Description
Filed with the SEC from Aug 30 to Sep 05:
Cracker Barrel Old Country Store (CBRL)
Activist investor and restaurant-industry specialist Biglari Holdings (ticker: BH) responded to Cracker Barrel's decision to reject Biglari's proposed nomination of two directors to the Cracker Barrel board, including the investment company's founder and CEO, Sardar Biglari. In its rejection, CBRL cited concerns about "potential conflicts of interest" with rival restaurant Steak 'n Shake, which is owned by Biglari, and it suggested that Biglari propose director nominees who aren't "executive officers or directors of any other restaurant company that competes with Cracker Barrel." Biglari called CBRL's counterproposal "not serious." Biglari also disclosed that it continues to own 4,064,509 shares (17.5% of the total voting shares).
BUSINESS OVERVIEW
OVERVIEW
Cracker Barrel Old Country Store, Inc. (“we,” “us,” “our” or the "Company," which reference, unless the context requires otherwise, also includes our direct and indirect wholly-owned subsidiaries), is principally engaged in the operation and development of the Cracker Barrel Old Country Store® concept (“Cracker Barrel”). We are headquartered in Lebanon, Tennessee and were organized under the laws of the State of Tennessee in August 1998 (as a successor to one of our affiliated companies). We maintain an Internet website at crackerbarrel.com. We make available free of charge through our Internet website our periodic and other reports filed with or furnished to the SEC pursuant to the Securities and Exchange Act of 1934 (the “Exchange Act”) as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. Information on our website is not deemed to be incorporated by reference into this Annual Report on Form 10-K or any other filings that we make from time to time with the SEC.
OPERATIONS
As of September 20, 2011, we operated 604 stores in 42 states. None of our stores is franchised. Our stores are intended to appeal to both the traveler and the local customer and we believe they have consistently been a consumer favorite. We are often recognized for the quality of our operations. Most recently, in September 2011, we took first place in the family-dining category in a new independent consumer survey sponsored by Nation Restaurant News. Cracker Barrel was also recognized by consumers in the new Zagat restaurant survey for having the best breakfast. Additionally, in 2011, we were named “The Most RV Friendly Sit-Down Restaurant in America” by The Good Sam Club for the tenth consecutive year.
Store Format : The format of our stores consists of a trademarked rustic, old country-store design offering a full-service restaurant menu featuring home-style country food and a wide variety of decorative and functional items featuring rocking chairs, holiday and seasonal gifts and toys, apparel, cookware and foods. All stores are freestanding buildings. Store interiors are subdivided into a dining room occupying approximately 28% of the total interior store space, and a gift shop occupying approximately 23% of such space, with the balance primarily consisting of kitchen, storage and training areas. All stores have stone fireplaces and are decorated with antique-style furnishings and other authentic and nostalgic items, reminiscent of and similar to those found and sold in the past in traditional old country stores. The front porch of each store features rows of the signature Cracker Barrel rocking chairs that can be used by guests while waiting for a table in our dining room or after enjoying a meal and are sold by the gift shop. The kitchens contain modern food preparation and storage equipment allowing for flexibility in menu variety and development.
Products : Our restaurant, which generated approximately 79% of our total revenue in 2011, offers home-style country cooking featuring many of our own recipes that emphasize authenticity and quality. Except for Christmas day, when they are closed, and Christmas Eve when they close at 2:00 p.m., our restaurants serve breakfast, lunch and dinner daily between the hours of 6:00 a.m. and 10:00 p.m. (closing at 11:00 p.m. on Fridays and Saturdays). Menu items are moderately priced. The restaurants do not serve alcoholic beverages. Breakfast items can be ordered at any time throughout the day and include juices, eggs, pancakes, bacon, country ham, sausage, grits, and a variety of biscuit specialties, such as gravy and biscuits and country ham and biscuits. Prices for a breakfast meal range from $2.99 to $8.99, and the breakfast day-part (until 11:00 a.m.) accounted for approximately 23% of restaurant sales in 2011. Lunch and dinner items include country ham, chicken and dumplings, chicken fried chicken, meatloaf, country fried steak, pork chops, fish, steak, roast beef, vegetable plates, salads, sandwiches, soups and specialty items such as pinto beans and turnip greens. Lunches and dinners range in price from $3.99 to $13.49. In 2011, lunch (11:00 a.m. to 4:00 p.m.) and dinner (4:00 p.m. to close) day-parts reflected approximately 38% and 39% of restaurant sales, respectively. We may from time to time feature new items as off-menu specials or in test menus at certain locations to evaluate possible ways to enhance customer interest and identify potential future additions to the menu. Our menu has daily dinner features that showcase a popular dinner entrée for each day of the week. There is some variation in menu pricing and content in different regions of the country for both breakfast and lunch/dinner. The average check per guest during 2011 was $9.22, which represents a 2.2% increase over the prior year.
We also offer items for sale in the gift shop that are featured on, or related to, the restaurant menu, such as pies, cornbread mix, coffee, syrups and pancake mixes. The gift shop, which generated approximately 21% of our total revenue in 2011, offers a wide variety of decorative and functional items such as rocking chairs, seasonal gifts, apparel, toys, music CD’s, cookware, old-fashioned-looking ceramics, figurines, a book-on-audio sale-and-exchange program and various other gift items, as well as various candies, preserves and other food items. Five categories (apparel, food, home, seasonal and toys) accounted for the largest shares of our retail sales in 2011 at approximately 21%, 18%, 15%, 14% and 12%, respectively. Our typical gift shop features approximately 3,200 stock keeping units (“SKU’s”). Many of the food items are sold under the “Cracker Barrel Old Country Store” brand name. We believe that we achieve high retail sales per square foot of retail selling space (approximately $398 per square foot in 2011) as compared to mall stores both by offering appealing merchandise and by having a significant source of customers who are typically restaurant guests. We served an average of approximately 6,700 restaurant guests per week in a typical store in 2011.
Product Development and Merchandising : We maintain a product development department, which develops new and improved menu items either in response to shifts in customer preferences or to create customer interest. We utilize a formal development process to ensure products brought to market have a greater likelihood of meeting our goals. Our seasonal restaurant events are designed to provide new offerings to our customer base and to increase guest traffic. Our merchandising department selects and develops products for our gift shop. We are focused on driving retail sales by converting those customers who come to us for a restaurant visit. We follow a core and seasonal theme approach to meet the expectations of our guests while also providing new offerings to maintain high purchase levels. Our music program serves to deliver sales, provides a promotional platform for us, and, deepens and extends our country lifestyle associations. Some of the most recent additions to our exclusive music program include The Grascals, Jason Michael Carrol and Kenny Rogers Gospel.
Store Management and Quality Controls : Our store management, typically consisting, at each store, of one general manager, four associate managers and one retail manager, is responsible for an average of 102 employees on two shifts. The relative complexity of operating one of our stores requires an effective management team at the individual store level. To motivate store managers to improve sales and operational performance, we maintain a bonus plan designed to provide store managers with an opportunity to share in the profits of their store. The bonus plan also rewards managers who achieve specific operational targets. We also employ district managers to support individual store managers and regional vice presidents to support individual district managers. Each district manager oversees seven to eight individual stores and each regional vice president supports seven to nine district managers. Each store is assigned to both a restaurant and a retail district manager and each district is assigned to both a restaurant and a retail regional vice president. The various levels of restaurant and retail management work closely together to allow our stores to deliver a unique, integrated guest experience.
To ensure that individual stores are operated at a high level of quality, we focus significant attention on the selection and training of store managers. The store management recruiting and training program begins with an evaluation and screening process. In addition to multiple interviews and verification of background and experience, we conduct testing designed to identify those applicants most likely to be best suited to manage store operations. Candidates who successfully pass this screening process are then required to complete an eight-week restaurant training program consisting of five weeks of in-store training and three weeks of training at our corporate facilities. The training program provides us with managers who can effectively demonstrate the ability to deliver a great guest experience through the leadership and execution of our operating systems. This program allows new managers the opportunity to become familiar with our operations, culture, management objectives, controls and evaluation criteria before assuming management responsibility. We provide our managers and hourly employees with ongoing training through various development courses taught through a blended learning approach, including a mix of hands-on, classroom, written and Internet-based training. Each store is equipped with dedicated training computers for the Internet-based computer-assisted instruction programs. Additionally, each store typically has an employee training coordinator who oversees the training of the store’s hourly employees.
Purchasing and Distribution: We negotiate directly with food vendors as to specification, price and other material terms of most food purchases. We have a contract with an unaffiliated distributor with custom distribution centers in Lebanon, Tennessee; McKinney, Texas; Gainesville, Florida; Elkton, Maryland; Kendalville, Indiana; and Ft. Mill, South Carolina. We purchase the majority of our food products and restaurant supplies on a cost-plus basis through this unaffiliated distributor. The distributor is responsible for placing food orders, warehousing and delivering food products to our stores. Deliveries are generally made once per week to the individual stores.
