The discussion and analysis below for the Company should be read in conjunction with the consolidated financial statements and the notes to such financial statements (pages F-1 to F-29), "Forward-looking Statements" (page 3) and Risk Factors set forth in Item 1A. Our CompanyTexas 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 firstTexas Roadhouse restaurant inClarksville, Indiana . Since then, we have grown to 611 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 destination for a broad segment of consumers seeking high-quality, affordable meals served with friendly, attentive service. As ofDecember 31, 2019 , our 611 restaurants included:
514 "company restaurants," of which 494 were wholly-owned and 20 were
majority-owned. The results of operations of company restaurants are included
in our 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 consolidated statements of
income and comprehensive income. Of the 514 restaurants we owned and operated
at the end of 2019, we operated 484 as
28 as Bubba's 33 restaurants. In addition, we operated two restaurants outside
of the casual dining segment.
97 "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 consolidated statements of
? income and comprehensive income. Additionally, we provide 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 operated asTexas Roadhouse restaurants. Of the 97 franchise restaurants, 69 were domestic restaurants and 28 were international restaurants.
We have contractual arrangements which grant us the right to acquire at pre-determined formulas (i) the remaining equity interests in 18 of the 20 majority-owned company restaurants and (ii) 66 of the 69 domestic franchise restaurants.
Throughout this report, we use the term "restaurants" to include
Presentation of Financial and Operating Data
We operate on a fiscal year that typically ends on the last Tuesday in December. Fiscal year 2019 was 53 weeks in length and, as such, the fourth quarter of fiscal 2019 was 14 weeks in length. Fiscal years 2018 and 2017 were 52 weeks in length, while the fourth quarters for those years were 13 weeks in length. As further noted in note 2 to the consolidated financial statements, 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 as of the beginning of our 2019 fiscal year and used 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. In addition, as further noted in note 2 to the consolidated financial statements, we adopted Accounting Standards Codification 606, Revenue from Contracts with Customers as of the beginning of our 2018 fiscal year. As a result of this adoption, certain transactions that were previously recorded as expense are now classified as revenue. These include breakage income and third party gift card fees from our gift card program which are included in other sales and previously were included in other operating expense as well as certain fees received from our franchisees which are 36
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included in franchise royalties and fees and previously were a reduction of general and administrative expense. In addition, we reclassified certain amounts between restaurant operating costs and general and administrative expenses. None of the above mentioned reclassifications had an impact to income before taxes and the comparative financial information has not been restated for these reclassifications. The comparative impact of these reclassifications is further detailed below.
Long-term Strategies to Grow Earnings Per Share
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 continue to evaluate opportunities to develop restaurants in existing markets and in new domestic and international markets. Domestically, we 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 a more current design and/or to 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 2019, we opened 22 company restaurants while our franchise partners opened nine restaurants. We currently plan to open at least 30 company restaurants in 2020 including as many as seven Bubba's 33 restaurants. In addition, we anticipate our existing franchise partners will open as many as eightTexas Roadhouse restaurants, primarily international, in 2020. Our average capital investment for the 19Texas Roadhouse restaurants opened during 2019, including pre-opening expenses and a capitalized rent factor, was$5.5 million . We expect our average capital investment forTexas Roadhouse restaurants opening in 2020 to be approximately$5.6 million . For 2019, the average capital investment, including pre-opening expenses and a capitalized rent factor, for the three Bubba's 33 restaurants opened during the year was$6.7 million . We expect our average capital investment for Bubba's 33 restaurants opening in 2020 to be approximately$6.7 million . We remain focused on driving sales and managing restaurant investment costs in order 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 any 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 ofTexas Roadhouse restaurants in several foreign countries. We currently have signed franchise and/or development agreements in nine countries in theMiddle East as well asTaiwan ,the Philippines ,Mexico ,China andSouth Korea . As ofDecember 31, 2019 , we had 17 restaurants open in five countries in theMiddle East , three restaurants open inTaiwan , five inthe Philippines and one each inMexico ,China andSouth Korea for a total of 28 restaurants in ten foreign countries. For the existing international agreements, the franchisee is generally 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 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-level profitability (restaurant margin), in any given year, depending on the level of inflation we experience. Restaurant margin is not aU.S. generally accepted accounting principle ("GAAP") measure and should not be considered in isolation, or as an alternative from income from operations. See further discussion of restaurant margin below. 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 higher comparable restaurant sales, we remain focused on encouraging repeat visits by our guests and 37 Table of Contents 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. In addition, we continue to focus on driving to-go sales which has significantly contributed to our recent sales growth. Leveraging Our Scalable Infrastructure. To support our growth, we have made significant investments in our infrastructure over the past several years, including information and accounting systems, real estate, human resources, legal, marketing, international and restaurant operations, including the development of new concepts. In addition, in Q4 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. OnFebruary 20, 2020 , our Board of Directors declared a quarterly dividend of$0.36 per share of common stock. 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 a number of factors, including, but not limited to, earnings, financial condition, applicable covenants under our amended credit facility, other contractual restrictions and other factors deemed relevant. In 2008, our Board of Directors approved our first stock repurchase program. Since then, we have paid$356.4 million through our authorized stock repurchase programs to repurchase 17,470,096 shares of our common stock at an average price per share of$20.40 . OnMay 31, 2019 , our Board of Directors approved a stock repurchase program under which we may repurchase up to$250.0 million of our common stock. This stock repurchase program has no expiration date and replaced a previous stock repurchase program which was approved onMay 22, 2014 . All repurchases to date have been made through open market transactions. This includes repurchases of$89.6 million under the new repurchase program and repurchases of$50.2 million under the previous stock purchase program. As ofDecember 31, 2019 ,$160.4 million remains authorized for stock repurchases.
