TXRH

Business Context and Reporting Period

Company: Texas Roadhouse, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 28, 2004
Overview: Texas Roadhouse is a moderately priced, full-service restaurant chain focusing on hand-cut steaks and casual dining. As of the reporting date, the company operated 193 restaurants across 35 states, comprising 107 company-owned locations and 86 franchised/licensed units. The fiscal year 2004 was marked by a significant corporate reorganization and an Initial Public Offering (IPO) completed on October 8, 2004, converting the entity from a limited liability company to a "C" corporation.

Key Financial Metrics

Margins: Operating margin was 10.7% in 2004 compared to 12.0% in 2003. Net income margin was 6.0% in 2004 versus 8.2% in 2003. The decline in net income margin is primarily attributable to the recognition of a $5.0 million deferred tax liability upon conversion to a "C" corporation.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 26.7% year-over-year, driven by the opening of 19 new company restaurants and 7.6% comparable restaurant sales growth.
• Cost of Sales: Increased to 34.9% of restaurant sales from 32.9% in 2003, primarily due to higher beef and pork rib costs. Management expects this to remain elevated in 2005.
• Debt Reduction: Long-term debt decreased significantly from $56.3 million to $12.8 million. The company utilized $68.9 million of IPO proceeds to repay outstanding borrowings under its previous credit facility.
• Equity Structure: The company completed its IPO, raising approximately $105.1 million in net proceeds. This resulted in a substantial increase in stockholders' equity from $37.9 million to $173.2 million.
• Accounting Adjustments: A $1.3 million adjustment was recorded to rent expense to correct lease accounting practices regarding straight-line rent calculations. Additionally, a $1.7 million adjustment was recorded for gift card breakage income.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Expansion: The company plans to open 20 additional company restaurants in 2005. Franchisees plan to open 6 new units.
• Capital Expenditures: Expected to range between $50.0 million and $60.0 million in 2005, primarily for new restaurant openings.
• Cost Expectations: Cost of sales is expected to be 25 to 50 basis points higher in 2005 versus 2004, driven by pork rib costs.

Management Commentary:

• Management emphasizes a strategy of "Legendary Food, Legendary Service" with a focus on dinner service to optimize labor and quality.
• The company intends to retain future earnings to finance growth and does not anticipate paying cash dividends in the foreseeable future.

Risks and Contingencies:

• Commodity Prices: Significant exposure to beef and pork prices; inability to pass costs to consumers could impact margins.
• Supply Chain: High dependence on a single vendor for beef supply.
• Regulatory: Subject to "dram shop" statutes regarding alcohol service and minimum wage laws.
• Self-Insurance: The company self-insures a portion of workers' compensation and liability claims; actual losses could differ from actuarial estimates.

Investor Verification Checklist

• Deferred Tax Liability: Verify the impact of the $5.0 million one-time deferred tax charge on future effective tax rates now that the company is a "C" corporation.
• Commodity Hedging: Assess the company's ability to maintain margins given the lack of financial hedging for commodity prices and reliance on menu price increases.
• Debt Covenants: Confirm continued compliance with the new $150 million credit facility covenants (minimum fixed charge coverage ratio of 1.50:1.00 and maximum leverage ratio of 3.00:1.00).
• Franchisee Performance: Monitor the performance of the 86 franchised units, as the company's royalty revenue depends on their sales volume.
• Capital Allocation: Track the execution of the planned 20 new store openings in 2005 against the projected $50-$60 million capital expenditure budget.