TEXAS ROADHOUSE, INC. 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. These statements include, but are not limited to, statements related to the potential impact of the COVID-19/Coronavirus outbreak and other non-historical statements. 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 endedDecember 31, 2019 , and in Part II, Item 1A in this Form 10-Q, along with disclosures in our otherSecurities 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 theSEC , 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, except as may be required by applicable law. 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 theSEC 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. RECENT DEVELOPMENTS
OnMarch 13, 2020 , the novel coronavirus ("COVID-19") outbreak was declared a National Public Health Emergency. As a result, several state and local mandates were implemented that encouraged the practice of social distancing, placed restrictions from individuals gathering in groups and, in many areas, placed complete restrictions on non-essential movement outside of the home. Shortly after the national emergency declaration, state and local officials began placing restrictions on restaurants, some of which allowed To-Go or curbside service only while others limited capacity in the dining room. ByMarch 31, 2020 , the last day of our Q1 2020 fiscal quarter, all of our domestic company and franchise restaurants were under state or local order which only allowed for To-Go or curbside service. As a result of the temporary dining room closures, we have experienced a significant decrease in traffic which has impacted our operating results. While we have seen significant sales growth in our To-Go program, we currently do not expect these sales will generate a similar profit margin to our normal operating model. We expect our operating results to continue to be severely impacted until such time that state and local restrictions are lifted, and our dining rooms can re-open at full capacity. We cannot predict how long the pandemic will last or when the state and local restrictions will be lifted. In addition, we cannot predict how quickly our guests will return to our restaurants once such restrictions have been lifted or the impact this will have on consumer spending habits. The impact on our operating results as well as the operational and financial measures we have implemented in response to the COVID-19 pandemic (the "pandemic") have been included throughout this document.
In response to the pandemic, the Company and its Board of Directors implemented the following measures during the quarter to enhance financial flexibility:
o Decreased capital expenditures by only continuing construction on nine
restaurants, including one relocation site, that were substantially complete;
o Suspended all quarterly cash dividends occurring after
o Suspended all share repurchase activity;
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o Increased the borrowings under the revolving credit facility by
and,
Decreased salaries including voluntary reductions of salary and bonus for the
executive and leadership teams to make relief grants available for restaurant
o employees. Each non-employee member of the Board of Directors has also
volunteered to forgo their director and committee fees along with any cash
retainers effective immediately and continuing throughout fiscal 2020. In addition, we continue to monitor federal and state plans to re-open the economy and have developed a framework that would allow us to implement a hybrid business model with limited capacity dining rooms together with enhanced To-Go through curbside service as permitted by local guidelines. We expect the re-opening process to be a gradual one with the safety of our employees and guests as our top priority. As ofMay 11, 2020 , the Company had re-opened the dining rooms in approximately 160 of our company-owned restaurants under various limited capacity restrictions. EffectiveMarch 27, 2020 , legislation was passed to benefit companies that were significantly impacted by the pandemic. This legislation, referred to as the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") includes potential payroll tax credits and the deferral of certain payroll taxes. This legislation did not impact the results of our Q1 2020 fiscal quarter but we expect it will have potential payroll tax and cashflow benefits for the remainder of the year. We are currently evaluating the impact of these items. In addition, the CARES Act provided for small business loans that were forgivable if certain criteria were met. The Company did not pursue any of these loans on behalf of company restaurants as we believe we have sufficient alternatives
for raising capital if needed.
Given the level of volatility and uncertainty surrounding the future impact of the pandemic, we have withdrawn our full year financial outlook for fiscal 2020 as described in our Current Report on Form 8-K filed with theSEC on March
19, 2020. OVERVIEWTexas Roadhouse, Inc. is a growing restaurant company operating predominately in the casual dining segment. Our founder, chairman, chief executive officer and president,W. Kent Taylor , started the business in 1993 with the opening of the firstTexas Roadhouse restaurant inClarksville, Indiana . Since then, we have grown to 617 restaurants in 49 states and ten foreign countries. As ofMarch 31, 2020 , our 617 restaurants included:
519 "company restaurants," of which 499 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
519 restaurants we owned as of
Roadhouse restaurants and operated 29 as Bubba's 33 restaurants. In addition,
we operated two restaurants outside of the casual dining segment. As of March
31, 2020, one company restaurant has been temporarily closed due to the pandemic but continues to be included in the above total. 98 "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 (loss) 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
Of the 98 franchise restaurants, 70 were domestic restaurants and 28 were
international restaurants. As of
have been temporarily closed due to the pandemic but continue to be included in
the above total.
