CRACKER BARREL OLD COUNTRY STORE, INC. Cracker Barrel Old Country Store, Inc. and its subsidiaries (collectively, the "Company," "our" or "we") are principally engaged in the operation and development inthe United States of the Cracker Barrel Old Country Store® ("Cracker Barrel") concept. AtApril 30, 2021 , we operated 664Cracker Barrel stores in 45 states and 37Maple Street Biscuit Company ("MSBC") company-owned locations in eight states. AtApril 30, 2021 , MSBC had seven franchised locations. 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. 22
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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 endedJuly 31, 2020 (the "2020 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 risks and uncertainties associated with the novel coronavirus ("COVID-19") pandemic, including the duration of the COVID-19 pandemic and its ultimate impact on our business, levels of consumer confidence in the safety of dine-in restaurants, restrictions (including occupancy restrictions) imposed by governmental authorities, the effectiveness of cost saving measures undertaken throughout our operations, disruptions to our operations as a result of the spread of COVID-19 in our workforce, and our increased level of indebtedness, or additional constraints on our expenditures or cash management, brought on by additional borrowing or amendments to our credit facility necessitated by the COVID-19 pandemic; general or regional economic weakness, business and societal conditions, and the weather impact on sales and customer travel; discretionary income or personal expenditure activity of our customers; information technology-related incidents, including data privacy and information security breaches, whether as a result of infrastructure failures, employee or vendor errors, or actions of third parties; our ability to identify, acquire and sell successful new lines of retail merchandise and new menu items at our restaurants; our ability to sustain or the effects of plans intended to improve operational or marketing execution and performance; uncertain performance of acquired businesses, strategic investments and other initiatives that we may pursue now or in the future; changes in or implementation of additional governmental or regulatory rules, regulations and interpretations affecting tax, wage and hour matters, health and safety, pensions, insurance or other undeterminable areas; the effects of plans intended to promote or protect our brands and products; commodity price increases; the ability of and cost to us to recruit, train, and retain qualified hourly and management employees; the effects of increased competition at our locations on sales and on labor recruiting, cost, and retention; workers' compensation, group health and utility price changes; consumer behavior based on negative publicity, changes in consumer health or dietary trends or safety aspects of our food or products or those of the restaurant industry in general, including concerns about outbreaks of infectious disease as well as the possible effects of such events on the price or availability of ingredients used in our restaurants; the effects of our indebtedness and associated restrictions on our financial and operating flexibility and ability to execute or pursue our operating plans and objectives; changes in interest rates, increases in borrowed capital or capital market conditions affecting our financing costs and ability to refinance all or portions of our indebtedness; the effects of business trends on the outlook for individual restaurant locations and the effect on the carrying value of those locations; our ability to retain key personnel; the availability and cost of suitable sites for restaurant development and our ability to identify those sites; our ability to enter successfully into new geographic markets that may be less familiar to us; changes in land, building materials and construction costs; the actual results of pending, future or threatened litigation or governmental investigations and the costs and effects of negative publicity or our ability to manage the impact of social media associated with these activities; economic or psychological effects of natural disasters or other unforeseen events such as terrorist acts, social unrest or war and the military or government responses to such events; disruptions to our restaurant or retail supply chain, including as a result of COVID-19; changes in foreign exchange rates affecting our future retail inventory purchases; the impact of activist shareholders; our reliance on limited distribution facilities and certain significant vendors; implementation of new or changes in interpretation of existing accounting principles generally accepted inthe United States of America ("GAAP") and those factors contained in Part I, Item 1A of the 2020 Form 10-K, as well as the factors described under "Critical Accounting Estimates" on pages 36-38 of this report or, from time to time, in our filings with theSecurities 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 theSEC or in our other public disclosures. 23
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Overview
Management continues to believe that the Cracker Barrel brand remains one of the strongest and most differentiated brands in the restaurant industry. Our priorities for 2021 consist of the following:
• Enhancing the Core business to drive sustainable sales growth and continued
business model improvements. During 2021, we are focused on driving topline
sales by further growing our off-premise business even as in-person dining
volumes have begun to increase during the ongoing COVID-19 pandemic recovery,
introducing menu and beverage innovation and evolving our digital
infrastructure and digital strategy to improve the guest experience across all
channels. Additionally, in response to the COVID-19 pandemic, we have
instituted operational protocols to comply with applicable regulatory
requirements to protect the health and safety of our employees and guests while
maintaining the service levels that guests associate with our brand, and we
have implemented, and continue to adapt, various strategies to support the
recovery of our business and navigate through the uncertain environment.
