Business Context and Reporting Period
Company: Texas Roadhouse, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 27, 2007 (13 weeks)
Business Overview: A growing, moderately priced, full-service restaurant chain operating 261 locations (173 company-owned, 88 franchise) across 44 states as of the period end. The company focuses on high-quality, affordable meals with a strategy centered on expanding its restaurant base and improving unit profitability.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2007 | Q1 2006 |
|---|---|---|
| Total Revenue | $178,337 | $149,399 |
| Net Income | $12,296 | $8,182 |
| Diluted EPS | $0.16 | $0.11 |
| Operating Cash Flow | $8,087 | $10,075 |
| Capital Expenditures | $(24,061) | $(14,722) |
| Cash and Equivalents (End of Period) | $14,550 | $23,819 |
| Total Debt (Long-term + Current) | $30,448 | $36,015 |
| Operating Margin | 11.0% | 9.4% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 19.4% year-over-year, driven primarily by the opening of 10 new company restaurants. Restaurant sales grew 19.5%.
- Profitability: Net income rose 50.3% to $12.3 million. Operating margin expanded to 11.0% from 9.4% due to improved cost management and higher sales volume.
- Cost Structure:
- Cost of Sales: Decreased to 34.8% of restaurant sales (from 35.2%) due to menu price increases offsetting higher commodity costs.
- Labor: Increased to 27.5% of sales (from 27.1%) due to state-mandated minimum wage hikes and higher costs associated with new restaurant openings.
- G&A Expenses: Decreased significantly to 4.7% of revenue (from 6.9%) due to the timing of the annual managing partner conference (held in Q2 2007 vs. Q1 2006) and the absence of a $0.8 million acquisition charge recorded in Q1 2006.
- Cash Flow: Operating cash flow decreased to $8.1 million (from $10.1 million) primarily due to higher gift card redemptions. Investing cash outflows increased to $23.9 million due to higher capital expenditures for new development, though this was lower than the prior year's $27.5 million which included $13.2 million for franchise acquisitions.
Guidance, Outlook, and Risks
- Capital Expenditure Guidance: The company expects capital expenditures for fiscal 2007 to be between $90.0 million and $100.0 million, excluding franchise acquisitions.
- Expansion Plans: The company is negotiating to acquire nine franchise restaurants, which are expected to be accretive to diluted EPS. Future growth will rely on opening new company restaurants in mid-sized markets.
- Liquidity: The company maintains a $150 million revolving credit facility with $122.5 million available (net of letters of credit). It is currently in compliance with all financial covenants.
- Risks and Contingencies:
- Legal Proceedings: A class action lawsuit (Ehrheart v. Texas Roadhouse, Inc.) was filed on March 26, 2007, alleging violations of the Fair and Accurate Credit Transactions Act. The outcome is currently undeterminable.
- Supply Chain: The company relies on four primary beef suppliers. A disruption could cause supply shortages and sales losses.
- Commodity Prices: Exposure to volatile commodity prices (produce, cheese) which may not be fully passable to consumers via menu price increases.
Investor Verification Checklist
- Verify the impact of the pending Ehrheart class action litigation on potential future liabilities.
- Monitor the progress and closing of the nine franchise restaurant acquisitions currently under negotiation.
- Track the effectiveness of menu price increases in offsetting rising labor and commodity costs in subsequent quarters.
- Confirm continued compliance with debt covenants, specifically the fixed charge coverage ratio and leverage ratio, as capital expenditures remain high.
- Review the timeline for the recognition of the $5.7 million in unrecognized share-based compensation costs.