Cracker Barrel Old Country Store, Inc. — Fiscal 2012 First-Quarter Form 10-Q
Reporting period: Quarter ended October 28, 2011; comparative quarter ended October 29, 2010. The unaudited results cover the company’s single U.S. operating segment. Cracker Barrel operated 606 stores in 42 states at period end, versus 596 stores a year earlier.
Financial performance and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Total revenue | $598.4 million | $598.7 million | Flat |
| Gross profit | $412.1 million | $418.9 million | Down $6.8 million |
| Operating income | $44.6 million | $45.4 million | Down $0.8 million |
| Net income | $23.8 million | $23.7 million | Up $0.1 million |
| Diluted EPS | $1.03 | $1.01 | Up $0.02 |
| Operating cash flow | $20.2 million | $(9.9) million | Improved $30.2 million |
- Restaurant revenue was $481.5 million and retail revenue was $116.9 million, each representing approximately 80.5% and 19.5% of total revenue, respectively.
- Gross margin declined to 68.9% from 70.0%; cost of goods sold increased to 31.1% of revenue from 30.0%, primarily because of food commodity inflation.
- Operating margin was 7.5% versus 7.6%, while net margin was approximately 4.0% in both periods.
- Comparable-store restaurant sales decreased 1.6%, retail sales decreased 1.3%, and combined comparable-store sales decreased 1.5%. Restaurant traffic declined 3.8%, partly offset by a 2.2% increase in average check.
- Cash and cash equivalents were $49.8 million at October 28, 2011, compared with $52.3 million at July 29, 2011. Net cash decreased $2.5 million during the quarter.
- Capital expenditures were $18.7 million, principally for new stores and maintenance. The company estimated full-year fiscal 2012 capital expenditures of $90 million to $100 million.
- Total debt was approximately $550.2 million, including $318.8 million drawn under the revolving credit facility and a $231.3 million term loan. Revolving borrowing availability was $152.5 million after standby letters of credit.
- The company was in compliance with its debt covenants. Working capital remained negative at $(13.8) million, primarily reflecting the seasonal buildup of retail inventory.
- The company paid a $0.22 per-share dividend and declared a $0.25 per-share quarterly dividend. No share repurchases occurred during the quarter.
Material changes versus the prior comparable period
- Revenue was essentially unchanged, but gross profit declined because restaurant food costs rose; restaurant commodity inflation was 5.5%.
- Labor expense improved to 37.0% of revenue from 37.6%, aided by lower workers’ compensation and health-care costs and improved labor productivity.
- Other store operating expenses declined to 18.2% of revenue from 18.7%, including the benefit of a $3.0 million lawsuit settlement recorded as a gain in other store operating expenses.
- General and administrative expense increased to 6.2% of revenue from 6.1%, reflecting manager meeting costs and expenses associated with the proxy contest involving Biglari Holdings Inc.
- Interest expense declined to $11.1 million from $11.7 million, primarily because of lower debt outstanding.
- Operating cash flow improved substantially because of lower annual bonus payments and the timing of accounts-payable payments.
- Net income benefited from a lower effective tax rate of 28.9%, compared with 29.6%, primarily due to higher employer tax credits.
Guidance, outlook, risks and unusual items
- Management expected guest traffic to continue improving over the remainder of fiscal 2012, although the filing provided no formal revenue or earnings guidance.
- Management expected commodity inflation to approximately double in fiscal 2012 compared with fiscal 2011 and planned to mitigate it through menu-price increases, supply contracts and other cost-reduction initiatives.
- Management expected approximately $2 million to $3 million of additional proxy-contest expense, mostly in the second quarter.
- Advertising spending was expected to be highest in the second quarter because of a revised marketing strategy.
- The company expected cash on hand, operating cash flow and available revolver capacity to fund operations, expansion, debt payments, share repurchases and dividends for at least the next twelve months.
- Interest-rate swaps had a net liability of approximately $47.3 million and reduced exposure to variable interest rates. The company’s weighted-average rate on outstanding swapped borrowings was 7.57%.
- Standby letters of credit totaled $28.7 million and supported workers’ compensation insurance obligations while reducing revolver availability.
- The company self-insures significant portions of its workers’ compensation, general liability and health-care programs; adverse claims development could increase costs.
- The company reported ordinary-course litigation and lease guarantees, including approximately $691,000 related to an assigned lease and approximately $971,000 related to former Logan’s restaurants. Management considered material losses unlikely and recorded no related provisions.
- The filing stated that there were no material changes to previously disclosed risk factors or market risks. Results are seasonal, with generally lower earnings in the first and third quarters.
- Management concluded that disclosure controls and procedures were effective as of October 28, 2011, with no material changes in internal control over financial reporting.
Investor verification checklist
- Verify whether expected commodity inflation and menu-price increases affected subsequent gross margins and comparable-store sales.
- Review actual traffic trends, average checks and new-store performance following the reported 1.5% comparable-store sales decline.
- Reconcile debt maturities, interest-rate swap exposure, covenant requirements and available revolver capacity.
- Assess whether the planned $90 million to $100 million of fiscal 2012 capital expenditures and fifteen-store development program were completed as expected.
- Track proxy-contest costs, restructuring savings and any further organizational changes.
- Monitor workers’ compensation, health-care and other self-insurance reserves, including the sustainability of the quarter’s favorable claims experience.
- Review the $3.0 million lawsuit settlement and other unusual items when comparing recurring operating performance.