What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-25 compared with 2021-02-23 · 172 added, 128 removed, 279 unchanged (52% of the section changed)

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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 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.

At April 30, 2021, we operated 664 Cracker Barrel stores in 45 states and 37 Maple Street Biscuit Company (“MSBC”) company-owned locations in eight states.

At April 30, 2021, MSBC had seven franchised locations.

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

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Readers are advised, however, to consult any future public disclosures that we may make on related subjects in reports that we file with or furnish to the SEC or in our other public disclosures.

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 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.

Management continues to believe that the Cracker Barrel brand remains one of the strongest and most differentiated brands in the restaurant industry.

Our priorities for 2021 consist of the following:

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

During 2021, we are focused on driving topline sales by further growing our off-premise business, 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.

During 2021, we are focused on driving topline sales by further growing our off-premise business even as in-person dining volumes have begun to increase during the ongoing COVID-19 pandemic recovery, introducing menu and beverage innovation and evolving our digital infrastructure and digital strategy to improve the guest experience across all channels.

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

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

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

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

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

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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 second quarter and first six months of 2021 as well as the same periods in the prior year.

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

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

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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 second quarter and first six months of 2021 as well as the same periods in the prior year.

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

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

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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 second quarter and first six months of 2021 as well as the same periods in the prior year.

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

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

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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 second quarter and first six months of 2021 as well as the same periods in the prior year.

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

Results of Operations

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:

The following table highlights our operating results by percentage relationships to total revenue for the quarter and nine months ended April 30, 2021 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Nine Months Ended

Total revenue

4 unchanged sentences

Gain on sale and leaseback transaction

Operating income

Operating income (loss)

Interest expense, net

Income before income taxes

Income (loss) before 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 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:

Net income (loss)

The following table sets forth the change in the number of Company-owned and franchised units in operation at the beginning and end of the quarters and nine months ended April 30, 2021 and May 1, 2020 as well as the number of Company-owned and franchised units at the end of the quarters and nine months ended April 30, 2021 and May 1, 2020:

Quarter Ended

Six Months Ended

Nine Months Ended

Net change in units:

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Franchise – MSBC

Effective October 10, 2019, we acquired MSBC.

In 2020, we converted six of our former Holler & Dash locations into MSBC locations.

These six locations were temporarily closed during the third quarter of 2020.

Total Revenue

Total revenue for the 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:

Total revenue for the third quarter and first nine months of 2021 increased 64.9% and 0.5%, respectively, as compared to the same periods in the prior year.

While recovery is progressing and all dining rooms were open to some extent during the third quarter of 2021, the COVID-19 pandemic continues to negatively impact our sales and traffic as a result of both changes in consumer behavior and federal, state and local governmental authorities’ continuation of various restrictions on travel, group gatherings and limitations on dine-in services.

Dining room service was operational to varying degrees, yet in most locations continued to be impacted by capacity restrictions, social distancing guidelines, and decreased consumer demand for in-person dining.

The following table highlights the key components of revenue for the quarter and nine months ended April 30, 2021 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Nine Months Ended

Revenue in dollars:

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Average check increase

Comparable restaurant guest traffic decrease (2) :

Comparable restaurant guest traffic increase (decrease) (2) :

(1) Average unit volumes include sales of all stores except for MSBC and Holler & Dash.

(2) Comparable store sales consist of sales of stores open at least six full quarters at the beginning of the period and are measured on comparable calendar weeks.

(2) Comparable store sales and traffic consist of sales of stores open at least six full quarters at the beginning of the period and are measured on comparable calendar weeks.

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

For the 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.

For the third quarter of 2021, our comparable store restaurant sales increased as a result of a 50.8% guest traffic increase and a 5.7% average check increase (including a 2.8% average menu price increase) as compared to the prior year third quarter.

For the first nine months of 2021, our comparable store restaurant sales decrease resulted from a 5.4% guest traffic decrease as compared to the prior year period partially offset by a 2.8% average check increase (including a 1.7% average menu price increase) as compared to the prior year period.

