Texas Roadhouse is an All-American restaurant Specializing in ribs, chicken, steak, and seafood. Popular for its “Legendary Food, Legendary Service,” the restaurant has become a popular favorite bringing fine cuisine, reasonable prices and excellent value at the disposal of the typical American. Founded in 1993 by Mr. Kent Taylor, Texas Roadhouse is now worth just under $1.2 billion.
Located in 46 states, Texas Roadhouse currently has 345 restaurants with plans of opening a total of 11 new restaurants in 2011. The company's direct competitors are Brinker International Inc. and Darden Restaurants Inc.
Texas Roadhouse, Inc. currently has 274 restaurants located in 43 states, as well as providing licensing and franchising rights to 71 locations in 24 states. Of the 274 restaurants wholly owned and operated by Texas Roadhouse, Inc., only three had a restaurant name that differed from Texas Roadhouse (all were named Aspen Creek). Future expansion is expected to come from within the corporation, with naming rights as Texas Roadhouse for all future locations.
Focus on Dinner: Texas Roadhouse, Inc. focuses much of their business segmentation strategy on that of providing service, namely dining services for their largely walk-in clientele. Within the constraint of being an eating establishment for consumers, a large percentage of locations limit their operations to that of the "dinner rush" during the weekdays. This practice is used in order to provide management and employees with a better work/life balance during the week, as well as allowing for a more specific area of emphasis among the employees when working during the week. The main purpose for this strategy is to provide a higher quality finished product with amicable service to clients, all while attempting to maintain competitiveness with other service chains.
"Attractive" Pricing Model: Texas Roadhouse, Inc. offers food and beverages at price points that are as low as or lower than those offered by many of our competitors. Within each menu category, it offers a choice of several price points with the goal of fulfilling each guest's budget and value expectations. For example, steak entrées, which include the choice of two side items, generally range from $8.99 for the 6-ounce sirloin to $20.99 for the 18-ounce T-bone. The per guest average check for the restaurants owned and operated in 2010 was approximately $14.63. Per guest average check represents restaurant sales divided by the number of guests served. Many of the averages found take into account that only figures from dinner are used.
Atmosphere: Another key point in the brand of Texas Roadhouse, Inc. is the atmosphere provided to customers. In order to better serve clientele and provide for the most relaxing and enjoyable experience possible, an attempt is made at each corporate owned and franchised location to provide a rustic southwestern lodge décor accentuated with hand-painted murals, neon signs, and southwestern prints, rugs and artifacts. In addition, an emphasis is placed on a country-type atmosphere, with music almost exclusively devoted to the genre, as well as in house entertainment entailing dancing and private parties.
Texas Roadhouse, Inc (TXRH) is sustained largely on restaurant sales of food and beverages, and uses these proceeds as the main source of their revenue. In 2010, restaurant sales represented 99.1% of total revenue ($995,988,000 of $1,004,993 was attributed to the sale of food and beverages within each restaurant location). The remaining 0.9% of revenue was allocated to the receipts of franchise royalties and fees associated with the 71 locations that were not owned by TXRH during 2010.
After carefully examining the Cash Flow Statement for Texas Roadhouse, Inc., it was concluded that the information provided was relatively normal for a company of similar size and stature to that of TXRH. The following is a brief overview of the increase or decrease and direction of significant cash flows for Texas Roadhouse, Inc. during 2010:
A large percentage in the change of operating cash flow was due to depreciation and amortization of long term assets held by the corporation, which is typical of many different types of companies within many industries. This increase in cash flow is used to offset the increases in expenses caused by depreciation throughout the fiscal year. It is assumed that the indirect method of determining cash flows is used (using fiscal year net income as a base to determine operating cash flow), so it is necessary to "add back" the depreciation and amortization costs to more accurately reflect a value for cash flow from operations that is useful to external users. Some of the other major sources of cash inflows for Texas Roadhouse, Inc. included deferred revenues by way of gift cards and certificates (inflow of $4,722,000), share-based compensation expenses (inflow of $7,686,000), and prepaid income taxes and income taxes payable (outflow of $3,212,000). Overall, there was not any value included that provides significant cause for doubt about the cash flow from operations of TXRH.
As is typical with many other companies, a large portion of Texas Roadhouse, Inc.'s cash flow related to financing was attributed to the repayment of loans. Although a large portion of its' assets are financed by equity, the remaining portion of assets not yet paid off or still owed is included in the Financing section of the statement of cash flows. In 2010, TXRH had an outflow of $49,000,000 related to the repayment of principal loans from the revolving credit facilities. This can be viewed in a positive light, however, as it reflects the ability of TXRH to pay off debts to creditors, proving a strong base of liquidity within the company's total asset base. The largest inflow from this section of the Statement of Cash Flows is derived from the exercise of stock options provided to investors who held capital in the company.
