Texas Roadhouse, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 27, 2016 (52 weeks); fourth quarter was 13 weeks. The filing was dated February 24, 2017. This is an annual report, not a standalone quarterly filing.
Business context
Texas Roadhouse operates casual-dining restaurants, primarily under the Texas Roadhouse brand, with Bubba’s 33 as a developing concept. At year-end, the company operated 431 restaurants and franchised 86, for 517 systemwide locations in 49 states and six foreign countries. It opened 30 company restaurants during 2016, including 21 Texas Roadhouse and nine Bubba’s 33 locations.
Financial and operating results
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $1,990.7 million | $1,807.4 million |
| Income from operations | $171.9 million | $144.6 million |
| Net income attributable to Texas Roadhouse | $115.6 million | $96.9 million |
| Diluted EPS | $1.63 | $1.37 |
| Operating cash flow | $257.1 million | $227.9 million |
| Cash and cash equivalents, year-end | $112.9 million | $59.3 million |
| Long-term debt and capital lease obligations, net of current maturities | $52.4 million | $25.6 million |
Revenue rose 10.1%; restaurant sales increased 10.2%, reflecting 7.8% more company-restaurant store weeks and 3.5% comparable-sales growth. Comparable growth comprised 2.1% higher guest traffic and 1.4% higher average check. Texas Roadhouse company-restaurant average unit volume was $4.802 million, up from $4.664 million.
Restaurant margin increased to 18.7% of restaurant sales from 17.3%; margin dollars per store week rose 10.1%. Commodity deflation of approximately 3.8%, primarily lower beef costs, was a key factor. Labor costs increased to 29.9% of restaurant sales from 29.3%; depreciation and amortization rose to $83.0 million from $69.7 million, reflecting investment in new and existing restaurants. Net income increased 19.3% and diluted EPS increased 18.8%.
Fourth quarter: Revenue was $484.7 million versus $454.4 million in Q4 2015. Operating income was $30.8 million versus $33.7 million, and net income attributable to the company was $20.7 million versus $23.0 million. Diluted EPS was $0.29 versus $0.32.
Cash provided by operations was $257.1 million; investing activities used $164.7 million and financing activities used $38.7 million. Cash increased $53.6 million during the year. The company reported $50.0 million outstanding on its revolving credit facility, $143.2 million of remaining availability after letters of credit, and compliance with its financial covenants. Current liabilities exceeded current assets, in part reflecting $129.6 million of deferred gift-card revenue; management notes the business typically operates with negative working capital.
Material changes and notable items
- Compared with 2015, comparable-sales growth slowed from 7.2% to 3.5%, while cost of sales improved from 35.9% to 33.9% of restaurant sales. Labor and other operating costs rose as a share of sales.
- General and administrative expense included a $7.3 million pretax charge ($4.5 million after tax; $0.06 per diluted share) for a Fair Labor Standards Act class-action settlement. The settlement payment was capped at $9.5 million.
- After fiscal year-end, the company acquired four franchise restaurants in Florida and Georgia for approximately $16.8 million.
- Operating lease commitments totaled $768.4 million. The company expected adoption of the new lease accounting standard in fiscal 2019 to materially increase reported assets and liabilities.
Outlook, management commentary and risks
- Management planned approximately 30 company openings in 2017, including about six Bubba’s 33 restaurants; franchise partners were expected to open as many as seven primarily international restaurants. Planned 2017 capital expenditures were approximately $170 million, excluding franchise acquisitions.
- Expected average investment was approximately $5.1 million per new Texas Roadhouse and $6.5 million per Bubba’s 33. The company expected 1%–2% food-cost deflation in 2017, with about 60% of overall food costs under fixed-price contracts.
- Management anticipated mid-single-digit labor-cost inflation in 2017, including an estimated $4.5 million–$5.5 million impact from overtime-policy changes, and higher depreciation and amortization as a percentage of revenue. Expected effective tax rate was 29%–30%. These are company estimates, not guarantees.
- Key risks include beef and other commodity price volatility and supplier concentration; wage, overtime and benefit cost increases; competition and changes in consumer spending; food safety and negative publicity; hiring and retention; execution and returns on new restaurants, especially Bubba’s 33 and international expansion; cybersecurity and payment-card exposure; self-insurance reserve variability; and litigation.
- The EEOC age-discrimination case went to trial in January 2017 and ended in a mistrial on February 3 after the jury could not reach a unanimous verdict. A retrial was scheduled for May 2017. The company denied liability and said it could not estimate a potential loss.
- Management reported effective disclosure controls and internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and internal control.
Investor facts to verify
- Whether comparable-sales and traffic growth sustain or weaken, particularly as 2016 growth was below 2015.
- Whether projected food-cost deflation offsets labor inflation and supports restaurant margins.
- Returns from planned openings and the higher capital requirements of Bubba’s 33; monitor actual 2017 opening pace and capital spending.
- Cash generation, revolving-credit borrowings and covenant headroom alongside dividends, repurchases and restaurant investment.
- Final cost and outcome of the EEOC case, and any subsequent developments in the four-restaurant acquisition.
- Long-term lease commitments and the balance-sheet effect of the forthcoming lease-accounting standard.