CRACKER BARREL OLD COUNTRY STORE, INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Cracker Barrel Old Country Store, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Cracker Barrel Old Country Store, Inc. and subsidiaries (the "Company") as of July 30, 2021, and July 31, 2020, the related consolidated statements of income (loss), consolidated statements of comprehensive income (loss), consolidated statements of changes in shareholders’ equity, and consolidated statements of cash flows, for each of the three years in the period ended July 30, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 30, 2021, and July 31, 2020, and the results of its operations and its cash flows for each of the three years in the period ended July 30, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of July 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 24, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. Change in Accounting Principle As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases using the modified retrospective adoption on August 3, 2019 due to the adoption of Accounting Standards Codification Topic 842, “Leases”. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Commitments and Contingencies—Insurance Reserves—Refer to Notes 2 and 17 to the financial statements Critical Audit Matter Description The Company self‐insures a significant portion of its workers’ compensation and general liability program and records a reserve for all unresolved claims and an estimate of incurred but not reported (IBNR) claims. These reserves and estimates of IBNR claims are based upon a full‐scope actuarial study performed annually by management’s specialist at the end of the third quarter and are adjusted by the actuarially determined losses and actual claims payments for the fourth quarter. The reserves and losses in the actuarial study represent a range of possible outcomes within which no given estimate is more likely than any other estimate. Using this information, the Company records the expected losses in the lower half of the range, which is discounted to present value using a risk‐free interest rate. The Company also monitors actual claims development as another means of estimating the adequacy of the historical reserves. 51 Index We identified insurance reserves as a critical audit matter because estimating the reserve for all unresolved claims and IBNR claims involves significant estimation by management. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists, when performing audit procedures to evaluate whether insurance reserves were appropriately recorded as of July 30, 2021. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the insurance reserves included the following, among others: • We tested the effectiveness of controls related to insurance reserves, including management’s controls over the claims data provided to the actuary and those over the estimation of unresolved claims and IBNR claims. • We evaluated the methods and assumptions used by management to estimate the insurance reserves by: - Testing the underlying data that served as the basis for the actuarial analysis, including reconciling the claims data to the actuarial analysis, testing current‐year claims and payment data, verifying the self‐insured retention limits, testing the annual exposure data, and recalculating the discount using the published risk‐free rates. - Comparing management’s selected insurance reserve estimates within the range provided by their third‐party actuary to historical trends. - Performing a retrospective review by comparing the prior‐year recorded amounts to the subsequent claim emergence. - Developing, with the assistance of our actuarial specialists, an independent range of estimates of the insurance reserves, utilizing paid and reported loss development factors from the Company’s historical data and industry loss development factors as deemed necessary, and comparing our estimated range to management’s estimates. Long-term Debt—2026 Notes—Refer to Note 7 to the financial statements Critical Audit Matter Description On June 18, 2021, the Company issued $300 million aggregate principal amount of 0.625% Convertible Senior Notes due 2026 (the “ 2026 Notes”), which included the exercise in full of the initial purchasers’ option to purchase up to an additional $25 million principal amount of the 2026 Notes. In accordance with accounting guidance on embedded conversion features indexed to and settled in equity, the Company valued and bifurcated the conversion option associated with the 2026 Notes from the respective host debt instrument. The carrying amount of the equity component is recorded as a debt discount and represents the difference between the proceeds from the issuance of the Notes and the fair value of the liability component of the 2026 Notes. The significant assumptions used in the fair value of the liability component of the 2026 Notes were the discount rate based on the Company’s implied credit spread and the expected volatility of Company’s stock price. Application of the accounting framework for the 2026 Notes is complex, and the determination of the fair value of the liability component requires the Company to make significant estimates and assumptions relating to the implied credit spread and expected volatility. Therefore, performing audit procedures to evaluate the appropriateness of the accounting framework and the reasonableness of the significant estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the 2026 Notes included the following procedures, among others: • We tested the effectiveness of internal controls over the 2026 Notes, including the Company’s accounting treatment for the recording of the 2026 Notes and the determination of the fair value of the liability component. • With the assistance of professionals in our firm having expertise in debt issuance accounting, we evaluated the Company’s conclusions regarding the accounting treatment applied to the recording of the 2026 Notes. 52 Index • With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and the significant assumptions used to determine the fair value of the liability component, by: - Testing the source information underlying the fair value of the liability component and the mathematical accuracy of the calculation. - Developing a range of independent estimates and compared those to the fair value of the liability component determined by management. /s/ Deloitte & Touche LLP Nashville, Tennessee September 24, 2021 We have served as the Company’s auditor since 1974. 53 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONSOLIDATED BALANCE SHEETS (In thousands except share data) ASSETS July 30, 2021 July 31, 2020 Current Assets: Cash and cash equivalents $ 144,593 $ 436,996 Accounts receivable 27,372 20,157 Income taxes receivable 21,123 28,852 Inventories 138,320 139,091 Prepaid expenses and other current assets 22,188 17,916 Total current assets 353,596 643,012 Property and Equipment: Land 255,238 306,201 Buildings and improvements 776,441 897,120 Restaurant and other equipment 783,264 748,606 Leasehold improvements 405,785 394,461 Construction in progress 13,761 17,130 Total 2,234,489 2,363,518 Less: Accumulated depreciation and amortization 1,254,639 1,233,457 Property and equipment – net 979,850 1,130,061 Operating lease right-of-use assets, net 974,477 691,949 Goodwill 4,690 4,690 Intangible assets 21,285 20,960 Other assets 57,796 53,586 Total $ 2,391,694 $ 2,544,258 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 135,176 $ 103,504 Current portion of long-term debt 124 39,395 Current operating lease liabilities 50,451 42,301 Taxes withheld and accrued 48,031 31,177 Accrued employee compensation 64,792 56,315 Accrued employee benefits 23,724 24,377 Deferred revenues 93,157 94,762 Dividend payable 23,970 31,598 Other current liabilities 25,837 27,627 Total current liabilities 465,262 451,056 Long-term debt 327,253 910,000 Long-term operating lease liabilities 748,305 632,630 Long-term interest rate swap liability — 23,860 Other long-term obligations 88,615 80,605 Deferred income taxes 98,626 27,718 Commitments and Contingencies (Notes 11 and 17) Shareholders’ Equity: Preferred stock – 100,000,000 shares of $ 0.01 par value authorized; 300,000 shares designated as Series A Junior Participating Preferred Stock; no shares issued — — Common stock – 400,000,000 shares of $ 0.01 par value authorized; 2021 – 23,497,166 shares issued and outstanding; 2020 – 23,697,396 shares issued and outstanding 235 237 Additional paid-in capital — — Accumulated other comprehensive loss — ( 20,346 ) Retained earnings 663,398 438,498 Total shareholders’ equity 663,633 418,389 Total $ 2,391,694 $ 2,544,258 See Notes to Consolidated Financial Statements. 54 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS) (In thousands except share data) Fiscal years ended July 30, 2021 July 31, 2020 August 2, 2019 Total revenue $ 2,821,444 $ 2,522,792 $ 3,071,951 Cost of goods sold (exclusive of depreciation and rent) 865,261 779,937 931,077 Labor and other related expenses 983,120 924,994 1,078,751 Other store operating expenses 676,301 614,733 626,453 General and administrative expenses 147,825 146,975 152,826 Gain on sale and leaseback transactions ( 217,722 ) ( 69,954 ) — Impairment — 22,496 — Operating income 366,659 103,611 282,844 Interest expense 56,108 22,327 16,488 Income before income taxes 310,551 81,284 266,356 Provision for income taxes (income tax benefit) 56,038 ( 28,683 ) 42,955 Loss from unconsolidated subsidiary — ( 142,442 ) — Net income (loss) $ 254,513 $ ( 32,475 ) $ 223,401 Net income (loss) per share - basic $ 10.74 $ ( 1.36 ) $ 9.29 Net income (loss) per share - diluted $ 10.71 $ ( 1.36 ) $ 9.27 Basic weighted average shares outstanding 23,692,063 23,865,367 24,037,272 Diluted weighted average shares outstanding 23,767,390 23,865,367 24,096,396 See Notes to Consolidated Financial Statements. 55 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) Fiscal years ended July 30, 2021 July 31, 2020 August 2, 2019 Net income (loss) $ 254,513 $ ( 32,475 ) $ 223,401 Other comprehensive income (loss) before income tax expense (benefit): Change in fair value of interest rate swaps 27,110 ( 17,740 ) ( 15,466 ) Income tax expense (benefit) 6,764 ( 4,307 ) ( 3,868 ) Other comprehensive income (loss), net of tax 20,346 ( 13,433 ) ( 11,598 ) Comprehensive income (loss) $ 274,859 $ ( 45,908 ) $ 211,803 See Notes to Consolidated Financial Statements. 56 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands except share data) Common Stock Additional Paid-In Accumulated Other Comprehensive Retained Total Shareholders’ Shares Amount Capital Income (Loss) Earnings Equity Balances at August 3 , 2018 24,011,550 $ 240 $ 44,049 $ 4,685 $ 532,807 $ 581,781 Comprehensive Income: Net income — — — — 223,401 223,401 Other comprehensive loss, net of tax — — — ( 11,598 ) — ( 11,598 ) Total comprehensive income (loss) — — — ( 11,598 ) 223,401 211,803 Cash dividends declared - $ 8.05 per share — — — — ( 194,558 ) ( 194,558 ) Share-based compensation — — 8,181 — — 8,181 Issuance of share-based compensation awards, net of shares withheld for employee taxes 37,690 1 ( 2,498 ) — — ( 2,497 ) Purchases and retirement of common stock — — — — — — Balances at August 2 , 2019 24,049,240 241 49,732 ( 6,913 ) 561,650 604,710 Comprehensive Income: Net loss — — — — ( 32,475 ) ( 32,475 ) Other comprehensive loss, net of tax — — — ( 13,433 ) — ( 13,433 ) Total comprehensive loss — — — ( 13,433 ) ( 32,475 ) ( 45,908 ) Cash dividends declared - $ 3.90 per share — — — — ( 93,757 ) ( 93,757 ) Share-based compensation — — 6,386 — — 6,386 Issuance of share-based compensation awards, net of shares withheld for employee taxes 27,130 — ( 2,160 ) — — ( 2,160 ) Purchases and retirement of common stock ( 378,974 ) ( 4 ) ( 53,958 ) — ( 1,045 ) ( 55,007 ) Cumulative-effect of change in accounting principle — — — — 4,125 4,125 Balances at July 31 , 2020 23,697,396 $ 237 $ — $ ( 20,346 ) $ 438,498 $ 418,389 Net income — — — — 254,513 254,513 Other comprehensive income, net of tax — — — 20,346 — 20,346 Total comprehensive income — — — 20,346 254,513 274,859 Cash dividends declared - $ 1.00 per share — — — — ( 23,766 ) ( 23,766 ) Share-based compensation — — 8,729 — — 8,729 Issuance of share-based compensation awards, net of shares withheld for employee taxes 32,313 — ( 2,282 ) — — ( 2,282 ) Purchases and retirement of common stock ( 232,543 ) ( 2 ) ( 29,151 ) — ( 5,847 ) ( 35,000 ) Equity component value of convertible note Issuance, net of tax — — 53,004 — — 53,004 Sale of common stock warrant — — 31,710 — — 31,710 Purchase of convertible note hedge — — ( 62,010 ) — — ( 62,010 ) Balances at July 30 , 2021 23,497,166 $ 235 $ — $ — $ 663,398 $ 663,633 See Notes to Consolidated Financial Statements. 