Cracker Barrel Old Country Store, Inc. — Q1 FY2017 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter ended October 28, 2016, compared with the quarter ended October 30, 2015. Cracker Barrel operated 643 stores at quarter-end, including 641 Cracker Barrel stores and two Holler & Dash locations, across 43 states and one state, respectively. The company operates as one reportable segment in the United States.
Financial Performance and Liquidity
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Total revenue | $710.0 million | $702.6 million |
| Operating income | $75.7 million | $65.3 million |
| Net income | $48.4 million | $40.9 million |
| Diluted EPS | $2.01 | $1.70 |
| Operating margin | 10.7% | 9.3% |
| Net margin | 6.8% | 5.8% |
| Operating cash flow | $34.9 million | $(4.4) million |
| Capital expenditures, net of insurance recoveries | $26.3 million | $17.0 million |
- Restaurant revenue increased to $573.7 million from $562.3 million; retail revenue declined to $136.3 million from $140.4 million.
- Comparable restaurant sales increased 1.3%, comprising a 3.0% average-check increase partly offset by a 1.7% guest-traffic decline. Comparable retail sales decreased 4.0%; combined restaurant and retail comparable sales increased 0.2%.
- Cost of goods sold declined to 30.0% of revenue from 31.7%, supported by 5.1% commodity deflation, menu pricing, and lower food waste. Labor costs increased to 35.1% of revenue from 34.8%.
- Cash and cash equivalents were $125.1 million at October 28, 2016, versus $151.0 million at July 29, 2016. Inventories rose to $187.2 million from $152.3 million, primarily due to retail inventory.
- Total debt was $400.0 million under the $750.0 million revolving credit facility. Remaining borrowing availability was $338.8 million after $11.2 million of standby letters of credit. The company was in compliance with its debt covenants.
- The company paid $29.6 million in dividends, or $1.15 per share, and declared an additional $1.15-per-share dividend. No shares were repurchased during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue increased 1.0%, while operating income rose approximately 16% and net income rose approximately 18%.
- Operating and net margins expanded by approximately 1.4 and 1.0 percentage points, respectively, despite higher wage-related labor costs.
- Operating cash flow improved by approximately $39.3 million, changing from a use of cash to a source of cash, primarily due to payment timing, lower bonus payments, and higher net income.
- Capital expenditures increased by approximately $9.3 million, reflecting new stores, existing-store investments, and strategic initiatives.
- Interest expense increased modestly to $3.7 million, primarily due to higher weighted-average interest rates.
- The fair value liability for interest-rate swaps declined to $16.1 million from $22.3 million, generating $3.8 million of after-tax other comprehensive income.
Guidance, Outlook, Risks, and Unusual Items
- Management planned to open eight or nine Cracker Barrel stores and four or five Holler & Dash locations during FY2017. Two Cracker Barrel stores opened during the quarter.
- Estimated FY2017 capital expenditures were approximately $125 million, funded through operating cash flow and, as necessary, revolver borrowings.
- Management expected 2017 commodity deflation of approximately 3.0% to 4.0%, an effective tax rate of approximately 32%, and advertising expense of approximately 2.9% of revenue versus 2.7% in FY2016.
- Management stated that cash on hand, operating cash flow, and available borrowing capacity should fund operations, dividends, and expansion plans for at least the next twelve months.
- Key operating pressures include declining guest traffic, weak retail categories, markdowns and obsolete inventory, wage inflation, commodity-price changes, health-care and insurance costs, and execution risk associated with new-store expansion.
- The company self-insures significant portions of workers’ compensation, general liability, and health-care programs. Legal and regulatory matters are ordinary-course items and were not expected by management to materially affect financial position or results.
- Results are seasonal, with historically lower income in the first and third quarters and higher income in the second and fourth quarters; interim results are not necessarily indicative of full-year performance.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Investor Verification Checklist
- Verify whether restaurant traffic stabilizes and whether retail comparable sales recover from the 4.0% decline.
- Track the effect of commodity deflation, menu pricing, wage inflation, and markdowns on future margins.
- Compare actual store openings, Holler & Dash expansion, and FY2017 capital expenditures with management’s targets.
- Monitor cash generation, inventory growth, dividend commitments, repurchase capacity, and compliance with revolver covenants.
- Review interest-rate swap valuations and exposure to changes in interest rates.
- Assess potential changes from pending accounting standards, particularly revenue recognition, leases, inventory, deferred taxes, breakage, and share-based payments.