CRACKER BARREL OLD COUNTRY STORE, INC 10-Q

ITEM 1. Financial Statements (Unaudited) CRACKER BARREL OLD COUNTRY STORE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited) ASSETS October 30, 2020 July 31, 2020* Current Assets: Cash and cash equivalents $ 597,619 $ 436,996 Accounts receivable 22,338 20,157 Income taxes receivable 26,533 28,852 Inventories 155,737 139,091 Prepaid expenses and other current assets 22,636 17,916 Total current assets 824,863 643,012 Property and equipment 2,196,537 2,363,518 Less: Accumulated depreciation and amortization 1,190,166 1,233,457 Property and equipment – net 1,006,371 1,130,061 Operating lease right-of-use assets, net 1,009,509 691,949 Goodwill 4,690 4,690 Intangible assets 20,960 20,960 Other assets 53,729 53,586 Total assets $ 2,920,122 $ 2,544,258 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 136,051 $ 103,504 Current portion of long-term debt 39,395 39,395 Other current liabilities 269,170 308,157 Total current liabilities 444,616 451,056 Long-term debt 910,000 910,000 Long-term operating lease liabilities 773,204 632,630 Long-term interest rate swap liability 21,494 23,860 Other long-term obligations 96,471 80,605 Deferred income taxes 82,725 27,718 Commitments and Contingencies (Note 12) Shareholders’ Equity: Preferred stock – 100,000,000 shares of $ 0.01 par value authorized; 300,000 shares designated as Series A Junior Participating Preferred Stock; no shares issued — — Common stock – 400,000,000 shares of $ 0.01 par value authorized; 23,720,324 shares issued and outstanding at October 30, 2020, and 23,697,396 shares issued and outstanding at July 31, 2020 237 237 Additional paid-in capital — — Accumulated other comprehensive loss ( 17,745 ) ( 20,346 ) Retained earnings 609,120 438,498 Total shareholders’ equity 591,612 418,389 Total liabilities and shareholders’ equity $ 2,920,122 $ 2,544,258 See Notes to unaudited Condensed Consolidated Financial Statements. * This Condensed Consolidated Balance Sheet has been derived from the audited Consolidated Balance Sheet as of July 31, 2020, as filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2020. 3 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share data) (Unaudited) Quarter Ended October 30, 2020 November 1, 2019 Total revenue $ 646,454 $ 749,040 Cost of goods sold (exclusive of depreciation and rent) 199,044 219,814 Labor and other related expenses 227,188 263,314 Other store operating expenses 161,274 162,908 General and administrative expenses 39,564 39,631 Gain on sale and leaseback transaction ( 217,722 ) — Operating income 237,106 63,373 Interest expense, net 10,715 3,580 Income before income taxes 226,391 59,793 Provision for income taxes 55,711 10,590 Loss from unconsolidated subsidiary — ( 5,980 ) Net income $ 170,680 $ 43,223 Net income per share: Basic $ 7.20 $ 1.80 Diluted $ 7.18 $ 1.79 Weighted average shares: Basic 23,707,750 24,038,354 Diluted 23,771,230 24,103,922 See Notes to unaudited Condensed Consolidated Financial Statements. 4 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited and in thousands) Quarter Ended October 30, 2020 November 1, 2019 Net income $ 170,680 $ 43,223 Other comprehensive income (loss) before income tax expense: Change in fair value of interest rate swaps 3,466 ( 545 ) Income tax expense (benefit) 865 ( 107 ) Other comprehensive income (loss), net of tax 2,601 ( 438 ) Comprehensive income $ 173,281 $ 42,785 See Notes to unaudited Condensed Consolidated Financial Statements. 5 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited and in thousands except share data) Common Stock Additional Paid-In Accumulated Other Comprehensive Retained Total Shareholders’ Shares Amount Capital Loss Earnings Equity Balances at July 31, 2020 23,697,396 $ 237 $ — $ ( 20,346 ) $ 438,498 $ 418,389 Comprehensive Income: Net income — — — — 170,680 170,680 Other comprehensive income, net of tax — — — 2,601 — 2,601 Total comprehensive income — — — 2,601 170,680 173,281 Cash dividends previously declared in prior quarters — — — — ( 40 ) ( 40 ) Share-based compensation — — 1,974 — — 1,974 Issuance of share-based compensation awards, net of shares withheld for employee taxes 22,928 — ( 1,974 ) — ( 18 ) ( 1,992 ) Balances at October 30, 2020 23,720,324 $ 237 $ — $ ( 17,745 ) $ 609,120 $ 591,612 Common Stock Additional Paid-In Accumulated Other Comprehensive Retained Total Shareholders’ Shares Amount Capital Loss Earnings Equity Balances at August 2, 2019 24,049,240 $ 241 $ 49,732 $ ( 6,913 ) $ 561,650 $ 604,710 Comprehensive Income: Net income — — — — 43,223 43,223 Other comprehensive loss, net of tax — — — ( 438 ) — ( 438 ) Total comprehensive income — — — ( 438 ) 43,223 42,785 Cash dividends declared - $ 1.30 per share — — — — ( 31,452 ) ( 31,452 ) Share-based compensation — — 1,798 — — 1,798 Issuance of share-based compensation awards, net of shares withheld for employee taxes 18,466 — ( 1,994 ) — — ( 1,994 ) Purchases and retirement of common stock ( 91,748 ) ( 1 ) ( 14,187 ) — — ( 14,188 ) Cumulative-effect of change in accounting principle — — — — 4,125 4,125 Balances at November 1, 2019 23,975,958 $ 240 $ 35,349 $ ( 7,351 ) $ 577,546 $ 605,784 See Notes to unaudited Condensed Consolidated Financial Statements. 