Cracker Barrel Old Country Store, Inc. — Q1 FY2011 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter ended October 29, 2010, compared with the quarter ended October 30, 2009. Cracker Barrel operates an integrated restaurant and retail concept in the United States. At quarter-end, it operated 596 units in 41 states, including three new units opened during the quarter.
Financial performance and liquidity
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Total revenue | $598.7 million | $581.2 million | +3.0% |
| Gross profit | $418.9 million | $403.7 million | +3.8% |
| Gross margin | 70.0% | 69.5% | +50 basis points |
| Operating income | $45.4 million | $38.0 million | +19.6% |
| Operating margin | 7.6% | 6.5% | +110 basis points |
| Net income | $23.7 million | $18.0 million | +31.7% |
| Net margin | 4.0% | 3.1% | +90 basis points |
| Diluted EPS | $1.01 | $0.78 | +29.5% |
| Net cash from operating activities | $(9.9) million | $23.4 million | Decrease of $33.3 million |
| Capital expenditures | $18.2 million | $14.9 million | +22.0% |
Restaurant revenue was $481.8 million and retail revenue was $116.9 million. Comparable-store restaurant sales increased 2.4%, comparable-store retail sales increased 1.5%, and combined comparable-store sales increased 2.2%. The restaurant increase reflected a 1.9% average-check increase and a 0.5% traffic increase.
Cash and cash equivalents were $24.7 million at October 29, 2010, compared with $47.7 million at July 30, 2010. Negative working capital was $41.2 million at quarter-end, versus $73.3 million at fiscal year-end. Operating cash flow was negative primarily because of seasonal retail inventory purchases, timing of accounts-payable payments, and higher annual bonus payments.
Total debt, including current maturities and the note payable, was approximately $578.8 million. The company had no borrowings under its revolving credit facility and had $219.7 million of available capacity after $30.3 million of standby letters of credit. The facility included $346.5 million of term loans due April 27, 2013, and $231.9 million due April 27, 2016. The company was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Revenue growth was supported by comparable-store sales and three additional units; average unit revenue increased to $1.007 million from $985.7 thousand.
- Gross margin improved because of lower retail inventory obsolescence reserves, reflecting more active inventory management and successful porch-sale events.
- Labor expense declined to 37.6% of revenue from 38.7%, primarily due to lower healthcare costs and lower store hourly labor costs relative to revenue.
- Other store operating expenses increased to 18.7% of revenue from 18.2%, principally because of higher maintenance and supplies costs.
- The effective tax rate declined to 29.6% from 31.2%, primarily due to higher employer tax credits.
- Operating cash flow changed from $23.4 million provided to $9.9 million used, while capital expenditures increased by $3.3 million.
- The company issued 359,858 shares upon exercise of equity awards and received $10.3 million of proceeds. No share repurchases occurred during the quarter.
- The interest-rate-swap liability increased to $68.4 million from $66.3 million. The company entered into a new $200 million interest-rate swap effective May 3, 2013.
Guidance, outlook, commentary, risks and unusual items
Management estimated fiscal 2011 capital expenditures of $110 million to $120 million, including construction of eleven new stores, site acquisitions, maintenance, and operational innovation. Management expected to fund capital expenditures through operating cash flow and, as necessary, borrowings under the revolving facility.
Management stated that available cash, operating cash flow, revolving capacity, and proceeds from equity-award exercises were expected to fund continuing operations, expansion, debt principal payments, planned share repurchases, and dividends for at least the next twelve months and the foreseeable future. Management expected to repurchase shares in the second quarter from free cash flow to offset equity compensation dilution, subject to a maximum authorization of $65 million and credit-facility restrictions.
The business is seasonal, with historically lower income in the first and third quarters and higher income in the second and fourth quarters. Accordingly, first-quarter results are not necessarily indicative of full-year performance.
Key risks include interest-rate exposure, reliance on seasonal retail sales and traffic, inventory obsolescence and shrinkage, self-insured workers’ compensation, general liability and health claims, tax-position uncertainty, litigation, and the ability to maintain debt covenants. The company had $68.4 million of interest-rate-swap liabilities and approximately $29.6 million of pre-tax accumulated swap losses expected to be reclassified into earnings over the following twelve months.
The filing reports no material changes in previously disclosed risk factors, no material changes in market risk, and no material changes in material commitments outside the ordinary course. Management stated that legal and regulatory proceedings were not expected to materially affect consolidated results or financial position. Standby letters of credit, lease guarantees, and Logan’s lease-related guarantees remained contingent obligations.
Important facts for investors to verify
- Whether comparable-store sales and guest traffic trends continued after the holiday season.
- Whether seasonal inventory purchases converted into cash without increased markdowns or obsolescence.
- Actual fiscal 2011 capital expenditures versus the $110 million to $120 million estimate and the pace of new-store openings.
- Available revolving-credit capacity after the facility’s reduction from $250 million to $165 million after April 27, 2011.
- Interest-rate-swap cash payments, fair-value changes, and the effect of approximately $29.6 million of accumulated losses expected to enter earnings.
- Compliance with leverage and interest-coverage covenants and the effect of dividend and share-repurchase restrictions.
- Development of self-insurance claims, litigation, tax audits, inventory shrinkage, and other contingent obligations.