Key Operating Personnel
Key management personnel who have a significant impact on the performance of our restaurants include market partners, managing partners, kitchen managers, service managers and assistant managers. Managing partners are single restaurant operators who have primary responsibility for the day-to-day operations of the entire restaurant. Kitchen managers have primary responsibility for managing operations relating to our food preparation and food quality, and service managers have primary responsibility for managing our service quality and guest experiences. The assistant managers support our kitchen and service managers; these managers are collectively responsible for the operations of the restaurant in the absence of a managing partner. All managers are responsible for maintaining our standards of quality and performance. We use market partners to oversee the operation of our restaurants. Each market partner oversees a group of varying sizes of managing partners and their respective management teams. Market partners are also responsible for the hiring and development of each restaurant's management team and assist in the site selection process for new restaurants. Through regular visits to the restaurants, the market partners facilitate adherence to all aspects of our concepts, strategies and standards of quality. Managing partners and market partners are required, as a condition of employment, to sign a multi-year employment agreement. The annual compensation of our managing partners and market partners includes a base salary plus a percentage of the pre-tax income of the restaurant(s) they operate or supervise. Managing partners and market partners are eligible to participate in our equity incentive plan and are generally required to make refundable deposits of$25,000 and$50,000 , respectively. Generally, the deposits are refunded after five years of service.
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 38
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the restaurant opens. Typically, newTexas 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 sales for company restaurants over the same period of the prior year 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 annual restaurant and other sales for company restaurants open for a full six months before the beginning of the period measured excluding sales on 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 consolidated statements of income and comprehensive income. Beginning in 2018, with the adoption of new revenue recognition accounting guidance, other sales include the amortization of fees associated with our third party gift card sales net of the amortization of gift card breakage income which had previously been recorded in restaurant other operating expense. 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 agreement, paid to us by our domestic and international franchisees. Domestic and/or 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. Beginning in 2018, with the adoption of new revenue recognition accounting guidance, franchise royalties and fees include certain fees which had previously been recorded as a reduction of general and administrative expenses. These 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 half relates to beef costs.
39
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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 or relocated restaurant and are comprised principally of opening team and training 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 a number of 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, Net. Impairment and closure costs, net include any impairment of long-lived assets, including property and equipment, operating lease right-of-use assets and 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 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 ofDecember 31, 2019 ,December 25, 2018 andDecember 26, 2017 , we owned a 5.0% to 10.0% equity interest in 24 franchise restaurants. Additionally, as ofDecember 31, 2019 ,December 25, 2018 andDecember 26, 2017 , 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 inChina . 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 atDecember 31, 2019 andDecember 25, 2018 included 20 majority-owned restaurants, all of which were open. AtDecember 26, 2017 , our consolidated subsidiaries included 18 majority-owned restaurants, all of which were open.
2019 Financial Highlights
Total revenue increased$298.7 million or 12.2% to$2.8 billion in 2019 compared to$2.5 billion in 2018. The increase was primarily due to an increase in average unit volume driven by comparable restaurant sales growth, the opening of new restaurants and the addition of the 53rd week in 2019. The 53rd week resulted in$59.0 million in 40
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restaurant and other sales or 2.4% of the increase in 2019 compared to 2018. Store weeks and comparable restaurant sales increased 7.2% and 4.7%, respectively, at company restaurants in 2019.
