What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-02-23 compared with 2020-12-03 · 140 added, 75 removed, 267 unchanged (45% of the section changed)

2 unchanged sentences

and its subsidiaries (collectively, the “Company,” “our” or “we”) are principally engaged in the operation and development in the United States of the Cracker Barrel Old Country Store ® (“Cracker Barrel”) concept.

At October 30, 2020, we operated 663 Cracker Barrel stores in 45 states and 35 Maple Street Biscuit Company (“MSBC”) company-owned locations in seven states.

At October 30, 2020, MSBC had six franchised locations.

At January 29, 2021, we operated 663 Cracker Barrel stores in 45 states and 36 Maple Street Biscuit Company (“MSBC”) company-owned locations in eight states.

At January 29, 2021, MSBC had seven franchised locations.

All dollar amounts reported or discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are shown in thousands, except per share amounts and certain statistical information (e.g., number of stores).

8 unchanged sentences

however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in or implied by the forward-looking statements.

In addition to the risks of ordinary business operations, and those discussed or described in this report or in information incorporated by reference into this report, factors and risks that may result in actual results differing from this forward-looking information include, but are not limited to risks and uncertainties associated with the novel coronavirus (“COVID-19”) pandemic, including the duration of the COVID-19 pandemic and its ultimate impact on our business, levels of consumer confidence in the safety of dine-in restaurants, restrictions (including occupancy restrictions) imposed by governmental authorities, the effectiveness of cost saving measures undertaken throughout our operations, disruptions to our operations as a result of the spread of COVID-19 in our workforce, and our increased level of indebtedness brought on by additional borrowing necessitated by the COVID-19 pandemic;

general or regional economic weakness, and weather on sales and customer travel;

In addition to the risks of ordinary business operations, and those discussed or described in this report or in information incorporated by reference into this report, factors and risks that may result in actual results differing from this forward-looking information include, but are not limited to risks and uncertainties associated with the novel coronavirus (“COVID-19”) pandemic, including the duration of the COVID-19 pandemic and its ultimate impact on our business, levels of consumer confidence in the safety of dine-in restaurants, restrictions (including occupancy restrictions) imposed by governmental authorities, the effectiveness of cost saving measures undertaken throughout our operations, disruptions to our operations as a result of the spread of COVID-19 in our workforce, and our increased level of indebtedness, or additional constraints on our expenditures or cash management, brought on by additional borrowing or amendments to our credit facility necessitated by the COVID-19 pandemic;

general or regional economic weakness, business and societal conditions, and the weather impact on sales and customer travel;

discretionary income or personal expenditure activity of our customers;

17 unchanged sentences

changes in land, building materials and construction costs;

the actual results of pending, future or threatened litigation or governmental investigations and the costs and effects of negative publicity associated with these activities;

the actual results of pending, future or threatened litigation or governmental investigations and the costs and effects of negative publicity or our ability to manage the impact of social media associated with these activities;

economic or psychological effects of natural disasters or other unforeseen events such as terrorist acts, social unrest or war and the military or government responses to such events;

1 unchanged sentence

changes in foreign exchange rates affecting our future retail inventory purchases;

the impact of activist shareholders;

our reliance on limited distribution facilities and certain significant vendors;

implementation of new or changes in interpretation of existing accounting principles generally accepted in the United States of America (“GAAP”) and those factors contained in Part I, Item 1A of the 2020 Form 10-K, as well as the factors described under “Critical Accounting Estimates” on pages 31-33 of this report or, from time to time, in our filings with the Securities and Exchange Commission (“SEC”), press releases and other communications.

3 unchanged sentences

The COVID-19 pandemic continues to negatively impact the Company’s sales and traffic as a result of changes in consumer behavior as well as unprecedented restrictions by federal, state and local governmental authorities and recommendations by public health experts limiting 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.

Future consumer behavior and governmental regulations continue to be undeterminable while the COVID-19 pandemic continues to impact local, state, and national health conditions.

Future consumer behavior and governmental regulations continue to be undeterminable while the COVID-19 pandemic continues to impact local, state, and national health and economic conditions.

Despite the impact of the COVID-19 pandemic, management continues to believe that the Cracker Barrel brand remains one of the strongest and most differentiated brands in the restaurant industry.

1 unchanged sentence

Enhancing the Core business to drive sustainable sales growth and continued business model improvements.

