Texas Roadhouse, Inc. quarterly report, Q1 FY2012

Texas Roadhouse, Inc. — Q1 2012 Form 10-Q

Reporting period: 13 weeks ended March 27, 2012; comparisons are with the 13 weeks ended March 29, 2011. Dollar amounts below are in millions unless stated otherwise. Texas Roadhouse operated 374 restaurants at quarter-end: 302 company restaurants and 72 franchise or license restaurants.

Financial performance

Operating margin declined to 9.1% of revenue from 10.6%; net margin attributable to the company declined to 5.8% from 7.0%. Restaurant cost of sales rose to 34.1% of restaurant sales from 33.3%, while labor improved to 29.0% from 29.4%. Reported G&A increased to 6.2% of revenue from 4.9%, including a $5.0 million legal-settlement charge. Excluding that charge, diluted EPS was $0.31 versus $0.27, and G&A was 4.6% of revenue.

Comparable restaurant sales grew 6.0% versus 4.6% a year earlier; management attributed the increase to higher average checks and guest traffic. Company restaurant sales growth also reflected 7.9% more store weeks and 5.4% higher average unit volumes. Eight company restaurants opened in the quarter.

Cash, liquidity and debt

Cash and cash equivalents were $77.3 million at March 27, 2012, versus $73.7 million at December 27, 2011. Operating cash flow of $38.8 million funded $22.8 million of capital expenditures; investing cash outflow was $22.7 million. Financing cash outflow was $12.4 million, including $10.0 million of net revolver repayments and $5.5 million of dividends paid. Cash increased $3.6 million during the quarter.

Total debt and capital lease obligations were $51.8 million, down from $61.9 million at year-end, including $50.0 million outstanding under the revolver. The $200 million revolving facility had $145.7 million available, net of letters of credit. The company reported compliance with its covenants. Current assets were $112.8 million and current liabilities $137.6 million; the filing notes that restaurant operations have historically required limited working capital. The board authorized a $100 million stock repurchase program; no shares were repurchased under it during Q1.

Outlook, commentary and risks

• Management planned 25 company restaurant openings in 2012 and expected franchise partners to open 2–3 restaurants. Full-year capital expenditures were estimated at $80–$85 million; management expected operating cash flow to exceed capital expenditures.
• Management expected 2012 commodity cost inflation of approximately 7.0%–7.5%; about 70% of food costs for the remainder of the year were under fixed-price contracts. It expected pre-opening expenses to rise with expansion and the full-year tax rate to be 32.5%–33.0%.
• Q1 commodity inflation was approximately 7.5%, especially for beef and pork. Management cautioned that pricing actions may not fully offset inflation and that margin performance depends on costs, traffic and pricing.
• A Massachusetts wage-and-tip class action settlement agreement for $5.0 million was filed April 30, 2012, subject to court approval. The company recorded the charge in Q1. A separate EEOC age-discrimination lawsuit remained unresolved; the company said it could not estimate a possible loss.
• The company identified exposure to interest-rate changes and commodity-price volatility, and dependence on four primary beef suppliers. It also remained contingently liable on certain restaurant leases assigned to franchisees.

Important facts for investors to verify

• Whether the $5.0 million settlement receives final court approval and whether the EEOC case results in an estimable liability.
• Whether restaurant traffic and comparable sales growth persist and offset food, wage and other cost inflation.
• Progress against the 25-restaurant opening plan and $80–$85 million capital expenditure outlook.
• Revolver availability, covenant compliance, and the effect of interest rates despite the company’s swaps on $50 million of notional debt.
• Execution and funding of capital returns, including the newly authorized repurchase program and dividends.