Item 7. Management’s Discussion and Analysis
ITEM 7. 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. 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. 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.
This overview summarizes the MD&A, which includes the following sections:
● Executive Overview – a general description of our business, the restaurant and retail industries, our strategic priorities and our key performance indicators.
● Results of Operations – an analysis of our consolidated statements of income presented in our Consolidated Financial Statements.
● Liquidity and Capital Resources – an analysis of our primary sources of liquidity, capital expenditures and material commitments.
● Critical Accounting Estimates – a discussion of accounting policies that require critical judgments and estimates.
The following MD&A includes a discussion of 2024 and 2023 items and year-to-year comparisons between the years ended August 02, 2024 and July 28, 2023. Discussion of 2022 items and year-to-year comparisons between the years ended July 28, 2023 and July 29, 2022 that are not included in this MD&A can be found in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended July 28, 2023, filed with the SEC on September 26, 2023.
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EXECUTIVE OVERVIEW
Cracker Barrel Old Country Store, Inc. (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. 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. As of September 13, 2024, the Company operated 658 Cracker Barrel stores located in 44 states. The Company also owns Maple Street Biscuit Company (“MSBC”), a breakfast and lunch fast casual concept. As of September 13, 2024, the Company operated 68 MSBC locations in ten states.
Strategic Priorities
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 competitive component of our business strategy. Our long-term strategy is anchored on three overarching business imperatives: driving relevancy, delivering food and experiences guests love, and growing profitability.
We believe there are significant challenges in the macroeconomic outlook for the coming quarters, including continued inflationary pressures, higher interest rates, higher consumer debt levels and lower savings rates, as well as the potential uncertainty associated with the geopolitical environment and the U.S. presidential election, among other factors. However, despite these challenges, we remain focused on delivering long-term growth and returns for shareholders. On May 16, 2024, we announced details of our strategic transformation plan, which was already underway and is built on the following five pillars of our strategy:
● Refining the brand : evolving the brand across all touchpoints including refining and strengthening our positioning to best reach existing and new guests.
● Enhancing the menu : introducing menu innovation focused on craveability and traffic drivers, streamlining processes to improve execution, and optimizing strategic pricing to protect value and improve profitability.
● Evolving the store and guest experience : delivering an exceptional guest experience through operational excellence and improved store design and atmosphere. We are in the process of testing remodel prototypes and expect to complete 25-30 remodels in 2025 along with 25-30 store refreshes.
● Winning in digital and off-premise : growing the off-premise business and leveraging technology such as our Cracker Barrel Rewards loyalty program. We continue to leverage guest data to better understand consumer behavior and identify ways to drive frequency and engagement.
● Elevating the employee experience : upgrading training and development programs and tools, simplifying job roles and utilizing technology to improve the employee experience.
The Board of Directors is committed to a balanced capital allocation approach focused on profitable growth. Investing in the business continues to be the top priority followed by returning cash to shareholders through a regular quarterly dividend. In conjunction with its strategic transformation plan, the Board of Directors modified the Company’s capital allocation policy to increase investments in the business to drive organic growth and reduce the quarterly dividend to facilitate these investments. The Board of Directors declared a dividend of $0.25 per share that was subsequently paid on August 06, 2024 to shareholders of record on July 19, 2024.
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Key Performance Indicators
Management uses a number of key performance indicators to evaluate our operational and financial performance, including the following:
● 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), which we express as a percentage, we divide the absolute dollar change by the comparable store restaurant sales for the historical 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), which we express as a percentage, we divide the absolute dollar change by the comparable store retail sales for the historical period.
● Comparable store restaurant and retail sales increase/(decrease) : To calculate comparable store restaurant and retail sales increase/(decrease), we determine total restaurant and 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 restaurant and 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 restaurant and retail sales increase/(decrease), which we express as a percentage, we divide the absolute dollar change by the comparable store restaurant and retail sales for the historical period.
● Average check increase per guest : To calculate average check per guest, we determine comparable store restaurant sales, as described above, and divide by comparable restaurant guest traffic, as described below. 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.
● 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), which we express as a percentage, we divide the absolute numerical change by the total entrees sold for the historical period.
These performance indicators exclude the impact of new store openings and sales related to MSBC.
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 key 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.
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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, such as elevated and/or volatile rates of inflation and unemployment adversely 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 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 stores. 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 the Board of Directors and management team continually monitor and reexamine these considerations in light of ongoing trends.
