Business Context and Reporting Period
Company: Texas Roadhouse, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 30, 2008 (53-week fiscal year)
Business Overview: Texas Roadhouse is a moderately priced, full-service, casual dining restaurant chain operating in the United States. As of December 30, 2008, the system comprised 314 restaurants in 46 states, including 245 company-owned locations and 69 franchised/licensed locations. The company focuses on high-quality steaks, friendly service, and a rustic southwestern lodge atmosphere.
Key Financial Metrics
| Metric | 2008 (53 Weeks) | 2007 (52 Weeks) |
|---|---|---|
| Total Revenue | $880.5 million | $735.1 million |
| Restaurant Sales | $871.6 million | $724.4 million |
| Income from Operations | $62.0 million | $63.2 million |
| Net Income | $38.2 million | $39.3 million |
| Diluted EPS | $0.52 | $0.51 |
| Operating Cash Flow | $101.2 million | $76.6 million |
| Total Assets | $622.7 million | $546.0 million |
| Long-Term Debt (excl. current) | $132.5 million | $66.5 million |
| Cash and Equivalents | $5.3 million | $11.6 million |
Margins: Operating margin decreased to 7.0% in 2008 from 8.6% in 2007. Net income margin was 4.3% in 2008 compared to 5.3% in 2007.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 20% to $880.5 million, driven primarily by the opening of 29 new company restaurants, the acquisition of 13 franchise restaurants, and the inclusion of a 53rd week in the fiscal year.
- Comparable Sales Decline: Comparable restaurant sales for company-owned locations declined 2.3% in 2008, reversing a trend of growth seen in prior years. This was attributed to economic conditions and competitive pressures.
- Cost Pressures: Restaurant cost of sales increased to 35.4% of sales (from 35.2%) due to higher commodity costs (wheat, oil, produce, dairy), partially offset by lower beef costs. Labor expenses rose to 29.0% of sales (from 28.4%) due to federal and state minimum wage increases and higher average hourly rates.
- Debt Increase: Long-term debt more than doubled to $132.5 million (excluding current maturities) as the company borrowed heavily to fund a $57.0 million stock repurchase program and franchise acquisitions.
- Impairment Charges: The company recorded $2.2 million in impairment and closure costs in 2008, including a $1.4 million impairment charge for an underperforming restaurant and $0.8 million in closure costs for a restaurant closed in the first quarter.
Guidance, Outlook, and Risks
Management Outlook:
- Expansion: The company plans to open approximately 15 additional company restaurants in 2009. Capital expenditures for 2009 are expected to be between $50.0 million and $60.0 million, excluding franchise acquisitions.
- Commodity Costs: Management expects commodity cost deflation of approximately 2-3% in 2009. The company has fixed-price contracts for 90% of its beef volume for 2009.
- Stock Repurchases: As of year-end, $18.2 million remained authorized under the $75.0 million stock repurchase program.
Key Risks and Contingencies:
- Economic Sensitivity: The business is highly dependent on discretionary consumer spending, which may decline during economic downturns.
- Commodity Volatility: Profitability is sensitive to fluctuations in food costs, particularly beef, which is sourced from a limited number of suppliers.
- Labor Costs: Future increases in federal and state minimum wages and tip rates could adversely impact operating expenses.
- Franchisee Performance: The company relies on franchisees to maintain brand standards; failure to do so could harm the brand reputation.
- Legal and Insurance: The company self-insures a significant portion of workers' compensation and general liability claims. Unanticipated changes in actuarial assumptions could materially affect expenses.
Investor Verification Checklist
- Comparable Sales Trend: Verify the sustainability of the 2.3% decline in comparable restaurant sales and the effectiveness of menu pricing strategies to offset inflation.
- Debt Covenants: Confirm continued compliance with the credit facility covenants, specifically the minimum fixed charge coverage ratio of 2.00:1.00 and maximum leverage ratio of 3.00:1.00, given the increased debt load.
- Acquisition Integration: Assess the financial performance of the 13 franchise restaurants acquired in 2008 to ensure they meet projected revenue and profitability targets.
- Commodity Hedging: Review the extent of fixed-price contracts for key ingredients (beef, wheat, oil) to gauge exposure to future price volatility.
- Impairment Frequency: Monitor the frequency of impairment charges and restaurant closures, as the company recorded charges in both 2007 and 2008 related to underperforming locations.