57 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Fiscal years ended July 30, 2021 July 31, 2020 August 2, 2019 Cash flows from operating activities: Net income (loss) $ 254,513 $ ( 32,475 ) $ 223,401 Net loss from unconsolidated subsidiary — 142,442 — Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 108,604 118,178 107,537 Amortization of debt discount and issuance costs 864 — — Loss on disposition of property and equipment 4,064 6,469 10,265 Gain on sale and leaseback transactions ( 217,722 ) ( 69,954 ) — Impairment — 23,160 — Share-based compensation 8,729 6,386 8,181 Noncash lease expense 55,817 63,442 — Amortization of asset recognized from gain on sale and leaseback transactions 12,735 — — Changes in assets and liabilities: Accounts receivable ( 7,016 ) 3,124 ( 3,261 ) Income taxes receivable 7,729 ( 19,403 ) ( 9,449 ) Inventories 771 16,094 1,295 Prepaid expenses and other current assets ( 3,538 ) 401 ( 1,985 ) Other assets ( 3,997 ) ( 5,638 ) 2,852 Accounts payable 31,672 ( 30,593 ) 9,889 Current operating lease liabilities 8,150 ( 11,269 ) — Taxes withheld and accrued 16,854 ( 7,019 ) 1,127 Accrued employee compensation 8,472 ( 11,573 ) 7,311 Accrued employee benefits ( 653 ) ( 550 ) ( 489 ) Deferred revenues ( 1,605 ) 13,028 5,442 Other current liabilities 2,791 6,868 3,492 Long-term operating lease liabilities ( 59,388 ) ( 48,854 ) — Other long-term obligations 6,919 10,673 1,362 Deferred income taxes 67,138 ( 11,935 ) ( 4,174 ) Net cash provided by operating activities 301,903 161,002 362,796 Cash flows from investing activities: Purchase of property and equipment ( 71,409 ) ( 297,328 ) ( 138,293 ) Proceeds from insurance recoveries of property and equipment 1,279 1,320 753 Proceeds from sale of property and equipment 149,960 207,253 151 Purchase of investment in unconsolidated subsidiary — — ( 89,100 ) Notes receivable from unconsolidated subsidiary — ( 35,500 ) ( 15,085 ) Acquisition of business, net of cash acquired ( 1,500 ) ( 32,971 ) — Net cash provided by (used in) investing activities 78,330 ( 157,226 ) ( 241,574 ) Cash flows from financing activities: Proceeds from issuance of long-term debt 60,000 801,395 400,000 Proceeds from issuance of convertible senior notes 291,605 — — Taxes withheld from issuance of share-based compensation awards ( 2,282 ) ( 2,160 ) ( 2,497 ) Principal payments under long-term debt ( 924,572 ) ( 252,000 ) ( 400,000 ) Proceeds from issuance of warrants 31,710 — — Purchase of convertible note hedge ( 62,010 ) — — Purchases and retirement of common stock ( 35,000 ) ( 55,007 ) — Deferred financing costs ( 420 ) ( 1,348 ) ( 3,022 ) Dividends on common stock ( 31,667 ) ( 94,544 ) ( 193,475 ) Net cash provided by (used in) financing activities ( 672,636 ) 396,336 ( 198,994 ) Net increase (decrease) in cash and cash equivalents ( 292,403 ) 400,112 ( 77,772 ) Cash and cash equivalents, beginning of year 436,996 36,884 114,656 Cash and cash equivalents, end of year $ 144,593 $ 436,996 $ 36,884 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized $ 40,802 $ 20,268 $ 12,100 Income taxes 2,907 5,666 56,450 Supplemental schedule of non-cash investing and financing activities: Capital expenditures accrued in accounts payable $ 5,806 $ 1,691 $ 9,508 Change in fair value of interest rate swaps 27,110 ( 17,740 ) ( 15,466 ) Change in deferred tax asset for interest rate swaps ( 6,764 ) 4,307 3,868 Dividends declared but not yet paid 24,157 32,063 32,859 See Notes to Consolidated Financial Statements. 58 Index CRACKER BARREL OLD COUNTRY STORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data) 1. Description of the Business Cracker Barrel Old Country Store, Inc. and its affiliates (collectively, in the Notes, the “Company”) are principally engaged in the operation and development in the United States (“U.S.”) of the Cracker Barrel Old Country Store® (“Cracker Barrel”) concept. COVID-19 Impact and Company Response Despite experiencing improvements in conditions during 2021 from the initial wave of infections and public health response during the second half of 2020, the COVID-19 pandemic continued 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 dine-in services. During 2021, dining room service was operational to varying degrees in most markets where we operate, yet most locations were impacted at times during the year by capacity restrictions, social distancing guidelines and decreased consumer demand for in-person dining. As of September 15, 2021, all of our stores were open for dine-in service. However, it is possible that renewed outbreaks or increases in cases, either as part of a national trend or on a more localized basis, could result in additional capacity restrictions or limit our dine-in services . In response to the COVID-19 pandemic, we instituted operational protocols to comply with applicable regulatory requirements to protect the health and safety of employees and guests, and we implemented a number of strategies to support the recovery of our business and navigate through the uncertain environment. We continue to focus on growing our off-premise business and investing in our digital infrastructure to improve the guest experience in the face of these ongoing challenges . 2. Summary of Significant Accounting Policies GAAP – The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). Fiscal year – The Company’s fiscal year ends on the Friday nearest July 31st and each quarter consists of thirteen weeks unless noted otherwise. References in these Notes to a year or quarter are to the Company’s fiscal year or quarter unless noted otherwise . Principles of consolidation – The Consolidated Financial Statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated. Cash and cash equivalents – The Company’s policy is to consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Accounts receivable – Accounts receivable represent their estimated net realizable value. Accounts receivable are written off when they are deemed uncollectible. Inventories – Cost of restaurant inventory is determined by the first-in, first-out (“FIFO”) method. Retail inventories are valued using the retail inventory method (“RIM”) except at the retail distribution center which are valued using moving average cost. Approximately 70 % of retail inventories are valued using RIM. Retail inventories valued using RIM are stated at the lower of cost or market. Cost of restaurant inventory and retail inventory valued using moving average cost are stated at the lower of cost and net realizable value. See Note 6 for additional information regarding the components of inventory. Valuation provisions are included for retail inventory obsolescence, retail inventory shrinkage, returns and amortization of certain items. The estimate of retail inventory shrinkage is adjusted upon physical inventory counts. Annual physical inventory counts are conducted based upon a cyclical inventory schedule. An estimate of shrinkage is recorded for the time period between physical inventory counts by using a two-year average of the physical inventories’ results on a store-by-store basis. 59 Index Property and equipment – Property and equipment are stated at cost. For financial reporting purposes, depreciation and amortization on these assets are computed by use of the straight-line and double-declining balance methods over the estimated useful lives of the respective assets, as follows: Years Buildings and improvements 30 - 45 Restaurant and other equipment 2 - 10 Leasehold improvements 1 - 35 Accelerated depreciation methods are generally used for income tax purposes. Total depreciation expense and depreciation expense related to store operations for each of the three years are as follows: 2021 2020 2019 Total depreciation expense $ 107,090 $ 117,259 $ 107,294 Depreciation expense related to store operations* 100,054 109,362 100,366 * Depreciation expense related to store operations is included in other store operating expenses in the Consolidated Statements of Income. Gain or loss is recognized upon disposal of property and equipment. The asset and related accumulated depreciation and amortization amounts are removed from the accounts. Maintenance and repairs, including the replacement of minor items, are charged to expense and major additions to property and equipment are capitalized. Impairment of long-lived assets – The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying value of the asset to the undiscounted future cash flows expected to be generated by the asset. If the total expected future cash flows are less than the carrying value of the asset, the carrying value is written down, for an asset to be held and used, to the estimated fair value or, for an asset to be disposed of, to the fair value, net of estimated costs of disposal. Any loss resulting from impairment is recognized by a charge to income. See Note 5 for information related to the impairment charges recorded in 2020 for certain Cracker Barrel and MSBC locations. Goodwill and other intangible assets – The Company accounts for all transactions that represent business combinations using the acquisition method of accounting, where the identifiable assets acquired and the liabilities assumed are recognized and measured at their fair values on the date the Company obtains control in the acquiree. Such fair values that are not finalized for reporting periods following the acquisition date are estimated and recorded as estimated amounts. Adjustments to these estimated amounts during the measurement period (defined as the date through which all information required to identify and measure the consideration transferred, the assets acquired and the liabilities assumed has been obtained, limited to one year from the acquisition date) are recorded when identified. Goodwill is determined as the excess of the fair value of the consideration conveyed in the acquisition over the fair value of the net assets acquired. Goodwill and other intangibles will be evaluated for impairment annually on June 1 and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. At July 30, 2021 and July 31, 2020, the Company does not have any reporting units that are at risk of failing step one of the impairment test. Convertible Senior Notes – In June 2021, the Company completed a $ 300,000 principal aggregate amount private offering of 0.625 % convertible Senior Notes due in 2026 (the “Notes”). In accordance with accounting guidance on embedded conversion features indexed to and settled in equity, the Company valued and bifurcated the conversion option associated with the Notes from the respective host debt instrument. The carrying amount of the equity is recorded as a debt discount and represents the difference between the proceeds from the issuance of the Notes and the fair value of the liability component of the Notes. The significant assumptions used in the fair value of the liability component of the Notes were risk-free rate, discount rate based on the Company’s implied credit spread and term of the Notes, expected volatility of the Company’s stock price and dividend yield. The resulting debt discount on the Notes is amortized to interest expense using the effective interest method over the contractual term of the Notes. In addition, the debt issuance costs related to the issuance of the Notes were allocated between the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component were recorded as a contra-liability and are presented net against the Notes balance on the Company’s consolidated balance sheets. These costs are amortized to interest expense using the effective interest method over the term of the Notes. 