Cracker Barrel Old Country Store, Inc. — Fiscal 2016 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended April 29, 2016, compared with the quarter and nine months ended May 1, 2015. The unaudited results cover 635 stores in 42 states. The company operates one reportable segment combining restaurant and retail operations.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $700.1 million | $683.7 million | $2.167 billion | $2.123 billion |
| Operating income | $67.0 million | $55.5 million | $202.9 million | $182.1 million |
| Net income | $49.2 million | $35.3 million | $138.3 million | $116.5 million |
| Diluted EPS | $2.04 | $1.47 | $5.75 | $4.85 |
| Net margin | 7.0% | 5.2% | 6.4% | 5.5% |
| Operating margin | 9.6% | 8.1% | 9.4% | 8.6% |
- Revenue increased 2.4% in the quarter and 2.1% year to date. Restaurant revenue was $570.5 million in the quarter and $1.714 billion year to date; retail revenue was $129.7 million and $453.1 million, respectively.
- Comparable restaurant and retail sales increased 2.3% in the quarter and 1.9% year to date. Restaurant traffic declined 0.6% in the quarter and 1.3% year to date, partly offset by higher average checks and menu pricing.
- Store operating margin improved to 14.8% from 13.8% in the quarter and to 14.3% from 13.7% year to date. Improvements reflected commodity deflation, menu pricing, lower food waste, lower bonus and payroll-tax expense, and improved retail initial margins.
- Other store operating expenses increased as a percentage of revenue, primarily because of higher advertising and maintenance spending. General and administrative expense ratios declined to 5.2% from 5.7% in the quarter and to 4.9% from 5.1% year to date.
- Net cash provided by operating activities was $149.4 million for the first nine months, down from $216.7 million. Management attributed the decline primarily to the timing of accounts-payable payments, higher retail inventory levels and higher bonus payments.
- Capital expenditures were $69.5 million net of insurance recoveries, compared with $60.1 million in the prior-year period. Cash used in investing activities was $68.9 million.
- Cash and cash equivalents were $176.7 million at April 29, 2016, compared with $265.5 million at July 31, 2015. Total assets were $1.496 billion and shareholders’ equity was $580.4 million.
Debt, liquidity and capital allocation
- Debt outstanding was $400.0 million under the $750.0 million revolving credit facility. Borrowing availability was $338.8 million after $11.2 million of standby letters of credit.
- The weighted-average interest rate on swapped borrowings was 2.96%. Interest expense declined to $3.4 million in the quarter and $10.5 million year to date, primarily because of lower rates and the expiration or replacement of higher-cost swaps.
- The company was in compliance with all debt covenants. The facility includes leverage, interest-coverage, dividend and share-repurchase restrictions.
- The company paid regular dividends of $3.30 per share and a special dividend of $3.00 per share during the first nine months, totaling $151.4 million. It repurchased 100,000 shares for $14.7 million.
- Working capital was positive $56.6 million at April 29, 2016, compared with positive $11.2 million at July 31, 2015. Management stated that available cash, operating cash flow and borrowing capacity should fund operations, dividends and expansion for at least the next twelve months.
Material changes, outlook and unusual items
- Management’s 2016 priorities were to increase traffic and sales, improve guest experience through technology and processes, reduce store operating costs, and invest in new units and a fast-casual concept.
- Management expected approximately flat commodity inflation for 2016 and an effective tax rate of approximately 29.0%; excluding recognition of prior-year tax positions, the expected rate was approximately 31.0%.
- Management estimated 2016 capital expenditures of $100.0 million to $110.0 million, including five new stores expected to open during 2016, future-store development, maintenance, technology and operational improvements.
- The lower reported tax rate was primarily due to recognition of tax reserve positions from prior years. Excluding that item, the third-quarter and year-to-date effective tax rates would have been approximately 31.0% and 30.9%, respectively.
- Other comprehensive loss was $7.1 million year to date, largely reflecting changes in the fair value of interest-rate swaps. Interest-rate swap liabilities totaled $17.6 million at April 29, 2016.
- 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 therefore not necessarily indicative of full-year performance.
- Legal and regulatory matters were described as ordinary-course proceedings that management does not expect to materially affect financial condition or results. The company is significantly self-insured for workers’ compensation and general liability claims.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether improved margins can persist despite declining guest traffic, wage inflation, maintenance costs and increased advertising spending.
- The sustainability of cash generation after substantial dividend payments, share repurchases and planned capital expenditures.
- Compliance with leverage and interest-coverage covenants, including the effect of dividend and repurchase restrictions.
- The effect of interest-rate swap valuations and future rate changes on accumulated other comprehensive loss, interest expense and liquidity.
- Progress on the five planned new stores, the fast-casual concept, retail omni-channel initiatives and projected $100.0 million to $110.0 million of 2016 capital spending.
- Potential variability in tax expense, insurance reserves, retail inventory shrinkage and obsolescence, impairment estimates, share-based compensation and legal contingencies.