• Expanding the Footprint by building profitable new
core and developing markets. We currently anticipate adding two stores during
2021, both of which opened during the first nine months of 2021.
• Extending the Brand to drive further shareholder value creation by developing
new platforms to drive growth, such as MSBC, a recently acquired growth-stage
fast casual concept that we believe provides us with a vehicle to drive growth
in a complementary segment of the restaurant industry.
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 consist of restaurant sales of stores
open at least six full quarters at the beginning of the year and are measured on
comparable calendar weeks. This measure excludes the impact of new store
openings. This measure also excludes sales related to MSBC and Holler & Dash
Biscuit HouseTM ("Holler & Dash") since MSBC was acquired by the Company in the
first quarter of 2020 and our Holler & Dash locations have been converted into
MSBC locations. Comparable store restaurant sales are expressed as a percentage
of an increase or decrease in restaurant sales versus the same period in the
prior year. Total comparable store restaurant sales for the current year period
are subtracted from total comparable store restaurant sales for the prior year
period to calculate the absolute dollar change. The absolute dollar change is
divided by the prior year comparable store restaurant sales. This amount,
expressed as a percentage, is the comparable store restaurant sales discussed in
MD&A. See the section below entitled "Total Revenue" for the comparable store
restaurant sales percentages for the third quarter and first nine months of 2021
as well as the same periods in the prior year. Management uses comparable store
restaurant sales as a measure of sales growth to evaluate how established stores
have performed over time. We believe this measure is useful for investors to
provide a consistent comparison of restaurant sales results and trends across
periods within our core, established restaurant base, unaffected by results of
store openings, closings, and other transitional changes.
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• Comparable store retail sales consist of retail sales of stores open at
least six full quarters at the beginning of the year and are measured on
comparable calendar weeks. This measure excludes the impact of new store
openings. Comparable store retail sales are expressed as a percentage of an
increase or decrease in retail sales versus the same period in the prior year.
Total comparable store retail sales for the current year period are subtracted
from total comparable store retail sales for the prior year period to calculate
the absolute dollar change. The absolute dollar change is divided by the prior
year comparable store retail sales. This amount, expressed as a percentage, is
the comparable store retail sales discussed in MD&A. See the section below
entitled "Total Revenue" for the comparable store retail sales percentages for
the third quarter and first nine months of 2021 as well as the same periods in
the prior year. Management uses comparable store retail sales as a measure of
sales growth to evaluate how established stores have performed over time. We
believe this measure is also useful for investors to provide a consistent
comparison of retail sales results and trends across periods within our core,
established store base, unaffected by results of store openings, closings and
other transitional changes.
• Comparable restaurant guest traffic reflects both dine-in and off-premise
occasions. Traffic growth is measured as the change in entrees sold, which
includes entrees sold in our dine-in and off-premise business. Comparable
restaurant guest traffic consists of entrees sold in stores open at least six
full quarters at the beginning of the year and are measured on comparable
calendar weeks. This measure excludes guest traffic related to MSBC and Holler
& Dash since MSBC was acquired by the Company in the first quarter of 2020 and
our Holler & Dash locations have been converted into MSBC locations. Comparable
restaurant guest traffic is expressed as a percentage of an increase or decrease
in restaurant guest traffic versus the same period in the prior year. This
amount, expressed as a percentage, is the guest traffic discussed in MD&A. See
section below entitled "Total Revenue" for the restaurant guest traffic
percentages for the third quarter and first nine months of 2021 as well as the
same periods in the prior year. Management uses this measure to evaluate how
established stores have performed over time excluding growth achieved through
menu price and sales mix change. We believe this measure is useful for
investors because an increase in comparable restaurant guest traffic represents
an increase in guests purchasing from our established restaurants as well as an
increase in the likelihood of a retail sales conversion for guests intending to
dine, while also providing an indicator as to the development of our brand and
the effectiveness of our marketing strategy.
• Average check per guest is an indicator which management uses to analyze
the dollars spent per guest in our stores on restaurant purchases. Average
check is calculated using the comparable store restaurant sales (as defined
above) divided by comparable restaurant guest traffic (as defined above).
Average check is expressed as a percentage of an increase or decrease in average
check versus the same period in the prior year. Average check for the current
year period is subtracted from average check for the prior year period to
calculate the absolute dollar change. The absolute dollar change is divided by
the prior year average check number. This amount, expressed as a percentage, is
the average check number discussed in MD&A. This measure aids management in
identifying trends in guest preferences as well as the effectiveness of menu
price increases and other menu changes. We believe this measure is useful for
investors to evaluate per guest expenditures as well as our pricing and menu
strategies. See the section below entitled "Total Revenue" for the average
check percentages for the third quarter and first nine months of 2021 as well as
the same periods in the prior year.
