Texas Roadhouse Inc (TXRH) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for your patience and welcome to the third quarter 2005 Texas Roadhouse, Inc. earnings conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to your host for today's presentation, Mr. Scott Colosi, Chief Financial Officer, please proceed.

Thank you, Bill. Good afternoon, everybody.

By now everyone should have access to our earnings announcement released this afternoon for the third quarter ended September 27, 2005. It may also be found on our website at www.texasroadhouse.com under the Investor Relations section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore undo reliance should not be put upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Texas Roadhouse.

On the call with me today is G.J. Hart, our CEO and G.J. is going to provide some general comments on the business and I will walk you through the financials including an update to our 2005 forecast and a first look at 2006, then we'll open it up for questions. G.J.?

Thank you, Scott, and good afternoon everyone. Our third quarter, particularly the month of September, was very challenging for us with two major hurricanes and one minor one that directly impacted 13 restaurants, 12 of which were company owned. In addition, we experienced a significant spike in utility and gasoline costs. From a sales standpoint, we lost quite a bit of momentum in September with the arrival of Hurricanes Katrina, Rita, and Ophelia. In fact, although our comps in July and August averaged just over 6%, they were flat in September. Excluding hurricane-impacted restaurants; however, our September comps were up 2% but that result was still below our expectations. Fortunately, all restaurants that did close because of the hurricanes are all now open and strong. In fact, I'm very encouraged by our sales to date for the fourth quarter as our comps have averaged 4.2% excluding two restaurants that were closed until just recently.

Our check averages are up about 2.4% and transaction growth at about 2%. From a regional perspective since the beginning of September, our comp sales in the Northeast and Midwest have been softer than the rest of the country. On the margin front, we took quite a beating in Q3 as restaurant margins were about 115 basis points worse than last year. Higher credit card fees and food and utility costs were slightly offset by lower insurance costs. Scott will go into more detail on the credit card fees, utilities, and insurance, but I will give you our latest thoughts on food costs and commodity inflation.

Firstly, we recently locked in our chicken contracts for 2006 at an overall 10% reduction. Chicken represents about 5% of our food costs. On the pork side, we are closing -- close to finalizing our 2006 contracts and are expecting a slight reduction in this cost which represents about 13% of our total food costs. With beef, we are still in negotiations with our suppliers but are cautiously optimistic in realizing a slight reduction as well. Since the spike in gasoline prices, we have begun to see a number of fuel charges come our way, but none of these are significant when compared to our other costs. Overall, we are expecting our food costs to fall by 1.5 to 3% in 2006.

In terms of development for the third quarter, we opened seven restaurants bringing our year-to-date total to 13. Our franchise partners opened three restaurants during the quarter bringing their year-to-date total to eight. In the fourth quarter, we expect to open an additional seven company-owned restaurants, two of which have already opened. This will result in twenty company restaurant openings for the year, which is right in line with our original plan. For 2006, we expect to open 23 to 24 company restaurants, 16 restaurants are already in permitting, including five that are under construction.

On the franchise side, our partners will likely open three to four new restaurants next year. On the franchise acquisition front, we've made a lot of progress in completing our due diligence on the first round of transactions. Pending the completion of our work and the approval of our board of directors, we expect to acquire eleven restaurants later this quarter. In addition, we have begun negotiations to acquire another six to ten restaurants sometime during the first half of 2006. We have given you some earnings guidance if all these deals get completed within these time frames, but nothing is a sure thing until it's completely done. From a 2000 earnings perspective in our press releases we provided our first forecast whereby we have committed to at least 20% earnings per share growth excluding franchise acquisitions and stock option expense.

On the sales side we are forecasting same-store sales growth of 2 to 3%. Combined with the development forecast I provided earlier, revenues should be up next year just over 20%. Lower food costs will certainly help and we are hopeful that utility inflation may moderate over the coming months. G&A should grow a bit slower than revenue as we begin to leverage our infrastructure. Overall, we believe we are very well positioned to weather increases in consumer inflation, as well as competitive pressures.