In 2011, four food categories (dairy (including eggs), beef, poultry and pork) accounted for the largest shares of our food purchasing expense at approximately 13%, 11%, 11% and 11%, respectively. Each of these categories includes several individual items. The single food item within these categories that accounted for the largest share of our food purchasing expense in 2011 was chicken tenderloin at approximately 5% of food purchases. Dairy is purchased through numerous vendors including local vendors. Eggs are purchased through two vendors. We purchase our beef, poultry and pork each through eight vendors. Should any food items from a particular vendor become unavailable, we believe that these food items could be obtained, or alternative products substituted, in sufficient quantities from other sources at competitive prices to allow us to avoid any material adverse effects that could be caused by such unavailability.
We purchase the majority of our retail items (approximately 84% in 2011) directly from domestic and international vendors and warehouse them at a retail distribution center in Lebanon. The distribution center, which we lease, is an approximately 370,000 square foot warehouse facility with 36 foot ceilings and 170 bays and includes an additional approximate 14,000 square feet of office and maintenance space. The distribution center fulfills retail item orders generated by our automated replenishment system and generally ships the retail orders once a week to the individual stores by a third-party dedicated freight line. Certain retail items, not centrally purchased and warehoused at the distribution center, are drop-shipped directly by our vendors to our stores. Approximately 38% of our 2011 retail purchases were directly from vendors in the People’s Republic of China. We have relationships with foreign buying agencies to source purchased product, monitor quality control and supplement product development.
Operational and Inventory Controls : Our information technology and telecommunications systems and various analytical tools are used to evaluate store operating information and provide management with reports to support prompt detection of unusual variances in food costs, labor costs or operating expenses. Management also monitors individual store restaurant and retail sales on a daily basis and closely monitors sales mix, sales trends, operational costs and inventory levels. The information generated by the information technology and telecommunication systems, analysis tools and monitoring processes is used to manage the operations of each store, replenish retail inventory levels and facilitate retail purchasing decisions. These systems and processes also are used in the development of forecasts, budget analyses and planning.
Guest Satisfaction : We are committed to providing our guests a home-style, country-cooked meal, and a variety of retail merchandise served and sold with genuine hospitality in a comfortable environment, in a way that evokes memories of the past. Our commitment to offering guests a quality experience begins with our employees. Our mission statement, “Pleasing People,” embraces guests and employees alike, and our employees are trained on the importance of that mission in a culture of mutual respect. We also are committed to staffing each store with an experienced management team to ensure attentive guest service and consistent food quality. Through the regular use of guest surveys and store visits by district managers and regional vice presidents, management receives valuable feedback that is used in our ongoing efforts to improve the stores and to demonstrate our continuing commitment to pleasing our guests. We have a guest-relations call center that takes comments and suggestions from guests and forwards them to operations or other management for information and follow up. We use an interactive voice response (“IVR”) system to monitor operational performance and guest satisfaction at all stores on an ongoing basis. We have public notices in our menus, on our website and posted in our stores informing customers and employees about how to contact us by Internet or toll-free telephone number with questions, complaints or concerns regarding services or products. We conduct training in how to gather information and investigate and resolve customer concerns. This is accompanied by comprehensive training for all store employees on our public accommodations policy and commitment to "pleasing people."
Marketing : Outdoor advertising (i.e., billboards and state department of transportation signs) is the primary advertising medium utilized to reach our guests. Outdoor advertising accounted for approximately 57% of advertising expenditures in 2011, with our having approximately 1,600 billboards at year-end. We believe we are among the top billboard advertisers in the restaurant industry. We also employ other types of media, such as radio and television, to improve awareness and increase local visits. Digital marketing is becoming a larger part of how we plan to engage our guests with our website being the hub of our activities. Through the use of tools such as email and social media, we look to further engage our guests to build affinity, increase visits to our stores and encourage visits to our website. Additionally, in July 2011, we changed our agency of record to one of the largest global integrated marketing communications agencies, which we expect will extend our reach through new messaging and refinements in our marketing strategy. In 2012, we plan to spend approximately 2.0% of our revenues on advertising which is comparable to our spending in prior years. Outdoor advertising is expected to represent approximately 53% of advertising expenditures in 2012.
STORE DEVELOPMENT
We opened eleven new stores in 2011. We plan to open fifteen new stores during 2012, one of which was open as of September 20, 2011.
Our stores are located primarily along interstate highways; however, as of September 20, 2011, 94 (or approximately 16%) of our stores are located near "tourist destinations" or are considered “off-interstate” stores. In 2012, we intend to open eight of our new stores along interstate highways as compared to seven in 2011. We believe we should pursue development of both interstate locations and off-interstate locations to capitalize on the strength of our brand associated with travelers on the interstate highway system and by locating in certain local markets where our guests live and work. We have identified approximately 500 trade areas for potential future development with characteristics that appear to be consistent with those believed to be necessary to support successful stores.
Of the 604 stores open as of September 20, 2011, we own the land and buildings for 404, while the other 200 properties are either ground leases or ground and building leases. Our store prototypes range in size from approximately 8,900 square feet to approximately 10,000 square feet including approximately 2,100 square feet of retail selling space and have dining room seating for 177 to 207 guests.
Our capital investment in new stores may differ in the future due to building design specifications, site location and site characteristics. Land costs are expected to range from $800 to $1,400 per site if purchased. Building, furniture and equipment costs are expected to be in the range of $2,300 to $2,900 per store. Pre-opening costs are expected to be approximately $350 to $400 per store.
EMPLOYEES
As of July 29, 2011, we employed approximately 67,000 people, of whom 507 were in advisory and supervisory capacities, 3,530 were in-store management positions and 41 were officers. Many store personnel are employed on a part-time basis. None of our employees are represented by any union and management considers its employee relations to be good.
COMPETITION
The restaurant industry is intensely competitive with respect to the type and quality of food, price, service, location, personnel, concept, attractiveness of facilities and effectiveness of advertising and marketing. We compete with a significant number of national and regional restaurant chains, some of which have greater resources than us, as well as locally owned restaurants. The restaurant business is often affected by changes in consumer taste; national, regional or local economic conditions; demographic trends; traffic patterns; the type, number and location of competing restaurants; and consumers’ discretionary purchasing power. In addition, factors such as inflation, increased food, labor and benefits costs and the lack of experienced management and hourly employees may adversely affect the restaurant industry in general and our restaurants in particular.
RAW MATERIALS SOURCES AND AVAILABILITY
Essential restaurant supplies and raw materials are generally available from several sources. However, in our stores, certain branded items are single source products or product lines. Generally, we are not dependent upon single sources of supplies or raw materials. Our ability to maintain consistent quality throughout our store system depends in part upon our ability to acquire food products and related items from reliable sources. When the supply of certain products is uncertain or prices are expected to rise significantly, we may enter into purchase contracts or purchase bulk quantities for future use.
Adequate alternative sources of supply, as well as the ability to adjust menus if needed, are believed to exist for substantially all of our restaurant products. Our retail supply chain generally involves longer lead-times and, often, more remote sources of product, including the People’s Republic of China, and most of our retail product is distributed to our stores through a single distribution center. Although disruption of our retail supply chain could be difficult to overcome, we continuously evaluate the potential for disruptions and ways to mitigate them should they occur.
ENVIRONMENTAL MATTERS
Federal, state and local environmental laws and regulations have not historically had a significant impact on our operations; however, we cannot predict the effect of possible future environmental legislation of regulations on our operations.
TRADEMARKS
We deem the various Cracker Barrel trademarks and service marks that we own to be of substantial value. Our policy is to obtain federal registration of trademarks and other intellectual property whenever possible and to pursue vigorously any infringement of our trademarks.
RESEARCH AND DEVELOPMENT
While research and development is important to us, these expenditures have not been material due to the nature of the restaurant and retail industries.
SEASONAL ASPECTS
Historically, our profits have been lower in the first and third quarters and higher in the second and fourth quarters. We attribute these variations primarily to the Christmas holiday shopping season and the summer vacation and travel season. Our gift shop sales, which are made substantially to our restaurant guests, historically have been highest in our second quarter, which includes the Christmas holiday shopping season. Historically, interstate tourist traffic and the propensity to dine out have been much higher during the summer months, thereby generally contributing to higher profits in the Company’s fourth quarter. We also generally open additional new stores throughout the year. Therefore, the results of operations for any interim period cannot be considered indicative of the operating results for an entire year.
