Business Context and Reporting Period
Company: Texas Roadhouse, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 26, 2006 (13 weeks) and 39 weeks (Year-to-Date)
Business Overview: A growing, moderately priced, full-service restaurant chain operating 241 locations (153 company-owned, 88 franchise) across 43 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
| Metric (in thousands) | 13 Weeks Ended Sep 26, 2006 | 39 Weeks Ended Sep 26, 2006 |
|---|---|---|
| Total Revenue | $148,454 | $444,573 |
| Net Income | $9,150 | $26,163 |
| Diluted EPS | $0.12 | $0.34 |
| Operating Cash Flow (39 weeks) | $39,357 | |
| Cash and Equivalents (End of Period) | $9,290 | |
| Total Debt (Long-term + Current) | $20,523 | |
| Operating Margin | 9.6% | 9.6% |
Material Changes vs. Prior Period
- Revenue Growth: Restaurant sales increased 30.6% in Q3 2006 and 31.0% YTD compared to the prior year, driven by new openings, the acquisition of 11 franchise restaurants, and comparable restaurant sales growth of 2.3% (Q3) and 3.4% (YTD).
- Profitability: Net income rose 29.6% in Q3 and 9.0% YTD. However, operating margins declined slightly from 11.0% to 9.6% YTD due to increased pre-opening costs and depreciation.
- Cost Structure:
- Labor: Increased to 27.8% of sales in Q3 (from 27.5%) and 27.6% YTD (from 27.1%), primarily due to the adoption of SFAS 123R (stock-based compensation) and higher costs for new restaurants.
- Cost of Sales: Improved slightly to 35.1% of sales (from 35.2%) due to a 1% menu price increase in January 2006, offset by higher commodity costs.
- Pre-opening Expenses: Increased significantly to $8.8 million YTD (from $5.3 million) due to a larger development pipeline.
- Acquisitions: Completed the acquisition of 11 franchise restaurants in Q1 2006 for a total purchase price of approximately $40.8 million (stock and cash), generating $37.0 million in goodwill.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects 2006 capital expenditures to be between $80.0 million and $90.0 million, excluding acquisitions, primarily for new restaurant openings.
- Liquidity: The company intends to fund growth through cash on hand, operating cash flows, and its $150 million revolving credit facility. As of September 26, 2006, $15.0 million was drawn, leaving $132.6 million in availability.
- Accounting Changes: The adoption of SFAS 123R reduced operating profit by $5.0 million and net income by $4.0 million for the 39 weeks ended September 26, 2006. The effective tax rate increased to 37.6% YTD due to non-deductible stock options and an acquisition-related charge.
- Risks:
- Commodity Prices: Exposure to volatile prices for beef, produce, and cheese. The company relies heavily on five beef vendors.
- Interest Rates: Variable rate debt exposes the company to interest rate fluctuations, though management notes a 1% increase would not be material.
- Legal: Routine litigation (slip and fall, employment) is covered by insurance and not expected to be material.
Investor Verification Checklist
- Stock-Based Compensation Impact: Verify the ongoing impact of SFAS 123R on labor and G&A expenses, which reduced net income by $4.0 million YTD.
- Acquisition Integration: Monitor the performance of the 11 acquired franchise restaurants, which contributed $31.2 million in sales YTD but added significant depreciation and amortization.
- Capital Expenditure Execution: Track actual capital spending against the $80M-$90M guidance to ensure liquidity remains sufficient for the development pipeline.
- Commodity Cost Management: Assess the ability to pass on rising food costs (specifically produce and beef) through menu price increases without impacting traffic.
- Debt Covenants: Confirm continued compliance with the credit facility's fixed charge coverage ratio (min 1.50:1) and leverage ratio (max 3.00:1).