Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. operates company-owned restaurant and retail gift-shop locations under one integrated concept. The Form 10-K covers the 52-week fiscal year ended August 1, 2014; fiscal 2013 ended August 2, 2013. Fiscal 2012 contained 53 weeks. At fiscal year-end, the Company operated 631 stores, and it operated 633 stores in 42 states as of September 18, 2014.
Restaurants generated 79.6% of revenue and retail operations generated 20.4%. The fourth quarter generated revenue of $692.7 million and net income of $39.2 million, compared with $674.1 million and $34.3 million, respectively, in the fourth quarter of 2013.
Financial and Operating Metrics
| Metric | 2014 | 2013 | Change or margin |
|---|---|---|---|
| Total revenue | $2,683.7 million | $2,644.6 million | 1.5% increase |
| Restaurant revenue | $2,137.4 million | $2,104.8 million | 1.6% increase |
| Retail revenue | $546.3 million | $539.9 million | 1.2% increase |
| Operating income | $208.4 million | $201.5 million | 7.8% of revenue versus 7.6% |
| Net income | $132.1 million | $117.3 million | 12.7% increase; 4.9% margin versus 4.4% |
| Diluted EPS | $5.51 | $4.90 | 12.4% increase |
| Operating cash flow | $177.6 million | $208.5 million | Decrease primarily from working-capital timing and higher retail inventories |
| Capital expenditures, net | $90.6 million | $74.0 million | Increase from new-store development and maintenance |
| Cash and equivalents | $119.4 million | $121.7 million | Decrease of $2.4 million |
- Comparable restaurant sales increased 0.7%, while comparable retail sales increased 0.4%; combined comparable sales increased 0.6%.
- Restaurant comparable sales benefited from a 2.6% increase in average check, including a 2.1% menu price increase, partly offset by a 1.9% decline in guest traffic.
- Average check was $9.94, up 2.6% from the prior year.
- Store operating income was $337.8 million, or 12.6% of revenue, versus 13.0% in 2013. Cost of goods sold increased to 32.5% of revenue from 32.3%, while labor expense improved to 36.0% from 36.5%.
- General and administrative expense declined to 4.8% of revenue from 5.4%, primarily due to lower incentive compensation. 2014 included $4.3 million of proxy-contest and special-meeting costs.
- Interest expense declined to $17.6 million from $35.7 million, reflecting lower rates following the expiration of a prior interest-rate swap and lower debt outstanding.
Liquidity, Debt and Capital Allocation
- Working capital was negative $14.8 million, compared with negative $13.9 million in 2013, consistent with the Company’s cash-oriented restaurant model and trade-credit financing.
- Total debt was $400.0 million, consisting of $212.5 million drawn on the revolving facility and $187.5 million under the term loan. The Company had $266.9 million of revolving borrowing availability after $20.6 million of standby letters of credit.
- The credit facility expires July 8, 2016. Management planned to refinance it before the end of 2015 and stated that the Company was in compliance with its financial covenants.
- The Company paid $71.5 million of dividends, repurchased $12.5 million of common stock, and paid dividends of $3.00 per share in 2014. The quarterly dividend was increased to $1.00 per share beginning with the dividend declared in the third quarter.
- Management expected cash on hand, operating cash flow and available revolver capacity to fund 2015 operations, expansion and expected dividends.
Material Changes, Outlook and Unusual Items
- The Company opened seven stores in 2014 and planned to open six or seven stores in 2015. Planned 2015 capital expenditures were $100 million to $110 million.
- Management expected food commodity inflation of approximately 4% to 5% in 2015, partly offset by menu pricing, supply contracts and cost-reduction initiatives.
- Management expected 2015 advertising expense of approximately 2.5% of revenue, compared with 2.4% in 2014.
- The expected 2015 effective tax rate was 32% to 33%, assuming the Work Opportunity Tax Credit would not be renewed. Renewal could reduce 2015 tax expense by approximately $5 million to $6 million.
- Management attributed 2014 performance to menu initiatives, value-focused pricing, improved retail merchandise, process and technology enhancements, new-store growth and the launch of licensed food products.
- Retail inventories increased to $128.4 million from $112.7 million, primarily because holiday merchandise was received early and sales were lower than anticipated.
- Three putative Fair Labor Standards Act collective actions challenged the classification of associate managers as exempt from minimum-wage and overtime requirements. The matters were in early stages, and the Company could not reasonably estimate potential losses; an adverse outcome could be material.
- Other principal risks include commodity and labor-cost inflation, intense competition, consumer discretionary-spending weakness, severe weather, supply-chain disruption, reliance on a single retail distribution facility, information-technology and privacy incidents, regulatory changes, litigation, and substantial debt and lease obligations.
- Contractual cash obligations totaled approximately $1.29 billion, including $755.6 million of operating-lease commitments, $400.0 million of debt principal and $98.0 million of purchase obligations.
- The Company’s disclosure controls and internal control over financial reporting were reported effective, and Deloitte & Touche issued unqualified audit opinions.
Investor Verification Checklist
- Verify the sustainability of positive earnings and EPS growth given the decline in guest traffic and lower store operating margin.
- Assess whether 2015 commodity inflation, wage pressure, advertising increases and maintenance spending can be offset without materially reducing margins.
- Review the planned refinancing of the credit facility before July 2016, covenant requirements, interest-rate swaps and available liquidity.
- Monitor retail inventory levels, markdowns and sales trends following the 2014 inventory build.
- Evaluate the financial exposure and potential certification or settlement outcomes of the FLSA litigation.
- Confirm the assumptions supporting planned store openings and the $100 million to $110 million 2015 capital-expenditure plan.
- Review dividend and repurchase capacity under the credit-facility liquidity and leverage restrictions.