the positive impact in April was approximately 150 basis points.

For the quarter, restaurant operating profit increased 18.9% or $16.4 million compared to the prior year and restaurant margin dollars per store week were up 9.7%. Restaurant margin as a percentage of sales was 20.1%, which was 116 basis point increase over the prior year period.

Now I'll provide a little color on some of the expense lines for the first quarter as compared to the prior year period. Cost of sales as a percentage of sales were 120 basis points lower during the quarter, versus last year due to lower food costs driven by beef. Our food cost deflation for the quarter was approximately 1.1%.

Labor costs as a percentage of sales were six basis points higher versus last year while labor costs were impacted by wage rate inflation and higher turnover. These factors were largely offset by average unit volume growth and the benefit of lower payroll taxes. We continue to see core labor inflation in the 3% to 3.5% range in the first quarter.

Other operating costs were flat compared to last year as the benefit from average unit volume growth and lower utility costs were offset by higher gift card fees and higher general liability insurance.

Below restaurant margins, depreciation expense increased $3.2 million in the quarter versus last year and increased 24 basis points as a percentage of revenue to 3.8%. G&A costs were up $8.3 million in the quarter and increased to 109 basis points as a percentage of revenue versus the same period last year.

The driver here was the $5.5 million estimated settlement charge I mentioned earlier. Excluding this charge, G&A, as a percentage of revenue, would have been essentially flat compared to last year. Pre-opening costs increased $1 million on a year-over-year basis, primarily due to more restaurant openings this quarter compared to the prior year period.

Finally, our tax rate for the quarter came in at 30%, which was slightly lower than the 30.7% rate last year. Our balance sheet remains strong as we ended the year with $96 million in cash and $51 million in debt.

During the quarter we generated $65 million in cash flow from operations, incurred capital expenditures of $34 million and increased our debt by $25 million. We also used $12 million to pay dividends and $4 million to repurchase stock. As a result, our cash balance was $37 million higher compared to year-end.

With regards to 2016, our expectations have not changed since our last call in February. However, I will point out a few second quarter housekeeping items.

While we continue to expect full year commodity deflation of 1% to 2% on the cost of sales line, we expect deflation in the second quarter to be well above our full year range, given where beef costs were during the second quarter last year.

Finally, on the G&A line, we currently expect costs associated with our managing partner conference this year to be up approximately $1 million in the second quarter, compared to the same quarter last year. Now I'll turn the call over to Scott for final comments..

Thank you, Tonya. I'd like to start off by echoing Kent's comments regarding our conference. It was great to be together with all of our operators celebrating the year. Also, a special congratulations to Mark Hymes from Fayetteville, North Carolina who is our 2015 Managing Partner of the Year. 2016 is off to a good start.

Sales are up and restaurant margins are moving in the right direction with food cost deflation for the first time in five years.

And while we are pleased with our momentum, we understand the importance of maintaining our disciplined approach as it relates to consistency of food quality and the guest experience, as well as taking care of our employees.

As Kent mentioned, our development pipeline is strong, and we see a healthy opportunity for growth ahead of us, as we are already filling the pipeline for 2017 and beyond. Our solid performance in the quarter helped us generate over $30 million in free cash flow, which further strengthens our ability to enhance shareholder returns in the future.

In closing, we feel very good about the direction of our business and the depth of our teams, both in the field and in our support center. I do want to be clear that we do not take any future success for granted.

We continue to challenge ourselves to improve every facet of our business, and maintain a high level of discipline in managing our cash expenditures, whether they are infrastructure investments, capital spending projects or share repurchases. And that concludes our prepared remarks. So Justin, please open the line for questions..

Well, thank you. And the first question comes from Brett Levy with Deutsche Bank..

Good afternoon. Just one point of clarification, and then a question. Did you say that the second quarter beef will be significantly better deflation? I just wanted to make sure I heard that correctly..

Yeah. That's correct. It will be above the 1% to 2% range that we have for the full year. So if you take the (10:31) second quarter, if you remember, we have such a high level of food cost inflation..

Yeah, it was 9.4%. Okay.

Should we assume something modestly better, or approaching almost a reversal?.

Approaching a reversal would probably be a little strong, but I can say it's going to be significantly above the high end of the range..

Okay.

And have you noticed any competitive differences from employers who are being additionally promotional, or any changes out in the competitive landscape that you want to discuss?.

Hey, Brett. This is Scott. We don't have any measure of competitive discounting or special offerings, or any of that. We don't have a sense of that increase, decrease is the same. We just know we haven't changed anything that we're doing..

I'll let everyone else and just go into (11:41) the queue. Thank you..

And moving on to Brian Bittner with Oppenheimer & Company..

Thanks. This is Mike Tamas on for Brian. So I just wanted a one more quick clarification. Did you say that G&A in 2Q would be $1 million higher year-over-year? And then a follow-up question. Thank you..

Yeah. It would be $1 million higher, just because of – it's going to be up $1 million just because of conference expense. So conference expense for Q2 is coming in $1 million higher than it did last year..

That's because Miami has -.

Got you. Perfect..

It's a little more expensive down there. So next year we're in Orlando, which is not quite as expensive..