60 Index Derivative instruments and hedging activities – The Company is exposed to market risk, such as changes in interest rates and commodity prices. The Company has interest rate risk relative to its outstanding borrowings under the revolving credit facility, which bear interest at the Company’s election either at the prime rate or LIBOR plus a percentage point spread based on certain specified financial ratios under its revolving credit facility (see Note 7). The Company’s policy has been to manage interest cost using a mix of fixed and variable rate debt. To manage this risk in a cost-efficient manner, historically, the Company used derivative instruments, specifically interest rate swaps. For each of the Company’s interest rate swaps, the Company agreed to exchange with a counterparty the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. The interest rates on the portion of the Company’s outstanding debt covered by its interest rate swaps were fixed at the rates plus the Company’s credit spread. All of the Company’s interest rate swaps were accounted for as cash flow hedges. For derivative instruments that were designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument was reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings and was presented in the same statement of income (loss) line item as the earnings effect of the hedged item. Gains and losses on the derivative instrument representing hedge components excluded from the assessment of effectiveness, if any, will be recognized currently in earnings in the same statement of income (loss) line item as the earnings effect of the hedged item. The Company did not elect to reclassify income tax effects resulting from the Tax Cuts and Jobs Act to retained earnings; income tax effects are released on an individual basis to income tax expense (benefit). Companies may elect whether or not to offset related assets and liabilities and report the net amount on their financial statements if the right of setoff exists. Under a master netting agreement, the Company has the legal right to offset the amounts owed to the Company against amounts owed by the Company under a derivative instrument that exists between the Company and a counterparty. When the Company is engaged in more than one outstanding derivative transaction with the same counterparty and also has a legally enforceable master netting agreement with that counterparty, its credit risk exposure is based on the net exposure under the master netting agreement. If, on a net basis, the Company owes the counterparty, the Company regards its credit exposure to the counterparty as being zero . The Company does not hold or use derivative instruments for trading purposes. The Company also does not have any derivatives not designated as hedging instruments and has not designated any non-derivatives as hedging instruments. See Note 8 for additional information on the Company’s derivative and hedging activities. Segment reporting – Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Using these criteria, the Company manages its business on the basis of one reportable operating segment (see Note 10 for additional information regarding segment reporting). Unredeemed gift cards and certificates – Unredeemed gift cards and certificates represent a liability of the Company related to unearned income and are recorded at their expected redemption value. No revenue is recognized in connection with the point-of-sale transaction when gift cards or gift certificates are sold. For those states that exempt gift cards and certificates from their escheat laws, the Company makes estimates of the ultimate unredeemed (“breakage”) gift cards and certificates in the period of the original sale and amortizes this breakage over the redemption period that other gift cards and certificates historically have been redeemed by reducing its liability and recording revenue accordingly. For those states that do not exempt gift cards and certificates from their escheat laws, the Company records breakage in the period that gift cards and certificates are remitted to the state and reduces its liability accordingly. Any amounts remitted to states under escheat or similar laws reduce the Company’s deferred revenue liability and have no effect on revenue or expense while any amounts that the Company is permitted to retain are recorded as revenue. See “Revenue recognition” section in this Note for further information regarding breakage. 61 Index Revenue recognition – Revenue consists primarily of sales from restaurant and retail operations. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a restaurant guest, retail customer or other customer. The Company recognizes revenues from restaurant sales when payment is tendered at the point of sale, as the Company’s performance obligation to provide food and beverages is satisfied. The Company recognizes revenues from retail sales when payment is tendered at the point of sale, as the Company’s performance obligation to provide merchandise is satisfied. Ecommerce sales, including shipping revenue, are recorded upon delivery to the customer. Additionally, the Company provides for estimated returns based on return history and sales levels. The Company’s policy is to present sales in the Consolidated Statements of Income on a net presentation basis after deducting sales tax. Included in restaurant and retail revenue is gift card breakage. Customer purchases of gift cards, to be utilized at the Company's stores, are not recognized as sales until the card is redeemed and the customer purchases food and/or merchandise. Gift cards do not carry an expiration date; therefore, customers can redeem their gift cards indefinitely. A certain number of gift cards will not be fully redeemed. Management estimates unredeemed balances and recognizes gift card breakage revenue for these amounts in the Company's Consolidated Statements of Income over the expected redemption period. Gift card breakage is recognized when the likelihood of a gift card being redeemed by the customer is remote and the Company determines that there is not a legal obligation to remit the unredeemed gift card balance to the relevant jurisdiction. The determination of the gift card breakage rate is based upon the Company’s specific historical redemption patterns. The Company recognizes gift card breakage by applying its estimate of the rate of gift card breakage over the period of estimated redemption. For 2021, 2020 and 2019, gift card breakage was $ 6,349 , $ 6,288 , and $ 6,814 , respectively. Revenue recognized in the Consolidated Statements of Income for 2021, 2020 and 2019, respectively, for the redemption of gift cards which were included in the deferred revenue balance at the beginning of the fiscal year was $ 42,266 , $ 36,756 , and $ 42,292 , respectively. Deferred revenue related to the Company’s gift cards was $ 93,098 and $ 94,754 , respectively, at July 30, 2021 and July 31, 2020. Insurance – The Company self-insures a significant portion of its workers’ compensation and general liability programs. The Company purchases insurance for individual workers’ compensation claims that exceed $ 250 , $ 750 or $ 1,000 depending on the state in which the claim originates. The Company purchases insurance for individual general liability claims that exceed $ 500 . The Company records a reserve for workers’ compensation and general liability for all unresolved claims and for an estimate of incurred but not reported claims (“IBNR”). These reserves and estimates of IBNR claims are based upon a full scope actuarial study which is performed annually at the end of the Company’s third quarter and is adjusted by the actuarially determined losses and actual claims payments for the fourth quarter. Additionally, the Company performs limited scope actuarial studies on a quarterly basis to verify and/or modify the Company’s reserves. The reserves and losses in the actuarial study represent a range of possible outcomes within which no given estimate is more likely than any other estimate. As such, the Company records the losses at the lower half of that range and discounts them to present value using a risk-free interest rate based on projected timing of payments. The Company also monitors actual claims development, including incurrence or settlement of individual large claims during the interim periods between actuarial studies as another means of estimating the adequacy of its reserves. The Company’s group health plans combine the use of self-insured and fully-insured programs. Benefits for any individual (employee or dependents) in the self-insured program are limited. The Company records a liability for the self-insured portion of its group health program for all unpaid claims based upon a loss development analysis derived from actual group health claims payment experience. The Company also records a liability for unpaid prescription drug claims based on historical experience. Store pre-opening costs – Start-up costs of a new store are expensed when incurred. Leases – In 2020, the Company adopted new accounting guidance for leases which requires the recognition of lease assets and lease liabilities on the balance sheet and certain disclosures (see Note 11). Under this accounting guidance, leases are classified as either finance or operating leases. Upon adoption of this accounting guidance, the Company elected to apply the short-term lease exemption to all asset classes which exempts the Company from recognizing lease assets and liabilities for these short-term leases. Additionally, the Company elected to not separate lease and non-lease components for all classes of leased assets. 62 Index The Company has ground leases for its leased stores and office space leases that are recorded as operating leases under various non-cancellable operating leases. The Company also leases its advertising billboards, vehicle fleets and certain equipment under various non-cancellable operating leases. To determine whether a contract is or contains a lease, the Company determines at contract inception whether it contains the right to control the use of an identified asset for a period of time in exchange for consideration. If the contract has the right to obtain substantially all of the economic benefit from use of the identified asset and the right to direct the use of the identified asset, the Company recognizes a right-of-use asset and lease liability. The Company’s leases all have varying terms and expire at various dates through 2055. Restaurant leases typically have base terms of ten years with four to five optional renewal periods of five years each. The Company uses a lease life that generally begins on the commencement date, including the rent holiday periods, and generally extends through certain renewal periods that can be exercised at the Company’s option. During rent holiday periods, which include the pre-opening period during construction, the Company has possession of and access to the property, but is not obligated to, and normally does not, make rent payments. The Company has included lease renewal options in the lease term for calculations of the right-of-use asset and liability for which at the commencement of the lease it is reasonably certain that the Company will exercise those renewal options. Additionally, some of the leases have contingent rent provisions and others require adjustments for inflation or index. Contingent rent is determined as a percentage of gross sales in excess of specified levels. The Company records a contingent rent liability and corresponding rent expense when it is probable sales have been achieved in amounts in excess of the specified levels. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants . Advertising – The Company expenses the costs of producing advertising the first time the advertising takes place. Other advertising costs are expensed as incurred. Advertising expense for each of the three years was as follows: 2021 2020 2019 Advertising expense $ 83,630 $ 79,155 $ 81,855 Share-based compensation – The Company’s share-based compensation consists of nonvested stock awards and units. Share-based compensation is recorded in general and administrative expenses in the Consolidated Statements of Income (Loss). Share-based compensation expense is recognized based on the grant date fair value and the achievement of performance conditions for certain awards. The Company recognizes share-based compensation expense on a straight-line basis over the requisite service period, which is generally the award’s vesting period, or to the date on which retirement eligibility is achieved, if shorter. Certain nonvested stock awards and units contain performance conditions. Compensation expense for performance-based awards is recognized when it is probable that the performance criteria will be met. If any performance goals are not met, no compensation expense is ultimately recognized and, to the extent previously recognized, compensation expense is reversed. If a share-based compensation award is modified after the grant date, incremental compensation expense is recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. Incremental compensation expense for vested awards is recognized immediately. For unvested awards, the sum of the incremental compensation expense and the remaining unrecognized compensation expense for the original award on the modification date is recognized over the modified service period. Additionally, the Company’s policy is to issue shares of common stock to satisfy exercises of share-based compensation awards. Income taxes – The Company’s provision for income taxes includes employer tax credits for FICA taxes paid on employee tip income and other employer tax credits are accounted for by the flow-through method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company recognizes (or derecognizes) a tax position taken or expected to be taken in a tax return in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained (or not sustained) upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company recognizes, net of tax, interest and estimated penalties related to uncertain tax positions in its provision for income taxes. See Note 15 for additional information regarding income taxes. 