Texas Roadhouse, Inc. — Q1 2011 Form 10-Q
Business context and period. Results cover the 13 weeks ended March 29, 2011, compared with the 13 weeks ended March 30, 2010. Texas Roadhouse operated 347 restaurants in 46 states: 276 company restaurants and 71 franchise or license restaurants. Two company restaurants opened during the quarter.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Total revenue | $283.8 | $259.6 | +9.3% |
| Restaurant sales | $281.3 | $257.3 | +9.3% |
| Income from operations | $30.2 | $30.1 | Nearly flat |
| Operating margin | 10.6% | 11.6% | Down 1.0 percentage point |
| Net income attributable to Texas Roadhouse | $19.8 | $19.2 | +2.9% |
| Diluted EPS | $0.27 | $0.27 | Unchanged |
| Cash from operating activities | $32.1 | $22.7 | Improved, primarily from income-tax and other working-capital changes |
| Capital expenditures | $12.5 | $7.8 | Higher, mainly for new restaurants |
Restaurant sales growth reflected 4.6% more store weeks and 4.8% higher average unit volumes. Comparable company restaurant sales rose 4.6%, versus 0.4% a year earlier; management attributed the current-period increase primarily to higher guest traffic and a slight increase in average check. Franchise comparable sales increased 3.8%.
Restaurant cost of sales rose to 33.3% of restaurant sales from 32.2%, mainly due to higher produce, pork and beef costs. Labor costs rose to 29.4% from 29.1%; other operating costs improved to 16.1% from 16.6%. Pre-opening expense increased to $1.9 million from $1.1 million. The effective tax rate declined to 31.9% from 33.3%; management cited tax credits and deductions.
Financial position and liquidity
- Cash and cash equivalents were $77.4 million at March 29, 2011, down from $82.2 million at December 28, 2010.
- Total debt and capital lease obligations were $52.1 million, including $50.0 million drawn on the revolving facility. The $250 million facility had $196.2 million available after letters of credit and expires May 31, 2012.
- Management reported compliance with all credit covenants. A one-percentage-point increase in variable borrowing rates was estimated to increase annual interest expense by $0.5 million; interest-rate swaps hedge $50 million of the revolver.
- Operating cash flow was $32.1 million; investing cash outflow was $12.4 million and financing cash outflow was $24.5 million. Financing outflow included $25.3 million of share repurchases.
- Current assets were $107.3 million and current liabilities $114.3 million. The balance sheet included $22.3 million of deferred gift-card revenue and $5.7 million of dividends payable.
Material changes, outlook and risks
- The company repurchased 1.5 million shares for approximately $25.3 million under a new $50 million authorization; $24.8 million remained authorized at quarter-end. It declared a $0.08-per-share dividend, paid April 1, 2011.
- Management planned 20 company restaurant openings in 2011, including the two opened in Q1, and expected fiscal 2011 capital expenditures of $65–$70 million. It expected operating cash flow to exceed capital expenditures.
- Management raised its 2011 commodity-inflation expectation to approximately 4% from approximately 3%, following roughly 3% inflation in Q1. Fixed-price contracts covered 65%–70% of food costs; remaining purchases were exposed to market prices. Management was evaluating possible further menu-price increases.
- Management expected higher labor costs from wage, insurance and inflation pressures; higher pre-opening costs due to development plans; and approximately $1.7 million of additional 2011 share-based compensation expense from an executive-related RSU grant. It expected a 2011 effective tax rate of approximately 32%.
- Beef sourcing was concentrated among three suppliers. The company warned that supply disruption or sustained commodity inflation, particularly if menu-price increases cannot offset costs, could adversely affect results.
- The company disclosed an EEOC age-discrimination hiring matter and a Massachusetts class-action complaint alleging improper tip pooling. It denied the allegations and intended to defend them; possible losses could not be estimated. The tip case could have a material adverse effect if statutory penalties and other remedies were imposed.
- Capital project commitments were approximately $58.9 million. The company also remained contingently liable on leases assigned to franchisees; no liability was recorded because the guarantees’ fair value was not considered significant.
Management said disclosure controls were effective and reported no material changes in internal control over financial reporting. The filing stated that previously disclosed risk factors had not materially changed.
Important facts for investors to verify
- Whether sales and traffic growth continue to offset food and labor cost inflation, and whether pricing actions protect restaurant margins.
- Progress and returns from the planned 2011 openings, the $65–$70 million capital-spending plan, and any additional repurchases or dividends.
- Cash generation and revolver availability ahead of the facility’s May 2012 expiration, including covenant compliance.
- Developments and potential financial exposure in the EEOC matter and Massachusetts tip-pooling litigation.
- Beef supplier continuity, commodity-price trends, and the extent of costs covered by fixed-price contracts.