Business Context and Reporting Period
Company: Texas Roadhouse, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 27, 2006 (13 and 26 weeks)
Business Overview: A growing, moderately priced, full-service restaurant chain operating 233 locations (148 company-owned, 85 franchise) across 43 states as of the period end. The company focuses on mid-sized markets with a strategy of expanding its restaurant base and improving unit profitability.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | 13 Weeks Ended June 27, 2006 |
26 Weeks Ended June 27, 2006 |
|---|---|---|
| Total Revenue | $146,720 | $296,119 |
| Net Income | $8,831 | $17,013 |
| Diluted EPS | $0.12 | $0.22 |
| Operating Cash Flow | N/A | $23,759 |
| Cash and Equivalents (End of Period) | $14,359 | $14,359 |
| Total Debt (Long-term + Current) | $15,659 | $15,659 |
| Operating Margin | 9.7% | 9.6% |
Material Changes vs. Prior Period
- Revenue Growth: Restaurant sales increased 27.4% in Q2 2006 and 31.2% year-to-date (YTD) compared to the prior year. This growth was driven by new openings, the acquisition of 11 franchise restaurants, and comparable restaurant sales growth of 1.2% (Q2) and 3.9% (YTD).
- Profitability: Net income increased to $8.8 million in Q2 2006 from $8.0 million in Q2 2005. However, operating margins compressed slightly (9.7% vs. 11.0% in Q2 2005) due to increased pre-opening costs and stock-based compensation expenses.
- Expense Increases:
- Labor: Increased to 28.0% of sales (Q2) from 26.9% (prior year), primarily due to the adoption of SFAS 123R (stock-based compensation) and higher costs in new restaurants.
- Pre-opening: Rose to $3.2 million (Q2) from $1.6 million (prior year) due to a larger development pipeline.
- Depreciation & Amortization: Increased to 3.5% of revenue (Q2) from 3.0% due to capital spending and acquisitions.
- Acquisitions: In Q1 2006, the company acquired 11 franchise restaurants for a total consideration of approximately $40.8 million (stock and cash), generating $37.0 million in goodwill.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects 2006 capital expenditures to be between $80.0 million and $90.0 million, excluding acquisitions, primarily for new restaurant openings.
- Liquidity: The company intends to fund requirements via cash on hand, operating cash flow, and a $150 million revolving credit facility. As of June 27, 2006, $10.0 million was outstanding with $137.6 million available.
- Accounting Changes: The adoption of SFAS 123R reduced operating profit by $1.7 million in Q2 and $3.5 million YTD. The effective tax rate increased to 37.5% (Q2) and 38.7% (YTD) due to non-deductible stock option expenses and an EITF 04-1 charge.
- Risks:
- Commodity Prices: Exposure to volatility in beef and other ingredient prices; reliance on four major beef vendors.
- Interest Rates: Exposure to variable rates on the revolving credit facility (LIBOR + margin).
- Legal: Routine litigation (slip and fall, employment) is covered by insurance and not considered material.
Investor Verification Checklist
- Stock-Based Compensation Impact: Verify the ongoing impact of SFAS 123R on labor and G&A expenses, which reduced net income by $2.8 million YTD.
- Acquisition Integration: Monitor the performance of the 11 acquired franchise restaurants, which contributed $21.2 million in sales YTD but also added to depreciation and amortization.
- Comparable Sales Trend: Note the deceleration in comparable restaurant sales growth (1.2% in Q2 2006 vs. 6.8% in Q2 2005) and assess if this trend persists.
- Debt Covenants: Confirm continued compliance with the credit facility covenants (minimum fixed charge coverage of 1.50:1.00 and maximum leverage of 3.00:1.00).
- Capital Commitments: Review the $52.7 million in estimated capital project commitments as of June 27, 2006.