Exclusive Interview: How Texas Roadhouse Keeps Serving Up Meaty Numbers

By Motley Fool Staff Markets Fool.com

Last month here at Fool HQ, we were visited by two special guests let's call them "Roadies" fromTexas Roadhouse(NASDAQ:TXRH), a two-timeStock Advisorrecommendation. Wehad the pleasure of interviewing senior investor relations director Tonya Robinson and senior PR director Travis Doster and learning more about what makes Texas Roadhouse's employee culture so unique and vibrant, how the company is generating impressive comparable restaurant sales growth in a time when many restaurants (especially casual diners) are struggling, the philosophy and practices of founder and CEO Kent Taylor, and the significance of Willie Nelson to the company. Watch the video or read the transcript below!

Continue Reading Below

About 50 minutes. Scroll down for transcript.

{% video %}

DAVID KRETZMANN:

Well, thanks everyone, for joining us and thank you to Tanya and Travis for taking time to talk about Texas Roadhouse, one of our favorite restaurants here at the Fool. Before we dive into a conversation, I thought I'd just give a little background on Texas Roadhouse.

Here at the Fool it's a two-time recommendation by David Gardner inStock Advisor. It's been a great market-beating stock. Both of those recommendations are up. It's actually the top holding, the last I checked, in the Great America Fund at Fool Funds, a separate portion of the business here at the Fool. It's also a holding in our Odyssey 2 portfolio inSupernova. So there's a lot of growing love for Texas Roadhouse and you're in good hands, here.

Continue Reading Below

Why don't we start with an introduction from both of you? What you do at Texas Roadhouse, when did you join the company, and what's kept you on as a Roadie all these years. Let's start with you, Tanya.

TANYA ROBINSON:

I started with Texas Roadhouse in 1998. I've been there almost 18 years, now, which is hard to believe. I tell people I started when I was 15. It's been a great place to grow up. When I started there, I started as a part-time staff accountant. I was working on my MBA. The next thing you know, I'm working full-time within two weeks. The energy and the passion that you could feel there, and you still do feel, even as big as we are, has just been tremendous.

I started there in 1998. I started in accounting and moved up. I was the controller when we went public. Then I moved into financial reporting and now to investor relations, finance, and financial reporting for the company. Thanks for having me. I really appreciate it.

TRAVIS DOSTER:

And she's also our current Leader of the Year. We give recognition every year, and Tanya is our Leader of the Year.

AUDIENCE:

[Applause]

TANYA ROBINSON:

Thank you.

TRAVIS DOSTER:

My name is Travis Doster. I have been at Texas Roadhouse 10 years. Before that, I was their outside PR and communications rep. The story I tell is I had a number of clients and Roadhouse was one of them. My wife one day said, "You know what? I never see you happier than after you've been to a meeting at Texas Roadhouse." I grew up in Arkansas. She said, "You just talk about them like you used to talk about Arkansas."

I thought, "You know what? You're right." So I left my previous job and was hired for Roadhouse. It's been the best experience I've ever had. It is a family, and our founder likes to say that we are a people company that just happens to serve steaks. I've felt the love in that building.

I oversee our internal and external communications and sponsorships, and I'm on the crisis team. And thank you for allowing me to be here. I am a longtime Fool fan. I looked for my book that I bought years ago and I've had multiple moves and I couldn't find it. I was thinking, "It's got to be a first edition."

AUDIENCE:

[Laughter]

TRAVIS DOSTER:

Thank you. It's an honor to be here.

DAVID KRETZMANN:

Let's back up, first. How many people, here, have been in a Texas Roadhouse? So about 75% of the room.

TRAVIS DOSTER:

We would say, "Yee-haw!"

DAVID KRETZMANN:

There you go. How many people, here, are shareholders of Texas Roadhouse? Maybe that number will go up after this.

TANYA ROBINSON:

Yes.

DAVID KRETZMANN:

For those of us who haven't been in a Texas Roadhouse, when someone walks in, what's the experience? The dcor like? The food? Can you just walk us through a little bit about what the Texas Roadhouse dining experience is like?

TRAVIS DOSTER:

We like to say it's an "assault to the senses." You walk through that front door. Hopefully you've been told, "Welcome to Texas Roadhouse," like you would if you walked into somebody's house. You smell the bread. We give away fresh baked bread. Cook it every five minutes. You hear the loud country music. That's by design. Kent talks about creating that energy and that experience. He says it beats chirping crickets when you walk into our restaurant.

Then you see the meat case, because we hand cut all of our steaks. We have a butcher in our restaurant. We like to say we have a butcher, a baker, and no candlestick maker ... yet. Who knows? And then you're sat at your table with your bread. You've got peanuts on the table. Last year we spent $25 million on bread and peanuts, so it's definitely an advantage for us.