During 2021, we are focused on driving topline sales by further growing our off-premise business, introducing menu innovation and evolving our digital infrastructure and digital strategy to improve the guest experience across all channels.

Additionally, in response to the COVID-19 pandemic, we have instituted operational protocols to comply with applicable regulatory requirements to protect the health and safety of our employees and guests while maintaining the service levels that guests associate with our brand, and we have implemented, and continue to adapt, various strategies to support the recovery of our business and navigate through the uncertain environment.

During 2021, we are focused on driving topline sales by further growing our off-premise business, introducing menu and beverage innovation and evolving our digital infrastructure and digital strategy to improve the guest experience across all channels.

Additionally, in response to the COVID-19 pandemic, we have instituted enhanced operational protocols to comply with applicable regulatory requirements to protect the health and safety of our employees and guests while maintaining the service levels that guests associate with our brand, and we have implemented, and continue to adapt, various strategies to support the recovery of our business and navigate through the uncertain environment.

Expanding the Footprint by building profitable new Cracker Barrel stores in core and developing markets.

We currently anticipate adding three stores during 2021, one of which opened during the first three months of 2021.

We currently anticipate adding two stores during 2021, one of which opened during the first six months of 2021.

Extending the Brand to drive further shareholder value creation by developing new platforms to drive growth, such as MSBC, a recently acquired growth-stage fast casual concept that we believe provides us with a vehicle to drive growth in a complementary segment of the restaurant industry.

8 unchanged sentences

This amount, expressed as a percentage, is the comparable store restaurant sales discussed in MD&A.

See the section below entitled “Total Revenue” for the comparable store restaurant sales percentages for the first quarter of 2021 as well as the same period in the prior year.

See the section below entitled “Total Revenue” for the comparable store restaurant sales percentages for the second quarter and first six months of 2021 as well as the same periods in the prior year.

Management uses comparable store restaurant sales as a measure of sales growth to evaluate how established stores have performed over time.

6 unchanged sentences

This amount, expressed as a percentage, is the comparable store retail sales discussed in MD&A.

See the section below entitled “Total Revenue” for the comparable store retail sales percentages for the first quarter of 2021 as well as the same period in the prior year.

See the section below entitled “Total Revenue” for the comparable store retail sales percentages for the second quarter and first six months of 2021 as well as the same periods in the prior year.

Management uses comparable store retail sales as a measure of sales growth to evaluate how established stores have performed over time.

6 unchanged sentences

This amount, expressed as a percentage, is the guest traffic discussed in MD&A.

See section below entitled “Total Revenue” for the restaurant guest traffic percentages for the first quarter of 2021 as well as the same period in the prior year.

See section below entitled “Total Revenue” for the restaurant guest traffic percentages for the second quarter and first six months of 2021 as well as the same periods in the prior year.

Management uses this measure to evaluate how established stores have performed over time excluding growth achieved through menu price and sales mix change.

8 unchanged sentences

We believe this measure is useful for investors to evaluate per guest expenditures as well as our pricing and menu strategies.

See the section below entitled “Total Revenue” for the average check percentages for the first quarter of 2021 as well as the same period in the prior year.

See the section below entitled “Total Revenue” for the average check percentages for the second quarter and first six months of 2021 as well as the same periods in the prior year.

Results of Operations

The following table highlights our operating results by percentage relationships to total revenue for the quarter ended October 30, 2020 as compared to the same period in the prior year:

The following table highlights our operating results by percentage relationships to total revenue for the quarter ended January 29, 2021 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Total revenue

5 unchanged sentences

Operating income

Interest expense

Interest expense, net

Income before income taxes

Provision for income taxes

Provision for income taxes (income tax benefit)

Net loss from unconsolidated subsidiary

The following table sets forth the change in the number of Company-owned and franchised units in operation during the quarters ended October 30, 2020 and November 1, 2019 as well as the number of Company-owned and franchised units at the end of the quarters ended October 30, 2020 and November 1, 2019:

The following table sets forth the change in the number of Company-owned and franchised units in operation at the beginning and end of the quarters and six months ended January 29, 2021 and January 31, 2020 as well as the number of Company-owned and franchised units at the end of the quarters and six months ended January 29, 2021 and January 31, 2020:

Quarter Ended

Six Months Ended

Net change in units:

1 unchanged sentence

Company-owned – MSBC

Company-owned – Holler & Dash

Franchise - MSBC

6 unchanged sentences

Total Revenue

Total revenue for the first quarter of 2021 decreased 13.7% as compared to the same period in the prior year.