63 Index Comprehensive income (loss) – Comprehensive income (loss) includes net income (loss) and the effective unrealized portion of the changes in the fair value of the Company’s interest rate swaps. Net income (loss) per share – Basic consolidated net income per share is computed by dividing consolidated net income (loss) to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted consolidated net income per share reflects the potential dilution that could occur if securities, options or other contracts to issue common stock were exercised or converted into common stock and is based upon the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares related to nonvested stock awards and units issued by the Company, the Company’s convertible senior notes and related warrants are calculated using the treasury stock method. The outstanding nonvested stock awards and units issued by the Company represent the only dilutive effects on diluted consolidated net income per share. The convertible senior notes have been excluded from the computation of diluted earnings per share since the conversion price of the convertible senior notes exceeded the average market price of the Company’s common stock. Warrants were excluded from the computation of diluted earnings per share since the warrants’ strike price was greater than the average market price of the Company’s common stock during the period. See Note 16 for additional information regarding net income (loss) per share and Note 7 for additional information regarding the Company’s convertible senior notes . Use of estimates – Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods to prepare these Consolidated Financial Statements in conformity with GAAP. Management believes that such estimates have been based on reasonable and supportable assumptions and that the resulting estimates are reasonable for use in the preparation of the Consolidated Financial Statements. Actual results, however, could differ from those estimates. Recent Accounting Pronouncements Adopted Goodwill Impairment In January 2017, the Financial Accounting Standards Board (“FASB”) issued accounting guidance related to the subsequent measurement of goodwill. Under this new guidance, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. This guidance was effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of this accounting guidance in the first quarter of 2021 did not have a significant impact on the Company’s consolidated financial position or results of operations. Recent Accounting Pronouncements Not Yet Adopted Accounting for Income Taxes In December 2019, the FASB issued accounting guidance in order to simplify the accounting for income taxes. This new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This accounting guidance is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. In general, entities will apply the new guidance on a prospective basis, except for certain items such as the guidance on franchise taxes that are partially based on income. The guidance on franchise taxes that are partially based on income will be applied either retrospectively for all periods presented or using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company does not expect that the adoption of this accounting guidance in the first quarter of 2022 will have a significant impact on the Company’s consolidated financial position or results of operations. 64 Index Accounting for Convertible Instruments In August 2020, the FASB issued accounting guidance to simplify the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity’s own equity. For convertible instruments, the Board decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock. By removing the separation model, a convertible debt instrument will be reported as a single liability instrument with no separate accounting for embedded conversion features. This new standard also removes certain settlement conditions that are required for contracts to qualify for equity classification and simplifies the diluted earnings per share calculations by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in diluted earnings per share calculations. This guidance is effective for public business entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted. This guidance should be applied through either a modified retrospective method of transition or a fully retrospective method of transition. The Company elected to early adopt this guidance in the first quarter of 2022 using the modified retrospective method. The impact of this adoption in the first quarter of 2022 resulted in the increase in long-term debt and decrease in equity on the Consolidated Balance Sheet by the amount of the equity component of the convertible notes recognized in equity. 3. Equity Method Investment Effective July 18, 2019, the Company purchased approximately 58.6 % of the economic ownership interest, and approximately 49.7 % of the voting ownership interest, in PBS HoldCo, LLC (“(PBS HC”) for $ 89,100 . PBS HC and its subsidiaries develop, own, and operate food, beverage and entertainment establishments under the name of Punch Bowl Social (“PBS”). The Company does not have the power to unilaterally direct any activities of PBS HC, a variable interest entity, that most significantly impact PBS HC’s economic performance. As a result, the Company’s investment in PBS HC, for which it has the ability to exercise significant influence, but not control and is not the primary beneficiary, is accounted for using the equity method . The Company assesses the impairment of its equity investment whenever events or changes in circumstances indicate that a decrease in value of the investment has occurred that is other than temporary. During the onset of the COVID-19 pandemic, PBS Holdco’s wholly-owned subsidiary and principal operating company, PBS BrandCo, LLC (“Brandco”) suffered unsustainable disruption to its business across the chain and suspended all operations. On March 20, 2020, the primary lender under Brandco’s secured credit facility (“Lender”) provided notice of the Lender’s intention to foreclose on its collateral interest in Brandco unless Cracker Barrel repaid or unconditionally guaranteed the indebtedness. In keeping with the Company’s strategy of concentrating its resources on its core business during the COVID-19 pandemic, and in light of the substantial uncertainties surrounding PBS business coming out of the COVID-19 pandemic, the Company decided not to invest further resources to prevent foreclosure or otherwise provide additional capital to PBS HC. The Company recorded a loss of $ 132,878 , which represented the Company’s equity investment in PBS HC and the principal and accumulated interest under the outstanding unsecured indebtedness of PBS HC held by the Company. This loss is recorded in the net loss in unconsolidated subsidiary line on the Company’s Consolidated Statement of Income (Loss) in 2020. During the course of the pandemic, the Lender unsuccessfully sought a buyer for Brandco and its assets, culminating in Brandco filing a petition for reorganization under Chapter 11 of the United States Bankruptcy Code in December 2020. In April 2021, the United States Bankruptcy Court for the District of Delaware approved a plan of liquidation of Brandco, pursuant to which the Lender purchased Brandco and certain of its assets and liabilities for a purchase price of approximately $ 32,000 , none of which proceeds were attributable to the Company’s interest in PBS. Following the completion of this sale transaction, the Company’s remaining interest in PBS was determined to have no remaining value. 4. Acquisition of Business Effective October 10, 2019, the Company acquired 100 % ownership of Maple Street Biscuit Company (“MSBC”), a breakfast and lunch fast casual concept, for a purchase price of $ 36,000 , of which $ 32,000 was paid to the sellers in cash with the remaining $ 4,000 being held as security for the satisfaction of indemnification obligations of the sellers, if any. The first installment of $ 1,500 , to be held as security, was paid to the principal seller in the first quarter of 2021, and the remaining amount, if any, will be paid in a final installment to the sellers on the two-year anniversary of closing. 65 Index The Company believes that this investment supports its strategic initiative to extend the brand by becoming a market leader in the breakfast and lunch-focused fast casual dining segment of the restaurant industry and by providing a platform for growth. In 2020, the Company converted its six Holler & Dash locations into MSBC locations. At July 30, 2021, MSBC had 37 company-owned and seven franchised fast casual locations across seven states. The goodwill of $ 4,690 arising from the acquisition consists largely of the Company’s determination of the value of MSBC’s future free cash flows less the value of the identifiable tangible and intangible assets and liabilities. None of the goodwill recognized is expected to be deductible for income tax purposes. Acquisition-related costs of $ 1,269 were recorded in the general and administrative expenses line in the Consolidated Statement of Income (Loss) in 2020. The following table summarizes the consideration paid for MSBC and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date: Fair value of total consideration transferred $ 36,000 Recognized amounts of identifiable assets acquired and liabilities assumed Financial assets $ 96 Property and equipment 13,580 Operating lease right-of-use assets, net 14,454 Indefinite-lived intangible asset* 20,960 Other current and noncurrent assets 394 Financial liabilities ( 1,876 ) Operating lease liabilities ( 15,973 ) Other noncurrent liabilities ( 325 ) Total identifiable net assets 31,310 Goodwill $ 4,690 * Consists entirely of MSBC’s Tradename All amounts recorded for the assets acquired, liabilities assumed and goodwill are final. 5. Fair Value Measurements Fair value for certain of the Company’s assets and liabilities is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, a three level hierarchy for inputs is used. These levels are: ● Quoted Prices in Active Markets for Identical Assets (“Level 1”) – quoted prices (unadjusted) for an identical asset or liability in an active market. ● Significant Other Observable Inputs (“Level 2”) – quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability. ● Significant Unobservable Inputs (“Level 3”) – unobservable and significant to the fair value measurement of the asset or liability. 66 Index The Company’s assets and liabilities measured at fair value on a recurring basis at July 30, 2021 were as follows: Level 1 Level 2 Level 3 Total Fair Value Cash equivalents* $ 35,001 $ — $ — $ 35,001 Total $ 35,001 $ — $ — $ 35,001 Deferred compensation plan assets** measured at net asset value aa aa aa 32,527 Total assets at fair value aa aa aa $ 67,528 aa aa aa Interest rate swap liability (see Note 8) $ — $ — $ — $ — Total liabilities at fair value $ — $ — $ — $ — The Company’s assets and liabilities measured at fair value on a recurring basis at July 31, 2020 were as follows : Level 1 Level 2 Level 3 Total Fair Value Cash equivalents* $ 132,001 $ — $ — $ 132,001 Total $ 132,001 $ — $ — $ 132,001 Deferred compensation plan assets** measured at net asset value aaa aaa aaa 28,530 Total assets at fair value aa aa aaa $ 160,531 aa aa aaa Interest rate swap liability (see Note 8) $ — $ 27,746 $ — $ 27,746 Total liabilities at fair value $ — $ 27,746 $ — $ 27,746 * Consists of money market fund investments. ** Represents plan assets invested in mutual funds established under a Rabbi Trust for the Company’s non-qualified savings plan and is included in the Consolidated Balance Sheets as other assets (see Note 14). The Company’s money market fund investments are measured at fair value using quoted market prices. The fair values of the Company’s interest rate swap liabilities were determined based on the present value of expected future cash flows. Since the Company’s interest rate swap values were based on the LIBOR forward curve, which is observable at commonly quoted intervals for the full terms of the swaps, it is considered a Level 2 input. Nonperformance risk was reflected in determining the fair value of the interest rate swaps by using the Company’s credit spread less the risk-free interest rate, both of which are observable at commonly quoted intervals for the terms of the swaps. Thus, the adjustment for nonperformance risk was also considered a Level 2 input. The Company’s deferred compensation plan assets are measured based on net asset value per share as a practical expedient to estimate fair value . The fair values of accounts receivable and accounts payable at July 30, 2021 and July 31, 2020, approximate their carrying amounts because of their short duration. The fair value of the Company’s variable rate debt, based on quoted market prices, which are considered Level 1 inputs, approximates its carrying amounts at July 30, 2021 and July 31, 2020 . Assets Measured at Fair Value on a Nonrecurring Basis As part of the Company’s acquisition of MSBC effective October 10, 2019, the Company recorded MSBC’s property and equipment and the MSBC tradename at fair value. The remaining identifiable assets and liabilities acquired were recorded at carrying value, which approximated their fair value at October 10, 2019. Additionally, goodwill was recorded as the excess of fair value of the consideration conveyed in the acquisition over the fair value of the net assets acquired. The fair value of MSBC’s property and equipment, tradename and the related goodwill are considered Level 3 inputs. The valuation method used by the Company depends on the type of asset and the availability of data. 67 Index The Company’s assets measured at fair value on a nonrecurring basis as of October 10, 2019 were as follows: Level 1 Level 2 Level 3 Total Fair Value Property and equipment $ — $ — $ 13,580 $ 13,580 Tradename* — — 20,960 20,960 Goodwill — — 4,690 4,690 Total $ — $ — $ 39,230 $ 39,230 * Included in the Consolidated Balance Sheets as intangible assets. See Notes 2 and 4 for further information in regard to the determination of goodwill. The fair value of the property and equipment was determined by using the cost approach. Assumptions used in the cost method included estimates of replacement costs for similar property and equipment. Replacement cost was estimated to be approximately $ 500 per MSBC store. The fair value of MSBC’s tradename was determined by using the present value of estimated cash flows from comparable industry royalty rates for MSBC’s estimated future revenue streams. Assumptions used under this approach included an approximate 2.5 % royalty rate and a discount rate of 12.0 %. During 2020, certain Cracker Barrel and MSBC locations were determined to be impaired. Fair value of these locations was determined by sales prices of comparable assets or estimates of discounted future cash flows considering their highest and best use. Assumptions used in the cash flow model included projected annual revenue growth rates and projected cash flows, which can be affected by economic conditions and management’s expectations. Additionally, changes in the local economies and overall market can impact the sales prices of the assets. The Company has determined that the majority of the inputs used to value its long-lived assets held and used are unobservable inputs, and thus, are considered Level 3 inputs. Based on its analysis, the Company recorded an estimated impairment charge of $ 22,496 , which is included in the impairment line on the Consolidated Statement of Income (Loss) . The Company’s financial instruments that are not remeasured at fair value include the 0.625 % convertible Senior Notes (see Note 7). The Company estimates the fair value of the Notes through consideration of quoted market prices of similar instruments, classified as Level 2 as described above. The estimated fair value of the Notes was $ 249,233 as of July 30, 2021. 