UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-Q
(Mark
One)
of the
Securities Exchange Act of 1934
For the
Quarterly Period Ended January 30, 2009
or
of the
Securities Exchange Act of 1934
For the
Transition Period from ________ to _______.
Commission
file number 000-25225
CRACKER
BARREL OLD COUNTRY STORE, INC.
(Exact
Name of Registrant as
Specified
in Its Charter)
Tennessee |
62-1749513 |
(State or Other
Jurisdiction |
(IRS
Employer |
of Incorporation or
Organization) |
Identification
No.) |
305
Hartmann Drive, P. O. Box 787
Lebanon, Tennessee
37088-0787
(Address
of Principal Executive Offices)
(Zip
Code)
615-444-5533
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated
filer |
x |
Accelerated
filer |
o |
|
|
|
|
Non-accelerated
filer |
o |
Smaller reporting
company |
o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
x
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
22,394,103
Shares of Common Stock
Outstanding
as of February 27, 2009
CRACKER
BARREL OLD COUNTRY STORE, INC.
FORM
10-Q
For
the Quarter Ended January 30, 2009
INDEX
PART
I. FINANCIAL INFORMATION
|
Page
|
|
|
|
Item
1
|
|
|
● |
Condensed
Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
a) |
Condensed
Consolidated Balance Sheet as of January 30, 2009 and August 1,
2008 |
3 |
|
|
|
|
|
|
|
b) |
Condensed
Consolidated Statement of Income for the Quarters and Six |
|
|
|
|
Months
Ended January 30, 2009 and February 1, 2008
|
4 |
|
|
|
|
|
|
|
c) |
Condensed
Consolidated Statement of Cash Flows for the Six Months |
|
|
|
|
Ended
January 30, 2009 and February 1, 2008
|
5 |
|
|
|
|
|
|
|
d) |
Notes
to Condensed Consolidated Financial Statements |
6 |
|
|
|
|
|
|
Item
2 |
|
|
● |
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
15 |
|
|
|
|
|
|
Item
3 |
|
|
● |
|
Quantitative
and Qualitative Disclosures About Market Risk |
29 |
|
|
|
|
|
|
Item
4 |
|
|
● |
|
Controls
and Procedures |
29 |
|
|
|
|
|
PART
II. OTHER INFORMATION |
|
|
|
|
|
|
|
Item
1A |
|
|
● |
|
Risk
Factors |
29 |
|
|
|
|
|
|
Item
4 |
|
|
● |
|
Submission
of Matters to a Vote of Security Holders |
29 |
|
|
|
|
|
|
Item
6 |
|
|
● |
|
Exhibits |
29 |
|
|
|
|
|
|
30 |
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
CRACKER
BARREL OLD COUNTRY STORE, INC.
CONDENSED
CONSOLIDATED BALANCE SHEET
(In
thousands, except share data)
(Unaudited)
|
|
January
30, |
|
|
August
1, |
|
|
|
2009 |
|
|
|
2008* |
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
11,135 |
|
|
$ |
11,978 |
|
Property
held for sale
|
|
|
5,543 |
|
|
|
3,248 |
|
Accounts
receivable
|
|
|
12,687 |
|
|
|
13,484 |
|
Income
taxes receivable
|
|
|
5,034 |
|
|
|
6,919 |
|
Inventories
|
|
|
137,758 |
|
|
|
155,954 |
|
Prepaid
expenses and other current assets
|
|
|
12,070 |
|
|
|
10,981 |
|
Deferred
income taxes
|
|
|
24,814 |
|
|
|
18,075 |
|
Total
current assets
|
|
|
209,041 |
|
|
|
220,639 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
1,599,536 |
|
|
|
1,571,816 |
|
Less:
Accumulated depreciation and amortization of capital
leases
|
|
|
550,675 |
|
|
|
526,576 |
|
Property
and equipment – net
|
|
|
1,048,861 |
|
|
|
1,045,240 |
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
41,855 |
|
|
|
47,824 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,299,757 |
|
|
$ |
1,313,703 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
56,143 |
|
|
$ |
93,112 |
|
Current
maturities of long-term debt and other long-term
obligations
|
|
|
8,811 |
|
|
|
8,714 |
|
Deferred
revenues
|
|
|
36,233 |
|
|
|
22,618 |
|
Accrued
interest expense
|
|
|
10,999 |
|
|
|
12,485 |
|
Other
accrued expenses
|
|
|
114,693 |
|
|
|
127,790 |
|
Total
current liabilities
|
|
|
226,879 |
|
|
|
264,719 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
771,907 |
|
|
|
779,061 |
|
Capital
lease obligations
|
|
|
69 |
|
|
|
77 |
|
Interest
rate swap liability
|
|
|
63,326 |
|
|
|
39,618 |
|
Other
long-term obligations
|
|
|
82,054 |
|
|
|
83,147 |
|
Deferred
income taxes
|
|
|
52,933 |
|
|
|
54,330 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock – 100,000,000 shares of $.01 par
|
|
|
|
|
|
|
|
|
value
authorized; no shares issued
|
|
|
-- |
|
|
|
-- |
|
Common
stock – 400,000,000 shares of $.01 par value authorized;
|
|
|
|
|
|
|
|
|
22,394,103
shares issued and outstanding at January 30, 2009,
|
|
|
|
|
|
|
|
|
and
22,325,341 shares issued and outstanding at August 1, 2008
|
|
|
224 |
|
|
|
223 |
|
Additional
paid-in capital
|
|
|
5,300 |
|
|
|
731 |
|
Accumulated
other comprehensive loss
|
|
|
(44,518 |
) |
|
|
(27,653 |
) |
Retained
earnings
|
|
|
141,583 |
|
|
|
119,450 |
|
Total
shareholders’ equity
|
|
|
102,589 |
|
|
|
92,751 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
1,299,757 |
|
|
$ |
1,313,703 |
|
See notes
to unaudited condensed consolidated financial statements.
* This
condensed consolidated balance sheet has been derived from the audited
consolidated balance sheet as of August 1, 2008, as filed in the Company’s
Annual Report on Form 10-K for the fiscal year ended August 1,
2008.
CRACKER
BARREL OLD COUNTRY STORE, INC.
|
CONDENSED
CONSOLIDATED STATEMENT OF INCOME
|
(In
thousands, except share and per share
data)
|
|
Quarter
Ended
|
|
|
|
Six
Months Ended |
|
|
|
|
January
30,
|
|
|
|
February
1,
|
|
|
|
January
30,
|
|
|
|
February
1,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
630,182 |
|
|
$ |
634,453 |
|
|
$ |
1,204,114 |
|
|
$ |
1,215,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
222,493 |
|
|
|
223,735 |
|
|
|
403,850 |
|
|
|
403,963 |
|
Gross
profit
|
|
|
407,689 |
|
|
|
410,718 |
|
|
|
800,264 |
|
|
|
811,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
and other related expenses
|
|
|
234,118 |
|
|
|
229,133 |
|
|
|
456,551 |
|
|
|
454,801 |
|
Impairment
and store closing charges
|
|
|
-- |
|
|
|
68 |
|
|
|
-- |
|
|
|
877 |
|
Other
store operating expenses
|
|
|
105,740 |
|
|
|
106,473 |
|
|
|
211,706 |
|
|
|
211,693 |
|
Store
operating income
|
|
|
67,831 |
|
|
|
75,044 |
|
|
|
132,007 |
|
|
|
144,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
28,558 |
|
|
|
29,623 |
|
|
|
60,176 |
|
|
|
62,841 |
|
Operating
income
|
|
|
39,273 |
|
|
|
45,421 |
|
|
|
71,831 |
|
|
|
81,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
13,281 |
|
|
|
14,454 |
|
|
|
27,314 |
|
|
|
29,363 |
|
Interest
income
|
|
|
-- |
|
|
|
128 |
|
|
|
-- |
|
|
|
185 |
|
Income
before income taxes
|
|
|
25,992 |
|
|
|
31,095 |
|
|
|
44,517 |
|
|
|
52,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
7,630 |
|
|
|
10,861 |
|
|
|
13,323 |
|
|
|
18,048 |
|
Income
from continuing operations
|
|
|
18,362 |
|
|
|
20,234 |
|
|
|
31,194 |
|
|
|
34,217 |
|
Loss
from discontinued operations, net of tax
|
|
|
-- |
|
|
|
(17 |
) |
|
|
-- |
|
|
|
(111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,362 |
|
|
$ |
20,217 |
|
|
$ |
31,194 |
|
|
$ |
34,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.82 |
|
|
$ |
0.87 |
|
|
$ |
1.39 |
|
|
$ |
1.46 |
|
Loss
from discontinued operations, net of tax
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
Net
income per share
|
|
$ |
0.82 |
|
|
$ |
0.87 |
|
|
$ |
1.39 |
|
|
$ |
1.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.81 |
|
|
$ |
0.85 |
|
|
$ |
1.38 |
|
|
$ |
1.42 |
|
Loss
from discontinued operations, net of tax
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
Net
income per share
|
|
$ |
0.81 |
|
|
$ |
0.85 |
|
|
$ |
1.38 |
|
|
$ |
1.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,389,598 |
|
|
|
23,133,206 |
|
|
|
22,369,783 |
|
|
|
23,419,403 |
|
Diluted
|
|
|
22,597,183 |
|
|
|
23,758,343 |
|
|
|
22,631,754 |
|
|
|
24,101,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$ |
0.20 |
|
|
$ |
0.18 |
|
|
$ |
0.40 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes
to unaudited condensed consolidated financial statements.
