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Item 7. Management’s Discussion and Analysis

2022-09-27 compared with 2021-09-24 · 438 added, 279 removed, 196 unchanged (79% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides information which management believes is relevant to an assessment and

understanding of our consolidated results of operations and financial condition.

MD&A should be read in conjunction with the Consolidated Financial Statements and notes thereto.

Readers should also carefully review the information presented under the section entitled “Risk Factors” and other cautionary statements in this report.

Readers should also carefully review the information presented

under the section entitled “Risk Factors” and other cautionary statements in this report.

All dollar amounts (other than per share amounts) reported or discussed in this MD&A are shown in thousands.

References in MD&A to a year or quarter are to our fiscal year or quarter unless expressly noted or the context clearly indicates otherwise.

References in MD&A to a year or quarter

are to our fiscal year or quarter unless expressly noted or the context clearly indicates otherwise.

This overview summarizes the MD&A, which includes the following sections:

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(the “Company,” “our” or “we”) is a publicly traded (Nasdaq:

CBRL) company that, through its operations and those of certain subsidiaries, is principally engaged in the operation and development of the Cracker Barrel Old Country Store® (“Cracker Barrel”) concept.

CBRL) company that, through its operations and those of certain subsidiaries, is principally

engaged in the operation and development of the Cracker Barrel Old Country Store® (“Cracker Barrel”) concept.

Each Cracker Barrel store consists of a restaurant with a gift shop.

The restaurants serve breakfast, lunch and dinner.

The gift shop offers a variety of decorative and functional items specializing in rocking chairs, holiday gifts, toys, apparel and foods.

The gift shop

offers a variety of decorative and functional items specializing in rocking chairs, holiday gifts, toys, apparel and foods.

As of September 14, 2022, the Company operated 664 Cracker Barrel stores located in 45 states.

Effective October 19, 2019, the Company acquired 100% ownership of Maple Street Biscuit Company (“MSBC”), a breakfast and lunch fast casual concept.

As of September 15, 2021, the Company operated 37 owned MSBC locations, and there were an additional seven franchised locations open, located in seven states.

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.

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.

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.

Restaurant and Retail Industries

Our stores operate in both the restaurant and retail industries in the United States.

The restaurant and retail industries are highly competitive with respect to quality, variety and price of the food products, availability of carryout and home delivery, internet and mobile ordering capabilities and retail merchandise offered.

We compete with a significant number of national and regional restaurant and retail chains.

Additionally, there are many segments within the restaurant industry, such as family dining, casual dining, full-service, fast casual and quick service, which often overlap and provide competition for widely diverse restaurant concepts.

Cracker Barrel primarily operates in the full-service segment of the restaurant industry, and our growing MSBC concept operates in the fast casual segment.

Competition also exists in securing prime real estate locations for new stores, in hiring qualified employees, in advertising, in the attractiveness of facilities and with competitors having similar menu offerings or convenience features.

The restaurant and retail industries are often affected by changes in consumer taste and preference;

national, regional or local economic conditions;

demographic trends;

traffic patterns;

the type, number and location of competing restaurants and retailers;

and consumers’ discretionary purchasing power.

Additionally, economic, seasonal and weather conditions affect the restaurant and retail industries.

Adverse economic conditions and unemployment rates affect consumer discretionary income and dining and shopping habits.

Historically, interstate tourist traffic and the propensity to dine out have been much higher during the summer months, thereby contributing to higher profits in our fourth quarter.

Retail sales, which are made substantially to our restaurant guests, are historically strongest in the second quarter, which includes the holiday shopping season.

Severe weather also affects restaurant and retail sales adversely from time to time.

Furthermore, we are not able to predict the impact that the ongoing COVID-19 pandemic may continue to have on the seasonality of our business.

Effective October 19, 2019,

the Company acquired 100% ownership of Maple Street Biscuit Company (“MSBC”), a breakfast and lunch fast casual concept.

As of September 14, 2022, the Company operated 53 MSBC locations in nine states, none of which are franchised.

Company Performance in 2022

Management believes that the Cracker Barrel brand remains one of the strongest and most differentiated brands in the restaurant industry, and we plan to continue to leverage and build on that

strength as a core component of our business strategy.

Our long-term strategy remains centered on driving sustainable sales growth, continued business model improvements, building profitable Cracker Barrel and MSBC stores, and ultimately driving

shareholder returns.

Fiscal 2022 included challenges from historically high commodity and wage inflation, COVID-19 case count resurgences and record gas prices in the second half of the fiscal year (adversely impacting

consumers’ discretionary income).

While navigating these challenges, we focused our efforts on maintaining a strong value proposition, continued growth in our off-premise business, delivering continued strong retail sales, marketing and culinary

innovation to grow average check through introduction of add-ons and menu enhancements, thoughtful expansion of MSBC, and store-level operational excellence.

While our overall performance was not where we expected at the outset of the fiscal year, and macro challenges worsened as the year progressed, we made significant progress on many of our key

business initiatives, and we continued our focus on generating shareholder returns by paying $4.90 per share in dividends for fiscal 2022 and declaring a dividend of $1.30 per share that was subsequently paid on August 5, 2022 to shareholders of

record on July 15, 2022, totaling $143,744 dividends declared or paid in 2022, and repurchasing $131,542 in shares of our common stock.

Key Performance Indicators

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Comparable store restaurant sales increase/(decrease) :

To calculate comparable store restaurant sales increase/(decrease), we determine total restaurant sales of stores open at least six full quarters before the beginning of the applicable period, measured on comparable calendar weeks.

We then subtract total comparable store restaurant sales for the current year period from total comparable store restaurant sales for the applicable historical period to calculate the absolute dollar change.

To calculate comparable store restaurant sales increase/(decrease), we determine total restaurant sales of stores open at least six full quarters before the beginning of the

applicable period, measured on comparable calendar weeks.

We then subtract total comparable store restaurant sales for the current year period from total comparable store restaurant sales for the applicable historical period to calculate

the absolute dollar change.

To calculate comparable store restaurant sales increase/(decrease), which we express as a percentage, we divide the absolute dollar change by the comparable store restaurant sales for the historical period.

Comparable store average restaurant sales :

To calculate comparable store average restaurant sales, we determine total restaurant sales of stores open at least six full quarters before the beginning of the applicable period, measured on comparable calendar weeks, and divide by the number of comparable stores for the applicable period.

To calculate comparable store average restaurant sales, we determine total restaurant sales of stores open at least six full quarters before the beginning of the applicable period,

measured on comparable calendar weeks, and divide by the number of comparable stores for the applicable period.

Comparable store retail sales increase/(decrease) :

To calculate comparable store retail sales increase/(decrease), we determine total retail sales of stores open at least six full quarters before the beginning of the applicable period, measured on comparable calendar weeks.

We then subtract total comparable store retail sales for the current year period from total comparable store retail sales for the applicable historical period to calculate the absolute dollar change.

To calculate comparable store retail sales increase/(decrease), we determine total retail sales of stores open at least six full quarters before the beginning of the applicable

period, measured on comparable calendar weeks.

We then subtract total comparable store retail sales for the current year period from total comparable store retail sales for the applicable historical period to calculate the absolute dollar

To calculate comparable store retail sales increase/(decrease), which we express as a percentage, we divide the absolute dollar change by the comparable store retail sales for the historical period.

Comparable store retail average weekly sales :

To calculate comparable store average retail sales, we determine total retail sales of stores open at least six full quarters before the beginning of the applicable period, measured on comparable calendar weeks, and divide by the number of comparable stores for the applicable period.

To calculate comparable store average retail sales, we determine total retail sales of stores open at least six full quarters before the beginning of the applicable period, measured on

comparable calendar weeks, and divide by the number of comparable stores for the applicable period.

Comparable restaurant guest traffic increase/(decrease) :

To calculate comparable restaurant guest traffic increase/(decrease), we determine the number of entrees sold in our dine-in and off-premise business from stores open at least six full quarters at the beginning of the applicable period, measured on comparable calendar weeks.

We then subtract total entrees sold for the current year period from total entrees sold for the applicable historical period to calculate the absolute numerical change.

To calculate comparable restaurant guest traffic increase/(decrease), we determine the number of entrees sold in our dine-in and off-premise business from stores open at

least six full quarters at the beginning of the applicable period, measured on comparable calendar weeks.

We then subtract total entrees sold for the current year period from total entrees sold for the applicable historical period to

calculate the absolute numerical change.

To calculate comparable restaurant guest traffic increase/(decrease), which we express as a percentage, we divide the absolute numerical change by the total entrees sold for the historical period.

