Cracker Barrel Old Country Store, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the first quarter of fiscal 2013 ended November 2, 2012, with comparison to the quarter ended October 28, 2011. Cracker Barrel operated 620 stores in 42 states at period end, compared with 606 stores a year earlier. The company operates an integrated restaurant and retail-store concept and reports one operating segment.
Financial Performance and Position
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Total revenue | $627.5 million | $598.4 million |
| Restaurant revenue | $504.3 million | $481.5 million |
| Retail revenue | $123.1 million | $116.9 million |
| Gross profit | $429.6 million | $412.1 million |
| Operating income | $45.3 million | $44.6 million |
| Net income | $23.2 million | $23.8 million |
| Diluted EPS | $0.97 | $1.03 |
| Operating cash flow | $(13.6) million | $20.2 million |
- Total revenue increased 4.8%. Comparable restaurant and retail sales increased 3.3% and 1.6%, respectively, for a combined comparable-store increase of 2.9%.
- Gross margin declined to 68.5% from 68.9%. Store operating margin declined to 12.9% from 13.7%, while operating margin declined to 7.2% from 7.5%. Net margin declined to 3.7% from 4.0%.
- Restaurant comparable sales reflected a 2.5% increase in average check, including a 2.0% menu-price increase, and a 0.8% increase in guest traffic.
- Cash and cash equivalents were $118.9 million at November 2, 2012, down from $152.0 million at August 3, 2012. Working capital was $35.1 million, compared with $18.2 million at fiscal year-end.
- Operating cash flow was adversely affected by higher retail inventories and payments of annual and long-term incentive bonuses. Capital expenditures were $13.4 million, and net cash used in investing activities was $13.3 million.
- Total debt was approximately $525.1 million, consisting primarily of $312.5 million drawn on the revolving facility and a $212.5 million term loan. Borrowing availability was $159.3 million after outstanding borrowings and standby letters of credit.
- The weighted-average interest rate on swapped borrowings was 7.32%. Interest-rate-swap liabilities totaled $28.9 million. The company was in compliance with its debt covenants.
- Dividends declared were $0.50 per share, compared with $0.25 per share in the prior-year quarter. No shares were repurchased; 203,956 shares were issued from equity-award exercises.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by positive comparable-store performance and four net new stores opened during the quarter.
- Cost of goods sold increased as a percentage of revenue because of food commodity inflation, a shift toward higher-cost menu items, increased retail inventory reserves, higher markdowns and higher merchandise purchase costs.
- Commodity inflation was 2.4% in the quarter. Labor expense was broadly stable as a percentage of revenue, with higher health-care and workers’ compensation costs offset by lower store hourly labor costs.
- Other store operating expenses increased as a percentage of revenue, primarily because of the non-recurrence of a litigation settlement received in the prior-year quarter, higher advertising costs and other operating changes.
- General and administrative expenses declined to 5.7% of revenue from 6.2%, primarily because manager-conference, incentive-compensation and legal expenses were lower; higher proxy-contest expenses partially offset the reduction.
- Net income and diluted EPS declined despite higher revenue and operating income, primarily because the effective tax rate increased to 33.0% from 28.9%, reflecting expiration of the Work Opportunity Tax Credit and other tax factors.
- Cash generation deteriorated materially, changing from $20.2 million of operating cash inflow to $13.6 million of operating cash outflow.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2013 commodity inflation of approximately 5.0% to 6.0% and an effective tax rate of approximately 32% to 33%.
- Management expects 2013 interest expense to decline by approximately $8 million to $9 million, primarily following expiration of a seven-year interest-rate swap on May 3, 2013.
- Estimated 2013 capital expenditures are $90 million to $100 million, funded through operating cash flow and, as necessary, revolver borrowings.
- Expected 2013 proxy-contest expenses are $4.0 million to $4.5 million.
- Management believes available cash, operating cash flow, borrowing capacity and proceeds from equity-award exercises will fund operations, expansion, debt payments, planned repurchases and dividends for at least the next twelve months.
- Key risks include commodity inflation, labor and health-care costs, retail inventory valuation and markdowns, self-insured workers’ compensation and general-liability claims, tax estimates, long-lived-asset impairment, interest-rate exposure and compliance with debt covenants.
- The company had $28.2 million of standby letters of credit supporting workers’ compensation insurance, reducing revolver availability. Ordinary-course legal proceedings were not expected to materially affect financial results.
- The company disclosed an enhanced risk relating to charter provisions, Tennessee law and a shareholder rights plan that may deter or delay a change in control. The rights plan expires April 9, 2015 and may be triggered if a person or group acquires 20% or more of the common stock, subject to its terms.
- The company adopted revised presentation requirements for comprehensive income; the adoption did not affect financial position or results of operations. The filing states that the next disclosed accounting adoption was not expected to have a significant impact.
Important Facts for Investors to Verify
- Whether comparable-store traffic and sales growth can offset projected 5.0% to 6.0% commodity inflation and continued labor and health-care cost pressure.
- The sustainability of liquidity given negative first-quarter operating cash flow, elevated retail inventories, approximately $525 million of debt and $159.3 million of revolver availability.
- The effect of the May 2013 interest-rate-swap expiration on interest expense and exposure to variable interest rates.
- Compliance with leverage, interest-coverage and dividend restrictions under the credit facility.
- Future retail inventory reserves, markdowns and shrinkage, as well as potential impairment or insurance-reserve adjustments.
- The final amount of proxy-contest costs, share repurchases and dividends, subject to credit-facility restrictions.
- The potential governance and takeover implications of the shareholder rights plan and related charter and Tennessee-law provisions.