cbrl10q050109.htm
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 May 1, 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes o
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.
22,612,937
Shares of Common Stock
Outstanding
as of May 29, 2009
CRACKER
BARREL OLD COUNTRY STORE, INC.
FORM
10-Q
For
the Quarter Ended May 1, 2009
INDEX
PART
I. FINANCIAL INFORMATION
|
Page
|
|
|
|
Item
1
|
|
|
· Condensed
Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
a) Condensed
Consolidated Balance Sheet as of May 1, 2009 and August 1,
2008
|
3
|
|
|
|
b) Condensed
Consolidated Statement of Income for the Quarters and Nine Months Ended
May 1, 2009 and May 2, 2008
|
4
|
|
|
|
c) Condensed
Consolidated Statement of Cash Flows for the Nine Months Ended May 1, 2009
and May 2, 2008
|
5
|
|
|
|
d) Notes
to Condensed Consolidated Financial Statements
|
6
|
|
|
|
|
Item
2
|
|
|
· Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
|
|
|
Item
3
|
|
|
· Quantitative
and Qualitative Disclosures About Market Risk
|
28
|
|
|
|
Item
4
|
|
|
· Controls
and Procedures
|
28
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1A
|
|
|
· Risk
Factors
|
28
|
|
|
|
Item
2
|
|
|
· Unregistered
Sales of Equity Securities and Use of Proceeds
|
28
|
|
|
|
|
Item
6
|
|
|
· Exhibits
|
28
|
|
|
SIGNATURES
|
29
|
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
CRACKER
BARREL OLD COUNTRY STORE, INC.
CONDENSED
CONSOLIDATED BALANCE SHEET
(In
thousands, except share data)
(Unaudited)
|
|
May
1,
|
|
|
August
1,
|
|
|
|
2009
|
|
|
|
2008*
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
35,932 |
|
|
$ |
11,978 |
|
Property
held for sale
|
|
|
5,543 |
|
|
|
3,248 |
|
Accounts
receivable
|
|
|
13,600 |
|
|
|
13,484 |
|
Income
taxes receivable
|
|
|
229 |
|
|
|
6,919 |
|
Inventories
|
|
|
133,346 |
|
|
|
155,954 |
|
Prepaid
expenses and other current assets
|
|
|
11,338 |
|
|
|
10,981 |
|
Deferred
income taxes
|
|
|
25,142 |
|
|
|
18,075 |
|
Total
current assets
|
|
|
225,130 |
|
|
|
220,639 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
1,609,021 |
|
|
|
1,571,816 |
|
Less:
Accumulated depreciation and amortization of capital
leases
|
|
|
563,073 |
|
|
|
526,576 |
|
Property
and equipment – net
|
|
|
1,045,948 |
|
|
|
1,045,240 |
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
40,596 |
|
|
|
47,824 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,311,674 |
|
|
$ |
1,313,703 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
61,999 |
|
|
$ |
93,112 |
|
Current
maturities of long-term debt and other long-term
obligations
|
|
|
8,812 |
|
|
|
8,714 |
|
Accrued
interest expense
|
|
|
10,841 |
|
|
|
12,485 |
|
Other
current liabilities
|
|
|
144,869 |
|
|
|
150,408 |
|
Total
current liabilities
|
|
|
226,521 |
|
|
|
264,719 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
769,709 |
|
|
|
779,061 |
|
Capital
lease obligations
|
|
|
64 |
|
|
|
77 |
|
Interest
rate swap liability
|
|
|
65,123 |
|
|
|
39,618 |
|
Other
long-term obligations
|
|
|
82,919 |
|
|
|
83,147 |
|
Deferred
income taxes
|
|
|
52,386 |
|
|
|
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;
|
|
|
|
|
|
|
|
|
22,605,346
shares issued and outstanding at May 1, 2009,
|
|
|
|
|
|
|
|
|
and
22,325,341 shares issued and outstanding at August 1, 2008
|
|
|
226 |
|
|
|
223 |
|
Additional
paid-in capital
|
|
|
11,694 |
|
|
|
731 |
|
Accumulated
other comprehensive loss
|
|
|
(45,977 |
) |
|
|
(27,653 |
) |
Retained
earnings
|
|
|
149,009 |
|
|
|
119,450 |
|
Total
shareholders’ equity
|
|
|
114,952 |
|
|
|
92,751 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
1,311,674 |
|
|
$ |
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)
(Unaudited)
|
|
Quarter
Ended
|
|
|
Nine
Months Ended
|
|
|
|
May
1,
|
|
|
May
2,
|
|
|
May
1,
|
|
|
May
2,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
567,568 |
|
|
$ |
567,138 |
|
|
$ |
1,771,682 |
|
|
$ |
1,782,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
176,327 |
|
|
|
180,588 |
|
|
|
580,177 |
|
|
|
584,551 |
|
Gross
profit
|
|
|
391,241 |
|
|
|
386,550 |
|
|
|
1,191,505 |
|
|
|
1,198,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
and other related expenses
|
|
|
230,014 |
|
|
|
226,851 |
|
|
|
686,565 |
|
|
|
681,652 |
|
Impairment
and store closing charges
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
877 |
|
Other
store operating expenses
|
|
|
104,235 |
|
|
|
103,157 |
|
|
|
315,941 |
|
|
|
314,850 |
|
Store
operating income
|
|
|
56,992 |
|
|
|
56,542 |
|
|
|
188,999 |
|
|
|
200,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
27,979 |
|
|
|
28,800 |
|
|
|
88,155 |
|
|
|
91,641 |
|
Operating
income
|
|
|
29,013 |
|
|
|
27,742 |
|
|
|
100,844 |
|
|
|
109,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
12,737 |
|
|
|
14,215 |
|
|
|
40,051 |
|
|
|
43,578 |
|
Interest
income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
185 |
|
Income
before income taxes
|
|
|
16,276 |
|
|
|
13,527 |
|
|
|
60,793 |
|
|
|
65,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
4,328 |
|
|
|
3,048 |
|
|
|
17,651 |
|
|
|
21,096 |
|
Income
from continuing operations
|
|
|
11,948 |
|
|
|
10,479 |
|
|
|
43,142 |
|
|
|
44,696 |
|
Income
(loss) from discontinued operations, net of
tax
|
|
|
4 |
|
|
|
(35 |
) |
|
|
4 |
|
|
|
