Texas Roadhouse, Inc. — Q3 2016 Form 10-Q
Reporting period: 13 weeks ended September 27, 2016; year-to-date (YTD) means the 39 weeks ended that date. Comparatives are the periods ended September 29, 2015. Financial amounts below are in U.S. dollars.
Business context
Texas Roadhouse operated 422 company restaurants and franchised 85 more across 49 states and five foreign countries. Company restaurants included 408 Texas Roadhouse locations, 12 Bubba’s 33 locations and two other restaurants. YTD, the company opened 21 company restaurants and franchisees opened three.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Total revenue | $481.6 million | $438.1 million | $1,506.0 million | $1,353.0 million |
| Operating income | $38.5 million | $30.6 million | $141.1 million | $110.9 million |
| Net income attributable to Texas Roadhouse | $25.7 million | $20.5 million | $94.9 million | $73.9 million |
| Diluted EPS | $0.36 | $0.29 | $1.34 | $1.05 |
| Restaurant margin | 18.1% | 16.6% | 19.2% | 17.3% |
Q3 revenue increased 9.9% and attributable net income increased 25.4%. YTD revenue grew 11.3% and attributable net income grew 28.4%. Restaurant margin is a company-defined, non-GAAP measure.
Company restaurant sales rose 10.1% in Q3, reflecting more store weeks and higher average unit volume. Comparable sales increased 3.4% (traffic +2.0%; average check +1.4%), down from 6.9% in Q3 2015. YTD comparable sales growth was 4.2%, versus 8.1% a year earlier.
Q3 restaurant cost of sales fell to 33.9% of restaurant sales from 36.1%, primarily on 4.2% commodity deflation, especially beef, and operating efficiencies. Labor rose to 30.4% from 29.8%, mainly due to wage increases. G&A rose to 5.4% of revenue from 5.0%; it included a $1.2 million additional charge for an employment settlement. Q3 net income benefited from stronger restaurant margins, partly offset by higher G&A and depreciation.
YTD operating cash flow was $159.8 million, versus $131.5 million; capital expenditures were $113.2 million, versus $125.1 million. Cash and equivalents were $81.7 million at September 27, 2016. Total debt and capital lease obligations were $52.6 million, including $50.0 million drawn on the revolving facility. The company had $143.4 million of revolver availability, net of letters of credit, and was in compliance with its covenants. Current liabilities exceeded current assets; gift-card deferred revenue was a substantial component of current liabilities.
Outlook, risks and unusual items
- Management planned approximately 30 company openings in 2016, including as many as nine Bubba’s 33 restaurants, and approximately four franchise openings. For 2017, it anticipated approximately 30 company openings and as many as seven franchise openings.
- Fiscal 2016 capital expenditures were projected at $165–175 million. Management expected operating cash flow to exceed capital expenditures and anticipated using excess funds for dividends, share repurchases and/or debt repayment.
- Management expected approximately 3.5% food-cost deflation for 2016 and low-single-digit commodity deflation for 2017. About 75% of remaining-2016 food costs and 50% of 2017 food costs were under fixed-price contracts. Commodity inflation and reliance on three principal beef suppliers remain risks.
- Management expected mid-single-digit labor inflation for the remainder of 2016, including effects of wage changes and new overtime rules effective December 1, 2016. It planned an approximately 1.0% menu price increase in late November 2016; price increases or traffic growth might not offset higher costs.
- Management expected an approximately 30% effective tax rate for 2016 and 30%–31% for 2017. Depreciation as a percentage of revenue was expected to remain higher in 2016 due to new restaurants and reinvestment.
- A Fair Labor Standards Act class settlement was approved with payments not to exceed $9.5 million. The company recorded a total YTD charge of $6.7 million ($4.1 million after tax); the final payment may vary because participation is opt-in. The charge reduced YTD diluted EPS by $0.06.
- An EEOC age-discrimination lawsuit remained pending, with trial scheduled for January 2017. The company denied liability and said it could not estimate any potential loss. Management reported no material change in previously disclosed risk factors.
- Management said disclosure controls were effective. A new general ledger and accounting system was implemented during the quarter; management planned to continue monitoring related control changes.
Important facts for investors to verify
- Whether comparable-sales growth and guest traffic continue to moderate, and how the planned menu pricing affects check and traffic.
- Whether expected food-cost deflation persists and offsets wage, overtime, and other operating-cost pressure.
- Actual settlement payments and developments in the EEOC litigation.
- Restaurant-opening pace, capital spending, and the company’s ability to fund expansion and shareholder returns while maintaining covenant compliance.
- Whether the new accounting system’s related control changes remain effective through year-end.