Texas Roadhouse, Inc.

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Texas Roadhouse, Inc.

6040 Dutchmans Lane, Suite 400
Louisville, Kentucky 40205
U.S.A.
Telephone: (502) 426-9984
Toll Free: (800) 839-7623
Fax: (502) 426-3274
Web site: http://www.texasroadhouse.com

Public Company
Incorporated: 1993 as Texas Roadhouse, LLC
Employees: 9,700
Sales: $286.5 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: TXRH
NAIC: 722110 Full-Service Restaurants; 533110 Owners and Lessors of Other Non-Financial Assets

Texas Roadhouse, Inc. operates a chain of casual-dining restaurants catering to blue-collar families, offering a menu of steak, chicken, side dishes, and made-from-scratch rolls. Texas Roadhouse operates 182 restaurants in 34 states. The company's restaurants feature a southwestern décor, hand-painted murals, neon signs, and jukeboxes, offering patrons a free, unlimited supply of peanuts and inexpensive entrées. The per guest check average is $13.53, roughly two-thirds less than the per guest check average of the company's largest competitor, Outback Steakhouse, Inc. Texas Roadhouse targets secondary markets for expansion, preferring communities with populations above 60,000 and a high concentration of working-class families. The company is controlled by its founder and chairman, W. Kent Taylor, who owns approximately 60 percent of Texas Roadhouse stock.

Origins

Kent Taylor's first passion was the state of Colorado, not Texas, specifically the mountains in Colorado. The Texas Roadhouse founder, a self-described skiing addict, moved to Colorado after earning an undergraduate degree at the University of North Carolina. To help pay for his skiing equipment and lift tickets, Taylor managed nightclubs and restaurants in Colorado. His idyllic life of splitting time between work and the slopes came to an end when troubles in his personal life forced a retreat to his hometown. Taylor and his wife divorced in 1990, an event that forced him decidedly off pitch and back to Louisville, Kentucky.

Back in his hometown, Taylor began rebuilding his life. He worked as a manager for KFC Corporation, the operator of the massive fast-food chicken chain. He managed a Hooters of America restaurant. Taylor's thoughts were on Colorado, however, propelling him to hatch plans to open his own restaurant, a Colorado-themed bar and grill. His desire turned to reality when John Y. Brown, the former Governor of Kentucky, agreed to help financially support the opening of Taylor's own restaurant. Brown gave Taylor $80,000, a sum used to open Buckhead Hickory Grill. The Louisville restaurant did well, quickly turning a profit, which convinced Brown to invest more. Brown wanted to open a second Buckhead in Clarkesville, Indiana, but as Taylor began making preparations for his second grand opening the partnership collapsed. Brown, according to Taylor, was unwilling to divide the profits from the second restaurant evenly.

Taylor's hopes of opening a second restaurant appeared dashed. The Clarkesville project gained new life, however, after Taylor solicited the financial backing of three cardiologists. With the money obtained from his new backers, Taylor opened his restaurant in Clarkesville, but he was forced to choose another name and to abandon his Colorado theme. The Clarkesville restaurant opened in February 1993, debuting as Texas Roadhouse. One year later, Taylor sold his interest in Buckhead. The Kentucky native, educated in North Carolina and emotionally attached to Colorado, would stake his business future on a casual-dining brand inspired by Texas and first begun in Indiana.

The opening of the Clarkesville restaurant represented the beginning of a chain of Texas Roadhouse restaurants, although it would be several years before the company could be discerned as operating a chain of restaurants. Expansion did occur in the years immediately following the Clarkesville opening. However, there appeared to be no strategic cohesion. Taylor, earlier in his life, had competed in a track meet in Gainesville, Florida, leaving the city with positive memories. The second Texas Roadhouse opened in Gainesville. "We were all over the map the first few years," the Gainesville restaurant's first manager noted in a March 2003 interview with Chain Leader. The Gainesville restaurant proved to be successful, but poor site selection afflicted Taylor during his first years in business. Within a year of their opening, restaurants in Cincinnati, Ohio, and in Clearwater and Sarasota, Florida, were forced to close their doors.