6. Inventories Inventories were comprised of the following at: July 30, 2021 July 31, 2020 Retail $ 104,143 $ 105,502 Restaurant 21,583 19,636 Supplies 12,594 13,953 Total $ 138,320 $ 139,091 7. Debt On September 5, 2018, the Company entered into a five-year $ 950,000 revolving credit facility (“2019 Revolving Credit Facility”) with substantially the same terms and financial covenants as the Company’s $ 750,000 revolving credit facility, which it replaced. The 2019 Revolving Credit Facility also contains an option to increase the revolving credit facility by $ 300,000 . In the fourth quarter of 2020, the Company drew an additional $ 39,395 under this option for a one-year period. In the third quarter of 2021, the Company entered into an amendment to the 2019 Revolving Credit Facility which reduced the commitment amount from $ 950,000 to $ 800,000 . At July 30, 2021 and July 31, 2020, the Company had $ 85,000 and $ 949,395 , respectively, in outstanding borrowings under the 2019 Revolving Credit Facility . 68 Index At July 30, 2021, the Company had $ 31,896 of standby letters of credit, which reduce the Company’s borrowing availability under the 2019 Revolving Credit Facility (see Note 17) . At July 30, 2021, the Company had $ 683,104 in borrowing availability under the 2019 Revolving Credit Facility. In accordance with the 2019 Revolving Credit Facility, outstanding borrowings bear interest, at the Company’s election, either at LIBOR or prime plus a percentage point spread based on certain specified financial ratios. At July 30, 2021, the weighted average interest rate on $ 85,000 of the Company’s outstanding borrowings was 3.18 %. At July 31, 2020, $ 400,000 of our outstanding borrowings under the 2019 Revolving Credit Facility were swapped at a weighted average interest rate of 5.36 % ; the weighted average interest rate on the remaining $ 549,395 of our outstanding borrowings was 3.79 % . See Note 8 for information on the Company’s interest rate swaps. 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. At July 30, 2021, the Company was in compliance with all debt covenants under the 2019 Revolving Credit Facility. As a result of the uncertainty regarding the impact of the COVID-19 pandemic on the Company’s financial position and results of operations, the Company obtained a waiver for the financial covenants for the fourth quarter of 2020. The 2019 Revolving Credit Facility also imposes restrictions on the amount of dividends the Company is permitted to pay and the amount of shares the Company is permitted to repurchase. Under the 2019 Revolving Credit Facility, provided there is no default existing and the total of the Company’s availability under the 2019 Revolving Credit Facility plus the Company’s cash and cash equivalents on hand is at least $ 100,000 (the “Cash Availability”), the Company may declare and pay cash dividends on shares of its common stock and repurchase shares of its common stock (1) in an unlimited amount if, at the time such dividend or repurchase is made, the Company’s consolidated total leverage ratio is 3.00 to 1.00 or less and (2) in an aggregate amount not to exceed $ 100,000 in any fiscal year if the Company’s consolidated total leverage ratio is greater than 3.00 to 1.00 at the time the dividend or repurchase is made; notwithstanding (1) and (2), so long as immediately after giving effect to the payment of any such dividends, Cash Availability is at least $ 100,000 , the Company may declare and pay cash dividends on shares of its common stock in an aggregate amount not to exceed in any fiscal year the product of the aggregate amount of dividends declared in the fourth quarter of the immediately preceding fiscal year multiplied by four . Convertible Senior Notes On June 18, 2021, the Company completed a $ 300,000 principal aggregate amount private offering of 0.625 % convertible Senior Notes due in 2026 (the “Notes”) which included the exercise in full of the initial purchasers’ option to purchase up to an additional $ 25,000 principal amount of the Notes. The Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association as the Trustee. The Notes will mature on June 15, 2026 , unless earlier converted, repurchased or redeemed. The Notes bear cash interest at an annual rate of 0.625 % , payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2021. The Notes are unsecured obligations and do not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. In an event of default, the principal amount of, and all accrued and unpaid interest on, all of the notes then outstanding will immediately become due and payable. However, notwithstanding the foregoing, the Company may elect, at its option, that the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture will consist exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 calendar days during which such event of default has occurred and is continuing, at a specified rate for the first 90 days of 0.25 % per annum, and thereafter at a rate of 0.50 % per annum, on the principal amount of the Notes. The initial conversion rate applicable to the Notes was 5.3153 shares of the Company’s common stock per $ 1,000 principal amount of Notes, which represented an initial conversion price of approximately $ 188.14 per share of the Company’s common stock, a premium of 25.0 % over the last reported sale price of $ 150.51 per share on June 15, 2021, the date on which the Notes were priced. The conversion rate is subject to customary adjustments upon the occurrence of certain events, including for the payment of dividends to holders of the Company’s common stock. On July 15, 2021, the conversion rate was adjusted to 5.3519 shares of the Company’s common stock per $ 1,000 principal amount of Notes as a result of Company’s declaration of the regular quarterly dividend subsequently paid on August 6, 2021 , to shareholders of record on July 16, 2021 . In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. 69 Index Net proceeds from the 2026 Notes offering were $ 291,125 , after deducting the initial purchasers’ discounts and commissions and the Company’s offering fees and expenses. In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component before the allocation of any issuance costs was calculated by measuring the fair value of a similar liability that does not have an associated exchangeable feature. The carrying amount of the equity component (before the allocation of any issuance costs), representing the conversion option, which does not require separate accounting as a derivative as it meets a scope exception for certain contracts involving an entity’s own equity, was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the consolidated balance sheet and accreted over the period from the date of issuance to the contractual maturity date, resulting in the recognition of non-cash interest expense. The equity component of the Notes of $ is included in additional-paid in capital in the consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification. Issuance costs were allocated to the liability and equity components in the same proportion as the allocation of the proceeds. Issuance costs attributable to the liability component were recorded as debt issuance costs in the consolidated balance sheet and are amortized to interest expense using the effective interest method over the term of the Notes, and issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity. The following table includes the outstanding principal amount and carrying value of the Notes as of the period indicated: July 30, 2021 Liability component Principal $ 300,000 Less: Debt discount (1) 50,767 Less: Debt issuance costs 7,254 Net carrying amount 241,979 (1) Debt discount and issuance costs are amortized to interest expense using the effective interest method over the expected life of the Notes. During any calendar quarter preceding September 30, 2021, in which the closing price of the Company’s common stock exceeds 130 % of the applicable conversion price of the Notes on at least 20 of the last 30 consecutive trading days of the quarter, holders may in the immediate quarter following, convert all of a portion of their Notes. Based on the daily closing prices of the Company’s stock during the quarter ended July 30, 2021, holders of the Notes are eligible to convert their Notes during the first quarter of 2022. When a conversion notice is received, the Company has the option to pay or deliver cash, shares of the Company’s common stock, or a combination thereof. Accordingly, as of July 30, 2021, the Company could not be required to settle the Notes in cash and, therefore, the Notes are classified as long-term debt. Convertible Note Hedge and Warrant Transactions In connection with the offering of the Notes, the Company entered into convertible note hedge transactions (the “Convertible Note Hedge Transactions”) with certain of the initial purchasers of the Notes and/or their respective affiliates and other financial institutions (in this capacity, the “Hedge Counterparties”). Concurrently with the Company’s entry into the Convertible Note Hedge Transactions, the Company also entered into separate, warrant transactions with the Hedge Counterparties collectively relating to the same number of shares of the Company’s common stock, which initially is approximately 1,600,000 shares, subject to customary anti-dilution adjustments, and for which the Company received proceeds that partially offset the cost of entering into the Convertible Note Hedge Transactions (the “Warrant Transactions”). 70 Index The Convertible Note Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock that initially underlie the Notes, and are expected generally to reduce the potential equity dilution, and/or offset any cash payments in excess of the principal amount due, as the case may be, upon conversion of the Notes. The Warrant Transactions could have a dilutive effect on the Company’s common stock to the extent that the price of its common stock exceeds the strike price of the Warrant Transactions. The strike price will initially be $ 263.39 per share and is subject to certain adjustments under the terms of the Warrant Transactions. On July 15, 2021, the strike price of the Warrant Transactions was adjusted to $ 261.59 per share as a result of the dividend declared in the fourth quarter of 2021. The portion of the net proceeds to the Company from the offering of the Notes that was used to pay the premium on the Convertible Note Hedge Transactions, net of the proceeds to the Company from the Warrant Transactions, was approximately $ 30,310 . The net costs incurred in connection with the Convertible Note Hedge Transactions and Warrant Transactions were recorded as a reduction to additional paid-in capital on the Company’s Consolidated Balance Sheet during 2021. As these transactions meet certain accounting criteria, the Convertible Note Hedge Transactions and Warrant Transactions were recorded in stockholders’ equity, not accounted for as derivatives and are not remeasured each reporting period. 