TXRH

Business Context and Reporting Period

Company: Texas Roadhouse, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 27, 2005
Business Overview: Texas Roadhouse is a growing, moderately priced, full-service casual dining restaurant chain. As of the reporting date, the company operated 221 restaurants in 41 states, comprising 127 company-owned locations and 94 franchised/licensed locations. The company focuses on high-quality, freshly prepared food, specifically steaks, served in a rustic southwestern lodge atmosphere.

Key Financial Metrics

Margins (as % of Restaurant Sales):

• Cost of Sales: 35.2% (2005) vs. 34.9% (2004)
• Labor: 27.2% (2005) vs. 27.4% (2004)
• Operating Income Margin: 10.5% (2005) vs. 10.9% (2004)

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 26.4% year-over-year, driven by the opening of 20 new company restaurants and 5.6% comparable restaurant sales growth.
• Profitability: Net income increased 39.7% to $30.3 million. Operating income rose 22.3% to $47.3 million.
• Debt Reduction: Long-term debt decreased significantly from $12.8 million to $6.3 million. The company repaid $4.0 million of its credit facility using proceeds from a July 2005 follow-on stock offering.
• Interest Expense: Net interest expense dropped to $0.3 million from $4.7 million in 2004, primarily due to reduced debt levels and interest income.
• Cost Pressures: Cost of sales increased slightly as a percentage of sales due to higher pork rib costs, partially offset by menu price increases of approximately 2%.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Expansion: The company plans to open 23 to 24 additional company restaurants in 2006. Franchisees plan to open 3 to 4 new locations.
• Acquisitions: On December 28, 2005 (post-period), the company acquired 11 franchise restaurants. This is expected to be accretive to 2006 diluted EPS by approximately $0.02, though it will incur a $0.8 million settlement loss in Q1 2006.
• Capital Expenditures: Expected to be between $65.0 million and $75.0 million in 2006, excluding franchise acquisitions.
• Accounting Changes: Adoption of SFAS No. 123R in 2006 is estimated to decrease net income by $6.0 million to $7.0 million ($0.08 to $0.09 per share).

Key Risks and Contingencies:

• Commodity Prices: Significant exposure to beef and pork prices; the company relies heavily on one primary beef supplier.
• Food Safety: Risks related to foodborne illness (e.g., norovirus incident in 2004) and negative publicity regarding beef consumption.
• Labor Costs: Sensitivity to minimum wage increases and labor shortages.
• Franchisee Performance: Reliance on franchisees to maintain brand standards; failure to do so could harm the company's reputation.
• Concentration: Approximately 22% of company restaurants are located in Texas, creating sensitivity to local economic conditions.

Investor Verification Checklist

• Comparable Sales Growth: Verify the sustainability of the 5.6% comparable restaurant sales growth rate in a competitive casual dining market.
• Unit Economics: Confirm that new restaurant openings are achieving the projected average unit volume of $3.9 million within the expected 3-6 month ramp-up period.
• Debt Covenants: Monitor compliance with the credit facility covenants, specifically the minimum fixed charge coverage ratio of 1.50 to 1.00 and maximum leverage ratio of 3.00 to 1.00.
• Acquisition Integration: Assess the financial impact of the 11 franchise restaurants acquired in late December 2005 and the associated $0.8 million settlement charge.
• Stock-Based Compensation: Review the impact of the new SFAS No. 123R accounting standard on future earnings per share.