Cracker Barrel Old Country Store, Inc. — Fiscal 2014 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended May 2, 2014, compared with the quarter and nine months ended May 3, 2013. The unaudited statements were prepared under U.S. GAAP. The company operated 627 stores in 42 states at quarter-end.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $643.3 million | $640.4 million | $1,990.9 million | $1,970.5 million |
| Gross profit | $441.8 million | $438.4 million | $1,340.5 million | $1,326.5 million |
| Operating income | $45.2 million | $44.2 million | $148.2 million | $146.7 million |
| Net income | $28.7 million | $24.6 million | $92.9 million | $83.0 million |
| Diluted EPS | $1.20 | $1.02 | $3.88 | $3.47 |
| Net cash from operations | Not provided for quarter | Not provided for quarter | $101.2 million | $106.7 million |
- Margins: Q3 gross margin was 68.7%, versus 68.5%; operating margin was 7.0%, versus 6.9%; and net margin was 4.5%, versus 3.8%. For the nine months, gross margin was 67.3% in both periods, operating margin was 7.4% in both periods, and net margin increased to 4.7% from 4.2%.
- Revenue mix: Q3 restaurant revenue was $523.6 million and retail revenue was $119.7 million. Comparable combined restaurant and retail sales declined 0.3%, including a 2.9% restaurant traffic decline, partially offset by higher average checks.
- Cash and liquidity: Cash and equivalents were $88.2 million at May 2, 2014, compared with $121.7 million at August 2, 2013. Nine-month operating cash flow was $101.2 million. Capital expenditures were $63.2 million, and net cash used in investing activities was $60.8 million.
- Debt: Total debt was $400.0 million, consisting of $212.5 million drawn on the revolving facility and a $187.5 million term loan. Revolving availability was $266.9 million after $20.6 million of standby letters of credit. The company was in compliance with its debt covenants.
- Shareholder returns: The company paid $53.6 million of dividends during the first nine months and repurchased 120,000 shares for $12.5 million. The quarterly dividend was increased 33% to $1.00 per share.
Material changes versus the prior comparable period
- Q3 revenue increased 0.5% and nine-month revenue increased 1.0%, primarily reflecting new-store sales and modest retail growth.
- Q3 net income increased 16.8% and diluted EPS increased 17.6%; nine-month net income increased 12.0% and diluted EPS increased 11.8%.
- Interest expense declined to $4.3 million from $10.2 million in Q3 and to $13.2 million from $31.2 million for the nine months, due to lower debt, lower credit spreads, and the expiration of a higher-rate interest-rate swap.
- General and administrative expense declined to $32.5 million from $36.0 million in Q3, primarily because of lower incentive compensation, partially offset by $1.1 million of special shareholder-meeting costs.
- Other store operating expenses increased as a percentage of revenue, primarily due to higher utilities, depreciation, supplies, maintenance, and weather-related costs. Severe winter weather also reduced traffic and increased food waste.
- Operating cash flow declined by $5.5 million year over year, principally because of accounts-payable timing and retail inventory changes.
- Capital expenditures increased materially to $63.2 million from $46.2 million for the first nine months, reflecting higher maintenance spending and new-store development.
Guidance, outlook, risks, and unusual items
- Management expects 2014 commodity inflation of approximately 2%, fourth-quarter commodity inflation of approximately 2.5%, interest expense of approximately $17 million to $18 million, and an effective tax rate of 31% to 32%.
- 2014 capital expenditures are estimated at $90 million to $100 million, including approximately seven new stores opened or expected to open during the year, sites for 2015 stores, maintenance, technology, and operating improvements.
- Management believes available cash, operating cash flow, and revolver capacity will fund operations, expansion, share repurchases, and dividends for at least the next twelve months.
- Key operating pressures include a challenging consumer environment, promotional competition, weather-related traffic disruption, food and labor costs, utilities, insurance claims, and retail inventory shrinkage or markdowns.
- An FLSA collective action filed in April 2014 challenges the classification of associate managers as exempt from minimum-wage and overtime requirements. The company believes it has meritorious defenses, but cannot estimate the potential outcome or financial effect; an adverse outcome could be material.
- The Kraft litigation was settled in March 2014. The settlement permits specified uses of the company’s marks on food products but restricts use of the CRACKER BARREL OLD COUNTRY STORE mark outside designated company channels.
- The filing states that no material changes occurred in previously disclosed risk factors or market risks. Interim results are subject to significant seasonality and are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether comparable-store traffic weakness persists after the severe winter weather and whether higher pricing can offset traffic declines.
- The company’s ability to fund elevated capital expenditures and shareholder distributions while maintaining covenant compliance and adequate liquidity.
- Food commodity inflation, particularly for beef, pork, eggs, and dairy, and its effect on restaurant margins.
- The ultimate scope, certification status, damages exposure, and potential settlement costs of the FLSA litigation.
- Execution of the new-store pipeline, technology and process initiatives, and the company’s stated 2014 capital-expenditure and tax-rate expectations.