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. These statements include, but are not limited to, statements related to the potential impact of the COVID-19/Coronavirus outbreak and other non-historical statements. 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 endedDecember 31, 2019 , and in Part II, Item 1A in this Form 10-Q, along with disclosures in our otherSecurities 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 theSEC , 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, except as may be required by applicable law. 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 theSEC 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. RECENT DEVELOPMENTS OnMarch 13, 2020 , the novel coronavirus ("COVID-19") pandemic (the "pandemic") was declared a National Public Health Emergency. Shortly after the national emergency declaration, state and local officials began placing restrictions on restaurants, some of which allowed To-Go or curbside service only while others limited capacity in the dining room. ByMarch 31, 2020 , the last day of our Q1 2020 fiscal quarter, all of our domestic company and franchise restaurants were under state or local order which only allowed for To-Go or curbside service. Beginning in earlyMay 2020 , state and local guidelines began to allow dining rooms to re-open, typically at a limited capacity. ByJune 30, 2020 , the last day of our Q2 2020 fiscal quarter, 499 of our 521 company-owned restaurants had re-opened their dining rooms under various limited capacity restrictions. Our remaining restaurants, with the exception of one that is temporarily closed, are limited to outdoor dining and/or To-Go or curbside service only. We continue to monitor state and local plans as they move along their phased approach to re-open their economies. We have developed a hybrid operating model that accommodates our limited capacity dining rooms together with enhanced To-Go, which includes a curbside and/or drive-up operating model, as permitted by local guidelines. This includes design changes to our building to better accommodate the increased To-Go sales and the expansion of outdoor seating areas where allowed. We also have installed booth partitions in all of our restaurants as an added safety measure for our guests. In addition, we have increased our already strict sanitation requirements, are conducting daily health and temperature checks for all employees before they begin their shift and are requiring personal protective equipment to be worn by all restaurant employees at all times. As we work through the re-opening phases at each of our locations, the safety of our employees and guests remains our top priority. As a result of the temporary dining room closures and the subsequent limited capacity restrictions for in-person dining, we have experienced a significant decrease in traffic which has impacted our operating results. While many of our dining rooms have re-opened, the capacity restrictions severely limit the number of guests we can serve. In addition, while we have seen significant sales growth in our To-Go program, even in those stores with dining rooms re-opened, we currently do not expect these sales will generate a similar profit margin and cash flows to our normal operating model. 16
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We expect our operating results to continue to be impacted until at least such time that state and local restrictions are lifted, and our dining rooms can re-open at full capacity. We cannot predict how long the pandemic will last, how long it will take until all state and local restrictions will be lifted, or if dining rooms will be required to close again in whole or in part in areas severely impacted by the pandemic. In addition, we cannot predict the overall impact on the economy or consumer spending habits. The impact on our operating results as well as the operational and financial measures we have implemented in response to the pandemic have been included throughout this document.
In response to the pandemic, the Company and its Board of Directors implemented the following measures in 2020 to enhance financial flexibility:
o Decreased the number of planned new restaurants for the remainder of 2020;
o Suspended all quarterly cash dividends occurring after
o Suspended all share repurchase activity;
o Expanded the capacity of the revolving credit facility and increased the
borrowings by
Decreased compensation including voluntary reductions of salary and bonus for
the executive and leadership teams to make relief grants available for
o restaurant employees. Each non-employee member of the Board of Directors has
also volunteered to forgo their director and committee fees along with any cash
retainers effective immediately and continuing throughout fiscal 2020. EffectiveMarch 27, 2020 , legislation referred to as the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was passed to benefit companies that were significantly impacted by the pandemic. This legislation allowed for the deferral of the social security portion of the employer portion of FICA payroll taxes from the date of enactment through the end of 2020. Amounts are required to be repaid in equal installments at the end of 2021 and 2022. In addition, the CARES Act provided for small business loans that were forgivable if certain criteria were met. The Company did not pursue any of these loans on behalf of company restaurants as we believe we have sufficient alternatives for raising capital if needed. OVERVIEWTexas Roadhouse, Inc. is a growing restaurant company operating predominately in the casual dining segment. Our founder, chairman, chief executive officer and president,W. Kent Taylor , started the business in 1993 with the opening of the firstTexas Roadhouse restaurant inClarksville, Indiana . Since then, we have grown to 617 restaurants in 49 states and ten foreign countries. As ofJune 30, 2020 , our 617 restaurants included:
521 "company restaurants," of which 501 were wholly-owned and 20 were
majority-owned. The results of operations of company restaurants are included
in our unaudited condensed consolidated statements of income (loss) and
comprehensive income (loss). 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 (loss)
and comprehensive income (loss). Of the 521 restaurants we owned as of
2020, we operated 489 as
33 restaurants. In addition, we operated two restaurants outside of the casual
dining segment. As of
closed due to the pandemic but continues to be included in the above total.
96 "franchise restaurants," 24 of which we have a 5.0% to 10.0% ownership
interest. The income derived from our minority interests in these franchise
restaurants is reported in the line item entitled "Equity (loss) income from
investments in unconsolidated affiliates" in our unaudited condensed
consolidated statements of income (loss) and comprehensive income (loss). ? Additionally, we provided various management services to these 24 franchise
restaurants, as well as six additional franchise restaurants in which we have
no ownership interest. All of the franchise restaurants are operated as
Roadhouse restaurants. Of the 96 franchise restaurants, 70 were domestic
restaurants and 26 were international restaurants. As of
international restaurants remain temporarily closed due to the pandemic but
continue to be included in the above total. 17 Table of Contents
We have contractual arrangements that grant us the right to acquire at pre-determined formulas the remaining equity interests in 18 of the 20 majority-owned company restaurants and 67 of the 70 domestic franchise restaurants.