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Results of Operations
The following table highlights our operating results by percentage relationships
to total revenue for the quarter and nine months ended
Quarter Ended Nine Months Ended
April 30, May 1, April 30, May 1,
2021 2020 2021 2020
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold (exclusive of
depreciation and rent) 28.8 31.7 30.9 31.0
Labor and other related expenses 35.1 43.7 35.1 36.4
Other store operating expenses 23.5 32.1 24.3 23.3
General and administrative expenses 5.2 6.5 5.5 5.3
Gain on sale and leaseback transaction - - (10.7 ) -
Impairment - 4.3 - 0.9
Operating income (loss) 7.4 (18.3 ) 14.9 3.1
Interest expense, net 1.4 1.2 1.5 0.6
Income (loss) before income taxes 6.0 (19.5 ) 13.4 2.5
Provision for income taxes (income tax
benefit) 1.3 (12.8 ) 2.7 (1.7 )
Net loss from unconsolidated subsidiary - (30.7 ) - (7.0 )
Net income (loss) 4.7 % (37.4 %) 10.7 % (2.8 %)
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 and nine
months ended April 30, 2021 and May 1, 2020 as well as the number of
Company-owned and franchised units at the end of the quarters and nine months
ended April 30, 2021 and May 1, 2020 :
Quarter Ended Nine Months Ended
April 30, May 1, April 30, May 1,
2021 2020 2021 2020
Net change in units:
Company-owned - Cracker Barrel 1 3 2 4
Company-owned - MSBC 1 - 2 28
Company-owned - Holler & Dash - (6 ) - (7 )
Franchise - MSBC - 1 1 1
Units in operation at end of the period:
Company-owned - Cracker Barrel 664 664 664 664
Company-owned - MSBC 37 28 37 28
Company-owned - Holler & Dash - - - -
Total Company -owned units at end of the
period 701 692 701 692
Franchise - MSBC 7 6 7 6
Effective October 10, 2019 , we acquired MSBC. In 2020, we converted six of our
former Holler & Dash locations into MSBC locations. These six locations were
temporarily closed during the third quarter of 2020.
Total Revenue
Total revenue for the third quarter and first nine months of 2021 increased
64.9% and 0.5%, respectively, as compared to the same periods in the prior year.
While recovery is progressing and all dining rooms were open to some extent
during the third quarter of 2021, the COVID-19 pandemic continues to negatively
impact our sales and traffic as a result of both changes in consumer behavior
and federal, state and local governmental authorities' continuation of various
restrictions on travel, group gatherings and limitations on dine-in services.
Dining room service was operational to varying degrees, yet in most locations
continued to be impacted by capacity restrictions, social distancing guidelines,
and decreased consumer demand for in-person dining.
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The following table highlights the key components of revenue for the quarter and nine months endedApril 30, 2021 as compared to the same periods in the prior year: Quarter Ended Nine Months Ended April 30, May 1, April 30, May 1, 2021 2020 2021 2020 Revenue in dollars: Restaurant$ 569,402 $ 360,379 $ 1,605,869 $ 1,630,501 Retail 144,014 72,165 431,170 397,226 Total revenue$ 713,416 $ 432,544 $ 2,037,039 $ 2,027,727 Total revenue by percentage relationships: Restaurant 79.8 % 83,3 % 78.8 % 80.4 % Retail 20.2 % 16.7 % 21.2 % 19.6 % Average unit volumes(1): Restaurant$ 842.5 $ 535.7 $ 2,380.1 $ 2,442.9 Retail 216.8 108.7 649.9 600.5 Total revenue$ 1,059.3 $ 644.4 $ 3,030.0 $ 3,043.4 Comparable store sales increase (decrease) (2): Restaurant 56.5 % (41.7 %) (2.6 %) (11.8 %) Retail 102.8 % (45.5 %) 8.4 % (12.7 %) Restaurant and retail 64.2 % (42.3 %) (0.4 %) (12.0 %) Average check increase 5.7 % 1.9 % 2.8 % 3.1 % Comparable restaurant guest traffic increase (decrease)(2): 50.8 % (43.6 %) (5.4 %) (14.9 %) (1) Average unit volumes include sales of all stores except for MSBC and Holler & Dash. (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 and Holler & Dash. For the third quarter of 2021, our comparable store restaurant sales increased as a result of a 50.8% guest traffic increase and a 5.7% average check increase (including a 2.8% average menu price increase) as compared to the prior year third quarter. For the first nine months of 2021, our comparable store restaurant sales decrease resulted from a 5.4% guest traffic decrease as compared to the prior year period partially offset by a 2.8% average check increase (including a 1.7% average menu price increase) as compared to the prior year period. Our retail sales are made substantially to our restaurant guests. For the third quarter of 2021, our comparable store retail sales increase resulted primarily from the guest traffic increase and strong performance in the apparel and accessories, food and convenience, toys and décor merchandise categories. For the first nine months of 2021, our comparable retail sales increase resulted from strong performance in the toys, food and convenience, and décor merchandise categories as compared to the same period in the prior year partially offset by the guest traffic decrease. 27