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 67 of the 70 domestic franchise restaurants.
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Throughout this report, we use the term "restaurants" to include
Presentation of Financial and Operating Data
Throughout this report, the 13 weeks endedMarch 31, 2020 andMarch 26, 2019 are referred to as Q1 2020 and Q1 2019, respectively. Fiscal year 2020 will be 52 weeks in length, while the quarters for the year will be 13 weeks in length. Fiscal year 2019 was 53 weeks in length and, as such, the fourth quarter of fiscal 2019 was 14 weeks in length.
Long-Term Strategies to Grow Earnings Per Share and Create Shareholder Value
While our short-term strategies have changed due to the temporary change in our business model from the pandemic, our long-term strategies remain unchanged. 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 existingTexas Roadhouse locations once the associated lease expired or as a result of eminent domain which allows us to update them to a 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 2020, five company restaurants, including one Bubba's 33, and one domestic franchise restaurant were opened. As a result of the pandemic, we are only continuing construction on nine restaurants, including one relocation site, that are substantially complete and have delayed construction on the remaining locations in our pipeline. This was done to preserve cashflow and to avoid expected construction delays from the pandemic. We expect that several of these restaurants will not open until the dining rooms in their area are allowed to re-open. The remaining stores in our pipeline remain under evaluation as to when we will resume or start construction. 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 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 ofMarch 31, 2020 , we had 17 restaurants 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. Due to the pandemic, 22 of our international locations were temporarily closed as ofMarch 31, 2020 . As ofMay 11, 2020 , 17 of these locations remain closed. 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 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 17
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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 to 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 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. In addition, we continue to focus on driving To-Go sales which has significantly contributed to our sales growth in prior years. Leveraging Our Scalable Infrastructure. To support our growth, we have made 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. 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 evaluate opportunities to return capital to our shareholders including the payment of dividends and 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 which was paid onMarch 27, 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 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. OnMarch 24, 2020 , the Board of Directors voted to suspend the payment of quarterly cash dividends of the Company's common stock, effective with respect to dividends occurring afterMarch 27, 2020 . This was done to preserve cashflow due to the pandemic. In 2008, our Board of Directors approved our first stock repurchase program. From inception throughMarch 31, 2020 , we have paid$369.0 million through our authorized stock repurchase programs to repurchase 17,722,505 shares of our common stock at an average price per share of$20.82 . 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. In Q1 2020, we paid$12.6 million to repurchase 252,409 shares of our common stock. The company suspended all share repurchase activity onMarch 17, 2020 , in order to preserve cashflow due to the pandemic. As ofMarch 31, 2020 ,$147.8 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, 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 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
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measured excluding restaurants permanently 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 Texas Roadhouse restaurants open for a full
six months before the beginning of the period measured excluding restaurants
permanently 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. Store weeks include weeks in which a restaurant is temporarily closed.
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 royalties and 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.
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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, dining room and To-Go 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 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, 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 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 Expense (Income), Net. Interest expense (income), net includes interest expense on our debt or financing obligations including the amortization of loan fees reduced by earnings on cash and cash equivalents.
Equity (Loss) Income from Unconsolidated Affiliates. As ofMarch 31, 2020 andMarch 26, 2019 , we owned a 5.0% to 10.0% equity interest in 24 domestic franchise restaurants. Additionally, as ofMarch 31, 2020 andMarch 26, 2019 , 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 (loss) 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 atMarch 31, 2020 andMarch 26, 2019 included 20 majority-owned restaurants, all of which were open.
Q1 2020 Financial Highlights
Total revenue decreased$38.1 million , or 5.5%, to$652.5 million in Q1 2020 compared to$690.6 million in Q1 2019 primarily due to a decrease in average unit volumes driven by a decrease in comparable restaurant sales. While store weeks increased 5.3%, comparable restaurant sales decreased 8.4%. The decrease in average unit volumes is primarily due to the temporary closure of our dining rooms in mid-March related to the pandemic. 20 Table of Contents Restaurant margin dollars decreased$44.0 million , or 35.9%, to$78.6 million in Q1 2020 compared to$122.6 million in Q1 2019 and restaurant margin, as a percentage of restaurant and other sales, decreased to 12.1% in Q1 2020 compared to 17.9% in Q1 2019. The decrease in restaurant margin, as a percentage of restaurant and other sales, was due to lower sales along with higher labor and other operating costs partially offset by lower cost of sales. See further discussion of the specific drivers included below.