Throughout this report, we use the term "restaurants" to include
Presentation of Financial and Operating Data
Throughout this report, the 13 weeks endedJune 30, 2020 andJune 25, 2019 are referred to as Q2 2020 and Q2 2019, respectively. The 26 weeks endedJune 30, 2020 andJune 25, 2019 are referred to as 2020 YTD and 2019 YTD. Fiscal year 2020 will be 52 weeks in length, while the quarters for the year will be 13 weeks in length. Fiscal year 2019 was 53 weeks in length and, as such, the fourth quarter of fiscal 2019 was 14 weeks in length.
Long-Term Strategies to Grow Earnings Per Share and Create Shareholder Value
While our short-term strategies have changed due to the temporary change in our business model due to the pandemic, our long-term strategies remain unchanged. 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. In recent years, we have relocated several existingTexas Roadhouse locations once the associated lease expired or as a result of eminent domain which allows us to move to a better site, update them to a current prototypical design, and/or obtain more favorable lease terms. We continue to evaluate these opportunities particularly as it relates to older locations with strong sales. Our ability to expand our restaurant base is influenced by many factors beyond our control and, therefore, we may not be able to achieve our anticipated growth. In 2020 YTD, eight company restaurants, including two Bubba's 33, were opened while one company restaurant closed. At the onset of the pandemic, we delayed construction on all restaurants that were not substantially complete. As ofJune 30, 2020 , 14 restaurants, including one relocation site, had either resumed construction or were approved to resume construction. We currently expect as many as six of these restaurants will open in Q3 2020. To the extent that state and local guidelines begin to significantly reduce capacity and/or re-close dining rooms, we could pull back on development and reduce capital expenditures accordingly. In 2020 YTD, our franchise partners opened one domestic restaurant and closed two international restaurants. We currently expect our franchise partners will open four restaurants in 2020. 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, local permitting requirements, our ability to negotiate with landlords, cost of liquor and other licenses and hook-up fees and geographical location. We have entered into area development and franchise agreements for the development and operation ofTexas Roadhouse restaurants in several foreign countries. We currently have signed franchise and/or development agreements in nine countries in theMiddle East as well asTaiwan ,the Philippines ,Mexico ,China andSouth Korea . As ofJune 30, 2020 , we had 15 restaurants in five countries in theMiddle East , three restaurants open inTaiwan , five inthe Philippines and one each inMexico ,China andSouth Korea for a total of 26 restaurants in ten foreign countries. Due to the pandemic, five of our international locations were temporarily closed as ofJune 30, 2020 . As ofAugust 7, 2020 , four of these locations remain closed. For the existing international agreements, the franchisee is required to pay us a franchise fee for each restaurant to be opened, royalties on the gross sales of each restaurant and/or a development fee for our grant 18
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of development rights in the named countries. We anticipate that the specific business terms of any future franchise agreement for international restaurants might vary significantly from the standard terms of our domestic agreements and from the terms of existing international agreements, depending on the territory to be franchised and the extent of franchisor-provided services to each franchisee. Maintaining and/or Improving Restaurant Level Profitability. We continue to balance the impacts of inflationary pressures with our value positioning as we remain focused on our long-term success. This may create a challenge in terms of maintaining and/or increasing restaurant-level profitability (restaurant margin), in any given year, depending on the level of inflation we experience. Restaurant margin is not aU.S. generally accepted accounting principle ("GAAP") measure and should not be considered in isolation, or as an alternative to income from operations. See further discussion of restaurant margin below. In addition to restaurant margin, as a percentage of restaurant and other sales, we also focus on the growth of restaurant margin dollars per store week as a measure of restaurant-level profitability. In terms of driving comparable restaurant sales, we remain focused on encouraging repeat visits by our guests and attracting new guests through our continued commitment to operational standards relating to food and service quality. To attract new guests and increase the frequency of visits of our existing guests, we also continue to drive various localized marketing programs, focus on speed of service and increase throughput by adding seats and parking at certain restaurants. In addition, we continue to focus on driving To-Go sales which has significantly contributed to our sales growth in prior years. Leveraging Our Scalable Infrastructure. To support our growth, we have made investments in our infrastructure over the past several years, including information and accounting systems, real estate, human resources, legal, marketing, international and restaurant operations, including the development of new concepts. Whether we are able to leverage our infrastructure in future years by growing our general and administrative costs at a slower rate than our revenue will depend, in part, on our new restaurant openings, our comparable restaurant sales growth rate going forward and the level of investment we continue to make in our infrastructure. Returning Capital to Shareholders. We continue to evaluate opportunities to return capital to our shareholders including the payment of dividends and repurchases of common stock. In 2011, our Board of Directors declared our first quarterly dividend of$0.08 per share of common stock. OnFebruary 20, 2020 , our Board of Directors declared a quarterly dividend of$0.36 per share of common stock which was paid onMarch 27, 2020 . OnMarch 24, 2020 , the Board of Directors voted to suspend the payment of quarterly cash dividends on the Company's common stock, effective with respect to dividends occurring afterMarch 27, 2020 . This was done to preserve cash flow due to the pandemic. The declaration and payment of cash dividends on our common stock is at the discretion of our Board of Directors, and any decision to declare a dividend will be based on 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. We do not expect to resume the payment of cash dividends until our cash flows from operations have stabilized. In 2008, our Board of Directors approved our first stock repurchase program. From inception throughJune 30, 2020 , we have paid$369.0 million through our authorized stock repurchase programs to repurchase 17,722,505 shares of our common stock at an average price per share of$20.82 . OnMay 31, 2019 , our Board of Directors approved a stock repurchase program under which we may repurchase up to$250.0 million of our common stock. This stock repurchase program has no expiration date and replaced a previous stock repurchase program which was approved onMay 22, 2014 . All repurchases to date have been made through open market transactions. In 2020 YTD, we paid$12.6 million to repurchase 252,409 shares of our common stock. The Company suspended all share repurchase activity onMarch 17, 2020 , in order to preserve cash flow due to the pandemic. As ofJune 30, 2020 ,$147.8 million remains authorized for stock repurchases. We do not expect to resume the repurchase of shares until our cash flows from operations have stabilized. 19 Table of Contents
