TEXAS ROADHOUSE, INC. 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. This Management's Discussion and Analysis of Financial Condition and Results of Operations focuses on discussion of 2020 results as compared to 2019 results. For discussion of 2019 results as compared to 2018 results, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" within our Form 10-K for the year endedDecember 31, 2019 filed
with theSEC onFebruary 28, 2020 . 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 634 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 29, 2020 , our 634 restaurants included:
537 "company restaurants," of which 517 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 537 restaurants we owned and operated
at the end of 2020, we operated 503 as
Bubba's 33 restaurants and three as Jaggers restaurants.
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 five additional
franchise restaurants in which we have no ownership interest. All of the
franchise restaurants operated as
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) 65 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 2020 was 52 weeks in length, while the fourth quarter was 13 weeks in length. Fiscal year 2019 was 53 weeks in length and, as such, the fourth quarter was 14 weeks in length.
COVID-19 Impact
OnMarch 13, 2020 , the novel coronavirus ("COVID-19") pandemic (the "pandemic") was declared a National Public Health Emergency. 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. By late March, all of our domestic company and franchise restaurants were under state or local order which only allowed for To-Go or curbside service. Beginning in earlyMay 2020 , state and local guidelines began to allow dining rooms to re-open, typically at a limited capacity. While all of our dining rooms were able to open in some 39
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capacity, many were required to close again in areas more severely impacted by the pandemic. As ofDecember 29, 2020 , 82% of our company restaurants had their dining rooms operating under various limited capacity restrictions. Our remaining restaurants were limited to outdoor and/or To-Go or curbside service only.
In response to the impact of the pandemic on our restaurant operations, we have developed a hybrid operating model that accommodates our limited capacity dining rooms together with enhanced To-Go, which includes a curbside and/or drive-up operating model, as permitted by local guidelines. This includes design changes to our building to better accommodate the increased To-Go sales and the expansion of outdoor seating areas where allowed. We also have installed booth partitions in all of our restaurants as an added safety measure for our guests. In addition, we have increased our already strict sanitation requirements, are conducting daily health and temperature checks for all employees before they begin their shift and are requiring personal protective equipment to be worn by all restaurant employees at all times. As we work through the local regulations at each of our locations, the safety of our employees and guests remains our top priority.
As a result of the dining room restrictions and temporary closures, we have experienced a significant decrease in traffic which has impacted our operating results. While the majority of our dining rooms have re-opened, a significant portion continue to operate under capacity restrictions that severely limit the number of guests we can serve. In addition, while we have seen significant sales growth in our To-Go program, even with dining rooms re-opened, we currently do not expect these sales will generate a similar profit margin and cash flows to our normal operating model. We expect our operating results to continue to be impacted until at least such time that all state and local restrictions are lifted, and our dining rooms can operate at full capacity. We cannot predict how long the pandemic will last, how long it will take until all state and local restrictions will be lifted, or the extent to which our dining rooms will have to close again. In addition, we cannot predict the overall impact on the economy or consumer spending habits. The impact on our operating results as well as the operational and financial measures we have implemented in response to the pandemic have been included throughout this report.