Then your server will come over. Our servers only have three tables. The average in the industry is five or maybe six. It's that high touch, so you've got a server that's greeting you. You tell them your name. We say we're a collection of local restaurants, so you're not getting a chain experience. You're getting a local hometown feeling.

DAVID KRETZMANN:

Let's go to the beginning. One of the things we like about Texas Roadhouse, here at the Fool, is it's a founder-led company. Kent Taylor founded the company in 1993. He opened the first restaurant then. It's grown to about 500 restaurants today. Multiple concepts, which we can talk about a little later. Why don't you talk a little bit about the early beginnings of Texas Roadhouse? Tanya, you joined within just a few years of Texas Roadhouse's history. What were some of the early learnings that Kent and company took from those beginnings that translated into what the culture and the company has become today?

TANYA ROBINSON:

When I first started with the company in 1998, I think we had about 20 restaurants open, so compared to the 490 some odd restaurants we have today, it's hard to look back and believe that amount of growth has occurred. Back then, we were in a really small building. We were definitely outgrowing our space. My first desk was a fold-up table in a hallway by the fax machine. Lord only knows where that went.

And it's fine because everybody was learning all the time. We were all contributing. We were all learning something. You'd meet the managing partners who would come in, or we'd go out to the restaurants to see them. So that culture was there from day one that culture of we're all in this together. We're going to figure it out. We're going to grow this business. We're going to make something out of it. I think this really contributed to our growth.

Our break room was this tiny kitchen in the corner. Every Friday Kent would wheel a cooler in full of beer. At three o'clock, we'd sit and have a few beers and talk about what was going on. And that continued. We still do those social events where we all get together, even as big as we are. I think that's the one thing we've really worked hard at to make sure we're keeping that culture alive.

And it's tough when you get bigger. It's not easy. We have about 350 people in our support center. I think you guys are about the same size, here. You really have to fight for it. You have to work hard at it to make sure you're keeping that culture alive, but we're all just so committed to it, because we know the value it brings. I think that was the biggest learning all along how we can be big but act small. That's something we're always thinking about.

TRAVIS DOSTER:

One of the neat things is we've had a successful run, but Kent always wants to make sure we never forget our failures. If you walk into his office, it's a celebration of failure. He's got rejection letters on the wall. He just never wants to forget that this is a cyclical industry, but you've got to take something. Three of the first five restaurants failed, and on the wall he has mementos. I think all three are stuffed fish that are part of the dcor, and he wrote under [each] how much money we lost. I'm just amazed. You go into offices and there are ego walls. There is none of that.

He just drives that a lot within our company and will say, "If you make a decision and you fail, learn from it and move on, but keep doing that." That helps us feel small, because we all remember [the beginning]. In my department it's the same thing. We like to joke and celebrate our failures, because if we don't, people will be afraid to make decisions and afraid to take chances.

We do that in the restaurants, too. Somebody will come up with a crazy idea. They're not going to be fired. Maybe it's a great idea, but at least they're trying.

DAVID KRETZMANN:

Tanya, you hit on something I think is really important. The majority of the company's restaurants are company owned. There's a smaller portion that are franchised, but most are company owned. And a unique structure within Texas Roadhouse is that the restaurant managers actually invest in the store, and they earn 10% of the operating income. That contributes...

AUDIENCE:

[Laughter]

DAVID KRETZMANN:

Our backdrop is falling apart.

AUDIENCE:

[Laughter]

DAVID KRETZMANN:

Celebrating failure. Exactly. Obviously that contributes a lot to the ownership mentality within the company starting with the restaurant managers, or the multi-restaurant operators down to the servers and the hourly employees. What are some of the steps, especially as the company scales nationally and now even internationally, to identify, train, and retain those managers, since it is such an ownership-based culture? What are some steps you take to scale that culture and ownership model?

TANYA ROBINSON:

We do a couple of things. One is we have about 45 to 50 market partners in our system, and they supervise up to 10 to 12 restaurants. So you've got the managing partner running one restaurant, and then they have a market partner above them that helps their market.

Every week those market partners have calls with their managing partners, so they're always talking. We talk about how we communicate. Is it via email? Whatever it may be. For us, it's either looking you in the eye and having a conversation with you, or getting on the phone and everybody having a voice and being able to talk.

That's really where our best ideas come from, so I think as we continue to grow, it's making sure we stay focused on those managing partners having a voice, and making sure they understand they have a voice and we want to hear from them. We were talking about it at lunch.

The best ideas that we had came from our managing partners, and it was one person who started it. One person who said, "I could do this quicker if I could cut a hole in the wall, right there, and make a pass-through, and I'm going to do it." He didn't have to call somebody and ask to do it. He did it. And then he got on the phone the next week and told all his market about how awesome it is and it's really working and they started doing it. Then the market partners were talking and now everybody's doing it.

That's the thing you want to keep alive and you want to make sure is still happening, so for us that's really what the culture is. It's having a voice, being able to act on it, and not having to follow this bureaucratic chain to get something done. That's when you win. That's when the magic happens, as far as we're concerned.

