Texas Roadhouse, Inc. — Q1 2017 Form 10-Q
Business context and period. The filing covers the unaudited 13 weeks ended March 28, 2017, compared with the 13 weeks ended March 29, 2016. Texas Roadhouse operated 441 company restaurants and franchised 84 restaurants at quarter-end, across 49 states and six foreign countries. The company also operated Bubba’s 33 and two other restaurants.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $567.7 million | $515.6 million | +10.1% |
| Income from operations | $49.0 million | $52.8 million | −7.2% |
| Net income attributable to Texas Roadhouse | $34.3 million | $35.6 million | −3.6% |
| Diluted EPS | $0.48 | $0.50 | −4.4% |
| Operating cash flow | $94.3 million | $64.9 million | +$29.4 million |
| Capital expenditures | $36.1 million | $34.2 million | +$1.9 million |
Restaurant sales rose 10.2%, reflecting 8.0% growth in company store weeks and 3.1% comparable restaurant sales growth. Comparable sales growth comprised 2.7% higher guest traffic and a 0.4% increase in average check. Franchise royalties and fees increased 2.1% to $4.4 million.
Restaurant margin was $112.3 million, or 19.9% of restaurant sales, versus $103.0 million, or 20.1%, a year earlier. Cost of sales declined to 32.7% of sales from 33.9%, helped by approximately 2.4% commodity deflation, mainly beef. Labor rose to 30.2% from 28.9%, primarily due to higher wages and compensation-structure changes. General and administrative expense increased to $40.2 million from $30.1 million, and depreciation and amortization rose to $22.6 million from $19.5 million.
The effective tax rate was 26.5%, compared with 30.0%; the 2017 rate included a $1.6 million tax benefit from share-based compensation accounting changes. Consolidated net income, including noncontrolling interests, was $36.0 million versus $37.0 million.
Balance sheet, cash flow and liquidity
- Cash and cash equivalents were $137.5 million at March 28, 2017, up from $112.9 million at December 27, 2016.
- Total assets were $1.198 billion and total liabilities were $416.3 million. Long-term debt and capital lease obligations totaled $52.5 million, including $50.0 million drawn on the revolving facility.
- The company reported $142.9 million of available revolver capacity, net of $7.1 million in letters of credit, under its $200 million facility. It was in compliance with financial covenants.
- Operating cash flow increased to $94.3 million; management attributed the increase principally to working-capital timing, including accrued wages, other accrued liabilities and receivables, partly offset by lower deferred gift-card revenue.
- Investing cash outflow was $52.6 million, including $36.1 million of capital expenditures and $16.5 million for four acquired franchise restaurants. Financing cash outflow was $17.2 million, including $13.4 million of dividends paid and $7.0 million of shares withheld for tax obligations.
Material changes and unusual items
- Revenue growth was supported by new restaurant openings and comparable sales, but comparable sales growth eased to 3.1% from 4.6% in Q1 2016; average unit volume growth eased to 2.3% from 4.1%.
- The company recorded a $14.9 million pretax charge ($9.2 million after tax) related to the EEOC age-discrimination case: $12.6 million for the settlement and $2.3 million in defense legal fees. Management said the charge reduced diluted EPS by $0.13. The settlement included a $12.0 million fund for eligible claimants.
- Four franchise restaurants in Florida and Georgia were acquired for approximately $16.5 million, net of cash acquired; the acquisition generated approximately $4.5 million of goodwill.
- The company adopted new share-based compensation guidance, recognizing excess tax benefits and deficiencies in the income tax provision. It also adopted deferred-tax balance-sheet classification guidance prospectively.
Outlook, commentary and risks
- Management planned approximately 30 company restaurant openings in 2017, including about six Bubba’s 33 locations, and anticipated up to seven franchise openings, primarily international. Expected 2017 capital expenditures were approximately $170 million, excluding franchise acquisitions.
- Management expected 1.0%–2.0% food-cost deflation for 2017 and mid-single-digit labor inflation. Changes to compensation structure were expected to add $4.5 million–$5.5 million to 2017 labor costs. A 0.5% menu price increase was planned for May 2017.
- Management expected 2017 depreciation and amortization as a share of revenue to remain above the prior year and estimated an effective tax rate of approximately 29.0%–30.0%. It anticipated operating cash flow would exceed capital expenditures in 2017.
- Risks include wage and commodity inflation, the ability to offset cost increases with pricing or traffic, and dependence on three major beef suppliers. The company had fixed-price contracts for approximately 60% of food costs; remaining costs were exposed to market prices.
- Operating leases represented approximately $787.5 million of remaining rental payments. Management expected the new lease accounting standard to materially increase balance-sheet assets and liabilities. Seven assigned leases carried $16.2 million of contingent maximum exposure; no material liability was recorded because default was considered less than probable.
Important facts for investors to verify
- Whether comparable-sales growth, traffic and average check trends persist, and how the planned price increase affects demand.
- Whether labor inflation and compensation changes pressure restaurant margins, and whether expected food-cost deflation materializes.
- The final costs and implementation of the EEOC consent decree, including claimant awards from the $12.0 million fund.
- Actual restaurant openings, capital spending and returns from acquired and newly opened restaurants.
- Cash generation and debt usage relative to dividends, share repurchases and the company’s substantial lease commitments.
- The company’s assessment of the future balance-sheet effects of lease accounting and the evolving accounting treatment of gift-card breakage and franchise fees.