Business Context and Reporting Period
Company: Texas Roadhouse, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 28, 2010 (39 weeks YTD)
Business Overview: A growing, moderately priced, full-service restaurant chain operating 338 locations (267 company-owned, 71 franchise) across 46 states as of the period end. The company focuses on high-quality, affordable meals with a "Legendary Food, Legendary Service" mission.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Sep 28, 2010 | 39 Weeks Ended Sep 28, 2010 |
|---|---|---|
| Total Revenue | $245,613 | $760,399 |
| Net Income (Attributable to Texas Roadhouse) | $13,952 | $48,229 |
| Diluted EPS | $0.19 | $0.66 |
| Operating Cash Flow (39 weeks) | $74,302 | |
| Cash and Cash Equivalents | $55,425 | |
| Total Debt (Long-term + Current) | $62,244 | |
| Restaurant Operating Margins (Cost of Sales %) | 32.5% | 32.5% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 8.5% in Q3 2010 and 6.3% YTD compared to the prior year periods. This was driven by new restaurant openings (7 company restaurants opened YTD) and a 4.3% increase in comparable restaurant sales for Q3.
- Profitability: Net income attributable to the company rose 30.5% in Q3 and 24.4% YTD. Operating income margins improved to 8.7% in Q3 from 7.6% in the prior year.
- Cost Management: Restaurant cost of sales decreased as a percentage of sales (32.5% vs. 33.2% prior year) due to lower beef and commodity costs. Labor costs also improved slightly (29.5% vs. 30.1%) despite higher minimum wage rates, aided by volume growth.
- Debt Reduction: The company significantly reduced borrowings under its revolving credit facility, paying down $39 million YTD. Outstanding revolver debt dropped from $99 million at year-end 2009 to $60 million at period end.
Guidance, Outlook, and Risks
- Expansion Plans: The company plans to open approximately 14 company restaurants in 2010 (7 opened YTD) and has increased its 2011 development plan to approximately 20 restaurants. Average capital investment per prototype restaurant is expected to decrease by $0.2 million to $0.4 million.
- International Growth: Signed the first international franchise agreement in April 2010 for development in eight Middle Eastern countries, with the first opening expected in 2011.
- Commodity Outlook: Management expects commodity cost deflation of approximately 2.5% for the remainder of 2010, with inflation of 2.0%-3.0% anticipated in 2011.
- Legal Contingency: The EEOC issued a determination letter alleging a pattern of age discrimination in hiring for certain positions. The company denies the allegations and intends to defend vigorously; the potential loss is currently unquantifiable.
- Stock Repurchase: No shares were repurchased during the period. Approximately $18.2 million remains authorized under the current program.
Investor Verification Checklist
- Comparable Sales Sustainability: Verify if the 4.3% comparable sales growth in Q3 can be sustained given the shift in guest traffic vs. average check dynamics.
- Capital Expenditure Efficiency: Monitor if the projected reduction in average capital investment per new restaurant ($4.0M to ~$3.6M-$3.8M) is realized in 2011 openings.
- Legal Exposure: Track the status of the EEOC age discrimination charge and any potential settlement or litigation costs.
- Debt Covenant Compliance: Confirm continued compliance with the fixed charge coverage ratio (min 2.00:1) and leverage ratio (max 3.00:1) covenants as debt levels fluctuate.
- Commodity Hedging: Assess the impact of the expected 2011 commodity inflation on margins, given that only ~75% of food costs were fixed-price contracted for the remainder of 2010.