Texas Roadhouse, Inc. — Q1 2019 Form 10-Q
Reporting period: 13 weeks ended March 26, 2019; comparisons are with the 13 weeks ended March 27, 2018. Financial statements are unaudited. At quarter-end, the company operated 495 restaurants and franchised 93, for 588 total locations.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $690.6 million | $627.7 million | +10.0% |
| Income from operations | $60.4 million | $64.9 million | Down; operating margin 8.8% vs. 10.3% |
| Net income attributable to Texas Roadhouse | $50.4 million | $54.5 million | -7.6% |
| Diluted EPS | $0.70 | $0.76 | -8.1% |
| Operating cash flow | $111.4 million | $106.8 million | +$4.6 million |
| Capital expenditures | $42.0 million | $35.3 million | +$6.7 million |
Company comparable restaurant sales grew 5.2%, with traffic and average check each up 2.6%. Company store weeks increased 5.6%. Restaurant margin, a non-GAAP measure, rose 2.7% to $122.6 million, but declined to 17.9% of restaurant and other sales from 19.2%; margin per store week was $19,197 versus $19,735. Labor costs were 32.7% of restaurant sales versus 31.5%. Cost of sales was 32.7% versus 32.6%. General and administrative expense rose to $36.0 million from $30.2 million.
Cash and cash equivalents were $252.1 million at March 26, 2019, versus $210.1 million at December 25, 2018. The company had no revolving-credit borrowings and reported $191.6 million of facility availability, net of letters of credit; it was in compliance with its covenants. The $200 million unsecured revolver matures August 2022. Total operating lease liabilities were $522.9 million, recognized following adoption of ASC 842; these lease liabilities are distinct from borrowings. Current assets were $323.0 million and current liabilities $362.5 million.
Changes, outlook and management commentary
- Revenue growth reflected higher average unit volume, comparable sales growth and new restaurants. Net income and EPS declined, primarily due to higher G&A and depreciation and amortization, partly offset by higher restaurant margin dollars. Operating margin also contracted.
- Management attributed margin pressure chiefly to wage inflation and staffing initiatives. It anticipated 2019 labor-cost inflation of approximately 7%–8% and commodity inflation of approximately 1%–2%; approximately 50% of overall food costs were under fixed-price contracts. Beef sourcing was concentrated among three suppliers.
- Management planned 25–30 company openings in 2019, including as many as four Bubba’s 33 restaurants, and expected franchise partners to open as many as eight restaurants, primarily international. Q1 included four company and two international franchise openings. Planned 2019 capital expenditures were approximately $210–$220 million.
- The company took an approximately 1.5% menu price increase at the start of Q2 2019 and said further pricing could be considered. It expected a 2019 effective tax rate of approximately 15% and operating cash flow to exceed capital expenditures.
- The quarterly dividend declared was $0.30 per share, up 20% from the prior-year-period declaration. No shares were repurchased in Q1; approximately $69.9 million remained under the authorization.
- ASC 842 adoption added a $472.1 million operating lease right-of-use asset and $522.9 million of operating lease liabilities at quarter-end, with a $2.7 million after-tax reduction to opening retained earnings. Management reported no significant effect on operating results, cash flows, liquidity or credit-covenant compliance.
Risks, contingencies and unusual items
Risks highlighted include labor and commodity cost inflation, the ability to offset cost increases through pricing or traffic, and dependence on three beef suppliers. The company reported $183.7 million in estimated costs to complete capital projects and $14.5 million of maximum exposure under seven lease guarantees; no material guarantee liability was recorded because default was considered less than probable. Management reported no litigation believed likely to have a material adverse effect and no material changes to previously disclosed risk factors. Fiscal 2019 is a 53-week year, so the fourth quarter will be 14 weeks.
Investor verification priorities
- Track whether comparable sales and traffic growth sustain revenue while restaurant margin percentage recovers from 17.9%.
- Compare actual labor, commodity and menu-price trends with management’s 2019 expectations, including beef costs and supplier concentration.
- Monitor the pace, capital cost and returns of planned restaurant openings and the $210–$220 million capital-spending plan.
- Assess cash generation, dividend capacity, lease obligations and credit-facility availability alongside expansion needs.
- Confirm subsequent-period performance against the stated tax-rate and operating-cash-flow outlook; management cautioned that Q1 results are not necessarily indicative of full-year results.