6 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited and in thousands) Three Months Ended October 30, 2020 November 1, 2019 Cash flows from operating activities: Net income $ 170,680 $ 43,223 Net loss from unconsolidated subsidiary — 5,980 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,351 28,678 Loss on disposition of property and equipment 801 1,740 Gain on sale and leaseback transaction ( 217,722 ) — Impairment — 664 Share-based compensation 1,974 1,798 Noncash lease expense 13,888 15,330 Amortization of asset recognized from gain on sale and leaseback transactions 3,184 — Changes in assets and liabilities: Inventories ( 16,646 ) ( 33,534 ) Other current assets ( 4,582 ) ( 10,875 ) Accounts payable 32,547 11,848 Other current liabilities ( 5,083 ) ( 18,000 ) Deferred income taxes 54,142 12,211 Other long-term assets and liabilities ( 2,543 ) ( 14,228 ) Net cash provided by operating activities 56,991 44,835 Cash flows from investing activities: Purchase of property and equipment ( 11,431 ) ( 27,901 ) Proceeds from insurance recoveries of property and equipment 217 73 Proceeds from sale of property and equipment 149,829 1,534 Notes receivable from unconsolidated subsidiary — ( 16,000 ) Acquisition of business, net of cash acquired ( 1,500 ) ( 32,971 ) Net cash provided by (used in) investing activities 137,115 ( 75,265 ) Cash flows from financing activities: Proceeds from issuance of long-term debt — 129,000 Taxes withheld from issuance of share-based compensation awards ( 1,992 ) ( 1,994 ) Principal payments under long-term debt — ( 44,000 ) Purchases and retirement of common stock — ( 14,188 ) Dividends on common stock ( 31,491 ) ( 32,063 ) Net cash provided by (used in) financing activities ( 33,483 ) 36,755 Net increase in cash and cash equivalents 160,623 6,325 Cash and cash equivalents, beginning of period 436,996 36,884 Cash and cash equivalents, end of period $ 597,619 $ 43,209 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized $ 10,201 $ 4,174 Income taxes $ 1 $ 167 Supplemental schedule of non-cash investing and financing activities * : Capital expenditures accrued in accounts payable $ 2,736 $ 4,866 Change in fair value of interest rate swaps $ 3,466 $ ( 545 ) Change in deferred tax asset for interest rate swaps $ ( 865 ) $ 107 Dividends declared but not yet paid $ 612 $ 32,248 * See Note 10 for additional supplemental disclosures related to leases See Notes to unaudited Condensed Consolidated Financial Statements. 7 Index CRACKER BARREL OLD COUNTRY STORE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except percentages, share and per share data) (Unaudited) 1. Condensed Consolidated Financial Statements Cracker Barrel Old Country Store, Inc. and its affiliates (collectively, in these Notes to Condensed Consolidated Financial Statements, the “Company”) are principally engaged in the operation and development in the United States of the Cracker Barrel Old Country Store® (“Cracker Barrel”) concept. The accompanying condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) without audit. In the opinion of management, all adjustments (consisting of normal and recurring items) necessary for a fair presentation of such condensed consolidated financial statements have been made. The results of operations for any interim period are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended July 31, 2020 (the “2020 Form 10-K”). The accounting policies used in preparing these condensed consolidated financial statements are the same as described in the 2020 Form 10-K. References to a year in these Notes to Condensed Consolidated Financial Statements are to the Company’s fiscal year unless otherwise noted. COVID-19 Impact The COVID-19 pandemic continues to negatively impact the Company’s sales and traffic due to changes in consumer behavior as federal, state and local governmental authorities have imposed unprecedented restrictions on travel, group gatherings and non-essential activities, such as “social distancing” guidance, shelter-in-place orders and limitations on or full prohibitions of dine-in services. In response to the COVID-19 pandemic, the Company has instituted operational protocols to comply with applicable regulatory requirements to protect the health and safety of employees and guests, and the Company has implemented various strategies to support the recovery of its business and navigate through the uncertain environment. The Company continues to focus on growing its off-premise business and investing in its digital infrastructure to improve the guest experience. Furthermore, the Company continued to maintain and bolster its cash reserves by completing a sale and leaseback transaction in August 2020 in which the Company sold a total of 62 Cracker Barrel