8. Derivative Instruments and Hedging Activities During the fourth quarter of 2021, in conjunction with paying down debt under the revolving credit facility, the Company terminated all of its interest rate swap agreements which resulted in the reclassification of the remaining losses from accumulated other comprehensive loss (“AOCL”) to the Consolidated Statements of Income (Loss) as part of interest expense. The determination of the amounts reclassified from AOCL to interest expense was based on the Company’s assessment that the forecasted transactions under the hedging relationships were no longer probable. Prior to the termination of the interest rate swaps, for each of the Company’s interest rate swaps, the Company had agreed to exchange with a counterparty the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. The interest rates on the portion of the Company’s outstanding debt covered by its interest rate swaps were fixed at the rates specified in the interest rate swap agreements plus the Company’s credit spread. The Company’s credit spread was 3.00 % at July 31, 2020. All of the Company’s interest rate swaps were accounted for as cash flow hedges. The estimated fair values of the Company’s derivative instruments were as follows: (See Note 5) Balance Sheet Location July 30, 2021 July 31, 2020* Interest rate swaps Other current liabilities $ — $ 3,886 Interest rate swaps Long-term interest rate swap liability — 23,860 Total liabilities $ — $ 27,746 *These interest rate swap liabilities were recorded gross at July 31, 2020 since there were no offsetting assets under the Company’s master netting agreements. The estimated fair values of the Company’s interest rate swap liabilities incorporated the Company’s non-performance risk (see Note 5). The adjustment related to the Company’s non-performance risk at July 31, 2020 resulted in a reduction of $ 978 in the total fair value of the interest rate swap liabilities. The offset to the interest rate swap liabilities was recorded in AOCL, net of the deferred tax assets. Cash flows related to the interest rate swaps are included in the interest expense line in the Consolidated Statements of Income (Loss) and in operating activities in the Consolidated Statements of Cash Flows. The following table summarizes the pre-tax effects of the Company’s derivative instruments on AOCL for each of the three years: Amount of Income (Loss) Recognized in AOCL on Derivatives (Effective Portion) 2021 2020 2019 Cash flow hedges: Interest rate swaps $ 27,110 $ ( 17,740 ) $ ( 15,466 ) 71 Index The following table summarizes the changes in AOCL, net of tax, related to the Company’s interest rate swaps for the years ended July 30, 2021, July 31, 2020 and August 2, 2019: July 31, 2021 July 30, 2020 August 2, 2019 Beginning AOCL balance $ ( 20,346 ) $ ( 6,913 ) $ 4,685 Other comprehensive income (loss) before reclassifications 39,424 ( 12,559 ) ( 11,752 ) Amounts reclassified from AOCL into earnings ( 19,078 ) ( 874 ) 154 Other comprehensive income (loss), net of tax 20,346 ( 13,433 ) ( 11,598 ) Ending AOCL balance $ — $ ( 20,346 ) $ ( 6,913 ) The following table summarizes the pre-tax effects of the Company’s derivative instruments on income for each of the three years: Location of (Income) Loss Reclassified from AOCL into Income (Effective Portion) Amount of (Income) Loss Reclassified from AOCL into Income (Effective Portion) 2021 2020 2019 Cash flow hedges: Interest rate swaps Interest expense $ 25,420 $ 1,165 $ ( 206 ) The following table summarizes the amounts reclassified out of AOCL related to the Company’s interest rate swaps for the years ended July 30, 2021, July 31, 2020 and August 2, 2019: Affected Line Item in the Consolidated Details about AOCL July 30, 2021 July 31, 2020 August 2, 2019 Statement of Income Loss on cash flow hedges: Interest rate swaps $ ( 25,420 ) $ ( 1,165 ) $ 206 Interest expense Tax benefit 6,342 291 ( 52 ) Provision for income taxes $ ( 19,078 ) $ ( 874 ) $ 154 Net of tax No gains or losses representing amounts excluded from the assessment of effectiveness were recognized in earnings in 2021 and 2020. No ineffectiveness has been recorded in 2019. 9. Share Repurchases In 2019, the Company’s Board of Directors approved share repurchase authorizations up to a maximum of $ 25,000 . Additionally, in the fourth quarter of 2019, the Company’s Board of Directors increased the share repurchase authorization to $ 50,000 . In the third quarter of 2020, the Company’s Board of Directors approved the repurchase of up to an additional $ 25,000 . This authorization was effective immediately and replaced the $ 50,000 share repurchase authorization which had been expended. In response to the COVID-19 pandemic, however, the Company temporarily suspended all share repurchases until the fourth quarter of 2021 when 232,543 shares of the Company’s common stock were repurchased at an aggregate cost of $ 35,000 in conjunction with the Company’s offering and sale of the Notes (see Note 7 for further information regarding the Notes). In 2020, the Company repurchased 378,974 shares of its common stock in the open market at an aggregate cost of $ 55,007 . The Company did no t repurchase any shares of its common stock in 2019 . 10. Segment Information Cracker Barrel stores represent a single, integrated operation with two related and substantially integrated product lines. The operating expenses of the restaurant and retail product lines of a Cracker Barrel store are shared and are indistinguishable in many respects. Accordingly, the Company manages its business on the basis of one reportable operating segment. All of the Company’s operations are located within the United States. 72 Index Disaggregation of revenue Total revenue was comprised of the following at: 2021 2020 2019 Restaurant $ 2,227,246 $ 2,032,030 $ 2,482,377 Retail 594,198 490,762 589,574 Total revenue $ 2,821,444 $ 2,522,792 $ 3,071,951 11. Leases In 2020 , the Company adopted new accounting guidance for leases. As part of the adoption of this accounting guidance for leases, the Company elected to not separate lease and non-lease components. Additionally, the Company elected to apply the short term lease exemption to all asset classes and the short term lease expense for the period reasonably reflects the short term lease commitments. As the Company’s leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at the time of commencement or modification date in determining the present value of lease payments. For operating leases that commenced prior to the date of adoption of the new lease accounting guidance, the Company used the incremental borrowing rate as of the adoption date. Assumptions used in determining the Company’s incremental borrowing rate include the Company’s implied credit rating and an estimate of secured borrowing rates based on comparable market data. The Company has entered into agreements for real estate leases that are not recorded as right-of-use assets or lease liabilities as it has not yet taken possession. These leases are expected to commence in 2022 with undiscounted future payments of $ 11,186 . The following table summarizes the components of lease cost for operating leases for the years ended July 30, 2021: Year Ended July 30, 2021 Year Ended July 31, 2020 Operating lease cost $ 106,266 $ 82,963 Short term lease cost 2,363 2,896 Variable lease cost 2,248 1,719 Total lease cost $ 110,877 $ 87,578 Prior to the adoption of the new lease accounting guidance in 2020, rent expense under operating leases, including the sale-leaseback transactions discussed below, for 2019 was: Year Minimum Contingent Total 2019 $ 78,044 $ 280 $ 78,324 The following table summarizes supplemental cash flow information and non-cash activity related to the Company’s operating leases for the year ended July 30, 2021 and July 31, 2020 : Year Ended July 30, 2021 Year Ended July 31 , 2020 Operating cash flow information: Gain on sale and leaseback transactions $ 217,722 $ 69,954 Cash paid for amounts included in the measurement of lease liabilities 89,264 80,265 Noncash information: Right-of-use assets obtained in exchange for new operating lease liabilities 316,563 267,266 Lease modifications or reassessments increasing or decreasing right-of-use assets 35,059 29,793 Lease modifications removing right-of-use assets ( 544 ) ( 19,939 ) 73 Index The following table summarizes the weighted-average remaining lease term and the weighted-average discount rate for operating leases as of July 30, 2021 and July 31, 2020: July 30 , 2021 July 31 , 2020 Weighted-average remaining lease term 18.17 Years 19.05 Years Weighted-average discount rate 4.84 % 4.50 % The following table summarizes the maturities of undiscounted cash flows reconciled to the total operating lease liability as of July 30, 2021: Year Total 2022 $ 86,992 2023 78,471 2024 63,908 2025 61,182 2026 61,548 Thereafter 884,987 Total future minimum lease payments 1,237,088 Less imputed remaining interest ( 438,332 ) Total present value of operating lease liabilities $ 798,756 Sale and Leaseback Transactions In 2009, the Company completed sale and leaseback transactions involving 15 of its owned stores and its retail distribution center. Under the transactions, the land, buildings and improvements at the locations were sold and leased back for terms of 20 and 15 years, respectively. Equipment was not included. The leases include specified renewal options for up to 20 additional years. In 2000, the Company completed a sale and leaseback transaction involving 65 of its owned Cracker Barrel stores. Under the transaction, the land, buildings and building improvements at the locations were sold and leased back for a term of 21 years. The leases for these stores included specified renewal options for up to 20 additional years. On July 29, 2020, the Company entered into an agreement with the original lessor and a third party financier to obtain ownership of 64 of the 65 Cracker Barrel properties and simultaneously entered into a sale and leaseback transaction with the financier for an aggregate purchase price, net of closing costs, of $ 198,083 . The Company purchased the remaining property for approximately $ 3,200 . In connection with the sale and leaseback transaction, the Company entered into lease agreements for each of the properties for initial terms of 20 years and renewal options up to 50 years. The aggregate initial annual rent payment for the properties is approximately $ 14,379 and includes 1 % annual rent increases over the initial lease terms. All the properties qualified for sale and leaseback and operating lease accounting classification and the Company recorded a gain on the sale and leaseback transaction of $ 69,954 which is recorded in the gain on sale and leaseback transactions line in the Consolidated Statements of Income (Loss). The Company also recorded operating lease right-of-use assets and corresponding operating lease liabilities of $ 261,698 and $ 182,649 , respectively. On August 4, 2020, the Company completed a subsequent sale and leaseback transaction involving 62 of its owned Cracker Barrel stores for an aggregate purchase price, net of closing costs, of $ 146,357 . Under the transaction, the land, buildings and building improvements at the locations were sold and leased back for initial terms of 20 years and renewal options up to 50 years. The aggregate initial annual rent payment for the properties is approximately $ 10,393 and includes 1 % annual rent increases over the initial lease terms. All of the properties qualified for sale and leaseback and operating lease accounting classification, and the Company recorded a gain of $ 217,722 which is recorded in the gain on sale and leaseback transaction line in the Consolidated Statement of Income in the first quarter of 2021. The Company also recorded operating lease right-of-use assets, including a non-cash asset recognized as part of accounting for the transaction of $ 175,960 , and corresponding operating lease liabilities of $ 309,624 and $ 133,663 , respectively . 