form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended May 3, 2013

OR

 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______________ to______________
 
Commission file number: 001-25225
 

 
Cracker Barrel Old Country Store, Inc.
(Exact name of registrant as specified in its charter)

Tennessee
(State or other jurisdiction of incorporation or organization)
 
62-0812904
(I.R.S. Employer Identification Number)
     
305 Hartmann Drive, P.O. Box 787
Lebanon, Tennessee
(Address of principal executive offices)
 
37088-0787
(Zip code)

Registrant's telephone number, including area code: (615) 444-5533

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 þ   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 þ    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 þ
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 Act).
Yes o    No þ

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
23,785,827 Shares of Common Stock
Outstanding as of May 28, 2013
 


 
 

 
 
CRACKER BARREL OLD COUNTRY STORE, INC.

FORM 10-Q

For the Quarter Ended May 3, 2013

INDEX

PART I.  FINANCIAL INFORMATION
Page
   
 
Item 1
 
 
·    Condensed Consolidated Financial Statements (Unaudited)
 
     
 
3
     
 
4
     
 
5
 
 
 
6
   
 
7
     
 
Item 2
 
 
15
   
 
Item 3
 
 
28
   
 
Item 4
 
 
28
   
PART II.  OTHER INFORMATION
 
   
 
Item 1
 
 
29
     
 
Item 1A
 
 
·    Risk Factors
29
     
 
Item 2
 
 
29
   
 
Item 6
 
 
·    Exhibits
29
   
30

 
2

 
PART I – FINANCIAL INFORMATION
ITEM 1.  Financial Statements

CRACKER BARREL OLD COUNTRY STORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
ASSETS
 
May 3,
2013
   
August 3,
2012*
 
Current Assets:
           
Cash and cash equivalents
  $ 58,457     $ 151,962  
Property held for sale
    884       884  
Accounts receivable
    14,406       14,609  
Income taxes receivable
    1,435       --  
Inventories
    134,131       143,267  
Prepaid expenses and other current assets
    16,016       11,405  
Deferred income taxes
    7,407       15,181  
Total current assets
    232,736       337,308  
Property and equipment
    1,775,076       1,741,571  
Less: Accumulated depreciation and amortization of capital leases
    758,265       719,201  
Property and equipment – net
    1,016,811       1,022,370  
Other assets
    60,126       59,314  
Total assets
  $ 1,309,673     $ 1,418,992  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current Liabilities:
               
Accounts payable
  $ 72,732     $ 101,271  
Income taxes payable
    --       5,825  
Deferred revenues
    47,374       37,696  
Current interest rate swap liability
    --       20,215  
Other current liabilities
    135,753       154,052  
Total current liabilities
    255,859       319,059  
Long-term debt
    400,000       525,036  
Long-term interest rate swap liability
    16,888       14,166  
Other long-term obligations
    119,855       114,897  
Deferred income taxes
    61,739       63,159  
                 
Commitments and Contingencies (Note 11)
               
Shareholders’ Equity:
               
Preferred stock – 100,000,000 shares of $.01 par value authorized; 300,000 shares designated as Series A Junior Participating Preferred Stock; no shares issued
    --       --  
Common stock – 400,000,000 shares of $.01 par value authorized; 23,757,956 shares issued and outstanding at May 3, 2013, and 23,473,024 shares issued and outstanding at August 3, 2012
    237       234  
Additional paid-in capital
    43,255       28,676  
Accumulated other comprehensive loss
    (10,376 )     (21,158 )
Retained earnings
    422,216       374,923  
Total shareholders’ equity
    455,332       382,675  
Total liabilities and shareholders’ equity
  $ 1,309,673     $ 1,418,992  
 
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 3, 2012, as filed in the Company’s Annual Report on Form 10-K for the fiscal year ended August 3, 2012.
 
 
3

 
CRACKER BARREL OLD COUNTRY STORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)

   
Quarter Ended
   
Nine Months Ended
 
   
May 3,
   
April 27,
   
May 3,
   
April 27,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Total revenue
  $ 640,407     $ 608,514     $ 1,970,529     $ 1,880,185  
                                 
Cost of goods sold
    201,982       189,615       644,027       611,313  
Gross profit
    438,425       418,899       1,326,502       1,268,872  
                                 
Labor and other related expenses
    241,864       235,275       719,474       691,176  
Other store operating expenses
    116,408       109,947       354,859       338,127  
Store operating income
    80,153       73,677       252,169       239,569  
                                 
General and administrative expenses
    35,981       34,569       105,492       108,500  
Operating income
    44,172       39,108       146,677       131,069  
                                 
Interest expense
    10,194       11,173       31,199       33,333  
Income before income taxes
    33,978       27,935       115,478       97,736  
                                 
Provision for income taxes
    9,376       8,961       32,516       29,351  
                                 
Net income
  $ 24,602     $ 18,974     $ 82,962     $ 68,385  
                                 
Net income per share:
                               
Basic
  $ 1.04     $ 0.82     $ 3.50     $ 2.97  
Diluted
  $ 1.02     $ 0.81     $ 3.47     $ 2.93  
                                 
Weighted average shares:
                               
Basic
    23,760,589       23,132,730       23,683,133       22,990,544  
Diluted
    24,006,821       23,535,765       23,913,226       23,329,230  
                                 
Dividends declared per share
  $ 0.50     $ 0.65     $ 1.50     $ 1.15  
 
See Notes to unaudited Condensed Consolidated Financial Statements.
 
 
4

 
CRACKER BARREL OLD COUNTRY STORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited and in thousands)

   
Quarter Ended
   
Nine Months Ended
 
   
May 3,
   
April 27,
   
May 3,
   
April 27,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Net income
  $ 24,602     $ 18,974     $ 82,962     $ 68,385  
                                 
Other comprehensive income before income tax expense:
                               
Change in fair value of interest rate swaps
    4,982       6,348       17,493       12,902  
Income tax expense
    1,921       1,808       6,711       2,000  
Other comprehensive income, net of tax
    3,061       4,540       10,782       10,902  
Comprehensive income
  $ 27,663     $ 23,514     $ 93,744     $ 79,287  

See Notes to unaudited Condensed Consolidated Financial Statements.
 
 
5

 
CRACKER BARREL OLD COUNTRY STORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)

   
Nine Months Ended
 
   
May 3,
   
April 27,
 
   
2013
   
2012
 
Cash flows from operating activities:
           
Net income
  $ 82,962     $ 68,385  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    49,000       47,742  
Loss on disposition of property and equipment
    2,324       1,832  
Share-based compensation
    10,996       9,430  
Excess tax benefit from share-based compensation
    (1,961 )     (1,921 )
Changes in assets and liabilities:
               
Inventories
    9,136       10,543  
Other current assets
    (3,882 )     (2,263 )
Accounts payable
    (28,539 )     (12,023 )
Other current liabilities
    (16,550 )     18,699  
Other long-term assets and liabilities
    3,213       1,461  
Net cash provided by operating activities
    106,699       141,885  
Cash flows from investing activities:
               
Purchase of property and equipment
    (46,178 )     (57,434 )
Proceeds from sale of property and equipment
    550       491  
Proceeds from insurance recoveries of property and equipment
    440       668  
Net cash used in investing activities
    (45,188 )     (56,275 )
Cash flows from financing activities:
               
