Business Context and Reporting Period
Company: Texas Roadhouse, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 28, 2010 (52-week fiscal year)
Business Overview: Texas Roadhouse is a moderately priced, full-service, casual dining restaurant chain operating primarily in the United States. As of the reporting date, the company owned and operated 274 restaurants (271 Texas Roadhouse, 3 Aspen Creek) and franchised/licensed an additional 71 restaurants across 46 states. The company operates as a single reportable segment.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Revenue | $1,004,993,000 | $942,331,000 |
| Restaurant Sales | $995,988,000 | $934,100,000 |
| Income from Operations | $90,617,000 | $75,861,000 |
| Net Income (Attributable to Texas Roadhouse) | $58,289,000 | $47,479,000 |
| Diluted EPS | $0.80 | $0.67 |
| Operating Margin | 9.0% | 8.1% |
| Net Cash from Operating Activities | $119,908,000 | $115,129,000 |
| Cash and Cash Equivalents (Year End) | $82,215,000 | $46,858,000 |
| Long-Term Debt (Excl. Current) | $51,906,000 | $101,179,000 |
| Comparable Restaurant Sales Growth | 2.4% | (2.8)% |
| Average Unit Volume | $3,728,000 | $3,660,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 6.6% year-over-year, driven by the opening of 14 new company restaurants and a 1.9% increase in average unit volumes.
- Profitability: Operating income increased 19.5% to $90.6 million. Operating margin expanded from 8.1% to 9.0% due to improved restaurant-level profitability and lower cost of sales (32.6% vs. 33.5% in 2009) driven by lower beef and commodity costs.
- Debt Reduction: The company significantly reduced its leverage, paying down borrowings under its revolving credit facility from $99.0 million in 2009 to $50.0 million in 2010.
- Impairment Charges: Impairment and closure costs decreased to $2.0 million in 2010 from $3.0 million in 2009. The 2010 charge included $1.7 million related to goodwill impairment at four restaurants.
- Capital Expenditures: Total capital expenditures were $45.1 million in 2010, consistent with 2009 levels, despite opening fewer restaurants (14 vs. 17), due to a larger development pipeline for 2011.
Guidance, Outlook, and Risks
- 2011 Outlook: Management plans to open approximately 20 new company-owned restaurants in 2011, an increase from 14 in 2010. Capital expenditures are expected to range between $65.0 million and $70.0 million.
- Pricing Strategy: The company anticipates a menu price increase averaging approximately 1% in the first quarter of 2011 to offset expected commodity cost inflation of roughly 3.0%.
- Shareholder Returns: On February 17, 2011, the Board authorized a new $50.0 million stock repurchase program and declared a cash dividend of $0.08 per share.
- Key Risks:
- Commodity Costs: Profitability is sensitive to beef and other food costs; the company relies on a limited number of beef suppliers.
- Expansion Risks: Growth depends on securing suitable sites, obtaining permits, and hiring qualified management. New restaurants typically take 3-6 months to reach steady cash flow.
- Legal Proceedings: The company is defending against an EEOC charge alleging age discrimination in hiring practices; the potential loss is currently indeterminable.
- Franchisee Performance: The company's reputation relies on franchisees adhering to operational standards, which are outside the company's direct control.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the credit facility's fixed charge coverage ratio (min 2.00:1.00) and leverage ratio (max 3.00:1.00).
- Impairment Monitoring: Review the performance of the five restaurants currently being monitored for potential future goodwill impairment charges.
- Commodity Hedging: Assess the impact of the 65% fixed-price food contracts expiring and the remaining 35% subject to market volatility.
- Legal Exposure: Monitor the status of the EEOC age discrimination charge and any potential settlement or litigation costs.
- Development Pipeline: Confirm the ability to execute the plan to open 20 new restaurants in 2011 given site selection and labor availability constraints.