TRAVIS DOSTER:

And one of the stories Kent will tell is he worked for Kentucky Fried Chicken. He was an area manager in Charlotte. His boss came to see him (and this was in the '80s) and Kent was serving bottled water and had created his own chicken sandwich long before they had adopted that. He got in trouble, and they told him he might need to move on.

Well, his sales were through the roof. He was the best-performing restaurant, which is why they came to visit him. So he's never forgotten that.What? I had an idea, and I was executing, and I was doing well.We feed all military (current and former) on Veteran's Day. All day long they get free steak or whatever they want. That started with three stores saying, "Hey, let's do this." Within three years, all 500 were doing it, and we've done it for nine years.

That didn't come from the marketing department saying, "Hey, let's feed veterans and here's what we'll get out of it." It started from the ground up. I think as long as we keep that voice that Tanya talked about and that ownership, then it's 500 owners of the restaurant, not Louisville that owns the restaurants.

DAVID KRETZMANN:

Switching gears a little bit, Texas Roadhouse has seen, I believe, 24 consecutive quarters of same-store sales growth, which is a great accomplishment. At the Fool, we do take a longer-term view, but we still follow things up-to-date. Over the past quarter, casual diners, as a whole, have really struggled in the US. It's been the weakest-performing segment of restaurants. But Texas Roadhouse in the first quarter actually grew same-store sales about 4.5% while many casual diners saw negative same-store sales. As a whole, the category was up less than 1%. What are some of the things that you think are attracting people to your restaurants when casual diners, as a whole, are having a more difficult time?

TANYA ROBINSON:

One of the biggest things I think that contributes to that is the consistency in our restaurants. We're very diligent about the marketing process and the grass roots marketing. We don't do any limited-time offers. When you're someone in the back of the house cooking for us and you are cooking, because you're making food from scratch, making dressings, mashing potatoes and grilling steaks you don't have to learn a new recipe every six weeks. We just don't do that, so you get really good at executing on that menu.

And that pride that pride of ownership of knowing they made that food translates from the back of the house to the servers, who take so much pride in what they do. So when they're serving the guests, I think the guests get it, and they feel it. I think it's that consistency on execution. Consumers are looking for value. They're not afraid to pay for something, but they want it to be good quality, so I think they know when they come to Roadhouse, that's what they're going to get, and it's going to be consistent across the country. I think that's kind of our secret sauce.

TRAVIS DOSTER:

A lot of restaurants are special-occasion restaurants. We want to be that everyday occasion restaurant where you bring your family. We always say, "You get it when you get it."Wow, this steak was hand cut?In 1993, the number one steak was the six-ounce sirloin. In 2016, the number one selling item is the six-ounce sirloin. I think people, even more so than maybe 20 years ago, are not getting home-cooked meals. We're making our croutons. Sometimes people will say, "What's this in my mashed potatoes?" It's called part of a potato.

AUDIENCE:

[Laughter]

TRAVIS DOSTER:

So I think it is that consistency. It's almost thatthis is what my mom did. This is what my grandmother did.There's just not a lot of people doing that anymore.

TANYA ROBINSON:

Our average check across the system is $16.50. Where can you go for $16.50 and get a steak, two sides, free bread, and free peanuts? You can take your whole family. And oh, by the way, we play really loud music, so we're not going to hear your kids screaming. It's just a comfortable place for families to go where they feel they can take their kids and they're going to be OK. I don't have to worry about them crying or screaming. It's really a nice, comfortable place.

TRAVIS DOSTER:

And we talk about value, which is obviously a huge part. We take the Wal-Mart model, in that we're very diligent about protecting that price. One of the things I think is very unique is when it comes time, Tanya and her team are dealing with inflation and beef; but when it comes time to price, Kent calls every single managing partner and asks, " Do you want to take price," instead of just saying, "Here's what we're doing."

There may be pockets. They go out and look at competitor pricing. I think that's truly amazing, because there may be parts of the country that are doing well, and they don't want to break those barriers of $9.99 or $6.99. But again, how many places can the managing partner of a restaurant have say on whether he raises the prices of his restaurant?

And remember, he or she has skin in the game. They know if they raise prices they might lose traffic and vice versa. And who better to know those markets, whether it's Joliet, Illinois or Madison, Wisconsin than a person living in Joliet or Madison, Wisconsin? It's not always from the hierarchy.

DAVID KRETZMANN:

Going back to culture, something that sets Texas Roadhouse apart from a lot of companies, of course, is the culture which we've talked a bit about. When you go to Glassdoor and look at the employee ratings for the company, Texas Roadhouse is above other restaurants that we know and love here at the Fool like Chipotle Mexican Grill, Buffalo Wild Wings, and others in terms of how employees rate the company and rate the CEO. Would recommend the company to a friend. What are some steps the company takes, on a restaurant level, to engage with those hourly employees? The servers? The people who are in the restaurants each day?

