Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. operates company-owned restaurant and gift-shop locations under the Cracker Barrel concept. As of September 18, 2012, it operated 620 stores in 42 states. Restaurants generated approximately 80% of 2012 revenue and retail gift shops approximately 20%.
This Form 10-K covers the fiscal year ended August 3, 2012. Fiscal 2012 included 53 weeks, including a 14-week fourth quarter, compared with 52 weeks in fiscal 2011. The estimated benefit of the additional week was $51.1 million of revenue and $6.3 million of net income.
Key Financial Metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Total revenue | $2,580.2 million | $2,434.4 million | 6.0% increase |
| Operating income | $191.0 million | $167.2 million | 14% increase |
| Net income | $103.1 million | $85.2 million | 21% increase |
| Diluted EPS | $4.40 | $3.61 | 22% increase |
| Operating margin | 7.4% | 6.9% | 50 basis-point increase |
| Net margin | 4.0% | 3.5% | Improved |
| Cash flow from operations | $219.8 million | $138.2 million | Increase of $81.6 million |
| Capital expenditures, net | $80.2 million | $77.7 million | Increase of $2.5 million |
| Cash and cash equivalents | $152.0 million | $52.3 million | Increase of $99.7 million |
| Long-term debt | $525.0 million | $550.1 million | Decrease of $25.1 million |
Restaurant revenue was $2,054.1 million, up from $1,934.0 million, while retail revenue was $526.1 million, up from $500.4 million. Comparable restaurant sales increased 2.2% and comparable retail sales increased 1.6%. The average restaurant check increased 2.4%, including a 2.2% menu-price increase, while comparable restaurant traffic declined 0.2%.
Store operating income was $337.1 million, or 13.1% of revenue, compared with 12.6% in 2011. Cost of goods sold increased to 32.1% of revenue from 31.7%, primarily because of 4.5% food commodity inflation. Labor and related expenses improved to 36.8% of revenue from 37.1%, while other store operating expenses declined to 18.0% from 18.6%.
Fiscal fourth-quarter revenue was $700.0 million and net income was $34.7 million, compared with revenue of $612.9 million and net income of $17.5 million in the prior-year quarter. The comparison is affected by the additional two weeks in the 2012 fourth quarter.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected 13 new store openings, positive comparable sales and the additional fiscal week.
- Operating and net income improved despite higher commodity costs. Cost controls, improved labor productivity, lower utility costs and lower interest expense supported margin expansion.
- Interest expense declined to $44.7 million from $51.5 million, primarily because fiscal 2011 included debt-refinancing costs and fiscal 2012 had lower average debt.
- Fiscal 2012 had no impairment charges or store-disposition gains, compared with a net $0.6 million benefit in 2011 from store gains exceeding impairment charges.
- The company incurred $1.7 million of severance costs from an April 2012 field-organization restructuring and $5.2 million of costs related to the December 2011 proxy contest.
- Cash flow from operations increased substantially, aided by higher earnings and the timing of bonus, tax and accounts-payable payments.
- The company repurchased 265,538 shares for $14.9 million and paid $22.4 million of dividends. Dividends paid per share increased to $0.97 from $0.86.
- Shareholders’ equity increased to $382.7 million from $268.0 million, aided by net income, share-based compensation and changes in the fair value of interest-rate swaps.
Debt, Liquidity and Commitments
The company had a $750.0 million credit facility consisting of a $250.0 million term loan and a $500.0 million revolving facility. At August 3, 2012, borrowings consisted of $212.5 million under the term loan and $312.5 million under the revolver. After $31.5 million of standby letters of credit, borrowing availability was $156.0 million.
Working capital was positive at $18.2 million, compared with a deficit of $21.2 million in 2011. The company stated that cash on hand, operating cash flow, revolver capacity and proceeds from equity-award exercises were expected to fund 2013 operations, expansion, repurchases and dividends.
Total contractual cash obligations were $1.5 billion, including $797.9 million of operating leases, $525.1 million of debt, $147.1 million of purchase obligations and $42.0 million of other long-term obligations. The company was in compliance with its debt covenants at year end.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2013 commodity inflation of approximately 5% to 6%, with planned offsets from menu-price increases, supply contracts and cost-reduction initiatives.
- Management expected 2013 interest expense to decline by approximately $8 million to $9 million, primarily after the expiration of a seven-year interest-rate swap with a 5.57% fixed rate plus the credit spread.
- Management expected a 2013 effective tax rate of approximately 32% to 33%, partly because of expiration of the Work Opportunity Tax Credit.
- Planned 2013 capital expenditures were $90 million to $100 million. The company planned to open 12 new stores, four of which were already open as of September 18, 2012.
- Planned 2013 advertising spending was approximately 2.2% of revenue, with outdoor advertising expected to represent approximately 50% of advertising expenditures.
- Key risks include discretionary consumer spending, intense restaurant and retail competition, food and utility inflation, labor availability and wage pressures, weather and travel patterns, food safety, regulatory costs, litigation, information-technology disruption and reliance on a single retail distribution center.
- Approximately 38% of 2012 retail purchases were sourced directly from China, exposing the company to foreign-sourcing, tariff, transportation, political and supply-chain risks.
- The company self-insures significant portions of workers’ compensation, general liability and health programs, creating exposure to adverse claims-development and actuarial outcomes.
- Biglari Holdings had indicated its intention to nominate two candidates to the company’s board, creating potential proxy-contest costs and management distraction. The company also adopted an April 2012 shareholder rights plan subject to shareholder approval at the 2012 annual meeting.
- Michael A. Woodhouse announced retirement as Executive Chairman effective November 7, 2012. Subject to service through that date, he was eligible for a $0.9 million cash payment, pro rata incentive awards and up to 18 months of COBRA premium payments.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of August 3, 2012.
Investor Verification Items
- Separate the effect of the 53rd week and 14-week fourth quarter from underlying comparable-sales and earnings growth.
- Verify whether projected 2013 commodity inflation can be offset without materially weakening traffic or restaurant margins.
- Review the maturity and refinancing risk of the $525.0 million debt balance, particularly the $475.0 million scheduled maturity in 2016.
- Assess available revolver capacity after standby letters of credit and the restrictions imposed by debt covenants on dividends and repurchases.
- Monitor the expiration of interest-rate swaps, changes in interest expense and exposure to variable-rate debt.
- Evaluate the sustainability of 2012 cash flow, including the impact of nonrecurring working-capital timing benefits and the absence of the 2012 health-insurance reimbursement in 2013.
- Review the effect of the proxy contest, shareholder rights plan and executive-chairman transition on governance and capital allocation.
- Assess supply-chain concentration, China sourcing and the single retail distribution facility.
- Review uncertain tax positions of $24.7 million, including management’s expectation that approximately $5 million to $7 million could decrease within the following twelve months.