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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 third quarter and first nine months of 2021 as compared to the same periods
in the prior year:
Quarter Ended Nine Months Ended
April 30, May 1, April 30, May 1,
2021 2020 2021 2020
Cost of Goods Sold in dollars:
Restaurant $ 138,481 $ 94,231 $ 411,563 $ 416,364
Retail 66,898 42,907 217,944 212,795
Total Cost of Goods Sold $ 205,379 $ 137,138 $ 629,507 $ 629,159
Cost of Goods Sold by percentage of revenue:
Restaurant 24.3 % 26.1 % 25.6 % 25.5 %
Retail 46.5 % 59.5 % 50.5 % 53.6 %
The decrease in restaurant cost of goods sold as a percentage of restaurant
revenue in the third quarter of 2021 as compared to the same period in the prior
year primarily resulted from lower food waste, our menu price increase
referenced above and a shift to lower cost menu items partially offset by
commodity inflation of 0.6%. Lower food waste and lower cost menu items
accounted for decreases of 0.9% and 0.3%, respectively, as a percentage of
restaurant revenue for the third quarter of 2021 as compared to the same period
in the prior year.
The increase in restaurant cost of goods sold as a percentage of restaurant
revenue in the first nine months of 2021 as compared to the same period in the
prior year was primarily the result of a shift to higher cost items and
commodity inflation of 1.7% partially offset by our menu price increase
referenced above and lower food waste. Higher cost menu items accounted for an
increase of 0.6% as a percentage of restaurant revenue for the first nine months
of 2021 as compared to the same period in the prior year. Lower food waste
accounted for a decrease of 0.2% in restaurant cost of goods sold as a
percentage of restaurant revenue for the first nine months of 2021 as compared
to the same period in the prior year.
We presently expect the rate of commodity inflation to be approximately 2.4% in 2021.
The decrease in retail cost of goods sold as a percentage of retail revenue in
the third quarter of 2021 as compared to the third quarter of 2020 resulted from
higher initial margin, a decrease in discounts and allowances, lower markdowns,
lower freight expense, the change in the provision for obsolete inventory and
lower inventory shrinkage.
Third Quarter
Decrease as a Percentage of
Total Revenue
Higher initial margin (3.6 %)
Discounts and allowances (3.3 %)
Markdowns (3.0 %)
Freight expense (1.2 %)
Provision for obsolete inventory (1.2 %)
Inventory shrinkage (0.7 %)
The decrease in retail cost of goods sold as a percentage of retail revenue in
the first nine months of 2021 as compared to the first nine months of 2020
resulted primarily from lower markdowns, the change in provision for obsolete
inventory, higher initial margin, lower inventory shrinkage and lower freight
expense partially offset by an increase in discounts and allowances.
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First Nine Months
(Decrease) Increase as a
Percentage of Total Revenue
Markdowns (2.1 %)
Provision for obsolete inventory (0.4 %)
Higher initial margin (0.4 %)
Inventory shrinkage (0.3 %)
Freight expense (0.1 %)
Discounts and allowances 0.3 %
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 third quarter and
first nine months of 2021 as compared to the same periods in the prior year:
Quarter Ended Nine Months Ended
April 30, May 1, April 30, May 1,
2021 2020 2021 2020
Labor and related expenses 35.1 % 43.7 % 35.1 % 36.4 %
This percentage change resulted primarily from the following:
Third Quarter
(Decrease) Increase as a
Percentage of Total Revenue
Store management compensation (5.9 %)
Miscellaneous wages (2.7 %)
Employee health care expense (1.2 %)
Payroll tax expense (0.6 %)
Workers' compensation expense (0.5 %)
Store bonus expense 1.9 %
Store hourly labor 0.3 %
This percentage change resulted primarily from the following:
First Nine Months
(Decrease) Increase as a
Percentage of Total Revenue
Miscellaneous wages (0.8 %)
Store management compensation (0.8 %)
Employee health care expense (0.2 %)
Workers' compensation expense (0.1 %)
Payroll taxes expense (0.1 %)
Preopening labor expense (0.1 %)
Store hourly labor 0.7 %
Store bonus expense 0.2 %
In response to the COVID-19 pandemic, in March 2020 , we temporarily closed the
dining rooms in all of our restaurants and operated with pick-up or delivery
only. As a result, in general, certain expenses for the third quarter and first
nine months of 2020 as a percentage of total revenue were materially increased
by the significant reduction in total revenue and reduced operations caused by
the impact of the COVID-19 pandemic. During the third quarter of 2021, the
dining rooms in all of our restaurants were open to some extent. As a result,
in general, during the third quarter of 2021 and the first nine months of 2021
as compared to the same periods in the prior year, certain expenses as a
percentage of total revenue materially decreased by the significant increase in
total revenue and increased operations.
