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Texas Roadhouse Inc (NASDAQ:TXRH)
Q3 2019 Earnings Call
Oct 28, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good evening, and welcome to the Texas Roadhouse Third Quarter Earnings Conference Call. [Operator Instruction] . After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

I would now like to introduce Tonya Robinson, the Chief Financial Officer of Texas Roadhouse. You may begin your conference.

Tonya Robinson -- Chief Financial Officer

Thank you, Holly and good evening, everyone. By now, you should have access to our earnings release for the third quarter ended September 24, 2019. It may also be found on our website at texasroadhouse.com, in the Investors section.Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. We refer all of you to our earnings release and our recent filings with the SEC for a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements.In addition, we may refer to non-GAAP measures. If applicable, reconciliations of the non-GAAP measures to the GAAP information can be found in our earnings release.On the call with me today is Kent Taylor, Founder and Chief Executive Officer of Texas Roadhouse. Following our remarks, we will open the call for questions.

Now, I'd like to turn the call over to Kent.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Thanks Tonya. We're pleased to report strong third quarter results that included not only another quarter of strong revenue growth, but also solid restaurant margin performance and earnings-per-share growth. Our comps in the third quarter were up 4.4% including traffic growth of 1.5%. And our sales momentum has continued into October with comps increasing to 5.3%.The benefit of average unit volume growth along with improvement in labor productivity resulted in restaurant margin expansion of approximately 0.5% during the quarter. Tonya will give you more detail on the specific drivers and our financial update, but I will say that our operators deserve all of the credit for the improvement we saw throughout the quarter. Their focus on labor scheduling and efficiency, while maintaining the right levels of staffing to execute our high standards of food and service quality will continue to serve us well.We continue to focus on growing guest counts with an increased emphasis on driving those sales through to the bottom line without sacrificing the guest or employee experience. Sales growth continued at Bubba's 33 this quarter with 20 restaurants and a comp base generating growth of 8.8%. Our test of adding lunch in 5 Bubba locations which began earlier this year contributed 2.5% of that growth aka 8.8 minus 2.5 equals 6.3 growth, Yee Haw.Construction and permitting delays continued to be a challenge in the third quarter, which pushed several more openings into early next year. With these delays we now expect to have approximately 7.2% store growth in 2019 including a benefit of a 53rd week. So far in the fourth quarter, we have opened 5 restaurants and expect to open 6 more before year-end. On a full year basis that will give us 22 new restaurants in 2019 including 3 Bubba's 33 sites.Looking ahead in 2020, I'm excited with our development pipeline is coming together. We currently are targeting at least 30-plus company restaurant openings including as many as eight Bubba's. We also look forward to opening two Jaggers next year, which are not included in our development outlook.

From both a commodity and wage rate perspective, we expect 2020 to be another inflationary year. As a result, we plan to roll out a menu of price increase of approximately, 1.9% in late November to replace the menu pricing that will be rolling off.Whether this pricing action will be enough to offset inflation and maintain restaurant margins in 2020, will depend on a number of factors including traffic growth, the exact levels of inflation we experience and continued improvement in our labor productivity. For those Roadhouse folks on the line, let me repeat, for the continued improvement in our labor productivity. Thank you.Finally, we spent the last month traveling the country meeting with our managing partners on our Annual Fall Tour. I came away from those meetings, confident about the direction of our business and our long-term growth opportunities. I want to thank our operators and the entire team for continuing to grow sales, take care of our guests and employees and for never accepting average as Gary Grimes likes to say.

Now Tonya will walk you through our financial update.

Tonya Robinson -- Chief Financial Officer

Thanks, Kent. For the third quarter of 2019 revenue grew 9.4%, driven by 5% store rate growth and a 4.4% increase in average unit volume. Restaurant margin dollars grew 12.7% to $108 million while restaurant margin, as a percentage of total sales, increased 49 basis points to 16.7%. Additionally, net income increased 25.4% to $36.5 million or $0.52 per diluted share.Comparable restaurant sales increased 4.4% during the quarter comprised of a 1.5% increase in traffic growth and a 2.9% increase in average check. By month, comparable sales increased 4.3%, 3.9% and 5.1% for July, August and September periods respectively, and as Kent mentioned, comparable sales increased 5.3% for our October period.

Cost of sales as a percentage of total sales decreased 76 basis points compared to the prior-year period. The impact of approximately 0.8% commodity inflation was more than offset by the benefit of a higher average check. Based upon our expectation for inflation in the fourth quarter, we've updated our full year 2019 commodity inflation guidance to 1.5% to 2%.Labor, as a percentage of total sales increased 33 basis points to 33.8% and labor dollars per store week were up 5.2% compared to the prior-year period. The main drivers were wage and other inflation of 4.2% and growth in hours of 1.4%, which included the impact of higher guest counts. Labor per store week growth benefited by 0.4%, due to adjustments to the reserve associated with a group health insurance claims, development history and our workers' compensations claims experience. In total, these adjustments resulted in $1 million of expense this quarter compared to $1.8 million of expense in the prior year quarter. We now expect labor dollars per store week growth for the full year 2019 to be between 6% to 7%.Lastly, other operating cost as a percentage of total sales were essentially flat compared to the prior-year period. We continued to see higher year-over-year insurance premiums. However, this increase was offset by favorable adjustments related to our quarterly actuarial reserve analysis for general liability insurance. These adjustments resulted in a $1.1 million credit this quarter, compared to a $0.5 million credit in the prior year quarter.Moving along our restaurant margin G&A cost increased $0.2 million and as a percentage of revenue decreased 48 basis points to 5.4%. The primary drivers of the decrease were a lapping of an additional $1.4 million of an incentive and equity compensation expenses from last year and $0.9 million in legal settlement expenses from last year.

