Cracker Barrel Old Country Store, Inc. — Q2 FY2023 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended January 27, 2023, compared with the periods ended January 28, 2022. Cracker Barrel operated 665 restaurants in 45 states and 56 Maple Street Biscuit Company locations in 10 states, for 721 company-owned units in total. The company operates as one reportable segment in the United States.
Key financial metrics
| Metric | Q2 FY2023 | Q2 FY2022 | 6M FY2023 | 6M FY2022 |
|---|---|---|---|---|
| Revenue | $933.9 million | $862.3 million | $1.773 billion | $1.647 billion |
| Operating income | $39.0 million | $46.7 million | $62.6 million | $89.6 million |
| Net income | $30.5 million | $37.6 million | $47.6 million | $71.0 million |
| Diluted EPS | $1.37 | $1.60 | $2.14 | $3.02 |
| Operating margin | 4.2% | 5.4% | 3.5% | 5.4% |
| Net margin | 3.3% | 4.4% | 2.7% | 4.3% |
| Operating cash flow | — | — | $100.8 million | $107.8 million |
Restaurant revenue increased 9.4% in the quarter and 8.6% for the six-month period; retail revenue increased 4.7% and 4.6%, respectively. Comparable restaurant and retail sales increased 7.4% in Q2 and 6.9% for the first six months. Restaurant comparable sales benefited from average check growth of 10.1% and 9.5%, respectively, partially offset by guest traffic declines of 1.7% and 1.8%.
At January 27, 2023, cash and cash equivalents were $49.4 million, inventories were $187.3 million, and total assets were $2.257 billion. Long-term debt was $454.1 million, including $160.0 million outstanding under the revolving credit facility and $300.0 million principal amount of 0.625% convertible notes due 2026. Revolver borrowing availability was $508.1 million after $31.9 million of standby letters of credit. The company was in compliance with its debt covenants.
Six-month investing cash outflows were $48.1 million, primarily reflecting $48.9 million of property and equipment purchases. Financing cash outflows were $48.4 million, including $58.5 million of dividends, $17.4 million of share repurchases, and $60.0 million of debt repayments, partially offset by $90.0 million of new borrowings. Cash increased by $4.3 million from July 29, 2022.
Material changes versus the prior comparable period
- Revenue increased 8.3% in Q2 and 7.7% for the first six months, but operating income declined 16.5% and 30.1%, respectively.
- Net income declined 19.0% in Q2 and 32.9% for the first six months; diluted EPS declined 14.4% and 29.1%, respectively, partly reflecting lower share counts from repurchases.
- Cost of goods sold increased to 35.0% of revenue in Q2 from 32.9% and to 34.3% for the six months from 32.0%. Restaurant commodity inflation was 12.5% in Q2 and 14.5% for the six months; retail margins were also pressured by higher markdowns and inventory provisions.
- Labor costs improved as a percentage of revenue, but maintenance, utilities, supplies, and other operating costs increased. Interest expense rose to $4.4 million in Q2 and $7.9 million for the six months due to higher revolver borrowings and interest rates.
- Six-month general and administrative expenses included proxy contest and settlement expenses related to the 2022 annual shareholders meeting.
- Company-owned units increased from 702 to 721 year over year, driven primarily by MSBC growth from 38 to 56 locations.
Guidance, outlook, risks, and unusual items
- Management expects full-year 2023 commodity inflation of approximately 8.5% to 9.0%, wage inflation of approximately 6.5%, and an effective tax rate of approximately 10% to 12%.
- 2023 capital expenditures are estimated at approximately $110 million to $120 million, including existing-store investments and new Cracker Barrel and MSBC locations.
- Management expects cash generated from operations, cash on hand, and revolver capacity to fund operations, dividends, capital expenditures, lease obligations, expansion, and share repurchases over the next twelve months and beyond.
- Key risks include commodity, wage, utility, freight, and construction cost inflation; labor recruitment and retention; interest-rate exposure on variable-rate debt; consumer demand and economic weakness; supply-chain disruptions; COVID-19 resurgence; cybersecurity incidents; competition; litigation and regulatory matters; and potential impairment of long-lived assets or lease assets.
- The company has substantial operating lease obligations: present value of operating lease liabilities was $761.3 million, with undiscounted future payments of $1.170 billion. Working capital was negative $162.1 million at January 27, 2023.
- Management stated that ordinary-course legal and regulatory contingencies are not expected to materially affect the financial statements. No material changes to previously disclosed risk factors or material commitments were reported.
Important facts for investors to verify
- Whether pricing and menu changes can offset persistent commodity, labor, freight, and other operating-cost inflation without further weakening guest traffic.
- The sustainability of comparable-sales growth given the traffic declines and reliance on average-check increases.
- Revolver utilization, floating interest rates, covenant headroom, and refinancing plans for the 2026 convertible notes.
- Whether planned $110 million to $120 million of capital expenditures and MSBC expansion generate targeted returns while dividends and repurchases continue.
- The effects of lease obligations, self-insured claims, inventory markdowns, impairment estimates, and any renewed COVID-19 or supply-chain disruption.