(146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
11,952 |
|
|
$ |
10,444 |
|
|
$ |
43,146 |
|
|
$ |
44,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.53 |
|
|
$ |
0.47 |
|
|
$ |
1.93 |
|
|
$ |
1.94 |
|
Income
(loss) from discontinued operations, net
of
tax
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
Net
income per share
|
|
$ |
0.53 |
|
|
$ |
0.47 |
|
|
$ |
1.93 |
|
|
$ |
1.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.52 |
|
|
$ |
0.46 |
|
|
$ |
1.90 |
|
|
$ |
1.88 |
|
Income
(loss) from discontinued operations, net
of
tax
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
Net
income per share
|
|
$ |
0.52 |
|
|
$ |
0.46 |
|
|
$ |
1.90 |
|
|
$ |
1.88 |
|
Weighted
average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,467,468 |
|
|
|
22,140,557 |
|
|
|
22,402,344 |
|
|
|
22,993,121 |
|
Diluted
|
|
|
22,830,712 |
|
|
|
22,812,380 |
|
|
|
22,698,074 |
|
|
|
23,671,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$ |
0.20 |
|
|
$ |
0.18 |
|
|
$ |
0.60 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes
to unaudited condensed consolidated financial statements.
CRACKER
BARREL OLD COUNTRY STORE, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited
and in thousands)
|
|
Nine
Months Ended
|
|
|
|
May
1,
|
|
|
May
2,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
43,146 |
|
|
$ |
44,550 |
|
(Income)
loss from discontinued operations, net of tax
|
|
|
(4 |
) |
|
|
146 |
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
by
operating activities of continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
44,060 |
|
|
|
42,666 |
|
Loss
on disposition of property and equipment
|
|
|
2,285 |
|
|
|
101 |
|
Impairment
|
|
|
-- |
|
|
|
532 |
|
Share-based
compensation
|
|
|
6,330 |
|
|
|
6,626 |
|
Excess
tax benefit from share-based compensation
|
|
|
(830 |
) |
|
|
(41 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
712 |
|
|
|
(377 |
) |
Income
taxes receivable
|
|
|
6,690 |
|
|
|
(8,771 |
) |
Inventories
|
|
|
22,608 |
|
|
|
11,096 |
|
Prepaid
expenses and other current assets
|
|
|
(357 |
) |
|
|
957 |
|
Accounts
payable
|
|
|
(31,146 |
) |
|
|
(23,603 |
) |
Accrued
interest expense
|
|
|
(1,644 |
) |
|
|
12,776 |
|
Other
current liabilities
|
|
|
(6,032 |
) |
|
|
(7,403 |
) |
Other
long-term assets and liabilities
|
|
|
4,279 |
|
|
|
4,582 |
|
Net
cash provided by operating activities of continuing
operations
|
|
|
90,097 |
|
|
|
83,837 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(49,862 |
) |
|
|
(60,834 |
) |
Proceeds
from sale of property and equipment
|
|
|
1,590 |
|
|
|
4,878 |
|
Proceeds
from insurance recoveries of property and equipment
|
|
|
122 |
|
|
|
135 |
|
Net
cash used in investing activities of continuing operations
|
|
|
(48,150 |
) |
|
|
(55,821 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
620,000 |
|
|
|
577,400 |
|
Principal
payments under long-term debt and other long-term
obligations
|
|
|
(629,267 |
) |
|
|
(545,661 |
) |
Proceeds
from exercise of share-based compensation awards
|
|
|
3,806 |
|
|
|
2,218 |
|
Excess
tax benefit from share-based compensation
|
|
|
830 |
|
|
|
41 |
|
Purchases
and retirement of common stock
|
|
|
-- |
|
|
|
(52,380 |
) |
Deferred
financing costs
|
|
|
(274 |
) |
|
|
-- |
|
Dividends
on common stock
|
|
|
(13,094 |
) |
|
|
(11,756 |
) |
Net
cash used in financing activities of continuing operations
|
|
|
(17,999 |
) |
|
|
(30,138 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from discontinued operations:
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities of discontinued
operations
|
|
|
6 |
|
|
|
(225 |
) |
Net
cash provided by (used in) discontinued operations
|
|
|
6 |
|
|
|
(225 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
23,954 |
|
|
|
(2,347 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
11,978 |
|
|
|
14,248 |
|
Cash
and cash equivalents, end of period
|
|
$ |
35,932 |
|
|
$ |
11,901 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the nine months for:
|
|
|
|
|
|
|
|
|
Interest,
excluding interest rate swap payments, net of amounts
capitalized
|
|
$ |
27,312 |
|
|
$ |
27,598 |
|
Interest
rate swap
|
|
$ |
12,540 |
|
|
$ |
1,495 |
|
Income
taxes
|
|
$ |
12,196 |
|
|
$ |
26,331 |
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non-cash financing activity:
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate swap
|
|
$ |
(25,505 |
) |
|
$ |
(33,634 |
) |
Change
in deferred tax asset for interest rate swap
|
|
$ |
7,181 |
|
|
$ |
10,070 |
|
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 May 1, 2009 and August 1, 2008 and the
related condensed consolidated statements of income and cash flows for the
quarters and/or nine-month periods ended May 1, 2009 and May 2, 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 nine-month period ended May 1, 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 (“AOCL”), 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 (“FSP”) FAS No. 157-2,
“Effective Date of FASB Statement No. 157” (“FSP FAS 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
FAS No. 157-2. The Company is currently evaluating but has not yet
determined the impact of FSP FAS No. 157-2 for these assets and liabilities upon
adoption in the first quarter of 2010.
