Cracker Barrel Old Country Store, Inc. — Fiscal Q1 2016 Form 10-Q
Business context and reporting period
The company operates the Cracker Barrel Old Country Store restaurant and retail concept in the United States. It operated 635 stores in 42 states at October 30, 2015, compared with 633 stores a year earlier. The report covers the quarter ended October 30, 2015, compared with the quarter ended October 31, 2014. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Total revenue | $702.6 million | $683.4 million | 2.8% increase |
| Restaurant revenue | $562.3 million | $546.7 million | 2.9% increase |
| Retail revenue | $140.4 million | $136.7 million | 2.7% increase |
| Store operating income | $99.6 million | $88.6 million | 12.4% increase |
| Operating income | $65.3 million | $55.4 million | 17.8% increase |
| Net income | $40.9 million | $34.0 million | 20.1% increase |
| Diluted EPS | $1.70 | $1.42 | 19.7% increase |
| Operating margin | 9.3% | 8.1% | Up 1.2 percentage points |
| Net margin | 5.8% | 5.0% | Up 0.8 percentage points |
| Cash flow from operations | $(4.4) million | $36.7 million | Decreased $41.1 million |
| Capital expenditures, net | $17.0 million | $18.4 million | Decreased $1.4 million |
Comparable restaurant sales increased 2.5%, consisting of a 3.2% average check increase, including a 2.8% menu price increase, partly offset by a 0.7% decline in guest traffic. Comparable retail sales increased 2.4%, supported primarily by apparel and accessories.
Cash and cash equivalents were $127.5 million at October 30, 2015, down from $265.5 million at July 31, 2015. Working capital was $12.2 million. The company had $400.0 million outstanding under its $750.0 million revolving credit facility and $338.8 million of borrowing availability after standby letters of credit. The company reported compliance with all debt covenants.
Interest expense declined to $3.5 million from $4.4 million, primarily because of lower weighted-average interest rates following the expiration of certain interest-rate swaps and the use of lower-cost swaps. Interest-rate swap liabilities totaled $12.0 million at October 30, 2015.
Material changes versus the prior comparable period
- Revenue growth was driven by higher comparable restaurant and retail sales and sales from stores opened since the prior-year period.
- Store operating margin improved to 14.2% from 13.0%. Cost of goods sold declined to 31.7% of revenue from 32.5%, and labor expense declined to 34.8% from 35.5%.
- Other store operating expense increased to 19.3% of revenue from 19.0%, primarily because of a bi-annual manager conference and training event that did not occur in the prior-year quarter.
- Operating cash flow turned negative, primarily because of higher retail inventory, payment timing for accounts payable, and the absence of prior-year health-care premium reimbursements.
- The company paid a regular dividend of $1.10 per share and a special dividend of $3.00 per share, totaling $98.6 million, compared with $23.8 million of dividends paid in the prior-year quarter.
- The company repurchased 100,000 shares for $14.7 million and issued 53,854 shares upon vesting of share-based compensation awards.
- Retail inventory increased to $145.3 million from $115.8 million at July 31, 2015, contributing to the decline in operating cash flow.
Guidance, outlook, risks and unusual items
Management plans to focus on traffic and sales initiatives, technology and process improvements, cost savings, new-unit expansion, and development of a fast-casual concept. The dining room management system was implemented during the quarter to improve wait-list and seating management and reduce labor costs.
- Expected 2016 commodity inflation: approximately 2.5% to 3.0%.
- Expected 2016 effective tax rate: approximately 31% to 32%, assuming the Work Opportunity Tax Credit is not renewed. Retroactive renewal could reduce 2016 tax expense by an estimated $3.5 million to $6.5 million.
- Expected 2016 capital expenditures: approximately $110.0 million, including costs for seven new stores, future locations, maintenance, technology and operations improvements.
- Management believes available cash, operating cash flow and revolver capacity will fund operations, dividends and expansion plans for at least the next twelve months.
- The business is seasonal, with historically lower earnings in the first and third quarters and higher earnings in the second and fourth quarters.
- The company is exposed to commodity costs, labor and health-care costs, retail inventory valuation, insurance claims, tax audits, litigation, interest-rate movements and impairment of long-lived assets.
- Standby letters of credit of $11.2 million support workers’ compensation insurance and reduce revolver availability. Ordinary-course legal and regulatory proceedings were not expected by management to materially affect results or financial position.
- No material changes to previously disclosed risk factors or market risks were reported.
Important facts for investors to verify
- Whether comparable-store traffic improves after the 0.7% decline in restaurant guest traffic.
- Whether the planned $110.0 million capital program and seven new stores are delivered within budget and schedule.
- The sustainability of margin gains after menu pricing, productivity improvements and lower utilities costs are weighed against expected commodity inflation.
- Inventory normalization and the resulting recovery of operating cash flow.
- Compliance with leverage and interest-coverage covenants after the special dividend, share repurchases and planned capital spending.
- The effect of the Work Opportunity Tax Credit’s renewal or expiration on the effective tax rate.
- Future changes in interest-rate swap fair values and the company’s $400.0 million revolver balance.
- Seasonal performance in the remaining fiscal quarters, which management cautions may not be inferred from the first-quarter results.