In response to the pandemic, the Company and our Board of Directors implemented the following measures in 2020 to enhance financial flexibility:
? Decreased the number of planned new restaurants for 2020;
? Suspended all quarterly cash dividends occurring after
? Suspended all share repurchase activity;
? Expanded the capacity of the revolving credit facility and increased the
borrowings by
Decreased compensation including voluntary reductions of salary and bonus for
the executive and leadership teams to make relief grants available for
? restaurant employees. Each non-employee member of the Board of Directors also
volunteered to forgo their director and committee fees along with any cash
retainers effective
EffectiveMarch 27, 2020 , legislation referred to as the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was passed to benefit companies that were significantly impacted by the pandemic. This legislation allowed for the deferral of the social security portion of the employer portion of FICA payroll taxes from the date of enactment through the end of 2020. Amounts are required to be repaid in equal installments at the end of 2021 and 2022. As ofDecember 29, 2020 , the Company had deferred$47.3 million in payroll taxes with the amount due in 2021 included in accrued wages and payroll taxes and the amount due in 2022 included in other liabilities in our consolidated balance sheets. The CARES Act also allowed for an Employee Retention Credit for companies severely impacted by the pandemic to encourage the retention of full-time employees. This refundable payroll tax credit was available for any company that had fully or partially suspended operations due to government order or experienced a significant decline in gross receipts and had employees who were paid but did not actually work. The Company provided various forms of relief pay for hourly restaurant employees throughout the year, as significant portion of which qualified for this tax credit. For the year endedDecember 29, 2020 , we recorded$7.0 million related to this credit which is included in labor expense in our 40 Table of Contents
consolidated statements of income and comprehensive income.
Finally, 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.
Long-term Strategies to Grow Earnings Per Share
Although a significant portion of 2020 required us to focus on adapting our business to account for the impacts of the pandemic, we remain committed to our core operating strategy that has defined and grown our brand. 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 existingTexas Roadhouse locations once the associated lease expired or as a result of eminent domain which allows us to move to a better site, 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 2020, we opened 22 company restaurants while our franchise partners opened four restaurants. This included 18Texas Roadhouse restaurants, three Bubba's 33 restaurants, and one Jaggers restaurant. At the onset of the pandemic, we delayed construction on all restaurants that were not substantially complete which decreased our planned store openings for the year. We currently plan to open 25 to 30 company restaurants across all concepts in 2021. To the extent that state and local guidelines begin to further reduce capacity at our restaurants, we could pull back on development and reduce capital expenditures accordingly. In addition, we anticipate our existing franchise partners will open as many as sixTexas Roadhouse restaurants, primarily international, in 2021. Our average capital investment for the 18Texas Roadhouse restaurants opened during 2020, including pre-opening expenses and a capitalized rent factor, was$6.2 million . We expect our average capital investment forTexas Roadhouse restaurants opening in 2021 to be approximately$5.5 million . Our average capital investment for the three Bubba's 33 restaurants opened during 2020, including pre-opening expenses and a capitalized rent factor, was$7.3 million . We expect our average capital investment for Bubba's 33 restaurants opening in 2021 to be approximately$6.9 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. In addition, we have seen increased building costs as a result of the pandemic. We have entered into area development and franchise agreements for the development and operation ofTexas Roadhouse restaurants in several foreign countries and oneU.S territory. We currently have signed franchise and/or development agreements in nine countries in theMiddle East as well asTaiwan ,the Philippines ,Mexico ,China ,South Korea ,Brazil andPuerto Rico . As ofDecember 29, 2020 , we had 15 restaurants open in five countries in theMiddle East , four restaurants open inTaiwan , five inthe Philippines , two inSouth Korea , and one each inMexico andChina 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
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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 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, with the increase in To-Go sales in prior years and the significant increase in the current year due to the pandemic, we are currently testing changes to our building layout to help better accommodate higher To-Go volumes at our restaurants. In addition, we continue to look for ways through various strategic initiatives to drive awareness of our brands and increase profitability. At the onset of the pandemic, we began selling ready-to-grill steaks and pork for customers to prepare at home. While we reduced our store-level offerings around ready-to-grill products once our dining rooms began to re-open, based on the success of this program we have developed Texas Roadhouse Butcher Shop. This on-line platform allows for the purchase and delivery hand-cut quality steaks that are available in our restaurants. This platform launched in our Q4 2020 fiscal quarter.