The total revenue decrease for the first quarter of 2021 was driven by the decline in restaurant guest traffic as a result of restrictions mandated by federal, state and local governments in the United States to mitigate the spread of COVID-19 and the related changes in consumer behavior.

The following table highlights the key components of revenue for the quarter ended October 30, 2020 as compared to the quarter ended November 1, 2019:

Total revenue for the second quarter and first six months of 2021 decreased 20.0% and 17.0%, respectively, as compared to the same period in the prior year.

The total revenue decrease for the second quarter and first six months of 2021 was driven by the decline in restaurant guest traffic as a result of restrictions mandated by federal, state and local governments in the United States to mitigate the spread of COVID-19 and the related changes in consumer behavior.

Our dining room service continues to be impacted by the COVID-19 pandemic, and in the second quarter of 2021, we experienced an increased number of dining room closures and capacity restrictions as compared to the first quarter of 2021.

As of February 16, 2021, eight of our restaurants were not open for dine-in services to some extent.

The following table highlights the key components of revenue for the quarter and six months ended January 29, 2021 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Revenue in dollars:

10 unchanged sentences

Comparable store sales and traffic exclude MSBC and Holler & Dash.

For the first quarter of 2021, our comparable store restaurant sales decreased as a result of an 18.3% decrease in guest traffic decrease partially offset by a 1.9% increase in average check increase (including a 1.0% average menu price increase) as compared to the prior year first quarter.

For the second quarter of 2021, our comparable store restaurant sales decreased as a result of a 24.2% guest traffic decrease partially offset by a 2.3% average check increase (including a 1.2% average menu price increase) as compared to the prior year second quarter.

For the first six months of 2021, our comparable store restaurant sales decrease resulted from a 21.3% guest traffic decrease as compared to the prior year period partially offset by a 2.0% average check increase (including a 1.1% average menu price increase) as compared to the prior year period.

Our retail sales are made substantially to our restaurant guests.

For the first quarter of 2021 our comparable store retail sales decrease resulted from the guest traffic decline and the impact of the COVID-19 pandemic as compared to the same period in the prior year.

For the second quarter and first six months of 2021, our comparable store retail sales decreases resulted from the guest traffic decline and the impact of the COVID-19 pandemic as compared to the same periods in the prior year.

Cost of Goods Sold (Exclusive of Depreciation and Rent)

The following table highlights the components of cost of goods sold (exclusive of depreciation and rent) in dollar amounts and as percentages of revenues for the first quarter of 2021 as compared to the same period in the prior year:

The following table highlights the components of cost of goods sold (exclusive of depreciation and rent) in dollar amounts and as percentages of revenues for the second quarter and first six months of 2021 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Cost of Goods Sold in dollars:

1 unchanged sentence

Cost of Goods Sold by percentage of revenue:

The increase in restaurant cost of goods sold as a percentage of restaurant revenue in the first quarter of 2020 as compared to the same period in the prior year primarily resulted from a shift in purchases to menu items that have a higher cost relative to other menu items, commodity inflation of 1.9% and higher food waste partially offset by our menu price increase referenced above.

Higher cost menu items and higher food waste accounted for increases of 1.2% and 0.1%, respectively, in restaurant cost of goods sold as a percentage of restaurant revenue for the first quarter of 2021 as compared to the same period in the prior year.

We presently expect the rate of commodity inflation to be approximately 2.0% to 2.5% in 2021 as compared to 2020.

The increase in retail cost of goods sold as a percentage of retail revenue in the first quarter of 2021 as compared to the first quarter of 2020 resulted from lower initial margin.

The increase in restaurant cost of goods sold as a percentage of restaurant revenue in the second quarter of 2021 as compared to the same period in the prior year primarily resulted from commodity inflation of 2.0%, a shift to higher cost menu items and higher food waste partially offset by our menu price increase referenced above.

Higher cost menu items and higher food waste accounted for increases of 0.8% and 0.2%, respectively, as a percentage of restaurant revenue for the second quarter of 2021 as compared to the same period in the prior year.

The increase in restaurant cost of goods sold as a percentage of restaurant revenue in the first six months of 2021 as compared to the same period in the prior year primarily resulted from commodity inflation of 2.0% and a shift to higher cost menu items partially offset by our menu price increase referenced above.

