Texas Roadhouse, Inc. — Q3 2022 Form 10-Q
Reporting period: Unaudited results for the 13 and 39 weeks ended September 27, 2022, compared with the corresponding periods ended September 28, 2021. Amounts below are in millions of dollars unless noted. The company operated 587 restaurants and franchised 98 at quarter-end.
Financial performance
| Metric | 13 weeks ended Sep. 27, 2022 | Year-over-year change | 39 weeks ended Sep. 27, 2022 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $993.3 | +14.3% | $3,005.4 | +17.0% |
| Income from operations | $75.3 | +22.0% | $251.3 | +8.2% |
| Net income attributable to Texas Roadhouse | $62.3 | +18.5% | $209.9 | +9.2% |
| Diluted EPS | $0.93 | +$0.18 | $3.08 | +$0.34 |
| Restaurant margin, non-GAAP | $152.0; 15.4% of restaurant sales | Margin rate down 0.3 percentage points | $481.9; 16.1% of restaurant sales | Margin rate down 1.2 percentage points |
Q3 comparable restaurant sales rose 8.2%, reflecting a 7.7% increase in average check and 0.5% higher guest traffic. Store weeks increased 6.1%. For the 39-week period, comparable sales increased 10.5%. Management attributed sales growth to higher checks, traffic, new openings and acquired restaurants. Q3 operating margin was approximately 7.6% of revenue; net margin attributable to the company was approximately 6.3%.
Food and beverage costs were 34.7% of restaurant sales in Q3 (up 0.1 percentage points year over year); labor was 33.5% (up 0.3 points). YTD, food costs were 34.4% (up 1.3 points) and labor 33.0% (up 0.3 points). Inflation weighed on restaurant margins, partly offset by higher sales and menu prices. Bubba’s 33 Q3 restaurant margin rate fell to 10.8% from 16.1%; Texas Roadhouse’s remained 15.7%.
Cash flow, balance sheet and capital returns
- Cash flow, 39 weeks: Operating cash flow was $395.1 million, versus $348.7 million. Capital expenditures were $174.2 million, versus $139.0 million; operating cash flow less capital expenditures was $220.9 million. Investing cash outflow was $195.6 million, including $33.1 million for franchise acquisitions. Financing cash outflow was $349.8 million, principally reflecting $212.9 million of share repurchases and $93.3 million of dividends.
- Liquidity: Cash was $185.3 million at September 27, 2022, down from $335.6 million at December 28, 2021. Current assets were $277.4 million and current liabilities $515.7 million. The company reported $213.3 million of revolving-credit availability, net of letters of credit.
- Debt and leases: Revolver borrowings were $75.0 million, down from $100.0 million at year-end; the weighted-average borrowing rate was 3.69%. The unsecured facility has $300 million capacity and matures May 1, 2026. The company was in compliance with its covenants. Operating lease liabilities totaled approximately $697.8 million, including current obligations.
- Capital returns: The quarterly dividend declared was $0.46 per share, versus $0.40 a year earlier. The company repurchased 2.73 million shares for $212.9 million in the 39-week period, but none in Q3; $166.9 million remained authorized under the current program.
Outlook, risks and notable items
- Management planned up to 23 Texas Roadhouse and Bubba’s 33 company openings in 2022 and approximately 30 such openings plus three Jaggers openings in 2023. Expected store-week growth was approximately 6% in 2022 and 5% in 2023, excluding potential franchise acquisitions. Expected capital expenditures were approximately $230 million in 2022 and $265 million in 2023.
- Management expected 2022 commodity inflation of approximately 10.5%, with about 70% of remaining forecast costs locked, and 2023 commodity inflation of 5%–6%. Expected labor inflation was approximately 8% in 2022 and 5%–6% in 2023. Expected effective tax rates were approximately 14% in 2022 and 15% in 2023, excluding legislative changes.
- Management cited food and supply cost inflation, supply availability and competition for restaurant labor as risks to costs and sales. Beef purchases were concentrated among four suppliers; the company did not use financial instruments to hedge commodity prices. A 1 percentage-point increase in variable borrowing rates was estimated to raise annual interest expense by $0.8 million.
- All company and franchise locations were operating without COVID-related restrictions at quarter-end. The company had deferred $47.3 million of employer Social Security taxes under pandemic relief provisions; $23.0 million was due at the end of 2022.
- Q3 other sales included a favorable $6.6 million gift-card breakage estimate adjustment. The company also recorded $0.8 million of Q3 impairment and closure costs. Eight franchise restaurants were acquired in 2022 YTD for $33.1 million; acquisition purchase-price allocations remained preliminary.
- Estimated capital-project commitments were $155.3 million. Seven lease guarantees had maximum potential payments of $11.5 million; no material liability was recorded. Management reported no litigation believed likely to have a material adverse effect and no material changes to previously disclosed risk factors.
- A significant accounting-system update changed certain processes affecting internal control over financial reporting. Management said the affected controls were effective and would continue to be monitored; disclosure controls were assessed as effective.
Management cautioned that interim results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainties.
Key facts for investors to verify
- Whether price increases and sales growth can offset food, wage and other operating-cost inflation without further erosion in restaurant margins.
- Whether projected 2022–2023 openings, capital spending and new-restaurant investment returns track management’s plans.
- Cash generation and liquidity after dividends, buybacks, acquisition spending and the $23.0 million payroll-tax repayment.
- Progress on the accounting-system changes and ongoing monitoring of affected internal controls.
- The final purchase-price allocation for acquired restaurants and the assumptions behind gift-card breakage estimates.