Texas Roadhouse, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 26, 2017 (52 weeks). The filing also reports fourth-quarter results; Q4 was a 13-week period. Financial amounts below are in U.S. dollars.
Business context
Texas Roadhouse operates casual-dining restaurants, principally under the Texas Roadhouse brand, with Bubba’s 33 as a smaller concept. At year-end, the system had 549 restaurants in 49 states and seven foreign countries: 462 company-operated and 87 franchised. The company reports one operating segment.
Financial and operating performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $2,219.5 million | $1,990.7 million |
| Income from operations | $186.2 million; 8.4% of revenue | $171.9 million; 8.6% of revenue |
| Net income attributable to Texas Roadhouse | $131.5 million | $115.6 million |
| Diluted EPS | $1.84 | $1.63 |
| Comparable company-restaurant sales growth | 4.5% | 3.5% |
| Restaurant margin, non-GAAP | $406.4 million; 18.4% of restaurant sales | $368.9 million; 18.7% |
| Operating cash flow | $286.4 million | $257.1 million |
| Cash and cash equivalents at year-end | $150.9 million | $112.9 million |
| Long-term debt and capital-lease obligations, net of current maturities | $52.0 million | $52.4 million |
FY 2017 restaurant sales were $2,203.0 million, up 11.6%; total revenue rose 11.5%. Company store weeks increased 7.8%, while Texas Roadhouse average unit volume was $4.973 million. Cost of sales fell to 32.8% of restaurant sales from 33.9%, primarily on commodity deflation (about 2.4%, mainly beef). Labor expense rose to 31.2% from 29.9%, reflecting wage increases, staffing initiatives and a compensation-structure change. These pressures contributed to lower restaurant margin as a percentage of sales.
Cash provided by operations exceeded investing outflows of $178.2 million and financing outflows of $70.2 million; cash increased $38.0 million during the year. Capital expenditures were $161.6 million, and the company spent $16.5 million acquiring four franchise restaurants. Current assets were $257.1 million and current liabilities $330.0 million; management notes that restaurant operations commonly function with negative working capital. The company had $50.0 million drawn on its $200.0 million revolving facility, with $142.5 million available after letters of credit, and was in compliance with its covenants.
Fourth-quarter results
Q4 revenue was $545.1 million versus $484.7 million in Q4 2016; operating income was $37.5 million versus $30.8 million; net income attributable to Texas Roadhouse was $28.6 million versus $20.7 million. Diluted EPS was $0.40 versus $0.29. Comparisons include unusual items: Q4 2017 benefited from a $3.1 million tax benefit related to tax reform, while Q4 2016 included a separate legal-settlement charge recorded earlier in that fiscal year.
Material changes and unusual items
- Net income increased 13.8% and diluted EPS increased 13.0% year over year. The effective tax rate declined to 26.1% from 29.8%; management attributed the decline primarily to tax-law changes and stock-compensation tax accounting. The filing identifies $6.5 million of tax benefits from these items in 2017.
- General and administrative expense included a $14.9 million pretax charge ($9.2 million after tax, or $0.13 per diluted share) for an EEOC matter and related legal fees. The settlement established a $12.0 million fund for eligible claimants. FY 2016 included a separate $7.3 million pretax legal-settlement charge.
- The company acquired four franchise restaurants for $16.5 million, net of cash acquired. Store count increased to 549 from 517.
- Cash dividends declared increased to $0.84 per share for 2017 from $0.76 in 2016. No open-market share repurchases were made in 2017; $69.9 million remained authorized at year-end.
Outlook, risks and contingencies
- For 2018, management planned approximately 30 company restaurant openings, including up to seven Bubba’s 33 locations, and expected franchise partners to open as many as six restaurants, primarily internationally. Expected capital expenditures were $165–$175 million, excluding franchise acquisitions.
- Management expected 2018 capital investment of about $5.3 million per new Texas Roadhouse restaurant and $6.8 million per Bubba’s 33 restaurant. It expected commodity costs to be relatively flat, with fixed-price contracts covering about 45% of food costs; labor costs were expected to face mid-single-digit inflation.
- Management projected a 2018 effective tax rate of 15%–16%. A March 2018 menu-price increase of approximately 0.8% was planned. No specific revenue or EPS guidance is provided in the filing.
- Operating risks include wage and labor availability pressures, beef and other commodity prices, intense competition, food safety and reputational events, weather, execution of restaurant expansion, and the ability to hire and retain personnel. Beef purchasing is concentrated among three suppliers. The company also cites cybersecurity, regulation, litigation, franchisee compliance and international-market risks.
- Operating lease commitments totaled $850.0 million, including $621.3 million due after five years. The company disclosed $15.6 million of contingent exposure on seven assigned leases; no material liability was recorded because default was considered less than probable. Adoption of the new lease accounting standard was expected to materially increase reported balance-sheet assets and liabilities.
Important facts for investors to verify
- Whether comparable-sales and traffic growth can continue to offset higher labor costs and protect restaurant-level margins.
- Actual 2018 openings, unit investment costs, capital spending and returns, particularly for Bubba’s 33.
- The sustainability of the lower tax rate and the effect of tax reform on ongoing earnings and cash taxes.
- Cash generation after capital spending, dividends and any franchise acquisitions, together with revolving-credit usage and covenant headroom.
- The full economics and continuing effects of the EEOC settlement, lease obligations and adoption of lease accounting.