Higher cost menu items accounted for an increase of 1.0% as a percentage of restaurant revenue for the first six months of 2021 as compared to the same period in the prior year.

We presently expect the rate of commodity inflation to be approximately 2.0% in 2021 as compared to 2020 commodity inflation.

The decrease in retail cost of goods sold as a percentage of retail revenue in the second quarter of 2021 as compared to the second quarter of 2020 resulted primarily from lower markdowns partially offset by lower initial margin, higher freight expense and an increase in discounts and allowances.

Second Quarter

(Decrease) Increase as a

Percentage of Total Revenue

Lower initial margin

Higher freight expense

Discounts and allowances

The increase in retail cost of goods sold as a percentage of retail revenue in the first six months of 2021 as compared to the first six months of 2020 resulted primarily from lower initial margin, higher freight expense and an increase in discounts and allowances partially offset by lower markdowns.

First Six Months

Increase (Decrease) as a

Percentage of Total Revenue

Lower initial margin

Higher freight expense

Discounts and allowances

Labor and Related Expenses

Labor and related expenses include all direct and indirect labor and related costs incurred in store operations.

The following table highlights labor and related expenses as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year:

The following table highlights labor and related expenses as a percentage of total revenue for the second quarter and first six months of 2021 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Labor and related expenses

This percentage change resulted from the following:

First Quarter

(Decrease) Increase as a

This percentage change resulted primarily from the following:

Second Quarter

Increase (Decrease) as a

Percentage of Total Revenue

Store hourly labor

Store management compensation

Store bonus expense

Miscellaneous wages

This percentage change resulted primarily from the following:

First Six Months

Increase (Decrease) as a

Percentage of Total Revenue

Store hourly labor

Store management compensation

The decrease in store bonus expense as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year resulted from lower performance against financial objectives for certain components of the incentive plan in the first quarter of 2021 as compared to the same period in the prior year.

The decrease in miscellaneous wages as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year resulted primarily from a reduction in the use of indirect labor hours.

The increase in store hourly labor costs as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year resulted primarily from wage inflation exceeding menu price increases.

The increase in store management compensation as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year was primarily due to the decrease in revenue in the first quarter of 2021 as compared to the same period in the prior year.

Store bonus expense

Miscellaneous wages

In general, during the second quarter of 2021 and the first six months of 2021 as compared to the same periods in the prior year, labor and other related expenses as a percentage of total revenue were materially increased by the impact of the COVID-19 pandemic.

In particular, the increases in store management compensation as a percentage of total revenue in the second quarter of 2021 and first six months of 2021 as compared to the prior year periods were primarily driven by the decreases in revenue.

The increase in store hourly labor as a percentage of total revenue for the second quarter and first six months of 2021 as compared to the same periods in the prior year resulted primarily from wage inflation.

The decreases in store bonus expense as a percentage of total revenue for the second quarter and first six months of 2021 as compared to the same periods in the prior year resulted from lower performance against financial objectives for certain components of the incentive plan in the second quarter and first six months of 2021 as compared to the same periods in the prior year.

The decrease in miscellaneous wages as a percentage of total revenue for the first six months of 2021 as compared to the same period in the prior year resulted primarily from a reduction in the use of indirect labor hours.

Other Store Operating Expenses

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

The following table highlights other store operating expenses as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year:

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

The following table highlights other store operating expenses as a percentage of total revenue for the second quarter and first six months of 2021 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Other store operating expenses

This percentage change resulted primarily from the following:

First Quarter

These percentage changes resulted primarily from the following:

Second Quarter

Increase as a Percentage

of Total Revenue

Supplies expense

First Six Months

Increase as a Percentage

of Total Revenue

Other store expenses

Maintenance expense

Depreciation expense

Advertising expense

The increase in rent expense as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year resulted primarily from the sale and leaseback transaction involving 62 of our owned Cracker Barrel stores completed on August 4, 2020.

Supplies expense

Depreciation expense

Utilities expense

In general, during the second quarter of 2021 and the first six months of 2021 as compared to the same periods in the prior year, other store operating expenses as a percentage of total revenue were materially increased by the impact of the COVID-19 pandemic.

In particular, the increases in maintenance expense, advertising expense, supplies expense, depreciation expense and utilities expense as a percentage of total revenue in the second quarter of 2021 and first six months of 2021 as compared to the prior year periods were all primarily driven by the decreases in revenue.