WORKING CAPITAL
In the restaurant industry, substantially all sales are either for cash or third-party credit card. Therefore, like many other restaurant companies, we are able to, and often do operate with negative working capital. Restaurant inventories purchased through our principal food distributor are on terms of net zero days, while restaurant inventories purchased locally generally are financed through normal trade credit. Because of our gift shop, which has a lower product turnover than the restaurant, we carry larger inventories than many other companies in the restaurant industry. Retail inventories purchased domestically generally are financed from normal trade credit, while imported retail inventories generally are purchased through wire transfers. These various trade terms are aided by rapid product turnover of the restaurant inventory. Employees generally are paid on weekly or semi-monthly schedules in arrears of 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.
CEO BACKGROUND
Robert V. Dale , age 73, first became one of our directors in 1986. Mr. Dale was President of Windy Hill Pet Food Company, Nashville, Tennessee, from March 1995 until its sale in July 1998; Partner in PFB Partnership, Nashville, Tennessee, from August 1994 to March 1995; President of Martha White Foods, Inc., Nashville, Tennessee, from October 1985 to August 1994. Mr. Dale has been a Director of Genesco, Inc. since June 2000. Mr. Dale serves as our Lead Independent Director.
Director Qualifications:
• Leadership Experience—President of Windy Hill Pet Food Company; President of Martha White Foods, Inc.; President of Beatrice Specialty Products division and a Vice President of Beatrice Companies, Inc., the owner of Martha White Foods
• Financial Experience—Serves as a member of Cracker Barrel’s Audit Committee
• Industry Experience—President of Martha White Foods, Inc.; Director of Genesco, Inc.; President of Windy Hill Pet Food Company; President of Beatrice Specialty Products division and a Vice President of Beatrice Companies, Inc., the owner of Martha White Foods
Richard J. Dobkin , age 65, first became one of our directors in 2005. Mr. Dobkin was the Managing Partner of the Tampa, Florida office of Ernst & Young, LLP, an independent registered public accounting firm, from 1987 until June 2005. Mr. Dobkin is a member of the board of directors of PBSJ Corporation, which provides planning, design, and construction management services in the U.S. and abroad.
Director Qualifications:
• Leadership Experience—Managing Partner of the Tampa, Florida office of Ernst & Young, LLP
• Financial Experience—Managing Partner of the Tampa, Florida office of Ernst & Young, LLP; Chairman of Cracker Barrel’s Audit Committee
Robert C. Hilton , age 73, first became one of our directors in 1981. Mr. Hilton has been the President of Autumn Capital, an investment firm, Nashville, Tennessee, since August 1999. Mr. Hilton was the Chairman, President and Chief Executive Officer of Home Technology Healthcare, Inc., Nashville, Tennessee, from October 1991 to August 1999.
Director Qualifications:
• Leadership Experience—President of Autumn Capital; Chairman, President and Chief Executive Officer of Home Technology Healthcare, Inc.
• Financial Experience—President of Autumn Capital; serves as a member of Cracker Barrel’s Audit Committee
• Industry Experience— Deep knowledge of our industry as a long-standing member of Cracker Barrel’s Board
Charles E. Jones, Jr. , age 65, first became one of our directors in 1981. Mr. Jones is President of Corporate Communications, Inc., an investor/shareholder communications and public relations firm in Nashville, Tennessee.
Director Qualifications:
• Leadership Experience—President of Corporate Communications, Inc.
• Financial Experience—Former financial analyst at J.C. Bradford & Co.
• Industry Experience— Deep knowledge of our industry as a former restaurant analyst and as a long-standing member of Cracker Barrel’s Board
B. F. “Jack” Lowery , age 73, first became one of our directors in 1971. Mr. Lowery is an attorney and the Chairman and Chief Executive Officer of LoJac Companies Inc., a diversified group of companies engaged in the manufacturing of asphalt and building materials, heavy highway construction, asphalt and concrete paving, traffic control, safety devices and sand mining operations.
Director Qualifications:
• Leadership Experience—Chairman and Chief Executive Officer of LoJac Companies, Inc.
• Industry Experience— Extensive knowledge of our industry as a member of Cracker Barrel’s Board since 1971
Martha M. Mitchell , age 70, first became one of our directors in 1993. Ms. Mitchell was the Senior Partner and Senior Vice President Fleishman-Hillard, Inc., an international communications consulting and public relations firm in St. Louis, Missouri, from 1987 until July 2005.
Director Qualifications:
• Leadership Experience—Senior Partner and Senior Vice President of Fleishman-Hillard, Inc.; extensive executive level experience in business and government, including positions of Senior Partner with an international communications organization and Special Assistant to the President of the United States; managed public and private sector business development and outreach initiatives at the United States Department of Commerce and the United States Small Business Administration; experience in corporate crisis management includes work on environmental issues, consumer boycotts and litigation
• Industry Experience—Directed consultancies with major consumer products, food and beverage, automotive and telecommunications corporations involving consumer marketing initiatives, executive communications, diversity and multicultural customer development, branding and corporate responsibility
Andrea M. Weiss , age 55, first became one of our directors in 2003. Ms. Weiss is the President and Chief Executive Officer of Retail Consulting, Inc., a retail consulting firm, since October 2002; President of dELiA*s Corp., a multichannel retailer to teenage girls and young women, from May 2001 to October 2002; Executive Vice President and Chief Store Officer of The Limited, Inc. and Intimate Brands, Inc., a women’s retailer, from May 1998 to February 2001; Director Chicos FAS, since February 2009; Director GSI Commerce Inc., since August 2006; former Director Tabi International Inc., (private) from January 2004 to February 2010; Director Worth Ltd., (private) a direct marketer of luxury ladies apparel and accessories, since September 2007; former Chairman of Cortefiel Group, SA, a European retailer, from April 2006 to June 2007; former Director Ediets.com Inc., from July 2004 to May 2009.
Director Qualifications:
• Leadership Experience—President and Chief Executive Officer of Retail Consulting, Inc.; President of dELiA*s Corp.; Executive Vice President and Chief Store Officer of The Limited, Inc. and Intimate Brands, Inc.; Chairman of Cortefiel Group, SA
• Industry Experience— President and Chief Executive Officer of Retail Consulting, Inc.; President of dELiA*s Corp.; Executive Vice President and Chief Store Officer of The Limited, Inc. and Intimate Brands, Inc.; Director of Chicos FAS; Director of GSI Commerce Inc.; Director of Tabi International Inc.; Director of Worth Ltd.; Chairman of Cortefiel Group, SA
Jimmie D. White , age 69, first became one of our directors in 1993. Mr. White served as Senior Vice President - Finance and Chief Financial Officer of Cracker Barrel Old Country Store, Inc., from 1985 to December 1995.
Director Qualifications:
• Leadership Experience—former Senior Vice President – Finance and Chief Financial Officer of Cracker Barrel Old Country Store, Inc.
• Financial Experience—former Senior Vice President – Finance and Chief Financial Officer of Cracker Barrel Old Country Store, Inc.; serves as a member of Cracker Barrel’s Audit Committee
• Industry Experience—deep knowledge of our company and our industry through his service as former Senior Vice President – Finance and Chief Financial Officer of Cracker Barrel Old Country Store, Inc. and as member of our Board since 1993
Michael A. Woodhouse , age 65, first became one of our directors in 1999. Mr. Woodhouse has served as Chairman of the Board since November 23, 2004 and President and CEO of Cracker Barrel since August 4, 2001; President and COO of Cracker Barrel from July 2000 through August 3, 2001; Executive Vice President and COO of Cracker Barrel from July 1999 to July 2000; Senior Vice President and CFO of Cracker Barrel from January 1999 to July 1999; Senior Vice President Finance and CFO of Cracker Barrel Old Country Store, Inc., from December 1995 to December 1998.
Director Qualifications:
• Leadership Experience—Chairman of the Board, President and Chief Executive Officer of Cracker Barrel; former President and Chief Operations Officer of Cracker Barrel
• Financial Experience—former Senior Vice President and Chief Financial Officer of Cracker Barrel; President and Chief Financial Officer of Daka International, Inc.; Executive Vice President and Chief Financial Officer of Steak & Ale Restaurants; Executive Vice President and Chief Financial Officer of T.G.I. Friday’s Inc.
• Industry Experience—Various leadership positions at Cracker Barrel since 1995; Senior Vice President and Chief Financial Officer of DAKA International, Inc.; Executive Vice President and Chief Financial Officer of Steak & Ale Restaurants; Executive Vice President and Chief Financial Officer of T.G.I. Friday’s Inc.
MANAGEMENT DISCUSSION FROM LATEST 10K
EXECUTIVE OVERVIEW
Cracker Barrel Old Country Store, Inc. (the “Company,” “our” or “we”) is a publicly traded (Nasdaq: CBRL) company that, through certain subsidiaries, is engaged in the operation and development of the Cracker Barrel Old Country Store® (“Cracker Barrel”) restaurant and retail concept. As of September 20, 2011, the Company operated 604 Cracker Barrel stores located in 42 states. The restaurants serve breakfast, lunch and dinner. The retail area offers a variety of decorative and functional items specializing in rocking chairs, holiday gifts, toys, apparel and foods.
