Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. operates an integrated restaurant and retail concept in the United States. The unaudited Form 10-Q covers the quarter ended November 1, 2013, compared with the quarter ended November 2, 2012. The company operated 625 stores in 42 states at quarter-end, versus 620 stores a year earlier.
Financial Results and Key Metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Total revenue | $649.1 million | $627.5 million | 3.5% increase |
| Restaurant revenue | $521.9 million | $504.3 million | 3.5% increase |
| Retail revenue | $127.2 million | $123.1 million | 3.3% increase |
| Gross profit | $443.2 million | $429.6 million | 3.2% increase |
| Operating income | $44.2 million | $45.3 million | 2.4% decrease |
| Net income | $27.2 million | $23.2 million | 17.1% increase |
| Diluted EPS | $1.14 | $0.97 | Increase |
| Operating cash flow | $(9.2) million | $(13.6) million | Improved by $4.4 million |
- Gross margin was 68.3%, compared with 68.5% in the prior-year quarter.
- Operating margin was 6.8%, compared with 7.2%. Store operating income margin declined to 12.5% from 12.9%.
- Net margin improved to 4.2% from 3.7%, primarily because interest expense fell to $4.4 million from $10.7 million.
- Comparable restaurant sales increased 2.8%, including a 2.9% average check increase and a 0.1% traffic decline. Comparable retail sales increased 2.5%.
- Commodity inflation was 4.0% in the quarter. Management expected approximately 2% commodity inflation for fiscal 2014.
- Cash and cash equivalents were $57.5 million at November 1, 2013, down from $121.7 million at August 2, 2013.
- Capital expenditures were $17.7 million, partially offset by $0.6 million of insurance recoveries. Net capital expenditures were approximately $17.1 million.
Balance Sheet, Debt and Liquidity
- Total assets were $1.35 billion and shareholders’ equity was $475.9 million at November 1, 2013.
- Total debt was $400.0 million, consisting of $212.5 million drawn on the revolving facility and a $187.5 million term loan. Current maturities were $6.25 million.
- Revolving-credit availability was $266.9 million after considering $20.6 million of standby letters of credit for workers’ compensation insurance.
- Outstanding borrowings were effectively at a weighted-average interest rate of 3.73% through interest-rate swaps. The company was in compliance with its debt covenants.
- Working capital was negative $30.5 million, compared with negative $13.9 million at August 2, 2013, principally because of lower cash, seasonal retail inventory build, payment timing and bonus payments.
- Financing activities used $38.0 million, including $17.8 million of dividends and $12.5 million for share repurchases.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3.5%, supported by positive comparable restaurant and retail sales and one additional store.
- Restaurant cost of goods sold increased to 27.3% of restaurant revenue from 26.8%, reflecting commodity inflation and a shift toward higher-cost menu items, partly offset by pricing and lower food waste.
- Labor costs improved to 36.5% of revenue from 37.1%, primarily because of pricing, productivity and lower health-care and pre-opening labor costs.
- Other store operating expenses increased to 19.3% of revenue from 18.5%, mainly due to higher advertising, a store-manager conference, maintenance and lighting costs.
- General and administrative expense remained 5.7% of revenue. Proxy contest expenses were $2.8 million in the current quarter and $2.9 million in the prior-year quarter.
- Interest expense declined by $6.3 million due to lower debt and borrowing costs and the expiration of a higher-rate interest-rate swap.
- The company repurchased 120,000 shares for $12.5 million and paid a quarterly dividend of $0.75 per share, compared with $0.50 per share in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
- Management’s 2014 priorities included menu improvements, brand and merchandise marketing, improved merchandise breadth, technology and process enhancements, and increased shareholder returns.
- Management expected fiscal 2014 interest expense of approximately $16 million to $18 million, an effective tax rate of 31% to 32%, advertising expense at approximately the prior-year percentage of revenue, and capital expenditures of $90 million to $100 million.
- Planned capital expenditures included approximately seven or eight new stores, maintenance programs, technology and operating improvements.
- Management estimated that the 16-day federal government shutdown negatively affected comparable traffic and sales by approximately 0.2% to 0.3% during the quarter.
- Results are seasonal, with historically lower earnings in the first and third quarters and higher earnings in the second and fourth quarters. Interim results are not necessarily indicative of full-year performance.
- Kraft Foods pursued trademark-related declaratory and injunctive relief concerning Cracker Barrel-branded food products. A preliminary injunction restricting certain prospective retail uses was affirmed by the Seventh Circuit on November 14, 2013. A stipulation allowed limited distribution of products under the CB Old Country Store mark.
- The company is subject to ordinary-course legal and regulatory proceedings, self-insurance exposure, tax-estimate uncertainty, inventory valuation risk, impairment risk and share-based compensation estimation risk. Management did not expect other disclosed proceedings to materially affect results or financial position.
- The company stated that cash on hand, operating cash flow and revolving-credit capacity should fund operations, expansion, repurchases and dividends for at least the next twelve months.
Important Facts for Investors to Verify
- Whether comparable-store traffic weakness persists despite higher average checks and menu pricing.
- Whether commodity inflation, labor costs and higher store operating expenses pressure restaurant and operating margins.
- Actual operating cash generation, seasonal inventory requirements and the pace of cash depletion.
- Compliance with debt covenants, available revolving capacity and restrictions on dividends and share repurchases.
- Execution of the $90 million to $100 million capital-expenditure plan and the expected new-store openings.
- Developments in the Kraft trademark litigation and the commercial impact of restrictions on branded food distribution.
- Whether the projected $16 million to $18 million of interest expense and 31% to 32% tax rate are achieved.