Cracker Barrel Old Country Store, Inc. — Fiscal 2015 First-Quarter 10-Q
Reporting period: Quarter ended October 31, 2014, compared with the quarter ended November 1, 2013. The company operated 633 stores in 42 states at quarter-end, including two stores opened during the quarter. Results are unaudited and interim results are seasonal.
Financial performance and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total revenue | $683.4 million | $649.1 million | +5.3% |
| Restaurant revenue | $546.7 million | $521.9 million | +4.7% |
| Retail revenue | $136.7 million | $127.2 million | +7.5% |
| Gross profit | $461.1 million | $443.2 million | +4.0% |
| Gross margin | 67.5% | 68.3% | -80 basis points |
| Store operating income | $88.6 million | $81.1 million | +9.3% |
| Operating income | $55.4 million | $44.2 million | +25.3% |
| Operating margin | 8.1% | 6.8% | +130 basis points |
| Net income | $34.0 million | $27.2 million | +25.3% |
| Diluted EPS | $1.42 | $1.14 | +24.6% |
| Operating cash flow | $36.7 million | $(9.2) million | Improved by $46.0 million |
Comparable restaurant and retail sales increased 3.8% combined, consisting of a 3.3% restaurant increase and a 6.1% retail increase. Restaurant comparable sales reflected a 2.5% average-check increase and 0.8% guest-traffic growth. Store operating margin improved to 13.0% from 12.5%.
Cash and cash equivalents were $105.9 million at October 31, 2014, down from $119.4 million at August 1, 2014. Capital expenditures were $18.4 million, and cash used in financing activities was $32.8 million, including $23.8 million of dividends. No common stock was repurchased during the quarter.
Total debt was $393.8 million, comprising $212.5 million outstanding under the revolving facility and $181.3 million under the term loan. Revolving borrowing availability was $267.3 million after $20.2 million of standby letters of credit. The company was in compliance with its debt covenants; the credit facility expires July 8, 2016, and management planned to renew or refinance it before the end of 2015.
Material changes versus the prior comparable period
- Revenue growth reflected comparable-store sales, two additional stores, and stronger retail sales, particularly in bed and bath, décor, and apparel.
- Operating profitability improved despite lower gross margin. Labor expense declined to 35.5% of revenue from 36.5%, while other store operating expense declined to 19.0% from 19.3%.
- General and administrative expense declined to $33.2 million from $36.9 million, primarily because the prior-year period included $2.8 million of proxy contest costs and higher severance expense.
- Prior-year store manager conference costs did not recur. Lower advertising spending also benefited the quarter, although management expected a conference in the first quarter of 2016.
- Restaurant cost of goods sold increased as a percentage of restaurant revenue because of higher-cost menu mix, commodity inflation, and higher food waste. Commodity inflation was 3.7% in the quarter.
- Cash flow from operations turned positive, primarily because of lower retail inventory cash usage, payment timing, and higher net income.
Guidance, outlook, risks and unusual items
- Management planned to open six to seven new stores during fiscal 2015 and estimated full-year capital expenditures of $100 million to $110 million.
- Expected 2015 commodity inflation was approximately 4.0% to 4.5%; expected effective tax rate was 32% to 33%, assuming the Work Opportunity Tax Credit was not renewed. Renewal could reduce 2015 tax expense by approximately $5 million to $6 million.
- Management expected additional health-plan premium credits of approximately $2 million to $3 million during the remainder of fiscal 2015.
- The company cited seasonality: historically, net income is lower in the first and third quarters and higher in the second and fourth quarters.
- Several putative FLSA collective actions challenge the classification of associate managers as exempt from wage and overtime requirements. The proceedings were in early stages, and the ultimate outcome and potential liability could not be determined. The company recorded a provision relating to certain New York state claims; the amount was not disclosed and was considered immaterial by management.
- Interest-rate swaps had a net liability of $8.6 million at October 31, 2014, and generated an after-tax other comprehensive loss of $0.5 million during the quarter.
- Management stated that cash, operating cash flow, and available revolver capacity should fund operations, expansion, share repurchases, and dividends for at least the next twelve months.
Important facts for investors to verify
- Whether comparable-store traffic and pricing continue to support revenue growth while food and commodity costs rise.
- The timing and terms of renewal or refinancing for the credit facility before its July 2016 maturity.
- Compliance with leverage, interest-coverage, dividend, and share-repurchase restrictions under the credit agreement.
- The ultimate cost and scope of the pending FLSA litigation and related wage-and-hour claims.
- Whether the six-to-seven-store expansion plan and $100 million to $110 million capital-spending estimate remain achievable.
- The effect of potential Work Opportunity Tax Credit renewal and expected health-plan credits on the tax rate and earnings.
- Seasonal inventory levels and holiday retail performance, given the planned inventory build and the concentration of retail sales in the second quarter.