Texas Roadhouse, Inc. — Q3 2023 Form 10-Q
Business context and period. The unaudited filing covers the 13 and 39 weeks ended September 26, 2023, compared with the periods ended September 27, 2022. Texas Roadhouse operated three concepts and had 722 restaurants at quarter-end: 623 company-operated and 99 franchised.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 2023 YTD | 2022 YTD |
|---|---|---|---|---|
| Total revenue | $1,121.8 million | $993.3 million | $3,467.3 million | $3,005.4 million |
| Operating income | $73.9 million | $75.3 million | $270.2 million | $251.3 million |
| Net income attributable to Texas Roadhouse | $63.8 million | $62.3 million | $232.4 million | $209.9 million |
| Diluted EPS | $0.95 | $0.93 | $3.46 | $3.08 |
| Restaurant margin | $162.8 million; 14.6% | $152.0 million; 15.4% | $531.3 million; 15.4% | $481.9 million; 16.1% |
- Q3 revenue rose 12.9%, supported by 5.7% growth in company store weeks and 8.2% comparable sales growth. Comparable sales reflected 4.1% traffic growth and a 4.1% increase in average check.
- Q3 attributable net income increased 2.3%, while operating income declined. Restaurant margin dollars grew 7.1%, but margin rate fell as commodity, labor and general liability insurance costs increased.
- For the 39 weeks, operating cash flow was $390.7 million versus $395.1 million. Capital expenditures were $243.9 million versus $174.2 million; net cash used in investing activities was $273.5 million. Cash ended at $69.3 million, down from $173.9 million at December 27, 2022.
- At September 26, 2023, the company had no revolving-credit borrowings and $287.7 million of facility availability, net of letters of credit. Long-term debt was zero; operating lease liabilities totaled approximately $757.3 million. The $300 million unsecured facility matures May 1, 2026, and the company reported covenant compliance.
- Total assets were $2.55 billion and total equity was $1.12 billion. The company declared $1.65 per share in dividends during the first 39 weeks and repurchased $45.2 million of stock.
Changes, outlook and risks
- Q3 sales growth outpaced profit growth: food and beverage costs were 34.6% of restaurant sales and labor 34.0%; labor’s share increased from 33.5% a year earlier. Management attributed margin pressure mainly to 4.2% commodity inflation, wage and labor inflation, and higher general liability insurance expense.
- Management expected 2023 commodity inflation of 5%–6% and labor inflation of 6%–7%; for 2024, it expected commodity inflation of 5%–6% and labor inflation of 4%–5%. About 75% of remaining 2023 forecast commodity costs were locked, with the balance exposed to market prices.
- Management planned as many as 27 Texas Roadhouse and Bubba’s 33 company openings in 2023, with approximately 6% store-week growth across concepts. It expected approximately 8% store-week growth in 2024, including a benefit from the 53rd week. Expected capital expenditures were approximately $340 million in 2023 and $340 million–$350 million in 2024.
- Management expected an effective tax rate of approximately 13% for 2023 and 14%–15% for 2024. The lower 2023 rate reflected increased FICA tip tax credits and stock-compensation tax benefits.
- The company acquired eight franchise restaurants for $39.1 million, net of cash acquired, on the first day of fiscal 2023. Purchase accounting remained preliminary; management said the acquired restaurants’ results were not material to the reported statements.
- Other notable items: Q3 other sales included a favorable $3.7 million gift-card breakage estimate adjustment; Q3 2022 included a favorable $6.6 million adjustment. The filing cites exposure to commodity price volatility and dependence on four beef suppliers; the company does not use financial instruments to hedge commodity prices. Seven lease guarantees had a maximum potential exposure of $10.6 million, with no material liability recorded. Management reported no litigation it believed could materially adversely affect the business and no material change in previously disclosed risk factors.
Investor verification priorities
- Track whether sales and traffic growth can sustain earnings growth as restaurant margin rates remain below the prior-year levels.
- Verify actual commodity and labor inflation against management’s forecasts, including beef costs, insurance claims and wage pressures.
- Compare planned restaurant openings and capital spending with cash generation, liquidity and the remaining $261.3 million of estimated capital-project commitments.
- Monitor comparable sales drivers, particularly traffic versus check increases and the effects of menu pricing.
- Review the final purchase accounting for the eight acquired restaurants and changes in gift-card breakage estimates.