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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Cracker Barrel Old Country Store, Inc.    CBRL

CRACKER BARREL OLD COUNTRY STORE, INC.

(CBRL)
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CRACKER BARREL OLD COUNTRY STORE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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02/25/2020 | 01:11pm EDT
Cracker Barrel Old Country Store, Inc. and its subsidiaries (collectively, the
"Company," "our" or "we") are principally engaged in the operation and
development in the United States of the Cracker Barrel Old Country Store®
("Cracker Barrel") concept.  At January 31, 2020, we operated 661 Cracker Barrel
stores in 45 states.  Additionally, effective October 10, 2019, we acquired
Maple Street Biscuit Company ("MSBC").  As of January 31, 2020, MSBC had 28
company-owned and five franchised fast casual locations across seven states.  As
of January 31, 2020, we are in the process of converting our existing six Holler
& Dash Biscuit HouseTM locations ("Holler & Dash") into MSBC locations.  Our
Holler & Dash locations operate in the same states as MSBC.

All dollar amounts reported or discussed in this Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A") are shown in
thousands, except per share amounts and certain statistical information (e.g.,
number of stores).  References to years in MD&A are to our fiscal year unless
otherwise noted.

MD&A provides information which management believes is relevant to an assessment
and understanding of our consolidated results of operations and financial
condition.  MD&A should be read in conjunction with the (i) condensed
consolidated financial statements and notes thereto included in this Quarterly
Report on Form 10-Q and (ii) audited consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended August 2, 2019 (the "2019 Form 10-K").  Except for specific
historical information, many of the matters discussed in this report may express
or imply projections of items such as revenues or expenditures, estimated
capital expenditures, compliance with debt covenants, plans and objectives for
future operations, inventory shrinkage, growth or initiatives, expected future
economic performance or the expected outcome or impact of pending or threatened
litigation. These and similar statements regarding events or results which we
expect will or may occur in the future are forward-looking statements that, by
their nature, involve risks, uncertainties and other factors which may cause our
actual results and performance to differ materially from those expressed or
implied by such statements.  All forward-looking information is provided
pursuant to the safe harbor established under the Private Securities Litigation
Reform Act of 1995 and should be evaluated in the context of these risks,
uncertainties and other factors. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "trends,"
"assumptions," "target," "guidance," "outlook," "opportunity," "future,"
"plans," "goals," "objectives," "expectations," "near-term," "long-term,"
"projection," "may," "will," "would," "could," "expect," "intend," "estimate,"
"anticipate," "believe," "potential," "should," "projects," "forecasts" or
"continue"  (or the negative or other derivatives of each of these terms) or
similar terminology.  We believe the assumptions underlying any forward-looking
statements are reasonable; however, any of the assumptions could be inaccurate,
and therefore, actual results may differ materially from those projected in or
implied by the forward-looking statements.  In addition to the risks of ordinary
business operations, and those discussed or described in this report or in
information incorporated by reference into this report, factors and risks that
may result in actual results differing from this forward-looking information
include, but are not limited to, those contained in Part I, Item 1A of the 2019
Form 10-K, as well as the factors described under "Critical Accounting
Estimates" on pages 28-30 of this report or, from time to time, in our filings
with the Securities and Exchange Commission ("SEC"), press releases and other
communications.

Readers are cautioned not to place undue reliance on forward-looking statements
made in this report because the statements speak only as of the report's date.
Except as may be required by law, we have no obligation or intention to update
or revise any of these forward-looking statements to reflect events or
circumstances occurring after the date of this report or to reflect the
occurrence of unanticipated events.  Readers are advised, however, to consult
any future public disclosures that we may make on related subjects in reports
that we file with or furnish to the SEC or in our other public disclosures.

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Overview


Management believes that the Cracker Barrel brand remains one of the strongest
and most differentiated brands in the restaurant industry, and we plan to
continue to leverage that strength throughout 2020 to grow sales and profits.
Our priorities for 2020 consist of the following:

• Enhancing the core business by introducing craveable, signature food,

accelerating our off-premise business, improving the employee and guest

experience and by achieving ongoing cost reductions through business model

   improvements;



• Expanding the footprint in new and developing markets while replenishing our

store opening pipeline. We anticipate opening six Cracker Barrel stores during

2020, one of which opened in the first six months of 2020; and

• Extending the brand to further drive shareholder value by developing new

platforms to drive growth, such as our acquisition of Maple Street Biscuit

Company ("MSBC") and through our strategic relationship with Punch Bowl Social

   ("PBS").