CRACKER
BARREL OLD COUNTRY STORE, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited
and in thousands)
|
Six
Months Ended
|
|
|
January
30, |
|
|
February
1, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
31,194 |
|
|
$ |
34,106 |
|
Loss
from discontinued operations, net of tax
|
|
|
-- |
|
|
|
111 |
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
by
operating activities of continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
28,938 |
|
|
|
27,983 |
|
Loss
(gain) on disposition of property and equipment
|
|
|
1,790 |
|
|
|
(446 |
) |
Impairment
|
|
|
-- |
|
|
|
532 |
|
Share-based
compensation
|
|
|
3,744 |
|
|
|
4,980 |
|
Excess
tax benefit from share-based compensation
|
|
|
-- |
|
|
|
(49 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
797 |
|
|
|
731 |
|
Income
taxes receivable
|
|
|
1,834 |
|
|
|
(11,967 |
) |
Inventories
|
|
|
18,196 |
|
|
|
17,222 |
|
Prepaid
expenses and other current assets
|
|
|
(1,089 |
) |
|
|
117 |
|
Accounts
payable
|
|
|
(36,969 |
) |
|
|
(27,101 |
) |
Deferred
revenues
|
|
|
13,615 |
|
|
|
14,323 |
|
Accrued
interest expense
|
|
|
(1,486 |
) |
|
|
13,824 |
|
Other
accrued expenses
|
|
|
(13,543 |
) |
|
|
(15,636 |
) |
Other
long-term assets and liabilities
|
|
|
2,813 |
|
|
|
4,860 |
|
Net
cash provided by operating activities of continuing
operations
|
|
|
49,834 |
|
|
|
63,590 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(37,444 |
) |
|
|
(45,123 |
) |
Proceeds
from sale of property and equipment
|
|
|
1,496 |
|
|
|
4,786 |
|
Proceeds
from insurance recoveries of property and equipment
|
|
|
74 |
|
|
|
114 |
|
Net
cash used in investing activities of continuing operations
|
|
|
(35,874 |
)
|
|
|
(40,223 |
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
518,200 |
|
|
|
415,300 |
|
Principal
payments under long-term debt and other long-term
obligations
|
|
|
(525,265 |
) |
|
|
(383,286 |
) |
Proceeds
from exercise of share-based compensation awards
|
|
|
877 |
|
|
|
1,965 |
|
Excess
tax benefit from share-based compensation
|
|
|
-- |
|
|
|
49 |
|
Purchases
and retirement of common stock
|
|
|
-- |
|
|
|
(52,380 |
) |
Dividends
on common stock
|
|
|
(8,615 |
) |
|
|
(7,660 |
) |
Net
cash used in financing activities of continuing operations
|
|
|
(14,803 |
) |
|
|
(26,012 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from discontinued operations:
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities of discontinued
operations
|
|
|
-- |
|
|
|
(170 |
) |
Net
cash used in discontinued operations
|
|
|
-- |
|
|
|
(170 |
) |
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(843 |
) |
|
|
(2,815 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
11,978 |
|
|
|
14,248 |
|
Cash
and cash equivalents, end of period
|
|
$ |
11,135 |
|
|
$ |
11,433 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the six months for:
|
|
|
|
|
|
|
|
|
Interest,
excluding interest rate swap payments, net of amounts
capitalized
|
|
$ |
18,832 |
|
|
$ |
14,111 |
|
Interest
rate swap
|
|
$ |
8,743 |
|
|
$ |
357 |
|
Income
taxes
|
|
$ |
10,856 |
|
|
$ |
25,812 |
|
Supplemental
schedule of non-cash financing activity:
|
|
|
|
|
|
|
Change
in fair value of interest rate swap
|
|
$ |
(23,708 |
) |
|
$ |
(46,901 |
) |
Change
in deferred tax asset for interest rate swap
|
|
$ |
6,843 |
|
|
$ |
15,724 |
|
See notes to unaudited condensed
consolidated financial statements.
CRACKER BARREL OLD COUNTRY
STORE, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except percentages, share and per share data)
(Unaudited)
1. |
Condensed Consolidated
Financial Statements |
The
condensed consolidated balance sheets at January 30, 2009 and August 1, 2008 and
the related condensed consolidated statements of income and cash flows for the
quarters and/or six-month periods ended January 30, 2009 and February 1, 2008,
have been prepared by Cracker Barrel Old Country Store, Inc. (the “Company”) in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) and pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”) without audit. The Company is principally
engaged in the operation and development of the Cracker Barrel Old Country
Store®
(“Cracker Barrel”) restaurant and retail concept. In the opinion of
management, all adjustments (consisting of normal and recurring items) necessary
for a fair presentation of such condensed consolidated financial statements have
been made. The results of operations for any interim period are not
necessarily indicative of results for a full year.
These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K for the year ended August 1, 2008 (the “2008 Form 10-K”).
References
in these Notes to Condensed Consolidated Financial Statements to a year are to
the Company’s fiscal year unless otherwise noted.
2. |
Summary of Significant
Accounting Policies |
The
significant accounting policies of the Company are included in the 2008 Form
10-K. During the six-month period ended January 30, 2009, there were
no significant changes to those accounting policies.
3.
|
Recent Accounting
Pronouncements
|
Fair
Value
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements for financial assets and liabilities, as well as any
other assets and liabilities that are carried at fair value on a recurring basis
in the financial statements. Effective August 2, 2008, the first day
of 2009, the Company adopted SFAS No. 157 on a prospective basis. The
adoption of SFAS No. 157 resulted in a $5,809 decrease in the Company’s interest
rate swap liability related to non-performance risk, with the offset reflected
in accumulated other comprehensive loss, net of the deferred tax asset, on the
Company’s condensed consolidated balance sheet (see Note 8). See Note
4 for additional information on the Company’s fair value
measurements.
In
February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of
FASB Statement No. 157” (“FSP No. 157-2”), which deferred the effective date of
SFAS No. 157 as it applies to certain nonfinancial assets and liabilities to
fiscal years beginning after November 15, 2008. The deferral applies
to such items as nonfinancial long-lived asset groups measured at fair value for
an impairment assessment. The Company elected the deferral for
nonfinancial assets and liabilities under FSP No. 157-2. The Company
is currently evaluating but has not yet determined the impact of FSP No. 157-2
for these assets and liabilities upon adoption in the first quarter of
2010.
Income
Tax Benefits of Dividends on Share–Based Payment Awards
The
Emerging Issues Task Force (“EITF”) reached a consensus on EITF 06-11,
“Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards”
(“EITF 06-11”) in June 2007. The EITF consensus indicates that the
tax benefit received on dividends associated with share-based awards that are
charged to retained earnings should be recorded in additional paid-in capital
and included in the pool of excess tax benefits available to absorb potential
future tax deficiencies on share-based award payments. The Company adopted
EITF 06-11 on August 2, 2008, the first day of 2009. The adoption of
EITF 06-11 did not have a significant impact on the Company’s consolidated
financial statements.
Derivative
Disclosures
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”), which amends SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” (“SFAS No.
133”). SFAS No. 161 requires enhanced disclosures about how and why
an entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations, and how derivative instruments and related hedged items affect
an entity’s financial position, results of operations, financial performance and
cash flows. SFAS No. 161 is effective for fiscal years and interim
periods beginning after November 15, 2008. The Company does not
expect that the adoption of SFAS No. 161 in the third quarter of 2009 will have
a significant impact on its consolidated financial statements.
GAAP
Hierarchy
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with GAAP. SFAS No. 162 was
effective on November 15, 2008. The adoption of SFAS No. 162 did not
have a significant impact on the Company’s consolidated financial
statements.
4.
|
Fair Value
Measurements
|
Fair
value is defined under SFAS No. 157 as the price that would be received to sell
an asset or paid to transfer a liability in the principal or most advantageous
market in an orderly transaction between market participants on the measurement
date. SFAS No. 157 also establishes a three-level hierarchy, which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value.
The
valuation hierarchy is based upon the transparency of inputs to the valuation of
an asset or liability on the measurement date. The three levels of
inputs to the valuation methodology are:
·
|
Level
1 – quoted prices (unadjusted) for an identical asset or liability in an
active market. |
|
|
·
|
Level
2 – quoted prices for a similar asset or liability in an active market or
model-derived valuations in which all significant inputs are observable
for substantially the full term of the asset or
liability.
|
|
|
·
|
Level
3 – unobservable and significant to the fair value measurement of the
asset or liability. |
The Company’s assets and liabilities
measured at fair value on a recurring basis subject to the disclosure
requirements of SFAS No. 157 at January 30, 2009 were as follows:
|
Quoted
Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
in
Active
|
|
|
|
Other |
|
|
|
Significant |
|
|
|
|
|
|
|
|
Markets
for
|
|
|
|
Observable |
|
|
|
Unobservable |
|
|
|
Fair
Value as
|
|
|
Identical
Assets |
|
|
Inputs |
|
|
|
Inputs |
|
|
|
of
January 30, |
|
|
|
|
(Level
1)
|
|
|
|
(Level
2) |
|
|
|
(Level
3) |
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents*
|
|
$ |
98 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
98 |
|
Deferred
compensation plan assets**
|
|
|
21,607 |
|
|
|
-- |
|
|
|
-- |
|
|
|
21,607 |
|
Total
assets at fair value
|
|
$ |
21,705 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
21,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap liability
|
|
$ |
-- |
|
|
$ |
63,326 |
|
|
$ |
-- |
|
|
$ |
63,326 |
|
Total
liabilities at fair value
|
|
$ |
-- |
|
|
$ |
63,326 |
|
|
$ |
-- |
|
|
$ |
63,326 |
|
**Represents
plan assets invested in mutual funds established under a Rabbi Trust for the
Company’s non-qualified savings plan and is included in the condensed
consolidated balance sheet as other assets.