Our retail sales are made substantially to our restaurant guests.

For the 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.

For the third quarter of 2021, our comparable store retail sales increase resulted primarily from the guest traffic increase and strong performance in the apparel and accessories, food and convenience, toys and décor merchandise categories.

For the first nine months of 2021, our comparable retail sales increase resulted from strong performance in the toys, food and convenience, and décor merchandise categories as compared to the same period in the prior year partially offset by the guest traffic decrease.

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 second quarter and first six months of 2021 as compared to the same periods 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 third quarter and first nine months of 2021 as compared to the same periods in the prior year:

Quarter Ended

Six Months Ended

Nine Months Ended

Cost of Goods Sold in dollars:

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Cost of Goods Sold by percentage of revenue:

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

The decrease in restaurant cost of goods sold as a percentage of restaurant revenue in the third quarter of 2021 as compared to the same period in the prior year primarily resulted from lower food waste, our menu price increase referenced above and a shift to lower cost menu items partially offset by commodity inflation of 0.6%.

Lower food waste and lower cost menu items accounted for decreases of 0.9% and 0.3%, respectively, as a percentage of restaurant revenue for the third quarter of 2021 as compared to the same period in the prior year.

The increase in restaurant cost of goods sold as a percentage of restaurant revenue in the first nine months of 2021 as compared to the same period in the prior year was primarily the result of a shift to higher cost items and commodity inflation of 1.7% partially offset by our menu price increase referenced above and lower food waste.

Higher cost menu items accounted for an increase of 0.6% as a percentage of restaurant revenue for the first nine months of 2021 as compared to the same period in the prior year.

Lower food waste accounted for a decrease of 0.2% in restaurant cost of goods sold as a percentage of restaurant revenue for the first nine months of 2021 as compared to the same period in the prior year.

We presently expect the rate of commodity inflation to be approximately 2.4% in 2021.

The decrease in retail cost of goods sold as a percentage of retail revenue in the third quarter of 2021 as compared to the third quarter of 2020 resulted from higher initial margin, a decrease in discounts and allowances, lower markdowns, lower freight expense, the change in the provision for obsolete inventory and lower inventory shrinkage.

Third Quarter

Decrease as a Percentage of

Total Revenue

Higher initial margin

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

Freight expense

Provision for obsolete inventory

Inventory shrinkage

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

First Nine Months

(Decrease) Increase as a

Percentage of Total Revenue

Lower initial margin

Higher freight expense

Provision for obsolete inventory

Higher initial margin

Inventory shrinkage

Freight expense

Discounts and allowances

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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 second quarter and first six months of 2021 as compared to the same periods in the prior year:

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

Quarter Ended

Six Months Ended

Nine Months Ended

Labor and related expenses

This percentage change resulted primarily from the following:

Second Quarter

Increase (Decrease) as a

Third Quarter

(Decrease) Increase as a

Percentage of Total Revenue

Store hourly labor

Store management compensation

Miscellaneous wages

Employee health care expense

Payroll tax expense

Workers’ compensation expense

Store bonus expense

Store hourly labor

This percentage change resulted primarily from the following:

First Six Months

Increase (Decrease) as a

First Nine Months

(Decrease) Increase as a

Percentage of Total Revenue

Store hourly labor

Miscellaneous wages

Store management compensation

Employee health care expense

Workers’ compensation expense

Payroll taxes expense

Preopening labor expense

Store hourly labor

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.

In response to the COVID-19 pandemic, in March 2020, we temporarily closed the dining rooms in all of our restaurants and operated with pick-up or delivery only.

As a result, in general, certain expenses for the third quarter and first nine months of 2020 as a percentage of total revenue were materially increased by the significant reduction in total revenue and reduced operations caused by the impact of the COVID-19 pandemic.

During the third quarter of 2021, the dining rooms in all of our restaurants were open to some extent.

As a result, in general, during the third quarter of 2021 and the first nine months of 2021 as compared to the same periods in the prior year, certain expenses as a percentage of total revenue materially decreased by the significant increase in total revenue and increased operations.