We remain focused on the delivery of our three-year strategic priorities.

Results of Operations

The following table highlights our operating results by percentage relationships to total revenue for the quarter and six months ended January 31, 2020 as compared to the same periods in the prior year:

                                                    Quarter Ended                     Six Months Ended
                                            January 31,       February 1,       January 31,       February 1,
                                               2020              2019              2020              2019
Total revenue                                      100.0 %           100.0 %           100.0 %           100.0 %
Cost of goods sold (exclusive of
depreciation and rent)                              32.2              32.7              30.8              31.5
Labor and other related expenses                    33.6              34.1              34.4              34.7
Other store operating expenses                      20.3              19.3              21.0              20.0
General and administrative expenses                  4.5               4.4               4.9               4.8
Operating income                                     9.4               9.5               8.9               9.0
Interest expense                                     0.5               0.6               0.4               0.6
Income before income taxes                           8.9               8.9               8.5               8.4
Provision for income taxes                           1.3               1.4               1.4               1.4
Net loss from unconsolidated subsidiary             (0.4 )               -              (0.6 )               -
Net income                                           7.2 %             7.5 %             6.5 %             7.0 %



The following table sets forth the number of Company-owned units in operation at
the beginning and end of the quarters and six months ended January 31, 2020 and
February 1, 2019 as well as the number of franchised units at end of the
quarters and six months ended January 31, 2020 and February 1, 2019:

                                                    Quarter Ended                       Six Months Ended
                                            January 31,        February 1,       January 31,         February 1,
                                               2020               2019              2020                2019
Company-owned units in operation:
Open at beginning of the period                      695                663               667                 660
MSBC units acquired during period                      -                  -                28                   -
Opened during the period                               1                  2                 1                   5
Closed during the period                              (1 )               (1 )              (1 )                (1 )
Total Company-owned units at end of the
period                                               695                664               695                 664
Total franchised MSBC units at end of
the period                                             5                  -                 5                   -



Effective October 10, 2019, we acquired MSBC.  We are currently in the process
of converting our existing six Holler & Dash locations into MSBC locations and
expect to complete this conversion in the third quarter of 2020.

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Total Revenue

Total revenue for the second quarter and first six months of 2020 increased 4.2% and 3.2%, respectively, compared to the same periods in the prior year.


The following table highlights the key components of revenue for the quarter and
six months ended January 31, 2020 as compared to the quarter and six months
ended February 1, 2019:

                                                    Quarter Ended                     Six Months Ended
                                            January 31,       February 1,       January 31,      February 1,
                                               2020              2019               2020             2019
Revenue in dollars:
Restaurant                                 $     663,043$     631,175$  1,270,122$  1,222,153
Retail                                           183,100           180,532           325,061          323,097
Total revenue                              $     846,143$     811,707$  1,595,183$  1,545,250
Total revenue by percentage
relationships:
Restaurant                                          78.4 %            77.8 %            79.6 %           79.1 %
Retail                                              21.6 %            22.2 %            20.4 %           20.9 %
Average unit volumes(1):
Restaurant                                 $       985.3$       950.4$    1,893.7$    1,843.9
Retail                                             274.6             271.8             487.4            487.5
Total revenue                              $     1,259.9$     1,222.2$    2,381.1$    2,331.4
Comparable store sales increase
(decrease) (2):
Restaurant                                           3.8 %             3.8 %             3.0 %            2.7 %
Retail                                               1.3 %            (1.4 %)            0.4 %            1.1 %
Restaurant and retail                                3.2 %             2.6 %             2.5 %            2.3 %

(1) Average unit volumes include sales of all stores except for MSBC. (2) Comparable store sales exclude MSBC.


For the second quarter of 2020, our comparable store restaurant sales increase
resulted from a 4.0% average check increase (including a 2.2% average menu price
increase) partially offset by a 0.2% guest traffic decrease as compared to the
prior year second quarter.  For the second quarter of 2020, our comparable store
retail sales increase resulted primarily from strong performance in the décor,
the kitchen and dining and the apparel merchandise categories partially offset
by lower performance in the bed and bath, licensed and media merchandise
categories as compared to the second quarter of 2019.