The "Investing" section of Texas Roadhouse, Inc.'s statement of cash flows is the most sparse, but provides insight into the direction of the company. During 2010, TXRH had a cash outflow of $45,051,000 related to capital expenditures related to property and equipment. This value reflects improvements made to existing property and equipment that is not common in nature, but improves the quality or life of the underlying asset. This number reflects a strong commitment from the management of Texas Roadhouse, Inc. to provide up to date property and equipment design to better serve the customers and clients that they provide services to. Such a large outflow towards this purpose was not uncommon for TXRH, as the two previous years brought with them equal or greater outflows in the section in order to continually improve the overall product TXRH provides to the consumer.
TXRH is a U.S.-based company engaged in operating full service, moderately priced and casual dining restaurant chain. The company is principally engaged in the operation, management and franchising of restaurants in the US. It owns and operates 261 restaurants in 43 states across the country. The company also licensed and franchised an additional 70 restaurants in 24 states. The restaurant operated under the brand name Texas Roadhouse and Aspen Creek. Key menu items represent traditional American cuisine.
TXRH’s greatest strength can be considered the American family values it strives to maintain in all of its restaurants. It is not a tangible strength such as money or brick-and-mortar locations, but the experience customers, especially families, enjoy when they choose to dine at TXRH. The company has a strong foothold in the U.S. Another of its greatest strengths is its strong focus on quality. The restaurant strives to have the best quality of ingredients by having fresh meat, fresh vegetables to provide a home-styled, quality, American meal. Their slogan for both service and food is “Legendary Food, Legendary Service.” This unique trait helps differentiate TXRH from classic, American restaurants such as Applebee’s and Chili’s and gives its customers an experience it cannot get anywhere else.
Texas Roadhouse has two noticeable weaknesses relating to its limited liquidity position and a decentralized supply chain. Many of the restaurants and regional franchises all buy their main ingredients from various suppliers.
Texas Roadhouse can create a supply chain with all their franchises buy from one central supplier. Due to the economies of scale, prices will go down drastically by the bulk orders. Also due to the American public’s growing demand for better quality in terms of both service and food, Texas Roadhouse with their slogan “Legendary Food, Legendary Service”, will be able to increase their customer with growing exposure.
TXRH has one major threat and that is the intense amounts of competition the restaurant franchise faces from other companies in the industry. The company has growing competition from companies such as Roadhouse Grill, Buffalo Wild Wings, and California Pizza Kitchen. Each of the aforementioned companies has their own unique characteristics in terms of food and perspective on service. All three companies, however, believe in the quality of their menu. TXRH will have to continue to stand out to maintain its position as a forerunner among its competitors.
Porter’s Five Forces
High: The restaurant industry is intensely competitive and TXRH competes with many well-established food service companies on the basis of taste, quality and price of products offered, guest service, atmosphere, location and overall guest experience. Competitors include a large and diverse group of restaurant chains and individual restaurants that range from independent, local operators that have opened restaurants in various markets to well-capitalized national restaurant companies. Many of the competitors or potential competitors have substantially greater financial and other resources than TXRH does, which allows them to react to changes in pricing, marketing and the casual dining segment of the restaurant industry better than TXRH. As competitors expand their operations, competition should intensify. There is also competition with other restaurant chains and other retail businesses for quality site locations and hourly employees.
Medium/High: TXRH’s success depends upon the popularity of their food products. Shifts in consumer preferences away from our restaurants or cuisine, particularly beef, would harm the business. Also, success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, TXRH may experience declines in sales during economic downturns or during periods of uncertainty. Any material decline in the amount of discretionary spending could have a material adverse effect on our business, results of operations, financial condition or liquidity.
Low:Markets may have different competitive conditions, consumer tastes and discretionary spending patterns than companies existing markets, which may cause new restaurants to be less successful than restaurants in existing markets. An additional risk of expanding into new markets is the lack of market awareness of new brands. Restaurants opened in new markets may open at lower average weekly sales volumes than restaurants opened in existing markets and may have higher restaurant-level operating expense ratios than in existing markets. Sales at restaurants opened in new markets may take longer to reach average unit volumes, if at all, thereby affecting our overall profitability. Though it is fairly easy to enter the restaurant industry, it is very difficult to create a successful franchise.