5.
|
Property Held for
Sale
|
Property
held for sale consists of real estate properties that the Company expects to
sell within one year. The assets are reported at the lower of
carrying amount or fair value less estimated selling costs. At
January 30, 2009, property held for sale was $5,543 and consisted of
office space with a carrying amount of $3,232, which now is unnecessary as the
Company has completed its transition to a one concept company, and closed
stores. At August 1, 2008, property held for sale was $3,248 and
consisted of closed stores.
Inventories
were comprised of the following at:
|
|
January
30, |
|
|
August
1, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
Retail
|
|
$ |
103,669 |
|
|
$ |
124,572 |
|
Restaurant
|
|
|
18,849 |
|
|
|
17,439 |
|
Supplies
|
|
|
15,240 |
|
|
|
13,943 |
|
Total
|
|
$ |
137,758 |
|
|
$ |
155,954 |
|
7. Debt
Long-term
debt consisted of the following at:
|
|
January
30,
2009
|
|
|
August
1,
2008
|
|
Term
Loan B
|
|
|
|
|
|
|
payable
$1,792 per quarter with the remainder due
on
April 27, 2013
|
|
$ |
629,872 |
|
|
$ |
633,456 |
|
|
|
|
|
|
|
|
|
|
Delayed-Draw
Term Loan Facility
payable
$383 per quarter with the remainder due
on
April 27, 2013
|
|
|
150,338 |
|
|
|
151,103 |
|
Revolving
Credit Facility
payable
on or before April 27, 2011
|
|
|
-- |
|
|
|
3,200 |
|
|
|
|
|
|
|
|
|
|
Note
payable
|
|
|
491 |
|
|
|
-- |
|
|
|
|
780,701 |
|
|
|
787,759 |
|
Current
maturities
|
|
|
(8,794 |
) |
|
|
(8,698 |
) |
Long-term
debt
|
|
$ |
771,907 |
|
|
$ |
779,061 |
|
The
Company has a credit facility (the “Credit Facility”) that consists of term
loans (aggregate outstanding at January 30, 2009 was $780,210) with a scheduled
maturity date of April 27, 2013 and a $250,000 revolving credit facility
expiring April 27, 2011 (the “Revolving Credit Facility”). At January
30, 2009, $625,000 of the Company’s term loans was swapped at 7.07% and the
weighted average interest rate on the remaining $155,210 was
2.00%. At January 30, 2009, the Company had outstanding $32,362 of
standby letters of credit, which reduce the Company’s availability under the
Revolving Credit Facility (see Note 17). At January 30, 2009, the
Company had $217,638 available under the Revolving Credit Facility.
The
Credit Facility contains customary financial covenants, which include
maintenance of a maximum consolidated total leverage ratio as specified in the
agreement and maintenance of minimum interest coverage ratios. At
January 30, 2009, the Company was in compliance with all debt
covenants.
The
Credit Facility also imposes restrictions on the amount of dividends the Company
is able to pay. If there is no default then existing and there is at
least $100,000 then available under the Revolving Credit Facility, the Company
may both: (1) pay cash dividends on its common stock if the aggregate amount of
dividends paid in any fiscal year is less than 15% of Consolidated EBITDA from
continuing operations (as defined in the Credit Facility) during the immediately
preceding fiscal year; and (2) in any event, increase its regular quarterly cash
dividend in any quarter by an amount not to exceed the greater of $.01 or 10% of
the amount of the dividend paid in the prior fiscal quarter.
The note
payable consists of a five-year note with a vendor in the original principal
amount of $507 and represents the financing of prepaid maintenance for
telecommunications equipment. The note payable is payable in monthly
installments of principal and interest of $9 through October 16, 2013 and bears
interest at 2.88%.
8. |
Derivative Instruments and Hedging
Activities |
The
Company accounts for its interest rate swap in accordance with SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” The
estimated fair value of this interest rate swap liability was $63,326 (see Note
4) and $39,618 at January 30, 2009 and August 1, 2008,
respectively. In accordance with the provisions of SFAS No. 157, the
estimated fair value of the Company’s interest rate swap liability at January
30, 2009 incorporates the Company’s own non-performance risk. The
adjustment related to non-performance risk at January 30, 2009 represents an
additional reduction of $8,232 in the fair value of the interest rate swap
liability from the amount recognized upon adoption of SFAS No. 157 in the first
quarter of 2009 (see Note 3). The offset to the interest rate swap
liability is in accumulated other comprehensive loss, net of the deferred tax
asset. Cash flows related to the interest rate swap are included in
interest expense and in operating activities. Cash paid for interest
on the interest rate swap was $8,743, $357 and $5,578, respectively, for the
first six months of 2009, the first six months of 2008 and for the full year
2008.
During
the six-month period ended January 30, 2009, the Company received proceeds of
$877 from the exercise of share-based compensation awards and the corresponding
issuance of 68,762 shares of its common stock. During the six-month
period ended January 30, 2009, the Company did not make any share
repurchases.
During
the six-month period ended January 30, 2009, the Company paid dividends of $0.38
per common share. During the second quarter of 2009, the Company also
declared an additional dividend of $0.20 per common share that was paid on
February 5, 2009 and is recorded in other accrued expenses in the accompanying
condensed consolidated balance sheet. Subsequent to the end of the
second quarter of 2009, the Company declared a dividend of $0.20 per common
share payable on May 5, 2009 to shareholders of record on April 17,
2009.
During
the six-month period ended January 30, 2009, the unrealized loss, net of tax, on
the Company’s interest rate swap increased by $16,865 to $44,518 and is recorded
in accumulated other comprehensive loss (see Notes 3, 4, 8 and 10).
During
the six-month period ended January 30, 2009, total share-based
compensation was $3,744 and the tax deficiency from share-based
compensation was $51. During the six-month period ended
February 1, 2008, total share-based compensation was $4,980 and the excess
tax benefit from share-based compensation was
$49.
|
10. Comprehensive Income
(Loss)
Comprehensive
income (loss) consisted of the following at:
|
|
Quarter
Ended |
|
|
Six
Months Ended |
|
|
|
January
30, |
|
|
February
1, |
|
|
January
30, |
|
|
February
1, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,362 |
|
|
$ |
20,217 |
|
|
$ |
31,194 |
|
|
$ |
34,106 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate
Swap,
net of tax
|
|
|
(15,304 |
) |
|
|
(20,685 |
) |
|
|
(16,865 |
)
|
|
|
(31,177 |
)
|
Total
comprehensive income (loss)
|
|
$ |
3,058 |
|
|
$ |
(468 |
) |
|
$ |
14,329 |
|
|
$ |
2,929 |
|
For the
quarters ended January 30, 2009 and February 1, 2008, the change in fair value
of the Company’s interest rate swap is net of a tax benefit of $6,584 and
$10,735, respectively. For the six-month periods ended
January
30, 2009 and February 1, 2008, the change in fair value of the Company’s
interest rate swap is net of a tax benefit of $6,843 and $15,724,
respectively.
11. Seasonality
Historically,
the net income of the Company has been lower in the first three quarters and
highest in the fourth quarter, which includes much of the summer vacation and
travel season. Management attributes these variations to the decrease
in interstate tourist traffic and propensity to dine out less during the regular
school year and winter months and the increase in interstate tourist traffic and
propensity to dine out more during the summer months. The Company's
retail sales historically have been highest in the Company's second quarter,
which includes the Christmas holiday shopping season. Therefore, the
results of operations for any interim period cannot be considered indicative of
the operating results for an entire year.
12. Segment
Reporting
Cracker
Barrel units represent a single, integrated operation with two related and
substantially integrated product lines. The operating expenses of the
restaurant and retail product line of a Cracker Barrel unit are shared and are
indistinguishable in many respects. Accordingly, the Company manages
its business on the basis of one reportable operating segment. All of
the Company’s operations are located within the United States. The
following data is presented in accordance with SFAS No. 131, “Disclosures About
Segments of an Enterprise and Related Information,” for all periods
presented.
|
|
Quarter
Ended |
|
|
Six
Months Ended |
|
|
|
January
30, |
|
|
February
1, |
|
|
January
30, |
|
|
February
1, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
|
|
$ |
468,919 |
|
|
$ |
465,105 |
|
|
$ |
924,886 |
|
|
$ |
927,858 |
|
Retail
|
|
|
161,263 |
|
|
|
169,348 |
|
|
|
279,228 |
|
|
|
287,760 |
|
Total
revenue
|
|
$ |
630,182 |
|
|
$ |
634,453 |
|
|
$ |
1,204,114 |
|
|
$ |
1,215,618 |
|
13. Impairment of Long-lived
Assets
In
accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company evaluates for impairment long-lived assets and
certain identifiable intangibles to be held and used in its business whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Whether impairment exists is determined by
comparing undiscounted future operating cash flows that are expected to result
from an asset to the carrying values of an asset on a store-by-store
basis. In addition, the recoverability test considers the likelihood
of possible outcomes that existed at the balance sheet date, including the
assessment of the likelihood of the future sale of the asset. If
impairment exists, the amount of impairment is measured as the sum of the
estimated discounted future operating cash flows of the asset and the expected
proceeds upon sale of the asset less its carrying value. Assets held
for sale, if any, are reported at the lower of carrying amount or fair value
less costs to sell (see Note 5).
