CRACKER BARREL OLD COUNTRY STORE, INC quarterly report, Q2 FY2021

Cracker Barrel Old Country Store, Inc. — Q2 FY2021 Form 10-Q Summary

Reporting period: Quarter and six months ended January 29, 2021, compared with the quarter and six months ended January 31, 2020. The filing is unaudited. The company operates Cracker Barrel restaurants and retail stores in the United States and, through Maple Street Biscuit Company, fast-casual restaurants. At period-end, it operated 663 Cracker Barrel stores, 36 company-owned MSBC locations, and seven franchised MSBC locations.

Key financial metrics

Metric	Q2 FY2021	Q2 FY2020	Six months FY2021	Six months FY2020
Total revenue	$677.2 million	$846.1 million	$1,323.6 million	$1,595.2 million
Operating income	$14.4 million	$79.1 million	$251.5 million	$142.5 million
Net income	$14.0 million	$61.2 million	$184.7 million	$104.4 million
Diluted EPS	$0.59	$2.55	$7.77	$4.34
Net cash from operating activities	Not separately provided	Not separately provided	$121.3 million	$184.0 million

Revenue mix: Q2 restaurant revenue was $521.2 million and retail revenue was $155.9 million. Six-month restaurant revenue was $1,036.5 million and retail revenue was $287.2 million.
Margins: Operating margin was 2.1% in Q2 versus 9.4% in the prior-year quarter, and 19.0% for six months versus 8.9%. The six-month comparison includes a $217.7 million gain on the sale and leaseback of 62 stores.
Net margin: Net margin was 2.1% in Q2 versus 7.2% in the prior-year quarter, and 14.0% for six months versus 6.5%.
Cash and liquidity: Cash and cash equivalents were $568.8 million at January 29, 2021, up from $437.0 million at July 31, 2020. Working capital was $358.1 million.
Debt: Outstanding borrowings under the revolving credit facility were $874.4 million, with $83.4 million of borrowing availability after $31.6 million of standby letters of credit. Long-term debt on the balance sheet was $835.0 million.
Lease obligations: Long-term operating lease liabilities were $763.8 million; total present value of operating lease liabilities was $813.1 million.
Capital expenditures: Six-month capital expenditures, net of insurance recoveries, were $29.2 million, compared with $58.3 million in the prior-year period. Management estimated full-year FY2021 capital expenditures of approximately $90 million.
Shareholder returns: Six-month dividends paid were $31.6 million. Future dividends and share repurchases were suspended during the period.

Material changes versus the prior comparable period

Q2 revenue decreased 20.0%, while six-month revenue decreased 17.0%, primarily because COVID-19 restrictions and changes in consumer behavior reduced restaurant traffic and dining-room availability.
Comparable restaurant sales declined 21.9% in Q2 and 19.3% for six months. Comparable restaurant guest traffic declined 24.2% and 21.3%, respectively, partly offset by average check increases of 2.3% and 2.0%.
Comparable retail sales declined 15.3% in Q2 and 12.1% for six months.
Q2 operating income declined sharply despite lower absolute operating expenses because fixed and semi-variable costs represented a larger percentage of lower revenue. Labor and related expenses increased to 35.0% of revenue from 33.6%, and other store operating expenses increased to 24.7% from 20.3%.
Restaurant cost of goods sold increased to 26.9% of restaurant revenue from 26.0%, reflecting approximately 2.0% commodity inflation, menu mix, and higher food waste, partly offset by pricing.
Interest expense increased to $10.8 million in Q2 and $21.5 million for six months, versus $3.5 million and $7.1 million, respectively, due primarily to higher borrowings, higher weighted-average rates, and the absence of prior-year interest income from Punch Bowl Social promissory notes.
The six-month results benefited from the $217.7 million sale and leaseback gain recorded in the first quarter. The transaction generated net proceeds of $146.4 million and increased future rent obligations.
Operating cash flow decreased to $121.3 million from $184.0 million, while investing activities provided $119.2 million versus using $122.7 million, primarily because of sale and leaseback proceeds.

Guidance, outlook, risks, contingencies, and unusual items

Management expected commodity inflation of approximately 2.0% for FY2021 and an effective tax rate of approximately 17% to 18%.
Management anticipated adding two Cracker Barrel stores during FY2021, with one opened during the first six months. It continued to prioritize off-premise sales, digital infrastructure, menu and beverage innovation, and development of MSBC.
Management stated that cash on hand, operating cash flow, borrowing capacity, cost reductions, suspended dividends and repurchases, and sale and leaseback proceeds were expected to fund obligations for the next twelve months.
COVID-19 continued to cause dining-room closures and capacity restrictions; as of February 16, 2021, eight restaurants were not open for dine-in service to some extent. Management could not determine the duration or ultimate financial impact of the pandemic.
The credit facility provided covenant relief for the fourth quarter of FY2020 and the first and second quarters of FY2021. During the relief period, minimum liquidity was $140 million and aggregate cash capital expenditures were limited to $60 million; capital expenditures during the period were $37.0 million as of January 29, 2021.
The filing disclosed a subsequent third-quarter FY2021 credit amendment that reduced the facility commitment from $950 million to $800 million and extended covenant relief. The amended terms required minimum liquidity of $140 million and imposed additional dividend and capital expenditure restrictions.
Operating lease commitments, commodity inflation, wage inflation, interest rates, supply-chain disruptions, labor availability, information security, litigation, insurance reserves, asset impairment, and the pandemic remain material risk areas.
The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and no material changes in market risk since July 31, 2020.
The effective tax rate for Q2 was unusually negative at 291.1% because of tax benefits related to federal net operating loss carrybacks and resolution of state audits, applied under the discrete method.

Most important facts for investors to verify

Whether restaurant traffic, dining-room capacity, and comparable sales recover as COVID-19 restrictions ease.
Compliance with the revised credit facility’s liquidity, capital expenditure, dividend, and leverage-related restrictions.
The sustainability of liquidity after considering $874.4 million of borrowings, substantial lease obligations, and reduced operating cash flow.
The effect of the 62-store sale and leaseback on future rent expense, cash generation, leverage, and reported earnings.
Whether the $217.7 million sale and leaseback gain is properly treated as a nonrecurring item when assessing normalized earnings.
Progress and financial performance of MSBC, including the growth of company-owned and franchised locations.
Actual FY2021 capital expenditures relative to the approximately $90 million estimate and the $70 million cap under the subsequent extended covenant relief period.
Future dividend reinstatement and share repurchase capacity after covenant relief expires.