Beef Stakes
Western-themed Texas Roadhouse is rounding up impressive numbers.

By David Farkas

The thermometer at 6 p.m. reads 10 degrees, extraordinarily cold for Louisville, Ky. Still, Texas Roadhouse has a 10-minute wait when founder and CEO Kent Taylor appears, greeting a hostess and heading to the bar for a frozen margarita. “Ever have one of these?” he asks a visitor. “We sell a ton.”

Texas Roadhouse CEO Kent Taylor

A few minutes later, the lanky 47-year-old slides into a booth that receives an arctic blast whenever the front door swings open, which is often. He explains he founded the chain 10 years ago, right here in Louisville, and since then it has grown to 142 units across 26 states. Most of that growth has come in recent years, after a private placement in 1997 raised $5 million.

Still a private concern of which Taylor owns about 60 percent, Texas Roadhouse is quietly making its presence felt in the $10 billion casual steakhouse category. Not surprisingly, Taylor isn’t eager to share profits for Texas Roadhouse or reveal margins or cash flow at the unit level.

After all, the segment is brutally competitive these days, dominated by three well-funded public rivals: Outback, Longhorn and Lone Star. “I don’t mind talking about store growth and sales trends,” Taylor says cautiously, before slicing into a juicy ribeye.

On those counts, Texas Roadhouse appears to be holding its own. Taylor claims same-store sales have so far climbed 2.5 percent this year among the 120 units that report comparables. Last year the units posted an overall 2.5 percent gain. That figure puts Texas Roadhouse ahead of both 249-unit Lone Star and 749-unit Outback, where gains were essentially flat or slightly negative.

Positive sales trends, along with swelling store margins, have given Taylor and his investors confidence that the concept has broad appeal. The company, for example, opened 22 of the Western-themed units last year, a sum Taylor says will be more or less repeated over the next three years. Secondary markets with 60,000 people and up are particularly attractive, especially areas with concentrations of blue-collar families. Muncie, Ind., with a population of 68,000 and an average per capita income of $29,000, is a good example. Weekly sales at that unit have run as high $85,000.

Keeping ‘Em Coming
The chain’s customers seem impressed by high levels of service and food quality, plenty of options and relatively low prices. The menu, for example, features four sizes of sirloin, ranging in price from $7.99 to $14.99. There are a dozen non-red meat entrees.

“I call the place a redneck Outback,” declares longtime investor George Rich, a former investment banker for Alex. Brown & Sons. “That means we have a similar offering in terms of service and menu, but our price points are lower and our check average is only about $12.50. If you are two-thirds the price [of Outback], you have to do 40 percent more business. And we do. Our unit volumes are above $3 million.” Analysts say Outback units average $3.3 million yearly.

The big question: Will consumers continue to appreciate the difference as their ability to spend is imperiled by a weak economy? Taylor says he isn’t taking success for granted. “As we entered this economy, we said we have to focus more on execution, day to day, with a little more intensity,” he says.

Dan Burton, a general manager in Cleveland, appears to have gotten the message. He was recently shepherding elderly patrons to their car on a snowy evening. Burton, who has managed the restaurant for a year, says his goal is to raise sales 15 percent. He wants to bring it up to the system average of $3.2 million.

An early-bird promotion featuring two dinners for $13.99 is helping. Still, he has been hauling the chain’s signature rolls to local businesses and fire departments to spread goodwill. He’s begun donating 10 percent of a party’s check to the church of their choice to stimulate Sunday business. When not long ago Burton heard a country-music disk jockey remark she was hungry, he headed to the station loaded with food. “We got mentioned all afternoon,” he says proudly.

Taking Responsibility
Regional vice presidents—or market partners, as the company dubs them—allocate 2 percent of sales toward marketing, much of which is spent on local store marketing. A unit in Grand Prairie, Texas, for example, funds a club for regulars, called the Roadhouse Gang. “It’s just guest recognition in the store, putting up pictures and stuff like that,” Taylor explains. “It is the little things these guys do for their guests.”

Taylor dislikes promotions, fearing operators let them drive the business instead of holding themselves accountable for sales and margins. “I don’t want stores discounting. I want operators to take responsibility for taking care of their day-to-day business,” he declares.

That philosophy has so far swelled average unit volume. “Texas Roadhouse is putting a lot of customers through the restaurants,” says restaurant analyst Andrew Barish of Banc of America Securities, who has studied the company. “Their formula works: great food and great price and great service in a fun, lively atmosphere.”

Fun is an important component of the work environment. Burton recalls that an older customer recently griped employees were enjoying themselves too much. “He loved the food but he saw some people jumping around and didn’t like it,” he chuckles. Taylor, a disciple of the provocative Southwest Airlines CEO Herb Kelleher, encourages wackiness. “Nuts! is my favorite book,” he declares, referring to the best-selling account of Kelleher’s unusual style of leadership.

