Cracker Barrel Old Country Store, Inc. — Fiscal 2023 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended April 28, 2023, compared with April 29, 2022. The unaudited filing covers the company’s Cracker Barrel restaurant and retail operations and Maple Street Biscuit Company (MSBC). At quarter-end, the company operated 661 Cracker Barrel stores and 56 MSBC locations.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $832.7 million | $790.2 million | $2.606 billion | $2.437 billion |
| Operating income | $16.8 million | $30.5 million | $79.4 million | $120.0 million |
| Net income | $14.0 million | $27.5 million | $61.6 million | $98.5 million |
| Diluted EPS | $0.63 | $1.19 | $2.77 | $4.21 |
| Net cash from operations | Not separately provided | Not separately provided | $151.2 million | $106.4 million |
- Revenue growth: Q3 revenue increased 5.4%; nine-month revenue increased 6.9%.
- Revenue mix: Q3 restaurant revenue was $681.3 million, up from $632.2 million; retail revenue was $151.4 million, down from $158.0 million. Nine-month restaurant revenue was $2.062 billion and retail revenue was $544.5 million.
- Margins: Q3 operating margin declined to 2.0% from 3.9%, and net margin declined to 1.7% from 3.5%. Nine-month operating margin declined to 3.0% from 4.9%, and net margin declined to 2.4% from 4.0%.
- Comparable sales: Q3 comparable restaurant sales increased 7.4%, driven by a 10.6% average-check increase, including an 8.8% menu-price increase, partly offset by a 3.2% traffic decline. Comparable retail sales decreased 4.6%. Combined comparable restaurant and retail sales increased 5.0%.
- Costs: Q3 commodity inflation was 4.3%; nine-month commodity inflation was 11.0%. Q3 wage inflation and higher retail shrinkage and markdowns pressured profitability.
- Cash flow and capital spending: Nine-month operating cash flow was $151.2 million. Capital expenditures were $87.6 million, compared with $60.0 million in the prior-year period. Financing cash outflows included $87.3 million of dividends and $17.4 million of share repurchases.
- Liquidity: Cash and equivalents were $22.5 million at April 28, 2023, down from $45.1 million at July 29, 2022. Working capital was negative $176.2 million.
- Debt: Revolver borrowings were $150.0 million, with $518.1 million of remaining borrowing availability after $31.9 million of standby letters of credit. The company also had $300.0 million principal amount of 0.625% convertible senior notes due June 2026, carried at $294.4 million net of issuance costs. The revolver’s weighted-average interest rate was 6.49%, and the company was in compliance with its covenants.
Material Changes Versus Prior Comparable Period
- Revenue increased, but operating income declined 44.9% in Q3 and 33.9% for the first nine months, primarily reflecting higher operating costs, impairment and store-closing charges, and interest expense.
- Net income declined 49.2% in Q3 and 37.5% for the first nine months. The Q3 tax line was a $1.7 million benefit versus a $0.8 million provision in the prior year, partly cushioning the earnings decline.
- Q3 included $11.7 million of impairment charges for six Cracker Barrel locations and $2.2 million of closure costs for four Cracker Barrel and three MSBC locations.
- Interest expense increased to $4.5 million in Q3 from $2.2 million and to $12.5 million for the nine months from $7.0 million, driven primarily by higher revolver borrowings and interest rates.
- Store count decreased by three Cracker Barrel locations year to date, while MSBC locations increased by 15 year over year to 56. Four Cracker Barrel and three MSBC locations were closed during Q3.
- Share count declined: diluted weighted-average shares decreased to 22.3 million in Q3 from 23.2 million and to 22.3 million for the nine months from 23.4 million, reflecting share repurchases.
Guidance, Outlook, Risks and Unusual Items
- Management expects fourth-quarter 2023 commodity inflation to be flat and wage inflation to be approximately 5.0%.
- Management expects a 2023 effective tax rate of approximately 6%.
- Fourth-quarter 2023 capital expenditures are estimated at approximately $30 million to $35 million, including investments in existing stores and new Cracker Barrel and MSBC locations.
- Management cites heightened economic uncertainty, weaker consumer confidence and consumer concerns about personal finances as potential pressures on demand.
- Other principal risks include commodity, labor, insurance and utility costs; employee recruiting and retention; competition; supply-chain disruptions; interest-rate exposure; indebtedness and covenant restrictions; technology and cybersecurity incidents; impairment of underperforming locations; litigation; weather; and potential future COVID-19 restrictions or demand effects.
- The company self-insures significant portions of its workers’ compensation and general liability programs. Management believes outstanding legal and regulatory matters are not expected to materially affect the financial statements, but actual outcomes could differ.
- The company has substantial operating lease obligations: $759.1 million of present-value operating lease liabilities and $1.161 billion of undiscounted future payments at April 28, 2023.
- No material changes to previously disclosed risk factors, market risks, material commitments or off-balance-sheet arrangements were reported. Management stated that disclosure controls were effective.
Investor Verification Items
- Verify whether traffic declines persist as price increases drive comparable sales growth, particularly the 3.2% Q3 restaurant traffic decline.
- Assess the sustainability of margins amid wage inflation, commodity costs, retail markdowns, inventory shrinkage and higher insurance expenses.
- Review the performance and planned expansion economics of MSBC, including the rationale and financial effects of recent closures.
- Monitor impairment indicators for additional Cracker Barrel locations and the assumptions supporting discounted cash-flow and fair-value estimates.
- Reconcile planned capital expenditures, dividends and repurchases with cash generation, low cash balances and revolver utilization.
- Evaluate interest-rate sensitivity, refinancing requirements, debt-covenant headroom and the June 2026 convertible-note maturity.
- Review the company’s extensive operating lease commitments and their effect on long-term fixed obligations and financial flexibility.