Texas Roadhouse, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 25, 2018 (52 weeks). The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures are also disclosed. Texas Roadhouse operated 491 company restaurants and franchised 91 restaurants, for 582 locations across 49 states and nine foreign countries.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $2.457 billion | $2.220 billion |
| Operating income | $187.8 million | $186.2 million |
| Net income attributable to Texas Roadhouse | $158.2 million | $131.5 million |
| Diluted EPS | $2.20 | $1.84 |
| Operating cash flow | $352.9 million | $286.4 million |
| Capital expenditures | $156.0 million | $161.6 million |
| Cash and cash equivalents at year-end | $210.1 million | $150.9 million |
- Revenue rose 10.7%, reflecting 5.4% comparable sales growth and additional restaurant weeks from new openings. Company restaurant traffic increased 3.9%; average check increased 1.5%.
- Operating income increased only 0.9%; operating margin declined to 7.6% of revenue from 8.4%. Restaurant margin, a non-GAAP measure, increased in dollars to $424.2 million but fell to 17.4% of restaurant and other sales from 18.4%.
- Higher labor costs were a key pressure: labor expense rose to 32.6% of restaurant and other sales from 31.2%, reflecting wage rates, staffing initiatives, health insurance and workers’ compensation. Cost of sales improved to 32.6% from 32.8%, partly from pricing and accounting reclassifications.
- Net income increased 20.3%, aided by lower income taxes as well as revenue growth. The effective tax rate fell to 12.9% from 26.1%, principally following federal tax reform reducing the statutory corporate rate from 35% to 21%.
- Investing cash outflow was $158.1 million; financing cash outflow was $135.5 million, including repayment of $50 million of revolver borrowings and $68.6 million of dividends paid.
Fourth quarter: Revenue was $605.9 million, operating income $33.2 million, net income attributable to the company $30.3 million, and diluted EPS $0.42. The comparable 2017 quarter reported revenue of $545.1 million, operating income of $37.5 million, net income of $28.6 million, and diluted EPS of $0.40.
Debt, liquidity and capital allocation
- At year-end, long-term debt and capital-lease obligations totaled $2.1 million, primarily a capital lease; the company had no revolver borrowings. It had $191.6 million of revolver availability, net of $8.4 million in letters of credit, under a $200 million facility maturing in 2022.
- The company reported compliance with its credit-facility covenants. Cash increased by $59.2 million during the year.
- Operating leases represented substantial future commitments: $927.3 million of minimum operating-lease payments, including $50.0 million due within one year. Separately, capital-project commitments were estimated at $168.3 million.
- FY 2018 dividends declared were $1.00 per share. The board authorized a $0.30 quarterly dividend in February 2019, with a stated 2019 annual rate of $1.20 per share. No share repurchases were made in 2018; $69.9 million remained authorized.
Outlook, commentary and material items
- For 2019, management planned 25–30 company restaurant openings, including up to four Bubba’s 33 locations; franchise partners were expected to open as many as eight Texas Roadhouse restaurants, primarily internationally.
- Management estimated 2019 average opening investment of approximately $5.5 million per Texas Roadhouse and $6.5 million per Bubba’s 33. Expected capital expenditures were $210–$220 million, excluding cash used for franchise acquisitions. Fiscal 2019 was expected to have 53 weeks.
- Management expected commodity inflation of 1%–2%, labor-cost inflation in the mid-single digits, an effective tax rate of approximately 15%, and a menu price increase of about 1.5% in March 2019. Management noted labor and commodity pressures may not be fully offset by pricing or traffic growth.
- ASC 606 revenue recognition was adopted at the start of FY 2018. It changed the classification and timing of certain gift-card and franchise-related items; comparative periods were not restated. The company said the reclassifications had no impact on income before taxes, and reported FY 2018 net income was approximately $3,000 lower than under prior guidance.
- FY 2017 included a $14.9 million pre-tax charge ($9.2 million after tax, or $0.13 per diluted share) for an EEOC settlement. FY 2018 included $1.5 million of related claims-administration costs. The filing said ordinary-course litigation had not materially affected the company and identified no pending matter it believed would have a material adverse effect.
- Risks highlighted include wage and labor availability, food and beef costs and supplier concentration, food safety and reputation, competition and consumer spending, execution and returns from new restaurants, weather, cybersecurity and payment-card exposure, and self-insurance estimates. The company bought most of its beef from three suppliers and did not use financial instruments to hedge commodity prices.
- Adoption of the new lease standard in 2019 was estimated to recognize a right-of-use asset of approximately $470 million, net of deferred rent, and a lease liability of approximately $520 million; management expected no significant impact on operations, cash flows, liquidity or credit covenants.
Important facts for investors to verify
- Whether comparable-sales and traffic momentum can continue while restaurant margin remains pressured by labor inflation and staffing investment.
- Whether management’s 2019 opening, capital-expenditure, commodity-inflation, labor-inflation and tax-rate assumptions were achieved.
- The quality and sustainability of earnings growth, given the substantial reduction in the effective tax rate and the prior-year legal charge.
- The impact of lease obligations and adoption of the lease standard on reported liabilities, leverage measures and covenant calculations.
- Progress on restaurant-level returns, particularly for Bubba’s 33 and newer markets, and exposure to beef suppliers, food safety, labor and cybersecurity risks.