Cracker Barrel Old Country Store, Inc. — Fiscal 2011 Form 10-K
Reporting period: Fiscal year ended July 29, 2011. The filing includes unaudited fourth-quarter data for the 13 weeks ended July 29, 2011; fiscal years generally comprise 52 weeks. Dollar amounts are in thousands unless otherwise indicated.
Business context
Cracker Barrel operates an integrated restaurant and retail concept in the United States. Restaurants generated approximately 79% of fiscal 2011 revenue and gift shops approximately 21%. The company operated 603 stores at fiscal year-end and 604 stores in 42 states as of September 20, 2011. Eleven stores opened and one closed during fiscal 2011. No stores are franchised.
Financial performance and key metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Total revenue | $2,434,435 | $2,404,515 | 1.2% increase |
| Operating income | $167,181 | $164,668 | 1.5% increase |
| Operating margin | 6.9% | 6.8% | Up approximately 10 basis points |
| Income before taxes | $115,691 | $115,709 | Essentially flat |
| Net income | $85,208 | $85,258 | Essentially flat |
| Diluted EPS | $3.61 | $3.62 | Down $0.01 |
| Cash flow from operations | $138,212 | $212,106 | 35% decrease |
| Capital expenditures, net | $77,686 | $69,891 | 11% increase |
- Restaurant revenue was $1,934,049, up from $1,911,664; retail revenue was $500,386, up from $492,851.
- Comparable restaurant sales increased 0.2%, while comparable retail sales increased 0.7%. Restaurant guest traffic declined 2.0%, offset by a 2.2% increase in average check to $9.22, including approximately 2.0% menu pricing.
- Store operating income declined to $305,778, or 12.6% of revenue, from $313,350, or 13.0%. Food commodity inflation, higher advertising, supplies and insurance expenses pressured margins.
- Cost of goods sold increased to 31.7% of revenue from 31.0%; restaurant food cost increased to 26.5% of restaurant revenue from 25.6%, principally because of 2.9% food commodity inflation.
- Labor and related expenses improved to 37.1% of revenue from 37.8%, while other store operating expenses increased to 18.6% from 18.2%.
- Fiscal 2011 included $5,136 of additional interest expense from debt refinancing transaction fees and the write-off of deferred financing costs.
Fourth-quarter information
| Metric | Q4 fiscal 2011 | Q4 fiscal 2010 |
|---|---|---|
| Total revenue | $612,942 | $612,483 |
| Income before taxes | $21,761 | $33,757 |
| Net income | $17,543 | $27,413 |
| Basic EPS | $0.77 | $1.18 |
| Diluted EPS | $0.75 | $1.14 |
Fourth-quarter revenue was essentially flat year over year, while pretax income and net income declined materially. The filing attributes fiscal 2011 earnings pressure in part to refinancing costs, commodity inflation, lower traffic and restructuring-related charges.
Liquidity, debt and capital resources
- Cash and cash equivalents were $52,274 at July 29, 2011, compared with $47,700 a year earlier.
- Working capital remained negative at $(21,188), an improvement from $(73,289) in fiscal 2010.
- Total debt was approximately $550,246, consisting principally of $231,250 under a term loan and $318,750 under a revolving credit facility. Long-term debt on the balance sheet was $550,143.
- On July 9, 2011, the company entered into a five-year $750,000 credit facility comprising a $250,000 term loan and a $500,000 revolving facility. Borrowing availability at year-end was $151,269 after $29,981 of standby letters of credit.
- The company reported compliance with its financial covenants and expects to remain in compliance. Debt is subject to leverage, interest coverage and dividend restrictions.
- Contractual cash obligations totaled $1,529,426, including $752,929 of operating leases, $149,721 of purchase obligations and $550,000 of credit-facility debt.
- The company repurchased 676,600 shares for $33,563 and paid dividends of $0.86 per share during fiscal 2011. A further $65,000 share-repurchase authorization was available for fiscal 2012.
Material changes versus the prior comparable period
- Revenue increased modestly, primarily from new stores and slightly positive comparable sales, but customer traffic weakened beginning in the second quarter and continued declining in the second half.
- Store operating margin fell 40 basis points because commodity, advertising, supplies and insurance costs rose faster than sales.
- General and administrative expense declined to 5.7% of revenue from 6.1%, although fiscal 2011 included $1,768 of severance charges.
- Net income was essentially flat despite higher operating income because refinancing costs increased interest expense and operating cash flow declined sharply.
- Debt declined modestly from the prior year, but the debt mix shifted substantially toward the new revolving facility, which had no comparable year-earlier balance.
- Shareholders’ equity increased to $268,034 from $191,617, aided by net income and a favorable change in the fair value of interest-rate swaps.
Guidance, outlook, risks and unusual items
- Management planned approximately 15 new stores in fiscal 2012 and estimated capital expenditures of $90,000 to $100,000.
- Management expected food commodity inflation to approximately double in fiscal 2012 compared with fiscal 2011 and intended to mitigate it through menu pricing, supply contracts and cost-reduction initiatives.
- Management expected lower guest-traffic trends to continue into fiscal 2012.
- A July 2011 restructuring eliminated approximately 60 headquarters management and staff positions. Management estimated annual pretax savings of approximately $10,000; the initiative generated $1,768 of severance charges and a $1,044 office-space impairment charge.
- Impairment charges totaled $3,219, partly offset by $4,109 of gains from store dispositions and condemnation proceeds, producing a net benefit of $625.
- The company adopted a new $750,000 credit facility and used interest-rate swaps to manage exposure to variable interest rates. The interest-rate swap liability was $51,604 at year-end.
- The company relies heavily on discretionary consumer spending, interstate traffic, billboards, food and merchandise supply chains, qualified labor and a single primary retail distribution facility. Key risks include commodity inflation, wage and benefit increases, severe weather, competition, regulatory changes, litigation, insurance claims, information-technology disruption and privacy breaches.
- The company disclosed a proxy-related risk involving Biglari Holdings and subsequently adopted a shareholder rights plan on September 22, 2011. The plan generally becomes exercisable if a person or group acquires 10% or more of the common stock and expires September 22, 2014, subject to shareholder approval and other terms.
- Management expected proceeds from a lawsuit settlement in the first quarter of fiscal 2012 but had not recognized the gain at July 29, 2011 because it was treated as a gain contingency.
- Management stated that ordinary-course legal proceedings were not expected to materially affect consolidated results or financial position. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification checklist
- Verify the sustainability of positive comparable sales given the 2.0% decline in restaurant traffic and management’s expectation of continued traffic weakness.
- Reconcile the effect of commodity inflation, menu pricing and potential margin recovery in fiscal 2012.
- Review debt-covenant calculations, revolving-facility availability, interest-rate swaps and refinancing-related costs.
- Assess whether the projected $10,000 annual restructuring savings were realized without impairing store-level execution.
- Review the $90,000 to $100,000 fiscal 2012 capital-expenditure plan and the returns from 15 planned new stores.
- Examine contractual lease obligations, supply-chain concentration, foreign sourcing and the $29,981 of standby letters of credit.
- Follow the lawsuit settlement, proxy contest and shareholder-rights-plan developments after the fiscal year-end.