RBC on Texas Roadhouse

8/12/2019 RBC on Texas Roadhouse

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EQUITYRESEARCH

RBC Capital Markets, LLC

David Palmer (Analyst)(212) [email protected]

Eric Gonzalez (Associate)(212) [email protected]

Jack Kindregan, CFA(Associate)(212) 618-7716

[email protected]

OutperformNASDAQ: TXRH; USD 25.17

Price Target USD 32.00

WHAT'S INSIDE

Rating/Risk Change Price Target Change

In-Depth Report Est. Change

Preview News Analysis

Scenario Analysis*

DownsideScenario

22.00

11%

CurrentPrice

25.17

PriceTarget

32.00

29%

UpsideScenario

40.00

61%

*Implied Total Returns

Key StatisticsShares O/S (MM): 71.1

Dividend: 0.48

Float (MM): 57.9

Debt to Cap: 40%

Market Cap (MM): 1,7

Yield: 1.9

Tr. 12 ROE: 12.00

3-Yr. Est. EPS Growth:

RBC EstimatesFY Dec 2012A 2013A 2014E 201

Revenue 1,263.3 1,422.6 1,569.7 1,719

Prev. 1,567.5 1,718

EPS, Ops Diluted 1.03 1.13 1.27 1.

Prev. 1.29 1.

P/E 24.4x 22.3x 19.8x 16.

Revenue Q1 Q2 Q3 Q

2013 359.7A 352.1A 334.8A 376.02014 397.1A 397.9E 379.9E 394.

Prev. 397.3E 379.4E 393.

2015 440.7E 434.6E 413.3E 431.

Prev. 429.

EPS, Ops Diluted

2013 0.37A 0.28A 0.24A 0.24

2014 0.37A 0.35E 0.03E 0.2

Prev. 0.37E 0.29E 0.2

2015 0.47E 0.41E 0.33E 0.3

Prev. 0.43E 0.34E 0.3All values in USD unless otherwise noted.

July 31, 2014

Texas Roadhouse, Inc.

Trimming EPS due to beef costs; Outperform

Our view: Ahead of earnings, we are trimming our 2014 and 2015 EPS

estimates to account for continued inflation in steak prices in 2Q14 and

into 2H14. However, we still believe Texas Roadhouse will maintain its SSS

growth gap to the industry with the possibility for additional traffic if it can

maintain its entry-point prices.

Key points:Trimming 2014 and 2015 EPS estimates: We are trimming our 2014

and 2015 EPS estimates from $1.29 and 1.55 to 1.27 (+13% YOY, $1.26

consensus) and 1.52 (+20% YOY, $1.48 consensus), respectively. Our 2Q

same-store-sales (SSS) growth estimate remains 3.2% (consensus 2.7%),

however our 2Q EPS estimate is now $0.35 to account for higher thanexpected steak prices impacting restaurant profitability. While our new

estimates reflect increased headwinds from steak prices in 2H14, we

continue to believe Texas Roadhouse will maintain its 350bp+ SSS growth

gap to the industry and realize outsize EPS growth in 2014 and, especially,

2015.

Steak forecasts revising higher:Texas Roadhouse is currently forecasting

low-single-digit food inflation. However, the ~5%-10% rise in steak price

inflation expectations (45% of food basket) in the last 3 months may push

that guidance higher. During our recent Let's Talk Food Costs conference

call, Kevin Good of Cattle Fax was calling for 10%-20% YOY inflation on

ribeye and sirloin prices in 2H14 (vs 5%-10% previously) due to ongoing

strong global demand.Texas Roadhouse has some cushion given the pricesit paid in 2013 were ~10pp higher than market prices, however inflation in

line with current expectations will likely limit the ability to leverage food

costs in 2014, depending on recent contracting from the company.

Modest labor inflation expected:We are forecasting 20 bp higher labor

costs as a percent of sales in 2014, with labor costs easing in 2015. In

1Q, labor costs increased 60bps as a percent of sales as a result of: 1)

reclassification of expenses from the other income expense line (~30

35bps negative impact); 2) ~1.5% wage inflation; 3) higher healthcare

costs; and 4) higher staffing associated with new unit openings. Excluding

expense reclassification, we assume modest labor deleverage as wage

inflation and healthcare costs are partially offset by sales leverage and

1.5pp of price.

