Cracker Barrel Old Country Store, Inc. — FY2023 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended July 28, 2023, with comparative fiscal years ended July 29, 2022 and July 30, 2021. The company operates Cracker Barrel restaurants with integrated retail gift shops and owns Maple Street Biscuit Company (MSBC), a breakfast and lunch fast-casual concept. As of September 13, 2023, the company operated 661 Cracker Barrel stores in 45 states and 59 MSBC locations in 10 states. Dollar amounts are in thousands unless otherwise stated.
Financial performance and key metrics
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Total revenue | $3,442,808 | $3,267,786 | 5.4% increase |
| Restaurant revenue | $2,740,866 | $2,565,628 | 6.8% increase |
| Retail revenue | $701,942 | $702,158 | Flat, down slightly |
| Operating income | $120,617 | $153,003 | 21.2% decrease |
| Operating margin | 3.5% | 4.7% | Down 1.2 percentage points |
| Net income | $99,050 | $131,880 | 24.9% decrease |
| Diluted EPS | $4.45 | $5.67 | 21.6% decrease |
| Net cash from operations | $250,457 | $205,253 | 22.0% increase |
| Capital expenditures, net | $125,387 | $97,104 | 29.1% increase |
Restaurant revenue represented 79.6% of total revenue and retail revenue represented 20.4%. Comparable Cracker Barrel restaurant sales increased 6.3%, driven by a 9.8% increase in average check, including an 8.6% menu price increase, while comparable guest traffic declined 3.5%. Comparable retail sales declined 0.4%. Off-premise sales remained approximately 20% of restaurant sales.
Cost pressures reduced profitability. Restaurant cost of goods sold increased to 28.1% of restaurant revenue from 27.5%, while retail cost of goods sold increased to 51.1% from 49.0%, primarily due to higher markdowns and freight expense. Labor and related costs were 35.1% of revenue, broadly consistent with 35.2% in FY2022, as wage inflation was partly offset by productivity initiatives and lower health-care and management compensation costs.
Interest expense increased to $17,006 from $9,620, primarily due to higher average debt levels and higher variable interest rates. The effective tax rate declined to 4.4% from 8.0%, mainly because of tax credits. The resulting approximate net margin was 2.9% versus 4.0% in FY2022.
Balance sheet, debt, liquidity and cash flow
- Cash and cash equivalents were $25,147 at July 28, 2023, down from $45,105.
- Working capital was negative $206,679, compared with negative $185,048 in FY2022; management notes that negative working capital is typical for the restaurant industry.
- Outstanding revolving credit borrowings were $120,000, down from $130,000. The $700,000 facility provided $548,104 of borrowing availability after borrowings and $31,896 of standby letters of credit.
- The company had $300,000 principal amount of 0.625% convertible senior notes due June 15, 2026, with a net carrying amount of $294,829.
- Total long-term debt, including current debt, was approximately $414,979. The company was in compliance with its revolving-credit financial covenants.
- Operating lease liabilities totaled approximately $748,749 on a present-value basis, with undiscounted future lease payments of $1,134,447.
- Net cash used in investing activities was $124,319, primarily reflecting $126,987 of property and equipment purchases, partly offset by proceeds from insurance recoveries and asset sales.
- Net cash used in financing activities was $146,096, including $116,075 of dividends, $17,449 of share repurchases and net debt repayments.
Management believes cash on hand, operating cash flow and revolver availability will fund operations, debt service, dividends, capital expenditures and expansion plans for at least the next twelve months and beyond. Contractual cash obligations totaled $1,748,893, including $1,134,447 of lease payments, $305,625 of convertible-debt obligations and $156,455 of purchase obligations.
Material changes versus the prior comparable period
- Revenue increased 5.4%, but operating income declined 21.2% and net income declined 24.9% as inflation, labor costs, retail markdowns, freight and higher interest expense outweighed pricing and sales growth.
- Comparable restaurant sales growth was largely price-driven; guest traffic declined 3.5%.
- The company recorded $11,692 of impairment charges for six underperforming Cracker Barrel locations and $2,307 of store-closing costs related to six Cracker Barrel and four MSBC closures.
- Two new Cracker Barrel stores and 12 new MSBC locations opened during FY2023, while six Cracker Barrel and four MSBC locations closed.
- Capital expenditures increased by $28,283, reflecting higher spending on existing stores, new stores, digital infrastructure and the loyalty program.
- Operating cash flow improved by $45,204, primarily because of lower retail inventory, partly offset by payment timing for accounts payable and taxes.
- Shares outstanding declined as the company repurchased 171,792 shares for $17,449, versus 1,248,184 shares for $131,542 in FY2022.
- Dividends paid increased to $5.20 per share from $4.90 per share.
Guidance, outlook, commentary and risks
- Management expected approximately 1% to 2% commodity deflation and 4% to 5% wage inflation in the first quarter of FY2024.
- Management expected a FY2024 effective tax rate of approximately 6%.
- Planned first-quarter FY2024 openings were one to two new Cracker Barrel stores and approximately four to five MSBC locations.
- Estimated first-quarter FY2024 capital expenditures were $27,000 to $32,000.
- Julie Felss Masino was scheduled to become President and Chief Executive Officer on November 1, 2023, replacing Sandra Cochran, who was expected to continue as Executive Chair until retirement no later than September 30, 2024. The transition may disrupt management attention or execution.
- Principal risks include persistent food, labor, freight, utility and merchandise inflation; reduced consumer discretionary spending; declining traffic; intense competition; supply-chain dependence, including foreign-sourced retail merchandise and a single primary retail distribution facility; cybersecurity and data-privacy incidents; regulatory and litigation exposure; labor availability; weather and other catastrophic events; and debt covenant, refinancing and interest-rate risk.
- The company self-insures significant workers’ compensation and general liability exposures. Insurance reserves depend on actuarial estimates and were identified as the fiscal-year critical audit matter.
- Legal proceedings are described as ordinary-course matters that management does not expect to materially affect consolidated results or financial position. The filing text does not provide a clear quantified exposure for these proceedings.
- The shareholder rights plan expires April 9, 2024 and may discourage or delay certain change-of-control transactions.
Important facts for investors to verify
- Whether price increases can offset food and labor inflation without causing further traffic declines.
- Comparable-store traffic, average check, restaurant margins and retail markdown rates in subsequent quarters.
- Liquidity and covenant headroom as variable borrowing costs remain elevated and the $300,000 convertible notes approach their 2026 maturity.
- Execution and financial performance of planned Cracker Barrel and MSBC openings, including MSBC’s targeted acceleration.
- Progress and costs associated with the digital infrastructure, loyalty program and cost-savings initiatives.
- Potential effects of the CEO transition, store impairments, closures and self-insured claims development.
- Future dividend and repurchase capacity under the revolving-credit facility and the status of the shareholder rights plan.