Cracker Barrel Old Country Store, Inc. — Fiscal 2024 Q2 Form 10-Q
Reporting period: Quarter and six months ended January 26, 2024; comparative periods ended January 27, 2023. Financial statements are unaudited. The company operated 662 Cracker Barrel stores and 63 Maple Street Biscuit Company locations at quarter-end.
Financial performance and position
| Metric | Q2 2024 | Q2 2023 | Six months 2024 | Six months 2023 |
|---|---|---|---|---|
| Total revenue | $935.4 million | $933.9 million | $1,759.2 million | $1,773.4 million |
| Operating income | $30.8 million | $39.0 million | $42.2 million | $62.6 million |
| Net income | $26.5 million | $30.5 million | $32.0 million | $47.6 million |
| Diluted EPS | $1.19 | $1.37 | $1.44 | $2.14 |
| Operating margin | 3.3% | 4.2% | 2.4% | 3.5% |
| Net margin | 2.8% | 3.3% | 1.8% | 2.7% |
| Cash flow from operations | Not separately provided | Not separately provided | $61.9 million | $100.8 million |
- Q2 restaurant revenue increased 1.8% to $730.7 million, while retail revenue declined 5.2% to $204.7 million. Six-month restaurant revenue rose 0.8%, while retail revenue fell 6.5%.
- Comparable restaurant sales increased 1.2% in Q2 and 0.4% year to date, supported by higher average checks, while comparable guest traffic declined 4.0% and 5.5%, respectively. Comparable retail sales declined 5.3% and 6.6%.
- Average check increased 5.2% in Q2 and 5.9% year to date, including menu price increases of 4.8% and 5.8%, respectively.
- Cost of goods sold improved to 33.7% of revenue in Q2 and 32.4% year to date, versus 35.0% and 34.3%. Labor costs increased to 34.5% and 35.7% of revenue, and general and administrative costs increased to 5.6% and 5.8%.
- Interest expense rose to $5.1 million in Q2 and $10.0 million year to date, primarily due to higher revolving-credit interest rates.
- At January 26, 2024, cash and cash equivalents were $12.6 million, current liabilities were $458.8 million, and working capital was negative $191.0 million.
- Long-term debt was $452.3 million, comprising $156.5 million outstanding under the revolving facility and $295.7 million net carrying value of the $300 million convertible senior notes. Operating lease liabilities totaled $689.5 million.
- Borrowing availability under the $700 million revolving facility was $511.0 million after $32.5 million of standby letters of credit. The company was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Revenue was broadly flat in Q2 but declined 0.8% for the first six months, reflecting weaker retail sales and lower customer traffic.
- Q2 operating income declined 21.1% and six-month operating income declined 32.6%. Net income declined 13.0% in Q2 and 32.8% year to date.
- Profitability was pressured by wage inflation, additional staffing and guest-experience labor investments, higher advertising and loyalty-program spending, higher professional fees, CEO transition costs, and corporate restructuring severance costs.
- Operating cash flow declined $38.9 million year to date, primarily because of lower net income, smaller reductions in retail inventory and higher bonus payments.
- Capital expenditures increased to $51.1 million from $48.4 million year to date. No common-stock repurchases occurred; the company paid regular dividends of $2.60 per share during the first six months.
- The company launched the Cracker Barrel Rewards loyalty program in the first quarter. Deferred revenue related to the program was $0.7 million at quarter-end.
Outlook, commentary, risks and unusual items
- Management cited significant macroeconomic uncertainty and lower consumer demand associated with inflation, higher interest rates, higher consumer debt, lower savings and recession risk.
- Management expects 2024 commodity inflation of approximately 0% to 2%, wage inflation of approximately 5%, an effective tax rate of approximately 1% to 4%, and capital expenditures of approximately $120 million to $135 million.
- Management believes cash generated from operations, cash on hand and revolver availability will fund operations, dividends, capital expenditures, lease obligations and expansion needs for at least the next twelve months and beyond.
- Key risks include commodity, labor and utility costs; supply-chain concentration and disruptions; competition and staffing; consumer spending; interest rates and refinancing; information security; regulatory and litigation exposure; impairment of store assets; and execution of the strategic transformation initiative.
- The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements and no material changes in market risks.
- Management stated that ordinary-course legal and regulatory proceedings are not expected to materially affect the financial statements. Standby letters of credit totaled $32.5 million.
- After quarter-end, the board adopted a three-year shareholder rights plan effective February 27, 2024, subject to shareholder approval. It generally imposes dilution upon an acquiring person obtaining 20% or more of the common stock and is intended to replace the prior rights plan.
- Disclosure controls were deemed effective, and management reported no material changes in internal control over financial reporting.
Investor verification items
- Verify whether continued traffic declines and weaker retail sales offset menu pricing and restaurant sales growth.
- Monitor labor, advertising, strategic-transformation and CEO-transition costs and their effect on operating margin.
- Reconcile expected capital expenditures of $120 million to $135 million with operating cash flow, dividends and revolver borrowings.
- Assess variable-rate debt exposure, covenant headroom and refinancing requirements through the 2026 convertible-note maturity.
- Review the terms and shareholder approval status of the February 2024 rights agreement.
- Evaluate the assumptions underlying retail inventory valuation, insurance reserves, lease accounting and potential store impairments.