ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
This report contains forward-looking statements based on our current expectations, estimates and projections about our industry and certain assumptions made by us. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will" and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 27, 2016, in Part II, Item 1A in this Form 10-Q and disclosures in our other Securities and Exchange Commission ("SEC
"
) filings discuss some of the important risk factors that may affect our business, results of operations, or financial condition. You should carefully consider those risks, in addition to the other information in this report, and in our other filings with the SEC, before deciding to invest in our Company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition.
OVERVIEW
Texas Roadhouse, Inc. is a growing restaurant company operating predominately in the casual dining segment. Our founder, chairman and chief executive officer ("CEO"), W. Kent Taylor, started the business in 1993 with the opening of the first Texas Roadhouse restaurant in Clarksville, Indiana. Since then, we have grown to 540 company and franchise restaurants in 49 states and six 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 favorite for a broad segment of consumers seeking high quality, affordable meals served with friendly, attentive service. As of September 26, 2017, our 540 restaurants included:
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455 "company restaurants," of which 437 were wholly-owned and 18 were majority-owned. The results of operations of company restaurants are included in our unaudited condensed consolidated statements of income and comprehensive income. The portion of income attributable to noncontrolling interests in company restaurants that are not wholly-owned is reflected in the line item entitled "Net income attributable to noncontrolling interests" in our unaudited condensed consolidated statements of income and comprehensive income. Of the 455 restaurants we owned and operated as of September 26, 2017, we operated 433 as Texas Roadhouse restaurants and operated 20 as Bubba’s 33 restaurants. In addition, we operated two restaurants outside of the casual dining segment.
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85 "franchise restaurants," 24 of which we have a 5.0% to 10.0% ownership interest. The income derived from our minority interests in these 24 franchise restaurants is reported in the line item entitled "Equity income from investments in unconsolidated affiliates" in our unaudited condensed consolidated statements of income and comprehensive income. Additionally, we provide various management services to these franchise restaurants, as well as six additional franchise restaurants in which we have no ownership interest. All of the franchise restaurants operated as Texas Roadhouse restaurants.
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We have contractual arrangements which grant us the right to acquire at pre-determined formulas the remaining equity interests in 16 of the 18 majority-owned company restaurants and 66 of the franchise restaurants.
Throughout this report, we use the term "restaurants" to include Texas Roadhouse and Bubba’s 33, unless otherwise noted.
Presentation of Financial and Operating Data
Throughout this report, the 13 weeks ended September 26, 2017 and September 27, 2016 are referred to as Q3 2017 and Q3 2016, respectively. The 39 weeks ended September 26, 2017 and September 27, 2016 are referred to as 2017 YTD and 2016 YTD, respectively.
Long-term Strategies to Grow Earnings Per Share and Create Shareholder Value
Our long-term strategies with respect to increasing net income and earnings per share, along with creating shareholder value, include the following:
Expanding Our Restaurant Base.
We will continue to evaluate opportunities to develop restaurants in existing markets and in new domestic and international markets. Domestically, we will remain focused primarily on markets where we believe a significant demand for our restaurants exists because of population size, income levels and the presence of shopping and entertainment centers and a significant employment base. 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 2017 YTD, we opened 20 company restaurants while our franchise partners opened three restaurants. We currently plan to open 26 or 27 company restaurants in 2017 including four Bubba’s 33 restaurants. In addition, we anticipate that our existing franchise partners will open as many as five, primarily international, Texas Roadhouse restaurants during 2017.
Our average capital investment for the 21 Texas Roadhouse restaurants opened during 2016, including pre‑opening expenses and a capitalized rent factor, was $5.0 million. We expect our average capital investment for Texas Roadhouse restaurants opening in 2017 to be approximately $5.2 million. For 2016, the average capital investment, including pre-opening expenses and a capitalized rent factor, for the nine Bubba’s 33 restaurants opened during the year was $6.6 million. We expect our average capital investment for Bubba’s 33 restaurants opened in 2017 to be approximately $6.1 million.
We remain focused on driving sales and managing restaurant investment costs to maintain our restaurant development in the future. Our capital investment (including cash and non-cash costs) for new restaurants varies significantly depending on a number of factors including, but not limited to: the square footage, layout, scope of required site work, type of construction labor (union or non-union), local permitting requirements, our ability to negotiate with landlords, cost of liquor and other licenses and hook-up fees and geographical location.
We may, at our discretion, add franchise restaurants, domestically and/or internationally, primarily with franchisees who have demonstrated prior success with Texas Roadhouse or other restaurant concepts and in markets in which the franchisee demonstrates superior knowledge of the demographics and restaurant operating conditions. In conjunction with this strategy, we signed our first international franchise development agreement in 2010 for the development of Texas Roadhouse restaurants in eight countries in the Middle East over a 10-year period. In 2015, we amended our agreement in the Middle East to add one country to the territory. In addition to the Middle East, we currently have signed franchise development agreements for the development of Texas Roadhouse restaurants in Taiwan, the Philippines, Mexico and China. We currently have 10 restaurants open in four countries in the Middle East, three restaurants open in Taiwan and two in the Philippines for a total of 15 restaurants in six foreign countries. Additionally, in 2010, we entered into a joint venture agreement with a casual dining restaurant operator in China for a minority ownership in four non‑Texas Roadhouse restaurants, all of which are currently open. We continue to explore opportunities in other countries for international expansion. We may also look to acquire domestic franchise restaurants under terms favorable to us and our stockholders. In Q1 2017, we acquired four franchise restaurants located in Florida and Georgia for an aggregate purchase price of $16.5 million. Additionally, from time to time, we will evaluate potential mergers, acquisitions, joint ventures or other strategic initiatives to acquire or develop additional concepts domestically and/or internationally.
Maintaining and/or Improving Restaurant Level Profitability.
