CRACKER BARREL OLD COUNTRY STORE, INC 10-Q

ITEM 1. Financial Statements (Unaudited) CRACKER BARREL OLD COUNTRY STORE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited) ASSETS October 29, 2021 July 30, 2021* Current Assets: Cash and cash equivalents $ 125,865 $ 144,593 Accounts receivable 30,197 27,372 Income taxes receivable 14,739 21,123 Inventories 159,633 138,320 Prepaid expenses and other current assets 26,789 22,188 Total current assets 357,223 353,596 Property and equipment 2,243,823 2,234,489 Less: Accumulated depreciation and amortization 1,276,724 1,254,639 Property and equipment – net 967,099 979,850 Operating lease right-of-use assets, net 966,866 974,477 Goodwill 4,690 4,690 Intangible assets 21,267 21,285 Other assets 55,592 57,796 Total assets $ 2,372,737 $ 2,391,694 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 138,199 $ 135,176 Dividends payable 30,850 23,970 Other current liabilities 280,598 306,116 Total current liabilities 449,647 465,262 Long-term debt 376,974 327,253 Long-term operating lease liabilities 744,150 748,305 Other long-term obligations 86,562 88,615 Deferred income taxes 86,189 98,626 Commitments and Contingencies (Note 10) Shareholders’ Equity: Preferred stock – 100,000,000 shares of $ 0.01 par value authorized; 300,000 shares designated as Series A Junior Participating Preferred Stock; no shares issued — — Common stock – 400,000,000 shares of $ 0.01 par value authorized; 23,519,857 shares issued and outstanding at October 29, 2021 , and 23,497,166 shares issued and outstanding at July 30, 2021 235 235 Retained earnings 628,980 663,398 Total shareholders’ equity 629,215 663,633 Total liabilities and shareholders’ equity $ 2,372,737 $ 2,391,694 See Notes to unaudited Condensed Consolidated Financial Statements. * This Condensed Consolidated Balance Sheet has been derived from the audited Consolidated Balance Sheet as of July 30, 2021, as filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the fiscal year ended July 30, 2021. 3 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share data) (Unaudited) Quarter Ended October 29, 2021 October 30, 2020 Total revenue $ 784,930 $ 646,454 Cost of goods sold (exclusive of depreciation and rent) 242,771 199,044 Labor and other related expenses 274,657 227,188 Other store operating expenses 183,679 161,274 General and administrative expenses 40,910 39,564 Gain on sale and leaseback transactions — ( 217,722 ) Operating income 42,913 237,106 Interest expense, net 2,629 10,715 Income before income taxes 40,284 226,391 Provision for income taxes 6,908 55,711 Net income $ 33,376 $ 170,680 Net income per share: Basic $ 1.42 $ 7.20 Diluted $ 1.41 $ 7.18 Weighted average shares: Basic 23,507,361 23,707,750 Diluted 23,593,882 23,771,230 See Notes to unaudited Condensed Consolidated Financial Statements. 4 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited and in thousands) Quarter Ended October 29, 2021 October 30, 2020 Net income $ 33,376 $ 170,680 Other comprehensive income before income tax expense: Change in fair value of interest rate swaps — 3,466 Income tax expense — 865 Other comprehensive income, net of tax — 2,601 Comprehensive income $ 33,376 $ 173,281 See Notes to unaudited Condensed Consolidated Financial Statements. 5 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited and in thousands, except share data) Common Stock Additional Paid-In Accumulated Other Comprehensive Retained Total Shareholders’ Shares Amount Capital Loss Earnings Equity Balances at July 30, 2021 23,497,166 $ 235 $ — $ — $ 663,398 $ 663,633 Comprehensive Income: Net income — — — — 33,376 33,376 Other comprehensive income, net of tax — — — — — — Total comprehensive income — — — — 33,376 33,376 Cash dividends declared - $ 1.30 per share — — — — ( 30,838 ) ( 30,838 ) Share-based compensation — — 2,309 — — 2,309 Cumulative-effect of change in accounting principle, net of taxes (see Note 1) — — — — ( 36,956 ) ( 36,956 ) Issuance of share-based compensation awards, net of shares withheld for employee taxes 22,691 — ( 2,309 ) — — ( 2,309 ) Balances at October 29, 2021 23,519,857 $ 235 $ — $ — $ 628,980 $ 629,215 Common Stock Additional Paid-In Accumulated Other Comprehensive Retained Total Shareholders’ Shares Amount Capital Loss Earnings Equity Balances at July 31, 2020 23,697,396 $ 237 $ — $ ( 20,346 ) $ 438,498 $ 418,389 Comprehensive Income: Net income — — — — 170,680 170,680 Other comprehensive income, net of tax — — — 2,601 — 2,601 Total comprehensive income — — — 2,601 170,680 173,281 Cash dividends previously declared in prior quarters — — — — ( 40 ) ( 40 ) Share-based compensation — — 1,974 — — 1,974 Issuance of share-based compensation awards, net of shares withheld for employee taxes 22,928 — ( 1,974 ) — ( 18 ) ( 1,992 ) Balances at October 30, 2020 23,720,324 $ 237 $ — $ ( 17,745 ) $ 609,120 $ 591,612 See Notes to unaudited Condensed Consolidated Financial Statements. 