(2) Recent Accounting Pronouncements
Leases
(Accounting Standards Codification 842, "ASC 842")
On December 26, 2018, we adopted ASC 842,
Leases
, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. As further described in note 3, we lease land and/or buildings for the majority of our restaurants under non-cancelable lease agreements. We adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods.
ASC 842 also permitted the election of certain practical expedients upon adoption. We elected the transition package of practical expedients which allowed us to carryforward the historical lease classification. We also elected the practical expedient to not separate lease and non-lease components for all leases entered into after the date of adoption. Finally, we elected the hindsight practical expedient which required us to assess the lease term for all existing leases. This resulted in extending the terms for certain existing leases in which renewal options had already been exercised or were reasonably certain of being exercised and shortening the terms for certain existing leases in which renewal options were not reasonably certain of being exercised. As a result of the hindsight election, we recorded a $2.7 million reduction, net of tax, to retained earnings as of the first day of fiscal 2019 to reflect the change in lease terms.
The adoption of this standard had a significant impact on our consolidated balance sheet. There was no significant impact to our results of operations or cash flows. This standard did not have a significant impact on our liquidity or on our compliance with our financial covenants associated with our credit facility.
Financial Instruments
(Accounting Standards Update 2016-13, "ASU 2016-13")
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, which requires measurement and recognition of expected versus incurred losses for financial assets held. ASU 2016-13 is effective for annual periods beginning after December 15, 2019 (our 2020 fiscal year), with early adoption permitted for annual periods beginning after December 15, 2018. We are currently assessing the impact of this new standard on our consolidated financial position, results of operations and cash flows.
Goodwill
(Accounting Standards Update 2017-04, "ASU 2017-04")
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,
which simplifies the accounting for goodwill impairment and is expected to reduce the cost and complexity of accounting for goodwill. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Instead, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 (our 2020 fiscal year) and will be applied on a prospective basis. Early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently assessing the impact of this new standard on our consolidated financial position, results of operations and cash flows.
Fair Value Measurement
(Accounting Standards Update 2018-13, "ASU 2018-13")
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,
which eliminates, modifies and adds disclosure requirements for fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 (our 2020 fiscal year) and for interim periods within those years, with early adoption permitted. We are currently assessing the impact of this new standard on our consolidated financial statements.
(4) Long-term Debt
On August 7, 2017, we entered into the Amended and Restated Credit Agreement (the "Amended Credit Agreement") with respect to our revolving credit facility with a syndicate of commercial lenders led by JPMorgan Chase Bank, N.A., PNC Bank, N.A., and Wells Fargo Bank, N.A. The revolving credit facility remains an unsecured, revolving credit agreement under which we may borrow up to $200.0 million with the option to increase the revolving credit facility by an additional $200.0 million subject to certain limitations. The Amended Credit Agreement extends the maturity date of our revolving credit facility until August 5, 2022.
The terms of the Amended Credit Agreement require us to pay interest on outstanding borrowings at the London Interbank Offered Rate ("LIBOR") plus a margin of 0.875% to 1.875% and to pay a commitment fee of 0.125% to 0.30% per year on any unused portion of the revolving credit facility, in each case depending on our leverage ratio, or the Alternate Base Rate, which is the highest of the issuing banks’ prime lending rate, the Federal Reserve Bank of New York rate plus 0.50% or the Adjusted Eurodollar Rate for a one month interest period on such day plus 1.0%. In April 2018, we paid off our outstanding credit facility of $50.0 million. The weighted-average interest rate for the amended revolving credit facility as of March 26, 2019 and December 25, 2018 was 3.37% and 3.81%, respectively. As of March 26, 2019, we had $191.6 million of availability, net of $8.4 million of outstanding letters of credit.
The lenders’ obligation to extend credit pursuant to the Amended Credit Agreement depends on us maintaining certain financial covenants, including a minimum consolidated fixed charge coverage ratio of 2.00 to 1.00 and a maximum consolidated leverage ratio of 3.00 to 1.00. The Amended Credit Agreement permits us to incur additional secured or unsecured indebtedness outside the amended revolving credit facility, except for the incurrence of secured indebtedness that in the aggregate is equal to or greater than $125.0 million and 20% of our consolidated tangible net worth. We were in compliance with all financial covenants as of March 26, 2019.
(5) Income Taxes
A reconciliation of the statutory federal income tax rate to our effective tax rate for the 13 weeks ended March 26, 2019 and March 27, 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
|
March 26, 2019
|
|
March 27, 2018
|
|
|
Tax at statutory federal rate
|
|
21.0
|
%
|
21.0
|
%
|
|
State and local tax, net of federal benefit
|
|
3.6
|
|
4.0
|
|
|
FICA tip tax credit
|
|
(9.4)
|
|
(9.5)
|
|
|
Work opportunity tax credit
|
|
(1.4)
|
|
(1.1)
|
|
|
Stock compensation
|
|
(0.5)
|
|
(2.1)
|
|
|
Net income attributable to noncontrolling interests
|
|
(0.5)
|
|
(1.1)
|
|
|
Officers compensation
|
|
1.4
|
|
0.9
|
|
|
Other
|
|
0.7
|
|
0.9
|
|
|
Total
|
|
14.9
|
%
|
13.0
|
%
|
Our effective tax rate increased to 14.9% for the 13 weeks ended March 26, 2019 compared to 13.0% for the 13 weeks ended March 27, 2018. This increase was primarily driven by lower excess tax benefits related to our share-based compensation program.
(6)
Commitments and Contingencies
The estimated cost of completing capital project commitments at March 26, 2019 and December 25, 2018 was approximately $183.7 million and $168.3 million, respectively.
As of March 26, 2019 and December 25, 2018, we were contingently liable for $14.5 million and $14.8 million, respectively, for seven lease guarantees, listed in the table below. These amounts represent the maximum potential liability of future payments under the guarantees. In the event of default, the indemnity and default clauses in our
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
This report contains forward-looking statements based on our current expectations, estimates and projections about our industry and certain assumptions made by us. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will" and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 25, 2018, and in Part II, Item 1A in this Form 10-Q, along with disclosures in our other Securities and Exchange Commission ("SEC
"
) filings discuss some of the important risk factors that may affect our business, results of operations, or financial condition. You should carefully consider those risks, in addition to the other information in this report, and in our other filings with the SEC, before deciding to invest in our Company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition.