Restaurant margin increased$50.1 million or 11.8% to$474.2 million in 2019 from$424.2 million in 2018 while restaurant margin, as a percentage of restaurant and other sales, remained relatively unchanged at 17.3% in 2019 compared to 17.4% in 2018. 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 prior staffing initiatives intended to increase sales. These decreases were partially offset by lower cost of sales due to the benefit of higher average check. Net income increased$16.2 million or 10.3% to$174.5 million in 2019 compared to$158.2 million in 2018 primarily due to higher restaurant margin dollars partially offset by higher depreciation and amortization expense, general and administration expense, and income tax expense. Diluted earnings per share increased 11.9% to$2.46 from$2.20 in the prior year. In addition, diluted earnings per share were positively impacted by$0.10 to$0.11 as a result of the 53rd week. Results of Operations Fiscal Year 2019 2018 2017 $ % $ % $ % (In thousands) Consolidated Statements of Income: Revenue: Restaurant and other sales 2,734,177 99.2 2,437,115 99.2 2,203,017 99.3 Franchise royalties and fees 21,986 0.8 20,334 0.8 16,514 0.7 Total revenue 2,756,163 100.0 2,457,449 100.0 2,219,531 100.0 Costs and expenses: (As a percentage of restaurant and other sales) Restaurant operating costs (excluding depreciation and amortization shown separately below): Cost of sales 883,357 32.3 795,300 32.6 721,550 32.8 Labor 905,614 33.1 793,384 32.6 687,545 31.2 Rent 52,531 1.9 48,791 2.0 44,807 2.0 Other operating 418,448 15.3 375,477 15.4 342,702 15.6 (As a percentage of total revenue) Pre-opening 20,156 0.7 19,051 0.8 19,274 0.9 Depreciation and amortization 115,544 4.2 101,216 4.1 93,499 4.2 Impairment and closure, net (899) NM 278 NM 654 NM General and administrative 149,389 5.4 136,163 5.5 123,294 5.6 Total costs and expenses 2,544,140 92.3 2,269,660 92.4 2,033,325 91.6 Income from operations 212,023 7.7 187,789 7.6 186,206 8.4 Interest income (expense), net 1,514 0.1 (591) (0.0) (1,577) (0.1) Equity income from investments in unconsolidated affiliates 378 0.0 1,353 0.1 1,488 0.1 Income before taxes 213,915 7.8 188,551 7.7 186,117 8.4 Provision for income taxes 32,397 1.2 24,257 1.0 48,581 2.2 Net income including noncontrolling interests 181,518 6.6 164,294 6.7 137,536 6.2 Net income attributable to noncontrolling interests 7,066 0.3 6,069 0.2 6,010 0.3 Net income attributable toTexas Roadhouse, Inc. and subsidiaries 174,452 6.3 158,225 6.4 131,526 5.9 NM - Not meaningful 41 Table of Contents Reconciliation of Income
from Operations to Restaurant Margin
Fiscal Year Ended 2019 2018 2017 (In
thousands, except per store week)
Income from operations$ 212,023 $ 187,789 $ 186,206
Less:
Franchise royalties and fees 21,986
20,334 16,514 Add: Pre-opening 20,156 19,051 19,274
Depreciation and amortization 115,544
101,216 93,499 Impairment and closure, net (899) 278 654 General and administrative 149,389 136,163 123,294 Restaurant margin$ 474,227 $ 424,163 $ 406,413
Restaurant margin $/store week$ 17,914 $ 17,177 $ 17,462 Restaurant margin (as a percentage of restaurant and other sales) 17.3% 17.4% 18.4% Restaurant Unit Activity Total Texas Roadhouse Bubba's 33 Other Balance at December 25, 2018 582 555 25 2 Company openings 22 19 3 - Franchise openings - Domestic 1 1 - -
Franchise openings - International 8 8 -
-
Franchise closings - International (2) (2) -
- Balance at December 31, 2019 611 581 28 2 December 31, 2019 December 25, 2018 December 26, 2017 Company - Texas Roadhouse 484 464 440 Company - Bubba's 33 28 25 20 Company - Other 2 2 2
Franchise - Texas Roadhouse - U.S. 69 69 70 Franchise - Texas Roadhouse - International 28
22 17 Total 611 582 549 42 Table of Contents
Restaurant and Other Sales
Restaurant and other sales increased 12.2% in 2019 compared to 2018 and increased 10.6% in 2018 compared to 2017. The following table summarizes certain key drivers and/or attributes of restaurant sales at company restaurants for the periods presented. Company restaurant count activity is shown in the restaurant unit activity table above. 2019 2018 2017Company Restaurants : Increase in store weeks 7.2 % 6.1 % 7.8 %
Increase in average unit volume 4.1 % 4.8 % 3.5 % Other(1) 1.0 % (0.1) % 0.3 % Total increase in restaurant sales 12.3 % 10.8 % 11.6 % Other sales(2) (0.1) % (0.2) % - % Total increase in restaurant and other sales
12.2 % 10.6 % 11.6 %
Store weeks 26,473 24,693 23,274 Comparable restaurant sales growth
4.7 % 5.4 % 4.5 %
Texas Roadhouse restaurants only: Comparable restaurant sales growth 4.6 % 5.4 % 4.5 % Average unit volume (in thousands)$ 5,555 $ 5,209 $ 4,973 Average unit volume (in thousands), 2018 and 2017 adjusted (3)
Weekly sales by group: Comparable restaurants (448, 408 and 380 units, respectively) 102,824 100,810 96,572 Average unit volume restaurants (21, 21 and 27 units, respectively)(4) 94,379 88,493 82,526 Restaurants less than six months old (15, 35 and 33 units, respectively )
106,328 97,268 92,208
Includes the impact of the year-over-year change in sales volume of all
(1) non-
less than six months before the beginning of the period measured, and, if
applicable, the impact of restaurants closed or acquired during the period.