Got you. Okay, perfect. Thanks. And then the question is, you're still doing very strong comps in April, I think up 3.6%, excluding that Easter benefit shift. So is there anything to talk about – it's a little bit slower than the first quarter. I think your peers are talking about a similar type of trajectory.

Can you just talk about maybe what you think is going on there, either for you or for the industry? Be helpful. Thank you..

One thing I would point out, Mike, just on the April comp, is that last year; April was up 8.1%. So if you kind of look at that from that perspective, as far as looking at the trend – looks like a downward trend with the 3.6% number in April, the adjusted number. If you kind of look at it on a year-over-year basis, that might get....

Two year over two year. Yeah, yeah..

Yeah, two year stack (13:10). It might give you a little bit different perspective..

All right. Thank you..

And the next question comes from David Tarantino with Baird..

Hi. Good afternoon, and congrats on a good start to the year. I had a question, maybe coming back to Bubba's 33.

I know that you're fairly early on in the development there, but I was wondering if you could give us a little more detail on how the first seven units, at least the ones that were open at the start of this year, are performing, both from a top line, bottom line, and ROIC perspective, if you're willing to share those details..

Actually, we have nine open now, and a few more to open this year. Again, it's a relatively new concept, and we're looking at our returns. I've got a smaller prototype that's going to be opening this summer to see how that one works out. But we're very encouraged, by the results so far, to continue opening more stores..

And, I guess, if you're not willing to share specifics, could you talk maybe directionally about what you're seeing in returns, relative to maybe what you've seen on your Texas Roadhouse locations?.

Well, Scott's really good at directional answer, so I'll let him take it..

Hey, David. I would tell you this. The sales picture has been pretty good so far for Bubba's, comparable to Texas Roadhouse. The margins are substantially better than Texas Roadhouse. And of course, Texas Roadhouse is so heavy steak, high food cost item, and – versus burgers and pizza. And then Bubba's has a much higher alcohol mix.

So Bubba's has a much lower food cost than Texas Roadhouse, and we need to have higher margins at Bubba's because the investment cost at Bubba's is roughly $1 million-ish greater than a Texas Roadhouse, primarily building it a little bit bigger, a little bit more equipment....

Bigger parking lot..

...more parking lot and so forth. So, as Kent mentioned, we're looking at different prototypes, primarily just to see how much smaller we can go on the Bubba's prototype and still bang out quite a bit of sales, and maybe even increase the returns.

So with the higher investment cost offset by the higher margins at Bubba's, I'd tell you, the returns are pretty comparable to what we might expect out of a Texas Roadhouse..

Great. That's very helpful. And then, if I could ask one clarification on the quarter itself, if I look at the implied deflation, it looks a little bit, in food costs (16:10) it looks a little bit higher than what you actually said, I think 1.1%.

Are you still getting benefits from some efficiencies, from an operator efficiency standpoint? If so, about how much of a benefit was that in the quarter, and do you expect it to continue?.

Yeah. David, you're right. We are continuing to see some of those efficiencies and it ran, I believe, about 30 basis points for Q1. So a little less than maybe what we've seen in the past. It may be a little too early to tell right now what the trend's going to be going forward.

I would expect that we're going to start lapping some of those as we continue on throughout the year, but there's no hard buttons that were pushed as far as switching them on, so we really couldn't say how we'll be lapping that going forward, but I would imagine we'll see that trending off a little bit here throughout the year..

Great. That's helpful. Thank you..

And moving on to David Palmer with RBC Capital Markets..

Thanks. Just a follow-up on David's question about Bubba's. Do you foresee that the pace of development might accelerate because of Bubba's? In the past, you've had a certain run rate. It looks like you're adding more Bubba's and it's causing the unit growth rate to creep up a little bit.

I'm wondering if you could see this continuing, particularly, if you solve some investment hurdles that you're talking about in the future..

This is Scott. I would tell you that traditionally, we've been comfortable with opening 25 to 30 company restaurants a year, plus some franchise restaurants, and of course, that is beginning to grow via our international business, but I could definitely see us going above 30. How far above 30 will be the big question for us.

We still want to make sure we're making good real estate decisions and we want to make sure we're making really good people decisions of who runs these high volume, made from scratch – lots of employees, service-based restaurants, so we'll see, but we're definitely comfortable getting above 30, 40, who knows? That would be kind of a bigger question for us, for us to get that high.

At some point – don't know if we'd be able to bang out 25 Texas Roadhouses a year. Maybe, maybe not. And so we'll just see where the future takes us, but we're going to stay disciplined on site selection and people for sure..

I guess my follow up on that is, if you're at a point now where you're adding many of these Bubba's often times within miles of your existing Texas Roadhouse footprint, what you see the constraint being on ramping up that parallel track of Bubba's units? Is it a people resource thing? How do you think about that?.

This is Kent. Since we're still tweaking with a Bubba's on every new opening, a little bit here, a little bit there – we want to keep it kind of reasonable in the short-term and then what happens in the long term, we don't really know yet..

Thank you..

And next will be Keith Siegner with UBS..

