Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. filed an unaudited Form 10-Q for the quarter ended April 29, 2011, covering the third quarter and first nine months of fiscal 2011. The company operated 601 Cracker Barrel stores in 42 states and reported one integrated operating segment comprising restaurant and retail operations.
Financial Results and Key Metrics
| Metric | Q3 FY2011 | Q3 FY2010 | 9M FY2011 | 9M FY2010 |
|---|---|---|---|---|
| Revenue | $582.5 million | $578.2 million | $1,821.5 million | $1,792.0 million |
| Operating income | $31.2 million | $31.8 million | $129.1 million | $119.2 million |
| Net income | $15.2 million | $14.4 million | $67.7 million | $57.8 million |
| Diluted EPS | $0.64 | $0.61 | $2.85 | $2.47 |
| Gross margin | 69.1% | 70.1% | 68.2% | 68.6% |
| Operating margin | 5.4% | 5.5% | 7.1% | 6.7% |
| Net margin | 2.6% | 2.5% | 3.7% | 3.2% |
- Q3 comparable-store sales declined 0.2% overall: restaurant sales decreased 0.3% and retail sales increased 0.1%. Restaurant traffic declined 2.6%, partly offset by a 2.3% increase in average check.
- For the first nine months, comparable-store sales increased 0.8%, with restaurant sales up 0.8% and retail sales up 1.0%.
- Nine-month operating cash flow was $89.2 million, down from $136.8 million in the prior-year period. Capital expenditures were $59.4 million, compared with $40.2 million.
- Cash and cash equivalents were $62.5 million at April 29, 2011, versus $47.7 million at July 30, 2010.
- Total debt was approximately $575.3 million, including $575.0 million of term loans. The company had no revolver borrowings and $135.0 million of available revolver capacity after standby letters of credit.
- The company reported negative working capital of $25.7 million at quarter-end, improved from negative working capital of $73.3 million at fiscal year-end.
- Dividends declared were $0.22 per share for the quarter. The company repurchased 500,000 shares during the first nine months for $25.6 million and issued 718,720 shares from equity award exercises for $20.1 million.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 0.7%, while nine-month revenue increased 1.6%, primarily from newly opened stores and modest comparable-store growth.
- Q3 net income increased approximately 5%, and nine-month net income increased approximately 17%. Lower general and administrative expense, lower interest expense, and a lower effective tax rate supported earnings.
- Q3 gross margin declined 100 basis points because food commodity costs increased 4.7% and food waste was higher. Nine-month commodity inflation was 2.5% and gross margin declined 40 basis points.
- Q3 operating income declined approximately 2%, despite lower general and administrative expense, because of lower store operating income and higher operating costs.
- General and administrative expense declined to 5.8% of revenue in Q3 from 6.6% and to 5.7% for the nine months from 6.0%, primarily due to lower incentive and share-based compensation.
- Interest expense declined to $11.6 million in Q3 from $12.2 million and to $35.2 million for the nine months from $37.2 million, primarily due to lower debt outstanding.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected lower guest traffic trends to continue into the fourth quarter and expected commodity inflation to increase further.
- Fiscal 2011 capital expenditures were estimated at $85 million to $90 million, including maintenance, innovation initiatives, and construction or acquisition of sites for eleven new stores opening or opened during 2011.
- Management stated that available cash, operating cash flow, revolver capacity, and equity-award proceeds should fund operations, expansion, debt payments, repurchases, and dividends for at least the next twelve months and the foreseeable future.
- The company was exploring alternatives to refinance its credit facilities before the term loans become current within twelve months of their respective maturities. It was in compliance with all debt covenants at April 29, 2011.
- Q3 included a $2.2 million impairment charge for one leased store, more than offset by $4.1 million of gains from two closed-store sales and a condemnation award. The net benefit was $2.0 million.
- Interest rate swaps had a $51.3 million liability at quarter-end and reduced exposure to variable interest rates; $22.9 million of swap-related interest payments were made during the first nine months.
- Standby letters of credit totaled $30.0 million and related primarily to workers’ compensation insurance. The company also had lease guarantees totaling approximately $1.9 million.
- Management identified risks relating to guest traffic, commodity inflation, food waste, self-insurance reserves, retail inventory shrinkage and obsolescence, impairment estimates, tax positions, share-based compensation, gift-card breakage, litigation, and refinancing.
- The filing states that there were no material changes to previously disclosed risk factors, no material changes in market risk, and no material changes in internal control over financial reporting.
Investor Verification Points
- Verify whether guest traffic and commodity-cost trends developed as projected in the fourth quarter and subsequent periods.
- Review the timing and terms of refinancing for the $575 million term-loan balance and the company’s compliance with leverage and interest-coverage covenants.
- Assess whether operating cash flow recovered from the nine-month decline while funding planned capital expenditures of $85 million to $90 million.
- Separate recurring operating performance from the $4.1 million store-disposition and condemnation gains and the $2.2 million impairment charge.
- Monitor comparable-store sales, restaurant traffic, average checks, menu pricing, retail sales, and the profitability of newly opened locations.
- Review exposure to interest-rate swap valuation changes, self-insurance claims, legal proceedings, lease guarantees, and other contingencies.