Texas Roadhouse, Inc. — Q2 2011 Form 10-Q
Reporting period: Unaudited 13 weeks ended June 28, 2011, compared with the 13 weeks ended June 29, 2010; year-to-date comparisons cover 26 weeks. The company operated 350 restaurants at quarter-end: 279 company-operated and 71 franchised or licensed.
Financial performance
| Metric | Q2 2011 | Q2 2010 | 2011 YTD | 2010 YTD |
|---|---|---|---|---|
| Total revenue | $279.6 million | $255.2 million | $563.4 million | $514.8 million |
| Operating income | $23.7 million | $23.3 million | $54.0 million | $53.4 million |
| Net income attributable to Texas Roadhouse | $16.1 million | $15.0 million | $35.9 million | $34.3 million |
| Diluted EPS | $0.22 | $0.21 | $0.49 | $0.47 |
| Operating margin | 8.5% | 9.1% | 9.6% | 10.4% |
Q2 revenue increased 9.6% and attributable net income rose 6.9%; YTD revenue increased 9.4% and attributable net income rose 4.6%. Company comparable sales increased 4.4% in Q2 and 4.5% YTD, with higher guest traffic and average checks contributing. Restaurant sales growth also benefited from new openings.
Cost pressure weighed on margins: cost of sales rose to 33.3% of restaurant sales in both Q2 and YTD, versus 32.7% and 32.4%, respectively. Labor rose to 29.9% in Q2 and 29.7% YTD, from 29.5% and 29.3%. Other operating costs declined as a share of sales. The effective tax rate was 29.1% in Q2 and 30.7% YTD, versus 31.9% and 32.7%.
Cash flow, balance sheet and capital
- YTD operating cash flow was $56.4 million, compared with $48.3 million. Investing activities used $29.0 million, including $29.1 million of capital expenditures; financing activities used $30.2 million.
- Cash was $79.4 million at June 28, 2011, versus $82.2 million at December 28, 2010. Current assets were $108.6 million and current liabilities $105.2 million.
- Total debt and capital lease obligations were approximately $52.0 million, including $50.0 million drawn on the revolving facility. The company reported $196.2 million of remaining facility availability, net of letters of credit, and compliance with its covenants.
- The $250 million credit facility expires May 31, 2012; management had signed a commitment letter for a replacement facility and expected to finalize it in Q3 2011.
- YTD capital expenditures were $29.1 million. Full-year 2011 capital expenditures were projected at $65–$70 million. The company repurchased 1.5 million shares for $25.3 million YTD and paid $5.7 million in dividends; a $0.08-per-share dividend was distributed July 1.
Outlook, risks and notable items
- Management planned 20 company restaurant openings in 2011, with five opened by June 28, and at least 25 openings in 2012. It expected 2011 commodity inflation of approximately 4% and further average-check growth of about 1% in the second half, primarily reflecting a Q3 menu price increase.
- Management expected the 2011 effective tax rate to be approximately 30.7%. It also anticipated higher pre-opening costs and labor costs tied to restaurant development, training and service initiatives.
- Beef purchasing is concentrated among three suppliers; commodity price volatility and the ability to pass cost increases through to customers could affect results. Interest-rate sensitivity disclosure estimates a one-percentage-point increase in variable borrowing rates would raise annual interest expense by $0.5 million; $50 million of revolver borrowings was hedged through swaps.
- The EEOC alleged a pattern and practice of age discrimination in hiring; the company denied the allegations and could not estimate any loss. A Massachusetts class action alleges improper sharing of pooled tips; the company is defending the case, and stated that potential statutory penalties and damages could materially affect results. No loss range was estimable for either matter.
- Estimated costs to complete capital projects were $72.7 million. The company also remained contingently liable on certain leases assigned to franchisees if those franchisees default.
- Notable capital returns included the share repurchase program, with $24.8 million still authorized at quarter-end, and quarterly dividends initiated in 2011. Share-based compensation expense was $5.7 million YTD, versus $3.7 million, including higher RSU-related costs.
Important facts for investors to verify
- Whether sales and traffic gains continue to offset food, labor and new-store cost inflation, and how restaurant-level margins develop.
- Progress on planned 2011–2012 openings, capital spending, and completion of the replacement credit facility before the existing facility expires.
- Cash generation and liquidity after repurchases, dividends and expansion spending; confirm remaining repurchase authorization and future dividend decisions.
- Developments and potential exposure in the EEOC matter and Massachusetts tip-pooling class action.
- Supplier concentration and commodity pricing exposure, including the extent and duration of food-cost protections.