For the first six months of 2020, our comparable store restaurant sales increase
resulted from a 3.8% average check increase (including a 2.2% average menu price
increase) partially offset by a 0.8% guest traffic decline as compared to the
prior year period. For the first six months of 2020, our comparable store retail
sales increase resulted primarily from strong performance in the décor and the
kitchen and dining merchandise categories partially offset by lower performance
in the bed and bath, toys, licensed and media merchandise categories as compared
to the prior year period.

Restaurant and retail sales from newly opened stores and the revenue from MSBC
accounted for the remainder of the total revenue increase in the second quarter
and first six months of 2020 as compared to the same periods in the prior year.

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Index

Cost of Goods Sold (Exclusive of Depreciation and Rent)


The following table highlights the components of cost of goods sold (exclusive
of depreciation and rent) in dollar amounts and as percentages of revenues for
the second quarter and first six months of 2020 as compared to the same periods
in the prior year:

                                                        Quarter Ended                     Six Months Ended
                                                 January 31,       February 

1, January 31, February 1,

                                                   2020              2019              2020              2019
Cost of Goods Sold in dollars:
Restaurant                                     $     172,676$     165,861$     322,133$     315,049
Retail                                                99,531            99,318           169,888           172,423
Total Cost of Goods Sold                       $     272,207$     265,179$     492,021$     487,472
Cost of Goods Sold by percentage of revenue:
Restaurant                                              26.0 %            26.3 %            25.4 %            25.8 %
Retail                                                  54.4 %            55.0 %            52.3 %            53.4 %



The decreases in restaurant cost of goods sold as a percentage of restaurant
revenue in the second quarter and first six months of 2020 as compared to the
same periods in the prior year primarily resulted from the recognition of
favorable vendor allowances.

We presently expect the rate of commodity inflation to be approximately 1.5% to 2.0% in 2020 as compared to 2019.

The decrease in retail cost of goods sold as a percentage of retail revenue in the second quarter and first six months of 2020 as compared to the second quarter and first six months of 2019 resulted primarily from higher initial margin partially offset by higher markdowns.

                           Second Quarter            First Six Months
                         (Decrease) Increase        (Decrease) Increase
                         as a Percentage of         as a Percentage of
                            Total Revenue              Total Revenue
Higher initial margin                    (1.8 %)                    (1.6 %)
Markdowns                                 1.1 %                      0.5 %



Labor and Related Expenses

Labor and related expenses include all direct and indirect labor and related
costs incurred in store operations.  The following table highlights labor and
related expenses as a percentage of total revenue for the second quarter and
first six months of 2020 as compared to the same periods in the prior year:

                                                    Quarter Ended                      Six Months Ended
                                            January 31,       February 1,       January 31,        February 1,
                                               2020              2019              2020               2019
Labor and related expenses                          33.6 %            34.1 %            34.4 %             34.7 %


This percentage change resulted primarily from the following:

                                       Second Quarter
                                  (Decrease) Increase as a
                                 Percentage of Total Revenue
Store hourly labor                                       (0.2 %)
Store management compensation                            (0.1 %)
Miscellaneous wages                                      (0.1 %)
Workers' compensation expense                            (0.1 %)
Employee health care expenses                             0.1 %



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Index

This percentage change resulted primarily from the following:

                                      First Six Months
                                  (Decrease) Increase as a
                                 Percentage of Total Revenue
Miscellaneous wages                                      (0.1 %)
Store bonus expense                                      (0.1 %)
Preopening labor expense                                 (0.1 %)
Employee health care expenses                             0.1 %



The decrease in store hourly labor costs as a percentage of total revenue for
the second quarter of 2020 as compared to the second quarter of 2019 resulted
primarily from improvements in productivity.

The decrease in store management compensation as a percentage of total revenue
for the second quarter of 2020 as compared to the second quarter of 2019
resulted primarily from the increase in revenue in the second quarter of 2020 as
compared to the prior year period.

The decreases in miscellaneous wages as a percentage of total revenue for the
second quarter and first six months of 2020 as compared to the same periods in
the prior year resulted primarily from the non-recurrence of costs associated
with a store closure in the prior year.

The decrease in workers' compensation expense as a percentage of total revenue for the second quarter of 2020 as compared to the second quarter of 2019 resulted primarily from revised actuarial estimates.