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To calculate average check per guest, we determine comparable store restaurant sales, as described above, and divide by comparable guest traffic (as described above).

We then subtract average check per guest for the current year period from average check per guest for the applicable historical period to calculate the absolute dollar change.

The absolute dollar change is divided by the prior year average check number to calculate average check increase per guest, which we express as a percentage.

These performance indicators exclude the impact of new store openings and sales related to MSBC and Holler & Dash Biscuit House TM (“Holler & Dash”), since we acquired MSBC in the first quarter of 2020, and we have converted our Holler & Dash locations into MSBC locations.

We then subtract average

check per guest for the current year period from average check per guest for the applicable historical period to calculate the absolute dollar change.

The absolute dollar change is divided by the prior year average check number to calculate

average check increase per guest, which we express as a percentage.

These performance indicators exclude the impact of new store openings and sales related to MSBC and Holler & Dash Biscuit House TM (“Holler & Dash”), since we acquired MSBC in the first quarter of 2020 and converted our Holler & Dash locations into MSBC locations.

We use comparable store sales metrics as indicators of sales growth to evaluate how our established stores have performed over time.

We use comparable restaurant guest traffic increase/(decrease) to evaluate how established stores have performed over time, excluding growth achieved through menu price and sales mix change.

Finally, we use average check per guest to identify trends in guest preferences, as well as the effectiveness of menu changes.

We believe these performance indicators are useful for investors to provide a consistent comparison of sales results and trends across comparable periods within our core, established store base, unaffected by results of store openings, closings, and other transitional changes.

Company Performance in 2021

Management believes that the Cracker Barrel brand remains one of the strongest and most differentiated brands in the restaurant industry, and we plan to continue to leverage and build on that strength as a core component of our business strategy.

Our long-term strategy includes the following:

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

During 2021, we focused on driving topline sales despite the challenging environment brought on by the COVID-19 pandemic by accelerating our off-premise business, introducing craveable, signature food, and improving the employee and guest experience.

Additionally, during 2021 we continued to make progress on key strategic initiatives such as continuing the rollout of beer and wine to our stores, investments in our digital capabilities, and upgrades to our point of sale system.

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

In 2021, we opened two new Cracker Barrel locations and two new MSBC locations.

Extending the Brand to further drive shareholder value creation by developing new platforms to drive growth, such as our acquisition of MSBC in 2020 and continued integration of that concept into the Company in 2021.

Additionally, during 2021, we continued our focus on generating shareholder returns by reinstating our regular quarterly dividend.

Like many companies in the restaurant and retail industries, we had temporarily suspended our quarterly cash dividend as a result of the exigencies of the COVID-19 pandemic.

In the fourth quarter of 2021, we declared (and subsequently paid in the first quarter of 2022) a dividend at $1.00 per share.

We use comparable restaurant guest traffic increase/(decrease)

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

Finally, we use average check per guest to identify trends in guest preferences, as well as the effectiveness of menu

closings, and other transitional changes.

COVID-19 Impact and Company Response

During 2022, the Company continued to recover from the COVID-19 pandemic (notwithstanding new variant outbreaks), and all dining rooms were open to some extent during 2022.

While all our dining

rooms are currently operating without COVID-19-related restrictions, it is possible that renewed outbreaks or increases in cases and/or further new variants of the disease, either as part of a national trend or on a more localized basis, could

result in COVID-19-related restrictions including 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 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.

Restaurant and Retail Industries

Our stores operate in both the restaurant and retail industries in the United States.

The restaurant and retail industries are highly competitive with respect to quality, variety and price of the

food products, availability of carryout and home delivery, internet and mobile ordering capabilities and retail merchandise offered.

We compete with a significant number of national and regional restaurant and retail chains.

Additionally, there

are many segments within the restaurant industry, such as family dining, casual dining, full-service, fast casual and quick service, which often overlap and provide competition for widely diverse restaurant concepts.

Cracker Barrel primarily

operates in the full-service segment of the restaurant industry, and our growing MSBC concept operates in the fast casual segment.

Competition also exists in securing prime real estate locations for new stores, in hiring qualified employees, in

advertising, in the attractiveness of facilities and with competitors having similar menu offerings or convenience features.

The restaurant and retail industries are often affected by changes in consumer taste and preference;

national, regional or

local economic conditions;

demographic trends;

traffic patterns;

the type, number and location of competing restaurants and retailers;

and consumers’ discretionary purchasing power.

Additionally, economic, seasonal and weather conditions affect the restaurant and retail industries.

Adverse economic conditions and unemployment rates affect consumer discretionary income and

dining and shopping habits.

Historically, interstate tourist traffic and the propensity to dine out have been much higher during the summer months, thereby contributing to higher profits in our fourth quarter.

Retail sales, which are made

substantially to our restaurant guests, are historically strongest in the second quarter, which includes the holiday shopping season.

Severe weather events such as hurricanes, floods, tornadoes, and winter storms may prevent or dissuade guests from visiting our stores, impair our ability to staff our stores

or force us to temporarily close affected stores, adversely impacting our restaurant and retail sales.

Additionally, severe drought conditions (such as the severe drought affecting much of the southwestern United States) and associated

restrictions on water use may impair restaurant operations or increase costs in locations affected by such conditions.

Climate change, changing weather patterns or unpredictable weather patterns may increase the incidence of any of these events and

otherwise also impact guest visitation patterns on a macro scale.

In addition to its impact on store operations, severe weather may also disrupt our supply chain, both in distribution to ports and central warehouses and in distribution to local

In general, we believe that the geographic dispersion of our stores and multiple sources of distribution adequately mitigate the potential impact of severe weather and changing

weather patterns on our stores, but our board of directors and management team continually monitor and reexamine these considerations in light of ongoing trends.

RESULTS OF OPERATIONS

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(2) Average weekly sales are calculated by dividing net sales by operating weeks and include all stores except for MSBC and Holler & Dash.

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

(3) Comparable store sales and traffic consist of sales of stores open at least six full quarters at the beginning of the period and

are measured on comparable calendar weeks.

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

Total revenue benefited from the opening of four new units in 2021, five new units in 2020, and eight new units in 2019, partially offset by the closing of one unit in 2021, two units in 2020 and one unit in 2019.

Dining room service was operational to varying degrees in 2021, yet most locations were impacted at times during the year by capacity restrictions, social distancing guidelines, and decreased consumer demand for in-person dining.

The total revenue decrease for 2020 as compared to 2019 was primarily the result of all of our restaurant operations being limited to pick-up and delivery orders with no dine-in service for a portion of the third quarter of 2020, the related significant decline in restaurant guest traffic, restrictions mandated by federal, state and local governments in the United States to mitigate the spread of COVID-19 and the related changes in consumer behavior.

The total revenue decrease was partially offset by our subsequent resumption of dine-in services at a number of our Cracker Barrel stores and the acceleration of our off-premise business, which benefited from a number of operational improvements implemented to support that business’s growth.

Total revenue benefited from the opening of seven new MSBC units in 2022, two new units for both Cracker Barrel and MSBC in 2021, and four new Cracker Barrel units and one new MSBC unit in 2020,

partially offset by the closing of one Cracker Barrel unit in 2021 and one unit each for Cracker Barrel and Holler & Dash in 2020.

Additionally, in the fourth quarter of 2022, the Company acquired direct ownership of MSBC’s seven franchised

units from their respective franchisees.

During 2020 and 2021, the COVID-19 pandemic negatively impacted 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.

Dining room service was operational to varying degrees, yet most locations were impacted at times by capacity restrictions, social distancing guidelines, and

decreased consumer demand for in-person dining.

In 2022, the Company continued to recover from the COVID-19 pandemic;

however, we believe outbreaks of new variants adversely impacted consumer demand in 2022.

All dining rooms were open to some

extent during 2022 and most dining rooms operated with few, if any, restrictions.

Going forward it is possible that renewed outbreaks, increases in cases and/or new variants of the disease, either as part of a national trend or on a more localized

basis, could result in COVID-19-related restrictions including capacity restrictions or otherwise limit our dine-in services, or negatively affect consumer demand.

The following table highlights comparable store sales* results over the past two years:

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*Comparable store sales consist of sales of stores open at least six full quarters at the beginning of the year, are measured on comparable calendar weeks and exclude MSBC and Holler & Dash.

Our comparable store restaurant sales increase in 2021 from 2020 resulted from an average check increase of 3.1% (including a 2.1% average menu price increase) and an increase in guest traffic of 5.3%.

