Texas Roadhouse, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the 13 and 26 weeks ended June 26, 2012, compared with the periods ended June 28, 2011. The company operated 381 restaurants: 309 company restaurants and 72 franchise or license restaurants. It opened 15 company restaurants in the first half.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | 2012 YTD | 2011 YTD |
|---|---|---|---|---|
| Total revenue | $320.3 million | $279.6 million | $645.1 million | $563.4 million |
| Operating income | $31.2 million | $23.7 million | $60.6 million | $54.0 million |
| Net income attributable to Texas Roadhouse | $20.3 million | $16.1 million | $39.2 million | $35.9 million |
| Diluted EPS | $0.28 | $0.22 | $0.55 | $0.49 |
| Operating cash flow | — | — | $60.3 million | $56.4 million |
| Capital expenditures | — | — | $42.5 million | $29.1 million |
- Q2 revenue rose 14.6%; reported net income attributable to the company increased about 26%. YTD revenue rose 14.5%, while reported net income increased about 9%.
- Operating margin was 9.8% in Q2 versus 8.5% a year earlier; YTD it was 9.4% versus 9.6%. YTD results include a $5.0 million pretax legal settlement charge ($3.1 million after tax). Excluding it, management reported YTD diluted EPS of $0.59, versus $0.49 in 2011; this is a non-GAAP measure.
- Comparable restaurant sales increased 4.5% in Q2 and 5.3% YTD. The company attributed growth to higher guest traffic and a 3.9% increase in average check, including menu price increases.
- Restaurant food costs rose to 33.7% of restaurant sales in Q2 from 33.3%, and to 33.9% YTD from 33.3%, amid approximately 7% commodity inflation. Labor costs improved as a share of sales: 29.4% versus 29.9% in Q2 and 29.2% versus 29.7% YTD.
- Cash and cash equivalents were $77.2 million at June 26. Current assets were $111.7 million and current liabilities $123.1 million. Total debt and capital lease obligations were $51.8 million, including $50.0 million drawn on the revolving facility. Revolver availability was $145.8 million, net of letters of credit; the company reported compliance with covenants.
- YTD operating cash flow was $60.3 million. Investing used $42.4 million and financing used $14.3 million; cash increased $3.5 million to $77.2 million. Capital expenditures increased year over year, including spending on new restaurants and refurbishments.
Outlook, risks, and notable items
- Management planned approximately 25 company restaurant openings in 2012, with 15 already opened, and expected 2–3 franchise openings. It forecast approximately $90 million of 2012 capital expenditures and expected operating cash flow to exceed capital expenditures.
- Management expected approximately 7% commodity cost inflation for full-year 2012; about 70% of overall food costs and 90% of beef costs were covered by fixed-price contracts for the remainder of the year. It expected the effective tax rate to be 32.5%–33.0%.
- Management anticipated higher pre-opening expenses due to development activity and higher share-based compensation costs in 2012. It expected G&A, excluding the settlement charge, to grow more slowly than revenue.
- A proposed $5.0 million settlement of a Massachusetts wage-and-tip class action had preliminary court approval; final approval was scheduled for August 28, 2012. The company had recorded the charge in Q1. A separate EEOC age-discrimination case remained at a preliminary stage; the company said it could not estimate a possible loss.
- Risks include commodity-price volatility, reliance on four principal beef suppliers, wage inflation, and interest-rate exposure. The company used two $25 million interest-rate swaps. Management reported no material change to previously disclosed risk factors.
- The board authorized up to $100 million of share repurchases in February 2012; none had been made through June 26. Dividends declared in the first half totaled $0.18 per share.
Key facts for investors to verify
- Whether the proposed $5.0 million settlement receives final court approval and whether the EEOC litigation creates an estimable exposure.
- Progress on 2012 restaurant openings and capital spending versus management’s targets.
- Whether commodity inflation, menu pricing, and guest traffic support restaurant margins and sales growth.
- Cash generation, revolver borrowings and availability, covenant compliance, and planned dividends or repurchases.
- The basis and comparability of the company’s non-GAAP earnings and EPS excluding the settlement charge.