Cracker Barrel Old Country Store, Inc. — Fiscal 2024 First-Quarter 10-Q
Reporting period: Quarter ended October 27, 2023, compared with the quarter ended October 28, 2022. The unaudited results cover Cracker Barrel’s integrated restaurant and retail operations and Maple Street Biscuit Company (MSBC). At period-end, the Company operated 661 Cracker Barrel stores in 45 states and 60 MSBC locations in 10 states.
Key Financial Metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Total revenue | $823.8 million | $839.5 million | Down 1.9% |
| Restaurant revenue | $660.8 million | $662.2 million | Down 0.2% |
| Retail revenue | $163.0 million | $177.3 million | Down 8.0% |
| Operating income | $11.4 million | $23.6 million | Down 51.7% |
| Net income | $5.5 million | $17.1 million | Down 68.1% |
| Diluted EPS | $0.25 | $0.77 | Down $0.52 |
| Operating margin | 1.4% | 2.8% | Down 140 basis points |
| Net margin | 0.7% | 2.0% | Down 130 basis points |
- Comparable restaurant sales declined 0.5%, reflecting a 7.1% decrease in guest traffic partially offset by a 6.6% increase in average check, including a 6.8% menu price increase.
- Comparable retail sales declined 8.1%; combined comparable restaurant and retail sales declined 2.1%.
- Cost of goods sold declined to 31.0% of revenue from 33.5%, helped by 2.3% restaurant commodity deflation versus 16.7% inflation in the prior-year quarter.
- Labor and related expenses increased to 37.0% of revenue from 34.8%, primarily due to higher staffing levels, additional guest-experience labor, management compensation and health-care claims.
- Other store operating expenses increased to 24.7% of revenue from 23.4%, driven by higher advertising, occupancy and insurance costs.
- Interest expense increased to $4.9 million from $3.5 million because of higher average borrowing rates. The effective income tax rate was 15.7%, compared with 14.7%.
Cash Flow, Balance Sheet, Debt and Liquidity
- Operating activities used $15.8 million of cash, compared with $0.6 million used in the prior-year quarter. Management attributed the change primarily to lower earnings and higher bonus payments related to prior-year performance.
- Capital expenditures were $24.7 million, compared with $21.8 million; net capital expenditures after insurance recoveries were $24.6 million.
- Financing activities provided $29.2 million, including $156.0 million of revolver borrowings and $96.0 million of principal repayments, partially offset by $29.3 million of dividends.
- Cash and cash equivalents declined to $13.9 million from $25.1 million at July 28, 2023.
- At October 27, 2023, total current assets were $287.7 million and current liabilities were $461.9 million, resulting in negative working capital of approximately $174.2 million. Retail inventory increased to $158.4 million from $145.2 million as the Company built seasonal inventory for holiday sales.
- Outstanding borrowings under the $700.0 million revolving credit facility were $180.0 million. After $32.5 million of standby letters of credit, borrowing availability was $487.5 million. The weighted-average borrowing rate was 6.93%.
- The Company had $300.0 million principal amount of 0.625% convertible Senior Notes due June 2026, with a net carrying value of $295.3 million.
- The Company was in compliance with all revolving-credit financial covenants. Management stated that available cash, operating cash flow and borrowing capacity should fund operations, dividends, capital expenditures, lease obligations and working capital needs over the next twelve months and beyond.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly, but profitability contracted materially because of lower traffic, higher labor costs, increased advertising and insurance expenses, corporate restructuring severance costs, and higher interest rates.
- Restaurant traffic weakened despite higher pricing. Management cited inflation, higher interest rates, elevated consumer debt, lower savings rates and recession concerns as contributors to lower demand.
- Retail revenue declined substantially, primarily in conjunction with lower restaurant guest traffic and higher freight expense.
- The Company launched the Cracker Barrel Rewards loyalty program. It deferred $0.4 million of revenue related to outstanding loyalty rewards at quarter-end.
- Cracker Barrel unit count increased by one year to date, while MSBC increased by one location during the quarter. Total units increased to 721 from 718 at the prior-year quarter-end.
- No common stock was repurchased during the quarter. The Company paid and declared regular dividends of $1.30 per share.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2024 commodity inflation in the low-single digits, wage inflation in the mid-single digits and an effective tax rate of approximately 2% to 5%.
- Estimated fiscal 2024 capital expenditures are $120 million to $135 million, including existing-store investments and new Cracker Barrel and MSBC locations.
- Management reported sequential monthly improvement in guest traffic and is emphasizing marketing effectiveness, guest experience, menu and operational execution, off-premise sales, loyalty-program growth and selective MSBC expansion.
- Management cautioned that macroeconomic conditions remain uncertain. Principal risks include inflation and labor costs, supply-chain disruptions, competition, consumer demand, interest rates and refinancing, indebtedness and covenant restrictions, information-security incidents, regulatory matters, litigation, staffing, site availability, weather and economic weakness.
- Unusual or notable items included corporate restructuring severance costs, increased holiday advertising timing and spending, higher health-care and insurance claims, and the launch costs and deferred revenue associated with Cracker Barrel Rewards.
- The Company self-insures significant portions of workers’ compensation and general liability programs. Management stated that pending legal and regulatory matters are not expected to materially affect the financial statements, but actual claims and actuarial estimates could differ.
- The filing states that interim results are seasonal and not necessarily indicative of full-year performance; historically, the first and third quarters are weaker than the second and fourth quarters.
Important Facts for Investors to Verify
- Whether the reported traffic decline stabilizes or worsens and whether pricing can continue to offset lower guest volumes.
- Progress toward restoring operating margins as labor, advertising, insurance and other store costs remain elevated.
- Retail inventory levels, holiday sell-through and potential markdown or obsolescence risk.
- Cash generation relative to planned $120 million to $135 million of capital expenditures, dividends and lease obligations.
- Revolver utilization, variable interest-rate exposure, covenant compliance and refinancing plans for debt obligations, including the 2026 convertible notes.
- The financial contribution, customer retention impact and accounting estimates associated with the Cracker Barrel Rewards program.
- Whether management’s low-single-digit commodity, mid-single-digit wage and 2% to 5% tax-rate expectations remain current; the filing text provides no broader revenue or earnings guidance.