Restaurant Industry
Our stores operate in the full-service segment of the restaurant industry in the United States. The restaurant business is highly competitive with respect to quality, variety and price of the food products offered. The restaurant business is often affected by changes in consumer taste; national, regional or local economic conditions; demographic trends; traffic patterns; the type, number and location of competing restaurants; and consumers’ discretionary purchasing power. There are many segments within the restaurant industry, such as family dining, casual dining, fast casual and quick service, which often overlap and provide competition for widely diverse restaurant concepts. Competition also exists in securing prime real estate locations for new stores, in hiring qualified employees, in advertising, in the attractiveness of facilities and with competitors having similar menu offerings or convenience.
Additionally, economic, seasonal and weather conditions affect the restaurant business. Adverse economic conditions affect consumer discretionary income and dining and shopping habits. Historically, interstate tourist traffic and the propensity to dine out have been much higher during the summer months, thereby contributing to higher profits in our fourth quarter. Retail sales, which are made substantially to our restaurant guests, are strongest in the second quarter, which includes the Christmas holiday shopping season. Severe weather also affects restaurant and retail sales adversely from time to time.
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 and restaurant guest traffic consist of sales and calculated number of guests, respectively, of stores open at least six full quarters at the beginning of the year and are measured on comparable calendar weeks. This measure highlights performance of existing stores because it excludes the impact of new store openings.
Percentage of retail sales to total sales indicates the relative proportion of spending by guests on retail product at our stores and helps identify overall effectiveness of our retail operations. Management uses this measure to analyze a store’s ability to convert restaurant traffic into retail sales since we believe that the substantial majority of our retail guests are also guests in our restaurants.
Average check per person is an indicator which management uses to analyze the dollars spent in our stores per guest on restaurant purchases. This measure aids management in identifying trends in guest preferences as well as the effectiveness of menu price increases and other menu changes.
Store operating margins are defined as total revenue less cost of goods sold, labor and other related expenses and other store operating expenses, all as a percent of total revenue. Management uses this indicator as a primary measure of operating profitability.
Labor and Related Expenses
Labor and other related expenses include all direct and indirect labor and related costs incurred in store operations. Labor and other related expenses as a percentage of total revenue were 37.1%, 37.8% and 38.7% in 2011, 2010 and 2009, respectively. The year-to-year decrease from 2010 to 2011 resulted primarily from decreases of 0.3%, 0.2% and 0.2% as a percentage of total revenue, respectively, in store management compensation, health care costs and store hourly labor. The decrease in store management compensation resulted primarily from lower store bonus expense, which reflected lower performance against financial objectives as compared to the prior year. The decrease in health care costs resulted from lower medical claims. The decrease in store hourly labor costs as a percentage of total revenue resulted from menu price increases being higher than wage inflation.
The year-to-year decrease from 2009 to 2010 resulted from decreases of 0.7% and 0.2% as a percentage of total revenue, respectively, in health care costs and store hourly labor costs. The decrease in health care costs resulted from lower medical claims and the benefit of the calendar 2010 group health plan design changes. The decrease in store hourly labor costs as a percentage of total revenue resulted from menu pricing being higher than wage inflation.
Other Store Operating Expenses
Other store operating expenses include all store-level operating costs, the major components of which are utilities, operating supplies, repairs and maintenance, depreciation and amortization, advertising, rent, credit card fees and general insurance. Other store operating expenses as a percentage of total revenue were 18.6%, 18.2% and 17.8% in 2011, 2010 and 2009, respectively. The year-to-year increase from 2010 to 2011 resulted primarily from equal increases in advertising, supplies and general insurance expenses. The increase in advertising expense resulted from increased spending related to billboards and consumer research as compared to the prior year. We purchased additional billboard coverage during the 2011 summer travel season to better capture available guest traffic. Additionally, the incremental consumer research was conducted to gain consumer insight into menu offerings and recent guest traffic trends. The increase in supplies expense resulted from increases in numerous supply categories including office supplies and shopping bags. Higher general insurance expense resulted from favorable actuarial reserve adjustments made in the prior year.
The year-to-year increase from 2009 to 2010 was due in equal parts to higher maintenance and rent expenses. Higher maintenance expense resulted from the timing of sign maintenance and other programs. The increase in rent expense resulted from the sale-leaseback transactions we completed in the fourth quarter of 2009 (see Note 10 to the accompanying Consolidated Financial Statements).
General and Administrative Expenses
General and administrative expenses as a percentage of total revenue were 5.7%, 6.1% and 5.1% in 2011, 2010 and 2009, respectively. The year-to-year decrease from 2010 to 2011 resulted from a decrease of 0.6% in incentive compensation, including share-based compensation, partially offset by a 0.2% increase in salaries. The decrease in incentive compensation reflected lower performance against financial objectives in 2011 as compared to the prior year. The increase in salaries resulted primarily from severance charges related to our cost reduction and organizational streamlining initiative (see sub-section below entitled “Restructuring”) and an increase in the number of store managers in training. The year-to-year increase from 2009 to 2010 resulted from higher incentive compensation, including share-based compensation, which reflected better performance against financial objectives in 2010 as compared to the prior year.
Restructuring
In July 2011, we implemented a cost reduction and organization streamlining initiative, which we estimate will generate annual pre-tax savings of approximately $10,000. This initiative resulted in the elimination of approximately 60 management and staff positions. Most of the employees affected worked in our headquarters in Lebanon, Tennessee, and the restructuring did not affect any store positions. As a result, in the fourth quarter of 2011, we incurred severance charges of $1,768, which are recorded in general and administrative expenses (see sub-section above entitled “General and Administrative Expenses”). Additionally, as part of our cost reduction and organization streamlining initiative, we incurred an impairment charge of $1,044 related to office space we expect to sell within one year (see sub-section above entitled “Impairment and Store Dispositions, Net”).
Interest Expense
Interest expense was $51,490, $48,959 and $52,177 in 2011, 2010, and 2009, respectively. The year-to-year increase from 2010 to 2011 resulted primarily from costs related to our debt refinancing partially offset by lower average debt outstanding. As part of our debt refinancing, we incurred additional expenses of $5,136 related to transaction fees and the write-off of deferred financing costs. The year-to-year decrease from 2009 to 2010 resulted primarily from lower average debt outstanding.
Provision for Income Taxes
Provision for income taxes as a percent of income before income taxes was 26.3%, 26.3% and 26.8% in 2011, 2010 and 2009, respectively. Our effective tax rate remained flat at 2011 compared to 2010. The decrease in the effective tax rate from 2009 to 2010 reflected a net reduction in our liability for uncertain tax positions of $2,134 in 2010 compared to $389 in 2009 and higher employer tax credits on an absolute dollar basis mostly offset by the effect on our tax rate from the increase in pretax income.
Our primary sources of liquidity are cash generated from our operations and our borrowing capacity under our revolving credit facility. Our internally generated cash, along with cash on hand at July 30, 2010, our borrowings under our revolving credit facility and proceeds from exercises of share-based compensation awards, were sufficient to finance all of our growth, share repurchases, dividend payments, working capital needs and other cash payment obligations in 2011.
We believe that cash at July 29, 2011, along with cash generated from our operating activities, the borrowing capacity under our revolving credit facility and proceeds from exercises of share-based compensation awards will be sufficient to finance our continuing operations, our continuing expansion plans, our principal payments on our debt, our share repurchase plans and our expected dividend payments for at least the next twelve months and thereafter for the foreseeable future.
Cash Generated from Operations
Our cash generated from operating activities was $138,212, $212,106 and $164,171 in 2011, 2010 and 2009, respectively. The decrease in net cash flow provided by operating activities from 2010 to 2011 reflected a decrease in accounts payable, payments for estimated income taxes and higher annual bonus payments made in 2011 for the prior year’s performance partially offset by the change in retail inventories. The decrease in accounts payable reflected the results of conversion to more electronic payment methods and lower accounts payable related to retail inventory. The change in retail inventories was primarily related to the timing of seasonal inventory purchases. The increase in net cash flow provided by operating activities from 2009 to 2010 reflected higher net income, increase in accounts payable, the timing of payments for estimated income taxes, higher incentive compensation accruals and an increase in the sales of our gift cards partially offset by the change in retail inventories. The increase in incentive compensation accruals in 2010 reflected better performance against financial objectives in 2010 as compared to the prior year. The increase in accounts payable from 2009 to 2010 resulted from more effective vendor terms management and improvements to disbursement cycles. The change in retail inventories was primarily related to the timing of seasonal inventory purchases.