Proceeds from issuance of long-term debt
    --       92,600  
Principal payments under long-term debt and other long-term obligations
    (125,087 )     (92,704 )
Proceeds from exercise of share-based compensation awards
    5,195       16,729  
Excess tax benefit from share-based compensation
    1,961       1,921  
Purchases and retirement of common stock
    (3,570 )     (12,279 )
Deferred financing costs
    --       (263 )
Dividends on common stock
    (33,515 )     (16,568 )
Net cash used in financing activities
    (155,016 )     (10,564 )
                 
Net (decrease) increase in cash and cash equivalents
    (93,505 )     75,046  
Cash and cash equivalents, beginning of period
    151,962       52,274  
Cash and cash equivalents, end of period
  $ 58,457     $ 127,320  
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest, net of amounts capitalized
  $ 29,670     $ 29,593  
Income taxes
  $ 35,659     $ 11,764  
                 
Supplemental schedule of non-cash financing activity:
               
Change in fair value of interest rate swaps
  $ 17,493     $ 12,902  
Change in deferred tax asset for interest rate swaps
  $ (6,711 )   $ (2,000 )
 
See Notes to unaudited Condensed Consolidated Financial Statements.
 
 
6

 
CRACKER BARREL OLD COUNTRY STORE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except percentages, share and per share data)
(Unaudited)

1.
Condensed Consolidated Financial Statements

Cracker Barrel Old Country Store, Inc. and its affiliates (collectively, in these Notes to Condensed Consolidated Financial Statements, the “Company”) are principally engaged in the operation and development in the United States of the Cracker Barrel Old Country Store® (“Cracker Barrel”) concept.
 
The condensed consolidated balance sheets at May 3, 2013 and August 3, 2012 and the related condensed consolidated statements of income, comprehensive income and cash flows for the quarters and/or nine-month periods ended May 3, 2013 and April 27, 2012, have been prepared by 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 (the “SEC”) without audit.  In the opinion of management, all adjustments (consisting of normal and recurring items) necessary for a fair presentation of such condensed consolidated financial statements have been made.  The results of operations for any interim period are not necessarily indicative of results for a full year.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended August 3, 2012 (the “2012 Form 10-K”).  The accounting policies used in preparing these condensed consolidated financial statements are the same as described in the 2012 Form 10-K.  References to a year in these Notes to Condensed Consolidated Financial Statements are to the Company’s fiscal year unless otherwise noted.

Recent Accounting Pronouncement Adopted

Presentation of Comprehensive Income

In June 2011, the Financial Accounting Standards Board (“FASB”) issued amended accounting guidance which requires companies to present total comprehensive income and its components and the components of net income in either a single continuous statement of comprehensive income or in two consecutive statements reporting net income and comprehensive income.  This requirement eliminates the option to present components of comprehensive income as part of the statement of changes in shareholders’ equity.  This guidance affects only the presentation of comprehensive income and does not change the components of comprehensive income.  The Company adopted this accounting guidance on a retrospective basis in the first quarter of 2013 by presenting separate but consecutive statements.  The adoption of this accounting guidance did not have an impact on the Company’s consolidated financial position or results of operations.
 
 
7

 
Recent Accounting Pronouncements Not Yet Adopted

Disclosures about Offsetting Assets and Liabilities
 
In December 2011, the FASB issued accounting guidance which requires companies to disclose information about the nature of their rights of setoff and related arrangements associated with their financial instruments and derivative instruments to enable users of financial statements to understand the effect of those arrangements on their financial position.  Each company will be required to provide both net and gross information in the notes to its financial statements for relevant assets and liabilities that are eligible for offset.  In January 2013, the FASB issued additional accounting guidance which limits these disclosures to derivatives, repurchase agreements and securities lending transactions to the extent that they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement.  These disclosure requirements are effective for fiscal years beginning on or after January 1, 2013 on a retrospective basis.  The Company does not expect that the adoption of these disclosure requirements in the first quarter of 2014 will have a significant impact on its consolidated financial position or results of operations.

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued accounting guidance which requires companies to provide information regarding the amounts reclassified out of accumulated other comprehensive income by component.  A company will be required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required by GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under GAAP to be reclassified in their entirety to net income, a company is required to cross-reference to other disclosures required under GAAP that provide additional detail regarding those amounts.  This accounting guidance is effective for fiscal years beginning after December 15, 2012 on a prospective basis.  Since the guidance only affects presentation and disclosure of amounts reclassified out of accumulated other comprehensive income, the adoption of this guidance in the first quarter of 2014 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

2. 
Fair Value Measurements

The Company’s assets and liabilities measured at fair value on a recurring basis at May 3, 2013 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 3, 2013
 
Cash equivalents*
  $ 29,766     $ --     $ --     $ 29,766  
Deferred compensation plan assets**
    31,046       --       --       31,046  
Total assets at fair value
  $ 60,812     $ --     $ --     $ 60,812  
                                 
Interest rate swap liability (see Note 5)
  $ --     $ 16,888     $ --     $ 16,888  
Total liabilities at fair value
  $ --     $ 16,888     $ --     $ 16,888  

 
8

 
The Company’s assets and liabilities measured at fair value on a recurring basis at August 3, 2012 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 August 3,
2012
 
Cash equivalents*
  $ 104,531     $ --     $ --     $ 104,531  
Deferred compensation plan assets**
    29,443       --       --       29,443  
Total assets at fair value
  $ 133,974     $ --     $ --     $ 133,974  
                                 
Interest rate swap liability (see Note 5)
  $ --     $ 34,381     $ --     $ 34,381  
Total liabilities at fair value
  $ --     $ 34,381     $ --     $ 34,381  

*Consists of money market fund investments.
**Represents plan assets invested in mutual funds established under a Rabbi Trust for the Company’s non-qualified savings plan and is included in the Consolidated Balance Sheets as other assets.

The Company’s money market fund investments and deferred compensation plan assets are measured at fair value using quoted market prices.  The fair value of the Company’s interest rate swap liabilities is determined based on the present value of expected future cash flows.  Since the values of the Company’s interest rate swaps are based on the LIBOR forward curve, which is observable at commonly quoted intervals for the full terms of the swaps, it is considered a Level 2 input.  Non-performance risk is reflected in determining the fair value of the interest rate swaps by using the Company’s credit spread less the risk-free interest rate, both of which are observable at commonly quoted intervals for the terms of the swaps.  Thus, the adjustment for non-performance risk is also considered a Level 2 input.
 
The fair values of the Company’s accounts receivable and accounts payable approximate their carrying amounts because of their short duration.  The fair value of the Company’s variable rate debt, based on quoted market prices, which are considered Level 1 inputs, approximates its carrying amount at May 3, 2013 and August 3, 2012.
 
