Texas Roadhouse, Inc. — Q3 2019 Form 10-Q
Reporting period: 13 and 39 weeks ended September 24, 2019, compared with the corresponding periods ended September 25, 2018. Fiscal 2019 has 53 weeks, including a 14-week fourth quarter, versus 52 weeks in fiscal 2018. Amounts below are in U.S. dollars.
Business context
The company operated 597 restaurants at period-end: 502 company-operated and 95 franchised, across 49 states and 10 foreign countries. Company restaurant count grew from 479 a year earlier; total restaurant count increased from 570. Results include Texas Roadhouse, Bubba’s 33, and two other company restaurants.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | 2019 YTD | 2018 YTD |
|---|---|---|---|---|
| Total revenue | $650.5m | $594.6m | $2,030.9m | $1,851.5m |
| Operating income | $44.9m | $35.4m | $158.6m | $154.6m |
| Net income attributable to Texas Roadhouse | $36.5m | $29.1m | $131.8m | $127.9m |
| Diluted EPS | $0.52 | $0.40 | $1.85 | $1.78 |
| Restaurant margin, non-GAAP | 16.7% | 16.2% | 17.4% | 17.9% |
- Q3 revenue rose 9.4%, while company comparable restaurant sales increased 4.4% (5.5% prior year); guest traffic grew 1.5% and average check rose 2.9%. YTD comparable sales rose 4.8% versus 5.4%.
- Q3 restaurant margin dollars increased 12.7% to $108.0m. Lower cost of sales, supported by menu pricing and higher average check, more than offset commodity inflation; higher wages and staffing costs were a partial offset. YTD margin percentage declined, with labor expense rising to 33.1% of restaurant sales from 32.3%.
- Q3 operating margin increased to 6.9% from 6.0%; YTD operating margin declined to 7.8% from 8.3%. Q3 net income rose 25.4%; YTD net income increased about 3.0%.
- Cash from operations was $242.0m YTD versus $225.6m. Capital expenditures were $144.9m versus $110.9m; financing outflows were $208.0m, including $131.0m of share repurchases and $60.7m of dividends paid. Cash declined to $99.5m from $210.1m at December 25, 2018.
- No revolving-credit borrowings were outstanding. The $200m facility had $191.8m available after letters of credit, matures August 2022, and the company reported covenant compliance. The facility’s stated weighted-average rate was 2.92%.
- Adoption of ASC 842 added $495.4m of operating lease right-of-use assets and $549.2m of operating lease liabilities. It materially affected the balance sheet, but management reported no significant effect on earnings, cash flows, liquidity, or credit-facility covenant compliance. Total assets were $1,855.6m and total liabilities $946.9m.
Material changes, outlook, and risks
- Q3 restaurant cost of sales improved to 31.8% of restaurant sales from 32.6%; labor increased to 33.8% from 33.5%. Higher average wages, labor-market pressures, and prior staffing initiatives remain cost headwinds.
- Management planned approximately 22 company restaurant openings in 2019 and at least 30 in 2020, including up to eight Bubba’s 33 locations. It anticipated 2020 store-week growth of 3.5%–4.5%, including the effect of lapping 2019’s extra week. Franchise partners were expected to open up to eight restaurants in both 2019 and 2020.
- Management expected 2019 capital expenditures of approximately $200m and 2019 commodity-cost inflation of 1.5%–2.0%; its 2020 commodity-cost inflation estimate was 1.0%–2.0%. It planned an approximately 1.9% menu price increase in November 2019 and indicated further 2020 pricing could be considered. Expected effective tax rates for 2019 and 2020 were 14%–15%.
- Capital return increased: the quarterly dividend declared was $0.30 per share, up 20% year over year. A new $250m repurchase authorization was approved in May; $169.3m remained at quarter-end. YTD repurchases totaled $131.0m for 2.46m shares.
- Key exposures include beef-price volatility and dependence on three beef suppliers, continued wage inflation, and the risk that competitive conditions limit the ability to pass through cost increases. Seven assigned leases carried contingent maximum exposure of $14.1m; no material liability was recorded because default was considered less than probable. The company reported no litigation it believed could materially adversely affect the business and no material changes to previously disclosed risk factors.
- Unusual or period-specific items include a Q3 one-time charge related to the foreign joint venture, which contributed to equity-method investment results turning to a $0.2m loss from $0.4m income. YTD results also reflect $131.0m of repurchases and the $2.7m after-tax cumulative retained-earnings adjustment on lease-standard adoption.
Important facts for investors to verify
- Whether comparable-sales and traffic trends sustain, given Q3 traffic growth slowed to 1.5% while average check growth accelerated to 2.9%.
- Whether labor inflation and food-cost changes, particularly beef costs, are offset by productivity, pricing, and sales growth without weakening demand or restaurant margins.
- Whether the planned 2019–2020 restaurant openings and approximately $200m 2019 capital-spending plan proceed as expected, and how new-unit performance affects returns.
- Cash deployment and liquidity after substantial buybacks and dividends; confirm the remaining authorization, cash balance, credit availability, and covenant headroom in subsequent filings.
- The scale and duration of lease commitments, including the recorded lease liabilities and $980.4m of undiscounted operating lease payments in the disclosed maturity schedule.
- Whether management’s commodity, labor, pricing, tax-rate, and store-growth outlook remains current; these are forward-looking estimates, not guarantees.