In the previous part of this series, we learned that Texas Roadhouse’s (TXRH) cash balance increased in 2013. But this was after all the costs incurred during the year. Let’s look at how the company managed its costs.
Cost of sales
The restaurant’s cost of sales includes food and beverage costs. The absolute cost of sales increased to $492 million in 2013. As a percentage of sales, costs increased to 34.9% in 2013 from 33.8% in 2012. This increase in the cost of sales was primarily because of food inflation. We discussed food inflation in more details in an earlier part of this series.
Labor costs as a percentage of sales have been declining over the past five years, as you can see in the chart above. In 2013, labor costs decreased to 29.2% from 29.4% in 2012. Labor costs decreased due to operating leverage. Higher sales volume per unit leads to most cost spreading. Restaurants have been facing a constant upward pressure of wage increases, which can affect their margins.
This can severely affect fast-food restaurants like McDonald’s (MCD), Burger King (BKW), Popeye’s (PLKI), and KFC under the umbrella of Yum! Brands (YUM). It can also affect the Consumer Discretionary Select Sector SPDR Fund (XLY), since fast-food restaurants often rely on low-priced items.
Other operating costs
Other operating costs include rent, utilities, advertising, property tax, repairs and maintenance, credit card fees, and supplies. These costs too have been declining over the years as a percentage of sales. In 2013, other operating costs accounted for 15.9% of sales compared to 16.3% in 2012.
Rent expenses haven’t changed much over five years. This is because the company’s entering long-term leases, resulting in lower rent variability.
Following the above analysis, we must also look at the company’s operating income performance. Let’s discuss this in more detail in the next part of this series.