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 evaluate opportunities to return capital to our shareholders, including the payment of dividends and repurchase of common stock. In 2011, our Board of Directors declared our first quarterly dividend of$0.08 per share of common stock. 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 . OnMarch 24, 2020 , the Board of Directors voted to suspend the payment of quarterly cash dividends on the Company's common stock, effective with respect to dividends occurring afterMarch 27, 2020 . This was done to preserve cash flow due to the pandemic. 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. We are currently evaluating when we will resume the payment of cash dividends. In 2008, our Board of Directors approved our first stock repurchase program. From inception throughDecember 29, 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. For the year endedDecember 29, 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 cash flow due to the pandemic. As ofDecember 29, 2020 ,$147.8 million remains authorized for stock repurchases. We are currently evaluating when we will resume the repurchase of shares. 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 the kitchen staff and overall kitchen operations including food preparation and food quality. Service managers have primary responsibility for managing the front of house staff and 42 Table of Contents overall dining room operations including service quality and the guest experience. The assistant managers support our managing partners, kitchen, and service managers. 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 assisting in the site selection process. 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 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. Comparable restaurant sales 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 permanently closed during the period. Comparable restaurant sales 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 sales for company restaurants open for a full six months before the beginning of the period measured excluding sales of 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 food and beverage costs, 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.
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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. 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
consistent with the historic redemption pattern of the associated gift card or
on actual redemptions in periods where redemptions do not align with historic
redemption patterns.
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. 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.
Food and Beverage Costs. Food and beverage costs consists of the costs of raw
materials and ingredients used in the preparation of food and beverage products
sold in our company restaurants. Approximately half of our food and beverage
costs relates to beef costs.
Restaurant Labor Expenses. Restaurant labor expenses include all direct and indirect labor costs incurred in operations except for profit sharing incentive compensation expenses earned by our restaurant managing partners and market partners. These profit sharing expenses are reflected in restaurant other operating expenses. Restaurant labor expenses also include share-based compensation expense related to restaurant-level employees.
Restaurant Rent Expense. Restaurant rent expense includes all rent, except pre-opening rent, associated with the leasing of real estate and includes base, percentage and straight-line rent expense.
Restaurant Other Operating Expenses. Restaurant other operating expenses consist
of all other restaurant-level operating costs, the major components of which are
utilities, 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
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
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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 Income (Loss) from Unconsolidated Affiliates. Equity income (loss) includes our percentage share of net income earned by unconsolidated affiliates. This includes our 5.0% to 10.0% equity interest in 24 franchise restaurants. Additionally, we own a 40% equity interest in four non-Texas Roadhouse restaurants as part of a joint venture agreement with a casual dining restaurant operator inChina . 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 include 20 majority-owned restaurants for all periods presented.
2020 Financial Highlights
