Cracker Barrel Old Country Store, Inc. 10-Q Summary
Business Context and Reporting Period
Cracker Barrel operates an integrated restaurant and retail-store concept in the United States. As of January 29, 2016, it operated 635 stores in 42 states and reported one operating segment. This unaudited Form 10-Q covers the quarter and six months ended January 29, 2016, compared with the respective periods ended January 30, 2015, and the balance sheet date of July 31, 2015.
Financial Performance and Key Metrics
| Metric | Quarter Ended January 29, 2016 | Six Months Ended January 29, 2016 |
|---|---|---|
| Total revenue | $764.0 million | $1.467 billion |
| Operating income | $70.5 million; 9.2% margin | $135.8 million; 9.3% margin |
| Net income | $48.2 million; 6.3% margin | $89.1 million; 6.1% margin |
| Diluted EPS | $2.01 | $3.70 |
| Net cash from operating activities | Not separately provided | $85.6 million |
| Capital expenditures | Not separately provided | $37.0 million gross; $36.8 million net of insurance recoveries |
- Quarterly revenue increased 1.1%, while six-month revenue increased 1.9% year over year. Restaurant revenue was $580.9 million for the quarter and $1.143 billion for the six months; retail revenue was $183.1 million and $323.4 million, respectively.
- Quarterly net income increased from $47.2 million to $48.2 million, while six-month net income increased from $81.2 million to $89.1 million. Diluted EPS increased from $1.96 to $2.01 for the quarter and from $3.38 to $3.70 for the six months.
- Quarterly operating income declined from $71.2 million to $70.5 million; six-month operating income increased from $126.7 million to $135.8 million.
- Quarterly store operating margin was 13.9%, compared with 14.3% in the prior-year quarter. Six-month store operating margin improved to 14.0% from 13.7%.
- Comparable sales increased 1.1% in the quarter and 1.7% for the six months. Restaurant comparable sales rose 0.6% and 1.5%, respectively, while retail comparable sales rose 2.6% and 2.5%.
- Restaurant traffic declined 2.8% in the quarter and 1.7% for the six months, offset by higher average checks. Management estimated severe winter weather reduced second-quarter comparable sales by approximately 0.6 percentage points.
- Cash and cash equivalents were $171.6 million at January 29, 2016, down from $265.5 million at July 31, 2015. Working capital was positive $38.7 million.
- The company had $400.0 million outstanding under its $750.0 million revolving credit facility, $338.8 million of remaining borrowing availability after standby letters of credit, and was in compliance with all debt covenants. Outstanding borrowings had a weighted-average swapped interest rate of 2.96%.
- Net cash from operating activities declined from $153.1 million to $85.6 million, primarily due to the timing of accounts-payable and tax payments, higher retail inventory, and higher bonus payments.
Material Changes Versus the Prior Comparable Period
- Revenue growth slowed materially relative to the prior-year comparable-sales increases, particularly in restaurants, where traffic declined despite menu pricing and average-check increases.
- Labor expense improved as a percentage of revenue, partly because of lower store bonus expense and favorable payroll-tax trends. This was offset by higher maintenance, advertising, and manager-conference costs.
- Retail cost of goods sold improved as a percentage of retail revenue because of higher initial margins and, for the six-month period, lower markdowns.
- Interest expense fell to $3.6 million for the quarter and $7.1 million for the six months, primarily because of lower weighted-average rates, refinancing benefits, and the non-recurrence of a prior-year deferred-financing-cost write-off.
- The effective tax rate was 27.9% for the quarter and 30.8% for the six months. The company recorded a $4.6 million second-quarter Work Opportunity Tax Credit benefit, including credits related to prior periods.
- The company paid regular dividends of $2.20 per share and a special dividend of $3.00 per share during the first six months, for total dividend cash payments of $125.1 million. It also repurchased 100,000 shares for $14.7 million.
- Other comprehensive loss increased primarily because of changes in the fair value of interest-rate swaps; accumulated other comprehensive loss was $9.9 million at January 29, 2016.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management’s 2016 priorities include driving traffic and sales, improving technology and processes, pursuing cost savings, expanding stores, and developing a fast-casual concept.
- Management expected 2016 commodity inflation of approximately 1.0%, an effective tax rate of 30.0% to 31.0%, and capital expenditures of $90 million to $100 million. The plan included five or six new stores, maintenance, technology, and operating improvements.
- Management believed cash on hand, operating cash flow, and available revolver capacity would fund operations, expected dividends, and expansion for at least the next twelve months.
- Seasonality is significant: historically, results are stronger in the second and fourth fiscal quarters because of the holiday shopping and summer travel seasons. Interim results are therefore not necessarily indicative of full-year performance.
- The company self-insures a significant portion of workers’ compensation and general liability risks and uses actuarial estimates for related reserves. Actual claims experience could materially differ from estimates.
- The company was party to ordinary-course legal and regulatory proceedings; management did not expect them to materially affect consolidated results or financial position. A $2.75 million litigation accrual had been recorded in the prior-year six-month period, including $2.15 million in the prior-year second quarter.
- Standby letters of credit totaled $11.2 million and supported workers’ compensation insurance obligations. The company was also secondarily liable for lease payments associated with one property, with no provision recorded because non-performance was not known.
- Interest-rate swaps created a $16.0 million net liability at January 29, 2016. The company does not use derivatives for trading purposes.
- No material changes were reported in previously disclosed risk factors, market risks, material commitments, or internal control effectiveness.
Important Facts for Investors to Verify
- Whether restaurant traffic can stabilize as pricing continues to support average checks and revenue.
- Whether planned cost savings, advertising, maintenance spending, and labor trends support store-level margin recovery.
- The sustainability of dividend payments and share repurchases given the $400.0 million debt balance, revolver restrictions, and lower operating cash flow.
- Execution of the planned five or six new stores, $90 million to $100 million capital-spending program, and fast-casual development initiative.
- The recurring versus nonrecurring nature of the $4.6 million Work Opportunity Tax Credit benefit and its effect on the 2016 tax rate.
- Exposure to commodity inflation, food waste, wage and health-care costs, weather-related traffic volatility, insurance claims, litigation, and interest-rate swap valuations.