3. 
Inventories

Inventories were comprised of the following at:
 
   
May 3, 2013
   
August 3, 2012
 
Retail
  $ 98,110     $ 108,846  
Restaurant
    21,185       19,728  
Supplies
    14,836       14,693  
Total
  $ 134,131     $ 143,267  

4. 
Debt

Long-term debt consisted of the following at:
 
   
May 3, 2013
   
August 3, 2012
 
Revolving credit facility expiring on July 8, 2016
  $ 212,500     $ 312,500  
Term loan payable on or before July 8, 2016
    187,500       212,500  
Note payable
    63       142  
      400,063       525,142  
Current maturities
    (63 )     (106 )
Long-term debt
  $ 400,000     $ 525,036  

 
9

 
The Company’s $750,000 credit facility (the “Credit Facility”) consists of a term loan and a $500,000 revolving credit facility (the “Revolving Credit Facility”).  At May 3, 2013, the Company had $212,500 of outstanding borrowings under the Revolving Credit Facility and $28,171 of standby letters of credit, which reduce the Company’s availability under the Revolving Credit Facility (see Note 11).  At May 3, 2013, the Company had $259,329 in borrowing availability under the Revolving Credit Facility.
 
In accordance with the Credit Facility, outstanding borrowings bear interest, at the Company’s election, either at LIBOR or prime plus a percentage point spread based on certain specified financial ratios under the Credit Facility.  As of May 3, 2013, the Company’s outstanding borrowings were swapped at a weighted average interest rate of 3.98% (see Note 5 for information on the Company’s interest rate swaps).
 
The Credit Facility contains customary financial covenants, which include maintenance of a maximum consolidated total leverage ratio and a minimum consolidated interest coverage ratio.  At May 3, 2013, the Company was in compliance with all debt covenants.
 
The Credit Facility also imposes restrictions on the amount of dividends the Company is permitted to pay.  Prior to the June 3, 2013 amendment described below, if there was no default existing and the total of the Company’s availability under the Revolving Credit Facility plus the Company’s cash and cash equivalents on hand was at least $100,000 (the “liquidity requirements”), the Company could declare and pay cash dividends on shares of its common stock if the aggregate amount of dividends paid in any fiscal year was less than 20% of Consolidated EBITDA from continuing operations (as defined in the Credit Facility) (the “20% limitation”) during the immediately preceding fiscal year.  In any event, as long as the liquidity requirements were met, dividends could be declared and paid in any fiscal year up to the amount of dividends permitted and paid in the preceding fiscal year without regard to the 20% limitation.
 
Effective June 3, 2013, the Company amended the Credit Facility to provide more flexibility with regard to the dividends the Company is permitted to pay.  Under the amended Credit Facility, if there is no default existing and the liquidity requirements are met, the Company may declare and pay cash dividends on shares of its common stock if the aggregate amount of dividends paid in any fiscal year is less than the sum of (1) the 20% limitation and (2) provided the Company’s consolidated total leverage ratio is 3.25 to 1.00 or less, $100,000 (less the amount of any share repurchases during the current fiscal year).  In any event, as long as the liquidity requirements are met, dividends may be declared and paid in any fiscal year up to the amount of dividends permitted and paid in the preceding fiscal year without regard to the 20% limitation.
 
The note payable consists of a five-year note with a vendor with an 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% per year.
 
5. 
Derivative Instruments and Hedging Activities
 
The Company has interest rate risk relative to its outstanding borrowings (see Note 4).  The Company’s policy has been to manage interest cost using a mix of fixed and variable rate debt.  To manage this risk in a cost efficient manner, the Company uses derivative instruments, specifically interest rate swaps.
 
 
10

 
For each of the Company’s interest rate swaps, the Company has agreed to exchange with a counterparty the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount.  The interest rates on the portion of the Company’s outstanding debt covered by its interest rate swaps are fixed at the rates in the table below plus the Company’s credit spread.  The Company’s weighted average credit spread at May 3, 2013 was 1.75%.  All of the Company’s interest rate swaps are accounted for as cash flow hedges.
 
A summary of the Company’s interest rate swaps at May 3, 2013 is as follows:
 
 
Trade Date
 
 
Effective Date
 
Term
(in Years)
   
 
Notional Amount
   
Fixed Rate
 
August 10, 2010
 
May 3, 2013
    2     $ 200,000       2.73 %
July 25, 2011
 
May 3, 2013
    2       50,000       2.00 %
July 25, 2011
 
May 3, 2013
    3       50,000       2.45 %
September 19, 2011
 
May 3, 2013
    2       25,000       1.05 %
September 19, 2011
 
May 3, 2013
    2       25,000       1.05 %
December 7, 2011
 
May 3, 2013
    3       50,000       1.40 %
March 18, 2013
 
May 3, 2015
    3       50,000       1.51 %
April 8, 2013
 
May 3, 2015
    2       50,000       1.05 %
April 15, 2013
 
May 3, 2015
    2       50,000       1.03 %
April 22, 2013
 
May 3, 2015
    3       25,000       1.30 %
April 25, 2013
 
May 3, 2015
    3       25,000       1.29 %
 
The Company’s interest rate swap with a notional amount of $525,000 and a fixed rate of 5.57% expired on May 3, 2013.

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 and has not designated any non-derivatives as hedging instruments.

The estimated fair values of the Company’s derivative instruments as of May 3, 2013 and August 3, 2012 were as follows:
 
 
Balance Sheet Location
 
May 3, 2013
   
August 3, 2012
 
Interest rate swap
Current interest rate swap liability
  $ --     $ 20,215  
Interest rate swaps
Long-term interest rate swap liability
    16,888       14,166  
Total (See Note 2)
    $ 16,888     $ 34,381  

The estimated fair value of the Company’s interest rate swap liabilities incorporates the Company’s non-performance risk (see Note 2).  The adjustment related to the Company’s non-performance risk at May 3, 2013 and August 3, 2012 resulted in reductions of $360 and $851, respectively, in the fair value of the interest rate swap liabilities.  The offset to the interest rate swap liabilities is recorded in accumulated other comprehensive loss (“AOCL”), net of the deferred tax asset, and will be reclassified into earnings over the term of the underlying debt.  As of May 3, 2013, the estimated pre-tax portion of AOCL that is expected to be reclassified into earnings over the next twelve months is $5,959.  Cash flows related to the interest rate swap are included in interest expense and in operating activities.

The following table summarizes the pre-tax effects of the Company’s derivative instruments on AOCL for the nine-month period ended May 3, 2013 and the year ended August 3, 2012:
 
   
Amount of Income Recognized in AOCL on
Derivatives (Effective Portion)
 
   
Nine Months Ended
   
Year Ended
 
   
May 3, 2013
   
August 3, 2012
 
Cash flow hedges:
           
Interest rate swaps
  $ 17,493     $ 17,223  

 
11


The following table summarizes the pre-tax effects of the Company’s derivative instruments on income for the quarters and nine-month periods ended May 3, 2013 and April 27, 2012:

 
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
 
     
May 3,
2013
   
April 27,
2012
   
May 3,
2013
   
April 27,
2012
 
Cash flow hedges:
                         
Interest rate swaps
Interest expense
  $ 13,743     $ 7,222     $ 20,773     $ 22,134  
 
Any portion of the fair value of the swaps determined to be ineffective will be recognized currently in earnings.  No ineffectiveness has been recorded in the nine-month periods ended May 3, 2013 and April 27, 2012.
 
6. 
Shareholders’ Equity
 
During the nine-month period ended May 3, 2013, the Company received proceeds of $5,195 from the exercise of share-based compensation awards and the corresponding issuance of 329,232 shares of its common stock.  During the nine-month period ended May 3, 2013, the Company repurchased 44,300 shares of its common stock in the open market at an aggregate cost of $3,570.