Those benefits were partially offset by the expansion of our regional operations support structure, which impacted G&A by approximately $1 million. We currently expect that the regional operations expansion will have a negative impact on 2019's fourth quarter of approximately $0.7 million as we will begin to lap the expansion, which began during the fourth quarter of last year. Overall, we continue to expect 2019 G&A cost to grow approximately 12% on a 53-week basis compared to the prior year.Depreciation expense increased $2.5 million to $28.3 million or 4.4% as a percentage of revenue, which is flat as compared to the prior year period. The increase included $1 million of additional accelerated depreciation, primarily related to restaurants expected to be relocated within the next nine months. We expect additional accelerated depreciation of approximately $0.2 million in the fourth quarter.Our tax rate for the quarter came in at 15.1%, which is unchanged from our rate in the prior year period. Our full year income tax rate guidance remains unchanged at 14% to 15%.Finally, our total share count was down on a year-over-year basis as a result of share repurchase activity. The impact of the 2.1 million shares repurchased in this year's second quarter along with a 358,000 shares repurchased in the third quarter benefited earnings-per-share growth by approximately 3.7%.We will continue to allocate our operating cash flow in a smart and balanced way with a focus on disciplined growth of our brands, dividends, share repurchases and franchise acquisitions. Our balance sheet remains strong as we ended the quarter with $100 million in cash. During the quarter, we generated $65 million in cash flow from operations, incurred capital expenditures of $57 million, paid dividends of $21 million and repurchased 19 million of stock. We have updated our projected 2019 capital expenditures to approximately $200 million.

As we near the end of 2019, I want to remind everyone that the fourth quarter will have an extra week, which falls between Christmas and New Years and is usually part of our January period. We estimate this extra week will benefit diluted earnings-per-share growth by approximately 4% for the full year 2019. Finally, due to the timing of our year-end on December 31st, the fourth quarter of this year will have two dividend payments.Looking ahead to 2020, our initial expectation include positive comparable sales growth and as Kent mentioned at least 30 news store openings including as many as eight Bubba's 33 restaurants. While we will be lapping the benefit of the 53rd week from 2019, we expect to grow restaurant store week by 3.5% to 4.5% with openings more evenly weighted throughout the year. We currently expect 1% to 2% commodity inflation with fixed prices on approximately 30% of our commodity basket at this time.Our expectation for mid-single digit labor expense growth per store week includes the impact of increases to mandated state wage rates, as well as the impact of ongoing market pressure and growth in labor hours due to traffic growth.Our 2020 expectations also include an income tax rate of 14% to 15%, and capital expenditures of $190 million to $200 million.

That concludes our prepared remarks. Holli, please open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is going to come from the line of David Tarantino with Baird.

David E. Tarantino -- Robert W. Baird & Co. Incorporated, Research Division -- Analyst

Hi. Good afternoon. My question's on the restaurant margin performance you delivered in Q3. It does mark a pretty nice inflection point relative to what you've been running. And I wanted to ask in particular on the labor line, what exactly are you doing to drive some of the productivity enhancements that you mentioned? And how sustainable do you think those efforts are as you think about the fourth quarter in 2020? And then, I have a follow-up?

Tonya Robinson -- Chief Financial Officer

Sure, David. Really, we saw those labor improvements kind of happen throughout Q3, so we're still learning a bit. But we've been talking a lot about labor. We've had some meetings with our market partners, we just came off our tour, because that hasn't really -- we haven't seen any impact of that yet, but really we're talking to stores just about what their number is. What the number of hours they need to continue to grow restaurant sales and these are guest count, the guest counts that they have. So that's really what we've been doing.

If you remember, back at the beginning of the year, we talked about the staffing initiatives we had. We felt like a lot of people really did a great job of getting guests properly, where they may be understaffed in the past. So, what we then said was, there could have been some overcorrection, if you will, from some stores.So, I think, some of what we're seeing right now is just a little bit of a balancing of that, kind of, tweaking that a little bit, if you will, and just bringing that more in line. So, I think, it is -- right now, we expect that we we'll see that to be sustainable.Too early to say Q4 will be a great indication of going forward what we will expect, but we've built into our mid-single digit -- for 2020, our mid-single digit labor guidance, an expectation that those hours will start to be more in line with traffic growth and maybe even a little bit below traffic growth.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

And part of that was, we brought quite a few managers on to get geared up for doing $6 million and a lot of those folks are now out of training and executing within the stores. And then, I will tell you, on fall tour Doug Thompson did one heck of a class in labor productivity and I was quite amazed to see people coming out of those meetings very energized and educated a little better.