Net income decreased
Results of Operations
13 Weeks Ended
March 31, 2020 March 26, 2019
$ % $ %
(In thousands)
Consolidated Statements of Income:
Revenue:
Restaurant and other sales 647,626 99.2 685,117 99.2
Franchise royalties and fees 4,898 0.8 5,491 0.8
Total revenue 652,524 100.0 690,608 100.0
Costs and expenses:
(As a percentage of restaurant and
other sales)
Restaurant operating costs
(excluding depreciation
and amortization shown separately
below):
Cost of sales 210,180 32.5 223,712 32.7
Labor 241,079 37.2 223,880 32.7
Rent 13,471 2.1 13,128 1.9
Other operating 104,289 16.1 101,802 14.9
(As a percentage of total revenue)
Pre-opening 5,112 0.8 3,868 0.6
Depreciation and amortization 29,054 4.5 27,773
4.0 Impairment and closure, net 595 NM 17 NM General and administrative 32,954 5.1 35,983 5.2 Total costs and expenses 636,734 97.6 630,163 91.2 Income from operations 15,790 2.4 60,445 8.8 Interest expense (income), net 69 0.0 (754)
(0.1)
Equity (loss) income from investments in unconsolidated affiliates (508) (0.1) 113
0.0
Income before taxes 15,213 2.3 61,312
8.9
Income tax (benefit) expense (1,939) (0.3) 9,119
1.3
Net income including noncontrolling interests 17,152 2.6 52,193 7.6 Net income attributable to noncontrolling interests 1,123 0.2 1,803 0.3 Net income attributable toTexas Roadhouse, Inc. and subsidiaries 16,029 2.5 50,390 7.3 NM - Not meaningful 21 Table of Contents Reconciliation of Income
from Operations to Restaurant Margin
(in thousands)
13 Weeks Ended
March 31, 2020 March 26, 2019
Income from operations $ 15,790 $ 60,445
Less:Franchise royalties and fees 4,898
5,491
Add:
Pre-opening 5,112 3,868Depreciation and amortization 29,054
27,773
Impairment and closure, net 595 17
General and administrative 32,954 35,983
Restaurant margin $ 78,607 $ 122,595
Restaurant margin $/store week $ 11,695 $ 19,197 Restaurant margin (as a percentage of restaurant and other sales) 12.1% 17.9%
See above for the definition of restaurant margin.
Restaurant Unit Activity
Total Texas Roadhouse Bubba's 33 Other
Balance at December 31, 2019 611 581 28 2
Company openings 5 4 1 -
Franchise openings - Domestic 1 1 - -Franchise openings - International - - -
-
Balance at March 31, 2020 617 586 29 2
March 31, 2020 March 26, 2019
Company - Texas Roadhouse 488 468
Company - Bubba's 33 29 25
Company - Other 2 2
Franchise - Texas Roadhouse - U.S. 70 69
Franchise - Texas Roadhouse - International 28 24
Total (1) 617 588
(1) Includes one domestic Company -
Roadhouse - International locations that are temporarily closed.
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Q1 2020 (13 weeks) compared to Q1 2019 (13 weeks)
Restaurant and Other Sales. Restaurant and other sales decreased by 5.5% in Q1
2020 as compared to Q1 2019. 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 2020 Q1 2019
Company Restaurants :
Increase in store weeks 5.3 % 5.6 %(Decrease) increase in average unit volume (8.5) % 4.6 % Other(1) (2.1) % 0.1 % Total (decrease) increase in restaurant sales (5.3) % 10.3 % Other sales(2) (0.2) % (0.2) % Total (decrease) increase in restaurant and other sales
(5.5) % 10.1 %
Store weeks 6,721 6,386 Comparable restaurant sales growth
(8.4) % 5.2 %
Texas Roadhouse restaurants only: Comparable restaurant sales growth (8.2) % 5.1 % Average unit volume (in thousands) $
1,283
Weekly sales by group: Comparable restaurants (452 and 429 units, respectively)$ 98,979 $ 109,634 Average unit volume restaurants (20 and 22 units, respectively)(3)$ 91,373 $ 98,938 Restaurants less than six months old (16 and 17 units, respectively)$ 97,353 $ 113,880
Includes the impact of the year-over-year change in sales volume of all
non-
applicable, the impact of restaurants permanently closed or acquired during
the period.
