CRACKER BARREL OLD COUNTRY STORE, INC annual report, FY2019

Cracker Barrel Old Country Store, Inc. — FY2019 Form 10-K Summary

Business context and reporting period

Cracker Barrel operates full-service restaurants combined with gift shops. The fiscal year ended August 2, 2019 and comprised 52 weeks; fiscal 2018 comprised 53 weeks, including a 14-week fourth quarter. As of September 18, 2019, the Company operated 660 Cracker Barrel stores in 45 states and seven Holler & Dash locations. Cracker Barrel restaurants generated 80.8% of FY2019 revenue and retail operations generated 19.2%.

Financial performance and key metrics

Metric	FY2019	FY2018
Total revenue	$3,071.951 million	$3,030.445 million
Restaurant revenue	$2,482.377 million	$2,439.389 million
Retail revenue	$589.574 million	$591.056 million
Operating income	$282.844 million	$293.592 million
Net income	$223.401 million	$247.620 million
Diluted EPS	$9.27	$10.29
Net cash from operating activities	$362.796 million	$330.620 million
Capital expenditures, net	$137.540 million	$151.633 million

Store operating income was $435.670 million, or 14.2% of revenue, compared with 14.4% in 2018. Operating margin was 9.2%, compared with 9.7%.
Net margin was approximately 7.3%, compared with 8.2% in 2018. The decline reflected higher labor, depreciation, other store operating and general and administrative expenses, as well as higher interest expense.
Comparable restaurant and retail sales increased 2.1% in total, comprising a 2.6% restaurant increase and a 0.1% retail increase. Restaurant sales benefited from a 3.3% higher average check, partially offset by a 0.7% decline in guest traffic.
Restaurant cost of goods sold declined to 25.3% of restaurant revenue from 25.7%, while retail cost of goods sold declined to 51.3% from 52.3%.
Labor and related expenses increased to 35.1% of revenue from 34.8%; other store operating expenses increased to 20.4% from 19.9%; general and administrative expenses increased to 5.0% from 4.7%.
Fourth-quarter 2019 revenue was $787.098 million, net income was $65.025 million and diluted EPS was $2.70, compared with fourth-quarter 2018 revenue of $810.893 million, net income of $61.354 million and diluted EPS of $2.55. The 2018 quarter included an additional week.

Liquidity, debt and capital allocation

Cash and cash equivalents declined to $36.884 million from $114.656 million. Working capital was a deficit of $150.094 million versus a deficit of $57.867 million.
Operating cash flow increased to $362.796 million. Investing cash outflows were $241.574 million, including $89.100 million for the Punch Bowl Social investment and $15.085 million of notes receivable. Financing cash outflows were $198.994 million, principally dividends.
At year-end, debt was $400.000 million under a new five-year $950.000 million revolving credit facility expiring September 5, 2023. Borrowing availability was $541.045 million after $8.955 million of standby letters of credit.
The Company was in compliance with its debt covenants and stated that cash, operating cash flow and available borrowing capacity should fund 2020 operations, expansion, dividends and expected repurchases.
Dividends paid were $8.00 per share in 2019. The regular quarterly dividend increased from $1.25 to $1.30 per share, and a $3.00 per-share special dividend was declared. No shares were repurchased in 2019; the remaining repurchase authorization was increased to $50.000 million.
Contractual cash obligations totaled $1.232 billion, including $729.319 million of operating lease commitments and $400.000 million of debt.

Material changes versus the prior comparable period

Revenue increased 1.4%, but comparability is affected by the extra week in FY2018, which contributed approximately $58.353 million of revenue.
Net income declined 9.8% and diluted EPS declined 9.9%, while operating income declined 3.7%.
Restaurant comparable sales improved materially from 0.6% growth in 2018 to 2.6% growth in 2019. Retail comparable sales improved from a 0.1% decline to 0.1% growth.
Eight new Cracker Barrel stores opened and one store closed in 2019; management planned six new Cracker Barrel stores for 2020. No new Holler & Dash locations opened in 2019, and none were expected in 2020.
The Company refinanced its prior $750.000 million credit facility with the $950.000 million facility and incurred $3.022 million of deferred financing costs.
On July 18, 2019, the Company acquired a noncontrolling interest in Punch Bowl Social. The investment was recorded at $89.100 million, with additional notes and funding provided.
The FY2018 effective tax rate benefited from the Tax Cuts and Jobs Act; consequently, the FY2019 effective tax rate increased to 16.1% from 11.1%, despite the lower statutory federal rate.

Guidance, outlook, risks and unusual items

Management expected 2020 commodity inflation of approximately 2.0% to 2.5%, net interest expense of approximately $14.0 million and an effective tax rate of approximately 17%.
Planned 2020 capital expenditures were approximately $115 million to $125 million, including six new Cracker Barrel stores and sites for future openings.
The Company committed to provide additional capital to Punch Bowl Social through 2020. The MD&A describes a commitment of approximately $38 million, while the financial statement note describes a commitment of up to $51 million and states that $12.5 million had been funded as of year-end; this disclosure should be reconciled.
Adoption of the new lease accounting standard in the first quarter of 2020 was expected to increase balance-sheet lease assets and liabilities by approximately $490 million to $540 million, without a material effect on income or cash flow.
Key risks include discretionary consumer spending, intense restaurant and retail competition, food and commodity inflation, labor availability and wage increases, food safety, severe weather, foreign-sourced merchandise and tariffs, reliance on a single retail distribution center, cybersecurity and technology disruptions, litigation, activist shareholder actions, and variable-rate debt and LIBOR transition risk.
The Company self-insures significant workers’ compensation and general liability exposures. Insurance reserves were identified as the critical audit matter because they rely on actuarial estimates of incurred and incurred-but-not-reported claims.
Management and Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported no unresolved SEC staff comments.

Important facts for investors to verify

Reconcile reported FY2019 growth and fourth-quarter comparisons for the 53rd week in FY2018.
Assess whether traffic declines and labor-cost inflation could offset menu pricing and comparable restaurant sales gains.
Review the $400 million debt balance, covenant thresholds, interest-rate swaps, borrowing availability and dividend restrictions.
Reconcile the Punch Bowl Social funding commitment disclosed as approximately $38 million versus up to $51 million in the notes.
Evaluate the effect of recognizing approximately $490 million to $540 million of lease assets and liabilities in 2020.
Monitor the sustainability of the regular and special dividend policy relative to cash flow, debt leverage and planned capital expenditures.
Review self-insurance reserves, uncertain tax positions, operating lease commitments and the Company’s exposure to supply-chain, labor, commodity and weather risks.