David E. Tarantino -- Robert W. Baird & Co. Incorporated, Research Division -- Analyst

Great. And then, the follow-up I had was related to 2020 and I know, Kent, you just -- you mentioned that you're taking a 1.9% price increase and I think that's replacing 1.7%. But, I guess in, 2019 you took a second price increase in the spring to manage through the inflationary pressures.So one question is, is that second price increase still something that you might consider for 2020? And then, generally our philosophy around what you'd like to accomplish on restaurant margin in 2020, whether it's holding the line or increasing margins? Just directionally how are you thinking about it?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Well, as we went through, I meet with all 60 of our market partners. And, obviously, we -- probably in a lot of the higher wage states to have a bigger box, took a higher percentage than our 1.9% and then there were states that had no increase in late state wage that we took a less of a percentage. So you can't really say, it's an average, it depends on the state we're in. As far as of next year, we didn't know it at this point a year ago that we're going to do that additional bump, so it's hard to tell.

Tonya Robinson -- Chief Financial Officer

So I think a lot is going to depend on how we see labor trend and we'll probably having those conversations as that 1.5 million roll off at the end of March but really too early right now to say whether we'll be doing that. I think maintaining restaurant margin is a good place to be in the labor environment. If we can do that with traffic -- driving traffic and maybe getting a little bit of help from a commodity inflation standpoint, despite being a little bit lower on that range we gave I think that will be really positive.

Yes. The biggest thing she said is the traffic. We don't know our traffic number say first quarter of 2020 and that's a big indicator of what will do or not do.

David E. Tarantino -- Robert W. Baird & Co. Incorporated, Research Division -- Analyst

Great. Thank you very much.

Operator

And our next question is going to come from the line of Brian Bittner, Oppenheimer & Co.

Brian Bittner -- Oppenheimer & Co. -- Analyst

Thank you. Question on the food cost inflation outlook for 2020, the 1% to 2% for next year is pretty good even potentially better than what you're operating in this year. Can you just talk a bit more about what that outlook is exactly based on, is it based on what you're currently contracting at with your suppliers now or is it based on what do you expect the floating rates to be at? Any commentary there would be helpful?

Tonya Robinson -- Chief Financial Officer

Sure. Well, Brian it's actually early in 2020 inflation -- commodity inflation. And we're rock as we said of about 30%, 40% of basket. So it's -- we're making a lot of estimates if you will about what those floating prices might be on some items. So that's what I would tell you. Right now, we feel like from the B side of things, we are seeing a little bit of supply restriction, if you will just some certain degrees that we use on these, some cuts of that happening right now which is why we upped that overall guidance.We've kind of narrowed the range to 1.5% to 2% of the full year 2019. We may see some hangover of that into Q1. Again, a lot just remains to be seen, but I would tell you that were baking and. We've got some prices locked. We're floating a lot of things. We're making some assumptions.But overall, we feel good about that range right now. It's -- the inflation in that number, it's spread across the basket. There isn't one item that I -- or one piece of the basket that I would really call out as be more of a driver. There are various things -- some deflationary, some inflationary. We've got a little bit of fortune inflation built in not as much as we thought maybe we would have heading into 2020 and that's really all about -- about all I could tell you.

Brian Bittner -- Oppenheimer & Co. -- Analyst

Okay. And just quick follow-up. As we do approach the spring when you take price last year, I know you talked about labor, I'm watching that. But is it safe to say you'd have to see food cost really surprise you above this range to really take price in the springtime? Is that probably something we should be gauging when we think about how you're thinking about the springtime price increase?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Maybe you could give us some outlook on what the tariffs will be at that time that might help us?

Tonya Robinson -- Chief Financial Officer

Yes those -- those ranges are pretty big. And when we're looking at the commodity inflation guidance, the labor guidance we're given. So I think I can say, a lot is going to depend on traffic trends where we are there, what the labor productivity we're seeing, how that's coming out and the rest of this year and heading into next year? So much, much the same way we were sitting here last year, thinking about, what would additional pricing might be? So, we'll be talking a lot more about that on the call in February.

Brian Bittner -- Oppenheimer & Co. -- Analyst

Okay. Thank you.

Operator

Our next question will come from the line of John Glass, Morgan Stanley.

John Glass -- Morgan Stanley, Research Division -- Analyst

Maybe Tonya, can you just go back to the G&A commentary. This quarter was flat year-on-year, there may have been some noise but it sounded like it came in a lot less than what I would've expected. So what are the one-time items in this quarter that we would not expect to continue and how do you think about maybe the G&A number for next year, now that after you stepped up in 2019 with some I think those additional managing partners or area partners?

Tonya Robinson -- Chief Financial Officer

Sure, John. Just to tackle the first part of that question first. We had about $2.6 million of charges that we were lapping from last year. So between some extra incentive and equity compensation with tax reform, we paid out bonuses a little bit higher due to that. We had a legal settlement, some other things. So that was about 7.5% of an offset to the growth we saw this quarter.And then looking at 2019, really the biggest thing with saw was the expansion of that regional, that we called out that regional support structure, which was about $1.2 million. Again that was about 18-inch basis points as a percentage of revenue. So, overall, even if you kind of bake all these things out, growth on G&A was reasonable, a reasonable number, as far as I am concerned it was below revenue growth.It's still good. I think we're still -- we're still very good with a 12% G&A growth on a full year basis. And I'll remind everyone too that we do, one of the reasons that G&A will bump up in Q4 is because we do have that extra week impact, which is about 2% I think on the full year relating to G&A growth, so you have that going on. But as we look to 2020, my expectation would be that we should be able to get some leverage on G&A. So I think it's flattish but feel like we have some opportunity to get a little bit of leverage there.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

What I can tell that you that the new President of Texas Roadhouse will we paid one crisp -- $100 bill next year, meaning me for that role. So that might help a little bit.