74 Index 12. Share-Based Compensation Stock Compensation Plans The Company’s employee compensation plans are administered by the Compensation Committee of the Company’s Board of Directors (the “Committee”). The Committee is authorized to determine, at time periods within its discretion and subject to the direction of the Board of Directors, which employees will be granted awards, the number of shares covered by any awards granted, and within applicable limits, the terms and provisions relating to the exercise and vesting of any awards. On November 19, 2020, the Company’s shareholders approved the 2020 Omnibus Incentive Plan (the “2020 Omnibus Plan”) which became effective on that date. The 2020 Omnibus Plan authorizes the following types of awards for employees and non-employee directors: stock options, stock appreciation rights, nonvested stock, restricted stock units, other share-based awards and performance awards. After the effective date of the 2020 Omnibus Plan, no additional awards could be granted under the Company’s 2010 Omnibus Incentive Stock and Incentive Plan (the “Prior Plan”). The 2020 Omnibus Plan allows the Committee to grant awards for an aggregate of 1,033,441 shares, the number of shares that were available for issuance as of September 24, 2020 (the “Cutoff Date”) pursuant to the Prior Plan, plus the number of shares that became available for issuance pursuant to the terms of the Prior Plan following the Cutoff Date and prior to the effective date. However, this share reserve is increased by shares awarded under this and the Prior Plan which are forfeited, expired, settled for cash and shares withheld by the Company in payment of a tax withholding obligation after the effective date of the 2020 Omnibus Plan. Additionally, this share reserve was decreased by shares granted from the 2020 Omnibus Plan after the effective date. At July 30, 2021, the number of shares authorized for future issuance under the Company’s active plan is 1,054,002 . At July 30, 2021, the number of outstanding awards under the 2020 Omnibus Plan and the Prior Plan was 12,118 and 125,334 , respectively. Types of Share-Based Awards Nonvested Stock Awards Nonvested stock awards consist of the Company’s common stock, generally accrue dividend equivalents and vest over 1 – 5 years. The fair value of the Company’s nonvested stock awards which accrue dividends is equal to the market price of the Company’s stock at the date of the grant. Dividends are forfeited for any nonvested stock awards that do not vest. The Company’s nonvested stock awards include its long-term performance plans which were established by the Committee for the purpose of rewarding certain officers with shares of the Company’s common stock if the Company achieved certain performance targets. The stock awards under the long-term performance plans are calculated or estimated based on achievement of financial performance measures. The following table summarizes the performance periods and vesting periods for the Company’s nonvested stock awards under its long-term performance plans at July 30, 2021: Long-Term Performance Plan (“LTPP”) Performance Period Vesting Period (in Years) 2021 LTPP 2021 – 2022 2 or 3 2020 LTPP 2020 – 2021 2 or 3 The following table summarizes the shares that have been accrued under the 2021 LTPP and 2020 LTPP at July 30, 2021: 2021 LTPP 15,594 2020 LTPP 19,824 75 Index A summary of the Company’s nonvested stock activity as of July 30, 2021, and changes during 2021 are presented in the following table: Nonvested Stock Shares Weighted-Average Grant Date Fair Value Unvested at July 31, 2020 59,755 $ 152.34 Granted 59,096 122.44 Vested ( 21,998 ) 145.48 Forfeited ( 7,530 ) 133.86 Unvested at July 30, 2021 89,323 $ 135.81 The following table summarizes the total fair value of nonvested stock that vested for each of the three years: 2021 2020 2019 Total fair value of nonvested stock $ 3,200 $ 3,084 $ 5,119 Nonvested Stock Units Beginning in 2017 through 2020, the Company adopted long-term incentive plans that award nonvested stock units based upon relative total shareholder return (“rTSR RSUs”). The number of nonvested stock units that will ultimately be awarded and will vest at the end of the applicable three-year performance period is based on relative total shareholder return, which is defined as increases in the Company’s stock price plus dividends paid during the performance period as compared to the total shareholder return of a group of peer companies determined by the Committee. The number of shares awarded at the end of the performance period for each nonvested stock unit may range from 75 % to 125 % of the target award. The probability of the actual shares expected to be earned is considered in the grant date valuation; therefore, the expense will not be adjusted to reflect the actual units earned. The fair value of the nonvested stock units is determined using the Monte-Carlo simulation model, which simulates a range of possible future stock prices and estimates the probabilities of the potential payouts. This model uses the average prices for the 60 consecutive calendar days beginning 30 days prior to and ending 30 days after the first business day of the performance period. This model also incorporates the following ranges of assumptions: ● The expected volatilities are the historical volatilities of the Company’s stock and the members of the peer group over the period commensurate with the three-year performance period. ● T he risk-free interest rate is based on the U.S. Treasury rate assumption commensurate with the three-year performance period. The risk-free rate for the nonvested stock units granted in 2020 was 1.6 % . The risk-free interest rate for the nonvested stock units granted in 2019 was 2.9 % . ● The expected dividend yield is assumed to be zero since the award holders are entitled to any dividends paid over the performance period. Dividends accrue on the nonvested stock units. Dividends will be forfeited for nonvested stock units that do not vest. The following table summarizes the shares that have been accrued for rTSR RSUs awards under the 2020 and 2019 long-term incentive plans at July 30, 2021: Shares 2020 rTSR RSUs 4,120 2019 rTSR RSUs 8,591 Compensation Expense The following table highlights the components of share-based compensation expense for each of the three years: 2021 2020 2019 Total compensation expense $ 8,729 $ 6,386 $ 8,181 76 Index The following table highlights the total unrecognized compensation expense related to the outstanding nonvested stock awards and nonvested stock units and the weighted-average periods over which the expense is expected to be recognized as of July 30, 2021: Nonvested Stock Awards Nonvested Stock Units Total unrecognized compensation $ 5,335 $ 476 Weighted-average period in years 1.78 1.00 During 2021, the Company issued 32,313 shares of its 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 reduction to shareholders’ equity of $ 2,282 . 13. Shareholder Rights Plan On April 9, 2021, the Company’s Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $ 0.01 per share, and adopted a shareholder rights plan, as set forth in the Rights Agreement dated as of April 9, 2021 (the “Rights Agreement”), by and between the Company and American Stock Transfer & Trust Company, LLC, as rights agent. The dividend was payable on April 19, 2021 to the shareholders of record on April 19, 2021 . The Rights Agreement is intended to replace the Company’s previous shareholder rights plan adopted in 2018 (the “2018 Plan”), and it became effective immediately following the expiration of the 2018 Plan at the close of business on April 9, 2021 . The 2018 Plan and the preferred share purchase rights issued thereunder expired by their own terms and shareholders of the Company were not entitled to any payment as a result of the expiration of the 2018 Plan. The Rights Agreement will terminate unless approved by shareholders at the Company’s 2021 annual meeting . The Rights The Rights initially trade with, and are inseparable from, the Company’s common stock. The Rights are evidenced only by certificates or book entries that represent shares of common stock. New Rights will accompany any new shares of common stock the Company issues after April 19, 2021 until the Distribution Date described below . Exercise Price Each Right will allow its holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock (“Preferred Share”) for $ 600.00 (the “Exercise Price”), once the Rights become exercisable. This portion of a Preferred Share will give the shareholder approximately the same dividend and liquidation rights as would one share of common stock. Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights. Exercisability The Rights will not be exercisable until 10 days after the public announcement that a person or group has become an “Acquiring Person” by obtaining beneficial ownership of 20 % or more of the Company’s outstanding common stock. Certain synthetic interests in securities created by derivative positions – whether or not such interests are considered to be ownership of the underlying common stock or are reportable for purposes of Regulation 13D of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) – are treated as beneficial ownership of the number of shares of the Company’s common stock equivalent to the economic exposure created by the derivative . The date when the Rights become exercisable is the “Distribution Date.” Until the Distribution Date, the common stock certificates will also evidence the Rights, and any transfer of shares of common stock will constitute a transfer of Rights. After that date, the Rights will separate from the common stock and will be evidenced by book-entry credits or by Rights certificates that the Company will mail to all eligible holders of common stock. Any Rights held by an Acquiring Person will be void and may not be exercised. At July 30, 2021, none of the Rights were exercisable. 77 Index Consequences of a Person or Group Becoming an Acquiring Person ● Flip in. If a person or group becomes an Acquiring Person, all holders of Rights except the Acquiring Person may, for $ 600.00 , purchase shares of the Company’s common stock with a market value of $ 1,200.00 , based on the market price of the common stock prior to such acquisition. ● Flip Over . If the Company is later acquired in a merger or similar transaction after the Distribution Date, all holders of Rights except the Acquiring Person may, for $ 600.00 , purchase shares of the acquiring corporation with a market value of $ 1,200.00 , based on the market price of the acquiring corporation’s stock prior to such transaction. ● Notional Shares . Shares held by affiliates and associates of an Acquiring Person, and Notional Common Shares (as defined in the Rights Agreement) held by counterparties to a Derivatives Contract (as defined in the Rights Agreement) with an Acquiring Person, will be deemed to be beneficially owned by the Acquiring Person. Preferred Share Provisions Each one one-hundredth of a Preferred Share, if issued: ● will not be redeemable; ● will entitle holders to quarterly dividend payments of $ 0.01 per share, or an amount equal to the dividend paid on one share of common stock, whichever is greater; ● will entitle holders upon liquidation either to receive $ 1.00 per share or an amount equal to the payment made on one share of common stock, whichever is greater; ● will have the same voting power as one share of common stock; and ● if shares of the Company’s common stock are exchanged via merger, consolidation, or a similar transaction, will entitle holders to a per share payment equal to the payment made on one share of common stock. The value of one one-hundredth of a Preferred Share will generally approximate the value of one share of common stock. Redemption The Board of Directors may redeem the Rights for $ 0.01 per Right at any time before any person or group becomes an Acquiring Person. If the Board of Directors redeems any Rights, it must redeem all of the Rights. Once the Rights are redeemed, the only right of the holders of Rights will be to receive the redemption price of $ 0.01 per Right. The redemption price will be adjusted if the Company has a stock split or stock dividends of its common stock. Qualifying Offer Provision The Rights would also not interfere with any all-cash, fully financed tender offer, exchange offer of common stock of the offeror meeting certain terms and conditions further described below, or a combination thereof, in each case for all shares of common stock that remain open for a minimum of 60 business days and subject to a minimum condition of a majority of the outstanding shares and provide for a 20 -business day “subsequent offering period” after consummation (such offers are referred to as “qualifying offers”). If an offer includes shares of common stock of the offeror, the Rights would not interfere with such offer if such consideration consists solely of freely-tradeable common stock of a publicly-owned United States corporation; such common stock is listed or admitted to trading on the New York Stock Exchange, Nasdaq Global Select Market or Nasdaq Global Market; the offeror has already received stockholder approval to issue such common stock prior to the commencement of such offer or no such approval is or will be required; the offeror has no other class of voting stock outstanding; no person (including such person’s affiliated and associated persons) beneficially owns twenty percent ( 20 %) or more of the shares of common stock of the offeror then outstanding at the time of commencement of the offer or at any time during the term of the offer; and the offeror meets the registrant eligibility requirements for use of a registration statement on Form S-3 for registering securities under the Securities Act of 1933, as amended, including the filing of all reports required to be filed pursuant to the Exchange Act in a timely manner during the twelve (12) calendar months prior to the date of commencement, and throughout the term, of such offer. In the event the Company receives a qualifying offer and the Board of Directors has not redeemed the Rights prior to the consummation of such offer, the consummation of the qualifying offer will not cause the offeror or its affiliates to become an Acquiring Person, and the Rights will immediately expire upon consummation of the qualifying offer . 