CRACKER BARREL OLD COUNTRY STORE, INC. 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
17
--------------------------------------------------------------------------------
Index
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
Overview
Management believes that the
During the first quarter, we continued to make progress on key strategic
initiatives such as continuing the rollout of beer and wine to our stores and
investments in our digital capabilities. We also expanded our virtual brand,
Chicken 'n Biscuits, to a total of 500 stores in the first quarter, and we
launched a second virtual brand,
For the full fiscal year, we currently anticipate adding three new
Key Performance Indicators
Management uses a number of key performance measures to evaluate our operational and financial performance, including the following:
• Comparable store restaurant sales increase/(decrease): To calculate comparable
store restaurant sales increase/(decrease), we determine total restaurant sales of stores open at least six full quarters before the beginning of the applicable period, measured on comparable calendar weeks. We then subtract total comparable store restaurant sales for the current year period from total comparable store restaurant sales for the applicable historical period to calculate the absolute dollar change. To calculate comparable store restaurant sales increase/(decrease), which we express as a percentage, we divide the absolute dollar change by the comparable store restaurant sales for the historical period.
• Comparable store average restaurant sales: To calculate comparable store
average restaurant sales, we determine total restaurant sales of stores open at least six full quarters before the beginning of the applicable period, measured on comparable calendar weeks, and divide by the number of comparable stores for the applicable period.
• Comparable store retail sales increase/(decrease): To calculate comparable
store retail sales increase/(decrease), we determine total retail sales of stores open at least six full quarters before the beginning of the applicable period, measured on comparable calendar weeks. We then subtract total comparable store retail sales for the current year period from total comparable store retail sales for the applicable historical period to calculate the absolute dollar change. To calculate comparable store retail sales increase/(decrease), which we express as a percentage, we divide the absolute dollar change by the comparable store retail sales for the historical period.
• Comparable store retail average weekly sales: To calculate comparable store
average retail sales, we determine total retail sales of stores open at least six full quarters before the beginning of the applicable period, measured on comparable calendar weeks, and divide by the number of comparable stores for the applicable period.
• Comparable restaurant guest traffic increase/(decrease): To calculate
comparable restaurant guest traffic increase/(decrease), we determine the number of entrees sold in our dine-in and off-premise business from stores open at least six full quarters at the beginning of the applicable period, measured on comparable calendar weeks. We then subtract total entrees sold for the current year period from total entrees sold for the applicable historical period to calculate the absolute numerical change. To calculate comparable restaurant guest traffic increase/(decrease), which we express as a percentage, we divide the absolute numerical change by the total entrees sold for the historical period.
• Average check increase per guest: To calculate average check per guest, we
determine comparable store restaurant sales, as described above, and divide by
comparable guest traffic (as described above). We then subtract average check
per guest for the current year period from average check per guest for the
applicable historical period to calculate the absolute dollar change. The
absolute dollar change is divided by the prior year average check number to
calculate average check increase per guest, which we express as a percentage.
18--------------------------------------------------------------------------------
Index
These performance indicators exclude the impact of new store openings and sales related to MSBC.
We use comparable store sales metrics as indicators of sales growth to evaluate how our established stores have performed over time. We use comparable restaurant guest traffic increase/(decrease) to evaluate how established stores have performed over time, excluding growth achieved through menu price and sales mix change. Finally, we use average check per guest to identify trends in guest preferences, as well as the effectiveness of menu changes. We believe these performance indicators are useful for investors by providing a consistent comparison of sales results and trends across comparable periods within our core, established store base, unaffected by results of store openings, closings, and other transitional changes.