Borrowing Capacity and Debt Covenants
On July 9, 2011, we entered into a five-year $750,000 credit facility (the “2011 Credit Facility”) consisting of a $250,000 term loan (aggregate outstanding at July 29, 2011 was $231,250) and a $500,000 revolving credit facility (“the 2011 Revolving Credit Facility”). The 2011 Credit Facility replaced term loans totaling $575,000 and a $165,000 revolving credit facility. The decrease in the term loan portion of the 2011 Credit Facility and the increase in the 2011 Revolving Credit Facility provide us with increased flexibility in our capital structure.
During 2011, 2010 and 2009, we made $18,750, $57,856 and $130,988, respectively, in optional principal prepayments under our term loan facilities. At July 29, 2011, we had $318,750 of outstanding borrowings under the 2011 Revolving Credit Facility and we had $29,981 of standby letters of credit related to securing reserved claims under workers’ compensation insurance which reduce our borrowing availability under the 2011 Revolving Credit Facility. At July 29, 2011, we had $151,269 in borrowing availability under our 2011 Revolving Credit Facility. See “Material Commitments” below and Note 5 to our Consolidated Financial Statements for further information on our long-term debt.
The 2011 Credit Facility contains customary financial covenants, which are specified in the agreement and include maintenance of a maximum consolidated total leverage ratio and a minimum consolidated interest coverage ratio. We presently are and expect to remain in compliance with the 2011 Credit Facility’s financial covenants for the remaining term of the facility.
Capital Expenditures
Capital expenditures (purchase of property and equipment), net of proceeds from insurance recoveries were $77,686, $69,891 and $67,842 in 2011, 2010 and 2009, respectively. Our capital expenditures consisted primarily of costs of new store locations and capital expenditures for maintenance programs in 2011, capital expenditures for maintenance programs in 2010 and costs of new store locations in 2009. The increase in capital expenditures from 2010 to 2011 resulted primarily from an increase in the number of new store locations acquired and under construction as compared to the prior year partially offset by lower capital expenditures for maintenance programs. The increase in capital expenditures from 2009 to 2010 resulted primarily from higher capital expenditures for maintenance programs and operational innovation initiatives partially offset by lower costs related to fewer new store locations. We estimate that our capital expenditures during 2012 will be between $90,000 and $100,000. This estimate includes certain costs related to the acquisition of sites and construction of fifteen new stores that will open or have opened during 2012, as well as for acquisition and construction costs for store locations to be opened in future years and capital expenditures for maintenance programs. We intend to fund our capital expenditures with cash flows from operations and borrowings under our 2011 Revolving Credit Facility, as necessary.
Proceeds from Sale of Property and Equipment
During 2011, we received net proceeds of $1,054 from the sale of two closed stores and $6,576 as a result of a condemnation award.
In the fourth quarter of 2009, we completed sale-leaseback transactions involving 15 of our stores and our retail distribution center. Net proceeds from the sale-leaseback transactions of $56,260, along with excess cash from operations, were used to reduce our outstanding borrowings (see “Borrowing Capacity and Debt Covenants” above).
Share Repurchases, Dividends and Proceeds from the Exercise of Share-Based Compensation Awards
Subject to a maximum amount of $65,000, we were authorized by our Board of Directors to repurchase shares during 2011 to offset share dilution that results from the issuance of shares under our equity compensation plans. Additionally, subject to a maximum amount of $65,000, we have been authorized by our Board of Directors to repurchase shares during 2012 at the discretion of management. Our current criteria for share repurchases are that they be accretive to expected net income per share and are within the limits imposed by our 2011 Credit Facility. During 2011, we repurchased 676,600 shares in the open market at an aggregate cost of $33,563. During 2010, we repurchased 1,352,000 shares in the open market at an aggregate cost of $62,487. We did not repurchase any shares in 2009.
Our 2011 Credit Facility imposes restrictions on the amount of dividends we are able to pay. If there is no default then existing and the total of our availability under our 2011 Revolving Credit Facility plus our cash and cash equivalents on hand is at least $100,000, we may both: (1) pay cash dividends on our common stock if the aggregate amount of such dividends paid during any fiscal year is less than 15% of Consolidated EBITDA from continuing operations (as defined in the 2011 Credit Facility) during the immediately preceding fiscal year; and (2) in any event, increase our regular quarterly cash dividend in any quarter by an amount not to exceed the greater of $.01 per share or 10% of the amount of the dividend paid in the prior fiscal quarter.
During the first quarter of 2011, we declared a quarterly dividend of $0.22 per share of our common stock (an annual equivalent of $0.88 per share), an increase from the quarterly dividend of $0.20 per share paid in the first quarter of 2010. We paid dividends of $0.22 per share during the second, third and fourth quarters of 2011. Additionally, on September 12, 2011, the Board declared a dividend of $0.25 per share payable on November 7, 2011 to shareholders of record on October 21, 2011. In 2010 and 2009, we paid dividends of $0.80 and $0.78 per share, respectively.
During 2011, we received proceeds of $20,540 from the exercise of share-based compensation awards and the corresponding issuance of 784,793 shares. The excess tax benefit realized upon exercise of share-based compensation awards was $4,108. During 2010 and 2009, we received proceeds of $37,460 and $4,362, respectively, from the exercise of share-based compensation awards.
Working Capital
In the restaurant industry, virtually all sales are either for cash or third-party credit card. Like many other restaurant companies, we are able to, and often do, operate with negative working capital. Restaurant inventories purchased through our principal food distributor are on terms of net zero days, while restaurant inventories purchased locally generally are financed from normal trade credit. Because of our retail operations, 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 generally are financed from normal trade credit, while imported retail inventories generally are purchased through wire transfers. These various trade terms are aided by 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 $21,188, $73,289 and $66,637, respectively, at July 29, 2011, July 30, 2010 and July 31, 2009. The change in working capital at July 29, 2011 compared with July 30, 2010 primarily reflected the decrease in accounts payable, payments for estimated income taxes, lower incentive compensation accruals and an optional prepayment of our required principal payments due within the next twelve months on our outstanding term loan. The decrease in accounts payable reflected the results of conversion to more electronic payment methods and lower accounts payable related to retail inventory. Lower incentive compensation accruals resulted from the payment of annual bonuses in the first quarter of 2011 that were earned for 2010. The change in working capital at July 30, 2010 compared with July 31, 2009 primarily reflected the increase in accounts payable, the timing of payments for estimated income taxes, higher incentive compensation accruals based on better performance against financial objectives and an increase in cash generated from operations. The increase in accounts payable resulted from more effective vendor terms management and improvements to disbursement cycles.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
Management believes that the Cracker Barrel brand remains one of the strongest and most differentiated brands in the restaurant industry and we plan to leverage that strength to grow guest traffic, sales and profits. Our strategic plan includes the following three key components:
â—ŹEnhancing the core by focusing on our six priorities for 2012 as described below, increasing average unit volume in existing stores and enhancing the competitive advantage of our unique and differentiated brand through innovation and productivity.
â—ŹExpanding the footprint through a continued commitment to profitable new unit growth with a focus on best locations and flawless execution.
â—ŹExtending the brand beyond our physical stores to create long term value through e-commerce and licensing.
Our six priorities for 2012 are:
â—ŹNew marketing messaging to better connect with our current and potential guests and reinforce the authentic value of the Cracker Barrel experience that has created such a powerful attraction to our brand.
●Implementing refined menu and pricing strategies to increase the variety and everyday affordability of our menu in the face of ongoing challenges to our guests’ household budgets.
â—ŹEnhancing our restaurant operating platform to generate sustained improvements in the guest experience.
â—ŹDriving retail sales growth by continuing to review and modify as needed our retail assortment to deliver value and further enhance the role of the retail store in our guests overall experience.
â—ŹImplementing initiatives to reduce costs to offset at least a portion of the impact of higher food commodity costs.
â—ŹLeveraging our strong cash flow generation to both reinvest in the business as well as increase our return of capital to our shareholders.
During the quarter, we continued our progress on these six priorities.
●We continued our gains in comparable store traffic and restaurant and retail sales with both comparable store traffic and sales out-performing the Knapp-Track™ Index for the quarter. Additionally, for the second consecutive quarter, we achieved positive comparable restaurant traffic.
â—ŹWe restructured and streamlined our field organization to better align our restaurant and retail operations under central leadership. We estimate that this restructuring will generate annual savings of approximately $5,000.
â—ŹWe continue to generate strong cash flow. As a result, we were able to deliver on our commitment to enhance shareholder value by declaring a quarterly dividend of $0.40 per share, which represents a sixty percent increase in our quarterly dividend, and also by repurchasing shares during the quarter.
