Texas Roadhouse, Inc. — Q2 2016 Form 10-Q
Reporting period: 13 and 26 weeks ended June 28, 2016, compared with the periods ended June 30, 2015. The company operated 415 company restaurants and franchised 84 restaurants at quarter-end.
Financial performance
| Metric | Q2 2016 | Q2 2015 | 2016 YTD | 2015 YTD |
|---|---|---|---|---|
| Total revenue | $508.8 million | $454.7 million | $1,024.4 million | $914.9 million |
| Operating income | $49.8 million | $31.7 million | $102.6 million | $80.3 million |
| Net income attributable to Texas Roadhouse | $33.6 million | $21.1 million | $69.2 million | $53.4 million |
| Diluted EPS | $0.47 | $0.30 | $0.98 | $0.76 |
| Restaurant margin | 19.2% | 16.2% | 19.7% | 17.6% |
Q2 revenue grew 11.9%; company restaurant sales increased 12.0%, reflecting 8.4% more store weeks and 3.7% higher average unit volume. Comparable sales rose 4.5%, including 2.9% traffic growth and a 1.6% increase in average check. Management attributed the sharp margin improvement primarily to 6.8% commodity deflation, particularly beef; higher wage rates partly offset the benefit. Q2 cost of sales fell to 34.0% of restaurant sales from 37.3%, while labor rose to 29.7% from 29.3%.
For the first half, revenue increased 12.0% and restaurant margin increased to 19.7% from 17.6%. Net income included a $5.5 million pretax ($3.4 million after-tax) charge for an employment-related settlement, reducing YTD diluted EPS by approximately $0.05. The effective tax rate was 30.1% YTD, versus 30.3%.
Cash flow, liquidity and debt
- YTD operating cash flow was $114.1 million, compared with $94.8 million. Capital expenditures were $69.2 million, versus $70.9 million; the difference between operating cash flow and capital expenditures was approximately $44.9 million.
- Cash and cash equivalents were $95.3 million at June 28, 2016, up from $59.3 million at year-end 2015. Current assets were $146.0 million and current liabilities $218.9 million.
- Total debt was $50.6 million, including $50.0 million drawn on the revolving credit facility and a $0.6 million installment loan. Revolver availability was $143.4 million, net of letters of credit. The company reported covenant compliance.
- YTD financing cash outflow was $8.9 million, including $25.3 million of shareholder dividends and $4.1 million of share repurchases; the company also borrowed $25.0 million net under its revolver. Quarterly dividends declared were $0.19 per share.
- Operating lease obligations totaled $741.6 million; estimated capital project commitments were $171.8 million. These are contractual commitments, not reported debt.
Outlook, commentary and risks
- Management planned approximately 30 company restaurant openings in 2016, including about seven Bubba’s 33 locations, and anticipated approximately four franchise openings. Fourteen company restaurants and two franchise restaurants had opened YTD.
- Full-year 2016 capital expenditures were expected to be approximately $165–$175 million. Management expected operating cash flow to exceed capital expenditures and anticipated using excess funds for dividends, repurchases and/or debt repayment.
- Management expected 2.5%–3.0% food-cost deflation for 2016 and an approximately 30% tax rate. Labor costs faced inflationary pressure from minimum and tip wage increases and regulatory changes. D&A as a percentage of revenue was expected to exceed the prior year.
- Beef sourcing was concentrated among three suppliers. Management warned that supplier disruption could cause shortages, higher procurement costs or lost sales; commodity price increases may pressure results if menu pricing or traffic cannot offset them.
- The EEOC age-discrimination lawsuit remained unresolved, with trial scheduled for January 2017; the company denied liability and could not estimate a loss. Separately, a court-approved FLSA settlement was capped at $9.5 million; the company had recorded a $5.5 million pretax estimate, and the final payment could vary.
- The company remained contingently liable for up to $16.8 million of lease guarantees relating to seven assigned leases; no material liability was recorded because default was considered less than probable. Management reported no material changes to previously disclosed risk factors and effective disclosure controls.
Most important facts for investors to verify
- Whether comparable-sales growth and restaurant margins remain resilient as food-cost deflation moderates and wage pressure continues.
- Actual 2016 openings and capital spending compared with the stated plans, and the resulting cash generation and revolver borrowings.
- The final cost and timing of the FLSA settlement, and any developments or potential exposure in the EEOC case.
- Beef supply and commodity-cost trends, labor and regulatory cost changes, and the company’s ability to offset them through traffic, productivity or pricing.
- Revolver covenant headroom and the scale of lease and capital commitments relative to cash and operating cash flow.