Cracker Barrel Old Country Store, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended January 31, 2020; comparable periods ended February 1, 2019. The financial statements are unaudited. The company operated 661 Cracker Barrel stores in 45 states and, following its October 10, 2019 acquisition, 28 company-owned and five franchised Maple Street Biscuit Company locations.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Change |
|---|---|---|---|
| Total revenue | $846.1 million | $811.7 million | 4.2% increase |
| Operating income | $79.1 million | $76.7 million | 3.2% increase |
| Operating margin | 9.4% | 9.5% | 10 bps decrease |
| Income before taxes | $75.6 million | $72.5 million | 4.3% increase |
| Net income | $61.2 million | $60.8 million | 0.7% increase |
| Diluted EPS | $2.55 | $2.52 | 1.2% increase |
| Net margin | 7.2% | 7.5% | 30 bps decrease |
| Metric | Six months FY2020 | Six months FY2019 | Change |
|---|---|---|---|
| Total revenue | $1.595 billion | $1.545 billion | 3.2% increase |
| Operating income | $142.5 million | $138.4 million | 3.0% increase |
| Operating margin | 8.9% | 9.0% | 10 bps decrease |
| Net income | $104.4 million | $108.0 million | 3.3% decrease |
| Diluted EPS | $4.34 | $4.48 | 3.1% decrease |
| Net margin | 6.5% | 7.0% | 50 bps decrease |
Revenue mix and comparable sales: Q2 restaurant revenue was $663.0 million, up from $631.2 million, while retail revenue was $183.1 million, up from $180.5 million. Company comparable sales increased 3.2%, including restaurant comparable sales growth of 3.8% and retail growth of 1.3%. Restaurant growth reflected a 4.0% average check increase, including 2.2% menu pricing, partly offset by a 0.2% traffic decline.
Margins and costs: Cost of goods sold improved to 32.2% of revenue from 32.7%, and labor costs improved to 33.6% from 34.1%. These benefits were offset by higher other store operating expenses, which rose to 20.3% from 19.3%, primarily due to higher advertising, depreciation and off-premise business costs. The effective tax rate declined to 14.4% from 16.2% in Q2 and to 15.9% from 16.9% for the six-month period.
Cash flow, liquidity and capital structure
- Six-month operating cash flow was $184.0 million, compared with $190.9 million in the prior-year period.
- Capital expenditures were $58.3 million, versus $70.3 million; management estimated full-year 2020 capital expenditures of approximately $125 million.
- Investing cash outflows included $33.0 million of additional funding to Punch Bowl Social and $33.0 million for the MSBC acquisition, net of cash acquired.
- Cash and cash equivalents were $72.8 million at January 31, 2020, compared with $36.9 million at August 2, 2019.
- Outstanding revolver borrowings were $460.0 million, up from $400.0 million. Borrowing availability was $483.1 million after $6.9 million of standby letters of credit.
- The company was in compliance with its debt covenants. At January 31, 2020, $400.0 million of borrowings were hedged at a weighted-average interest rate of 3.61%; the remaining $60.0 million carried a weighted-average rate of 3.13%.
- The company paid regular dividends of $2.60 per share during the first six months and declared an additional $1.30 per-share dividend paid February 5, 2020. It repurchased 129,325 shares for $20.0 million.
Material changes versus the prior comparable period
- MSBC was acquired for $36.0 million, including $32.0 million paid in cash and $4.0 million held for indemnification obligations. The acquisition added $6.4 million of provisional goodwill and generated $1.3 million of acquisition-related costs.
- The company recognized a $9.6 million loss from its equity-method investment in Punch Bowl Social during the first six months, compared with no such loss in the prior-year period. The PBS investment balance declined to $79.5 million from $89.1 million.
- Lease accounting adoption materially increased reported assets and liabilities. At January 31, 2020, operating lease right-of-use assets were $465.7 million and operating lease liabilities totaled $510.4 million.
- Share count declined to 23.943 million shares outstanding from 24.049 million at August 2, 2019, primarily reflecting share repurchases.
Guidance, outlook and risks
Management planned to enhance the core business through menu innovation, off-premise growth, improved employee and guest experience and cost reductions. It anticipated opening six Cracker Barrel stores during 2020, with one opened in the first six months, and one MSBC location. The six existing Holler & Dash locations were expected to be converted to MSBC locations during the third quarter of 2020.
Management expected approximately 1.5% to 2.0% commodity inflation and an approximately 16% effective tax rate for 2020. It believed cash on hand, operating cash flow and revolver capacity would fund operations, dividends and expansion for at least the next twelve months.
- Key risks include execution and integration of MSBC, the performance and funding requirements of PBS, potential impairment of investments and acquired goodwill or intangibles, commodity inflation, labor and health-care costs, traffic trends and retail inventory valuation.
- The company committed to fund PBS up to $51.0 million through calendar 2020; total funding reached $45.5 million at January 31, 2020, including $33.0 million during the first six months.
- A $0.7 million impairment charge was recorded in the first quarter related to converting Holler & Dash locations to MSBC.
- Legal and regulatory matters were described as ordinary-course contingencies and were not expected by management to materially affect the financial statements. The company reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether MSBC integration and the Holler & Dash conversions achieve expected sales, profitability and growth targets.
- The financial condition of PBS, future funding needs and the recoverability of the $79.5 million equity investment and related notes.
- Compliance with revolver leverage and interest-coverage covenants as debt remains elevated.
- The effect of lease adoption, lease commitments and fixed operating costs on future margins and liquidity.
- Whether comparable-store traffic improves, given the Q2 restaurant traffic decline and continued reliance on higher average checks and pricing.
- The accuracy of provisional MSBC purchase accounting, including $6.4 million of goodwill and the $19.5 million tradename valuation.