Industry outperformance is sustainable, in our view:We believe Texas

Roadhouse can continue its track record of outperformance in an

otherwise struggling industry thanks to its: 1) unparalleled core steak

value; 2) strong manager compensation/incentives; 3) low employee

turnover; 3) strong corporate culture. These factors lead to high consumer

preference, strong average unit sales (2nd-best among major 200+ unit

chains at $4.2 million); and an ongoing unit growth opportunity (8%

annual growth for 20122014E).

Priced as of prior trading day's market close, EST (unless otherwise noted)For Required Conflicts Disclosures, see Page 5.


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ValuationOur $32 price target is based on two methods: 1) DCF analysis, which yields a $32 value based

upon an 8.2% WACC and a 2.5% terminal growth rate; and 2) comparable peer analysis versus

a group of sustaining double-digit earnings growers. Our target equates to 21x our 2015E EPSestimate of $1.52. Our estimates are modestly above consensus and imply 13% and 20% EPS

growth in 2014E and 2015E, respectively. Our mid-teens long-term EPS growth estimate is

driven by 68% annual unit growth, and 33.5% SSS growth long term.

Price target impedimentsSlowing economic activity:Restaurant meal occasions are highly discretionary in nature. Thus,

Texas Roadhouses customers may be influenced by various macroeconomic factors (domestic

and international), including employment, gas prices, personal savings, discretionary income,

housing, consumer confidence, etc.

Food safety and quality:Texas Roadhouse spends a significant portion of its limited marketing

budget promoting the companys made-from-scratch food and hand-cut steaks. As such, any

challenge to the perception of quality might cause immeasurable harm to the companys

reputation and value.

Food and labor inflation:While Texas Roadhouse has the majority of its food costs locked in for

the current fiscal year, a rapid increase in the price of key commodities would affect the future

earnings growth. The company is exposed to beef pricing, in particular, as it represent 45% of

food costs. Wage increaseswhether from statutory minimum wage increases or voluntary

would affect store-level profitability.

Competitor menu and marketing moves:Texas Roadhouses leading price point on key menu

items is a sustainable driver of traffic. Significant promotional pricing by competitors could

erode this price gap and lead to Texas Roadhouse losing customers to its competition.

Company descriptionTexas Roadhouse, Inc. operates a chain of casual-dining restaurants under the Texas

Roadhouse and Aspen Creek names. The Texas Roadhouse chain offers a variety of hand-cut

steaks, fall-off-the-bone ribs, made-from-scratch sides, and fresh-baked bread. The company

was founded in 1993 by current Chairman and Chief Executive Officer W. Kent Taylor and is

headquartered in Louisville, KY. There are currently over 400 locations in 48 states and two

foreign territories. Franchise partners operate 72 of the locations, with the balance being

company owned.


July 31, 2014 David Palmer (212) 905-5998; [email protected] 3


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Texas Roadhouse, Inc. Target $1.03 $ 0.37 $0.28 $0.24 $0.24 $1.13 $0.37 $0.35 $0.28 $0.26 $1. 27 $1. 52

Income Statement Actual $1.03 $ 0.37 $0.28 $0.24 $0.24 $1.13 $0.37 $0.35 $0.28 $0.26 $1. 27 $1. 52

David Palmer R oun ded $ 1.03 $ 0.37 $0.28 $0.24 $0.24 $1.13 $0.37 $0.35 $0.28 $0.26 $1. 27 $1. 52

RBC Capital Markets

Currently Running: Base Case

(Figures in $MM, except per-share data. Fiscal year ends Dec.)

