CRACKER BARREL OLD COUNTRY STORE, INC annual report, FY2022

Business Context and Reporting Period

Cracker Barrel Old Country Store, Inc. filed this Form 10-K for the fiscal year ended July 29, 2022. The company operates a single integrated restaurant and retail segment, with 664 Cracker Barrel locations in 45 states and 53 Maple Street Biscuit Company locations as of September 14, 2022. Restaurant operations generated 78.5% of fiscal 2022 revenue and retail operations generated 21.5%.

Financial Results and Key Metrics

Metric	Fiscal 2022	Fiscal 2021	Change
Total revenue	$3.268 billion	$2.821 billion	15.8% increase
Restaurant revenue	$2.566 billion	$2.227 billion	15.2% increase
Retail revenue	$702.2 million	$594.2 million	18.2% increase
Operating income	$153.0 million	$366.7 million	58.3% decrease
Operating margin	4.7%	13.0%	830 basis-point decline
Net income	$131.9 million	$254.5 million	48.2% decrease
Diluted EPS	$5.67	$10.71	47.1% decrease
Net cash from operations	$205.3 million	$301.9 million	32.0% decrease
Capital expenditures, net	$97.1 million	$70.1 million	Increase

Comparable Cracker Barrel restaurant sales increased 15.0%, including a 7.0% increase in average check and an 8.0% increase in guest traffic. The average check increase included a 5.9% average menu price increase. Comparable retail sales increased 18.2%.

Profitability deteriorated despite strong sales growth. Cost of goods sold increased to 32.1% of revenue from 30.7%, primarily due to 13.1% commodity inflation. Labor and related expenses increased to 35.2% of revenue from 34.8%, as wage inflation exceeded menu price increases and productivity declined. Other store operating expenses improved to 23.2% of revenue from 24.0%, while general and administrative expenses declined to 4.8% from 5.2%.

Cash and cash equivalents declined to $45.1 million from $144.6 million. Working capital was a deficit of $185.0 million, compared with a deficit of $111.7 million in the prior year. Inventories increased to $213.2 million from $138.3 million, primarily because prior-year inventory had been unusually low due to market constraints.

Debt, Liquidity and Capital Allocation

At July 29, 2022, borrowings under the revolving credit facility were $130.0 million, compared with $85.0 million a year earlier.
The new revolving credit facility provides $700.0 million of capacity, with an option to increase capacity by $200.0 million. Borrowing availability was $538.1 million after outstanding borrowings and $31.9 million of standby letters of credit.
The company had $300.0 million principal amount of 0.625% convertible senior notes due June 2026, with a net carrying amount of $293.1 million.
Total long-term debt on the balance sheet was $423.2 million, excluding the current portion of long-term debt.
The company was in compliance with its revolving credit facility covenants at fiscal year-end and expected to remain compliant.
Operating lease liabilities totaled $776.7 million on a present-value basis, with undiscounted future lease payments of $1.187 billion.
Fiscal 2022 dividends paid were $4.90 per share, and the company declared an additional $1.30 per share dividend subsequently paid in August 2022. Share repurchases totaled $131.5 million for 1.25 million shares.
Management stated that cash, operating cash flow and available revolver capacity should fund operations, debt service, dividends, repurchases, expansion and working capital needs for at least the next twelve months.

Material Changes Versus the Prior Comparable Period

Revenue and comparable sales recovered further from pandemic-affected periods, but operating income and net income declined materially because of inflation, labor pressures, COVID-19 resurgences and higher operating costs.
Interest expense fell to $9.6 million from $56.1 million, primarily because of lower average debt and the absence of prior-year interest-rate-swap termination costs.
Fiscal 2021 included a $217.7 million gain from a sale-and-leaseback transaction; no comparable gain occurred in fiscal 2022. This significantly affected the year-over-year operating income comparison.
The company generated $205.3 million of operating cash flow, down from $301.9 million, while increasing capital expenditures to $97.1 million.
The company adopted new convertible-instrument accounting guidance using a modified retrospective method. The adoption increased long-term debt by $49.2 million, reduced deferred taxes by $12.3 million and reduced equity by $37.0 million.
The company directly acquired seven previously franchised Maple Street Biscuit Company units during the fourth quarter.

Guidance, Outlook, Commentary and Risks

Management expected approximately 8% commodity inflation and approximately 5% wage inflation in fiscal 2023, compared with 13.1% commodity inflation in fiscal 2022.
Fiscal 2023 capital expenditures were estimated at approximately $125 million, including three to four new Cracker Barrel stores, 15 to 20 new Maple Street Biscuit Company locations, existing-store investments, technology, digital infrastructure and a loyalty program.
The company planned to continue expanding off-premise sales, investing in digital capabilities, improving menu and retail offerings, and pursuing operational efficiency initiatives.
Management expected a fiscal 2023 effective tax rate of approximately 10% to 15%.
All dining rooms were open to some extent during fiscal 2022 and were operating without COVID-19 restrictions at the filing date; renewed outbreaks could reduce traffic, restrict operations or increase costs.
Key risks include persistent inflation in food, labor, transportation and utilities; consumer sensitivity to price increases; labor availability and retention; supply-chain disruption; foreign sourcing of retail merchandise, including significant sourcing from China; cybersecurity and data privacy incidents; competition; severe weather; litigation; and possible impairment of underperforming locations.
The company self-insures significant portions of workers’ compensation, general liability and health claims. Insurance reserves depend on actuarial estimates and could differ materially from recorded amounts.
Affiliates of activist shareholder Sardar Biglari owned approximately 9.0% of outstanding common stock as of August 18, 2022 and had nominated two board candidates for the 2022 annual meeting.
The shareholder rights plan expires April 9, 2024 and generally becomes exercisable if a person or group acquires 20% or more of the company’s common stock, subject to qualifying-offer provisions.

Most Important Facts for Investors to Verify

Whether menu pricing, traffic trends and operating initiatives can offset expected commodity and wage inflation without materially reducing demand.
Available liquidity, revolver covenant headroom and the company’s ability to manage the $300 million convertible notes due in 2026.
The sustainability of dividends and share repurchases given the reduced cash balance, working-capital deficit, lease obligations and debt restrictions.
Execution of the planned 2023 store openings and the performance and profitability trajectory of Maple Street Biscuit Company.
Retail inventory levels, markdown exposure and supply-chain dependence on foreign vendors and a primary retail distribution center.
Potential changes in consumer demand from inflation, fuel prices, economic weakness or renewed infectious-disease restrictions.
Insurance reserve adequacy, pending or future litigation, tax uncertainties and any impairment indicators at individual store locations.