6 Index CRACKER BARREL OLD COUNTRY STORE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited and in thousands) Three Months Ended October 29, 2021 October 30, 2020 Cash flows from operating activities: Net income $ 33,376 $ 170,680 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,788 26,351 Amortization of debt issuance costs 479 — Loss on disposition of property and equipment 1,870 801 Gain on sale and leaseback transaction — ( 217,722 ) Share-based compensation 2,309 1,974 Noncash lease expense 14,329 13,888 Amortization of asset recognized from gain on sale and leaseback transactions 3,184 3,184 Changes in assets and liabilities: Inventories ( 21,313 ) ( 16,646 ) Other current assets ( 1,401 ) ( 4,582 ) Accounts payable 3,023 32,547 Other current liabilities ( 23,693 ) ( 5,083 ) Deferred income taxes ( 151 ) 54,142 Other long-term assets and liabilities ( 14,777 ) ( 2,543 ) Net cash provided by operating activities 23,023 56,991 Cash flows from investing activities: Purchase of property and equipment ( 14,097 ) ( 11,431 ) Proceeds from insurance recoveries of property and equipment 44 217 Proceeds from sale of property and equipment 14 149,829 Acquisition of business, net of cash acquired ( 1,500 ) ( 1,500 ) Net cash provided by (used in) investing activities ( 15,539 ) 137,115 Cash flows from financing activities: Taxes withheld from issuance of share-based compensation awards ( 2,309 ) ( 1,992 ) Dividends on common stock ( 23,903 ) ( 31,491 ) Net cash used in financing activities ( 26,212 ) ( 33,483 ) Net increase (decrease) in cash and cash equivalents ( 18,728 ) 160,623 Cash and cash equivalents, beginning of period 144,593 436,996 Cash and cash equivalents, end of period $ 125,865 $ 597,619 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized $ 2,686 $ 10,201 Income taxes $ 12 $ 1 Supplemental schedule of non-cash investing and financing activities * : Capital expenditures accrued in accounts payable $ 3,048 $ 2,736 Change in fair value of interest rate swaps $ — $ 3,466 Change in deferred tax asset for interest rate swaps $ — $ ( 865 ) Dividends declared but not yet paid $ 31,007 $ 612 * See Note 8 fo r additional supplemental disclosures related to leases. See Notes to unaudited Condensed Consolidated Financial Statements. 7 Index CRACKER BARREL OLD COUNTRY STORE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except percentages, share and per share data) (Unaudited) 1. Condensed Consolidated Financial Statements Cracker Barrel Old Country Store, Inc. and its affiliates (collectively, in these Notes to Condensed Consolidated Financial Statements, the “Company”) are principally engaged in the operation and development in the United States of the Cracker Barrel Old Country Store® (“Cracker Barrel”) concept. The accompanying condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) without audit. In the opinion of management, all adjustments (consisting of normal and recurring items) necessary for a fair presentation of such condensed consolidated financial statements have been made. The results of operations for any interim period are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended July 30, 2021 (the “2021 Form 10-K”). The accounting policies used in preparing these condensed consolidated financial statements are the same as described in the 2021 Form 10-K. References to a year in these Notes to Condensed Consolidated Financial Statements are to the Company’s fiscal year unless otherwise noted. COVID-19 Impact The Company continues to recover from the COVID-19 pandemic as all dining rooms were open to some extent during the first quarter of 2022. Although dining room service was operational to varying degrees, some locations continued to be adversely impacted by capacity restrictions and social distancing guidelines. 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 otherwise limit our dine-in services, or negatively affect consumer demand. 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 and have continually adapted 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. Recent Accounting Pronouncements Adopted Accounting for Convertible Instruments In August 2020, the Financial Accounting Standards Boar d (“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 on the Condensed Consolidated Balance Sheet resulted in the increase in long-term debt of $ 49,242 , a reduction in deferred income taxes of $ 12,286 and decrease in equity of $ 36,956 . The decrease in equity is comprised of a decrease in Retained Earnings of $ 36,956 , which is due to the depletion of Additional Paid-In Capital as a result of this adoption. There was no impact to earnings per share in the first quarter of 2022 as a result of the adoption. 8 Index 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 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. The new guidance was applied on a prospective basis, except for the guidance on franchise taxes that are partially based on income which was applied using a modified retrospective approach. The adoption of the accounting guidance in the first quarter of 2022 did not have a significant impact on the Company’s consolidated financial position or results of operations. 