We plan to maintain, or possibly increase, restaurant-level profitability (restaurant margin) through a combination of increased comparable restaurant sales and operating cost management. In general, we continue to balance the impacts of inflationary pressures with our value positioning as we remain focused on our long-term success. This may create a challenge in terms of maintaining and/or increasing restaurant margin, as a percentage of restaurant sales, in any given year, depending on the level of inflation we experience. In addition to restaurant margin, as a percentage of restaurant 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 guest traffic counts, 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 in certain restaurants.
Leveraging Our Scalable Infrastructure.
To support our growth, we continue to make investments in our infrastructure. Over the past several years, we have made significant investments in our infrastructure, including information and accounting systems, real estate, human resources, legal, marketing, international and restaurant operations, including the development of new concepts. Our goal is for general and administrative costs to increase at a slower growth rate than our revenue. Whether we can leverage our infrastructure in future years will depend, in part, on our new restaurant openings, our comparable restaurant sales growth rate going forward and the level of investment we continue to make in our infrastructure.
Returning Capital to Shareholders.
We continue to pay dividends and evaluate opportunities to return capital to our shareholders through repurchases of common stock. In 2011, our Board of Directors declared our first quarterly dividend of $0.08 per share of common stock. We have consistently grown our per share dividend each year since that time and our long-term strategy includes increasing our regular quarterly dividend amount over time. On August 31, 2017, our Board of Directors declared a quarterly dividend of $0.21 per share of common stock. The declaration and payment of cash dividends on our common stock is at the discretion of our Board of Directors, and any decision to declare a dividend will be based on many factors, including, but not limited to, earnings, financial condition, applicable covenants under our revolving credit facility, other contractual restrictions and other factors deemed relevant.
In 2008, our Board of Directors approved our first stock repurchase program. From inception through September 26, 2017, we have paid $216.6 million through our authorized stock repurchase programs to repurchase 14,844,851 shares of our common stock at an average price per share of $14.59. On May 22, 2014, our Board of Directors approved a stock repurchase program under which we may repurchase up to $100.0 million of our common stock. This stock repurchase program has no expiration date and replaced a previous stock repurchase program which was approved on February 16, 2012. All repurchases to date have been made through open market transactions. As of September 26, 2017, $69.9 million remains authorized for stock repurchases.
Key Measures We Use to Evaluate Our Company
Key measures we use to evaluate and assess our business include the following:
Number of Restaurant Openings.
Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For company restaurant openings, we incur pre‑opening costs, which are defined below, before the restaurant opens. Typically, new Texas Roadhouse restaurants open with an initial start‑up period of higher than normalized sales volumes, which decrease to a steady level approximately three to six months after opening. However, although sales volumes are generally higher, so are initial costs, resulting in restaurant margins that are generally lower during the start‑up period of operation and increase to a steady level approximately three to six months after opening.
Comparable Restaurant Sales Growth.
Comparable restaurant sales growth reflects the change in sales for company-owned restaurants over the same period in prior years for the comparable restaurant base. We define the comparable restaurant base to include those restaurants open for a full 18 months before the beginning of the period measured excluding restaurants closed during the period. Comparable restaurant sales growth can be impacted by
changes in guest traffic counts or by changes in the per person average check amount. Menu price changes and the mix of menu items sold can affect the per person average check amount.
Average Unit Volume.
Average unit volume represents the average quarterly or annual restaurant sales for company-owned restaurants open for a full six months before the beginning of the period measured excluding restaurants closed during the period. Historically, average unit volume growth is less than comparable restaurant sales growth which indicates that newer restaurants are operating with sales levels lower than the company average. At times, average unit volume growth may be more than comparable restaurant sales growth which indicates that newer restaurants are operating with sales levels higher than the company average.
Store Weeks.
Store weeks represent the number of weeks that our company-owned restaurants were open during the period measured.
Restaurant Margin
. Restaurant margin (in dollars and as a percentage of restaurant sales) represents restaurant sales less operating costs, including cost of sales, labor, rent and other operating costs. Depreciation and amortization expense, substantially all of which relates to restaurant-level assets, is excluded from restaurant operating costs and is shown separately as it represents a non-cash charge for the investment in our restaurants. Restaurant margin is widely regarded as a useful metric by which to evaluate restaurant-level operating efficiency and performance. Restaurant margin is not a measurement determined in accordance with U.S. generally accepted accounting principles ("GAAP") and should not be considered in isolation, or as an alternative, to income from operations or other similarly titled measures of other companies. Restaurant margin, as a percentage of restaurant sales, may fluctuate based on many factors, including, but not limited to, inflationary pressures, commodity costs and wage rates. As such, we also focus on the growth of restaurant margin dollars per store week as a measure of restaurant-level profitability as it provides additional insight on operating performance.
Other Key Definitions
Restaurant Sales.
Restaurant sales include gross food and beverage sales, net of promotions and discounts, for all company-owned restaurants. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from restaurant sales in the unaudited condensed consolidated statements of income and comprehensive income.
Franchise Royalties and Fees.
Franchise royalties consist of royalties, as defined in our franchise agreements, paid to us by domestic and international franchisees. Domestic and/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.
Restaurant Cost of Sales.
Restaurant cost of sales consists of food and beverage costs of which approximately 50% 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, supplies, local store advertising, repairs and maintenance, equipment rent, property taxes, credit card and gift card fees and general liability insurance offset by gift card breakage income. 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 restaurant and are comprised principally of opening team and training team compensation and benefits, travel expenses, rent, food, beverage and other initial supplies and expenses. On average, over 70% of total pre-opening costs incurred per restaurant opening relate to the hiring and training of employees. Pre-opening costs vary by location depending on many factors, including the size and physical layout of each location; the number of management and hourly employees required to operate each restaurant; the availability of qualified restaurant staff members; the cost of travel and lodging for different geographic areas; the timing of the restaurant opening; and the extent of unexpected delays, if any, in obtaining final licenses and permits to open the restaurants.
Depreciation and Amortization Expenses.
Depreciation and amortization expenses ("D&A") include the depreciation of fixed assets and amortization of intangibles with definite lives, substantially all of which relates to restaurant-level assets.
