Texas Roadhouse, Inc. annual report, FY2013

Texas Roadhouse, Inc. — FY2013 Form 10-K

Business context and reporting period. Texas Roadhouse operates a single reportable casual-dining segment. At December 31, 2013, it had 346 company-operated and 74 franchised restaurants across 48 states and three foreign countries. Fiscal 2013 ended December 31 and comprised 53 weeks; Q4 comprised 14 weeks, versus 52 weeks and 13-week quarters in fiscal 2012. Amounts below are in U.S. dollars.

Financial and operating performance

Revenue: FY2013 revenue was $1.423 billion, up 12.6% from $1.263 billion. Company restaurant sales rose 12.6%; the extra week contributed approximately $32 million. Comparable restaurant sales increased 3.4% (check average +2.4%, guest traffic +1.0%). Adjusted to 52 weeks, average unit volume was $4.194 million, up from $4.085 million.
Profit and EPS: Operating income was $119.7 million, up from $110.5 million, but operating margin declined to 8.4% from 8.7%. Net income attributable to Texas Roadhouse was $80.4 million versus $71.2 million; diluted EPS was $1.13 versus $1.00. The extra week contributed an estimated $0.03–$0.04 to diluted EPS.
Q4: Revenue was $376.0 million versus $309.5 million; operating income was $26.1 million versus $22.1 million; attributable net income was $17.1 million versus $13.9 million. Comparisons are affected by Q4’s 14 weeks versus 13 weeks in 2012.
Costs and margins: Food cost rose to 34.9% of restaurant sales from 33.8%, primarily due to approximately 7% commodity inflation, particularly beef. Labor improved to 29.2% from 29.4%; other operating costs declined to 15.9% from 16.3%. Pre-opening expenses increased to $17.9 million from $12.4 million. FY2013 included a $1.8 million gain on the Aspen Creek sale.
Cash flow: Operating cash flow was $173.8 million, up from $148.0 million. Investing cash outflow was $111.2 million, including $111.5 million of capital expenditures; financing cash outflow was $49.5 million. Cash increased $13.1 million to $94.9 million.
Liquidity and debt: Current assets were $145.7 million and current liabilities $175.2 million; management noted the business typically operates with negative working capital. Debt and capital-lease obligations totaled $51.2 million, including $50.0 million drawn on the revolving facility. The $200 million facility had $145.3 million available after letters of credit and matures November 2018. The company reported compliance with covenants. Operating lease commitments were $522.1 million.
Capital returns: The company paid $46.9 million in dividends during 2013, including an extra payment relating to a 2012 special dividend, and repurchased $12.8 million of stock. The Board declared a $0.15-per-share dividend for payment in April 2014; the stated 2014 regular annual dividend rate rose to $0.60 per share from $0.48.

Material changes versus prior period

Revenue growth reflected new restaurants, comparable sales growth, two franchise restaurant acquisitions at the end of 2012, and the 53rd week; the extra week alone added about $32 million in restaurant sales.
Attributable net income rose about 13%, while diluted EPS increased from $1.00 to $1.13. The 2012 comparison included a $5.0 million legal-settlement charge ($3.1 million after tax, or $0.04 per diluted share).
Food-cost pressure weighed on restaurant margins despite lower labor and other operating-cost percentages. Pre-opening expense and capital spending increased as development activity expanded.
Cash and operating cash flow increased. Stock repurchases fell to $12.8 million from $29.4 million in 2012.

Outlook, commentary, and risks

Management planned 25–30 company restaurant openings in 2014, with franchise partners expected to open up to five. Expected 2014 capital expenditures were approximately $110 million; management anticipated operating cash flow would exceed capital expenditures.
Management expected low-single-digit commodity inflation in 2014. Fixed-price contracts covered 35%–40% of overall food costs; the remainder was exposed to market prices. Higher minimum and tipped wages and expanded health coverage were expected to pressure labor costs. The company estimated health-benefit costs would be $2.5–$3.0 million higher in 2014.
Management expected a 2014 tax rate of 30%–31%, partly reflecting expiration of the Work Opportunity Tax Credit.
Key risks include beef and other food-cost volatility, dependence on a limited number of beef suppliers, wage and benefit increases, food-safety or reputational events, competition, consumer spending, weather, new-restaurant execution, and franchisee compliance. The company also cited self-insured claims and potential impairment judgments as areas of estimation risk.
An EEOC lawsuit alleges age discrimination in hiring applicants over 40 for certain restaurant positions. The company denies liability; the case was in discovery and the possible loss could not be estimated. Separately, the company recorded a $5.0 million charge in 2012 to settle a Massachusetts wage-and-tip class action.
On December 31, 2013, the company sold its two Aspen Creek restaurants and concept, receiving two Texas Roadhouse franchise restaurants in Ohio and $1.5 million cash; it recorded a $1.8 million gain. It also remained contingently liable under certain assigned restaurant leases.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded controls were effective as of year-end.

Important facts for investors to verify

Separate underlying growth from the 53rd-week benefit and compare Q4 on a consistent 13-week basis.
Track beef inflation, menu pricing, guest traffic, food-cost percentage, and restaurant-level margins.
Assess whether planned openings, roughly $110 million of 2014 capital spending, and lease commitments can be supported by operating cash flow.
Monitor the EEOC case, self-insurance reserves, and contingent lease guarantees for changes in estimated exposure.
Confirm the effect of higher health-benefit costs and the tax-credit expiration on 2014 earnings and cash generation.