OVERVIEW
Texas Roadhouse, Inc. is a growing restaurant company operating predominately in the casual dining segment. Our founder, chairman and chief executive officer, W. Kent Taylor, started the business in 1993 with the opening of the first Texas Roadhouse restaurant in Clarksville, Indiana. Since then, we have grown to 588 restaurants in 49 states and ten foreign countries. Our mission statement is "Legendary Food, Legendary Service
®
." Our operating strategy is designed to position each of our restaurants as the local hometown favorite for a broad segment of consumers seeking high quality, affordable meals served with friendly, attentive service. As of March 26, 2019, our 588 restaurants included:
|
|
·
|
|
495 "company restaurants," of which 475 were wholly-owned and 20 were majority-owned. The results of operations of company restaurants are included in our unaudited condensed consolidated statements of income and comprehensive income. The portion of income attributable to noncontrolling interests in company restaurants that are not wholly-owned is reflected in the line item entitled "Net income attributable to noncontrolling interests" in our unaudited condensed consolidated statements of income and comprehensive income. Of the 495 restaurants we owned and operated as of March 26, 2019, we operated 468 as Texas Roadhouse restaurants and operated 25 as Bubba’s 33 restaurants. In addition, we operated two restaurants outside of the casual dining segment.
|
|
|
·
|
|
93 "franchise restaurants," 24 of which we have a 5.0% to 10.0% ownership interest. The income derived from our minority interests in these franchise restaurants is reported in the line item entitled "Equity income from investments in unconsolidated affiliates" in our unaudited condensed consolidated statements of income and comprehensive income. Additionally, we provided various management services to these 24 franchise restaurants, as well as six additional franchise restaurants in which we have no ownership interest. All of the franchise restaurants are operated as Texas Roadhouse restaurants. Of the 93 franchise restaurants, 69 were domestic restaurants and 24 were international restaurants.
|
We have contractual arrangements that grant us the right to acquire at pre-determined formulas the remaining equity interests in 18 of the 20 majority-owned company restaurants and 66 of the 69 domestic franchise restaurants.
Throughout this report, we use the term "restaurants" to include Texas Roadhouse and Bubba’s 33, unless otherwise noted.
Presentation of Financial and Operating Data
Throughout this report, the 13 weeks ended March 26, 2019 and March 27, 2018 are referred to as Q1 2019 and Q1 2018, respectively. Fiscal year 2019 will be 53 weeks in length and, as such, the fourth quarter of fiscal 2019 will be 14 weeks in length. Fiscal year 2018 was 52 weeks in length, while the quarters for the year were 13 weeks in length.
As further noted in note 2 to our unaudited condensed consolidated financial statements, in Q1 2019 we adopted Accounting Standards Codification 842,
Leases (
"ASC 842")
, which required an entity to recognize a right-of-use asset and a lease liability for virtually all leases. We adopted this standard using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of this standard had a significant impact on our consolidated balance sheet. There was no significant impact to our results of operations or cash flows related to the adoption of this standard.
Long-Term Strategies to Grow Earnings Per Share and Create Shareholder Value
Our long-term strategies with respect to increasing net income and earnings per share, along with creating shareholder value, include the following:
Expanding Our Restaurant Base.
We will continue to evaluate opportunities to develop restaurants in existing markets and in new domestic and international markets. Domestically, we will remain focused primarily on markets where we believe a significant demand for our restaurants exists because of population size, income levels, and the presence of shopping and entertainment centers and a significant employment base. In recent years, we have relocated several existing locations once the associated lease expired or as a result of eminent domain which allows us to update them to our current prototypical design and/or obtain more favorable lease terms. We continue to evaluate these opportunities particularly as it relates to older locations with strong sales. Our ability to expand our restaurant base is influenced by many factors beyond our control and, therefore, we may not be able to achieve our anticipated growth.
In Q1 2019, we opened four Texas Roadhouse restaurants while our franchise partners opened two international restaurants. We currently plan to open 25 to 30 company restaurants in 2019 including as many as four Bubba’s 33 restaurants. In addition, we anticipate that our existing franchise partners will open as many as eight Texas Roadhouse restaurants, primarily international, in 2019.
Our average capital investment for the 23 Texas Roadhouse restaurants opened during 2018, including pre‑opening expenses and a capitalized rent factor, was $5.2 million. We expect our average capital investment for Texas Roadhouse restaurants opening in 2019 to be approximately $5.5 million. The increase in our estimated 2019 average capital investment is due to the purchase of land and the related site improvement costs at more locations.
Our average capital investment for the five Bubba’s 33 restaurants opened during 2018, including pre-opening expenses and a capitalized rent factor, was $7.1 million. This includes higher costs at one urban site in New Jersey. Excluding this site, the average capital investment would have been $6.5 million. We expect our average capital investment for Bubba’s 33 restaurants opened in 2019 to be approximately $6.6 million. We continue to evaluate our Bubba’s 33 prototypical asset design.
We remain focused on driving sales and managing restaurant investment costs to maintain our restaurant development in the future. Our capital investment (including cash and non-cash costs) for new restaurants varies significantly depending on a number of factors including, but not limited to: the square footage, layout, scope of required site work, type of construction labor, local permitting requirements, our ability to negotiate with landlords, cost of liquor and other licenses and hook-up fees and geographical location.
We have entered into area development and franchise agreements for the development and operation of Texas Roadhouse restaurants in several foreign countries. We currently have signed franchise and/or development agreements
in nine countries in the Middle East as well as Taiwan, the Philippines, Mexico, China and South Korea. As of March 26, 2019, we had 16 restaurants open in five countries in the Middle East, three restaurants open in Taiwan, two in the Philippines and one in Mexico, China and South Korea for a total of 24 restaurants in 10 foreign countries. For the existing international agreements, the franchisee is required to pay us a franchise fee for each restaurant to be opened, royalties on the gross sales of each restaurant and a development fee for our grant of development rights in the named countries. We anticipate that the specific business terms of any future franchise agreement for international restaurants might vary significantly from the standard terms of our domestic agreements and from the terms of existing international agreements, depending on the territory to be franchised and the extent of franchisor-provided services to each franchisee.
