Texas Roadhouse, Inc. — Q3 2014 Form 10-Q
Reporting period: 13 weeks ended September 30, 2014, compared with 13 weeks ended September 24, 2013; year-to-date (YTD) covers 39 weeks. Unaudited consolidated results.
Business context
Texas Roadhouse operated 436 restaurants at quarter-end: 361 company restaurants and 75 franchise restaurants. It opened 15 company restaurants and one franchise restaurant during the first 39 weeks of 2014. The company describes itself as a growing, moderately priced full-service restaurant chain.
Financial and operating performance
- Q3 revenue: $385.2 million, up 15.1% from $334.8 million. Restaurant sales were $382.0 million; franchise royalties and fees were $3.2 million.
- Q3 earnings: Operating income was $28.8 million versus $25.7 million; net income attributable to Texas Roadhouse was $18.9 million versus $17.2 million. Diluted EPS was $0.27 versus $0.24.
- Q3 margins: Operating margin was 7.5%, down from 7.7%; restaurant margin was 16.8% of restaurant sales, down from 17.2%. Restaurant margin per store week increased to $13,703 from $13,284.
- YTD revenue and earnings: Revenue was $1,177.7 million, up 12.5%. Net income attributable to the company was $68.4 million versus $63.3 million; diluted EPS was $0.97 versus $0.89. Operating margin was 8.8% versus 9.0%, and restaurant margin was 18.1% versus 18.3%.
- Comparable sales: Company comparable restaurant sales rose 5.9% in Q3, driven by approximately 4.4% traffic growth and 1.5% higher average check. YTD comparable sales rose 3.9%.
- Cash flow: YTD operating cash flow was $116.3 million, versus $98.7 million. Capital expenditures were $89.6 million, versus $70.9 million; operating cash flow less capital expenditures was approximately $26.7 million. Cash declined by $35.6 million to $59.3 million.
- Debt and liquidity: Total debt was $50.9 million, including $50.0 million drawn on the revolver. Revolver availability was $144.6 million, net of letters of credit; the company reported compliance with all covenants. Current assets were $99.0 million and current liabilities were $164.9 million.
- Capital returns: YTD share repurchases totaled $40.0 million for 1.575 million shares; $88.2 million remained under the authorization. The company declared a $0.15-per-share dividend, paid October 3, 2014.
Material changes and management commentary
Revenue growth reflected new restaurant openings and higher average unit volumes, including comparable-sales growth; the 2013 acquisition of two franchise restaurants and sale of two Aspen Creek restaurants also affected comparisons. Food cost rose to 36.0% of restaurant sales in Q3 from 35.1%, primarily because of commodity inflation, particularly beef. Management reported Q3 commodity inflation of approximately 4.5% and expected approximately 3.0% for full-year 2014, with low- to mid-single-digit inflation anticipated in 2015. Labor was 29.5% of sales versus 29.8% in Q3 2013; management cited wage, cleaning and healthcare cost pressures. The YTD effective tax rate increased to 30.6% from 28.8%, mainly due to lower incentive-stock-option deductions and the expiration of the Work Opportunity Tax Credit.
Outlook, risks and contingencies
- Management expected approximately 25 company restaurant openings in 2014, with about 10 more planned for the remainder of the year; 25 to 30 company openings were planned for 2015. Franchise partners could open as many as five more restaurants in 2014.
- Planned menu pricing included an approximately 1.8% increase in late November 2014. Management cautioned that pricing and traffic might not offset food, wage and healthcare cost increases.
- Management forecast 2014 capital expenditures of approximately $110 million and operating cash flow exceeding capital expenditures. It expected a 30.0%–31.0% tax rate for 2014 and 29.0%–31.0% for 2015, subject to possible tax-credit reinstatement.
- Capital project commitments were approximately $114.0 million. Operating lease obligations totaled $599.3 million; the filing also disclosed contingent lease liabilities for assigned restaurant leases, with no liability recorded because their estimated fair value was not considered significant.
- The EEOC age-discrimination lawsuit remained in discovery. The company denied liability and said it could not estimate a possible loss. Management said ordinary-course litigation was not expected to have a material effect; it reported no material change in previously disclosed risk factors.
- Beef sourcing was concentrated among four suppliers, and the company warned that supply disruption or sustained commodity increases could adversely affect results. Interest-rate exposure was partly hedged by two swaps covering $50 million of borrowings.
Most important facts for investors to verify
- Whether comparable-sales and traffic growth continue, and whether new restaurants achieve expected volumes.
- Actual food, labor and healthcare cost trends versus management’s 2014–2015 assumptions, and the extent to which pricing can offset them.
- Cash generation, capital spending, restaurant commitments and revolver availability as expansion and shareholder returns continue.
- Developments in the EEOC litigation, contingent lease guarantees and beef-supplier concentration.
- Whether the expected restaurant openings and tax-rate outlook are achieved; the filing notes interim results are not necessarily indicative of full-year results.