Impairment and Closure Costs.
Impairment and closure costs include any impairment of long-lived assets, including goodwill, and expenses associated with the closure of a restaurant. Closure costs also include any gains or losses associated with a relocated restaurant or the sale of a closed restaurant and/or assets held for sale as well as lease costs associated with closed or relocated restaurants.
General and Administrative Expenses.
General and administrative expenses ("G&A") are comprised of expenses associated with corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future growth including certain advertising costs incurred less amounts remitted by franchise restaurants. Supervision and accounting fees received from certain franchise restaurants are offset against G&A. G&A also includes legal fees, settlement charges and share-based compensation expense related to executive officers, support center employees and area managers, including market partners. The realized and unrealized holding gains and losses related to the investments in our deferred compensation plan, as well as offsetting compensation expense, are also recorded in G&A.
Interest Expense, Net.
Interest expense includes the cost of our debt or financing obligations including the amortization of loan fees, reduced by interest income and capitalized interest. Interest income includes earnings on cash and cash equivalents.
Equity Income from Unconsolidated Affiliates.
As of September 26, 2017 and September 27, 2016, we owned a 5.0% to 10.0% equity interest in 24 franchise restaurants. Additionally, as of September 26, 2017 and September 27, 2016, we owned a 40% equity interest in four non-Texas Roadhouse restaurants as part of a joint venture agreement with a casual dining restaurant operator in China. Equity income from unconsolidated affiliates represents our percentage share of net income earned by these unconsolidated affiliates.
Net Income Attributable to Noncontrolling Interests.
Net income attributable to noncontrolling interests represents the portion of income attributable to the other owners of the majority-owned restaurants. Our consolidated subsidiaries at September 26, 2017 and September 27, 2016 included 18 and 16 majority-owned restaurants, respectively, all of which were open.
Q3 2017 Financial Highlights
Total revenue increased $58.9 million, or 12.2%, to $540.5 million in Q3 2017 compared to $481.6 million in Q3 2016 primarily due to the opening of new restaurants combined with an increase in average unit volume driven by comparable restaurant sales growth. Store weeks and comparable restaurant sales increased 8.1% and 4.5%, respectively, at company restaurants in Q3 2017.
Restaurant margin increased $9.0 million to $95.6 million in Q3 2017 compared to $86.6 million in Q3 2016 while restaurant margin, as a percentage of restaurant sales, decreased to 17.8% in Q3 2017 compared to 18.1% in Q3 2016. The decrease in restaurant margin, as a percentage of restaurant sales, was primarily due to higher labor costs as a result of higher average wage rates, current staffing initiatives, and a change in our compensation structure. Higher labor costs were partially offset by commodity deflation of approximately 2.0% driven by lower food costs, primarily beef.
Net income increased $5.3 million, or 20.8%, to $31.0 million in Q3 2017 compared to $25.7 million in Q3 2016 primarily due to an increase in restaurant margin dollars, partially offset by higher depreciation costs. Diluted earnings per share increased in Q3 2017 by 19.9% to $0.43 from $0.36 in Q3 2016.
Results of Operations
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13 Weeks Ended
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39 Weeks Ended
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September 26, 2017
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September 27, 2016
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September 26, 2017
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September 27, 2016
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$
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%
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$
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%
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$
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%
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$
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%
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(In thousands)
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(In thousands)
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Consolidated Statements of Income:
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Revenue:
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Restaurant sales
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536,341
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99.2
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477,617
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99.2
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1,661,821
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99.2
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1,493,531
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99.2
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Franchise royalties and fees
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4,166
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0.8
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4,020
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0.8
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12,634
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0.8
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12,473
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0.8
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Total revenue
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540,507
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100.0
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481,637
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100.0
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1,674,455
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100.0
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1,506,004
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100.0
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Costs and expenses:
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(As a percentage of restaurant sales)
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Restaurant operating costs (excluding depreciation and amortization shown separately below):
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Cost of sales
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176,498
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32.9
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161,886
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33.9
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545,862
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32.8
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506,565
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33.9
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Labor
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169,355
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31.6
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145,301
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30.4
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514,287
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30.9
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442,861
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29.7
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Rent
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11,257
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2.1
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10,266
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2.1
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33,238
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2.0
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30,477
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2.0
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Other operating
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83,679
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15.6
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73,583
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15.4
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254,176
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15.3
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227,082
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15.2
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(As a percentage of total revenue)
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Pre-opening
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4,548
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0.8
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5,017
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1.0
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14,302
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0.9
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14,253
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0.9
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Depreciation and amortization
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23,534
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4.4
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20,941
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4.3
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69,236
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4.1
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60,718
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4.0
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Impairment and closure
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2
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NM
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13
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NM
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13
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NM
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54
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NM
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General and administrative
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26,123
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4.8
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26,162
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5.4
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94,594
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5.6
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82,933
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5.5
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Total costs and expenses
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494,996
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91.6
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443,169
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92.0
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1,525,708
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91.1
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1,364,943
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90.6
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Income from operations
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45,511
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8.4
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38,468
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8.0
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148,747
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8.9
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141,061
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9.4
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Interest expense, net
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500
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0.1
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288
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0.1
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1,211
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0.1
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902
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0.1
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Equity income from investments in unconsolidated affiliates
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(359)
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(0.1)
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(4)
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NM
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(1,149)
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(0.1)
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(831)
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(0.1)
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Income before taxes
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45,370
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8.4
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38,184
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7.9
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148,685
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8.9
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140,990
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9.4
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Provision for income taxes
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13,046
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2.4
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11,381
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2.4
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41,159
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2.5
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42,325
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2.8
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Net income including noncontrolling interests
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32,324
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6.0
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26,803
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5.6
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107,526
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6.4
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98,665
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6.6
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Net income attributable to noncontrolling interests
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1,310
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0.2
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1,128
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0.2
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4,618
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0.3
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3,792
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0.3
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Net income attributable to Texas Roadhouse, Inc. and subsidiaries
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31,014
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5.7
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25,675
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5.3
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102,908
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6.1
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94,873
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6.3
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13 Weeks Ended
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39 Weeks Ended
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September 26, 2017
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September 27, 2016
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September 26, 2017
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September 27, 2016
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$
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%
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$
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%
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$
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%
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$
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%
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(As a percentage of restaurant sales)
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Restaurant margin ($ in thousands)
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95,552
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17.8
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86,581
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18.1
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314,258
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18.9
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286,546
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19.2
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Restaurant margin $/store week
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16,284
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15,953
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18,140
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17,866
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See page 18 for the definition of restaurant margin.
