Cracker Barrel Old Country Store, Inc. — Fiscal 2017 Third-Quarter Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended April 28, 2017, compared with April 29, 2016. The company operates Cracker Barrel restaurants and retail stores in the United States, with 643 Cracker Barrel locations in 44 states and four Holler & Dash locations in three states at quarter-end. The company reports one operating segment.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $700.4 million | $700.1 million | $2.183 billion | $2.167 billion |
| Operating income | $71.5 million | $67.0 million | $229.9 million | $202.9 million |
| Net income | $46.9 million | $49.2 million | $148.0 million | $138.3 million |
| Diluted EPS | $1.95 | $2.04 | $6.14 | $5.75 |
| Operating margin | 10.2% | 9.6% | 10.5% | 9.4% |
| Net margin | 6.7% | 7.0% | 6.8% | 6.4% |
Quarterly restaurant revenue increased to $575.1 million from $570.5 million, while retail revenue declined to $125.3 million from $129.7 million. Comparable sales decreased 1.2% overall, including a 0.4% restaurant decline and a 4.7% retail decline. Restaurant traffic fell 2.1%, partly offset by a 1.7% increase in average check.
For the first nine months, restaurant revenue increased 1.5% and retail revenue declined 2.2%. Comparable sales decreased 0.3% overall, with a 0.5% restaurant increase and a 3.4% retail decrease. Restaurant traffic declined 1.4%, offset by a 1.9% average check increase.
Gross cost performance improved primarily because of restaurant commodity deflation, menu pricing and lower food waste. Restaurant commodity deflation was 3.9% in the quarter and 5.6% year-to-date. Retail costs worsened as a percentage of retail revenue because of higher obsolete inventory provisions, markdowns, shrinkage, lower initial margins and freight.
Nine-month net cash provided by operating activities was $203.1 million, compared with $149.4 million in the prior-year period. Capital expenditures were $81.2 million, versus $70.0 million, and net cash used in financing activities was $89.9 million, including $85.1 million of dividends. Cash increased to $183.7 million from $151.0 million at July 29, 2016.
Long-term debt was $400.0 million under a $750.0 million revolving facility. Remaining borrowing availability was $340.3 million after $9.7 million of standby letters of credit. The weighted-average swapped interest rate was 2.85%, and the company was in compliance with all debt covenants. Working capital was positive at $39.9 million compared with negative working capital of $13.1 million at fiscal year-end.
Material changes versus the prior comparable period
- Third-quarter revenue was essentially flat, while nine-month revenue increased 0.8%.
- Third-quarter operating income increased 6.6%, and the operating margin expanded by 0.6 percentage points, despite flat sales.
- Third-quarter net income declined 4.6% and diluted EPS declined from $2.04 to $1.95, primarily reflecting a higher effective tax rate of 31.1% versus 22.7%.
- Nine-month net income increased 7.0% and diluted EPS increased 6.8%; the nine-month effective tax rate rose to 32.5% from 28.1%.
- Labor expense increased as a percentage of revenue, driven by management compensation, bonuses, hourly labor and wage inflation. Advertising spending also increased as planned.
- The interest-rate-swap liability declined to $6.5 million from $22.3 million, generating $9.7 million of after-tax other comprehensive income year-to-date.
- The company opened six stores during the first nine months, compared with one in the prior-year period, and ended the period with 647 total locations.
Guidance, outlook, risks and unusual items
- Management planned to open six Cracker Barrel stores and three Holler & Dash locations during 2017.
- 2017 capital expenditures were estimated at approximately $125 million, and depreciation expense at approximately $85 million to $87 million.
- Management expected approximately 4.5% commodity deflation and an effective tax rate of approximately 32% for 2017.
- Planned 2017 advertising spending was approximately 2.9% of revenue, compared with 2.7% in 2016.
- Management expected cash on hand, operating cash flow and revolver capacity to fund operations, dividends and expansion for at least the next twelve months.
- Key operating risks include declining guest traffic, weak retail categories, labor and wage inflation, inventory obsolescence and shrinkage, commodity changes, insurance claims, tax uncertainties, impairment judgments and legal proceedings.
- The company is self-insured for significant portions of workers’ compensation and general liability exposures and maintains $9.7 million of related standby letters of credit. Management stated that pending legal and regulatory matters were not expected to materially affect results or financial position.
- Seasonality is significant: historically, the first and third quarters are weaker, while the second and fourth quarters benefit from holiday shopping and summer travel.
Important facts for investors to verify
- Whether restaurant traffic and comparable-store sales improve after the reported declines, particularly in retail.
- Whether commodity deflation, pricing and cost initiatives continue to support margins as labor costs rise.
- Progress against the 2017 store-opening plan and the approximately $125 million capital-expenditure forecast.
- Compliance with revolver leverage and interest-coverage covenants, including the restrictions governing dividends and share repurchases.
- Changes in the effective tax rate, Work Opportunity Tax Credit collections and uncertain tax positions.
- Future insurance claims, inventory provisions, impairment testing, legal proceedings and interest-rate-swap valuations.
- The company’s adoption impact from pending revenue-recognition, lease, share-based-payment and other accounting standards; the filing does not provide a clear quantified impact for standards still under evaluation.