Other sales, for Q1 2020, represented $7.8 million related to the
amortization of third-party gift card fees net of
amortization of gift card breakage income. For Q1 2019, other sales
(2) represented
fees net of
income. The increase in all amounts is primarily due to continued growth in
our third-party gift card program.
Average unit volume restaurants include restaurants open a full six and up to (3) 18 months before the beginning of the period measured, excluding sales from
restaurants permanently closed during the period.
The decrease in restaurant sales for Q1 2020 is primarily attributable to the
decrease in average unit volumes, driven by a decline in comparable restaurant
sales, partially offset by an increase in store weeks. Comparable restaurant
sales increased 8.0% and 4.2% for our January and February periods,
respectively. These increases were driven by increased guest traffic and an
increase in per person average check of 3.5%.
Comparable restaurant sales decreased 29.7% for our March period as we
temporarily closed our dining rooms and shifted to a To-Go only model as a
result of the pandemic. Our expanded To-Go model, which includes a curbside
and/or drive-up operating model, allows guests to order via phone, through our
mobile app, or once on site. In addition to our regular menu, we have also added
family value packs which include four entrees with an assortment of sides. We
also have added ready-to-grill steaks and pork that allow customers to order
their preferred cut of meat to prepare at home. As a result of this significant
change in our operating model and in the products which we are currently
offering, we do not believe that our per person average check and guest traffic
counts, beginning with our March 2020 period, provide a meaningful comparison to
the prior year period. As such, these amounts have not been disclosed for Q1
2020.
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We opened fourTexas Roadhouse restaurants and one Bubba's 33 restaurant in Q1 2020. As a result of the pandemic, we are only continuing construction on nine restaurants that are substantially complete and have delayed construction on remaining locations in our pipeline. This was done to preserve cashflow and to avoid expected construction delays from the pandemic. We expect that several of these restaurants will not open until the dining rooms in their area are allowed to re-open. The remaining stores in our pipeline remain under evaluation as to when we will resume or start construction. Franchise Royalties and Fees. Franchise royalties and fees decreased by$0.6 million , or by 10.8%, in Q1 2020 from Q1 2019. The decrease is due to lower average unit volume, driven by a comparable restaurant sales decrease of 9.4% at domestic and international franchise stores. This comparable sales decrease includes the impact of 22 international locations that were temporarily closed as of the end of the quarter. This decrease was slightly offset by the opening of new franchise restaurants. Additionally, in Q1 2020 we waived royalties of$0.2 million for international franchisees in countries that were significantly impacted by the pandemic. We also made royalty deferral arrangements for many of our domestic and international franchisees. We believe collection of these royalties remains probable and have continued to record royalty revenue related to these deferred royalties. We have agreed to waive or defer royalties for our franchisees through the end of our Q2 2020 fiscal quarter.
Our existing franchise restaurant partners opened one domestic
Restaurant Cost of Sales. Restaurant cost of sales, as a percentage of restaurant and other sales, decreased to 32.5% in Q1 2020 from 32.7% in Q1 2019. The decrease is primarily due to the benefit of menu pricing actions and the benefit of a shift to lower priced menu items, partially offset by commodity inflation of 1.4%. Restaurant Labor Expenses. Restaurant labor expenses, as a percentage of restaurant and other sales, increased to 37.2% in Q1 2020 compared to 32.7% in Q1 2019. This increase was primarily due to relief payments and increased benefits provided to our hourly restaurant employees related to the pandemic, higher wage rates and labor inefficiencies, higher costs associated with health insurance and a decrease in average unit volume. InMarch 2020 , we incurred costs of$10.7 million for relief pay and benefits for our hourly employees. This pay was based on their level of hours worked prior to the pandemic and indexed for tenure. In addition, we enhanced certain sick pay and accrued vacation benefits and also provided a premium holiday on health insurance. We also experienced higher wage rates and labor inefficiencies as a significant number of employees were moved from a tipped wage rate to a non-tipped wage rate as a result of our change in operating model. Finally, higher health insurance costs were primarily driven by a$2.3 million increase in claim costs in Q1 2020. This was due to a significant increase in high dollar claims that were below our retention level. We do not believe this increase is due to any pandemic related claims.
In addition, we expect to take further compensation actions to support our restaurant level employees during the pandemic to ensure that our dining rooms are properly staffed with experienced team members once they re-open.