Total revenue decreased$358.0 million or 13.0% to$2.4 billion in 2020 compared to$2.8 billion in 2019. The decrease was primarily due to a decrease in average unit volumes driven by a decrease in comparable restaurant sales. While store weeks increased 2.7% in 2020, comparable restaurant sales decreased 14.2%. The decrease in average unit volumes is primarily due to our dining rooms operating under various limited capacity restrictions due to the pandemic. Also, the addition of the 53rd week in 2019 resulted in$59.0 million in restaurant and other sales. Restaurant margin decreased$208.6 million or 44.0% to$265.6 million in 2020 compared to$474.2 million in 2019 and restaurant margin, as a percentage of restaurant and other sales, decreased to 11.2% in 2020 compared to 17.3% in 2019. The decrease in restaurant margin, as a percentage of restaurant and other sales, was due to lower sales along with higher costs due to the pandemic. In addition, restaurant margin was pressured by an increase in To-Go sales which typically result in a less profitable transaction. See further discussion of specific drivers included below. Net income decreased$143.2 million or 82.1% to$31.3 million in 2020 compared to$174.5 million in 2019 primarily due to lower restaurant margin dollars partially offset by lower general and administrative expenses and an income tax benefit. Diluted earnings per share decreased 81.8% to$0.45 from$2.46 in the prior year. Also, the addition of the 53rd week in 2019 resulted in additional diluted earnings per share of$0.10 to$0.11 . 45 Table of Contents Results of Operations Fiscal Year 2020 2019 $ % $ % (In thousands) Consolidated Statements of Income: Revenue: Restaurant and other sales 2,380,177 99.3 2,734,177
99.2
Franchise royalties and fees 17,946 0.7 21,986
0.8
Total revenue 2,398,123 100.0 2,756,163
100.0
Costs and expenses: (As a percentage of restaurant and other sales) Restaurant operating costs (excluding depreciation and amortization shown separately below): Food and beverage 780,646 32.8 883,357 32.3 Labor 875,764 36.8 905,614 33.1 Rent 54,401 2.3 52,531 1.9 Other operating 403,726 17.0 418,448 15.3 (As a percentage of total revenue) Pre-opening 20,099 0.8 20,156 0.7
Depreciation and amortization 117,877 4.9 115,544
4.2
Impairment and closure, net 2,263 NM (899) NM
General and administrative 119,503 5.0 149,389 5.4
Total costs and expenses 2,374,279 99.0 2,544,140 92.3
Income from operations 23,844 1.0 212,023 7.7Interest expense (income), net 4,091 0.2 (1,514)
(0.1)
Equity (loss) income from investments in unconsolidated affiliates (500) (0.0) 378
0.0
Income before taxes 19,253 0.8 213,915
7.8
Income tax (benefit) expense (15,672) (0.7) 32,397
1.2
Net income including noncontrolling interests 34,925 1.5 181,518
6.6
Net income attributable to noncontrolling interests 3,670 0.2 7,066
0.3
Net income attributable toTexas Roadhouse, Inc. and subsidiaries 31,255 1.3 174,452
6.3
NM - Not meaningful
Reconciliation of Incomefrom Operations to Restaurant Margin
Fiscal Year Ended
2020 2019
(In thousands, except per store week)
Income from operations $ 23,844 $ 212,023 Less:
Franchise royalties and fees 17,946
21,986
Add:
Pre-opening 20,099 20,156Depreciation and amortization 117,877 115,544 Impairment and closure, net 2,263 (899) General and administrative 119,503 149,389 Restaurant margin$ 265,640 $ 474,227 Restaurant margin $/store week$ 9,773 $ 17,914 Restaurant margin (as a percentage of restaurant and other sales) 11.2% 17.3% 46 Table of Contents Restaurant Unit Activity Total Texas Roadhouse Bubba's 33 Jaggers Balance at December 31, 2019 611 581 28 2 Company openings 22 18 3 1 Company closings (1) (1) - - Franchise openings - Domestic 2 2 - -
Franchise openings - International 2 2 -
-
Franchise closings - International (2) (2) -
-
Balance at December 29, 2020 634 600 31
3
December 29, 2020 December 31, 2019
Company - Texas Roadhouse 503 484
Company - Bubba's 33 31 28
Company - Jaggers 3 2Franchise - Texas Roadhouse - U.S. 69 69 Franchise - Texas Roadhouse - International 28 28
Total 634 611
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Restaurant and Other Sales
Restaurant and other sales decreased 12.9% in 2020 compared to 2019. 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.
2020 2019
Company Restaurants :
Increase in store weeks 2.7 % 7.2 %
(Decrease) increase in average unit volume (16.3) % 4.1 %
Other(1) 0.6 % 1.0 %
Total (decrease) increase in restaurant sales (13.0) % 12.3 %
Other sales(2) 0.1 % (0.1) %
Total (decrease) increase in restaurant and other sales (12.9) % 12.2 %
Store weeks 27,181 26,473
Comparable restaurant sales (14.2) % 4.7 %
Texas Roadhouse restaurants only:
Comparable restaurant sales (14.1) % 4.6 %
Average unit volume (in thousands) $ 4,649 $ 5,555
Average unit volume (in thousands), 2019 adjusted (3) $
4,649
Weekly sales by group: Comparable restaurants (453 and 430 units, respectively) 89,621 105,336 Average unit volume restaurants (20 and 22 units, respectively)(4) 84,485 94,437 Restaurants less than six months old (30 and 32 units, respectively) 81,546 105,732
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 2020, represent
third-party gift card fees net of
of gift card breakage income. Other sales, for 2019, represent
million related to the amortization of gift card breakage income. The
decrease in amounts for 2020 is primarily due to a decrease in gift card
sales and redemptions.