TRAVIS DOSTER:

Kent will say it's not always rocket science. It's treating people like your family. Love them. Our COO always talks about how do you spell love? And he'll say T-I-M-E. So it's spending time with your employees. In the restaurant it's one-on-one. We also have a fund called Andy's Fund, which helps our employees in times of crisis, whether it's a funeral, fixing a car, or helping them with rent.

So I think it's just spending that time. Not treating people like a commodity but treating them like humans. We have very low turnover. The next time you go to a Texas Restaurant, look above the door and it will say, "Owner," or "Owner Operator." That managing partner is going to be in that community a long time. The employees know he's not going to be here for four weeks and then move. It's his house, in some ways, or her house. So I think it starts with that, and then the culture part is they have ownership. They can make decisions. It's not just coming down. I think it's that whole basket.

And then one other thing we like to do in the restaurants is just have fun. Where else can you wear jeans and a t-shirt? You can listen to music while you're working. Every store has a fun budget, so they're supposed to go bowling and have pizza parties. Starbucks always talks about the third place. You've got home, you've got work, and you've got Starbucks is the third place. I think there's a big portion of that with Texas Roadhouse. Work is a combination. It's hopefully your home, and your work, and your social aspect.

DAVID KRETZMANN:

Let's move to international. It's a newer effort for the company to expand. You're in several countries, already. Maybe you could talk a little bit about steps you're taking to maintain the culture and the consistency of the brand and the experience in these new countries, and just the process of finding partners in the countries you're expanding into.

TANYA ROBINSON:

From an international perspective, that really was the biggest question for us. How do we take this unique brand and this unique culture and bring it overseas? It really means finding a good partner. All of our international locations, right now, are franchised, so we really wanted to find that great franchise partner. And finding a partner dictated where the locations were going to be.

We do have a great franchise partner in the Middle East. We've got nine or 10 restaurants open there. We have two in Taiwan, two in the Philippines. And in each of those places, it's been about finding the right partner who understands restaurant operations, for sure, but who is open to listening to the way we do things, and open to learning our culture, and how we operate, and why we're successful. Our international group has done a great job of finding those partners, and I think that's really the key to the success of the program. They do those international places really well.

Being here 18 years, when I saw a picture of the restaurant in Taiwan, I was thinking, "I cannot believe there is Texas Roadhouse in Taiwan. This is insane." It's on a second story. It's all glass. It's all lit up. The building is totally different. But when you go inside you can see it has the same feel. It's the same culture. The employees are excited. So that's really what we started to do from an international standpoint, is just make sure we can take that culture and brand with it, and it doesn't change just because you're in the Philippines versus you're in Peoria or Joliet.

TRAVIS DOSTER:

My two favorite cities. We wanted to make sure they had US steaks and US potatoes, which costs a lot of money to send over, but we wanted to have that unique experience, because we're also serving a lot of Americans. [Almost everything is the same] except in the Middle East we can't have alcohol. You have to close twice a day. But trying to make it as close to what Kent's vision was, and it's been very successful.

DAVID KRETZMANN:

I just have a couple more questions, and then we can open it up to the audience. First, can you just explain the significance of Willie Nelson to Texas Roadhouse?

TRAVIS DOSTER:

Willie has been a longtime partner for Texas Roadhouse. He has two restaurants that he owns in Austin. We actually met Willie at Farm Aid years and years ago. We were supporting the farmers. Our founder and Willie just hit it off and so for a number of years, Willie went around to a lot of our store openings and signed autographs. But every restaurant has a Willie's Corner which is a booth dedicated to Willie.

DAVID KRETZMANN:

Even the international locations?

TRAVIS DOSTER:

No, they do not. They do not. It's actually very expensive. It's an elaborate setup, so the international do not. Some of them have different music tastes. But he's been around for a long time. He's played concerts for employees. He's just a great guy.

We were putting a press release out one time, and it was about having a "Willie-oke" contest. Sing like Willie, meet Willie, and get a guitar. And as a courtesy, I sent the press release. I faxed it I think I had Tanya's fax machine. They said fax it to Willie, and he'll look at it. I thought, "No way." So I faxed this and then I get a phone call at the front desk and they said, "There's a guy that sounds like Willie Nelson calling." He wanted to put a comma after one of the sentences. I was like, "Well, that's pretty cool." I said, "Yes, sir. You can have a comma." He's been a big fan.

And the Willie braids that he's holding we go nowhere without Willie braids. Those are the greatest thing ever. Put them on and then we tell people to have a "Willie nice day." You've got them on upside down, though. The logo needs to be in front.

DAVID KRETZMANN:

I don't wear this every day.

TRAVIS DOSTER:

It's a great Halloween costume.