The increases in rent expense as a percentage of total revenue for the second quarter and first six months of 2021 as compared to the same periods in the prior year resulted primarily from the sale and leaseback transaction involving 62 of our owned Cracker Barrel stores completed on August 4, 2020.

The aggregate initial annual rent payment for these properties is approximately $10,393.

Additionally, the related rent expense includes $3,184 recorded in the first quarter of 2021 for the non-cash amortization of the asset recognized from the gain on the Company’s sale and leaseback transactions.

Additionally, the related rent expense includes $3,184 and $6,368, respectively, recorded in the second quarter and first six months of 2021 for the non-cash amortization of the asset recognized from the gain on the Company’s sale and leaseback transactions.

See Note 10 to the Condensed Consolidated Financial Statements for additional information regarding the Company’s sale and leaseback transactions.

The increase in supplies expense as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year resulted primarily from costs associated with the growth in our off-premise business.

The increase in other store expenses as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year resulted primarily from costs associated with the growth in our off-premise business.

The increase in maintenance expense as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year resulted primarily from costs associated with the implementation of technology initiatives to improve the guest experience and the decrease in revenue in the first quarter of 2021 as compared to the prior year period.

The increase in depreciation expense as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year resulted primarily from the decrease in revenue in the first quarter of 2021 as compared to the prior year period partially offset by the decrease in depreciation expense resulting from the August 4, 2020 sale and leaseback transaction and lower spending on capital expenditures..

The increase in advertising expense as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year resulted primarily from higher online media spending and a decrease in revenue in the first quarter of 2021 as compared to the prior year period.

The increases in other store expenses as a percentage of total revenue for the second quarter and first six months of 2021 as compared to the same period in the prior year resulted primarily from costs associated with the growth in our off-premise business.

General and Administrative Expenses

The following table highlights general and administrative expenses as a percentage of total revenue for the first quarter of 2021 as compared to the same period in the prior year:

The following table highlights general and administrative expenses as a percentage of total revenue for the second quarter and first six months of 2021 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

General and administrative expenses

The increase in general and administrative expenses as a percentage of total revenue in the first quarter of 2021 as compared to the same period in the prior year resulted primarily from expenses related to the proxy contest initiated by affiliates of Sardar Biglari in connection with the Company’s 2020 annual shareholders meeting held on November 19, 2020.

The increase in general and administrative expenses as a percentage of total revenue in the second quarter of 2021 as compared to the same period in the prior year resulted primarily from a 0.4% increase in payroll and related expenses.

This percentage change resulted primarily from the following:

First Six Months

Increase as a Percentage of

Total Revenue

Payroll and related expenses

Proxy expenses

The increase in general and administrative expenses as a percentage of total revenue in the first six months of 2021 as compared to the same periods in the prior year resulted primarily from increases in payroll and related expenses and expenses related to the proxy contest initiated by affiliates of Sardar Biglari in connection with the Company’s 2020 annual shareholders meeting held on November 19, 2020.

The increases in payroll and related expense for the second quarter and first six months of 2021 as a percentage of total revenue as compared to the same periods in the prior year were primarily driven by the decrease in revenues in 2021 as compared to the same periods in the prior year as the result of the impact of the COVID-19 pandemic on our operations partially offset by the reduction in payroll and related expenses in the second quarter and the first six months of 2021 as compared to the same periods in the prior year due to the elimination of positions in the corporate headquarters and in the field in 2020.

Gain on Sale and Leaseback Transaction

2 unchanged sentences

Interest Expense, net

The following table highlights interest expense, net in dollars for the first quarter of 2021 as compared to the same period in the prior year:

The following table highlights interest expense, net in dollars for the second quarter and first six months of 2021 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Interest expense, net

The increase in interest expense for the first quarter of 2021 as compared to the same period in the prior year resulted primarily from higher debt levels caused by our borrowing under our 2019 Revolving Credit Facility in response to the COVID-19 pandemic, higher weighted average interest rates and the nonrecurrence of interest income on Punch Bowl Social (“PBS”) promissory notes written off in the third quarter of 2020.

The increases in interest expense for the second quarter and first six months of 2021 as compared to the same periods in the prior year resulted primarily from higher debt levels caused by our borrowing under our 2019 Revolving Credit Facility in response to the COVID-19 pandemic, higher weighted average interest rates and the nonrecurrence of interest income on Punch Bowl Social (“PBS”) promissory notes written off in the third quarter of 2020.

