TXRH

Business Context and Reporting Period

Company: Texas Roadhouse, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 26, 2007 (13 and 26 weeks)
Business Overview: A growing, moderately priced, full-service restaurant chain. As of June 26, 2007, the company operated 270 restaurants (180 company-owned, 90 franchise) across 44 states.

Key Financial Metrics

Margins (26 Weeks YTD):

• Operating Margin: 9.6%
• Net Income Margin: 6.0%
• Cost of Sales: 34.9% of restaurant sales
• Labor Expense: 27.9% of restaurant sales

Material Changes vs. Prior Period

Revenue Growth: Total revenue increased 23.6% in Q2 2007 and 21.5% YTD compared to the prior year, primarily driven by the opening of 19 new company restaurants and 2 new franchise restaurants since the beginning of the fiscal year.

Profitability: Net income rose 4.8% in Q2 and 26.7% YTD. Operating income increased 4.4% in Q2 and 21.9% YTD.

Expense Trends:

• Labor Costs: Increased to 28.2% of sales in Q2 (from 28.0%) due to state-mandated minimum wage increases and higher costs associated with new restaurant openings.
• Cost of Sales: Decreased slightly to 34.9% of sales, aided by menu price increases (approx. 2.8% total) which offset higher commodity costs (dairy and produce).
• G&A Expenses: Increased to 6.4% of revenue in Q2 due to the timing of the annual managing partner conference, though YTD G&A decreased to 5.5% due to lower share-based compensation.

Debt and Liquidity: The company amended its credit facility on May 31, 2007, increasing capacity from $150 million to $250 million. Outstanding revolver borrowings increased to $76.0 million to fund operations and a subsequent acquisition.

Guidance, Outlook, and Risks

Acquisitions: On June 27, 2007 (first day of Q3), the company acquired nine franchise restaurants for approximately $22.6 million, plus $12.1 million for related real estate. Management estimates these acquisitions will be slightly accretive to fiscal 2007 diluted EPS and approximately $0.015 accretive on an annualized basis.

Capital Expenditures: Expected to be between $90.0 million and $100.0 million for fiscal 2007, excluding franchise acquisitions.

Tax Outlook: The effective tax rate is expected to be approximately 36.0% for fiscal 2007.

Risks and Contingencies:

• Legal Proceedings: Two class-action lawsuits (Ehrheart and Aliano) were filed alleging violations of the Fair and Accurate Credit Transactions Act (FACTA) regarding credit card receipts. Statutory damages range from $100 to $1,000 per violation. Management intends to vigorously defend but notes a material adverse effect is possible if class certification is granted.
• Commodity Prices: Exposure to volatile beef, dairy, and produce prices. The company relies on four primary beef suppliers.
• Interest Rates: A 1% increase in interest rates would increase annual interest expense by approximately $0.8 million.

Investor Verification Checklist

• Acquisition Impact: Verify the accretion estimates for the nine franchise restaurants acquired on June 27, 2007, and the associated $0.5 million pre-tax acquisition charge expected in Q3.
• Legal Exposure: Monitor the status of the FACTA class-action lawsuits (Ehrheart and Aliano) for potential class certification and statutory damage assessments.
• Debt Covenants: Confirm continued compliance with the new credit facility covenants (minimum fixed charge coverage ratio of 2.00:1.00 and maximum leverage ratio of 3.00:1.00) given the increased debt load.
• Commodity Hedging: Assess the company's strategy for managing rising beef and produce costs, as they do not currently use financial instruments to hedge commodity prices.
• Capital Allocation: Track actual capital expenditures against the $90M-$100M guidance to ensure alignment with the planned restaurant opening schedule.