In particular, the decreases in store management compensation, workers’ compensation expense and payroll taxes expense as a percentage of total revenue in the third quarter and first nine months of 2021 as compared to the same periods in the prior year were primarily driven by the increases in total revenue in 2021.

Additionally, the decrease in preopening labor expense as a percentage of total revenue in the third quarter of 2021 as compared to the same period in the prior year were primarily driven by the increase in total revenue in the third quarter of 2021.

The decreases in miscellaneous wages as a percentage of total revenue for the third quarter and first nine months of 2021 as compared to the same periods in the prior year resulted primarily from the non-recurrence of retention pay for our field employees;

in the third quarter of 2020, we paid certain of our field employees retention pay due to reduced operations as a result of the COVID-19 pandemic.

Lower employee health care expenses as a percentage of total revenue for the third quarter and first nine months of 2021 as compared to the same periods in the prior year resulted primarily from lower claims activity.

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

The increases in store hourly labor expense as a percentage of total revenue for the third quarter and first nine months of 2021 as compared to the same periods in the prior year resulted primarily from wage inflation exceeding menu price increases and a reduction in productivity.

Other Store Operating Expenses

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

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

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

Quarter Ended

Six Months Ended

Nine Months Ended

Other store operating expenses

These percentage changes resulted primarily from the following:

Second Quarter

Increase as a Percentage

of Total Revenue

First Six Months

Increase as a Percentage

This percentage changes resulted primarily from the following:

Third Quarter

Decrease as a Percentage

of Total Revenue

Other store expenses

Depreciation expense

Maintenance expense

Advertising expense

Utilities expense

Real and personal property taxes expense

Supplies expense

Loss on disposition of property and equipment

This percentage change resulted primarily from the following:

First Nine Months

Increase (Decrease) as a

Percentage of Total Revenue

Other store expenses

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.

Loss on disposition of property and equipment

The decreases in maintenance expense, advertising expense, real and personal property taxes expense and loss on asset disposition as a percentage of total revenue in the third quarter of 2021 as compared to the same period in the prior year were primarily driven by the increase in total revenue in the third quarter of 2021.

Additionally, the decreases in depreciation expense and loss on disposition of property and equipment for the first nine months of 2021 as compared to the same period in the prior year were primarily driven by the increase in total revenue in the first nine months of 2021.

The decreases in depreciation expense as a percentage of total revenue for the third quarter and first nine months of 2021 as compared to the same periods in the prior year resulted primarily from lower spending on capital expenditures and the increases in total revenue in 2021.

The decrease in utilities expense as a percentage of total revenue for the third quarter of 2021 as compared to the same period in the prior year was primarily driven by the increase in total revenue in 2021 partially offset by the severe weather impact experienced in Texas during the third quarter of 2021.

The decrease in supplies expense as a percentage of total revenue for the third quarter of 2021 as compared to the same period in the prior year was primarily driven by the increase in total revenue in the third quarter of 2021 partially offset by higher costs.

For both the third quarter and first nine months of 2021, we incurred higher costs associated with the growth in our off-premise business and increased operations in our dining rooms during the third quarter of 2021.

The increase in supplies expense as a percentage of total revenue for the first nine months of 2021 as compared to the same period in the prior year was primarily driven by the higher costs referred above.

The decrease in rent expense as a percentage of total revenue for the third quarter of 2021 as compared to the same period in the prior year was primarily driven by increases in total revenue in 2021 partially offset by the sale and leaseback transaction described below.

The increase in rent expense as a percentage of total revenue for the first nine months of 2021 as compared to the same period in the prior year resulted primarily from the sale and leaseback transaction involving 62 of our 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 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.

Additionally, the related rent expense includes $3,183 and $9,551, respectively, recorded in the third quarter and first nine months of 2021 for the non-cash amortization of the asset recognized from the gain on the Company’s sale and leaseback transactions.

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

The 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.

