Cracker Barrel Old Country Store
Annual Report 2014

Plain-text annual report

 s we look back on 2014, we are pleased with our accomplishments. We continued to focus for many perception attributes including Value, on our long-term strategy to Enhance the Food Quality, Menu Variety, and Friendly Service. Core business, Expand the Footprint of our stores, and Extend the Cracker Barrel® brand. In every quarter of the year, we outperformed the Knapp-TrackTM Casual Dining Index for sales and traffic. This achievement marks eleven consecutive quarters in which we have outperformed this peer group. We grew our restaurant and retail comparable store sales, operating margins, and earnings per diluted share despite continued headwinds within the restaurant industry. In addition, we once again celebrated record sales on Thanksgiving Day. In addition, we were named to Forbes Magazine’s list of America’s 100 Most Trustworthy Companies. This list, developed by GMI Ratings, evaluated the accounting and governance behaviors of more than 8,000 publicly traded companies in North America. We are proud to be on this list, which we believe further demonstrates that Cracker Barrel is a brand not only our customers can trust, but also a solid long-term investment our shareholders can trust. Financial Perform ance Our Operations team consistently executed our Our success in the 2014 fiscal year was achieved in mission of Pleasing People® and we saw year-over- the face of a challenging economic environment for year increases in several of our guest loyalty our consumer, severe winter weather, and signifi- metrics. Consumer ratings for the 2014 fiscal year cant promotional activity by many of our competitors. indicate that Cracker Barrel received the highest We grew our revenues by 1.5% to $2.7 billion, with overall rating among 32 large restaurant chains comparable store restaurant sales increasing analyzed by Technomic Inc., a well-recognized 0.7% and comparable store retail sales increasing industry research firm. Moreover, we led in ratings 0.4%. Adjusted for proxy contest and severance 1 expenses, we improved our operating margins to 7.9% the Cracker Barrel brand. This culture begins with from 7.8% in the prior fiscal year1. This improvement our mission of Pleasing People. The Pleasing People was the result of the many cost savings initiatives that mission is demonstrated by our employees and is we implemented as part of our strategic plan. Our evidenced in our guests’ and employees’ survey adjusted earnings per diluted share grew 13.3% to responses about their experience at Cracker Barrel. $5.63, compared to $4.97 in fiscal 2013. During 2014, Overall guest and employee satisfaction remained we directly increased shareholder return by growing high during fiscal 2014. Guests’ perceptions of overall our regular quarterly dividend by over 33% to $1.00, value once again showed a year-over-year increase. resulting in an annual yield of approximately 4.0%. Among our front-line store employees, employee Pleasing Peo ple ® We believe that Cracker Barrel Old Country Store® morale and sentiment toward the company remained high. More than 80% of our hourly and management is one of the most unique and differentiated brands 1 Operating income determined in accordance with GAAP in full-service dining. This belief is supported by Technomic Inc. research regarding customer ratings of brand uniqueness. We also believe that our organizational culture is uniquely capable of delivering was $208.4 million, or 7.8% of total revenue, for 2014 and $201.5 million, or 7.6% of total revenue, for 2013. Diluted earnings per share in accordance with GAAP were $5.51 for 2014 and $4.90 for 2013. The GAAP amount for 2014 includes proxy contests expenses and their related tax effects. The GAAP amount for 2013 includes proxy contest expenses, other items and their related tax effects. Please see selected financial data for further explanation. Cracker Barrel Old Country Store, Inc. Earnings Per Diluted Share Cracker Barrel Old Country Store, Inc. From Continuing Operations Earnings Per Diluted Share Cracker Barrel Old Country Store, Inc. Declared Dividends per Share Cracker Barrel Old Country Store, Inc. Since FY 2010 Declared Dividends Per Share Since FY 2010 $6.00 $5.00 $4.00 $3.00 $2.00 $ 1.00 $0 2010 2011(a) 2012(b) Fiscal Year 2013(c) 2014(d) (a) (b) (c) (d) Fiscal 2011 adjusted for charges related to an impairment, severance and the proxy contest. Fiscal 2012 adjusted for charges related to severance and the proxy contest, and on a 52-week basis. Fiscal 2013 adjusted for charges related to severance, the proxy contest, and retroactive reinstatement of the work opportunities tax credit. Fiscal 2014 adjusted for charges related to proxy contests. e r a h S r e P s d n e d i v i D d e r a l c e D $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $ .50 $0 2010 2011 2012 Fiscal Year 2013 2014 employees responded to our annual employee engagement survey that they feel proud to work at Cracker Barrel, while over 90% responded that they would recommend Cracker Barrel as a great place to eat and shop. In addition, our management retention rates have remained high. S t r a t e gic Prio rit ies At the beginning of 2014, we announced fi ve strategic business priorities for the fi scal year: fi rst, focusing on better-for-you additions and reinforcing everyday value on our menu; second, continuing to message our “Handcrafted by Cracker Barrel” theme in support of the brand, menu, and merchandise; third, driving retail sales with improved quality and breadth of our merchandise assortment; fourth, improving operations and margins by applying technology and process improvements; and fi fth, focusing on enhancing long- term total shareholder returns. We believe that we made signifi cant progress on all fi ve priorities in 2014. In August, we rolled out a new category within the Cracker Barrel menu to meet our guests’ desire for additional healthy menu items. The Wholesome Fixin’s® category introduced nine complete meals for under 600 calories at breakfast, lunch or dinner. 