Texas Roadhouse, Inc. — Q1 2013 Form 10-Q
Business context and period. The unaudited filing covers the 13 weeks ended March 26, 2013, compared with the 13 weeks ended March 27, 2012. Texas Roadhouse operated 397 restaurants at quarter-end: 323 company restaurants and 74 franchise or licensed restaurants. Fiscal 2013 is a 53-week year.
Financial performance and position
- Revenue: $359.7 million, up 10.7% from $324.9 million. Restaurant sales were $356.6 million, up 10.7%; franchise royalties and fees were $3.1 million, up 8.9%.
- Profit: Operating income was $38.2 million versus $29.4 million; operating margin was 10.6% versus 9.1%. Net income attributable to Texas Roadhouse was $26.2 million versus $18.9 million. Diluted EPS was $0.37 versus $0.27.
- Comparable sales: Company comparable restaurant sales grew 3.5%, down from 6.0%. The increase reflected a 3.0% rise in average check and 0.5% traffic growth. Store weeks rose 8.4%; average unit volume rose 2.8% to $1.111 million.
- Restaurant costs and margins: Cost of sales increased to 34.9% of restaurant sales from 34.1%, reflecting commodity inflation. Labor improved to 28.5% from 29.0%; other operating costs improved to 15.6% from 15.9%. Restaurant margin, calculated from the filing’s stated cost ratios, was approximately 19.0% versus 19.1%.
- Cash flow and investment: Operating cash flow was $39.4 million versus $37.9 million. Capital expenditures were $15.6 million versus $22.8 million, leaving approximately $23.8 million of operating cash flow after capital expenditures. Cash increased by $13.7 million to $95.5 million.
- Debt and liquidity: Total debt and capital lease obligations were $51.5 million, including $50.0 million drawn on the $200 million revolver. Revolver availability was $145.3 million, net of letters of credit. The company reported compliance with debt covenants. Current assets were $129.1 million and current liabilities $142.3 million.
- Shareholder returns: The company declared a $0.12 per-share dividend; $13.1 million was paid during the quarter, and the $8.4 million declared dividend was payable at quarter-end. No shares were repurchased in Q1; $70.6 million remained under the $100 million authorization.
Material changes versus prior year
- Revenue and operating income rose, supported by restaurant openings, the December 2012 acquisition of two franchise restaurants, and higher average unit volumes. Five restaurants opened in Q1, including three company locations.
- Reported net income and EPS benefited from comparison with Q1 2012, which included a $5.0 million pretax legal-settlement charge ($3.1 million after tax). Excluding that charge, prior-year net income was $21.9 million and diluted EPS was $0.31; the filing reports Q1 2013 diluted EPS of $0.37.
- The effective tax rate declined to 28.7% from 32.5%, primarily due to tax credits, including the reinstated Work Opportunity Tax Credit.
- Gift-card deferred revenue declined to $32.6 million from $53.0 million at year-end, with the quarter’s operating cash flow reflecting a $20.5 million cash use from this working-capital change.
Outlook, commentary, and risks
- Management planned approximately 28 company restaurant openings in 2013 and expected franchise partners to open as many as five restaurants, primarily internationally. Expected 2013 capital expenditures were $100–$105 million.
- Management expected 2013 commodity inflation of 6%–7%; approximately 65% of overall food costs were covered by fixed-price contracts for the remainder of the year. Beef supply depends heavily on four vendors, and higher commodity costs may pressure results if menu pricing cannot offset them.
- Management did not plan further menu price increases until later in 2013. It anticipated labor-cost pressure from state-mandated minimum- and tipped-wage increases, and higher pre-opening expense due to the development plan.
- Management expected a fiscal 2013 effective tax rate of approximately 31.0%. Annual conference costs were expected to be $2.5–$3.0 million higher than in 2012, contributing to possible G&A growth.
- The EEOC age-discrimination lawsuit remained in discovery. The company denied liability and could not estimate a possible loss or range. Other ordinary-course claims were not expected by management to have a material effect.
- Estimated capital project commitments were $79.2 million. The company also remained contingently liable on certain leases assigned to franchisees; no liability was recorded because the guarantees’ fair value was considered insignificant.
- Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether comparable-sales and traffic trends continue, particularly given Q1 traffic growth of only 0.5% and slower comparable-sales growth than the prior year.
- Whether projected 6%–7% commodity inflation and wage pressures affect restaurant margins, and whether menu pricing can offset them.
- Execution of the 2013 opening plan and $100–$105 million capital-spending outlook, alongside cash generation and shareholder distributions.
- Debt covenant headroom and continued availability under the revolver as investment and distributions proceed.
- Developments in the EEOC case, for which the company could not estimate potential exposure.
- The filing’s non-GAAP comparison: Q1 2012 results included a $5.0 million pretax legal charge, so reported year-over-year earnings growth should be assessed against the adjusted comparison as well.