TXRH

Business Context and Reporting Period

Company: Texas Roadhouse, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 28, 2005 (13 and 26 weeks)
Business Overview: A growing, moderately priced, full-service restaurant chain operating 204 locations (113 company-owned, 91 franchise) across 37 states as of June 28, 2005. The company completed a corporate reorganization and initial public offering (IPO) on October 8, 2004, transitioning from a limited liability company to a "C" corporation subject to federal and state income taxes.

Key Financial Metrics

Note: Debt figures include current maturities of long-term debt ($476k) and long-term debt excluding current maturities ($10,511k) as of June 28, 2005.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 28.9% in Q2 2005 and 30.7% year-to-date (YTD) compared to the prior year, driven by new restaurant openings and 6.8% comparable restaurant sales growth.
• Profitability: Net income rose 24.7% in Q2 and 19.8% YTD. Operating margins improved to 11.0% in Q2 2005 from 10.3% in Q2 2004.
• Cost Structure: Cost of sales as a percentage of restaurant sales increased slightly to 35.3% (Q2) due to higher pork rib costs, partially offset by menu price increases. Labor costs decreased as a percentage of sales to 26.9% due to sales growth outpacing wage inflation.
• Taxation: The company began recording a provision for income taxes in 2005 following its reorganization into a "C" corporation. The effective tax rate for 2005 YTD was 35.3%. No tax provision was recorded for the comparable 2004 periods.
• Interest Expense: Net interest expense decreased significantly to $0.1 million in Q2 2005 from $1.0 million in Q2 2004, reflecting a reduction in long-term debt following the IPO.
• Minority Interest: Minority interest deductions dropped to $0.2 million in Q2 2005 from $1.9 million in Q2 2004 after the company acquired remaining interests in 31 majority-owned restaurants during the reorganization.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects 2005 capital expenditures to range between $50.0 million and $60.0 million, primarily for new restaurant openings.
• Cost Outlook: Restaurant cost of sales is expected to be 25 to 50 basis points higher in 2005 versus 2004, principally driven by pork rib costs.
• Liquidity: The company maintains a $150.0 million revolving credit facility. As of June 28, 2005, $4.0 million was outstanding with $144.2 million available. This revolver was paid off in July 2005 using proceeds from a follow-on stock offering.
• Subsequent Event: On July 5, 2005, the company sold 350,000 shares in a follow-on offering, netting $11.6 million. Proceeds were used to pay down debt and fund development.
• Risks: Key risks include commodity price volatility (specifically beef and pork), labor shortages, competition in the casual dining segment, and the ability to successfully execute growth strategies. The company relies heavily on four vendors for beef supply.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the $150M credit facility covenants, specifically the minimum fixed charge coverage ratio (1.50:1.00) and maximum leverage ratio (3.00:1.00).
• Commodity Hedging: Confirm the extent of fixed-price contracts for key ingredients (beef, pork) given the stated risk of price volatility impacting margins.
• Capital Allocation: Monitor the use of the $11.6 million follow-on offering proceeds to ensure alignment with the stated plan for new restaurant development.
• Comparable Sales: Track the sustainability of the 6.8% comparable restaurant sales growth rate against industry trends.
• Stock-Based Compensation: Review the impact of the upcoming adoption of SFAS No. 123R (Share-Based Payment) on future net income, as the company currently uses the intrinsic-value method (APB 25).