Key Measures We Use to Evaluate Our Company
Key measures we use to evaluate and assess our business include the following:
Number of Restaurant Openings. Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For company restaurant openings, we incur pre-opening costs, which are defined below, before the restaurant opens. Typically, newTexas Roadhouse restaurants open with an initial start-up period of higher than normalized sales volumes, which decrease to a steady level approximately three to six months after opening. However, although sales volumes are generally higher, so are initial costs, resulting in restaurant margins that are generally lower during the start-up period of operation and increase to a steady level approximately three to six months
after opening. Comparable Restaurant Sales Growth. Comparable restaurant sales growth reflects the change in restaurant sales for company 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 permanently 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 forTexas Roadhouse restaurants open for a full six months before the beginning of the period measured excluding restaurants permanently closed during the period. Historically, average unit volume growth is less than comparable restaurant sales growth which indicates that newer restaurants are operating with sales levels lower than the company average. At times, average unit volume growth may be more than comparable restaurant sales growth which indicates that newer restaurants are operating with sales levels higher than the company average.
Store Weeks. Store weeks represent the number of weeks that our company restaurants were open during the reporting period. Store weeks include weeks in which a restaurant is temporarily closed.
Restaurant Margin. Restaurant margin (in dollars and as a percentage of restaurant and other sales) represents restaurant and other sales less restaurant-level operating costs, including cost of sales, labor, rent and other operating costs. Restaurant margin is not a measurement determined in accordance with GAAP and should not be considered in isolation, or as an alternative, to income from operations. This non-GAAP measure is not indicative of overall company performance and profitability in that this measure does not accrue directly to the benefit of shareholders due to the nature of the costs excluded. Restaurant margin is widely regarded as a useful metric by which to evaluate restaurant-level operating efficiency and performance. In calculating restaurant margin, we exclude certain non-restaurant-level costs that support operations, including pre-opening and general and administrative expenses, but do not have a direct impact on restaurant-level operational efficiency and performance. We also exclude depreciation and amortization expense, substantially all of which relates to restaurant-level assets, as it represents a non-cash charge for the investment in our restaurants. We also exclude impairment and closure expense as we believe this provides a clearer perspective of the Company's ongoing operating performance and a more useful comparison to prior period results. Restaurant margin as presented may not be comparable to other similarly titled measures of other companies in our industry. A reconciliation of income from operations to restaurant margin is included in the Results of Operations section below. Other Key Definitions Restaurant and Other Sales. Restaurant sales include gross food and beverage sales, net of promotions and discounts, for all company restaurants. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from restaurant sales in the unaudited condensed consolidated statements of income (loss) and comprehensive income (loss). Other sales include the amortization of fees associated with our third-party gift card sales net of the amortization of gift card breakage income. These amounts are generally amortized over a period consistent with the historic redemption pattern of the associated gift cards.
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 international franchisees also typically pay an initial
20 Table of Contents 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. Franchise royalties and fees also include advertising fees paid by domestic franchisees to our system-wide marketing and advertising fund and management fees paid by certain domestic franchisees for supervisory and administrative services that we perform.
Restaurant Cost of Sales. Restaurant cost of sales consists of food and beverage costs of which approximately half 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 management employees.
Restaurant Rent Expense. Restaurant rent expense includes all rent, except pre-opening rent, associated with the leasing of real estate and includes base, percentage and straight-line rent expense.
Restaurant Other Operating Expenses. Restaurant other operating expenses consist of all other restaurant-level operating costs, the major components of which are utilities, dining room and To-Go supplies, local store advertising, repairs and maintenance, equipment rent, property taxes, credit card fees and general liability insurance. Profit-sharing incentive compensation expenses earned by our restaurant managing partners and market partners are also included in restaurant other operating expenses. Pre-opening Expenses. Pre-opening expenses, which are charged to operations as incurred, consist of expenses incurred before the opening of a new or relocated restaurant and are comprised principally of opening team and training 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, Net. Impairment and closure costs, net include any impairment of long-lived assets, including property and equipment, operating lease right-of-use assets and goodwill, and expenses associated with the closure of a restaurant. Closure costs also include any gains or losses associated with a relocated restaurant or the sale of a closed restaurant and/or assets held for sale as well as lease costs associated with closed or relocated restaurants. General and Administrative Expenses. General and administrative expenses ("G&A") are comprised of expenses associated with corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future growth including certain advertising costs incurred. G&A also includes legal fees, settlement charges and share-based compensation expense related to executive officers, support center employees, and market partners, and the realized and unrealized holding gains and losses related to the investments in our deferred compensation plan.