Other sales, for 2019, represent
third party gift card fees net of
related to the amortization of third party gift card fees net of
related to the amortization of gift card breakage income.
(3) As 2019 contains 53 weeks, for comparative purposes, 2018 and 2017 average
unit volumes were adjusted to a 53-week basis.
(4) Average unit volume restaurants include restaurants open a full six 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. In addition, the increase in store weeks in 2019 includes the impact of the 53rd week. 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. 2019 2018 2017 Guest traffic counts 1.8 % 3.9 % 3.6 % Per person average check 2.9 % 1.5 % 0.9 %
Comparable restaurant sales growth 4.7 % 5.4 % 4.5 %
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 for all periods presented.
The increase in our per person average check for the periods presented was primarily driven by menu price increases shown below, which were taken as a result of inflationary pressures, primarily labor and/or commodities.
43 Table of Contents Menu Price Increases Q4 2019 1.9% Q2 2019 1.5% Q4 2018 1.7% Q1 2018 0.8% Q4 2017 0.3% Q2 2017 0.5% Q4 2016 1.0%
In all periods presented, average guest check may not have changed in line with the menu price increases implemented as guests shifted to other menu price items and/or purchased more or less beverages. We may take additional pricing in 2020 if needed. In 2020, we plan to open at least 30 company restaurants, including as many as seven Bubba's 33 restaurants. We have either begun construction or have sites under contract for purchase or lease for the majority of our expected 2020 openings.
Franchise Royalties and Fees
Franchise royalties and fees increased$1.7 million or 8.1% in 2019 compared to 2018 and increased$3.8 million or 23.1% in 2018 compared to 2017. The increases in both 2019 and 2018 were attributable to an increase in average unit volume at domestic restaurants, driven by comparable restaurant sales growth of 3.8%, and the opening of new restaurants. The increase in 2019 was also impacted by the addition of the 53rd week. The 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. Also included in the increase in 2018 were reclassifications of$2.6 million in conjunction with the implementation of new revenue recognition accounting guidance as previously described.
We anticipate our existing franchise partners will open as many as eight
Restaurant Cost of Sales
Restaurant cost of sales, as a percentage of restaurant and other sales, decreased to 32.3% in 2019 from 32.6% in 2018 and from 32.8% in 2017. These decreases were primarily due to the benefit of menu pricing actions partially offset by commodity inflation of 1.9% and 1.4% in 2019 and 2018, respectively. The decrease in 2018 was also due to the reclassification of$5.4 million in conjunction with the implementation of new revenue recognition accounting guidance as previously described.
For 2020, we currently expect commodity cost inflation of 1.0% to 2.0% with fixed price contracts for just over 50% of our overall food costs and the remainder subject to fluctuating market prices.
