Texas Roadhouse, Inc. — Q1 2015 Form 10-Q
Business context and period. The filing covers the 13 weeks ended March 31, 2015, compared with the 13 weeks ended April 1, 2014. Texas Roadhouse operated 375 company restaurants and franchised 79, for 454 locations across 49 states and four foreign countries. It opened three company restaurants during the quarter, including one Bubba’s 33.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $460.2 million | $397.1 million | +15.9% |
| Restaurant sales | $456.3 million | $394.0 million | +15.8% |
| Income from operations | $48.6 million | $40.2 million | +21.0% |
| Net income attributable to Texas Roadhouse | $32.3 million | $26.5 million | +22.0% |
| Diluted EPS | $0.46 | $0.37 | +23.0% |
| Operating cash flow | $57.7 million | $45.8 million | +$11.9 million |
- Company comparable restaurant sales rose 8.9%, supported by traffic growth of approximately 6.9% and average-check growth of approximately 2.0%. Franchise comparable sales rose 8.0%.
- Restaurant margin was 19.0% of restaurant sales, down from 19.2%. Cost of sales increased to 35.1% from 34.2%, largely reflecting approximately 5.2% commodity inflation, mainly beef. Labor improved to 28.8% from 29.1%; other operating costs improved to 15.2% from 15.4%.
- Operating margin increased to 10.6% from 10.1%. G&A declined to 4.7% of revenue from 5.1%; pre-opening expense was $3.8 million versus $4.3 million.
- Cash and cash equivalents were $98.5 million at quarter-end. Operating cash flow of $57.7 million funded $33.4 million of investing outflows, primarily capital expenditures; cash increased $12.4 million during the quarter.
- Total debt was approximately $50.8 million, including $50.0 million drawn on the revolving facility. The company reported $144.2 million of remaining facility availability after letters of credit and compliance with its covenants. Current liabilities were $208.3 million; total liabilities were $320.5 million.
- Capital expenditures were $33.4 million, compared with $23.1 million in Q1 2014. The company declared a $0.17-per-share dividend, payable April 2; no shares were repurchased in Q1.
Material changes and outlook
- Revenue growth reflected higher comparable sales, average unit volume and new restaurant openings; store weeks increased 7.4%. Restaurant margin percentage declined despite higher sales, primarily because of commodity inflation.
- Management planned 25–30 company restaurant openings in 2015, including as many as five Bubba’s 33 locations, and anticipated four to six franchise openings. Three company restaurants opened in Q1.
- Management estimated 2015 capital expenditures of $135–$145 million and expected operating cash flow to exceed capital expenditures. Expected average investment for a Texas Roadhouse restaurant opening in 2015 was approximately $4.8 million.
- Management forecast 2015 commodity inflation of 3%–4%, including anticipated purchasing savings of $1–$2 million; additional purchasing initiatives were expected to save $1.5–$2 million. Expanded employee health coverage was expected to add $5–$6 million to 2015 costs. Minimum and tip wage increases and healthcare costs were expected to pressure labor expense.
- Management expected 2015 D&A as a percentage of revenue to exceed the prior year and estimated an effective tax rate of 30%–31%. No full-year revenue, earnings or EPS guidance is provided in the filing text.
Risks, contingencies and notable items
- Beef purchasing was concentrated among four suppliers. The company cautioned that supply disruption or higher commodity prices could hurt results, especially if menu pricing cannot offset cost increases; it did not use financial instruments to hedge commodity prices.
- An EEOC age-discrimination lawsuit was in discovery. The company denied liability and stated it could not predict the outcome or estimate a possible loss range.
- The company remained contingently liable for seven assigned restaurant leases, with maximum potential future payments of $17.8 million; no material liability was recorded because default was considered less than probable. Estimated costs to complete capital project commitments were $172.3 million.
- Interest-rate swaps hedged $50 million of variable-rate debt; the swaps had a reported fair-value liability of $1.0 million. The company noted exposure to interest-rate and commodity-price movements.
- Share-based compensation increased to $4.9 million from $3.6 million, partly due to executive and director awards. There were no impairment and closure costs in Q1 2015, compared with $17,000 in Q1 2014.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether comparable-sales growth, particularly traffic gains, continues and supports planned restaurant expansion.
- Actual beef and other commodity inflation versus the 3%–4% outlook, and the extent to which pricing and purchasing savings offset it.
- Whether wage and expanded health-benefit costs remain within expectations and are offset by sales growth or pricing.
- Progress on the 25–30 planned company openings, capital spending, and cash flow relative to the $135–$145 million capex estimate.
- Developments in the EEOC litigation and any changes to lease guarantees or capital project commitments.
- Revolver availability, covenant compliance, debt levels, and future capital returns, including dividends and any share repurchases.