The decrease in store bonus expense as a percentage of total revenue for the
first six months of 2020 as compared to the same period in the prior year
resulted from lower performance against financial objectives in the first six
months of 2020 as compared to the same period in the prior year.

The decrease in preopening labor expense as a percentage of total revenue for
the first six months of 2020 as compared to the same period in the prior year
resulted primarily from the timing of new unit openings.

Higher employee health care expenses as a percentage of total revenue for the
second quarter and first six months of 2020 as compared the same periods in the
prior year resulted primarily from higher claims activity.

Other Store Operating Expenses


Other store operating expenses include all store-level operating costs, the
major components of which are utilities, preopening expenses excluding labor,
operating supplies, repairs and maintenance, depreciation and amortization,
advertising, rent, credit and gift card fees, real and personal property taxes,
general insurance and costs associated with our bi-annual manager conference and
training event.

The following table highlights other store operating expenses as a percentage of
total revenue for the second quarter and first six months of 2020 as compared to
the same periods in the prior year:

                                                    Quarter Ended                      Six Months Ended
                                            January 31,       February 1,       January 31,        February 1,
                                               2020              2019              2020               2019
Other store operating expenses                      20.3 %            19.3 %            21.0 %             20.0 %



These percentage changes resulted primarily from the following:

                            Second Quarter               First Six Months
                       Increase as a Percentage      Increase as a Percentage
                           of Total Revenue              of Total Revenue
Advertising expense                          0.5 %                         0.4 %
Depreciation expense                         0.3 %                         0.3 %
Other store expenses                         0.2 %                         0.2 %



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The increases in advertising expense as a percentage of total revenue for the
second quarter and first six months of 2020 as compared to the same periods in
the prior year resulted primarily from higher media spending.

The increases in depreciation expense as a percentage of total revenue for the
second quarter and first six months 2020 as compared to the same periods in the
prior year resulted primarily from capital expenditures with accelerated
depreciation methods.

The increases in other store expenses as a percentage of total revenue for the
second quarter and first six months of 2020 as compared to the same periods in
the prior year resulted from costs associated with the growth in our off-premise
business.

General and Administrative Expenses


General and administrative expenses as a percentage of total revenue increased
slightly to 4.5% in the second quarter of 2020 as compared to 4.4% in the second
quarter of 2019.  General and administrative expenses as a percentage of total
revenue increased slightly to 4.9% in the first six months of 2020 as compared
to 4.8% in the same period in the prior year.

Interest Expense, net


The following table highlights interest expense, net in dollars for the second
quarter and first six months of 2020 as compared to the same periods in the
prior year:

                                 Quarter Ended                     Six Months Ended
                         January 31,       February 1,       January 31,       February 1,
                            2020              2019              2020              2019
Interest expense, net   $       3,505$       4,177$       7,085$       8,526



Both period-over-period decreases resulted primarily from the interest income on
the PBS promissory notes and lower weighted average interest rates partially
offset by higher debt levels.  Additionally, as part of our debt refinancing in
the first quarter of 2019, we incurred additional interest expense of $166
related to the write-off of deferred financing costs.

Provision for Income Taxes


The following table highlights the provision for income taxes as a percentage of
income before income taxes ("effective tax rate") for the second quarter and
first six months of 2020 as compared to the same periods in the prior year:

                              Quarter Ended                      Six Months Ended
                      January 31,       February 1,       January 31,        February 1,
                         2020              2019              2020               2019
Effective tax rate            14.4 %            16.2 %            15.9 %             16.9 %



The decrease in the effective tax rate from the second quarter of 2019 to the
second quarter of 2020 resulted primarily from the tax benefits generated from
our investment in PBS and the retroactive reinstatement of the Work Opportunity
Tax Credit through December 31, 2020.  The decrease in the effective tax rate
from the first six months of 2019 to the first six months of 2020 resulted from
the tax benefit generated from our investment in PBS.

We presently expect our effective tax rate for 2020 to be approximately 16%.

Liquidity and Capital Resources


Our primary sources of liquidity are cash generated from our operations and our
borrowing capacity under our revolving credit facility.  Our internally
generated cash, along with cash on hand at August 2, 2019 and borrowings under
our revolving credit facility, was sufficient to finance all of our growth,
dividend payments, share repurchases, working capital needs and other cash
payment obligations in the first six months of 2020.