In April
2009, the FASB issued FSP FAS No. 107-1 and APB No. 28-1, “Interim Disclosures
about Fair Value of Financial Instruments” (“FSP FAS No. 107-1 and APB No.
28-1”), which amends SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments” to require disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. It also amends Accounting Principles Board
(“APB”) Opinion No. 28-1, “Interim Financial Reporting” to require those
disclosures in summarized financial information at interim reporting
periods. FSP FAS No. 107-1 and APB No. 28-1 is effective for interim
reporting periods ending after June 15, 2009. The Company does not
expect that the adoption of FSP FAS No. 107-1 and APB No. 28-1 in the fourth
quarter of 2009 will have a significant impact on its consolidated financial
statements.
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 adopted SFAS
No. 161 on a prospective basis in the third quarter of 2009; accordingly,
disclosures related to interim periods prior to the date of adoption have not
been presented. The adoption of SFAS No. 161 did not have a
significant impact on the Company’s consolidated financial
statements. See Note 8 for the Company’s derivative
disclosures.
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.
Subsequent
Events
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), which
establishes the requirements for evaluating, recording and disclosing events or
transactions occurring after the balance sheet date in an entity’s financial
statements. SFAS No. 165 is effective for interim and annual
financial periods ending after June 15, 2009. The Company does not
expect that the adoption of SFAS No. 165 in the fourth quarter of 2009 will have
a significant impact on its 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 May 1, 2009 were as
follows:
|
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Fair
Value as
of
May 1,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents*
|
|
$ |
24,146 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
24,146 |
|
Deferred
compensation plan assets**
|
|
|
20,506 |
|
|
|
-- |
|
|
|
-- |
|
|
|
20,506 |
|
Total
assets at fair value
|
|
$ |
44,652 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
44,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap liability (Note 8)
|
|
$ |
-- |
|
|
$ |
65,123 |
|
|
$ |
-- |
|
|
$ |
65,123 |
|
Total
liabilities at fair value
|
|
$ |
-- |
|
|
$ |
65,123 |
|
|
$ |
-- |
|
|
$ |
65,123 |
|
**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 May 1,
2009, property held for sale was $5,543 and consisted of office space 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:
|
|
May
1,
|
|
|
August
1,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
98,421 |
|
|
$ |
124,572 |
|
Restaurant
|
|
|
20,169 |
|
|
|
17,439 |
|
Supplies
|
|
|
14,756 |
|
|
|
13,943 |
|
Total
|
|
$ |
133,346 |
|
|
$ |
155,954 |
|
Long-term
debt consisted of the following at:
|
|
May
1,
2009
|
|
|
August
1,
2008
|
|
|
|
|
|
|
|
|
Term
Loan B
|
|
|
|
|
|
|
payable
$1,792 per quarter with the remainder due
on
April 27, 2013
|
|
$ |
628,080 |
|
|
$ |
633,456 |
|
|
|
|
|
|
|
|
|
|
Delayed-Draw
Term Loan Facility
payable
$383 per quarter with the remainder due
on
April 27, 2013
|
|
|
149,955 |
|
|
|
151,103 |
|
Revolving
Credit Facility
payable
on or before April 27, 2011
|
|
|
-- |
|
|
|
3,200 |
|
|
|
|
|
|
|
|
|
|
Note
payable
|
|
|
468 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
778,503 |
|
|
|
787,759 |
|
Current
maturities
|
|
|
(8,794 |
) |
|
|
(8,698 |
) |
Long-term
debt
|
|
$ |
769,709 |
|
|
$ |
779,061 |
|
The
Company has a credit facility (the “Credit Facility”) that consists of term
loans (aggregate outstanding at May 1, 2009 was $778,035) 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 May 1,
2009, $625,000 of the Company’s term loans was swapped at 7.07% and the weighted
average interest rate on the remaining $153,035 was 1.94%. At May 1,
2009, the Company had outstanding $33,892 of standby letters of credit, which
reduce the Company’s availability under the Revolving Credit Facility (see Note
17). At May 1, 2009, the Company had $216,108 available under the
Revolving Credit Facility.