We remain focused on the day-to-day execution of our concept with little change to keep things simple for our operators. I just completed a 20-city national tour where I met with our restaurant management teams and I can tell you our folks are fired up and feel great about our continued strategy of staying the course on providing legendary food and legendary service. While the recent hurricanes and other external factors have presented great challenges, we are still very, very, optimistic that our comps will continue to be positive. In fact, we have found that post other disasters of this magnitude, our demographic base has actually broadened due to our strong position as a quality, yet value based concept. With that I'll turn it over to Scott to walk you through the third quarter financials.

Thanks G.J. During my review of the third quarter, please note that many of the numbers I will mention are listed in the schedule of supplemental financial and operating data that was included in the press release. So starting at the top of our P&L for the third quarter of 2005 as compared to 2004, total revenue increased 24% and company-owned restaurant sales also increased 24%. Hurricane-related restaurant closure costs up a little more than $600,000 in lost restaurant sales.

Company owned restaurant operating weeks increased 22% and comparable restaurant sales increased 3.8% on top of the 6.8% gain achieved last year. Of the 3.8% growth, about 1.5 points were attributable to transactions and about 2.5 points to pricing mix. Comp sales did increase 4.4% for the quarter excluding hurricane-related closures. Averaging of volumes increased 3.4% for the quarter and weekly sales averaged just over $73,000. Franchise royalties and fees increased by $400,000 or 18% to $2.7 million. This increase was driven by about a 14% increase in the number of franchise restaurants opened as well as comparable restaurant sales growth of 3.2%. In terms of cost, as a percentage of sales, restaurant operating costs were 116 basis points higher than last year.

As G.J. mentioned earlier, higher credit card, food, utility, and hurricane-related costs were slightly offset by lower insurance costs. On the food side, cost of sales was about 45 basis points higher than last year due primarily to higher rib costs. This was partially offset by the menu price increase we took in the fourth quarter of last year. Restaurant labor and rent expenses were essentially flat versus last year as a percentage of sales. As you might expect, the hurricane certainly hurt us on the labor line.

Restaurant other operating expense increased about 85 basis points quarter-over-quarter due to the following. First, we recorded a $500,000 non-cash pretax charge to recognize a change in our accounting for credit card fees. Essentially, we changed from a cash to an accrual basis. The net of all this is that we will record 13 months worth of credit card fees in 2005 versus 12 in 2004 and the same approach will hold in future years. Second, we experienced a pretty sizable spike in utility costs that cost us about 40 basis points during the quarter. We're forecasting significant utility inflation in 2006, although we're hopeful these costs will moderate. To that point, although some of the variable rate indexes for utilities have moved down a bit, we know many utility companies have already applied for significant rate increases and for now we are assuming these rate increase requests are improved and implemented. Third, the sales deleveraging impact of hurricane related closures affected a number of other smaller items that roll into restaurant other operating expenses. As you might expect, we will file claims with our insurance providers to recoup some of our hurricane induced losses. We think we may get back about 200 to $250,000 after the cost of our deductible is factored in.

We did have some good news with regards to operating costs. We were able to take a $400,000 credit to the insurance line based on our latest actuarial() report related to our workers' comp and general liability activity. And to date we've had a very good year with respect to insurance. Pre-opening expenses were up about $450,000 quarter-over-quarter as we opened two more restaurants this year versus last. In addition, some of this increase relates to the fact that we have been on track to exceed our company development plan in previous guidance by two restaurants this year although two restaurants have slipped into 2006. One was near New Orleans and is now set to open mid next year. The other has slipped a few weeks and will open very early January.

Depreciation expense increased about 30 basis points versus the prior year, mostly driven by capital spending on new restaurants. G&A expenses as a percent of revenue were essentially flat versus last year. We still have a ways to go completing our first SOX 404 certification. We have a good feel for the costs and they are included in our current guidance. This gets us to the income from operations line.

