TXRH

Business Context and Reporting Period

Company: Texas Roadhouse, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 26, 2006
Business Overview: Texas Roadhouse is a moderately priced, full-service, casual dining restaurant chain operating in the United States. As of the reporting date, the company operated 251 restaurants in 43 states, comprising 163 company-owned locations and 88 franchised/licensed locations. The company's strategy focuses on high-quality, freshly prepared food, specifically hand-cut steaks, and a "Legendary Service" atmosphere.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 30.2% year-over-year, driven primarily by the opening of 25 new company restaurants and the acquisition of 11 franchise restaurants in early 2006.
• Acquisition Impact: The acquisition of 11 franchise restaurants contributed $41.0 million in restaurant sales and generated $35.6 million in goodwill. This transaction was funded through a combination of cash ($2.1 million) and the issuance of 2.48 million shares of Class A common stock.
• Expense Increases:
  • Share-Based Compensation: The adoption of SFAS 123(R) in 2006 resulted in a $6.2 million non-cash charge ($2.9 million in labor, $3.3 million in G&A), reducing operating profit.
  • Pre-opening Costs: Increased to $12.5 million from $8.1 million due to a larger pipeline of new restaurant openings.
  • Interest Expense: Rose to $0.6 million from $0.3 million due to increased borrowings under the credit facility to fund acquisitions and construction.
• Debt Levels: Long-term debt increased significantly as the company utilized its $150 million revolving credit facility, drawing $30.0 million in 2006 compared to zero outstanding borrowings in 2005.

Guidance, Outlook, and Risks

• 2007 Outlook: Management plans to open approximately 28 to 30 additional company restaurants in 2007. Capital expenditures are expected to range between $90.0 million and $100.0 million, excluding franchise acquisitions.
• Menu Pricing: The company implemented menu price increases of approximately 2.0% in early 2007 to offset rising minimum wage and tip wage legislation in various states.
• Key Risks:
  • Commodity Costs: Profitability is sensitive to fluctuations in beef and other food costs. The company relies on four primary beef suppliers.
  • Labor Costs: Rising minimum wages and labor shortages could impact operating margins.
  • Franchisee Performance: The company's reputation depends on franchisees adhering to operational standards.
  • Geographic Concentration: Approximately 21% of company restaurants are located in Texas, creating sensitivity to local economic conditions.
• Liquidity: The company maintains a $150 million credit facility with $117.5 million available as of year-end. It is in compliance with all financial covenants, including a maximum leverage ratio of 3.00 to 1.00.

Investor Verification Checklist

• Acquisition Integration: Verify the performance of the 11 franchise restaurants acquired in Q1 2006 to ensure they meet projected profitability targets.
• Share-Based Compensation Impact: Monitor the ongoing impact of SFAS 123(R) on future earnings, as the $6.2 million charge in 2006 was a one-time adoption effect but recurring expenses will persist.
• Debt Utilization: Track the utilization of the $150 million credit facility, as the company increased borrowings to $30 million to fund growth; assess if this trend continues.
• Comparable Sales Trend: Observe if the deceleration in comparable restaurant sales growth (from 5.6% in 2005 to 3.5% in 2006) stabilizes or declines further.
• Beef Supply Chain: Confirm the stability of relationships with the four primary beef suppliers and monitor for any supply disruptions or price volatility.