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

General and Administrative Expenses

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

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

Quarter Ended

Six Months Ended

Nine Months Ended

General and administrative expenses

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.

Third Quarter

(Decrease) Increase as a

Percentage of Total

Payroll and related expense

Professional fees expense

Other expense

Depreciation expense

Incentive compensation expense

This percentage change resulted primarily from the following:

First Nine Months

Increase (Decrease) as a

Percentage of Total

Incentive compensation expense

Payroll and related expense

The decreases in payroll and related expense, professional fees expense, and other expenses for the third quarter of 2021 as a percentage of total revenue as compared to the same period in the prior year were primarily driven by cost savings initiatives implemented in response to the COVID-19 pandemic and the increase in total revenue in the third quarter of 2021.

Additionally, the decrease in payroll and related expense for the first nine months of 2021 as compared to the same period in the prior year was also primarily driven by the cost savings measures and the increase in total revenue in the first nine months of 2021.

The increases in incentive compensation expense as a percentage of total revenue in the third quarter and first nine months of 2021 as compared to the same periods in the prior year resulted primarily from better performance against financial objectives during the third quarter and first nine months of 2021 as compared to the same periods in the prior year.

The decrease in depreciation expense during the third quarter of 2021 as a percentage of total revenue as compared to the same period in the prior year was primarily due to the increase in revenue in the third quarter of 2021 as compared to the same period in the prior year.

Gain on Sale and Leaseback Transaction

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See Note 10 to the Condensed Consolidated Financial Statements for additional information regarding this sale and leaseback transaction.

During the third quarter of 2020, we determined that five leased Cracker Barrel stores were impaired, resulting in impairment charges of $18,336.

Each of these leased stores was impaired because of declining operating performance and resulting negative cash flow projections as a result of the impact of the COVID-19 pandemic.

It is possible that we may recognize additional impairment as a result of the unknown impacts of the COVID-19 pandemic and our response.

The Company did not incur impairment charges during the first nine months of 2021.

Interest Expense, net

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:

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

Quarter Ended

Six Months Ended

Nine Months Ended

Interest expense, net

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

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:

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

Additionally, as part of our amendment to the 2019 Revolving Credit Facility in the third quarter of 2021, we incurred additional interest expense of $452 related to the write-off of deferred financing costs.

Provision for Income Taxes (Income Tax Benefit)

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

Quarter Ended

Six Months Ended

Nine 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 decrease in the effective rate in the third quarter of 2021 and increase in the first nine months of 2021 as compared to the same periods in the prior year are primarily due to our recognition of loss on our investment in PBS, which is excluded from income when calculating the effective tax rate and the tax benefits recorded for FICA Tip and Work Opportunity federal tax credits.

We currently expect our effective tax rate for 2021 to be approximately 18% to 19%.

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

However, in the prior year, the Company recorded its interim income tax provision using the discrete method as of May 1, 2020, as allowed under Accounting Standards Codification (“ASC”) 740-270, Accounting for Income Taxes - Interim Reporting.

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

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

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

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

Liquidity and Capital Resources

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

Our internally generated cash, along with cash on hand 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 six 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.

Based on the actions taken by management, such as cost savings measures, the suspension of dividend payments during 2021 except for the deferred dividend paid in September 2020, the temporary suspension of share repurchases during 2021 year-to-date and the recent completion of sale and leaseback transactions, management expects to meet its obligations over the next twelve months.

Cash Generated From Operations

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.

Our operating activities provided net cash of $212,537 for the first nine months of 2021, representing an increase from the $87,232 net cash provided during the first nine months of 2020.

This increase primarily reflected the timing of payments for accounts payable and certain taxes and lower bonus payments made in 2021 as a result of the prior year impact of COVID-19 pandemic on our operations in 2020.

Borrowing Capacity and Debt Covenants

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

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.

In the third quarter of 2021, we entered into an amendment to the 2019 Revolving Credit Facility which reduced the commitment amount from $950,000 to $800,000.

