TXRH - EXPENSIVE AND IT'S NOT BUILT TO STAY THAT WAY

Reports spectacular EPS and margin improvement, but this too shall pass.

TXRH confirms that April was soft from a SSS stand point.  The company was quick to point out that the second half of April was better than the first.

At 8.8x EV/EBITDA, TXRH is one of the most expensive Full Service restaurants with a mediocre story.  SSS are punk with no real plan to drive traffic and the cost of construction does not justify new unit growth.

The company is also looking a developing another concept (Aspen Creek) to help drive incremental growth.  Why would TXRH need to develop a second concept?  The new concept and its ROI would need to be spectacular for this to overcome the obvious issues that can be inferred from this move - the original concept does not have the growth opportunity that was initially planned.

Notes from the call:

Food, labor, and utility costs were all favorable

  • Comparable restaurant sales growth of 0.4%
  • Margin expansion of 218 bps paved the way for better-than-expected earnings
  • Improved cash position and paid down debt
  • Being conservative until returns justify increased investment
  • Positioned well to take advantage of future opportunities

Financials

  • Revenues increased 6%
    • 5.4% increase in restaurant sales
    • 5% store week increase
    • 0.2% increase in AUVs
    • Opened 2 restaurants in 1Q
    • Comp store sales positive for first time in over two years
    • Guest traffic down 0.1% for quarter
    • Comps in January were down 1.6%, down slightly in February, and up 2.6% in March
    • 231 SSS restaurants averaged $75,100 in sales per week
    • 24 restaurants open 6-18 months that were in the AUV comp averaged  and averaged $73,100/wk
    • Others averaged $93,400/wk

Margins

  • Restaurant margin up 218 bps YoY
    • COS line down 185 bps
    • Food cost deflation
    • Labor down 18 bps
    • Low hourly turnover – below 80%
    • Preopening costs were down thanks to reduced openings
    • More assets becoming fully depreciated than they are adding

Other

  • Paid down 12m in debt
  • Net debt of $35m

Outlook

  • Tax rate for 10 will be ~33%
  • Continuing to generate excess cash flow and paying down debt
  • EPS now estimated up 14% to 18% (from $0.67) growth for 2010 (upward revision from previous 5%-10% growth estimate)
    • Flat to up 1% SSS growth
    • 14-15 openings
    • Food cost deflation of 2.5% to 3%
    • Capex of $50m
  • Food cost deflation will be less for the remainder of the year because of contracts
  • Spending on their conference will be $1-$1.2m more than last year
  • 2010 development is backend loaded
  • Confident necessary returns will be generated

Working on ways to enhance the guest experience

  • Refining processes
  • New menu rolling out
  • April gave back some sales momentum during the holiday season
  • 2H April was better
    • Sales environment will gradually improve
  • New kitchen design is decreasing development costs
    • Also looking at smaller units
    • Lower investment cost
  • 2010 investment cost could come down 200-400k from the 4m last year
    • If sales hold steady TXRH should hit the 1.1x sale : investment ratio
  • Looking at international markets carefully
  • Will be looking at two more aspen creek restaurants this year

Q&A

Q: Can you quantify the “improvement” in the second half of April? Menu impact on average check? More or less items?

A: Second half of April is consistent with what competitors have said.  There is no price increase in the menu.  Adding fried pickles, taking off one other item. Check neutral.

Q: Were you positive in the second half of April? Commodity deflation in 2Q?

A: Yes we were.

Commodity deflation in 2Q will be less.  Contracted for proteins through 2010.

Q: Any thought about extending contract on beef?

A: It’s early to talk about beef prices.  Will keep all doors open.

Q: 1Q comps, any negative impact from weather?

A: No, we don’t keep up with that. We don’t calculate bounce back from pent up demand either.

Q: Increase seating capacity initiative, how may units have been completed? Outlook for ’10?

A: Done 47.  Did 4 in 1Q.  Will do another 6 or 7 in the balance of the year.

Q: Comment on deflation?

A: In January beef costs were higher. Last year there were higher food costs in January but much lower in February and March.  This year then, there were substantial deflation in January but less so in February and March. That will continue into 2Q.

Q: When will you be considering expansion pace increasing?

A: Having those conversations now, have to be having them now.  We’re happy with the costs coming down and the performance of the recently opened stores.

Q: Does the 14 to 15 openings include the Aspen Creek locations?

A: Yes.  Store 15 may open after December 31st, they have to be built.

Q: Development – should we think about 2Q openings being similar to 1Q?

A: Fewer in 2Q. Late third quarter and beginning 4Q will have 75% of the remainder.

Q: No menu pricing going forward?

A: Lapped price at the beginning of April?

Q: Rate of deflation? Could 2Q food costs touch 33%?

A: Would expect them to be a little higher in 2Q as % of sales.

Q: In the long term is it a 35% concept?

A: Can’t predict what commodity markets are going to do or what pricing strategy is going to be.

Q: Clarify pricing versus ticket and traffic…was most improvement in the traffic line or did check pick up also?

A: Traffic was down .1% and check was up 0.4%.  Traffic was constant through the quarter, check improvement drove the quarter. No regional disparity – broad based.

Q: Marketing is getting more competitive, when you think about fighting for traffic since you’re not taking price and how are you managing the price versus marketing for that traffic?

A: If you compare historical performance through difficult times, TXRH does well through local store initiatives.  Looking at

how commodities behave will dictate future pricing.

Q: What are you doing to prepare for future price increases?

A: Not testing anything and have not made that decision yet.  I would guess that we will test it but have not made a decision yet.

Q: Development outlook.  Give some thoughts on why it makes sense to look at a second concept.

A: Texas Roadhouse will continue to be the focus but need to look at what will propel the brand  in 5 years.  Looking internationally.  The second concept is driven by the chairman and, starting from scratch, it could have future growth potential if the new concept works.

Q: International agreements…what is the number of near term units? What are the costs of development and negotiating/sourcing…negative G&A impact this quarter?

A: Franchise deal for 35 restaurants in 10 years.  Not a negative to G&A…no incremental G&A piece going forward. We’ve dedicated some resources to the international effort . 

Q: Capex outlook?

A: Lighter than last quarter…15m maintenance and remodel and the majority will be cost of new development.

Q: Other regions besides Middle East?

A: We are taking a targeted approach in Asia and Mexico also.

Q: Labor per operating week has fallen for 4 quarters in a row. Continuing?

A: Turnover is less – below 80%. Not sure it will continue to decrease.

Q: 2011 development, if ramped up, will it be spread across geographies?

A: Would like to spread it out as much as we can, similar to how it has been in the past.

Q: Competitive pressure in late night…alcohol is only 10% of your sales but have you seen pressure in late night?

A: We’re not a late night concept. Mix has continued to go down as a percentage of sales.  Not seeing anything different trend-wise. No impact from that…

Howard Penney

Managing Director