Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. operates integrated restaurant and retail stores in the United States. This unaudited Form 10-Q covers the quarter and six months ended January 27, 2017, compared with January 29, 2016. At quarter-end, the company operated 641 Cracker Barrel stores in 43 states and four Holler & Dash Biscuit House locations in three states. The company reported one operating segment.
Financial Performance and Position
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Total revenue | $772.7 million | $764.0 million | $1,482.7 million | $1,466.6 million |
| Operating income | $82.7 million | $70.5 million | $158.4 million | $135.8 million |
| Net income | $52.7 million | $48.2 million | $101.1 million | $89.1 million |
| Diluted EPS | $2.19 | $2.01 | $4.19 | $3.70 |
| Net cash from operating activities | Not separately provided | Not separately provided | $149.5 million | $85.6 million |
- Quarterly revenue increased 1.1%; six-month revenue also increased 1.1%.
- Quarterly operating margin was 10.7%, versus 9.2% in the prior-year quarter. Six-month operating margin was 10.7%, versus 9.3%.
- Quarterly net margin was 6.8%, versus 6.3%; six-month net margin was 6.8%, versus 6.1%.
- Restaurant revenue increased to $591.1 million in the quarter and $1.165 billion for six months. Retail revenue declined to $181.6 million and $317.9 million, respectively.
- Comparable restaurant sales increased 0.6% in the quarter and 0.9% for six months, while comparable retail sales declined 2.2% and 3.0%, respectively. Restaurant traffic declined 2.1% in the quarter and 1.9% for six months, partly offset by higher average checks.
- Cash and cash equivalents were $185.7 million at January 27, 2017, compared with $151.0 million at July 29, 2016. Working capital was positive $22.6 million, compared with negative $13.1 million at fiscal year-end.
- Debt consisted of $400.0 million outstanding under a $750.0 million revolving credit facility. Remaining borrowing availability was $340.3 million after standby letters of credit. The company was in compliance with its debt covenants.
- Capital expenditures were $52.9 million for the first six months, compared with $36.8 million in the prior-year period. Dividends paid were $57.4 million, and no common stock was repurchased.
Material Changes Versus the Prior Comparable Period
- Profitability improved despite modest revenue growth, primarily because restaurant food costs declined as a percentage of revenue, reflecting commodity deflation, menu pricing and lower food waste.
- Cost of goods sold decreased to 33.0% of revenue in the quarter from 34.7%, and to 31.6% for six months from 33.3%.
- Labor costs increased to 33.6% of quarterly revenue from 33.0% and to 34.3% for six months from 33.8%, driven primarily by higher bonuses, management compensation and wage inflation.
- Retail margins weakened because of higher markdowns and lower initial margins.
- Operating cash flow increased by $63.9 million year over year, reflecting higher net income and favorable timing of taxes, accounts payable and incentive compensation payments.
- The fair value liability for interest-rate swaps declined to approximately $6.5 million from $22.3 million at July 29, 2016. The resulting after-tax comprehensive income included $10.8 million of other comprehensive income for the six-month period.
- The company opened four Cracker Barrel stores during the first six months, including two during the quarter, and ended the quarter with 645 stores before the filing’s quarter-end operating count was presented as 641 in the business description; the filing text does not clearly reconcile this difference.
Guidance, Outlook, Risks and Unusual Items
- Management planned to open eight Cracker Barrel stores and four Holler & Dash locations during fiscal 2017.
- Fiscal 2017 capital expenditures were estimated at approximately $125 million, including new stores, technology and strategic initiatives.
- Management expected approximately 4.0% commodity deflation, depreciation expense of approximately $85 million to $87 million, advertising expense of approximately 2.9% of revenue and an effective tax rate of approximately 32% for fiscal 2017.
- Management stated that cash on hand, operating cash flow and revolver availability should fund operations, dividends and expansion for at least the next twelve months.
- Key operating risks include declining guest traffic, retail merchandise performance, wage inflation, commodity and utility costs, inventory markdowns and the company’s seasonal business pattern.
- The company self-insures significant workers’ compensation and general liability exposures and had $9.7 million of standby letters of credit supporting workers’ compensation claims.
- Various ordinary-course legal and regulatory matters were disclosed; management did not expect them to materially affect financial position or results, although actual outcomes could differ.
- The filing states that no material changes occurred in previously disclosed risk factors, market risks or material commitments. Several new accounting standards, including revenue recognition and lease accounting, were still under evaluation.
- The interim financial statements were unaudited, and management cautioned that seasonal quarterly results are not necessarily indicative of full-year performance.
Important Facts for Investors to Verify
- Reconcile the reported store counts of 641 Cracker Barrel stores in the business description and 645 stores at the end of the six-month operating table.
- Assess whether restaurant traffic declines and continued retail sales weakness offset menu pricing, commodity deflation and cost-saving benefits.
- Review the $400 million revolver balance, covenant compliance, interest-rate swap exposure and $340.3 million of stated borrowing availability.
- Evaluate the sustainability of the unusually strong operating cash flow increase, including the effects of working-capital timing.
- Confirm execution of the planned store openings and approximately $125 million of fiscal 2017 capital expenditures.
- Monitor the impact of wage inflation, commodity prices, tax credits and the projected 32% effective tax rate.