At April 30, 2021, we had $614,395 of outstanding borrowings under the 2019 Revolving Credit Facility and $31,626 of standby letters of credit related to securing reserved claims under our workers’ compensation insurance and our July 29, 2020 and August 4, 2020 sale and leaseback transactions, which reduce our borrowing availability under the 2019 Revolving Credit Facility.

At April 30, 2021, we had $193,374 in borrowing availability under our 2019 Revolving Credit Facility.

During the first nine months of 2021, we repaid $395,000 of borrowings and borrowed an additional $60,000 under the 2019 Revolving Credit Facility.

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

The 2019 Revolving Credit Facility contains customary financial covenants, which include maintenance of a maximum consolidated total leverage ratio and a minimum consolidated interest coverage ratio.

As a result of the negative impact of the COVID-19 pandemic on our financial position and results of operations, we have obtained 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, we are required to maintain liquidity (defined as the availability under the 2019 Revolving Credit Facility plus unrestricted cash and cash equivalents) of at least $140,000.

Additionally, during 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.

As a result of the negative impact of the COVID-19 pandemic on our financial position and results of operations, we have obtained waivers for the financial covenants for the fourth quarter of 2020 and the first and second quarters of 2021 (“Covenant Relief Period”) as well as for the third and fourth quarters of 2021 (“Extended Covenant Relief Period”).

During these relief periods, we are required to maintain liquidity (defined as the availability under the 2019 Revolving Credit Facility plus unrestricted cash and cash equivalents) of at least $140,000.

Additionally, during the Extended Covenant Relief Period, our cash payments with respect to capital expenditures may not exceed $70,000 in the aggregate.

As of April 30, 2021, cash payments with respect to capital expenditures during the Extended Covenant Relief Period were $12,704.

Capital Expenditures and Proceeds from Sale of Property and Equipment

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

Capital expenditures (purchase of property and equipment) net of proceeds from insurance recoveries were $44,115 for the first nine months of 2021 as compared to $82,645 for the same period in the prior year.

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

The decrease in capital expenditures during the first 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.

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

We estimate that our capital expenditures during 2021 will be approximately $70,000.

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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 $149,877 for the first six months of 2021 as compared to $1,565 for the same period in the prior year.

The proceeds from sale of property and equipment were $149,910 for the first nine months of 2021 as compared to $1,827 for the same period in the prior year.

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

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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 $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.

As part of the transaction, we agreed to fund PBS up to $51,000 through calendar 2020, of which we funded $35,500 during the first nine months of 2020, for a total of $48,000.

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

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

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

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

Additionally, we have suspended all further dividend payments under the Company’s dividend program until further notice.

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

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.

Additionally, we temporarily suspended all further dividend payments under the Company’s dividend program until the first quarter of 2022.

In the fourth quarter of 2021, in light of the ongoing recovery from the COVID-19 pandemic, our Board of Directors resumed our dividend program and approved a dividend payable on August 6, 2021 to shareholders of record on July 16, 2021 of $1.00 per share.

In response to the COVID-19 pandemic, we have temporarily suspended all share repurchases, subject to the ongoing evaluation of our Board of Directors in light of changing market dynamics.

During the first nine months of 2021, we issued 28,976 shares of our common stock resulting from the vesting of share-based compensation awards.

Related tax withholding payments on these share-based compensation awards resulted in a net use of cash of $2,127.

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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 $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.

We had positive working capital of $144,915 at April 30, 2021 versus positive working capital of $191,956 at July 31, 2020.

The change in working capital from July 31, 2020 to April 30, 2021 primarily resulted from the decrease in cash, the timing of payments for accounts payable and certain taxes and an increase in the current liability for leases partially offset by the temporary suspension of dividend payments.

The decrease in cash resulted primarily from debt payments partially offset by cash generated by operations and proceeds received from the sale and leaseback transaction completed on August 4, 2020.

Off-Balance Sheet Arrangements

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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 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.

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

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

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

We have not made any material changes in the methodology used to establish our insurance reserves during the first 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.

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

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

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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 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.

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

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

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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