Texas Roadhouse, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. The quarter ended June 25, 2019 (13 weeks); year-to-date figures cover 26 weeks. Texas Roadhouse operated 498 company restaurants and franchised 93 restaurants across 49 states and 10 countries. Fiscal 2019 is a 53-week year.
Financial performance
- Q2 revenue: $689.8 million, up 9.6% from $629.2 million. Restaurant and other sales rose 9.7%; company-store comparable sales grew 4.7%, comprising 1.7% traffic growth and a 3.0% increase in average check.
- Q2 earnings: Operating income was $53.3 million, down from $54.3 million; operating margin declined to 7.7% from 8.6%. Net income attributable to Texas Roadhouse was $44.8 million, up 1.4%; diluted EPS was $0.63 versus $0.62.
- Restaurant margin (non-GAAP): $120.8 million, up 6.5%, while margin rate fell to 17.6% from 18.2%. Higher labor costs weighed on the rate; improved cost of sales partly offset them.
- First-half results: Revenue was $1.380 billion, up 9.8%; operating income was $113.7 million versus $119.1 million. Attributable net income was $95.2 million versus $98.8 million, and diluted EPS was $1.32 versus $1.37. Restaurant margin rate declined to 17.8% from 18.7%.
- Cash flow and investment: First-half operating cash flow was $187.0 million versus $165.1 million. Capital expenditures were $87.8 million versus $66.7 million, principally reflecting support-center remodeling and restaurant relocations. Cash declined by $65.3 million to $144.8 million.
- Liquidity and debt: No revolver borrowings were outstanding; $191.6 million was available after letters of credit. The unsecured facility permits up to $200 million of borrowings, matures August 2022, and all covenants were met. The balance sheet includes $538.3 million of operating lease liabilities recognized after adopting ASC 842; these are lease obligations, not reported borrowings.
- Shareholder returns: The company repurchased 2.10 million shares for $112.1 million year to date and declared dividends of $0.60 per share for the first half, up from $0.50. A new $250 million repurchase authorization was approved in May; $188.2 million remained at quarter-end.
Changes, outlook and risks
- Sales growth reflected new restaurant weeks and higher average unit volumes, but comparable-sales growth moderated to 4.7% from 5.7% in Q2 2018, with slower traffic growth partly offset by stronger check growth.
- Labor cost rose to 32.9% of restaurant sales from 32.0%; management cited wage pressure and staffing initiatives. Cost of sales improved to 32.3% from 32.7%, despite commodity inflation.
- Management expected approximately 25 company openings in 2019, including up to four Bubba’s 33 locations, and up to eight franchise openings. Expected 2019 capital expenditures were approximately $210 million; expected average investment was about $5.5 million per new Texas Roadhouse and $6.8 million per Bubba’s 33.
- Management expected 2019 commodity inflation of 1%–2%, labor dollars per store week growth of 7%–8%, and an effective tax rate of 14%–15%. Additional menu pricing may be considered; these are forecasts, not guarantees.
- Key exposures include labor availability and costs, commodity volatility, and reliance on three beef suppliers. About half of overall food costs were under fixed-price contracts; the remainder was exposed to market prices. The company did not use commodity hedges.
- Capital project commitments were approximately $197.2 million. Seven assigned leases carried maximum contingent guarantees of $14.3 million; no material liability was recorded because default was considered less than probable. Management reported no litigation believed likely to have a material adverse effect and no material changes to previously disclosed risk factors.
- ASC 842 adoption materially increased reported assets and liabilities, with no significant effect on results or cash flows; it reduced opening retained earnings by $2.7 million, net of tax. The company said adoption did not significantly affect liquidity or credit-covenant compliance.
Important facts for investors to verify
- Whether labor-cost growth and ongoing staffing initiatives continue to pressure restaurant margins, and whether pricing offsets the impact.
- Comparable-sales drivers, particularly the durability of traffic growth and the contribution of menu pricing to average check.
- Actual restaurant openings, capital spending, and operating cash flow versus management’s 2019 expectations.
- Cash and liquidity after substantial repurchases and dividends, including use of the remaining buyback authorization.
- Exposure to beef-supplier disruption, commodity inflation, lease obligations, and contingent lease guarantees.