NM — Not meaningful
Restaurant Unit Activity
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Total
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Texas Roadhouse
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Bubba's 33
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Jaggers
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Balance at December 27, 2016
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517
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499
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16
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2
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Company openings
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20
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16
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4
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—
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Franchise openings - Domestic
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1
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1
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—
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—
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Franchise openings - International
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2
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2
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|
—
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—
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Balance at September 26, 2017
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540
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|
518
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20
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|
2
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Q3 2017 (13 weeks) compared to Q3 2016 (13 weeks) and 2017 YTD (39 weeks) compared to 2016 YTD (39 weeks)
Restaurant Sales.
Restaurant sales increased by 12.3% in Q3 2017 as compared to Q3 2016 and by 11.3% in 2017 YTD compared to 2016 YTD. 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.
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Q3 2017
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Q3 2016
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2017 YTD
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2016 YTD
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|
Company Restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in store weeks
|
|
|
8.1
|
%
|
|
7.6
|
%
|
|
8.0
|
%
|
|
8.1
|
%
|
|
Increase in average unit volume
|
|
|
3.9
|
%
|
|
2.8
|
%
|
|
3.1
|
%
|
|
3.7
|
%
|
|
Other(1)
|
|
|
0.3
|
%
|
|
(0.3)
|
%
|
|
0.2
|
%
|
|
(0.4)
|
%
|
|
Total increase in restaurant sales
|
|
|
12.3
|
%
|
|
10.1
|
%
|
|
11.3
|
%
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store weeks
|
|
|
5,868
|
|
|
5,427
|
|
|
17,324
|
|
|
16,039
|
|
|
Comparable restaurant sales growth
|
|
|
4.5
|
%
|
|
3.4
|
%
|
|
4.0
|
%
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas Roadhouse restaurants only:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable restaurant sales growth
|
|
|
4.6
|
%
|
|
3.5
|
%
|
|
4.0
|
%
|
|
4.2
|
%
|
|
Average unit volume (in thousands)
|
|
$
|
1,197
|
|
$
|
1,152
|
|
$
|
3,776
|
|
$
|
3,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weekly sales by group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable restaurants (396 and 368 units, respectively)
|
|
$
|
92,712
|
|
$
|
89,079
|
|
|
|
|
|
|
|
|
Average unit volume restaurants (21 and 24 units, respectively)(2)
|
|
$
|
79,891
|
|
$
|
80,390
|
|
|
|
|
|
|
|
|
Restaurants less than six months old (16 units for each period)
|
|
$
|
93,419
|
|
$
|
84,539
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes the impact of the year-over-year change in sales volume of all non-Texas Roadhouse restaurants, along with Texas Roadhouse restaurants open less than six months before the beginning of the period measured and, if applicable, the impact of restaurants closed or acquired during the period.
|
|
(2)
|
|
Average unit volume restaurants include restaurants open a full six and up to 18 months before the beginning of the period measured.
|
The increases in restaurant sales for all periods presented were primarily attributable to the opening of new restaurants combined with an increase in average unit volume driven by comparable restaurant sales growth. Comparable restaurant sales growth for all periods presented was due to an increase in our guest traffic counts and an increase in our per person average check as shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2017
|
|
|
Q3 2016
|
|
|
2017 YTD
|
|
|
2016 YTD
|
|
|
Guest traffic counts
|
|
|
3.5
|
%
|
|
2.0
|
%
|
|
3.2
|
%
|
|
2.7
|
%
|
|
Per person average check
|
|
|
1.0
|
%
|
|
1.4
|
%
|
|
0.8
|
%
|
|
1.5
|
%
|
|
Comparable restaurant sales growth
|
|
|
4.5
|
%
|
|
3.4
|
%
|
|
4.0
|
%
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-over-year sales for newer restaurants included in our average unit volume, but excluded from our comparable restaurant sales, partially offset the impact of positive comparable restaurant sales growth in Q3 2017 and 2017 YTD.
The increases in our per person average check for the periods presented were primarily driven by menu price increases taken in 2017, 2016 and 2015. In 2016 and 2015, we increased menu prices in the fourth quarter by approximately 1.0% and approximately 2.0%, respectively. In May 2017, we took an additional price increase of 0.5%. These menu price increases were taken as a result of inflationary pressures, primarily commodities and/or labor. In Q3 2017 and 2017 YTD, average guest check did not increase in line with the menu price increases implemented as some guests shifted to lower priced menu items and/or purchased fewer beverages.
In 2017, we plan to open 26 or 27 company restaurants, including four Bubba’s 33 restaurants. We opened 20 restaurants in 2017 YTD including 16 Texas Roadhouse restaurants and four Bubba’s 33 restaurants. We have begun construction for all of our expected 2017 openings. Additionally, we currently plan to open approximately 30 company restaurants in 2018, including up to seven Bubba’s 33 restaurants.
Franchise Royalties and Fees.
Franchise royalties and fees increased by $0.1 million, or by 3.6%, in Q3 2017 from Q3 2016 and $0.2 million, or by 1.3%, in 2017 YTD from 2016 YTD. The increases in Q3 2017 and 2017 YTD were attributable to an increase in average unit volume at domestic restaurants, driven by comparable restaurant sales growth, and the opening of new franchise restaurants. These increases were partially offset by the loss of royalties associated with the acquisition of four franchise restaurants in Q1 2017 and a decrease in average unit volume at international restaurants, driven by a decrease in comparable restaurant sales at those locations.
