Cracker Barrel Old Country Store, Inc. — FY2013 Form 10-K Summary
Business Context and Reporting Period
The filing covers the fiscal year ended August 2, 2013. Fiscal 2013 had 52 weeks, compared with 53 weeks in fiscal 2012, which affects year-over-year comparisons. Cracker Barrel operated 624 company-owned stores in 42 states as of September 20, 2013, combining full-service restaurants with retail gift shops. Restaurant sales represented 79.6% of revenue and retail sales 20.4%.
Key Financial Metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $2.645 billion | $2.580 billion | 2.5% increase |
| Restaurant revenue | $2.105 billion | $2.054 billion | 2.5% increase |
| Retail revenue | $539.9 million | $526.1 million | 2.6% increase |
| Operating income | $201.5 million | $191.0 million | 5.5% increase |
| Net income | $117.3 million | $103.1 million | 13.8% increase |
| Diluted EPS | $4.90 | $4.40 | 11.4% increase |
| Operating margin | 7.6% | 7.4% | 20 basis-point increase |
| Net margin | 4.4% | 4.0% | Improved |
| Store operating margin | 13.0% | 13.1% | 10 basis-point decrease |
Comparable-store restaurant sales increased 3.1%, driven by a 2.5% increase in average check, including a 2.2% menu price increase, and 0.6% higher guest traffic. Comparable retail sales increased 2.9%. Average check was $9.68, up 2.5%.
Gross margin was 67.7% of revenue, compared with 67.9% in 2012. Restaurant cost of goods sold increased to 27.2% of restaurant revenue from 26.9%, primarily because of 3.4% food commodity inflation. Labor and related expenses improved to 36.5% of revenue from 36.8%, reflecting productivity improvements and pricing leverage. General and administrative expense declined to 5.4% of revenue from 5.7%.
Fourth-quarter revenue was $674.1 million and net income was $34.3 million, compared with $700.0 million and $34.7 million, respectively, in the 14-week fourth quarter of 2012.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $208.5 million, versus $219.8 million in 2012.
- Net capital expenditures were $74.0 million, compared with $80.2 million in 2012.
- Cash and cash equivalents were $121.7 million at year-end, down from $152.0 million.
- Net cash used in financing activities was $165.3 million, primarily reflecting $125.2 million of debt repayments and $45.4 million of dividends.
- Long-term debt was $400.0 million, down from $525.0 million. The company had $258.5 million of borrowing availability under its $500.0 million revolving facility after standby letters of credit.
- Working capital was a deficit of $13.9 million, compared with positive working capital of $18.2 million in 2012.
- The company reported compliance with its credit-facility covenants. The term loan and revolving facility mature on or before July 8, 2016.
- Dividends declared increased to $2.25 per share for 2013 from $1.15 in 2012. The quarterly dividend was increased to $0.75 in the fourth quarter. No shares were repurchased in the fourth quarter; a new $50.0 million repurchase authorization was approved for 2014.
Material Changes Versus the Prior Comparable Period
- Revenue increased despite the absence of the extra week included in fiscal 2012.
- Net income benefited from higher sales, lower interest expense, lower general and administrative costs and improved labor productivity.
- Interest expense declined to $35.7 million from $44.7 million because of lower debt, lower credit spreads and expiration of a high-rate interest-rate swap in May 2013.
- Food commodity inflation increased restaurant cost pressure, while food-waste reductions and menu pricing partially offset the impact.
- The company opened eight stores in 2013, compared with 13 in 2012, and ended the year with 624 stores versus 616.
- The company incurred $4.1 million of costs related to the November 2012 proxy contest, included in 2013 general and administrative expense. No impairment or store-disposition charges were recorded in 2013 or 2012.
Guidance, Outlook, Commentary and Risks
- Management expected approximately 2% commodity inflation in 2014 and planned to offset it through menu pricing, supply contracts and cost-reduction initiatives.
- Expected 2014 interest expense was approximately $16 million to $18 million, and the effective tax rate was expected to be 31% to 32%, partly because of expiration of the Work Opportunity Tax Credit.
- 2014 capital expenditures were estimated at $90 million to $100 million, including seven or eight new stores, maintenance, technology and operational improvements.
- Management expected 2014 advertising spending of approximately 2.2% of revenue, compared with 2.3% in 2013, with outdoor advertising representing approximately 47% of advertising expense.
- Management stated that available cash, operating cash flow and revolving-credit capacity should fund 2014 operations, expansion, share repurchases and dividends.
- Kraft Foods obtained a preliminary injunction restricting certain prospective retail-channel uses of the Cracker Barrel mark in connection with branded food products. The company disagreed with the ruling and appealed.
- Key risks include discretionary consumer spending, intense restaurant and retail competition, food and commodity inflation, labor availability and wage regulation, seasonal and weather volatility, reliance on a single retail distribution facility, foreign sourcing, information-security and technology disruptions, self-insured claims, litigation, leverage and covenant restrictions.
- The company disclosed an activist shareholder and proxy-contest risk involving affiliates of Biglari Holdings. Its shareholder rights plan expires April 9, 2015 and generally activates upon a person or group acquiring 20% or more of the common stock.
- Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of August 2, 2013.
Important Facts for Investors to Verify
- Reconcile reported 2013 growth with the 53-week 2012 comparison and review comparable-store sales on a calendar-week basis.
- Assess whether menu pricing and productivity can offset expected commodity, labor, health-care and other operating-cost inflation.
- Review debt maturities in 2015 and 2016, covenant calculations, interest-rate swaps and the company’s ability to refinance by July 2016.
- Monitor liquidity after dividends, planned capital expenditures, new-store investment and any future share repurchases.
- Track the Kraft trademark litigation and the commercial impact of restrictions on branded retail food products.
- Evaluate the effect of the shareholder rights plan, activist involvement and executive change-in-control provisions on governance and capital-allocation decisions.
- Review retail inventory valuation, shrinkage, self-insurance reserves and uncertain tax positions, which depend on management estimates and could produce future adjustments.