TXRH

Business Context and Reporting Period

Company: Texas Roadhouse, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 28, 2006 (13 weeks)
Business Overview: A growing, moderately priced, full-service restaurant chain operating 226 locations (142 company-owned, 84 franchise) across 42 states as of the period end. The company focuses on mid-sized markets with a strategy of expanding its restaurant base and improving unit profitability.

Key Financial Metrics

Margins: Operating margin was 9.4% in Q1 2006 compared to 12.4% in Q1 2005. Net income margin was 5.5% compared to 8.0% in the prior year.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 34.5% year-over-year, driven by the acquisition of 11 franchise restaurants in late 2005, the opening of 5 new restaurants, and 6.4% comparable restaurant sales growth.
• Net Income Decline: Despite higher revenue, net income decreased 8.7% to $8.2 million. This was primarily due to the adoption of SFAS 123R (Share-Based Payment), which reduced net income by $1.5 million, and a $0.8 million charge related to EITF 04-1 regarding the acquisition of franchise restaurants.
• Expense Increases: General and Administrative (G&A) expenses rose to $10.4 million (6.9% of revenue) from $6.0 million (5.4% of revenue), largely due to the new accounting standard, the EITF charge, and annual conference costs. Pre-opening expenses increased to $2.6 million due to a larger development pipeline.
• Debt Expansion: Long-term debt increased significantly to $17.2 million (excluding current maturities) from $6.3 million, primarily due to $12.0 million in borrowings under the revolving credit facility to fund acquisitions and capital expenditures.
• Effective Tax Rate: Increased to 40.0% from 35.3% due to non-deductible stock option expenses and the EITF 04-1 charge.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects capital expenditures for fiscal 2006 to range between $65.0 million and $75.0 million, primarily for new restaurant openings.
• Liquidity: The company intends to fund future requirements through cash on hand, operating cash flows, and its $150 million revolving credit facility. As of March 28, 2006, $135.6 million remained available under the facility.
• Dividends: The company does not anticipate paying dividends in the foreseeable future, as earnings will be retained to finance growth.
• Accounting Changes: The adoption of SFAS 123R resulted in a $1.8 million reduction in operating profit for the quarter. Management expects the effective tax rate to be approximately 38.1% for the remainder of 2006.
• Risks: Key risks include exposure to commodity price volatility (specifically beef, with high dependency on four vendors), interest rate fluctuations on variable-rate debt, and the ability to pass cost increases to consumers. The company is currently in compliance with all financial covenants.

Investor Verification Checklist

• Acquisition Impact: Verify the accretive nature of the 11 acquired franchise restaurants and the timeline for full integration into comparable sales metrics.
• Stock-Based Compensation: Monitor the ongoing impact of SFAS 123R on future earnings per share and operating margins as more options vest.
• Debt Covenants: Confirm continued compliance with the minimum fixed charge coverage ratio (1.50:1.00) and maximum leverage ratio (3.00:1.00) given the increased debt load.
• Utility Costs: Track the trajectory of utility costs, which management noted as a rising expense component expected to continue increasing in 2006.
• Capital Commitments: Review the $58.1 million in estimated capital project commitments to ensure alignment with the $65-$75 million capital expenditure guidance.