Restaurant Rent Expense. Restaurant rent expense, as a percentage of restaurant and other sales, increased to 2.1% in Q1 2020 compared to 1.9% in Q1 2019. This increase was due to the decrease in average unit volume along with 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 16.1% in Q1 2020 compared to 14.9% in Q1 2019. The increase is due to higher supplies, utilities, and general liability insurance expenses and a decrease in average unit volume partially offset by lower incentive compensation expense. Higher supplies expense is due to an increase in To-Go supplies due to the temporary changes in our operating model. Higher general liability insurance is due to a$1.3 million unfavorable adjustment to our quarterly insurance reserve compared to a$0.8 million unfavorable adjustment in Q1 2019. Lower incentive compensation expense is due to lower restaurant profitability. 24 Table of Contents Restaurant Pre-opening Expenses. Pre-opening expenses increased to$5.1 million in Q1 2020 from$3.9 million in Q1 2019. This increase was primarily due to the timing of restaurant openings as average pre-opening expenses incurred for each restaurant remained relatively unchanged. 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 4.5% in Q1 2020 compared to 4.0% in Q1 2019. This increase was primarily due to a decrease in average volume and higher depreciation at new restaurants. Impairment and Closure Costs, Net. Impairment and closure costs, net was$0.6 million in Q1 2020. This includes the impairment of the operating lease right-of-use assets for one underperforming store that was closed inApril 2020 and one that was relocated during the period.
General and Administrative Expenses. G&A, as a percentage of total revenue, decreased to 5.1% in Q1 2020 compared to 5.2% in Q1 2019. The decrease was primarily due to lower performance based stock compensation expense and lower incentive compensation costs partially offset by a decrease in average unit volume.
In addition, as a result of the pandemic, our executive and leadership teams voluntarily agreed to reductions of salary and bonus for all or part of the remainder of our fiscal year 2020. Also, each non-employee member of our Board of Directors has also volunteered to forgo their director and committee fees and any cash retainers for the remainder of our fiscal year 2020.
Interest Expense (Income), Net. Interest expense was
Equity (Loss) Income from Unconsolidated Affiliates. Equity loss was
Income Tax (Benefit) Expense. Our effective tax rate decreased to (12.7%) in Q1 2020 compared to 14.9% in Q1 2019 primarily due to the significant decrease in our pre-tax income. As a result, the impact of our FICA tip and Work opportunity tax credits had a more significant impact to our effective tax rate. Additionally, these credits exceeded our federal liability in Q1 2020 but we expect to utilize these credits in the current year or by carrying back to
our 2019 tax 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):
13 Weeks Ended
March 31, 2020 March 26, 2019 Net cash provided by operating activities $ 21,716$ 111,415 Net cash used in investing activities (44,505)
(42,044)
Net cash provided by (used in) financing activities 145,516
(27,389)
Net increase in cash and cash equivalents$ 122,727
$ 41,982 Net cash provided by operating activities was$21.7 million in Q1 2020 compared to$111.4 million in Q1 2019. This decrease was primarily due to changes in working capital and a decrease in net income. The decrease in cash generated from changes in working capital is primarily due to decreases in accounts payable, income taxes payable and accrued wages partially offset by a decrease in accounts receivable. 25 Table of Contents Typically, 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. As previously discussed, all of our restaurants temporarily closed their dining rooms due to the pandemic and we may not be able to generate sufficient cash to cover all of our operations until they can re-open at full capacity. In addition, we cannot predict how quickly our guests will return to our restaurants once such restrictions have been lifted or the impact this will have on consumer spending habits.
