Texas Roadhouse, Inc. — Q3 2020 Form 10-Q
Reporting period: Unaudited quarter ended September 29, 2020 (13 weeks), compared with the 13 weeks ended September 24, 2019. Year-to-date (YTD) comparisons cover 39 weeks. The company operated 526 restaurants and franchised 97 as of quarter-end.
Financial performance
| Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Total revenue | $631.2 million | $650.5 million | $1,760.1 million | $2,030.9 million |
| Operating income | $35.0 million | $44.9 million | $3.4 million | $158.6 million |
| Net income attributable to Texas Roadhouse | $29.2 million | $36.5 million | $11.7 million | $131.8 million |
| Diluted EPS | $0.42 | $0.52 | $0.17 | $1.85 |
| Restaurant margin | 14.5% | 16.7% | 10.4% | 17.4% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $146.0 million | $242.0 million |
Restaurant margin is a company-defined non-GAAP measure. Q3 comparable restaurant sales fell 6.3%; store weeks increased 4.6%. To-Go orders were 23.3% of company restaurant sales. Monthly comparable sales improved from down 13.0% in July to down 6.6% in August and down 0.5% in September.
For YTD, capital expenditures were $117.5 million, producing approximately $28.5 million of operating cash flow less capital expenditures. Cash and equivalents were $328.6 million at September 29, 2020, versus $107.9 million at December 31, 2019. The company reported $240.0 million of revolving-credit borrowings: $190.0 million long-term and $50.0 million due within one year. Remaining facility availability was $34.3 million, net of letters of credit; the weighted-average borrowing rate was 1.98%. The company was in compliance with its financial covenants. Current assets of $399.5 million slightly exceeded current liabilities of $396.4 million. Operating lease liabilities totaled approximately $586.1 million.
Material changes and drivers
- Q3 revenue declined 3.0%, while attributable net income fell 20.0% and diluted EPS fell 19.9%. Lower sales and restaurant margin drove the earnings decline; lower general and administrative expense partly offset it.
- YTD revenue declined 13.3%; YTD operating income fell to $3.4 million from $158.6 million. The pandemic’s dining-room closures and capacity limits reduced traffic and average unit volumes.
- Q3 restaurant margin dollars declined 15.6% to $91.1 million. Margin pressure reflected lower sales, higher labor, food and other operating costs, and a greater mix of lower-margin To-Go transactions. Q3 food and beverage costs were 32.1% of restaurant sales and labor was 34.7%.
- YTD operating cash flow declined to $146.0 million from $242.0 million. Financing cash flow included $240.0 million of credit-facility borrowings. Capital expenditures were lower year over year as development was delayed.
- The company declared and paid a $0.36-per-share dividend in March, then suspended dividends after March 27, 2020. Share repurchases were also suspended in March; $147.8 million remained authorized at quarter-end.
Outlook, risks and unusual items
- Management expected results and operating cash flow to remain affected until restrictions eased and dining rooms could operate at full capacity. It warned that renewed closures, consumer-spending changes, staffing disruption, or supplier interruptions could further harm results. To-Go sales were not expected to produce margins or cash flows comparable to the normal operating model. No specific earnings or revenue guidance was provided.
- Management expected as many as eight of 18 delayed or resumed company restaurant projects to open in Q4 2020 and the remaining 10 in the first half of 2021; additional development could be slowed if restrictions worsened. Franchise partners were expected to open as many as five restaurants in 2020.
- The CARES Act employee-retention credit contributed $4.5 million to Q3 labor expense. The company had deferred $30.0 million of employer payroll taxes, repayable in installments at the ends of 2021 and 2022.
- Other notable items included a $3.0 million sale of a legal claim that reduced G&A, a $1.8 million favorable workers’ compensation reserve adjustment, and a $1.4 million unfavorable general-liability insurance reserve adjustment. Q3 impairment and closure costs were $0.7 million.
- Capital project commitments were estimated at $110.5 million. Seven lease guarantees represented maximum potential contingent payments of $13.3 million; no material liability was recorded. The filing reported no litigation believed likely to have a material adverse effect.
- Risks also include variable-rate debt and commodity-price exposure, particularly beef sourced primarily from three suppliers. A one-percentage-point increase in rates on variable-rate borrowings was estimated to raise annual interest expense by $2.4 million.
Key facts for investors to verify
- Whether comparable sales, traffic and dining-room capacity continued improving after September 29, and whether To-Go sales supported adequate margins.
- Cash generation, remaining credit availability, covenant compliance and the May 2021 maturity of the $50.0 million incremental facility borrowing.
- Timing of dividend resumption and share repurchases, neither of which management had committed to restart.
- Collection and timing of tax credits, repayment of deferred payroll taxes, and the realization of deferred tax benefits.
- Whether restaurant openings and the $110.5 million capital-project commitment proceeded as planned amid pandemic-related uncertainty.