Cracker Barrel Old Country Store, Inc. — FY2018 Form 10-K Summary
Business Context and Reporting Period
The filing covers the fiscal year ended August 3, 2018. Fiscal 2018 included 53 weeks, and the fourth quarter included 14 weeks; comparable prior periods generally included 52 weeks. Cracker Barrel operated 655 company-owned stores in 45 states as of September 20, 2018. Its integrated concept combines full-service restaurants with retail gift shops. The company also operated seven Holler & Dash Biscuit House locations.
Key Financial Metrics
| Metric | FY2018 | FY2017 | Change or Comment |
|---|---|---|---|
| Total revenue | $3,030.4 million | $2,926.3 million | Up 3.6%; includes approximately $58.4 million from the additional week |
| Restaurant revenue | $2,439.4 million | $2,351.2 million | 80.5% of total revenue |
| Retail revenue | $591.1 million | $575.1 million | 19.5% of total revenue |
| Store operating income | $437.3 million | $454.6 million | Margin declined to 14.4% from 15.5% |
| Operating income | $293.6 million | $313.2 million | Margin declined to 9.7% from 10.7% |
| Net income | $247.6 million | $201.9 million | Up 22.7%, primarily aided by lower taxes |
| Diluted EPS | $10.29 | $8.37 | Up 22.9% |
| Effective tax rate | 11.1% | 32.4% | Reduced by the Tax Cuts and Jobs Act and deferred-tax remeasurement |
| Cash flow from operations | $330.6 million | $320.8 million | Up $9.9 million |
| Capital expenditures | $151.6 million | $110.1 million | Increased for new stores and strategic initiatives |
| Cash and equivalents | $114.7 million | $161.0 million | Declined by $46.3 million during the year |
| Long-term debt | $400.0 million | $400.0 million | No borrowings or repayments during FY2018 |
| Working capital | $(57.9) million | $(17.0) million | Deficit widened |
Fourth-quarter FY2018 revenue was $810.9 million, compared with $743.2 million in the prior-year quarter. Fourth-quarter net income was $61.4 million, or $2.55 diluted EPS, compared with $53.9 million, or $2.23 diluted EPS, in the prior-year quarter.
- Comparable restaurant sales increased 0.6%, driven by a 2.5% higher average check, including a 2.4% menu price increase, partly offset by a 1.9% decline in guest traffic.
- Comparable retail sales declined 0.1%, reflecting weaker décor, toys, and bed-and-bath categories, partly offset by apparel and accessories.
- Restaurant cost of goods sold increased to 25.7% of restaurant revenue from 25.3%, primarily due to 3.3% food commodity inflation and higher waste.
- Retail cost of goods sold increased to 52.3% of retail revenue from 51.5%, due to lower initial margins, obsolete inventory provisions, shrinkage, and freight costs.
- Labor expense remained 34.8% of revenue, while other store operating expenses increased to 19.9% from 19.2%.
Material Changes Versus the Prior Comparable Period
- Revenue growth benefited from eleven new stores opened during the year, including eight new Cracker Barrel locations and three Holler & Dash locations, as well as the extra fiscal week.
- Operating profitability weakened despite higher revenue. Store operating income declined $17.2 million and operating income declined $19.6 million, reflecting commodity inflation, wage inflation, lower labor productivity, maintenance, depreciation, supplies, and conference-related costs.
- Net income increased substantially despite lower operating income because the effective tax rate fell to 11.1% from 32.4%. FY2018 included a provisional $30.5 million tax benefit from remeasurement of deferred tax liabilities under the Tax Cuts and Jobs Act.
- Operating cash flow improved modestly, but higher capital expenditures, dividends, and share repurchases caused cash to decline by $46.3 million.
- The company repurchased 100,000 shares for $14.8 million in FY2018; no shares were repurchased in FY2017.
- Regular quarterly dividends increased to $1.25 per share in the fourth quarter, and the company declared a $3.75 per-share special dividend. Dividends declared totaled $8.60 per share for FY2018.
- On September 5, 2018, after fiscal year-end, the company replaced its $750.0 million revolving credit facility with a five-year $950.0 million facility, including an option to increase capacity by $300.0 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expected FY2019 commodity inflation of approximately 2.0%, compared with 3.3% in FY2018.
- Management expected a FY2019 effective tax rate of approximately 17% to 18%, subject to further tax guidance and state tax responses.
- FY2019 capital expenditures were estimated at approximately $160 million to $170 million, including eight planned new Cracker Barrel stores and investments in equipment, technology, and strategic initiatives.
- The company planned to open eight new Cracker Barrel stores in FY2019 and did not plan to open additional Holler & Dash locations.
- Management stated that cash on hand, operating cash flow, and revolver capacity were expected to fund FY2019 operations, expansion, share repurchases, and dividends. The company was in compliance with debt covenants at August 3, 2018.
- Contractual cash obligations totaled approximately $1.21 billion, including $710.1 million of operating lease commitments, $400.0 million of revolving-facility debt, and $58.8 million of purchase obligations. The company also had $9.5 million of standby letters of credit.
- Key risks include intense restaurant and retail competition, discretionary consumer spending, food and labor inflation, minimum-wage increases, employee retention, supply-chain disruption, foreign sourcing and tariffs, food safety, cybersecurity, severe weather, reliance on a single retail distribution center, litigation, lease obligations, debt covenants, and activist shareholder activity.
- The company self-insures portions of workers’ compensation, general liability, and healthcare programs, creating exposure to adverse claims development. Management stated that ordinary-course legal proceedings were not expected to materially affect consolidated results.
- The 2018 shareholder rights plan would expire following the 2018 annual meeting unless approved by shareholders; if approved, it would expire April 9, 2021. The plan generally activates when a person or group acquires 20% or more of the common stock.
Investor Verification Checklist
- Verify the extent to which FY2018 revenue and earnings benefited from the additional 53rd week and the $30.5 million provisional tax benefit.
- Assess whether restaurant traffic, retail sales, commodity costs, wage inflation, and store operating margins improved or deteriorated in subsequent periods.
- Review the terms, leverage covenants, interest-rate exposure, and available capacity under the September 2018 $950 million revolving credit facility.
- Evaluate the sustainability of regular and special dividends and future share repurchases relative to operating cash flow, capital expenditures, and debt obligations.
- Monitor execution of the planned eight-store FY2019 expansion and the performance and capital requirements of Holler & Dash.
- Review the impact of the pending lease-accounting standard, which management was still evaluating and expected to adopt in fiscal 2020.
- Confirm shareholder approval and subsequent status of the 2018 rights plan, including implications for change-of-control transactions.