During
the six months ended January 30, 2009, the Company recorded no impairment
charges. During the six months ended February 1, 2008, the Company
closed two stores, which resulted in impairment charges of $532 and store
closing charges of $345 (see “Impairment of long-lived assets” in Note 2 to the
Consolidated Financial Statements contained in the 2008 Form 10-K for additional
information). These impairments were recorded based upon the lower of
unit carrying amount or fair value less estimated selling costs.
14. Shared-Based
Compensation
The Company accounts for share-based
compensation in accordance with SFAS No. 123 (Revised 2004), “Share-Based
Payment,” which requires the measurement and recognition of compensation cost at
fair value for all share-based payments. Share-based compensation is
recorded in general and administrative expenses. For the quarter and
six-month period ended January 30, 2009, share-based compensation expense
totaled $925 and $1,952, respectively, for stock options and $1,091 and $1,792,
respectively, for nonvested stock. For the quarter and six-month
period ended February 1, 2008, share-based compensation expense was $1,261 and
$2,426, respectively, for stock options and $1,405 and $2,554, respectively, for
nonvested stock.
During
the second quarter of 2009, the first six months of 2009 and the second quarter
of 2008, there were no forfeitures of equity awards and, therefore, no
reversals. During the first six months of 2008, the Company reversed
approximately $295 of share-based compensation expense for nonvested stock
grants that were forfeited.
15. Discontinued
Operations
The
Company sold Logan’s Roadhouse, Inc. (“Logan’s”) in 2007 (see Note 3 to the
Company’s Consolidated Financial Statements included in the 2008 Form 10-K for
additional information).
In the six-month period ended February
1, 2008, the Company reported in discontinued operations certain expenses
related to the divestiture of Logan’s, which consisted of the
following:
|
|
Quarter
Ended |
|
Six
Months Ended |
|
|
|
February
1, |
|
|
February
1, |
|
|
|
2008 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before tax benefit from discontinued operations
|
|
$ |
(25 |
) |
|
$ |
(170 |
) |
Tax
benefit
|
|
|
8 |
|
|
|
59 |
|
Loss
from discontinued operations, net of tax
|
|
$ |
(17 |
) |
|
$ |
(111 |
) |
No
expenses related to the divestiture of Logan’s were incurred during the
six-month period ended January 30, 2009.
16. Net Income Per Share and
Weighted Average Shares
Basic
consolidated net income per share is computed by dividing consolidated net
income available to common shareholders by the weighted average number of common
shares outstanding for the reporting period. Diluted consolidated net
income per share reflects the potential dilution that could occur if securities,
options or other contracts to issue common stock were exercised or converted
into common stock and is based upon the weighted average number of common and
common equivalent shares outstanding during the reporting
period. Common equivalent shares related to stock options and
nonvested stock and stock awards issued by the Company are calculated using the
treasury stock method. The Company’s outstanding stock options and
nonvested stock and stock awards represent the only dilutive effects on diluted
consolidated net income per share.
The
following table reconciles the components of the diluted earnings per share
computations:
|
Quarter
Ended |
|
|
Six
Months Ended |
|
|
|
January
30, |
|
|
February
1, |
|
|
January
30, |
|
|
February
1, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations per share
numerator
|
|
$ |
18,362 |
|
|
$ |
20,234 |
|
|
$ |
31,194 |
|
|
$ |
34,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of
tax,
per share numerator
|
|
$ |
-- |
|
|
$ |
(17 |
) |
|
$ |
-- |
|
|
$ |
(111 |
) |
Income
from continuing operations, loss from
discontinued
operations, net of tax, and net
income
per share denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
22,389,598 |
|
|
|
23,133,206 |
|
|
|
22,369,783 |
|
|
|
23,419,403 |
|
Add
potential dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and nonvested stock and
stock
awards
|
|
|
207,585 |
|
|
|
625,137 |
|
|
|
261,971 |
|
|
|
682,262 |
|
Diluted
weighted average shares
|
|
|
22,597,183 |
|
|
|
23,758,343 |
|
|
|
22,631,754 |
|
|
|
24,101,665 |
|
17.
Commitments and
Contingencies
The
Company and its subsidiaries are parties to various legal and regulatory
proceedings and claims incidental to and arising out of the ordinary course of
its business. In the opinion of management, based upon information
currently available, the ultimate liability with respect to these proceedings
and claims will not materially affect the Company’s consolidated results of
operations or financial position.
The
Company is contingently liable pursuant to standby letters of credit as credit
guarantees related to insurers. At January 30, 2009, the Company had
$32,362 of standby letters of credit related to securing reserved claims under
workers' compensation insurance. All standby letters of credit are
renewable annually and reduce the Company’s availability under its Revolving
Credit Facility (see Note 7 for further information on the Company’s Revolving
Credit Facility).
The
Company is secondarily liable for lease payments under the terms of an operating
lease that has been assigned to a third party. At January 30, 2009,
the lease has a remaining life of approximately 4.7 years with annual lease
payments of approximately $361 for a total guarantee of $1,683. The
Company’s performance is required only if the assignee fails to perform its
obligations as lessee. At this time, the Company has no reason to
believe that the assignee will not perform, and, therefore, no provision has
been made in the accompanying condensed consolidated balance sheet for amounts
to be paid in case of non-performance by the assignee.
Upon the
sale of Logan’s, the Company reaffirmed its guarantee of the lease payments for
two Logan’s restaurants. At January 30, 2009, the operating leases
have remaining lives of 2.9 and 11.2 years with annual payments of approximately
$94 and $98, respectively, for a total guarantee of $1,513. The
Company’s performance is required only if Logan’s fails to perform its
obligations as lessee. At this time, the Company has no reason to
believe Logan’s will not perform, and therefore, no provision has been made in
the condensed consolidated financial statements for amounts to be paid as a
result of non-performance by Logan’s.
The
Company enters into certain indemnification agreements in favor of third parties
in the ordinary course of business. The Company believes that the
probability of incurring an actual liability under such indemnification
agreements is sufficiently remote so that no liability has been
recorded. In connection with the divestiture of Logan’s and Logan’s
sale-leaseback transaction (see Note 3 to the Company’s
Consolidated
Financial
Statements included in the 2008 Form 10-K), the Company entered into
various agreements to indemnify third parties against certain tax
obligations, for any breaches of representations and warranties in the
applicable transaction documents and for certain costs and expenses that
may arise out of specified real estate matters, including potential
relocation and legal costs. With the exception of certain tax
indemnifications, the Company believes that the probability of being
required to make any indemnification payments to Logan’s is
remote. Therefore, at January 30, 2009, the Company has
recorded a liability of $387 in the condensed consolidated balance sheet
for these potential tax indemnifications, but no provision has been
recorded for potential non-tax
indemnifications.
|
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Cracker
Barrel Old Country Store, Inc. and its subsidiaries (collectively, the
“Company,” “our” or “we”) are principally engaged in the operation and
development in the United States of the Cracker Barrel Old Country Store® restaurant and
retail concept. Unless otherwise noted, management’s discussion and
analysis of financial condition and results of operations (“MD&A”) relates
only to results from continuing operations. All dollar amounts
reported or discussed in Part I, Item 2 of this Quarterly Report on Form 10-Q
are shown in thousands, except per share amounts and certain statistical
information (e.g., number of stores). References to years in the
MD&A are to our fiscal year unless otherwise noted.
The
following 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
(i) condensed consolidated financial statements and notes thereto in this Form
10-Q and (ii) the financial statements and the notes thereto included in the
Company’s Annual Report on Form 10-K for the fiscal year ended August 1, 2008
(the “2008 Form 10-K”). Except for specific historical information,
many of the matters discussed in this report may express or imply projections of
revenues or expenditures, plans and objectives for future operations, growth or
initiatives, expected future economic performance, or the expected outcome or
impact of pending or threatened litigation. These and similar
statements regarding events or results which we expect will or may occur in the
future, are forward-looking statements that involve risks, uncertainties and
other factors which may cause our actual results and performance to differ
materially from those expressed or implied by those statements. All
forward-looking information is provided pursuant to the safe harbor established
under the Private Securities Litigation Reform Act of 1995 and should be
evaluated in the context of these risks, uncertainties and other
factors. Forward-looking statements generally can be identified by
the use of forward-looking terminology such as “trends,” “assumptions,”
“target,” “guidance,” “outlook,” “opportunity,” “future,” “plans,” “goals,”
“objectives,” “expectations,” “near-term,” “long-term,”
“projection,” “may,” “will,” “would,” “could,” “expect,” “intend,” “estimate,”
“anticipate,” “believe,” “potential,” “regular,” “should,” “projects,”
“forecasts” or “continue” (or the negative or other derivatives of
each of these terms) or similar terminology.
