Texas Roadhouse, Inc. — Q1 2020 Form 10-Q
Business context and period. Unaudited results cover the 13 weeks ended March 31, 2020, compared with the 13 weeks ended March 26, 2019. At quarter-end, Texas Roadhouse operated 519 company restaurants and franchised 98 more. One company restaurant and 22 international franchise restaurants were temporarily closed because of COVID-19. By March 31, domestic company and franchise dining rooms were subject to orders limiting service to takeout or curbside.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $652.5 million | $690.6 million |
| Operating income | $15.8 million | $60.4 million |
| Net income attributable to Texas Roadhouse | $16.0 million | $50.4 million |
| Diluted EPS | $0.23 | $0.70 |
| Operating cash flow | $21.7 million | $111.4 million |
| Capital expenditures | $46.7 million | $42.0 million |
- Revenue declined 5.5%; comparable restaurant sales fell 8.4%, while store weeks increased 5.3%. Comparable sales rose 8.0% in January and 4.2% in February, then decreased 29.7% in March as dining rooms closed.
- Restaurant margin, a company-defined non-GAAP measure, fell to $78.6 million, or 12.1% of restaurant and other sales, from $122.6 million, or 17.9%. Restaurant labor costs rose to 37.2% of sales from 32.7%; cost of sales eased to 32.5% from 32.7%.
- Operating margin was 2.4%, versus 8.8%. The effective tax rate was negative 12.7%, compared with 14.9%, primarily reflecting the greater effect of FICA tip and work opportunity tax credits as pretax income declined.
- Cash and equivalents were $230.6 million at March 31, up from $107.9 million at year-end. The company borrowed $190.0 million on its revolver in March; the cash increase should be viewed alongside that borrowing. Operating cash flow declined substantially, in part because of lower earnings and working-capital movements.
- Long-term debt was $190.0 million, with $1.8 million of revolver availability at quarter-end, net of letters of credit. Current assets were $302.6 million and current liabilities were $310.9 million. Lease liabilities totaled $571.1 million, including current and noncurrent portions.
Material changes and management actions
- Restaurant traffic and results were severely affected by dining-room restrictions. Management said takeout sales had grown significantly but were not expected to produce margins comparable to the normal operating model.
- In March, the company recorded $10.7 million of relief pay and benefits for hourly restaurant employees. Management also cited higher labor inefficiencies, health-insurance claims, takeout supplies, and insurance costs as pressures on restaurant margins.
- The company paused construction on locations not substantially complete, continuing work on nine restaurants, and suspended share repurchases on March 17 and dividends after the March 27 payment. It repurchased $12.6 million of stock during the quarter and paid a $0.36-per-share dividend on March 27.
- Management withdrew its full-year 2020 financial outlook because of pandemic uncertainty. As of May 11, dining rooms had reopened in approximately 160 company restaurants under capacity restrictions.
- On May 11, after quarter-end, the company amended its credit facility to add up to $82.5 million of availability and modify covenants through Q1 2021. It also gave notice of intent to draw $50.0 million of the increased amount. Management expected compliance with the amended covenants over the next 12 months.
Outlook, risks and contingencies
- Management could not predict the duration of the pandemic, when restrictions would be lifted, the pace of guest return, or the effects on consumer spending. Reopening was expected to be gradual, with a limited-capacity dining-room and enhanced takeout model.
- The company said it might need additional financing if disruption persisted; there was no assurance that additional credit or other liquidity would be available on favorable terms. The amended facility and expected CARES Act payroll-tax benefits were potential liquidity support, but the company was still evaluating the tax provisions’ impact.
- Capital project commitments were estimated at $141.1 million; $11.7 million related to the nine restaurants still under construction. Seven lease guarantees carried maximum potential exposure of $13.7 million, with no material liability recorded because default was considered less than probable.
- Beef purchasing was concentrated among three suppliers. The company reported no material supply disruption to date but warned that supplier interruptions could cause shortages, higher costs, or lost sales. It also identified risks from staffing losses, employee illness or quarantine, and prolonged restaurant closures.
- Management reported no litigation believed likely to have a material adverse effect and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Subsequent-quarter revenue, comparable sales, and restaurant-level margins as dining rooms reopened and capacity limits changed.
- Cash burn and liquidity, including actual use of the additional credit capacity, covenant compliance, and any further financing needs.
- The timing and cost of restarting deferred restaurant construction and the effect of delayed openings on growth and capital spending.
- Whether suspended dividends or repurchases resume, and any realized CARES Act tax or cash-flow benefits.
- Potential impairment of restaurant property, goodwill, or lease assets, and the financial effects of lease guarantees or supplier disruption.