Despite some bad decisions made early on, Taylor's business strategy proved to be sound. He emphasized service and quality food—objectives of nearly every restaurateur, but objectives that were far easier to proclaim than to fulfill. Taylor achieved his objectives, creating a new entrant in the casualdining steakhouse category of the industry that would present concern for the three, publicly held and well-funded leaders of the industry segment. As Taylor built his chain, he was competing against the industry stalwart, Outback Steakhouse, Inc., and the two other biggest contenders, Lone Star Steakhouse & Saloon, Inc. and RARE Hospitality International, Inc.'s LongHorn Steakhouse chain. As Taylor's chain expanded and matured, it created its own identity in the fiercely competitive steakhouse category, one described by an investment banker and investor in Texas Roadhouse. "I call the place a redneck Outback," George Rich said in a March 2003 interview with Chain Leader.

Texas Roadhouse expanded at a moderate pace during its formative years. The pace of expansion was dictated in large part by the lack of financial resources at Taylor's disposal. Although Taylor was intent on building a chain of restaurants, he demonstrated an unwillingness to obtain money from outside sources, his partnerships with Brown and the three cardiologists aside. Once Texas Roadhouse was up and running, Taylor avoided dealing with venture capitalists and other external sources of raising cash saying in a 2003 interview in Chain Leader, "I'm not interested; I don't need their money." Taylor only completed one private placement during his first decade in business, but that private placement, a $5 million deal completed in 1997, was raised primarily from employees, with the average investment being $75,000, which left Taylor in firm control.

Rapid Expansion in the Late 1990s

The cash raised in 1997 ignited Texas Roadhouse's first substantial burst of expansion. Again, Taylor made some bad decisions in terms of site selection. Restaurants were opened in Utah, Idaho, and Colorado for the wrong reasons. "Back when we jumped out there because of my ski addiction," Taylor conceded in his March 2003 interview with Chain Leader, "that was definitely not the right thing to do. I don't think I'd do that anymore." Taylor also experienced the hazards of overly aggressive expansion, attempting in 1999 to open 30 new restaurants. The hallmarks of his success—service and food quality—suffered as a result of the overzealous expansion. "Back in the late 1990s everything was go-go-go," Taylor explained in his interview with Chain Leader. "The economy was doing great and everyone was getting excited. That's when we realized we were rushing people to get them ready to take on stores. That was a real education."

Mistakes were made during Texas Roadhouse's development into a chain, but on balance, the good decisions outweighed the bad. Instead of relinquishing control to outside investors, Taylor helped pay for the expansion of the chain by franchising the concept, typically signing franchise agreements with former employees. By relying on a franchise network and by securing loans from banks, who were more than willing to help finance the chain's expansion in the "go-go-go" late 1990s, Taylor constructed a modestly sized chain. By the end of the decade, there were 67 restaurants operating under the Texas Roadhouse banner. Together, the restaurants generated $71 million in revenue in 1999 and registered $4.4 million in net income.

Texas Roadhouse experienced another growth spurt as it entered a new decade. Taylor and his management team focused on establishing restaurants in secondary markets, focusing on communities with a high concentration of blue-collar families. The company chose communities with populations above 60,000, but below the figures reflective of a large metropolitan market. In December 2000, for instance, the company opened one of its 250-seat units in Columbia, South Carolina, its fourth restaurant in the state, adding to units already operating in Greenville, Spartanburg, and Anderson. The following year, at a time when the company was opening an average of 25 restaurants each year, Texas Roadhouse moved into Oklahoma, opening a 5,000-square-foot unit along Interstate 240 in Oklahoma City. In 2003, the company entered New Hampshire, opening a restaurant in Nashua.