Thank you. My first question follows up on that a little bit. So if you think about the state of the asset base, some of these bump-outs, some of the Star Bars, now maybe ramping up that unit growth a little bit; toying around with the Bubba's. We've watched the CapEx run up from the low $100 millions to this $175 million-ish range.

Do you think could this also move up a little bit over the next couple of years as you maybe scale up that unit growth like you talked about? Is there anything else we should be aware of, or is this kind of a good run rate with some bias upward going forward?.

Hey, Keith. This is Scott. I would say – it could move up a little bit, if we continue to open a higher number of restaurants each year.

We still have got, I think, many more restaurants we can bump-out, and we still continue to have – we probably are going to have one or two relocations a year going forward as old as our system is, and on top of that, we started buying more and more land for additional parking for our restaurants, which is, I guess, is a good problem to have for us.

So, we're still – we've got plenty of things to spend money on and then lastly our system, like any restaurant company, we continue to get older and you've got to reinvest in the asset base to keep things fresh and relevant for the guests.

So I definitely don't see – it's probably more likely that the capital spending numbers will only go up versus staying flat or coming down..

Perfect. And one other question. If I've got it right, I think you were one of the first concepts to test the tabletop tablets years ago, but it seems like you maybe took a pass on them as far as Texas Roadhouse goes.

I was just wondering, is it not right for the brand? Is it not the right time? Are there any of these other tech tools that you think might make more sense for you folks? Just some update on how you're thinking about watching all these other brands makings some of these adjustments.

Which ones might work for you?.

Well, the tablets just really weren't that friendly. And they didn't do a good job of upselling our guest on another items. So that's my version, but Scott's probably got another one..

I would say, with regards to tablets, it depends what you want them for. So if you want them to help the guest pay their bill, there's different technologies, and some of those involving the guest paying directly from their phone, for example.

So we don't want to go out and have tablets in 500 restaurants times, 60 tables a restaurant that we're dealing with when people are going to pay from their phones, hypothetically. So we kind of wanted to see where things shake out. We're still going to have three-table stations.

We want to have servers very much straightforward in front of our guests, taking their orders for them. We're in the service hospitality business, and we're going to stick to that model. So we're absolutely looking at technology. We're about to start testing an app that other concepts do have that would enable our guests to get on our call-ahead list.

That would enable our guest to pay their bill and also to order to go online. So we'll be testing that soon, with some anticipated rollout probably sometime later this year or next year. But certainly, (23:10) the pay-at-the-table remains the most interesting piece of that whole dynamic for us at this moment..

All right. That's clear. Thank you..

And the next question comes from Jason West with Credit Suisse..

Yeah. Thanks, guys. Just following up on Keith's question there. I guess on the to-go side, you guys have always sort of deemphasized that, it feels like.

Could you talk about where your mix is there? And if you feel like maybe there's an opportunity to be a little more focused on that locally?.

Yeah. This is Scott again. I would tell you our mix traditionally has been very low in to-go, okay. Less than 5% of our sales are to-go sales. And we've got a few stores that are higher than that. And we just want to make sure we give the guest a good experience with to-go, should they choose to want to pursue that.

And again, some of our restaurants do quite a bit of to-go sales volume. And we want to be proud of the to-go experience that we offer.

At the same time, we much prefer our guests to dine in with us, because again, we are selling a lot of hospitality, we have a high service component in our business, and we'd much rather the guest come in and dine-in with us than take the food home..

Okay.

And then just a separate question on the sales trends, can you guys explain why the Easter shift was so much higher in terms of impact in April versus March impact? And can you talk a bit about what you're seeing out there? Was there been any change sort of that you feel like in the underlying trend that some others in the restaurant industry have talked about, whether there has been any weather headwinds in April, or any particular regional variances such as maybe Texas oil markets? Those types of things would be helpful..

Sure, Jason. This is Tonya. So the only reason for the difference on the March versus April is that March is a five-week period for us and April is a four-week period. So that's really just what's driving that difference.

Otherwise though, I would tell you, we didn't really see anything in April different than we have been seeing, nothing regionally that we would point out. Texas is much the same story as we talked about before, as far as, there is a few stores in West Texas that see that impact from the economy. But other than that, Texas remains strong.

So nothing that we would point out there..

Okay..

This is Scott. As far as the overall sales trends goes, we just don't feel like we've experienced a weakening, if you will, in trends maybe like some other companies have. We also haven't changed our food, we haven't raised prices to the level of inflation and we haven't changed out basic labor standards.

If anything, we've ramped up our investments in some of these things and improved our level of service, or improved the quality of our food and stepped it up a notch and had an increased level of investment and servicing our guests. And we think that's why we continue to generate the sales growth that we do..

Okay.

Could I slip in one quick one just on the balance sheet, just curious why you guys drew down the revolver in the quarter? It didn't seem to really need the money, just (26:34) that just kind of where you want to keep the cash balance at this level? Or was there any particular timing issue for that?.

No Jason, this is Tonya. There wasn't any particular timing issue. In Q4 we do get a lot of cash in the door with gift card sales, which is kind of what precipitated the pay down. So we just went on and drew that back down in Q1, nothing else driving that..

All right. Thanks..