In 2020, our comparable store restaurant sales, comparable retail sales and comparable restaurant guest traffic were negatively affected by the COVID-19 pandemic as all dining rooms were closed beginning the week of March 27, 2020 and only certain restaurants resumed dine-in operations with limited capacity beginning at the end of April 2020.

Our comparable store restaurant sales decrease in 2020 from 2019 resulted from a decrease in guest traffic of 21.6% partially offset by an average check increase of 2.7% (including a 1.8% average menu price increase).

Our comparable store restaurant sales increase in 2022 as compared to 2021 resulted from an average check increase of 7.0% (including a 5.9% average menu price increase) and an increase in guest

traffic of 8.0%.

Our comparable store restaurant sales increase in 2021 as compared to 2020 resulted from an average check increase of 3.1% (including a 2.1% average menu price increase) and an increase in guest

traffic of 5.3%.

Our retail sales are made substantially to our restaurant guests.

The increase in our comparable store retail sales in 2021 from 2020 resulted primarily from the guest traffic increase and strong performance in the toys, apparel and accessories, food and convenience and décor merchandise categories.

The decrease in our comparable store retail sales in 2020 from 2019 resulted primarily from the impact of the COVID-19 pandemic and resulting dining room closures and restrictions which caused a marked decline in guest traffic.

The increase in our comparable store retail sales in 2022 as compared to 2021 resulted primarily from the guest traffic increase

and strong performance in the apparel and accessories, food and convenience, toys, décor, and bed and bath merchandise categories.

The increase in our comparable store retail sales in 2021 as compared to 2020 resulted primarily from the guest

traffic increase and strong performance in the toys, apparel and accessories, food and convenience and décor merchandise categories.

Cost of Goods Sold (Exclusive of Depreciation and Rent)

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Restaurant Cost of Goods Sold

The increase in restaurant cost of goods sold as a percentage of restaurant revenue in 2021 as compared to 2020 was primarily the result of commodity inflation of 2.4% partially offset by lower food waste and a decrease in employee discounts.

The increase in restaurant cost of goods sold as a percentage of restaurant revenue in 2022 as compared to 2021 was primarily the result of commodity inflation of 13.1% partially offset by our menu

price increase referenced above.

The increase in restaurant cost of goods sold as a percentage of restaurant revenue in 2021 as compared to 2020 was primarily the result of commodity inflation of 2.4% partially offset by lower

food waste and a decrease in employee discounts.

Lower food waste and the decrease in employee discounts both accounted for decreases of 0.1%.

Restaurant cost of goods sold as a percentage of restaurant revenue increased slightly in 2020 from 2019.

We presently expect the rate of commodity inflation to be mid-to-high single digits in 2022 as compared to 2.4% in 2021.

We continue to partially offset inflationary pressures through menu price increases and operational improvements, and we presently expect the rate of commodity inflation to be approximately 8% in

2023 as compared to 13.1% in 2022.

The following table highlights retail cost of goods sold as a percentage of retail revenue for the past three years:

Retail Cost of Goods Sold

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

(Decrease) Increase as a Percentage of Total Revenue

2022 Compared to 2021

(Decrease) Increase as a

Percentage of Total Revenue

Provision for obsolete inventory

The decrease in retail cost of goods sold as a percentage of retail revenue in 2022 as compared to 2021 resulted primarily from lower markdowns partially offset by the change in the provision for

obsolete inventory.

2021 Compared to 2020

(Decrease) Increase as a

Percentage of Total Revenue

Higher initial margin

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Discounts and allowances

The increase in retail cost of goods sold as a percentage of retail revenue in 2020 as compared to 2019 resulted primarily from higher markdowns, higher employee discounts, higher freight expense and lower retail credits.

Increase as a Percentage of Total Revenue

Employee discounts

Freight expense

Retail credits

The decrease in retail cost of goods sold as a percentage of retail revenue in 2021 as compared to 2020 resulted from lower markdowns, higher initial margin, lower freight expense, the change in

the provision for obsolete inventory and lower inventory shrinkage partially offset by an increase in discounts and allowances.

Labor and Other Related Expenses

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

The following table highlights labor and other related expenses as a percentage of total revenue for the past three years:

The following table highlights labor and other related expenses as a

percentage of total revenue for the past three years:

Labor and other related expenses

The year-to-year percentage change from 2020 to 2021 resulted primarily from the following:

(Decrease) Increase as a Percentage of Total Revenue

The year-to-year percentage change in 2022 as compared to 2021 resulted from the following:

2022 Compared to 2021

Increase (Decrease) as a

Percentage of Total Revenue

Store hourly labor

Store management expenses

The increase in store hourly labor in 2022 as compared to 2021 as a percentage of total revenue resulted primarily from wage inflation exceeding menu price increases and lower productivity, i.e.,

fewer guests served per labor hours incurred.

In addition to menu price increases, we continue to partially offset inflationary pressures through labor productivity initiatives, and we presently expect the rate of wage inflation to be

approximately 5% in 2023.

The decrease in store management expenses as a percentage of total revenue in 2022 as compared to 2021 was primarily driven by lower bonus expense in 2022 and the increase in total revenue in 2022

partially offset by wage inflation.

The lower bonus expense resulted from lower performance against financial objectives for certain components of the incentive plan in 2022 as compared to 2021.

The year-to-year percentage change in 2021 as compared to 2020 resulted primarily from the following:

2021 Compared to 2020

(Decrease) Increase as a

Percentage of Total Revenue

Store management compensation

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Store bonus expense

Store hourly labor

In general, during 2021 as compared to 2020, certain expenses as a percentage of total revenue materially decreased as a function of the significant increase in total revenue and increased operations.

co hourly labor

In general, during 2021 as compared to 2020, certain expenses as a percentage of total revenue materially decreased as a function of the significant increase in total revenue and increased

In particular, the decreases in store management compensation, miscellaneous wages, and store bonus expense as a percentage of total revenue in 2021 as compared to 2020 were primarily driven by the increases in total revenue in 2021.

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The increase in store hourly labor in 2021 as compared to 2020 as a percentage of total revenue resulted primarily from wage inflation exceeding menu price increases.

The year-to-year percentage change from 2019 to 2020 resulted primarily from the following:

Increase (Decrease) as a Percentage of Total Revenue

Store management compensation

Miscellaneous wages

Employee health care expenses

Store hourly labor

Store bonus expense

In general, in 2020, labor and other related expenses as a percentage of total revenue were materially increased by the impact of the COVID-19 pandemic.

In particular, the increases in store management compensation and miscellaneous wages as a percentage of total revenue in 2020 were all primarily driven by this decrease in revenue.

Higher employee health care expenses as a percentage of total revenue in 2020 as compared to 2019 resulted primarily from higher claims activity.

The decrease in store hourly labor as a percentage of total revenue in 2020 as compared to 2019 resulted primarily from lower usage of hourly employees due to reduced operations caused by the COVID-19 pandemic.

The decrease in store bonus expense as a percentage of total revenue in 2020 as compared to 2019 resulted from lower performance against financial objectives in 2020 as compared to 2019 due to the impact of the COVID-19 pandemic.

Other Store Operating Expenses

Other store operating expenses include all store-level operating costs, the major components of which are depreciation and amortization, operating supplies, utilities, repairs and maintenance, advertising, rent, credit card and gift card fees, real and personal property taxes and general insurance.

Other store operating expenses include all store-level operating costs, the major components of which are operating supplies, repairs and maintenance, utilities, depreciation and amortization,

advertising, rent, credit card and gift card fees, real and personal property taxes and general insurance.

The following table highlights other store operating expenses as a percentage of total revenue for the past three years:

Other store operating expenses

The year-to-year percentage change from 2020 to 2021 resulted from the following:

(Decrease) Increase as a Percentage of Total Revenue

The year-to-year percentage change in 2022 as compared to 2021 resulted primarily from the following:

2022 Compared to 2021

(Decrease) Increase as a

Percentage of Total Revenue

Other store expenses

The decreases in depreciation expense, rent and advertising expenses as a percentage of total revenue for 2022 as compared to 2021 were primarily driven by the increase in total revenue in 2022.

The increase in maintenance expense as a percentage of total revenue for 2022 as compared to 2021 resulted primarily from higher expenditures, which were the result of increased repair costs

associated with limited availability of replacement equipment.

The increase in other store expenses as a percentage of total revenue for 2022 as compared to the same period in the prior year resulted primarily from costs associated with the expansion of our

off-premise business.