During the nine-month period ended May 3, 2013, the Company paid dividends of $1.40 per share of its common stock.  In addition, the Company declared a regular dividend of $0.50 per share of its common stock that was paid on May 6, 2013 to shareholders of record on April 19, 2013.  During the fourth quarter of 2013, the Company declared a regular dividend of $0.75 per share of its common stock payable on August 5, 2013 to shareholders of record on July 19, 2013.

During the nine-month period ended May 3, 2013, the unrealized loss, net of tax, on the Company’s interest rate swaps decreased by $10,782 to $10,376 and is recorded in AOCL (see Notes 2 and 5).

During the nine-month period ended May 3, 2013, total share-based compensation expense was $10,996.  The excess tax benefit realized upon exercise of share-based compensation awards was $1,961.

7. 
Seasonality

Historically, the net income of the Company has been lower in the first and third quarters and higher in the second and fourth quarters.  Management attributes these variations to the Christmas holiday shopping season and the summer vacation and travel season.  The Company's retail sales, which are made substantially to the Company’s restaurant customers, historically have been highest in the Company's second quarter, which includes the Christmas holiday shopping season.  Historically, interstate tourist traffic and the propensity to dine out have been higher during the summer months, thereby contributing to higher profits in the Company’s fourth quarter.  The Company generally opens additional new locations throughout the year.  Therefore, the results of operations for any interim period cannot be considered indicative of the operating results for an entire year.
 
 
12


8. 
Segment Information
 
Cracker Barrel stores represent a single, integrated operation with two related and substantially integrated product lines.  The operating expenses of the restaurant and retail product lines of a Cracker Barrel store are shared and are indistinguishable in many respects.  Accordingly, the Company currently manages its business on the basis of one reportable operating segment.  All of the Company’s operations are located within the United States.  Total revenue was comprised of the following at:
 
   
Quarter Ended
   
Nine Months Ended
 
   
May 3,
2013
   
April 27,
2012
   
May 3,
2013
   
April 27,
2012
 
Revenue:
                       
Restaurant
  $ 522,642     $ 500,025     $ 1,555,111     $ 1,485,065  
Retail
    117,765       108,489       415,418       395,120  
Total revenue
  $ 640,407     $ 608,514     $ 1,970,529     $ 1,880,185  
 
9. 
Share-Based Compensation

Share-based compensation is recorded in general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.  Total share-based compensation was comprised of the following at:

   
Quarter Ended
   
Nine Months Ended
 
   
May 3,
2013
   
April 27,
2012
   
May 3,
2013
   
April 27,
2012
 
Nonvested stock awards
  $ 5,074     $ 2,774     $ 9,238     $ 6,839  
Performance-based market stock units (“MSU Grants”)
     513        491        1,670        1,526  
Stock options
    --       219       88       1,065  
    $ 5,587     $ 3,484     $ 10,996     $ 9,430  

10. 
Net Income Per Share and Weighted Average Shares

Basic consolidated net income per share is computed by dividing consolidated net income available to common shareholders by the weighted average number of shares of common stock outstanding for the reporting period.  Diluted consolidated net income per share reflects the potential dilution that could occur if securities, options or other contracts to issue shares of common stock were exercised or converted into shares of common stock and is based upon the weighted average number of shares of common stock and common equivalent shares outstanding during the reporting period. Common equivalent shares related to stock options, nonvested stock awards and MSU Grants issued by the Company are calculated using the treasury stock method.  The Company’s outstanding stock options, nonvested stock awards and MSU Grants issued by the Company represent the only dilutive effects on diluted consolidated net income per share.
 
 
13

 
The following table reconciles the components of diluted earnings per share computations:
 
   
Quarter Ended
   
Nine Months Ended
 
   
May 3,
2013
   
April 27,
2012
   
May 3,
2013
   
April 27,
2012
 
Net income per share numerator
  $ 24,602     $ 18,974     $ 82,962     $ 68,385  
                                 
Net income per share denominator:
                               
Weighted average shares
    23,760,589       23,132,730       23,683,133       22,990,544  
Add potential dilution:
                               
Stock options, nonvested stock awards and MSU Grants
     246,232        403,035        230,093        338,686  
Diluted weighted average shares
    24,006,821       23,535,765       23,913,226       23,329,230  
 
11. 
Commitments and Contingencies

The Company and its subsidiaries are party to various legal and regulatory proceedings and claims incidental to their business in the ordinary course.  In the opinion of management, based upon information currently available, the ultimate liability with respect to these proceedings and claims will not materially affect the Company’s consolidated results of operations or financial position.

Related to its workers’ compensation insurance coverage, the Company is contingently liable pursuant to standby letters of credit as credit guarantees to certain insurers.  As of May 3, 2013, the Company had $28,171 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 borrowing availability under its Revolving Credit Facility (see Note 4).
 
At May 3, 2013, the Company is secondarily liable for lease payments associated with two properties.  The Company is not aware of any non-performance under these lease arrangements that would result in the Company having to perform in accordance with the terms of those guarantees; and therefore, no provision has been recorded in the Condensed Consolidated Balance Sheets for amounts to be paid in case of non-performance by the third parties.
 
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 the Condensed Consolidated Balance Sheets.
 
 
14

 
ITEM 2. 

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 StoreÒ (“Cracker Barrel”) concept.  At May 3, 2013, we operated 622 Cracker Barrel stores in 42 states.  All dollar amounts reported or discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“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 included in this Quarterly Report on 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 3, 2012 (the “2012 Form 10-K”).  Except for specific historical information, many of the matters discussed in this report may express or imply projections of items such as revenues or expenditures, estimated capital expenditures, compliance with debt covenants, plans and objectives for future operations, inventory shrinkage, 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, by their nature, 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,” “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.  In addition to the risks of ordinary business operations, and those discussed or described in this report or in information incorporated by reference into this report, 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 2012 Form 10-K and Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended November 2, 2012, which are incorporated herein by this reference, as well as the factors described under “Critical Accounting Estimates” on pages 23-27 of this report 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 because 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 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.
 
 
15


Overview
 
Management believes that the Cracker Barrel brand remains one of the strongest and most differentiated brands in the restaurant industry, and we plan to leverage that strength to grow guest traffic, sales and profits.

Our six priorities for 2013 are:

 
·
Refresh select menu categories that will reinforce our value and provide healthier options to our guests;
 
 
·
Grow retail sales with unique merchandise;
 
 
·
Build on the successful “Handcrafted by Cracker Barrel” advertising campaign;
 
 
·
Invest in and leverage technology and equipment to support operations and reduce costs;
 
 
·
Continued focus on shareholder return; and
 
 
·
Expand the brand through e-commerce and licensing.

During the third quarter of 2013, we continued our progress on these six priorities.  We achieved positive comparable store traffic, restaurant sales and retail sales for the sixth consecutive quarter, and our comparable store traffic and restaurant sales outperformed the Knapp-Track™ Casual Dining Index for the sixth consecutive quarter.  This third quarter also reflects the second consecutive quarter of positive over positive comparable store traffic growth.  Additionally, continued strong performance in our apparel and accessories categories contributed to retail sales growth.  Menu and operational initiatives contributed to margin improvement and earnings growth.  We continue to generate strong cash flow which has enabled us to reduce our long-term debt by $125,000, repurchase shares and to declare a quarterly dividend of $0.50 per share during the quarter for the third consecutive quarter.  Additionally, during the fourth quarter of 2013, we declared a quarterly dividend of $0.75 per share, which represents a fifty percent increase in our quarterly dividend.
 
