Texas Roadhouse, Inc. — Q3 2018 Form 10-Q
Reporting period: 13 and 39 weeks ended September 25, 2018, compared with the respective periods ended September 26, 2017. Financial statements are unaudited. The company operated 479 restaurants and franchised 91, for 570 total restaurants.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 2018 YTD | 2017 YTD |
|---|---|---|---|---|
| Total revenue | $594.6 million | $540.5 million | $1,851.5 million | $1,674.5 million |
| Income from operations | $35.4 million | $45.5 million | $154.6 million | $148.7 million |
| Net income attributable to Texas Roadhouse | $29.1 million | $31.0 million | $127.9 million | $102.9 million |
| Diluted earnings per share | $0.40 | $0.43 | $1.78 | $1.44 |
| Restaurant margin, non-GAAP | $95.8 million; 16.2% | $95.6 million; 17.8% | $328.6 million; 17.9% | $314.3 million; 18.9% |
Q3 revenue rose 10.0%, with company-store weeks up 5.6% and comparable restaurant sales up 5.5%. Comparable sales growth reflected traffic growth of 4.0% and a 1.5% increase in average check. YTD comparable sales growth was 5.4%.
Q3 operating income and net income declined despite higher sales. Labor costs rose to 33.5% of restaurant and other sales from 31.6%, reflecting wage rates, staffing initiatives, workers’ compensation and health insurance costs. Q3 G&A also increased, including incentive compensation and legal claims-administration costs. Lower income taxes partly offset these pressures. YTD net income increased, aided by lower taxes and the absence of the prior-year legal settlement charge.
Cash flow, balance sheet and liquidity
- For the 39 weeks, operating cash flow was $225.6 million, capital expenditures were $110.9 million, investing cash outflow was $110.9 million, and financing cash outflow was $114.4 million. Cash ended at $151.2 million, compared with $150.9 million at fiscal year-end 2017.
- Cash from operations increased from $188.1 million a year earlier, primarily with higher net income; working-capital movements, including gift-card deferred revenue, partly offset the increase.
- Long-term debt and capital-lease obligations totaled $2.0 million at September 25, 2018, versus $52.0 million at December 26, 2017. The company repaid its $50.0 million revolver balance in April and had no revolver borrowings at quarter-end. Revolver availability was $192.3 million, net of $7.7 million in letters of credit; the company reported compliance with its financial covenants.
- Total assets were $1.325 billion, total liabilities $383.5 million, and total equity $941.3 million. Current assets were $216.2 million and current liabilities $272.5 million; gift-card deferred revenue was $87.9 million.
- The declared quarterly dividend was $0.25 per share, totaling $17.9 million, and was paid September 28, 2018. No shares were repurchased in the period; $69.9 million remained authorized under the repurchase program.
Changes, outlook and key risks
- Tax: Effective tax rates fell to 15.1% in Q3 and 14.4% YTD, versus 28.8% and 27.7%, respectively, primarily following the federal corporate tax-rate reduction. Management expected a 14%–15% effective rate for both 2018 and 2019.
- Growth and investment: Management planned 27–28 company openings in 2018, including five Bubba’s 33 restaurants, and approximately 25–30 in 2019, including four Bubba’s 33 restaurants. The 2018 capital-expenditure outlook was $160–$165 million. Management anticipated operating cash flow would exceed capital expenditures in 2018.
- Pricing and costs: Management planned an approximately 1.7% menu-price increase in November 2018 and said additional 2019 pricing might be needed. Expected commodity inflation was approximately 1% for 2018 and 1%–2% for 2019. Labor costs were expected to face mid-single-digit inflation for the remainder of 2018 and in 2019; management noted pricing or traffic growth might not offset it.
- Accounting: ASC 606 adoption changed the timing of certain franchise-fee recognition and reclassified gift-card and franchise-related items between revenue and expenses. The company said these changes did not affect pretax income; prior comparative periods were not restated. Adoption reduced opening retained earnings by $0.9 million, net of tax.
- Leases: Remaining operating-lease payments were approximately $894.6 million. The company expected adoption of the new lease standard in fiscal 2019 to materially increase reported assets and liabilities, while not then expecting a material effect on results or cash flows.
- Contingencies and exposure: The company remained contingently liable for up to $15.0 million under seven assigned lease guarantees; no material liability was recorded because default was considered less than probable. Beef purchases were concentrated among three suppliers, and the filing cited potential supply and cost impacts if they could not perform. Ordinary-course litigation was not believed likely to have a material adverse effect. The EEOC matter had been settled under a consent decree; the company recorded $1.5 million of claims-administration costs YTD in 2018.
Important facts for investors to verify
- Whether comparable-sales and traffic growth can continue while labor inflation pressures restaurant margins.
- Whether management meets its restaurant-opening, capital-spending, and cash-flow expectations.
- The effects of ASC 606 presentation changes and the expected balance-sheet impact of lease-standard adoption.
- Current status of lease guarantees, legal claims-administration costs, and dependence on three major beef suppliers.
- Whether the lower effective tax rate and dividend level remain consistent with management’s expectations and future cash needs.