Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. operates an integrated restaurant and retail concept in the United States. As of February 1, 2013, it operated 621 stores in 42 states. This unaudited Form 10-Q covers the quarter and six months ended February 1, 2013, compared with January 27, 2012, and the balance sheet is compared with August 3, 2012.
Key Financial Metrics
| Metric | Quarter Ended February 1, 2013 | Six Months Ended February 1, 2013 |
|---|---|---|
| Total revenue | $702.7 million | $1.330 billion |
| Revenue growth versus prior period | 4.4% | 4.6% |
| Operating income | $57.2 million | $102.5 million |
| Operating margin | 8.1% | 7.7% |
| Net income | $35.2 million | $58.4 million |
| Net margin | 5.0% | 4.4% |
| Diluted earnings per share | $1.47 | $2.45 |
| Net cash provided by operating activities | Not separately provided | $81.0 million |
Restaurant revenue was $528.2 million for the quarter and $1.032 billion for six months; retail revenue was $174.5 million and $297.7 million, respectively. Comparable restaurant and retail sales increased 3.2% in the quarter and 3.1% for six months. Restaurant comparable sales reflected higher average checks and modest positive guest traffic.
Gross margin was 65.2% for the quarter and 66.8% for six months. The quarter benefited from improved retail markdowns and inventory reserves, lower advertising and utilities costs, and lower general and administrative expenses. Restaurant food costs were pressured by approximately 2.5% commodity inflation.
At February 1, 2013, cash and cash equivalents were $186.1 million, working capital was $62.7 million, and total assets were $1.446 billion. Total debt, including current maturities, was approximately $525.1 million. Revolving credit borrowings were $312.5 million, with $159.3 million of remaining borrowing availability after standby letters of credit. The company was in compliance with its debt covenants.
Capital expenditures were $29.3 million net of insurance recoveries for the six months. The company paid $21.7 million of dividends during the period, or $0.90 per share, and declared an additional $0.50 per-share dividend paid February 5, 2013. No shares were repurchased.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 4.4%, operating income increased from $47.3 million to $57.2 million, and net income increased from $25.6 million to $35.2 million.
- Six-month revenue increased 4.6%, operating income increased from $92.0 million to $102.5 million, and net income increased from $49.4 million to $58.4 million.
- Quarterly operating margin improved to 8.1% from 7.0%; six-month operating margin improved to 7.7% from 7.2%.
- General and administrative expense declined, primarily due to lower proxy-contest, incentive compensation, legal and manager-conference costs.
- Interest expense declined to $10.3 million for the quarter and $21.0 million for six months, primarily due to lower debt outstanding.
- The effective tax rate decreased to 25.0% for the quarter and 28.4% for six months, partly because of a $4.6 million retroactive Work Opportunity Tax Credit recorded in the quarter.
- Operating cash flow declined to $81.0 million from $114.0 million, reflecting higher incentive bonus payments, inventory changes and payment timing for accounts payable.
- Cash increased by $34.2 million from fiscal year-end, while the interest-rate-swap liability declined from $34.4 million to $21.9 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2013 commodity inflation of approximately 4% to 5%, an effective tax rate of 28% to 29%, and capital expenditures of $90 million to $100 million.
- Management expects 2013 interest expense to decline by approximately $8 million to $9 million, primarily because a seven-year interest-rate swap with a 5.57% fixed rate expires May 3, 2013.
- Management believes cash, operating cash flow and available borrowing capacity will fund operations, expansion, debt payments, share repurchases and dividends for at least the next twelve months.
- The company entered into a multi-year licensing agreement to distribute certain Cracker Barrel products through a new retail channel. Management does not expect a material fiscal 2013 effect but expects potential longer-term brand and profitability benefits.
- Kraft Foods Group Brands filed a lawsuit seeking declaratory and injunctive relief concerning the use or licensing of the Cracker Barrel mark in retail food channels. The company intends to defend the matter vigorously; the filing does not provide a quantified potential loss.
- Operations are seasonal, with historically higher earnings in the second and fourth quarters. Interim results are therefore not necessarily indicative of full-year performance.
- Key judgment areas include long-lived-asset impairment, insurance reserves, retail inventory valuation, tax provisions and share-based compensation.
Important Facts for Investors to Verify
- Verify the remaining availability and covenant compliance under the $750 million credit facility, including the impact of $28.2 million in standby letters of credit.
- Assess whether expected commodity inflation of 4% to 5% can be offset through pricing, menu mix, productivity and waste reduction.
- Monitor the expiration and restructuring of interest-rate swaps and the resulting effect on interest expense and cash flow.
- Evaluate the sustainability of comparable-store traffic and sales growth, particularly after the favorable holiday-season quarter.
- Review the Kraft trademark litigation and any effect on the new licensing initiative.
- Confirm the timing and funding of the planned $90 million to $100 million of 2013 capital expenditures, dividends and any future share repurchases.
- Consider that the quarterly tax benefit included a $4.6 million retroactive credit and may not recur at the same level.