Results of Operations

The following table highlights operating results by percentage relationships to total revenue for the quarter and nine-month period ended May 3, 2013 as compared to the same periods in the prior year:

   
Quarter Ended
   
Nine Months Ended
 
   
May 3,
   
April 27,
   
May 3,
   
April 27,
 
   
2013
   
2012
   
2013
   
2012
 
Total revenue
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of goods sold
    31.5       31.2       32.7       32.5  
Gross profit
    68.5       68.8       67.3       67.5  
Labor and other related expenses
    37.8       38.6       36.5       36.8  
Other store operating expenses
    18.2       18.1       18.0       18.0  
Store operating income
    12.5       12.1       12.8       12.7  
General and administrative expenses
    5.6       5.7       5.4       5.7  
Operating income
    6.9       6.4       7.4       7.0  
Interest expense
    1.6       1.8       1.5       1.8  
Income before income taxes
    5.3       4.6       5.9       5.2  
Provision for income taxes
    1.5       1.5       1.7       1.6  
Net income
    3.8 %     3.1 %     4.2 %     3.6 %

 
16

 
The following table sets forth the number of stores in operation at the beginning and end of the quarters and nine-month periods ended May 3, 2013 and April 27, 2012, respectively:

   
Quarter Ended
   
Nine Months Ended
 
   
May 3,
   
April 27,
   
May 3,
   
April 27,
 
   
2013
   
2012
   
2013
   
2012
 
Open at beginning of period
    621       608       616       603  
Opened during period
    1       5       6       10  
Open at the end of period
    622       613       622       613  

Total Revenue

Total revenue for the third quarter and first nine months of 2013 increased 5.2% and 4.8%, respectively, compared to the same periods in the prior year.

The following table highlights the key components of revenue for the quarter and nine-month period ended May 3, 2013 as compared to the quarter and nine-month period ended April 27, 2012:

   
Quarter Ended
   
Nine Months Ended
 
   
May 3,
2013
   
April 27,
2012
   
May 3,
2013
   
April 27,
2012
 
Revenue in dollars:
                       
Restaurant
  $ 522,642     $ 500,025     $ 1,555,111     $ 1,485,065  
Retail
    117,765       108,489       415,418       395,120  
Total revenue
  $ 640,407     $ 608,514     $ 1,970,529     $ 1,880,185  
Total revenue by percentage relationships:
                               
Restaurant
    81.6 %     82.2 %     78.9 %     79.0 %
Retail
    18.4 %     17.8 %     21.1 %     21.0 %
Average unit volumes(1):
                               
Restaurant
  $ 840.8     $ 817.9     $ 2,506.5     $ 2,443.4  
Retail
    189.4       177.4       669.5       650.1  
Total revenue
  $ 1,030.2     $ 995.3     $ 3,176.0     $ 3,093.5  
Comparable store sales increase:
                               
Restaurant
    3.1 %     3.1 %     3.2 %     1.7 %
Retail
    5.5 %     0.3 %     3.4 %     1.1 %
Restaurant and retail
    3.5 %     2.6 %     3.3 %     1.5 %

 (1)Average unit volumes include sales of all stores.

For the third quarter of 2013, our comparable store restaurant sales increase consisted of a 2.4% average check increase for the quarter (including a 2.3% average menu price increase) and a 0.7% guest traffic increase.  For the first nine months of 2013, our comparable store restaurant sales increase consisted of a 2.7% average check increase for the nine months (including a 2.3% average menu price increase) and a 0.5% guest traffic increase.

For the third quarter and first nine months of 2013, our comparable store retail sales increases resulted primarily from strong performance in certain retail merchandise categories and the increases in guest traffic.

Restaurant and retail sales from newly opened stores accounted for the balance of the total revenue increases in the third quarter and first nine months of 2013 as compared to the same periods in the prior year.
 
 
17


Cost of Goods Sold
 
The following table highlights the components of cost of goods sold in dollar amounts and percentages for the third quarter and first nine months of 2013 as compared to the same periods in the prior year:

   
Quarter Ended
   
Nine Months Ended
 
   
May 3,
2013
   
April 27,
2012
   
May 3,
2013
   
April 27,
2012
 
Cost of Goods Sold in dollars:
                       
Restaurant
  $ 141,617     $ 135,301     $ 423,138     $ 401,453  
Retail
    60,365       54,314       220,889       209,860  
Total Cost of Goods Sold
  $ 201,982     $ 189,615     $ 644,027     $ 611,313  
Cost of Goods Sold by percentage of revenue:
                               
Restaurant
    27.1 %     27.1 %     27.2 %     27.0 %
Retail
    51.3 %     50.1 %     53.2 %     53.1 %

Restaurant cost of goods sold as a percentage of restaurant revenue remained flat at 27.1% in the third quarter of 2013 as compared to the prior year quarter.  The increase in restaurant cost of goods sold as a percentage of restaurant revenue in the first nine months of 2013 as compared to the same period in the prior year was primarily the result of food commodity inflation partially offset by our menu price increase referenced above.  Commodity inflation was ­­2.9% in the first nine months of 2013.  We presently expect the rate of commodity inflation to be approximately 3.5% to 4% for the current year.

The increase in retail cost of goods sold as a percentage of retail revenue in the third quarter of 2013 as compared to the prior year quarter resulted from higher markdowns and higher inbound freight expenses.
 
   
Third Quarter
Increase as a Percentage of
Retail Revenue
 
Markdowns
    0.9 %
Freight
    0.3 %

Retail cost of goods sold as a percentage of retail revenue was relatively constant in the first nine months of 2013 as compared to the same period in the prior year.
 
Labor and Related Expenses

Labor and related expenses include all direct and indirect labor and related costs incurred in store operations.  Labor and related expenses as a percentage of total revenue decreased to 37.8% in the third quarter of 2013 as compared to 38.6% in the third quarter of 2012.  This percentage change resulted from the following:
 
   
Third Quarter
(Decrease) Increase as a
Percentage of Total Revenue
 
Store hourly labor and related payroll taxes
    (0.9 %)
Workers’ compensation expense
    (0.1 %)
Pre-opening labor expense
    (0.1 %)
Store bonus expense
    0.3 %

 
18

 
Labor and related expenses as a percentage of total revenue decreased to 36.5% in the first nine months of 2013 as compared to 36.8% in the first nine months of 2012.  This percentage change resulted primarily from the following:
 
   
Nine Month Period
(Decrease) Increase as a
Percentage of Total Revenue
 
Store hourly labor and related payroll taxes
    (0.6 %)
Employee health care expenses
    0.2 %
Store bonus expense
    0.2 %

The decreases in store hourly labor costs and related payroll taxes as a percentage of total revenue for the third quarter and first nine months of 2013 as compared to the same periods in the prior year resulted from menu price increases being higher than wage inflation and improved productivity.

The decrease in workers’ compensation expense as a percentage of total revenue for the third quarter of 2013 as compared to the same period in the prior year resulted primarily from favorable claims development.

The decrease in pre-opening labor expense as a percentage of total revenue for the third quarter of 2013 as compared to the same period in the prior year resulted from the timing of new store openings.