The year-to-year percentage change from 2021 as compared to 2020 resulted from the following:

2021 Compared to 2020

(Decrease) Increase as a

Percentage of Total Revenue

Real and personal property taxes

Pre-opening expenses

Loss on asset disposition

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In general, during 2021 as compared to 2020, certain expenses as a percentage of total revenue materially decreased by the significant increase in total revenue and increased operations.

In particular, the decreases in depreciation expense, real and personal property taxes, and advertising expense as a percentage of total revenue for 2021 as compared to 2020 were primarily driven by the increase in total revenue in 2021.

The decrease in utilities expense as a percentage of total revenue for 2021 as compared to 2020 was primarily driven by the increase in total revenue in 2021 partially offset by higher natural gas, electricity, and water rates.

The decrease in preopening expenses as a percentage of total revenue for 2021 as compared to 2020 resulted primarily from the timing of new store openings.

The decrease in loss on asset disposition as a percentage of total revenue for 2021 as compared to 2020 resulted primarily from increased repair and maintenance activity for equipment as opposed to asset disposal.

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

particular, the decreases in depreciation expense, real and personal property taxes, and advertising expense as a percentage of total revenue for 2021 as compared to 2020 were primarily driven by the increase in total revenue in 2021.

The decrease in utilities expense as a percentage of total revenue for 2021 as compared to 2020 was primarily driven by the increase in total revenue in 2021 partially offset by higher natural gas,

electricity, and water rates.

The decrease in pre-opening expenses as a percentage of total revenue for 2021 as compared to 2020 resulted primarily from the timing of new store openings.

The decrease in loss on asset disposition as a percentage of total revenue for 2021 as compared to 2020 resulted primarily from increased repair and maintenance activity for equipment as opposed to

asset disposal.

The increase in rent expense as a percentage of total revenue for 2021 as compared to 2020 resulted primarily from the sale and leaseback transaction involving 62 of our owned Cracker Barrel stores

completed on August 4, 2020.

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

Additionally, the related rent expense includes $12,735 recorded in 2021 for the non-cash amortization of the asset recognized from the gain on the Company’s sale and leaseback transactions.

Additionally, the related rent expense includes $12,735 recorded in 2021 for the non-cash amortization of the asset recognized

from the gain on the Company’s sale and leaseback transactions.

See Note 9 to the Consolidated Financial Statements for additional information regarding the Company’s sale and leaseback transactions.

The increase in other store expenses as a percentage of total revenue for 2021 as compared to 2020 resulted primarily from costs associated with the growth in our off-premise business.

The year-to-year percentage change from 2019 to 2020 resulted primarily from the following:

Increase as a Percentage

of Total Revenue

Other store expenses

Real and personal property taxes

In general, for 2020, other store operating expenses as a percentage of total revenue were materially increased by the significant reduction in total revenue and reduced operations caused by the impact of the COVID-19 pandemic.

In particular, the increases in rent expense, supplies expense, advertising expense, utilities expense, real and personal property taxes and maintenance expense as a percentage of total revenue for 2020 were all primarily driven by this decrease in revenue.

The increase in depreciation expense as a percentage of total revenue for 2020 as compared to 2019 resulted primarily from higher capital expenditures with accelerated depreciation methods.

The increase in other store expenses as a percentage of total revenue for 2020 as compared to 2019 resulted primarily from costs associated with the expansion of our off-premise business.

General and Administrative Expenses

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General and administrative expenses

The year-to-year percentage change from 2020 to 2021 resulted from the following:

The year-to-year percentage change in 2022 as compared to 2021 resulted from lower incentive compensation.

The decrease in incentive compensation as a percentage of total revenue in 2022 as

compared to 2021 was primarily the result of lower performance against financial objectives in 2022 as compared to 2021.

The year-to-year percentage change in 2021 as compared to 2020 resulted from the following:

2021 Compared to 2020

(Decrease) Increase as a

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Incentive compensation expense

The decreases in payroll and related expense and travel expense as a percentage of total revenue in 2021 as compared to 2020 were primarily driven by cost savings initiatives implemented in response to the COVID-19 pandemic and the increase in total revenue in 2021.

The decrease in professional fees as a percentage of total revenue in 2021 as compared to 2020 was primarily driven by lower fees related to sale and leaseback transactions partially offset by additional proxy expenses related to the proxy contest initiated by affiliates of Sardar Biglari in connection with the Company’s 2020 annual shareholders meeting held on November 19, 2020.

The decreases in payroll and related expense and travel expense as a percentage of total revenue in 2021 as compared to 2020 were primarily driven by cost savings initiatives implemented in

response to the COVID-19 pandemic and the increase in total revenue in 2021.

The decrease in professional fees as a percentage of total revenue in 2021 as compared to 2020 was primarily driven by lower fees related to sale and leaseback transactions partially offset by

additional proxy expenses related to the proxy contest initiated by affiliates of Sardar Biglari in connection with the Company’s 2020 annual shareholders meeting held on November 19, 2020.

The reduction in total professional fees as a percentage

of total revenue in 2021 was the result of higher fees associated with the initial sale and leaseback transaction in the fourth quarter of 2020, when compared to the 2021 sale and leaseback transactions and additional professional fees related to

the proxy contest in connection with the 2020 annual meeting of shareholders (held in the second fiscal quarter of 2021).

The decrease in depreciation expense as a percentage of total revenue in 2021 as compared to 2020 was primarily driven by the increase in total revenue in 2021.

The increase in incentive compensation as a percentage of total revenue in 2021 as compared to 2020 was primarily driven by better performance against financial objectives in 2021 as compared to

The year-to-year percentage change from 2019 to 2020 resulted primarily from the following:

Increase (Decrease) as a

Percentage of Total Revenue

Payroll and related expenses

Professional fees

Incentive compensation expense

In general, for 2020, general and administrative expenses as a percentage of total revenue were materially increased by the significant reduction in total revenue and reduced operations caused by the impact of the COVID-19 pandemic.

In particular, the increases in payroll and related expense and professional fees were all primarily driven by this decrease in revenue.

The increase in payroll and related expenses also resulted from severance expenses recorded in 2020 as part of the elimination of positions in the corporate headquarters and in the field.

The decrease in incentive compensation in 2020 as compared to 2019 resulted from lower performance against financial objectives in 2020 as compared to 2019 due to the impact of the COVID-19 pandemic.

Gain on Sale and Leaseback Transactions

On July 29, 2020, we entered into a sale and leaseback transaction involving 64 of our owned Cracker Barrel properties and recorded a gain of $69,954.

On August 4, 2020, we entered into a second sale and leaseback transaction involving 62 of our owned Cracker Barrel stores and recorded a gain of $217,722.

On August 4, 2020, we entered into a second

sale and leaseback transaction involving 62 of our owned Cracker Barrel stores and recorded a gain of $217,722.

See Note 9 to the Consolidated Financial Statements for additional information regarding these sale and leaseback transactions.

During the third and fourth quarters of 2020, we determined that certain Cracker Barrel and MSBC locations were impaired, resulting in impairment charges of $22,496.

These locations were impaired because of declining operating performance and resulting negative cash flow projections as a result of the impact of the COVID-19 pandemic.

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

The Company did not incur impairment charges in 2021 or 2019.

These locations were impaired

because of declining operating performance and resulting negative cash flow projections as a result of the impact of the COVID-19 pandemic.

The Company did not incur similar impairment charges in 2022 or 2021.

It is possible that we may recognize

future additional impairment charges as a result of the unknown impacts of the COVID-19 pandemic and our response or for other business reasons.

Interest Expense

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Interest expense

The year-to-year increase in 2021 from 2020 resulted primarily from the costs associated with termination of interest rate swaps, higher weighted average debt levels caused by our borrowing under our 2019 Revolving Credit Facility in response to the COVID-19 pandemic, higher weighted average interest rates, and the cessation of interest income on Punch Bowl Social (“PBS”) promissory notes written off in the third quarter of 2020.

Additionally, as part of our amendment to the 2019 Revolving Credit Facility in the third quarter of 2021, we incurred additional interest expense of $452 related to the write-off of deferred financing costs and we incurred interest expense of $768 related to the amortization of the original issue discount on our Notes.

The year-to-year increase in 2020 from 2019 resulted primarily from materially higher debt levels caused by our borrowing of the remaining available amount under our 2019 Revolving Credit Facility in March 2020 and exercising the accordion feature under the 2019 Revolving Credit Facility to borrow an additional amount in response to the COVID-19 pandemic and higher weighted average interest rates.

We presently expect our interest expense for 2022 to be approximately $9,000.