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Index

We believe that cash on hand at January 31, 2020, along with cash generated from
our operating activities and the borrowing capacity under our revolving credit
facility, will be sufficient to finance our continuing operations, expected
dividend payments and our continuing expansion plans for at least the next
twelve months.

Cash Generated From Operations


Our operating activities provided net cash of $184,004 for the first six months
of 2020, representing a decrease from the $190,863 net cash provided during the
first six months of 2019.  This decrease primarily reflected the timing of
payments for accounts payable.

Borrowing Capacity and Debt Covenants


On September 5, 2018, we entered into a five-year $950,000 revolving credit
facility ("2019 Revolving Credit Facility") which replaced our $750,000
revolving credit facility of which $400,000 in borrowings was outstanding.  The
2019 Revolving Credit Facility also contains an option to increase the revolving
credit facility by $300,000.  In the first quarter of 2019, we paid $3,022 in
deferred financing costs related to the debt refinancing.

During the six months ended January 31, 2020, we borrowed $215,000 under the
2019 Revolving Credit Facility to fund our dividend payments, acquisition of
MSBC and other working capital needs, and repaid $155,000 of the borrowings.  At
January 31, 2020, we had $460,000 of outstanding borrowings under the 2019
Revolving Credit Facility and we had $6,879 of standby letters of credit related
to securing reserved claims under our workers' compensation insurance which
reduce our borrowing availability under the 2019 Revolving Credit Facility. 

At

January 31, 2020, we had $483,121 in borrowing availability under our 2019 Revolving Credit Facility. See Note 6 to our Condensed Consolidated Financial Statements for further information on our long-term debt.


The 2019 Revolving Credit Facility contains customary financial covenants, which
include maintenance of a maximum consolidated total leverage ratio and a minimum
consolidated interest coverage ratio.  We presently are in compliance with all
financial covenants.

Capital Expenditures

Capital expenditures (purchase of property and equipment) net of proceeds from
insurance recoveries were $58,289 for the first six months of 2020 as compared
to $69,829 for the same period in the prior year.  Our capital expenditures
consisted primarily of capital investments for existing stores, new store
locations and capital expenditures for strategic initiatives.  The decrease in
capital expenditures from the first six months of 2020 to the first six months
of 2019 resulted primarily from lower capital expenditures for strategic
initiatives partially offset by higher capital expenditures for existing
stores.  We estimate that our capital expenditures during 2020 will be
approximately $125,000.  This estimate includes the acquisition of sites and
construction costs of six new Cracker Barrel stores and one MSBC location that
we expect to open during 2020, as well as for acquisition and construction costs
for store locations to be opened in 2021.  We intend to fund our capital
expenditures with cash flows from operations and borrowings under our 2019
Revolving Credit Facility, as necessary.

Maple Street Biscuit Company


Effective October 10, 2019, we acquired 100% ownership of MSBC, a breakfast and
lunch fast casual concept, for a purchase price of $36,000, of which $32,000 was
paid to the sellers in cash with the remaining $4,000 being held as security for
the satisfaction of indemnification obligations.  The unused portion of the
amounts held for security, if any, will be paid in two installments with $1,500
due to the principal seller on the one-year anniversary of closing and the
remaining amount due to the sellers on the two-year anniversary of closing. 

We

also incurred acquisition-related costs of $1,269.  We are currently converting
our existing six Holler & Dash locations into MSBC locations and expect this
conversion to be completed during the third quarter of 2020.  We believe that
the investment in MSBC supports our strategic initiative to extend the brand by
becoming a market leader in the breakfast and lunch-focused fast casual dining
segment of the restaurant industry and by providing a platform for growth.

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Punch Bowl Social


Effective July 18, 2019, we entered into a strategic relationship with PBS, a
food, beverage and entertainment concept, by purchasing a non-controlling
interest in the concept.  As part of the transaction, we agreed to fund PBS up
to $51,000 through calendar 2020 of which we funded $33,000 during the first six
months of 2020, for a total of $45,500.  The terms of the Company's investment
in PBS provide us with a call right beginning in 2023 to purchase the remaining
ownership interest in PBS, subject to terms and conditions governed by the PBS
operating agreement, and, after the expiration of that call right, provide us
with the right to demand that PBS initiate a sale process to sell PBS to an
unaffiliated third party. We believe the investment in PBS provides us with
another growth vehicle to deliver shareholder value and drive continued growth.