And moving on to Jeff Farmer with Wells Fargo..

Great. Thanks. Just another follow up on commodities, because it looks like it will impact your quarterly EPS growth cadence if I have this modeled out right, but Tonya, I think you said 1.1% deflation in Q1. I'm taking a guess here, but let's call it mid-single digit deflation in Q2.

Even if I'm close, could that mean a flat-ish commodity basket in the back half of the year?.

No, I don't think you would see flat, necessarily. I mean Q4 is probably where you'd get the closest to that, just because of the amount of inflation we had in Q4 last year. But right now, based on what we're seeing, we expect some deflation in Q3. Just the biggest piece of it's going to be in Q2, the biggest piece of deflation for the year.

So we still feel very comfortable with the range that we have out there, the 1% to 2% range..

Okay. And then just one more on Bubba's.

A lot of questions on this one today, but when it came to the decision to accelerate the development for that concept, what are have you seen with Bubba's that – going back five or six years ago – that you didn't see with Aspen Creek? You guys just talked a lot about the financial metrics, but what exactly was it about Bubba's that Aspen Creek did not have?.

This is Kent. What I like about Bubba's is that there's less intrusion to the sales of Texas Roadhouse, because the menu is further away from Roadhouse than say Aspen Creek, and with burgers and heavy appetizers and kind of a sports theme. And we think we're a little more well defined with Bubba's in a segment that has less competition.

So that's why the choice was to go with Bubba's and sell Aspen Creek..

All right. Thank you..

And next will be Jeffrey Bernstein with Barclays..

Great. Thank you very much. Two questions, just one following up on the Food-Quest side of things. I'm just wondering if you could give an update – I think you said last quarter, you were 80% locked on beef, I think it was 65% for your overall basket.

I'm just wondering where that stands, and kind of tying that in, we've heard some companies that already start to talk about the broadly commodity deflation in 2016 might ease as we move through the year, at least through the month of 2017 and turn back into inflation.

I would think you'd be somewhat a little bit more insulated from that, just because maybe the beef has the longer cycle. So I'm just wondering whether you could comment on any reason to believe why beef would not continue to be a nice deflationary tailwind going through 2017 as well, and then I have a follow up..

Sure. On the piece – the question on what we're locked – it's still that 65% and 80% that you referenced. So 80% on beef, 65% on the overall basket is where we are on that side of things. As far as the beef outlet going forward, I mean, I would say we're probably hearing much the same that you're hearing.

I think a lot depends on the cut of beef you're talking about. Just what other things maybe look like as we head into the back half of the year. Not as impactful for us this year just because we are locked up on so much of it, but heading into 2017, a lot of it depend I think on exports and just on other things going on..

Okay. And then just on the labor side of things, I think you said you were still comfortable with the labor basket up 2.5% to 3%.

Just wanted to confirm that was the case, and then I know pricing the decision has to be made at the very end of the year, so should we assume at this point that the high 1% range that I think you've got it to in the past is what we should expect for the next few quarters and presumably some at least deleverage on the labor line for the next few quarters based on that?.

Yeah. Labor is definitely going to be a headwind and actually right now from an inflation perspective, we saw about 3%, close to 3.5% on core labor inflation in Q1. So actually that's a bit of an uptick from where we were in Q4. So hourly turnover for us is up a little bit, I believe it was around 119% in Q1 and more in March.

So we continue to see a (31:31) job market. We continue to hear that from our operators.

We don't think that that trend will change much as we head into the rest of 2016, but from a pricing perspective, that's obviously a big part of the decision when it comes to pricing is what the labor inflation looks like and just what the noises out there at that time on minimum tips, wage increases, DOL regulations and just all of that talk that everyone is hearing..

Got it. But the fact that you were able to hold your labor line relatively flat in this first quarter would seem like that was surprisingly good, considering the inflation you're seeing.

I'm assuming that you'd expect to see more deleverage, I assume (32:16), the rest of the year, based on the pricing we're talking about and the labor inflation you're talking about..

Yeah. A lot will depend on traffic, as far as what we'll end up seeing. I mean check, we've got about 1.5%, up to 2% of check, but – for the rest of the year. But a lot'll depend on traffic, and it's that 3% to 3.5% hold on labor inflation the rest of the year. We'll see where those – the traffic trends come in, how much that helped..

Understood. Thank you..

And next will be John Glass with Morgan Stanley..

Thanks. Just a few follow-ups.

First, did you guys say what pricing was this quarter and are you still intending, I think you said last quarter, 1.9%? Is that still the intention for the year?.

Yeah. Traffic was around 2% – or I'm sorry. Pricing was about 2% in the quarter. Check was around 1.4%. So we did have a little bit more negative mix in Q1 than we typically see. Normally we run, I would say, in the 20 basis point to 40 basis point range on negative mix.

But I think a lot of what was driving that – if you go back and look at Q1 last year, we actually had positive mix last year of about 30 basis points. That didn't happen the rest of 2015. It actually went back to what we would call a normal range. And that's sort of what we're expecting here for the rest of 2016.

We think the 75 basis points may be a bit of an anomaly, and we'll see that come down a bit..