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In particular, the decreases in store management compensation, workers' compensation expense and payroll taxes expense as a percentage of total revenue in the third quarter and first nine months of 2021 as compared to the same periods in the prior year were primarily driven by the increases in total revenue in 2021. Additionally, the decrease in preopening labor expense as a percentage of total revenue in the third quarter of 2021 as compared to the same period in the prior year were primarily driven by the increase in total revenue in the third quarter of 2021. The decreases in miscellaneous wages as a percentage of total revenue for the third quarter and first nine months of 2021 as compared to the same periods in the prior year resulted primarily from the non-recurrence of retention pay for our field employees; in the third quarter of 2020, we paid certain of our field employees retention pay due to reduced operations as a result of the COVID-19 pandemic. Lower employee health care expenses as a percentage of total revenue for the third quarter and first nine months of 2021 as compared to the same periods in the prior year resulted primarily from lower claims activity. The increases in store bonus expense as a percentage of total revenue for the third quarter and first nine months of 2021 as compared to the same periods in the prior year resulted from better performance against financial objectives for certain components of the incentive plan in the third quarter and first nine months of 2021 as compared to the same periods in the prior year. The increases in store hourly labor expense as a percentage of total revenue for the third quarter and first nine months of 2021 as compared to the same periods in the prior year resulted primarily from wage inflation exceeding menu price increases and a reduction in productivity.
Other Store Operating Expenses
Other store operating expenses include all store-level operating costs, the
major components of which are depreciation, operating supplies, utilities,
advertising, maintenance, rent, credit and gift card fees, third party delivery
fees, real and personal property taxes, general insurance, preopening expenses
excluding labor 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 third quarter and first nine months of 2021 as compared to
the same periods in the prior year:
Quarter Ended Nine Months Ended
April 30, May 1, April 30, May 1,
2021 2020 2021 2020Other store operating expenses 23.5 % 32.1 % 24.3 %
23.3 %
This percentage changes resulted primarily from the following:
Third Quarter
Decrease as a Percentage
of Total Revenue
Depreciation expense (2.8 %)
Maintenance expense (1.3 %)
Advertising expense (1.3 %)
Utilities expense (1.1 %)
Real and personal property taxes expense (0.8 %)
Supplies expense (0.6 %)
Rent expense (0.4 %)
Loss on disposition of property and equipment (0.2 %)
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This percentage change resulted primarily from the following:
First Nine Months
Increase (Decrease) as a
Percentage of Total Revenue
Rent expense 0.9 %
Other store expenses 0.5 %
Supplies expense 0.3 %
Depreciation expense (0.3 %)
Loss on disposition of property and equipment (0.2 %)
The decreases in maintenance expense, advertising expense, real and personal property taxes expense and loss on asset disposition as a percentage of total revenue in the third quarter of 2021 as compared to the same period in the prior year were primarily driven by the increase in total revenue in the third quarter of 2021. Additionally, the decreases in depreciation expense and loss on disposition of property and equipment for the first nine months of 2021 as compared to the same period in the prior year were primarily driven by the increase in total revenue in the first nine months of 2021. The decreases in depreciation expense as a percentage of total revenue for the third quarter and first nine months of 2021 as compared to the same periods in the prior year resulted primarily from lower spending on capital expenditures and the increases in total revenue in 2021. The decrease in utilities expense as a percentage of total revenue for the third quarter of 2021 as compared to the same period in the prior year was primarily driven by the increase in total revenue in 2021 partially offset by the severe weather impact experienced inTexas during the third quarter of 2021. The decrease in supplies expense as a percentage of total revenue for the third quarter of 2021 as compared to the same period in the prior year was primarily driven by the increase in total revenue in the third quarter of 2021 partially offset by higher costs. For both the third quarter and first nine months of 2021, we incurred higher costs associated with the growth in our off-premise business and increased operations in our dining rooms during the third quarter of 2021. The increase in supplies expense as a percentage of total revenue for the first nine months of 2021 as compared to the same period in the prior year was primarily driven by the higher costs referred above. The decrease in rent expense as a percentage of total revenue for the third quarter of 2021 as compared to the same period in the prior year was primarily driven by increases in total revenue in 2021 partially offset by the sale and leaseback transaction described below. The increase in rent expense as a percentage of total revenue for the first nine months of 2021 as compared to the same period in the prior year resulted primarily from the sale and leaseback transaction involving 62 of our ownedCracker Barrel stores completed onAugust 4, 2020 . The aggregate initial annual rent payment for these properties is approximately$10,393 . Additionally, the related rent expense includes$3,183 and$9,551 , respectively, recorded in the third quarter and first nine months of 2021 for the non-cash amortization of the asset recognized from the gain on the Company's sale and leaseback transactions. See Note 10 to the Condensed Consolidated Financial Statements for additional information regarding the Company's sale and leaseback transactions.
