Texas Roadhouse, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. The unaudited quarter comprised 13 weeks ended June 30, 2020; year-to-date (YTD) covers 26 weeks. The company operated 521 restaurants and franchised 96. COVID-19 restrictions sharply limited dining-room capacity: 499 company restaurants had reopened dining rooms by quarter-end, generally subject to restrictions; one company location and five international franchise locations were temporarily closed.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | 2020 YTD | 2019 YTD |
|---|---|---|---|---|
| Total revenue | $476.4m | $689.8m | $1,128.9m | $1,380.4m |
| Operating income (loss) | ($47.3m) | $53.3m | ($31.5m) | $113.7m |
| Net income (loss) attributable to Texas Roadhouse | ($33.6m) | $44.8m | ($17.5m) | $95.2m |
| Diluted EPS | ($0.48) | $0.63 | ($0.25) | $1.32 |
| Restaurant margin | $11.8m; 2.5% | $120.8m; 17.6% | $90.4m; 8.1% | $243.4m; 17.8% |
Restaurant margin is a company-defined non-GAAP measure. Q2 comparable restaurant sales fell 32.8%; YTD they fell 20.5%. Monthly comparable sales declines improved from 46.7% in April to 41.9% in May and 14.1% in June. Q2 restaurant cost of sales, labor, rent and other operating costs were 34.7%, 41.1%, 2.8% and 18.9% of restaurant sales, respectively; labor and other costs rose notably as sales volumes fell.
- Cash flow: YTD operating cash flow was $61.8m, versus $187.0m a year earlier; capital expenditures were $81.8m, versus $87.8m. Financing provided $192.4m, principally reflecting credit-facility borrowings. Cash increased $174.6m to $282.5m.
- Debt and liquidity: $240.0m was outstanding under revolving facilities at June 30, at a weighted-average rate of 2.01%. Of this, $190.0m was classified as long-term and $50.0m as current, with the incremental facility maturing May 2021. Additional facility availability was $34.3m, net of letters of credit. The company was in compliance with financial covenants. Current assets were $359.4m and current liabilities $402.2m.
- Capital returns: The $0.36-per-share dividend paid March 27 was the last declared before quarterly dividends were suspended. Share repurchases were suspended March 17; $147.8m remained authorized. YTD repurchases totaled $12.6m.
Material changes, outlook and risks
- Revenue fell 30.9% in Q2 and 18.2% YTD, primarily due to reduced traffic and limited dining-room capacity. Management said To-Go sales had grown but were not expected to generate margins and cash flows comparable to the normal operating model.
- Management expected results and operating cash flow to remain significantly affected until restrictions were lifted and dining rooms could operate at full capacity. It could not predict the pandemic’s duration, future restrictions or effects on consumer spending. No quantified earnings or sales guidance was provided.
- In response, the company drew $240.0m from its credit facilities, expanded the facility by up to $82.5m, reduced planned restaurant development, suspended dividends and repurchases, and implemented compensation reductions and employee support measures. It did not seek CARES Act small-business loans.
- Fourteen restaurant projects had resumed construction or been approved to resume; management expected as many as six openings in Q3, subject to conditions. Development and capital spending could be reduced further if restrictions tightened.
- Risks include renewed dining-room closures, lower guest traffic, staffing and employee-retention challenges, supply disruption, and uncertainty in liquidity availability if the pandemic persists. Beef sourcing is concentrated among three suppliers. A 1 percentage-point increase in variable borrowing rates was estimated to raise annual interest expense by $2.4m.
- Other items: YTD included a $0.5m impairment loss on a China joint-venture investment and a $1.5m legal settlement in G&A. Capital project commitments were $133.2m; seven lease guarantees had maximum potential exposure of $13.5m, with no material liability recorded. The company reported no litigation it believed could materially adversely affect its business.
Important facts for investors to verify
- Subsequent comparable-sales trends, dining-room capacity and the profitability of To-Go business.
- Cash burn, available borrowing capacity, covenant compliance and the May 2021 maturity of the $50m incremental borrowing.
- Whether restaurant construction plans, capital commitments and suspended shareholder returns change as restrictions evolve.
- Potential impairment or valuation effects on restaurant assets, goodwill and leases, and any material change in supplier, staffing or legal risks.