Cracker Barrel Old Country Store, Inc. — Fiscal 2012 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended January 27, 2012; comparisons are to January 28, 2011 unless otherwise noted. The filing is unaudited. Cracker Barrel operated 608 stores in 42 states at period end and reports one operating segment.
Business Context and Reporting Period
The company operates integrated restaurant and retail stores under the Cracker Barrel Old Country Store concept. An internal restructuring merger became effective December 23, 2011; management stated that it did not materially change the company’s business, assets, liabilities, management, employees, or net worth. Results are seasonal, with the second quarter benefiting from the Christmas shopping season.
Key Financial Metrics
| Metric | Quarter Ended Jan. 27, 2012 | Prior Year Quarter | Six Months Ended Jan. 27, 2012 | Prior Year Six Months |
|---|---|---|---|---|
| Revenue | $673.2 million | $640.3 million | $1.272 billion | $1.239 billion |
| Gross profit | $437.8 million | $420.9 million | $850.0 million | $839.8 million |
| Gross margin | 65.0% | 65.7% | 66.8% | 67.8% |
| Operating income | $47.3 million | $52.5 million | $92.0 million | $97.9 million |
| Operating margin | 7.0% | 8.2% | 7.2% | 7.9% |
| Net income | $25.6 million | $28.8 million | $49.4 million | $52.5 million |
| Diluted EPS | $1.10 | $1.20 | $2.13 | $2.21 |
Restaurant revenue increased 5.2% for the quarter and 2.6% for the six-month period; retail revenue increased 5.0% and 2.9%, respectively. Comparable restaurant and retail sales increased 3.5% in the quarter and 1.1% for the six months.
Six-month operating cash flow was $114.0 million, compared with $57.3 million in the prior-year period. Capital expenditures were $38.8 million, resulting in approximately $75.2 million of operating cash flow before capital expenditures. Cash and cash equivalents were $119.4 million at January 27, 2012, compared with $52.3 million at July 29, 2011.
Total debt was approximately $550.2 million, including $318.8 million outstanding under the revolving facility and $231.3 million under the term loan. Revolving borrowing availability was $152.6 million after considering $28.6 million of standby letters of credit. The company was in compliance with its debt covenants. The interest rate swap liability was $45.1 million, and swapped borrowings carried a weighted-average interest rate of 7.57%.
Working capital was positive at $5.0 million at January 27, 2012, compared with negative working capital of $21.2 million at July 29, 2011. Shareholders’ equity was $320.4 million, versus $268.0 million at fiscal year-end.
Material Changes Versus the Prior Comparable Period
- Revenue grew 5.1% in the quarter and 2.6% for the first six months, supported by comparable sales gains and five net new stores opened during the six-month period.
- Net income declined 11.0% in the quarter and 5.9% for the six months. Diluted EPS declined 8.3% and 3.6%, respectively, partly reflecting lower operating income.
- Food commodity inflation was 5.7% in the quarter and 5.6% for the six months. Restaurant cost of goods sold increased to 27.5% of restaurant revenue from 26.6% in the quarter and to 27.0% from 26.0% for the six months.
- Gross, store operating, and operating margins contracted as commodity costs, advertising, general and administrative expenses, and certain compensation costs increased relative to revenue.
- General and administrative expenses included higher costs associated with the proxy contest initiated by Biglari Holdings Inc.; proxy-related costs represented approximately 0.5% of quarterly revenue and 0.4% of six-month revenue.
- Interest expense declined to $11.0 million in the quarter and $22.2 million for the six months, primarily because of lower debt outstanding and lower fees following the July 2011 refinancing.
- Operating cash flow nearly doubled year over year, largely due to the timing of bonus, accounts payable, and estimated tax payments.
- The company did not repurchase shares during the first six months, although the board authorized up to $65.0 million of 2012 repurchases subject to credit-facility restrictions. Dividends paid during the six months were $0.47 per share, and a $0.25-per-share dividend was declared for payment in February 2012.
Guidance, Outlook, Risks, and Unusual Items
- Management expected food commodity inflation to approximately double in 2012 compared with 2011 and planned to mitigate it through menu pricing, supply contracts, and cost reductions.
- Management anticipated further year-over-year traffic improvement after sequential monthly improvement during the first six months.
- Planned 2012 capital expenditures were $85 million to $95 million, funded through operating cash flow and revolver borrowings as necessary.
- Management expected advertising expense for the full year to be similar as a percentage of revenue to the prior year, despite higher second-quarter spending and lower expected spending in the second half.
- The effective tax rate was expected to increase for the remainder of 2012 because the Work Opportunity Tax Credit expired at the end of calendar 2011.
- A $3.0 million lawsuit settlement gain was recorded in the first quarter of fiscal 2012. The company also recorded health-insurance reimbursement receivables of approximately $2.5 million in the first quarter and $1.5 million in the second quarter related to a retrospective policy.
- Approximately 60 management and staff positions were eliminated in July 2011; the related severance liability was reduced to $0.4 million at January 27, 2012.
- Key risks include commodity inflation, consumer traffic and spending, labor and health-care costs, self-insured workers’ compensation and liability claims, inventory valuation, tax estimates, litigation, debt covenant compliance, interest-rate exposure, and seasonal variability.
- Standby letters of credit of $28.6 million reduce revolver availability. The company also guaranteed certain lease obligations totaling approximately $1.5 million in aggregate, subject to lessee nonperformance.
- Management stated that no material changes had occurred in previously disclosed risk factors or market risks and that controls and procedures were effective as of January 27, 2012.
Important Facts for Investors to Verify
- Whether comparable traffic and sales improvements continued after the reporting date and offset the anticipated increase in commodity inflation.
- The effect of food, labor, health-care, advertising, and proxy-contest costs on future operating margins.
- Revolver availability, debt maturities, interest-rate swap exposure, and compliance with leverage and interest-coverage covenants.
- Actual 2012 capital expenditures relative to the $85 million–$95 million estimate and the resulting effect on free cash flow.
- The sustainability of unusually strong operating cash flow, given that management attributed part of the increase to payment timing.
- Future tax rates following expiration of the Work Opportunity Tax Credit.
- Potential changes in insurance reserves, retail inventory valuation, gift-card breakage estimates, litigation exposure, and lease guarantees.