2011 2012 1Q13 2Q13 3Q13 4Q13 2013 1Q14 2Q14E 3Q14E 4Q14E 2014E 2015E

2011 2012 Mar-13 Jun-13 Sep-13 Dec-13 2013 Mar-14 Jun-14 S ep-14 Dec-14 2014 2015

Revenues

Restaurant Sales $1,099.5 $1,252.4 $3 56 .6 $ 34 8.9 $ 33 1. 7 $3 72. 9 $1,410.1 $394.0 $394.7 $376.5 $391.0 $1,556.1 $1,704.7

YOY Change 10.4% 13.9% 10.7% 9.9% 8.4% 21.5% 12.6% 10.5% 13.1% 13.5% 4 .9% 10.4% 9.5%

Franchise Royalties & Fees $9.8 $11.0 3.1 3.2 3.0 3.1 $12.5 3.2 3.2 3.4 3.7 $13.6 $15.1

YOY Change 8.3% 12.5% 8.9% 16.9% 14.9% 14.0% 13.6% 2.4% 1.6% 1 3.0% 18.5% 8.8% 11.2%

To tal revenu es $1,109.2 $1,263.3 $359.7 $352.1 $334.8 $376.0 $1,422.6 $397.1 $397.9 $379.9 $394.7 $1,569.7 $1,719.8

YOY Change 10.4% 13.9% 10.7% 9.9% 8.5% 21.5% 12.6% 10.4% 13.0% 13.5% 5 .0% 10.3% 9.6%

Cost and expenses

Costs of Sales (Food) $367.4 $423.6 124.6 120.2 116.6 131.0 $492.3 134.8 137.8 133.5 138.6 $544.7 $599.4

YOY Change 13.3% 15.3% 13.6% 12.5% 13.3% 25.7% 16.2% 8.2% 14.6% 14.5% 5.9% 10.6% 10.0%

% of Company Restaurant Sales 33.4% 33.8% 34.9% 34.5% 35.1% 35.1% 34.9% 34.2% 34.9% 35.4% 35.5% 35.0% 35.2%

Margin Change 86bp 41bp 88bp 80bp 150bp 117bp 109bp -71bp 46bp 31bp 33bp 9bp 16bp

Gross Profit $732.1 $828.7 232.0 228.7 215.2 241.9 $917.8 259.1 256.9 243.0 2 52.3 $1,011.4 $1,105.3

YOY Change 9.0% 13.2% 9.3% 8.6% 5.9% 19.4% 10.7% 11.7% 12.3% 12.9% 4.3% 10.2% 9.3%


Margin Change -86bp -41bp -88bp -80bp -150bp -117bp -109bp 71bp -46bp -31bp -33bp -9bp -16bp

Labor $326.2 $367.8 101.7 101.7 99.0 109.0 $411.4 114.7 115.1 112.7 114.5 $456.9 $495.6

YOY Change 11.3% 12.7% 8.9% 9.1% 8.2% 21.6% 11.9% 12.8% 13.2% 13.8% 5.0% 11.1% 8.5%


Margin Change 25bp -31bp -48bp -21bp -6bp 0bp -19bp 60bp 2bp 8bp 4bp 19bp -29bp

R ent $23.2 $25.8 7.1 7.2 7.2 7.6 $29.0 8.0 8.1 8.2 8.5 $32.9 $35.0

YOY Change 8.4% 11.4% 12.9% 12.1% 10.7% 13.6% 12.3% 14.0% 13.7% 14.3% 12.5% 13.6% 6.3%


Margin Change -4bp -5bp 4bp 4bp 4bp -14bp 0bp 6bp 1bp 2bp 15bp 6bp -6bp

Other Operating $184.1 $204.3 55.8 55.0 51.9 62.2 $224.9 60.9 59.5 57.7 62.4 $240.5 $259.6

YOY Change 6.5% 11.0% 8.9% 8.8% 3.5% 18.7% 10.1% 9.1% 8.2% 11.0% 0.4% 6.9% 7.9%


Margin Change -62bp -43bp -27bp -16bp -74bp -39bp -37bp -20bp -68bp - 34bp - 70bp -49bp -23bp

To tal Restau rant Co sts $900.8 $1,021.5 $289.0 $284.1 $274.7 $309.7 $1,157.6 $318.4 $320.5 $312.0 $324.1 $1,275.0 $1,389.5

