Texas Roadhouse, Inc. — Q3 2011 Form 10-Q
Reporting period: 13 and 39 weeks ended September 27, 2011, compared with the periods ended September 28, 2010. Amounts are in millions, except per-share data. Texas Roadhouse operated 356 restaurants in 46 states and one foreign country: 284 company-operated and 72 franchised or licensed.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 2011 YTD | 2010 YTD |
|---|---|---|---|---|
| Total revenue | $269.3 | $245.6 | $832.6 | $760.4 |
| Operating income | $23.1 | $21.4 | $77.0 | $74.9 |
| Operating margin | 8.6% | 8.7% | 9.3% | 9.8% |
| Net income attributable to Texas Roadhouse | $15.8 | $14.0 | $51.7 | $48.2 |
| Diluted EPS | $0.22 | $0.19 | $0.71 | $0.66 |
- Revenue increased 9.6% in Q3 and 9.5% YTD, driven by new restaurants and higher average unit volumes and comparable sales. Company comparable restaurant sales rose 4.0% in Q3 and 4.4% YTD; Q3 traffic and average check both contributed.
- Cost of sales rose to 33.3% of restaurant sales from 32.5% in both comparison periods, reflecting commodity inflation. Restaurant labor was 29.6% of sales in Q3 versus 29.5%; other operating costs improved to 16.9% from 17.9%.
- YTD operating margin declined 0.5 percentage points. Higher food costs, pre-opening expense and other costs more than offset sales growth and lower other operating expenses. Q3 attributable net income rose about 13%; YTD rose about 7%.
Cash flow, liquidity and capital
- YTD operating cash flow was $81.0 million, versus $74.3 million. Investing outflow was $51.7 million, including $51.8 million of capital expenditures; financing outflow was $55.9 million.
- Cash fell $26.5 million from year-end to $55.7 million, primarily amid capital spending, $46.4 million of share repurchases and $11.4 million of dividends paid.
- At September 27, cash was $55.7 million and total debt and capital-lease obligations were approximately $52.0 million, including $50.0 million drawn on the revolver. The new $200 million revolving facility expires in August 2016; $146.2 million was available after letters of credit. The company reported compliance with its financial covenants.
- Current assets were $84.3 million and current liabilities $100.9 million. The filing describes the company as having positive working capital, but the reported balance-sheet totals show current liabilities exceeded current assets.
- Capital-project commitments were approximately $77.6 million. Total contractual obligations, including operating leases, were $339.5 million.
Outlook, risks and unusual items
- Management planned 20 company restaurant openings in 2011 and at least 25 in 2012. It expected 2011 capital expenditures of approximately $70 million and higher pre-opening expense in 2012.
- Management expected 2011 commodity inflation of approximately 4% and 2012 inflation of 7%–9%. It reported that 65%–70% of remaining-2011 food costs were covered by fixed-price contracts. Around 50 restaurants in six states faced announced minimum- or tip-wage increases effective January 2012.
- Management expected an effective tax rate of about 29.8% for 2011 and 32.5% for 2012. No specific full-year earnings guidance was provided.
- The EEOC filed an age-discrimination hiring lawsuit on September 30, 2011. A Massachusetts class action alleges improper tip pooling. The company disputes both matters and could not estimate potential losses; it warned the tip case could materially affect results if penalties are imposed.
- The company depends heavily on three beef suppliers and is exposed to commodity-price volatility. Interest-rate swaps hedge $50 million of revolver borrowings; a 1 percentage-point increase in variable borrowing rates was estimated to increase annual interest expense by $0.5 million.
- Q3 and YTD results included higher share-based compensation; YTD G&A also included a $0.5 million one-time charge related to restricted stock units. The filing says interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether comparable-sales and traffic trends persist, and whether pricing can offset the forecast increase in food and labor costs without hurting demand or margins.
- Whether planned restaurant openings, capital spending and commitments remain on schedule and within the stated cash-flow and financing capacity.
- Developments and potential exposure in the EEOC and Massachusetts tip-pooling cases, for which loss ranges were not estimable.
- Cash allocation, including repurchases, dividends and debt reduction, alongside liquidity and compliance with credit-facility covenants.