Texas Roadhouse, Inc. — Q1 2016 Form 10-Q
Business context and period: Unaudited results cover the 13 weeks ended March 29, 2016, compared with the 13 weeks ended March 31, 2015. At quarter-end, the company operated 408 restaurants and franchised 83, across 49 states and four foreign countries.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Total revenue | $515.6 million | $460.2 million | +12.0% |
| Restaurant sales | $511.3 million | $456.3 million | +12.1% |
| Operating income | $52.8 million | $48.6 million | +8.7%; operating margin 10.2% vs. 10.6% |
| Net income attributable to Texas Roadhouse | $35.6 million | $32.3 million | +10.2% |
| Diluted EPS | $0.50 | $0.46 | +9.8%; Q1 2016 included an estimated $0.05-per-share legal settlement charge |
| Restaurant margin | 20.1%; $103.0 million | 19.0%; $86.6 million | Margin rate improved 116 basis points |
| Operating cash flow | $64.9 million | $57.7 million | Capital expenditures were $34.2 million and $33.4 million, respectively |
| Cash and cash equivalents | $96.0 million | $59.3 million at Dec. 29, 2015 | Quarter-end current assets $147.2 million; current liabilities $233.2 million |
| Total debt | $50.7 million | $25.7 million at Dec. 29, 2015 | Includes $50.0 million drawn on revolving facility |
Operating drivers: Company comparable restaurant sales grew 4.6% (traffic +3.2%; average check +1.4%), versus 8.9% growth a year earlier. Growth in restaurant sales also reflected an 8.3% increase in store weeks. Lower food costs, primarily beef, and pricing and operating efficiencies helped reduce cost of sales to 33.9% of restaurant sales from 35.1%. Labor costs rose to 28.9% from 28.8% of restaurant sales.
Material changes and financial position
- General and administrative expense increased to $30.1 million from $21.8 million, including a $5.5 million pretax ($3.4 million after-tax) charge for a proposed wage-and-hour class settlement.
- Depreciation and amortization increased to $19.5 million from $16.3 million; pre-opening expense rose to $4.8 million from $3.8 million, reflecting more restaurant openings.
- Cash provided by operations increased year over year. The filing attributes this to higher earnings and noncash expenses, with working-capital movements including lower deferred gift-card revenue partly offsetting cash generation.
- Capital spending was $34.2 million, including $22.9 million for new company restaurants and $11.3 million for refurbishment. Quarter-end cash exceeded total debt; $143.4 million remained available under the revolving facility, net of letters of credit. The company reported compliance with its debt covenants.
- The company declared a $0.19-per-share dividend, paid April 1, 2016, and repurchased 114,700 shares for $4.1 million during the quarter.
Outlook, risks and contingencies
- Management planned approximately 30 company restaurant openings in 2016, including about seven Bubba’s 33 locations; seven company restaurants had opened in Q1. Franchise partners were expected to open as many as six restaurants, primarily internationally.
- 2016 capital expenditures were expected to be approximately $165 million to $175 million. Management expected operating cash flow to exceed capital expenditures, with excess cash potentially used for repurchases, dividends or debt repayment.
- Management expected 1.0%–2.0% food-cost deflation for 2016, while noting labor-cost pressure from minimum and tipped wage increases. Approximately 65% of overall food costs were under fixed-price contracts. D&A as a percentage of revenue was expected to be higher; the expected fiscal 2016 tax rate was approximately 30%.
- Key exposures include commodity-price volatility and reliance on three principal beef suppliers, wage inflation, variable-rate debt, and the ability to maintain traffic and margins. A one-percentage-point increase in variable borrowing rates was estimated to raise annual interest expense by $0.5 million.
- The EEOC age-discrimination case remained in discovery, with trial preparation for 2017; the company denied liability and could not estimate a possible loss. The wage-and-hour settlement remained subject to a finalized agreement and court approval; actual payments could differ from the recorded estimate.
- Estimated capital project commitments were $157.5 million. The company also had $716.8 million of operating lease obligations and contingent maximum liability of $17.0 million on seven assigned leases; no material liability was recorded for those guarantees.
Important facts for investors to verify
- Whether comparable-sales and traffic momentum continues, given the slowdown in comparable growth versus Q1 2015.
- Actual settlement amount and court approval of the wage-and-hour matter, and developments in the EEOC litigation.
- Whether forecast food-cost deflation offsets wage inflation and other operating-cost pressures.
- Execution and funding of the 2016 opening and capital-spending plans, and the resulting cash flow, debt and shareholder returns.
- Exposure to beef supplier disruption, commodity volatility, lease commitments and variable interest rates.