John Glass -- Morgan Stanley, Research Division -- Analyst

Good to know. And then just to be clear Tonya on the price increase, where does that leave the fourth quarter effective pricing maybe first quarter effective pricing, given the increase you just talked about?

Tonya Robinson -- Chief Financial Officer

Sure. Q4 2019 will run about 3.2% because that 1.7% will roll-off and then we have about a week before, we have at the 1.9% rolling in. So we'll be at about 3.2%. Q1 of 2019 will be about 3.4% and then assuming that 1.5% rolls off it's replaced you're obviously, dropped down to the 1.9% for the rest of the year. So I think on a full year basis for 2020 that will get you about 2.1% pricing in the menu effective.

John Glass -- Morgan Stanley, Research Division -- Analyst

Got you. You said 1Q, 2019, but I'm assume you mean, 1Q 2020 is the 3.4%?

Tonya Robinson -- Chief Financial Officer

Yes I did. Thanks, John. Q1, 2020.

John Glass -- Morgan Stanley, Research Division -- Analyst

Thank you.

Operator

Our next question will come from the line of Jeffrey Bernstein, Barclays.

Jeffrey Bernstein -- Barclays Bank PLC, Research Division -- Analyst

Great. Thank you very much. As we look at the comp trends in the current quarter, it seems like a solid continuation of momentum from the third quarter. I'm just looking at the compared to the rest of the year. It looks like we get sequentially more difficult in November and December, I don't know if there's any unusuals or shifts or anything like that but we should anticipate going into the remaining months of this year or whether, perhaps you don't look at it on a two-year basis because those are these things going on, just trying to access how you think the comp will play out for the rest of this quarter?

Tonya Robinson -- Chief Financial Officer

The only thing from a calendar shift perspective, I'd called out, we'll probably be in December. I mean, you got the benefit of that extra week, which I think adds like 8% in a quarter to store week growth. And that that typically is one of our biggest -- it's a busier week that week between Christmas and New Year's than the other weeks of December. So you'll get a little bit of a help from that in December.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

We are going to be enjoying Christmas on a Wednesday and Christmas Eve on a Tuesday, which is a lot better than the weekend as well as New Year's Eve on a Tuesday, so that helps too.

Tonya Robinson -- Chief Financial Officer

Yeah, for sure.

Jeffrey Bernstein -- Barclays Bank PLC, Research Division -- Analyst

Got it. And then is there any -- I mean presumably inflation will dictate whether you take another increase in early 2020. But I'm just wondering as you now look back on the past many months of the second increase you took earlier this year, did you get the sense there was any pushback in terms of consumer sentiment or reason to believe that you might not want to take an increase even as inflation justified it because of maybe some response from the consumer? Or is it really all flowing through in your mind?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

If you look at the last two months, the comps are pretty OK, right?

Tonya Robinson -- Chief Financial Officer

Yeah. And I think right now from a mix perspective, we're not really seeing anything that would indicate that the pricing isn't being accepted by the guests. It feels pretty good. I mean it's always hard to tell when that really would show up in any pricing. I think it takes quite a bit longer to show itself and at that point you may not even realize that it's from pricing. You'll probably be looking at some other things. But at this -- right now sitting here today is the pricing falling through pretty well? It feels fine.

Jeffrey Bernstein -- Barclays Bank PLC, Research Division -- Analyst

Great. My last question maybe just a clarification. I think you said you got 30 units going into next year and then couple of Jaggers of 32. And this year you're talking about low 20s. But yet the capex spend is very similar. So I mean I know there's you spent ahead of the opening I'm just trying to see if there's anything else going on there maybe a change in the cost-to-build Texas versus Bubba's, or how that mix shift plays out? It just seems like a big differential for the units with capex being the same?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

A lot of these units that were supposed to open in December will now open in like January maybe February. So, most of the construction and people expenses to open those stores will have already been spent.

Tonya Robinson -- Chief Financial Officer

Yeah, that's definitely true. We're seeing that. And then we also are expanding the support center, which is about $20 million of the cost that we're seeing in that capex number this year. We took our two existing buildings that we're now filling up completely, built a building in between, so we're just taking those and getting it where it needs to be to hold all the growth we've had.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

And we're doing eight floors in one year. So a lot of that -- and that's all the floors we've got. So it's like let's get it over and done with and move on and not have to deal with that next year.

Jeffrey Bernstein -- Barclays Bank PLC, Research Division -- Analyst

Great. Thank you.

Operator

And our next question will come from the line of Brian Vaccaro, Raymond James.

Brian Vaccaro -- Raymond James & Associates, Inc., Research Division -- Analyst

Thank you, good evening. Just back to the comps. The momentum accelerated through the quarter with an obviously a pretty strong start to the fourth quarter. I'm curious what you attribute that to? How much might be due to improved staffing and throughput versus some other dynamic? And anything worth calling out from our retail or day of the week standpoint?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Legendary Food to Legendary Service, I'll let Tonya fill in the blanks.

Tonya Robinson -- Chief Financial Officer

Nothing from a regional perspective that I would point out any difference in what we've seen. Day parts are all behaving similarly, so nothing new there that I would call out. So I think it's just the strength of the brand to Kent's point. We continue to execute really well and I think that we're just seeing that momentum. So that's great.