Medium: Food service businesses can be adversely affected by litigation and complaints from guests, consumer groups or government authorities resulting from food quality, illness, injury or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants. Adverse publicity about these allegations may negatively affect TXRH, regardless of whether the allegations are true, by discouraging guests from eating at the restaurants. Like other restaurant chains, consumer preferences could be affected by health concerns about the consumption of beef, the key ingredient in many of the menu items, or negative publicity concerning food quality, illness and injury in general. In recent years there has been negative publicity concerning e-coli, hepatitis A, "mad cow," "foot-and-mouth" disease and "bird flu." The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their guests, resulting in legislation in some jurisdictions which require nutritional information to be disclosed to guests. Nutritional labeling could be enacted in many additional states, counties or cities as well as on a federal level. Nutritional labeling requirements and negative publicity concerning any of the food products TXRH serve, may adversely affect demand for our food and could result in a decrease in guest traffic to our restaurants. If we react to the labeling requirements or negative publicity by changing the concept or menu offerings or their ingredients, TXRH may lose guests who do not prefer the new concept or products. In addition, TXRH may have different or additional competitors for intended guests as a result of a change in their concept and may not be able to compete successfully against those competitors. A decrease in guest traffic to our restaurants as a result of these health concerns or negative publicity or as a result of a change in our menu or concept could materially harm to their business.
Low: TXRH’s profitability depends in part on the ability to anticipate and react to changes in food and supply costs. Any increase in food prices, particularly proteins, could adversely affect operating results. In addition, TXRH are susceptible to increases in food costs as a result of factors beyond their control, such as weather conditions, food safety concerns, product recalls, global market and trade conditions, and government regulations. TXRH cannot predict whether they will be able to anticipate and react to changing food costs by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect operating results. In addition, because TXRH provides a moderately priced product, they may not seek to or be able to pass along price increases to their guests. TXRH currently purchases the majority of their beef from four of the largest beef suppliers in the country under annual contracts. While they maintain relationships with additional suppliers, if any of the vendors were unable to fulfill its obligations under its contracts, TXRH could encounter supply shortages and incur higher costs to secure adequate supplies, either of which would harm their businesses.
Texas Roadhouse uses several marketing strategies but their goal is simple. Attract new customers and keep the old ones coming back. Naturally raising profits, this makes room for the company to grow and open new restaurants. The company’s marketing efforts focus on promoting exceptional food quality, experience and value. All the while maintaining a local area focus.
In order to effectively market the Texas Roadhouse brand, various techniques are used to spread the message of their “Legendary Food, Legendary Service.” The most effective and also the most commonly used in this chain of restaurants is their in-restaurant marketing. A great portion of the company’s marketing budget goes towards training employees how to interact with the customers and how to market the company through the point of purchase. Also, they run seasonal promotions throughout the year in hopes of repeat business. Two of their most popular are their Mother’s Day and Valentine’s Day promotions. Gift cards are also used as a promotional tool. Texas Roadhouse offers these cards to customers, offering price-cuts on their meals as an incentive for buying. Lastly, for the kids, is their mascot “Andy Armadillo” providing a friendly and easily recognizable face.
Texas Roadhouse is all about giving back to the community. So they effectively market themselves when giving charitable donations to their local communities. Aside from doing local charity work, they make sure to give out free food to local businesses when a newly competing restaurant opens in the area to keep their piece of the market. Also, Texas Roadhouse encourages managing partners to promote their “Legendary Food, Legendary Service” as much as possible through local television and/or radio shows.
Texas Roadhouse usually does not spend a lot of money on advertising. However, in recent years the company has shifted their marketing budget to allow for more. One example is partnering with online search engines, which has effectively increased their web traffic by 40%. Also, they have partnered with Knotice, a direct viral marketing company that utilizes various marketing techniques through email, web, and mobile platforms. The rest of the money goes towards billboards, radio and TV commercials. Most designed to promote the Texas Roadhouse experience and the message: “Legendary Food, Legendary Service.”
Texas Roadhouse’s philosophy is to continuously supply fresh and high-quality products to its restaurants at reasonable and competitive prices while maintaining the operating efficiencies. Texas Roadhouse directly negotiates with its suppliers to ensure the quality of products and obtain competitive prices. Since there are 345 restaurants in 43 different states, Texas Roadhouse purchase certain products such as dairy products from selected local producers.