owned properties and received net proceeds, after fees and expenses, of $ 146,357 . See Note 10 for additional information regarding this sale and leaseback transaction. Recent Accounting Pronouncements Adopted Goodwill Impairment In January 2017, the Financial Accounting Standards Board (“FASB”) issued accounting guidance related to the subsequent measurement of goodwill. Under this new guidance, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. This guidance is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. This guidance should be applied on a prospective basis. The adoption of this accounting guidance in the first quarter of 2021 did not have a significant impact on the Company’s consolidated financial position or results of operations. 8 Index Recent Accounting Pronouncements Not Adopted Accounting for Income Taxes In December 2019, the FASB issued accounting guidance in order to simplify the accounting for income taxes. This new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This accounting guidance is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. In general, entities will apply the new guidance on a prospective basis, except for certain items such as the guidance on franchise taxes that are partially based on income. The guidance on franchise taxes that are partially based on income will be applied either retrospectively for all periods presented or using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of adopting this accounting guidance in the first quarter of 2022. 2. Maple Street Biscuit Company Effective October 10, 2019, the Company acquired 100 % ownership of Maple Street Biscuit Company (“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 of the sellers, 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. The Company believes that this acquisition supports its 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. At October 30, 2020, MSBC had 35 company-owned and six franchised fast casual locations across seven states. The goodwill of $ 4,690 arising from the acquisition consisted largely of the Company’s determination of the value of MSBC’s future free cash flows less the value of the identifiable tangible and intangible assets and liabilities. All amounts recorded for the assets acquired, liabilities assumed and goodwill are final. None of the goodwill recognized is expected to be deductible for income tax purposes. Acquisition-related costs of $ 1,269 were recorded in the general and administrative expenses line in the Condensed Consolidated Statement of Income in the quarter ended November 1, 2019. 3. Fair Value Measurements The Company’s assets and liabilities measured at fair value on a recurring basis at October 30, 2020 were as follows: Level 1 Level 2 Level 3 Total Fair Value Cash equivalents* $ 175,001 $ — $ — $ 175,001 Deferred compensation plan assets** 29,119 Total assets at fair value $ 204,120 Interest rate swap liability (see Note 6) $ — $ 24,121 $ — $ 24,121 Total liabilities at fair value $ — $ 24,121 $ — $ 24,121 9 Index The Company’s assets and liabilities measured at fair value on a recurring basis at July 31, 2020 were as follows: Level 1 Level 2 Level 3 Total Fair Value Cash equivalents* $ 132,001 $ — $ — $ 132,001 Deferred compensation plan assets** 28,530 Total assets at fair value $ 160,531 Interest rate swap liability (see Note 6) $ — $ 27,746 $ — $ 27,746 Total liabilities at fair value $ — $ 27,746 $ — $ 27,746 * Consists of money market fund investments. ** Represents plan assets invested in mutual funds established under a rabbi trust for the Company’s non-qualified savings plan and is included in the Condensed Consolidated Balance Sheets as other assets. The Company’s money market fund investments are measured at fair value using quoted market prices. The fair values of the Company’s interest rate swap liabilities are determined based on the present value of expected future cash flows. Since the values of the Company’s interest rate swaps are based on the LIBOR forward curve, which is observable at commonly quoted intervals for the full terms of the swaps, it is considered a Level 2 input. Non-performance risk is reflected in determining the fair value of the interest rate swaps by using the Company’s credit spread less the risk-free interest rate, both of which are observable at commonly quoted intervals for the terms of the swaps. Thus, the adjustment for non-performance risk is also considered a Level 2 input. The Company’s deferred compensation plan assets are measured based on net asset value per share as a practical expedient to estimate fair value. The fair values of the Company’s accounts receivable and accounts payable approximate their carrying amounts because of their short duration. The fair value of the Company’s variable rate debt, based on quoted market prices, which are considered Level 1 inputs, approximates its carrying amount at October 30, 2020 and July 31, 2020. 