Brian Vaccaro -- Raymond James & Associates, Inc., Research Division -- Analyst

Okay. And the acceleration I guess, it's a modest acceleration but a pretty solid acceleration. Was it concentrated in some set of stores where maybe you're seeing the fruit of that investment you were making in the prior quarters, or pretty -- or more broad based?

Tonya Robinson -- Chief Financial Officer

I think it's more broad-based, Brian. I would tell you, it's more across -- all across the country. It's -- we're seeing it across various dayparts. And even among that, you're seeing a lot of it in Early Dine were seem to go -- continue to grow and that's certainly helping from a traffic perspective. So that continues to be about 7% of our sales And, overall, we thought to go up 10% year-over-year. So that continues to be definitely a contributor to the growth.

Brian Bittner -- Oppenheimer & Co. -- Analyst

Okay. And then, on Bubba's, with plans to reaccelerate the growth there, you mentioned the strong comps. Kent, I'm curious, what's driving the comp, I think, it's been pretty strong in the last few quarters now? Is it brand awareness that's breaking through? Are you hitting it on all cylinders on the trail of execution? Or something else you'd point to there?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

No. I would say, you've nailed it on both counts. I think our people are -- the people we have in place have been there now one to maybe three years. So that part's getting more stable. And then, I think, just people in these various markets where we're located are just trusting the brand more than we thought and so that's a good thing.

Brian Vaccaro -- Raymond James & Associates, Inc., Research Division -- Analyst

Okay. And lastly -- I'm sorry, go ahead?

Tonya Robinson -- Chief Financial Officer

No. No, go ahead.

Brian Vaccaro -- Raymond James & Associates, Inc., Research Division -- Analyst

Last one, if I could. Could you just circle back on Bubba's? Could you just walk through the key components of the unit economic targets for the concept AUV store margins and investment? That's all for me. Thank you.

Tonya Robinson -- Chief Financial Officer

Sure. Right now, we really haven't given a whole lot of that data out there. I'll tell you, their sales growth's looking great, again 8.8% in the quarter. We continue to see that level of growth all year, which has been very encouraging. They continue to get improved restaurant margin, so they're really -- those operators are really honing in on labor costs and different things, as they dive into that and that's certainly been encouraging too.

From a unit development cost standpoint, I think, right now, we are seeing those costs coming in anywhere from, I would tell you, from $6 million to $6.5 million. That's taking out one store that we had that was much higher than that. So we kind of bake that out. There were some other things going on there driving that other than the--

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Because rent at a 10 times.

Tonya Robinson -- Chief Financial Officer

And that includes -- yeah, that includes rent at a 10 times factor as we usually do from a development cost standpoint.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Development cost as well.

Tonya Robinson -- Chief Financial Officer

Yeah. And also fully loaded preopening. So we expect to see mid-teen returns when we're modeling those -- these stores out, just like we do at Texas Roadhouse, is what we're looking for. So, again, I think, we've talked before that if we can get $85,000 a week in sales, if we can keep that building cost around $6 million, assuming margin that's slightly better than Texas Roadhouse, because of the alcohol spend there and then the lower cost of sales, those returns look good so...

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

And we do have three buildings that are slightly smaller getting ready to open that might provide some efficiencies and lower cost, but too early to tell since they're not open yet.

Tonya Robinson -- Chief Financial Officer

Yeah

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

All right. That's helpful. Thank you.

Operator

And our next question will come from the line of Will Slabaugh with Stephens Incorporated.

Will Slabaugh -- Stephens Inc., Research Division -- Analyst

Well, I just had a question on labor. If there's anything different happening in the labor market that would point to any loosening of that market at all or if the improvement that we're seeing in the P&L is purely a result of the productivity initiatives that you have going on?

Tonya Robinson -- Chief Financial Officer

Well, it really looks to be more on hours' growth than wage inflation. I mean, wage inflation in Q3 did tick down just a little bit from where it was in Q2, 2019. I don't know how sustainable that would be. I don't know if maybe we're just we're trying to catching up and now we're going to see it kind of moderate a little bit. We're not expecting that kind of in our guidance. But the hours is really where we saw the bigger turnaround in Q3 of 2019.

Will Slabaugh -- Stephens Inc., Research Division -- Analyst

Got it. And just a quick follow-up on Bubba, as you mentioned a small box that you have opening up in a few stores just coming up, can you remind us how much smaller that is? And how much you're saving there? And then as you think about next year how many of the potential 8 stores, you expect in the smaller format box stores?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Well as far as next year, it's just those 3 because you're always up more than a year out. I want to say, it's 450 square feet smaller something like that.

Tonya Robinson -- Chief Financial Officer

I believe that's right. I think it comes in and around a couple of hundred thousand maybe lower-cost.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

250 was the target.

Will Slabaugh -- Stephens Inc., Research Division -- Analyst

Got it. Thank you.

Operator

Our next question will come from the line of Chris O'Cull, Stifel.

Chris O'Cull -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst

Thanks, good afternoon guys. These stores have opened at really strong volume in the past few quarters. Is there anything the company is doing differently to generate these higher volume openings?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Yes. We're locating in smaller towns go figure, huh?

Tonya Robinson -- Chief Financial Officer

Yes. That's true. Other than that, I mean there's really nothing we're doing differently. We are in 6 towns that are a little bit smaller than maybe we would've expected to be in before. And we are seeing just really great performance out of them as Kent mentioned. So nothing that I could point out that, we have really done differently from an execution standpoint.