The increase in other store expenses as a percentage of total revenue for the first nine months of 2021 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 third quarter and first nine months of 2021 as compared to the same periods in the prior year:
Quarter Ended Nine Months Ended
April 30, May 1, April 30, May 1,
2021 2020 2021 2020General and administrative expenses 5.2 % 6.5 % 5.5 % 5.3 %
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This percentage change resulted primarily from the following:
Third Quarter
(Decrease) Increase as a
Percentage of Total
Revenue
Payroll and related expense (2.5 %)
Professional fees expense (0.5 %)
Other expense (0.5 %)
Depreciation expense (0.3 %)
Incentive compensation expense 2.6 %
This percentage change resulted primarily from the following:
First Nine Months
Increase (Decrease) as a
Percentage of Total
Revenue
Incentive compensation expense 0.7 %
Payroll and related expense (0.4 %)
The decreases in payroll and related expense, professional fees expense, and
other expenses for the third quarter of 2021 as a percentage of total revenue as
compared to the same period in the prior year were primarily driven by cost
savings initiatives implemented in response to the COVID-19 pandemic and the
increase in total revenue in the third quarter of 2021. Additionally, the
decrease in payroll and related expense for the first nine months of 2021 as
compared to the same period in the prior year was also primarily driven by the
cost savings measures and the increase in total revenue in the first nine months
of 2021.
The increases in incentive compensation expense as a percentage of total revenue
in the third quarter and first nine months of 2021 as compared to the same
periods in the prior year resulted primarily from better performance against
financial objectives during the third quarter and first nine months of 2021 as
compared to the same periods in the prior year.
The decrease in depreciation expense during the third quarter of 2021 as a percentage of total revenue as compared to the same period in the prior year was primarily due to the increase in revenue in the third quarter of 2021 as compared to the same period in the prior year.
Gain on Sale and Leaseback Transaction
OnAugust 4, 2020 , the Company completed a sale and leaseback transaction involving 62 of its ownedCracker Barrel stores and recorded a gain of$217,722 which is recorded in the gain on sale and leaseback transaction line in the Condensed Consolidated Statement of Income in the first quarter of 2021. See Note 10 to the Condensed Consolidated Financial Statements for additional information regarding this sale and leaseback transaction.
Impairment
During the third quarter of 2020, we determined that five leasedCracker Barrel stores were impaired, resulting in impairment charges of$18,336 . Each of these leased stores was impaired because of declining operating performance and resulting negative cash flow projections as a result of the impact of the COVID-19 pandemic. It is possible that we may recognize additional impairment as a result of the unknown impacts of the COVID-19 pandemic and our response. The Company did not incur impairment charges during the first nine months of 2021. 32
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Interest Expense, net
The following table highlights interest expense, net in dollars for the third
quarter and first nine months of 2021 as compared to the same periods in the
prior year:
Quarter Ended Nine Months Ended
April 30, May 1, April 30, May 1,
2021 2020 2021 2020
Interest expense, net
The increases in interest expense for the third quarter and first nine months of
2021 as compared to the same periods in the prior year resulted primarily from
higher debt levels caused by our borrowing under our 2019 Revolving Credit
Facility in response to the COVID-19 pandemic, higher weighted average interest
rates and the cessation of interest income on Punch Bowl Social ("PBS")
promissory notes written off in the third quarter of 2020. Additionally, as
part of our amendment to the 2019 Revolving Credit Facility in the third quarter
of 2021, we incurred additional interest expense of $452 related to the
write-off of deferred financing costs.
