TXRH

Business Context and Reporting Period

Company: Texas Roadhouse, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 25, 2007 (52 weeks)
Business Overview: Texas Roadhouse is a moderately priced, full-service, casual dining restaurant chain operating in the U.S. As of the reporting date, the system comprised 285 restaurants in 44 states, consisting of 204 company-owned locations and 81 franchised/licensed locations. The company focuses on high-quality steaks, friendly service, and a rustic southwestern lodge atmosphere.

Key Financial Metrics

Margins (as % of Restaurant Sales):

• Cost of Sales: 35.2% (2007) vs. 35.1% (2006)
• Labor Expenses: 28.4% (2007) vs. 27.7% (2006)
• Operating Margin: 8.7% (2007) vs. 9.3% (2006)

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 23.1% year-over-year, driven primarily by the opening of 32 new company restaurants, the acquisition of nine franchise restaurants in June 2007, and 1.4% comparable restaurant sales growth.
• Acquisitions: The company acquired nine franchise restaurants for approximately $33.2 million in cash, which included the purchase of land and buildings previously leased by the franchisees. This transaction increased goodwill by $15.2 million.
• Cost Pressures: Labor costs as a percentage of sales increased to 28.4% due to state-mandated minimum wage increases and higher costs associated with new restaurant openings. Cost of sales rose slightly to 35.2% due to higher dairy and bread mix costs.
• Impairment Charges: The company recorded $1.7 million in impairment charges in 2007 related to one underperforming restaurant, compared to $0.5 million in 2006.
• Debt Levels: Long-term debt increased significantly to $66.5 million from $35.4 million, primarily due to borrowings under the credit facility to fund the acquisition of franchise restaurants and capital expenditures.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Expansion: Management plans to open approximately 30 additional company restaurants in 2008.
• Capital Expenditures: Expected capital expenditures for 2008 are projected to be between $100.0 million and $110.0 million, excluding franchise acquisitions.
• Pricing: The company implemented a 1.1% menu price increase in January 2008 to offset inflationary pressures and continues to evaluate further adjustments.
• Stock Repurchase: On February 14, 2008, the Board approved a $25.0 million stock repurchase program valid for two years.

Key Risks and Contingencies:

• Commodity Costs: Profitability is sensitive to fluctuations in beef and other food commodity prices. The company relies on three primary beef suppliers.
• Labor Costs: Continued increases in federal and state minimum and tipped wages pose a risk to operating margins.
• Legal Proceedings: Two class-action lawsuits (Ehrheart and Aliano) were filed alleging violations of the Fair and Accurate Credit Transactions Act (FACTA) regarding credit card receipts. Statutory damages could range from $100 to $1,000 per violation if class status is granted.
• Franchisee Performance: The company's reputation depends on franchisees adhering to operational standards, as they are independent third parties.

Investor Verification Checklist

• Verify the impact of the $1.7 million impairment charge on the specific underperforming restaurant's future cash flows.
• Monitor the status of the FACTA class-action lawsuits (Ehrheart and Aliano) for potential material liability.
• Assess the company's ability to pass on inflationary food and labor costs through menu price increases without negatively impacting guest traffic.
• Review the execution of the 2008 expansion plan (30 new openings) against the projected $100-$110 million capital expenditure budget.
• Confirm compliance with credit facility covenants (minimum fixed charge coverage ratio of 2.00:1.00 and maximum leverage ratio of 3.00:1.00) given the increased debt load.