Income from operations increased 5% for the quarter. Because of our IPO and transactions associated with our corporate reorganization, income from operations is probably the most comparable bottom line growth number to analyze on an historical basis. Now, obviously, the credit card charge and hurricanes had a significant impact on our growth for the quarter. Interest expense was significantly lower than last year due to the elimination of most of our debt with proceeds from the IPO. We are now down to about $7 million of debt and expect to pay some of this off next year. Minority interest expense fell to about $200,000 from $1.7 million last year. This decrease was due to the acquisition of 31 restaurants in connection with our corporate reorganization and IPO. Minority interest now includes only three majority-owned restaurants. Typically our ownership is 52.5 to 60%, but could be higher.

Going forward this expanse will represent the minority investor share of net income in these three restaurants and others we may open in the future. Equity income from unconsolidated affiliates was $65,000 of income in Q3 of 2005 versus $22,000 of income in Q3 of 2004, the increase was driven by additional restaurants that have opened over the past year. Our effective tax rate for the quarter was 35.3%. We don't see this changing much in the near term. You might recall that we were an LLC prior to our IPO last year and as such did not pay income tax. Our weighted average diluted share count was just short of 74 million. This incorporates our recent two for one stock split and the 700,000 shares we sold in our follow on offering ()at the beginning of the quarter. So the bottom line for our third quarter of 2005 was $7 million of net income which on a diluted share count of 73.8 million resulted in $0.10 per share which was essentially flat over last year.

Now onto an update of full year 2005 guidance. Through the first five weeks of the 13-week fourth fiscal quarter, ending December 27, 2005, comparable restaurant sales have increased approximately 4%, excluding hurricane related closures and 3% with all restaurants included. Based on our year-to-date results, our fourth quarter-to-date comparable restaurant sales and other factors, we are lowering our diluted EPS guidance by about $0.02 to at least $0.43 per share. This guidance change is driven by the following three items. First, the one-time, non-cash, pre-tax credit card charge of $500,000, the expected pretax earnings impact of the hurricanes of about 5 to $600,000, and a spike in utility costs which we think may be unfavorable to our previous forecast by $750,000 to $1 million on a pretax basis. Additionally, with two exceptions, the other key assumptions in this guidance are consistent with what we have said in the past, and they include, we'll open twenty company and our franchisees will open eight restaurants.

We're expecting same store sales growth of approximately 5%, revenue growth of 26% to roughly $460 million. Restaurant operating costs as a percent of restaurant sales should now increase zero to 20 basis points versus last year. This is lower than our previous forecast, all due to what I discussed earlier relative to credit card fees and utility costs. G&A as a percent of revenue will be flattish to last year at approximately 5.0 to 5.9%. Our effective tax rate should be around 35.3% and weighted average diluted share should be around $73.3 million. We expect capital spending to now be between 55 and 65 million which is about $5 million higher than our previous guidance range.

One final note on 2005 guidance, if we do complete the acquisition of eleven restaurants in 2005 as G.J. noted earlier, we'll have to take a one time charge to account for the application of an accounting rule called EITF 04-1, accounting for pre-existing relationships between parties to a business combination. Basically, this rule says that anytime the company acquires franchise restaurants whose current royalty rates are less than the rates charged to new restaurants, then the company must record a one-time noncash charge for the value of the difference between the two royalty rates. Therefore, if we do complete the acquisition of eleven restaurants later this year, the one-time pretax charge would be approximately $800,000. Any ongoing accretive EPS impact from these restaurants excluding the charge would be immaterial for 2005 since the acquisitions would take place so late in the year.

Now on to full-year 2006 guidance. As G.J. noted earlier, our EPS forecast for 2006 is to achieve at least 20% earnings per share growth. This equates to $0.52 per share and excludes any acquisition-related impacts and stock option expense. Some of the key assumptions in this guidance include, first, we'll open 23 or 24 company and our franchisees will open three to four restaurants. We're expecting same store sales growth of 2 to 3%. Restaurant operating cost as a percent of restaurant sales should decrease 15 to 35 basis points versus last year mostly driven by food costs, though we are forecasting a significant increase in utility costs. G&A as a percent of revenue should fall between 20 and 30 basis points next year. Our effective tax rate should be around 35.3%.