Maintaining and/or Improving Restaurant Level Profitability.
We plan to maintain, or possibly increase, restaurant-level profitability (restaurant margin) through a combination of increased comparable restaurant sales and operating cost management. Restaurant margin is not a U.S. generally accepted accounting principle ("GAAP") measure and should not be considered in isolation, or as an alternative to income from operations. See further discussion of restaurant margin below. In general, we continue to balance the impacts of inflationary pressures with our value positioning as we remain focused on our long-term success. This may create a challenge in terms of maintaining and/or increasing restaurant margin, as a percentage of restaurant and other sales, in any given year, depending on the level of inflation we experience. In addition to restaurant margin, as a percentage of restaurant and other sales, we also focus on the growth of restaurant margin dollars per store week as a measure of restaurant-level profitability. In terms of driving comparable restaurant sales, we remain focused on encouraging repeat visits by our guests and attracting new guests through our continued commitment to operational standards relating to food and service quality. To attract new guests and increase the frequency of visits of our existing guests, we also continue to drive various localized marketing programs, focus on speed of service and increase throughput by adding seats and parking at certain restaurants.
Leveraging Our Scalable Infrastructure.
To support our growth, we continue to make investments in our infrastructure. Over the past several years, we have made significant investments in our infrastructure, including information and accounting systems, real estate, human resources, legal, marketing, international and restaurant operations, including the development of new concepts. In addition, in 2018 we increased our number of regional market partners, market partners, and regional support teams. Whether we are able to leverage our infrastructure in future years by growing our general and administrative costs at a slower rate than our revenue will depend, in part, on our new restaurant openings, our comparable restaurant sales growth rate going forward and the level of investment we continue to make in our infrastructure.
Returning Capital to Shareholders.
We continue to pay dividends and evaluate opportunities to return capital to our shareholders through repurchases of common stock. In 2011, our Board of Directors declared our first quarterly dividend of $0.08 per share of common stock. We have consistently grown our per share dividend each year since that time and our long-term strategy includes increasing our regular quarterly dividend amount over time. On February 13, 2019, our Board of Directors declared a quarterly dividend of $0.30 per share of common stock representing a 20% increase compared to the quarterly dividend declared in the prior year period. The declaration and payment of cash dividends on our common stock is at the discretion of our Board of Directors, and any decision to declare a dividend will be based on many factors, including, but not limited to, earnings, financial condition, applicable covenants under our revolving credit facility, other contractual restrictions and other factors deemed relevant.
In 2008, our Board of Directors approved our first stock repurchase program. From inception through March 26, 2019, we have paid $216.6 million through our authorized stock repurchase programs to repurchase 14,844,851 shares of our common stock at an average price per share of $14.59. On May 22, 2014, our Board of Directors approved a stock repurchase program under which we may repurchase up to $100.0 million of our common stock. This stock repurchase program has no expiration date and replaced a previous stock repurchase program which was approved on February 16, 2012. All repurchases to date have been made through open market transactions. As of March 26, 2019, approximately $69.9 million remains authorized for stock repurchases.
Key Measures We Use to Evaluate Our Company
Key measures we use to evaluate and assess our business include the following:
Number of Restaurant Openings.
Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For company restaurant openings, we incur pre‑opening costs, which are defined below, before the restaurant opens. Typically, new Texas Roadhouse restaurants open with an initial start‑up period of higher than normalized sales volumes, which decrease to a steady level approximately three to six months after opening. However, although sales volumes are generally higher, so are initial costs, resulting in restaurant margins that are generally lower during the start‑up period of operation and increase to a steady level approximately three to six months after opening.
Comparable Restaurant Sales Growth.
Comparable restaurant sales growth reflects the change in restaurant sales for company restaurants over the same period in prior years for the comparable restaurant base. We define the comparable restaurant base to include those restaurants open for a full 18 months before the beginning of the period measured excluding restaurants closed during the period. Comparable restaurant sales growth can be impacted by changes in guest traffic counts or by changes in the per person average check amount. Menu price changes and the mix of menu items sold can affect the per person average check amount.
Average Unit Volume.
Average unit volume represents the average quarterly or annual restaurant sales for company restaurants open for a full six months before the beginning of the period measured excluding restaurants closed during the period. Historically, average unit volume growth is less than comparable restaurant sales growth which indicates that newer restaurants are operating with sales levels lower than the company average. At times, average unit volume growth may be more than comparable restaurant sales growth which indicates that newer restaurants are operating with sales levels higher than the company average.
Store Weeks.
Store weeks represent the number of weeks that our company restaurants were open during the reporting period.
Restaurant Margin.
Restaurant margin (in dollars and as a percentage of restaurant and other sales) represents restaurant and other sales less restaurant-level operating costs, including cost of sales, labor, rent and other operating costs. Restaurant margin is not a measurement determined in accordance with GAAP and should not be considered in isolation, or as an alternative, to income from operations. This non-GAAP measure is not indicative of overall company performance and profitability in that this measure does not accrue directly to the benefit of shareholders due to the nature of the costs excluded. Restaurant margin is widely regarded as a useful metric by which to evaluate restaurant-level operating efficiency and performance. In calculating restaurant margin, we exclude certain non-restaurant-level costs that support operations, including pre-opening and general and administrative expenses, but do not have a direct impact on restaurant-level operational efficiency and performance. We also exclude depreciation and amortization expense, substantially all of which relates to restaurant-level assets, as it represents a non-cash charge for the investment in our restaurants.
We also exclude impairment and closure expense as we believe this provides a clearer perspective of the Company’s ongoing operating performance and a more useful comparison to prior period results. Restaurant margin as presented may not be comparable to other similarly titled measures of other companies in our industry. A reconciliation of income from operations to restaurant margin is included in the Results of Operations section below.
Other Key Definitions
Restaurant and Other Sales.
Restaurant sales include gross food and beverage sales, net of promotions and discounts, for all company restaurants. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from restaurant sales in the unaudited condensed consolidated statements of income and comprehensive income. Other sales include the amortization of fees associated with our third party gift card sales net of the amortization of gift card breakage income. These amounts are amortized over a period consistent with the historic redemption pattern of the associated gift cards.