I'm sorry.

Was pricing was 1.9% this quarter? Or what was it?.

Pricing was around 1.92%..

Got it. Okay. Thank you. And then, a couple other questions. One is, do the overtime rules apply to you? I know we've talked about it in other retailers, but restaurants haven't talked about it.

But do you have an issue with overtime pay, and is there a way to work around that?.

Hey, John. This is Scott. Yeah, the new Department of Labor regulations, from what we've heard, will have a potential impact on quite a few of our fellow Roadies, both folks in our restaurants and folks here at our Support Center.

So we have been crunching a bunch of numbers and looking at various scenarios of how we might adjust or adapt to the new regulations. One thing that is different about us than many is that we have a lot of incentive compensation at Texas Roadhouse. So a number of folks get a little bit lower base salary, but they get a lot of incentive compensation.

And it doesn't sound like the Department of Labor is going to give us much credit for the incentive compensation that we pay. So we may have to change a few things with some of the folks, again, both here in our Support Center and also folks that run restaurants for us..

Which would mean increasing the base salary and decreasing the bonus piece..

So net-net though, that you don't think it will impact your business, it's just a question of how you allocate the compensation?.

No. I think there'll be some impact. The question for us is just how much. And that's the big question for us right now. There will be some impact. We just haven't decided how far we're willing to go. When Kent says we'll reduce somebody's incentive compensation, we have decisions to make.

Will we reduce all the way to zero? Will it be 25% of what they used to get, 50%? Those kinds of decisions that we're going to have to talk about and make..

Yeah, we will not reduce our overall compensation. We'll just kind of shift from one basket to another..

Okay. Got you.

And then the $0.05 charge this quarter, was that – is there any ongoing implications for that, or was that just a one-time legal reserve (36:12) and now it's all done?.

What was your question John, again?.

The $0.05 charge that you took this quarter, is that just a one-time incident or was there any ongoing implications for that, for the P&L?.

Well, if they closed all the law schools, it would probably be – no, I'm just kidding. I would say that the $5.5 million is a settlement, represents an estimate of a settlement that we've reached, but it's still pending judicial approval. So I can't really comment more on it than that.

Just to say that we did record a $5.5 million estimate for the settlement of this matter. That is one matter; a nationwide class matter..

Thank you..

Moving on to Karen Holthouse with Goldman Sachs..

I apologize, I was on mute. Thank you for taking the question. I actually wanted to clarify, (37:16) commentary on the calendar shift, where it sounded like last quarter, the reverse was actually expected, that it was going to be a benefit in Q1, and a headwind then into the second quarter.

So I'm just curious why that played out differently than anticipated?.

No, Karen, we expected it to be a negative in March and then a benefit in April. So it played out the way we expected it to..

Okay. And then also, it looks like there is a little bit bigger of a gap between the comp-based average weekly sales and the AUV average weekly sales. I'm just curious what's driving that, or if that's impacted by different concepts being included in different sets of those.

Or are those two different pieces?.

I would tell you that that's just Texas Roadhouse restaurants, so there's no other concepts in that number. And a lot of it is the size of the group and the timing of the openings sometimes plays a part in what you're seeing that describe (38:24) the difference between those two numbers..

But it is the biggest gap we've had in some time. And so absolutely, we're watching this very, very closely, again, with the disciplined approach we have to opening restaurants, the volumes are still very good. So for that group to do $88,000 a week, that's still a very good volume and still good returns for us.

But you're right, there's a gap there and we're looking at it and talking about it and making sure it's not the trend going forward, but more of an anomaly, as Tonya mentioned, based on sometimes when we open stores and clash years are all a little bit different, that kind of thing..

All right, thank you..

And next will be Chris O'Cull with KeyBanc..

Thanks. Good afternoon, guys.

Scott, have you guys seen any pushback from guests in the markets where you raised the price of the entry-level sirloin above $10?.

No. As a matter of fact, we've been really very surprised but very happy with the results in those markets. And keep in mind those markets are where you've had minimum wage go to $10, $9, 50% increase in the tip wage in New York State, that kind of thing. And we're still quite a bit below any relevant competitor for that particular item.

So we're content with the results so far. But it's still kind of early, I would say. It hasn't been that long and we wouldn't be claiming victory in breaking the $9.99 price point barrier..

Are these stores actually seeing some mixed benefit, maybe people trading up to the bigger portion steak?.

Hard to tell. At this point, it's just too early to tell because other things going on in the menu. As Tonya mentioned, we had negative mix overall just quarter to quarter. So we'll probably have a better sense of it probably three months to six months from now where we're really shaking out..

And then I believe you guys added some new combo items to some of the stores.

Are those in all the company stores?.

Yes, they are in all the company stores now..

Okay. Have you seen any -.

And part of that was adding some smaller steaks on the combos, which potentially affected our mix a little bit..

Okay.

So the combos could have actually – are they intended to create more value which could have hurt the check a little bit?.

Actually, right now, like Scott said, it's really hard to read into those numbers right now because of kind of the anomaly when you're looking at last year. So I'm a little hesitant to even comment too much on it because it's hard to say. But the combos look like they're helping a bit on mix. So (41:22) helping a little bit.