The year-to-year decrease in 2022 as compared to 2021 resulted primarily from lower weighted average debt levels, lower weighted average interest rates and the prior year including costs associated with the termination

of the Company’s interest rate swaps.

The year-to-year increase in 2021 as compared to 2020 resulted primarily from the costs associated with termination of interest rate swaps, higher weighted average debt levels caused by our

borrowing under our 2019 Revolving Credit Facility in response to the COVID-19 pandemic, higher weighted average interest rates, and the cessation of interest income on Punch Bowl Social (“PBS”) promissory notes written off in the third quarter of

of $768 related to the amortization of the original issue discount on our Notes.

Provision for Income Taxes (Income Tax Benefit)

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Effective tax rate

The increase in our effective tax rate from 2020 to 2021 is primarily the result of the increase in income before income tax.

The decrease in our effective tax rate from 2019 to 2020 is primarily due to the tax benefits from the net loss recorded for PBS and a large reduction in income before income taxes relative to a modest reduction in the tax credits.

We presently expect our effective tax rate for 2022 to be approximately 18%.

The decrease in our effective tax rate in 2022 as compared to 2021 is primarily the result of the decrease in income before income tax and the benefit of higher income tax credits.

The increase in

our effective tax rate in 2021 as compared to 2020 is primarily the result of the increase in income before income tax.

We presently expect our effective tax rate for 2023 to be approximately 10% to 15%.

LIQUIDITY AND CAPITAL RESOURCES

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Our primary sources of liquidity are cash generated from our operations and our borrowing capacity under our revolving credit facility.

Our internally generated cash, along with cash on hand at July 30, 2021 and borrowings under our 2019 Revolving Credit Facility, were sufficient to finance all of our growth, share repurchases, dividend payments, working capital needs, interest payments under our revolving credit facility and other cash payment obligations in 2021.

We believe that cash at July 30, 2021, along with cash expected to be generated from our operating activities and the borrowing capacity under our revolving credit facility, will be sufficient to finance our continuing operations, our continuing expansion plans, debt service and working capital needs for 2022.

Our internally generated cash, along with cash on hand at

July 30, 2021 and borrowings under our revolving credit facility, were sufficient to finance all of our growth, share repurchases, dividend payments, working capital needs, interest payments on long-term debt obligations and other cash payment

obligations in 2022.

We believe that cash at July 29, 2022, along with cash expected to be generated from our operating activities and the borrowing capacity under our revolving credit facility, will be sufficient to finance our continuing

operations, our continuing expansion plans, debt service, dividend payments, share repurchases and working capital needs for the next twelve months.

Furthermore, we believe that cash expected to be generated from our operating activities and the

borrowing capacity under our revolving credit facility will be sufficient to finance our continuing operations, capital expenditures, interest expense on long-term debt obligations, operating lease obligations, continuing expansion plans, share

repurchases and working capital needs beyond the next twelve months.

A summary of our contractual cash obligations and commitments as of July 29, 2022, is as follows:

Payments due by Years

Contractual Obligations (a)

2022 Revolving Credit Facility (b)

Convertible Debt (c)

Purchase obligations (e)

Other long-term obligations (f)

Total contractual cash obligations

Amount of Commitment Expirations by Years

2022 Revolving Credit Facility (b)

Convertible Debt (c)

Standby letters of credit (g)

Total commitments

At July 29, 2022, the entire liability for uncertain tax positions (including penalties and interest) is classified as a long-term liability.

At this time, we are unable to make a reasonably reliable estimate of the amounts and timing

of payments in individual years because of uncertainties in the timing of the effective settlement of tax positions.

As such, the liability for uncertain tax positions of $17,991 is not included in the contractual cash obligations and

commitments table above.

Our 2022 Revolving Credit Facility expires on June 17, 2027.

Using our weighted average interest rate of 3.49% and the outstanding borrowings at July 29, 2022, we anticipate having interest payments of $4,543, $9,086 and $9,086 in 2023,

2024-2025 and 2026-2027, respectively.

Based on our outstanding borrowings and our standby letters of credit at July 29, 2022 and our current unused commitment fee as defined in the 2022 Revolving Credit Facility, our unused commitment fees

in 2023, 2024-2025 and 2026-2027 would be $1,376, $2,753 and $2,613, respectively;

however, the actual amount will differ based on actual usage of the 2022 Revolving Credit Facility.

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.

Includes base lease terms and certain optional renewal periods for which, at the inception of the lease, it is reasonably certain that we will exercise.

Purchase obligations consist of purchase orders for food and retail merchandise;

purchase orders for capital expenditures, supplies, other operating needs and other services;

and commitments under contracts for maintenance needs and

other services.

We have excluded contracts that do not contain minimum purchase obligations.

We excluded long-term agreements for services and operating needs that can be cancelled within 60 days without penalty.

We included long-term

agreements and certain retail purchase orders for services and operating needs that can be cancelled with more than 60 days’ notice without penalty only through the term of the notice.

We included long-term agreements for services and

operating needs that only can be cancelled in the event of an uncured material breach or with a penalty through the entire term of the contract.

Because of the uncertainties of seasonal demands and promotional calendar changes, our best

estimate of usage for food, supplies and other operating needs and services is ratably over either the notice period or the remaining life of the contract, as applicable, unless we had better information available at the time related to

each contract.

Other long-term obligations include our Non-Qualified Savings Plan ($27,843, with a corresponding long-term asset to fund the liability;

see Note 12 to the Consolidated Financial Statements), Deferred Compensation Plan ($2,166) and our

long-term incentive plans ($3,937).

Our standby letters of credit relate to securing reserved claims under workers’ compensation insurance and securing certain sale and leaseback transactions.

Our standby letters of credit reduce our borrowing availability under our

revolving credit facility.

Cash Generated from Operations

The increase in net cash flow provided by operating activities in 2021 from 2020 primarily reflected the timing of payments for accounts payable and certain taxes and lower bonus payments made in 2021 as a result of the prior year impact of the COVID-19 pandemic on our operations in 2020.

The decrease in net cash flow provided by operating activities in 2020 from 2019 primarily reflected the negative impact on our operations caused by the COVID-19 pandemic and the timing of payments for accounts payable.

The decrease in net cash flow provided by operating activities in 2022 as compared to 2021 primarily reflected higher retail inventory, the timing of payments for certain taxes and higher bonus

payments made in 2022 as a result of the prior year’s performance.

The higher retail inventory in 2022 as compared to 2021 was driven by unusually low retail inventory in 2021 resulting from market constraints on the availability of goods.

The increase in net cash flow provided by operating activities in 2021 as compared to 2020 primarily reflected the timing of payments for accounts payable and certain taxes and lower bonus payments

made in 2021 as a result of the prior year impact of the COVID-19 pandemic on our operations in 2020.

Capital Expenditures and Proceeds from Sale of Property and Equipment

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

On July 29, 2020, we entered into an agreement with the original lessor and a third party financier to obtain ownership of 64 Cracker Barrel properties and simultaneously entered into a sale and leaseback transaction with the financier.

The decrease in capital expenditures in 2021 from 2020 resulted primarily from a similar transaction in 2021 as well as decreases in new store construction, store remodels and other similar cost-saving measures in response to the COVID-19 pandemic and lower capital expenditures for existing stores partially offset by higher capital expenditures for strategic initiatives.

The increase in capital expenditures in 2020 from 2019 resulted primarily from the July 29, 2020 transaction discussed above partially offset by lower capital expenditures for strategic initiatives.

The increase in capital expenditures in 2022 from 2021

resulted primarily from higher capital expenditures for existing stores and an increase in the number of new store locations partially offset by lower capital expenditures for strategic initiatives.

On July 29, 2020, we entered into an agreement with the original lessor and a third-party financier to obtain ownership of 64 Cracker Barrel properties and simultaneously entered into a sale and

leaseback transaction with the financier.

measures in response to the COVID-19 pandemic and lower capital expenditures for existing stores partially offset by higher capital expenditures for strategic initiatives.

We estimate that our capital expenditures during 2023 will be approximately $125,000.

This estimate includes the acquisition of sites and construction costs of new Cracker Barrel stores and MSBC locations that we plan to open during 2022, as well as acquisition and construction costs for store locations to be opened in 2022.

This estimate includes existing store maintenance and aging equipment replacement, the acquisition of sites and

construction costs of three to four new Cracker Barrel stores and fifteen to twenty MSBC locations that we plan to open during 2023, as well as acquisition and construction costs for store locations to be opened in 2024, investments in digital and

technology infrastructure and the development of a loyalty program.