4. Inventories Inventories were comprised of the following at: October 30, 2020 July 31, 2020 Retail $ 118,377 $ 105,502 Restaurant 23,306 19,636 Supplies 14,054 13,953 Total $ 155,737 $ 139,091 5. Debt On September 5, 2018, the Company 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, the Company drew an additional $ 39,395 under this option for a one-year period. At both October 30, 2020 and July 31, 2020, the Company had a total of $ 949,395 of outstanding borrowings under the 2019 Revolving Credit Facility. At October 30, 2020, the Company had $ 31,804 of standby letters of credit, which reduce the Company’s borrowing availability under the 2019 Revolving Credit Facility (see Note 12 for more information on the Company’s standby letters of credit). At October 30, 2020, the Company had $ 8,196 in borrowing availability under the 2019 Revolving Credit Facility. In accordance with the 2019 Revolving Credit Facility, outstanding borrowings bear interest, at the Company’s election, either at LIBOR or prime plus a percentage point spread based on certain specified financial ratios under the 2019 Revolving Credit Facility. At October 30, 2020, $ 400,000 of the Company’s outstanding borrowings were swapped at a weighted average interest rate of 5.36 % (see Note 6 for information on the Company’s interest rate swaps). At October 30, 2020, the weighted average interest rate on the remaining $ 549,395 of the Company’s outstanding borrowings was 3.31 %. 10 Index 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 uncertainty regarding the impact of the COVID-19 pandemic on the Company’s financial position and results of operations, the Company has obtained a waiver for the financial covenants for the fourth quarter of 2020 and the first and second quarters of 2021 (“Covenant Relief Period”). During this Covenant Relief Period, the Company is required to maintain certain liquidity measures (defined as the availability under the 2019 Revolving Credit Facility plus unrestricted cash and cash equivalents) of at least $ 140,000 . Additionally, during this Covenant Relief Period, the Company’s cash payments with respect to capital expenditures may not exceed $ 60,000 in the aggregate. The 2019 Revolving Credit Facility also imposes restrictions on the amount of dividends the Company is permitted to pay and the amount of shares the Company is permitted to repurchase. During the Covenant Relief Period described above, the Company is subject to restrictions on its ability to pay dividends (other than the deferred dividend payment that the Company paid on September 2, 2020). Following the Covenant Relief Period described above, under the 2019 Revolving Credit Facility, provided there is no default existing and the total of the Company’s availability under the 2019 Revolving Credit Facility plus the Company’s cash and cash equivalents on hand is at least $ 100,000 (the “Cash Availability”), the Company may declare and pay cash dividends on shares of its common stock and repurchase shares of its common stock (1) in an unlimited amount if, at the time such dividend or repurchase is made, the Company’s 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 the Company’s consolidated total leverage ratio is greater than 3.00 to 1.00 at the time the dividend or repurchase is made; notwithstanding (1) and (2), so long as immediately after giving effect to the payment of any such dividends, Cash Availability is at least $ 100,000 , the Company may declare and pay cash dividends on shares of its 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 . 6. Derivative Instruments and Hedging Activities The Company has interest rate risk relative to its outstanding borrowings (see Note 5 for information on the Company’s outstanding borrowings). The Company’s policy has been to manage interest cost using a mix of fixed and variable rate debt. To manage this risk in a cost-efficient manner, the Company uses derivative instruments, specifically interest rate swaps. For each of the Company’s interest rate swaps, the Company has agreed to exchange with a counterparty the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. The interest rates on the portion of the Company’s outstanding debt covered by its interest rate swaps are fixed at the rates in the table below plus the Company’s credit spread. The Company’s credit spread at October 30, 2020 was 3.00 %. All of the Company’s interest rate swaps are accounted for as cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings and is presented in the same statement of income line item as the earnings effect of the hedged item. Gains and losses on the derivative instrument representing hedge components excluded from the assessment of effectiveness, if any, will be recognized currently in earnings in the same statement of income line item as the earnings effect of the hedged item. The Company does not hold or use derivative instruments for trading purposes. The Company also does not have any derivatives not designated as hedging instruments and has not designated any