Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. operates restaurant and retail stores in the United States. This unaudited Form 10-Q covers the quarter and nine months ended May 3, 2019, compared with April 27, 2018. At period end, the company operated 659 Cracker Barrel stores in 45 states and seven Holler & Dash Biscuit House locations in five states.
Financial Results and Key Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $739.6 million | $721.4 million | $2.285 billion | $2.220 billion |
| Operating income | $65.1 million | $63.3 million | $203.5 million | $210.8 million |
| Net income | $50.4 million | $48.7 million | $158.4 million | $186.3 million |
| Diluted EPS | $2.09 | $2.03 | $6.57 | $7.74 |
| Net margin | 6.8% | 6.8% | 6.9% | 8.4% |
| Operating margin | 8.8% | 8.8% | 8.9% | 9.5% |
- Q3 revenue increased 2.5%; nine-month revenue increased 2.9%.
- Restaurant revenue increased to $610.1 million in Q3 and $1.832 billion for nine months. Retail revenue increased to $129.5 million in Q3 and $452.6 million for nine months.
- Q3 comparable-store sales increased 0.6%, comprising a 1.3% restaurant increase and a 2.6% retail decrease. Restaurant traffic declined 1.8%, while average check increased 3.1%.
- For nine months, comparable-store sales increased 1.8%; restaurant sales increased 2.2% and retail sales were flat. Restaurant traffic declined 1.0%, offset by a 3.2% average-check increase.
- Q3 store operating margin improved to 13.8% from 13.7%, while nine-month store operating margin declined to 13.8% from 14.4%.
- Labor expense increased to 36.2% of revenue in Q3 and 35.1% for nine months, primarily due to wage inflation, staffing, training, off-premise costs and bonuses.
- Cash and cash equivalents were $167.6 million at May 3, 2019, versus $114.7 million at August 3, 2018. Total assets were $1.595 billion and shareholders’ equity was $648.0 million.
- Operating cash flow for the first nine months was $252.6 million, compared with $221.0 million in the prior-year period. Capital expenditures were $103.9 million, and the company estimated approximately $150.0 million of 2019 capital expenditures.
- Debt outstanding was $400.0 million. The company had $541.0 million of borrowing availability under its $950.0 million revolving credit facility after $8.96 million of standby letters of credit.
- Dividends declared were $1.25 per share in Q3 and $3.75 per share for the first nine months. No shares were repurchased during the first nine months.
Material Changes Versus the Prior Comparable Period
- Q3 net income increased 3.4% and diluted EPS increased 3.0%, but nine-month net income decreased 15.0% and diluted EPS decreased 15.1%.
- The nine-month earnings decline primarily reflects the prior-year benefit from the Tax Cuts and Jobs Act, which included a $29.5 million deferred-tax remeasurement benefit in fiscal 2018. The 2019 effective tax rate was 17.0%, compared with 6.8% in the prior-year period.
- Nine-month operating income declined 3.5% as labor and other store operating expenses increased as percentages of revenue. Depreciation, supplies, loss on asset dispositions and certain store-closure costs increased, partly offset by lower advertising and maintenance expenses.
- Interest expense increased to $12.6 million from $10.9 million because of higher weighted-average interest rates and a $0.17 million write-off of prior financing costs related to refinancing.
- The company replaced its $750.0 million credit facility with a five-year $950.0 million facility, with an option to increase commitments by $300.0 million.
- Interest-rate swap fair value shifted from a net asset at August 3, 2018 to a $1.7 million liability at May 3, 2019, contributing to a $5.0 million after-tax decline in other comprehensive income for the first nine months.
Guidance, Outlook, Risks and Unusual Items
- Management’s 2019 priorities are improving the guest experience, food and value; expanding off-premise sales; opening new Cracker Barrel stores; and developing Holler & Dash.
- The company expected to open eight Cracker Barrel stores in 2019, with seven opened during the first nine months.
- Management expected approximately 2.0% commodity inflation for 2019 and approximately $150.0 million of capital expenditures.
- Management stated that cash on hand, operating cash flow and available borrowing capacity should fund operations, dividends and expansion for at least the next twelve months.
- The revolving facility contains leverage and interest-coverage covenants, dividend restrictions and share-repurchase restrictions. The company was in compliance with all covenants at May 3, 2019.
- The company expects adoption of the new lease standard in the first quarter of fiscal 2020 to materially increase lease-related assets and liabilities on the balance sheet, but does not expect a material effect on income or cash flow.
- Seasonality affects results: net income has historically been lower in the first and third quarters and higher in the second and fourth quarters.
- The company self-insures significant workers’ compensation and general liability exposures. It had $8.96 million of standby letters of credit supporting workers’ compensation claims.
- Management reported no material changes to previously disclosed risk factors, no material changes in market risk, and no material impact expected from ordinary-course legal and regulatory proceedings.
- Critical estimates include long-lived-asset impairment, insurance reserves and retail inventory valuation. Actual claims, shrinkage, obsolescence, operating performance and cash-flow assumptions could materially affect results.
Important Facts for Investors to Verify
- Reconcile the nine-month earnings decline with the prior-year Tax Act benefit and evaluate the normalized effective tax rate.
- Monitor restaurant traffic, average-check growth and the continuing weakness in retail comparable-store sales.
- Assess whether wage inflation, commodity inflation and higher labor costs continue to pressure margins.
- Verify compliance with revolving-credit covenants and the availability of borrowing capacity after letters of credit and other commitments.
- Evaluate the effect of the upcoming lease-accounting adoption on reported leverage, assets and liabilities.
- Review the sustainability of dividends and future capital expenditures relative to operating cash flow and debt capacity.
- Track the performance and expansion economics of new Cracker Barrel stores and the Holler & Dash concept.