Texas Roadhouse, Inc. — Q3 2015 Form 10-Q
Business context and period. The unaudited report covers the 13 weeks and 39 weeks ended September 29, 2015, compared with the corresponding periods ended September 30, 2014. Texas Roadhouse operated 394 company restaurants and franchised 81 restaurants across 49 states and four foreign countries; total system count was 475.
Financial performance and liquidity
- Q3 revenue: $438.1 million, up 13.7% year over year. Restaurant sales were $433.9 million; franchise royalties and fees were $4.2 million.
- Q3 earnings: Net income attributable to Texas Roadhouse was $20.5 million, up 8.5%; diluted EPS was $0.29, versus $0.27. Operating income was $30.6 million, with a 7.0% operating margin versus 7.5%.
- Q3 restaurant margin: $71.9 million, or 16.6% of restaurant sales, down from 16.8%. Labor was 29.8% of sales versus 29.5%; cost of sales was 36.1% versus 36.0%.
- Year to date: Revenue was $1.353 billion, up 14.9%; attributable net income was $73.9 million versus $68.4 million, and diluted EPS was $1.05 versus $0.97. Restaurant margin was 17.3% versus 18.1% of sales.
- Cash flow and investment: YTD operating cash flow was $131.5 million, compared with $117.3 million. Capital expenditures were $125.1 million, up from $89.6 million; cash used in investing was $124.8 million. Cash declined $13.5 million to $72.6 million.
- Debt and liquidity: Debt totaled $70.7 million, including $70.0 million drawn on the revolving facility; cash was $72.6 million. Revolver availability was $124.2 million, net of letters of credit, under a $200 million facility. The company reported compliance with covenants. It planned to repay the $20 million borrowed during Q3 in Q4.
- Shareholder returns: YTD dividends paid were $34.2 million; $0.17 per share was declared for payment in October. The company repurchased $4.7 million of shares YTD and had $80.7 million remaining under its authorization.
Material changes versus prior comparable periods
- Q3 comparable sales at company restaurants rose 6.9%, driven by traffic growth of 5.2% and average-check growth of 1.7%. YTD comparable sales rose 8.1%.
- Restaurant sales growth also reflected more store weeks from openings. The company opened 22 company restaurants YTD versus 15 in the prior-year period.
- Q3 restaurant margin percentage declined 22 basis points; management cited higher wage rates and health-insurance costs. YTD cost of sales rose to 36.1% from 35.1%, primarily due to commodity inflation, especially beef.
- Q3 pre-opening expense rose to $5.7 million from $3.9 million, and depreciation and amortization rose to $17.8 million from $15.2 million, reflecting increased openings and investment.
- YTD capital spending increased substantially, while share repurchases decreased versus 2014 YTD. Revolver borrowings increased from $50 million at year-end 2014 to $70 million at quarter-end.
Outlook, risks, and contingencies
- Management planned approximately 30 company openings in 2015, including four Bubba’s 33 restaurants, and expected 25–30 company openings in 2016, including at least five Bubba’s 33. It expected franchise partners to open up to three restaurants in 2015 and up to six in 2016.
- For 2015, management expected approximately $160 million in capital expenditures, commodity inflation of about 5%, wage-rate inflation of 2.5%–3.0%, and a 30.0%–30.5% effective tax rate. It planned an approximately 1.7% menu-price increase in late November. For 2016, it expected low-single-digit commodity deflation and a 30.0%–31.0% tax rate, subject to federal tax-credit reinstatement.
- Management estimated expanded employee health coverage would add $1.2–$1.5 million in costs for the remainder of 2015. It noted these cost increases might not be offset by pricing or traffic growth.
- Beef supply is concentrated among four vendors. Commodity-price volatility, supplier disruption, and inability to pass costs through to customers could pressure results. Variable-rate debt also creates interest-rate exposure; a one-percentage-point rate increase was estimated to raise annual interest expense by $0.5 million after swaps.
- Capital-project commitments were approximately $146.9 million. Operating lease obligations totaled $697.7 million under the contractual-obligations disclosure. The company also remained contingently liable for up to $17.4 million on seven assigned leases; no material liability was recorded because default was considered less than probable.
- An EEOC age-discrimination lawsuit was in discovery; the company denied liability and said it could not estimate any potential loss. Management said ordinary-course litigation was not expected to have a material effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether comparable-sales and traffic growth can continue while restaurant margins face beef, wage, and healthcare cost pressure.
- Whether planned openings and approximately $160 million of 2015 capital spending meet expected returns without requiring sustained incremental borrowing.
- Execution of the planned $20 million Q4 revolver repayment, continued covenant compliance, and liquidity after dividends and other capital returns.
- Developments in the EEOC litigation and any changes in the company’s contingent lease exposure.