Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. operates an integrated restaurant and retail concept in the United States. This unaudited Form 10-Q covers the quarter and nine months ended May 3, 2013, compared with April 27, 2012; the balance sheet is compared with August 3, 2012. The company operated 622 stores in 42 states at quarter-end, versus 613 stores a year earlier.
Financial Results and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $640.4 million | $608.5 million | $1.971 billion | $1.880 billion |
| Operating income | $44.2 million | $39.1 million | $146.7 million | $131.1 million |
| Net income | $24.6 million | $19.0 million | $83.0 million | $68.4 million |
| Diluted EPS | $1.02 | $0.81 | $3.47 | $2.93 |
| Operating margin | 6.9% | 6.4% | 7.4% | 7.0% |
| Net margin | 3.8% | 3.1% | 4.2% | 3.6% |
| Operating cash flow | Not separately provided | Not separately provided | $106.7 million | $141.9 million |
- Third-quarter revenue increased 5.2%, operating income increased approximately 13%, net income increased approximately 30%, and diluted EPS increased approximately 26% year over year.
- Nine-month revenue increased 4.8%, operating income increased approximately 12%, net income increased approximately 21%, and diluted EPS increased approximately 18%.
- Restaurant revenue was $522.6 million in the quarter, up 4.5%; retail revenue was $117.8 million, up 8.5%.
- Third-quarter comparable restaurant sales increased 3.1%, comprising a 2.4% average-check increase and 0.7% guest-traffic increase. Comparable retail sales increased 5.5%, and combined comparable sales increased 3.5%.
- Gross margin was 68.5% in the quarter and 67.3% for nine months, compared with 68.8% and 67.5%, respectively, in the prior-year periods.
- Labor and related expenses improved to 37.8% of revenue in the quarter from 38.6%, and to 36.5% for nine months from 36.8%. Management attributed the improvement primarily to menu pricing exceeding wage inflation and improved productivity.
- Cash and cash equivalents were $58.5 million at May 3, 2013, compared with $152.0 million at August 3, 2012. Working capital was negative $23.1 million, versus positive $18.2 million at fiscal year-end.
- Nine-month capital expenditures were $46.2 million, or $45.7 million net of proceeds. Net cash used in investing activities was $45.2 million.
- Total debt was approximately $400.1 million, including $212.5 million outstanding on the revolving facility and $187.5 million under the term loan. Revolving-facility availability was $259.3 million after standby letters of credit.
- The company was in compliance with its debt covenants. Outstanding borrowings were swapped at a weighted-average interest rate of 3.98% at quarter-end.
Material Changes Versus the Prior Comparable Period
- Profitability improved despite modest gross-margin pressure. Store operating income increased to $80.2 million from $73.7 million, and operating margin expanded by approximately 50 basis points.
- Interest expense declined to $10.2 million from $11.2 million in the quarter and to $31.2 million from $33.3 million for nine months, reflecting lower debt and a lower credit spread.
- Operating cash flow declined by $35.2 million for nine months, primarily because of payment timing for accounts payable and income taxes and higher incentive-bonus payments, partly offset by higher net income.
- Debt decreased by approximately $125.0 million from August 3, 2012. During the quarter, the company made a $25.0 million term-loan prepayment and paid down $100.0 million on the revolving facility.
- The company repurchased 44,300 shares for $3.6 million during the first nine months and issued 329,232 shares upon equity-award exercises for proceeds of $5.2 million.
- The regular dividend was $0.50 per share during the quarter. A $0.75 per-share dividend was declared during the fourth quarter, representing a 50% increase from the quarterly dividend.
- A $525.0 million interest-rate swap with a 5.57% fixed rate expired on May 3, 2013, contributing to expected future interest savings.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects 2013 commodity inflation of approximately 3.5% to 4% and an effective tax rate of approximately 28% to 29%.
- Management estimated 2013 capital expenditures of $75 million to $80 million, funded through operating cash flow and, as necessary, revolver borrowings.
- Management expected fourth-quarter interest expense to decline by approximately $6 million, primarily because of the expired high-rate swap and lower debt. It also expected a further credit-spread reduction, resulting in an anticipated weighted-average interest rate of 3.73%.
- Management stated that cash on hand, operating cash flow, revolver capacity, and proceeds from equity-award exercises should fund continuing operations, expansion, share repurchases, and dividends for at least the next twelve months.
- Effective June 3, 2013, an amendment to the credit facility provided greater dividend flexibility, subject to liquidity requirements, leverage limits, and other restrictions. Dividend and share-repurchase capacity remains dependent on the credit agreement.
- Key operating risks include commodity inflation, labor and health-care costs, retail markdowns and freight, consumer traffic, seasonality, self-insured workers’ compensation and general-liability claims, inventory shrinkage and obsolescence, tax positions, and impairment of long-lived assets.
- The company had $28.2 million of standby letters of credit securing workers’ compensation claims, reducing revolver availability. It was also secondarily liable for lease payments on two properties and had ordinary-course legal proceedings; management did not expect these matters to materially affect results or financial position.
- Results are seasonal, with historically lower net income in the first and third quarters and higher net income in the second and fourth quarters. The filing states that interim results are not necessarily indicative of full-year results.
- The company adopted updated comprehensive-income presentation requirements with no effect on financial position or results. Other recently issued accounting guidance was not expected to have a significant financial impact.
Important Facts for Investors to Verify
- Whether positive comparable traffic and sales trends continue, particularly as pricing contributed materially to restaurant sales growth.
- Whether commodity inflation remains within the projected 3.5% to 4% range and whether labor productivity continues to offset wage pressure.
- Actual fourth-quarter interest expense and the financial benefit from the expired 5.57% interest-rate swap and lower credit spread.
- Compliance with leverage, interest-coverage, liquidity, dividend, and share-repurchase requirements under the amended credit facility.
- Whether operating cash flow recovers from the nine-month decline while the company funds $75 million to $80 million of annual capital expenditures and shareholder returns.
- Potential changes in self-insurance reserves, workers’ compensation claims, retail markdowns and shrinkage, tax positions, and long-lived-asset impairment estimates.
- The filing’s forward-looking statements and management assumptions, which are subject to economic, operating, commodity, traffic, legal, tax, and financing risks.