(3) As 2019 contained 53 weeks, for comparative purposes, 2019 average unit
volumes were adjusted to a 52-week basis.
(4) Average unit volume restaurants include restaurants open a full six to 18
months before the beginning of the period measured.
The decrease in restaurant sales for 2020 was 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. The decrease in comparable restaurant sales was driven by the dining room closures and capacity restrictions due to the pandemic. In late March, all of our domestic company and franchise restaurants were required to temporarily close their dining rooms and shifted to a To-Go only model. 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, on-line, or once on site. As the dining rooms were allowed to re-open, we implemented a hybrid operating model with limited capacity dining rooms together with enhanced To-Go, which includes a curbside and/or drive-up operating model, as permitted by local guidelines. As ofDecember 29, 2020 , 82% of our company restaurants had their dining rooms operating under various limited capacity restrictions. Our expanded To-Go model helped to offset the loss of dining room sales particularly at the onset of the pandemic when all of our dining rooms were closed. In addition, we continued to see significant To-Go sales once our dining rooms began to re-open. To-Go sales as a percentage of total restaurant sales were 27.0% in 2020 compared to 7.2% in 2019. 48 Table of Contents In addition to our expanded To-Go model, we also added family value packs which include four entrées with an assortment of sides, and ready-to-grill steaks and pork that allow customers to order their preferred cut of meat to prepare at home. The majority of the sales around the family value packs and ready-to-grill occurred in the first half of 2020, when all of our dining rooms were closed. In total, these items represented less than 3% of restaurant sales for the year. As a result of the significant change in our operating model in the first half of 2020, including the offering of these items, we do not believe that our per person average check and guest traffic counts provide a meaningful comparison to the prior year period. As such, these amounts have not been disclosed for 2020.
In addition, in late
We opened 22 company restaurants across all concepts in 2020. At the onset of the pandemic, we delayed construction on all restaurants that were not substantially complete which decreased our planned store openings for the year. We currently plan to open 25 to 30 company restaurants across all concepts in 2021. To the extent that state and local guidelines begin to further reduce capacity at our restaurants, we could pull back on development and reduce capital expenditures accordingly.
Franchise Royalties and Fees
Franchise royalties and fees decreased by$4.0 million or 18.4% compared to 2019 due to lower average unit volume driven by comparable restaurant sales decreases at domestic and international franchise stores as well as the impact of the 53rd week in 2019. Comparable restaurant sales at domestic and international franchise stores decreased 17.3% in 2020. These comparable restaurant sales decreases include the impact of international locations that were temporarily closed during the year. Additionally, in 2020, we waived royalties of$0.4 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. The majority of these royalty waiver and deferral arrangements were through the end of our Q2 2020 fiscal quarter. Our existing domestic franchise partners opened twoTexas Roadhouse restaurants in 2020. In addition, our existing international franchise restaurant partners opened two restaurants and closed two restaurants in 2020. We also acquired two domestic franchise restaurants in the fourth quarter of 2020. We anticipate our existing franchise partners will open as many as sixTexas Roadhouse restaurants, primarily international, in 2021.
Food and Beverage Costs
Food and beverage costs, as a percentage of restaurant and other sales, increased to 32.8% in 2020 from 32.3% in 2019 primarily due to higher commodity inflation partially offset by a change in mix of items sold, including fewer alcoholic beverages. Commodity inflation was 2.1% in 2020, primarily driven by higher beef costs.
For 2021, we expect commodity cost inflation of approximately 3.0%.
