Cracker Barrel Old Country Store, Inc. — Q1 FY2021 10-Q Summary
Business context and reporting period
The filing covers the quarter ended October 30, 2020, compared with the quarter ended November 1, 2019. Cracker Barrel operated 663 company-owned Cracker Barrel stores in 45 states, 35 company-owned Maple Street Biscuit Company locations and six franchised MSBC locations. The business continued to be materially affected by COVID-19 restrictions, reduced consumer traffic and changes in dining behavior.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $646.5 million | $749.0 million | Down 13.7% |
| Restaurant revenue | $515.2 million | $607.1 million | Down 15.1% |
| Retail revenue | $131.2 million | $142.0 million | Down 7.6% |
| Operating income | $237.1 million | $63.4 million | Includes $217.7 million sale-leaseback gain |
| Net income | $170.7 million | $43.2 million | Up 294.9% |
| Diluted EPS | $7.18 | $1.79 | Up 301.1% |
| Cash flow from operations | $57.0 million | $44.8 million | Up $12.2 million |
Reported operating margin was 36.7%, compared with 8.5% in the prior-year quarter. Excluding the $217.7 million sale-leaseback gain, operating income was approximately $19.4 million, or approximately 3.0% of revenue. Net margin was 26.4%, compared with 5.8% in the prior year, but was substantially inflated by the same unusual gain.
- Comparable restaurant sales declined 16.4%, driven by an 18.3% decrease in guest traffic, partly offset by a 1.9% increase in average check, including a 1.0% menu price increase.
- Comparable retail sales declined 8.1%; combined restaurant and retail comparable sales declined 14.9%.
- Cost of goods sold was $199.0 million, or 30.8% of revenue, versus 29.3% in the prior year. Restaurant commodity inflation was 1.9%, with higher-cost menu mix and food waste also contributing.
- Labor and related expenses were 35.1% of revenue, broadly consistent with 35.2% in the prior year.
- Other store operating expenses increased to 25.0% of revenue from 21.7%, primarily due to higher rent following the sale-leaseback, off-premise operating costs, technology initiatives and the lower revenue base.
- Interest expense increased to $10.7 million from $3.6 million because of higher debt levels, higher weighted-average rates and the absence of prior-year interest income related to Punch Bowl Social.
Liquidity, debt and capital resources
- Cash and cash equivalents were $597.6 million at October 30, 2020, up from $437.0 million at July 31, 2020.
- Total current assets were $824.9 million and current liabilities were $444.6 million, producing positive working capital of $380.2 million.
- Outstanding borrowings under the revolving credit facility totaled $949.4 million. After $31.8 million of standby letters of credit, borrowing availability was only $8.2 million.
- The company had $910.0 million of long-term debt plus $39.4 million of current debt. Operating lease liabilities totaled approximately $820.9 million on a present-value basis.
- Operating cash flow was $57.0 million. Capital expenditures net of insurance recoveries were $11.2 million, while proceeds from property sales were $149.8 million, principally from the sale-leaseback transaction.
- Cash flow from investing activities was positive $137.1 million, and financing activities used $33.5 million, including $31.5 million of dividend payments.
Material changes, outlook and risks
On August 4, 2020, the company sold and leased back 62 Cracker Barrel properties, receiving net proceeds of $146.4 million and recognizing a $217.7 million gain. The transaction increased operating lease obligations and future rent expense while strengthening near-term cash reserves.
The company obtained covenant relief for the fourth quarter of FY2020 and the first two quarters of FY2021. During this period, it must maintain liquidity of at least $140.0 million and limit cash capital expenditures to $60.0 million in aggregate. Dividends, other than a deferred dividend paid in September 2020, and share repurchases were suspended during the pandemic-related relief period.
Management expected approximately $100.0 million of FY2021 capital expenditures, anticipated opening three new stores during FY2021 and expected commodity inflation of approximately 2.0% to 2.5%. Management also anticipated an effective tax rate of approximately 19% to 20%. No formal revenue or earnings guidance was provided.
Management's priorities were to expand off-premise sales, improve digital infrastructure, introduce menu innovation, protect employee and guest safety, develop new Cracker Barrel stores and grow MSBC. Key risks include the duration and effects of COVID-19, dine-in restrictions, consumer confidence, supply-chain disruption, labor availability, commodity inflation, increased leverage, limited borrowing availability, interest-rate exposure, lease obligations, impairment risk and execution of acquired or strategic businesses.
Legal proceedings were described as ordinary-course matters that management did not expect to materially affect the financial statements. The filing reported no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Investor verification points
- Separate recurring operating performance from the $217.7 million nonrecurring sale-leaseback gain.
- Monitor comparable restaurant traffic, off-premise sales and the pace of recovery from COVID-19 restrictions.
- Verify compliance with the $140.0 million minimum liquidity requirement and the $60.0 million capital-expenditure cap during the covenant relief period.
- Assess refinancing and liquidity risk given $949.4 million of borrowings and only $8.2 million of stated revolver availability at quarter-end.
- Evaluate the long-term effect of sale-leaseback transactions on rent expense, lease liabilities and store-level profitability.
- Track the suspension and potential resumption of dividends and share repurchases.
- Review MSBC performance and the remaining contingent payment obligations related to its acquisition.