Franchise comparable restaurant sales increased 2.8% and 2.9% in Q3 2017 and 2017 YTD, which included an increase in domestic franchise comparable restaurant sales of 4.7% and 4.0%, respectively. Franchise restaurant count activity is shown in the restaurant activity table above. In 2017, we anticipate that our existing franchise restaurant partners will open as many as five, primarily international, Texas Roadhouse restaurants, three of which opened in 2017 YTD. Additionally, we currently anticipate our franchise partners will open as many as seven Texas Roadhouse restaurants, primarily international, in 2018.
Restaurant Cost of Sales.
Restaurant cost of sales, as a percentage of restaurant sales, decreased to 32.9% in Q3 2017 from 33.9% in Q3 2016 and decreased to 32.8% in 2017 YTD from 33.9% in 2016 YTD. These decreases were primarily attributable to commodity deflation and menu pricing actions. Commodity deflation of approximately 2.0% in Q3 2017 and 2.1% in 2017 YTD was driven by lower food costs, primarily beef. Recent menu pricing actions are summarized in our discussion of restaurant sales above.
For the remainder of 2017, we have fixed price contracts for approximately 60% of our overall food costs with the remainder subject to fluctuating market prices. We expect approximately 2.0% food cost deflation in 2017.
In 2018, we expect commodity costs to be relatively flat. However, for 2018, we only have fixed price contracts for approximately 30% of our overall food costs with the remainder subject to fluctuating market prices.
Restaurant Labor Expenses.
Restaurant labor expenses, as a percentage of restaurant sales, increased to 31.6% in Q3 2017 compared to 30.4% in Q3 2016 and increased to 30.9% in 2017 YTD compared to 29.7% in 2016 YTD. These increases were primarily attributable to higher average wage rates, current staffing initiatives, and a change in our compensation structure, as discussed below, partially offset by lower workers’ compensation expense as well as the benefit from an increase in average unit volume. Lower workers’ compensation expense was driven by a $1.5 million reduction in workers’ compensation costs recorded in Q3 2017 compared to a $0.3 million reduction in costs recorded in Q3 2016 due to changes in our claims development history.
In 2016, the Department of Labor published changes related to the Fair Labor Standards Act ("FLSA") which would have resulted in changes to the threshold for overtime pay. The changes were scheduled to go into effect on December 1, 2016, however, in late November a federal judge blocked the implementation of the changes. Despite the injunction, we continued with the implementation of the changes to our overtime policies as originally planned.
For the remainder of 2017, we expect approximately 7.0% to 8.0% inflation due to increases in state-mandated minimum and tipped wages and increased competition for qualified workers, as well as by the impact of changes in our compensation structure as discussed above. We expect the changes to our compensation structure to increase our 2017 labor costs by $4.5 million to $5.5 million, which is included in our 7.0% to 8.0% inflation guidance. These increases may or may not be offset by additional menu price adjustments or guest traffic growth.
Restaurant Rent Expense.
Restaurant rent expense, as a percentage of restaurant sales, remained relatively unchanged at 2.1% in Q3 2017 and Q3 2016 as well as 2.0% in 2017 YTD and 2016 YTD. For both periods, the benefit from an increase in average unit volume was partially offset by higher rent expense, as a percentage of restaurant sales, at our newer restaurants.
Restaurant Other Operating Expenses.
Restaurant other operating expenses, as a percentage of restaurant sales, increased to 15.6% in Q3 2017 compared to 15.4% in Q3 2016 and increased to 15.3% in 2017 YTD compared to 15.2% in 2016 YTD. In Q3 2017, higher general liability insurance and higher costs associated with remodels were partially offset by lower costs associated with utilities and lower bonus expense along with an increase in average unit volume. In 2017 YTD, higher general liability insurance was partially offset by lower bonus expense along with an increase in average unit volume. Higher general liability insurance was driven by a $1.5 million reduction to general liability insurance costs recorded in Q3 2016 compared to a $0.2 million reduction in costs recorded in Q3 2017 due to changes in our claims development history.
Restaurant Pre-opening Expenses.
Pre-opening expenses decreased to $4.5 million in Q3 2017 from $5.0 million in Q3 2016 and remained relatively unchanged at $14.3 million in 2017 YTD and 2016 YTD. These variances were primarily due to the timing of restaurant openings.
Overall, we plan to open 26 or 27 company-owned restaurants in 2017 compared to 30 company-owned restaurants in 2016. Pre-opening costs will fluctuate from quarter to quarter based on the specific pre-opening costs incurred for each restaurant, the number and timing of restaurant openings and the number and timing of restaurant managers hired.
Depreciation and Amortization Expense.
D&A, as a percentage of total revenue, increased to 4.4% in Q3 2017 compared to 4.3% in Q3 2016 and increased to 4.1% in 2017 YTD compared to 4.0% in 2016 YTD. These increases were primarily due to higher depreciation, as a percentage of revenue, at new restaurants and increased re-investment in equipment at older restaurants. This increase was partially offset by the benefit of an increase in average unit volume.
For the remainder of 2017 and 2018, we expect D&A, as a percentage of revenue, to continue to be higher than the prior year due to an increase in our capitalized costs related to restaurants opened in 2016 and 2017, along with an increase in the level of reinvestment in our existing restaurants.
General and Administrative Expenses.
G&A, as a percentage of total revenue, decreased to 4.8% in Q3 2017 compared to 5.4% in Q3 2016 and increased to 5.6% in 2017 YTD compared to 5.5% in 2016 YTD. In Q3 2017, the decrease was driven by lower costs associated with incentive and share-based compensation, along with an increase in average unit volume. In 2017 YTD, the increase was primarily due to a pre-tax charge of $14.9 million ($9.2 million after-tax) related to legal fees and the settlement of a legal matter in March 2017 partially offset by lower incentive and share-based compensation and an increase in average unit volume. In addition, Q3 2016 and 2016 YTD also included charges of $1.2 million ($0.8 million after-tax) and $6.7 million ($4.1 million after-tax), respectively, related to the settlement of a legal matter.