Franchise Royalties and Fees.
Franchise royalties consist of royalties, as defined in our franchise agreements, paid to us by domestic and international franchisees. Domestic and international franchisees also typically pay an initial
franchise fee and/or development fee for each new restaurant or territory. The terms of the international agreements may vary significantly from our domestic agreements. Franchise fees also include advertising fees paid by domestic franchisees to our system-wide marketing and advertising fund and management fees paid by certain domestic franchisees for supervisory and administrative services that we perform.
Restaurant Cost of Sales.
Restaurant cost of sales consists of food and beverage costs of which approximately half relates to beef costs.
Restaurant Labor Expenses.
Restaurant labor expenses include all direct and indirect labor costs incurred in operations except for profit-sharing incentive compensation expenses earned by our restaurant managing partners and market partners. These profit-sharing expenses are reflected in restaurant other operating expenses. Restaurant labor expenses also include share-based compensation expense related to restaurant-level employees.
Restaurant Rent Expense.
Restaurant rent expense includes all rent, except pre-opening rent, associated with the leasing of real estate and includes base, percentage and straight-line rent expense.
Restaurant Other Operating Expenses.
Restaurant other operating expenses consist of all other restaurant-level operating costs, the major components of which are utilities, supplies, local store advertising, repairs and maintenance, equipment rent, property taxes, credit card fees and general liability insurance. Profit-sharing incentive compensation expenses earned by our restaurant managing partners and market partners are also included in restaurant other operating expenses.
Pre-opening Expenses.
Pre-opening expenses, which are charged to operations as incurred, consist of expenses incurred before the opening of a new restaurant and are comprised principally of opening team and training team compensation and benefits, travel expenses, rent, food, beverage and other initial supplies and expenses. On average, over 70% of total pre-opening costs incurred per restaurant opening relate to the hiring and training of employees. Pre-opening costs vary by location depending on many factors, including the size and physical layout of each location; the number of management and hourly employees required to operate each restaurant; the availability of qualified restaurant staff members; the cost of travel and lodging for different geographic areas; the timing of the restaurant opening; and the extent of unexpected delays, if any, in obtaining final licenses and permits to open the restaurants.
Depreciation and Amortization Expenses.
Depreciation and amortization expenses ("D&A") include the depreciation of fixed assets and amortization of intangibles with definite lives, substantially all of which relates to restaurant-level assets.
Impairment and Closure Costs.
Impairment and closure costs include any impairment of long-lived assets, including goodwill, and expenses associated with the closure of a restaurant. Closure costs also include any gains or losses associated with a relocated restaurant or the sale of a closed restaurant and/or assets held for sale as well as lease costs associated with closed or relocated restaurants.
General and Administrative Expenses.
General and administrative expenses ("G&A") are comprised of expenses associated with corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future growth including certain advertising costs incurred. G&A also includes legal fees, settlement charges and share-based compensation expense related to executive officers, support center employees, and market partners, and the realized and unrealized holding gains and losses related to the investments in our deferred compensation plan.
Interest Income (Expense), Net.
Interest income (expense), net includes earnings on cash and cash equivalents reduced by interest expense on our debt or financing obligations including the amortization of loan fees.
Equity Income from Unconsolidated Affiliates.
As of March 26, 2019 and March 27, 2018, we owned a 5.0% to 10.0% equity interest in 24 franchise restaurants. Additionally, as of March 26, 2019 and March 27, 2018, we owned a 40% equity interest in four non-Texas Roadhouse restaurants as part of a joint venture agreement with a casual dining restaurant operator in China. Equity income from unconsolidated affiliates represents our percentage share of net income earned by these unconsolidated affiliates.
Net Income Attributable to Noncontrolling Interests.
Net income attributable to noncontrolling interests represents the portion of income attributable to the other owners of the majority-owned restaurants. Our consolidated subsidiaries at March 26, 2019 and March 27, 2018 included 20 and 18 majority-owned restaurants, respectively, all of which were open.
Q1 2019 Financial Highlights
Total revenue increased $62.9 million, or 10.0%, to $690.6 million in Q1 2019 compared to $627.7 million in Q1 2018 primarily due to an increase in average unit volume driven by comparable restaurant sales growth combined with the opening of new restaurants. Store weeks and comparable restaurant sales increased 5.6% and 5.2%, respectively, at company restaurants in Q1 2019.
Restaurant margin dollars increased $3.2 million, or 2.7%, to $122.6 million in Q1 2019 compared to $119.4 million in Q1 2018 while restaurant margin, as a percentage of restaurant and other sales, decreased to 17.9% in Q1 2019 compared to 19.2% in Q1 2018. The increase in restaurant margin dollars was primarily due to higher revenue. The decrease in restaurant margin, as a percentage of restaurant and other sales, was primarily due to higher labor costs as a result of higher average wage rates and current staffing initiatives to increase sales and improve operations in the current challenging labor market.