We intend to fund our capital expenditures with cash generated by operations and cash on hand as the result of borrowings under our revolving credit facility, as necessary.

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Proceeds from sale of property and equipment

On August 4, 2020, we completed a sale and leaseback transaction involving 62 Cracker Barrel stores.

In 2021 and 2020, we completed sale and leaseback transactions.

The decrease in proceeds from sale of property and equipment in 2022 from 2021 resulted from the sale and leaseback transaction in

The decrease in proceeds from sale of property and equipment in 2021 from 2020 primarily relates to the proceeds from the August 4, 2020 sale and leaseback transactions being lower than the July 29, 2020 sale and leaseback transaction.

The increase in proceeds from sale of property and equipment in 2020 from 2019 also relates to the sale and leaseback transaction entered into on July 29, 2020.

Note 9 to the Consolidated Financial Statements for additional information regarding our sale and leaseback transactions.

Maple Street Biscuit Company

Effective October 10, 2019, we acquired 100% ownership of 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, 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.

Effective October 10, 2019, we acquired 100% ownership of 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, 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 second installment

of $1,500 was paid to the principal seller in the first quarter of 2022.

We also incurred acquisition-related costs of $1,269.

During 2020, we converted our six Holler & Dash locations into MSBC locations.

We believe that the investment in MSBC supports our 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.

We believe that the investment in

MSBC supports our 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.

Punch Bowl Social

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

The PBS concept was developed to focus on made-from-scratch food, a craft beverage program and social gaming.

We believed the investment in PBS provided a growth vehicle to deliver additional shareholder value and extend our footprint into a complementary market segment.

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.

For reasons previously disclosed in our public filings, we determined not to invest further resources to prevent foreclosure or otherwise provide additional capital to PBS and recorded a non-cash impairment charge on our investment of $132,878.

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.

concept was developed to focus on made-from-scratch food, a craft beverage program and social gaming.

At the time of our investment, we believed the investment in PBS would provide a growth vehicle to deliver additional shareholder value and

extend our footprint into a complementary market segment.

During the onset of the COVID-19 pandemic;

however, 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.

For reasons previously disclosed in our public filings, we determined not to invest further resources to prevent foreclosure or otherwise provide additional capital to

PBS and recorded a non-cash impairment charge on our investment of $132,878.

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.

Borrowing Capacity, Debt Covenants and Notes

On September 5, 2018, we entered into a five-year $950,000 revolving credit facility (the “2019 Revolving Credit Facility”) with substantially the same terms and financial covenants as our previous $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, we drew an additional $39,395 under this option for a one-year period.

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

The following table highlights our borrowing capacity and outstanding borrowings under the 2019 Revolving Credit Facility, our standby letters of credit and our borrowing availability under the 2019 Revolving Credit Facility as of July 30, 2021:

On June 17, 2022, we entered into a five-year $700,000 revolving credit facility (the “2022 Revolving Credit Facility”) with substantially the same terms and financial covenants as our previous

amended $800,000 revolving credit facility (the “2019 Revolving Credit Facility”).

The 2022 Revolving Credit Facility also contains an option for the Company to increase the revolving credit facility by $200,000.

The following table highlights our borrowing capacity and outstanding borrowings under the 2022 Revolving Credit Facility, our standby letters of credit and our borrowing availability under the

2022 Revolving Credit Facility as of July 29, 2022:

July 29, 2022

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Borrowing availability under the 2022 Revolving Credit Facility

*Our standby letters of credit relate to securing reserved claims under workers’ compensation insurance and securing our sale and leaseback transactions entered into on July 29, 2020 and August 4, 2020.

Our standby letters of credit reduce our borrowing availability under the 2019 Revolving Credit Facility.

During 2021, we repaid $924,395 under the 2019 Revolving Credit Facility and borrowed an additional $60,000 under the 2019 Revolving Credit Facility.

During 2020, we borrowed $801,395 under the 2019 Revolving Credit Facility to fund our dividend payments, acquisition of MSBC, other working capital needs and to provide flexibility as a result of the uncertainty caused by the COVID-19 pandemic.

*Our standby letters of credit relate to securing reserved claims under workers’ compensation insurance and securing certain sale and leaseback transactions.

Our standby letters of credit reduce our borrowing

availability under the 2022 Revolving Credit Facility.

During 2022, in addition to the refinancing of the revolving credit facility, we borrowed $100,000 and repaid $55,000 of borrowings under the 2019 Revolving Credit Facility.

During 2021, we repaid

$924,395 under the 2019 Revolving Credit Facility and borrowed an additional $60,000 under the 2019 Revolving Credit Facility.

During 2020, we borrowed $801,395 under the 2019 Revolving Credit Facility to fund our dividend payments, acquisition of

MSBC, other working capital needs and to provide flexibility as a result of the uncertainty caused by the COVID-19 pandemic.

During 2020, we repaid $252,000 of the borrowings.

Our 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.

We were in compliance with the 2019 Revolving Credit Facility’s financial covenants at July 30, 2021, and we expect to be in compliance with the 2019 Revolving Credit Facility’s financial covenants for the remaining term of the facility.

Our 2022 Revolving Credit Facility contains customary financial covenants, which include maintenance of a maximum consolidated total senior secured leverage ratio and a minimum consolidated

interest coverage ratio.

We were in compliance with the 2022 Revolving Credit Facility’s financial covenants at July 29, 2022, and we expect to be in compliance with the 2022 Revolving Credit Facility’s financial covenants for the remaining term

of the facility.

On June 18, 2021, the Company entered into an issuance and sale of $300,000 aggregate principal amount of 0.625% Convertible Senior Notes due 2026.

The Notes are senior, unsecured obligations of the Company and bear cash interest at a rate of 0.625% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2021.

The Notes mature on June 15, 2026, unless earlier converted, repurchased or redeemed.

The Notes are senior, unsecured obligations of

the Company and bear cash interest at a rate of 0.625% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2021.

The Notes mature on June 15, 2026, unless earlier converted, repurchased

Net proceeds from the Notes were $291,125, after deducting the initial purchasers’ discounts and commissions and the Company’s offering fees and expenses.

In connection with the issuance of the Notes, the Company entered into privately negotiated 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”), which cover, subject to customary anti-dilution adjustments, the aggregate number of shares of the Company’s common stock that initially underlie the Notes.

Concurrently with the Company’s entry into the Convertible Note Hedge Transactions, the Company also entered into separate, privately negotiated warrant transactions with the Hedge Counterparties collectively relating to the same number of shares of the Company’s common stock underlying the Notes, subject to customary anti-dilution adjustments, and for which the Company received premiums that partially offset the cost of entering into the Convertible Note Hedge Transactions (the “Warrant Transactions”).

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 $30,300.

See “Material Commitments” below and Note 7 to our Consolidated Financial Statements for further information on our long-term debt.

In connection with the issuance of the Notes, the Company entered into privately negotiated 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”), which cover, subject to customary anti-dilution adjustments, the aggregate number of shares of

the Company’s common stock that initially underlie the Notes.

Concurrently with the Company’s entry into the Convertible Note Hedge Transactions, the Company also entered into separate, privately negotiated warrant transactions with the Hedge

Counterparties collectively relating to the same number of shares of the Company’s common stock underlying the Notes, subject to customary anti-dilution adjustments, and for which the Company received premiums that partially offset the cost of

entering into the Convertible Note Hedge Transactions (the “Warrant Transactions”).

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 $30,300.

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

Dividends, Share Repurchases and Share-Based Compensation Awards

Our 2022 Revolving Credit Facility imposes restrictions on the amount of dividends we are permitted to pay and the amount of shares we are permitted to repurchase.

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

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

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

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

Additionally, on September 15, 2021, the Board declared a dividend of $1.30 per share payable on November 9, 2021 to shareholders on record on October 22, 2021.

In 2019, we also paid a special dividend of $3.00 per share.

Under the 2022 Revolving Credit

Facility, provided there is no default existing and the total of our availability under the 2022 Revolving Credit Facility plus our cash and cash equivalents on hand is at least $100,000 (the “Cash Availability”), we may declare and pay cash

dividends on shares of our common stock and repurchase shares of our common stock (1) in an unlimited amount if at the time the dividend or the repurchase is made our consolidated total senior secured leverage ratio is 2.75 to 1.00 or less and (2)

in an aggregate amount not to exceed $100,000 in any fiscal year if our consolidated total leverage ratio is greater than 2.75 to 1.00 at the time the dividend or repurchase is made;

notwithstanding (1) and (2), so long as immediately after giving

effect to the payment of any such dividends, Cash Availability is at least $100,000, we may declare and pay cash dividends on shares of our common stock in an aggregate amount not to exceed in any fiscal year the product of the aggregate amount of

dividends declared in the fourth quarter of the immediately preceding fiscal year multiplied by four.