Interest Expense
Interest expense for the third quarter of 2012 was $11,173 as compared to $11,619 in the same period in the prior year. Interest expense for the first nine months of 2012 was $33,333 as compared to $35,163 in the same period in the prior year. Both decreases resulted primarily from lower debt outstanding and lower ongoing fees because of our debt refinancing which was completed in July 2011.
Provision for Income Taxes
Provision for income taxes as a percentage of income before income taxes was 32.1% and 22.6%, respectively, in the third quarters of 2012 and 2011. The provision for income taxes as a percentage of income before income taxes was 30.0% and 28.0%, respectively, in the first nine months of 2012 and 2011. The increase in the effective tax rate from the third quarter of 2011 as compared to the third quarter of 2012 resulted primarily from a higher provision for uncertain tax positions than in the prior year. The increase in the effective tax rate from the first nine months of 2011 to the first nine months of 2012 resulted primarily from a higher provision for uncertain tax positions partially offset by employer tax credits.
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated from our operations and our borrowing capacity under our $500,000 revolving credit facility (the “Revolving Credit Facility”). Our internally generated cash, along with cash on hand at July 29, 2011, our borrowings under our Revolving Credit Facility and proceeds from exercises of share-based compensation awards, were sufficient to finance all of our growth, dividend payments, share repurchases, working capital needs and other cash payment obligations in the first nine months of 2012.
We believe that cash at April 27, 2012, along with cash generated from our operating activities, the borrowing capacity under our Revolving Credit Facility and proceeds from exercises of share-based compensation awards will be sufficient to finance our continuing operations, our continuing expansion plans, our principal payments on our debt, our share repurchase plans and our expected dividend payments for at least the next twelve months and thereafter for the foreseeable future.
Cash Generated from Operations
Our operating activities provided net cash of $141,885 for the first nine months of 2012, which represented an increase from the $89,178 net cash provided during the same period a year ago. This increase reflected lower annual bonus payments made this year for the prior year’s performance and the timing of payments for accounts payable and estimated income taxes.
Borrowing Capacity and Debt Covenants
Our $750,000 credit facility (the “Credit Facility”) consists of a term loan (aggregate outstanding at April 27, 2012 was $231,250) and our Revolving Credit Facility. At April 27, 2012, we had $318,750 of outstanding borrowings under the Revolving Credit Facility and we had $28,606 of standby letters of credit related to securing reserved claims under workers’ compensation insurance which reduce our borrowing availability under the Revolving Credit Facility. At April 27, 2012, we had $152,644 in borrowing availability under our Revolving Credit Facility. See Note 4 to our Condensed Consolidated Financial Statements for further information on our long-term debt. On May 3, 2012, we made $18,750 in optional principal prepayments under our term loan and paid down $6,250 on the Revolving Credit Facility.
The Credit Facility contains customary financial covenants, which include maintenance of a maximum consolidated total leverage ratio and a minimum consolidated interest coverage ratio. We presently are and currently expect to remain in compliance with the Credit Facility’s financial covenants.
Capital Expenditures
Capital expenditures (purchase of property and equipment), net of proceeds from insurance recoveries were $56,766 for the first nine months of 2012 as compared to $59,284 during the same period a year ago. Our capital expenditures consisted primarily of costs of new store locations and capital expenditures for maintenance programs. We estimate that our capital expenditures during 2012 will be between $85,000 and $90,000. This estimate includes certain costs related to the acquisition of sites and construction of new stores that have opened or are expected to open during 2012, as well as for acquisition and construction costs for store locations to be opened in future years and capital expenditures for maintenance programs. We intend to fund our capital expenditures with cash flows from operations and borrowings under our Revolving Credit Facility, as necessary.
Share Repurchases, Dividends and Proceeds from the Exercise of Share-Based Compensation Awards
Subject to a maximum amount of $65,000, we have been authorized by our Board of Directors to repurchase shares from time to time during 2012 through a combination of open market purchases, privately negotiated acquisitions, accelerated share repurchase transactions and/or other derivative transactions at the discretion of management. Our current criteria for share repurchases are that they be accretive to expected net income per share and are within the limits imposed by our Credit Facility. During the first nine months of 2012, we repurchased 220,400 shares of our common stock in the open market at an aggregate cost of $12,279.
Our Credit Facility imposes restrictions on the amount of dividends we are permitted to pay and the amount of shares we are permitted to repurchase. In April 2012, we amended our Credit Facility to provide more flexibility with regard to the dividends we are permitted to pay as well as the amount of shares we are able to repurchase. Under the amended Credit Facility, if there is no default existing and the total of our availability under our Revolving Credit Facility plus our cash and cash equivalents on hand is at least $100,000 (the “liquidity requirements”), we may declare and pay cash dividends on shares of our common stock if the aggregate amount of dividends paid during any fiscal year is less than 20% of Consolidated EBITDA from continuing operations (as defined in the Credit Facility) (the “20% limitation”) during the immediately preceding fiscal year. In any event, as long as the liquidity requirements are met, dividends may be declared and paid in any fiscal year up to the amount of dividends permitted and paid in the preceding fiscal year without regard to the 20% limitation.
During the first nine months of 2012, we paid dividends of $0.72 per share. During the third quarter of 2012, we declared a dividend of $0.25 per share that was paid on May 7, 2012. Additionally, during the third quarter of 2012, we declared a dividend of $0.40 per share payable on August 6, 2012 to shareholders of record on July 20, 2012.
During the first nine months of 2012, we received proceeds of $16,729 from the exercise of share-based compensation awards and the corresponding issuance of 605,193 shares of our common stock.
Working Capital
We had positive working capital of $11,766 at April 27, 2012 versus negative working capital of $21,188 at July 29, 2011. Working capital increased from July 29, 2011 primarily because of cash generated from operations and proceeds received from share-based compensation exercises partially offset by an increase in current maturities on our term loan, lower retail inventories, the increase in our dividend payable because of the additional $0.40 per share dividend declared and a net decrease in working capital related to the increase in sales of our gift cards. At July 29, 2011, current maturities on our term loan were lower because of an optional prepayment of our required principal payments which were due in 2012. Consistent with prior year, in the fourth quarter of 2012, we made an optional prepayment of our required principal payments which were due in 2013.
In the restaurant industry, virtually all sales are either for cash or third-party credit or debit card. Like many other restaurant companies, we are able to, and often do, operate with negative working capital. Restaurant inventories purchased through our principal food distributor are on terms of net zero days, while restaurant inventories purchased locally generally are 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 generally are financed from normal trade credit, while imported retail inventories generally are purchased through wire transfers. These various trade terms are aided by 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.
Off-Balance Sheet Arrangements
Other than various operating leases, we have no other material off-balance sheet arrangements. Refer to the sub-section entitled “Off-Balance Sheet Arrangements” under the section entitled “Liquidity and Capital Resources” presented in the MD&A of our 2011 Form 10-K for additional information regarding our operating leases.
Material Commitments
There have been no material changes in our material commitments other than in the ordinary course of business since the end of 2011. Refer to the sub-section entitled “Material Commitments” under the section entitled “Liquidity and Capital Resources” presented in the MD&A of our 2011 Form 10-K for additional information regarding our material commitments.
Recent Accounting Pronouncements Adopted
Fair Value Measurement and Disclosure Requirements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued amended accounting guidance which provides additional guidance on how to determine fair value under existing standards and expands existing disclosure requirements on a prospective basis. The guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this accounting guidance in the third quarter of 2012 did not have a significant impact on our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Presentation of Comprehensive Income
In June 2011, the FASB issued amended accounting guidance which requires companies to present total comprehensive income and its components and the components of net income in either a single continuous statement of comprehensive income or in two consecutive statements reporting net income and comprehensive income. This requirement eliminates the option to present components of comprehensive income as part of the statement of changes in shareholders’ equity. This guidance affects only the presentation of comprehensive income and does not change the components of comprehensive income. In December 2011, the FASB further amended this guidance to indefinitely defer the effective date of the requirement to present reclassification adjustments for each component of accumulated other comprehensive income in both net income and in other comprehensive income on the face of the financial statements. All other provisions of this guidance are effective for fiscal years beginning after December 15, 2011 on a retrospective basis. We do not expect that the adoption of this accounting guidance in the first quarter of 2013 will have a significant impact on our consolidated financial statements.
Disclosures about Offsetting Assets and Liabilities
In December 2011, the FASB issued accounting guidance which requires companies to disclose information about the nature of their rights of setoff and related arrangements associated with their financial instruments and derivative instruments to enable users of financial statements to understand the effect of those arrangements on their financial position. Each company will be required to provide both net and gross information in the notes to its financial statements for relevant assets and liabilities that are eligible for offset. This guidance is effective for fiscal years beginning on or after January 1, 2013 on a retrospective basis. We do not expect that the adoption of this accounting guidance in the first quarter of 2014 will have a significant impact on our consolidated financial statements.
