Cracker Barrel Old Country Store, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and six months ended January 26, 2018, compared with January 27, 2017. Cracker Barrel operated 648 Cracker Barrel stores in 44 states and six Holler & Dash locations at period end. The company operates as one reportable segment combining restaurant and retail operations.
Results are seasonal, with the second quarter benefiting from the holiday shopping season and the fourth quarter generally benefiting from summer travel and dining activity. Interim results are therefore not necessarily indicative of full-year performance.
Financial Performance and Position
| Metric | Q2 FY2018 | Q2 FY2017 | Six Months FY2018 | Six Months FY2017 |
|---|---|---|---|---|
| Total revenue | $787.8 million | $772.7 million | $1,498.1 million | $1,482.7 million |
| Operating income | $76.7 million | $82.7 million | $147.5 million | $158.4 million |
| Net income | $91.1 million | $52.7 million | $137.5 million | $101.1 million |
| Diluted EPS | $3.79 | $2.19 | $5.71 | $4.19 |
| Operating margin | 9.7% | 10.7% | 9.8% | 10.7% |
| Net margin | 11.6% | 6.8% | 9.2% | 6.8% |
| Net cash from operations | — | — | $148.5 million | $149.5 million |
Restaurant revenue increased 2.0% in the quarter and 1.4% for the six-month period. Retail revenue increased 1.7% in the quarter but declined 0.4% for the six-month period. Comparable restaurant and retail sales increased 1.0% in the quarter and 0.2% for the six months.
Store operating margin declined to 14.3% from 15.2% in the quarter and to 14.7% from 15.3% for the six months. Cost pressures included commodity inflation, food waste, lower retail initial margins, maintenance, depreciation, advertising, utilities, and labor inflation. Management reported commodity inflation of 2.7% in the quarter and 1.3% for the six months.
At January 26, 2018, cash and cash equivalents were $168.8 million, total assets were $1.56 billion, and working capital was positive $7.9 million. Debt was $400.0 million under the $750.0 million revolving credit facility, with $340.5 million of remaining borrowing availability after standby letters of credit. The weighted-average interest rate on swapped borrowings was 3.21%, and the company was in compliance with its debt covenants.
Capital expenditures were $63.5 million net of insurance recoveries during the first six months, compared with $52.9 million in the prior-year period. Dividends paid totaled $59.5 million, and the company repurchased 100,000 shares for $14.8 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, but operating income declined 7.3% for the quarter and 6.9% for the six months because operating costs grew faster than sales.
- Net income increased 72.8% in the quarter and 36.0% for the six months, primarily because of the Tax Cuts and Jobs Act and a provisional deferred-tax remeasurement benefit of $29.5 million recorded in the second quarter.
- The effective tax rate decreased to negative 24.9% in the quarter and 1.9% for the six months, compared with 33.3% and 33.1%, respectively, in the prior-year periods.
- Comparable restaurant sales benefited from higher average checks but were partly offset by lower guest traffic. Second-quarter restaurant traffic declined 0.9%, with adverse weather estimated to have reduced comparable traffic by approximately 0.3%.
- Retail comparable sales improved in the quarter but declined for the six months, reflecting weaker performance in categories including toys, décor, and bed and bath merchandise.
- Operating cash flow was essentially stable, declining to $148.5 million from $149.5 million, while capital spending increased materially.
- The company opened five Cracker Barrel stores and two Holler & Dash locations during the first six months, compared with four Cracker Barrel openings in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management planned to open eight to nine Cracker Barrel stores and three Holler & Dash locations during fiscal 2018; three Cracker Barrel and two Holler & Dash locations had opened through six months.
- Fiscal 2018 capital expenditures were estimated at $150 million to $160 million, including new-store construction, existing-store investments, technology, and strategic initiatives.
- Management expected 2018 commodity inflation of approximately 2.5% to 3.0% and an effective tax rate of approximately 11% to 14%.
- Management stated that cash on hand, operating cash flow, and available borrowing capacity should fund operations, dividends, and expansion for at least the next twelve months.
- The Tax Act accounting remains provisional; the final impact may differ because of further IRS guidance, state tax responses, and changes in interpretations or assumptions.
- The company self-insures a significant portion of workers’ compensation and general liability risks and is exposed to actuarial estimation uncertainty. Standby letters of credit of $9.5 million support workers’ compensation claims.
- The company is party to ordinary-course legal and regulatory proceedings. Management does not expect them to materially affect financial position or results, but actual outcomes could differ from estimates.
- Interest-rate swaps hedge borrowings and had a net liability of $1.7 million at period end. Changes in market rates affect swap values and accumulated other comprehensive income.
- Revenue recognition, lease, stored-value breakage, share-based payment, and hedge-accounting standards had not all been adopted; the company was evaluating their future effects, including potentially significant balance-sheet effects from lease accounting.
- No material changes were reported in previously disclosed risk factors, market risks, material commitments, or internal control effectiveness.
Important Facts for Investors to Verify
- Whether the provisional $29.5 million Tax Act benefit is revised during the one-year measurement period and how the ongoing tax rate develops.
- Whether comparable-store traffic stabilizes and whether menu-price increases can offset commodity, wage, maintenance, and utility inflation.
- Whether retail sales and margins recover, particularly in weaker merchandise categories.
- Progress against the planned store openings and the $150 million to $160 million capital-expenditure range.
- Debt covenant compliance, borrowing availability, interest-rate swap exposure, and the effect of dividend and repurchase restrictions.
- The effect of future revenue-recognition and lease-accounting adoptions on reported revenue, liabilities, assets, and operating metrics.
- Developments in self-insurance claims, legal proceedings, and other contingencies that could exceed recorded estimates.