Texas Roadhouse, Inc. — Q3 2012 Form 10-Q
Reporting period: Third quarter (13 weeks) and year to date (39 weeks) ended September 25, 2012; comparisons are with the periods ended September 27, 2011. Texas Roadhouse operated 384 restaurants at quarter-end: 312 company restaurants and 72 franchise or license restaurants, including three Aspen Creek locations among company restaurants.
Financial and operating performance
| Metric | Q3 2012 | Q3 2011 | 2012 YTD | 2011 YTD |
|---|---|---|---|---|
| Total revenue | $308.7 million | $269.3 million | $953.8 million | $832.6 million |
| Operating income | $27.7 million | $23.1 million | $88.4 million | $77.0 million |
| Net income attributable to Texas Roadhouse | $18.1 million | $15.8 million | $57.2 million | $51.7 million |
| Diluted EPS | $0.25 | $0.22 | $0.80 | $0.71 |
| Operating margin | 9.0% | 8.6% | 9.3% | 9.3% |
| Net margin attributable to the company | 5.9% | 5.9% | 6.0% | 6.2% |
- Q3 revenue rose 14.6%, with restaurant sales up 14.7%; YTD revenue rose 14.6%. Growth reflected restaurant openings and higher average unit volumes. Texas Roadhouse comparable sales increased 3.6% in Q3 and 4.8% YTD.
- Q3 diluted EPS increased from $0.22 to $0.25. YTD reported diluted EPS was $0.80; excluding the $5.0 million pretax legal-settlement charge, management reported non-GAAP diluted EPS of $0.84, versus $0.71 a year earlier.
- Restaurant cost of sales increased to 33.6% of restaurant sales in Q3 and 33.8% YTD, from 33.3% in both prior-year periods, mainly due to commodity inflation. Labor was 29.9% in Q3 versus 29.6%; YTD it improved to 29.4% from 29.6%. Other operating costs declined as a share of sales.
- Cash provided by operating activities was $92.3 million YTD, compared with $81.0 million. Capital expenditures were $63.1 million, versus $51.8 million; net cash used in investing was $62.9 million. Cash increased $10.6 million to $84.3 million.
- At September 25, cash was $84.3 million and total debt and capital-lease obligations were $51.7 million, including $50.0 million drawn on the revolver. Revolver availability was $145.8 million, net of letters of credit. The company was in compliance with its debt covenants. Current assets were $118.4 million and current liabilities $120.7 million.
- Cash dividends paid YTD were $18.1 million; dividends declared were $0.27 per share for the first three quarters. No shares were repurchased under the new $100 million authorization during the period.
Changes, outlook, and notable matters
- Restaurant sales growth reflected 10.9% more store weeks in Q3 and 9.6% more YTD, while average unit volumes grew 3.3% and 4.4%, respectively. Menu price increases and higher guest traffic supported comparable sales.
- Management planned approximately 25 company restaurant openings in 2012 (18 opened YTD) and approximately 28 in 2013; franchise partners were expected to open two in 2012 and as many as four in 2013. Expected 2012 capital expenditures were approximately $90 million. Management expected operating cash flow to exceed capital expenditures in 2012.
- Management forecast commodity inflation of 6.5%–7.0% for full-year 2012 and 5.0%–8.0% for 2013, with beef costs a concern. About 75% of remaining-2012 food costs, including about 90% of beef, were under fixed-price contracts. Minimum- and tip-wage increases were expected to pressure labor costs.
- Management expected effective tax rates of approximately 32.5%–33.0% in both 2012 and 2013, compared with 29.5% in 2011, citing lower tax credits and higher nondeductible officer compensation.
- A Massachusetts wage-and-tip class action settlement was approved and the complaint dismissed. The company recorded a $5.0 million pretax charge in Q1 2012 ($3.1 million after tax; $0.04 diluted EPS impact). Separately, an EEOC age-discrimination lawsuit remained pending; the company said it could not estimate a possible loss range.
- Other exposures include reliance on four principal beef suppliers, commodity-price volatility, contingent liability on certain franchisee leases, and $55.9 million of estimated capital-project commitments. The filing also discloses related-party restaurant leases and franchise relationships. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Key facts for investors to verify
- Whether comparable-sales, guest-traffic, and new-unit performance support planned restaurant growth and margin trends.
- How commodity and wage inflation affect restaurant costs, and whether pricing and fixed-price contracts offset those pressures.
- Progress and potential exposure in the EEOC litigation, along with payment and final costs of the $5.0 million settlement.
- Capital spending, operating cash generation, dividend decisions, and any use of the $100 million share-repurchase authorization.
- Revolver availability and covenant compliance, as well as contingent lease guarantees, capital commitments, and related-party arrangements.