In 2022, we paid regular dividends of $4.90 per share and declared a dividend of $1.30 per share that was subsequently paid on August 5, 2022 to shareholders of record on July 15, 2022 of $1.30 per

In 2021, in order to preserve available cash during the COVID-19 pandemic and in light of the uncertainties as to its duration and economic impact, we deferred the payment of the dividend of $1.30 per share declared in the third quarter of

2020 until September 2, 2020 to shareholders of record on August 14, 2020 and temporarily suspended future dividend payments.

In the fourth quarter of 2021, in light of the ongoing recovery from the COVID-19 pandemic, our Board of Directors

resumed our dividend program.

The following table highlights the dividends per share we paid for the last three years:

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Our criteria for share repurchases are that they be accretive to expected net income per share and are within the limits imposed by our debt commitments.

Subject to the limits imposed by our revolving credit facility, in 2019, we were authorized by our Board of Directors to repurchase shares at the discretion of management up to $25,000.

Additionally, in the fourth quarter of 2019, our Board of Directors increased the share repurchase authorization to $50,000.

In the third quarter of 2020, our 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, we temporarily suspended all share repurchases until the fourth quarter of 2021 when 232,543 shares of our common stock were repurchased at an aggregate cost of $35,000 in conjunction with the Company’s offering and sale of the Notes.

Additionally, on September 15, 2021, our Board of Directors authorized share repurchases up to $100,000 of the Company’s outstanding common stock.

In 2020, we repurchased 378,974 shares of our common stock in the open market at an aggregate cost of $55,007.

In 2019, we did not repurchase any shares of our common stock.

In 2021, 2020 and 2019, related tax withholding payments on the vesting of certain share-based compensation awards resulted in a net use of cash of $2,282, $2,160, and $2,497, respectively.

In 2020, in response to the COVID-19

pandemic, we temporarily suspended all share repurchases until the fourth quarter of 2021.

Subject to the limits imposed by our revolving credit facility, in September 2021, we were authorized by our Board of Directors to repurchase shares at the

discretion of management up to $100,000.

In the fourth quarter of 2022, we were authorized by our Board of Directors to repurchase shares of the Company’s outstanding common stock at management’s discretion up to a total value of $200,000;

authorization replaced the previous unused portion of the previous $100,000 authorization.

The following table highlights our share repurchases for the last three years:

Shares of common stock repurchased

Cost of shares repurchased

Working Capital

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

Like many other restaurant companies, we are able to, and often do, operate with negative working capital.

Like many other restaurant companies, we are able to, and often do, operate with negative

working capital.

Restaurant inventories purchased through our principal food distributor are on terms of net zero days, while other restaurant inventories purchased locally are generally financed through trade credit at terms of 30 days or less.

Because of our gift shop, which has a lower product turnover than the restaurant, we carry larger inventories than many other companies in the restaurant industry.

Retail inventories are generally financed through trade credit at terms of 60 days or less.

Retail inventories are generally financed through trade credit at terms of 60 days

These various trade terms are aided by rapid turnover of the restaurant inventory.

Employees generally are paid on weekly or semi-monthly schedules in arrears for hours worked except for bonuses that are paid either quarterly or annually in arrears.

Employees generally are paid on weekly or semi-monthly schedules in arrears for hours worked except for bonuses that are paid either quarterly or annually

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

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Working capital (deficit)

The change in working capital at July 30, 2021 compared to July 31, 2020 primarily reflected the decrease in cash and timing of payments for certain taxes.

The decrease in cash resulted primarily from higher debt repayments partially offset by lower capex spending, cash generated from operations and lower dividend payments.

The change in working capital at July 31, 2020 compared to August 2, 2019 primarily reflected the increase in cash and timing of accounts payable partially offset by the current portion of our long-term debt and the recognition of lease liabilities due to the adoption at August 3, 2019 of accounting guidance for leases.

The increase in cash resulted from the actions taken by management to increase and preserve liquidity during the COVID-19 pandemic such as borrowing under our revolving credit facility and the deferral of our dividend payment from the fourth quarter of 2020 until the first quarter of 2021.

The change in working capital at July 29, 2022 compared to July 30, 2021 primarily reflected the decrease in cash, higher accounts payable and the timing of payments for income taxes partially

offset by higher inventory levels.

The decrease in cash resulted primarily from higher share repurchases partially offset by net borrowings under of revolving credit facility.

The change in working capital at July 30, 2021 compared to July 31,

2020 primarily reflected the decrease in cash and timing of payments for certain taxes.

The decrease in cash resulted primarily from higher debt repayments partially offset by lower capex spending, cash generated from operations and lower dividend

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.

Material Commitments

Our contractual cash obligations and commitments as of July 30, 2021, are summarized in the tables below:

Payments due by Years

Contractual Obligations (a)

2019 Revolving Credit Facility (b)

Convertible Debt (c)

Purchase obligations (e)

Other long-term obligations (f)

Total contractual cash obligations

Amount of Commitment Expirations by Years

2019 Revolving Credit Facility (b)

Convertible Debt (c)

Standby letters of credit (g)

Total commitments

At July 30, 2021, the entire liability for uncertain tax positions (including penalties and interest) is classified as a long-term liability.

At this time, we are unable to make a reasonably reliable estimate of the amounts and timing of payments in individual years because of uncertainties in the timing of the effective settlement of tax positions.

As such, the liability for uncertain tax positions of $22,232 is not included in the contractual cash obligations and commitments table above.

Our 2019 Revolving Credit Facility expires on September 5, 2023.

Using a projected interest rate and the outstanding borrowings at July 30, 2021, we anticipate having interest payments of $3,221 and $3,194 in 2022 and 2023-2024, respectively.

The projected interest rate for our outstanding borrowings is the LIBOR rate at July 30, 2021 of 0.18% plus our current credit spread of 3.00%.

Based on our outstanding borrowings and our standby letters of credit at July 30, 2021 and our current unused commitment fee as defined in the 2019 Revolving Credit Facility, our unused commitment fees in 2022 and 2023-2024 would be $2,763 and $3,051, respectively;

however, the actual amount will differ based on actual usage of the 2019 Revolving Credit Facility.

Our $300,000 aggregate principal amount of 0.625% Convertible Senior Notes mature on June 15, 2026.

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.

Includes base lease terms and certain optional renewal periods for which, at the inception of the lease, it is reasonably certain that we will exercise.

Purchase obligations consist of purchase orders for food and retail merchandise;

purchase orders for capital expenditures, supplies, other operating needs and other services;

and commitments under contracts for maintenance needs and other services.

We have excluded contracts that do not contain minimum purchase obligations.

We excluded long-term agreements for services and operating needs that can be cancelled within 60 days without penalty.

We included long-term agreements and certain retail purchase orders for services and operating needs that can be cancelled with more than 60 days’ notice without penalty only through the term of the notice.

We included long-term agreements for services and operating needs that only can be cancelled in the event of an uncured material breach or with a penalty through the entire term of the contract.

Because of the uncertainties of seasonal demands and promotional calendar changes, our best estimate of usage for food, supplies and other operating needs and services is ratably over either the notice period or the remaining life of the contract, as applicable, unless we had better information available at the time related to each contract.

Other long-term obligations include our Non-Qualified Savings Plan ($32,527, with a corresponding long-term asset to fund the liability;

see Note 14 to the Consolidated Financial Statements), Deferred Compensation Plan ($2,000) and our long-term incentive plans ($4,853).

Our standby letters of credit relate to securing reserved claims under workers’ compensation insurance and securing our sale and leaseback transactions entered into on July 29, 2020 and August 4, 2020.

Our standby letters of credit reduce our borrowing availability under the 2019 Revolving Credit Facility.

Recent Accounting Pronouncements Adopted and Not Yet Adopted

See Note 2 to the accompanying Consolidated Financial Statements for a discussion of recent accounting guidance adopted and not yet adopted.

The adoption of accounting guidance discussed in Note 2 did not have a significant impact on our consolidated financial position or results of operations.

Regarding the accounting guidance not yet adopted, with the exception of the accounting guidance for convertible instruments, we do not expect the accounting guidance will have a significant impact on the Company’s financial position or results of operations.