We are currently experiencing, and have in the past experienced, inflationary conditions with respect to a variety of costs, including the cost for food, ingredients, retail merchandise, transportation, distribution, labor and utilities. While we continue to partially offset the impact of these inflationary pressures with menu price increases and operational improvements, there can be no assurance that such conditions will not adversely affect consumer demand or our cost structure in ways that we may be unable to manage without diminishing our profitability.
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RESULTS OF OPERATIONS
The following table highlights operating results over the past two years:
Relationship to Total Revenue
2024
2023
Total revenue
100.0
%
100.0
%
Cost of goods sold (exclusive of depreciation and rent)
31.3
32.8
Labor and other related expenses
36.6
35.1
Other store operating expenses
24.0
23.2
General and administrative expenses
6.0
5.0
Impairment and store closing costs
0.7
0.4
Goodwill impairment
0.1
—
Operating income
1.3
3.5
Interest expense, net
0.6
0.5
Income before income taxes
0.7
3.0
Provision for income taxes (income tax benefit)
(0.5)
0.1
Net income
1.2
%
2.9
%
The following table sets forth the change in the number of stores in operation for the past two years:
2024
2023
Net change in Company owned stores:
Cracker Barrel
(2)
(4)
MSBC
7
8
Stores in operation at end of the period:
Cracker Barrel
658
660
MSBC
66
59
Total stores at end of period
724
719
Total Revenue
The following table highlights the key components of revenue for the past two years:
2024
2023
Revenue in dollars: (1)
Restaurant
$
2,794,128
$
2,740,866
Retail
676,634
701,942
Total revenue
$
3,470,762
$
3,442,808
Total revenue percentage increase (1)
0.8
%
5.4
%
Total revenue by percentage relationships:
Restaurant
80.5
%
79.6
%
Retail
19.5
%
20.4
%
Average store volumes (1)(2) :
Restaurant
$
4,133.0
$
4,040.2
Retail
1,024.3
1,058.2
Total revenue
$
5,157.3
$
5,098.4
Comparable store sales increase (decrease) (3) :
Restaurant
(0.1)
%
6.3
%
Retail
(5.5)
%
(0.4)
%
Restaurant and retail
(1.2)
%
4.9
%
Average check increase
4.9
%
9.8
%
Comparable restaurant guest traffic decrease (3) :
(5.0)
%
(3.5)
%
(1) 2024 consists of 53 weeks while the other periods consist of 52 weeks.
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(2) Average store volumes include sales of all stores except for MSBC.
(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.
Total revenue in 2024 increased 0.8% as compared to 2023. Total revenue in 2024 benefited from the additional week of 2024, which resulted in an increase in revenue of $62,800. Our comparable store restaurant sales decrease in 2024 as compared to 2023 resulted primarily from the guest traffic decrease partially offset by the average check increase. The average check increase included an average menu increase of 4.9%. Off-premise sales represented approximately 20% of restaurant sales volumes in 2024 and 2023.
Our retail sales are made primarily to our restaurant guests. The decrease in our comparable store retail sales in 2024 as compared to 2023 resulted primarily from the decrease in guest traffic.
Cost of Goods Sold (Exclusive of Depreciation and Rent)
The following table highlights the components of cost of goods sold in dollar amounts for the past two years:
2024
2023
Cost of Goods Sold in dollars:
Restaurant
$
743,390
$
769,295
Retail
344,241
358,322
Total Cost of Goods Sold
$
1,087,631
$
1,127,617
The following table highlights restaurant cost of goods sold as a percentage of restaurant revenue for the past two years:
2024
2023
Restaurant Cost of Goods Sold
26.6
%
28.1
%
The decrease in restaurant cost of goods sold as a percentage of restaurant revenue in 2024 as compared to 2023 was primarily the result of our menu price increase referenced above. Commodity inflation was relatively flat in 2024. We presently expect the rate of commodity inflation to be approximately 2% to 3% in 2025.
The following table highlights retail cost of goods sold as a percentage of retail revenue for the past two years:
2024
2023
Retail Cost of Goods Sold
50.9
%
51.1
%
Retail cost of goods sold as a percentage of retail revenue remained relatively constant in 2024 as compared to 2023.
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 two years:
2024
2023
Labor and related expenses
36.6
%
35.1
%
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The year-to-year percentage change in 2024 as compared to 2023 resulted primarily from the following:
2024 Compared to 2023
Increase (Decrease) as a
Percentage of Total Revenue
Store hourly labor
1.1
%
Store management compensation
0.3
%
Employee health care expense
0.1
%
Other wages
(0.2)
%
The increase in store hourly labor and store management compensation as a percentage of total revenue in 2024 as compared to 2023 resulted primarily from higher staffing levels and the investment of additional labor hours to improve the guest experience as well as wage inflation partially offset by higher average check. We presently expect the rate of wage inflation to be approximately 3% to 4% in 2025.