Higher store bonus expense in the third quarter and first nine months of 2013 as compared to the same periods in the prior year resulted primarily from better performance against financial objectives in 2013 as compared to the prior year.
 
The increase in our employee health care expenses in the first nine months of 2013 as compared to the same period in the prior year resulted from reimbursements for certain health insurance premiums in the prior-year periods.  The fully-insured portion of our health insurance program contains a retrospective feature which could increase or decrease premiums based on actual claims experience.  As a result of lower claims experience in calendar 2011, we recorded $5,800 in the first nine months of 2012 for reimbursement of certain health insurance premiums paid in prior periods of calendar 2011.
 
Other Store Operating Expenses
 
Other store operating expenses include all store-level operating costs, the major components of which are utilities, operating supplies, repairs and maintenance, depreciation and amortization, advertising, rent, credit card fees, real and personal property taxes and general insurance.
 
Other store operating expenses as a percentage of total revenue increased to 18.2% in the third quarter of 2013 as compared to 18.1% in the third quarter of 2012.  This percentage change resulted primarily from higher advertising expense.  The increase in advertising expense resulted primarily from higher media spending on radio and television.
 
 
19


Other store operating expenses as a percentage of total revenue in the first nine months of 2013 remained flat at 18.0% as compared to the first nine months of 2012 as a result of the following offsetting variances.
 
   
Nine Month Period
Increase (Decrease) as a
Percentage of Total Revenue
 
Litigation settlement received in 2012
    0.2 %
Utilities expense
    (0.2 %)
 
Lower utilities expense resulted primarily from lower electricity costs.

General and Administrative Expenses

General and administrative expenses as a percentage of total revenue decreased to 5.6% in the third quarter of 2013 as compared to 5.7% in the third quarter of 2012.  This percentage change resulted from the following:
 
   
Third Quarter
(Decrease) Increase as a
Percentage of Total Revenue
 
Payroll and related expenses
    (0.5 %)
Incentive compensation
    0.4 %

General and administrative expenses as a percentage of total revenue decreased to 5.4% in the first nine months of 2013 as compared to 5.7% in the first nine months of 2012.  This percentage change resulted from the following:
 
   
Nine Month Period
(Decrease) as a Percentage
of Total Revenue
 
Payroll and related expenses
    (0.2 %)
Manager conference expense
    (0.1 %)

Lower payroll and related expenses in the third quarter and first nine months of 2013 as compared to the same periods in the prior year resulted primarily from our organizational restructuring in the prior year.

Higher incentive compensation in the third quarter as compared to the same period in the prior year resulted primarily from better performance against financial objectives and increases in the price of our common stock in 2013 as compared to the prior year.

The decrease in general and administrative expenses in the first nine months of 2013 as compared to the first nine months of 2012 also resulted from the non-recurrence of expenses associated with a biannual manager conference which was held in the first quarter of 2012.

Interest Expense

Interest expense for the third quarter of 2013 was $10,194 as compared to $11,173 in the third quarter of 2012.  Interest expense for the first nine months of 2013 was $31,199 as compared to $33,333 in the first nine months of 2012.  Both decreases resulted from lower debt outstanding and lower interest rates because of a reduction in our credit spread.    We presently expect a reduction in interest expense of approximately $6,000 in the fourth quarter of 2013 due primarily to the expiration of a seven-year interest rate swap on May 3, 2013 with a fixed interest rate of 5.57% plus our current credit spread and a reduction in our debt outstanding.   Additionally, during the fourth quarter of 2013, we expect a further reduction in our credit spread resulting in a weighted average interest rate of 3.73%.
 
 
20

 
Provision for Income Taxes
 
Provision for income taxes as a percentage of income before income taxes (the “effective tax rate”) was 27.6% and 32.1%, respectively, in the third quarters of 2013 and 2012.  The effective tax rate was 28.2% and 30.0%, respectively, in the first nine months of 2013 and 2012.  The decrease in the effective tax rate from the third quarter of 2012 to the third quarter of 2013 resulted primarily from a lower provision for uncertain tax positions than in the prior year.  The decrease in the effective tax rate from the first nine months of 2012 to the first nine months of 2013 resulted primarily from the retroactive extension by Congress of the Work Opportunity Tax Credit through the end of calendar 2013 and a lower provision for uncertain tax positions than in the prior year.  We presently expect our effective tax rate for 2013 to be between 28% to 29%.
 
 
Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from our operations and our borrowing capacity under our $500,000 revolving credit facility (the “Revolving Credit Facility”).  Our internally generated cash, along with cash on hand at August 3, 2012 and proceeds from exercises of share-based compensation awards, were sufficient to finance all of our growth, debt payments, dividend payments, share repurchases, working capital needs and other cash payment obligations in the third quarter of 2013.

We believe that cash on hand at May 3, 2013, along with cash generated from our operating activities, the borrowing capacity under our Revolving Credit Facility and proceeds from exercises of share-based compensation awards will be sufficient to finance our continuing operations, our continuing expansion plans, our share repurchase plans and our expected dividend payments for at least the next twelve months.
 
Cash Generated from Operations
 
Our operating activities provided net cash of $106,699 for the first nine months of 2013, which represented a decrease from the $141,885 net cash provided during the first nine months of 2012.  This decrease reflected the timing of payments for accounts payable and estimated income taxes and higher annual and long-term incentive bonus payments made in the current year as a result of the prior year’s performance partially offset by higher net income.
 
Borrowing Capacity and Debt Covenants
 
Our $750,000 credit facility (the “Credit Facility”) consists of a term loan (aggregate outstanding at May 3, 2013 was $187,500) and our Revolving Credit Facility.  At May 3, 2013, we had $212,500 of outstanding borrowings under the Revolving Credit Facility and we had $28,171 of standby letters of credit related to securing reserved claims under workers’ compensation insurance which reduce our borrowing availability under the Revolving Credit Facility. At May 3, 2013, we had $259,329 in borrowing availability under our Revolving Credit Facility. On May 3, 2013, we made $25,000 in optional principal prepayments under our term loan and paid down $100,000 on the Revolving Credit Facility.  See Note 4 to our Condensed Consolidated Financial Statements for further information on our long-term debt.
 
The Credit Facility contains customary financial covenants, which include maintenance of a maximum consolidated total leverage ratio and a minimum consolidated interest coverage ratio.  We presently are in compliance with the Credit Facility’s financial covenants.
 
 
21

 
Capital Expenditures
 
Capital expenditures (purchase of property and equipment), net of proceeds from insurance recoveries were $45,738 for the first nine months of 2013 as compared to $56,766 for the same period in the prior year.  Our capital expenditures consisted primarily of costs of new store locations and capital expenditures for maintenance programs.  The decrease in capital expenditures in the first nine months of 2013 as compared to the prior year is primarily the result of fewer new locations under construction as compared to the prior year partially offset by higher capital expenditures for maintenance programs and operational initiatives.  We estimate that our capital expenditures during 2013 will be between $75,000 and $80,000.  This estimate includes certain costs related to the acquisition of sites and construction of new stores that have opened or are expected to open during 2013, as well as for acquisition and construction costs for store locations to be opened in future years 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.

