Franchise royalties and fees
In the last part of this series, we learned about Texas Roadhouse’s (TXRH) revenues and year-over-year revenue growth. A fraction of those revenues comes from royalties and fees from franchises.
The terms of the agreement
In fiscal 2013, the company’s franchise revenue grew 13.6% year-over-year, as you can see in the chart above. TXRH had 74 franchise restaurants operated by 20 franchises by the end of 2013. Franchise agreements can make the franchisee responsible for developing a region. According to the company, none of its franchises operate more than 13 restaurants. This is important, since this number can influence the franchise’s bargaining power.
The franchise agreement in the US market has a ten-year term with two five-year renewal options. The royalties and fees in the chart above are part of the current 2%-to-4% franchise royalties and fees for gross franchise sales.
The company also requires marketing and advertising fund contributions from the franchise, which can extend to 2.5% of franchise gross sales, along with a marketing fee of 0.5%. TXRH uses this money to develop advertising and marketing materials.
Bear in mind that “gross sales” mean the top line or sales that exclude other costs incurred by the franchise.
Competition has similar agreements
Bloomin’ Brands (BLMN) charges a franchise royalty and fee of 3% of gross sales for Outback franchises. The Cheesecake Factory (CAKE) and Darden Restaurants (DRI), which operates LongHorn Steakhouse, also have similar license and development agreements.
You may consider the Consumer Discretionary Select Sector SPDR Fund (XLY) to invest in some of the restaurants we’ve mentioned above.
The overall revenues for the company are influenced by same-store sales and unit growth. Let’s first look at the same-store sales performance for TXRH in the next part of this series.