So we're not seeing anything from the addition of those that causes us to think anything differently. But I think Q2 will be a little better picture of things once we kind of get into a normal year-over-year comparison..

Okay. Were the combos added during the first quarter to -.

No, the combos – yeah, they were added in November when we took the price increase..

Okay, great. Thanks, guys..

Next will be Will Slabaugh with Stephens, Inc..

Yeah. Thanks, guys. I just wanted to follow up on the food costs. And I understand you're rolling over a much easier comparison from last year in the second quarter.

But if I look at your food costs from what you just saw in the first quarter versus what you expect going forward, should we expect that that cost of sales percentage should hang around the range we just saw or there may be some things to think about as it worked through the year seasonally or otherwise that I'm not thinking about?.

I would expect that you may see a little bit of an uptick there just with the level of deflation we could expect to see in Q2. I wouldn't be surprised to see a little bit – I'm talking about cost of sales as a percentage of sales..

Right, that's helpful. And then lastly, just any quantifiable impact this quarter from the bump-outs and then any update you may have as far as how far along you are versus the potential there..

We've had about, as of the beginning of the year, 40 or so that have been approved. And we've approved probably 10 more since the beginning of the year. I don't know for sure exactly how many we'll get done this year. I think we only got done – I think it was 15 last year.

So sometimes it takes longer than we think for permitting and legal approvals and food authorities and all that kind of stuff. So I'd probably say close to 20 to 25 maybe this year. And I think just given where our same-store sales have continued to grow to, it continues to enlargen (43:19) the pool of potential bump-out candidates.

So a lot of our managing partners, they want to get bump-outs. We talk to them about it and we kind of say, hey, you need to be at certain kind of guest count levels or sales levels to qualify for a bump-out. And they go out and get after it. And if those guys keep qualifying for it, we'll keep approving bump-outs.

So we may get to the vast majority of our system one day down the road. Of course, it'll take us a number of years going at a pace of 20 or 25 a year..

Great. And lastly, anything to speak to geographically that may have changed or have you saw anything in Texas or elsewhere that may have been stronger or weaker than maybe what you've seen historically..

I'll tell you, just – for the most part, we really haven't seen anything dramatic. The Northeast has been a little bit better than it has the last couple of years in comparison to the rest of the country. And as Tonya mentioned, there's a few places in Texas, West Texas specifically, a little bit of South Texas where there's a little bit of weakness.

But there's other parts of Texas for us that are still very strong and we don't view it as a big deal..

And sometimes that's just – they might have before had a T-bone or a bone-in ribeye and maybe they're ordering a smaller steak, but they're still coming in..

Great. Thanks, guys..

And the next question will come from John Ivankoe with JPMorgan..

Hi and thank you. I'm sorry I have to ask a follow-up on just the very last question on COGS.

Tonya, in terms of the second quarter of 2016 relative to the first quarter of 2016, did you say that we should maybe expect a slight increase relative to the 33.9% posted in the first quarter kind of ignoring the second quarter of 2015? If you could be more specific in guidance than usual on that line since it's so important..

Sure, no problem. You may see a slight uptick, but I don't think you're going to see anything that's very different on that line. I think the bigger thing in Q2 again is just going to be the amount of deflation we're going to see in Q2 because we are overlapping such a high inflation number.

And Q2 typically is our highest quarter of beef cost and it definitely was last year. So I think that's the bigger driver of anything that's going to happen in Q2. And I think we're very comfortable with that 1% to 2% deflation number – 1% to 2% deflation range for 2016..

John, this is Scott. It's really hard to say because, on one hand, we're locked on a lot of our food cost basket. But on the other hand, there's a certain percentage that we're not. And so it's moving around and to the extent it moves up or down a little bit and beef is – 80% locked on beef, so we still have some beef exposure, if you will.

And then of course if there was to be some mix shifts or continued mix shifts, that could impact us a little bit to the good or to the bad depending upon what items we're talking about. So my best guess would be close to Q1. You would hope within a few tenths of Q1.

But depending upon what happens all the variables I mentioned, it could swing a little bit more to either side of that..

Yeah, and lastly, just to add onto that, John, I would say what we were talking about earlier with the efficiencies and what your assumption there is on how those roll off over the course of 2016, if they roll off, could play a pretty big part too in kind of the impact on that percentage..

Okay, I understand. And also, relative to a previous question a while back and to really average weekly sales relative to same-store sales, the detail that you guys so nicely provide in your release, the average weekly sales class was down both for units open six months to 18 months and units open less than six months.

So it's actually a pretty big chunk of units across both classes of stores open less than 18 months. And I know, Scott, you did mention that you guys are kind of looking at it.

But considering that I don't think we've seen a negative year-on-year change of both of those store classes in a while, is there anymore type of market analysis, market penetration type of market that you can provide other than just things like timing and location size?.

When we look at the specific stores, there's sometimes a story on the stores we open, where we open them at, what types of markets, were they in the northern U.S. and you're talking wintertime or were they out west in very small towns. So sometimes it depends where we open them. The other thing is last year we opened two stores in Alaska.