DAVID KRETZMANN:

I should have put this on at the beginning. I probably look ridiculous. I should do this with a jester cap, and then we'd have the full deal. About a quarter of the restaurants you're opening this year are Bubba's 33, which is a relatively new concept within the past few years that was developed in-house by Texas Roadhouse and it's increasingly becoming a prominent part of your expansion. Maybe you could talk a little bit about the concept. From my understanding, it's a family friendly sports bar concept, maybe closely related to Buffalo Wild Wings. Kind of more in that area. Could you talk a little bit about the concept and how it fits into Texas Roadhouse with the expansion plans going forward?

TANYA ROBINSON:

A lot of times when I'm talking about Bubba's, I'll say this is how it's similar to Roadhouse and this is how it's not similar to Roadhouse. The things that really make Roadhouse successful those foundation things we talk about all the time like made from scratch food, manager compensation programs those are the things we really made sure we built into Bubba's, too. Taking that success over to this concept has been really key for us.

The food is fantastic. The food is totally different than Texas Roadhouse. There may be one steak on the menu. I'm not even sure if there's one steak. The focus is really on burgers, beer, and pizza. We have hamburgers with 33% bacon grind in them. They are delicious. You've got to try it.

It's a bigger restaurant. It's a bigger box, as we say. Most of the ones we've opened, so far, have two bars, and the bars are bigger. We have 24 beers on tap. One of the bars is an exterior bar with garage doors, so there tends to be more of an adult population in that one. And then we have family seating inside, so tables, booths, and things like that.

We call it a family friendly sports restaurant. Sixty-five televisions all around the perimeter. All over the place. You can't sit anywhere in this restaurant without seeing a TV. Most of them are playing sports. Several of them are also playing music videos and you've got the music playing in the background, too.

When you walk in a Bubba's, it's interesting, because you're going to see a diverse range of people. You're going to see the Little League team that just finished their game all sitting around a table. You're always going to see a group that's probably met after work. You're going to see a family. You're going to see a couple of guys who met at the bar watch a game. It's just a really cool vibe when you walk into the restaurant. And as I mentioned, the food is really fantastic. We should have 15 of those open by the end of the year. A lot of times people will say, "When will you know that this is it?"

That's a tough question. Originally it was, "Maybe when we have 10 we'll know." And then it was, "Maybe when we have 20 we'll know." I think Kent has commented, "It was probably 15 Roadhouses before I really knew what I had and what it was going to be." So we continue to tweak things. The first Bubba's were opened by market partners for Texas Roadhouse, so they had Roadhouses and Bubba's.

At the beginning of this year, we said that we needed a separate ops team for Bubba's, so now we've done that. They're really focused on just tweaking those things. Kent created the concept and he's very detail oriented. When you walk in a Bubba's with him, he'll tell you exactly why he put that sign right there. Or exactly why the lighting is what it is. He knows what the volume of the music needs to be right here. It's really intriguing to see.

So we're cautiously optimistic. We think it's doing well. The ops team is really doing a great job working on it. We'll probably see a handful of openings for the next couple of years.

DAVID KRETZMANN:

And an even earlier concept is Jaggers, so maybe just a couple of words about what Jaggers is and what's going on there.

TRAVIS DOSTER:

Jaggers is a fast casual concept. There's two in Indianapolis. They're known for hamburgers, chicken, and we also have salads. It's a combination cross between Five Guys and Chick-fil-A, so I said we should call it Two Guys and a Chick...

AUDIENCE:

[Laughter]

TRAVIS DOSTER:

...but that didn't work. So it's doing pretty well. It's a great learning. I'll tell you what's awesome about having Jaggers and Bubba's is the cross learning. With Roadhouse, 23 years, you may not have looked at equipment in a while. But we've taken some learnings from Bubba's like, "Oh, man. Look at this fryer. Look at this oven." So we're learning, and it's great. Even if Jaggers never makes it beyond five units, we've learned a lot about employees, the drive-thrus, and all of that.

One other thing I'll say on Bubba's I think that's interesting is people ask who the competitor is. Buffalo Wild Wings obviously would be. Maybe a BJ's. But one of the things you hear often is, "I love going to the sports bar, but the food's just OK." Kent's thought was, "Why can't you have the sports bar and the good food?" I also find it very funny to see anybody under probably 20 to 30 years old go, "What the heck is a music video?" Like I said, they're playing all these music videos from classic rock, so that's another difference. It's not country music. It's classic rock. But there's a lot of excitement in the brand.

And Bubba is Kent's nickname, so that's where Bubba came from. And Bubba was trademarked, so we had to come up with a number to go with it. Thirty-three if you look at athletics, some very famous athletes were number 33, Larry Bird being one of them. [Kent] tried to sell Larry Bird on the Texas Roadhouse concept. He chased him in an airport, and Larry got in the car, locked the doors, and took off. Also 33 degrees is the temperature of the beer, and then 33% bacon grind.