Interest Expense, Net.
Interest expense increased to $0.5 million in Q3 2017 compared to $0.3 million in Q3 2016 and increased to $1.2 million in 2017 YTD compared to $0.9 million in 2016 YTD. These increases were due to higher interest rates.
Income Tax Expense.
Our effective tax rate decreased to 28.8% in Q3 2017 compared to 29.8% in Q3 2016 and decreased to 27.7% in 2017 YTD compared to 30.0% in 2016 YTD primarily due to the adoption of Accounting Standards Update 2016-09,
Compensation – Stock Compensation.
As a result of the new guidance requirements, excess tax benefits and tax deficiencies from share-based compensation are recognized within the income tax provision. During
Q3 2017, we recognized $0.4 million, or $0.01 per share, as an income tax benefit. During 2017 YTD, we recognized $3.0 million, or $0.04 per share, as an income tax benefit. For the remainder of 2017, we expect the effective tax rate to be approximately 28.0%. For 2018, we expect the effective tax rate to be between 28.0% and 29.0%.
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):
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended
|
|
|
|
September 26, 2017
|
|
September 27, 2016
|
|
Net cash provided by operating activities
|
|
$
|
188,070
|
|
$
|
159,782
|
|
Net cash used in investing activities
|
|
|
(133,565)
|
|
|
(113,219)
|
|
Net cash used in financing activities
|
|
|
(53,013)
|
|
|
(24,184)
|
|
Net increase in cash and cash equivalents
|
|
$
|
1,492
|
|
$
|
22,379
|
|
Net cash provided by operating activities was $188.1 million in 2017 YTD compared to $159.8 million in 2016 YTD. This increase was primarily due to an increase in net income and non-cash items such as depreciation and amortization expense along with an increase in working capital. The increase in working capital was attributed to an increase in cash flows related to a change in the payment timing of accrued wages in the prior year along with a decrease in receivables partially offset by a change in deferred revenue related to gift cards.
Our operations have not required significant working capital and, like many restaurant companies, we have been able to operate with negative working capital. Sales are primarily for cash, and restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth.
Net cash used in investing activities was $133.6 million in 2017 YTD compared to $113.2 million in 2016 YTD. The increase was primarily due to the acquisition of four franchise restaurants in Q1 2017 for a purchase price of $16.5 million, along with an increase in capital expenditures. The increase in capital expenditures was primarily due to increased spending related to new restaurant openings.
We require capital principally for the development of new company restaurants, the refurbishment 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 of September 26, 2017, we had developed 140 of the 455 company restaurants on land which we own.
The following table presents a summary of capital expenditures related to the development of new restaurants and the refurbishment of existing restaurants (in thousands):
|
|
|
|
|
|
|
|
|
|
2017 YTD
|
|
2016 YTD
|
|
New company restaurants
|
|
$
|
78,943
|
|
$
|
75,231
|
|
Refurbishment of existing restaurants(1)
|
|
|
38,094
|
|
|
37,988
|
|
Total capital expenditures
|
|
$
|
117,037
|
|
$
|
113,219
|
|
|
|
|
|
|
|
|
|
Restaurant-related repairs and maintenance expense(2)
|
|
$
|
18,956
|
|
$
|
16,501
|
|
|
(1)
|
|
Includes minimal capital expenditures related to the support center office.
|
|
(2)
|
|
These amounts were expensed as incurred.
|
Our future capital requirements will primarily depend on the number of new restaurants we open, the timing of those openings and the restaurant prototype developed in a given fiscal year. These requirements will include costs directly related to opening new restaurants and may also include costs necessary to ensure that our infrastructure is able to support a larger restaurant base. In 2017, we expect our capital expenditures to be approximately $170.0 million, the
majority of which will relate to planned restaurant openings, including 26 or 27 restaurant openings in 2017. These amounts exclude any cash used for franchise acquisitions. In Q1 2017, we acquired four franchise restaurants for an aggregate purchase price of $16.5 million. See note 6 in the unaudited condensed consolidated financial statements for further discussion of these acquisitions. We intend to satisfy our capital requirements over the next 12 months with cash on hand, net cash provided by operating activities and, if needed, funds available under our revolving credit facility. For 2017, we anticipate net cash provided by operating activities will exceed capital expenditures. We currently anticipate this excess will be used to pay dividends, as approved by our Board of Directors, repurchase common stock, and/or repay borrowings under our revolving credit facility.
Net cash used in financing activities was $53.0 million in 2017 YTD compared to $24.2 million in 2016 YTD. The increase is due to borrowings on our revolving credit facility that occurred in Q1 2016 and an increase in dividends paid. These increases were partially offset by a decrease in spending on share repurchases, along with proceeds from noncontrolling interest contributions.
On May 22, 2014, our Board of Directors approved a stock repurchase program under which we may repurchase up to $100.0 million of our common stock. This stock repurchase program has no expiration date and replaced a previous stock repurchase program which was approved on February 16, 2012. All repurchases to date under our stock repurchase program 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 2017 YTD, we made no share repurchases and had approximately $69.9 million remaining under our authorized stock repurchase program as of September 26, 2017.
On August 31, 2017, our Board of Directors authorized the payment of a cash dividend of $0.21 per share of common stock. The payment of this dividend totaling $14.9 million was distributed on September 29, 2017 to shareholders of record at the close of business on September 13, 2017. The declared dividend is included as a liability in our unaudited condensed consolidated balance sheet as of September 26, 2017.
We paid distributions of $4.0 million to equity holders of 17 of our 18 majority-owned company restaurants in 2017 YTD. In 2016 YTD, we paid $3.5 million to equity holders of all our 16 majority-owned company restaurants.