Provision for Income Taxes

Provision for income taxes as a percentage of income before income taxes (the “effective tax rate”) was 24.6% and 17.7% in the first quarters of 2021 and 2020, respectively.

The increase in the effective rate is primarily the result of a reduction in tax credits and taxes on the sale and leaseback transaction completed in the first quarter of 2021.

We currently anticipate our effective tax rate for 2021 to be approximately 19% to 20%.

The following table highlights the provision for income taxes as a percentage of income before income taxes (“effective tax rate”) for the second quarter and first six months of 2021 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Effective tax rate

The significant decrease in the effective tax rate from the second quarter of 2020 to the second quarter of 2021 is due to the tax benefits recorded for carryback of 2020 federal net operating losses and resolution of state audits during the second quarter of 2021 which have a disproportionate impact due to lower earnings.

The increase in the effective tax rate from the first six months of 2020 to the first six months of 2021 resulted primarily from a reduction in tax credits and tax on the sale and leaseback transaction partially offset by tax benefit of federal net operating loss in 2021 and the tax benefit generated from investing in PBS in 2020.

The Company’s quarterly tax provision (benefit) for income taxes has historically been calculated using the annual effective tax rate method (“AETR method”), which applies an estimated annual effective tax rate to pre-tax income or loss.

However, the Company recorded its interim income tax provision (benefit) using the discrete method as of January 29, 2021, as allowed under Accounting Standards Codification (“ASC”) 740-270, Accounting for Income Taxes - Interim Reporting.

The Company used the discrete method, rather than the AETR method, due to significant variations in income tax expense, relative to projected annual pre-tax income (loss).

Use of the AETR method would have resulted in a disproportionate and unreliable tax rate.

We presently expect our effective tax rate for 2021 to be approximately 17% to 18%.

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from our operations and our borrowing capacity under our 2019 Revolving Credit Facility.

Our internally generated cash, along with cash on hand at July 31, 2020 was sufficient to finance all of our growth, deferred payment of our dividend declared in March 2020 that was originally scheduled to be paid in May 2020 and was subsequently paid in September 2020, working capital needs and other cash payment obligations in the first three months of 2021.

Based on the continued actions taken by management, such as the reduction in operating expenses to reflect reduced operations and sales levels, elimination of non-essential spending, the suspension of current and future dividend payments and share repurchases and the recent completion of sale and leaseback transactions, management expects to meet its obligations over the next twelve months.

Cash Generated From Operations

Our operating activities provided net cash of $56,991 for the first three months of 2021, representing an increase from the $44,835 net cash provided during the first three months of 2020.

This increase primarily reflected the timing of payments for accounts payable.

Our operating activities provided net cash of $121,316 for the first six months of 2021, representing a decrease from the $184,004 net cash provided during the first six months of 2020.

This decrease primarily reflected the impact on our operations caused by the COVID-19 pandemic partially offset by the timing of payments for accounts payable.

Borrowing Capacity and Debt Covenants

2 unchanged sentences

In the fourth quarter of 2020, we borrowed an additional $39,395 under this option for a one-year period.

At October 30, 2020, we had $949,395 of outstanding borrowings under the 2019 Revolving Credit Facility and we had $31,804 of standby letters of credit related to securing reserved claims under our workers’ compensation insurance and our July 29, 2020 and August 4, 2020 sale and leaseback transactions which reduce our borrowing availability under the 2019 Revolving Credit Facility.

At October 30, 2020, we had $8,196 in borrowing availability under our 2019 Revolving Credit Facility.

At January 29, 2021, we had $874,395 of outstanding borrowings under the 2019 Revolving Credit Facility and $31,626 of standby letters of credit related to securing reserved claims under our workers’ compensation insurance and our July 29, 2020 and August 4, 2020 sale and leaseback transactions, which reduce our borrowing availability under the 2019 Revolving Credit Facility.

At January 29, 2021, we had $83,374 in borrowing availability under our 2019 Revolving Credit Facility.

During the second quarter of 2021, we repaid $75,000 of borrowings under the 2019 Revolving Credit Facility.

See Note 5 to our Condensed Consolidated Financial Statements for further information on our long-term debt.

3 unchanged sentences

Additionally, during this Covenant Relief Period, our cash payments with respect to capital expenditures may not exceed $60,000 in the aggregate.