Chris O'Cull -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst

How many stores next you're going to be in these smaller towns?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Boy if I have the development report in front of me, I'll tell you. Let's see Tonya you want to answer something else while I...

Tonya Robinson -- Chief Financial Officer

I think we probably have that...

Chris O'Cull -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst

I do have a follow-up I'll ask another one.

Tonya Robinson -- Chief Financial Officer

Okay. Go on and ask your follow-up then. We'll...

Chris O'Cull -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst

Just about on the labor question, what portion of the store base do you think still has an opportunity to improve productivity? And when did you really start to see the improvement this quarter?

Tonya Robinson -- Chief Financial Officer

Well it kind of happens throughout the quarter probably a little bit in a bigger way in September, I would tell you. But it's really hard to say what opportunity each store -- what opportunity they have. Because to be honest every store is different and we've been really -- as we're talking about these labor productivity questions, challenging the stores to note their number and not giving them a target number is something that we feel like they should hit because we just don't have that labor model that we're going to push down from corporate.So it's hard to say, where that opportunity might be? But I feel pretty confident that we're going to continue to see them focused on that and continuing to find ways to make sure that they're hitting the number that works for them, so they can execute on guest experience and to quality for sure.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

9 towns.

Chris O'Cull -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst

Okay. And then just on back of the beef, what are you hearing from your suppliers to make you think the beef inflation outlook could actually improve after the first quarter next year?

Tonya Robinson -- Chief Financial Officer

Well I think some of what we're hearing of course again we're not that -- we don't have a lot of transparency. We aren't locked up -- locked on price on a lot of things. So some of what we're hearing is just maybe -- it wasn't -- it's not as bad as maybe what the expectation was, how it's coming off of the discussion that's been going on all year on tariffs and the swine fever and how that would impact beef. So it just doesn't seem to be there as much as we thought it would be.Now again, there is some supply -- a little bit from the supply perspective just on the choice beef, just from a grading perspective. We've -- no concerns as far as the supply of beef on our restaurants, but just overall in the industry a little bit of the supply constriction if you will, I think slaughter rates are down year-over-year, those types of things. So, again using what we are locked on and then making assumptions on the floating, we get comfortable with beef where it lies within that 1% to 2% overall commodity inflation.

Chris O'Cull -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst

Great. Thanks, guys.

Operator

And our next question is going to come from the line of David Palmer, Evercore ISI.

David Palmer -- Evercore ISI -- Analyst

Just a follow-up on labor productivity. You mentioned mid-single-digit labor inflation in 2020. Could you break down kind of your assumption on -- that goes into that same-store traffic? You've obviously talked about productivity, perhaps managing hours better versus wage inflation, any breakdown would be helpful? And I have a follow-up.

Tonya Robinson -- Chief Financial Officer

Sure. So when we're thinking about that mid-single-digit range, we're thinking, you've got approximately 1% to 1.5% that we know is just state-mandated increases that are coming. And then probably another, I would call it 1.5% to 2%, I've just continued market pressure. So that would keep us pretty steady as far as the wage inflation we're seeing along with a 1% we see on inflation on the other categories, which is just taxes group insurance things like that, we think that will continue.On the hours side of things, that is when you kind of where you get to a range, right because you've got to make some assumptions on traffic. So without kind of giving any of that away, we typically don't get traffic guidance. I'll tell you what we're hoping is we see hours growth come on below traffic, below traffic growth is kind of what we anticipate happening.So I know, if we'll get back to 50%, which is typically what we have been seeing, hours growing about 50% of traffic. But within that range you have some scenarios where you at least see traffic or hours growth below traffic growth. So that made us comfortable with that mid-single-digit range which you could call 4% to 6%.

David Palmer -- Evercore ISI -- Analyst

That's helpful. And just a philosophical question. Kent, you made some comments in your opening remarks talking about labor productivity and obviously, there's been a lot of talk about this. It seems like the focus is up on that area. You talked about some evolutionary things about, how you've staffed up managers on that push to $6 million, but there's also that bigger question about why now? And what triggered this for you from an organizational focus? Is it something has to do with where the margins had gotten? Where you think that they should be? Or some other observations that you made about the business? Any color there would be helpful. Thanks.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Boy, I wish I could give you the specifics. I think we've just kind of evolved into that position. And I think our -- we learned from some of our better operators that were managing labor more effectively, listen to them and then basically we've been out teaching our learnings from those folks. So nothing we've done unusual. It's just that we've basically are sharing the best of the best ideas on various fronts not just labor.

Tonya Robinson -- Chief Financial Officer

I think too David, when you think about the overall pressure from a wage inflation standpoint, that does make you want to see -- do everything you can on the other assets of labor to really help from a cost perspective. And we continue to see wage inflation stack up. So as Kent said, really the operators came forward with some great ideas and that's just what we do best, share best practices, is really what our operators are great at.

David E. Tarantino -- Robert W. Baird & Co. Incorporated, Research Division -- Analyst

Great. Thank you.

Operator

Our next question is going to come from the line of Dennis Geiger, UBS.

Dennis Geiger -- UBS -- Analyst

Thank you. Just given where you're at now on labor inflation per store and considering the better labor scheduling and efficiencies. Wondering, if we can just talk about employee and customer satisfaction metrics, kind of, what you're seeing also on the throughput trends? Maybe in the context of those more tightly managed stores, but then just broadly across the system?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Now, when I go on to stores, I look at the faces of our guests that are interacting with our people, and I continue to see smiles going back and forth. So I think we're still keeping the staffing levels at the appropriate point to have those great guest to employee interactions. So I don't really see anything new to report on.