Interest Expense (Income), Net. Interest expense (income), net includes interest expense on our debt or financing obligations including the amortization of loan fees reduced by earnings on cash and cash equivalents.
Equity (Loss) Income from Unconsolidated Affiliates. As ofJune 30, 2020 andJune 25, 2019 , we owned a 5.0% to 10.0% equity interest in 24 domestic franchise restaurants. Additionally, as ofJune 30, 2020 andJune 25, 2019 , we owned a 40% equity interest in four non-Texas Roadhouse restaurants as part of a joint venture agreement with a casual 21
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dining restaurant operator in
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 atJune 30, 2020 andJune 25, 2019 included 20 majority-owned restaurants, all
of which were open. Q2 2020 Financial Highlights Total revenue decreased$213.4 million , or 30.9%, to$476.4 million in Q2 2020 compared to$689.8 million in Q2 2019 primarily due to a decrease in average unit volumes driven by a decrease in comparable restaurant sales. While store weeks increased 4.4%, comparable restaurant sales decreased 32.8%. The decrease in average unit volumes is primarily due to the temporary closure of our dining rooms and subsequent re-opening at limited capacity related to the pandemic. Restaurant margin dollars decreased$108.9 million , or 90.2%, to$11.8 million in Q2 2020 compared to$120.8 million in Q2 2019 and restaurant margin, as a percentage of restaurant and other sales, decreased to 2.5% in Q2 2020 compared to 17.6% in Q2 2019. The decrease in restaurant margin, as a percentage of restaurant and other sales, was due to lower sales along with higher labor, other operating costs and cost of sales. See further discussion of the specific drivers included below. Net income decreased$78.4 million , or 174.8%, to a net loss of$33.6 million in Q2 2020 compared to net income of$44.8 million in Q2 2019 primarily due to lower restaurant margin dollars partially offset by lower income taxes and lower general and administrative expenses. Diluted (loss) earnings per share decreased 177.4% to ($0.48 ) in Q2 2020 from$0.63 in Q2 2019. 22 Table of Contents Results of Operations 13 Weeks Ended 26 Weeks Ended June 30, 2020 June 25, 2019 June 30, 2020 June 25, 2019 $ % $ % $ % $ % (In thousands) (In thousands) Consolidated Statements of Income (Loss): Revenue: Restaurant and other sales 473,090 99.3 684,373 99.2 1,120,716 99.3 1,369,490 99.2 Franchise royalties and fees 3,335 0.7 5,455 0.8 8,233 0.7 10,946 0.8 Total revenue 476,425 100.0 689,828 100.0 1,128,949 100.0 1,380,436 100.0 Costs and expenses: (As a percentage of restaurant and other sales) Restaurant operating costs (excluding depreciation and amortization shown separately below): Cost of sales 164,041 34.7 221,266 32.3 374,221 33.4 444,978 32.5 Labor 194,622 41.1 225,490 32.9 435,701 38.9 449,370 32.8 Rent 13,251 2.8 13,051 1.9 26,722 2.4 26,179 1.9 Other operating 89,348 18.9 103,811 15.2 193,637 17.3 205,613 15.0 (As a percentage of total revenue) Pre-opening 4,290 0.9 4,197 0.6 9,402 0.8 8,065 0.6 Depreciation and amortization 29,016 6.1 28,454 4.1 58,070 5.1 56,227 4.1 Impairment and closure, net (440) NM 316 NM 155 NM 333 NM General and administrative 29,615 6.2 39,960 5.8 62,569 5.5 75,943 5.5 Total costs and expenses 523,743 109.9 636,545 92.3 1,160,477 102.8 1,266,708 91.8 (Loss) income from operations (47,318) (9.9) 53,283 7.7 (31,528) (2.8) 113,728 8.2 Interest expense (income), net 1,030 0.2 (691) (0.1) 1,099 0.1 (1,445) (0.1)
Equity (loss) income from investments in unconsolidated affiliates (90) (0.0) 141 0.0 (598) (0.1) 254 0.0 (Loss) income before taxes (48,438) (10.2) 54,115 7.8 (33,225) (2.9) 115,427 8.4 Income tax (benefit) expense (15,132) (3.2) 7,427 1.1 (17,071) (1.5) 16,546 1.2 Net (loss) income including noncontrolling interests (33,306) (7.0) 46,688 6.8 (16,154) (1.4) 98,881 7.2 Net income attributable to noncontrolling interests 247 0.1 1,843 0.3 1,370 0.1 3,646 0.3 Net (loss) income attributable toTexas Roadhouse, Inc. and subsidiaries (33,553) (7.0) 44,845 6.5 (17,524) (1.6) 95,235 6.9 NM - Not meaningful 23 Table of Contents Reconciliation of (Loss) Income
from Operations to Restaurant Margin
(in thousands) 13 Weeks Ended 26 Weeks Ended June 30, 2020 June 25, 2019 June 30, 2020 June 25, 2019
(Loss) income from operations $ (47,318) $ 53,283
$ (31,528)
Less:
Franchise royalties and fees 3,335 5,455
8,233 10,946 Add: Pre-opening 4,290 4,197 9,402 8,065
Depreciation and amortization 29,016 28,454
58,070 56,227 Impairment and closure, net (440) 316 155 333 General and administrative 29,615 39,960 62,569 75,943 Restaurant margin $ 11,828$ 120,755 $ 90,435$ 243,350
Restaurant margin $/store week $ 1,754 $ 18,692 $ 6,717 $ 18,943 Restaurant margin (as a percentage of restaurant and other sales) 2.5% 17.6% 8.1% 17.8%
See above for the definition of restaurant margin.