Restaurant Labor Expenses
Restaurant labor expense, as a percentage of restaurant and other sales, increased to 36.8% in 2020 compared to 33.1% in 2019. This increase was primarily due to higher wage rates, increased benefits provided to our employees related to the pandemic, higher costs associated with health insurance, and a decrease in average unit volume. These increases were partially offset by employee retention payroll tax credits of$7.0 million related to relief pay paid to our hourly restaurant employees as well as a decrease in worker's compensation costs. Higher wage rates were due to a significant number of employees moving from a tipped wage rate to a non-tipped wage rate due to the significant increase in To-Go sales. In addition, we incurred costs of$20.2 million for relief pay and enhanced benefits for our hourly employees. The relief 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. Higher health insurance costs were due to higher claim costs as well as 49
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rate and enrollment increases. The increased claim costs, driven by unfavorable claims experience, resulted in$3.8 million of unfavorable adjustments to our actuarial reserve estimate in 2020. The employee retention payroll tax credit of$7.0 million was a credit made available through the CARES Act and related to relief pay for our hourly employees that was paid throughout 2020. The decrease in workers' compensation expense was due to changes in our claims development history included in our Q3 2020 actuarial reserve estimate that resulted in a favorable adjustment of
$1.8 million . Restaurant Rent Expense
Restaurant rent expense, as a percentage of restaurant and other sales, increased to 2.3% in 2020 compared to 1.9% in 2019 due to the decrease in average unit volume and the benefit of the 53rd week in 2019 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 17.0% in 2020 from 15.3% in 2019. This increase was due to a decrease in average unit volume, higher supplies expense and higher general liability insurance expense partially offset by lower losses on remodeling projects, laundry and linen and advertising expenses. Higher supplies expense was due to an increase in To-Go supplies, personal protective equipment, and other costs to support our hybrid operating model throughout the year. The increase in general liability insurance expense was due to changes in our claims development history included in our Q3 2020 actuarial reserve estimate that resulted in an unfavorable adjustment of$1.4 million . This compared to a favorable adjustment of$1.1 million in 2019. In addition, due to the significant decrease in our average unit volumes, expenses that are largely fixed, including utilities, property taxes, and other outside services increased as a percentage of restaurant and other sales.
Restaurant Pre-opening Expenses
Pre-opening expenses decreased to$20.1 million in 2020 from$20.2 million in 2019. The change in pre-opening expense is primarily driven by the number and timing of restaurant openings in a given year. Pre-opening costs will typically 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 4.9% in 2020 compared to 4.2% in 2019. The increase was primarily due to a decrease in average unit volume and higher depreciation at new restaurants partially offset by lower accelerated depreciation. In 2019, our accelerated depreciation was higher due to the planned relocation of several restaurants.
Impairment and Closure Costs, Net
Impairment and closure costs, net were$2.3 million and($0.9) million in 2020 and 2019, respectively. In 2020, impairment and closure costs, net included$1.2 million related to the impairment of the fixed assets and operating lease right-of-use assets at four restaurants, all of which have relocated or are scheduled to be relocated. In addition, we recorded goodwill impairment of$1.1 million related to two restaurants. In 2019, impairment and closure costs, net included a gain of$2.6 million related to the forced relocation of one restaurant and$1.1 million related to the impairment of the operating lease right-of-use asset at an underperforming restaurant.
General and Administrative Expenses ("G&A")
G&A, as a percentage of total revenue, decreased to 5.0% in 2020 compared to
5.4% in 2019. The decrease was primarily driven by lower incentive and
performance-based compensation costs, lower managing partner conference costs
and lower travel costs partially offset by a decrease in average unit volume.
Managing partner conference costs were lower in 2020 due to the cancellation of
our annual conference.
As a result of the pandemic, our executive and leadership teams voluntarily
agreed to reductions of salary and bonus for a portion of our 2020 fiscal year.
Also, each non-employee member of our Board of Directors volunteered to forgo
their director and committee fees and any cash retainers for a portion of our
2020 fiscal year.