Net income decreased $4.2 million, or 7.6%, to $50.4 million in Q1 2019 compared to $54.5 million in Q1 2018 primarily due to higher general and administrative expenses and higher depreciation and amortization expense partially offset by higher restaurant margin dollars. Diluted earnings per share decreased 8.1% to $0.70 in Q1 2019 from $0.76 in Q1 2018.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
March 26, 2019
|
|
March 27, 2018
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
(In thousands)
|
|
Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Restaurant and other sales
|
|
685,117
|
|
99.2
|
|
622,402
|
|
99.2
|
|
Franchise royalties and fees
|
|
5,491
|
|
0.8
|
|
5,303
|
|
0.8
|
|
Total revenue
|
|
690,608
|
|
100.0
|
|
627,705
|
|
100.0
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
(As a percentage of restaurant and other sales)
|
|
|
|
|
|
|
|
|
|
Restaurant operating costs (excluding depreciation and amortization shown separately below):
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
223,712
|
|
32.7
|
|
202,786
|
|
32.6
|
|
Labor
|
|
223,880
|
|
32.7
|
|
196,030
|
|
31.5
|
|
Rent
|
|
13,128
|
|
1.9
|
|
11,851
|
|
1.9
|
|
Other operating
|
|
101,802
|
|
14.9
|
|
92,378
|
|
14.8
|
|
(As a percentage of total revenue)
|
|
|
|
|
|
|
|
|
|
Pre-opening
|
|
3,868
|
|
0.6
|
|
5,044
|
|
0.8
|
|
Depreciation and amortization
|
|
27,773
|
|
4.0
|
|
24,484
|
|
3.9
|
|
Impairment and closure
|
|
17
|
|
NM
|
|
86
|
|
NM
|
|
General and administrative
|
|
35,983
|
|
5.2
|
|
30,175
|
|
4.8
|
|
Total costs and expenses
|
|
630,163
|
|
91.2
|
|
562,834
|
|
89.7
|
|
Income from operations
|
|
60,445
|
|
8.8
|
|
64,871
|
|
10.3
|
|
Interest income (expense), net
|
|
754
|
|
0.1
|
|
(359)
|
|
(0.1)
|
|
Equity income from investments in unconsolidated affiliates
|
|
113
|
|
0.0
|
|
324
|
|
0.1
|
|
Income before taxes
|
|
61,312
|
|
8.9
|
|
64,836
|
|
10.3
|
|
Provision for income taxes
|
|
9,119
|
|
1.3
|
|
8,457
|
|
1.3
|
|
Net income including noncontrolling interests
|
|
52,193
|
|
7.6
|
|
56,379
|
|
9.0
|
|
Net income attributable to noncontrolling interests
|
|
1,803
|
|
0.3
|
|
1,838
|
|
0.3
|
|
Net income attributable to Texas Roadhouse, Inc. and subsidiaries
|
|
50,390
|
|
7.3
|
|
54,541
|
|
8.7
|
NM — Not meaningful
|
|
|
|
|
|
|
|
|
Reconciliation of Income from Operations to Restaurant Margin
|
|
|
13 Weeks Ended
|
|
|
March 26, 2019
|
|
March 27, 2018
|
|
Income from operations
|
$
|
60,445
|
|
$
|
64,871
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
Franchise royalties and fees
|
|
5,491
|
|
|
5,303
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
Pre-opening
|
|
3,868
|
|
|
5,044
|
|
Depreciation and amortization
|
|
27,773
|
|
|
24,484
|
|
Impairment and closure
|
|
17
|
|
|
86
|
|
General and administrative
|
|
35,983
|
|
|
30,175
|
|
Restaurant margin
|
$
|
122,595
|
|
$
|
119,357
|
|
|
|
|
|
|
|
|
Restaurant margin $/store week
|
|
19,197
|
|
|
19,735
|
|
Restaurant margin
(as a percentage of restaurant and other sales)
|
|
17.9%
|
|
|
19.2%
|
See above for the definition of restaurant margin.
Restaurant Unit Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Texas Roadhouse
|
|
Bubba's 33
|
|
Other
|
|
Balance at December 25, 2018
|
|
582
|
|
555
|
|
25
|
|
2
|
|
Company openings
|
|
4
|
|
4
|
|
—
|
|
—
|
|
Franchise openings - Domestic
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Franchise openings - International
|
|
2
|
|
2
|
|
—
|
|
—
|
|
Balance at March 26, 2019
|
|
588
|
|
561
|
|
25
|
|
2
|
|
|
|
|
|
|
|
|
|
March 26, 2019
|
|
March 27, 2018
|
|
Company - Texas Roadhouse
|
|
468
|
|
446
|
|
Company - Bubba's 33
|
|
25
|
|
21
|
|
Company - Other
|
|
2
|
|
2
|
|
Franchise - Texas Roadhouse - U.S.
|
|
69
|
|
70
|
|
Franchise - Texas Roadhouse - International
|
|
24
|
|
19
|
|
Total
|
|
588
|
|
558
|
Q1 2019 (13 weeks) compared to Q1 2018 (13 weeks)
Restaurant and Other Sales.
Restaurant and other sales increased by 10.1% in Q1 2019 as compared to Q1 2018. The following table summarizes certain key drivers and/or attributes of restaurant and other sales at company restaurants for the periods presented. Company restaurant count activity is shown in the restaurant unit activity table above.
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2019
|
|
Q1 2018
|
|
|
Company Restaurants:
|
|
|
|
|
|
|
|
|
Increase in store weeks
|
|
|
5.6
|
%
|
|
6.5
|
%
|
|
Increase in average unit volume
|
|
|
4.6
|
%
|
|
4.4
|
%
|
|
Other(1)
|
|
|
0.1
|
%
|
|
(0.1)
|
%
|
|
Total increase in restaurant sales
|
|
|
10.3
|
%
|
|
10.8
|
%
|
|
Other sales(2)
|
|
|
(0.2)
|
%
|
|
(0.3)
|
%
|
|
Total increase in restaurant and other sales
|
|
|
10.1
|
%
|
|
10.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Store weeks
|
|
|
6,386
|
|
|
6,048
|
|
|
Comparable restaurant sales growth
|
|
|
5.2
|
%
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Texas Roadhouse restaurants only:
|
|
|
|
|
|
|
|
|
Comparable restaurant sales growth
|
|
|
5.1
|
%
|
|
4.9
|
%
|
|
Average unit volume (in thousands)
|
|
$
|
1,418
|
|
$
|
1,356
|
|
|
|
|
|
|
|
|
|
|
|
Weekly sales by group:
|
|
|
|
|
|
|
|
|
Comparable restaurants (429 and 407 units, respectively)
|
|
$
|
109,634
|
|
$
|
104,849
|
|
|
Average unit volume restaurants (22 and 21 units, respectively)(3)
|
|
$
|
98,938
|
|
$
|
93,684
|
|
|
Restaurants less than six months old (17 and 18 units, respectively)
|
|
$
|
113,880
|
|
$
|
106,627
|
|
|
|
(1)
|
|
Includes the impact of the year-over-year change in sales volume of all non-Texas Roadhouse restaurants, along with Texas Roadhouse restaurants open less than six months before the beginning of the period measured and, if applicable, the impact of restaurants closed or acquired during the period.