Restaurant Labor Expenses
Restaurant labor expense, as a percentage of restaurant and other sales, increased to 33.1% in 2019 compared to 32.6% in 2018. This increase was primarily attributed to higher average wage rates and prior staffing initiatives intended to increase sales partially offset by the benefit from an increase in average unit volume. Restaurant labor expense, as a percentage of restaurant and other sales, increased to 32.6% in 2018 compared to 31.2% in 2017. The increase was primarily attributed to higher average wage rates and staffing initiatives to increase sales along with higher costs associated with health insurance and workers' compensation expense partially offset by the benefit from an increase in average unit volume. In 2020, we anticipate our labor costs will be pressured by mid-single digit inflation due to ongoing labor market pressures and increases in state-mandated wage rates. These increases may or may not be offset by additional menu price adjustments. 44 Table of Contents Restaurant Rent Expense Restaurant rent expense, as a percentage of restaurant and other sales, remained relatively unchanged at 1.9% in 2019 compared to 2.0% in both 2018 and 2017. The decrease in 2019 was primarily due to the benefit of the 53rd week and an increase in average unit volume partially offset by higher rent expense, as a percentage of restaurant and other sales, at our newer restaurants. Rent expense was unchanged in 2018 compared to 2017 due to higher rent expense, as a percentage of restaurant and other sales, at our newer restaurants offset by the benefit from an increase in average unit volume.
Restaurant Other Operating Expenses
Restaurant other operating expense, as a percentage of restaurant and other sales, decreased to 15.3% in 2019 from 15.4% in 2018. The decrease was primarily attributed to lower utilities expense and lower marketing and advertising expense along with the benefit from an increase in average unit volume. These decreases were partially offset by higher general liability insurance expense and repairs and maintenance expense. Restaurant other operating expense, as a percentage of restaurant and other sales, decreased to 15.4% in 2018 from 15.6% in 2017. The decrease was primarily attributed to reclassifications of$4.7 million in 2018 made in conjunction with the implementation of the new revenue recognition accounting guidance along with lower incentive compensation expense and the benefit from an increase in average unit volume. The decrease was partially offset by higher credit card fees.
Restaurant Pre-opening Expenses
Pre-opening expenses increased to$20.2 million in 2019 from$19.1 million in 2018 and from$19.3 million in 2017. These changes are primarily due to the number of restaurant openings in a given year and the timing of restaurant openings. Pre-opening costs will fluctuate from period to period 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 Expenses ("D&A")
D&A, as a percentage of revenue, increased to 4.2% in 2019 compared to 4.1% in 2018. The increase in D&A was primarily due to higher depreciation at new stores from company restaurants and accelerated depreciation on relocated restaurants. These increases were partially offset by an increase in average unit volume. D&A, as a percentage of revenue, decreased to 4.1% in 2018 compared to 4.2% in 2017. The decrease in D&A was primarily due to the benefit from an increase in average unit volume partially offset by increased investment in short-lived assets, such as equipment at existing restaurants, and higher depreciation at new restaurants.
Impairment and Closure Costs, Net
Impairment and closure costs, net were($0.9) million ,$0.3 million and$0.7 million in 2019, 2018 and 2017, respectively. Impairment and closure income in 2019 included a gain of$2.6 million related to the forced relocation of one restaurant. This included a gain of$1.2 million related to the leasehold improvements and a gain of$1.4 million to settle a favorable operating lease. Also, in 2019, we recorded a charge of$1.1 million related to the impairment of the right-of-use asset at an underperforming restaurant. The remaining costs of$0.6 million related to closure costs primarily related to the relocation ofTexas Roadhouse restaurants. For 2018 and 2017, the amounts recorded were closure costs primarily related to the relocation ofTexas Roadhouse restaurants. See note 16 in the Consolidated Financial Statements for further discussion regarding closures and impairments recorded in 2019, 2018 and 2017. 45 Table of Contents
General and Administrative Expenses ("G&A")
G&A, as a percentage of total revenue, decreased to 5.4% in 2019 compared to 5.5% in 2018. The decrease was primarily due to the benefit of the 53rd week, lower claims administration costs related to a previously disclosed legal settlement and an increase in average unit volume. These decreases were partially offset by increased costs from the expansion of our regional operations support structure and increased marketing expenses due to decreased contributions from company restaurants. G&A, as a percentage of total revenue, decreased to 5.5% in 2018 compared to 5.6% in 2017. The decrease was primarily due to a pre-tax charge of$14.9 million ($9.2 million after-tax), or$0.13 per diluted share, related to the settlement of a legal matter in 2017 and the benefit of an increase in average unit volume. This decrease was offset by higher incentive compensation costs, higher managing partner conference costs, and reclassifications of$7.4 million made in conjunction with the implementation of the new revenue recognition accounting guidance as previously described. We are currently subject to various claims and contingencies that arise from time to time in the ordinary course of business, including those related to litigation, business transactions, employee-related matters and taxes, among others. See note 13 to the Consolidated Financial Statements for further discussion of these matters.