Weighted average diluted shares should be around $75.5 million and we expect capital spending to be between 65 to 75 million and which we should fund with our operating cash flow. Earlier I mentioned this forecast excludes franchise, acquisitions, and stock option expense. If we complete the acquisitions of eleven restaurants in 2005 and six to ten restaurants during the first half of 2006, 2006 earnings per share should be positively impacted by $0.03 to $0.04 prior to any one-time charges. The 2006 acquisitions could result in a one-time, pre-tax charge of $1.3 million based on the royalty rate accounting issue I just described. And finally, stock option expense. We expect the impact on diluted earnings per share from expensing stock options in 2006 will be between $0.05 and $0.06 a share. That covers our prepared remarks. Operator, please open the lines for questions.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Our first question comes from Jeff Omohundro of Wachovia Securities. Please proceed.

Thanks. I wonder if you could give us an update on where you are in pricing as you're lapping. Any thoughts there. Also as you go into the holidays, an update on the gift card program and your local store marketing efforts.

Hey, Jeff. How are you?

Great.

It's G.J. Firstly from the pricing perspective, we're positioned as a value concept. We're going to continue to stay focused on that. Once we get a better feeling on where we are with overall costs for next year and lock in the rest of our contracts, we'll evaluate that. But we're obviously leaving our options open. With respect to gift cards, it is a very, very big program for us. We are planning a pretty sizable increase and we are very aggressive in that program for the fourth quarter. We think we'll have a lot of success with it driving our first quarter comps.

Great. Thank you.

Thank you very much, sir. Ladies and gentlemen, our next question comes from the line of Paul Westra of SG Cowen. Please proceed.

Great, thanks. Good afternoon. A couple of questions. First, looking at your share count guidance for '06, can you walk us through what the 2 million share increase relates to?

Well, essentially, Paul, that's stock options. So that's the forecasted increase and the dilutive impact of stock options balanced off somewhat by what we might forecast for stock option exercises and the overall impact on the share count. Our current grant rate of stock options as a percent of diluted shares is about 2%.

Okay. Another question, can you walk us through, just one more time briefly, on the franchise purchasing, the multiple of -- that you're paying for those stores and what you're counting in that multiple calculation?

The multiple really depends upon what the share price is. The way the formula works is that we issue shares of stock in exchange for the franchise assets and we compare the franchise business, the profits in the franchise business to the profits of Texas Roadhouse, Inc. And essentially that ratio gets multiplied by a discount factor or a haircut and that subsequent ratio gets multiplied times our shares outstanding. So it's not a present value of cash calculation. It is not a multiple of EBITDA. The way the formula works you end up with a certain number of shares and the value of those share is totally determined upon whatever the current price of our shares are, or eventually what the person who sells their business to us, what they actually sell the shares for.

Do you give an approximation of what the store level cash flow multiple is?

Again, Paul, it really depends on the share price. So at -- where my current share price is, that might be a multiple of high single digits – mid to high single digits. And if my share price was lower, currently, it would be more mid single digits.

Okay. And then, G.J., did you mention -- I might have missed that for a second, the question on pricing for -- your menu pricing assumption for your '06 guidance.

Yes. Jeff asked me that question.

Yes.

Well our view of it is -- we want to stay in position. We think this is a great opportunity right now for us in where we're positioned. As I mentioned earlier in my remarks, we've seen our demographics increase at times like this when we're challenged in the economy. And so we want to be very, very, cognizant to stay focused being there. We're going to leave our options until once we complete all of our negotiations for our food costs for next year. But clearly, we're not closing the door.

Great. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Destin Tompkins of Morgan Keegan. Please proceed.

Good afternoon. I wanted to clarify a couple of points. One, the $0.03 to $0.04 potential accretion from the franchise acquisitions, that is net of the accounting, the non-cash charges, correct?

That excludes the non-cash charge.

It excludes the non-cash charge, okay.

That's the ongoing, year-after-year forecast.

Got you. Okay. And then on the -- you mentioned the gift card, the charge -- the $500,000 gift card charge. That is going to be in the -- that occurred in the third quarter or it's going to occur in the fourth quarter?

That was credit card fees.

Okay.