The increase in employee health care expenses as a percentage of total revenue in 2024 as compared to 2023 resulted primarily from higher claims.
During 2024, we revised our employee benefits policy which resulted in a one-time reduction in other wages expense for 2024 as compared to 2023.
Other Store Operating Expenses
Other store operating expenses include all store-level operating costs, the major components of which are occupancy costs, operating supplies, advertising, third-party delivery fees, credit card and gift card fees, real and personal property taxes and general insurance. Occupancy costs include maintenance, utilities, depreciation and rent.
The following table highlights other store operating expenses as a percentage of total revenue for the past two years:
2024
2023
Other store operating expenses
24.0
%
23.2
%
The increase in other store operating expenses as a percentage of total revenue in 2024 as compared to 2023 resulted primarily from the increase in advertising expense due to higher media spending and costs associated with our new customer loyalty program, Cracker Barrel Rewards.
We presently expect higher depreciation expense in 2025 due to higher capital expenditures driven by investments in our stores including our store remodeling program as well as other strategic initiatives.
General and Administrative Expenses
The following table highlights general and administrative expenses as a percentage of total revenue for the past two years:
2024
2023
General and administrative expenses
6.0
%
5.0
%
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The year-to-year percentage change in 2024 as compared to 2023 resulted primarily from the following:
2024 Compared to 2023
Increase as a Percentage
of Total Revenue
Professional fees
0.6
%
Payroll and related expense
0.2
%
Incentive compensation expense
0.1
%
The increase in professional fees as a percentage of total revenue in 2024 as compared to 2023 resulted primarily from the costs associated with the Company’s strategic transformation plan.
The increase in payroll and related expense as a percentage of total revenue in 2024 as compared to 2023 resulted primarily from severance costs related to corporate restructuring and Chief Executive Officer transition costs incurred in 2024.
The increase in incentive compensation as a percentage of total revenue in 2024 as compared to 2023 resulted primarily from Chief Executive Officer (“CEO”) transition costs incurred in 2024.
We presently expect our general and administrative expenses will be higher in 2025 primarily due to the investments related to our strategic transformation initiatives and our proxy contest in connection with the Company’s upcoming 2024 Annual Meeting.
Impairment and Store Closing Costs
During 2024 and 2023, we recorded impairment charges of $17,448 and $11,692, respectively, as a result of the deterioration in operating performance of six Cracker Barrel locations and thirteen MSBC locations in 2024 and six Cracker Barrel locations in 2023. Additionally, during 2024 and 2023, we incurred costs of $5,494 and $2,307, respectively, in connection with the closure of four Cracker Barrel and two MSBC locations in 2024 and six Cracker Barrel and four MSBC locations in 2023 because of poor operating performance.
Impairment and store closing costs consisted of the following for the past two years:
2024
2023
Impairment
$
17,448
$
11,692
Store closing costs
5,494
2,307
Total
$
22,942
$
13,999
Goodwill Impairment
During 2024, we recorded a goodwill impairment charge of $4,690 related to MSBC because of declining financial trends and changes in the macroeconomic environment, including interest rate and inflationary pressures. This amount is recorded in the goodwill impairment line on the Consolidated Statements of Income.
Operating income
Operating income consisted of the following for the past two years:
2024
2023
Operating Income
$
45,119
$
120,617
As discussed above, the decrease in operating income in 2024 as compared to 2023 resulted primarily from the investments made in 2024 related to labor, advertising and strategic transformation initiatives. We also incurred higher impairments costs based on performance and CEO transition costs in 2024. Operating income in 2024 benefited from lower commodity inflation.
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Interest Expense, Net
The following table highlights interest expense for the past two years:
2024
2023
Interest expense, net
$
20,933
$
17,006
The year-to-year increase in 2024 as compared to 2023 resulted primarily from higher weighted average debt levels and higher weighted average interest rates under our revolving credit facility.
Provision for Income Taxes (Income Tax Benefit)
The following table highlights the provision for income taxes as a percentage of income before income taxes (“effective tax rate”) for the past two years:
2024
2023
Effective tax rate
(69.2)
%
4.4
%
Our effective tax rate is lower than statutory rates primarily due to the benefit of tax credits. The decrease in our effective tax rate from 2023 to 2024 reflects the impact of tax credits on lower income before tax as well as favorable audit settlements.