The Brethren
The formula has paid off handsomely so far. Barish, who describes Texas Roadhouse as a growth company, compares its performance to public companies like P.F. Chang’s, The Cheesecake Factory and Panera Bread Co. “I would put them up there with higher growth players,” he says. Earnings, observers report, are climbing 25 percent or more, helped by low interest rates and a reorganization of credit lines that put them under one set of bank covenants.

Taylor is aware of the benefits of the public market. “We could reduce debt, have funds to grow and provide liquidity for investors,” he explains. With company debt hovering between $50 million and $60 million, an IPO would relieve some pressure. Debt, of course, isn’t unusual for a growing company. Barish, in fact, believes current cash flow levels can easily support it.

Investment bankers estimate Texas Roadhouse could command a market cap of $425 million were the company to go public. While a long way from Outback’s $2.7 billion, the figure is in the ballpark with archrivals Rare Hospitality ($631 million) and Lone Star ($426 million).

Even so, Taylor is scarcely eager to sell a piece of his company to the public. “If you have a long-term outlook in a low-interest-rate environment and a strong balance sheet, you can continue to secure funds from banks,” he says.

Taylor, it would seem, has never let himself been tempted by big money. The company’s only private placement to date has been $5 million, which it raised in 1997, and then mostly from employees. The average investment was a paltry $75,000. Surely venture capitalists have come calling? “I’m not interested. I don’t need their money,” Taylor insists.

Pay Some Day
The company’s one hitch could be stock options. Copious amounts have been granted to senior managers, market partners and managing partners, a practice that’s certainly not unusual for rapidly growing companies. Eventually, says Rich, liquidity will become an issue. “An IPO or something is inevitable,” he says.

Taylor shrugs. “I’m just trying to do what’s best for the company,” he maintains. “I’m just focused on the business. Going public wouldn’t make sense right now.” You can’t blame him. The upshots of recent restaurant IPOs are decidedly mixed.

Ninety-unit Cosi (COSI), for instance, priced its shares at $7 in a November offering, only to watch them sink 30 percent. Shares of Red Robin (RRGB), which also went public last year, spiked from an IPO $12 to $15 in January.

Taylor is also cool to the idea of letting a strategic buyer acquire his baby. He fears the worst: losing control. “I’m having fun,” he insists.

Taylor has long indulged a passion for fun, namely in the form of skiing. He developed it while managing nightclubs and restaurants in Colorado, where he’d gravitated after graduating from the University of North Carolina. Divorce forced him to Louisville, his hometown, in 1990.

On Track and Off
There, he managed KFCs and a Hooters of America while nurturing a desire to open a Colorado-themed bar and grill. He got his chance when former Kentucky governor John Y. Brown agreed to put up $80,000. Taylor’s dream restaurant, dubbed Buckhead Hickory Grill, turned a profit, and Brown wanted open a second in nearby Clarksville, Ind. Taylor, however, says the partnership dissolved after Brown refused to make him a fifty-fifty partner. Three cardiologists resuscitated the deal, although the restaurant was now called Texas Roadhouse. It opened in Clarksville in February 1993, and Taylor sold his interest in Buckhead in 1994.

Shortly thereafter a second unit opened, improbably, in Gainesville, Fla. “Kent told me he once ran a track meet in Gainesville and liked the place,” recalls Jeff Read, the restaurant’s first manager and now a market partner in Louisville. “We were all over the map the first few years.” Bad locations forced the company to shutter three units—in Cincinnati; Clearwater and Sarasota, Fla.—within a year.

To his credit, Taylor hasn’t closed a company unit since. He also franchised units to help pay the bills, though franchisees were mostly former employees. Franchising efforts ended three years ago, and Taylor has no plans to renew them.

Taylor also opened units in Colorado, Idaho and Utah beginning in ’97, a result of his ski fever. Today, he concedes it was a mistake: “Back when we jumped out there because of my ski addiction; that was definitely not the right thing to do. I don’t think I’d do that anymore.”

The company plans to open 14 company restaurants, most in existing markets, in ’03; franchisees, who operate 61 units, will build a half-dozen this year. Taylor won’t share site information, except to say Detroit will get three more stores. “We do well there.” He stresses that the equity-owning market partners pick the site, and he signs off on them. He wants to add more market partners, who now number 20.

Learning from Mistakes
Expansion hasn’t been without an ugly side. Caught up in the irrational exuberance of the late ’90s, Taylor tried to open 30 units in 1999. Service and food quality—the concept’s hallmarks—suffered as the company sped up training to man the restaurants. “Back in the late ’90s everything was go-go-go. The economy was doing great and everyone was getting excited,” admits Taylor, who also franchised 15 units. “That’s when we realized we were rushing people to get them ready to take on stores. That was a real education.”

He learned there’s no substitute for lots of experience. General managers, called managing partners because they have equity in their units and share in 10 percent of the profits, must toil as service managers and kitchen managers before overseeing a restaurant.

Burton, the Cleveland manager, joined the company as a waiter nine years ago, and then spent five years managing front and back of the house. His training for managing partner lasted 16 weeks. “You really have to prove yourself.” he claims.

For his part, Taylor feels he only has to prove himself to his customers. And that the numbers, will bear him out.