Critical Accounting Estimates
We prepare our Consolidated Financial Statements in conformity with GAAP. 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 2011 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.
CONF CALL
Barbara Gould - Investor Relations
Thank you, [Dwayne]. Welcome to our fourth quarter 2009 conference call and webcast this morning. Our press release announcing our fiscal 2009 fourth quarter results and outlook for fiscal 2010 was released before the market opened this morning.
In our press release and during this call statements may be made by management of their beliefs and expectations as to the company’s future operating results. These are what are known as forward-looking statements which involve risks and uncertainties that in many cases are beyond the control of the company and may cause actual results to differ materially from management’s expectations. We urge caution to our listeners and readers in considering forward-looking statements for information. Many of the factors that can affect results are summarized in the cautionary description of risks and uncertainties found at the end of this morning’s press release and are described in detail in our annual and quarterly reports that we file with the SEC and we urge you to read this information carefully.
We also remind you that we don’t review or comment on earnings estimates made by other parties. In addition, any guidance that we give speaks only as of the date it is given and we do not update our own guidance or express continuing comfort with it except as required by law and in broadly disseminated disclosures such as this morning’s press release and call. The company disclaims any obligation to update disclosed information on trends or guidance, and should we provide any updates after today, they will be made only by broad dissemination such as press releases or in our filings with the SEC.
On the call with me this morning are Cracker Barrel’s Chairman, President and CEO, Mike Woodhouse and our Executive Vice President and CFO, Sandy Cochran. Mike will begin with a review of the business. Sandy will review the financials and outlook and then Mike will return to close. We will then respond to your questions. Mike?
Michael A. Woodhouse - Chairman, President and Chief Executive Officer
Thanks, Barb. Good morning everyone. Thanks for joining us today. We have a lot of good news to share with you. On Saturday, Cracker Barrel Country Store will be 40 years old. And while I’m certain that there were some challenging times in the early days, I’m also certain that this last fiscal year presented more challenges than most of us have ever seen and so I look at our year-end results as a major win for everyone working here in Lebanon and everyone working at our 590 Cracker Barrel restaurants.
A year ago we established an initial guidance range of $2.80 to $3.00 in EPS for fiscal 2009. Today, despite the headwinds that we encountered all year long, we’re reporting EPS of $2.89. And along the way, we were able to beat expectations in each of the four quarters. Of course the sudden and unexpected slowdown in industry traffic in late September and early October caused our initial sales outlook to turn out to be optimistic, but we kept our focus on driving sales, controlling store operating costs and controlling G&A expenses and also tightly managing cash to insure that we would have no risk of violating our debt covenants.
The sales efforts were three-fold. First, insuring the best possible guest experience with our weekend execution initiative to make certain that we’re executing at the highest possible standard at the busiest times of the week; second, developing and rolling out a series of strong new product offerings and supporting these first with radio and then with targeted radio and TV advertising in key markets. The positive impact from these efforts can clearly be seen in our performance compared with the Knapp-Track index. In the 42 weeks from the third week of October, 2008 to the end of the fiscal year we exceeded the index in guest traffic by an average of 3%. And since the casual dining industry has been a net discounter since May we’re even further ahead [based] on sales terms.
We’ve tightly controlled store offering costs with a focus on execution at the store level, supported by new tools and systems and we supplemented the tight management of cash including aggressively reducing retail inventories in line with lower sales levels, with the sale of lease-back in 15 stores and our retail DC. As a result, we were able to pay down $143 million of our long-term debt and there were no issues with our covenants.
And most importantly we achieved all of these things without compromising the guest experience. No changes in product specs or portions, no reduction in service levels and no discounting our offerings in order to boost traffic. So we believe we’re in a very strong position to deal with the future.
As I’ve said many times, it’s all about the brand. I believe that the reason Cracker Barrel has done so well over the years is because we’ve stayed true to the brand and true to the principles that have been there since the beginning. Cracker Barrel started in the south and southern cooking and hospitality are our mainstays, but the attributes beyond the brand, friendliness, quality and value translate well wherever we go.
I’ve already said that our success and our performing in the casual dining industry and traffic did not come at the expense of the brand. Nor did our success come at the expense of margin. In the fourth quarter we achieved year-on-year margin improvement despite higher costs of labor and some impairment charges. There’s something about genuine Cracker Barrel hospitality that inspires a strong sense of loyalty to the brand, and its’ one reason why people continue to rate us the best. For 19 years in a row now we’ve won Restaurants and Institutions Choice in Chains Award for the best in family dining.
There’s more evidence to show that our efforts are producing positive results. Our top box guest satisfaction scores increased 2% this year. 2% may not sound like much but it amounts to millions of our guests being more satisfied with their experience in 2009 than in fiscal 2008. All of this was accomplished with a combination of factors that contributed to guest satisfaction whether it’s how quickly people were served, finding something new on the menu or buying the latest music from your favorite country artist.
Speaking of country music, the CD “Our Heroes” by Montgomery Gentry, released exclusively at Cracker Barrel over the Memorial Day weekend, set an all-time sales record of almost 80,000 copies to date. A portion of the proceeds from the sale of the CD benefited the Wounded Warrior Project, which supports the recovery of our returning severely injured servicemen and women. The CD stayed in the top 35 on Billboard Magazine’s top current country album chart for 11 weeks. At the end of August, we released our latest exclusive CD, “The Collection of My Best Recollection” by country music legend George Jones. This looks like another success in the making. The CD entered the Billboard top country album chart at number 24 in its first week.
Let me now give you some examples of how we provide more menu variety for our guests. In the fourth quarter we offered Campfire Grill Chicken and Beef and a Grilled Chicken and Pineapple salad, which we supported with TV advertising in about 25% of our markets. These items accounted for more than double the mix compared with last year’s promotion. For breakfast we continued through July 5 with our Breakfast Skillets which also performed better than last year’s promotion.
Our pipeline of new products is growing. We want our regular guests to have a reason to visit us more frequently and we also want to expand the range of offerings at a range of portable price points to stimulate trial for non-users. For example in our latest promotion which we began on August 31, we introduced what we’re calling Then and Now offerings to celebrate our 40th anniversary. New this fall for breakfast is a Fresh Fruit and Yogurt breakfast and an Apple Streusel French Toast breakfast and these are going to be promoted alongside the traditional Country Meat and Biscuits with Fried Chicken Tenderloin, Country Ham or Sausage Patties. For lunch and dinner, we’re bringing back a guest favorite, Autumn Applefest Grilled Chicken and Dressing and at the same time introducing the Autumn Applefest Grilled Chicken Salad, which broadens our salad range and builds on the success of the Pineapple Salad that we offered during the summer. For dessert, to celebrate our anniversary, we’ll be offering our very popular and exclusive Double Chocolate Fudge Coca-Cola Cake all year long.
So let’s go from what’s on the menu to what’s happening behind the scenes at Cracker Barrel. While our people on the front lines are developing a high quality guest experience, the remainder of our company has been hard at work developing better ways to support them. The Seat to Eat initiative is an integrative tool to drive store traffic and increase productivity. When tested in the stores in four of our districts, we were able to consistently deliver food to guests in less than 14 minutes in all day parts. Beginning next month, the initiative will be deployed over the next 18 months on a region-by-region basis.
This is a people business and that’s why employees with more experience make all the difference. Our turnover for the year was 76% for hourly employees and 18% for management. And while we’re very pleased with the results that come from a more stable workforce, we continue to look for more effective ways to schedule and deploy labor. Our goal is to always have the right people in the right places at the right time in order to provide the service our guests expect. We’re especially focused on achieving this goal of peak demand times and the weekend execution initiative that we rolled out in the second quarter has been very effective in doing this. To further improve our ability to achieve this goal, we have a new labor deployment system in test with a roll-out expected to begin late in the fiscal year.
Moving on to retail, in an extremely difficult retail environment our comparable store sales were down 7% in the fourth quarter. On the bright side, sales for our media products, CD’s, books and stationery and the gifts which are new this year were up double digits and now account for about 10% of sales. The softest areas in retail were toys and apparel. Demand for women’s apparel continues to be soft and toys were down in the quarter largely owing to fewer new offerings for Webkinz and Ty plush toys. We hope to see a boost in toys in this new quarter with our new, exclusive offering of the Webkinz Opossum starting out fiscal 2010.
Our retail people did an excellent job in reducing inventories. By limiting our buys where we could, delaying purchases and managing markdowns, we reduced our year-end inventory to $108 million, $16 million below last year’s level. Until we see that our guests are willing to commit to more discretionary purchases, we’re going to be careful in balancing our new product themes, looking for ways to tie the restaurant and country store together and continue to manage inventory levels in line with sales trends.
