Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. operates Cracker Barrel restaurants and retail stores in the United States, with Maple Street Biscuit Company (MSBC) locations. This unaudited Form 10-Q covers the quarter and nine months ended April 29, 2022, compared with April 30, 2021. At quarter-end, the Company operated 664 Cracker Barrel stores, 41 company-owned MSBC locations and seven franchised MSBC locations.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $790.2 million | $713.4 million | $2.437 billion | $2.037 billion |
| Restaurant revenue | $632.2 million | $569.4 million | $1.904 billion | $1.606 billion |
| Retail revenue | $158.0 million | $144.0 million | $533.7 million | $431.2 million |
| Operating income | $30.5 million | $52.5 million | $120.0 million | $304.0 million |
| Net income | $27.5 million | $33.5 million | $98.5 million | $218.2 million |
| Diluted EPS | $1.19 | $1.41 | $4.21 | $9.17 |
| Net cash from operating activities | Not separately provided | Not separately provided | $106.4 million | $212.5 million |
Q3 operating margin was approximately 3.9%, versus 7.4% in the prior-year quarter. Nine-month operating margin was approximately 4.9%, versus 14.9%; the prior-year period included a $217.7 million sale-and-leaseback gain. Net margin was approximately 3.5% in Q3 2022 and 4.0% for the first nine months.
Comparable restaurant sales increased 10.9% in Q3 and 18.4% for the first nine months. Comparable retail sales increased 9.7% and 23.9%, respectively. Q3 restaurant traffic increased 4.7%, while average check increased 6.2%, including a 5.9% menu price increase.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $24.8 million at April 29, 2022, down from $144.6 million at July 30, 2021.
- Working capital was negative $171.5 million, compared with negative $111.7 million at fiscal year-end.
- Revolving-credit borrowings were $80.0 million, with $688.1 million of borrowing availability after standby letters of credit of $31.9 million. The Company was in compliance with its debt covenants.
- The $300.0 million 0.625% convertible senior notes are due in 2026 and had a net carrying amount of $292.7 million. Total long-term debt was $372.9 million.
- The Company paid $84.9 million of dividends and repurchased $73.4 million of common stock during the first nine months, including 615,876 shares. A new repurchase authorization of up to $200.0 million was approved in the fourth quarter.
- Capital expenditures were $60.0 million in the first nine months, net of $1.2 million of insurance recoveries. Management estimated full-year 2022 capital expenditures of approximately $90.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 10.8% in Q3 and 19.7% for the first nine months, reflecting recovery in dine-in activity, higher pricing and increased traffic.
- Profitability declined despite revenue growth. Q3 operating income fell 42.0% and net income fell 17.8%; nine-month operating income fell 60.5% and net income fell 54.8%.
- Cost of goods sold increased to 31.6% of revenue in Q3 from 28.8%, primarily due to commodity inflation. Management reported commodity inflation of 18.0% in Q3 and 11.4% for the first nine months.
- Labor expense increased to 35.9% of revenue in Q3 from 35.1%, driven by wage inflation and lower productivity. Management expected approximately 10% wage inflation for fiscal 2022.
- Operating cash flow declined by $106.2 million, primarily due to higher retail inventory, payment timing, taxes and bonus payments.
- The Company early adopted convertible-instrument accounting guidance, increasing reported long-term debt by $49.2 million and reducing equity by $37.0 million, with no earnings-per-share impact.
- Share count declined through repurchases: issued and outstanding shares were 22.9 million at April 29, 2022 versus 23.5 million at July 30, 2021.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately 13% commodity inflation and approximately 10% wage inflation for fiscal 2022, and an effective tax rate of approximately 12%.
- The Company planned to add 15 MSBC locations during fiscal 2022; four had opened during the first nine months, and the plan included purchasing five franchised locations in the fourth quarter.
- Management believed available cash, operating cash flow and revolver capacity would fund operations, expansion, capital expenditures, dividends, repurchases and working capital needs over the next twelve months.
- COVID-19 restrictions had generally eased, but renewed outbreaks or variants could restrict dining-room capacity, reduce consumer demand or disrupt the workforce and supply chain.
- Key operating risks include commodity and wage inflation, labor recruitment and retention, supply-chain constraints, inventory shrinkage and obsolescence, interest-rate exposure, indebtedness, lease obligations, cybersecurity, competition and consumer-spending weakness.
- Operating lease liabilities totaled $785.4 million on a present-value basis, with undiscounted future minimum payments of $1.206 billion. The Company also self-insures significant portions of workers’ compensation and general liability programs.
- Legal proceedings were described as ordinary-course matters, and management did not expect them to materially affect the financial statements. No material off-balance-sheet arrangements were reported.
Investor Verification Points
- Verify whether pricing and traffic gains can offset continuing commodity, labor, freight and supply-chain inflation.
- Assess liquidity after dividends, share repurchases, capital expenditures and elevated retail inventories, given the low cash balance and negative working capital.
- Review revolver covenant headroom, refinancing plans and the 2026 convertible notes, including potential dilution from the related warrants if the share price exceeds their adjusted strike price.
- Separate recurring operating performance from the prior-year $217.7 million sale-and-leaseback gain when evaluating year-over-year earnings.
- Monitor COVID-19 developments, consumer demand, restaurant traffic, MSBC expansion and the Company’s ability to achieve its stated 2022 inflation and tax-rate assumptions.