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We are currently subject to various claims and contingencies that arise from
time to time in the ordinary course of business, including those related to
litigation, business transactions, employee-related matters and taxes, among
others. See note 13 to the consolidated financial statements for further
discussion of these matters.
Interest Expense (Income) Expense, Net
Interest expense was
Income Taxes
Our effective tax rate was a benefit of 81.4% in 2020 compared to expense of 15.1% in 2019. The benefit was primarily due to the impact of FICA tip and Work opportunity tax credits on lower pre-tax income. Additionally, these credits exceeded our federal tax liability in 2020 but we expect to utilize these credits in the future years or by carrying back to our 2019 tax year.
Liquidity and Capital Resources
The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities (in thousands):
Fiscal Year
2020 2019
Net cash provided by operating activities$ 230,438 $
374,298
Net cash used in investing activities (161,105)
(214,820)
Net cash provided by (used in) financing activities 185,943 (261,724)
Net increase (decrease) in cash and cash equivalents
Net cash provided by operating activities was$230.4 million in 2020 compared to$374.3 million in 2019. This decrease was primarily due to a decrease in net income and a decrease in deferred income taxes partially offset by favorable changes in working capital. Working capital changes included the benefit of deferred payroll taxes related to the CARES Act.
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$161.1 million in 2020 compared to$214.8 million in 2019. The decrease is primarily due to a decrease in capital expenditures partially offset by the purchase of two franchise restaurants in 2020. The decrease in capital expenditures is primarily due to a delay in our development schedule due to the pandemic and decreased expenditures due to the completion of the remodel of our Support Center office. We require capital principally for the development of new company restaurants, the refurbishment or relocation of existing restaurants and the acquisition of franchise restaurants, if any. We either lease our restaurant site locations under operating leases for periods of five to 30 years (including renewal periods) or purchase the land when appropriate. As ofDecember 29, 2020 , 148 of the 537 company restaurants have been developed on land which we own. 51
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The following table presents a summary of capital expenditures (in thousands):
2020 2019
New company restaurants $ 78,941 $ 99,957
Refurbishment of existing restaurants 47,735 63,548
Relocation of existing restaurants 17,917
25,131
Capital expenditures related to Support Center office 9,808 25,704 Total capital expenditures
$ 154,401 $ 214,340 At the onset of the pandemic, we delayed construction on all restaurants that were not substantially complete which decreased our planned restaurant openings for the year. In addition, we delayed any projects on existing restaurants that were not critical to their operations. In 2021, we expect our capital expenditures to be$210.0 million to$220.0 million and we currently plan to open 25 to 30 company restaurants across all concepts. To the extent that state and local guidelines begin to significantly reduce capacity and/or re-close dining rooms, we could pull back on development and reduce capital expenditure spend accordingly. Net cash provided by financing activities was$185.9 million in 2020 compared to net cash used in financing activities of$261.7 million in 2019. The increase is primarily due to increased borrowings under our revolving credit facility offset by a decrease in share repurchases and dividends paid. InMarch 2020 , we increased our borrowings by$190.0 million as a precautionary measure in order to bolster our cash position and enhance financial flexibility. OnMay 11, 2020 , we amended the revolving credit facility to increase the amount available under the facility by$82.5 million and drew down$50.0 million of the increased amount. The proceeds from these borrowings, which totaled$240.0 million , are being 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 facility. 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 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 2020, we paid$12.6 million to repurchase 252,409 shares of our common stock. OnMarch 17, 2020 , we suspended all share repurchase activity. As ofDecember 29, 2020 ,$147.8 million remains authorized for stock repurchases. We are currently evaluating when we will resume the repurchase
of shares. OnFebruary 20, 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 are currently evaluating when we will resume the payment
of cash dividends.