YOY Change 11.0% 13.4% 11.0% 10.5% 9.4% 22.5% 13.3% 10.1% 12.8% 13.6% 4.6% 10.1% 9.0%

Company Restaurant Margin $198.6 $230.9 $67.5 $64.9 $57.0 $63.1 $252.6 $75.6 $74.1 $64.5 $66.9 $281.1 $315.1

YOY Change 7.7% 16.2% 9.7% 7.2% 3.9% 17.1% 9.4% 11.9% 14.3% 13.0% 5.9% 11.3% 12.1%


Margin Change -45bp 37bp -17bp -47bp -75bp -64bp -52bp 25bp 19bp -7bp 17bp 15bp 42bp

Pre-Opening Expense $11.5 $12.4 2.8 4.2 4.7 6.1 $17.9 4.3 4.6 5.2 6.0 $20.1 $22.7

YOY Change 63.6% 7.5% (21.2%) 52.5% 93.1% 70.1% 44.3% 51.5% 9.3% 9.9% (1.7%) 12.4% 12.7%

% of Total Revenues 1.0% 1.0% 0.8% 1.2% 1.4% 1.6% 1.3% 1.1% 1.2% 1.4% 1.5% 1.3% 1.3%

Margin Change 34bp -6bp -32bp 34bp 62bp 46bp 28bp 29bp -4bp -4bp -10bp 2bp 4bp

Depr eciation & Amortization $42.7 $46.7 12.2 12.2 12.5 14.7 $51.6 14.1 1 3.3 13.5 14.5 $55.3 $58.6

YOY Change 3.5% 9.4% 7.6% 5.6% 5.4% 22.5% 10.4% 15.3% 8.8% 8.6% ( 1.7%) 7.3% 5.9%


Margin Change -26bp -15bp -10bp -14bp -11bp 3bp -7bp 15bp -13bp -16bp -25bp -10bp -12bp

Impairment & Closure $1.2 $1.6 0.1 0.0 0.1 0.2 $0.4 0.0 0.0 0.1 0.2 $0.4 $0.5

YOY Change (40.1%) 35.2% 200.0% 35.0% 329.2% (86.4%) (75.4%) (70.2%) 1 4.8% 1 5.4% 1 4.7% 2.8% 12.5%


Margin Change -9bp 2bp 1bp 0bp 2bp -45bp -10bp -1bp 0bp 0bp 1bp 0bp 0bp

General & Administrative $57.7 $65.6 17.4 21.8 17.1 19.2 $75.5 20.2 2 2.6 19.2 21.4 $83.5 $89.2

YOY Change 9.9% 13.8% 15.5% 23.4% 10.0% 10.3% 15.0% 16.3% 3.9% 12.7% 11.5% 10.7% 6.9%


Margin Change -2bp -1bp 20bp 68bp 7bp -52bp 11bp 26bp -50bp -4bp 32bp 2bp -13bp

To tal Co st s & E xp en ses $ 1, 014 .0 $1 ,1 47. 9 $ 321 .5 $ 32 2.3 $ 30 9. 1 $3 50. 0 $1 ,3 02. 9 $ 35 7. 0 $3 61. 1 $ 35 0. 1 $ 366 .2 $1 ,43 4. 4 $ 1, 56 0.5

YOY Change 10.9% 13.2% 10.7% 11.5% 10.0% 21.7% 13.5% 11.0% 12.0% 13.3% 4.6% 10.1% 8.8%

Operating Profit (EBIT) $95.2 $115.5 $38.168 $29.8 $25.7 $26.1 $119.7 $40.184 $36.8 $29.8 $28.5 $135.3 $159.3

YOY Change 5.1% 21.2% 10.9% (4.6%) (7.3%) 18.0% 3.7% 5.3% 23.5% 16.0% 9.4% 13.0% 17.7%


Margin Change -43bp 55bp 2bp -129bp -131bp -20bp -72bp -49bp 78bp 17bp 29bp 20bp 64bp