Restaurant Unit Activity Total Texas Roadhouse Bubba's 33 Other Balance at December 31, 2019 611 581 28 2 Company openings 8 6 2 - Company closings (1) (1) - - Franchise openings - Domestic 1 1 - -
Franchise openings - International - - -
-
Franchise closings - International (2) (2) -
- Balance at June 30, 2020 617 585 30 2 June 30, 2020 June 25, 2019 Company - Texas Roadhouse 489 471 Company - Bubba's 33 30 25 Company - Other 2 2 Franchise - Texas Roadhouse - U.S. 70 70 Franchise - Texas Roadhouse - International 26 23 Total (1) 617 591
(1) Includes one domestic company-owned and five international franchise
locations that are temporarily closed. 24 Table of Contents
Q2 2020 (13 weeks) compared to Q2 2019 (13 weeks) and 2020 YTD (26 weeks) compared to 2019 YTD (26 weeks)
Restaurant and Other Sales. Restaurant and other sales decreased by 30.9% in Q2 2020 as compared to Q2 2019 and by 18.2% in 2020 YTD compared to 2019 YTD. The following table summarizes certain key drivers and/or attributes of restaurant and other sales at company restaurants for the periods presented. Company restaurant count activity is shown in the restaurant unit activity table above. Q2 2020 Q2 2019 2020 YTD 2019 YTDCompany Restaurants :
Increase in store weeks 4.4 % 5.2 % 4.8 % 5.4 % (Decrease) increase in average unit volume (32.5) % 4.2 % (20.4) % 4.4 % Other(1) (2.9) % 0.4 % (2.6) % 0.2 % Total (decrease) increase in restaurant sales (31.0) % 9.8 % (18.2) % 10.0 % Other sales(2) 0.1 % (0.1) % 0.0 % (0.1) % Total (decrease) increase in restaurant and other sales
(30.9) % 9.7 % (18.2) % 9.9 %
Store weeks 6,742 6,460 13,463 12,846 Comparable restaurant sales growth
(32.8) % 4.7 % (20.5) % 5.0 %
Texas Roadhouse restaurants only: Comparable restaurant sales growth (32.4) % 4.6 % (20.2) % 4.9 % Average unit volume (in thousands) $
935
Weekly sales by group: Comparable restaurants (454 and 434 units, respectively)$ 72,005 $ 107,590 Average unit volume restaurants (20 units for both periods)(3)$ 69,174 $ 98,426 Restaurants less than six months old (15 and 17 units, respectively)$ 61,781 $ 115,233
Includes the impact of the year-over-year change in sales volume of all
non-
applicable, the impact of restaurants permanently closed or acquired during
the period. Other sales, for Q2 2020, represented$1.7 million related to the
amortization of third-party gift card fees net of
amortization of gift card breakage income. For Q2 2019, other sales
represented
fees net of
amortization of third party gift card fees net of
amortization of gift card breakage income. For 2019 YTD, other sales
represent
net of
The decrease in all amounts is primarily due to a decrease in gift card redemptions.
Average unit volume restaurants include restaurants open a full six and up to (3) 18 months before the beginning of the period measured, excluding sales from
restaurants permanently closed during the period. The decrease in restaurant sales for Q2 2020 and 2020 YTD is primarily attributable to the decrease in average unit volumes, driven by a decline in comparable restaurant sales, partially offset by an increase in store weeks. In March, we temporarily closed our dining rooms and shifted to a To-Go only model as a result of the pandemic. Our expanded To-Go model, which includes a curbside and/or drive-up operating model, allows guests to order via phone, through our mobile app, on-line, or once on site. In addition to our regular menu, we also added family value packs which include four entrees with an assortment of sides. We also added ready-to-grill steaks and pork that allow customers to order
their 25 Table of Contents preferred cut of meat to prepare at home. In May, many state and local guidelines began easing restrictions by allowing restaurants to open with various limited capacity restrictions. As the dining rooms were allowed to re-open, we implemented a hybrid operating model with limited capacity dining rooms together with enhanced To-Go, which includes a curbside and/or drive-up operating model, as permitted by local guidelines. With this implementation we significantly reduced our offerings around the family value packs and the ready-to-grill steaks and pork. As ofJune 30, 2020 , 499 of our company-owned restaurants were open at limited capacity. Comparable restaurant sales decreased 46.7%, 41.9% and 14.1% for our April, May and June periods, respectively. The improvement per month was driven by the re-opening of our dining rooms. As a result of this significant change in our operating model, we do not believe that our per person average check and guest traffic counts provide a meaningful comparison to the prior year period. As such, these amounts have not been disclosed for Q2 2020 or 2020 YTD. We opened sixTexas Roadhouse restaurants and two Bubba's 33 restaurants in 2020 YTD. At the onset of the pandemic, we delayed construction on all restaurants that were not substantially complete. As ofJune 30, 2020 , 14 restaurants, including one relocation site, had either resumed construction or were approved to resume construction. We currently expect as many as six of these restaurants will open in Q3 2020. To the extent that state and local guidelines begin to significantly reduce capacity and/or re-close dining rooms, we could pull back on development and reduce capital expenditures accordingly. Franchise Royalties and Fees. Franchise royalties and fees decreased by$2.1 million , or by 38.9%, in Q2 2020 from Q2 2019 and decreased$2.7 million , or by 24.8%, in 2020 YTD from 2019 YTD. The decreases in both periods were due to lower average unit volume, driven by comparable restaurant sales decreases at domestic and international franchise stores partially offset by the opening of new franchise restaurants. Comparable restaurant sales at domestic and international franchise stores decreased 38.2% and 23.4% for Q2 2020 and 2020 YTD, respectively. These comparable sales decreases include the impact of international locations that were temporarily closed during both periods including five as of the end of the quarter. Additionally, in Q2 2020 and 2020 YTD, we waived royalties of$0.1 million and$0.3 million , respectively, for international franchisees in countries that were significantly impacted by the pandemic. We also made royalty deferral arrangements for many of our domestic and international franchisees. We believe collection of these royalties remains probable and have continued to record royalty revenue related to these deferred royalties. The majority of these royalty waiver and deferral arrangements were through the end of our Q2 2020 fiscal quarter.