On August 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 by JPMorgan Chase Bank, N.A., PNC Bank, N.A., and Wells Fargo Bank, N.A. The revolving credit facility remains an unsecured, revolving credit agreement under which we may borrow up to $200.0 million with the option to increase the revolving credit facility by an additional $200.0 million subject to certain limitations. The Amended Credit Agreement extends the maturity date of our revolving credit facility until August 5, 2022.
The terms of the Amended Credit Agreement require us to pay interest on outstanding borrowings at the London Interbank Offered Rate plus a margin of 0.875% to 1.875% and to pay a commitment fee of 0.125% to 0.30% per year on any unused portion of the revolving credit facility, in each case depending on our leverage ratio, or the Alternate Base Rate, which is the highest of the issuing banks’ prime lending rate, the Federal Funds rate plus 0.50% or the Adjusted Eurodollar Rate for a one month interest period on such day plus 1.0%. The weighted-average interest rate for the revolving credit facility as of September 26, 2017 and December 27, 2016 was 2.11% and 1.57%, respectively. As of September 26, 2017, we had $50.0 million outstanding under the revolving credit facility and $142.9 million of availability, net of $7.1 million of outstanding letters of credit.
The lenders’ obligation to extend credit pursuant to the Amended Credit Agreement depends on us maintaining certain financial covenants, including a minimum consolidated fixed charge coverage ratio of 2.00 to 1.00 and a maximum consolidated leverage ratio of 3.00 to 1.00. The Amended Credit Agreement permits us to incur additional secured or unsecured indebtedness outside the revolving credit facility, except for the incurrence of secured indebtedness that in the aggregate is equal to or greater than $125.0 million and 20% of our consolidated tangible net worth. We were in compliance with all financial covenants as of September 26, 2017.
Contractual Obligations
The following table summarizes the amount of payments due under specified contractual obligations as of September 26, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
1 year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
5 years
|
|
Long-term debt obligations
|
|
$
|
51,993
|
|
$
|
9
|
|
|
22
|
|
|
50,030
|
|
|
1,932
|
|
Interest(1)
|
|
|
10,777
|
|
|
1,280
|
|
|
2,588
|
|
|
2,525
|
|
|
4,384
|
|
Operating lease obligations
|
|
|
839,920
|
|
|
45,037
|
|
|
90,067
|
|
|
89,885
|
|
|
614,931
|
|
Capital obligations
|
|
|
150,629
|
|
|
150,629
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total contractual obligations(2)
|
|
$
|
1,053,319
|
|
$
|
196,955
|
|
$
|
92,677
|
|
$
|
142,440
|
|
$
|
621,247
|
|
|
(1)
|
|
Uses interest rates as of September 26, 2017 for our variable rate debt. We assumed $50.0 million remains outstanding on the revolving credit facility until the expiration date. We calculated interest rate payments on the revolving credit facility using an interest rate of 2.11%, which was the interest rate associated with our revolving credit facility at September 26, 2017.
|
|
(2)
|
|
Unrecognized tax benefits under Accounting Standards Codification 740 are immaterial and, therefore, are excluded from this amount.
|
We have no material minimum purchase commitments with our vendors that extend beyond a year. See note 5 to the unaudited condensed consolidated financial statements for a discussion of contractual obligations.
Off-Balance Sheet Arrangements
Except for operating leases (primarily restaurant leases), we do not have any material off-balance sheet arrangements.
Guarantees
As of September 26, 2017 and December 27, 2016, we are contingently liable for $15.8 million and $16.4 million, respectively, for seven lease guarantees, listed in the table below. These amounts represent the maximum potential liability of future payments under the guarantees. In the event of default, the indemnity and default clauses in our assignment agreements govern our ability to pursue and recover damages incurred. No material liabilities have been recorded as of September 26, 2017 and December 27, 2016 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
|
|
Everett, Massachusetts (1)(2)
|
|
September 2002
|
|
February 2023
|
|
Longmont, Colorado (1)
|
|
October 2003
|
|
May 2019
|
|
Montgomeryville, Pennsylvania (1)
|
|
October 2004
|
|
March 2021
|
|
Fargo, North Dakota (1)(2)
|
|
February 2006
|
|
July 2021
|
|
Logan, Utah (1)
|
|
January 2009
|
|
August 2019
|
|
Irving, Texas (3)
|
|
December 2013
|
|
December 2019
|
|
Louisville, Kentucky (3)(4)
|
|
December 2013
|
|
November 2023
|
|
|
(1)
|
|
Real estate lease agreements for restaurant locations which we entered into before granting franchise rights to those restaurants. We have subsequently assigned the leases to the franchisees, but remain contingently liable under the terms of the lease if the franchisee defaults
.
|
|
(2)
|
|
As discussed in note 7 to the unaudited condensed consolidated financial statements, these restaurants are owned, in whole or part, by certain officers, directors and 5% shareholders of the Company.
|
|
(3)
|
|
Leases associated with non-Texas Roadhouse restaurants which were sold. The leases were assigned to the acquirer, but we remain contingently liable under the terms of the lease if the acquirer defaults.
|
|
(4)
|
|
We may be released from liability after the initial contractual lease term expiration contingent upon certain conditions being met by the acquirer.
|
Recently Issued Accounting Standards
Revenue Recognition
(Accounting Standards Update 2014‑09, "ASU 2014‑09")
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB approved a one-year deferral of the effective date of the new revenue standard. ASU 2014-09 is now effective for fiscal years beginning on or after December 15, 2017 (our 2018 fiscal year), including interim periods within those annual periods, with early adoption permitted in the first quarter of 2017. The standard permits the use of either the full retrospective or cumulative-effect transition method. In March and April 2016, the FASB issued the following amendments to clarify the implementation guidance: ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
and ASU No. 2016-10
, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
. Additionally, on December 21, 2016, the FASB issued ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, which provides disclosure relief and clarifies the scope and application of the new revenue standard and related cost guidance. The standard will not impact our recognition of sales from company-owned restaurants or our recognition of continuing fees from franchisees, which are based on a percentage of franchise sales. Under this standard, initial franchise fees and upfront fees from international development agreements will be recognized over the life of the applicable franchise agreements. We currently recognize initial franchise fees when the related services have been provided, which is generally upon the opening of the restaurant, and upfront fees on a pro-rata basis as restaurants under the development agreement are opened. In addition, certain transactions that were previously recorded as a reduction of expense will be classified as revenue. These include breakage income from our gift card program which is currently recognized as a reduction of other operating expense and advertising contributions received from our franchisees which are currently recognized as a reduction of general and administrative expense. We continue to evaluate the standard’s impact on other transactions currently not classified as revenue. We currently expect to use the cumulative-effect method of adoption and do not believe this adoption will have a material impact on our consolidated statements of income and comprehensive income.