Net cash used in investing activities was$44.5 million in Q1 2020 compared to$42.0 million in Q1 2019. The increase was primarily due to an increase in capital expenditures partially offset by the proceeds received related to a sale leaseback transaction at one location. The increase in capital expenditures was primarily due to the relocation of existing restaurants. We require capital principally for the development of new company restaurants, the refurbishment or relocation of existing restaurants and the acquisition of franchise restaurants, if any. We either lease our restaurant site locations under operating leases for periods of five to 30 years (including renewal periods) or purchase the land when appropriate. As ofMarch 31, 2020 , we had developed 147 of the 519 company restaurants on land in which we own. The following table presents a summary of capital expenditures (in thousands): Q1 2020 Q1 2019 New company restaurants$ 19,124 $ 17,233 Refurbishment of existing restaurants 12,902
12,317
Relocation of existing restaurants 11,188
4,960
Capital expenditures related to Support Center office 3,458 7,534 Total capital expenditures
$ 46,672 $ 42,044 As a result of the pandemic, we are only continuing construction on nine restaurants, including one relocation site, that are substantially complete and have delayed construction on remaining locations in our pipeline. This was done to preserve cashflow and to avoid expected construction delays from the pandemic. Our capital requirements for the remainder of the year will primarily depend on when we can resume our normal development schedule. Net cash provided by financing activities was$145.5 million in Q1 2020 compared to cash used in financing activities of$27.4 million in Q1 2019. The increase is primarily due to borrowings under our revolving credit facility partially offset by an increase in share repurchases and dividends paid. In light of the current uncertainty in the global markets resulting from the pandemic and notwithstanding our healthy cash balance previously described in our Annual Report on Form 10-K for fiscal year endedDecember 31, 2019 , inMarch 2020 we increased our borrowings as a precautionary measure in order to bolster our cash position and enhance financial flexibility. The proceeds from these borrowings, which totaled$190 million , are being held on our balance sheet and may in the future be used for general corporate purposes, including, without limitation, working capital, capital expenditures in the ordinary course of business, or other lawful corporate purposes, all in accordance with and subject to the terms and conditions of the Amended Credit Agreement (defined below). OnMay 11, 2020 , as a precautionary measure to further enhance financial flexibility, we amended the revolving credit facility to increase the amount available under the facility by$82.5 million . In addition, we provided notice to the lenders of our intent to draw down$50.0 million of the increased amount. If the pandemic continues to adversely impact our business for a significant period of time, we may need to further increase the credit facility and/or seek other sources of liquidity. There is no guarantee that we can increase the credit facility or that additional liquidity will be readily available or available at favorable terms. 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 26 Table of Contents programs 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 2020, we paid$12.6 million to repurchase 252,409 shares of our common stock. OnMarch 17, 2020 , we suspended all share repurchase activity. OnMarch 17, 2020 , our Board of Directors authorized the payment of a cash dividend of$0.36 per share of common stock. The payment of this dividend totaling$25.0 million was distributed onMarch 27, 2020 to shareholders of record at the close of business onMarch 11, 2020 . OnMarch 24, 2020 , the Board of Directors voted to suspend the payment of quarterly cash dividends of the Company's common stock, effective with respect to dividends occurring afterMarch 27, 2020 .
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 byJPMorgan Chase Bank, N.A .,PNC Bank, N.A. , andWells 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 untilAugust 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, 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%. As noted above, inMarch 2020 , we borrowed$190.0 million under our revolving credit facility. The weighted-average interest rate for the revolving credit facility as ofMarch 31, 2019 andDecember 31, 2019 was 1.64% and 2.64%, respectively. As ofMarch 31, 2020 , we had$190.0 million outstanding under our revolving credit facility and$1.8 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. We were in
compliance with all financial covenants as of
OnMay 11, 2020 , we amended the revolving credit facility to increase the amount available under the facility by$82.5 million . The amendment modified the financial covenants and the pricing through the end of our Q1 2021 fiscal quarter. As ofMay 11, 2020 , we had$190.0 million outstanding under the revolving credit facility at an interest rate of 2.27% based on the pricing
per
the amendment.
27
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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
Long-term debt obligation $ 190,000 $ - $ 190,000 $ - $ -
Obligation under finance lease 2,113 - - - 2,113 Interest(1) 12,145 3,396 4,720 570 3,459 Operating lease obligations 1,010,893 53,516 109,770 110,093 737,514 Capital obligations 141,058 141,058 - - -
Total contractual obligations(2)
Includes interest on our revolving credit facility and interest on a finance
lease. Uses interest rates on our revolving credit facility as of
2020 for our variable rate debt. We assumed
calculated interest rate payments on the revolving credit facility using an
interest rate of 1.64%, which was the weighted average interest rate on our
revolving credit facility at
rate until maturity on our finance lease.
(2) 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 note 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.
28
Table of Contents
Guarantees
As ofMarch 31, 2020 andDecember 31, 2019 , we are contingently liable for$13.7 million and$13.9 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 ofMarch 31, 2020 andDecember 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) 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 7 to the unaudited condensed consolidated financial
statements, this restaurant is owned, in part, by our founder.
Leases associated with non-
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.
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