Dividends, Share Repurchases and Proceeds from the Exercise of Share-Based Compensation Awards
 
Our Credit Facility imposes restrictions on the amount of dividends we are permitted to pay and the amount of shares we are permitted to repurchase.  Prior to the June 3, 2013 amendment described below, if there was no default existing and the total of our availability under the Revolving Credit Facility plus our cash and cash equivalents on hand was at least $100,000 (the “liquidity requirements”), we could declare and pay cash dividends on shares of our common stock if the aggregate amount of dividends paid during any fiscal year was less than 20% of Consolidated EBITDA from continuing operations (as defined in the Credit Facility) (the “20% limitation”) during the immediately preceding fiscal year.  In any event, as long as the liquidity requirements were met, dividends could be declared and paid in any fiscal year up to the amount of dividends permitted and paid in the preceding fiscal year without regard to the 20% limitation.
 
Effective June 3, 2013, we amended the Credit Facility to provide more flexibility with regard to the dividends we are permitted to pay.  Under the amended Credit Facility, if there is no default existing and the liquidity requirements are met, we may declare and pay cash dividends on shares of our common stock if the aggregate amount of dividends paid in any fiscal year is less than the sum of (1) the 20% limitation and (2) provided our consolidated total leverage ratio is 3.25 to 1.00 or less, $100,000 (less the amount of any share repurchases during the current fiscal year).  In any event, as long as the liquidity requirements are met, dividends may be declared and paid in any fiscal year up to the amount of dividends permitted and paid in the preceding fiscal year without regard to the 20% limitation.
 
During the first nine months of 2013, we paid dividends of $1.40 per share.  During the third quarter of 2013, we declared a dividend of $0.50 per share that was paid on May 6, 2013 to shareholders of record on April 19, 2013.  During the fourth quarter of 2013, we declared a regular dividend of $0.75 per share of our common stock payable on August 5, 2013 to shareholders of record on July 19, 2013.

Subject to a maximum amount of $100,000 and the limits imposed by the Credit Facility, we have been authorized by our Board of Directors to repurchase shares from time to time during 2013 through a combination of open market purchases, privately negotiated acquisitions, accelerated share repurchase transactions and/or other derivative transactions at the discretion of management.  During the first nine months of 2013, we repurchased 44,300 shares of our common stock in the open market at an aggregate cost of $3,570.  Under the amended Credit Facility, we may repurchase shares up to a maximum amount of $100,000 less the amount of dividends paid provided the liquidity requirements are met.
 
During the first nine months of 2013, we received proceeds of $5,195 from the exercise of share-based compensation awards and the corresponding issuance of 329,232 shares of our common stock.
 
 
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Working Capital
 
In the restaurant industry, virtually all sales are either for cash or third-party credit or debit card.   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.  Because of our retail gift shops, which have a lower product turnover than the restaurant business, we carry larger inventories than many other companies in the restaurant industry.  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 or semi-monthly schedules in arrears for hours worked except for bonuses that are paid either quarterly or annually in arrears.  Many other operating expenses have normal trade terms and certain expenses such as certain taxes and some benefits are deferred for longer periods of time.
 
We had negative working capital of $23,123 at May 3, 2013 versus positive working capital of $18,249 at August 3, 2012.  This decrease in working capital from August 3, 2012 primarily reflects a decrease in cash partially offset by a reduction in accounts payable due to the timing of payments and the expiration of an interest rate swap.
 
Off-Balance Sheet Arrangements
 
Other than various operating leases, we have no other material off-balance sheet arrangements.  Refer to the sub-section entitled “Off-Balance Sheet Arrangements” under the section entitled “Liquidity and Capital Resources” presented in the MD&A of our 2012 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 2012.  Refer to the sub-section entitled “Material Commitments” under the section entitled “Liquidity and Capital Resources” presented in the MD&A of our 2012 Form 10-K for additional information regarding our material commitments.

Recent Accounting Pronouncements Adopted and Not Yet Adopted
 
See Note 1 to the accompanying Condensed Consolidated Financial Statements for a discussion of recent accounting guidance adopted and not yet adopted.  None of the accounting guidance discussed in Note 1 either had or is expected to have a significant impact on our consolidated financial position or results of operations.
 
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 2012 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.
 
 
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Critical accounting estimates are those that:

 
·
management believes are most important to the accurate portrayal of both our financial condition and operating results, and
 
·
require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

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
 
·
Insurance Reserves
 
·
Retail Inventory Valuation
 
·
Tax Provision
 
·
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 of an asset may not be recoverable.  Recoverability of assets is measured by comparing the carrying value of the asset to the undiscounted future cash flows expected to be generated by the asset.  If the total expected future cash flows are less than the carrying amount of the asset, the carrying value is written down, for an asset to be held and used, to the estimated fair value or, for an asset to be disposed of, to the fair value, net of estimated costs of disposal.  Any loss resulting from impairment is recognized by a charge to income.  Judgments and estimates that we make related to the expected useful lives of long-lived assets and future cash flows are affected by factors such as changes in economic conditions and changes in operating performance.  The accuracy of such provisions can vary materially from original estimates and management regularly monitors the adequacy of the provisions until final disposition occurs.
 
We have not made any material changes in our methodology for assessing impairments during the first nine months of 2013, and we do not believe that there is a reasonable likelihood that there will be a material change in the estimates or assumptions used by us in the future to assess impairment of long-lived assets.  However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and fair values of long-lived assets, we may be exposed to losses that could be material.
 
Insurance Reserves
 
We self-insure a significant portion of our expected workers’ compensation and general liability insurance programs.  We purchase insurance for individual workers’ compensation claims that exceed $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.
 
 
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We record a reserve for workers’ compensation and general liability for all unresolved claims and for an estimate of incurred but not reported (“IBNR”) claims.  These reserves and estimates of IBNR claims are based upon a full scope actuarial study which is performed annually at the end of our third quarter and is adjusted by the actuarially determined losses and actual claims payments for the fourth quarter.  Additionally, we perform limited scope actuarial studies on a quarterly basis to verify and/or modify our reserves.  The reserves and losses in the actuarial study represent a range of possible outcomes within which no given estimate is more likely than any other estimate.  As such, we record the losses in the lower end of that range and discount them to present value using a risk-free interest rate based on projected timing of payments.
 
A significant portion of our health insurance program is self-insured.  Benefits for any individual (employee or dependents) in the self-insured group health program are limited to not more than $20 in any given plan year and, in certain cases, to not more than $8 in any given year.  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.  The fully-insured portion of our health insurance program contains a retrospective feature which could increase or decrease premiums based on actual claims experience.
 
Our accounting policies regarding workers’ compensation, general insurance and health 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 2013 and do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate the insurance reserves.  However, changes in these actuarial assumptions, management judgments or claims experience in the future may produce materially different amounts of expense that would be reported under these insurance programs.
 
Retail Inventory Valuation
 
Cost of goods sold includes the cost of retail merchandise sold at our stores utilizing the retail inventory method (“RIM”).  Under RIM, the valuation of our retail inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of our inventories.  Inherent in the RIM calculation are certain significant management judgments and estimates, including initial markons, markups, markdowns and shrinkage, which may significantly impact the gross margin calculation as well as the ending inventory valuation.
 