We’ve also taken steps to reduce the risk around seasonal merchandise. In fiscal 2010, we’re offering fewer seasonal items in favor of a new program we’ve called Great Gifts. These are products designed to be used as gifts and priced at $20 or below. The idea is to make Cracker Barrel a top-of-mind place to go for a convenient gift year-round. And of course we’ll provide free gift-wrapping while you enjoy a meal with us. There will be new offerings throughout the year, but these products won’t be subjected to the same seasonal markdowns as we go through the year as our normal seasonal products are.
We’re also placing more products on the floor. And by removing the stories trailers which we’ve used for a number of years at the stores and saving over $1 million annually in the process, we’ve had to become more disciplined about what gets displayed and for how long.
In fiscal 2010 we’ll be looking at options to refinance portions of our debt. Our guidance for the year has no assumptions for the effects of any such refinancing such as timing, the amount of refinancing or the associated fees. And Sandy will cover more about this and about our guidance in her financial review. Sandy?
Sandra Cochran - Executive Vice President and Chief Financial Officer
Thanks Mike. I’d like to review the financials in more detail. Overall for the fourth quarter of 2009 we reported a 9% increase in diluted earnings per share of $0.99 compared with $0.91 per diluted share in the fourth quarter of last year.
Revenues during the fourth quarter decreased slightly to $596 million, reflecting top-line growth in restaurant revenues which was driven by store growth, offset by a year-over-year decline in retail. Comparable store restaurant sales declined 1.4%. Our average check increased 2.4% including a menu price increase of approximately 2.9%, which was partially offset by negative mix. Our average check was negatively affected by lower incidents of beverages and add-ons. Guest traffic was down 8% for the quarter. We have outperformed the Knapp Track index since the last quarter of fiscal ’06 and the gap has widened to more than 3 percentage points in the fourth quarter.
Cracker Barrel comparable store retail sales were down 7% in the fourth quarter of 2009. Growth in our media category could not offset the softness in toys and apparel. Media includes the exclusive CD’s by Montgomery Gentry and Dolly Parton that Mike mentioned as well as books, gifts and stationery items which were not available last year.
Gross margin for the quarter improved 40 basis points compared to last year. On the restaurant side, cost of sales as a percentage of sales was lower than last year because of higher menu pricing and favorable menu mix. This year’s summer promotion featuring Campfire Chicken and Beef and the Grilled Chicken Pineapple Salad contributed to the higher gross margin.
Food cost inflation in the quarter was only 0.1%. Increases in produce and poultry were offset by lower dairy and egg costs. Higher retail cost of sales partially offset the favorable restaurant cost of sales. Retail gross margin in the fourth quarter was lower due to lower initial margins and higher markdowns that were related to the planned shift in timing of our clearance activity into the fourth quarter. Both restaurant and retail cost of sales benefited from lower freight costs.
Labor expenses as a percentage of sales were 70 basis points higher than during the comparable quarter last year. Although we improved restaurant and retail labor costs by 10 basis points, they were more than offset by 40 basis points of higher healthcare costs which was in line with the guidance that we gave in the third quarter call, and in addition workers comp and store bonus expenses were higher. Despite the minimum wage increase, our hourly wage inflation in the quarter was only 0.6%. Hourly turnover below 80% reduces our hiring and training costs and helped contribute to the higher guest satisfaction scores and a positive guest experience.
Other store operating expenses were 20 basis points favorable in the quarter. Deflation in utilities and improvements in supplies and expenses related to our lower turnover were partially offset by losses on the sale of three sale lease-back stores. The loss of $1 million was expensed when the transaction closed, but gains on the remaining sale lease-back properties are deferred over the life of the leases.
During the fourth quarter the company incurred impairment charges of approximately $2.1 million. This charge includes the impairment on one Cracker Barrel location and the impairment on various corporate properties due to changes in their intended use.
In general and administrative expenses, lower incentive comp expense, lower expenses for training new store managers and our focus to control discretionary spending paid off as G&A at 5.3% of sales was down 60 basis points from the fourth quarter of 2008, and down in absolute terms by $3.6 million.
As a result of higher gross margin as well as lower G&A expenses, partially offset by higher labor and other related expenses and impairment charges, operating income was $41.4 million or 7% of revenues in the fourth quarter compared to $41.6 million or 6.9% of revenues in the same quarter of 2008.
Interest expense of $12.1 million was $1.7 million less than last year’s fourth quarter due to lower borrowing rates. And the fourth quarter income tax rate was 22.1% compared with 25.7% in the fourth quarter last year. The lower tax rate in the fourth quarter of 2009 was due to the rolling off of more FIN 48 reserves relating to expiring statues of limitations this year than last year that is not expected to repeat in fiscal ’10.
Income from continuing operations of $22.8 million in the fourth quarter was $2.2 million higher than last year. Our balance sheet and cash flow statements show the benefit from the execution of the action plans that we undertook during the year to improve our cash flow and reduce debt. On the balance sheet we reduced our retail inventory to $108.4 million at year-end, which is down $16.2 million from year-end fiscal 2008 and our total inventory was $137.4 million at year-end.
Our total borrowings including current maturities at year-end were $645 million, $25 million lower than we had projected at the end of the third quarter. There were no outstanding borrowings under our revolver.
We used excess cash and the proceeds from our sale lease-back to reduce our long-term debt by $133 million in the quarter and $143 million for the year. We remain in compliance with our debt covenants. At the end of the year our total leverage ratio was 3.02 and our interest coverage ratio was 7. The maximum leverage ratio and minimum interest coverage ratio are 3.75.
Now let’s move to our cash flow. For fiscal 2009, our cash flow provided by operating activities was $164.2 million compared with $124.5 million in 2008. The increase reflects the reduction in retail inventories in fiscal 2009 and timing differences in interest and income tax payments.
Capital expenditures for the year were $67.8 million compared with $87.8 million last year, reflecting fewer new units in fiscal 2009. We paid cash dividends of $17.6 million or $0.20 a share quarterly, which at current stock prices represents a yield of approximately 2.5%.
Now let’s look at the outlook. We’re still anticipating a difficult consumer environment in fiscal 2010 as do most of our peers. We expect traffic in retail sales to be negative at least for the first half of the fiscal year. We’re focused on controlling our costs, managing our inventory levels and improving sales trends as the year progresses. We currently expect fiscal 2010 total revenues to increase between 0.5% and 2.5% from total revenue of $2.4 billion in fiscal 2009.
We intend to open seven new Cracker Barrel units in fiscal 2010, two of which opened on Labor Day, one in Pearland, Texas and one in Sanford, North Carolina, which set an off-interstate opening day record.
Comparable store restaurant sales are projected to range between a decrease of 0.5% to an increase of 1.5%, including approximately 2.5% of menu pricing. In September we took a menu price increase of 1.2% and lapped a 1.8% price increase. We expect comparable store retail sales for the year to range between a decline of 1.5% and an increase of 0.5%.
Commodity cost inflation for fiscal 2010 is projected to be approximately flat. We currently have approximately 62% of our fiscal 2010 commodity requirements under contract.
Operating expenses in fiscal ’10 will include approximately $4.9 million related to the sale lease-back transactions compared to $1.4 million in fiscal ’09. Operating margin in fiscal ’10 is projected to be between 5.7% and 6.0% compared to 6.0% in fiscal 2009. We expect the impact of the sale lease-back transaction to be 20 basis points of margin in fiscal ’10.
We believe the range for our operating margin in our 2010 guidance balances uncertainties about consumer spending and the costs from rolling out important initiatives during the year against the benefits of our ongoing cost management efforts and expectations of easing inflationary pressures on key cost lines. Our net interest expense is projected in the range of $46 to $48 million and as Mike mentioned today, we do intend to explore opportunities to refinance or extend the maturities of a portion of our long-term debt during fiscal 2010. There are no assumptions included in our guidance to the terms, timing, fees or amount of the refinancing and our guidance is of course subject to the effects of those transactions that we might undertake.
We’re projecting diluted earnings per share for fiscal 2010 to be in the range of $2.85 to $3.10. Diluted shares outstanding are forecast to average 23 million. We plan to repurchase shares to offset dilution in the year associated with stock option exercises and other share-based compensation.
Capital expenditures are forecast to be in the range of $70 to $75 million, which allows for approximately $30 million of maintenance capital, seven new stores plus investment in innovation initiatives such as Seat to Eat.
In conclusion, we’re pleased that we were able to provide positive earnings growth in a very tough environment in fiscal 2009 which combined with slower unit growth and aggressive balance sheet management generated strong cash flow. As one of the strongest and most highly differentiated brands in the industry, we are well positioned to take advantage of an improved operating environment and to deliver premium returns to our shareholders when the economy turns.
Thank you for your time this morning. I’ll turn the call back over to Mike.
Michael A. Woodhouse - Chairman, President and Chief Executive Officer
Thanks, Sandy. And at this point I’d like to open up the call for questions.
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