We
believe the assumptions underlying these forward-looking statements are
reasonable; however, any of the assumptions could be inaccurate, and therefore,
actual results may differ materially from those projected in or implied by the
forward-looking statements. Factors and risks that may result in
actual results differing from this forward-looking information include, but are
not limited to, those contained in Part I, Item 1A of the 2008 Form 10-K, which
is incorporated herein by this reference, as well as other factors discussed
throughout this report, including, without limitation, the factors described
under “Critical Accounting Estimates” on pages 24-28 of this Form 10-Q or, from
time to time, in our filings with the Securities and Exchange Commission
(“SEC”), press releases and other communications.
Readers
are cautioned not to place undue reliance on forward-looking statements made in
this report, since the statements speak only as of the report’s
date. Except as may be required by law, we have no obligation, and do
not intend, to publicly update or revise any of these forward-looking statements
to reflect events or circumstances occurring after the date of this report or to
reflect the occurrence of unanticipated events. Readers are advised,
however, to consult any future public disclosures that we may make on related
subjects in reports that we file with or furnish to the SEC or in our other
public disclosures.
General
Overview
This
overview summarizes the MD&A, which includes the following
sections:
·
|
Results
of Operations – an analysis of our condensed consolidated statements of
income for the periods presented.
|
·
|
Liquidity
and Capital Resources – an analysis of our primary sources of liquidity
and capital expenditures.
|
·
|
Critical
Accounting Estimates – a discussion of accounting policies that require
critical judgments and estimates.
|
All
explanations of changes in results of operations are discussed in descending
order of their magnitude.
Results
of Operations
Overview
of Quarterly Results
Total
revenue decreased 0.7% in the second quarter of 2009 as compared to the second
quarter of 2008. Operating income margin was 6.2% of total revenue in the second
quarter of 2009 compared to 7.2% in the second quarter of
2008. Income from continuing operations for the second quarter of
2009 decreased 9.3% as compared to the second quarter of 2008. The
decrease in income from continuing operations reflected the
following:
·
|
lower
restaurant traffic and lower retail
sales,
|
·
|
higher
retail cost of goods sold,
|
·
|
higher
group health costs,
|
·
|
higher
utilities expense,
|
·
|
higher
store management wages,
|
·
|
non-recurrence
of the prior-year gain on the sale of the remaining Logan’s property we
had retained,
|
·
|
higher
workers’ compensation expense and
|
These
decreases were partially offset by the following:
·
|
lower
general insurance expense,
|
·
|
lower
interest expense,
|
·
|
lower
store miscellaneous expense,
|
·
|
lower
store bonus accruals,
|
·
|
lower
professional fees and
|
Diluted
income from continuing operations per share of $0.81 decreased 4.7% from prior
year due to the decrease in income from continuing operations partly offset by
lower average diluted shares outstanding.
Overview of Year-to-Date
Results
Total
revenue decreased 0.9% during the six-month period ended January 30, 2009 as
compared to the six-month period ended February 1, 2008. Operating
income margin was 6.0% of total revenue for the six-month period ended January
30, 2009 as compared to 6.7% in the six-month period ended February 1,
2008. Income from
continuing
operations for the six-month period ended January 30, 2009 decreased 8.8%
as compared to the six-month period ended February 1, 2008. The
decrease in income from continuing operations reflected the
following:
|
·
|
lower
restaurant traffic and lower retail
sales,
|
·
|
higher
utilities expense,
|
·
|
higher
store management wages,
|
·
|
non-recurrence
of the prior-year gain on the sale of the remaining Logan’s property we
had retained,
|
·
|
higher
retail costs of goods sold,
|
These
decreases were partially offset by the following:
·
|
lower
general insurance expense,
|
·
|
non-recurrence
of manager meeting expense,
|
·
|
lower
interest expense,
|
·
|
lower
professional fees and
|
Diluted
income from continuing operations per share of $1.38 decreased 2.8% from prior
year due to the decrease in income from continuing operations partly offset by
lower average diluted shares outstanding.
The following table
highlights operating results by percentage relationships to total revenue
for the quarter and six-month period ended January 30, 2009 as compared to
the same periods in the prior
year:
|
|
|
Quarter
Ended |
|
|
Six
Months Ended |
|
|
|
January
30, |
|
|
February
1, |
|
|
January
30, |
|
|
February
1, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Total
revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
35.3 |
|
|
|
35.3 |
|
|
|
33.5 |
|
|
|
33.2 |
|
Gross
profit
|
|
|
64.7 |
|
|
|
64.7 |
|
|
|
66.5 |
|
|
|
66.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
and other related expenses
|
|
|
37.1 |
|
|
|
36.1 |
|
|
|
37.9 |
|
|
|
37.4 |
|
Impairment
and store closing charges
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
0.1 |
|
Other
store operating expenses
|
|
|
16.8 |
|
|
|
16.8 |
|
|
|
17.6 |
|
|
|
17.4 |
|
Store
operating income
|
|
|
10.8 |
|
|
|
11.8 |
|
|
|
11.0 |
|
|
|
11.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
4.6 |
|
|
|
4.6 |
|
|
|
5.0 |
|
|
|
5.2 |
|
Operating
income
|
|
|
6.2 |
|
|
|
7.2 |
|
|
|
6.0 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
2.1 |
|
|
|
2.3 |
|
|
|
2.3 |
|
|
|
2.4 |
|
Interest
income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Income
before income taxes
|
|
|
4.1 |
|
|
|
4.9 |
|
|
|
3.7 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
1.2 |
|
|
|
1.7 |
|
|
|
1.1 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
2.9 |
|
|
|
3.2 |
|
|
|
2.6 |
|
|
|
2.8 |
|
Loss
from discontinued operations, net of tax
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
2.9 |
% |
|
|
3.2 |
% |
|
|
2.6 |
% |
|
|
2.8 |
% |
The
following table highlights the components of total revenue by percentage
relationships to total revenue for the quarter and six-month period ended
January 30, 2009 as compared to the same periods in the prior year:
|
|
Quarter
Ended |
|
|
Six
Months Ended |
|
|
|
January
30, |
|
|
February
1, |
|
|
January
30, |
|
|
February
1, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
|
|
|
74.4 |
% |
|
|
73.3 |
% |
|
|
76.8 |
% |
|
|
76.3 |
% |
Retail
|
|
|
25.6 |
|
|
|
26.7 |
|
|
|
23.2 |
|
|
|
23.7 |
|
Total
revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
The
following table sets forth the number of units in operation at the beginning and
end of the quarters and six-month periods ended January 30, 2009 and February 1,
2008, respectively:
|
|
Quarter
Ended |
|
|
|
Six
Months Ended |
|
|
|
|
January
30, |
|
|
|
February
1, |
|
|
|
January
30, |
|
|
|
February
1, |
|
|
|
|
2009 |
|
|
|
2008 |
|
|
|
2009 |
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open
at beginning of period
|
|
|
581 |
|
|
|
566 |
|
|
|
577 |
|
|
|
562 |
|
Opened
during period
|
|
|
4 |
|
|
|
4 |
|
|
|
8 |
|
|
|
10 |
|
Closed
during period
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(2 |
)
|
Open
at end of period
|
|
|
585 |
|
|
|
570 |
|
|
|
585 |
|
|
|
570 |
|
During
the six months ended February 1, 2008, we also replaced an existing unit with a
new unit in a nearby community. Replacements are not counted as
either units opened or closed.
Average
unit volumes include sales of all stores. The following table
highlights average unit volumes for the quarter and six-month period ended
January 30, 2009 as compared to the same periods in the prior year:
|
|
Quarter
Ended |
|
|
Six
Months Ended |
|
|
|
January
30, |
|
|
February
1, |
|
|
January
30, |
|
|
February
1, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
|
|
$ |
802.7 |
|
|
$ |
817.2 |
|
|
$ |
1,591.6 |
|
|
$ |
1,638.8 |
|
Retail
|
|
|
276.1 |
|
|
|
297.5 |
|
|
|
480.5 |
|
|
|
508.2 |
|
Total
revenue
|
|
$ |
1,078.8 |
|
|
$ |
1,114.7 |
|
|
$ |
2,072.1 |
|
|
$ |
2,147.0 |
|
Total
Revenue
Total
revenue for the second quarter of 2009 decreased 0.7% compared to the prior year
second quarter. For the second quarter, comparable store restaurant
sales decreased 1.5% and comparable store retail sales decreased 7.0% resulting
in a combined comparable store sales (total revenue) decrease of
2.9%. The comparable store restaurant sales decrease consisted of a
3.1% average check increase for the quarter (including a 3.6% average menu price
increase) and a 4.6% guest traffic decrease. The comparable store
retail sales decrease was due to a decline in guest traffic and lower guest
spending on retail products during the important holiday season. We
continue to experience the effects of pressures on consumer discretionary income
in our guest traffic and sales. Sales from newly opened stores
partially offset the decrease in comparable store restaurant and retail
sales.