3 Our guests responded positively to the new menu Country Dinner Plates at a $7.69 price point, further category. We saw improvements in survey scores enhancing the value perception of our menu. measuring guests’ attitudes about the brand including “offers appealing healthy options,” “uses fresh ingredients,” and “is a restaurant I can trust.” Our marketing focus at the beginning of the fiscal year was to build awareness around the introduction of the Wholesome Fixin’s menu category. We Throughout the year, we continued to build upon the promoted the category with new television and radio Wholesome Fixin’s category through our limited commercials which ran for five weeks during our time promotional offerings, and we plan to add these first fiscal quarter. During the holiday season we high- new entrees to the core menu category during fiscal lighted the Cracker Barrel brand and our value year 2015. We look forward to the long-term growth message through national cable television advertising of the Wholesome Fixin’s® category on our menu. for an additional five weeks. In support of the Through our promotional menu activity, we reinforced summer travel season, we again featured our Country the affordability of our menu by featuring two Dinner Plate value messaging during a national new limited time Weekday Lunch Special entrees at television commercial campaign. $5.99. Additionally, we continued to highlight our Additionally, we continued to promote the Cracker Barrel brand through our more than 1,600 billboards. During the fourth quarter, we refreshed 4 approximately one-fourth of our billboards with Our third strategic priority for the year was to drive new price-point messaging around our $5.99 and retail sales with improved quality and breadth of $7.69 value positions at both lunch and dinner. the merchandise assortment. During the fi scal year, As part of an ongoing sponsorship of military families, we held an online nationwide charity auction. Not only did the online auction generate proceeds to support our returning service men, women, and their families, it also afforded us the opportunity to increase the level of digital engagement and connection with our guests. we increased the number of merchandise themes that we feature each year and shortened their time on the fl oor in order to keep the merchandise assortment fresh and new. We introduced some eye-catching color themes such as Passion for Purple and Red Hot, with bright décor, home goods, and women’s clothing, which resonated with our guests. Additionally, our merchandising team To enhance our digital market presence during the broadened the appeal of the brand by sourcing summer travel season, we followed “The Four- products that have seasonal appeal and reach Star Salute: Cracker Barrel’s Military Family Online across generations and genders. Charity Auction” with our “Summer Stories Sweepstakes.” The digital sweepstakes allowed our guests to share summer pictures with us and other guests thus generating a two-way personalized online experience between our guests and our brand. We were very pleased with both of these digital media events and the brand impressions that they generated. Our women’s apparel and accessories continued process. These technology and process enhance- to be one of our strongest selling categories. To build ments, as well as others that are not listed, upon the strength of this category, we successfully resulted in increased productivity and throughput, introduced women’s footwear providing depth to the ultimately contributing in part to our increase assortment. Another leading sales category in in operating margin. 2014 was Décor. Our guests responded especially well to our sentiment and inspirational décor items. Our fi nal business priority has been, and will continue to be, a continued focus on maximizing We continue to invest in our employees and their total shareholder return. In 2014 we targeted career development. At the onset of our fi scal year, increasing the quarterly dividend, expanding the we held a very successful General Manager’s footprint through new unit growth, and extending conference. This conference provided a platform the brand outside of the four walls. In the third quarter, for the introduction and training of several new we declared a 33% dividend increase to $1.00, technology-based programs. We trained all of our which was paid in the first quarter of 2015. This General Managers on the second phase of our marks a fourth increase in the quarterly dividend labor management system and all of our Retail Managers on improved selling techniques to high- light our fun, unique, and nostalgic merchandise. Other successful process and technology improve- ments during the year included a new back of house system that supports superior food quality and enhances the employee experience and an inventory management technology system that can be built upon to automate the inventory and replenishment NOW available at your supermarket premium bacon spiral sliced ham 6 cboldcountrystore.com since November 2011, generating a total increase R e f l e c t i o n a n d O u t l o o k of 400% over that time period. While 2014 was a challenging year within the We delivered “total shareholder return” or TSR, which we believe is an appropriate measure