Cracker Barrel Old Country Store, Inc. — Fiscal 2019 First-Quarter 10-Q
Reporting period: Quarter ended November 2, 2018; comparable quarter ended October 27, 2017. The company operated 656 Cracker Barrel stores in 45 states and seven Holler & Dash locations at November 2, 2018. Results are unaudited and seasonally affected, with historically lower earnings in the first and third quarters.
Financial performance and position
- Revenue: $733.5 million, up 3.3% from $710.4 million. Restaurant revenue was $591.0 million, up from $578.2 million; retail revenue was $142.6 million, up from $132.1 million.
- Comparable sales: Restaurant and retail comparable sales increased 2.0%, including a 1.4% restaurant increase and a 4.3% retail increase. Restaurant traffic declined 1.6%, offset by a 3.0% average-check increase, including 2.0% menu pricing.
- Operating income: $61.7 million, down from $70.8 million. Operating margin declined to 8.4% from 10.0%.
- Store operating income: $100.6 million, down from $107.7 million; margin declined to 13.7% from 15.2%.
- Net income: $47.2 million, compared with $46.4 million. Diluted earnings per share increased to $1.96 from $1.92.
- Net margin: 6.4%, compared with 6.5% in the prior-year quarter.
- Operating costs: Cost of goods sold increased to 30.3% of revenue from 29.7%; labor and related expenses increased to 35.2% from 34.9%; other store operating expenses increased to 20.8% from 20.2%.
- Taxes: The effective tax rate declined to 17.7% from 31.0%, primarily reflecting the Tax Cuts and Jobs Act and its lower federal corporate tax rate.
- Operating cash flow: $59.6 million, up from $38.3 million, primarily due to lower cash usage for retail inventory and lower bonus payments.
- Capital expenditures: $37.1 million of property and equipment purchases, partially offset by $0.3 million of insurance recoveries and sale proceeds; net capital expenditures were $36.7 million.
- Cash and liquidity: Cash and equivalents were $101.6 million at November 2, 2018, down from $114.7 million at fiscal year-end. The company reported $541.0 million of borrowing availability under its new revolving facility.
- Debt: $400.0 million was outstanding under the revolving credit facility. The company was in compliance with its financial covenants. Borrowings were swapped at a weighted-average interest rate of 3.73%.
- Dividends and repurchases: The company paid and declared a regular dividend of $1.25 per share. No common shares were repurchased during the quarter.
- Balance sheet: Total assets were $1.56 billion and shareholders’ equity was $600.2 million. Working capital was negative $50.6 million, reflecting the company’s operating model and seasonal inventory build.
Material changes versus the prior comparable period
- Revenue increased 3.3%, supported by comparable sales growth, retail performance, and newly opened stores.
- Profitability weakened at the operating level as commodity inflation, wage inflation, higher depreciation, advertising, asset-disposition losses, and other store costs exceeded revenue growth.
- Restaurant commodity inflation was 4.3% in the quarter. Retail margins were pressured by lower initial margins, markdowns, and inventory shrinkage.
- Interest expense increased to $4.3 million from $3.6 million because of higher weighted-average interest rates and a $0.2 million write-off of prior financing costs.
- Net income and diluted EPS nevertheless increased because of the substantially lower effective tax rate.
- The company replaced its $750.0 million revolving facility with a five-year $950.0 million facility, which includes a $300.0 million expansion option. It incurred $3.0 million of new deferred financing costs.
- Three Cracker Barrel stores opened during the quarter, increasing the reported store count from 660 to 663, including the Holler & Dash locations referenced separately in the company overview.
Guidance, outlook, risks and unusual items
- Management anticipated opening eight Cracker Barrel stores during fiscal 2019, including three opened during the first three months.
- Fiscal 2019 capital expenditures were estimated at approximately $160 million to $170 million, including new stores, future locations, equipment, technology, and strategic initiatives.
- Management expected commodity inflation of approximately 2.0% for fiscal 2019 and an effective tax rate of approximately 17%.
- Management expected cash on hand, operating cash flow, and revolver capacity to fund operations, dividends, and expansion plans for at least the next twelve months.
- Key operational risks include declining guest traffic, commodity and wage inflation, retail markdowns and shrinkage, execution of new-store openings, and pressure on store-level margins.
- The company self-insures significant portions of workers’ compensation, general liability, and health programs, creating exposure to claims-development and actuarial-estimate changes.
- The company had $8.96 million of standby letters of credit supporting workers’ compensation insurance, reducing revolver availability. It also remained secondarily liable for lease payments on two properties occupied by a third party.
- Management stated that ordinary-course litigation and other contingencies were not expected to materially affect the financial statements.
- The company adopted new revenue-recognition, gift-card breakage, and share-based-payment guidance without a material financial statement impact. Lease accounting and other standards were not yet adopted; the company was evaluating their effects.
- The final tax accounting impact of the Tax Cuts and Jobs Act remained subject to additional guidance and analysis, which management expected to complete in the second quarter of fiscal 2019.
Important facts for investors to verify
- Whether comparable-sales growth can continue despite the 1.6% restaurant traffic decline.
- Whether commodity inflation, wage inflation, retail markdowns, and higher operating costs continue to compress store and operating margins.
- Progress against the eight-store opening plan and the estimated $160 million to $170 million capital-expenditure program.
- Compliance with revolver leverage and interest-coverage covenants, including restrictions on dividends and share repurchases.
- The final effective tax rate and any adjustments resulting from completion of the Tax Cuts and Jobs Act accounting analysis.
- Changes in self-insurance reserves, workers’ compensation claims, inventory shrinkage, and long-lived-asset impairment estimates.
- The eventual balance-sheet effects of required lease accounting adoption.