Dividends, Share Repurchases and Share-Based Compensation Awards


The 2019 Revolving Credit Facility imposes restrictions on the amount of
dividends we are permitted to pay and the amount of shares we are permitted to
repurchase.  Under the 2019 Revolving Credit Facility, provided there is no
default existing and the total of our availability under the 2019 Revolving
Credit Facility plus our cash and cash equivalents on hand is at least $100,000
(the "cash availability"), we may declare and pay cash dividends on shares of
our common stock and repurchase shares of our common stock (1) in an unlimited
amount if, at the time the dividend or the repurchase is made, our consolidated
total leverage ratio is 3.00 to 1.00 or less and (2) in an aggregate amount not
to exceed $100,000 in any fiscal year if our consolidated total leverage ratio
is greater than 3.00 to 1.00 at the time the dividend or repurchase is made;
notwithstanding (1) and (2), so long as immediately after giving effect to the
payment of any such dividends cash availability is at least $100,000, we may
declare and pay cash dividends on shares of our common stock in an aggregate
amount not to exceed in any fiscal year the product of the aggregate amount of
dividends declared in the fourth quarter of the immediately preceding fiscal
year multiplied by four.

During the first six months of 2020, we paid a regular dividend of $2.60 per
share and declared a dividend of $1.30 per share that was paid on February 5,
2020 to shareholders of record on January 17, 2020.

We have been authorized by our Board of Directors to repurchase shares at
management's discretion up to $50,000 during 2020.  During the first six months
of 2020, we repurchased 129,325 shares of our common stock in the open market at
an aggregate cost of $20,000.

During the first six months of 2020, we issued 23,333 shares of our common stock
resulting from the vesting of share-based compensation awards. Related tax
withholding payments on these share-based compensation awards resulted in a net
use of cash of $1,994.

Working Capital

In the restaurant industry, virtually all sales are either for cash or
third-party credit or debit card.  Restaurant inventories purchased through our
principal food distributor are on terms of net zero days, while restaurant
inventories purchased locally are generally financed from normal trade credit.
Because of our retail gift shops, which have a lower product turnover than the
restaurant business, we carry larger inventories than many other companies in
the restaurant industry.  Retail inventories purchased domestically are
generally financed from normal trade credit, while imported retail inventories
are generally purchased through wire transfers.  These various trade terms are
aided by the rapid turnover of the restaurant inventory.  Employees generally
are paid on weekly or semi-monthly schedules in arrears for hours worked except
for bonuses that are paid either quarterly or annually in arrears.  Many other
operating expenses have normal trade terms and certain expenses, such as certain
taxes and some benefits, are deferred for longer periods of time.

We had negative working capital of $158,814 at January 31, 2020 versus negative
working capital of $150,094 at August 2, 2019.  The change in working capital
from August 2, 2019 to January 31, 2020 primarily resulted from the recognition
of lease liabilities due to the adoption at August 3, 2019 of accounting
guidance for leases partially offset by the increase in cash and an increase in
real estate deposits.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.

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Index

Material Commitments


There have been no material changes in our material commitments other than in
the ordinary course of business since the end of 2019.  Refer to the sub-section
entitled "Material Commitments" under the section entitled "Liquidity and
Capital Resources" presented in the MD&A of our 2019 Form 10-K for additional
information regarding our material commitments.

Recent Accounting Pronouncements Adopted


See Note 1 to the accompanying Condensed Consolidated Financial Statements for a
discussion of recent accounting guidance adopted.  With the exception of the
accounting guidance for leases, the adopted accounting guidance discussed in
Note 1 did not have a significant impact on our consolidated financial position
or results of operations.  Regarding the accounting guidance for leases, the
adoption of the accounting guidance had a material impact on our consolidated
balance sheet.  See Notes 1 and 11 for additional information regarding leases.
Regarding the accounting guidance not yet adopted, we are still evaluating the
impact of adopting the accounting guidance.