Leases
(Accounting Standards Update 2016-02, "ASU 2016-02")
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. This update also requires additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (our 2019 fiscal year). Early adoption is permitted. A modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements.
We had operating leases with remaining rental payments of approximately $839.9 million as of September 26, 2017. The discounted minimum remaining rental payments will be the starting point for determining the right-of-use asset and lease liability. While we are still in the process of assessing the impact of this new standard on our consolidated financial position, results of operations and cash flows, we expect the adoption of this standard will have a material impact on our consolidated balance sheets due to the recognition of the right-of-use asset and lease liability related to operating leases. While the new standard is also expected to impact the measurement and presentation of elements of expenses and cash flows related to leasing arrangements, we do not presently believe there will be a material impact on our consolidated statements of income and comprehensive income or our consolidated statement of cash flows.
Financial Instruments
(Accounting Standards Update 2016-13, "ASU 2016-13")
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, which requires measurement and recognition of expected versus incurred losses for financial assets held. ASU 2016-13 is effective for annual periods beginning after December 15, 2019 (our 2020 fiscal year), with early adoption permitted for annual periods beginning after December 15, 2018. We are currently assessing the impact of this new standard on our consolidated financial position, results of operations and cash flows.
Statement of Cash Flows
(Accounting Standards Update 2016-15, "ASU 2016-15")
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which adds and/or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 (our 2018 fiscal year) and interim periods within those annual periods. Early adoption is permitted. We do not expect the adoption of this guidance will have a material impact on our consolidated financial position, results of operations or cash flows.
Income Taxes
(Accounting Standards Update 2016-16, "ASU 2016-16")
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740)
, which addresses the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This standard will require recognition of current and deferred income taxes resulting from an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for annual and interim periods beginning after December 15, 2017 (our 2018 fiscal year). Early adoption is permitted. We do not expect the adoption of this guidance will have a material impact on our consolidated financial position, results of operations or cash flows.
Goodwill
(Accounting Standards Update 2017-04, "ASU 2017-04")
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Text for Goodwill Impairment,
which simplifies the accounting for goodwill impairment and is expected to reduce the cost and complexity of accounting for goodwill. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Instead, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 (our 2020 fiscal year) and will be applied on a prospective basis. Early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently assessing the impact of this new standard on our consolidated financial position, results of operations and cash flows.
Compensation – Stock Compensation
(Accounting Standards Update 2017-09, "ASU 2017-09")
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting
, which clarifies when a change in the terms or conditions of a share-based payment award must be accounted for as a modification. ASU 2017-09 requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change in the terms and conditions of the award. ASU 2017-09 is effective for annual and interim periods beginning after December 15, 2017 (our 2018 fiscal year). Early adoption is permitted. We do not expect the adoption of this guidance will have a material impact on our consolidated financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RIS
K
We are exposed to market risk from changes in interest rates on variable rate debt and changes in commodity prices. Our exposure to interest rate fluctuations is limited to our outstanding bank debt. The terms of the revolving credit facility require us to pay interest on outstanding borrowings at London Interbank Offering Rate plus a margin of 0.875% to 1.875%, depending on our leverage ratio, or the Alternate Base Rate, which is the highest of the issuing banks’ prime lending rate, the Federal Funds rate plus 0.50% or the Adjusted Eurodollar Rate for a one month interest period on such day plus 1.0%. At September 26, 2017, we had $50.0 million outstanding under the revolving credit facility, which bears interest at 87.5 to 187.5 basis points (depending on our leverage ratios) over LIBOR. The interest rate on our revolving credit facility at September 26, 2017 was 2.11%. Should interest rates based on this variable rate borrowing increase by one percentage point, our estimated annual interest expense would increase by $0.5 million.
In an effort to secure high quality, low cost ingredients used in the products sold in our restaurants, we employ various purchasing and pricing contract techniques. When purchasing certain types of commodities, we may be subject to prevailing market conditions resulting in unpredictable price volatility. For certain commodities, we may also enter into contracts for terms of one year or less that are either fixed price agreements or fixed volume agreements where the price is negotiated with reference to fluctuating market prices. We currently do not use financial instruments to hedge commodity prices, but we will continue to evaluate their effectiveness. Extreme and/or long term increases in commodity prices could adversely affect our future results, especially if we are unable, primarily due to competitive reasons, to increase menu prices. Additionally, if there is a time lag between the increasing commodity prices and our ability to increase menu prices or if we believe the commodity price increase to be short in duration and we choose not to pass on the cost increases, our short‑term financial results could be negatively affected.
We are subject to business risk as our beef supply is highly dependent upon three vendors. If these vendors were unable to fulfill their obligations under their contracts, we may encounter supply shortages and/or higher costs to secure adequate supplies and a possible loss of sales, any of which would harm our business.
ITEM 4. CONTROLS AND PROCEDURE
S
Evaluation of disclosure controls and procedures
We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to, and as defined in, Rules 13a‑15(e) and 15d‑15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of our management, including the Chief Executive Officer (the "CEO") and the Chief Financial Officer (the "CFO"), our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 26, 2017.
Changes in internal control
There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.