Interest Income (Expense), Net
Interest income was$1.5 million in 2019 compared to interest expense of$0.6 million in 2018. Net interest expense decreased to$0.6 million in 2018 compared to$1.6 million in 2017. These changes were primarily driven by earnings on our cash and cash equivalents as well as paying off our outstanding credit facility of$50.0 million inApril 2018 .
Income Taxes
Our effective tax rate increased to 15.1% in 2019 compared to 12.9% in 2018 primarily due to lower excess tax benefits related to our share-based compensation program partially offset by lower non-deductible officers' compensation. In addition, the prior year tax rate benefitted from an adjustment related to tax reform that we recorded in conjunction with the filing of our 2017 tax return. See note 9 to the Consolidated Financial Statements for a reconciliation of the statutory federal income tax rate to our effective tax rate. For 2020, we expect the effective tax rate to be 14.0% to 15.0%. Our effective tax rate decreased to 12.9% in 2018 compared to 26.1% in 2017 primarily due to new tax legislation that was enacted in late 2017. As a result of the new tax legislation, significant tax changes were enacted including the reduction of the federal corporate tax rate from 35.0% to 21.0%. These changes were generally effective at the beginning of our 2018 fiscal year.
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):
Fiscal Year 2019 2018
2017
Net cash provided by operating activities
$ 286,373 Net cash used in investing activities (214,820) (158,145)
(178,156)
Net cash used in financing activities (261,724) (135,516)
(70,243)
Net (decrease) increase in cash and cash equivalents$ (102,246) $ 59,207 $ 37,974 Net cash provided by operating activities was$374.3 million in 2019 compared to$352.9 million in 2018. The increase was primarily due to an increase in net income and depreciation and amortization expense. The increase in net income was primarily driven by increased restaurant margin dollars. This was partially offset by a decrease in working capital along with a decrease in deferred income taxes. The decrease in working capital was primarily due to a decrease in deferred revenue related to gift cards partially offset by a decrease in prepaid income taxes. 46 Table of Contents Net cash provided by operating activities was$352.9 million in 2018 compared to$286.4 million in 2017. The increase was primarily due to an increase in net income and non-cash items such as deferred income taxes, depreciation and amortization expense and share-based compensation expense along with an increase in working capital. The increase in net income was primarily driven by a decrease in income tax expense due to new tax legislation that was enacted in late 2017. The increase in working capital was primarily due to an increase in deferred revenue related to gift cards and an increase in accounts payable partially offset by an increase in prepaid income taxes.
Our operations have not required significant working capital and, like many restaurant companies, we can operate with negative working capital. Sales are primarily for cash, and restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth.
Net cash used in investing activities was
We require capital principally for the development of new company restaurants, the refurbishment or relocation of existing restaurants and the acquisition of franchise restaurants, if any. We either lease our restaurant site locations under operating leases for periods of five to 30 years (including renewal periods) or purchase the land when appropriate. As ofDecember 31, 2019 , 146 of the 514 company restaurants have been developed on land which we own. The following table presents a summary of capital expenditures (in thousands): 2019 2018 2017 New company restaurants$ 99,957 $ 83,633 $ 104,819
Refurbishment of existing restaurants 63,548 58,125
49,344
Relocation of existing restaurants 25,131 6,100
4,807
Capital expenditures related to Support Center office 25,704 8,122 2,658 Total capital expenditures$ 214,340 $ 155,980 $ 161,628
Our future capital requirements will primarily depend on the number of new restaurants we open, the timing of those openings and the restaurant prototypes developed in a given fiscal year. These requirements will include costs directly related to opening new restaurants and relocating existing restaurants and may also include costs necessary to ensure that our infrastructure is able to support a larger restaurant base. In 2020, we expect our capital expenditures to be$210.0 million to$220.0 million , the majority of which will relate to planned restaurant openings, including at least 30 company restaurant openings in 2020, the refurbishment of existing restaurants and the relocation of existing company restaurants. 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 2020, we anticipate net cash provided by operating activities will exceed capital expenditures, which we currently 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$261.7 million in 2019 compared to$135.5 million in 2018. The increase is primarily due to share repurchases of$139.8 million in 2019 as well as higher dividend payments in 2019. As a result of the 53rd week, 2019 had five dividend payments versus four payments in 2018. These increases were partially offset by the repayment of our revolving credit facility in Q2 2018. Net cash used in financing activities was$135.5 million in 2018 compared to$70.2 million in 2017. The increase is primarily due to the$50.0 million repayment of our revolving credit facility in Q2 2018 along with an increase in dividends paid. OnMay 31, 2019 , our Board of Directors approved a stock repurchase program under which we may repurchase up to$250.0 million of our common stock. This stock repurchase program has no expiration date and replaced a previous stock repurchase program which was approved onMay 22, 2014 . All repurchases to date under our stock repurchase programs have been made through open market transactions. The timing and the amount of any repurchases are determined by management under parameters established by our Board of Directors, based on an evaluation of our stock price, market conditions and other corporate considerations. During 2019, we repurchased 2,625,245 shares for$139.8 million and had$160.4 million remaining under our authorized stock repurchase program as ofDecember 31, 2019 . 47 Table of Contents