They opened with pretty high volumes out of the gate. So we're lapping some of that. But yeah, we look at specific stores and we ask ourselves, okay, is there an issue. Some of the stores where we've got lower sales that are impacting those numbers had lower investment costs as well.

So their returns are still pretty good despite the sales being a little bit lower..

Is it your impression that those store classes stabilize year-on-year as we go throughout 2016 or should we model declines as we finish the year?.

I'm looking at the sales sheet here and I feel pretty good about a few of these stores coming up. So I wouldn't do that..

Yeah. The stores we've opened this year have started off pretty strong. But you don't know because sometimes we have smaller honeymoon curves, sometimes we have bigger honeymoon curves. So you don't know. But every class year is a little bit different. And having been here a long time, we've had some years that were better than others.

But like I said, we look at each individual store to kind of gauge are we okay with what these sales are settling in at or not. And if we weren't okay, trust me, we would slow down the number of Texas Roadhouses we would open. So -.

Understood..

Yeah..

Thank you..

And the next question comes from Andrew Strelzik with BMO Capital Markets..

Hey. Good afternoon, everyone. My first question I wanted to ask about real estate. On one hand, it seems like you were emphasizing from a development perspective that you were well into 2017 and beyond. So I was thinking maybe you might be farther out than normal from the development pipeline.

And then on the other hand, you mentioned a couple of times how closely you're looking at the real estate and the importance of the real estate.

So I'm just wondering, what are you seeing from that perspective? Have you seen a change? Are you indeed farther out than you normally would be this time of year? Just trying to kind of flip the two sides of the coin there..

Yeah, this is Kent. Yeah, we're a bit more into 2017 than we, say, were a year ago into 2016. And it just ebbs and flows over time. So it's nothing significant..

Okay. And then one more question on beef.

Just conceptually and I understand the uncertainties with regard to 2017, but if we wanted to take a more optimistic view, if you were to see a meaningful level of deflation above and beyond what you were able to lock in this year, does it change at all how you think about managing your exposures to beef? Is it harder to lock in? Are you more apt to float more? Or maybe if there is a period in history that you can kind of compare that to or is it really all the same?.

This is Scott. I would tell you back – I think it was maybe 2009, 2010. There were pretty big declines in beef prices and we locked in virtually all of our beef, I believe, back then. We may not have had it all locked in by January 1 but maybe by March 31 we did.

And I think we much prefer to have our beef prices locked in for the year and have that stability for our system. We much prefer to go that route. So that's all I could tell you right now..

Okay, great. That's helpful. Thank you..

And next will be Paul Westra with Stifel..

Great, thanks. Just two quick ones here. Coming to a question on the depreciation line, just seems to be creeping up pretty – high single digits on a weekly operating basis.

Can you talk about maybe what's driving that number up on a per-store basis or per-week basis?.

Sure, Paul. This is Tonya. A lot of it is just our ongoing investment, reinvestment in our stores that's been taking place probably over – gosh, probably as many as the last five years, we've seen an increase in that.

So if you look at it on average, it's probably about – we're spending about, call it, $125,000 per store per year just on existing restaurants. And I think the depreciation creeping up is just a manifestation of that increased spending and as we're writing those assets off.

So I think we continue to see that, because I feel like the $123,000 per store per year is going to – that's going to be where we stay, if not even go up a little bit, as we continue to have older stores in the system and things like that..

And you also have, in addition, everything Tonya just said, you have, with Bubba's, albeit small, but you've got a lot of shorter term depreciation when you've got 65 televisions and the sound system and the whole bit; you've got a lot of asset spending that's depreciated over a very short period of time relative to a Texas Roadhouse.

And then with both concepts, the development costs are quite a bit higher than they were just a few years ago. So -.

And then you have to add the bump-outs on top of that, and the Star Bar....

Bump-outs, Star Bars, so we've just been spending a lot of money and of course, our sales have been pretty good, I think as – and partly as a result. So we're comfortable with the depreciation going up – to a point, I'll say to a point..

Okay. That's helpful.

And lastly, where has the check creep come from within the menu? Is there something going on regionally perhaps, I know you talked about the, slight negative normality of it? Or is it because just the calculation when new stores enter the comp base or something?.

Are you talking negative mix?.

Negative mix. I'm sorry, I meant mix, yes..

Negative mix. Really the biggest negative mix item has been alcohol for us, and the second negative mix item I would say is soft drinks. So entrée mix is actually pretty small. Negative mix is pretty small for us. We've lost a little bit in the appetizer line, but the biggest piece has been alcohol.

Again, we don't know if that is something that is going to stay or is a one-time thing or a short-term thing, so we're also watching that as well..

Okay. Thank you..

But part of that could be with more families dining with us, so that could be that as well..

Great. Thank you..

And next will be Brian Vaccaro with Raymond James..

Hey. Thanks, and good evening. Just a few quick ones, if I could.

Scott, just circling back on the new units, for the unit economics, can you remind us what you're expecting in 2016, in terms of your average fully capitalized investment cost?.

Around $4.8 million-ish, fully capitalized, including preopening expense..

Okay..

So preopening running $600,000 to $700,000, and that includes 10 times the first year's rent..