Provision for Income Taxes (Income Tax Benefit)
The following table highlights the provision for income taxes (income tax
benefit) as a percentage of income (loss) before income taxes ("effective tax
rate") for the third quarter and first nine months of 2021 as compared to the
same periods in the prior year:
Quarter Ended Nine Months Ended
April 30, May 1, April 30, May 1,
2021 2020 2021 2020
Effective tax rate 21.9 % 65.5 % 20.0 % (66.0 %)
The decrease in the effective rate in the third quarter of 2021 and increase in
the first nine months of 2021 as compared to the same periods in the prior year
are primarily due to our recognition of loss on our investment in PBS , which is
excluded from income when calculating the effective tax rate and the tax
benefits recorded for FICA Tip and Work Opportunity federal tax credits. We
currently expect our effective tax rate for 2021 to be approximately 18% to 19%.
The Company's quarterly tax provision (benefit) for income taxes is calculated
using the annual effective tax rate method ("AETR method"), which applies an
estimated annual effective tax rate to pre-tax income or loss. However, in the
prior year, the Company recorded its interim income tax provision using the
discrete method as of May 1, 2020 , as allowed under Accounting Standards
Codification ("ASC") 740-270, Accounting for Income Taxes - Interim Reporting.
The Company used the discrete method rather than the AETR method due to
significant variations in income tax expense relative to projected annual
pre-tax income (loss). Use of the AETR method would have resulted in a
disproportionate and unreliable tax rate in the prior period.
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 atJuly 31, 2020 was sufficient to finance all of our growth, deferred payment of our dividend declared inMarch 2020 that was originally scheduled to be paid inMay 2020 and was subsequently paid inSeptember 2020 , working capital needs and other cash payment obligations in the first nine months of 2021. Based on the actions taken by management, such as cost savings measures, the suspension of dividend payments during 2021 except for the deferred dividend paid inSeptember 2020 , the temporary suspension of share repurchases during 2021 year-to-date and the recent completion of sale and leaseback transactions, management expects to meet its obligations over the next twelve months. 33
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Cash Generated From Operations
Our operating activities provided net cash of$212,537 for the first nine months of 2021, representing an increase from the$87,232 net cash provided during the first nine months of 2020. This increase primarily reflected the timing of payments for accounts payable and certain taxes and lower bonus payments made in 2021 as a result of the prior year impact of COVID-19 pandemic on our operations in 2020.
Borrowing Capacity and Debt Covenants
OnSeptember 5, 2018 , we entered into a five-year$950,000 revolving credit facility ("2019 Revolving Credit Facility"). The 2019 Revolving Credit Facility also contains an option to increase the revolving credit facility by$300,000 . In the fourth quarter of 2020, we borrowed an additional$39,395 under this option for a one-year period. In the third quarter of 2021, we entered into an amendment to the 2019 Revolving Credit Facility which reduced the commitment amount from$950,000 to$800,000 . AtApril 30, 2021 , we had$614,395 of outstanding borrowings under the 2019 Revolving Credit Facility and$31,626 of standby letters of credit related to securing reserved claims under our workers' compensation insurance and ourJuly 29, 2020 andAugust 4, 2020 sale and leaseback transactions, which reduce our borrowing availability under the 2019 Revolving Credit Facility. AtApril 30, 2021 , we had$193,374 in borrowing availability under our 2019 Revolving Credit Facility. During the first nine months of 2021, we repaid$395,000 of borrowings and borrowed an additional$60,000 under the 2019 Revolving Credit Facility. See Note 5 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. As a result of the negative impact of the COVID-19 pandemic on our financial position and results of operations, we have obtained waivers for the financial covenants for the fourth quarter of 2020 and the first and second quarters of 2021 ("Covenant Relief Period") as well as for the third and fourth quarters of 2021 ("Extended Covenant Relief Period"). During these relief periods, we are required to maintain liquidity (defined as the availability under the 2019 Revolving Credit Facility plus unrestricted cash and cash equivalents) of at least$140,000 . Additionally, during the Extended Covenant Relief Period, our cash payments with respect to capital expenditures may not exceed$70,000 in the aggregate. As ofApril 30, 2021 , cash payments with respect to capital expenditures during the Extended Covenant Relief Period were$12,704 .