We paid cash dividends of$102.4 million in 2019 including the payment of a regular quarterly dividend authorized by our Board of Directors onDecember 5, 2019 , of$0.30 per share of common stock to shareholders of record at the close of business onDecember 11, 2019 . This payment was distributed onDecember 27, 2019 . OnFebruary 20, 2020 , our Board of Directors authorized the payment of a quarterly cash dividend of$0.36 per share of common stock. This payment will be distributed onMarch 27, 2020 to shareholders of record at the close of business onMarch 11, 2020 . The increase in the dividend per share amount reflects the increase in our regular annual dividend rate from$1.20 per share in 2019 to$1.44 per share in 2020. 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 a number of factors, including, but not limited to, earnings, financial condition, applicable covenants under our amended credit facility and other contractual restrictions, or other factors deemed relevant.
We paid distributions of
OnAugust 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 byJP Morgan Chase Bank, N.A. ,PNC Bank, N.A. , andWells Fargo Bank, N.A . The amended 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 amended 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 untilAugust 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 amended revolving credit facility, depending on our consolidated net leverage ratio, or the Alternate Base Rate, which is the highest of the issuing banks' prime lending rate, theFederal 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%. The weighted-average interest rate for the amended revolving credit facility atDecember 31, 2019 andDecember 25, 2018 was 2.64% and 3.81%, respectively. AtDecember 31, 2019 , we had$191.8 million of availability, net of$8.2 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$125.0 million and 20% of our consolidated tangible net worth. We were in compliance with all financial covenants as ofDecember 31, 2019 .
Contractual Obligations
The following table summarizes the amount of payments due under specified
contractual obligations as of
Payments Due by Period Less than More than Total 1 year 1 - 3 Years 3 - 5 Years 5 years Obligation under finance lease$ 2,111 $ - $
- $ -$ 2,111 Interest on finance lease 4,938 278 561 569 3,530 Operating lease obligations 990,321 52,450 107,622 108,630 721,619 Capital obligations 163,546 163,546 - - -
Total contractual obligations(1)
Excluded from this amount are certain immaterial items including unrecognized (1) tax benefits under Accounting Standards Codification ("ASC") 740 as they are
immaterial.
We have no material minimum purchase commitments with our vendors that extend beyond a year. See notes 5 and 8 to the Consolidated Financial Statements for details of contractual obligations. 48
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Guarantees
As ofDecember 31, 2019 andDecember 25, 2018 , we were contingently liable for$13.9 million and$14.8 million , respectively, for seven leases, 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 ofDecember 31, 2019 , 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
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 2024 Louisville, Kentucky (3)(4) December 2013 November 2023
Real estate lease agreements for restaurant locations which we entered into (1) 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 17, these restaurants are owned, in whole or part, by
certain officers, directors and 5% shareholders of the Company.
Leases associated with a restaurant concept which was sold. The leases were (3) 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 lease term expiration
contingent upon certain conditions being met by the acquirer.
Critical Accounting Policies and Estimates
The above discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosures of contingent assets and liabilities. Our significant accounting policies are described in note 2 to the accompanying consolidated financial statements. Critical accounting policies are those that we believe are most important to portraying our financial condition and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments or uncertainties regarding the application of these policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing the consolidated financial statements. Impairment of Long-lived Assets. We evaluate long-lived assets related to each restaurant to be held and used in the business, such as property and equipment, right-of-use assets and intangible assets subject to amortization, for impairment whenever events and circumstances indicate that the carrying amount of a restaurant may not be recoverable. When we evaluate restaurants, cash flows are the primary indicator of impairment. Recoverability of assets to be held and used is measured by comparison of the carrying amount of the restaurant to estimated undiscounted future cash flows expected to be generated by the restaurant. Under our policies, trailing 12-month cash flow results under a predetermined amount at the individual restaurant level signals a potential impairment. In our evaluation of restaurants that do not meet the cash flow threshold, we estimate future undiscounted cash flows from operating the restaurant over its estimated useful life, which can be a period of over 20 years. In the estimation of future cash flows, we consider the period of time the restaurant has been open, the trend of operations over such period and future periods and expectations for future sales growth. We limit assumptions about important factors such as trend of future operations and sales growth to those that are supportable based upon our plans for the restaurant and actual results at comparable restaurants. Both qualitative and quantitative information are considered when evaluating for potential impairments. As we assess the 49
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ongoing expected cash flows and carrying amounts of our long-lived assets, these factors could cause us to realize a material impairment charge.