The
Credit Facility contains customary financial covenants, which are specified in
the agreement and include maintenance of a maximum consolidated total leverage
ratio and a minimum interest coverage ratio. At May 1, 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 uses derivative instruments to mitigate its interest rate
risk. The Company does not hold or use derivative instruments for
trading purposes. The Company also does not have any derivatives not
designated as hedging instruments under SFAS No. 133 and has not designated any
non-derivatives as hedging instruments.
The
Company has interest rate risk relative to its outstanding borrowings under its
Credit Facility (see Note 7). Loans under the Credit Facility bear
interest, at the Company’s election, either at the prime rate or LIBOR plus a
percentage point spread based on certain specified financial
ratios.
The
Company’s policy has been to manage interest cost using a mix of fixed and
variable rate debt (see Note 7). To manage this risk in a cost
efficient manner, the Company entered into an interest rate swap on May 4, 2006
in which it agreed to exchange with a counterparty, at specified intervals
effective August 3, 2006, the difference between fixed and variable interest
amounts calculated by reference to an agreed-upon notional principal
amount. The interest rate swap was accounted for as a cash flow hedge
under SFAS No. 133. The swapped portion of the Company’s outstanding
debt is fixed at a rate of 5.57% plus the Company’s credit spread, or 7.07%
based on the Company’s credit spread at May 1, 2009 over the 7-year life of the
interest rate swap.
The
swapped portion of the outstanding debt or notional amount of the interest rate
swap is as follows:
From
May 6, 2008 to May 4, 2009
|
$625,000
|
From
May 5, 2009 to May 3, 2010
|
600,000
|
From
May 4, 2010 to May 2, 2011
|
575,000
|
From
May 3, 2011 to May 2, 2012
|
550,000
|
From
May 3, 2012 to May 3, 2013
|
525,000
|
At May 1,
2009, the estimated fair value of the Company’s derivative instrument was as
follows:
|
May
1, 2009
|
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Interest
rate swap
|
Interest
rate swap liability
|
|
$ |
65,123 |
|
Total
|
|
|
$ |
65,123 |
|
The
estimated fair value of the interest rate swap liability at May 1, 2009
increased $25,505 from its estimated fair value of $39,618 at August 1,
2008. In accordance with the provisions of SFAS No. 157, the
estimated fair value of the Company’s interest rate swap liability at May 1,
2009 incorporates the Company’s own non-performance risk. The
adjustment related to non-performance risk at May 1, 2009 represents an
additional reduction of $2,469 in the fair value of the interest rate swap
liability as the result of adopting SFAS No. 157 in the first quarter of 2009
(see Note 3). The offset to the interest rate swap liability is
recorded in AOCL, net of the deferred tax asset, and will be reclassified into
earnings over the term of the underlying debt.
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 $12,540, $1,495 and $5,578, respectively, for the first nine months of
2009, the first nine months of 2008 and for the full year 2008. As of
May 1, 2009, the estimated pre-tax portion of AOCL that is expected to be
reclassified into earnings over the next twelve months is $26,912.
The
following table summarizes the pre-tax effects of the Company’s derivative
instrument on income and AOCL for the quarter and nine-month period ended May 1,
2009:
|
|
Amount
of Loss Recognized in
AOCL
on Derivative
(Effective
Portion)
|
|
Location
of Loss
Reclassified
from
AOCL
into Income
(Effective
Portion)
|
|
Amount
of Loss Reclassified from AOCL into Income
(Effective
Portion)
|
|
|
|
Quarter
Ended
|
|
|
Nine
Months Ended
|
|
|
|
Quarter
Ended
|
|
|
Nine
Months Ended
|
|
|
|
May
1, 2009
|
|
|
May
1, 2009
|
|
|
|
May
1, 2009
|
|
|
May
1, 2009
|
|
Cash
flow hedge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
|
|
$ |
(1,797 |
) |
|
$ |
(25,505 |
) |
Interest
expense
|
|
$ |
3,797 |
|
|
$ |
12,540 |
|
No
ineffectiveness has been recorded in the first nine months of
2009.
|
During
the nine-month period ended May 1, 2009, the Company received proceeds of $3,806
from the exercise of share-based compensation awards and the corresponding
issuance of 280,005 shares of its common stock. During the nine-month
period ended May 1, 2009, the Company did not make any share
repurchases.
During
the nine-month period ended May 1, 2009, the Company paid dividends of $0.58 per
common share. During the third quarter of 2009, the Company also
declared an additional dividend of $0.20 per common share that was paid on May
5, 2009 and is recorded in other current liabilities in the accompanying
condensed consolidated balance sheet. On May 29, 2009, the Company’s
Board of Directors declared a regular dividend of $0.20 per share payable on
August 5, 2009 to shareholders of record on July 17, 2009.
During
the nine-month period ended May 1, 2009, the unrealized loss, net of tax, on the
Company’s interest rate swap increased by $18,324 to $45,977 and is recorded in
AOCL (see Notes 3, 4, 8 and 10).
During
the nine-month period ended May 1, 2009, total share-based compensation was
$6,330 and the excess tax benefit from share-based compensation was
$830. During the nine-month period ended May 2, 2008, total
share-based compensation was $6,626 and the excess tax benefit from share-based
compensation was $41.