Tonya Robinson -- Chief Financial Officer

Yeah, and I think traffic -- the strong traffic growth we're seeing too is a great indication from a customer experience that we're doing the right thing.

Dennis Geiger -- UBS -- Analyst

Okay. And then maybe just if you could provide an update on where we stand with bump outs currently and the opportunity from here, either on an annual basis or kind of in-total system for the system from where we sit right now? Thank you.

Tonya Robinson -- Chief Financial Officer

Sure. So we've got about 250 of those done today at the bunkhouse, and I think we have 11 so far in 2019 completed. So as usual, there's usually about anywhere from 25 to 35 of those in the pipeline at any point in time and we continue to feel like, we can continue to see stores, meeting the hurdles that we, kind of, expect internally to get approved for those bump outs. So that's pretty exciting. I mean, I think from a Roadhouse perspective, I could see it being 90% of the units eventually being able to sustain a bump out like that, so that's really encouraging to be seeing.

Dennis Geiger -- UBS -- Analyst

Thanks.

Operator

Our next question is going to come from the line of Andy Barish, Jefferies.

Andy Barish -- Jefferies & Co -- Analyst

Hey guys, two questions. Just on the 53rd week this year and having the holidays, how should we think about the impact just starting out 2020 from that shift?

Tonya Robinson -- Chief Financial Officer

Yeah. So we will see a little bit of a negative impact from that busier week falling in P-12 versus being in P-1. It won't be as much of a benefit we're going to is in Q4 because Q1 tends to be higher from a sales perspective that we do think that that will have a little bit of an offset.Comps if that's on the average weekly sales numbers and because from a comp sales base it will be -- we'll be looking at 13 weeks over 13 week. So it won't be a comp sales impact. We'll just have an impact on average weekly sales growth.

Andy Barish -- Jefferies & Co -- Analyst

Okay. And then just following up on the Bubba's work that's been going on. The lunch tests, obviously, it's seeming like they're driving incremental sales. How applicable is that to, kind of, rolling out to the rest of the Bubba's stores at this point?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Like we do everything we just, kind of, move slow and then basically give something that we're testing like six months. So I don't -- it's possible we'll add a few more stores next year, but not significant numbers.

Andy Barish -- Jefferies & Co -- Analyst

Okay. Thank you.

Operator

Our next question is going to come from the line of Peter Saleh with BTIG.

Peter Saleh -- BTIG, LLC, Research Division -- Analyst

Great, thanks. I just wanted to come back to the conversation around Bubba's. The smaller format, is there a reason for the smaller format having removed the service bar, now you've just moved to just one bar? Is that the removal of the square footage in the cost savings?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Yeah. We did remove the service bar. We have a big party table that will be coming out of those three stores. So with the bar we lose a little square footage and that's pretty much it. But you also have the equipment that's in the bar that cost a lot of money. Then I think we took like four TVs out as well and a few speakers.

Peter Saleh -- BTIG, LLC, Research Division -- Analyst

Got it. And then, I think, the last we spoke, you had mentioned at one point you tested co-marketing Bubba's with Roadhouse and that kind of worked in your favor. Is that something that you guys are still doing or considering to do?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Yeah. I was the guy that really was not in favor of that, I'll be honest with you. And then, we had a few lower volume stores where we did billboard in each market that kind of mentioned that we're connected -- or did mention that we're connected. And that was very beneficial. So apparently I was wrong and we'll do that more in the future.

Peter Saleh -- BTIG, LLC, Research Division -- Analyst

Any sort of magnitude back on comp from co-marketing?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

It's hard to tell, just because all the stores are up. So -- but I would say, there is little more benefit on those that had it than those that did not. So yes.

Peter Saleh -- BTIG, LLC, Research Division -- Analyst

Great. Thank you very much.

Operator

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

John Ivankoe -- JPMorgan -- Analyst

Hi. Thank you. Firstly, Tonya, as you look at insurance and kind of think about fiscal 2020, how do you look at general liability and workers' comp in 2019? Was it an average year or high year or a low year as we think about potential lapse from fiscal 2020?

Tonya Robinson -- Chief Financial Officer

Well, I mean, they were up. Workers' GL probably more than workers' comp, I would tell you. We expect to see insurance increasing in 2020 again. I think, it's something we can absorb within the other operating line. But there will be some definite inflation on that line, as we continue to see some lines of insurance, just kind of contract, if you will, they get a little tighter, things like that.So insurance seems to creep up a little bit every year and I think we'll continue to see that happening a little bit on 2020. Now that's just from a premium perspective, John. On an actuarial adjustments and things like that based on claims experience, that's when you just really never know for sure how that's going to work or how that's going to happen and whether it's going to be a put or take in any given quarter.

John Ivankoe -- JPMorgan -- Analyst

Okay. Thank you. And there's some news on the take today on just delivery in general, third-party delivery. Have you seen -- even on a very temporary basis in any store at all, any type of competitive impact around, any type of free delivery promotions at some of your competitors may have run in. As I'm sure many have tried come into your office to give you their best pitch.Is there an idea at this point that, at least, in certain markets maybe, certainly the locations within certain markets, are any of your managing partners reaching out to you, say, hey, listen, third-party delivery might make -- excuse me, might make more sense, that was a tongue twister, in terms of adding delivery to their own store?