DAVID KRETZMANN:

Any questions from the audience? Jim? I'll just repeat the question. Obviously Chipotle has had a lot of issues and changes over the past six to eight months, or so, related to foodborne illness. Chipotle has changed a lot. Has that caused you to review some of your practices?

TRAVIS DOSTER:

I'll go back to Jack in the Box years ago when they had their issue and it changed the whole industry. So, yes, we're looking. The thing about Chipotle, to me, was that we're doing a lot of those things already. We're making the food from scratch, so it's not sitting somewhere. We have traceability. We already have a lot of those things.

But I think one of the keys, for us, is our product coaches. Product coaches are [CFSS?? 00:30:45] certified. They're working with the stores on sanitation and all of those things. They're the food safety experts. But they are out in the field working with each store. A couple of years ago we hired a phenomenal QA director. So we're doing a lot of those things. I think it does ramp up what we will all do, just because it will become the standard. Kent always talked about it being legendary food. That's what we call it legendary food, legendary service but part of that legendary food is legendary food safety.

DAVID KRETZMANN:

Whose idea was it to have the line dances?

TANYA ROBINSON:

That was my idea. No, it wasn't. Actually, that came from one of our restaurants. They started doing it in some of the early restaurants and it just took off from that. Again, it's grass roots, bottom-up ideas being generated.

TRAVIS DOSTER:

It was in Ashland, Kentucky which is 40,000 people. At one time we did a survey, and given the store numbers, we figured out 15% of the population ate with us on a weekly basis.

DAVID KRETZMANN:

David?

DAVID GARDNER:

First of all, thank you very much for the time you've spent with us today. We really appreciate that. And we're very sorry that Kent could not be here, today, but we certainly understand, and we wish him and his family our best.

Given that he wasn't here today, what do you think he might have said that didn't get said because he wasn't here today? And/or I often love looking at leaders and hearing their catchphrases recurring things that they say that often become part of the culture of the company. If there are one or two Kent-tailored catchphrases, I'd like to know them. Thank you.

DAVID KRETZMANN:

Just repeating real quick, what would founder and CEO Kent Taylor have said today that hasn't been said yet, and maybe two or three of the main catchphrases that are spread throughout the culture from Kent?

TRAVIS DOSTER:

Most of them probably aren't family friendly I'm kidding. Well, sort of kidding. Well, legendary food, legendary service. We talk about being bigger, stronger, faster. We talk about the collection of independent restaurants.

TANYA ROBINSON:

Act small, think big.

TRAVIS DOSTER:

Does anybody know what the honey badger is?

AUDIENCE:

[Laughter]

TRAVIS DOSTER:

I would say last year that was one of Kent's. If you've ever seen the honey badger video (and it says, "Honey badger don't give up"), Kent showed that at one of our meetings when beef was going crazy, and this and that, to say, "We don't care about the outside. Let's focus on what we're doing inside." And he even gave a honey badger award for a while.

This shows you the detail of Mr. Taylor. [He has a stuffed] honey badger that's about this big and when you squeeze its ear, it says the terrible things that that one said. And Kent said, "We should put some Willie braids on it." I'm not crafty whatsoever. I said, "I'll get somebody to put tiny Willie braids on this stuffed animal." So I had somebody do it. They glued them on. I took it to him, and he said, "That looks like crap."

AUDIENCE:

[Laughter]

TRAVIS DOSTER:

I said, "Well, I'll do it." And he goes, "Forget it! I'm going to do it." I thought, "No way. I'm going to outdo him." Well, by golly, the guy went home, and sliced those [braids] up, sewed them on, and gave the Willie braids away. I said, "I didn't know you could sew." He said, "Hell, yeah, I can sew."

He's very lighthearted. Very fun. If he were here today, he'd probably be in shorts or he'd be wearing his cowboy hat and cowboy boots and you would never, in a million years, if he walked through that room [know who he was]. You'd probably think he was homeless. He doesn't have that air. He's just a real guy.

DAVID KRETZMANN:

Buck? The question is about costs and challenges. You have beef prices, which is very important to the Texas Roadhouse concept. A rising minimum wage in various areas and states. What are some of the biggest challenges that you see for Texas Roadhouse over the next few years?

TANYA ROBINSON:

You named several of them. 2016 is our first year of beef deflation since 2010, so what normally is a temporary hurdle seemed like it was becoming permanent. Five years was a long time. But we finally got back into the deflationary cycle. Hopefully we see that deflationary cycle continue for a little bit. Who knows? It's hard to say, but we certainly hope we see a couple of years of that.

Labor I'm sure all of you hear the headlines and watch the news. See all the discussion about whether minimum wages are going up across the country. Whether tip credit is going away and no tipping, now with the DOL overtime regulations that everyone will be facing starting December 1st (and not just the restaurant industry). Labor seems to be the big pressure right now, and I think that's going to continue for probably several years. We'll continue to see that as it plays out.