Results of Operations
The following table highlights our operating results by percentage relationships to total revenue for the quarter endedOctober 29, 2021 as compared to the same period in the prior year: Quarter Ended October 29, October 30, 2021 2020 Total revenue 100.0 % 100.0 % Cost of goods sold (exclusive of depreciation and rent) 30.9 30.8 Labor and other related expenses 35.0 35.1 Other store operating expenses 23.4 25.0 General and administrative expenses 5.2 6.1 Gain on sale and leaseback transaction - (33.7 ) Operating income 5.5 36.7 Interest expense, net 0.4 1.7 Income before income taxes 5.1 35.0 Provision for income taxes 0.8 8.6 Net income 4.3 % 26.4 %
The following table sets forth the change in the number of Company-owned and
franchised units in operation at the beginning and end of the quarters ended
October 29, October 30,
2021 2020
Net change in units:
Company-owned - Cracker Barrel - -
Company-owned - MSBC - -
Franchise - MSBC - -
Units in operation at end of the period
Company-owned - Cracker Barrel 664 663
Company-owned - MSBC 37 35
Total Company -owned units at end of the period 701 698
Franchise - MSBC 7 5
Total Revenue
Total revenue for the first quarter of 2022 increased 21.4% as compared to the same period in the prior year. The Company continues to recover from the COVID-19 pandemic as all dining rooms were open to some extent during the first quarter of 2022. Dining room service was operational to varying degrees, yet in some locations continued to be impacted by capacity restrictions and social distancing guidelines. It is possible that renewed outbreaks or increases in cases, either as part of a national trend or on a more localized basis, could result in additional capacity restrictions or otherwise limit our dine-in services, or negatively affect consumer demand. Off-premise sales for the first quarter of 2022 represented approximately 20% of restaurant sales volumes compared to approximately 25% in the first quarter of 2021 when a large number of our restaurants were operating with limitations on or full prohibitions of dine-in services.
19
--------------------------------------------------------------------------------
Index
The following table highlights the key components of revenue for the quarter
ended
Quarter Ended
October 29, October 30,
2021 2020
Revenue in dollars:
Restaurant $ 615,414 $ 515,224
Retail 169,516 131,230
Total revenue $ 784,930 $ 646,454
Total revenue by percentage relationships:
Restaurant 78.4 % 79.7 %
Retail 21.6 % 20.3 %
Average unit volumes(1):
Restaurant $ 910.1 $ 765.0
Retail 255.1 197.9
Total revenue $ 1,165.2 $ 962.9
Comparable store sales increase (decrease)(2):
Restaurant 19.0 % (16.4 %)
Retail 29.1 % (8.1 %)
Restaurant and retail 21.0 % (14.9 %)
Average check increase 6.9 % 1.9 %
Comparable restaurant guest traffic increase/(decrease)(2): 12.1 % (18.3 %)
(1) Average unit volumes include sales of all stores except for MSBC. (2) Comparable store sales and traffic consist of sales of stores open at least six full quarters at the beginning of the period and are measured on comparable calendar weeks. Comparable store sales and traffic exclude MSBC.
For the first quarter of 2022, our comparable store restaurant sales increased as a result of a 12.1% guest traffic increase and a 6.9% average check increase (including a 5.5% average menu price increase) as compared to the prior year first quarter.
Our retail sales are made substantially to our restaurant guests. For the first quarter of 2022, our comparable store retail sales increase resulted primarily from the guest traffic increase and strong performance in the toys, food and convenience, décor merchandise, apparel and accessories and licensed categories.
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 first quarter of 2022 as compared to the same period in the prior year:
Quarter Ended
October 29, October 30,
2021 2020
Cost of Goods Sold in dollars:
Restaurant $ 160,301 $ 132,613
Retail 82,470 66,431
Total Cost of Goods Sold $ 242,771 $ 199,044
Cost of Goods Sold by percentage of revenue:
Restaurant 26.0 % 25.7 %
Retail 48.7 % 50.6 %
20--------------------------------------------------------------------------------
Index
The increase in restaurant cost of goods sold as a percentage of restaurant revenue in the first quarter of 2022 as compared to the same period in the prior year primarily resulted from higher food waste and commodity inflation of 7.3% partially offset by our menu price increase referenced above and a shift to lower cost menu items. Higher food waste accounted for an increase of 0.5% as a percentage of restaurant revenue for the first quarter of 2022 as compared to the same period in the prior year. Lower cost menu items accounted for a decrease of 0.5%.