Tonya Robinson -- Chief Financial Officer

Sure.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

We love third-party delivery for competitors that drives more to-go into our stores.

Tonya Robinson -- Chief Financial Officer

Yeah. And I'll tell you, just coming off of our tour, we talked about a lot of things to-go as a big topic, as we see volumes -- to-go volumes grow in a lot of our restaurants. So delivery was not a part of the conversation, doing delivery was not part of the conversations. I think they feel like they've got enough to handle with just the to-go volume we're seeing. And so no changes there.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

And we also love when our steak competitors advertise on TV, because that helps drive more people into our stores.

John Ivankoe -- JPMorgan -- Analyst

Thank you.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Thanks

Operator

Our next question comes from the line of Andrew Strelzik, BMO Capital Markets.

Andrew Strelzik -- BMO Capital Markets Equity Research -- Analyst

Good afternoon. Thanks for taking the questions. First for me, on the past couple of quarters you've talked about turnover creeping higher. So, I'm wondering how that's been trending? Did an improvement there maybe contribute to any of the better labor in the quarter? And how important is improving those metrics to kind of hold down to some of the labor productivity?

Tonya Robinson -- Chief Financial Officer

Sure. I mean -- from a turnover standpoint we didn't see too much of a change. I think our lease was down slightly versus what we saw last year...

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Management turnover is also down.

Tonya Robinson -- Chief Financial Officer

Yes, management turnover. We've been really seeing management turnover come down for quite some time now. A lot of it has to do with some of the things we did on compensation about two years ago, some other things we're doing from a quality-of-life standpoint. So we continue to see that be -- just be impactful which is really good.So overall from a turnover perspective, I mean we would always like to see those turnover numbers come down. We really work hard on making sure we're hiring right. We're doing the right things by our employees. We're paying correctly. Just all those things being flexible with schedule is another huge one to retaining employees so we talked about that quite a bit with the operators.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

And we think the fact that we've added more servers in the stores and more managers means, it's easier for our servers to get a night-off to go to that concert and our managers might get a little more time off maybe we can every once in a while off because we have additional managers in each store hopefully.

Andrew Strelzik -- BMO Capital Markets Equity Research -- Analyst

Great. That's very helpful. And my second question just kind of more broadly at the industry level, we've heard a lot in the quarter maybe some restraint on consumer spending and your comps were obviously quite healthy, but the traffic did slow sequentially I guess just a touch.Now talking about things maybe reaccelerating how are you viewing the consumer? Have you seen any pullback or listening on the strings at all? Just kind of a broader view of the consumer spending might be great?

Tonya Robinson -- Chief Financial Officer

Sure Andrew. I mean I would tell you just hearing from our operators, we don't hear that. The consumer seems to be in a really good shape and a really good place. So I think people continue to want to eat out. They want to have that experience and because of the execution levels, we have they continue to choose us because they know they're going to get a great value and great product. So -- great service. I think that's really where our focus is and what is very important, but nothing I would point to you from a consumer standpoint.

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

Yummy for their tummy. That's what we do.

Andrew Strelzik -- BMO Capital Markets Equity Research -- Analyst

Great. Thank you very much.

Operator

Our next question will come from the line of Jon Tower, Wells Fargo.

Jon Tower -- Wells Fargo -- Analyst

Great. Thanks. Just with plans to take another round of pricing what are you doing to ensure that value on the menu remains front and center for the consumer? Are you doing any menu alterations or inserts or perhaps a new product additions?

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

This is Kent. No. Pretty much the same like I've mentioned before more of the increase happens in the states that are really increasing minimum wage like California, Oregon, Washington, New York. And I think the consumer in those states kind of see that everywhere not just at our restaurant.

Jon Tower -- Wells Fargo -- Analyst

All right. That's it for me. Thank you.

Tonya Robinson -- Chief Financial Officer

Thanks Jon.

Operator

At this time we have no further questions. I'd like to turn the call back over to the management team for any final remarks.

Tonya Robinson -- Chief Financial Officer

Thanks Holly and thanks to everyone for joining us tonight. If you have any other questions, please feel free to reach out to us at a later date. Have a great night. Thanks

Operator

[Operator Closing Remarks].

Duration: 52 minutes

Call participants:

Tonya Robinson -- Chief Financial Officer

Wayne Kent Taylor -- Founder, Chairman and Chief Executive Officer

David E. Tarantino -- Robert W. Baird & Co. Incorporated, Research Division -- Analyst

Brian Bittner -- Oppenheimer & Co. -- Analyst

John Glass -- Morgan Stanley, Research Division -- Analyst

Jeffrey Bernstein -- Barclays Bank PLC, Research Division -- Analyst

Brian Vaccaro -- Raymond James & Associates, Inc., Research Division -- Analyst

Will Slabaugh -- Stephens Inc., Research Division -- Analyst

Chris O'Cull -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst

David Palmer -- Evercore ISI -- Analyst

Dennis Geiger -- UBS -- Analyst

Andy Barish -- Jefferies & Co -- Analyst

Peter Saleh -- BTIG, LLC, Research Division -- Analyst

John Ivankoe -- JPMorgan -- Analyst

Andrew Strelzik -- BMO Capital Markets Equity Research -- Analyst

Jon Tower -- Wells Fargo -- Analyst

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