78 Index Exchange After a person or group becomes an Acquiring Person, but before an Acquiring Person owns 50 % or more of the Company’s outstanding common stock, the Board of Directors may extinguish the Rights by exchanging one share of common stock or an equivalent security for each Right, other than Rights held by the Acquiring Person. Anti-Dilution Provisions The Board of Directors may adjust the purchase price of the Preferred Shares, the number of Preferred Shares issuable and the number of outstanding Rights to prevent dilution that may occur from a stock dividend, a stock split, a reclassification of the Preferred Shares or common stock. No adjustments to the Exercise Price of less than 1 % will be made. Amendments The terms of the Rights Agreement may be amended by the Board of Directors without the consent of the holders of the Rights. After a person or group becomes an Acquiring Person, the Board of Directors may not amend the agreement in a way that adversely affects holders of the Rights. Expiration If the Rights Agreement is approved by the shareholders at the 2021 annual meeting, the Rights will expire on April 9, 2024 . If shareholders do not approve the Rights Agreement, it will expire immediately following certification of the vote at the 2021 annual meeting . 14. Employee Savings Plans The Company sponsors a qualified defined contribution retirement plan (“401(k) Savings Plan”) covering salaried and hourly employees who have completed ninety days of service and have attained the age of twenty-one . This plan allows eligible employees to defer receipt of up to 50 % of their compensation, as defined in the plan. The Company also sponsors a non-qualified defined contribution retirement plan (“Non-Qualified Savings Plan”) covering highly compensated employees, as defined in the plan. This plan allows eligible employees to defer receipt of up to 50 % of their base compensation and 100 % of their eligible bonuses, as defined in the plan. Contributions under both plans may be invested in various investment funds at the employee’s discretion. Such contributions, including the Company’s matching contributions described below, may not be invested in the Company’s common stock. In 2021, 2020 (prior to the COVID-19 pandemic), and 2019, the Company matched 50 % of employee contributions for each participant in the 401(k) Savings Plan up to a total of 5 % of the employee’s compensation and matched 25 % of employee contributions in the Non-Qualified Savings Plan up to a total of 6 % of the employee’s compensation. In response to the COVID-19 pandemic, the Company temporarily suspended matches to the 401(k) Savings Plan and the Non-Qualified Savings Plan through the end of 2020 and resumed matches at the beginning of 2021. Employee contributions vest immediately while Company contributions vest 20 % annually beginning on the first anniversary of a contribution date and are vested 100 % on the fifth anniversary of such contribution date. At the inception of the Non-Qualified Savings Plan, the Company established a Rabbi Trust to fund the plan’s obligations. The market value of the trust assets for the Non-Qualified Savings Plan of $ 32,527 is included in other assets and the related liability to the participants of $ 32,527 is included in other long-term obligations in the Consolidated Balance Sheets. Company contributions under both plans are recorded as either labor and other related expenses or general and administrative expenses in the Consolidated Statements of Income. The following table summarizes the Company’s contributions for each plan for each of the three years: 2021 2020 2019 401(k) Savings Plan $ 4,071 $ 3,271 $ 4,553 Non-Qualified Savings Plan 259 239 320 79 Index 15. Income Taxes The components of the provision for income taxes (income tax benefit) for each of the three years were as follows: 2021 2020 2019 Current: Federal $ ( 13,505 ) $ ( 15,375 ) $ 38,831 State 2,405 ( 2,115 ) 8,310 Deferred: Federal 57,580 ( 13,467 ) ( 1,427 ) State 9,558 2,274 ( 2,759 ) Total provision for income taxes (income tax benefit) $ 56,038 $ ( 28,683 ) $ 42,955 A reconciliation of the Company’s provision for income taxes (income tax benefit) and income taxes based on the statutory U.S. federal rate of 21.0 % in 2021, 2020 and 2019 was as follows: 2021 2020 2019 Provision computed at federal statutory income tax rate $ 65,216 $ 17,070 $ 55,935 State and local income taxes, net of federal benefit 10,589 ( 263 ) 4,248 Loss on unconsolidated subsidiary — ( 29,913 ) — Federal net operating loss benefit ( 5,402 ) ( 1,573 ) — Employer tax credits for FICA taxes paid on employee tip income ( 12,323 ) ( 11,489 ) ( 15,107 ) Other employer tax credits ( 3,234 ) ( 3,606 ) ( 3,537 ) Other-net 1,192 1,091 1,416 Total provision for income taxes (income tax benefit) $ 56,038 $ ( 28,683 ) $ 42,955 The increase in the Company’s provision for income taxes from 2020 to 2021 is primarily due to the increase in income before income taxes. The decrease in the Company’s provision for income taxes (income tax benefit) from 2020 to 2019 is primarily due to the reduction in income due to the business interruption caused by the COVID-19 pandemic and the corresponding reduction in taxable income, partially offset by changes due to the Tax Cuts and Jobs Act. Significant components of the Company’s net deferred tax liability consisted of the following at: July 30, 2021 July 31, 2020 Deferred tax assets: Compensation and employee benefits $ 12,089 $ 6,559 Accrued liabilities 14,145 9,587 Operating lease liabilities 199,029 168,395 Insurance reserves 7,141 6,772 Inventory 2,968 3,104 Deferred tax credits and carryforwards 16,978 19,419 Deferred loss on equity investment — 35,281 Other 4,507 8,076 Deferred tax assets $ 256,857 $ 257,193 Deferred tax liabilities: Property and equipment $ 99,075 $ 99,452 Inventory 7,161 7,144 Operating lease right-of-use asset 243,553 172,641 Other 5,694 5,674 Deferred tax liabilities 355,483 284,911 Net deferred tax liability $ 98,626 $ 27,718 The Company has a deferred tax asset of $ 13,012 reflecting federal income tax credit carryforwards that expire in 2042. The Company has state income tax net operating loss carryforwards of $ 51,304 and has recorded a deferred tax asset of $ 2,941 reflecting this benefit. These state NOLs generally expire in years beginning 2037 and after. 80 Index The Company believes that adequate amounts of tax, interest and penalties have been provided for potential tax uncertainties; these amounts are included in other long-term liabilities in the Consolidated Balance Sheets. As of July 30, 2021 and July 31, 2020, the Company’s gross liability for uncertain tax positions, exclusive of interest and penalties, was $ 14,477 and $ 17,835 , respectively. Summarized below is a tabular reconciliation of the beginning and ending balance of the Company’s total gross liability for uncertain tax positions exclusive of interest and penalties: July 30, 2021 July 31, 2020 August 2, 2019 Balance at beginning of year $ 17,835 $ 18,006 $ 18,634 Tax positions related to the current year: Additions 1,596 1,407 2,742 Reductions — — — Tax positions related to the prior year: Additions — 202 203 Reductions ( 1,045 ) ( 256 ) ( 348 ) Settlements ( 1,786 ) ( 138 ) ( 1,784 ) Expiration of statute of limitations ( 2,123 ) ( 1,386 ) ( 1,441 ) Balance at end of year $ 14,477 $ 17,835 $ 18,006 If the Company were to prevail on all uncertain tax positions, the reversal of this accrual would be a tax benefit to the Company and impact the effective tax rate. The following table highlights the amount of uncertain tax positions, exclusive of interest and penalties, which, if recognized, would affect the effective tax rate for each of the three years : 2021 2020 2019 Uncertain tax positions $ 11,437 $ 14,090 $ 14,225 The Company had $ 7,755 , $ 7,210 , and $ 6,297 in interest and penalties accrued as of July 30, 2021, July 31, 2020, and August 2, 2019, respectively . The Company recognized accrued interest and penalties related to unrecognized tax benefits of $ 545 , $ 913 and $ 616 in its provision for income taxes on July 30, 2021, July 31, 2020 and August 2, 2019, respectively . In many cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities. Based on the outcome of these examinations or as a result of the expiration of the statutes of limitations for specific taxing jurisdictions, it is reasonably possible that the related uncertain tax positions taken regarding previously filed tax returns could decrease from those recorded as liabilities for uncertain tax positions in the Company’s financial statements at July 30, 2021 by approximately $ 3,000 to $ 4,000 within the next twelve months. At July 30, 2021, the Company was subject to income tax examinations for its U.S. federal income taxes after 2018 and for state and local income taxes generally after 2018 . 16. Net Income (Loss) Per Share and Weighted Average Shares The following table reconciles the components of diluted earnings per share computations: 2021 2020 2019 Net income (loss) per share numerator $ 254,513 $ ( 32,475 ) $ 223,401 Net income (loss) per share denominator: Basic weighted average shares outstanding 23,692,063 23,865,367 24,037,272 Add potential dilution: Nonvested stock awards and units 75,327 — 59,124 Diluted weighted average shares outstanding 23,767,390 23,865,367 24,096,396 81 Index 17. Commitments and Contingencies The Company and its subsidiaries are party to various legal and regulatory proceedings and claims incidental to their business in the ordinary course. In the opinion of management, based upon information currently available, the ultimate liability with respect to these proceedings and claims will not materially affect the Company’s consolidated results of operations or financial position. The Company maintains insurance coverage for various aspects of its business and operations. The Company has elected, however, to retain all or a portion of losses that occur through the use of various deductibles, limits and retentions under its insurance programs. This situation may subject the Company to some future liability for which it is only partially insured, or completely uninsured. The Company intends to mitigate any such future liability by continuing to exercise prudent business judgment in negotiating the terms and conditions of its contracts. See Note 2 for a further discussion of insurance and insurance reserves. Related to its insurance coverage, the Company is contingently liable pursuant to standby letters of credit as credit guarantees to certain insurers. As of July 30, 2021, the Company had $ 31,896 of standby letters of credit related to securing reserved claims under workers’ compensation insurance and the July 29, 2020 and August 4, 2020 sale and leaseback transactions. All standby letters of credit are renewable annually and reduce the Company’s borrowing availability under its Revolving Credit facility (see Note 7). During 2020, the Company received notice regarding non-performance by the primary obligor under lease arrangements for two properties occupied by a third party . At July 30, 2021 and July 31, 2020, the Company has recorded a provision of $ 344 in the Consolidated Balance Sheet for amounts to be paid as of result of non-performance by the primary obligor. The Company enters into certain indemnification agreements in favor of third parties in the ordinary course of business. The Company believes that the probability of incurring an actual liability under other indemnification agreements is sufficiently remote so that no liability has been recorded in the Consolidated Balance Sheet. 18. Quarterly Financial Data (Unaudited) Quarterly financial data for 2021 and 2020 are summarized as follows: 1 st Quarter (a) (c) 2 nd Quarter (a) 3 rd Quarter (a) (b) 4 th Quarter (a)(c) 2021 Total revenue $ 646,454 $ 677,169 $ 713,416 $ 784,405 Income before income taxes 226,391 3,580 42,876 37,704 Net income 170,680 14,000 33,470 36,363 Net income per share – basic 7.20 0.59 1.41 1.54 Net income per share – diluted 7.18 0.59 1.41 1.53 2020 Total revenue $ 749,040 $ 846,143 $ 432,544 $ 495,065 Income (loss) before income taxes 59,793 75,630 ( 84,274 ) 30,135 Net income (loss) 43,223 61,168 ( 161,932 ) 25,066 Net income (loss) per share – basic 1.80 2.55 ( 6.81 ) 1.06 Net income (loss) per share – diluted 1.79 2.55 ( 6.81 ) 1.05 (a) Beginning in the third quarter of 2020 and continuing throughout fiscal year 2021, the Company’s operating results were adversely affected by the impact of the COVID-19 pandemic. (b) In the third quarter of 2020, the Company recorded a loss of $ 132,878 , which represented its equity investment in PBS HC and its receivable related to the principal and accumulated interest amounts on PBS HC promissory notes. See Note 3 for further information regarding the Company’s investment in PBS HC. (c) In the fourth quarter of 2020, the Company completed a sale and leaseback transaction and recorded a gain on the sale and leaseback transaction of $ 69,954 . In the first quarter of 2021, the Company completed an additional sale and leaseback transaction and recorded a gain on the sale and leaseback transaction of $ 217,722 . ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 82 Index