Total
revenue for the six-month period ended January 30, 2009 decreased 0.9% compared
to the six-month period ended February 1, 2008. For the six-month
period ended January 30, 2009, comparable store restaurant sales
decreased
2.3% and comparable store retail sales decreased 5.0% resulting in a
combined comparable store sales (total revenue) decrease of
3.0%. The comparable store restaurant sales decrease consisted
of a 3.2% average check increase for the six months (including a 3.4%
average menu price increase) and a 5.5% guest traffic
decrease. We continue to experience the effects of pressures on
consumer discretionary income in our guest traffic and
sales. Sales from newly opened stores partially offset the
decrease in comparable store restaurant and retail
sales.
|
Cost
of Goods Sold
Cost of
goods sold as a percentage of total revenue for the second quarter of 2009
remained flat compared to the second quarter of the prior year at
35.3%. Costs of goods sold as a percentage of total revenue benefited
from a shift in the mix of sales versus prior year to restaurant sales from
retail sales, the latter of which typically have a higher cost of
sales. The increase in retail cost of goods sold as a percentage of
retail sales resulted from higher markdowns of retail merchandise and lower
initial mark-ons of retail merchandise versus the prior year. Lower
food costs resulted from higher menu pricing partially offset by commodity
inflation. The increase in commodity inflation from a year ago was
primarily due to increases in oils and produce.
Cost of
goods sold as a percentage of total revenue increased to 33.5% for the six-month
period ended January 30, 2009 compared to 33.2% in the six-month period ended
February 1, 2008. This increase was due to commodity inflation,
higher markdowns of retail merchandise and lower initial mark-ons of retail
merchandise versus the prior year partially offset by higher menu pricing and a
shift in the mix of sales versus prior year to restaurant sales from retail
sales, the latter of which typically have a higher cost of sales. The
increase in commodity inflation from a year ago was primarily due to increases
in oils, produce, grain products and poultry.
Labor
and Other Related Expenses
Labor and
other related expenses include all direct and indirect labor and related costs
incurred in store operations. Labor and other related expenses as a
percentage of total revenue increased to 37.1% in the second quarter of 2009
from 36.1% in the prior year. This increase was due to higher group
health costs, higher management costs, higher workers’ compensation expense and
the effect of lower guest traffic partially offset by lower store bonus accruals
and menu pricing. The increase in group health costs was due to
higher medical claims. The increase in management costs was due to
wage inflation and higher staffing levels. Although our limited scope
actuarial reviews completed during the second quarters of 2009 and 2008 resulted
in reductions in workers’ compensation expense, we recorded a smaller reduction
in the second quarter of 2009 as compared to the prior year. The decrease in
store bonus accruals reflected lower performance against financial objectives in
the second quarter of 2009 versus the same period a year ago.
Labor and
other related expenses as a percentage of total revenue increased to 37.9% in
the six-month period ended January 30, 2009 as compared to 37.4% in the
six-month period ended February 1, 2008. Higher management costs and
the effect of lower guest traffic were partially offset by menu
pricing. Management costs increased due to wage inflation and higher
staffing levels.
Impairment
and Store Closing Charges
We did
not record any impairment or store closing charges in the first six months of
2009. During the
first six months of 2008, we closed two stores, which resulted in impairment
charges of $532 and store closing charges of $345 (see “Impairment of long-lived
assets” in Note 2 to the Consolidated Financial Statements contained in the 2008
Form 10-K for additional information).
Other
Store Operating Expenses
Other
store operating expenses include all unit-level operating costs, the major
components of which are utilities, operating supplies, repairs and maintenance,
depreciation and amortization, advertising, rent, credit card
fees
and non-labor-related pre-opening expenses. Other store
operating expenses as a percentage of total revenue remained flat compared
to the second quarter of the prior year at 16.8%. Higher
utilities expense, higher property taxes and the effect of lower guest
traffic were partially offset by lower general insurance expense as a
result of revised actuarial estimates, lower store miscellaneous expense
and higher menu pricing. Lower store miscellaneous expense
resulted from lower hourly employee turnover and cost control
initiatives.
|
Other
store operating expenses as a percentage of total revenue increased to 17.6% in
the six-month period ended January 30, 2009 as compared to 17.4% in the
six-month period ended February 1, 2008. The increase was due to
higher utilities expense and lower guest traffic partially offset by lower
general insurance expense and higher menu pricing. Lower general
insurance expense resulted from revised actuarial estimates.
General
and Administrative Expenses
General
and administrative expenses as a percentage of total revenue remained flat
compared to the second quarter of the prior year at 4.6%. The
non-recurrence of the prior-year gain on the sale of the remaining Logan’s
property we had retained was partially offset by lower professional
fees.
General
and administrative expenses as a percentage of total revenue decreased to 5.0%
in the six-month period ended January 30, 2009 as compared to 5.2% in the
six-month period ended February 1, 2008. The decrease was due to the
non-recurrence of expenses associated with a manager meeting which was held in
the prior year and lower professional fees partially offset by the
non-recurrence of the prior-year gain on the sale of the remaining Logan’s
property we had retained. The next manager meeting is scheduled to be
held in 2010.
Interest
Expense
Interest
expense as a percentage of total revenue decreased to 2.1% in the second quarter
of 2009 as compared to 2.3% in the second quarter of last year. The
decrease was due to lower average interest rates partially offset by higher
average debt outstanding.
Interest
expense as a percentage of total revenue decreased to 2.3% in the six-month
period ended January 30, 2009 as compared to 2.4% in the six-month period ended
February 1, 2008. The decrease was due to lower average interest
rates partially offset by higher average debt outstanding.
Provision
for Income Taxes
The
provision for income taxes as a percent of pre-tax income was 29.4% in the
second quarter of 2009 and 29.9% in the first six months of 2009. The
provision for income taxes as a percent of pre-tax income was 34.9% in the
second quarter of 2008, 34.5% in the first six months of 2008 and 30.2% for the
full year of 2008. The decrease in the effective tax rate in the
first six months of 2008 to the first six months of 2009 reflected higher
employer tax credits on both an absolute dollar basis as well as a percent of
pre-tax income due to the decrease in income from continuing
operations. The decrease in the effective tax rate from the full year
of 2008 to the first six months of 2009 reflected higher employer tax credits as
a percent of pre-tax income partially offset by the non-recurrence of reserve
adjustments resulting from the expiration of certain statutes of limitations,
which generally do not occur in the first two quarters of any year.
Liquidity and Capital
Resources
Our
primary sources of liquidity are cash generated from our operations and our
borrowing capacity under our $250,000 revolving credit facility (the “Revolving
Credit Facility”), which will expire on April 27, 2011. Our
internally generated cash, along with cash on hand at August 1, 2008, proceeds
from exercises of share-based compensation awards and our borrowings under our
Revolving Credit Facility were sufficient to finance all of
our
growth, dividend payments, working capital needs and other cash payment
obligations in the first six months of 2009.
We
believe that cash at January 30, 2009, along with cash generated from our
operating activities, the borrowing capacity under our Revolving Credit
Facility and the expected proceeds from the planned sale-leaseback
transactions described below will be sufficient to finance our continued
operations, our continued expansion plans, our principal payments on our
debt and our dividend payments for at least the next twelve months and
thereafter for the foreseeable
future.
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Cash
Generated From Operations
Our
operating activities from continuing operations provided net cash of $49,834 for
the six-month period ended January 30, 2009, which represented a decrease from
the $63,590 provided during the same period a year ago. This decrease
reflected the timing of payments for interest, accounts payable and income taxes
and lower income from continuing operations.
Borrowing
Capacity and Debt Covenants
At
January 30, 2009, although we did not have any outstanding borrowings under the
Revolving Credit Facility, we had $32,362 of standby letters of credit related
to securing reserved claims under workers' compensation insurance which reduce
our availability under the Revolving Credit Facility. At January 30,
2009, we had $217,638 in borrowing capacity under our Revolving Credit
Facility.
The
Revolving Credit Facility is part of our $1,250,000 credit facility (the “Credit
Facility”), which also includes a Term Loan B facility and Delayed-Draw Term
Loan facility, each of which has a scheduled maturity date of April 27,
2013. At January 30, 2009, our Term Loan B balance was $629,872 and
our Delayed-Draw Term balance was $150,338. See Note 7 to our
Condensed Consolidated Financial Statements for further information on our
long-term debt.
The
Credit Facility contains customary financial covenants, which include a
requirement that we maintain a maximum consolidated total leverage ratio (ratio
of total indebtedness to EBITDA, which is defined as earnings before interest,
taxes, depreciation and amortization) as follows:
From
May 3, 2008 through May 1, 2009
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4.00
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From
May 2, 2009 thereafter
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3.75
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The
Credit Facility’s financial covenants also require that we maintain a minimum
consolidated interest coverage ratio (ratio of earnings before interest, taxes,
depreciation and amortization to cash interest payable, as defined) as
follows:
From
May 3, 2008 through May 1, 2009
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3.50
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From
May 2, 2009 through April 30, 2010
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3.75
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From
April 31, 2010 thereafter
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4.00
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At
January 30, 2009, our consolidated total leverage ratio and consolidated
interest coverage ratio were 3.72 and 5.34, respectively.
We intend
to engage in sale-leaseback transactions involving approximately 15 of our
stores and our retail distribution center, which we expect to conclude before
the end of 2009. Net proceeds from the transactions, which are
presently expected to be between $55,000 and $60,000, together with excess cash
flow from operations, will be used to reduce outstanding debt.
We
presently expect to remain in compliance with the Credit Facility’s financial
covenants for the remaining term of the facility.
Share
Repurchases, Dividends and Proceeds from the Exercise of Share-Based
Compensation Awards
On July
31, 2008, our Board of Directors approved share repurchases of up to $65,000 of
our common stock. The principal criteria for share repurchases are
that they be accretive to expected net income per share, are within the limits
imposed by our Credit Facility and that they be made only from free cash flow
(operating cash flow less capital expenditures and dividends) rather than
borrowings. During the six-month period ended January 30, 2009, we
did not make any share repurchases owing to a temporary suspension of our share
repurchase plans.