Okay. All right. That's helpful. And quickly, back to the first quarter comps, the spreads between company and franchise widened out a little.

Anything you'd call out that you attribute that to? Is that just regional differences or anything in terms of initiatives, et cetera, that might be driving that?.

No. Between the – nothing I would call out between the franchise and the company-owned units..

All right. And then just last one, wanted to ask about the Star Bars program. How impactful has that been to your business, and how many are planned for 2016? Thank you..

Let's say, it's got to be close to 100 planned for 2016. The impact we don't know quite yet. We haven't done a full in-depth study of the Star Bars. We're going to be able to do that pretty soon, because we would've had enough history behind the Star Bars.

It's tough to isolate just the Star Bar change, because many times we're Star Barring, at the same time, we're bumping out a restaurant and we've also be (56:37) reskinning, retinting buildings, restriping parking lots, a whole bunch of stuff at the same time we're doing Star Bar. So it's a little bit tough to isolate the Star Bar.

Anecdotally, I would tell you, it certainly seems like there's a lot more guests eating at the bar than what I've seen historically. That could be another reason for some challenging alcohol comparisons, because they're eating more versus drinking more at the bar, but again, that is anecdotal, we haven't done a full in-depth study on it.

We do believe that the Star Bar itself is a big part of keeping our concept and brand relevant in 2015..

And fresh..

And fresh for 2015. So the bar is the center of the energy universe within a Texas Roadhouse. So we knew we needed to take it up quite a bit from the original design over 20 years ago..

And if you've had the same haircut for 20 years, you might want to mix it up a little bit, you know?.

Yep. Understood. All right. Thanks, guys..

And next will be Matthew DiFrisco with Guggenheim Securities..

Some of us can't change our haircut, though. Nature prevents us from; so perfect segue right into my question. Guys, great quarter. I just was curious. Quick and easy here.

On the bump-outs, I guess, it looks like also you're doing – would it be correct to assume that you're also getting a little bit more efficient on the execution of the store, as far as, you're not adding as much labor as you potentially are adding out on the bump-out on sales there? I mean, I guess there was a question earlier on the call about the surprising amount of leverage you had on labor despite the wage pressure you are seeing out there.

Is that also indicative of the bump-outs, and is that something we could expect going forward, that the bump-outs, with capacity coming on, don't necessarily have a whole lot of operating cost in there, including labor, which produces some pretty good efficiencies?.

Well, you need more servers if you have additional seats. And then the kitchen maybe is not as affected as much as the front of the house..

It helps. But the number of bump-outs we've been doing is – the impact is very, very small to the system as a whole. So I wouldn't say it has much of a discernible impact on our labor productivity. Our guys get paid 10% of the bottom line still.

So they have an incentive to do the best job they can in managing their cost structure, while balancing that with sort of staying on offense from a guest experience perspective. And they're also very competitive with each other, and they share a lot of best practices with each other on how they staff and schedule their restaurants..

Okay. And then just a follow-up on – I think John had a question with respect to the overtime legislation.

And I'm just curious of how many employees on average do you have in your store that sort of is that salaried employee making between $24,000 and $50,000 right now, that might not be overtime eligible, but will be overtime eligible once this – now, going forward?.

We probably have anywhere from four to six, or it maybe three to six managers in our restaurants that would be impacted in some way by the new regs. It really depends on sales volume, which impacts the number of managers we might have. Our managing partners start out making a base salary of $45,000 a year.

So technically, they would be under what, has been told to us so far, that the salary threshold might be $50,000, technically they would be under it, unless we change something in the way they're paid..

Right, that's back to our earlier comment where we could shift some of the bonus dollars that we currently have today over to the base, so we'll see..

Okay, so when you say, are the managing partners included when you said the three to six in your stores?.

Yeah, because some of them are at $45,000 and technically would be, we would have to do something..

And their base is typically more than the $45,000, or I mean their bonus, I'm sorry..

Gets them over the $45,000. Got it..

So we'll shift some things around. We'll see..

Okay. Thank you, gentlemen..

And moving on to Steve Anderson with Maxim Group..

I noticed in a few of your states that you already bumped up the Early Dine to a $9.99 just in New York and California.

You're talking about some of the wage cost pressures, is this something that you are looking to expand to additional markets?.

Certainly that can happen over time, it just really depends on what those pressures end up being. And it's probably an inevitability that there's going to be some raising of the federal minimum wage and more states are going to get more active in minimum wage, and it's just going to happen and it's not a matter of if, it's just a matter of when.

But certainly we are getting a good learning from what we are having to do in the states that you mentioned..

And....

With that said, we already have experience in California and New York, where they've already jumped ahead..

Has there been any resistance to that?.

I'm sorry.

We couldn't hear you, your question?.

I'm sorry.

Has there been any customer resistance as to these increases?.

No..

Okay. Thank you..

And that does conclude the question and answer session, I'll now turn the conference back over to management team for any additional or closing remarks..

I just want to thank you all for being with us tonight. If you have any other questions, please let us know, and have a good evening. Thanks..

Thank you. And that does conclude today's conference call. We do thank you for your participation today..