As of January 29, 2021, cash payments with respect to capital expenditures during the Covenant Relief Period were $37,030.

In the third quarter of 2021, we entered into an amendment to the 2019 Revolving Credit Facility which reduced the commitment amount of $950,000 to $800,000 and extended the waiver for the financial covenants for the third and fourth quarters of 2021 (“Extended Covenant Relief Period”).

During this Extended Covenant Relief Period, we are 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 Extended Covenant Relief Period, our cash payments with respect to capital expenditures are prohibited from exceeding $70,000 in the aggregate.

In the third quarter of 2021, prior to the amendment of the credit facility, we repaid $100,000 of borrowings under the 2019 Revolving Credit Facility.

Capital Expenditures and Proceeds from Sale of Property and Equipment

Capital expenditures (purchase of property and equipment) net of proceeds from insurance recoveries were $11,214 for the first three months of 2021 as compared to $27,828 for the same period in the prior year.

Capital expenditures (purchase of property and equipment) net of proceeds from insurance recoveries were $29,224 for the first six months of 2021 as compared to $58,289 for the same period in the prior year.

Our capital expenditures consisted primarily of capital investments for existing stores, new store locations and capital expenditures for strategic initiatives.

The decrease in capital expenditures during the first three months of 2021 as compared to the first three months of 2020 resulted primarily from lower capital expenditures for existing stores as well as our decreases in new store construction, store remodels and other similar expenditures in response to the COVID-19 pandemic.

The decrease in capital expenditures during the first six months of 2021 as compared to the first six months of 2020 resulted primarily from lower capital expenditures for existing stores as well as our decreases in new store construction, store remodels and other similar cost-saving measures in response to the COVID-19 pandemic.

We estimate that our capital expenditures during 2021 will be approximately $90,000.

2 unchanged sentences

See the discussion above under “Borrowing Capacity and Debt Covenants” regarding a debt covenant restriction on our cash payment for capital expenditures.

The proceeds from sale of property and equipment were $149,829 for the first three months of 2021 as compared to $1,534 for the same period in the prior year.

The proceeds from sale of property and equipment were $149,877 for the first six months of 2021 as compared to $1,565 for the same period in the prior year.

This increase primarily relates to the sale and leaseback transaction entered into on August 4, 2020.

6 unchanged sentences

Effective July 18, 2019, we entered into a strategic relationship with PBS, a food, beverage and entertainment concept, by purchasing a non-controlling interest in the concept.

As part of the transaction, we agreed to fund PBS up to $51,000 through calendar 2020 of which we funded $16,000 during the first quarter of 2020.

During the first quarter of 2020, we recorded a loss related to our equity investment in PBS of $5,980 which was recorded in the net loss from unconsolidated subsidiary line on our Condensed Consolidated Statement of Income.

As part of the transaction, we agreed to fund PBS up to $51,000 through calendar 2020, of which we funded $33,000 during the first six months of 2020.

During the first six months of 2020, we recorded a loss related to our equity investment in PBS of $9,564 which was recorded in the net loss from unconsolidated subsidiary line on our Condensed Consolidated Statement of Income.

We believed the investment in PBS provided us with a growth vehicle to deliver additional shareholder value.

7 unchanged sentences

Following the Covenant Relief Period, under the 2019 Revolving Credit Facility, provided there is no default existing and the total of our availability under the 2019 Revolving Credit Facility plus our cash and cash equivalents on hand is at least $100,000 (the “Cash Availability”), we may declare and pay cash dividends on shares of our common stock and repurchase shares of our common stock (1) in an unlimited amount if, at the time the dividend or the repurchase is made, our consolidated total leverage ratio is 3.00 to 1.00 or less and (2) in an aggregate amount not to exceed $100,000 in any fiscal year if our consolidated total leverage ratio is greater than 3.00 to 1.00 at the time the dividend or repurchase is made;

notwithstanding (1) and (2), so long as immediately after giving effect to the payment of any such dividends Cash Availability is at least $100,000, we may declare and pay cash dividends on shares of our common stock in an aggregate amount not to exceed in any fiscal year the product of the aggregate amount of dividends declared in the fourth quarter of the immediately preceding fiscal year multiplied by four.

notwithstanding (1) and (2), so long as Cash Availability is at least $100,000 immediately after giving effect to the payment of any such dividends, we may declare and pay cash dividends on shares of our common stock in an aggregate amount not to exceed in any fiscal year the product of the aggregate amount of dividends declared in the fourth quarter of the immediately preceding fiscal year multiplied by four.