non-derivatives as hedging instruments. Companies may elect to offset related assets and liabilities and report the net amount on their financial statements if the right of setoff exists. Under a master netting agreement, the Company has the legal right to offset the amounts owed to the Company against amounts owed by the Company under a derivative instrument that exists between the Company and a counterparty. When the Company is engaged in more than one outstanding derivative transaction with the same counterparty and also has a legally enforceable master netting agreement with that counterparty, its credit risk exposure is based on the net exposure under the master netting agreement. If, on a net basis, the Company owes the counterparty, the Company regards its credit exposure to the counterparty as being zero. 11 Index A summary of the Company’s interest rate swaps at October 30, 2020 is as follows: Trade Date Effective Date Term (in Years) Notional Amount Fixed Rate January 30, 2015 May 3, 2019 2.0 $ 60,000 2.16 % January 30, 2015 May 4, 2021 3.0 120,000 2.41 % January 30, 2015 May 3, 2019 2.0 60,000 2.15 % January 30, 2015 May 4, 2021 3.0 80,000 2.40 % January 16, 2019 May 3, 2019 3.0 115,000 2.63 % January 16, 2019 May 3, 2019 2.0 115,000 2.68 % August 6, 2019 November 4, 2019 2.5 50,000 1.50 % August 7, 2019 May 3, 2021 1.0 35,000 1.32 % August 7, 2019 May 3, 2022 2.0 100,000 1.40 % August 7, 2019 May 3, 2022 2.0 100,000 1.36 % The estimated fair value of the Company’s derivative instruments as of October 30, 2020 and July 31, 2020 were as follows: (See Note 3) Balance Sheet Location October 30, 2020 July 31, 2020 Interest rate swaps Other current liabilities $ 2,627 $ 3,886 Interest rate swaps Long-term interest rate swap liability 21,494 23,860 Total liabilities** $ 24,121 $ 27,746 ** These interest rate swap liabilities are recorded gross at both October 30, 2020 and July 31, 2020 since there were no offsetting assets under the Company’s master netting agreements. The estimated fair value of the Company’s interest rate swap liabilities incorporates the Company’s non-performance risk (see Note 3). The adjustment related to the Company’s non-performance risk at October 30, 2020 and July 31, 2020 resulted in reductions of $ 848 and $ 978 , respectively, in the fair value of the interest rate swap liabilities. The offset to the interest rate swap liabilities are recorded in accumulated other comprehensive loss (“AOCL”), net of the deferred tax asset, and will be reclassified into earnings over the term of the underlying debt. As of October 30, 2020, the estimated pre-tax portion of AOCL that is expected to be reclassified into earnings over the next twelve months is $ 6,016 . Cash flows related to the interest rate swaps are included in the interest expense line in the Condensed Consolidated Statements of Income and in operating activities in the Condensed Consolidated Statements of Cash Flows. The following table summarizes the pre-tax effects of the Company’s derivative instruments on AOCL for the three months ended October 30, 2020 and the year ended July 31, 2020: Amount of Income (Loss) Recognized in AOCL on Derivatives Three Months Ended October 30, 2020 Year Ended July 31, 2020 Cash flow hedges: Interest rate swaps $ 3,466 $ ( 17,740 ) The following table summarizes the pre-tax effects of the Company’s derivative instruments on income for the quarters ended October 30, 2020 and November 1, 2019: Location of Gain Reclassified from AOCL into Income Amount of Gain Reclassified from AOCL into Income Quarter Ended October 30, 2020 November 1, 2019 Cash flow hedges: Interest rate swaps Interest expense $ ( 1,826 ) $ ( 82 ) 12 Index The following table summarizes the amounts reclassified out of AOCL related to the Company’s interest rate swaps for the quarter ended October 30, 2020: Details about AOCL Amount Reclassified from AOCL Affected Line Item in the Condensed Consolidated Statement of Income Gain on cash flow hedges: Interest rate swaps $ ( 1,826 ) Interest expense Tax expense 455 Provision for income taxes $ ( 1,371 ) Net of tax No gains or losses representing amounts excluded from the assessment of effectiveness were recognized in earnings for the three -months ended October 30, 2020. The following table summarizes the changes in AOCL, net of tax, related to the Company’s interest rate swaps for the three months ended October 30, 2020: Changes in AOCL AOCL balance at July 31, 2020 $ ( 20,346 ) Other comprehensive income before reclassifications 3,972 Amounts reclassified from AOCL ( 1,371 ) Other comprehensive income, net of tax 2,601 AOCL balance at October 30, 2020 $ ( 17,745 ) 7. Seasonality Historically, the net income of the Company has been lower in the first and third quarters and higher in the second and fourth quarters. Management attributes these variations to the holiday shopping season and the summer vacation and travel season. The Company’s retail sales, which are made substantially to the Company’s restaurant customers, historically have been highest in the Company’s second quarter, which includes the holiday shopping season. Historically, interstate tourist traffic and the propensity to dine out have been higher during the summer months, thereby contributing to higher profits in the Company’s fourth quarter. The Company generally opens additional new locations throughout the year. Therefore, the results of operations for any interim period cannot be considered indicative of the operating results for an entire year. Currently, the Company is not able to predict the impact that the COVID-19 pandemic may have on these historical consumer demand patterns or, as a result, on the seasonality of its business generally. 