Comprehensive
income consisted of the following at:
|
|
Quarter
Ended
|
|
|
Nine
Months Ended
|
|
|
|
May
1,
2009
|
|
|
May
2,
2008
|
|
|
May
1,
2009
|
|
|
May
2,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
11,952 |
|
|
$ |
10,444 |
|
|
$ |
43,146 |
|
|
$ |
44,550 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate
swap,
net of tax
|
|
|
(1,459 |
) |
|
|
7,613 |
|
|
|
(18,324 |
) |
|
|
(23,564 |
) |
Total
comprehensive income
|
|
$ |
10,493 |
|
|
$ |
18,057 |
|
|
$ |
24,822 |
|
|
$ |
20,986 |
|
For the
quarters ended May 1, 2009 and May 2, 2008, the change in fair value of the
Company’s interest rate swap is net of a tax benefit of $338 and a tax provision
of $5,654, respectively. For the nine-month periods
ended May
1, 2009 and May 2, 2008, the change in fair value of the Company’s interest rate
swap is net of a tax benefit of $7,181 and $10,070, respectively.
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.
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
|
|
|
Nine
Months Ended
|
|
|
|
May
1,
2009
|
|
|
May
2,
2008
|
|
|
May
1,
2009
|
|
|
May
2,
2008
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
|
|
$ |
466,562 |
|
|
$ |
460,406 |
|
|
$ |
1,391,448 |
|
|
$ |
1,388,264 |
|
Retail
|
|
|
101,006 |
|
|
|
106,732 |
|
|
|
380,234 |
|
|
|
394,492 |
|
Total
revenue
|
|
$ |
567,568 |
|
|
$ |
567,138 |
|
|
$ |
1,771,682 |
|
|
$ |
1,782,756 |
|
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 nine months ended May 1, 2009, the Company recorded no impairment
charges. During the nine months ended May 2, 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 nine-month period ended
May 1, 2009, share-based compensation expense totaled $859 and $2,811,
respectively, for stock options and $1,727 and $3,519, respectively, for
nonvested stock. For the quarter and nine-month period ended May 2,
2008, share-based compensation expense was $1,116 and $3,542, respectively, for
stock options and $530 and $3,084, respectively, for nonvested
stock.
During
the first nine months of 2009, there were no forfeitures of equity awards and,
therefore, no reversals. During the third quarter of 2008 and first
nine months of 2008, the Company reversed approximately $172 and $467,
respectively, 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
nine-month period ended May 2, 2008, the Company reported in discontinued
operations certain expenses related to the divestiture of Logan’s, which
consisted of the following:
|
|
Quarter
Ended
|
|
|
Nine
Months Ended
|
|
|
|
May
1,
|
|
|
May
2,
|
|
|
May
1,
|
|
|
May
2,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Income
(loss) before tax benefit from
discontinued
operations
|
|
$ |
-- |
|
|
$ |
(55 |
) |
|
$ |
-- |
|
|
$ |
(225 |
) |
Tax
benefit
|
|
|
-- |
|
|
|
20 |
|
|
|
-- |
|
|
|
79 |
|
Income
(loss) from discontinued operations,
net
of tax, before gain on sale of Logan’s
|
|
|
-- |
|
|
|
(35 |
) |
|
|
-- |
|
|
|
(146 |
) |
Gain
on sale of Logan’s, net of tax of $2
|
|
|
4 |
|
|
|
-- |
|
|
|
4 |
|
|
|
-- |
|
Income
(loss) from discontinued operations,
net
of tax
|
|
$ |
4 |
|
|
$ |
(35 |
) |
|
$ |
4 |
|
|
$ |
(146 |
) |
In the
third quarter of 2009, the Company recorded an adjustment in accordance with the
Logan’s sale agreement related to taxes, resulting in additional proceeds from
the sale of Logan’s of $6.
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
|
|
|
Nine
Months Ended
|
|
|
|
May
1,
|
|
|
May
2,
|
|
|
May
1,
|
|
|
May
2,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Income
from continuing operations per share
numerator
|
|
$ |
11,948 |
|
|
$ |
10,479 |
|
|
$ |
43,142 |
|
|
$ |
44,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations,
net
of tax, per share numerator
|
|
$ |
4 |
|
|
$ |
(35 |
) |
|
$ |
4 |
|
|
$ |
(146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations, income
(loss)
from discontinued operations, net of
tax,
and net income per share denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
22,467,468 |
|
|
|
22,140,557 |
|
|
|
22,402,344 |
|
|
|
22,993,121 |
|
Add
potential dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and nonvested stock and
stock
awards
|
|
|
363,244 |
|
|
|
671,823 |
|
|
|
295,730 |
|
|
|
678,782 |
|
Diluted
weighted average shares
|
|
|
22,830,712 |
|
|
|
22,812,380 |
|
|
|
22,698,074 |
|
|
|
23,671,903 |
|
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 May 1, 2009, the Company had
$33,892 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 May 1, 2009, the
lease has a remaining life of approximately 4.4 years with annual lease payments
of approximately $361 for a total guarantee of $1,593. 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 May 1, 2009, the operating leases have
remaining lives of 2.7 and 10.9 years with annual payments of approximately $94
and $98, respectively, for a total guarantee of $1,465. 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 balance sheet 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 May 1, 2009, the Company has
recorded a liability of $67 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® (“Cracker
Barrel”) restaurant and retail concept. At May 1, 2009, we operated
588 Cracker Barrel units in 41 states. 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 our MD&A
are shown in thousands, except per share amounts and certain statistical
information (e.g., number of stores). References to years in MD&A
are to our fiscal year unless otherwise noted.
