Cracker Barrel Old Country Store, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended July 31, 2020; fiscal 2020 and 2019 each contained 52 weeks. The company operated the Cracker Barrel restaurant and retail concept and acquired Maple Street Biscuit Company (MSBC) on October 10, 2019. As of September 16, 2020, it operated 663 Cracker Barrel stores in 45 states, 35 company-owned MSBC locations and six franchised MSBC locations.
Fiscal 2020 was materially affected by COVID-19. Dining rooms were temporarily closed beginning in March 2020, with operations shifting to pickup and delivery before limited-capacity dine-in services resumed.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $2,522.8 million | $3,072.0 million | (17.9%) |
| Restaurant revenue | $2,032.0 million | $2,482.4 million | (18.1%) |
| Retail revenue | $490.8 million | $589.6 million | (16.8%) |
| Operating income | $103.6 million | $282.8 million | (63.4%) |
| Operating margin | 4.1% | 9.2% | Down 5.1 points |
| Net income (loss) | $(32.5) million | $223.4 million | Turned to loss |
| Diluted EPS | $(1.36) | $9.27 | Declined |
| Cash flow from operations | $161.0 million | $362.8 million | (55.6%) |
| Capital expenditures, net | $296.0 million | $137.5 million | Up $158.5 million |
Comparable Cracker Barrel restaurant sales declined 18.9%, driven by a 21.6% decrease in guest traffic, partly offset by a 2.7% increase in average check. Comparable retail sales declined 17.1%. Restaurant cost of goods sold was 25.4% of restaurant revenue versus 25.3% in 2019; retail cost of goods sold increased to 53.8% from 51.3%. Labor and related expenses increased to 36.7% of revenue from 35.1%, while other store operating expenses increased to 24.4% from 20.4%.
Cash and cash equivalents were $437.0 million at July 31, 2020, compared with $36.9 million at August 2, 2019. Outstanding revolving-credit borrowings were $949.4 million, with $18.5 million of remaining borrowing availability after standby letters of credit. Total debt consisted of $39.4 million current debt and $910.0 million long-term debt. Interest expense rose to $22.3 million from $16.5 million.
Working capital was $192.0 million at year-end versus a deficit of $150.1 million in 2019. The company reported total operating lease liabilities of $674.9 million at July 31, 2020 and total contractual cash obligations of $2.10 billion, including debt, leases, purchase obligations and other long-term obligations.
Material changes versus the prior comparable period
- Revenue fell $549.2 million, primarily because of mandated dining-room closures, capacity restrictions, reduced traffic and changes in consumer behavior.
- Operating margin contracted substantially as fixed and semi-fixed expenses represented a larger share of reduced sales.
- The company recorded a $132.9 million loss related to its Punch Bowl Social investment and related notes after declining to provide further funding during the pandemic.
- The company recorded $22.5 million of impairment charges for certain Cracker Barrel and MSBC locations and $4.0 million of severance related to eliminating 469 positions.
- A $70.0 million gain was recorded on the July 2020 sale and leaseback of 64 properties. In August 2020, the company sold and leased back an additional 62 properties and received net proceeds of $146.4 million; the filing reports total gains of $217.7 million on that subsequent transaction.
- Debt increased materially from $400.0 million at the prior year-end as the company drew on its revolving facility to preserve liquidity.
- The company adopted ASC 842 lease accounting, recognizing $691.9 million of operating lease right-of-use assets and $674.9 million of operating lease liabilities at July 31, 2020. Prior periods were not restated.
- Dividends were reduced to $3.90 per share declared for fiscal 2020. The dividend scheduled for May 2020 was deferred and paid on September 2, 2020; future dividends were suspended until further notice. Share repurchases were also suspended after $55.0 million of fiscal 2020 repurchases.
Guidance, outlook, risks and unusual items
- Management estimated fiscal 2021 capital expenditures of approximately $100 million, including new Cracker Barrel and MSBC locations.
- Management expected fiscal 2021 net interest expense of approximately $40 million, commodity inflation of approximately 1.5% to 2.0%, and an effective tax rate of approximately 19%.
- The company planned to open three new Cracker Barrel stores during fiscal 2021, although construction and capital spending had been paused or delayed during the fourth quarter of fiscal 2020.
- The revolving credit facility provided covenant relief for the fourth quarter of fiscal 2020 and the first two quarters of fiscal 2021. During the relief period, the company was required to maintain at least $140 million of liquidity and limit aggregate cash capital expenditures to $60 million.
- Key risks include the duration and severity of COVID-19, renewed dining restrictions, consumer demand and traffic recovery, labor availability, supply-chain disruptions, commodity inflation, lease obligations, variable interest rates and LIBOR transition, debt-covenant compliance, additional asset impairments, and the ability to integrate and grow MSBC.
- The company self-insures significant portions of workers’ compensation, general liability and health costs. Insurance reserves involve substantial actuarial estimates and were identified as the critical audit matter.
- Management and Deloitte & Touche reported effective disclosure controls and internal control over financial reporting. The financial statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether restaurant traffic, dine-in capacity and comparable sales recover to pre-pandemic levels.
- Cash generation, liquidity availability and compliance with the revolving-credit facility’s covenants after the relief period.
- The sustainability of the substantially higher debt and lease obligations, including expected interest expense and refinancing requirements.
- The economic effect of the sale-and-leaseback transactions, including recurring rent increases and reduced owned real estate.
- Whether additional impairments arise at Cracker Barrel, MSBC or other investments as pandemic-related assumptions change.
- The status and financial performance of MSBC, the final purchase-price allocation, and any remaining exposure to Punch Bowl Social.
- Whether and when dividends and share repurchases can resume under operating conditions and credit-agreement restrictions.