Texas Roadhouse, Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 27, 2011 (52 weeks); fourth quarter was 13 weeks. Comparisons are with fiscal 2010 unless otherwise noted. Dollar amounts are in millions except per-share data.
Business context
Texas Roadhouse operates a moderately priced, full-service casual dining chain. At year-end, it reported 294 company restaurants and 72 franchised or licensed restaurants across 47 states and one foreign country. The company opened 20 company restaurants during 2011 and its first international franchise location, in Dubai. It reports one operating segment.
Financial performance and position
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Total revenue | $1,109.2 | $1,005.0 | Up 10.4% |
| Restaurant sales | $1,099.5 | $996.0 | Up 10.4% |
| Operating income | $95.2 | $90.6 | Operating margin 8.6%, down from 9.0% |
| Net income attributable to Texas Roadhouse | $64.0 | $58.3 | Up 9.7%; net margin remained 5.8% |
| Diluted EPS | $0.88 | $0.80 | Up 10.0% |
| Operating cash flow | $137.5 | $119.9 | Up $17.6 |
| Cash and cash equivalents | $73.7 | $82.2 | Down $8.5 |
| Long-term debt and capital leases, excluding current maturities | $61.6 | $51.9 | Debt increased; revolver borrowings were $60.0 |
Comparable restaurant sales grew 4.7% across company restaurants (4.8% for Texas Roadhouse locations), versus 2.4% in 2010. Average unit volume rose to $3.917 million from $3.730 million. Management attributed sales improvement to higher guest traffic and menu pricing.
Restaurant cost of sales increased to 33.4% of restaurant sales from 32.6%, mainly due to approximately 3.5% commodity inflation. Labor expense rose to 29.7% from 29.4%; other operating expenses improved to 16.7% from 17.4%. Restaurant-level cost pressures and higher pre-opening costs contributed to operating margin contraction.
Capital expenditures were $81.8 million, versus $45.1 million in 2010, primarily reflecting development activity. Investing cash outflow was $81.6 million and financing cash outflow was $64.4 million, including $59.1 million for share repurchases and $17.0 million in dividends. Working capital was negative by approximately $24.4 million, consistent with management’s description of the business’s low working-capital requirements. The company had $136.2 million available under its $200 million revolving facility, net of letters of credit, and reported compliance with its covenants.
Material changes, outlook and commentary
- Restaurant sales growth accelerated from 6.6% in 2010 to 10.4% in 2011; comparable sales growth increased from 2.4% to 4.7%.
- Food-cost pressure reversed the prior-year improvement: cost of sales increased as a share of restaurant sales. Management estimated commodity inflation of approximately 8% for 2012; 65%–70% of food costs were covered by fixed-price contracts, with the remainder exposed to market prices.
- Management planned approximately 25 company restaurant openings in 2012, with sites under construction or contract for 24. It expected 2012 capital expenditures of $80–$85 million and pre-opening expense to rise with development.
- Management expected 2012 labor costs to face pressure from state minimum- and tipped-wage increases, and anticipated menu pricing of approximately 2.2% for 2012. It forecast a 2012 effective tax rate of 32.5%–33.0%, compared with 29.5% in 2011, principally reflecting lower tax credits.
- Management said it expected 2012 G&A to grow more slowly than revenue, while share-based compensation costs were expected to increase by approximately $1.8 million.
- Shareholder returns expanded: 2011 included $59.1 million of repurchases and a $0.32 per-share dividend. Subsequent to year-end, the board authorized a $100 million repurchase program and a quarterly dividend of $0.09 per share.
- Quarterly results showed fourth-quarter revenue of $276.6 million and attributable net income of $12.3 million, compared with $244.6 million and $10.1 million, respectively, in fourth-quarter 2010. Fourth-quarter 2011 included a $0.8 million goodwill impairment charge ($0.5 million after tax).
Risks, contingencies and unusual items
- The company identified commodity and beef-supply costs, labor availability and wage inflation, consumer spending, competition, weather, food safety, and successful execution of restaurant growth as significant risks. Beef purchases were concentrated among a small number of suppliers.
- An EEOC lawsuit alleged age discrimination in hiring. The company disputed the allegations and said it could not estimate a possible loss.
- A Massachusetts class-action case alleged improper tip pooling. No class had been certified, and the company could not estimate a loss; it cautioned that statutory penalties and damages could materially affect financial position, results or cash flows.
- Goodwill and other impairment charges were $1.2 million in 2011, including approximately $0.8 million of goodwill impairment. Management was monitoring seven restaurants with $16.6 million of goodwill for potential impairment.
- Operating lease obligations totaled $199.5 million; total contractual obligations were $332.8 million. The company also remained contingently liable on certain leases assigned to franchisees.
- The company self-insures significant portions of several insurance programs, exposing results and liquidity to changes in claims experience and reserve estimates.
- Management and the independent auditor reported effective internal control over financial reporting. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Track whether the planned 25 restaurant openings and $80–$85 million capital-spending plan deliver expected sales and returns.
- Assess whether menu pricing and traffic can offset projected 8% commodity inflation and wage increases without weakening margins.
- Review cash generation, repurchases and dividends against the company’s rising borrowings, lease commitments and covenant requirements.
- Monitor outcomes and potential exposure from the EEOC and Massachusetts tip-pooling litigation; amounts of possible loss were not estimable in the filing.
- Reconcile restaurant-count disclosures: the filing reports 294 company and 72 franchise/license locations (366 total), while some narrative references say 365 restaurants.
- Consider that year-end cash declined despite stronger operating cash flow, reflecting higher investment and shareholder distributions.