Each restaurant is responsible for ordering and the products are delivered directly to the restaurant. Texas Roadhouse does not have a central warehouse. Most products are ordered and delivered individually by independent national distribution companies such as Tyson Foods and Smithfield Foods. Texas Roadhouse has more than 1 supplier for most categories of products to protect itself from supply shortages.
Texas Roadhouse (Ticker: TXRH) has been a sustained casual dining-in restaurant. The financials that correspond to their sector shows their stability. The industry is similar in certain financial metrics to indicate Texas Roadhouse's stability. Some key financial statistics to note which show the strengths of the company in comparison to the industry are the gross margin (TXRH: 67.73%, Industry: 24.87%),operating margin (TXRH: 9.02%, Industry: 5.1%) , and return on equity (TXRH: 12.71%, Industry: 5.78%). However, there are statistics of the corporation that are sub-par compared to the industry. Financials which Texas Roadhouse falter in are price-to-earnings ratio (TXRH: 21.16, Industry: 11.04) and quarterly revenue growth (TXRH: 7.6%, Industry: 16.30%). These financials indicate that Texas Roadhouse has maintained a positive business model, but have not succeeded in implementing a strategy that could push their company growth above the industry average.
Comparing Texas Roadhouse within itself over the past couple of years, their revenue has grown from $880.461 million to $942.331 million to finally breaking the billion dollar barrier with $1.004 billion. Furthermore, they have increased their property, plant and equipment by implementing the costs of $458.983 million from previous $456.281 million. These costs indicate that they have expanded in franchising more restaurants to further develop their growth as an organization.
Texas Roadhouse's valuation is analyzed based on the growth of the company in comparison to the market "efficient" price at the time in the market. A number of ratios show whether Texas Roadhouse's price is a proper indication of the value using their financial statements.
Based on the ratios, Texas Roadhouse seems to maintain a solid base of price in comparison to the financial statement analysis. Over the course of five years, the biggest down year is shown by the weakest numbers (lowest Price/Sales, lowest Price/Earnings, and the incapability of calculating Price/Free Cash Flow) which trended to be the fiscal year of 2008. Although there is relatively poor performance by Texas Roadhouse, it is fair to note that during that same fiscal year the financial crisis occurred. Therefore, the market trends are quite similar to the Texas Roadhouse fluctuations.
Solvency ratios indicate Texas Roadhouse's financial strength to manage their debt compared to assets they have. Initially, debt is used to build a foundation for a company such as Texas Roadhouse, with food inventories and property leases. The analysis of solvency and leverage exemplifies the capability of Texas Roadhouse in financing their debt through the equity that they receive over the course of their business history.
The ratios indicate that debt seemed to increase after the primary "down" year in fiscal year 2008. Texas Roadhouse needed debt to absorb their losses in order to create equity for the future years. Texas Roadhouse also had maintained a significant amount of long term debt to maintain financial structure and balance in their business model. Although it is generally a negative sign for a company to implement debt as a method of financing, it is necessary during start-up periods and periods of drastic recessions in order to move forward and develop growth in the business.
Texas Roadhouse needs a solid liquidity base. These following ratios analyze the ability of Texas Roadhouse to convert their assets to cash for spending purposes. These ratios show how quickly a company can overcome random expenses during their business years. Since Texas Roadhouse is in a catering/restaurant sector, they experience different expenses that cause the corporation to quickly turn certain assets to cash in order to fulfill their obligations.
Texas Roadhouse's liquidity has significantly improved over the past three years. Since their money was tied to debt, they could not manage to sufficiently liquidate their assets for cash. During the fiscal year of 2009, they had established the largest long-term debt in turn gave the inability to generate cash for liability purposes. But recently, their Current ratio has gone over the magical "1" number. This indicates that Texas Roadhouse is now capable of liquidating their assets to hedge against the possibility of having to pay off all of their liabilities.
Texas Roadhouse needs to generate a profit in order to sustain as a business. In the restaurant business, the resell of food products comes at a cost of creating various combinations and providing a specific taste that entices the customer to come back. These ratios will look into their capabilities of proper pricing structure in order to efficiently make back more than what they put in.
Texas Roadhouse has shown that they can implement a business model which generates profits. Maintaining solid margins compared to it's sector average implies that Texas Roadhouse has a successful business model. Another key issue is Texas Roadhouse's capability of investing their capital in appropriate areas to provide an effective return, which they have been growing in over the past three years, post recession. These positive signs indicate a brighter future, as the restaurant sector had been affected by the recession. Texas Roadhouse has performed well under difficult circumstances and looks to take advantage of a hopeful bull market.
