TXRH

Business Context and Reporting Period

Company: Texas Roadhouse, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 29, 2009 (52 weeks)
Business Overview: Texas Roadhouse operates a chain of moderately priced, full-service, casual dining restaurants. As of the reporting date, the company owned and operated 261 restaurants in 43 states and franchised/licensed an additional 70 restaurants in 24 states. The company aggregates its restaurant and franchising operations into a single reportable segment.

Key Financial Metrics

Key Ratios & Data:
- Comparable Restaurant Sales Growth: -2.8% (2009) vs -2.3% (2008).
- Average Unit Volume: $3.66 million (2009) vs $3.82 million (2008).
- Restaurant Cost of Sales: 33.5% of sales (2009) vs 35.4% (2008).
- Restaurant Labor Expenses: 29.6% of sales (2009) vs 29.0% (2008).

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 7.0% to $942.3 million, driven primarily by the opening of 17 new company restaurants and the acquisition of franchise restaurants in 2008. This growth was partially offset by a decline in comparable restaurant sales and the absence of the 53rd week present in fiscal 2008.
• Profitability: Income from operations increased 22.3% to $75.9 million. Net income attributable to the company rose 24.4% to $47.5 million. Operating margins improved to 8.1% from 7.0% in 2008.
• Cost Management: Restaurant cost of sales decreased as a percentage of sales (33.5% vs 35.4%) due to lower beef, dairy, and produce costs and menu price increases. However, labor expenses increased to 29.6% due to higher minimum wage rates and state unemployment taxes.
• Impairment Charges: The company recorded $3.0 million in impairment and closure costs in 2009, up from $2.2 million in 2008. This included charges related to goodwill and long-lived assets at five underperforming restaurants.
• Liquidity: Cash and cash equivalents increased significantly from $5.3 million to $46.9 million, driven by strong operating cash flows and a reduction in debt borrowings ($31.0 million repaid).

Guidance, Outlook, and Risks

Outlook and Guidance:
- Expansion: The company plans to open approximately 15 additional company restaurants in 2010. Average capital investment per new restaurant is expected to decrease to a range of $3.6 million to $3.9 million in 2010 due to design modifications and lower site work costs.
- Capital Expenditures: Expected to be between $50.0 million and $55.0 million for 2010, primarily for new openings.
- Commodity Costs: The company expects commodity cost deflation of approximately 2.5% to 3.0% in 2010. Approximately 65% of food costs are covered by fixed-price contracts.
- Tax Rate: The effective tax rate is expected to be approximately 32.0% to 32.5% for fiscal 2010.

Management Commentary:
Management noted that while menu price increases were implemented to offset inflationary pressures, the average guest check remained fairly constant as guests shifted to lower-priced items. The company moderated its development plans in 2009 and 2010 due to increasing development costs but aims to drive sales and decrease costs to support future growth.

Risks and Contingencies:
- Economic Conditions: Recessionary cycles and reduced discretionary spending could adversely affect guest traffic and sales.
- Commodity Prices: Volatility in beef and other food costs could impact margins if price increases cannot be passed to consumers.
- Labor Costs: Continued increases in federal and state minimum wages and unemployment taxes pose a risk to operating expenses.
- Franchisee Performance: The company relies on franchisees to maintain brand standards; failure to do so could harm the brand.
- Impairment Risk: The company is monitoring four restaurants with total goodwill of $3.7 million; significant decreases in cash flows could trigger future impairment charges.

Investor Verification Checklist

• Comparable Sales Trend: Verify the sustainability of the -2.8% comparable sales decline and the effectiveness of menu pricing strategies in offsetting it.
• Impairment Exposure: Review the specific performance metrics of the five underperforming restaurants that triggered $3.0 million in impairment charges to assess future risk.
• Labor Cost Trajectory: Monitor the impact of state-mandated minimum wage increases on the 29.6% labor expense ratio.
• Capital Allocation: Confirm the execution of the 2010 opening plan (15 restaurants) and the projected reduction in capital investment per unit.
• Debt Covenants: Verify continued compliance with the credit facility covenants (minimum fixed charge coverage ratio of 2.00:1.00 and maximum leverage ratio of 3.00:1.00).