Texas Roadhouse, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The year comprised 53 weeks, including a 14-week fourth quarter; FY2018 had 52 weeks and a 13-week fourth quarter. The filing was filed February 28, 2020.
Business context
Texas Roadhouse operates casual-dining restaurants, principally Texas Roadhouse, alongside Bubba’s 33. At year-end, it operated 514 company restaurants and had 97 franchised restaurants, across 49 U.S. states and 10 foreign countries. It reports one operating segment.
Financial and operating performance
| Metric | FY2019 | FY2018 | Change / context |
|---|---|---|---|
| Total revenue | $2.756 billion | $2.457 billion | +12.2%; the 53rd week contributed $59.0 million of restaurant and other sales, or 2.4% of the increase. |
| Restaurant and other sales | $2.734 billion | $2.437 billion | +12.2%; company comparable sales grew 4.7%, versus 5.4%. |
| Comparable-sales drivers | Traffic +1.8%; average check +2.9% | Traffic +3.9%; average check +1.5% | Sales growth relied more on check growth and less on traffic than in 2018. |
| Operating income | $212.0 million | $187.8 million | Operating margin 7.7%, versus 7.6%. |
| Net income attributable to Texas Roadhouse | $174.5 million | $158.2 million | +10.3%; net margin 6.3%, versus 6.4%. |
| Diluted EPS | $2.46 | $2.20 | +11.9%; the extra week added an estimated $0.10–$0.11 per diluted share. |
| Restaurant margin | $474.2 million; 17.3% of sales | $424.2 million; 17.4% | Margin dollars rose 11.8%; percentage slipped 0.1 point. This is a non-GAAP measure. |
| Operating cash flow | $374.3 million | $352.9 million | Investing cash flow was $(214.8) million and financing cash flow $(261.7) million. |
| Cash and cash equivalents | $107.9 million | $210.1 million | Cash fell $102.2 million during the year. |
Restaurant cost of sales improved to 32.3% of restaurant sales from 32.6%, helped by pricing and average check, despite 1.9% commodity inflation. Labor rose to 33.1% from 32.6%, reflecting higher wage rates and staffing initiatives. Depreciation and amortization increased to $115.5 million from $101.2 million.
At year-end, the company reported no borrowings under its revolving credit facility and $191.8 million of availability, net of letters of credit. The $200 million facility matures August 2022; the company was in compliance with its financial covenants. FY2019 total liabilities were $1.052 billion, including $556.0 million of operating lease liabilities recognized under the newly adopted lease standard. Undiscounted operating lease payments totaled $990.3 million. The balance sheet’s lease liabilities are not equivalent to funded debt.
Fourth quarter
FY2019 Q4 revenue was $725.2 million, operating income $53.4 million, net income attributable to Texas Roadhouse $42.7 million, and diluted EPS $0.61. FY2018 Q4 reported $605.9 million, $33.2 million, $30.3 million, and $0.42, respectively. The 2019 quarter contained 14 weeks versus 13 weeks in 2018, so the reported comparison includes an extra week; the filing estimates that week added $0.10–$0.11 to FY2019 diluted EPS.
Material changes and unusual items
- Restaurant growth and comparable-sales gains drove higher revenue; the additional fiscal week materially contributed to reported growth.
- Cash declined mainly amid increased capital spending, $139.8 million of share repurchases, and $102.4 million of shareholder dividends. Capital expenditures were $214.3 million, up from $156.0 million, including more restaurant relocations and Support Center spending.
- ASC 842 lease accounting was adopted in FY2019, adding right-of-use assets and lease liabilities to the balance sheet. The company said it had no significant impact on operating results or cash flows; prior-year balance-sheet figures were not restated.
- Impairment and closure costs were a net benefit of $0.9 million in 2019, including a $2.6 million gain related to a forced restaurant relocation, partly offset by a $1.1 million right-of-use-asset impairment and other relocation costs.
- The effective tax rate was 15.1%, versus 12.9% in 2018, largely due to lower excess share-based-compensation tax benefits and a prior-year tax adjustment. The 2018 rate reflected the reduction in the federal corporate tax rate enacted in 2017.
Outlook, risks, and contingencies
- For 2020, management planned at least 30 company restaurant openings, including as many as seven Bubba’s 33 locations; franchise partners were expected to open as many as eight Texas Roadhouse restaurants, primarily internationally.
- Expected average investment was approximately $5.6 million per new Texas Roadhouse and $6.7 million per Bubba’s 33. Planned 2020 capital expenditures were $210–$220 million, excluding cash used for franchise acquisitions.
- Management expected 1%–2% commodity inflation, with fixed-price contracts covering just over half of overall food costs. Labor costs were expected to face mid-single-digit inflation; further menu pricing might be used. The company expected a 14%–15% effective tax rate and said it might take additional pricing if needed.
- The filing does not provide specific 2020 revenue or earnings guidance. Management described growth, restaurant profitability, infrastructure leverage, and returning capital through dividends and repurchases as ongoing priorities.
- Key risks include food and beef costs and supplier concentration (three principal beef suppliers), labor availability and wage inflation, competition, food safety and reputational exposure, weather and seasonality, execution of new-store and international growth, leases, cybersecurity, litigation, and self-insurance estimates. The company also cited health outbreaks or pandemics as potential risks.
- The company disclosed ordinary-course claims and contingencies but said it knew of no litigation expected to have a material adverse effect. It remained contingently liable for up to $13.9 million on seven assigned leases; no material liability was recorded because default was considered less than probable.
Important facts for investors to verify
- Assess FY2019 growth after separating the 53rd-week benefit from underlying comparable sales and store growth.
- Track traffic, average check, and whether pricing can offset expected labor and commodity inflation without weakening guest demand.
- Evaluate the planned $210–$220 million of capital spending against operating cash generation, dividends, and repurchases; cash declined to $107.9 million.
- Review the scale and duration of lease commitments, credit-facility availability, covenant headroom, and the distinction between lease liabilities and funded debt.
- Monitor new-store returns, especially Bubba’s 33, and the company’s ability to recruit and retain qualified restaurant personnel.