|
|
|
(2)
|
|
Other sales, for Q1 2019, represented $7.1 million related to the amortization of third party gift card fees net of $3.8 million related to the amortization of gift card breakage income. For Q1 2018, other sales represented $4.9 million related to the amortization of third party gift card fees net of $3.1 million related to the amortization of gift card breakage income. The increase in both amounts is primarily due to continued growth in our third party gift card program.
|
|
|
(3)
|
|
Average unit volume restaurants include restaurants open a full six and up to 18 months before the beginning of the period measured.
|
The increases in restaurant sales for all periods presented were primarily attributable to an increase in average unit volume driven by comparable restaurant sales growth combined with the opening of new restaurants. Comparable restaurant sales growth for all periods presented was due to an increase in our guest traffic counts and an increase in our per person average check as shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2019
|
|
|
Q1 2018
|
|
|
Guest traffic counts
|
|
|
2.6
|
%
|
|
4.0
|
%
|
|
Per person average check
|
|
|
2.6
|
%
|
|
0.9
|
%
|
|
Comparable restaurant sales growth
|
|
|
5.2
|
%
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
Year-over-year sales for newer restaurants included in our average unit volume, but excluded from our comparable restaurant sales, partially offset the impact of positive comparable restaurant sales growth in Q1 2019.
The increases in our per person average check for the periods presented were primarily driven by menu price increases taken in 2018 and 2017. In 2018, we increased menu prices in the first quarter and fourth quarter by approximately 0.8% and 1.7%, respectively. In 2017, we increased menu prices in the second quarter and fourth quarter
by approximately 0.5% and 0.3%, respectively. These menu price increases were taken as a result of inflationary pressures, primarily commodities and/or labor. We took an additional price increase of approximately 1.5% at the beginning of our second quarter in 2019 and may take additional pricing if needed.
In 2019, we plan to open 25 to 30 company restaurants. While the majority of our restaurant growth in 2019 will be Texas Roadhouse restaurants, we currently expect to open as many as four Bubba’s 33 restaurants. We opened four Texas Roadhouse restaurants in Q1 2019. We have either begun construction or have sites under contract for all of our expected 2019 openings.
Franchise Royalties and Fees.
Franchise royalties and fees increased by $0.2 million, or by 3.5%, in Q1 2019 from Q1 2018. The increase in Q1 2019 was attributable to an increase in average unit volume at domestic restaurants, driven by comparable restaurant sales growth, and the opening of new franchise restaurants. These increases were partially offset by a decrease in average unit volume at international restaurants, driven by a decrease in comparable restaurant sales at those locations.
Franchise comparable restaurant sales increased 2.8% in Q1 2019 which included an increase in domestic franchise comparable restaurant sales of 4.3%. Franchise restaurant count activity is shown in the restaurant activity table above. Our existing franchise restaurant partners opened two international Texas Roadhouse restaurants in Q1 2019. We anticipate our franchise partners will open as many as eight Texas Roadhouse restaurants, primarily international, in 2019.
Restaurant Cost of Sales.
Restaurant cost of sales, as a percentage of restaurant and other sales, increased to 32.7% in Q1 2019 from 32.6% in Q1 2018. The increase was primarily due to commodity inflation of approximately 1.8%, driven by higher beef costs and a shift to higher priced but lower gross margin menu items partially offset by the benefit of menu pricing actions.
For 2019, we currently expect commodity cost inflation to be approximately 1.0% to 2.0% with fixed price contracts for approximately 50% of our overall food costs and the remainder subject to floating market prices.
Restaurant Labor Expenses.
Restaurant labor expenses, as a percentage of restaurant and other sales, increased to 32.7% in Q1 2019 compared to 31.5% in Q1 2018. This increase was primarily attributable to higher average wage rates and current staffing initiatives to increase sales partially offset by the benefit from an increase in average unit volume.
For 2019, we anticipate our labor costs will be pressured by approximately 7.0% to 8.0% of inflation due to ongoing labor market pressures, current staffing initiatives and increased investment in our people and increases in state-mandated minimum and tipped wage rates. These increases may or may not be offset by additional menu price adjustments or guest traffic growth.
Restaurant Rent Expense.
Restaurant rent expense, as a percentage of restaurant and other sales, remained relatively unchanged at 1.9% in Q1 2019 and Q1 2018. The benefit from an increase in average unit volume was offset by higher rent expense, as a percentage of restaurant and other sales, at our newer restaurants.
Restaurant Other Operating Expenses.
Restaurant other operating expenses, as a percentage of restaurant and other sales, increased to 14.9% in Q1 2019 from 14.8% in Q1 2018. The increase was due to higher general liability insurance costs, credit card charges, and supplies expense partially offset by lower incentive compensation expense, decreased contributions to the system-wide marketing and advertising fund, and the benefit from an increase in average unit volume.
Restaurant Pre-opening Expenses.
Pre-opening expenses decreased to $3.9 million in Q1 2019 from $5.0 million in Q1 2018. This variance was primarily due to the timing of restaurant openings as average pre-opening expenses incurred for each restaurant remained relatively unchanged.
Overall, we plan to open 25 to 30 company restaurants in 2019 compared to 28 company restaurants in 2018. Pre-opening costs will fluctuate from quarter to quarter based on the specific pre-opening costs incurred for each restaurant, the number and timing of restaurant openings and the number and timing of restaurant managers hired.
Depreciation and Amortization Expense.
D&A, as a percentage of total revenue, increased to 4.0% in Q1 2019 compared to 3.9% in Q1 2018. This increase was primarily due to higher depreciation at new restaurants and accelerated depreciation on restaurants that are being relocated. These increases were partially offset by an increase in average unit volume.
General and Administrative Expenses.
G&A, as a percentage of total revenue, increased to 5.2% in Q1 2019 compared to 4.8% in Q1 2018. The increase was primarily due to higher salaries and share-based compensation costs and increased marketing expense due to decreased contributions from company restaurants partially offset by the benefit of an increase in average unit volume.
Interest Income (Expense), Net.
Interest income was $0.8 million in Q1 2019 compared to interest expense of $0.4 million in Q1 2018, primarily driven by earnings on our cash and cash equivalents as well as paying off our outstanding credit facility of $50.0 million in April 2018.