We presently expect the rate of commodity inflation to be in the high single digits in 2022.
The decrease in retail cost of goods sold as a percentage of retail revenue in
the first quarter of 2022 as compared to the first quarter of 2021 resulted from
lower markdowns, a decrease in discounts and allowances, lower freight expense
and lower shrinkage partially offset by lower initial margin and the change in
the provision for obsolete inventory. Lower freight expense and lower shrinkage
as a percentage of retail revenue in the first quarter of 2022 as compared to
the same period in the prior year were primarily driven by the increase in
retail revenue in 2022.
First Quarter
(Decrease) Increase as a
Percentage of Retail
Revenue
Markdowns (1.2 %)
Discounts and allowances (1.1 %)
Freight expense (0.3 %)
Inventory shrinkage (0.1 %)
Lower initial margin 0.4 %
Provision for obsolete inventory 0.4 %
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 first quarter of 2022 as compared to the same period in the prior year:
Quarter Ended
October 29, October 30, 2020
2021
Labor and related expenses 35.0 % 35.1 %
This percentage change resulted from the following:
First Quarter
(Decrease) Increase as a
Percentage of Total Revenue
Store management compensation (0.7 %)
Store bonus expense (0.2 %)
Store hourly labor 0.8 %
The decrease in store management compensation as a percentage of total revenue in the first quarter of 2022 as compared to the same period in the prior year was primarily driven by the increase in total revenue in 2022 partially offset by wage inflation exceeding menu price increases.
The decrease in store bonus expense as a percentage of total revenue for the first quarter of 2022 as compared to the same period in the prior year resulted from lower performance against financial objectives for certain components of the incentive plan in the first quarter of 2022 as compared to the same period in the prior year.
The increase in store hourly labor expense as a percentage of total revenue for the first quarter of 2022 as compared to the same period in the prior year resulted primarily from wage inflation exceeding menu price increases and a reduction in productivity. We presently expect the rate of wage inflation to be in the high single digits in 2022.
21
--------------------------------------------------------------------------------
Index
Other Store Operating Expenses
Other store operating expenses include all store-level operating costs, the major components of which are operating supplies, utilities, repairs and maintenance, depreciation and amortization, advertising, rent, third party delivery fees, credit and gift card fees, real and personal property taxes and general insurance.
The following table highlights other store operating expenses as a percentage of
total revenue for the first quarter of 2022 as compared to the same period in
the prior year:
Quarter Ended
October 29, October 30,
2021 2020
Other store operating expenses 23.4 % 25.0 %
This percentage changes resulted primarily from the following:
First Quarter
(Decrease) Increase as a
Percentage of Total Revenue
Depreciation expense (0.8 %)
Rent expense (0.4 %)
Real and personal property taxes expense (0.3 %)
Supplies expense (0.2 %)
Utilities expense (0.2 %)
Other store expenses 0.4 %
The decreases in depreciation expense, rent expense, real and personal property taxes expense and utilities expense as a percentage of total revenue in the first quarter of 2022 as compared to the same period in the prior year were primarily driven by the increase in total revenue in the first quarter of 2022.
The decrease in supplies expense as a percentage of total revenue for the first quarter of 2022 as compared to the same period in the prior year was primarily driven by the increase in total revenue in the first quarter of 2022 partially offset by higher costs. For the first quarter of 2022, we incurred higher costs associated with the growth in our off-premise business and increased operations in our dining rooms.
The increase in other store expenses as a percentage of total revenue for the first quarter of 2022 as compared to the same period in the prior year resulted primarily from costs associated with the growth in our off-premise business.
General and Administrative Expenses
The following table highlights general and administrative expenses as a percentage of total revenue for the first quarter of 2022 as compared to the same period in the prior year:
Quarter Ended
October 29, October 30,
2021 2020
General and administrative expenses 5.2 % 6.1 %
The decrease in general and administrative expenses as a percentage of total revenue in the first quarter of 2022 as compared to the same period in the prior year resulted primarily from expenses related to the proxy contest in the first quarter of 2021.
