Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. filed this unaudited Form 10-Q for the quarter ended November 1, 2019, the first quarter of fiscal 2020. The company operated 660 Cracker Barrel stores and seven Holler & Dash locations in the United States and acquired Maple Street Biscuit Company (MSBC) on October 10, 2019. MSBC had 28 company-owned and five franchised locations at quarter-end.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $749.0 million | $733.5 million | +2.1% |
| Restaurant revenue | $607.1 million | $591.0 million | +2.7% |
| Retail revenue | $142.0 million | $142.6 million | -0.4% |
| Operating income | $63.4 million | $61.7 million | +2.7% |
| Net income | $43.2 million | $47.2 million | -8.4% |
| Diluted EPS | $1.79 | $1.96 | -8.7% |
| Operating cash flow | $44.8 million | $59.6 million | -24.8% |
- Net margin was approximately 5.8%, compared with 6.4% in the prior-year quarter. Operating margin improved to approximately 8.5% from 8.4%.
- Comparable restaurant sales increased 2.1%, driven by a 3.6% increase in average check, including a 2.3% menu-price increase, partially offset by a 1.5% decline in guest traffic.
- Comparable retail sales declined 0.9%, primarily because of weaker apparel, toys, and bed-and-bath merchandise sales.
- Cash and cash equivalents were $43.2 million at November 1, 2019, compared with $36.9 million at August 2, 2019.
- Capital expenditures were $27.9 million, versus $37.1 million in the prior-year quarter. Investing cash outflows also included $33.0 million for the MSBC acquisition and $16.0 million of additional funding to Punch Bowl Social.
- Debt outstanding under the revolving credit facility was $485.0 million, compared with $400.0 million at fiscal year-end. Borrowing availability was $458.1 million after standby letters of credit.
- Total operating lease liabilities were $517.8 million at quarter-end, following adoption of the new lease accounting standard. Total assets increased to $2.14 billion from $1.58 billion, primarily because of recognized right-of-use assets.
- The company declared a $1.30-per-share dividend and repurchased 91,748 shares for $14.2 million at an average price of $154.63 per share.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by restaurant sales and the inclusion of MSBC revenue, while retail sales were slightly lower.
- Cost of goods sold declined to 29.3% of revenue from 30.3%, reflecting improved restaurant and retail merchandise margins.
- Other store operating expenses increased to 21.7% of revenue from 20.8%, primarily because of higher depreciation, advertising, and utilities expense.
- Labor expense remained 35.2% of revenue; higher hourly labor costs were offset by lower bonus and preopening labor expense.
- Net income declined despite higher operating income because of a $6.0 million loss from the unconsolidated Punch Bowl Social investment. The prior-year quarter had no comparable loss.
- Operating cash flow decreased primarily because of a larger increase in retail inventory.
- The company adopted the new lease standard on August 3, 2019, recording $464.4 million of right-of-use assets and $506.4 million of operating lease liabilities at adoption, with a $4.1 million cumulative increase to retained earnings.
- The company recorded $1.3 million of MSBC acquisition-related costs in general and administrative expense and a $0.7 million impairment charge related to converting Holler & Dash locations to MSBC.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management planned to enhance the core business through new menu offerings, expanded off-premise sales, improved employee and guest experiences, and cost reductions.
- The company anticipated opening six new Cracker Barrel stores and one MSBC location during fiscal 2020 and planned to convert existing Holler & Dash locations to the MSBC concept during 2020.
- Expected fiscal 2020 commodity inflation was approximately 2.0% to 2.5%; expected effective tax rate was approximately 16% to 17%; and estimated capital expenditures were $115 million to $125 million.
- Management believed cash on hand, operating cash flow, and revolver capacity would fund operations, dividends, and expansion plans for at least the next twelve months.
- The company was in compliance with its debt covenants and lease-related covenants at quarter-end. The credit facility contains leverage, interest-coverage, dividend, and share-repurchase restrictions.
- Punch Bowl Social generated a $6.0 million equity-method loss during the quarter. The company had funded $28.5 million of an agreed commitment to provide up to $51.0 million through calendar 2020.
- Key risks include the performance and integration of MSBC, conversion of Holler & Dash locations, continued funding and potential impairment of the Punch Bowl Social investment, traffic declines, wage and commodity inflation, inventory valuation, lease obligations, insurance reserves, and impairment of goodwill or other long-lived assets.
- Management stated that no material changes had occurred in previously disclosed risk factors other than risks associated with MSBC and Punch Bowl Social. Ordinary-course legal and regulatory contingencies were not expected to materially affect the financial statements.
Important Facts for Investors to Verify
- Whether MSBC integration and the planned conversion of Holler & Dash locations produce the expected sales, earnings, and return on investment.
- The future funding requirements, operating losses, and potential impairment exposure associated with Punch Bowl Social.
- Comparable-store traffic trends, particularly the 1.5% restaurant traffic decline, and the sustainability of menu-price increases.
- Compliance with revolving-credit leverage and interest-coverage covenants as debt remains elevated.
- Actual fiscal 2020 capital expenditures, store openings, commodity inflation, and effective tax rate compared with management’s stated expectations.
- The impact of the newly recognized operating lease liabilities and long-term lease commitments on leverage, liquidity, and fixed costs.
- Retail inventory levels and the risk of markdowns, shrinkage, or obsolescence.