As the company expanded, it developed a managerial structure that gave considerable control to personnel on the local and regional level. Taylor created a performance-based compensation program for managers working out in the field. Restaurant managers, in the company's terms, were referred to as "managing partners," and regional managers were referred to as "market partners." To those two groups fell much of the responsibility for selecting sites and creating restaurants that drew some of their décor from the communities in which they operated. One of the largest murals in the company's Columbia, South Carolina restaurant, for example, depicted a scene from a University of South Carolina football game.

Company Perspectives:

We wanted to provide a place that the whole family could enjoy. Texas Roadhouse is about a hearty, good meal with service that is friendly, energetic, and enthusiastic. Life should be fun—so the workplace needs to reflect that as well—and that is why we put our employees first.

By the company's tenth anniversary, the Texas Roadhouse chain stood as a likely candidate to break into the ranks of the industry's elite, the upper echelon occupied by Outback Steak-house, Longhorn Steakhouse, and Lone Star Steakhouse & Saloon. There were 162 restaurants in more than 30 states in operation at the end of 2003, nearly 100 more units in existence than four years earlier. Annual revenue growth during this period reflected the physical growth, swelling from $71 million to $286 million. Profits leaped upward as well, jumping from $4.4 million in 1999 to $24.2 million during the company's tenth anniversary year. When George Rich, the investor who referred to Texas Roadhouse as a "redneck Outback," offered his analogy to Chain Leader in March 2003, his comments were not disparaging. "That means we have a similar offering in terms of service and menu," he continued. "But our price points are lower and our check average is only about $12.50. If you are two-thirds the price [of Outback Steakhouse], you have to do 40 percent more business. And we do."

As he celebrated his tenth year in business, Taylor presided over a proven business model. Profitable and growing, Texas Roadhouse drew covetous attention from the financial community, which wanted to invest in Taylor's model of success, particularly because the chain had yet to fully assert itself nationwide. Outback Steakhouse, with more than 800 restaurants, had little room for future expansion. Texas Roadhouse, in contrast, was perceived as having substantial room for future expansion. Taylor continued to shun outside involvement in the company, however, stating to Chain Leader in March 2003, "If you have a long-term outlook in a low-interest-rate environment and a strong balance sheet, you can continue to secure funds from banks." An initial public offering (IPO) of Texas Roadhouse stock was, in Taylor's estimation, "inevitable," he conceded to Chain Leader, but the timing was not right in his mind in 2003. By the following year, Taylor's mindset had changed, giving Wall Street the opportunity to take a stake in the future expansion of the chain.

Initial Public Offering of Stock in 2004

Texas Roadhouse completed its IPO in October 2004. The company, which previously had operated under the corporate title Texas Roadhouse LLC, changed its official name to Texas Roadhouse, Inc. Slightly more than nine million shares were sold to the public at $17.50 per share, raising $159.3 million and netting Taylor $100.2 million. After the offering, Taylor remained in financial control of the company, holding 61.6 percent of Texas Roadhouse stock. He planned to use the proceeds from the IPO to repay the company's debt, which totaled $65.8 million at the time of the offering.

Taylor, with the hopes of shareholders and his decade of success fueling great expectations, faced a future of opportunity following the IPO of Texas Roadhouse. Industry observers were waiting and watching for the chain to sweep the nation with its restaurants and complete its development into a national giant. The company, according to its web site, planned to open "many more locations" in the years immediately following its debut as a publicly traded company, years that would determine whether the Texas Roadhouse name would be included among the elite of the casual-dining segment.

Principal Competitors

Lone Star Steakhouse & Saloon, Inc.; Outback Steakhouse, Inc.; RARE Hospitality International, Inc.

Key Dates:

1993:: The first Texas Roadhouse restaurant opens in Clarkesville, Indiana.
1997:: Texas Roadhouse raises $5 million in a private placement.
1999:: By the end of the year, there are 67 Texas Roadhouse restaurants in operation.
2004:: Texas Roadhouse completes its initial public offering of stock.