22
--------------------------------------------------------------------------------
Index
Gain on Sale and Leaseback Transaction
On
Interest Expense, net
The following table highlights interest expense, net in dollars for the first quarter of 2022 as compared to the same period in the prior year:
Quarter Ended
October 29, October 30,
2021 2020
Interest expense $ 2,629 $ 10,715 The decrease in interest expense for the first quarter of 2022 as compared to the same period in the prior year resulted primarily from lower debt levels and lower average weighted interest rates.
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 first quarter of 2022 as compared to the same period in the prior year:
Quarter Ended
October 29, October 30,
2021 2020
Effective tax rate 17.1 % 24.6 %
The decrease in the effective tax rate is primarily the result of an increase in tax credits and taxes on the sale and leaseback transaction in the first quarter of 2021. We presently expect our effective tax rate for 2022 to be approximately 17%.
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated from our operations and our
borrowing capacity under our 2019 Revolving Credit Facility. Our internally
generated cash, along with cash on hand at
Cash Generated From Operations
Our operating activities provided net cash of
Borrowing Capacity, Debt Covenants and Notes
On
23
--------------------------------------------------------------------------------
Index
At
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 were in compliance with the 2019
Revolving Credit Facility's financial covenants at
On
In connection with the issuance of the Notes, the Company entered into privately
negotiated convertible note hedge transactions (the "Convertible Note Hedge
Transactions") with certain of the initial purchasers of the Notes and/or their
respective affiliates and other financial institutions (in this capacity, the
"Hedge Counterparties"), which cover, subject to customary anti-dilution
adjustments, the aggregate number of shares of the Company's common stock that
initially underlie the Notes. Concurrently with the Company's entry into the
Convertible Note Hedge Transactions, the Company also entered into separate,
privately negotiated warrant transactions with the Hedge Counterparties
collectively relating to the same number of shares of the Company's common stock
underlying the Notes, subject to customary anti-dilution adjustments, and for
which the Company received premiums that partially offset the cost of entering
into the Convertible Note Hedge Transactions (the "Warrant Transactions"). The
portion of the net proceeds to the Company from the offering of the Notes that
was used to pay the premium on the Convertible Note Hedge Transactions, net of
the proceeds to the Company from the Warrant Transactions, was approximately
Capital Expenditures and Proceeds from Sale of Property and Equipment
Capital expenditures (purchase of property and equipment) net of proceeds from
insurance recoveries were
The proceeds from sale of property and equipment were
Dividends, Share Repurchases and Share-Based Compensation Awards
Our 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
24
--------------------------------------------------------------------------------
Index
During the first three months of 2022, we paid a regular dividend of
We have been authorized by our Board of Directors to repurchase shares of the
Company's outstanding common stock at management's discretion up to a total
value of
During the first three months of 2022, we issued 22,691 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
Working Capital
In the restaurant industry, virtually all sales are either for third-party credit or debit card or cash. 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
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
Material Commitments
There have been no material changes in our material commitments other than in the ordinary course of business since the end of 2021. Refer to the sub-section entitled "Material Commitments" under the section entitled "Liquidity and Capital Resources" presented in the MD&A of our 2021 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. The adoption of the accounting guidance on income taxes discussed in Note 1 did not have a significant impact on our consolidated financial position or results of operations. See Note 1 regarding the impact of the adoption of the convertible instruments guidance.
25
--------------------------------------------------------------------------------
Index
Critical Accounting Estimates
We prepare our Consolidated Financial Statements in conformity with accounting
principles generally accepted in
Our significant accounting policies are discussed in Note 2 to the Consolidated Financial Statements contained in the 2021 Form 10-K. 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
Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.
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 three months of 2022, 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. It is possible that we may recognize impairment as a result of the unknown impacts of the COVID-19 pandemic and our response.
26
--------------------------------------------------------------------------------
Index
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
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 three months of 2022 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.
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 three months of 2022 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.
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.
27
--------------------------------------------------------------------------------
Index
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.
© Edgar Online, source