Capital Expenditures and Proceeds from Sale of Property and Equipment
Capital expenditures (purchase of property and equipment) net of proceeds from insurance recoveries were$44,115 for the first nine months of 2021 as compared to$82,645 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 during the first nine months of 2021 as compared to the first nine months of 2020 resulted primarily from lower capital expenditures for existing stores as well as our decreases in new store construction, store remodels and other similar cost-saving measures in response to the COVID-19 pandemic. We estimate that our capital expenditures during 2021 will be approximately$70,000 . This estimate includes the acquisition of sites and construction costs of newCracker Barrel stores and new MSBC locations that have opened or that we continue to expect to open during 2021, as well as for acquisition and construction costs for store locations that we continue to plan to be opened in 2022. We intend to fund our capital expenditures with cash generated by operations and cash on hand as the result of borrowings under our 2019 Revolving Credit Facility, as necessary. See the discussion above under "Borrowing Capacity and Debt Covenants" regarding a debt covenant restriction on our cash payment for capital expenditures. The proceeds from sale of property and equipment were$149,910 for the first nine months of 2021 as compared to$1,827 for the same period in the prior year. This increase primarily relates to the sale and leaseback transaction entered into onAugust 4, 2020 . See Note 10 to the Condensed Consolidated Financial Statements for additional information regarding this sale and leaseback transaction. 34
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EffectiveOctober 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, if any. The first installment of$1,500 , to be held as security, was paid to the principal seller in the first quarter of 2021, and the remaining amount, if any, will be paid in a final installment to the sellers on the two-year anniversary of closing. 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.
Punch Bowl Social
EffectiveJuly 18, 2019 , we entered into a strategic relationship withPBS , a food, beverage and entertainment concept, by purchasing a non-controlling interest in the concept. As part of the transaction, we agreed to fundPBS up to$51,000 through calendar 2020, of which we funded$35,500 during the first nine months of 2020, for a total of$48,000 . We believed the investment inPBS provided us with a growth vehicle to deliver additional shareholder value. However, as a result of the COVID-19 pandemic, PBS Holdco's wholly-owned subsidiary,PBS BrandCo, LLC ("Brandco") suspended all operations at each of its 19 locations and laid off substantially all restaurant and corporate employees in the third quarter of 2020. OnMarch 20, 2020 , the primary lender under Brandco's secured credit facility provided notice of the lender's intention to foreclose on its collateral interest in Brandco unless we repaid or unconditionally guaranteed the indebtedness. In keeping with our strategy of concentrating our resources on our core business during the COVID-19 pandemic, and in light of the substantial uncertainties surroundingPBS business coming out of the COVID-19 pandemic, we determined not to invest further resources to prevent foreclosure or otherwise provide additional capital toPBS . In the third quarter of 2020, we recorded a loss of$132,878 , which represented our equity investment inPBS and the principal and accumulated interest under the outstanding unsecured indebtedness ofPBS held by the Company.
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. During the Covenant Relief Period described above, we are subject to restrictions on our ability to pay dividends (other than the deferred dividend payment that we paid onSeptember 2, 2020 ). Following the Covenant Relief Period, 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 Cash Availability is at least$100,000 immediately after giving effect to the payment of any such dividends, 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. Additionally, during the Extended Covenant Relief Period, we are subject to additional restrictions on our ability to pay dividends. We were prohibited from declaring or paying cash dividends during the third quarter of 2021. We may declare but not pay cash dividends during the fourth quarter of 2021. To preserve available cash during the COVID-19 pandemic and in light of the uncertainties as to its duration and economic impact, we deferred payment of the dividend of$1.30 per share declared in the third quarter of 2020 untilSeptember 2, 2020 to shareholders of record onAugust 14, 2020 . Additionally, we temporarily suspended all further dividend payments under the Company's dividend program until the first quarter of 2022. In the fourth quarter of 2021, in light of the ongoing recovery from the COVID-19 pandemic, our Board of Directors resumed our dividend program and approved a dividend payable onAugust 6, 2021 to shareholders of record onJuly 16, 2021 of$1.00 per share.
In response to the COVID-19 pandemic, we have temporarily suspended all share repurchases, subject to the ongoing evaluation of our Board of Directors in light of changing market dynamics.
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During the first nine months of 2021, we issued 28,976 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$2,127 . 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 positive working capital of$144,915 atApril 30, 2021 versus positive working capital of$191,956 atJuly 31, 2020 . The change in working capital fromJuly 31, 2020 toApril 30, 2021 primarily resulted from the decrease in cash, the timing of payments for accounts payable and certain taxes and an increase in the current liability for leases partially offset by the temporary suspension of dividend payments. The decrease in cash resulted primarily from debt payments partially offset by cash generated by operations and proceeds received from the sale and leaseback transaction completed onAugust 4, 2020 .
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 2020. Refer to the sub-section entitled "Material Commitments" under the section entitled "Liquidity and Capital Resources" presented in the MD&A of our 2020 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 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 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 inthe 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 2020 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. 36
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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 nine months of 2021, 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.
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 first 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. 37
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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 nine months of 2021 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 nine months
of 2021 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.
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.
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