Inventory valuation provisions are included for retail inventory obsolescence and retail inventory shrinkage.  Retail inventory is reviewed on a quarterly basis for obsolescence and adjusted as appropriate based on assumptions made by management and judgments regarding inventory aging and future promotional activities.  Cost of goods sold includes an estimate of shrinkage that is adjusted upon physical inventory counts.  Annual physical inventory counts are conducted throughout the third and fourth quarters based upon a cyclical inventory schedule.  During both quarters ended May 3, 2013 and April 27, 2012, we recorded actual shrinkage resulting from physical inventory counts for approximately 40% of our stores.  An estimate of shrinkage is 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 methodologies, estimates or assumptions related to our merchandise inventories during the first nine months of 2013 and do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions in the future.  However, actual obsolescence or shrinkage recorded may produce materially different amounts than we have estimated.
 
 
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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.  Our estimates are made based on current tax laws, the best available information at the time of the provision and historical experience.
 
We recognize (or derecognize) a tax position taken or expected to be taken in a tax return 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.
 
We file our income tax returns many months after our year end.  These returns are subject to audit by various federal and 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, an unsuccessful legal proceeding or a settlement could result in material adjustments to our Consolidated Financial Statements and our consolidated financial position (see Note 15 to our Consolidated Financial Statements contained in the 2012 Form 10-K for additional information).
 
Share-Based Compensation
 
Our share-based compensation consists of nonvested stock awards, performance-based market stock units (“MSU Grants”) and stock options.  Share-based compensation expense is recognized based on the grant date fair value and the achievement of performance conditions for certain awards.  We recognize share-based compensation expense on a straight-line basis over the requisite service period, which is generally the award’s vesting period, or the date on which retirement is achieved, if shorter.
 
Compensation expense is recognized for only the portion of our share-based compensation awards that are expected to vest.  Therefore, an estimated forfeiture rate is derived from historical employee termination behavior and is updated annually.  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 at each reporting period and adjust compensation expense accordingly so that the amount of compensation expense 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.

Our nonvested stock awards are time vested except for awards under our long-term incentive plans, which also contain performance conditions.   At each reporting period, we reassess the probability of achieving the performance conditions under our long-term incentive plans.  Determining whether the performance conditions will be achieved involves judgment, and the estimate of expense for nonvested stock awards may be revised periodically based on changes in our determination of the probability of achieving the performance conditions.  Revisions are reflected in the period in which the estimate is changed.  If any performance conditions are not met, no shares will be granted, no compensation will ultimately be recognized and, to the extent previously recognized, compensation expense will be reversed.

Generally, the fair value of each nonvested stock grant is equal to the market price of our common 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.
 
 
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Beginning in 2011, we adopted annual long-term incentive plans that award MSU Grants to our executives instead of stock options.  In addition to providing the requisite service, MSU Grants contain both a market condition based on total shareholder return and a performance condition based on operating income.  Total shareholder return is defined as increases in our stock price plus dividends paid during the performance period.  The number of shares awarded at the end of the performance period for each MSU Grant may increase up to 150% of target in direct proportion to any percentage increase in shareholder value during the performance period.  The probability of the actual shares expected to be awarded is considered in the grant date valuation; therefore, the expense will not be adjusted to reflect the actual units awarded.  However, if the performance condition is not met, no shares will be granted, no compensation will ultimately be recognized and, to the extent previously recognized, compensation expense will be reversed.

The fair value of our MSU Grants was determined using the Monte-Carlo simulation model, which simulates a range of possible future stock prices and estimates the probabilities of the potential payouts.  The Monte-Carlo simulation model uses the average prices for the 60-consecutive calendar days beginning 30 days prior to and ending 30 days after the first business day of the performance period.  This model also 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 period commensurate with the three-year performance period.
 
·
The risk-free interest rate is based on the U.S. Treasury rate assumption commensurate with the three-year performance period.
 
·
The expected dividend yield is based on our current dividend yield as the best estimate of projected dividend yield for periods within the three-year performance period.

We update the historical and implied components of the expected volatility assumption when new grants are made.

The fair value of our stock options was estimated on the date of grant using a binomial lattice-based option valuation model.  This model incorporates several key assumptions, including expected volatility, risk-free rate of return, expected dividend yield and the option’s expected life.  Additionally, we use historical data to estimate option exercise and employee termination, and these assumptions are updated annually.  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.  The expected life is a by-product of the lattice model and is updated when new grants are made.  No stock options were granted in 2012 or in the first nine months of 2013.

We have not made any material changes in our estimates or assumptions used to determine share-based compensation during the first nine months of 2013 and do not believe there is a reasonable likelihood 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.
 
 
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ITEM 3.

Part II, Item 7A of the 2012 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 3, 2012.

ITEM 4. 

Our management, including our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of the end of the period covered by this report.  Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that as of May 3, 2013, 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 3, 2013 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.

 
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PART II – OTHER INFORMATION

ITEM 1.

Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarter ended February 1, 2013 is incorporated in this item of this Quarterly Report on Form 10-Q by this reference.

ITEM 1A.

There have been no material changes in the risk factors previously disclosed in “Item 1A. Risk Factors” of our 2012 Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended November 2, 2012.

ITEM 2.

Unregistered Sales of Equity Securities

There were no equity securities sold by the Company during the period covered by this Form 10-Q that were not registered under the Securities Act of 1933, as amended.
 
Issuer Purchases of Equity Securities
 
The following table sets forth information with respect to purchases of shares of the Company’s common stock made during the quarter ended May 3, 2013 by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange Act:

 
 
 
 
 
 
Period
 
 
 
 
Total Number of Shares Purchased
   
 
 
 
Average Price Paid Per
Share (1)
   
Total Number of
Shares 
Purchased as Part
of Publicly
Announced Plans
or Programs
 
 
 
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
2/2/13 – 3/1/13
    --       --       --  
Indeterminate (2)
3/2/13 – 3/29/13
    31,800     $ 80.75       31,800  
Indeterminate (2)
3/30/13 – 5/3/13
    12,500     $ 80.14       12,500  
Indeterminate (2)
Total for the quarter
    44,300     $ 80.58       44,300  
    Indeterminate (2)

 
(1)
Average price paid per share is calculated on a settlement basis and includes commissions and fees.
 
(2)
Subject to a maximum amount of $100,000 and the limits imposed by our Credit Facility, we have been authorized by our Board of Directors, on September 19, 2012, to repurchase shares during 2013.  See Note 7 to our Consolidated Financial Statements contained in the 2012 Form 10-K.

ITEM 6. 

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.

 
CRACKER BARREL OLD COUNTRY STORE, INC.
     
Date: June 3, 2013
By:
/s/Lawrence E. Hyatt
   
Lawrence E. Hyatt, Senior Vice President and
   
Chief Financial Officer
     
Date: June 3, 2013
By:
/s/P. Douglas Couvillion
   
P. Douglas Couvillion, Vice President, Corporate Controller and
Principal Accounting Officer

 
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INDEX TO EXHIBITS

Exhibit

Second Amendment to Credit Agreement dated as of May 31, 2013
   
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
101.INS
XBRL Instance Document (filed herewith)
   
101.SCH
XBRL Taxonomy Extension Schema (filed herewith)
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase (filed herewith)
   
101.LAB
XBRL Taxonomy Extension Label Linkbase (filed herewith)
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase (filed herewith)
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase (filed herewith)
 
 
31