With that said, we say that those are manageable things. We can manage that and we'll get through that. In my personal opinion I can't speak for Kent the biggest concern would be how we maintain the culture. How do we keep the brand, this awareness we have, moving forward and keep growing restaurants? Like I said earlier, you fight for that every day. We don't take any of that for granted.

We know we can't just sit back and say, "Twenty-four quarters of positive same-store sales growth." It's what we do to make this continue to go forward. We don't ever take that for granted, and we know we have to fight for that culture, fight for our guests, make sure we're doing the right thing by the guests, and make sure we're loving our employees. We're always focused on that.

TRAVIS DOSTER:

We also look at some of those things as opportunities. I've seen some CEOs of restaurant companies say, "Well, if minimum wage goes to X, we're going to put in kiosks." We say we zig when they zag. We think it's an opportunity that people eventually are going to crave that human interaction in restaurants. We have three tables, remember, so we won't go to four and we won't go to five. You can't change what made you great. We have our sacred cows, and three-table stations is one of them.

In fact, we heard yesterday that a couple of our stores are testing two-table stations. It's for bigger tables and to give better service. That obviously leads to a faster table turn, but it's better interaction and what we would call legendary service.

DAVID KRETZMANN:

Are the menus the same internationally, and or do you have unique menu items?

TANYA ROBINSON:

I'm not sure about unique menu items, but they are different. Like in the Middle East we have lamb on the menu. There's no alcohol on the menu. In the Philippines and in Taiwan, I'm not sure what the differences are, but there's definitely tweaks you do depending on where you are. You can see that even here in the United States. You may have a restaurant that's doing a special shrimp thing that nobody else does. Maybe it's because they're in the Northeast on the coast. So they have a little leeway to make a few of those little tweaks, but nothing too significant.

TRAVIS DOSTER:

One of the big things internationally are shareable items. Some bigger plates for family dining. That's one of the things we've tested over there.

DAVID KRETZMANN:

Before we wrap up, I just want to make sure you all have a chance to address some of the more unconventional aspects of Texas Roadhouse. You're a dinner-only chain, you blare country music, and you spend virtually nothing on national marketing. Could you talk a little bit about some of those unique qualities of the restaurants?

TANYA ROBINSON:

I think one of the biggest ones is just how we pay our people. When you look at the managing partner compensation program, that hasn't changed since day one. That consistency, I think, is what our MPs and all of our employees get. They get that. That's something really important to us the compensation. When we started that, it wasn't as unique of a thing, but now we are the only ones doing it, and we've stuck to it. I think that's one of those things that sets us apart from everybody else.

The made-from-scratch food. Cutting the steaks in-house. Baking the bread. All of those things contribute to our uniqueness.

TRAVIS DOSTER:

We spend zero in national advertising. The majority of our competitors and it works great for them are taking as much as 6% of sales out of each restaurant to contribute to the marketing fund around the commercials. We're taking 0.03% for marketing. It really started early on. We had no money and it was just grass roots. It was being on local TV. It was getting a review of an article. Stores can do some advertising, but it's just that grass roots model.

I think sometimes when you do these national campaigns, the stores sit back and wait, so when sales go down, it's, "Hey, when's our next campaign and our limited-time offer going to come out to help drive awareness and sales?" We want them to have that local ownership, and whether it's partnering with the Boy Scouts, or the local school, or whatever, they have more control. It's their face.

And especially, we're big on earned media, which is being at cooking shows and those type of things. I think it's more relevant now, just with technology (DVR and all those kinds of things) and I think we're well positioned on that. But our managing partners, to drive their traffic, know they need to be active in the community. And our founder likes to say, "I want you to be the mayor of your town. Everybody in town ought to know you run Texas Roadhouse."

We all grew up somewhere where you knew who the owner of a restaurant was. You loved them. You knew their kids and they knew you. That's unique for a chain, but that's what we strive for.

DAVID KRETZMANN:

We have time for one or two more questions before we wrap up. Andy? The question is about franchises. Why have franchises at all in the US? It's a small part of the business, overall. Could you talk a little bit more about franchising?

TANYA ROBINSON:

We have about 79 franchise stores, right now, including the ones internationally (probably about 12). With the domestic ones, as Travis mentioned, when Kent started Texas Roadhouse, he didn't have a lot of cash. He was lucky to have some really great franchise partners that really helped us build the brand in the beginning.

Those franchise partners are still with us for the most part. We've acquired some, over time, but they're just great partners to us, and they love being a part of Texas Roadhouse. And we're always interested in doing franchise acquisitions, but you won't find many of them who want to sell, because they're doing pretty well. They like being part of the family. They like coming to [00:43:44] and all of that.