Critical Accounting Estimates


We prepare our Consolidated Financial Statements in conformity with accounting
principles generally accepted in the United States of America.  The preparation
of these financial statements requires us to make estimates and assumptions
about future events and apply judgments that affect the reported amounts of
assets, liabilities, revenue, expenses and related disclosures.  We base our
estimates and judgments on historical experience, current trends, outside advice
from parties believed to be experts in such matters, and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources.
However, because future events and their effects cannot be determined with
certainty, actual results could differ from those assumptions and estimates, and
such differences could be material.
Our significant accounting policies are discussed in Note 2 to the Consolidated
Financial Statements contained in the 2019 Form 10-K with the exception of the
newly adopted lease accounting guidance and the valuation of goodwill and other
intangibles.  See Notes 1 and 11 above for further information regarding the
accounting policies for leases under the newly adopted accounting guidance.
Judgments and uncertainties affecting the application of those policies may
result in materially different amounts being reported under different conditions
or using different assumptions.

Critical accounting estimates are those that:

• management believes are most important to the accurate portrayal of both our

financial condition and operating results, and

• require management's most difficult, subjective or complex judgments, often as

a result of the need to make estimates about the effect of matters that are

   inherently uncertain.



We consider the following accounting estimates to be most critical in understanding the judgments that are involved in preparing our Consolidated Financial Statements:

• Impairment of Long-Lived Assets

• Insurance Reserves

• Retail Inventory Valuation

• Lease Accounting

Goodwill and Other Intangibles

Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.

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Index

Impairment of Long-Lived Assets


We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable.  Recoverability of assets is measured by comparing the carrying
value of the asset to the undiscounted future cash flows expected to be
generated by the asset.  If the total expected future cash flows are less than
the carrying amount of the asset, the carrying value is written down, for an
asset to be held and used, to the estimated fair value or, for an asset to be
disposed of, to the fair value, net of estimated costs of disposal.  Any loss
resulting from impairment is recognized by a charge to income.  Judgments and
estimates that we make related to the expected useful lives of long-lived assets
and future cash flows are affected by factors such as changes in economic
conditions and changes in operating performance.  The accuracy of such
provisions can vary materially from original estimates and management regularly
monitors the adequacy of the provisions until final disposition occurs.

We have not made any material changes in our methodology for assessing
impairments during the first six months of 2020, and we do not believe that
there is a reasonable likelihood that there will be a material change in the
estimates or assumptions used by us in the future to assess impairment of
long-lived assets.  However, if actual results are not consistent with our
estimates and assumptions used in estimating future cash flows and fair values
of long-lived assets, we may be exposed to losses that could be material.
During the first quarter of 2020, we recorded an impairment charge of $664
related to the transition from Holler & Dash locations to MSBC locations.

Insurance Reserves


We self-insure a significant portion of our expected workers' compensation and
general liability insurance programs.  We purchase insurance for individual
workers' compensation claims that exceed $250, $750 or $1,000 depending on the
state in which the claim originated.  We purchase insurance for individual
general liability claims that exceed $500.  We record a reserve for workers'
compensation and general liability for all unresolved claims and for an estimate
of incurred but not reported ("IBNR") claims.  These reserves and estimates of
IBNR claims are based upon a full scope actuarial study which is performed
annually at the end of our third quarter and is adjusted by the actuarially
determined losses and actual claims payments for the fourth quarter.
Additionally, we perform limited scope actuarial studies on a quarterly basis to
verify and/or modify our reserves.  The reserves and losses in the actuarial
study represent a range of possible outcomes within which no given estimate is
more likely than any other estimate.  As such, we record the losses in the lower
half of that range and discount them to present value using a risk-free interest
rate based on projected timing of payments.  We also monitor actual claims
development, including incurrence or settlement of individual large claims
during the interim periods between actuarial studies as another means of
estimating the adequacy of our reserves.

Our group health plans combine the use of self-insured and fully-insured
programs.  Benefits for any individual (employee or dependents) in the
self-insured group health program are limited.  We record a liability for the
self-insured portion of our group health program for all unpaid claims based
upon a loss development analysis derived from actual group health claims payment
experience.  Additionally, we record a liability for unpaid prescription drug
claims based on historical experience.

Our accounting policies regarding insurance reserves include certain actuarial
assumptions and management judgments regarding economic conditions, the
frequency and severity of claims and claim development history and settlement
practices.  We have not made any material changes in the methodology used to
establish our insurance reserves during the first six months of 2020 and do not
believe there is a reasonable likelihood that there will be a material change in
the estimates or assumptions used to calculate the insurance reserves.  However,
changes in these actuarial assumptions, management judgments or claims
experience in the future may produce materially different amounts of expense
that would be reported under these insurance programs.

