Cracker Barrel Old Country Store, Inc. — Fiscal 2012 Third-Quarter Form 10-Q
Business Context and Reporting Period
The filing covers the unaudited quarter and nine months ended April 27, 2012, compared with April 29, 2011. Cracker Barrel operated 613 stores in 42 states at quarter-end, compared with 601 stores a year earlier. The company operates one reportable segment combining restaurant and retail activities. Dollar amounts below are in thousands, except per-share data and store counts.
An internal restructuring effective April 2012 aligned restaurant and retail operations under central leadership and eliminated approximately 20 positions. The company also completed an internal legal restructuring in December 2011 without material changes to its business or financial position.
Key Financial Metrics
| Metric | Q3 FY2012 | Q3 FY2011 | 9M FY2012 | 9M FY2011 |
|---|---|---|---|---|
| Total revenue | $608,514 | $582,525 | $1,880,185 | $1,821,493 |
| Gross profit | $418,899 | $402,751 | $1,268,872 | $1,242,576 |
| Operating income | $39,108 | $31,205 | $131,069 | $129,093 |
| Net income | $18,974 | $15,154 | $68,385 | $67,665 |
| Diluted EPS | $0.81 | $0.64 | $2.93 | $2.85 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $141,885 | $89,178 |
- Revenue increased 4.5% in the quarter and 3.2% for the nine-month period. Restaurant revenue rose to $500,025 in the quarter, while retail revenue increased to $108,489.
- Q3 gross margin was 68.8%, down from 69.1%; nine-month gross margin was 67.5%, down from 68.2%. Restaurant food-cost inflation was 4.5% in the quarter and 5.2% year-to-date.
- Q3 operating margin improved to 6.4% from 5.4%; nine-month operating margin was 7.0% versus 7.1%. Q3 net margin improved to 3.1% from 2.6%; nine-month net margin was 3.6% versus 3.7%.
- Comparable restaurant and retail sales increased 2.6% in Q3 and 1.5% for the first nine months. Q3 comparable restaurant sales increased 3.1%, driven by a 2.5% average-check increase and 0.6% traffic growth.
- Cash and cash equivalents were $127,320 at April 27, 2012, compared with $52,274 at July 29, 2011. Working capital improved to $11,766 from negative $21,188.
- Long-term debt was $536,001, excluding current maturities of $14,168. Revolving-facility borrowings were $318,750, with $152,644 of additional borrowing availability after standby letters of credit.
- The interest-rate swap liability declined to $38,702 from $51,604. Outstanding borrowings were swapped at a weighted-average interest rate of 7.57%.
- Capital expenditures were $57,434 for the nine-month period, partially offset by $668 of insurance recoveries and $491 of asset-sale proceeds. Net cash used in investing activities was $56,275.
- The company repurchased 220,400 shares for $12,279 during the first nine months and paid $16,568 of dividends. It declared a $0.40-per-share dividend for payment in August 2012.
Material Changes Versus Prior Comparable Period
- Profitability improved in Q3 despite higher commodity costs, supported by sales growth, labor productivity, lower advertising and utility costs, and lower interest expense.
- Labor and related expenses declined to 38.6% of revenue from 39.0% in Q3 and to 36.8% from 37.1% for the nine-month period.
- Other store operating expenses declined to 18.1% of revenue from 19.3% in Q3. The prior-year period included a $2,175 impairment charge and $4,133 of gains on store dispositions; no comparable impairment, disposition gain or store-closing charge was recorded in Q3 FY2012.
- Interest expense declined to $11,173 in Q3 from $11,619 and to $33,333 for nine months from $35,163, primarily due to lower debt and refinancing-related fees.
- Operating cash flow increased $52,707 year over year, largely due to lower annual bonus payments and timing of accounts-payable and tax payments.
- Retail cost of goods sold increased as a percentage of retail revenue, reflecting higher merchandise and freight costs, markdowns and inventory valuation reserves.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately 5.0% to 5.5% commodity inflation for the fiscal year and estimates 2012 capital expenditures of $85,000 to $90,000.
- The field-organization restructuring generated $1,660 of severance expense and is expected to produce approximately $5,000 of annual pretax savings, including $3,500 in general and administrative savings and $1,500 in labor savings.
- Management stated that cash, operating cash flow, borrowing capacity and proceeds from equity-award exercises should fund operations, expansion, debt payments, repurchases and dividends for at least the next twelve months and the foreseeable future. The company made additional debt prepayments on May 3, 2012.
- The amended credit facility provides greater flexibility for dividends and share repurchases, subject to liquidity requirements, leverage and interest-coverage covenants. The company was in compliance with all covenants at April 27, 2012.
- The April 2012 shareholder rights plan becomes exercisable only after a person or group acquires 20% or more of outstanding common stock. Its ultimate expiration depends on shareholder approval at the 2012 annual meeting.
- Standby letters of credit totaled $28,606 and reduce revolving-credit availability. The company also had potential lease guarantees totaling approximately $1,412, subject to lessee nonperformance.
- The company received $3,000 from a litigation settlement during the first quarter and recorded it as a gain in other store operating expenses. Management believes outstanding legal proceedings will not materially affect financial results or position.
- Key operating and accounting risks include food and merchandise inflation, consumer traffic and spending, labor and health-care costs, self-insurance claims, retail inventory valuation, gift-card redemption estimates, tax positions, impairment estimates and interest-rate exposure.
- Management reported effective disclosure controls and no material changes affecting internal control over financial reporting. No material changes were reported to previously disclosed risk factors.
Investor Verification Priorities
- Verify the sustainability of comparable-store traffic and sales growth, particularly the Q3 improvement in restaurant traffic.
- Assess whether menu pricing and productivity initiatives can offset the projected 5.0% to 5.5% commodity inflation without weakening traffic or margins.
- Review debt maturities, borrowing availability, interest-rate swap terms and compliance with credit-facility covenants.
- Reconcile cash generation with capital expenditures, dividends, share repurchases and planned expansion.
- Evaluate the recurring nature of the $5,000 annual restructuring savings and distinguish them from the one-time $1,660 severance charge and $3,000 litigation settlement.
- Monitor the shareholder rights plan, executive change-in-control agreements and their potential effects on corporate control and future cash obligations.