Our
Credit Facility imposes restrictions on the amount of dividends we are able to
pay. If there is no default then existing and there is at least
$100,000 then available under our Revolving Credit Facility, we may both: (1)
pay cash dividends on our common stock if the aggregate amount of such dividends
paid during any fiscal year is less than 15% of Consolidated EBITDA from
continuing operations (as defined in the Credit Facility) during the immediately
preceding fiscal year; and (2) in any event, increase our regular quarterly cash
dividend in any quarter by an amount not to exceed the greater of $.01 or 10% of
the amount of the dividend paid in the prior fiscal quarter.
During
the six-month period ended January 30, 2009, we paid dividends of $0.38 per
common share. During the second quarter of 2009, we also declared an
additional dividend of $0.20 per common share that was paid on February 5,
2009. Subsequent to the end of the second quarter, we declared a
dividend of $0.20 per common share payable on May 5, 2009 to shareholders of
record on April 17, 2009.
During
the six-month period ended January 30, 2009, we received proceeds of $877 from
the exercise of share-based compensation awards and the corresponding issuance
of 68,762 shares of our common stock.
Working
Capital
We had
negative working capital of $17,838 at January 30, 2009 versus negative working
capital of $44,080 at August 1, 2008. The change in working capital
compared with August 1, 2008 reflected lower retail inventory and timing of
payments for accounts payable. 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. Restaurant inventories
purchased through our principal food distributor are on terms of net zero days,
while restaurant inventories purchased locally generally are financed from
normal trade credit. Retail inventories purchased domestically
generally are financed from normal trade credit, while imported retail
inventories generally are purchased through wire transfers. These
various trade terms are aided by rapid turnover of the restaurant
inventory. Employees generally are paid on weekly, bi-weekly or
semi-monthly schedules in arrears of hours worked, and certain expenses such as
certain taxes and some benefits are deferred for longer periods of
time.
Capital
Expenditures
Capital
expenditures (purchase of property and equipment) were $37,444 for the six-month
period ended January 30, 2009 as compared to $45,123 during the same period a
year ago. Construction of new locations accounted for most of the
expenditures. The decrease in capital expenditures from the first six
months of 2008 to the first six months of 2009 is primarily due to a reduction
in the number of new locations acquired and under construction as compared to
the prior year. We estimate that our capital expenditures for 2009
will be approximately $65,000 reflecting a reduction in capital expenditures for
2010 stores from the guidance we provided in our Quarterly Report on Form 10-Q
for the Quarterly Period ended October 31, 2008 (filed with the SEC on December
9, 2008). This estimate includes costs related to the acquisition of sites and
construction of 11 new stores that have opened during 2009 (three subsequent to
the end of the second quarter), as well as for
acquisition
and construction costs for 7 new stores to be opened in 2010 and capital
expenditures for maintenance programs. We intend to fund our
capital expenditures with cash flows from operations and borrowings under
our Revolving Credit Facility, as necessary. Capitalized
interest was $94 and $294, respectively, for the quarter and six-month
period ended January 30, 2009, as compared to $184 and $412, respectively,
for the quarter and six-month period ended February 1,
2008.
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Off-Balance
Sheet Arrangements
Other
than various operating leases, we have no material off-balance sheet
arrangements. Refer to our 2008 Form 10-K for additional
information regarding our operating
leases.
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Material
Commitments
There
have been no material changes in our material commitments other than in the
ordinary course of business since the end of 2008. Refer to our 2008
Form 10-K for additional information regarding our material
commitments.
Recent Accounting
Pronouncements
Fair
Value
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements for financial assets and liabilities, as well as any
other assets and liabilities that are carried at fair value on a recurring basis
in the financial statements. Effective August 2, 2008, the first day
of 2009, we adopted SFAS No. 157 on a prospective basis. The adoption
of SFAS No. 157 resulted in a $5,809 decrease in our interest rate swap
liability related to non-performance risk, with the offset reflected in
accumulated other comprehensive loss, net of the deferred tax asset, on our
condensed consolidated balance sheet. See Note 4 to our Condensed
Consolidated Financial Statements for additional information on our fair value
measurements.
In
February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of
FASB Statement No. 157” (“FSP No. 157-2”), which deferred the effective date of
SFAS No. 157 as it applies to certain nonfinancial assets and liabilities to
fiscal years beginning after November 15, 2008. The deferral applies
to such items as nonfinancial long-lived asset groups measured at fair value for
an impairment assessment. We elected the deferral for nonfinancial
assets and liabilities under FSP No. 157-2. We are currently
evaluating but have not yet determined the impact of FSP No. 157-2
for these assets and liabilities upon adoption in the first quarter of
2010.
Income
Tax Benefits of Dividends on Share–Based Payment Awards
The Emerging Issues Task Force (“EITF”)
reached a consensus on EITF 06-11, “Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards” (“EITF 06-11”) in June
2007. The EITF consensus indicates that the tax benefit received on
dividends associated with share-based awards that are charged to retained
earnings should be recorded in additional paid-in capital and included in the
pool of excess tax benefits available to absorb potential future tax
deficiencies on share-based award payments. We adopted EITF 06-11 on
August 2, 2008, the first day of 2009. The adoption of EITF 06-11 did
not have a significant impact on our consolidated financial
statements.
Derivative
Disclosures
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”), which amends SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” (“SFAS No.
133”). SFAS No. 161 requires enhanced disclosures about how and why
an entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations, and how derivative instruments and related hedged items affect
an entity’s financial position, results of operations, financial performance and
cash flows. SFAS No. 161 is effective for fiscal years and interim
periods beginning after November 15, 2008. We do not expect that the
adoption of SFAS No. 161 in the third quarter of 2009 will have a significant
impact on our consolidated financial statements.
GAAP
Hierarchy
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with accounting principles generally
accepted in the United States of America (“GAAP”). SFAS No. 162 was
effective on November 15, 2008. The adoption of SFAS No. 162 did not
have a significant impact on the Company’s consolidated financial
statements.
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 2 to the Consolidated
Financial Statements contained in the 2008 Form 10-K. 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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management
believes are both most important to the portrayal of our financial
condition and operating results and
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·
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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.
·
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Impairment
of Long-Lived Assets and Provision for Asset
Dispositions
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·
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Share-Based
Compensation
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·
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Unredeemed
Gift Cards and Certificates
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Management
has reviewed these critical accounting estimates and related disclosures with
the Audit Committee of our Board of Directors.
Impairment
of Long-Lived Assets and Provision for Asset Dispositions
We assess
the impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying value 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 amount is written down
to the estimated fair value of an asset to be held and used or the fair value,
net of estimated costs of disposal, of an asset to be disposed of, and a 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 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 first six months of 2009 and we do not believe that there will be a
material change in the estimates or assumptions used by us to assess impairment
on 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 as well as assets held for sale, we may be exposed
to losses that could be material.
Insurance
Reserves
We
self-insure a significant portion of our expected workers’ compensation, general
liability and health insurance programs. We purchase insurance for
individual workers’ compensation claims that exceed either $250, $500 or $1,000
depending on the state in which the claim originates. We purchase
insurance for individual general liability claims that exceed
$500. Prior to calendar 2009 we did not purchase such insurance for
our group health program, but did limit our benefits for any individual
(employee or dependents) in the program to not more than $1,000 lifetime, and,
in certain cases, to not more than $100 in any given plan
year. Beginning January 1, 2009, we split our group health program
into two programs. The first program is self-insured and limits our
offered benefits for any individual (employee or dependents) in the program to
not more than $100 in any given plan year, and, in certain cases, to not more
than $15 in any given plan year. The second program is fully insured
and as such has no liability for unpaid claims. 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 provided by our third party administrator.
We record
a liability for workers’ compensation and general liability for all unresolved
claims and for an actuarially determined estimate of incurred but not reported
claims at the anticipated cost to us based upon an actuarially determined
reserve as of the end of our third quarter and adjusting it by the actuarially
determined losses and actual claims payments for the subsequent quarters until
the next annual actuarial study of our reserve requirements. Those
reserves and these losses are determined actuarially from a range of possible
outcomes within which no given estimate is more likely than any other
estimate. In accordance with SFAS No. 5, “Accounting for
Contingencies,” we record the actuarially determined losses at the low end of
that range and discount them to present value using a risk-free interest rate
based on the actuarially projected timing of payments. We also
monitor actual claims development, including incurrence or settlement of
individual large claims during the interim period between actuarial studies as
another means of estimating the adequacy of our reserves. From time
to time, we perform limited scope interim updates of our actuarial studies to
verify and/or modify our reserves. During the second quarters of 2009
and 2008, we performed such updates.
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 accounting
methodology used to establish our insurance reserves during the first six months
of 2009 and do not believe 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.
Inventory
Shrinkage
Cost of
goods sold includes the cost of retail merchandise sold at our stores utilizing
the retail inventory accounting method. It includes an estimate of
shortages that are adjusted upon physical inventory counts in subsequent
periods. Consistent with the prior year, we will conduct our physical
inventory counts throughout the third and fourth quarters of the fiscal year
based upon a cyclical inventory schedule. During the quarter ended
January 30, 2009, an estimate of shrink was recorded based on the three-year
average of the physical inventories’ results on a store-by-store basis. We
have not made any material changes in the methodology used to estimate shrinkage
during the first six months of 2009 and do not believe that there will be a
material change in the future estimates or assumptions used to calculate
shrinkage. However, actual shrinkage recorded may produce materially
different amounts of shrinkage than we have estimated.