We presently expect our effective tax rate for 2025 to be approximately (7%) to (11%).
Net Income
Net income consisted of the following for the past two years:
2024
2023
Net income
$
40,930
$
99,050
Our net income in 2024 decreased compared to 2023 primarily due to our decline in our operating income discussed above partially offset by our income tax benefit for 2024 discussed above.
We presently expect total revenue in 2025 to be relatively flat to 2024 and the investments in our strategic transformation plan discussed above to more than offset expected cost savings in 2025. The Company’s focus for 2025 is to execute its strategic transformation plan while simultaneously remaining focused on operational excellence in our day-to-day business.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of our cash flows for the past two years:
2024
2023
Net cash provided by operating activities
$
168,980
$
250,457
Net cash used in investing activities
(124,327)
(124,319)
Net cash used in financing activities
(57,765)
(146,096)
Net decrease in cash and cash equivalents
$
(13,112)
$
(19,958)
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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 cash generated from our operations, together with our borrowing capacity under our 2022 Revolving Credit Facility, were sufficient to finance all of our growth, dividend payments, working capital needs, interest payments on long-term debt obligations and other cash payment obligations in 2024. We believe that cash at August 02, 2024, 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 strategic transformation initiative and continuing expansion plans, debt service, dividend payments, capital expenditures and working capital needs for the next twelve months and thereafter for the foreseeable future. Our ability to draw on our 2022 Revolving Credit Facility is subject to the satisfaction of the provisions of the credit facility, as amended, and we believe we will be able to refinance our Revolving Credit Facility and other debt instruments prior their maturity.
Cash Generated from Operations
The decrease in net cash flow provided by operating activities in 2024 as compared to 2023 resulted primarily from lower net income and a lower decrease in retail inventory levels.
Purchase Obligations
We enter into 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 in the normal course of business. Our estimate as of August 02, 2024, for these purchase obligations is $141,446, of which $107,485 is short-term. This estimate of our purchase obligations (i) excludes contracts that do not contain minimum purchase obligations and long-term agreements for services and operating needs that can be cancelled within 60 days without penalty, and (ii) includes long-term agreements and certain retail purchase orders for services and operating needs that can be cancelled (A) with more than 60 days’ notice without penalty only through the term of the notice period and (B) only 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 estimated usage for food, supplies and other operating needs and services is calculated ratably over either the termination notice period or the remaining life of the contract, as applicable, unless we had better information available at the time related to each contract.
Leases
As of August 02, 2024, the total present value of our lease expenses (including variable lease costs) under operating leases was $725,829, which had a weighted-average remaining lease term 15.88 years, of which $86,318 is short-term. As of August 02, 2024, we have entered into leases that have not yet commenced with future short-term and long-term lease payments of $12,615 that are not yet recorded on our Consolidated Balance Sheets. These leases are expected to commence in 2025 and 2026. For additional information regarding our operating leases, see Note 8 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Other Long-Term Obligations
At August 02, 2024, other long-term obligations include our Non-Qualified Savings Plan ($25,719, with a corresponding long-term asset to fund the liability; see Note 11 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K), Deferred Compensation Plan ($854) and our long-term incentive plans ($3,015).
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Taxes
At August 02, 2024, the entire liability of $15,317, 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. See Note 12 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information on our uncertain tax positions.
Capital Expenditures and Proceeds from Sale of Property and Equipment
The following table presents our capital expenditures (purchase of property and equipment), net of proceeds from insurance recoveries, for the past two years:
2024
2023
Capital expenditures, net of proceeds from insurance recoveries
$
127,461
$
125,387
Our capital expenditures consisted primarily of capital investments for existing stores, new store locations and strategic initiatives. The increase in capital expenditures in 2024 from 2023 resulted primarily from higher capital expenditures for strategic initiatives, including costs associated with our customer loyalty program, Cracker Barrel Rewards.
As part of our strategic transformation plan, we have modified our capital allocation policy and currently expect to increase our capital expenditures over the three-year period from 2025 to 2027 to approximately $600,000 to $700,000, of which $160,000 to $180,000 is estimated for 2025. This increase includes expansion of our maintenance and remodel initiatives as well as additional technology improvements. This estimate also includes the acquisition of sites and construction costs of two new Cracker Barrel stores and three to four MSBC locations that we plan to open during 2025. 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.
The following table presents our proceeds from sale of property and equipment for the past two years:
2024
2023
Proceeds from sale of property and equipment
$
3,134
$
1,068
The increase in proceeds from sale of property and equipment in 2024 from 2023 resulted primarily from the sale of excess real property in 2024.
