Texas Roadhouse, Inc. (NASDAQ:TXRH) both operates restaurants and sells franchising opportunities. To help investors understand the financial metrics driving the performance of Texas Roadhouse, Inc. I'll be breaking down the parts of ROE with a DuPont Analysis. I'll start with the most recent 3 years, and I'll break out the last 4 quarters individually to show the variation. Then I'll go over some of the most relevant information from the earnings call. Table 1 contains the DuPont analysis for each time period.
The tax burden reflects the amount of income the company was able to keep after paying for taxes. That may seem backwards to some people, but it is necessary to make the entire equation work. The company is generally paying taxes at an effective rate of 31% to 34%. That's fairly high in my experience, but for restaurants that operate almost entirely within the United States it isn't so unusual.
The interest burden figure works the same as the tax burden. This is telling us that the company is not having any problems with their interest expense. It consumes around 2% of EBIT (earnings before interest and taxes). The company is hardly leveraged and the debt they do have shouldn't be a concern to any investor.
The operating margins aren't great, but they really aren't terrible either when considering the industry that Texas Roadhouse is operating in. The restaurant industry is filled with companies that have fairly low operating margins, but the consistency of the operating margin for Texas Roadhouse is strong. Ranging from 8.78 to 8.47% is a pretty small change from year to year.
Where does that put TXRH relative to other restaurants? The following chart compares them with Famous Dave's (NASDAQ:DAVE), Carrolls Restaurant Group (NASDAQ:TAST), and Darden Restaurants (NYSE:DRI) for the trailing twelve months.
Asset turnover measures how effectively the company is using their assets to generate sales. A low asset turnover ratio indicates that the company is carrying a large amount of assets relative to the volume of sales they are creating. Since all assets have to be financed, either with debt or equity, holding extra assets that are not productive would hurt shareholder returns.
Texas Roadhouse is doing well on Asset Turnover. For the restaurant industry, posting 1.5 to 1.6 is pretty solid. The most impressive part, in my opinion, is how much they have been increasing it in the last couple quarters. Yes, some of that impact may be seasonal, but the average over the last 4 months is significantly better than the values for fiscal 2013. Clearly, that means the values for the last 2 quarters must be significantly better than they were for those 2 quarters in 2013.
The accounting formula for the leverage ratio can be misleading. We're comparing the book value of equity with the book value of assets. Neither of those numbers are really the ideal figures for use in calculating leverage. I'll use the next few tables to dive deeper into the leverage picture. See Table 2.
From the table above we can see the trends in cash, shares, and equity book value. The book value of equity is going up, the value of cash is going up, and after the number of shares dipped in 2012 it went up in 2013. Looking at the shares outstanding at the end of Quarter 2, we can see the company was planning a share buyback. Their cash is back down to around $77 million and the share count has been reduced.
Table 3 helps us look at the historical leverage of the company.
The company's market cap went up dramatically during 2013. It's not surprising the company allowed their share count to become more diluted; they may have felt the stock was riding higher than it should be and opted to stay out of it. Year to date, the company's stock is down by about 5%. There are multiple ways to interpret that, but I'll think of it as the company knowing when their stock was over-bought and avoiding overpriced buybacks.
Using the liabilities to enterprise value, we can get a better feel for the company's effective leverage. It dropped significantly going into 2013, but that was the result of a run upwards in the share price. I don't expect a company to be constantly readjusting their debt levels to balance against the market cap of their stock. Still, I wonder if the company will consider using more debt to get back towards the earlier ratios.
During the Q2 earnings call the CEO shed some light on the company's recent performance and the factors he thinks will be impacting performance over the next year. The company has done fairly well in generating traffic in their stores. In order to adjust for an ability to bring more people in the door, the company has been renovating restaurants to add additional seeding. That could be difficult for the kitchen to keep up with, but thus far the company is showing improvements in sales. During Q2, the SSS (same store sales) were up by 1.6%, 3.4%, and 3.7% respectively for April, May, and June. This has been a hard quarter for restaurants in general, so that performance is even more impressive than it would usually be.
For comparison, I'll use two tables. One of the competitors, DRI, has quite a few restaurants so their brands will be presented separately. The first table shows the growth in SSS (same store sales) over the last quarter for TXRH, DAVE, and TAST.
The next table provides the SSS growth for DRI broken down by brand.
As you can see, the SSS for TXRH at 2.90% was pretty strong compared to the competition.
The average check they were collecting from customers had increased 1.4% year over year, but their cost of food is up 3.8% which limited margins. I'm not surprised by the food inflation, Texas Roadhouse sells steaks and steak prices were up for everyone last quarter. I don't believe there is anything management could have reasonably done different to control the inflation of ingredient costs.
Over the next year management has warned of potential increases in their labor costs as 20 of the 48 states they are operating in are considering measures that could increase the minimum wage laws that apply to the restaurant.
Texas Roadhouse has been experimenting with a small number of locations doing an online ordering system. If it takes off, it could be great for the company. They are already spending cash on renovating their restaurants to make more room for customers. If they can increase the throughput at their restaurants by having customers buy food without taking up seats, it could be a nice growth driver for the company over the next few years. Management refers to it as "just dipping a toe in", and it is clear they are not committing to the plan until they have been able to run some analysis over how the test locations are doing. It's a cautious choice, and I think it's the right one.
The company's growth in same store sales should be seen as impressive. The increase in wages could be seen as a cause for concern, but this is a concern that affects most restaurants. The upside potential if the company can continue to build on their through put numbers by utilizing technology to improve the ordering process is very appealing. Unfortunately, the run up in price during 2013 has removed some of the potential for investors. Overall, I think the company may have more upside than downside, but I'm not completely sold. I'll leave it at saying, "I'm slightly bullish after researching the company".
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