Business context and reporting period
Texas Roadhouse, Inc. filed this unaudited Form 10-Q for the 13 weeks ended March 27, 2018 (Q1 2018), compared with the 13 weeks ended March 28, 2017. At quarter-end, the company operated 469 restaurants and franchised 89, across 49 U.S. states and eight foreign countries. It opened seven company restaurants and franchisees opened two during the quarter.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Total revenue | $627.7 million | $567.7 million | Up 10.6% |
| Income from operations | $64.9 million | $49.0 million | Operating margin was 10.3% of revenue versus 8.6% |
| Net income attributable to Texas Roadhouse | $54.5 million | $34.3 million | Up 59.0% |
| Diluted EPS | $0.76 | $0.48 | Up 57.9% |
| Restaurant margin | $119.4 million; 19.2% of restaurant and other sales | $112.3 million; 19.9% | Margin dollars rose 6.3%; margin rate declined |
| Operating cash flow | $106.8 million | $94.3 million | Capital expenditures were $35.3 million |
Restaurant comparable sales increased 4.9%, reflecting 4.0% higher guest traffic and a 0.9% increase in average check. Company store weeks rose 6.5%. Cost of sales was 32.6% of restaurant and other sales versus 32.7%; labor was 31.5% versus 30.2%; rent was 1.9% in both periods; and other operating costs were 14.8% versus 15.2%.
Cash and cash equivalents were $197.8 million at March 27, 2018, compared with $150.9 million at December 26, 2017. Total debt and capital-lease obligations were $52.0 million, including $50.0 million drawn on the revolving facility; $142.5 million of facility availability remained after letters of credit. The company reported covenant compliance and said it repaid the $50.0 million revolver balance in April 2018. Current liabilities exceeded current assets by $44.0 million. The filing reports $852.2 million of remaining operating lease payments.
Material changes and unusual items
- Net income growth reflected stronger restaurant margin dollars, lower G&A and lower income tax expense. The prior-year quarter included a $14.9 million pre-tax charge ($9.2 million after tax) for settlement and legal defense costs. Management said this comparison contributed a favorable 33.3% to diluted EPS growth.
- The effective tax rate declined to 13.0% from 26.5%, primarily following U.S. tax legislation reducing the federal corporate rate from 35% to 21%. Q1 2018 results also benefited from tax effects of equity awards that typically vest in the first quarter.
- Texas Roadhouse adopted ASC 606 in fiscal 2018. It changed the timing of recognition for certain franchise fees and reclassified some gift-card and franchise-related amounts between revenue and expenses. Prior-period figures were not restated; the company reported a $0.9 million cumulative reduction to retained earnings and a $31,000 reduction to Q1 net income attributable to the company compared with prior guidance.
- Restaurant margin is a non-GAAP measure. Management said labor pressure from higher wage rates and staffing initiatives drove the lower margin rate. ASC 606-related reclassifications also affected reported restaurant cost ratios but did not affect income before taxes.
Outlook, risks and contingencies
- Management planned approximately 30 company restaurant openings in 2018, including up to seven Bubba’s 33 restaurants; franchise partners were expected to open as many as six, primarily international, restaurants. Expected 2018 capital expenditures were $165 million to $175 million. Management anticipated operating cash flow would exceed capital expenditures.
- Management expected approximately 1% commodity cost inflation for 2018, with fixed-price contracts covering about 65% of food costs. Labor costs were expected to face mid-single-digit inflation. The company implemented an approximately 0.8% menu-price increase in late March 2018.
- Management expected a 2018 effective tax rate of 15% to 16%. It also anticipated lower 2018 interest expense after the April revolver repayment.
- Key risks include inflation in food and labor costs, the ability to pass costs through to customers, and dependence on three primary beef suppliers. The company had $143.7 million of estimated capital project commitments and seven lease guarantees with maximum potential liability of $15.4 million; no material guarantee liability was recorded because default was considered less than probable.
- The EEOC lawsuit was resolved under a consent decree; the related charge was recorded in Q1 2017. The company said it was not party to litigation it believed could materially adversely affect its business and reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether comparable-sales growth and traffic gains persist, and how wage and commodity inflation affect restaurant margin.
- How much of reported earnings growth reflects the prior-year legal charge and the lower tax rate, and whether the stated 2018 tax outlook is achieved.
- Progress on planned openings, capital spending, and the expected relationship between operating cash flow and capital expenditures.
- The effect of the April revolver repayment on cash, liquidity, and interest expense, alongside the company’s substantial lease commitments.
- How ASC 606 affects revenue comparability and the recognition of deferred franchise fees and gift-card balances.