Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. operates an integrated restaurant and retail concept in the United States. This unaudited Form 10-Q covers the quarter and nine months ended April 27, 2018, compared with April 28, 2017. At quarter-end, the Company operated 652 Cracker Barrel stores in 45 states and seven Holler & Dash Biscuit House locations in five states.
Financial Performance and Position
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Revenue | $721.4 million | $700.4 million | $2,219.6 million | $2,183.1 million |
| Operating income | $63.3 million | $71.5 million | $210.8 million | $229.9 million |
| Net income | $48.7 million | $46.9 million | $186.3 million | $148.0 million |
| Diluted EPS | $2.03 | $1.95 | $7.74 | $6.14 |
| Operating margin | 8.8% | 10.2% | 9.5% | 10.5% |
| Net margin | 6.8% | 6.7% | 8.4% | 6.8% |
- Q3 revenue increased 3.0%; nine-month revenue increased 1.7%. Restaurant revenue rose to $592.7 million in Q3, while retail revenue rose to $128.7 million.
- Comparable restaurant and retail sales increased 1.4% in Q3 and 0.6% for the first nine months. Q3 restaurant traffic declined 1.3%, offset by a 2.8% average check increase; the average menu price increase was 2.5%.
- Q3 store operating income declined to $98.7 million from $107.5 million, primarily reflecting higher food, maintenance, depreciation, supplies and other operating costs.
- Net income benefited materially from lower income taxes. The effective tax rate was 18.4% in Q3 and 6.8% for the first nine months, compared with 31.1% and 32.5%, respectively, in the prior-year periods.
- Nine-month operating cash flow was $221.0 million, up from $203.1 million. Capital expenditures were $101.7 million, compared with $80.9 million on a net basis in the prior year.
- Cash and cash equivalents were $174.3 million at April 27, 2018, compared with $161.0 million at July 28, 2017. Positive working capital was $18.5 million versus negative working capital of $17.0 million at fiscal year-end.
- Long-term debt was $400.0 million, unchanged from July 28, 2017. The $750.0 million revolving facility had $340.5 million of availability after $9.5 million of standby letters of credit. The Company was in compliance with its debt covenants.
- The Company paid $3.60 per share in regular dividends during the first nine months and repurchased 100,000 shares for $14.8 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was supported by new stores and modest comparable-sales growth, but profitability was pressured by commodity inflation, wage inflation, lower productivity, maintenance costs, depreciation and supplies.
- Restaurant cost of goods sold increased to 25.6% of restaurant revenue in Q3 from 24.8%; management cited 5.1% commodity inflation, higher food waste and a shift toward higher-cost menu items.
- Retail cost of goods sold increased to 51.1% of retail revenue from 50.6%, reflecting lower initial margins, higher shrinkage and freight costs, partly offset by lower markdowns.
- General and administrative expenses declined as a percentage of Q3 revenue to 4.9% from 5.1%, primarily because of lower incentive compensation, although nine-month G&A increased slightly as a percentage of revenue.
- The Tax Cuts and Jobs Act produced a provisional $29.5 million deferred-tax benefit during the second quarter, consisting of $27.0 million related to long-term deferred tax liabilities and $2.5 million related to short-term liabilities. Final tax effects remained subject to further evaluation.
- Property and equipment, net, increased to $1.127 billion from $1.098 billion, reflecting continued store expansion and strategic capital investments.
Guidance, Outlook, Risks and Unusual Items
- Management planned to open eight Cracker Barrel stores during fiscal 2018; seven had opened during the first nine months. Three Holler & Dash locations had also opened during the period.
- Management estimated fiscal 2018 capital expenditures of approximately $150.0 million, including new Cracker Barrel and Holler & Dash locations, 2019 development sites, technology and other strategic initiatives.
- Management expected approximately 3.25% commodity inflation for fiscal 2018 and an effective tax rate of approximately 11%, subject to further interpretation and guidance related to the Tax Act.
- Management stated that available cash, operating cash flow and revolver capacity should fund operations, dividends and expansion for at least the next twelve months.
- The Company adopted new inventory, deferred-tax and share-based-payment guidance; management reported no significant effect on financial position or results of operations. Revenue-recognition, lease and other accounting standards had not yet been adopted and were still under evaluation.
- A new shareholder rights plan became effective April 9, 2018 and required shareholder approval at the 2018 annual meeting to remain in effect. The plan generally becomes exercisable if a person or group acquires 20% or more of the common stock.
- The Company is exposed to commodity costs, labor and wage inflation, traffic declines, retail inventory shrinkage and obsolescence, weather, execution of new-store initiatives, self-insured workers’ compensation and general-liability claims, tax-law changes, impairment estimates and legal proceedings.
- The Company entered into new severance and change-in-control agreements with executive officers other than the chief executive officer after quarter-end. These agreements may require significant payments and benefit continuation following qualifying terminations or a change in control.
- Results are seasonal, with historically lower income in the first and third quarters and higher income in the second and fourth quarters; interim results are not necessarily indicative of full-year performance.
Investor Verification Points
- Verify whether the provisional Tax Act benefit and the approximately 11% fiscal-year effective tax-rate outlook were finalized as estimated.
- Monitor comparable-store traffic, average checks, menu pricing and retail merchandise trends, particularly because Q3 traffic declined despite positive sales growth.
- Assess whether commodity inflation, wage inflation, maintenance and depreciation costs continue to compress store-level and operating margins.
- Confirm the pace, economics and funding of the planned store openings and approximately $150.0 million capital-expenditure program.
- Review revolver availability, leverage and interest-coverage compliance, including the effect of dividends, the special dividend and share repurchases on liquidity.
- Evaluate the shareholder rights plan, its required shareholder approval and the potential effect on takeover activity.
- Review assumptions underlying insurance reserves, retail inventory shrinkage and obsolescence, long-lived-asset impairment, tax positions and legal contingencies.