Texas Roadhouse, Inc. — Q3 2013 Form 10-Q
Reporting period: 13 weeks ended September 24, 2013; year-to-date (YTD) covers 39 weeks. Comparatives are the corresponding 2012 periods. Fiscal 2013 comprises 53 weeks, including a 14-week fourth quarter.
Business context and results
The company operated 409 restaurants at quarter-end: 334 company restaurants and 75 franchise restaurants. Q3 revenue growth primarily reflected new restaurant openings, the acquisition of two franchise restaurants at the end of 2012, and higher average unit volumes.
| Metric | Q3 2013 | Q3 2012 | 2013 YTD | 2012 YTD |
|---|---|---|---|---|
| Total revenue | $334.8 million | $308.7 million | $1,046.6 million | $953.8 million |
| Operating income | $25.7 million | $27.7 million | $93.7 million | $88.4 million |
| Net income attributable to Texas Roadhouse | $17.2 million | $18.1 million | $63.3 million | $57.2 million |
| Diluted EPS | $0.24 | $0.25 | $0.89 | $0.80 |
| Restaurant margin | 17.2% | 17.9% | 18.3% | 18.7% |
Q3 revenue increased 8.5%, but operating income fell about 7% and attributable net income fell about 5%. YTD revenue rose 9.7% and attributable net income rose about 11%. Restaurant margin is a non-GAAP measure defined by the company as restaurant sales less cost of sales, labor, rent and other operating costs.
Cash flow, debt and liquidity
- YTD operating cash flow was $99.7 million, compared with $91.0 million. Capital expenditures were $71.9 million, versus $63.1 million; investing cash outflow was $71.9 million.
- Financing cash outflow was $22.1 million, including $29.9 million of dividends paid. Cash increased $5.6 million to $87.3 million.
- At September 24, cash was $87.3 million, current assets were $122.4 million and current liabilities were $131.3 million. The company reported negative working capital, which it said is typical of its cash-based restaurant operations.
- Total debt and capital-lease obligations were $51.3 million, including $50.0 million drawn on a $200 million revolving facility. Remaining availability, net of letters of credit, was $145.3 million. The company was in compliance with its financial covenants.
- After quarter-end, on November 1, 2013, the revolving facility maturity was extended to November 1, 2018, with no material change to its terms.
Material changes, outlook and risks
- Comparable restaurant sales rose 2.6% in Q3, below 3.6% in Q3 2012; guest traffic increased 0.4% and average check increased 2.2%. YTD comparable sales growth was 3.7%, versus 4.8%.
- Q3 food cost was 35.1% of restaurant sales, up from 33.6%, amid approximately 8.1% commodity inflation, primarily beef. Management expected roughly 7% commodity inflation for 2013 and low-single-digit inflation in 2014. About 70% of remaining-2013 food costs were under fixed-price contracts.
- Other operating costs benefited from a $1.3 million reduction in general-liability insurance costs tied to updated claims-development estimates. Pre-opening expense increased to $4.7 million from $2.5 million as more openings entered the pipeline.
- Management planned 28 company restaurant openings in 2013, including 14 in Q4, and 25–30 in 2014. Expected capital expenditures were approximately $105 million in 2013 and $100–$110 million in 2014. Management expected 2013 operating cash flow to exceed capital expenditures.
- Management forecast a 30.0%–30.5% effective tax rate for 2013 and 30.0%–31.0% for 2014, with the latter dependent in part on the Work Opportunity Tax Credit’s expiration.
- The EEOC age-discrimination lawsuit concerning hiring for certain restaurant positions remained in discovery. The company denied liability and said it could not predict or estimate any possible loss. It also disclosed contingent liability on certain leases assigned to franchisees.
- Beef supply is concentrated among four suppliers; interruptions or commodity price increases that cannot be passed through could hurt results. Management said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether comparable-sales momentum, particularly guest traffic, improves or weakens.
- Actual food-cost inflation and the effect of beef prices, supplier concentration and pricing actions on restaurant margins.
- Restaurant opening pace, pre-opening costs, and whether cash generation supports the planned capital spending and shareholder returns.
- Developments in the EEOC litigation and any changes to contingent lease exposures.
- Compliance with credit-facility covenants and the terms and availability of the amended revolving facility.