That occurred in the third quarter.

Okay. Then there's going to be a charge in the fourth quarter for gift card?

No.

Okay.

No.

What was it -- when you walked through the fourth quarter items that are going to affect the lowered guidance, you mentioned --.

The lower guidance was for the whole year.

Right, okay.

And it's only for the quarter, so some of the things that impacted us in the third quarter, we're just saying are going to carry forward for the whole year.

Okay. I apologize on that. And then the same-store sales. So the difference between the number excluding the hurricanes. Are you essentially just assuming it's zero for that store in the comp base to get to the 3.2% in the quarter-to-date?

That's right.

Okay. And can you give us any idea -- are the comparisons more difficult or easier as we go through the quarter?

I could tell you that. The comparisons are a little bit easier as you get to the end of the quarter.

Okay. Great. Thanks.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Andy Barish of Banc of America Securities. Please proceed.

Hey, guys. One quick accounting question on the -- this change in the capitalization now expensing of phantom rent. Do you guys already expense that? And then a second question on, actually, the development pipeline for next year. Can you give us a little sense of sort of first half openings versus back half openings as a couple of units have shifted there?

Okay Andy, first on the rent piece of it, no, we were not expensing pre-opening rent before. So we will be next year. That will hurt us for about $500,000 to $600,000. We know we're also lapping this hurricane stuff, so we think we can overcome that from a forecast perspective next year.

Is that in -- that's assumed in your guidance, though?

That's assumed in our guidance for 2006. That's right.

Got it.

We know that's coming. On the development pipeline, we think we're in great shape. We're forecasting to open about a third of our stores the first half of the year, two-thirds second half of the year. We've got a very strong pipeline, as G.J. mentioned, we've got a significant number of restaurants in permitting. And Kent and his team are well into 2007 as far as identifying sites.

And anything new on existing market partners versus new market partners, or is that ratio still what it's been in the past?

We're continuing down to bring on new market partners at the same rate we've discussed all along. And our existing market partner strategy is to allow them to open up one to two restaurants a year. So by definition, we would spread around the country in terms of our growth and we're not straying from that strategy at all.

Thank you.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Mr. David Goldberger of Fortress, please proceed.

Hi, guys. It looks like comps slowed from the 6 to 7% range you've been running for the past five quarters and as we look to the guidance for '06, it appears you've been anticipating an even more significant slowdown to the 2 to 3% range. Is this indicative of any trend you're seeing out there or are you just being conservative with the guidance?

Hi, David, this is Scott. I mean, that's -- typically our guidance is 2 to 3, which we always hope is conservative. Obviously things like hurricanes happen that you don't anticipate. But for the last five weeks or so, we're back up to about 4%. So I think we're cautiously optimistic we can deliver on the 2 to 3 or then some.

Okay. Great. Thank you.

Thank you very much sir. (OPERATION INSTRUCTIONS) Our next question comes as a follow-up from Jeff Omohundro. Please proceed, sir.

Yes. I'm sorry if you covered this. But the franchise opening number for '06, the deceleration there, how's the pipeline looking?

Well, the pipeline looks great for a franchise opening as we've talked about many times, Jeff, that we're kind of not franchising as much as we've done historically. We feel that returns on the company side have been pretty strong so much more of our focus is -- from the development standpoint --is on the company side.

I mean the franchise opening number. The number the franchisees chose to open is down year-over-year.

That's not because -- they may want to open more stores. Our franchisees have single store agreements, they don't have territorial agreements. So essentially we approve every site for them to expand. So we're just choosing to not open as many -- not approve as many franchise restaurants versus them -- they want to expand to help their concepts.

Okay. Yes, I just --.

And Jeff, too. Just remember that as we start to make these acquisitions, then obviously if we notify someone, we're not going to allow them to grow any longer.

Right. Right. That makes sense. Thanks.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of David Garrity of RBC Capital Markets. Please proceed.

