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 May 1, 2015, compared with May 2, 2014; the balance sheet is compared with August 1, 2014. The company operated 634 stores in 42 states at quarter-end and reports one operating segment.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $683.7 million | $643.3 million | $2.123 billion | $1.991 billion |
| Operating income | $55.5 million | $45.2 million | $182.1 million | $148.2 million |
| Net income | $35.3 million | $28.7 million | $116.5 million | $92.9 million |
| Diluted EPS | $1.47 | $1.20 | $4.85 | $3.88 |
| Operating margin | 8.1% | 7.0% | 8.6% | 7.4% |
| Net margin | 5.2% | 4.5% | 5.5% | 4.7% |
- Revenue increased 6.3% in the quarter and 6.6% for the nine-month period. Q3 restaurant revenue was $557.1 million and retail revenue was $126.6 million.
- Comparable store sales increased 5.1% in Q3 and 5.3% for nine months, comprising restaurant comparable sales growth of 5.2% and 5.5%, respectively, and retail growth of 4.5% in both periods.
- Q3 restaurant comparable sales reflected a 3.4% average check increase and 1.8% guest traffic growth. Nine-month results reflected a 3.0% average check increase and 2.5% traffic growth.
- Store operating margin improved to 13.8% in Q3 from 12.1% and to 13.7% for nine months from 12.4%. Labor expense leverage, lower health-care costs, productivity initiatives, lower utilities and pricing contributed to the improvement.
- Commodity inflation was 4.0% in Q3 and 3.9% for nine months. Management expects approximately 3.0% commodity inflation for fiscal 2015.
- Net cash provided by operating activities was $216.7 million for the nine months, versus $101.2 million in the prior-year period. Capital expenditures were $60.1 million, and management estimates approximately $95.0 million for fiscal 2015.
- Cash and cash equivalents were $202.1 million at May 1, 2015, compared with $119.4 million at August 1, 2014. Working capital was $75.4 million, compared with negative working capital of $14.8 million at fiscal year-end.
- Debt was $400.0 million, all under a new $750.0 million revolving credit facility. Borrowing availability was $338.5 million after $11.5 million of standby letters of credit. The company was in compliance with its debt covenants; outstanding borrowings had a weighted-average swapped interest rate of 3.48%.
- The company paid $3.00 per share in dividends during the first nine months, totaling $71.8 million. No share repurchases occurred during the period.
Material Changes Versus the Prior Comparable Period
- Operating income increased 22.7% in Q3 and 22.9% for nine months, while net income increased 22.9% and 25.4%, respectively.
- Labor and related expenses declined to 36.1% of revenue in Q3 from 37.8% and to 34.9% for nine months from 36.1%, primarily due to productivity, pricing leverage, lower health-care expenses and lower payroll taxes.
- General and administrative expense increased to 5.7% of revenue in Q3 from 5.1%, primarily because of higher incentive compensation. For nine months, the ratio increased modestly to 5.1% from 5.0%, including a $3.5 million provision related to FLSA litigation.
- The January 2015 refinancing replaced the prior term loan and revolving facility with a five-year $750.0 million revolver, reduced the credit spread by 0.25%, and increased long-term debt reported at May 1, 2015 to $400.0 million from $375.0 million.
- Q3 and nine-month results benefited from lower gasoline prices, milder weather, seasonal promotions, national advertising, market-level pricing and improved operating execution. The prior-year periods included $1.1 million of Q3 and $4.3 million of nine-month proxy contest expenses.
- Share-based compensation increased to $10.8 million for nine months from $6.1 million, while 127,857 shares were issued through vesting and option exercises.
Guidance, Outlook, Risks and Unusual Items
- Management plans to extend the brand, optimize guest checks through geographic pricing, improve store processes and margins, and open six new stores during fiscal 2015. A dining room management system was being implemented and was expected to be substantially complete in Q4 2015.
- Management expects a fiscal 2015 effective tax rate of 31% to 32% and approximately $95.0 million of capital expenditures.
- Management believes cash on hand, operating cash flow and revolver availability will fund operations, expected dividends and expansion for at least the next twelve months. Dividend and repurchase capacity is subject to leverage, cash-availability and other credit-facility conditions.
- FLSA collective-action litigation concerning the classification of associate managers remained subject to final court approval of a settlement executed in May 2015. The company had accrued approximately $3.5 million; any additional adverse outcome could be material.
- The company adopted a shareholder rights plan on April 9, 2015. Rights generally become exercisable after a person or group acquires 20% or more of the common stock. If approved by shareholders, the plan expires April 9, 2018; otherwise, it expires after the 2015 annual meeting vote.
- Key operating and financial risks include commodity inflation, labor and health-care costs, consumer traffic, retail inventory valuation and shrinkage, insurance reserves, impairment estimates, tax matters, litigation, interest-rate exposure and compliance with debt covenants.
- 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.
Investor Verification Items
- Verify the sustainability of comparable-store sales growth, traffic gains and pricing benefits after the effects of lower gasoline prices and favorable weather.
- Assess whether labor-cost productivity and lower health-care costs can continue to offset wage, commodity and other operating inflation.
- Review the $400.0 million revolver balance, $338.5 million availability, covenant headroom and restrictions on dividends and share repurchases.
- Confirm the final court approval, total cost and accounting treatment of the FLSA settlement.
- Evaluate the planned $95.0 million capital program and execution of the six-store expansion plan.
- Consider the effect of the shareholder rights plan and the subsequently declared $1.10 regular dividend plus $3.00 special dividend payable August 5, 2015.