The adoption of the accounting guidance for convertible instruments will increase long-term debt and decrease equity on the Consolidated Balance Sheet by the amount of the equity component of convertible notes recognized in equity.

Additionally, the if-converted method for calculating diluted earnings per share instead of the treasury stock method will be applied.

Recent Accounting Pronouncements Adopted

See Note 2 to the accompanying Consolidated Financial Statements for a discussion of recent accounting guidance adopted.

The adoption of accounting guidance on income taxes discussed in Note 2 did

not have a significant impact on our consolidated financial position or results of operations.

See Note 2 regarding the impact of the adoption of the convertible instruments guidance.

The adoption of the accounting guidance for convertible

instruments discussed in Note 2 resulted in an increase in long-term debt of $49,242, a reduction in deferred income taxes of $12,286 and a decrease in equity of $36,956 on the Consolidated Balance Sheet.

CRITICAL ACCOUNTING ESTIMATES

We prepare our Consolidated Financial Statements in conformity with GAAP.

The preparation of these financial statements requires us to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures.

We base our estimates and judgments on historical experience, current trends, outside advice from parties believed to be experts in such matters and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

The preparation of these financial statements requires us to make estimates and assumptions about future events and apply

judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures.

We base our estimates and judgments on historical experience, current trends, outside advice from parties believed to be experts in such

matters and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from

other sources.

However, because future events and their effects cannot be determined with certainty, actual results could differ from those assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 2 to the Consolidated Financial Statements.

Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.

Judgments and uncertainties affecting the application of those policies may result in

materially different amounts being reported under different conditions or using different assumptions.

Critical accounting estimates are those that:

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We assess 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 amount 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.

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 amount 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.

Judgments and estimates that we make related to the expected useful lives of long-lived assets and future cash flows are affected by factors such as changes in economic conditions and changes in operating performance.

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

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

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

During 2020, we recorded impairment charges of approximately $23,000 due to the deterioration in operating performance of certain Cracker Barrel and MSBC locations as a result of the impact of the COVID-19 pandemic.

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

Judgments and

estimates that we make related to the expected useful lives of long-lived assets and future cash flows are affected by factors such as changes in economic conditions and changes in operating performance.

The accuracy of such provisions can vary

materially from original estimates and management regularly monitors the adequacy of the provisions until final disposition occurs.

We have not made any material changes in our methodology for assessing impairments during the past three years and we do not believe that there is a reasonable likelihood that there will be a

material change in the estimates or assumptions used by us to assess impairment of long-lived assets.

However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and fair values of

long-lived assets, we may be exposed to losses that could be material.

During 2020, we recorded impairment charges of approximately $23,000 due to the deterioration in operating performance of certain Cracker Barrel and MSBC locations as a result

of the impact of the COVID-19 pandemic.

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

Insurance Reserves

We self-insure a significant portion of our expected workers’ compensation and general liability programs.

We purchase insurance for individual workers’ compensation claims that exceed $250, $750 or $1,000 depending on the state in which the claim originated.

We purchase insurance for individual workers’ compensation claims that exceed $300, $750

or $1,000 depending on the state in which the claim originated.

We purchase insurance for individual general liability claims that exceed $500.

We record a reserve for workers’ compensation and general liability for all unresolved claims and for an estimate of incurred but not reported (“IBNR”) claims.

These reserves and estimates of IBNR claims are based upon a full scope actuarial study which is performed annually at the end of our third quarter and is adjusted by the actuarially determined losses and actual claims payments for the fourth quarter.

We record a reserve for workers’ compensation and general liability for all unresolved claims and for

an estimate of incurred but not reported (“IBNR”) claims.

These reserves and estimates of IBNR claims are based upon a full scope actuarial study which is performed annually at the end of our third quarter and is adjusted by the actuarially

determined losses and actual claims payments for the fourth quarter.

Additionally, we perform limited scope actuarial studies on a quarterly basis to verify and/or modify our 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, we record the losses in the lower half of that range and discount them to present value using a risk-free interest rate based on projected timing of payments.

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, we record the losses in the lower half of that range and discount them to present value using a risk-free interest rate based on projected

timing of payments.

We also monitor 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 our reserves.

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Benefits for any individual (employee or dependents) in the self-insured group health program are limited.

We record a liability for the self-insured portion of our group health program for all unpaid claims based upon a loss development analysis derived from actual group health claims payment experience.

We also record a liability for unpaid prescription drug claims based on historical experience.

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

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

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

record a liability for the self-insured portion of our group health program for all unpaid claims based upon a loss development analysis derived from actual group health claims payment experience.

We also record a liability for unpaid prescription

drug claims based on historical experience.

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

development history and settlement practices.

We have not made any material changes in the methodology used to establish our insurance reserves during the past three years and do not believe there is a reasonable likelihood that there will be a

material change in the estimates or assumptions used to calculate the insurance reserves.

However, changes in these actuarial assumptions or management judgments in the future may produce materially different amounts of expense that would be

reported under these insurance programs.

Retail Inventory Valuation

Cost of goods sold includes the cost of retail merchandise sold at our stores utilizing the retail inventory method (“RIM”).

Under RIM, the valuation of our retail inventories is determined by applying a cost-to-retail ratio to the retail value of our inventories.

Inherent in the RIM calculation are certain inputs, including initial markons, markups, markdowns and shrinkage, which may significantly impact the gross margin calculation as well as the ending inventory valuation.

Under RIM, the valuation of our retail inventories is determined by

applying a cost-to-retail ratio to the retail value of our inventories.

Inherent in the RIM calculation are certain inputs, including initial markons, markups, markdowns and shrinkage, which may significantly impact the gross margin calculation as

well as the ending inventory valuation.

Inventory valuation provisions are included for retail inventory obsolescence and retail inventory shrinkage.

Retail inventory is reviewed on a quarterly basis for obsolescence and adjusted as appropriate based on assumptions made by management and judgment regarding inventory aging and future promotional activities.

Retail inventory is reviewed on a quarterly basis for obsolescence and adjusted as

appropriate based on assumptions made by management and judgment regarding inventory aging and future promotional activities.

Retail inventory also includes an estimate of shrinkage that 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.

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

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.

We have not made any material changes in the methodologies, estimates or assumptions related to our merchandise inventories during the past three years and do not believe there is a reasonable

likelihood that there will be a material change in the estimates or assumptions in the future.

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

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We have ground leases for our leased stores and office space leases that are recorded as operating leases under various non-cancellable operating leases.

Additionally, we lease our retail distribution center, advertising billboards, vehicle fleets, and certain equipment under various non-cancellable operating leases.

Effective August 3, 2019, we adopted lease accounting guidance which requires the recognition of lease assets and lease liabilities on the balance sheet.

Adoption of the accounting guidance for leases resulted in the recognition of right-of-use operating lease assets of $464,394 and total operating lease liabilities of $506,406 as of August 3, 2019.

Additionally, we lease our retail

distribution center, advertising billboards, vehicle fleets, and certain equipment under various non-cancellable operating leases.

We evaluate our leases at contract inception to determine whether we have the right to control use of the identified asset for a period of time in exchange for consideration.

If we determine that we have 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, we recognize a right-of-use asset and lease liability.

Also, at contract inception, we evaluate our leases to estimate their expected term which includes renewal options that we are reasonably assured that we will exercise, and the classification of the lease as either an operating lease or a finance lease.

Additionally, as our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the time of commencement or modification date in determining the present value of lease payments.

Assumptions used in determining our incremental borrowing rate include our implied credit rating and an estimate of secured borrowing rates based on comparable market data.

We assess the impairment of the right-of-use asset at the asset group level whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

If we determine that

we have 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, we recognize a right-of-use asset and lease liability.

Also, at contract inception, we

evaluate our leases to estimate their expected term which includes renewal options that we are reasonably assured that we will exercise, and the classification of the lease as either an operating lease or a finance lease.

Additionally, as our

leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the time of commencement or modification date in determining the present value of lease payments.

Assumptions used in determining

our incremental borrowing rate include our implied credit rating and an estimate of secured borrowing rates based on comparable market data.

We assess the impairment of the right-of-use asset at the asset group level whenever events or changes in

circumstances indicate that the carrying value of the asset may not be recoverable.

Changes in these assumptions and management judgments may produce materially different amounts in the recognition of the right-of-use assets and lease liabilities.

Additionally, any loss resulting from an impairment of the right-of-use assets is recognized by a charge to income, which could be material.

Additionally, any loss resulting

from an impairment of the right-of-use assets is recognized by a charge to income, which could be material.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis