Cracker Barrel Old Country Store, Inc. — Fiscal 2018 First-Quarter 10-Q Summary
Reporting period: Quarter ended October 27, 2017; comparable quarter ended October 28, 2016. The unaudited interim results were prepared under U.S. GAAP. Cracker Barrel operated 645 Cracker Barrel stores in 44 states and six Holler & Dash locations in four states at quarter-end.
Financial Results and Position
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Total revenue | $710.4 million | $710.0 million |
| Restaurant revenue | $578.2 million | $573.7 million |
| Retail revenue | $132.1 million | $136.3 million |
| Operating income | $70.8 million | $75.7 million |
| Net income | $46.4 million | $48.4 million |
| Diluted EPS | $1.92 | $2.01 |
| Dividends declared per share | $1.20 | $1.15 |
- Total revenue increased 0.1%. Restaurant revenue increased while retail revenue declined.
- Store operating margin declined to 15.2% from 15.5%; operating margin declined to 10.0% from 10.7%; net margin declined to 6.5% from 6.8%.
- Comparable restaurant sales increased 0.2%, consisting of a 2.0% average-check increase, including a 2.2% menu-price increase, offset by a 1.8% traffic decline. Comparable retail sales declined 3.6%, resulting in a 0.6% decline for combined restaurant and retail comparable sales.
- Net cash provided by operating activities was $38.3 million, compared with $34.9 million in the prior-year quarter. Capital expenditures were $30.6 million, and net cash used in financing activities was $48.7 million.
- Cash and cash equivalents were $120.2 million at October 27, 2017, down from $161.0 million at July 28, 2017. Negative working capital was $26.6 million.
- Debt consisted of $400.0 million outstanding under the $750.0 million revolving credit facility. Borrowing availability was $340.5 million after $9.5 million of standby letters of credit. The company was in compliance with its debt covenants.
- The company repurchased 100,000 shares for $14.8 million and paid $30.5 million in common-stock dividends during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat, but operating income declined primarily as other store operating expenses and general and administrative expenses increased as percentages of revenue.
- Other store operating expenses increased to 20.2% of revenue from 19.4%, reflecting a bi-annual manager conference, higher supplies, maintenance and depreciation expenses, and costs associated with strategic initiatives.
- General and administrative expenses increased to 5.2% of revenue from 4.8%, primarily due to higher payroll, staffing, average wages, travel and meeting expenses.
- Cost of goods sold improved to 29.7% of revenue from 30.0%. Restaurant food costs benefited from menu pricing and product mix, while retail margins were pressured by lower initial margins and higher obsolete-inventory provisions.
- The effective tax rate declined to 31.0% from 32.9%. Adoption of share-based-payment guidance produced a $0.8 million tax benefit and increased diluted EPS by $0.03.
- Retail inventories increased to $151.0 million from $119.4 million at July 28, 2017, contributing to the decline in cash and working capital.
Guidance, Outlook, Risks and Unusual Items
- Management plans to focus on value, culinary enhancements, speed of service, expansion into new markets and development of Holler & Dash. It anticipates opening eight to nine Cracker Barrel stores and three Holler & Dash locations during fiscal 2018; two Holler & Dash locations opened during the quarter.
- Fiscal 2018 capital expenditures are estimated at $150 million to $160 million, including new-store construction, technology and strategic initiatives. The company expects to fund capital spending through operating cash flow and revolver borrowings as necessary.
- Management expects commodity inflation of approximately 2.0% to 2.5% in fiscal 2018 compared with fiscal 2017. The filing does not provide full-year revenue or EPS guidance.
- Adverse weather reduced estimated comparable restaurant traffic by approximately 0.3% and comparable retail sales by approximately 0.6%. Weather-related store closures also resulted in discretionary employee pay.
- The company held a manager conference and training event during the quarter that did not occur in the prior-year quarter, creating an unusual year-over-year expense comparison.
- The company self-insures significant portions of workers’ compensation, general liability and health programs; changes in claims experience or actuarial assumptions could materially affect reserves and expense.
- Legal and regulatory claims are considered ordinary-course matters, and management does not currently expect them to materially affect results or financial position. The company also has standby letters of credit supporting workers’ compensation insurance and secondary liability for leases at two properties.
- Seasonality is significant: historically, net income is lower in the first and third quarters and higher in the second and fourth quarters.
- Revenue recognition, lease, stored-value breakage, share-based-payment and hedge-accounting standards had not all been adopted; management was evaluating their future effects where applicable.
Investor Verification Checklist
- Verify whether restaurant traffic weakness and retail sales declines persisted beyond the weather-affected quarter.
- Monitor commodity inflation, wage inflation, food waste, retail obsolescence and the effect of strategic initiatives on store margins.
- Confirm progress toward the planned store openings and the $150 million to $160 million capital-expenditure range.
- Track cash generation after dividends, share repurchases, inventory investment and capital spending, together with revolver availability and covenant compliance.
- Assess the sustainability of the $1.20 quarterly dividend and share-repurchase authorization under the revolving-credit-facility restrictions.
- Review future filings for changes in self-insurance reserves, legal contingencies, interest-rate swap values and adoption impacts from pending accounting standards.