Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. operates an integrated restaurant and retail concept in the United States. The unaudited Form 10-Q covers the quarter and six months ended January 28, 2011, compared with the periods ended January 29, 2010. The company operated 597 stores in 42 states at quarter-end, versus 593 stores a year earlier.
Financial Results and Position
Dollar amounts below are in thousands, except per-share data and store counts.
| Metric | Quarter Ended Jan. 28, 2011 | Prior Year | Six Months Ended Jan. 28, 2011 | Prior Year |
|---|---|---|---|---|
| Revenue | $640,277 | $632,616 | $1,238,968 | $1,213,799 |
| Gross profit | $420,887 | $420,718 | $839,825 | $824,430 |
| Operating income | $52,472 | $49,385 | $97,888 | $87,370 |
| Net income | $28,777 | $25,393 | $52,511 | $43,417 |
| Diluted EPS | $1.20 | $1.09 | $2.21 | $1.87 |
- Quarterly revenue increased 1.2%; six-month revenue increased 2.1%. Restaurant revenue was $478,614 for the quarter and $960,429 for six months; retail revenue was $161,663 and $278,539, respectively.
- Quarterly gross margin was 65.7%, down from 66.5%; six-month gross margin was 67.8%, compared with 67.9%.
- Quarterly operating margin improved to 8.2% from 7.8%; six-month operating margin improved to 7.9% from 7.2%. Net margin was 4.5% for the quarter and 4.2% for six months, versus 4.0% and 3.6%.
- Interest expense declined to $11,830 for the quarter and $23,544 for six months, primarily because of lower debt outstanding.
- Net cash provided by operating activities was $57,305 for six months, down from $86,264. Capital expenditures were $40,567, up from $27,550.
- Cash and cash equivalents were $63,249 at January 28, 2011, versus $47,700 at July 30, 2010. Working capital remained negative at $(23,992), improved from $(73,289).
- Total term loans outstanding were approximately $576,715, with $345,438 due by April 27, 2013 and $231,277 due by April 27, 2016. No borrowings were outstanding under the revolving facility; $220,019 was available after standby letters of credit.
- The company was in compliance with all debt covenants. The interest-rate swap liability was $55,627, and the company paid $15,113 in interest-rate swap cash payments during the six months.
- The company paid dividends of $0.42 per share during the first six months and declared a quarterly dividend of $0.22 per share. It repurchased 200,000 shares for $10,997 and issued 657,157 shares upon equity-award exercises.
Material Changes Versus the Prior Comparable Period
- Comparable-store sales increased 0.6% in the quarter and 1.4% for six months. Quarterly restaurant comparable sales rose 0.3% and retail comparable sales rose 1.3%.
- Quarterly restaurant traffic declined 1.5%, offset by a 1.8% average-check increase. Management estimated severe winter weather reduced combined comparable-store sales by approximately 0.9%.
- Commodity inflation of 2.1%, higher food waste and increased retail markdowns pressured quarterly gross margin.
- Labor costs improved as a percentage of revenue, reflecting lower bonuses, healthcare costs and store hourly labor costs. General and administrative expense also declined as a percentage of revenue.
- No impairment charge was recorded in the first six months of 2011, compared with a $2,263 impairment charge in the prior-year period. Store-closing charges were $84.
- Share-based compensation included a $1,221 incremental expense from replacing certain executive stock options with performance-based stock units, partly offset by a $314 reversal related to an executive performance goal that was not expected to be achieved.
- Comprehensive income increased to $62,087 for six months from $42,878, aided by a $9,576 after-tax improvement in the fair value of interest-rate swaps.
Guidance, Outlook, Risks and Unusual Items
- Management estimated fiscal 2011 capital expenditures of $90,000 to $100,000, including maintenance, operational initiatives and acquisition or construction costs associated with eleven new stores opening during 2011 and future locations.
- Management believes cash, operating cash flow, revolving-credit availability and equity-award proceeds will fund operations, expansion, debt payments, repurchases and dividends for at least the next twelve months and the foreseeable future.
- Results are seasonal: the second and fourth quarters are generally stronger because of the Christmas shopping and summer travel seasons. Interim results are not necessarily indicative of full-year performance.
- Key exposures include commodity inflation, guest traffic and severe weather, retail inventory markdowns and shrinkage, self-insured workers’ compensation and general liability claims, healthcare costs, tax estimates, impairment judgments, gift-card redemption assumptions and litigation outcomes.
- The company had $29,981 of standby letters of credit supporting workers’ compensation claims. It also had contingent lease guarantees totaling approximately $2,083, for which no provision was recorded because management considered nonperformance unlikely.
- Management reported no material changes in previously disclosed risk factors, market risks or material commitments. Various ordinary-course legal proceedings were not expected to materially affect results or financial position.
- Disclosure controls and procedures were deemed effective as of January 28, 2011, with no reported material changes in internal control over financial reporting.
Investor Verification Items
- Verify whether comparable-store traffic stabilizes after the weather-affected quarter and whether menu-price increases can offset commodity inflation.
- Monitor quarterly gross-margin performance, retail markdowns, food waste and insurance, maintenance and supplies costs.
- Reconcile operating cash flow with capital expenditures, dividends and share repurchases, particularly given the six-month decline in operating cash flow.
- Review debt maturities, revolving-facility availability after April 27, 2011, covenant compliance and the effect of interest-rate swaps on future interest expense.
- Assess execution of the planned $90,000-$100,000 capital program and the opening and performance of eleven new stores.
- Evaluate potential changes in insurance reserves, tax positions, long-lived-asset impairment estimates, gift-card breakage and performance-based compensation.
- Confirm the effect of seasonal sales patterns before annualizing second-quarter earnings.