Our existing franchise restaurant partners opened one domestic
Restaurant Cost of Sales. Restaurant cost of sales, as a percentage of restaurant and other sales, increased to 34.7% in Q2 2020 from 32.3% in Q2 2019 and increased to 33.4% in 2020 YTD from 32.5% in 2019 YTD. These increases were primarily due to the mix of menu items sold and higher commodity inflation. Commodity inflation was approximately 2.9% and 2.0% for Q2 2020 and 2020 YTD, respectively, primarily driven by higher beef costs. Restaurant Labor Expenses. Restaurant labor expenses, as a percentage of restaurant and other sales, increased to 41.1% in Q2 2020 compared to 32.9% in Q2 2019 and increased to 38.9% in 2020 YTD from 32.8% in 2019 YTD. The increase in both periods was primarily due to higher wage rates, increased benefits provided to our hourly restaurant employees related to the pandemic, higher costs associated with health insurance, and a decrease in average unit volume. Higher wage rates in both periods were due to a significant number of employees moving from a tipped wage rate to a non-tipped wage due to the significant increase in To-Go sales. In addition, we incurred costs of$4.7 million and$15.4 million in Q2 2020 and 2020 YTD, respectively, for relief pay and benefits for our hourly employees. This pay was based on their level of hours worked prior to the pandemic and indexed for tenure. In addition, we enhanced certain sick pay and accrued vacation benefits and also provided a premium holiday on health insurance. Finally, higher health insurance costs in both periods were due to rate and enrollment increases. In Q2 2020, these costs were partially offset 26 Table of Contents
by a decrease in claim costs of
Restaurant Rent Expense. Restaurant rent expense, as a percentage of restaurant and other sales, increased to 2.8% in Q2 2020 compared to 1.9% in Q2 2019 and increased to 2.4% in 2020 YTD compared to 1.9% in 2019 YTD. These increases were due to the decrease in average unit volume along with higher rent expense, as a percentage of restaurant and other sales, at our newer restaurants. Restaurant Other Operating Expenses. Restaurant other operating expenses, as a percentage of restaurant and other sales, increased to 18.9% in Q2 2020 compared to 15.2% in Q2 2019 and increased to 17.3% in 2020 YTD compared to 15.0% in 2019 YTD. These increases were due to a decrease in average unit volumes and higher supplies expense, partially offset by lower laundry and linen expense. Higher supplies expense was due to an increase in To-Go supplies, personal protective equipment, and other costs to support our current hybrid operating model. In addition, due to the significant decrease in average unit volumes, expenses that are largely fixed including utilities, property taxes, and other outside services increased as a percentage of restaurant and other sales. Restaurant Pre-opening Expenses. Pre-opening expenses increased to$4.3 million in Q2 2020 from$4.2 million in Q2 2019 and increased to$9.4 million in 2020 YTD compared to$8.1 million in 2019 YTD. These increases were primarily due to the timing of restaurant openings as average pre-opening expenses incurred for each restaurant remained relatively unchanged. 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 6.1% in Q2 2020 compared to 4.1% in Q2 2019 and increased to 5.1% in 2020 YTD compared to 4.1% in 2019 YTD. These increases were primarily due to a decrease in average unit volume and higher depreciation at new restaurants. Impairment and Closure Costs, Net. Impairment and closure costs, net was($0.4) million in Q2 2020 and$0.2 million in 2020 YTD. For Q2 2020, impairment and closure costs, net includes a gain related to a favorable lease settlement for one underperforming restaurant that was closed inApril 2020 . For 2020 YTD, impairment and closure costs, net includes the impairment of the operating lease right-of-use assets for the underperforming restaurant that was closed inApril 2020 and one restaurant that was relocated during the period. General and Administrative Expenses. G&A, as a percentage of total revenue, increased to 6.2% in Q2 2020 compared to 5.8% in Q2 2019 and remained unchanged at 5.5% in 2020 YTD compared to 2019 YTD. The increase in Q2 2020 compared to Q2 2019 is primarily driven by a decrease in average unit volume and a legal settlement of$1.5 million , partially offset by lower managing partner conference costs due to the cancellation of the 2020 conference, lower salary and incentive compensation costs, and lower travel costs. In 2020 YTD compared to 2019 YTD, the decrease in average unit volume and the legal settlement were offset by lower managing partner conference costs, lower salary and incentive compensation expense, and lower travel costs. As a result of the pandemic, our executive and leadership teams voluntarily agreed to reductions of salary and bonus for all or part of the remainder of our fiscal year 2020. Also, each non-employee member of our Board of Directors has volunteered to forgo their director and committee fees and any cash retainers for the remainder of our fiscal year 2020. Interest Expense (Income), Net. Interest expense was$1.0 million in Q2 2020 compared to interest income of$0.7 million in Q2 2019. Interest expense was$1.1 million in 2020 YTD compared to interest income of$1.4 million in 2019 YTD. The increase in interest expense for both periods is primarily driven by additional borrowings on our credit facility along with reduced earnings on
our cash and cash equivalents.