2. Fair Value Measurements The Company’s assets measured at fair value on a recurring basis at October 29, 2021 were as follows: Level 1 Level 2 Level 3 Total Fair Value Cash equivalents* $ 15,001 $ — $ — $ 15,001 Deferred compensation plan assets** 32,251 Total assets at fair value $ 47,252 The Company’s assets 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 Deferred compensation plan assets** 32,527 Total assets at fair value $ 67,528 * Consists of money market fund investments. ** Represents plan assets invested in mutual funds established under a rabbi trust for the Company’s non-qualified savings plan and is included in the Condensed Consolidated Balance Sheets as other assets. The Company did no t have any liabilities measured at fair value on a recurring basis at October 29, 2021 and July 30, 2021. The Company’s money market fund investments are measured at fair value using quoted market prices. The fair values of the Company’s accounts receivable and accounts payable approximate their carrying amounts because of their short duration. The fair value of the Company’s variable rate debt, based on quoted market prices, which are considered Level 1 inputs, approximates its carrying amount at October 29, 2021 and July 30, 2021. The Company’s financial instruments that are not remeasured at fair value include the 0.625 % convertible Senior Notes (see Note 4). The Company estimates the fair value of the Notes through consideration of quoted market prices of similar instruments, classified as Level 2. The estimated fair value of the Notes was $ 292,344 and $ 249,233 , respectively, as of October 29, 2021 and July 30, 2021 . 3. Inventories Inventories were comprised of the following at: October 29, 2021 July 30, 2021 Retail $ 122,178 $ 104,143 Restaurant 24,213 21,583 Supplies 13,242 12,594 Total $ 159,633 $ 138,320 9 Index 4. Debt On September 5, 2018, the Company entered into a five-year $ 950,000 revolving credit facility (“2019 Revolving Credit Facility”). The 2019 Revolving Credit Facility contains an option to increase the revolving credit facility by $ 300,000 , of which $ 260,605 remains. I n 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 . The Company’s outstanding borrowings under the 2019 Revolving Credit Facility were $ 85,000 at both October 29, 2021 and July 30, 2021 . At October 29, 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 10 for more information on the Company’s standby letters of credit). At October 29, 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 the London Inter-Bank Offered Rate (“LIBOR”) or prime plus a percentage point spread based on certain specified financial ratios under the 2019 Revolving Credit Facility. At October 29, 2021, the weighted average interest rate on $ 85,000 of the Company’s outstanding borrowings was 2.33 %. 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 October 29, 2021, the Company was in compliance with all debt covenants under the 2019 Revolving Credit Facility. 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. 10 Index 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 the payment of dividends to holders of the Company’s common stock. As of October 29, 2021, the conversion rate, as adjusted, was 5.4042 shares of the Company’s common stock per $ 1,000 principal amount of Notes. 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. 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 as of July 30, 2021, 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 did not require separate accounting as a derivative as it met 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 represented the debt discount, which was recorded as a direct deduction from the related debt liability in the Condensed 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 $ 53,004 was included in additional-paid in capital in the consolidated balance sheet as of July 30, 2021 and was not remeasured since it continued 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 Condensed 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. Due to our adoption of new accounting guidance for convertible instruments on July 31, 2021, we no longer bifurcate the Notes into a liability and an equity component in our Condensed Consolidated Balance Sheets (see Note 1 for additional information regarding the adoption of this new accounting guidance). Upon adoption of this new accounting guidance, the Notes are accounted for entirely as a liability, and the issuance costs of the Notes are accounted for wholly as debt issuance costs. The equity conversion feature that was recorded to equity, as well as the unamortized debt discount and amortization expense attributable to equity, have been derecognized. The following table includes the outstanding principal amount and carrying value of the Notes as of the period indicated: October 29, 2021 Liability