Analyzing Texas Roadhouse's Business And Stock Performance (Part 12 of 18)
Company-owned units require higher capital
In the last part of this series, we learned that Texas Roadhouse is adding more units each year. Of the total 420 units in the system, the majority is company-owned. This means a higher requirement of capital to fund unit growth. In a franchise operation, the franchisee bares the cost of restaurant opening, furniture, rent, signs, staff, et cetera . The franchise pays a percentage of royalties and fees from its top line to TXRH, as we discussed earlier.
Funding unit growth
The primary requirement for funding at TXRH is for developing new company-operated restaurants, acquiring franchise restaurants, and refurbishing existing locations. The land for the restaurant is either purchased outright or leased for five to 30 years.
In the chart above, you can see that TXRH’s capital expenditure has been increasing. In 2013, its capital expenditure increased to $111 million from $87 million in 2012. During this time, the company’s total debt position remained unchanged at $51 million.
Funding these capital expenditures is important, as it helps the company grow its revenues. The cash position in the chart above grew to $94.9 million in 2013 from $81.7 million in 2012. The increase in cash was a result of an increase in revenues.
Why restaurants have lower working capital requirements
The working capital requirement for restaurant businesses like TXRH, Darden Restaurants (DRI), Brinker International (EAT), the Cheesecake Factory (CAKE), and others included in the SPDR S&P 500 ETF (SPY) is low because most of the inventory is perishable and must be used within a few hours to a few days of arrival. Plus, customer payments by cash or credit cards don’t entail receivables.
Between revenues and cash, the company needs to effectively manage its costs. Let’s look at this concern in more detail in the next part of this series.
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