Tax
Provision
We must
make estimates of certain items that comprise our income tax
provision. These estimates include effective state and local income
tax rates, employer tax credits for items such as FICA taxes paid on employee
tip income, Work Opportunity and Welfare to Work credits, as well as estimates
related to certain depreciation and capitalization policies.
The
Company follows FASB Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 requires that a position
taken or expected to be taken in a tax return be recognized (or derecognized) in
the financial statements when it is more likely than not (i.e., a likelihood of
more than fifty percent) that the position would be sustained (or not sustained)
upon examination by tax authorities. A recognized tax position is
then measured at the largest amount of benefit that is greater than fifty
percent likely of being realized upon ultimate settlement.
Our
estimates are made based on current tax laws, the best available information at
the time of the provision and historical experience. We file our
income tax returns many months after our year end. These returns are
subject to audit by the federal and various state governments years after the
returns are filed and could be subject to differing interpretations of the tax
laws. We then must assess the likelihood of successful legal
proceedings or reach a settlement with the relevant taxing
authority. Although we believe that the judgments and estimates used
in establishing our tax provision are reasonable, a successful legal proceeding
or settlement could result in material adjustments to our consolidated financial
statements and our consolidated financial position (see Note 12 to our
Consolidated Financial Statements contained in the 2008 Form 10-K for additional
information).
Share-Based
Compensation
In
accordance with SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No.
123R”), share-based compensation cost is measured at the grant date based on the
fair value of the award and is recognized as expense over the requisite service
period. Our policy is to recognize compensation cost for awards with
only service conditions and a graded vesting schedule on a straight-line basis
over the requisite service period for the
entire
award. Additionally, our policy is to issue new shares of common
stock to satisfy exercises of share-based compensation awards.
The fair
value of each option award granted was estimated on the date of grant using a
binomial lattice-based option valuation model. This model
incorporates the following ranges of assumptions:
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·
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The
expected volatility is a blend of implied volatility based on
market-traded options on our stock and historical volatility of our stock
over the contractual life of the
options.
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·
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We
use historical data to estimate option exercise and employee termination
behavior within the valuation model; separate groups of employees that
have similar historical exercise behavior are considered separately for
valuation purposes. The expected life of options granted is
derived from the output of the option valuation model and represents the
period of time the options are expected to be
outstanding.
|
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·
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The
risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant for periods within the contractual life of the
option.
|
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·
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The
expected dividend yield is based on our current dividend yield as the best
estimate of projected dividend yield for periods within the contractual
life of the option.
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The
expected volatility, option exercise and termination assumptions involve
management’s best estimates at that time, all of which affect the fair value of
the option calculated by the binomial lattice-based option valuation model and,
ultimately, the expense that will be recognized over the life of the
option. We update the historical and implied components of the expected
volatility assumption quarterly. We update option exercise and termination
assumptions quarterly. The expected life is a by-product of the
lattice model and is updated when new grants are made.
SFAS No.
123R also requires that compensation expense be recognized for only the portion
of awards that are expected to vest. Therefore, an estimated
forfeiture rate derived from historical employee termination behavior, grouped
by job classification, is applied against share-based compensation
expense. The forfeiture rate is applied on a straight-line basis over
the service (vesting) period for each separately vesting portion of the award as
if the award were, in substance, multiple awards. We update the
estimated forfeiture rate to actual on each of the vesting dates and adjust
compensation expense accordingly so that the amount of compensation cost
recognized at any date is at least equal to the portion of the grant-date value
of the award that is vested at that date.
Generally,
the fair value of each nonvested stock grant is equal to the market price of our
stock at the date of grant reduced by the present value of expected dividends to
be paid prior to the vesting period, discounted using an appropriate risk-free
interest rate.
All of
our nonvested stock grants are time vested except the nonvested stock grants of
one executive that are based upon the achievement of strategic
goals. Compensation cost for performance-based awards is recognized
when it is probable that the performance criteria will be met. At
each reporting period, we reassess the probability of achieving the performance
targets and the performance period required to meet those targets. Determining
whether the performance targets will be achieved involves judgment and the
estimate of expense may be revised periodically based on the probability of
achieving the performance targets. Revisions are reflected in the
period in which the estimate is changed. If any performance goals are
not met, no compensation cost is ultimately recognized and, to the extent
previously recognized, compensation cost is reversed.
We have
not made any material changes in our estimates or assumptions used to determine
share-based compensation expense during the first six months of
2009. We do not believe that there will be a material change in the
future estimates or assumptions used to determine share-based compensation
expense. However, if actual results are not consistent with our
estimates or assumptions, we may be exposed to changes in share-based
compensation expense that could be material.
Unredeemed
Gift Cards and Certificates
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Unredeemed
gift cards and certificates represent a liability related to unearned income and
are recorded at their expected redemption value. No revenue is
recognized in connection with the point-of-sale transaction when gift cards or
gift certificates are sold. For those states that exempt gift cards
and certificates from their escheat laws, we make estimates of the ultimate
unredeemed (“breakage”) gift cards and certificates in the period of the
original sale and amortize this breakage over the redemption period that other
gift cards and certificates historically have been redeemed by reducing the
liability and recording revenue accordingly. For those states that do
not exempt gift cards and certificates from their escheat laws, we record
breakage in the period that gift cards and certificates are remitted to the
state and reduce our liability accordingly. Any amounts remitted to
states under escheat laws reduce our deferred revenue liability and have no
effect on revenue or expense while any amounts that we are permitted to retain
by state escheat laws for administrative costs are recorded as
revenue. Changes in redemption behavior or management's judgments
regarding redemption trends in the future may produce materially different
amounts of deferred revenue to be reported.
We have
not made any material changes in the methodology used to record the deferred
revenue liability for unredeemed gift cards and certificates during the first
six months of 2009 and do not believe there will be material changes in the
future estimates or assumptions used to record this
liability. However, if actual results are not consistent with our
estimates or assumptions, we may be exposed to losses or gains that could be
material.
Legal
Proceedings
We are
parties to various legal and regulatory proceedings and claims incidental to our
business. In the opinion of management, however, based upon
information currently available, the ultimate liability with respect to these
actions will not materially affect our consolidated results of operations or
financial position. We review outstanding claims and proceedings
internally and with external counsel as necessary to assess probability of loss
and for the ability to estimate loss. These assessments are
re-evaluated each quarter or as new information becomes available to determine
whether a reserve should be established or if any existing reserve should be
adjusted. The actual cost of resolving a claim or proceeding
ultimately may be substantially different than the amount of the recorded
reserve. In addition, because it is not permissible under GAAP to
establish a litigation reserve until the loss is both probable and estimable, in
some cases there may be insufficient time to establish a reserve prior to the
actual incurrence of the loss (upon verdict and judgment at trial, for example,
or in the case of a quickly negotiated settlement).
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Part II,
Item 7A of the 2008 Form 10-K is incorporated in this item of this Quarterly
Report on Form 10-Q by this reference. There have been no material
changes in our quantitative and qualitative market risks since August 1,
2008.
Item
4. Controls and Procedures
Our
management, with the participation of our principal executive and financial
officers, including the Chief Executive Officer and the Interim Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934 (the “Exchange Act”)). Based upon this evaluation, the Chief
Executive Officer and the Interim Chief Financial Officer concluded that as of
January 30, 2009, our disclosure controls and procedures were effective for the
purposes set forth in the definition thereof in Exchange Act Rule
13a-15(e).
There
have been no changes (including corrective actions with regard to significant
deficiencies and material weaknesses) during the quarter ended January 30, 2009
in our internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)) that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION
There
have been no material changes in the risk factors previously disclosed in “Item
1A. Risk Factors” of our 2008 Form 10-K.
Item 4. |
Submission of Matters to a Vote of Security
Holders |
Part II,
Item 4 of the Company’s Quarterly Report on Form 10-Q for the Quarterly Period
ended October 31, 2008 (filed with the SEC on December 9, 2008) is incorporated
herein by this reference.
Item 6. |
Exhibits |
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See
Exhibit Index immediately following the signature page
hereto.
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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CRACKER BARREL OLD COUNTRY
STORE, INC. |
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Date: 3/10/09
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By:
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/s/ N.B.
Forrest Shoaf |
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N.B.
Forrest Shoaf, Senior Vice President, Secretary, |
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Chief
Legal Officer and Interim Chief Financial Officer |
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Date: 3/10/09
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By:
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/s/ Patrick
A. Scruggs |
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Patrick
A. Scruggs, Vice President, Accounting and Tax |
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and Chief Accounting Officer |
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EXHIBIT
INDEX
Exhibit
No. Description
3(I),
4
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Articles
of Incorporation (as amended to date) (incorporated by reference to
Exhibit 3(I), 4 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended October 31, 2008 and filed with the SEC on December 9,
2008)
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10.1
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The
Company's Amended and Restated Stock Option Plan (as amended to
date)
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10.2
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The
Company’s 2002 Omnibus Incentive Compensation Plan (as amended to
date)
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31
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Rule
13a-14(a)/15d-14(a) Certifications
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32
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Section
1350 Certifications
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31