component Principal $ 300,000 Less: Debt issuance costs (1) 8,300 Net carrying amount $ 291,700 (1) Debt issuance costs are amortized to interest expense using the effective interest method over the expected life of the Notes. The effective rate of the Notes over their expected life is 1.24 %. The following is a summary of interest expense for the Notes for the quarter ended October 29, 2021: Quarter Ended October 29, 2021 Coupon interest $ 474 Amortization of issuance costs 479 Total interest expense $ 953 11 Index During any calendar quarter after 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 quarter immediately following, convert all or a portion of their Notes. The holders of the Notes were not 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 the conversion amount entirely in cash or a combination of cash and shares of the Company’s common stock. Accordingly, as of October 29, 2021, the Company could not be required to settle the Notes 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”). 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 was initially $ 263.39 per share and is subject to certain adjustments under the terms of the Warrant Transactions. As of October 29, 2021, the strike price, as adjusted, of the Warrant Transactions was $ 259.06 per share as a result of dividends declared since the Notes were issued. 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 Condensed 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. 5. Seasonality Historically, the net income of the Company has been lower in the first and third quarters and higher in the second and fourth quarters. Management attributes these variations to the holiday shopping season and the summer vacation and travel season. The Company’s retail sales, which are made substantially to the Company’s restaurant customers, historically have been highest in the Company’s second quarter, which includes the holiday shopping season. Historically, interstate tourist traffic and the propensity to dine out have been higher during the summer months, thereby contributing to higher profits in the Company’s fourth quarter. The Company generally opens additional new locations throughout the year. Therefore, the results of operations for any interim period cannot be considered indicative of the operating results for an entire year. Currently, the Company is not able to predict the impact that the COVID-19 pandemic may have on these historical consumer demand patterns or, as a result, on the seasonality of its business generally. 6. Segment Information Cracker Barrel stores represent a single, integrated operation with two related and substantially integrated product lines. The operating expenses of the restaurant and retail product lines of a Cracker Barrel store are shared and are indistinguishable in many respects. Accordingly, the Company currently manages its business on the basis of one reportable operating segment. All of the Company’s operations are located within the United States. 12 Index 7. Revenue Recognition Revenue consists primarily of sales from restaurant and retail operations. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a restaurant guest, retail customer or other customer. The Company’s policy is to present sales in the Condensed Consolidated Statements of Income on a net presentation basis after deducting sales tax. Disaggregation of revenue Total revenue was comprised of the following for the specified periods: Quarter Ended October 29, 2021 October 30, 2020 Revenue: Restaurant $ 615,414 $ 515,224 Retail 169,516 131,230 Total revenue $ 784,930 $ 646,454 Restaurant Revenue The Company recognizes revenues from restaurant sales when payment is tendered at the point of sale, as the Company’s performance obligation to provide food and beverages is satisfied. Retail Revenue The Company recognizes revenues from retail sales when payment is tendered at the point of sale, as the Company’s performance obligation to provide merchandise is satisfied. Ecommerce sales, including shipping revenue, are recorded upon delivery to the customer. Additionally, estimated sales returns are calculated based on return history and sales levels. Gift Card Breakage Included in restaurant and retail revenue is gift card breakage. Customer purchases of gift cards, to be utilized at the Company’s stores, are not recognized as sales until the card is redeemed and the customer purchases food and/or merchandise. Gift cards do not carry an expiration date; therefore, customers can redeem their gift cards indefinitely. A certain number of gift cards will not be fully redeemed. Management estimates unredeemed balances and recognizes gift card breakage revenue for these amounts in the Company’s Condensed Consolidated Statements of Income over the expected redemption period. Gift card breakage is recognized when the likelihood of a gift card being redeemed by the customer is remote and the Company determines that there is not a legal obligation to remit the