Cracker Barrel Old Country Store, Inc. — Fiscal 2023 First-Quarter Form 10-Q
Business Context and Reporting Period
Unaudited quarterly results for the three months ended October 28, 2022, compared with the three months ended October 29, 2021. The company operates 664 Cracker Barrel stores in 45 states and 54 company-owned Maple Street Biscuit Company locations in nine states. It reports one operating segment consisting of restaurant and retail operations.
Key Financial Metrics
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Total revenue | $839.5 million | $784.9 million |
| Restaurant revenue | $662.2 million | $615.4 million |
| Retail revenue | $177.3 million | $169.5 million |
| Operating income | $23.6 million | $42.9 million |
| Operating margin | 2.8% | 5.5% |
| Net income | $17.1 million | $33.4 million |
| Net margin | 2.0% | 4.3% |
| Diluted EPS | $0.77 | $1.41 |
| Net cash from operating activities | $(0.6) million | $23.0 million |
Revenue increased 7.0%. Comparable restaurant sales rose 7.1%, driven by an 8.9% average check increase, including 7.8% menu pricing, partly offset by a 1.8% decline in guest traffic. Comparable retail sales increased 4.3%. Commodity inflation was 16.7% in the quarter.
Cash and cash equivalents were $38.7 million at October 28, 2022, compared with $45.1 million at July 29, 2022. Inventories increased to $231.0 million from $213.2 million, primarily to support expected holiday sales. Working capital was negative $138.3 million.
Long-term debt was $483.7 million, including $190.0 million drawn under the $700.0 million revolving credit facility and $293.5 million net carrying value of the 0.625% convertible senior notes due 2026. Revolving-facility availability was $478.1 million after standby letters of credit. The company was in compliance with its debt covenants.
Capital expenditures were $21.8 million, or $21.6 million net of insurance recoveries. Financing activities included $60.0 million of revolver borrowings, $29.5 million of dividend payments and $12.4 million of share repurchases. The company declared a $1.30 per-share dividend and repurchased 120,958 shares at an average price of $102.91.
Material Changes Versus the Prior Comparable Period
- Revenue increased $54.6 million, or 7.0%, but operating income declined $19.3 million, or 45.0%, and net income declined $16.2 million, or 48.5%.
- Cost of goods sold increased to 33.5% of revenue from 30.9%, primarily because of commodity inflation. Retail costs also reflected higher markdowns and freight expense.
- Labor expense improved modestly to 34.8% of revenue from 35.0%, as lower health-care and workers’ compensation costs partly offset wage inflation and lower productivity.
- General and administrative expense increased to 5.5% of revenue from 5.2%, primarily due to proxy contest and settlement expenses related to the 2022 annual meeting.
- Interest expense increased to $3.5 million from $2.6 million because of higher debt levels and higher average interest rates.
- Operating cash flow fell from $23.0 million provided to $0.6 million used, primarily because of the timing of accounts-payable payments.
- Company-owned MSBC locations increased to 54 from 37; Cracker Barrel store count remained 664.
Guidance, Outlook, Risks and Unusual Items
- Management expects full-year fiscal 2023 commodity inflation of approximately 8% to 9%, with sequential moderation, wage inflation of approximately 5% to 6%, and an effective tax rate of approximately 10% to 15%.
- Management estimates fiscal 2023 capital expenditures of approximately $125 million, including new and planned Cracker Barrel and MSBC locations and existing-store investments.
- Management believes available cash, operating cash flow and revolver capacity will fund operations, dividends, capital expenditures, expansion, share repurchases and working-capital needs over the next twelve months and beyond.
- Key risks include renewed COVID-19 restrictions or demand effects, inflation in commodities, wages, utilities and construction, labor recruitment and retention, supply-chain disruptions, interest-rate increases, leverage and covenant restrictions, information-security incidents, competition, weather, litigation and impairment of long-lived or lease assets.
- Operating leases had a present value liability of $765.8 million at October 28, 2022, with total undiscounted future payments of $1.17 billion.
- The company reports no material off-balance-sheet arrangements and no material changes in legal contingencies; management believes existing proceedings will not materially affect the financial statements.
- All dining rooms were operating without COVID-19-related restrictions at period end, but management cautioned that future outbreaks or variants could adversely affect operations and demand.
Important Facts for Investors to Verify
- Whether menu pricing and average-check growth can offset persistent commodity, labor, utility and freight inflation without further traffic deterioration.
- The sustainability of profitability and operating cash flow after the significant year-over-year margin contraction.
- Revolver utilization, interest-rate exposure, covenant compliance and the company’s ability to refinance debt before maturity.
- Inventory levels, retail markdowns and holiday-season sell-through.
- Execution and returns from MSBC expansion and the approximately $125 million fiscal 2023 capital-expenditure plan.
- The effect of proxy contest and settlement costs, share repurchases, dividends and potential restrictions under the credit facility on financial flexibility.
- Potential impairment, insurance-reserve and lease-accounting exposures, as well as the long-term cash obligations associated with operating leases.