Cracker Barrel Old Country Store, Inc. — Q2 FY2022 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter and six months ended January 28, 2022, compared with the periods ended January 29, 2021. The Company operates Cracker Barrel restaurants and retail stores in the United States and, through Maple Street Biscuit Company (MSBC), operates company-owned and franchised locations. At quarter-end, it operated 664 Cracker Barrel stores, 38 company-owned MSBC locations and seven franchised MSBC locations.
Financial performance and condition
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Total revenue | $862.3 million | $677.2 million | $1,647.2 million | $1,323.6 million |
| Operating income | $46.7 million | $14.4 million | $89.6 million | $251.5 million |
| Net income | $37.6 million | $14.0 million | $71.0 million | $184.7 million |
| Diluted EPS | $1.60 | $0.59 | $3.02 | $7.77 |
| Operating margin | 5.4% | 2.1% | 5.4% | 19.0% |
| Net margin | 4.4% | 2.1% | 4.3% | 14.0% |
- Q2 revenue increased 27.3%, driven by restaurant revenue of $656.1 million and retail revenue of $206.2 million. Six-month revenue increased 24.4%.
- Comparable restaurant and retail sales increased 27.5% in Q2 and 24.3% for the first six months. Q2 comparable restaurant traffic increased 18.8%, while average check increased 7.1%, including a 5.3% menu price increase.
- Q2 operating income increased despite commodity and wage inflation. Restaurant cost of goods sold rose to 27.4% of restaurant revenue from 26.9%; total labor expense declined to 34.4% of revenue from 35.0%.
- Six-month net income and EPS declined substantially because the prior-year period included a $217.7 million gain from a sale-leaseback transaction. Excluding the unusual gain, the filing does not present a separate adjusted earnings measure.
- Operating cash flow was $107.8 million for the first six months, down from $121.3 million. Capital expenditures, net of insurance recoveries, were $29.8 million.
- Cash and cash equivalents were $79.7 million at January 28, 2022, compared with $144.6 million at July 30, 2021. The Company had $733.1 million of borrowing availability under its revolving credit facility.
- Debt included $35.0 million outstanding under the revolving facility and $300.0 million principal amount of 0.625% convertible senior notes due 2026, with a net carrying amount of $292.1 million. The Company repaid $50.0 million of revolving borrowings during Q2.
- The Company reported negative working capital of $172.2 million. Operating lease liabilities totaled $791.0 million on a present-value basis, with undiscounted future minimum lease payments of $1.22 billion.
- The Company paid $54.6 million of dividends and repurchased 279,664 shares for $34.2 million during the first six months.
Material changes versus the prior comparable period
- Revenue, comparable sales and guest traffic rebounded from the COVID-19-affected prior-year period, when many dining rooms had restrictions or prohibitions on dine-in service.
- Off-premise sales represented approximately 24% of restaurant sales in Q2 versus approximately 30% in the prior-year quarter, reflecting the return of dine-in activity.
- Q2 operating margin improved to 5.4% from 2.1%, but six-month operating margin fell to 5.4% from 19.0% because of the prior-year sale-leaseback gain.
- Interest expense declined to $2.2 million in Q2 from $10.8 million and to $4.8 million for six months from $21.5 million, primarily due to lower debt and interest rates.
- The Company early adopted convertible-instrument accounting guidance, increasing reported long-term debt by $49.2 million, reducing deferred taxes by $12.3 million and reducing equity by $37.0 million, without an EPS impact.
- Cash decreased by $64.9 million during the first six months, primarily reflecting dividends, debt repayment, share repurchases and capital expenditures.
Guidance, outlook, risks and unusual items
- Management expects to add two Cracker Barrel locations and 10 to 12 MSBC locations during FY2022; one MSBC location opened during the first six months.
- Estimated FY2022 capital expenditures are approximately $90 million. Management expects an effective tax rate of approximately 15%.
- Management presently expects commodity inflation of approximately 10% and wage inflation of approximately 10% in 2022.
- Management believes cash on hand, operating cash flow and revolver capacity will fund operations, expansion, share repurchases and working capital needs for the next twelve months.
- Key risks include renewed COVID-19 outbreaks and restrictions, staffing shortages, consumer demand, commodity and wage inflation, supply-chain disruption, competition, information-security incidents, interest-rate and refinancing risk, lease and impairment risks, litigation, insurance claims and execution of expansion initiatives.
- The Company was in compliance with its revolving-credit covenants at quarter-end and reported no material off-balance-sheet arrangements. Standby letters of credit totaled $31.9 million and reduced revolver availability.
- Subsequent to quarter-end, the Company extended CEO Sandra Cochran’s severance protections through September 30, 2024. No other employment-agreement provisions were modified.
Important facts for investors to verify
- Assess sustainable earnings excluding the prior-year $217.7 million sale-leaseback gain and evaluate the effect of inflation on restaurant and labor margins.
- Verify the Company’s ability to maintain dividends, repurchases and planned capital expenditures while cash declined and working capital remained negative.
- Review the terms, conversion conditions and potential dilution from the $300 million convertible notes, related hedges and warrants.
- Monitor COVID-19 developments, staffing availability, guest traffic, off-premise demand and supply-chain conditions.
- Evaluate long-term fixed lease obligations, including $791.0 million of recognized operating lease liabilities and $1.22 billion of undiscounted future payments.
- Confirm the assumptions underlying commodity inflation, wage inflation, the approximately 15% tax-rate expectation and the planned FY2022 store openings.