CRACKER BARREL OLD COUNTRY STORE, INC quarterly report, Q2 FY2015

Cracker Barrel Old Country Store, Inc. — Q2 FY2015 Form 10-Q

Reporting period: Quarter and six months ended January 30, 2015; comparative periods ended January 31, 2014. Financial statements are unaudited. The company operated 634 stores in 42 states and reports one operating segment.

Financial performance

Metric	Q2 FY2015	Q2 FY2014	Six months FY2015	Six months FY2014
Total revenue	$756.0 million	$698.5 million	$1,439.4 million	$1,347.6 million
Operating income	$71.2 million	$58.7 million	$126.7 million	$102.9 million
Net income	$47.2 million	$37.1 million	$81.2 million	$64.2 million
Diluted EPS	$1.96	$1.55	$3.38	$2.68
Net margin	6.2%	5.3%	5.6%	4.8%
Dividends declared per share	$1.00	$0.75	$2.00	$1.50

Quarterly revenue increased 8.2%; six-month revenue increased 6.8%.
Quarterly operating income increased 21.3%; six-month operating income increased 23.0%.
Quarterly net income increased 27.3%; six-month net income increased 26.4%.
Restaurant revenue increased 9.3% in Q2 and 7.0% for six months; retail revenue increased 4.9% and 6.0%, respectively.
Comparable-store sales increased 6.7% in Q2 and 5.3% for six months, including restaurant increases of 7.9% and 5.6% and retail increases of 3.2% and 4.4%.
Q2 restaurant comparable sales reflected 4.7% higher guest traffic and a 3.2% higher average check, including a 2.5% menu price increase.

Margins and operating drivers

Q2 store operating margin improved to 14.3% from 12.7%; the six-month margin improved to 13.7% from 12.6%.
Labor and related expenses declined to 33.3% of revenue in Q2 from 34.2% and to 34.3% for six months from 35.3%, aided by pricing, productivity initiatives and lower payroll taxes.
Other store operating expenses declined to 17.7% of revenue in Q2 from 18.3% and to 18.3% for six months from 18.8%, primarily due to lower maintenance, utilities and conference costs.
Restaurant cost of goods sold increased as a percentage of restaurant revenue, primarily due to commodity inflation and a shift toward higher-cost menu items. Commodity inflation was 4.0% in Q2 and 3.8% for six months.
General and administrative expense increased to 4.9% of revenue in Q2 from 4.3%, reflecting higher incentive compensation and a $2.15 million additional FLSA litigation provision.

Cash flow, liquidity and debt

Six-month operating cash flow was $153.1 million, compared with $62.9 million in the prior-year period.
Capital expenditures were $37.8 million; management estimated approximately $100 million of FY2015 capital expenditures.
Cash and cash equivalents were $182.6 million at January 30, 2015, compared with $119.4 million at August 1, 2014.
Working capital was positive $51.4 million at January 30, 2015 versus negative $14.8 million at August 1, 2014.
On January 8, 2015, the company entered into a five-year $750 million revolving credit facility, replacing its prior term loan and revolving facility. Outstanding borrowings were $400 million, with $338.5 million of availability after standby letters of credit.
The company was in compliance with all debt covenants. Outstanding borrowings were swapped at a weighted-average interest rate of 3.48%; interest-rate swap liabilities totaled $14.6 million.
Six-month financing cash outflows included $47.8 million of dividends. No share repurchases occurred, although the board authorized up to $25 million of repurchases during FY2015.

Material changes, outlook and commentary

Management cited milder winter weather, lower gasoline prices, national advertising, seasonal promotions and pricing as contributors to traffic and sales growth.
The company reported outperforming peers in the Knapp-Track Casual Dining Index for the thirteenth consecutive quarter and continued benefits from plate-presentation and labor-saving initiatives.
FY2015 priorities included extending brand reach, geographic pricing tiers, technology and process improvements, and opening six new stores. One store opened during Q2 and three had opened during the first six months.
Management expected 2015 commodity inflation of approximately 3.5% to 4.0%, an effective tax rate of 31% to 32%, advertising spending of approximately 2.5% of revenue and capital expenditures of approximately $100 million.
Management stated that cash on hand, operating cash flow and available revolver capacity should fund operations, expansion, share repurchases and expected dividends for at least the next twelve months.
Results are seasonal, with historically higher earnings in the second and fourth quarters; interim results are not necessarily indicative of the full year.

Risks, contingencies and unusual items

Three putative FLSA collective actions challenge the classification of associate managers as exempt from wage and overtime requirements. The proceedings were in early stages, and ultimate liability could not be determined. The company recorded a total provision of $2.75 million.
The company self-insures significant workers’ compensation and general liability exposures and had $11.5 million of standby letters of credit supporting workers’ compensation claims.
Interest-rate swap fair values produced a $4.2 million after-tax other comprehensive loss for the six-month period, increasing accumulated other comprehensive loss to $9.0 million.
The Q2 effective tax rate benefited from the retroactive reinstatement of the Work Opportunity Tax Credit, including a $3.1 million tax credit.
The company identified no material changes to previously disclosed risk factors or market risks. Management concluded that disclosure controls were effective as of January 30, 2015.

Investor verification points

Verify the sustainability of comparable-store traffic and sales gains after the benefit of favorable weather, lower gasoline prices and promotional activity.
Assess exposure to commodity inflation, labor costs and potential pressure on restaurant gross margins.
Review the new revolving credit facility’s leverage, interest coverage, dividend and repurchase restrictions.
Monitor FLSA litigation developments and whether the $2.75 million provision adequately reflects potential exposure.
Reconcile the planned six-store expansion and approximately $100 million capital-spending program with operating cash flow and leverage.
Consider the seasonal nature of earnings and the effect of tax credits and other unusual items on reported profitability.