Looking forward, you may see one to two domestic franchise restaurants each year. Not a big push, there. We like being company owned. We're restaurant operators and not brand managers, so we really want to own those restaurants. That's what we like to do. And I think you mentioned the executive-owned franchise units. That's something that started back in the early days, too, before we went public. That was just Kent rewarding people who had stuck with him and stayed, even when times were a little tougher. That was his way of rewarding people.

TRAVIS DOSTER:

And we no longer add new franchisees, so we don't even have a franchise department. Those original franchisees can add stores, but it's probably been 12 years since we closed our franchise department. We're proud and sad to say neither one of us have any ownership in any stores.

DAVID KRETZMANN:

And that would go for the new concepts, too? Bubba's 33 and Jaggers all are company owned?

TRAVIS DOSTER:

Correct. Some of the franchisees just put it in perspective. Kent had zero money and went to three doctors in town. And the reason he went to doctors is he said they're the worst investors in the world.

AUDIENCE:

[Laughter]

TRAVIS DOSTER:

They won't track it. They'll give you money. So he went to them and they gave him $500,000 to start the company. He had to go back to them several times to get more money, but their pictures are in our office as the original investors, and I think when we went public, that was probably worth $30-40 million or maybe more. So they've had ownership and they helped build it.

Kent was bartending and said to one of the doctors, "If you'll listen to my pitch, I'll give you free beer." And the doctor said, "Many times I wish I had stopped at that second beer."

AUDIENCE:

[Laughter]

DAVID KRETZMANN:

One more question. How do you plan on managing rising labor costs?

TANYA ROBINSON:

When you look at the restaurant, probably two-thirds of the restaurant staff are tipped employees. They're on salary. So when you see minimum wage going up, that's less impactful to that group from a cost perspective. In the back of the house, most of those employees, on average, are making $12 an hour, so they're making good money. Anytime there's an increase in minimum wage, sometimes there's some compression, there, and we just don't see a big impact from that.

Now, we are seeing a lot of labor inflation right now. We've got about 3-3.5% labor inflation. We've had that for a couple of quarters, and I don't see that changing. A small piece of it is minimum wage, and more of it is just the tightening job market and the improving job market. We're competing for employees, more, and finding really good employees is becoming harder. So I think that gets you up to that 3-3.5%

Part of you would say, "Man, I wish that would go away, but those employees have really good jobs and now they're coming to my restaurant and they're spending money." There's a benefit to that, too. So you like to see a balance with that. We're always talking about how you manage that piece without affecting the guest experience.

As Travis mentioned earlier, we're not going to take labor out of the restaurant. If anything, we're adding labor to the restaurant, whether it's two table stations for servers so they can turn more tables and we can get guests through quicker. Those are the things we do. Or adding a third person back in the grill, who just pulls the steaks out of the drawer and puts them on the grill just to help the people grilling be able to do it quicker.

Those are the ways we're looking at it. So again, rather than trying to control these labor costs (we can't control minimum wage going up) we try to focus on driving top line. That makes it a little bit easier of a pill to swallow when you're doing those kinds of things.

TRAVIS DOSTER:

One of the things we say is we want every restaurant to be the local hometown favorite and the best place to work. I think all things being equal, if it's $15 an hour back of the house, we hope we have that cultural aspect that people will choose Texas Roadhouse. But also, we're not open for lunch, and if anybody's been a server or worked in a restaurant, there's nothing worse than Wednesday lunch where you don't make any money. So I think that benefits us, too, but it's how you separate yourself from everybody else.

DAVID KRETZMANN:

One final question. I think this is why we all came here today. What's your go-to dish at Texas Roadhouse?

TANYA ROBINSON:

I have a lot of them. This is really hard. I really like the kabob. I call it the k-bob just for fun. But the kabob is chunks of sirloin meat with peppers and onions on a bed of rice. It's really good. Or the grilled shrimp. I really like that, too.

TRAVIS DOSTER:

I will eat at least four rolls to start. At least a bag of peanuts. I'll get a six-ounce sirloin medium rare, mashed potatoes, cream gravy, and a side salad with blue cheese dressing. But I will always start every single meal with rattlesnake bites. And if you haven't had rattlesnake bites at Texas Roadhouse, they're awesome. There's no rattlesnake killed in this process. It's a popper, but they're handmade. And I eat there a lot more than I probably should.

TANYA ROBINSON:

Can I change my answer?

DAVID KRETZMANN:

Well, thank you, Travis and Tanya, for making the trip from Kentucky here to visit us at Fool HQ. I think there's a lot of likeness between Roadies and Fools, so we're really glad to have you. Thanks, everyone, for coming. Fool on, and have a Willy nice day.

AUDIENCE:

[Applause]

TANYA ROBINSON:

Thank you, all.

TRAVIS DOSTER:

Thank you very much.

Brendan Mathewsowns shares of Texas Roadhouse.David Kretzmannowns shares of Texas Roadhouse.Jim Muellerowns shares of Texas Roadhouse. The Motley Fool owns shares of Texas Roadhouse.