Yes, Scott or G.J., maybe go back to the comp question that came up I think from Dave. Talk a little about what you saw going on in this third quarter. I think comps you said were up 6% the first two periods of the quarter and flattened out in September and all of a sudden are back to fourish. Maybe talk a little bit about color. Despite that you're indicating that you've seen a weakness as others have in both the Northwest and in the Midwest. So maybe just a little bit of color on what you see going on out there and why you think there's been such a sharp rebound in business.

Well, David, let me start off by saying, as I mentioned in my comments, if you go back to September 11th, and you see kind of what happened, people sitting around TVs through that terrible disaster and clearly you see some slowdown in activity. And after that, post that, what we saw was an opportunity to open our demographic as the people were a little tighter with their wallet. The higher income folks gave us a shot and they continued to stay with us and it drove our comps pretty significantly, post that period. So we look at this parallel in very much the same way. As in respect to the Midwest and Northeast. The Midwest, we had not seen any significant change from our comps up until the hurricanes hit. And that would be the same in the Northeast. Now, in the Northeast, it's a little bit unfair because we don't have enough stores in the comp base and there are some competitive environments up there. But net, net, we have seen some of that shift. But clearly we see the increase in overall comp store sales rebounding nicely because I think we have the opportunity with the way we're positioned as a value concept and just staying true to our focus and not going left or going right. We're continuing to drive our guest loyalties and people in the restaurants.

Thanks for that update.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Hil Davis of SunTrust. Please proceed.

Hi. Good afternoon. I was wondering as you look longer term in terms of your ability to drive traffic. Just given how busy the bosses are, especially the traffic growth over the last couple of years, how you think about continuing to maybe expand the day part, the evening day part, where people come later and earlier? And then also any thoughts on seeing how Outback uses the same Miliphant (ph) strategy, what you might think about them in terms of revamping their marketing and menu, your thoughts on that at all?

Well, Hil, in terms -- let me start with the second part of your question in terms of Outback. Clearly they're a great company. But from the standpoint of where we are positioned, we think we have done a phenomenal job in the value space and that we're going to continue to drive our business by staying focused on what we've always done. In terms of the first part of your question, the box itself. If you look at it on an aggregate, our average sales per hour as we measure it on weekends, we've got restaurants doing significantly higher than the overall average of the system. It's a true driver of our process to be able to get people in and out of the restaurants quickly. And we think we have a tremendous amount of room if you take the average in our system is, call it $2,500.00 an hour, we've got stores doing 37 to $3,800.00 an hour on weekends. So we think we've got a tremendous amount of opportunity to continue to grow that piece of our business without really going away from our core strategy.

Great. Thank you all very much.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Jason Whitmer of FTN Midwest Research. Please proceed.

Good evening, can you hear me?

We got you, Jason.

Just a quick clarification, Scott, on your food cost guidance. I believe you said down 15 to 30 some basis points next year and then the specific components specific there that -- chicken already locked in down 10%, does that also include, your guidance, does that also include what you expect here on rib and beef costs? Or would that be incremental going forward if you were to lock those in down year-over-year as well?

Well, I said is that overall restaurant operating costs would be done 15 to 35 basis points. So part of that is food, and some other things being flat or down, and part of that is offset by utility costs being higher. So we've incorporated assumptions for the chicken contract and we've incorporated an assumption for the beef and pork. So as G.J. mentioned, modest decreases at this point until we know more.

Okay. And then real quickly on your new restaurants, in terms of performance versus expectations, the volume that you're seeing, are they still above the system average in terms of weekly sales? Is that something that's still going well?

Yes, year-to-date, I think we're averaging a line growth of still above our same-store sales growth. And our clash year of '04, for example, our current forecast is for those stores to do in excess of $3.8 million and same thing with the stores that we are able to measure so far in 2005, over $3.8 million as well. So that equates to about a 1.3 sales investment ratio, which from a return standpoint gets us in the high 20s, 28, 29% in the way we measure the returns. So we feel pretty comfortable right now with the quality of our development.

Great. Thanks.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) At this time, we have no further questions. I'd like to turn the call back over to our management team for any closing remarks.

Okay. Well, thank you very much and we look forward to talking to you guys at the end of the next quarter. Thanks a lot.

Thank you very much, gentleman, and thank you, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.