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) 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 any 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 23-27 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.
Results
of Operations
The
following table highlights operating results by percentage relationships
to total revenue for the quarter and nine-month period ended May 1, 2009
as compared to the same periods in the prior
year:
|
|
|
Quarter
Ended
|
|
|
Nine
Months Ended
|
|
|
|
May
1,
|
|
|
May
2,
|
|
|
May
1,
|
|
|
May
2,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
31.1 |
|
|
|
31.8 |
|
|
|
32.7 |
|
|
|
32.8 |
|
Gross
profit
|
|
|
68.9 |
|
|
|
68.2 |
|
|
|
67.3 |
|
|
|
67.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
and other related expenses
|
|
|
40.5 |
|
|
|
40.0 |
|
|
|
38.8 |
|
|
|
38.2 |
|
Impairment
and store closing charges
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Other
store operating expenses
|
|
|
18.4 |
|
|
|
18.2 |
|
|
|
17.8 |
|
|
|
17.7 |
|
Store
operating income
|
|
|
10.0 |
|
|
|
10.0 |
|
|
|
10.7 |
|
|
|
11.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
4.9 |
|
|
|
5.1 |
|
|
|
5.0 |
|
|
|
5.2 |
|
Operating
income
|
|
|
5.1 |
|
|
|
4.9 |
|
|
|
5.7 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
2.2 |
|
|
|
2.5 |
|
|
|
2.3 |
|
|
|
2.4 |
|
Interest
income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Income
before income taxes
|
|
|
2.9 |
|
|
|
2.4 |
|
|
|
3.4 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
0.8 |
|
|
|
0.6 |
|
|
|
1.0 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
2.1 |
|
|
|
1.8 |
|
|
|
2.4 |
|
|
|
2.5 |
|
Income
(loss) from discontinued operations,
net
of tax
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
2.1 |
% |
|
|
1.8 |
% |
|
|
2.4 |
% |
|
|
2.5 |
% |
The following table highlights the components of total revenue by
percentage relationships to total revenue for the quarter and nine-month
period ended May 1, 2009 as compared to the same periods in the prior
year:
|
|
|
Quarter
Ended
|
|
|
Nine
Months Ended
|
|
|
|
May
1,
|
|
|
May
2,
|
|
|
May
1,
|
|
|
May
2,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
|
|
|
82.2 |
% |
|
|
81.2 |
% |
|
|
78.5 |
% |
|
|
77.9 |
% |
Retail
|
|
|
17.8 |
|
|
|
18.8 |
|
|
|
21.5 |
|
|
|
22.1 |
|
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 nine-month periods ended May 1, 2009 and May 2, 2008,
respectively:
|
Quarter
Ended
|
|
Nine
Months Ended
|
|
|
May
1,
|
|
May
2,
|
|
May
1,
|
|
May
2,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Open
at beginning of period
|
585
|
|
570
|
|
577
|
|
562
|
|
Opened
during period
|
3
|
|
6
|
|
11
|
|
16
|
|
Closed
during period
|
--
|
|
--
|
|
--
|
|
(2
|
)
|
Open
at end of period
|
588
|
|
576
|
|
588
|
|
576
|
|
During
the nine months ended May 2, 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 nine-month period ended May
1, 2009 as compared to the same periods in the prior year:
|
Quarter
Ended
|
|
Nine
Months Ended
|
|
May
1,
|
|
May
2,
|
|
May
1,
|
|
May
2,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Revenue:
|
|
|
|
|
|
|
|
Restaurant
|
$793.9
|
|
$803.9
|
|
$2,385.4
|
|
$2,442.6
|
Retail
|
171.9
|
|
186.4
|
|
651.9
|
|
694.1
|
Total
revenue
|
$965.8
|
|
$990.3
|
|
$3,037.3
|
|
$3,136.7
|
Quarterly Pre-Tax
Results
Total
Revenue
Total
revenue for the third quarter of 2009 increased 0.1% compared to the prior year
third quarter. For the third quarter, comparable store restaurant
sales decreased 0.9% and comparable store retail sales decreased 7.4% resulting
in a combined comparable store sales (total revenue) decrease of
2.1%. The comparable store restaurant sales decrease consisted of a
2.8% average check increase for the quarter (including a 3.4% average menu price
increase) and a 3.7% guest traffic decrease. The comparable store
retail sales decrease was due to a decline in guest traffic and lower guest
spending on retail products. We continue to experience the effects of
pressures on consumer discretionary income in our guest traffic and
sales. Sales from newly opened stores offset the decrease in
comparable store restaurant and retail sales.
Gross
Profit
Gross
profit as a percentage of total revenue for the third quarter of 2009 increased
to 68.9% compared to 68.2% in the third quarter of the prior
year. The increase was due in equal parts to food inflation, which
was lower than our menu pricing referenced above, the shift in a retail porch
sale from the third quarter to the fourth quarter this year versus the third
quarter in the prior year and a shift in the mix versus prior year from retail
sales toward restaurant sales, the latter of which typically have a lower cost
of sales.
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 40.5% in the third quarter of 2009 from
40.0% in the prior year. This increase resulted primarily from a 0.8%
increase in healthcare costs as a
percentage
of total revenue partially offset by a 0.2% decrease in pre-opening labor as a
percentage of total revenue as compared to the prior year. The
increase in healthcare costs was due to higher enrollment, higher utilization
and termination costs associated with the calendar 2008 plan. Lower
pre-opening labor was due to fewer store openings compared to the prior
year.