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, including approval by the syndicate of lenders. OnMay 11, 2020 , we amended the revolving credit facility to provide for an incremental revolving credit facility of up to$82.5 million . This amount reduced the additional$200.0 million that was available under the revolving credit facility. The maturity date for the incremental revolving credit facility isMay 10, 2021 . The maturity date for the original 52 Table of Contents
revolving credit facility remains
The terms of the amendment require us to pay interest on outstanding borrowings of the original revolving credit facility at LIBOR plus a margin of 1.50% and to pay a commitment fee of 0.25% per year on any unused portion of the revolving credit facility through the end of our Q1 2021 fiscal quarter. The amendment also provides an Alternate Base Rate that may be substituted for LIBOR. As ofDecember 29, 2020 , we had$190.0 million outstanding on the original revolving credit facility and$1.8 million of availability, net of$8.2 million of outstanding letters of credit. This outstanding amount is included as long-term debt on our consolidated balance sheet.
The terms of the amendment also require us to pay interest on outstanding
borrowings of the incremental revolving credit facility at LIBOR, which is
subject to a floor of 1.0%, plus a margin of 2.25% and to pay a commitment fee
of 0.50% per year on any unused portion of the incremental revolving credit
facility through the maturity date. As of
The weighted-average interest rate for the revolving credit facility as of
The lenders' obligation to extend credit pursuant to the Amended Credit Agreement depends on us maintaining certain financial covenants. The amendment to the revolving credit facility also modified the financial covenants through the end of our Q1 2021 fiscal quarter. We were in compliance with all financial covenants as ofDecember 29, 2020 .
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,
including current maturities $ 240,000 $ 50,000 190,000 $ - $ -
Obligation under finance lease 2,122 - - - 2,122 Interest(1) 10,287 4,083 2,389 571 3,244 Operating lease obligations 1,046,273 56,201 114,484 112,844 762,744 Capital obligations 95,870 95,870 - - -
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 December
(1) 29, 2020 for our variable rate debt. We assumed
outstanding on our revolving credit facility through the respective maturity
for all borrowings. We assumed a constant interest rate until maturity on our
finance lease.
(2) Unrecognized tax benefits under ASC 740, Income Taxes, are not significant
and excluded from this amount.
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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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Guarantees
As ofDecember 29, 2020 andDecember 31, 2019 , we were contingently liable for$13.0 million and$13.9 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 29, 2020 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 2026
Fargo, North Dakota (1) February 2006 July 2026
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 to the accompanying 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 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, operating lease 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. For the purposes of this evaluation, we define the asset group at the individual restaurant level. When we evaluate the 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 ongoing expected cash flows and carrying amounts of our long-lived assets, these factors could cause us to realize a
material impairment charge.
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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 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 2020, as a result of our quarterly impairment analysis, we recorded a total
charge of $1.2 million related to the impairment of the fixed assets and
operating lease right-of-use assets at four restaurants, all of which have
relocated or are scheduled to be relocated. See note 16 in the consolidated
financial statements for further discussion regarding closures and impairments
recorded in 2020, 2019 and 2018.
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 fair value of the reporting unit.
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 fair value of the reporting unit.
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.
At December 29, 2020 , we had 73 reporting units, primarily at the restaurant
level, with allocated goodwill of $127.0 million . The average amount of goodwill
associated with each reporting unit is $1.7 million with six reporting units
having goodwill in excess of $4.0 million . In connection with our annual
impairment analysis, we recorded an impairment charge of $1.1 million related to
two restaurant reporting units. Since we determine the fair value of goodwill at
the restaurant level, any significant decreases in cash flows at these
restaurants or others could further trigger impairment charges in the future.
The fair value of each of our reporting units, excluding the two in which we
recorded impairment charges in the current year, was substantially in excess of
their respective carrying values as of the 2020 goodwill impairment test. See
note 16 in the consolidated financial statements for further discussion
regarding closures and impairments recorded in 2020, 2019 and 2018.
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 or tipped wages and, accordingly, increases in minimum or tipped wages
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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