Texas Roadhouse, Inc. — Q2 2017 Form 10-Q
Reporting period: 13 and 26 weeks ended June 27, 2017, compared with the periods ended June 28, 2016. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The filing is unaudited.
Business context
Texas Roadhouse operated 532 restaurants at quarter-end: 448 company-owned (including 18 Bubba’s 33 restaurants and two other concepts) and 84 franchised, across 49 states and six foreign countries. The company had opened 13 company restaurants year to date and acquired four franchise restaurants in Florida and Georgia in Q1.
Financial performance
| Metric | Q2 2017 | Q2 2016 | 2017 YTD | 2016 YTD |
|---|---|---|---|---|
| Total revenue | $566.3 | $508.8 | $1,133.9 | $1,024.4 |
| Operating income | $54.2 | $49.8 | $103.2 | $102.6 |
| Net income attributable to Texas Roadhouse | $37.6 | $33.6 | $71.9 | $69.2 |
| Diluted EPS | $0.53 | $0.47 | $1.01 | $0.98 |
| Operating cash flow | — | — | $128.3 | $114.1 |
Q2 revenue rose 11.3%; company restaurant sales increased 11.4%, supported by 7.9% more store weeks and 4.0% comparable sales growth. Comparable sales reflected traffic growth of 3.1% and average check growth of 0.9%. Franchise royalties and fees were $4.1 million, slightly below the prior-year quarter.
Q2 restaurant margin increased to $106.5 million from $97.0 million, while margin as a share of restaurant sales eased to 18.9% from 19.2%. Labor rose to 31.1% of restaurant sales from 29.7%, primarily due to wage increases and compensation-structure changes. Cost of sales improved to 32.9% from 34.0%, helped by approximately 1.9% commodity deflation, mainly lower beef costs. Q2 operating margin was 9.6%, versus 9.8%.
For the first half, restaurant margin was 19.4% of restaurant sales, versus 19.7%; operating margin was 9.1%, versus 10.0%. Year-to-date G&A included a $14.9 million pretax legal charge. The effective tax rate was 27.2% year to date versus 30.1%, reflecting new stock-compensation tax accounting; the company reported a $2.6 million tax benefit from that change.
Operating cash flow was $128.3 million year to date. Investing used $90.2 million, including $73.6 million of capital expenditures and $16.5 million for the franchise-restaurant acquisition. Financing used $34.6 million, including $28.3 million of shareholder dividends. Cash increased $3.6 million to $116.5 million from year-end.
At June 27, 2017, total debt and capital-lease obligations were $52.5 million, including $50.0 million drawn on the revolving facility. The facility had $142.9 million available after letters of credit; the company was in compliance with its covenants. Current assets were $172.4 million and current liabilities $246.2 million. Operating-lease obligations totaled $814.6 million, and capital project commitments were approximately $144.6 million.
Material changes and outlook
- Q2 net income attributable to the company grew 11.8% and diluted EPS rose 11.0%. Year-to-date EPS increased despite a $14.9 million pretax charge related to an EEOC settlement; the filing also reports a separate $5.5 million pretax legal charge in the prior-year YTD period.
- Management planned 27–29 company openings in 2017, including approximately four Bubba’s 33 locations, and anticipated up to seven primarily international franchise openings. The company expected 2017 capital expenditures of approximately $170 million, excluding franchise acquisitions.
- Management expected 1%–2% food-cost deflation for 2017 and mid-single-digit labor inflation. Compensation-structure changes were expected to add $4.5–$5.5 million to 2017 labor costs, already included in that labor outlook. The company expected a 2017 effective tax rate of approximately 28% and D&A as a percentage of revenue to remain above the prior year.
- The company expected operating cash flow to exceed capital expenditures in 2017; anticipated excess cash could fund dividends, repurchases, or debt repayment. The board had declared a $0.21-per-share quarterly dividend. No shares were repurchased in the first half.
Risks, contingencies, and unusual items
- The EEOC consent decree established a $12.0 million fund for eligible claimants. The company recorded a $14.9 million pretax charge ($9.2 million after tax), including settlement costs and legal fees.
- Beef purchases were concentrated among three suppliers. Commodity-price volatility, supplier disruption, or inability to pass higher costs through menu pricing could pressure results. About 65% of overall food costs were covered by fixed-price contracts for 2017; the remainder was exposed to market prices.
- Variable-rate debt exposes the company to higher interest costs: a one-percentage-point rate increase was estimated to add approximately $0.5 million in annual interest expense.
- Operating leases create substantial future commitments. The company expected the adoption of the new lease accounting standard to materially increase reported assets and liabilities, though it did not then expect a material impact on income or cash flow statements.
- Seven assigned leases carried $16.0 million of contingent maximum exposure; no material liability was recorded because default was considered less than probable. Management reported no litigation it believed could materially adversely affect the business and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether comparable-sales growth and traffic gains continue, given slower check growth and new-store contributions.
- Actual wage inflation and the effect of compensation changes on restaurant margins relative to food-cost deflation.
- Delivery and returns from the planned restaurant openings, approximately $170 million capital-expenditure outlook, and franchise acquisition strategy.
- Cash generation after capital spending, dividends, and other shareholder returns; available revolver capacity and covenant compliance.
- The final cash and earnings impact of the EEOC consent decree, and exposure under lease guarantees and long-term operating leases.