Interest (income) expense $2.4 $2.3 0.60 0.57 0.53 0.51 $2.2 0.56 0.6 0.6 0.6 $2.2 $2.3

% of Avg. total debt 4.4% 4.5% 4.6% 4.4% 4.1% 4.0% 4.3% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4%

E quity I ncome f rom uncons aff il iates $0. 4 $0. 4 0.18 0.22 0.17 0.14 $0.7 0 .21 0.1 0.1 0.1 $0.5 $0.4

Pre-tax income $92.5 $112.7 37.8 29.4 25.3 25.7 $118.2 39.8 36.3 29.3 28.0 $133.5 $157.4

Income taxes $26.8 $36.6 10.5 8.6 7.5 7.5 $34.1 12.2 10.9 8.8 8.4 $40.3 $48.0

Tax Rate 28.9% 32.5% 27.9% 29.1% 29.6% 29.3% 28.9% 30.7% 30.0% 30. 0% 30. 0% 30. 2% 3 0. 5%

Net Income Incl Noncontrolling Interests $65.7 $76.0 $27.2 $20.9 $17.8 $18.2 $84.1 $27.6 $25.4 $20.5 $19.6 $93.2 $109.4

Minority interest $2.5 $2.6 1.0 0.9 0.7 1.0 $3.7 1.1 0.9 0.7 1.0 $3.8 $2.4

Net Income from Operations $63.2 $73.4 $26.2 $20.0 $17.2 $17.1 $80.42 $26.5 $24.5 $19.9 $18.6 $89.4 $107.0

YOY Change 10.1% 16.1% 19.6% (0.5%) (3.5%) 25.2% 9.5% 1.1% 22.9% 15.7% 8.5% 11.2% 19.6%

Nonrecurring (gain) loss 0.0 3.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

GAAP Net Income $63.2 $70.3 $26.2 $20.0 $17.2 $17.1 $80.4 $26.5 $24.5 $19.9 $18.6 $89.4 $107.0

5.2%

Earnings Per Share

Reported $0.87 $0.98 $0.37 $0.28 $0.24 $0.24 $1.13 $0.37 $0.35 $0.28 $0.26 $1.27 $1.52

Nonrecurring (gain) loss $0.00 $0.04 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Continuing operations $0.87 $1.03 $0.37 $0.28 $0.24 $0.24 $1.13 $0.37 $0.35 $0.28 $0.26 $1.27 $1.52

YOY Change 11.1% 17.4% 20.0% (0.1%) (3.0%) 24.7% 9.8% 0.4% 24.6% 17.9% 10.9% 12.5% 19.6%

Wt'd. avg. diluted shrs. (Mil.) 72.3 71.5 70.6 71.3 71.6 71.8 71.3 71.1 7 0.28 70.28 70.28 70.5 70.5

Source: Company Data and RBC Capital Markets estimates




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The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including

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Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in,

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29th Floor, South Tower, Toronto, Ontario M5J 2W7.

RBC Capital Markets, LLC makes a market in the securities of Texas Roadhouse, Inc..

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than

investment banking services from Texas Roadhouse, Inc. during the past 12 months. During this time, a member company of RBC

Capital Markets or one of its affiliates provided non-investment banking securities-related services to Texas Roadhouse, Inc..

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than

investment banking services from Texas Roadhouse, Inc. during the past 12 months. During this time, a member company of RBC

Capital Markets or one of its affiliates provided non-securities services to Texas Roadhouse, Inc..

RBC Capital Markets is currently providing Texas Roadhouse, Inc. with non-securities services.

RBC Capital Markets has provided Texas Roadhouse, Inc. with non-investment banking securities-related services in the past 12

months.

RBC Capital Markets has provided Texas Roadhouse, Inc. with non-securities services in the past 12 months.

The author is employed by RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in New York, USA.

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RBC Capital Markets, Equity Research

As of 30-Jun-2014

Investment Banking

Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [Top Pick & Outperform] 845 53.24 299 35.38

HOLD [Sector Perform] 658 41.46 159 24.16

SELL [Underperform] 84 5.29 10 11.90

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