Overall, Texas Roadhouse manages to sustain their business above the industry average. They enable themselves more leverage by managing their debt more efficiently by having higher earnings in comparison to interest and debt expenses. Texas Roadhouse maintains a financial balance by leveraging their assets to protect themselves from unbearable liabilities. Although, Texas Roadhouse does not have the most profitable business model, they are efficient in handling margins and maintain lower debt balances.
The founder, W. Kent Taylor is currently Chairman of Texas Roadhouse. From 2000 to the initial public offering in 2004, he performed as Chief Executive Officer. Prior to launching the Texas Roadhouse restaurant chain, Mr. Taylor co-owned Buckhead Bar and Grill in Louisville, Kentucky.
Gerard Johan Hart has many years of experience in the food industry. Mr. Hart served as President of Trifoods International, Inc. from 1991 to 1995. Mr. Hart later joined Al Copeland Investments in Metairie, Louisiana as President until 2000. Al Copeland was a privately held company which operates restaurants, hotels, a food processing company and comedy clubs. In 2000, Mr. Hart took the President position at Texas Roadhouse and he became Chief Executive Officer in 2004.
Prior to his employment at Texas Roadhouse, Steven L. Ortiz worked at Bennigan’s Restaurants as General Manager, Area Director and Regional Vice president from 1982 to 1996. Mr. Ortiz joined Texas Roadhouse in 1996 as a Market Partner who was in charge of starting new Texas Roadhouse restaurants in Texas. Mr. Ortiz served as Executive Vice President of Operations since 2001 and became Chief Operating Officer in 2004 after the initial public offering.
Scott M. Colosi was employed by YUM! Brands, Inc. who owned KFC, Pizza Hut and Taco Bell brands as different financial positions from 1992 to 2002. After joining Texas Roadhouse, he served as Director of Investor Relations and Chief Financial Officer.
Sheila C. Brown was Development Coordinator and was in charge of real estate development activities from 1998 to 2000. Mr. Brown served as Director of Property Acquisition from 2000 to 2001 and was named General Counsel and Secretary in November 2001.
James R. Ramsey currently is president of the University of Louisville. Mr. Ramsey has many notable academic positions before becoming president. Mr. Ramsey served as vice chancellor for finance and administration at both the University of North Carolina at Chapel Hill and Western Kentucky University. He has been associate dean, assistant dean and director of public administration in the College of Business Administration at Loyola University and has been a senior professor of economics and public policy at University of Louisville since 1999. Also, Mr. Ramsey held many positions in state government such as interim commissioner of the office of the New Economy and special advisor to the chairman of the Kentucky Council on Post-secondary Education.
James R. Zarley was Chief Executive officer of an information services company, Quantech Investments, from 1987 to 1996. From 1996 to 1998, Mr. Zarley was the Chairman and Chief Executive Officer of Best Internet and became Chief Operating Officer of Hiway Technologies when the two companies merged until 1999. Mr. Zarley joined ValueClick Inc.. an online advertising company in 1999 as Chief Executive Officer and now is the Executive Chairman of the Board of Directors of ValueClick, Inc.
Martin T. Hart is a private investor from Denver, Colorado. He has rich experience in operating businesses and has successfully managed them. He has been on the Board of Directors for numerous private and public companies including ValueClick, Inc.
James F. Parker was General Counsel until 2001 and was Chief Executive Officer and Vice-Chairman of the Board of of Southwest Airlines Co. until 2004.
Gregory N. Moore was the Vice President at PepsiCo, Inc. Mr. Gregory was in charge of Taco Bell and other parts of PepsiCo such as PepsiCola International. After leaving PepsiCo., Mr. Moore joined Yum! Brands, Inc. as the Senior Vice President through 2005. Mr. Moore is also a certified public accountant in the state of New York and California.
Since 2007, salary of the key executives at Texas Roadhouse has not changed significantly. In 2008, the executives were compensated with stock awards, roughly $6 million in total. Non-equity incentive was rewarded to the executives in 2007, 2008 and 2009. In 2009, there was a big jump in the value of non-equity incentive.
Below is a table of executive compensation data from 2007 to 2009.
According to Yahoo Finance, the key executives of Texas Roadhouse are compensated roughly the same compared to its competitor, Brinker International, Inc. (EAT). However, the key executives of Darden Restaurants, Inc. (DRI), another direct competitor, are compensated more than Texas Roadhouse’s executives.
Below are tables of TXRH Compensation VS. Industry and CEO's compensation in restaurant industry.