Texas Roadhouse, Inc. — Q3 2017 Form 10-Q
Reporting period: 13 and 39 weeks ended September 26, 2017; comparisons are with the corresponding 2016 periods. The company operated 455 restaurants and franchised 85, across 49 states and six countries.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 2017 YTD | 2016 YTD |
|---|---|---|---|---|
| Total revenue | $540.5m | $481.6m | $1,674.5m | $1,506.0m |
| Operating income | $45.5m | $38.5m | $148.7m | $141.1m |
| Net income attributable to Texas Roadhouse | $31.0m | $25.7m | $102.9m | $94.9m |
| Diluted EPS | $0.43 | $0.36 | $1.44 | $1.34 |
| Restaurant margin | $95.6m; 17.8% | $86.6m; 18.1% | $314.3m; 18.9% | $286.5m; 19.2% |
| Operating cash flow | — | — | $188.1m | $159.8m |
- Q3 revenue increased 12.2%, with company restaurant comparable sales up 4.5%, store weeks up 8.1%, and average unit volume up 3.9%. Traffic increased 3.5% and average check 1.0%.
- Q3 attributable net income rose 20.8% and diluted EPS rose 19.9%. YTD revenue increased 11.2%, while attributable net income rose 8.5% and diluted EPS rose 7.5%.
- Q3 restaurant margin dollars increased, but margin rate fell 0.3 percentage points; labor costs rose to 31.6% of restaurant sales from 30.4%. Lower food costs, including approximately 2% commodity deflation, helped reduce cost of sales to 32.9% from 33.9%.
- YTD cash from operations was $188.1m; investing cash outflow was $133.6m, including $117.0m of capital expenditures and $16.5m for four franchise restaurant acquisitions. Financing cash outflow was $53.0m. Cash ended at $114.4m, versus $112.9m at December 27, 2016.
Balance sheet, debt and liquidity
- At September 26, 2017, total assets were $1,212.7m, total liabilities $381.9m, and equity $830.8m. Long-term debt and capital lease obligations totaled $52.0m, including $50.0m drawn on the revolving credit facility.
- The amended unsecured revolver provides up to $200m, with an option to increase by up to $200m subject to limitations, and matures August 5, 2022. Availability was $142.9m after $7.1m in letters of credit. The weighted-average borrowing rate was 2.11%; the company reported covenant compliance.
- Operating lease obligations totaled $839.9m. The company reported $150.6m of estimated costs to complete capital projects and $15.8m of maximum potential exposure under seven lease guarantees; no material liability was recorded for those guarantees.
Changes, outlook and risks
- Q3 sales growth reflected new restaurant openings and higher comparable sales. Q3 labor pressure weighed on margin, partly offset by food-cost deflation. YTD G&A included a $14.9m pretax ($9.2m after-tax) charge for an employment lawsuit settlement and legal defense costs; this charge was recorded in Q1.
- Management planned 26–27 company restaurant openings in 2017, including four Bubba’s 33 locations, and approximately 30 company openings in 2018. It anticipated up to five franchise openings in 2017 and up to seven in 2018. Expected 2017 capital expenditures were approximately $170m, excluding franchise acquisitions; management expected operating cash flow to exceed capital expenditures.
- Management expected approximately 2% food-cost deflation for 2017 and relatively flat commodity costs in 2018. For the remainder of 2017, about 60% of food costs were covered by fixed-price contracts; for 2018, about 30% were covered.
- Management forecast 7%–8% labor inflation for the rest of 2017, including $4.5m–$5.5m of added costs from compensation-structure changes. It expected D&A as a share of revenue to remain higher in the remainder of 2017 and in 2018, and effective tax rates of about 28% for 2017 and 28%–29% for 2018.
- Key exposures include wage and commodity inflation, reliance on three major beef suppliers, variable-rate debt, restaurant lease commitments, and the possibility that costs cannot be offset through pricing or traffic growth. The company said the new lease accounting standard was expected to materially increase balance-sheet assets and liabilities. It reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether traffic, comparable sales and average unit volumes sustain growth, and whether labor inflation continues to outpace pricing or productivity improvements.
- Actual 2017 and 2018 restaurant openings, capital spending, and returns from the four acquired franchise restaurants.
- The trajectory of food costs and supplier concentration, particularly as fixed-price coverage declines in 2018.
- Cash generation, dividend and repurchase decisions, revolver utilization, and covenant headroom.
- The effects of the $14.9m settlement charge, lease guarantees, and forthcoming lease-accounting adoption on reported results and the balance sheet.