8. Segment Information Cracker Barrel stores represent a single, integrated operation with two related and substantially integrated product lines. The operating expenses of the restaurant and retail product lines of a Cracker Barrel store are shared and are indistinguishable in many respects. Accordingly, the Company currently manages its business on the basis of one reportable operating segment. All of the Company’s operations are located within the United States. 9. Revenue Recognition Revenue consists primarily of sales from restaurant and retail operations. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a restaurant guest, retail customer or other customer. The Company’s policy is to present sales in the Condensed Consolidated Statements of Income on a net presentation basis after deducting sales tax. 13 Index Disaggregation of revenue Total revenue was comprised of the following for the specified periods: Quarter Ended October 30, 2020 November 1, 2019 Revenue: Restaurant $ 515,224 $ 607,079 Retail 131,230 141,961 Total revenue $ 646,454 $ 749,040 Restaurant Revenue The Company recognizes revenues from restaurant sales when payment is tendered at the point of sale, as the Company’s performance obligation to provide food and beverages is satisfied. Retail Revenue The Company recognizes revenues from retail sales when payment is tendered at the point of sale, as the Company’s performance obligation to provide merchandise is satisfied. Ecommerce sales, including shipping revenue, are recorded upon delivery to the customer. Additionally, estimated sales returns are calculated based on return history and sales levels. Gift Card Breakage Included in restaurant and retail revenue is gift card breakage. Customer purchases of gift cards, to be utilized at the Company's stores, are not recognized as sales until the card is redeemed and the customer purchases food and/or merchandise. Gift cards do not carry an expiration date; therefore, customers can redeem their gift cards indefinitely. A certain number of gift cards will not be fully redeemed. Management estimates unredeemed balances and recognizes gift card breakage revenue for these amounts in the Company's Condensed Consolidated Statements of Income over the expected redemption period. Gift card breakage is recognized when the likelihood of a gift card being redeemed by the customer is remote and the Company determines that there is not a legal obligation to remit the unredeemed gift card balance to the relevant jurisdiction. The determination of the gift card breakage rate is based upon the Company’s specific historical redemption patterns. The Company recognizes gift card breakage by applying its estimate of the rate of gift card breakage over the period of estimated redemption. For the quarter ended October 30, 2020, gift card breakage was $ 940 . For the quarter ended November 1, 2019, gift card breakage was $ 1,238 . Deferred revenue related to the Company’s gift cards was $ 89,237 and $ 94,754 , respectively, at October 30, 2020 and July 31, 2020. Revenue recognized in the Condensed Consolidated Statements of Income for the three months ended October 30, 2020 and November 1, 2019, respectively, for the redemption of gift cards which were included in the deferred revenue balance at the beginning of the fiscal year was $ 16,242 and $ 17,947 . 10. Leases The Company has ground leases for its leased stores and office space leases that are recorded as operating leases under various non-cancellable operating leases. The Company also leases advertising billboards, vehicle fleets, and certain equipment under various non-cancellable operating leases. Additionally, the Company completed sale-leaseback transactions in 2009, 2020 and 2021 (see section below entitled “Sale and Leaseback Transactions”). To determine whether a contract is or contains a lease, the Company determines at contract inception whether it contains the right to control the use of an identified asset for a period of time in exchange for consideration. If the contract has 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, the Company recognizes a right-of-use asset and lease liability. 