unredeemed gift card balance to the relevant jurisdiction. The determination of the gift card breakage rate is based upon the Company’s specific historical redemption patterns. The Company recognizes gift card breakage by applying its estimate of the rate of gift card breakage over the period of estimated redemption. For the quarter ended October 29, 2021, gift card breakage was $ 1,105 . For the quarter ended October 30, 2020, gift card breakage was $ 940 . Deferred revenue related to the Company’s gift cards was $ 88,001 and $ 93,098 , respectively, at October 29, 2021 and July 30, 2021. Revenue recognized in the Condensed Consolidated Statements of Income for the three months ended October 29, 2021 and October 30, 2020, respectively, for the redemption of gift cards which were included in the deferred revenue balance at the beginning of the fiscal year was $ 16,807 and $ 16,242 . 13 Index 8. Leases The Company has ground leases for its leased stores and office space leases that are recorded as operating leases under various non-cancellable operating leases. The Company also leases advertising billboards, vehicle fleets, and certain equipment under various non-cancellable operating leases. Additionally, the Company completed sale-leaseback transactions in 2009, 2020 and 2021 (see section below entitled “Sale and Leaseback Transactions”). To determine whether a contract is or contains a lease, the Company determines at contract inception whether it contains the right to control the use of an identified asset for a period of time in exchange for consideration. If the contract has the right to obtain substantially all of the economic benefit from use of the identified asset and the right to direct the use of the identified asset, the Company recognizes a right-of-use asset and lease liability. 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. The Company has entered into agreements for real estate leases that are not recorded as right-of-use assets or lease liabilities as we have not yet taken possession. These leases are expected to commence in 2022 with undiscounted future payments of $ 7,053 . The Company has elected not to separate lease and non-lease components. Additionally, the Company has elected to apply the short term lease exemption to all asset classes and the short term lease expense for the period reasonably reflects the short term lease commitments. As the Company’s leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at the time of commencement or modification date in determining the present value of lease payments. For operating leases that commenced prior to the date of adoption of the new lease accounting guidance, the Company used the incremental borrowing rate as of the adoption date. Assumptions used in determining the Company’s incremental borrowing rate include the Company’s implied credit rating and an estimate of secured borrowing rates based on comparable market data. The following table summarizes the components of lease cost for operating leases for the quarters ended October 29, 2021 and October 30,2020: Quarter Ended Quarter Ended October 29,2021 October 30, 2020 Operating lease cost $ 26,992 $ 26,472 Short term lease cost 167 322 Variable lease cost 588 527 Total lease cost $ 27,747 $ 27,321 The following table summarizes supplemental cash flow information and non-cash activity related to the Company’s operating leases for the quarters ended October 29, 2021 and October 30, 2020: Quarter Ended Quarter Ended October 29, 2021 October 30, 2020 Operating cash flow information: Gain on sale and leaseback transactions $ — $ 217,722 Cash paid for amounts included in the measurement of lease liabilities 22,793 22,266 Noncash information: Right-of-use assets obtained in exchange for new operating lease liabilities 6,688 311,633 Lease modifications or reassessments increasing or decreasing right-of-use assets 3,377 23,257 Lease modifications removing right-of-use assets ( 162 ) ( 259 ) 14 Index The following table summarizes the weighted-average remaining lease term and the weighted-average discount rate for operating leases as of October 29, 2021 and October 30, 2020: October 29 , 2021 October 30 , 2020 Weighted-average remaining lease term 18.00 Years 18.59 Years Weighted-average discount rate 4.85 % 4.79 % The following table summarizes the maturities of undiscounted cash flows reconciled to the total operating lease liability as of October 29, 2021: Year Total Remainder of 2022 $ 66,730 2023 81,158 2024 65,259 2025 62,269 2026 62,494 Thereafter 891,632 Total future minimum lease payments 1,229,542 Less imputed remaining interest ( 434,015 ) Total present value of operating lease liabilities $ 795,527 Sale and Leaseback Transactions In 2009, the Company completed sale-leaseback transactions involving 15 of its owned stores and its retail distribution center. Under the transactions, the land, buildings and improvements at the locations were sold and leased back for terms of 20 and 15 