Texas Roadhouse, Inc. — Q2 2018 Form 10-Q
Business context and period: Unaudited results cover the 13 and 26 weeks ended June 26, 2018, compared with periods ended June 27, 2017. At quarter-end, the company operated 476 restaurants and franchised 90, across 49 states and eight foreign countries.
Key financial results
| Metric | Q2 2018 | Q2 2017 | 2018 YTD | 2017 YTD |
|---|---|---|---|---|
| Total revenue | $629.2 million | $566.3 million | $1,256.9 million | $1,133.9 million |
| Operating income | $54.3 million | $54.2 million | $119.1 million | $103.2 million |
| Net income attributable to Texas Roadhouse | $44.2 million | $37.6 million | $98.8 million | $71.9 million |
| Diluted EPS | $0.62 | $0.53 | $1.37 | $1.01 |
| Restaurant margin | 18.2% | 18.9% | 18.7% | 19.4% |
| Operating cash flow | Not separately presented for the quarter | $165.1 million | $128.3 million |
Q2 revenue rose 11.1% and attributable net income rose 17.7%. Company comparable restaurant sales increased 5.7% in Q2, driven by traffic growth of 4.3% and a 1.4% increase in average check. Operating margin was 8.6% in Q2 versus 9.6% a year earlier; YTD it was 9.5% versus 9.1%.
Cash, debt and liquidity
- Cash and cash equivalents were $154.4 million at June 26, 2018. Current assets were $216.8 million and current liabilities were $280.4 million.
- The company repaid its $50.0 million revolving-credit balance in April. Period-end debt consisted of $2.0 million in capital-lease obligations; revolver borrowings were zero.
- Revolver availability was $192.5 million, net of $7.5 million in letters of credit. The company reported compliance with all financial covenants.
- Six-month capital expenditures were $66.7 million. Cash flow from operating activities less capital expenditures was approximately $98.4 million, calculated from reported amounts.
- Operating lease payments totaled approximately $877.0 million over their remaining terms. The company expected the new lease accounting standard to materially increase reported assets and liabilities.
Changes, outlook and risks
- Restaurant growth and higher comparable sales lifted revenue, but restaurant margin percentage declined, mainly from higher wage rates and staffing initiatives. Labor was 32.0% of restaurant and other sales in Q2, up from 31.1%.
- The effective tax rate fell to 15.6% in Q2 and 14.2% YTD, compared with 27.9% and 27.2%, respectively, largely reflecting federal tax reform. Management expected a 2018 effective rate of 14.0%–15.0%.
- Management planned 27–28 company openings in 2018, including up to five Bubba’s 33 restaurants, and expected franchise partners to open as many as seven restaurants. Projected 2018 capital expenditures were $165–$175 million.
- Management expected approximately 1% commodity-cost inflation in 2018, with fixed-price contracts covering about 65% of food costs. It anticipated mid-single-digit labor-cost inflation and noted that pricing or traffic may not offset these pressures.
- Beef purchasing was concentrated among three suppliers, creating potential supply and cost exposure. The filing also reported $15.2 million of maximum potential liability under seven lease guarantees; no material liability was recorded because default was considered less than probable.
- A $14.9 million pretax legal settlement and defense charge in 2017 affected the YTD comparison. In 2018, the company recorded $0.6 million of claims-administration costs. Ordinary-course litigation was not believed to pose a material adverse effect.
- ASC 606 adoption changed the classification and timing of certain franchise and gift-card revenues and produced a $0.9 million reduction to opening retained earnings. The filing said the reclassifications did not affect pretax income; comparative periods were not restated.
Investor verification priorities
- Track whether sales and traffic growth can offset higher labor costs and the continued decline in restaurant margin percentage.
- Verify delivery of the 2018 restaurant-opening and capital-expenditure plans, and the resulting operating cash generation.
- Assess the sustainability of the lower effective tax rate and the earnings comparison against the prior-year legal charge.
- Review the scale of lease obligations, future balance-sheet effects of lease accounting, and exposure to beef suppliers and lease guarantees.
- Separate underlying performance from ASC 606 classification effects when comparing revenue and expense trends.