Borrowing Capacity, Debt Covenants and Notes
On June 17, 2022, we entered into a five-year $700,000 revolving credit facility (the “2022 Revolving Credit Facility”). The 2022 Revolving Credit Facility also contains an option for the Company to increase the revolving credit facility by $200,000. Using our weighted average interest rate of 7.19% at August 02, 2024 and the outstanding borrowings at August 02, 2024, we anticipate having interest payments of $13,080, in 2025.
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 August 02, 2024:
August 02,2024
Borrowing capacity under the 2022 Revolving Credit Facility
$
700,000
Less: Outstanding borrowings under the 2022 Revolving Credit Facility
180,000
Less: Standby letters of credit*
32,644
Borrowing availability under the 2022 Revolving Credit Facility
$
487,356
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*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 2024, we borrowed $406,500 and repaid $346,500 under the 2022 Revolving Credit Facility. During 2023, we borrowed $180,000 and repaid $190,000 under the 2022 Revolving Credit 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 August 02, 2024, and we expect to be in compliance with the 2022 Revolving Credit Facility’s financial covenants for the remaining term of the facility.
Our $300,000 aggregate principal amount of 0.625% Convertible Senior Notes (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 an annual rate of 0.625%, payable semi-annually in arrears on June 15 and December 15 of each year. For additional information regarding our 2022 Revolving Credit Facility and the Notes, see Note 4 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
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 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 2024, we paid regular dividends of $5.20 per share. In connection with our strategic transformation program, we modified our capital allocation policy to support increased investments in our business to drive organic growth. As part of this shift to increase investment in our business, the Board of Directors reduced the quarterly dividend and declared a dividend of $0.25 per share that was subsequently paid on August 6, 2024 to shareholders of record on July 19, 2024. Additionally, during the first quarter of 2025, the Board declared a dividend of $0.25 per share payable on November 13, 2024 to shareholders of record as of October 18, 2024.
The following table highlights the dividends per share we paid for the past two years:
2024
2023
Dividends per share paid
$
5.20
$
5.20
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. On June 02, 2023, the Board of Directors renewed our authorization to repurchase shares of the Company’s outstanding common stock at management’s discretion up to a total value of $200,000, for an additional year; this authorization has expired. We did not repurchase any shares of our common stock in 2024. In 2023, the Company repurchased 171,792 shares of its common stock in the open market at an aggregate cost of $17,449.
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Working Capital
In the restaurant industry, substantially all payments received are made by credit card, debit card or cash. 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 retail 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. These various trade terms are aided by rapid turnover of the restaurant inventory. Employees generally are paid once every week or every two weeks except for bonuses that are paid either quarterly or annually in arrears. 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.
2024
2023
Working capital deficit
$
(175,993)
$
(206,679)
The change in working capital at August 02, 2024 compared to July 28, 2023 primarily reflected the decrease in our dividend payable as a result of our reduction of our quarterly dividend and the timing of payments for income taxes.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
See Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a discussion of recent accounting guidance not yet adopted. We are currently evaluating the impact of adopting the accounting guidance.
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. 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 1 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. Critical accounting estimates are those that:
● management believes are most important to the accurate portrayal of both our financial condition and operating results; and
● require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
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We consider the following accounting estimates to be most critical in understanding the judgments that are involved in preparing our Consolidated Financial Statements:
● Impairment of Long-Lived Assets
● Insurance Reserves
● Retail Inventory Valuation
● Lease Accounting
Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of the Board of Directors.
Impairment of Long-Lived Assets
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. 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 2024 and 2023, we recorded impairment charges of $15,616 and $11,692, respectively, for long-lived assets due to the deterioration in operating performance of six Cracker Barrel locations and thirteen MSBC locations in 2024 and six Cracker Barrel locations in 2023. The impairment charges are included in the impairment and store closing costs line item on the Consolidated Statements of Income. See the Lease Accounting section below for information related to an impairment charge related to a right-of-use asset recorded in 2024.
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 $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 during the fourth quarter and is adjusted by the actuarially determined losses and actual claims payments made subsequent to this full scope actuarial study during 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. 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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Our group health plans combine the use of self-insured and fully-insured programs. 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.
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.
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 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. However, actual obsolescence or shrinkage recorded may produce materially different amounts than we have estimated.
Lease Accounting
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.
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.
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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. In 2024, we recorded an impairment charge of $1,832 related to a right-of-use asset for a Cracker Barrel location. This amount is included in the impairment and store closing costs line item on the Consolidated Statement of Income.