Business Context and Reporting Period
Company: Texas Roadhouse, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 25, 2007 (13 weeks) and 39 weeks ended September 25, 2007.
Business Overview: A growing, moderately priced, full-service restaurant chain. As of September 25, 2007, the company operated 275 restaurants in 44 states, comprising 194 company-owned restaurants and 81 franchise/license restaurants.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Sept 25, 2007 |
39 Weeks Ended Sept 25, 2007 |
|---|---|---|
| Total Revenue | $189,454 | $548,777 |
| Net Income | $10,552 | $32,105 |
| Diluted EPS | $0.14 | $0.42 |
| Operating Cash Flow | N/A | $48,070 |
| Capital Expenditures | N/A | $(76,673) |
| Total Debt (Long-term + Current) | $74,856 | $74,856 |
| Cash and Equivalents | $15,336 | $15,336 |
Margins (as % of Restaurant Sales):
- Cost of Sales: 35.2% (Q3 2007) vs 35.1% (Q3 2006)
- Labor: 28.7% (Q3 2007) vs 27.8% (Q3 2006)
- Operating Income Margin: 9.1% (Q3 2007) vs 9.6% (Q3 2006)
Material Changes vs. Prior Period
- Revenue Growth: Restaurant sales increased 28.1% in Q3 2007 and 23.7% year-to-date (YTD) compared to the prior year. Growth was driven by new openings, comparable restaurant sales growth (2.5% in Q3), and the acquisition of nine franchise restaurants on June 27, 2007.
- Profitability: Net income increased 15.3% in Q3 and 22.7% YTD. However, operating margins compressed slightly due to higher labor costs (driven by state-mandated minimum wage increases) and higher dairy costs.
- Acquisitions: The company acquired nine franchise restaurants for approximately $22.6 million, plus $12.1 million for related real estate. This transaction generated $15.1 million in goodwill and a $0.5 million pre-tax charge related to preexisting relationships (EITF 04-1).
- Debt and Liquidity: Long-term debt increased significantly due to borrowings under the revolving credit facility to fund acquisitions. The credit facility was amended in May 2007, increasing capacity from $150 million to $250 million. Outstanding revolver balance was $71.0 million as of September 25, 2007.
Guidance, Outlook, and Risks
Outlook and Guidance:
- Capital Expenditures: Expected to be between $100.0 million and $110.0 million for fiscal 2007, excluding franchise acquisitions.
- Acquisition Impact: The nine acquired restaurants are expected to be slightly accretive to fiscal 2007 diluted EPS and approximately $0.015 accretive on an annualized basis.
- Tax Rate: The effective tax rate is expected to be approximately 35.8% for fiscal 2007.
Risks and Contingencies:
- Legal Proceedings: Two class-action lawsuits (Ehrheart and Aliano) allege violations of the Fair and Accurate Credit Transactions Act (FACTA) regarding credit card receipts. Statutory damages range from $100 to $1,000 per violation. Management believes they have meritorious defenses but acknowledges a material adverse effect if class status is granted and penalties imposed.
- Commodity Prices: Exposure to volatile beef and dairy prices. The company relies on four primary beef suppliers.
- Interest Rates: Variable rate debt exposes the company to interest rate fluctuations. A 1% increase in rates would increase annual interest expense by approximately $0.7 million.
Investor Verification Checklist
- Acquisition Integration: Verify the accretive impact of the nine acquired franchise restaurants and the final allocation of the $33.0 million purchase price.
- Labor Cost Trends: Monitor the sustainability of labor costs as a percentage of sales given ongoing state-mandated wage increases.
- Legal Exposure: Track the status of the FACTA class-action lawsuits (Ehrheart and Aliano) for potential settlement costs or class certification.
- Debt Covenants: Confirm continued compliance with the fixed charge coverage ratio (min 2.00:1.00) and leverage ratio (max 3.00:1.00) under the amended $250 million credit facility.
- Capital Spending: Assess whether the projected $100M-$110M capital expenditure budget aligns with the planned restaurant opening schedule.