14 Index The Company’s leases all have varying terms and expire at various dates through 2055. Restaurant leases typically have base terms of ten years with four to five optional renewal periods of five years each. The Company uses a lease life that generally begins on the commencement date, including the rent holiday periods, and generally extends through certain renewal periods that can be exercised at the Company’s option. The Company has included lease renewal options in the lease term for calculations of the right-of-use asset and liability for which at the commencement of the lease it is reasonably certain that the Company will exercise those renewal options. Additionally, some of the leases have contingent rent provisions and others require adjustments for inflation or index. Contingent rent is determined as a percentage of gross sales in excess of specified levels. The Company records a contingent rent liability and corresponding rent expense when it is probable sales have been achieved in amounts in excess of the specified levels. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company has entered into agreements for real estate leases that are not recorded as right-of-use assets or lease liabilities as we have not yet taken possession. These leases are expected to commence in 2021 with undiscounted future payments of $ 16,677 . The Company has elected to not separate lease and non-lease components. Additionally, the Company has elected to apply the short term lease exemption to all asset classes and the short term lease expense for the period reasonably reflects the short term lease commitments. As the Company’s leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at the time of commencement or modification date in determining the present value of lease payments. For operating leases that commenced prior to the date of adoption of the new lease accounting guidance, the Company used the incremental borrowing rate as of the adoption date. Assumptions used in determining the Company’s incremental borrowing rate include the Company’s implied credit rating and an estimate of secured borrowing rates based on comparable market data. The following table summarizes the components of lease cost for operating leases for the quarters ended October 30, 2020 and November 1, 2019 : Quarter Ended October 30, 2020 Quarter Ended November 1, 2019 Operating lease cost $ 26,472 $ 19,856 Short term lease cost 322 384 Variable lease cost 527 451 Total lease cost $ 27,321 $ 20,691 The following table summarizes supplemental cash flow information and non-cash activity related to the Company’s operating leases for the quarters ended October 30, 2020 and November 1, 2019 : Quarter Ended October 30, 2020 Quarter Ended November 1, 2019 Operating cash flow information: Gain on sale and leaseback transaction $ 217,722 $ — Cash paid for amounts included in the measurement of lease liabilities 22,266 19,546 Noncash information: Right-of-use assets obtained in exchange for new operating lease liabilities 311,633 3,838 Lease modifications or reassessments increasing or decreasing right-of-use assets 23,257 6,826 Lease modifications removing right-of-use assets ( 259 ) ( 649 ) The following table summarizes the weighted-average remaining lease term and the weighted-average discount rate for operating leases as of October 30, 2020 and November 1, 2019 : October 30, 2020 November 1, 2019 Weighted-average remaining lease term 18.59 Years 18.11 Years Weighted-average discount rate 4.79 % 3.85 % 15 Index The following table summarizes the maturities of undiscounted cash flows reconciled to the total lease liability as of October 30, 2020: Year Total Remainder of 2021 $ 64,255 2022 79,760 2023 75,785 2024 62,188 2025 60,685 Thereafter 936,670 Total future minimum lease payments 1,279,343 Less imputed remaining interest ( 458,422 ) Total present value of operating lease liabilities $ 820,921 Sale and Leaseback Transactions In 2009, the Company completed sale-leaseback transactions involving 15 of its owned stores and its retail distribution center. Under the transactions, the land, buildings and improvements at the locations were sold and leased back for terms of 20 and 15 years, respectively. Equipment was not included. The leases include specified renewal options for up to 20 additional years. On July 29, 2020, the Company entered into an agreement with the original lessor and a third party financier to obtain ownership of 64 of the 65 Cracker Barrel properties previously covered in the original sale and leaseback arrangement and simultaneously entered into a sale and leaseback transaction with the financier for an aggregate purchase price, net of closing costs, of $ 198,083 . The Company purchased the remaining property for approximately $ 3,200 . In connection with this sale and leaseback transaction, the Company entered into lease agreements for each of the properties for initial terms of 20 years and renewal options up to 50 years. The aggregate initial annual rent payment for the properties is approximately $ 14,379 and includes 1 % annual rent