Cracker Barrel Old Country Store, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended July 29, 2016. Fiscal 2015 ended July 31, 2015. The filing also provides unaudited fourth-quarter results for the 13 weeks ended July 29, 2016.
Business context
Cracker Barrel operates an integrated full-service restaurant and retail concept in the United States. Restaurants generated approximately 80% of fiscal 2016 revenue and gift shops approximately 20%. As of September 19, 2016, the Company operated 640 Cracker Barrel stores in 43 states and two locations of its new Holler & Dash Biscuit House concept. The Company opened four Cracker Barrel stores and closed two during fiscal 2016.
Financial performance and key metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | $2,912.4 million | $2,842.3 million | 2.5% increase |
| Restaurant revenue | $2,323.2 million | $2,269.6 million | 2.4% increase |
| Retail revenue | $589.2 million | $572.7 million | 2.9% increase |
| Operating income | $280.5 million | $254.9 million | 10.0% increase |
| Operating margin | 9.6% | 9.0% | Up 0.6 percentage points |
| Net income | $189.3 million | $163.9 million | 15.5% increase |
| Diluted EPS | $7.86 | $6.82 | 15.2% increase |
| Net cash from operations | $271.4 million | $334.1 million | Decrease |
| Capital expenditures, net | $113.4 million | $90.5 million | Increase |
Margins and operating drivers: Cost of goods sold declined to 31.9% of revenue from 32.5%, while labor and related expenses declined to 34.6% from 34.9%. Other store operating expenses increased to 19.0% from 18.4%, primarily due to higher advertising, maintenance, supplies, depreciation and manager conference costs, partly offset by lower utilities. General and administrative expense declined to 4.9% of revenue from 5.2%.
Comparable restaurant sales increased 2.2%, driven by a 3.5% increase in average check, including a 2.8% average menu price increase, partly offset by a 1.3% decline in guest traffic. Comparable retail sales increased 2.7%. Average check was $10.63, up 3.5%, and average unit volume was $3.651 million for restaurants and $926 thousand for retail.
Fourth quarter: Revenue was $745.6 million versus $719.2 million in the prior-year quarter. Net income was $51.0 million versus $47.4 million, and diluted EPS was $2.12 versus $1.97.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $151.0 million at July 29, 2016, compared with $265.5 million at July 31, 2015.
- Working capital was a deficit of $13.1 million, compared with positive working capital of $11.2 million in the prior year.
- Outstanding revolving credit borrowings were $400.0 million under a $750.0 million facility. After $11.0 million of standby letters of credit, borrowing availability was $339.0 million.
- The Company was in compliance with its debt covenants and expected to remain compliant. The facility expires January 8, 2020.
- Dividends paid increased to $255.5 million from $95.7 million, reflecting regular dividends and a $3.25-per-share special dividend. Dividends paid per share totaled $10.65 versus $4.00.
- The Company repurchased 100,000 shares for $14.7 million. No shares were repurchased during the fourth quarter.
- Operating leases totaled $707.8 million in future minimum payments. Total contractual cash obligations were $1.205 billion, excluding $27.4 million of uncertain tax positions whose payment timing could not be reliably estimated.
Material changes versus the prior period
- Revenue growth slowed to 2.5% from 5.9%, with comparable restaurant sales growth moderating to 2.2% from 5.1% and traffic declining in fiscal 2016.
- Profitability improved: operating margin rose 60 basis points and net income increased 15.5%, aided by commodity deflation, pricing, labor savings, lower interest expense and a lower effective tax rate.
- Net cash from operations declined by $62.7 million, primarily due to the timing of accounts payable and income-tax payments and changes in retail inventories.
- Capital expenditures increased by $22.9 million, principally for existing stores and new locations.
- Interest expense declined to $14.1 million from $16.7 million. The effective tax rate declined to 28.9% from 31.2%, primarily due to reductions in reserves for uncertain tax positions.
- Accumulated other comprehensive loss increased to $13.7 million, primarily because of changes in the fair value of interest-rate swaps.
Guidance, outlook, risks and unusual items
- Management planned seven or eight new Cracker Barrel stores and four or five new Holler & Dash locations during fiscal 2017, with estimated capital expenditures of approximately $125.0 million.
- Management expected 2.0% to 3.0% commodity deflation in fiscal 2017 and an effective tax rate of 31% to 33%.
- Advertising was expected to be approximately 2.9% of revenue in fiscal 2017, versus 2.7% in fiscal 2016.
- Holler & Dash was not expected to have a material near-term financial impact, but represents an initiative to extend the brand into metropolitan markets.
- Principal risks include discretionary consumer spending, intense restaurant and retail competition, food and commodity costs, wage and benefit inflation, labor availability, supply-chain disruption, reliance on a single retail distribution center, information-security failures, severe weather, regulatory changes, litigation, store-development execution and leverage.
- The Company self-insures significant portions of workers’ compensation, general liability and health costs, creating exposure to adverse claims development and actuarial estimates. Management stated that ordinary-course legal proceedings were not expected to materially affect results or financial position.
- The Company had a shareholder rights plan expiring April 9, 2018. Biglari Holdings and affiliates beneficially owned approximately 19.7% of outstanding common stock, creating an ongoing activist-investor and governance consideration.
- Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Investor verification points
- Reconcile the strong earnings growth with the decline in operating cash flow and the substantial dividend outflow.
- Assess whether comparable-sales growth can continue without relying primarily on menu price increases, particularly given the 1.3% traffic decline.
- Review debt-covenant headroom, interest-rate swap exposure and the January 2020 credit-facility maturity.
- Evaluate the economics and execution risk of the planned Cracker Barrel expansion and Holler & Dash rollout.
- Monitor labor inflation, minimum-wage developments, food commodity prices and the Company’s ability to pass through cost increases.
- Review retail inventory markdowns, obsolescence provisions and exposure to foreign sourcing and the single retail distribution center.
- Verify future dividend and repurchase capacity under the revolving-credit-facility restrictions and cash-availability requirements.