If assets are determined to be impaired, we measure the impairment charge by calculating the amount by which the asset carrying amount exceeds its estimated fair value. The determination of asset fair value is also subject to significant judgment. We generally measure estimated fair value by independent third party appraisal or discounting estimated future cash flows. When fair value is measured by discounting estimated future cash flows, the assumptions used are consistent with what we believe hypothetical market participants would use. We also use a discount rate that is commensurate with the risk inherent in the projected cash flows. If these assumptions change in the future, we may be required to record impairment charges for these assets. In 2019, as a result of our impairment analysis, we recorded a charge of$1.1 million related to the impairment of the right-of-use asset at an underperforming restaurant. In addition, atDecember 31, 2019 , we had 17 restaurants whose trailing 12-month cash flows did not meet the predetermined threshold. However, the future undiscounted cash flows from operating each of these restaurants over their remaining estimated useful lives exceeded their respective remaining carrying values and no assets were determined to be impaired.
See note 16 in the Consolidated Financial Statements for further discussion regarding closures and impairments recorded in 2019, 2018 and 2017, including the impairments of goodwill and other long-lived assets.
Goodwill .Goodwill is tested annually for impairment, and is tested more frequently if events and circumstances indicate that the asset might be impaired. We have assigned goodwill to our reporting units, which we consider to be the individual restaurant level. An impairment loss is recognized to the extent that the carrying amount exceeds the implied fair value of goodwill. The determination of impairment consists of two steps. First, we determine the fair value of the reporting unit and compare it to its carrying amount. The fair value of the reporting unit may be based on several valuation approaches including capitalization of earnings, discounted cash flows, comparable public company market multiples and comparable acquisition market multiples. Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of the goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit, in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. The valuation approaches used to determine fair value are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions about appropriate revenue growth rates, operating margins, weighted average cost of capital, and comparable company and acquisition market multiples. In estimating the fair value using the capitalization of earnings or discounted cash flows methods we consider the period of time the restaurant has been open, the trend of operations over such period and future periods, expectations of future sales growth and terminal value. Assumptions about important factors such as the trend of future operations and sales growth are limited to those that are supportable based upon the plans for the restaurant and actual results at comparable restaurants. When developing these key judgments and assumptions, we consider economic, operational and market conditions that could impact fair value. The judgments and assumptions used are consistent with what we believe hypothetical market participants would use. However, estimates are inherently uncertain and represent only our reasonable expectations regarding future developments. If the estimates used in performing the impairment test prove inaccurate, the fair value of the restaurants may ultimately prove to be significantly lower, thereby causing the carrying value to exceed the fair value and indicating impairment has occurred. AtDecember 31, 2019 , we had 71 reporting units, primarily at the restaurant level, with allocated goodwill of$124.7 million . The average amount of goodwill associated with each reporting unit is$1.8 million with six reporting units having goodwill in excess of$4.0 million . We did not record any impairment charges as a result of our annual impairment analysis in 2019. We are not currently monitoring any restaurants for potential impairment. Since we determine the fair value of goodwill at the restaurant level, any significant decreases in cash flows at these restaurants or others could trigger an impairment charge in the future. The fair value of each of our reporting units was substantially in excess of their respective carrying values as of the 2019 goodwill impairment test. See note 16 in the Consolidated Financial Statements for further discussion regarding closures and impairments recorded in 2019, 2018 and 2017, including the impairments of goodwill and other long-lived assets. 50 Table of Contents Effects of Inflation We have not operated in a period of high commodity inflation for the last several years; however, we have experienced material increases in certain commodity costs, specifically beef, in the past. In addition, a significant number of our employees are paid at rates related to the federal and/or state minimum wage and, accordingly, increases in minimum wage have increased our labor costs for the last several years. We have increased menu prices and made other adjustments over the past few years, in an effort to offset increases in our restaurant and operating costs resulting from inflation. Whether we are able and/or choose to continue to offset the effects of inflation will determine to what extent, if any, inflation affects our restaurant profitability in future periods.
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