Equity (Loss) Income from Unconsolidated Affiliates. Equity loss was$0.1 million in Q2 2020 compared to equity income of$0.1 million in Q2 2019. Equity loss was$0.6 million in 2020 YTD compared to equity income of$0.3 million in 2019 YTD. The decrease in 2020 YTD compared to 2019 YTD was due to an impairment charge recorded in Q1 2020 related to our investment in a foreign joint venture. 27 Table of Contents
Income Tax (Benefit) Expense. Our effective tax rate was a benefit of 31.2% in Q2 2020 compared to an expense of 13.7% in Q2 2019 and was a benefit of 51.4% in 2020 YTD compared to expense of 14.3% in 2019 YTD primarily due to the significant decrease in our pre-tax income. As a result, the impact of our FICA tip and Work opportunity tax credits had a more significant impact to our effective tax rate. Additionally, these credits exceeded our federal tax liability in Q2 2020 and 2020 YTD but we expect to utilize these credits in the current or future years or by carrying back to our 2019 tax year.
Liquidity and Capital Resources
The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities (in thousands):
26 Weeks EndedJune 30, 2020 June 25, 2019
Net cash provided by operating activities $ 61,845 $
187,016
Net cash used in investing activities (79,666)
(87,782)
Net cash provided by (used in) financing activities 192,435
(164,520)
Net increase (decrease) in cash and cash equivalents$ 174,614 $ (65,286) Net cash provided by operating activities was$61.8 million in 2020 YTD compared to$187.0 million in 2019 YTD. This decrease was primarily due to a decrease in net income. Typically, 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. As previously discussed, our restaurants temporarily closed their dining rooms due to the pandemic and, as of the end of the quarter, the majority of our restaurants have re-opened at limited capacity. We expect that our cash provided by operations will continue to be significantly below our historic levels until such time that our dining rooms can re-open at full capacity. Net cash used in investing activities was$79.7 million in 2020 YTD compared to$87.8 million in 2019 YTD. The decrease was primarily due to a decrease in capital expenditures partially offset by the proceeds received related to a sale leaseback transaction at one location. The decrease in capital expenditures was primarily due to decreased expenditures related to the remodel of our Support Center office and a delay in our development schedule due to the pandemic. This was partially offset by increased expenditures relating to the relocation of existing restaurants. In 2020 YTD, three restaurants have been relocated and one additional relocation is scheduled in late 2020. We require capital principally for the development of new company restaurants, the refurbishment or relocation of existing restaurants and the acquisition of franchise restaurants, if any. We either lease our restaurant site locations under operating leases for periods of five to 30 years (including renewal periods) or purchase the land when appropriate. As ofJune 30, 2020 , we had developed 147 of the 521 company restaurants on land in which we own. The following table presents a summary of capital expenditures (in thousands): 2020 YTD 2019 YTD New company restaurants$ 31,525 $ 36,502 Refurbishment of existing restaurants 28,077
27,621
Relocation of existing restaurants 14,746
9,557
Capital expenditures related to Support Center office 7,485 14,102 Total capital expenditures
$ 81,833 $ 87,782 At the onset of the pandemic, we delayed construction on all restaurants that were not substantially complete. As ofJune 30, 2020 , 14 restaurants, including one relocation site, had either resumed construction or were approved to resume 28 Table of Contents
construction. We currently expect as many as six of these restaurants will open in Q3 2020. To the extent that state and local guidelines begin to significantly reduce capacity and/or re-close dining rooms, we could pull back on development and reduce capital expenditure spend accordingly. Net cash provided by financing activities was$192.4 million in 2020 YTD compared to cash used in financing activities of$164.5 million in 2019 YTD. The increase is primarily due to increased borrowings under our revolving credit facility as well as a decrease in share repurchases and dividends paid. In light of the current uncertainty in the global markets resulting from the pandemic and notwithstanding our healthy cash balance previously described in our Annual Report on Form 10-K for fiscal year endedDecember 31, 2019 , inMarch 2020 we increased our borrowings by$190.0 million as a precautionary measure in order to bolster our cash position and enhance financial flexibility. OnMay 11, 2020 , we amended the revolving credit facility to increase the amount available under the facility by$82.5 million and drew down$50.0 million of the increased amount. The proceeds from these borrowings, which totaled$240.0 million , are being used for general corporate purposes, including, without limitation, working capital, capital expenditures in the ordinary course of business, or other lawful corporate purposes, all in accordance with and subject to the terms and conditions of the facility. If the pandemic continues to adversely impact our business for a significant period of time, we may need to further increase the credit facility and/or seek other sources of liquidity. There is no guarantee that we can increase the credit facility or that additional liquidity will be readily available or available at favorable terms. OnMay 31, 2019 , our Board of Directors approved a stock repurchase program under which we may repurchase up to$250.0 million of our common stock. This stock repurchase program has no expiration date and replaced a previous stock repurchase program which was approved onMay 22, 2014 . All repurchases to date under our stock repurchase programs have been made through open market transactions. The timing and the amount of any repurchases will be determined by management under parameters established by the Board of Directors, based on an evaluation of our stock price, market conditions and other corporate