Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. operates an integrated restaurant and retail concept in the United States. As of February 1, 2019, it operated 657 Cracker Barrel stores in 45 states and seven Holler & Dash locations in five states. This unaudited Form 10-Q covers the quarter and six months ended February 1, 2019, compared with periods ended January 26, 2018. Dollar amounts are in thousands except per-share data.
Financial Performance and Liquidity
| Metric | Q2 FY2019 | Q2 FY2018 | Six Months FY2019 | Six Months FY2018 |
|---|---|---|---|---|
| Total revenue | $811,707 | $787,771 | $1,545,250 | $1,498,139 |
| Operating income | $76,711 | $76,674 | $138,389 | $147,512 |
| Net income | $60,755 | $91,139 | $107,962 | $137,519 |
| Diluted EPS | $2.52 | $3.79 | $4.48 | $5.71 |
| Operating margin | 9.5% | 9.7% | 9.0% | 9.8% |
| Net margin | 7.5% | 11.6% | 7.0% | 9.2% |
Restaurant revenue increased 4.6% in the quarter and 3.4% year to date; retail revenue declined 2.2% in the quarter but increased 2.0% year to date. Comparable restaurant and retail sales increased 2.6% in the quarter and 2.3% for the six-month period.
Store operating income was $112,935 in the quarter and $213,548 for six months. Store operating margin declined to 13.9% from 14.3% in the quarter and to 13.8% from 14.7% year to date. Labor and related costs increased as a percentage of revenue, primarily because wage inflation exceeded menu price increases. Restaurant commodity inflation was 2.0% in the quarter and 3.0% year to date.
Net cash provided by operating activities increased to $190,863 for the first six months from $148,505 in the prior-year period. Capital expenditures were $70,286, producing net cash used in investing activities of $69,738. Cash increased to $169,564 at February 1, 2019 from $114,656 at August 3, 2018.
The company had $400,000 of outstanding revolving debt and $541,045 of borrowing availability under its new $950,000 five-year revolving credit facility, after $8,955 of standby letters of credit. The facility includes a $300,000 expansion option. The company was in compliance with its financial covenants. Working capital remained negative at $20,987.
Dividends declared and paid were $1.25 per share in the quarter and $2.50 per share for six months. No common stock was repurchased during the first six months.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3.0% in the quarter and 3.1% for six months, driven primarily by restaurant sales and new stores.
- Quarterly operating income was essentially unchanged, while six-month operating income declined 6.2% as labor, depreciation, store operating costs and loss on asset dispositions increased.
- Net income declined 33.3% in the quarter and 21.5% for six months. The prior-year periods included provisional Tax Act benefits of $29,532 in total, including $27,032 of long-term and $2,500 of short-term deferred-tax remeasurement benefits.
- Interest expense increased to $4,177 in the quarter and $8,526 for six months, reflecting higher weighted-average interest rates and a $166 write-off of prior-credit-facility financing costs.
- The company refinanced its prior $750,000 revolving facility with the new $950,000 facility on September 5, 2018; total borrowings remained $400,000.
- Operating cash flow improved by $42,358 year over year, while capital expenditures increased from $63,728 to $70,286.
Guidance, Outlook, Risks and Unusual Items
Management intends to enhance the core business through guest-experience, food, value and off-premise initiatives; expand into new markets; and develop the Holler & Dash concept. It anticipated opening eight Cracker Barrel stores during fiscal 2019, five of which had opened during the first six months.
Management expected approximately 2.0% commodity inflation for fiscal 2019, an effective tax rate of approximately 17%, and capital expenditures of approximately $150,000. Capital spending includes eight new Cracker Barrel stores, 2020 site and construction costs, and technology and strategic initiatives. Management believed available cash, operating cash flow and revolver capacity would fund operations, dividends and expansion for at least the next twelve months.
Key risks include commodity and wage inflation, labor availability and costs, retail merchandise performance, store-level impairment, inventory obsolescence and shrinkage, self-insured workers’ compensation and general liability claims, interest-rate exposure, debt covenant and dividend restrictions, and execution of new-store and off-premise initiatives. The company uses interest-rate swaps as cash-flow hedges; changes in their fair value reduced other comprehensive income by $2,746 net of tax during the first six months.
Legal and regulatory proceedings were described as ordinary-course matters that management did not expect to materially affect the financial statements. The company had $8,955 of standby letters of credit related to workers’ compensation insurance and remained secondarily liable for lease payments on two properties occupied by a third party, without a recorded provision.
The company adopted revenue-recognition, gift-card breakage and share-based-payment guidance without a material impact. It was evaluating the effects of lease, hedge-accounting and certain tax-effect accounting standards expected to be adopted in the first quarter of fiscal 2020.
Facts Investors Should Verify
- Whether restaurant comparable-sales momentum can offset retail weakness and maintain overall revenue growth.
- Whether wage and commodity inflation remain near management’s assumptions and how effectively menu pricing offsets them.
- The sustainability of operating margins after higher labor, depreciation and store operating costs.
- Progress toward the eight-store fiscal 2019 opening plan and the expected approximately $150,000 capital-spending program.
- Compliance with leverage and interest-coverage covenants, available revolver capacity and restrictions on dividends and repurchases.
- The effect of adopting lease accounting and other pending accounting standards in fiscal 2020.
- Changes in self-insurance reserves, inventory shrinkage and obsolescence, long-lived-asset impairment assumptions, and interest-rate swap valuations.