Retail Inventory Valuation


Cost of goods sold includes the cost of retail merchandise sold at our stores
utilizing the retail inventory method ("RIM").  Under RIM, the valuation of our
retail inventories is determined by applying a cost-to-retail ratio to the
retail value of our inventories.  Inherent in the RIM calculation are certain
inputs, including initial markons, markups, markdowns and shrinkage, which may
significantly impact the gross margin calculation as well as the ending
inventory valuation.

                                       29

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Index

Inventory valuation provisions are included for retail inventory obsolescence
and retail inventory shrinkage.  Retail inventory is reviewed on a quarterly
basis for obsolescence and adjusted as appropriate based on assumptions made by
management and judgment regarding inventory aging and future promotional
activities.  Retail inventory also includes an estimate of shrinkage that is
adjusted upon physical inventory counts.  Annual physical inventory counts are
conducted based upon a cyclical inventory schedule.  An estimate of shrinkage is
recorded for the time period between physical inventory counts by using a
two-year average of the physical inventories' results on a store-by-store basis.

We have not made any material changes in the methodologies, estimates or
assumptions related to our merchandise inventories during the first six months
of 2020 and do not believe there is a reasonable likelihood that there will be a
material change in the estimates or assumptions in the future.  However, actual
obsolescence or shrinkage recorded may produce materially different amounts than
we have estimated.

Lease Accounting

We have ground leases for our leased stores and office space leases that are
recorded as operating leases under various non-cancellable operating leases.
Additionally, we lease our retail distribution center, advertising billboards,
vehicle fleets, and certain equipment under various non-cancellable operating
leases.  Effective August 3, 2019, we adopted lease accounting guidance which
requires the recognition of lease assets and lease liabilities on the balance
sheet.  Adoption of the accounting guidance for leases resulted in the
recognition of right-of-use operating lease assets of $464,394 and total
operating lease liabilities of $506,406 as of August 3, 2019.

We evaluate our leases at contract inception to determine whether we have the
right to control use of the identified asset for a period of time in exchange
for consideration.  If we determine that we have the right to obtain
substantially all of the economic benefit from use of the identified asset and
the right to direct the use of the identified asset, we recognize a right-of-use
asset and lease liability.  Also, at contract inception, we evaluate our leases
to estimate their expected term which includes renewal options that we are
reasonably assured that we will exercise, and the classification of the lease as
either an operating lease or a finance lease.  Additionally, as our leases do
not provide an implicit rate, we use our incremental borrowing rate based on the
information available at the time of commencement or modification date in
determining the present value of lease payments. Assumptions used in determining
our incremental borrowing rate include our implied credit rating and an estimate
of secured borrowing rates based on comparable market data. We assess the
impairment of the right-of-use asset whenever events or changes in circumstances
indicate that the carrying value of the asset may not be recoverable.

Changes in these assumptions and management judgments may produce materially different amounts in the recognition of the right-of-use assets and lease liabilities. Additionally, any loss resulting from an impairment of the right-of-use assets is recognized by a charge to income, which could be material.

Goodwill and Other Intangibles


Effective October 10, 2019, the Company acquired 100% ownership of MSBC and
recorded estimated amounts for goodwill and other intangibles.  Goodwill
represents the excess of the fair value of the consideration conveyed in the
acquisition over the fair value of net assets acquired.  Goodwill and other
intangibles will be evaluated for impairment annually during each fourth quarter
period and when an event occurs or circumstances change that, more likely than
not, reduce the fair value of the reporting unit below its carrying value.  See
Notes 2 and 3 to the Condensed Consolidated Financial Statements for further
information related to goodwill and other intangibles.

The qualitative and quantitative assessments related to the valuation and any
potential impairment of goodwill and other intangible assets are subject to
judgements and assumptions regarding the determination of the fair value of the
net assets acquired.  Such judgments and assumptions may include projecting
future cash flows, determining appropriate discount rates, applying the
appropriate valuation techniques and the computation of the implied fair value
of goodwill.  Future cash flow projections are based on management's projections
and represent best estimates taking into account recent financial performance,
market trends, strategic plans and other available information.  Changes in
these estimates and assumptions could materially affect the determination of
fair value or impairment.  Future indicators of impairment could result in an
asset impairment charge.  If actual results are not consistent with our
judgements and assumptions or if these judgement and assumptions are revised
based on new information, we may be exposed to losses that could be material.

                                       30

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Index

© Edgar Online, source Glimpses

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