Interest
Expense
Interest
expense as a percentage of total revenue decreased to 2.2% in the third quarter
of 2009 as compared to 2.5% in the third quarter of last year primarily due to
lower average interest rates.
Year-to-Date Pre-Tax
Results
Total
Revenue
Total
revenue for the nine-month period ended May 1, 2009 decreased 0.6% compared to
the nine-month period ended May 2, 2008. For the nine-month period
ended May 1, 2009, comparable store restaurant sales decreased 1.8% and
comparable store retail sales decreased 5.6% resulting in a combined comparable
store sales (total revenue) decrease of 2.7%. The comparable store
restaurant sales decrease consisted of a 3.1% average check increase for the
nine months (including a 3.4% average menu price increase) and a 4.9% guest
traffic decrease. The comparable store retail sales decrease was due
to a decline in guest traffic. 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.
Labor
and Other Related Expenses
Labor and
other related expenses as a percentage of total revenue increased to 38.8% in
the nine-month period ended May 1, 2009 as compared to 38.2% in the nine-month
period ended May 2, 2008. This increase resulted primarily from
increases of 0.3% and 0.2%, respectively, in healthcare costs and in store
management compensation as a percentage of total revenue compared to the prior
year. The increase in healthcare costs was due to higher enrollment,
higher utilization and termination costs associated with the calendar 2008
plan. The increase in
store management compensation was primarily due to higher staffing
levels.
Impairment
and Store Closing Charges
We did
not record any impairment or store closing charges in the first nine months of
2009. During the
first nine 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).
Provision for Income
Taxes
The
provision for income taxes as a percent of pre-tax income was 26.6% in the third
quarter of 2009 and 29.0% in the first nine months of 2009. The
provision for income taxes as a percent of pre-tax income was 22.5% in the third
quarter of 2008 and 32.1% in the first nine months of 2008. The
decrease in the effective tax rate from the first nine months of 2008 to the
first nine 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.
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
nine months of 2009.
We
believe that cash at May 1, 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.
Cash
Generated From Operations
Our
operating activities from continuing operations provided net cash of $90,097 for
the nine-month period ended May 1, 2009, which represented an increase from the
$83,837 provided during the same period a year ago. This increase
reflected the change in retail inventories and the timing of payments for income
taxes, interest and accounts payable.
Borrowing
Capacity and Debt Covenants
At May 1,
2009, although we did not have any outstanding borrowings under the Revolving
Credit Facility, we had $33,892 of standby letters of credit related to securing
reserved claims under workers' compensation insurance which reduce our
availability under the Revolving Credit Facility. At May 1, 2009, we
had $216,108 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 May 1, 2009, our Term Loan B balance was $628,080 and our
Delayed-Draw Term Loan balance was $149,955. 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
|
4.00
|
From
May 2, 2009 thereafter
|
3.75
|
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
|
3.50
|
From
May 2, 2009 through April 30, 2010
|
3.75
|
From
April 31, 2010 thereafter
|
4.00
|
At May 1,
2009, our consolidated total leverage ratio and consolidated interest coverage
ratio were 3.66 and 6.05, respectively.
We
currently expect to conclude sale-leaseback transactions involving 15 of our
stores and our retail distribution center before the end of
2009. Total net proceeds from the transactions, which are presently
expected to be approximately $53,000 to $54,000, together with excess cash flow
from operations, will be used to reduce borrowings outstanding under the Credit
Facility.
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 nine-month period ended May 1, 2009, we did
not make any share repurchases owing to a suspension of our share repurchase
plans during the current economic climate.
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 nine-month period ended May 1, 2009, we paid dividends of $0.58 per common
share. During the third quarter of 2009, we also declared an
additional dividend of $0.20 per common share that was paid on May 5,
2009. On May 29, 2009, our Board of Directors declared a regular
dividend of $0.20 per share payable on August 5, 2009 to shareholders of record
on July 17, 2009.
During
the nine-month period ended May 1, 2009, we received proceeds of $3,806 from the
exercise of share-based compensation awards and the corresponding issuance of
280,005 shares of our common stock.
Working
Capital
We had
negative working capital of $1,391 at May 1, 2009 versus negative working
capital of $44,080 at August 1, 2008. The change in working capital
compared with August 1, 2008 reflected more cash and cash equivalents at May 1,
2009 and the timing of payments for accounts payable partially offset by lower
retail inventories. 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 $49,862 for the
nine-month period ended May 1, 2009 as compared to $60,834 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 nine months of 2008 to the first nine 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. This estimate includes
certain costs related to the acquisition of sites and construction of 11 new
stores that have opened during 2009, as well as for acquisition and construction
costs for seven 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 $38 and $332, respectively,
for the quarter and nine-month period ended May 1, 2009, as compared to $113 and
$526, respectively, for the quarter and nine-month period ended May 2,
2008.
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.
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 FAS No. 157-2, “Effective
Date of FASB Statement No. 157” (“FSP FAS 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 FAS No. 157-2. We
are currently evaluating but have not yet determined the impact of FSP FAS No.
157-2 for these assets and liabilities upon adoption in the first quarter of
2010.
