Texas Roadhouse, Inc. — Q2 2015 Form 10-Q
Reporting period: 13 weeks ended June 30, 2015, compared with the 13 weeks ended July 1, 2014; year-to-date (YTD) figures cover 26 weeks. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
The company operated 384 restaurants and franchised 80, totaling 464 locations, as of June 30, 2015. Company-operated restaurants included 376 Texas Roadhouse locations and six Bubba’s 33 locations. Results reflect restaurant growth and stronger comparable sales, alongside substantial beef-cost inflation.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | YTD 2015 | YTD 2014 |
|---|---|---|---|---|
| Total revenue | $454.7 | $395.4 | $914.9 | $792.5 |
| Operating income | $31.7 | $34.4 | $80.3 | $74.6 |
| Net income attributable to Texas Roadhouse | $21.1 | $23.1 | $53.4 | $49.5 |
| Diluted EPS | $0.30 | $0.33 | $0.76 | $0.70 |
| Restaurant margin and rate | $73.0; 16.2% | $71.1; 18.1% | $159.6; 17.6% | $146.6; 18.7% |
Q2 revenue grew 15.0%; company comparable restaurant sales rose 8.2%, including approximately 6.5% traffic growth and 1.7% higher average check. YTD revenue increased 15.4% and comparable sales rose 8.5%. Q2 restaurant margin rate declined 193 basis points, primarily because of commodity inflation, especially beef. Cost of sales rose to 37.3% of restaurant sales from 35.0%; labor improved slightly to 29.3% from 29.4%.
For the 26 weeks, operating cash flow was $94.8 million, versus $81.7 million. Capital expenditures were $70.9 million, versus $54.0 million, and financing cash outflow was $39.1 million, versus $46.4 million. Cash declined $15.2 million to $71.0 million. At June 30, total debt was approximately $50.8 million, including $50.0 million drawn on the revolver; $144.2 million of revolver capacity remained available net of letters of credit. The company reported compliance with debt covenants. Current assets were $128.9 million and current liabilities were $201.7 million.
Cash dividends declared were $0.17 per share in Q2 and $0.34 per share YTD. The company repurchased 88,089 shares for approximately $3.1 million YTD; $82.3 million remained authorized under its repurchase program.
Material changes versus comparable periods
- Q2 attributable net income fell 8.4% and diluted EPS declined from $0.33 to $0.30, despite higher sales; management attributed the decline primarily to lower restaurant margins, partly offset by lower income tax expense.
- YTD attributable net income increased to $53.4 million from $49.5 million, while restaurant margin rate fell 110 basis points to 17.6%.
- Q2 commodity inflation was approximately 9.4%, versus 7.4% YTD; management said beef was the principal driver.
- Operating cash flow increased, while investing outflows rose with higher spending on new restaurants and existing restaurant refurbishments. Share repurchases were lower than in the prior-year YTD period.
Outlook, commentary, and risks
- Management planned approximately 30 company restaurant openings in 2015, including up to five Bubba’s 33 locations; franchise partners were expected to open four to five Texas Roadhouse restaurants. Twelve company locations and one franchise location had opened YTD.
- 2015 capital expenditures were expected to be approximately $145 million to $155 million. Management expected operating cash flow to exceed capital expenditures and anticipated using the excess for dividends, share repurchases and/or debt repayment.
- Full-year 2015 commodity inflation was expected at 4.0% to 4.5%, including $1 million to $2 million of purchasing savings; the company estimated 1.0% to 2.0% inflation in the second half. Purchasing savings from other initiatives were expected to be approximately $1.5 million to $2.0 million.
- Management expected added 2015 health-insurance costs of approximately $5 million to $6 million following expanded employee coverage, with further labor pressure from mandated wage increases and healthcare costs. Cost increases may not be offset by pricing or traffic growth.
- The expected 2015 effective tax rate was 30.0% to 31.0%. Depreciation and amortization as a percentage of revenue was expected to increase year over year. No full-year earnings or EPS guidance was provided.
- Beef purchasing was concentrated among four suppliers. Commodity price volatility, supply disruption, and inability to pass higher costs through to customers could hurt results. Interest-rate exposure was partly hedged by swaps on $50 million of borrowings; one $25 million swap was scheduled to end in November 2015 and another in January 2016.
- Seven assigned leases carried maximum contingent obligations of $17.6 million; no material liability was recorded because default was considered less than probable. An EEOC age-discrimination lawsuit remained in discovery; the company denied liability and said it could not estimate any loss range.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether strong comparable sales and traffic growth continue, and how much is attributable to traffic versus menu pricing and check growth.
- Whether beef and other commodity inflation, wage increases, and expanded healthcare costs remain within management’s expectations and can be offset by savings or pricing.
- Execution and returns on the planned restaurant openings and $145 million to $155 million capital-spending program.
- Revolver availability, covenant compliance, and debt exposure as interest-rate swaps expire.
- Developments in the EEOC litigation and any changes in the likelihood or estimated cost of the contingent lease guarantees.