years, respectively. Equipment was not included. The leases include specified renewal options for up to 20 additional years. On July 29, 2020, the Company entered into an agreement with the original lessor and a third party financier to obtain ownership of 64 of the 65 Cracker Barrel properties previously covered in the original sale and leaseback arrangement and simultaneously entered into a sale and leaseback transaction with the financier for an aggregate purchase price, net of closing costs, of $ 198,083 . The Company purchased the remaining property for approximately $ 3,200 . In connection with this sale and leaseback transaction, the Company entered into lease agreements for each of the properties for initial terms of 20 years and renewal options up to 50 years. The aggregate initial annual rent payment for the properties is approximately $ 14,379 and includes 1 % annual rent increases over the initial lease terms. All the properties qualified for sale and leaseback and operating lease accounting classification and the Company recorded a gain on the sale and leaseback transaction of $ 69,954 in the fourth quarter of 2020. The Company recorded operating lease right-of-use assets, including a non-cash asset recognized as a part of accounting for the transaction of $ 79,049 , and corresponding operating lease liabilities of $ 261,698 and $ 182,649 , respectively. On August 4, 2020, the Company completed a subsequent sale and leaseback transaction involving 62 of its owned Cracker Barrel stores for an aggregate purchase price, net of closing costs, of $ 146,357 . Under the transaction, the land, buildings and building improvements at the locations were sold and leased back for initial terms of 20 years and renewal options up to 50 years. The aggregate initial annual rent payment for the properties is approximately $ 10,393 and includes 1 % annual rent increases over the initial lease terms. All of the properties qualified for sale and leaseback and operating lease accounting classification, and the Company recorded a gain of $ 217,722 which is recorded in the gain on sale and leaseback transaction line in the Condensed Consolidated Statement of Income in the first quarter of 2021. The Company also recorded operating lease right-of-use assets, including a non-cash asset recognized as part of accounting for the transaction of $ 175,960 , and corresponding operating lease liabilities of $ 309,624 and $ 133,663 , respectively. 15 Index 9. Net Income Per Share and Weighted Average Shares Basic consolidated net income per share is computed by dividing consolidated net income available to common shareholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted consolidated net income per share reflects the potential dilution that could occur if securities, options or other contracts to issue shares of common stock were exercised or converted into shares of common stock and is based upon the weighted average number of shares of common stock and common equivalent shares outstanding during the reporting period. Common equivalent shares related to nonvested stock awards and units issued by the Company are calculated using the treasury stock method. The outstanding nonvested stock awards and units issued by the Company represent the only dilutive effects on diluted consolidated net income per share. The Company’s convertible senior notes and related warrants are calculated using the net share settlement option under the if converted method. 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 4 for additional information regarding the Company’s convertible senior notes . The following table reconciles the components of diluted earnings per share computations: Quarter Ended October 29, 2021 October 30, 2020 Net income per share numerator $ 33,376 $ 170,680 Net income per share denominator: Weighted average shares 23,507,361 23,707,750 Add potential dilution: Nonvested stock awards and units 86,521 63,480 Diluted weighted average shares 23,593,882 23,771,230 10. Commitments and Contingencies The Company and its subsidiaries are party to various legal and regulatory proceedings and claims incidental to their business in the ordinary course. In the opinion of management, based upon information currently available, the ultimate liability with respect to these contingencies will not materially affect the Company’s financial statements. Related to its insurance coverage, the Company is contingently liable pursuant to standby letters of credit as credit guarantees to certain insurers. As of October 29, 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 2019 Revolving Credit Facility (see Note 4). 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 October 29 , 2021, the Company has recorded an accrual of $ 344 in the Condensed 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 such indemnification agreements is sufficiently remote that no such liability has been recorded in the Condensed Consolidated Balance Sheet as of October 29 , 2021 . 16 Index