Income Tax Expense.
Our effective tax rate increased to 14.9% in Q1 2019 compared to 13.0% in Q1 2018 primarily due to lower excess tax benefits related to our share-based compensation program. For 2019, we expect the effective tax rate to be approximately 15.0%.
Liquidity and Capital Resources
The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
|
March 26, 2019
|
|
March 27, 2018
|
|
|
Net cash provided by operating activities
|
|
$
|
111,415
|
|
$
|
106,807
|
|
|
Net cash used in investing activities
|
|
|
(42,044)
|
|
|
(35,307)
|
|
|
Net cash used in financing activities
|
|
|
(27,389)
|
|
|
(24,589)
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
41,982
|
|
$
|
46,911
|
|
Net cash provided by operating activities was $111.4 million in Q1 2019 compared to $106.8 million in Q1 2018. This increase was primarily due to changes in working capital and non-cash items such as depreciation and amortization and share-based compensation partially offset by a decrease in deferred income taxes and net income. The increase in cash generated from changes in working capital was primarily due to an increase in income taxes payable and an increase in cash from receivables partially offset by a decrease in deferred revenue related to gift cards.
Our operations have not required significant working capital and, like many restaurant companies, we have been able to operate with negative working capital. Sales are primarily for cash, and restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth.
Net cash used in investing activities was $42.0 million in Q1 2019 compared to $35.3 million in Q1 2018. The increase was primarily due to an increase in capital expenditures. The increase in capital expenditures was due to the relocation of existing restaurants and the remodeling of our support center office.
We require capital principally for the development of new company restaurants, the refurbishment or relocation of existing restaurants and the acquisition of franchise restaurants, if any. We either lease our restaurant site locations under operating leases for periods of five to 30 years (including renewal periods) or purchase the land when appropriate. As of March 26, 2019, we had developed 143 of the 495 company restaurants on land which we own.
The following table presents a summary of capital expenditures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Q1 2019
|
|
Q1 2018
|
|
New company restaurants
|
|
$
|
17,233
|
|
$
|
20,406
|
|
Refurbishment of existing restaurants
|
|
|
12,317
|
|
|
10,460
|
|
Relocation of existing restaurants
|
|
|
4,960
|
|
|
517
|
|
Capital expenditures related to Support Center office
|
|
|
7,534
|
|
|
3,924
|
|
Total capital expenditures
|
|
$
|
42,044
|
|
$
|
35,307
|
Our future capital requirements will primarily depend on the number of new restaurants we open, the timing of those openings and the restaurant prototype developed in a given fiscal year. These requirements will include costs directly related to opening new restaurants or relocating existing restaurants and may also include costs necessary to ensure that our infrastructure is able to support a larger restaurant base. In 2019, we expect our capital expenditures to be approximately $210.0 million to $220.0 million, the majority of which will relate to planned restaurant openings, including 25 to 30 restaurant openings in 2019, the relocation of existing company restaurants and capital expenditures related to the remodeling of our support center office. This amount excludes any cash used for franchise acquisitions. We intend to satisfy our capital requirements over the next 12 months with cash on hand, net cash provided by operating activities and, if needed, funds available under our amended credit facility. For 2019, we anticipate net cash provided by operating activities will exceed capital expenditures, which we plan to use to pay dividends, as approved by our Board of Directors and/or repurchase common stock.
Net cash used in financing activities was $27.4 million in Q1 2019 compared to $24.6 million in Q1 2018. The increase is primarily due to an increase in dividends paid.
On May 22, 2014, our Board of Directors approved a stock repurchase program under which we may repurchase up to $100.0 million of our common stock. This stock repurchase program has no expiration date and replaced a previous stock repurchase program which was approved on February 16, 2012. All repurchases to date under our stock repurchase program have been made through open market transactions. The timing and the amount of any repurchases will be determined by management under parameters established by the Board of Directors, based on an evaluation of our stock price, market conditions and other corporate considerations. During Q1 2019, we made no share repurchases and had approximately $69.9 million remaining under our authorized stock repurchase program as of March 26, 2019.
On February 13, 2019, our Board of Directors authorized the payment of a cash dividend of $0.30 per share of common stock. The payment of this dividend totaling $21.5 million was distributed on March 29, 2019 to shareholders of record at the close of business on March 13, 2019. The declared dividend is included as a liability in our unaudited condensed consolidated balance sheet as of March 26, 2019.
We paid distributions of $1.6 million to equity holders of all 20 majority-owned company restaurants in Q1 2019. In Q1 2018, we paid distributions of $1.5 million to equity holders of all 18 majority-owned company restaurants.
On August 7, 2017 we entered into the Amended and Restated Credit Agreement (the "Amended Credit Agreement") with respect to our revolving credit facility with a syndicate of commercial lenders led by JPMorgan Chase Bank, N.A., PNC Bank, N.A., and Wells Fargo Bank, N.A. The revolving credit facility remains an unsecured, revolving credit agreement under which we may borrow up to $200.0 million with the option to increase the revolving credit facility by an additional $200.0 million subject to certain limitations. The Amended Credit Agreement extends the maturity date of our revolving credit facility until August 5, 2022.
The terms of the Amended Credit Agreement require us to pay interest on outstanding borrowings at the London Interbank Offered Rate plus a margin of 0.875% to 1.875% and to pay a commitment fee of 0.125% to 0.30% per year on any unused portion of the revolving credit facility, in each case depending on our consolidated net leverage ratio, or the Alternate Base Rate, which is the highest of the issuing banks’ prime lending rate, the Federal Reserve Bank of New York rate plus 0.50% or the Adjusted Eurodollar Rate for a one month interest period on such day plus 1.0%. In April 2018, we paid off our outstanding credit facility of $50.0 million. The weighted-average interest rate for the revolving
credit facility as of March 26, 2019 and December 25, 2018 was 3.37% and 3.81%, respectively. As of March 26, 2019, we had $191.6 million of availability, net of $8.4 million of outstanding letters of credit.
