Business Context and Reporting Period
Cracker Barrel Old Country Store, Inc. operates an integrated restaurant and retail concept in the United States. As of January 31, 2014, the Company operated 625 stores in 42 states. This unaudited Form 10-Q covers the quarter and six months ended January 31, 2014, compared with the comparable periods ended February 1, 2013.
Results are seasonal, with historically higher earnings in the second and fourth fiscal quarters. Interim results are therefore not necessarily indicative of full-year performance.
Financial Highlights
| Metric | Quarter Ended January 31, 2014 | Quarter Ended February 1, 2013 | Six Months Ended January 31, 2014 | Six Months Ended February 1, 2013 |
|---|---|---|---|---|
| Total revenue | $698.5 million | $702.7 million | $1,347.6 million | $1,330.1 million |
| Operating income | $58.7 million | $57.2 million | $102.9 million | $102.5 million |
| Net income | $37.1 million | $35.2 million | $64.2 million | $58.4 million |
| Diluted earnings per share | $1.55 | $1.47 | $2.68 | $2.45 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $62.9 million | $81.0 million |
Quarterly revenue declined 0.6%, while six-month revenue increased 1.3%. Quarterly operating margin improved to 8.4% from 8.1%, and six-month operating margin was 7.6% versus 7.7%. Net margin increased to 5.3% from 5.0% for the quarter and to 4.8% from 4.4% for the six-month period.
Quarterly restaurant revenue was $528.4 million and retail revenue was $170.1 million. Six-month restaurant revenue was $1,050.3 million and retail revenue was $297.3 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter comparable-store sales decreased 1.2%, consisting of a 0.6% restaurant decrease and a 3.0% retail decrease. Six-month comparable-store sales increased 0.7%, consisting of a 1.0% restaurant increase and a 0.7% retail decrease.
- Management estimated severe winter weather reduced comparable traffic and restaurant and retail sales by approximately 2.5% in the quarter and 1.2% for the six months.
- Quarterly guest traffic declined 2.9% in restaurants, partially offset by a 2.3% increase in average check, including a 1.8% menu price increase.
- Restaurant cost of goods sold increased to 28.1% of restaurant revenue from 27.7%, primarily due to 1.7% food commodity inflation, a shift to higher-cost menu items and increased food waste. Retail cost of goods sold improved to 55.6% of retail revenue from 56.1%.
- Labor and related expenses improved to 34.2% of revenue from 34.8% for the quarter and to 35.3% from 35.9% for six months, aided by lower incentive compensation and employee health-care costs.
- Other store operating expenses increased to 18.3% of revenue from 17.4% for the quarter and to 18.8% from 18.0% for six months, driven primarily by utilities, advertising, supplies, maintenance and a manager conference.
- General and administrative expenses declined 11.5% for the quarter and 3.9% for six months, primarily because of lower incentive compensation and severance expense. Proxy contest expenses were $3.2 million in the first six months of 2014 versus $4.1 million in the prior-year period.
- Interest expense declined to $4.5 million from $10.3 million for the quarter and to $8.9 million from $21.0 million for six months, reflecting lower debt, lower credit spreads and expiration of a high-rate interest-rate swap in May 2013.
- Operating cash flow fell $18.1 million, or approximately 22%, for the six-month period, primarily because of the timing of accounts-payable and interest payments.
- Capital expenditures increased to $39.3 million from $29.7 million for six months. The Company repurchased 120,000 shares for $12.5 million and paid $35.8 million in dividends.
Debt, Liquidity and Cash Flow
- Cash and cash equivalents were $91.4 million at January 31, 2014, down from $121.7 million at August 2, 2013.
- Total debt was $400.0 million, consisting of $212.5 million drawn on the revolving facility and a $187.5 million term loan. Current maturities were $12.5 million, with $387.5 million classified as long-term debt.
- Revolving-facility borrowing availability was $266.9 million after $20.6 million of standby letters of credit. The Company was in compliance with all debt covenants.
- Net working capital was negative $17.4 million at January 31, 2014, compared with negative $13.9 million at August 2, 2013.
- Net cash used in investing activities was $37.2 million, primarily for property and equipment. Net cash used in financing activities was $56.1 million, primarily for dividends, share repurchases and tax withholding related to share-based awards.
- Management believes cash on hand, operating cash flow and revolver capacity will fund continuing operations, expansion, share repurchases and dividends for at least the next twelve months.
Guidance, Outlook, Risks and Unusual Items
- Management’s 2014 priorities include menu and value initiatives, brand and merchandise marketing, retail assortment improvements, technology and process enhancements, margin improvement and increased shareholder returns.
- Management expects food commodity inflation of approximately 2% for 2014, advertising expense at approximately the same percentage of revenue as in 2013, interest expense of approximately $16 million to $18 million, an effective tax rate of 31% to 32%, and capital expenditures of $90 million to $100 million.
- The capital-expenditure estimate includes approximately seven new stores opened or expected to open during 2014, additional 2015 development costs, maintenance, technology and operational improvements.
- Management expected additional proxy contest expenses of approximately $1.0 million to $1.5 million in the third quarter related to a special shareholders meeting planned for April 2014.
- Key operating risks include severe weather, consumer spending and traffic trends, food commodity inflation, labor and health-care costs, utilities, retail inventory shrinkage and markdowns, and execution of new-store and technology investments.
- The Company self-insures significant portions of workers’ compensation and general liability exposures and maintains actuarial reserves. Changes in claims experience or assumptions could materially affect results.
- Standby letters of credit securing workers’ compensation claims reduce revolver availability. The Company also has lease guarantees, operating leases and ordinary-course legal proceedings; management does not expect these matters to materially affect financial position or results.
- Interest-rate swaps hedge borrowings. The net interest-rate swap liability was $9.8 million at January 31, 2014, and $6.0 million of pretax accumulated other comprehensive loss was expected to be reclassified into earnings over the next twelve months.
- No material changes were reported in previously disclosed risk factors, market risks, material commitments or internal-control effectiveness.
Important Facts for Investors to Verify
- Whether traffic and comparable-store sales recover after the reported winter-weather disruption, particularly in retail.
- Whether food commodity inflation remains near the approximately 2% full-year assumption and whether menu pricing offsets cost pressure.
- Progress against the $90 million to $100 million capital-expenditure plan and the expected seven-store development program.
- Available revolver capacity, liquidity requirements and compliance with leverage and interest-coverage covenants, especially given dividend and repurchase restrictions.
- Sustainability of improved labor, health-care and general-and-administrative expense ratios, including the effect of the shift to predominantly fully insured health coverage.
- Actual proxy contest costs and any consequences of the planned special shareholders meeting.
- Workers’ compensation, general liability and other self-insurance reserves, as well as the outcome of ordinary-course legal and lease-related contingencies.