increases over the initial lease terms. All the properties qualified for sale and leaseback and operating lease accounting classification and the Company recorded a gain on the sale and leaseback transaction of $ 69,954 in the fourth quarter of 2020. The Company recorded operating lease right-of-use assets, including a non-cash asset recognized as a part of accounting for the transaction of $ 79,049 , and corresponding operating lease liabilities of $ 261,698 and $ 182,649 , respectively. On August 4, 2020, the Company completed a subsequent sale and leaseback transaction involving 62 of its owned Cracker Barrel stores for an aggregate purchase price, net of closing costs, of $ 146,357 . Under the transaction, the land, buildings and building improvements at the locations were sold and leased back for initial terms of 20 years and renewal options up to 50 years. The aggregate initial annual rent payment for the properties is approximately $ 10,393 and includes 1 % annual rent increases over the initial lease terms. All of the properties qualified for sale and leaseback and operating lease accounting classification, and the Company 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. The Company also recorded operating lease right-of-use assets, including a non-cash asset recognized as part of accounting for the transaction of $ 175,960 and corresponding operating lease liabilities of $ 309,624 and $ 133,663 , respectively. On November 11, 2020, Cracker Barrel Old Country Store, Inc. and related affiliate entities entered into the First Amendment to Amended and Restated Master Lease (the “Amendment”) to bifurcate the existing Amended and Restated Master Lease (the “Original Lease”) into two separate lease pools. The Amendment removed 35 sites from the Original Lease and placed them in a new pool governed by the terms of a new Master Lease (the “New Master Lease”). This bifurcation was completed as an accommodation for the landlord to facilitate the landlord’s securitization of the properties. The terms and conditions of the Original Lease and New Master Lease are the same and no material changes were made to the terms thereof. 16 Index 11. Net Income Per Share and Weighted Average Shares Basic consolidated net income per share is computed by dividing consolidated net income available to common shareholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted consolidated net income per share reflects the potential dilution that could occur if securities, options or other contracts to issue shares of common stock were exercised or converted into shares of common stock and is based upon the weighted average number of shares of common stock and common equivalent shares outstanding during the reporting period. Common equivalent shares related to nonvested stock awards and units issued by the Company are calculated using the treasury stock method. The outstanding nonvested stock awards and units, issued by the Company represent the only dilutive effects on diluted consolidated net income per share. The following table reconciles the components of diluted earnings per share computations: Quarter Ended October 30, 2020 November 1, 2019 Net income per share numerator $ 170,680 $ 43,223 Net income per share denominator: Weighted average shares 23,707,750 24,038,354 Add potential dilution: Nonvested stock awards and units 63,480 65,568 Diluted weighted average shares 23,771,230 24,103,922 12. Commitments and Contingencies The Company and its subsidiaries are party to various legal and regulatory proceedings and claims incidental to their business in the ordinary course. In the opinion of management, based upon information currently available, the ultimate liability with respect to these contingencies will not materially affect the Company’s financial statements. Related to its workers’ compensation insurance coverage, the Company is contingently liable pursuant to standby letters of credit as credit guarantees to certain insurers. As of October 30, 2020, the Company had $ 31,804 of standby letters of credit related to securing reserved claims under workers’ compensation insurance and the July 29, 2020 and August 4, 2020 sale and leaseback transactions . All standby letters of credit are renewable annually and reduce the Company’s borrowing availability under its 2019 Revolving Credit Facility (see Note 5). At October 30, 2020, the Company has recorded a provision of $ 344 in the Condensed Consolidated Balance Sheet for amounts to be paid as of result of non-performance by the primary obligor for lease payments associated with two properties occupied by a third party. The Company enters into certain indemnification agreements in favor of third parties in the ordinary course of business. The Company believes that the probability of incurring an actual liability under such indemnification agreements is sufficiently remote that no such liability has been recorded in the Condensed Consolidated Balance Sheet as of October 30, 2020. 17 Index