The lenders’ obligation to extend credit pursuant to the Amended Credit Agreement depends on us maintaining certain financial covenants, including a minimum consolidated fixed charge coverage ratio of 2.00 to 1.00 and a maximum consolidated leverage ratio of 3.00 to 1.00. The Amended Credit Agreement permits us to incur additional secured or unsecured indebtedness outside the revolving credit facility, except for the incurrence of secured indebtedness that in the aggregate is equal to or greater than $125.0 million and 20% of our consolidated tangible net worth. We were in compliance with all financial covenants as of March 26, 2019.
Contractual Obligations
The following table summarizes the amount of payments due under specified contractual obligations as of March 26, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
Total
|
|
1 year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
5 years
|
|
|
Obligation under finance lease
|
|
$
|
2,084
|
|
$
|
—
|
|
$
|
—
|
|
|
—
|
|
|
2,084
|
|
|
Interest on finance lease
|
|
|
5,145
|
|
|
276
|
|
|
559
|
|
|
566
|
|
|
3,744
|
|
|
Operating lease obligations
|
|
|
930,476
|
|
|
36,807
|
|
|
99,800
|
|
|
102,245
|
|
|
691,624
|
|
|
Capital obligations
|
|
|
183,656
|
|
|
183,656
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total contractual obligations(1)
|
|
$
|
1,121,361
|
|
$
|
220,739
|
|
$
|
100,359
|
|
$
|
102,811
|
|
$
|
697,452
|
|
|
|
(1)
|
|
Unrecognized tax benefits under ASC 740,
Income Taxes,
are immaterial and excluded from this amount.
|
We have no material minimum purchase commitments with our vendors that extend beyond a year. See notes 3 and 6 to the unaudited condensed consolidated financial statements for a discussion of contractual obligations.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
Guarantees
As of March 26, 2019 and December 25, 2018, we are contingently liable for $14.5 million and $14.8 million, respectively, for seven lease guarantees, listed in the table below. These amounts represent the maximum potential liability of future payments under the guarantees. In the event of default, the indemnity and default clauses in our assignment agreements govern our ability to pursue and recover damages incurred. No material liabilities have been recorded as of March 26, 2019 and December 25, 2018 as the likelihood of default was deemed to be less than probable and the fair value of the guarantees is not considered significant.
|
|
|
|
|
|
|
|
|
|
Lease
|
|
Current Lease
|
|
|
|
|
Assignment Date
|
|
Term Expiration
|
|
|
Everett, Massachusetts (1)(2)
|
|
September 2002
|
|
February 2023
|
|
|
Longmont, Colorado (1)
|
|
October 2003
|
|
May 2029
|
|
|
Montgomeryville, Pennsylvania (1)
|
|
October 2004
|
|
March 2021
|
|
|
Fargo, North Dakota (1)(2)
|
|
February 2006
|
|
July 2021
|
|
|
Logan, Utah (1)
|
|
January 2009
|
|
August 2024
|
|
|
Irving, Texas (3)
|
|
December 2013
|
|
December 2019
|
|
|
Louisville, Kentucky (3)(4)
|
|
December 2013
|
|
November 2023
|
|
|
|
(1)
|
|
Real estate lease agreements for restaurant locations which we entered into before granting franchise rights to those restaurants. We have subsequently assigned the leases to the franchisees, but remain contingently liable under the terms of the lease if the franchisee defaults
.
|
|
|
(2)
|
|
As discussed in note 7 to the unaudited condensed consolidated financial statements, these restaurants are owned, in whole or part, by certain officers, directors and 5% shareholders of the Company.
|
|
|
(3)
|
|
Leases associated with non-Texas Roadhouse restaurants which were sold. The leases were assigned to the acquirer, but we remain contingently liable under the terms of the lease if the acquirer defaults.
|
|
|
(4)
|
|
We may be released from liability after the initial contractual lease term expiration contingent upon certain conditions being met by the acquirer.
|
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RIS
K
We are exposed to market risk from changes in interest rates on variable rate debt and changes in commodity prices. Our exposure to interest rate fluctuations is limited to our outstanding bank debt. The terms of the revolving credit facility require us to pay interest on outstanding borrowings at London Interbank Offering Rate plus a margin of 0.875% to 1.875%, depending on our consolidated net leverage ratio, or the Alternate Base Rate, which is the highest of the issuing banks’ prime lending rate, the Federal Reserve Bank of New York rate plus 0.50% or the Adjusted Eurodollar Rate for a one month interest period on such day plus 1.0%. As of March 26, 2019, we had no outstanding borrowings under our revolving credit facility.
In an effort to secure high quality, low cost ingredients used in the products sold in our restaurants, we employ various purchasing and pricing contract techniques. When purchasing certain types of commodities, we may be subject to prevailing market conditions resulting in unpredictable price volatility. For certain commodities, we may also enter into contracts for terms of one year or less that are either fixed price agreements or fixed volume agreements where the price is negotiated with reference to fluctuating market prices. We currently do not use financial instruments to hedge commodity prices, but we will continue to evaluate their effectiveness. Extreme and/or long term increases in commodity prices could adversely affect our future results, especially if we are unable, primarily due to competitive reasons, to increase menu prices. Additionally, if there is a time lag between the increasing commodity prices and our ability to increase menu prices or if we believe the commodity price increase to be short in duration and we choose not to pass on the cost increases, our short‑term financial results could be negatively affected.
We are subject to business risk as our beef supply is highly dependent upon three vendors. If these vendors were unable to fulfill their obligations under their contracts, we may encounter supply shortages and/or higher costs to secure adequate supplies and a possible loss of sales, any of which would harm our business.
ITEM 4. CONTROLS AND PROCEDURE
S
Evaluation of Disclosure Controls and Procedures
We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to, and as defined in, Rules 13a‑15(e) and 15d‑15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of our management, including the Chief Executive Officer (the "CEO") and the Chief Financial Officer (the "CFO"), our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 26, 2019.
Changes in Internal Control
On December 26, 2018, the Company adopted ASC 842. As a result, changes to processes and procedures occurred that affected the Company’s internal control over financial reporting. While we believe the Company’s internal control over financial reporting for affected processes and procedures is effective, we will continue to evaluate and monitor these changes and assess the effectiveness of our internal control over financial reporting as of the end of our fiscal year.
Except for the changes noted above, there were no other significant changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.