Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended May 1, 2020, compared with May 3, 2019. The company operated 664 Cracker Barrel stores in 45 states and, following its October 2019 acquisition, 28 company-owned and six franchised Maple Street Biscuit Company locations. Results were materially affected by the COVID-19 pandemic.
Key Financial Metrics
| Metric | Quarter Ended May 1, 2020 | Quarter Ended May 3, 2019 | Nine Months Ended May 1, 2020 | Nine Months Ended May 3, 2019 |
|---|---|---|---|---|
| Revenue | $432.5 million | $739.6 million | $2.028 billion | $2.285 billion |
| Operating income (loss) | $(79.0) million | $65.1 million | $63.5 million | $203.5 million |
| Net income (loss) | $(161.9) million | $50.4 million | $(57.5) million | $158.4 million |
| Diluted EPS | $(6.81) | $2.09 | $(2.41) | $6.57 |
| Cash flow from operations | Not separately provided | Not separately provided | $87.2 million | $252.6 million |
Quarterly revenue declined 41.5%, while nine-month revenue declined 11.3%. Restaurant revenue was $360.4 million for the quarter and $1.631 billion for the nine-month period; retail revenue was $72.2 million and $397.2 million, respectively.
Quarterly operating margin was negative 18.3%, compared with positive 8.8% in the prior-year quarter. The nine-month operating margin was 3.1%, compared with 8.9%. Net margin was negative 37.4% for the quarter and negative 2.8% for the nine-month period.
Comparable restaurant and retail sales declined 42.3% in the quarter and 12.0% for the nine-month period. Quarterly comparable restaurant sales fell 41.7%, driven by a 43.6% decrease in guest traffic, partly offset by a 1.9% increase in average check.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $363.3 million at May 1, 2020, compared with $36.9 million at August 2, 2019.
- Outstanding revolving-credit borrowings were $940.0 million, compared with $400.0 million at August 2, 2019. Borrowing availability was $3.3 million after $6.7 million of standby letters of credit.
- Operating cash flow of $87.2 million was more than offset by $149.3 million of investing cash outflows, including capital expenditures, the MSBC acquisition and $35.5 million of funding for PBS HoldCo. Financing activities provided $388.5 million.
- Capital expenditures, net of insurance recoveries, were $82.6 million for the first nine months. Management reduced expected 2020 capital expenditures to approximately $100 million from $125 million.
- The company was in compliance with debt covenants at May 1, 2020 and obtained covenant waivers for the fourth quarter of fiscal 2020 and the first and second quarters of fiscal 2021.
- On May 28, 2020, the company drew approximately $39.4 million under a new 364-day secured revolving line. The loan matures May 27, 2021. The amendment temporarily suspended financial covenants through January 29, 2021 and requires unrestricted liquidity of at least $140 million through delivery of a compliance certificate for the quarter ending April 30, 2021.
Material Changes Versus the Prior Comparable Period
- COVID-19 restrictions caused all restaurant dining rooms to close during March, with operations shifting to pickup and delivery. By May 20, 2020, 356 restaurants had reopened on a restricted basis and 338 remained pickup- or delivery-only.
- Five leased Cracker Barrel stores were impaired, resulting in an $18.3 million quarterly impairment charge. Management stated that additional impairment charges remain possible.
- The company recorded a $132.9 million loss related to its PBS HoldCo equity investment and related notes after deciding not to provide further funding. As of May 20, 2020, none of PBS’s locations was operating.
- The company incurred $3.1 million of severance expense related to eliminating 450 positions and implemented furloughs, executive pay reductions, reduced director retainers and other cost controls.
- Dividends were suspended, except for the previously declared $1.30 per-share dividend deferred to September 2, 2020. Share repurchases were also suspended after the company repurchased 378,974 shares for $55.0 million during the first nine months.
- The company adopted lease accounting guidance on August 3, 2019, recognizing $455.2 million of operating lease right-of-use assets and $500.6 million of operating lease liabilities at May 1, 2020.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a clear full-year revenue or earnings forecast. Priorities include expanding off-premise sales, reopening dining rooms under health and safety protocols, preserving liquidity and managing the recovery from COVID-19. The company expects approximately 1.0% commodity inflation for 2020 and higher fourth-quarter interest expense due to increased borrowings.
Material risks include prolonged or renewed restaurant closures, reduced consumer demand, labor shortages, supply-chain disruptions, elevated debt and interest expense, covenant compliance, limited borrowing availability, additional asset impairments and uncertainty regarding the timing and economics of reopening. The company stated that it may seek additional liquidity but cannot assure that financing will be available on favorable terms.
The company expects to complete the conversion of six former Holler & Dash locations to MSBC locations during the fourth quarter of 2020. It also entered into an agreement to purchase 65 properties from a landlord for $200.8 million, subject to customary closing conditions, with an intended assignment of the purchase rights to another party.
Investor Verification Checklist
- Verify the pace and profitability of dine-in reopening, off-premise demand and comparable-store traffic recovery.
- Review the amended credit agreement, including the $39.4 million 364-day loan, $140 million minimum unrestricted liquidity requirement, covenant relief and restrictions on dividends, capital expenditures and acquisitions.
- Assess cash burn, operating cash flow, borrowing availability and debt maturities under prolonged pandemic scenarios.
- Monitor for additional impairments of Cracker Barrel stores, MSBC assets or other intangible assets.
- Confirm the final outcome of the PBS investment, including any residual obligations or potential losses.
- Evaluate the timing, funding and accounting consequences of the planned property purchase and assignment.
- Track the resumption of dividends and share repurchases, which were suspended at the reporting date.