Texas Roadhouse, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 30, 2014 (52 weeks). The filing also reports fourth-quarter results; FY 2013 had 53 weeks, including a 14-week fourth quarter, which affects comparisons.
Business context
Texas Roadhouse operates full-service casual dining restaurants, primarily under the Texas Roadhouse brand. At year-end, it had 451 restaurants: 372 company-operated and 79 franchised, across 49 states and four foreign countries. Company operations and franchising are reported as one segment.
Financial and operating performance
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Total revenue | $1,582.1 million | $1,422.6 million | +11.2% |
| Operating income | $130.4 million | $119.7 million | +9.0% |
| Operating margin | 8.2% | 8.4% | Down 0.2 percentage points |
| Net income attributable to Texas Roadhouse | $87.0 million | $80.4 million | +8.2% |
| Diluted EPS | $1.23 | $1.13 | +8.8% |
| Operating cash flow | $191.7 million | $173.8 million | +10.3% |
| Cash and cash equivalents at year-end | $86.1 million | $94.9 million | Down $8.8 million |
| Long-term debt, excluding current maturities | $50.7 million | $51.0 million | Down $0.3 million |
Restaurant sales rose 11.2%; comparable restaurant sales increased 4.7%, reflecting 3.2% traffic growth and a 1.5% increase in average check. Average unit volume was $4.355 million. Restaurant cost of sales increased to 35.3% of restaurant sales from 34.9%, primarily due to food commodity inflation; labor was 29.3% versus 29.2%. Net income margin was 5.4%, compared with 5.7% in 2013.
Capital expenditures were $125.4 million, including $78.9 million for new company restaurants and $46.6 million for refurbishment. Operating cash flow less capital expenditures was approximately $66.3 million. Current assets were $147.7 million and current liabilities $216.0 million. The company reported $50.0 million drawn on its $200 million revolving facility and $144.2 million of availability, net of letters of credit.
Fourth quarter: Revenue was $404.4 million versus $376.0 million; operating income was $27.0 million versus $26.1 million; net income attributable to the company was $18.6 million versus $17.1 million; diluted EPS was $0.26 versus $0.24. The 2013 fourth quarter included an extra week, so the reported comparison is not like-for-like.
Material changes and notable items
- Restaurant sales growth was driven by additional store weeks and higher average unit volume. The extra week in FY 2013 added approximately $32 million in sales and an estimated $0.03–$0.04 to diluted EPS that year.
- Commodity inflation was approximately 3.4% in 2014, principally from higher food and beef costs. Menu price increases included 1.8% in November 2014.
- Average investment for Texas Roadhouse restaurants opened in 2014 was $5.1 million, up from $4.1 million in 2013; the company cited higher building costs at certain sites and opening delays. It expects approximately $4.7 million per 2015 opening.
- FY 2014 included a $0.6 million goodwill impairment charge for one restaurant. FY 2013 included a $1.8 million gain on sale of the Aspen Creek concept.
- The company repurchased 1.675 million shares for approximately $42.7 million in 2014. It paid $31.3 million in dividends and declared $0.60 per share for the year.
Outlook, risks and contingencies
- Management planned 25–30 company restaurant openings in 2015, including as many as five Bubba’s 33 locations; franchise partners were expected to open four to six restaurants, primarily internationally.
- 2015 capital expenditures were projected at $135–$145 million. Management expected operating cash flow to exceed capital expenditures and anticipated using excess cash for repurchases, dividends and/or debt repayment.
- Management forecast 3.0%–4.0% commodity inflation in 2015, including $1–$2 million in purchasing savings; health-benefit costs were expected to increase by $5–$6 million, with additional pressure from wage increases. The expected tax rate was 30.0%–31.0%.
- The $200 million revolver matures in November 2018 and is subject to a minimum fixed-charge coverage ratio of 2.00:1 and maximum leverage ratio of 3.00:1. The company reported covenant compliance at year-end. Two interest-rate swaps covered $50 million of borrowings.
- Operating lease commitments totaled $610.4 million; capital project commitments were estimated at $153.2 million. The company also had contingent exposure of up to $18.0 million on seven assigned leases; no material liability was recorded because default was considered less than probable.
- The EEOC age-discrimination case remained in discovery. The company denied liability and said it could not estimate any potential loss. Other ordinary-course litigation was not considered material by management.
- Key risks include beef and other commodity costs, wage and healthcare expenses, competition, restaurant-opening execution and cost overruns, food safety and adverse publicity, weather, labor availability, franchisee execution, and payment-card or information-security incidents. Four suppliers provided most beef purchases.
Most important facts for investors to verify
- Comparable-sales growth, traffic trends and check growth, while accounting for the different number of weeks in FY 2013.
- Whether food, labor and healthcare inflation and menu pricing affect restaurant-level margins as management expects.
- New-unit opening pace, investment per restaurant, and performance of Bubba’s 33 and newer markets.
- Cash generation relative to capital spending, dividends and buybacks, together with revolver availability and covenant headroom.
- Developments in the EEOC litigation, contingent lease guarantees, and impairment monitoring at restaurants with weaker cash flows.