considerations. During 2020 YTD, we paid$12.6 million to repurchase 252,409 shares of our common stock. OnMarch 17, 2020 , we suspended all share repurchase activity. As ofJune 30, 2020 ,$147.8 million remains authorized for stock repurchases. We do not expect to resume the repurchase of shares until our cash flows from operations have stabilized. OnMarch 17, 2020 , our Board of Directors authorized the payment of a cash dividend of$0.36 per share of common stock. The payment of this dividend totaling$25.0 million was distributed onMarch 27, 2020 to shareholders of record at the close of business onMarch 11, 2020 . OnMarch 24, 2020 , the Board of Directors voted to suspend the payment of quarterly cash dividends of the Company's common stock, effective with respect to dividends occurring afterMarch 27, 2020 . We do not expect to resume the payment of cash dividends until our cash flows from operations have stabilized. We paid distributions of$1.8 million and$3.3 million to equity holders of all 20 majority-owned company restaurants in 2020 YTD and 2019 YTD, respectively. No distributions were paid in Q2 2020. OnAugust 7, 2017 , we entered into the Amended and Restated Credit Agreement (the "Amended Credit Agreement") with respect to our revolving credit facility with a syndicate of commercial lenders led byJPMorgan Chase Bank, N.A .,PNC Bank, N.A. , andWells Fargo Bank, N.A . The revolving credit facility remains an unsecured, revolving credit agreement under which we may borrow up to$200.0 million with the option to increase the revolving credit facility by an additional$200.0 million subject to certain limitations, including approval by the syndicate of lenders. OnMay 11, 2020 , we amended the revolving credit facility to provide for an incremental revolving credit facility of up to$82.5 million . This amount reduced the additional$200.0 million that was available under the revolving credit facility. The maturity date for the incremental revolving credit facility isMay 10, 2021 . The maturity date for the original revolving credit facility remainsAugust 5, 2022 . The terms of the amendment require us to pay interest on outstanding borrowings of the original revolving credit facility at LIBOR plus a margin of 1.50% and to pay a commitment fee of 0.25% per year on any unused portion of the revolving credit facility through the end of our Q1 2021 fiscal quarter. The amendment also provides an Alternate Base Rate that may be substituted for LIBOR. As ofJune 30, 2020 , we had$190.0 million outstanding on the original 29
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revolving credit facility and
The terms of the amendment also require us to pay interest on outstanding borrowings of the incremental revolving credit facility at LIBOR, which is subject to a floor of 1.0%, plus a margin of 2.25% and to pay a commitment fee of 0.50% per year on any unused portion of the incremental revolving credit facility through the maturity date. As ofJune 30, 2020 , we had$50.0 million outstanding and$32.5 million of availability on the incremental revolving credit facility. This outstanding amount is included as current maturities of long-term debt on our condensed consolidated balance sheet.
The weighted-average interest rate for the revolving credit facility as of
The lenders' obligation to extend credit pursuant to the Amended Credit Agreement depends on us maintaining certain financial covenants. The amendment to the revolving credit facility also modified the financial covenants through the end of our Q1 2021 fiscal quarter. We were in compliance with all financial covenants as ofJune 30, 2020 . Contractual Obligations
The following table summarizes the amount of payments due under specified
contractual obligations as of
Payments Due by Period Less than More than Total 1 year 1 - 3 Years 3 - 5 Years 5 years Long-term debt obligation$ 240,000 $ 50,000 $ 190,000 $ - $ - Obligation under finance lease 2,116 -
- - 2,116 Interest(1) 12,973 4,977 4,039 571 3,386 Operating lease obligations 1,018,189 54,071 110,946 110,465 742,707 Capital obligations 133,244 133,244 - - -
Total contractual obligations(2)
Includes interest on our revolving credit facility and interest on a finance
lease. Uses interest rates on our revolving credit facility as of
outstanding on our revolving credit facility through the respective maturity
date for all borrowings. We assumed a constant interest rate until maturity
on our finance lease.
(2) Unrecognized tax benefits under ASC 740, Income Taxes, are immaterial and
excluded from this amount.
We have no material minimum purchase commitments with our vendors that extend beyond a year. See note 6 to the unaudited condensed consolidated financial statements for a discussion of contractual obligations.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
30 Table of Contents Guarantees As ofJune 30, 2020 andDecember 31, 2019 , we are contingently liable for$13.5 million and$13.9 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 ofJune 30, 2020 andDecember 31, 2019 as the likelihood of default was deemed to be less than probable and the fair value of the guarantees is not considered significant. Lease Current Lease Assignment Date Term Expiration
October 2003 May 2029 Montgomeryville, Pennsylvania (1) October 2004 March 2021 Fargo, North Dakota (1) February 2006 July 2021 Logan, Utah (1) January 2009 August 2024 Irving, Texas (3) December 2013 December 2024 Louisville, Kentucky (3)(4) December 2013 November 2023
Real estate lease agreements for restaurant locations which we entered into (1) before granting franchise rights to those restaurants. We have subsequently
assigned the leases to the franchisees, but remain contingently liable under
the terms of the lease if the franchisee defaults.
(2) As discussed in note 7 to the unaudited condensed consolidated financial
statements, this restaurant is owned, in part, by our founder.
Leases associated with non-
the terms of the lease if the acquirer defaults.
(4) We may be released from liability after the initial contractual lease term
expiration contingent upon certain conditions being met by the acquirer.
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