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What makes Texas Roadhouse's (NASDAQ: TXRH ) investment potential as juicy as its steaks? Find out as Fool analyst Brendan Mathews interviews CFO Price Cooper about:
- "Far and away the most important metric" the company is watching.
- How the company fosters an entrepreneurial culture among its managers.
- Picking your own cut of meat for your meal -- go for it!
- And more.
Keep scrolling to read the transcript.
Brendan Mathews: Hi, Fools. Stock Advisor Analyst Brendan Mathews here. I'm lucky to be joined by Price Cooper, the chief financial officer of Texas Roadhouse. We're going to be discussing our favorite chain of steakhouses today, along with their strategy, culture, and mission. Thank you very much for joining us, Price. How are you doing today?
Price Cooper: Doing great. Thank you, guys.
Mathews: Awesome. So, let's just get right into it. A lot of our members have been to Texas Roadhouse. For those that haven't been to one of your restaurants, could you give a quick description of the food? The decor? The whole experience?
Cooper: Sure, sure. When you come into Texas Roadhouse, you're first greeted by a friendly host or hostesses at the front. You immediately smell the fresh-baked bread in the window immediately to your left or right. You feel the energy of the upbeat country music. You'll notice we're very laid back. Very inviting. You've got peanuts on the table. You've got peanut shells on the floor. When you sit down, you've got an opportunity to peruse our menus, which -- all our food is 100% scratch-based. We cut all our own steaks in the restaurant that day. All of our sides are made from scratch -- from the croutons we bake and put in our salads to the salad dressing, the green beans -- every part of our menu is scratch-based food.
Mathews: And I understand -- I was recently at one of your restaurants -- I understand your customers have the opportunity to pick out their own steak?
Cooper: Certainly. Most of all of our restaurants, or all of our restaurants, will have a meat display case sitting up there at the front of the restaurant where they have varied cuts of beef that the meat cutter has cut fresh in that restaurant that day -- and should you wish, you're more than welcome to select your steak for that meal.
Mathews: That's a really cool feature. So, from an investor perspective, what are the typical unit economics of the store? Cost to build? Store sales? Restaurant-level operating margins? Payback period? Any color you could give us there?
Cooper: Sure. From a cost-to-build side of things, we look at total investment cost as both the initial cash outlay ... plus we take a 10 times rent component factor for the fact that in a lot of cases, we're leasing our land, and with another $450,000 or $500,000 of pre-opening costs, all those components together add up somewhere just short of $4 million right now in terms of total investment cost. Our new-store sales are doing a little bit in excess of that $4 million threshold right now. ...
That's a relationship we pay very close attention to, because generally speaking, if we can be in that 1-to-1 sales-to capitalized-investment ratio range, we can generate mid- to high-teens types of internal rates of return [IRR] -- which are great rates of return for our shareholders, but they're also great rates of return for our operators, because what is very unique about our system is our operators are paid off the bottom-line performance of their restaurants.
Mathews: Right. That's actually a really unique compensation structure, and I think it also speaks to the ownership culture of your managers. Could you talk a little bit about how that system came about, how it works -- just give our listeners a little bit better sense?
Cooper: Certainly. It came about 20 years ago with the opening of the first Texas Roadhouse restaurant. In essence, the way the program works is our managers -- who we call "managing partners" who run a Texas Roadhouse restaurant -- invest a certain amount of their own cash, and in exchange for that, when they start running a restaurant, they get paid a base salary plus they make 10% of the bottom-line profit of that restaurant that they run ... so it's a very lucrative opportunity for them. It creates a very entrepreneurship-based culture.
Mathews: And what is the approach for local marketing for new and existing stores?
Cooper: Both are very similar. In fact, we don't do any national advertising. We base solely on a local store marketing approach, where the individuals within that restaurant are very actively involved in civic organizations, including churches, schools, various nonprofits within their community. It's a very grassroots approach to assimilating yourself within the area that you're operating in and in developing relationships with your guest base.
Mathews: When we recently visited the restaurant, one of the things we noticed is that there was memorabilia for some of the local high school football teams, so you can definitely see that connection in the stores.
Cooper: Oh, definitely. A lot of our stores take a very localized approach and really support their communities.
Mathews: That's great. You talked about IRR, like hitting a mid-teen IRR on new restaurants. Setting aside GAAP financials, what are the two to three key metrics that you think are really important to the business? What are the numbers that you're watching?
Cooper: First and foremost, we're watching sales. We're a top-line-driven company. Everything about our model starts with the top-line growth, period. That's what creates the dollars that we're able to bring to the bottom line. We understand that over a period of time, our margins may bounce around depending on certain inflationary inputs in any given year or any given period -- but first and foremost, sales are ... far and away the most important metric that we're watching within our model.
Now, of course, beyond that we do what we can on the cost side of the business -- and I think we take a very logical approach to the cost side of the business -- but we will take the opportunity, at times, to give up some profit in exchange for more gain in terms of top-line sales and ultimately dollars then flow through to the bottom line.
Mathews: OK. That makes sense. So, traditionally a lot of your stores have been located in rural locations, and that's been a very successful model for you. I understand that there's a bigger push to move into some suburban or urban locations. How have those suburban stores fared versus your more rural locations?
Cooper: You know, we do and have done well in all different-size markets in all different areas of the country. We're in 48 states today -- all the contiguous parts of the United States -- and we're in markets of 30,000 to 1 million people. And the Texas Roadhouse brand resonates very, very well in a broad spectrum of markets.
Mathews: I understand you have a store or stores in the Middle East. How has that done?
Cooper: Our arrangement in the Middle East -- all of our restaurants there are franchise relationships...so Texas Roadhouse does not have any direct financial interest in those restaurants. It's all through a franchise agreement ... which they pay us a percentage of their sales, of their revenue.
Mathews: What other trends are you seeing in the restaurant industry? Are you seeing consumers becoming more health conscious? More cost or value conscious? What sort of consumer trends are you seeing?
Cooper: For us, there's always different companies focusing on different spectrums, I would say, of the industry. You know the No. 1 trend we've been fortunate enough to continue to see is that people are willing to pay for quality food, great service, and great value. And that's been a trend within the restaurant industry that has been consistent over many, many years, and we're certainly fortunate to see that at Texas Roadhouse.
Mathews: OK, so here's a fun question. Next time I'm at Texas Roadhouse, what's your favorite dish? I need to know what to order.
Cooper: Favorite dish ... far and away, is the bone-in ribeye. It is the most flavorful cut of meat, in my opinion. The house salad, the honey mustard, the bone-in ribeye, and the side of green beans, and you will not go wrong.
Mathews: Yeah, my mouth is watering right now. So, on that note, I'd like to thank Price Cooper for joining us. To learn more about Texas Roadhouse, pop on our discussion boards, or better yet, visit the closest restaurant and get a nice meal. Fool on!