Additionally, during the Extended Covenant Relief Period, we are subject to additional restrictions on our ability to pay dividends.

We are prohibited from declaring or paying cash dividends during the third quarter of 2021.

We may declare but not pay cash dividends during the fourth quarter of 2021.

To preserve available cash during the COVID-19 pandemic and in light of the uncertainties as to its duration and economic impact, we deferred payment of the dividend of $1.30 per share declared in the third quarter of 2020 until September 2, 2020 to shareholders of record on August 14, 2020.

1 unchanged sentence

In response to the COVID-19 pandemic, we have temporarily suspended all future share repurchases.

During the first three months of 2021, we issued 22,928 shares of our common stock resulting from the vesting of share-based compensation awards.

During the first six months of 2021, we issued 27,016 shares of our common stock resulting from the vesting of share-based compensation awards.

Related tax withholding payments on these share-based compensation awards resulted in a net use of cash of $1,999.

Working Capital

In the restaurant industry, virtually all sales are either for cash or third-party credit or debit card.

In the restaurant industry, virtually all sales are either for third-party credit or debit card or cash.

Restaurant inventories purchased through our principal food distributor are on terms of net zero days, while restaurant inventories purchased locally are generally financed from normal trade credit.

4 unchanged sentences

Many other operating expenses have normal trade terms and certain expenses, such as certain taxes and some benefits, are deferred for longer periods of time.

We had positive working capital of $380,247 at October 30, 2020 versus positive working capital of $191,956 at July 31, 2020.

The change in working capital from July 31, 2020 to October 30, 2020 primarily resulted from the increase in cash, the decrease in the dividend payable due to the temporary suspension of future dividend payments, lower incentive accruals resulting from the payment of annual and long-term incentive bonuses and the change in retail inventory levels partially offset by the timing of payments for accounts payable.

The increase in cash resulted primarily due to the proceeds received from the sale and leaseback transaction completed on August 4, 2020 and lower payments for annual and long-term incentive bonuses as compared to the prior year.

We had positive working capital of $358,082 at January 29, 2021 versus positive working capital of $191,956 at July 31, 2020.

The change in working capital from July 31, 2020 to January 29, 2021 primarily resulted from the increase in cash, the decrease in the dividend payable due to the temporary suspension of future dividend payments and the increase in our income taxes receivable partially offset by the increase in sales of our gift cards during the holiday shopping season and the timing of payments for accounts payable.

The increase in cash resulted primarily due to the proceeds received from the sale and leaseback transaction completed on August 4, 2020.

Off-Balance Sheet Arrangements

30 unchanged sentences

The accuracy of such provisions can vary materially from original estimates and management regularly monitors the adequacy of the provisions until final disposition occurs.

We have not made any material changes in our methodology for assessing impairments during the first three months of 2021, and we do not believe that there is a reasonable likelihood that there will be a material change in the estimates or assumptions used by us in the future to assess impairment of long-lived assets.

We have not made any material changes in our methodology for assessing impairments during the first six months of 2021, and we do not believe that there is a reasonable likelihood that there will be a material change in the estimates or assumptions used by us in the future to assess impairment of long-lived assets.

However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and fair values of long-lived assets, we may be exposed to losses that could be material.

15 unchanged sentences

Our accounting policies regarding insurance reserves include certain actuarial assumptions and management judgments regarding economic conditions, the frequency and severity of claims and claim development history and settlement practices.

We have not made any material changes in the methodology used to establish our insurance reserves during the first three months of 2021 and do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate the insurance reserves.

We have not made any material changes in the methodology used to establish our insurance reserves during the first six months of 2021 and do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate the insurance reserves.

However, changes in these actuarial assumptions, management judgments or claims experience in the future may produce materially different amounts of expense that would be reported under these insurance programs.

8 unchanged sentences

An estimate of shrinkage is recorded for the time period between physical inventory counts by using a two-year average of the physical inventories’ results on a store-by-store basis.

We have not made any material changes in the methodologies, estimates or assumptions related to our merchandise inventories during the first three months of 2021 and do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions in the future.

We have not made any material changes in the methodologies, estimates or assumptions related to our merchandise inventories during the first six months of 2021 and do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions in the future.

However, actual obsolescence or shrinkage recorded may produce materially different amounts than we have estimated.

11 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis