Texas Roadhouse, Inc. — Q2 2014 Form 10-Q
Business context and period. The filing covers the 13 and 26 weeks ended July 1, 2014, compared with the corresponding 2013 periods. Texas Roadhouse operated 433 restaurants: 358 company restaurants and 75 franchised restaurants. The statements are unaudited; management cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2014 | Q2 2013 | 2014 YTD | 2013 YTD |
|---|---|---|---|---|
| Total revenue | $395.4 million | $352.1 million | $792.5 million | $711.8 million |
| Operating income | $34.4 million | $29.8 million | $74.6 million | $68.0 million |
| Net income attributable to Texas Roadhouse | $23.1 million | $20.0 million | $49.5 million | $46.1 million |
| Diluted EPS | $0.33 | $0.28 | $0.70 | $0.65 |
| Restaurant margin | 18.1% | 18.6% | 18.7% | 18.8% |
| Operating margin | 8.7% | 8.5% | 9.4% | 9.5% |
Cash flow and liquidity. YTD operating cash flow was $80.7 million, versus $68.6 million. Capital expenditures were $54.0 million, versus $35.2 million; operating cash flow less capital expenditures was approximately $26.7 million, versus $33.4 million. Cash fell to $77.5 million from $94.9 million at December 31, 2013. Total debt was $50.9 million, including $50.0 million drawn on the revolving facility. The company reported $144.6 million of facility availability, net of letters of credit, and compliance with its covenants. The business typically operates with negative working capital.
Changes and operating drivers
- Q2 revenue rose 12.3%; YTD revenue rose 11.3%. Growth reflected new restaurants and higher average unit volumes, with some contribution from the prior-year acquisition of two franchise restaurants.
- Comparable sales growth was 2.9% in both Q2 and YTD, below 4.5% in Q2 2013 and 4.1% in 2013 YTD. Q2 2014 comparable growth comprised 1.4% higher average check and 1.5% higher guest traffic.
- Q2 restaurant margin declined 0.5 percentage point. Cost of sales rose to 35.0% of restaurant sales from 34.5%, primarily due to commodity inflation; labor rose to 29.4% from 29.2%. Lower other operating costs partly offset these increases.
- YTD net income attributable to the company increased 7.4%, while diluted EPS increased to $0.70 from $0.65. Q2 net income increased approximately 15.6%.
- The company repurchased 1.26 million shares for $31.8 million YTD. A new $100 million authorization was approved in May, with $96.4 million remaining at July 1. The declared $0.15-per-share dividend was paid July 3.
Outlook, risks and unusual items
- Management planned approximately 25 company restaurant openings in 2014 and expected franchise partners to open as many as five, including up to four internationally. Full-year capital expenditures were projected at $100–$110 million.
- Management expected low-single-digit commodity inflation for 2014 and a 30.0%–31.0% effective tax rate. Labor costs were expected to face pressure from wage-rate increases and healthcare costs; expanded employee health coverage was expected to add $2.5–$3.0 million of cost in 2014.
- Beef purchases were concentrated among four suppliers. Management warned that supply disruption, commodity cost increases, or inability to pass costs through menu pricing could adversely affect results.
- The EEOC age-discrimination lawsuit remained in discovery. The company denied liability and stated it could not predict the outcome or estimate a possible loss range.
- Estimated capital project commitments were $71.5 million. The company also remained contingently liable on certain restaurant leases assigned to buyers or franchisees; no liability was recorded because the estimated fair value of the guarantees was not considered significant.
- The company sold its two Aspen Creek restaurants and acquired two franchise restaurants in late 2013; the acquisition was reported as having no significant net revenue or accretive impact. The filing also noted the upcoming adoption of new revenue-recognition guidance, with its effect still under evaluation.
Investor verification priorities
- Track comparable sales, traffic, and average-check trends against the weaker growth rate reported in 2014.
- Verify whether commodity, wage, and healthcare inflation are offset by pricing, traffic, and operating efficiencies, and monitor restaurant margins.
- Assess planned openings and capital spending against operating cash generation, liquidity, debt availability, dividends, and share repurchases.
- Review beef-supplier concentration, the EEOC case, and contingent lease obligations for changes or financial exposure.
- Confirm progress against 2014 development, capital expenditure, commodity inflation, and tax-rate expectations; these are management expectations, not guaranteed results.