In April
2009, the FASB issued FSP FAS No. 107-1 and APB No. 28-1, “Interim Disclosures
about Fair Value of Financial Instruments” (“FSP FAS No. 107-1 and APB No.
28-1”), which amends SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments” to require disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. It also amends Accounting Principles Board
(“APB”) Opinion No. 28-1, “Interim Financial Reporting” to require those
disclosures in summarized financial information at interim reporting
periods. FSP FAS No. 107-1 and APB No. 28-1 is effective for interim
reporting periods ending after June 15, 2009. We do not expect that
the adoption of FSP No. FAS No. 107-1 and APB No. 28-1 in the fourth quarter of
2009 will have a significant impact on our consolidated financial
statements.
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 adopted SFAS No. 161 on
a prospective basis in the third quarter of 2009; accordingly, disclosures
related to interim periods prior to the date of adoption have not been
presented. The adoption of SFAS No. 161 did not have a significant
impact on our consolidated financial statements. See Note 8 to our Condensed
Consolidated Financial Statements for our derivative disclosures.
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.
Subsequent
Events
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), which
establishes the requirements for evaluating, recording and disclosing events or
transactions occurring after the balance sheet date in an entity’s financial
statements. SFAS No. 165 is effective for interim and annual
financial periods ending after June 15, 2009. We do not expect that
the adoption of SFAS No. 165 in the fourth quarter of 2009 will have a
significant impact on our 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:
·
|
management
believes are both most important to the portrayal of our financial
condition and operating results and
|
·
|
require
management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain.
|
We
consider the following accounting estimates to be most critical in understanding
the judgments that are involved in preparing our consolidated financial
statements.
·
|
Impairment
of Long-Lived Assets and Provision for Asset
Dispositions
|
·
|
Share-Based
Compensation
|
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 nine months of 2009, and we do not believe that there will be a
material change in the estimates or assumptions we use 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 adjust 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.
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 nine
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 conduct our physical
inventory counts throughout the third and fourth quarters of the fiscal year
based upon a cyclical inventory schedule. During the quarters ended
May 1, 2009 and May 2, 2008, Cracker Barrel performed physical inventory counts
in approximately 64% and 39%, respectively, of its stores. Actual
shrinkage was recorded for those stores that were counted. An
estimate of shrinkage was recorded for the time period between physical
inventory counts by using a 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 nine 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:
·
|
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.
|
·
|
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.
|
·
|
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.
|
·
|
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.
|
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 nine 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 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 are
sold. For those states that exempt gift cards from their escheat
laws, we make estimates of the ultimate unredeemed (“breakage”) gift cards in
the period of the original sale and amortize this breakage over the redemption
period that other gift cards historically have been redeemed by reducing the
liability and recording revenue accordingly. For those states that do
not exempt gift cards from their escheat laws, we record breakage in the period
that gift cards 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 during the first nine 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 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 Chief Financial Officer concluded that as of May 1,
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 May 1, 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
Item
1A.
|
Risk Factors
|
|
|
|
There
have been no material changes in the risk factors previously disclosed in
“Item 1A. Risk Factors” of our 2008 Form 10-K.
|
|
|
Item
2.
|
Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
|
|
Reference
is made to Item 1.01 and Item 5.02 of the Company’s Current Report on Form
8-K dated February 19, 2009 (the “March 2009 8-K”) and filed with the
Commission on March 13, 2009, which is incorporated herein by this
reference. In the March 2009 8-K, the Company reported that, in
connection with Sandra B. Cochran being elected the Company’s Executive
Vice President and Chief Financial Officer, Ms. Cochran received a
nonvested stock grant of 25,000 shares (the “Nonvested Shares”) of the
Company’s $0.01 par value common stock (the “Shares”) and options
(“Options”) to purchase 25,000 Shares at an exercise price equal to the
closing price of the Shares on March 11, 2009 ($24.27). Neither
the offer or sale of the Nonvested Shares nor the Options were registered
under the Securities Act of 1933, as amended (the “Act”) in reliance on
the exemption from registration set forth in section 4(2) of the
Act.
|
|
|
Item
6.
|
Exhibits
|
|
|
|
See
Exhibit Index immediately following the signature page
hereto.
|
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.
|
CRACKER
BARREL OLD COUNTRY STORE, INC.
|
|
|
|
|
|
|
|
|
|
Date:
6/9/09
|
By:
|
/s/Sandra B. Cochran
|
|
|
Sandra
B. Cochran, Executive Vice President and
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
Date:
6/9/09
|
By:
|
/s/Patrick A. Scruggs
|
|
|
Patrick
A. Scruggs, Vice President, Accounting and Tax
|
|
|
and
Chief Accounting
Officer
|
EXHIBIT
INDEX
Exhibit No.
|
Description
|
|
|
10.1
|
Severance
Plan (as amended to date)
|
|
|
10.2
|
Executive
Employment Agreement dated as of March 11, 2009 between Sandra B. Cochran
and the Company
|
|
|
10.3
|
Change
in Control Agreement with Sandra B. Cochran dated March 11, 2009 (not
filed because substantially identical to Exhibit 10(s) to the Company’s
Annual Report on Form 10-K for the fiscal year ended August 1, 2003 filed
with the Commission on October 15, 2003)
|
|
|
31
|
Rule
13a-14(a)/15d-14(a) Certifications
|
|
|
32
|
Section
1350 Certifications
|
30