TXRH

Business Context and Reporting Period

Texas Roadhouse, Inc. filed its Form 10-Q for the 13-week period ended March 31, 2009. The company operates a chain of moderately priced, full-service restaurants. As of the reporting date, the system included 323 restaurants across 46 states, comprising 254 company-owned locations and 69 franchise locations. The company reported a net income attributable to Texas Roadhouse, Inc. and subsidiaries of $14.3 million for the quarter.

Key Financial Metrics

Margins: Restaurant cost of sales decreased to 34.0% of sales (from 35.3% in Q1 2008). Labor expenses increased to 29.3% of sales (from 28.0%). The effective tax rate was 31.9% compared to 35.0% in the prior year.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 16.5% year-over-year, driven primarily by the opening of nine new company restaurants and the inclusion of revenue from 13 franchise restaurants acquired in fiscal 2008.
• Comparable Sales: Comparable restaurant sales declined 1.3% in Q1 2009, compared to a 1.2% decline in Q1 2008. Average unit volume decreased to $969,000 from $996,000.
• Cost Pressures: While beef and dairy costs decreased, labor costs rose due to state-mandated minimum wage increases and lower average unit volumes. Rent expense as a percentage of sales increased to 2.0% due to new openings and acquisitions.
• Franchise Royalties: Franchise royalties and fees decreased 24.1% to $2.0 million, primarily due to the loss of royalties from the 13 franchise restaurants converted to company ownership in 2008.
• Cash Flow: Operating cash flow decreased by $5.9 million, largely due to a $6.8 million reduction in cash collected from accounts receivable compared to the prior year, which had benefited from a bank holiday timing effect.

Outlook, Risks, and Management Commentary

• Guidance: Management expects capital expenditures for fiscal 2009 to range between $50.0 million and $60.0 million, primarily for restaurant openings. The company anticipates net cash provided by operating activities will exceed capital expenditures for the year. The effective tax rate is expected to be approximately 32.0% for fiscal 2009.
• Menu Pricing: An average menu price increase of 1.4% was implemented in April 2009 to offset inflationary pressures. Management expects commodity cost deflation of 2.0% to 3.0% in 2009.
• Stock Repurchases: The company has a $75.0 million authorization for stock repurchases. No shares were repurchased in Q1 2009; approximately $18.2 million remains available under the program.
• Liquidity: The company maintains a $250.0 million revolving credit facility with $119.0 million available (net of letters of credit). The company is in compliance with all financial covenants.
• Risks: Key risks include supply chain concentration (reliance on two beef suppliers), volatility in commodity prices, and potential adverse effects from viral outbreaks (e.g., H1N1) impacting guest traffic or food availability.

Investor Verification Checklist

• Verify the sustainability of the 1.3% decline in comparable restaurant sales amidst a challenging economic environment.
• Monitor the impact of rising labor costs (29.3% of sales) and whether future menu price increases can fully offset wage inflation.
• Confirm the company's ability to maintain liquidity given the reduction in cash reserves from $18.2 million to $7.8 million, despite strong operating cash flow.
• Assess the integration and performance of the 13 franchise restaurants acquired in 2008, which now contribute to company sales but reduced royalty income.
• Review the status of the $16.3 million in capital project commitments and the timeline for the planned 15 restaurant openings for fiscal 2009.