of value returned on the shareholders’ investment, of approximately 133%, compared to 77% for the S&P 600 restaurant index. Additionally, we successfully opened seven new Cracker Barrel Old Country Store® locations during the year, bringing our total store count at the end of the fi scal year to 631. restaurant industry, I am very proud of our leader- ship teams and our employees who consistently delivered on our mission of Pleasing People and executed our business priorities. As we look to 2015, we are well-positioned with a talented management team and engaged employees. We remain committed to delivering an outstanding dining and retail experience to our guests, providing a positive employee experience, and building In October, we shipped our fi rst licensed products on our accomplishments to provide value to our with John Morrell Food Group under our new shareholders. mark, CB Old Country StoreTM. Our licensed products have been well received at grocery stores and at the close of the fi scal year we had 19 products available through our licensing program. Sincerely, Sandra B. Cochran President and Chief Executive Offi cer 7 C R AC KE R BAR RE L OLD COUNTRY STO RE, INC. Directors Thomas H. Barr Interim CEO and Global President of Hailo Network, USA; former Vice President, Global Coffee at Starbucks Corporation James W. Bradford Chairman of the Board; Retired; former Dean and Professor for the Practice of Management at Vanderbilt University’s Owen Graduate School of Management Sandra B. Cochran President and CEO of Cracker Barrel Old Country Store, Inc. Glenn A. Davenport President of G. A. Food Service, Inc.; former Chairman and CEO of Morrison Management Specialists Richard J. Dobkin Retired; former Managing Partner of the Tampa, FL office of Ernst & Young, LLP Norman E. Johnson Retired; former Executive Chairman and CEO of CLARCOR, Inc. William W. McCarten Chairman of the board of directors of DiamondRock Hospitality Company Coleman H. Peterson President and CEO of Hollis Enterprises, LLC; former Chief People Officer of Wal-Mart Stores, Inc. Andrea M. Weiss President and CEO of Retail Consulting, Inc.; former President of dELiA*s Corp. 8 2014 Financial Table of Contents 10 Forward-Looking Statements – Risk Factors 12 Selected Financial Data 13 Shareholder Return Performance Graph 14 Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 Management’s Report on Internal Control Over Financial Reporting 30 Report Of Independent Registered Public Accounting Firm 31 Report Of Independent Registered Public Accounting Firm 32 Consolidated Balance Sheets 33 Consolidated Statements of Income and Consolidated Statements of Comprehensive Income 34 Consolidated Statements of Changes in Shareholders’ Equity 35 Consolidated Statements of Cash Flows 36 Notes To Consolidated Financial Statements 54 Corporate Officers 55 Corporate Information CB Financials_8-14_03.indd 1 9/24/14 6:06 PM Forward-Looking Statements – Risk Factors Except for specific historical information, many of the matters discussed in this Annual Report to Shareholders 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 that Cracker Barrel Old Country Store, Inc. (the “Company”) expects 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,” “expecta- tions,” “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 summarized below, as well as other factors discussed throughout this document, including, without limitation, the factors described under “Critical Accounting Estimates” on pages 24 to 27 of this Annual Report or, from time to time, in the Company’s filings with the Securities and Exchange Commission (“SEC”), press releases and other communications. 10 Readers are cautioned not to place undue reliance on forward-looking statements made in this document, since the statements speak only as of the document’s date. Except as may be required by law, the Company has no obligation, and does not intend, to publicly update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this document or to reflect the occurrence of unanticipated events. Readers are advised, however, to consult any future public disclosures that the Company may make on related subjects in its documents filed or furnished to the SEC or in its other public disclosures. Set forth below is a summary of the material risks associated with our business and, therefore, any investment in our securities. Our 2014 Annual Report on Form 10-K, filed with the SEC on September 25, 2014 and available at sec.gov, as well as our website, crackerbarrel.com, contains a more comprehensive discussion of these risks, and you are encouraged to review that Annual Report on Form 10-K and all our SEC filings. Risks Related to Our Business • General economic, business and societal conditions as well as those specific to the restaurant or retail industries that are largely out of our control may adversely affect our business, financial condition and results of operations. • We face intense competition, and if we are unable to continue to compete effectively, our business, financial condition and results of operations would be adversely affected. • The price and availability of food, ingredients, retail merchandise and utilities used by our stores could adversely affect our revenues and results of operations. • Our plans depend significantly on our strategic priorities and business initiatives designed to enhance our menu and retail offerings, support our brand, improve operating margins and improve the efficiencies and effectiveness of our operations. Failure to achieve or sustain these plans could adversely affect our results of operations. • We are dependent upon attracting and retaining qualified employees while also controlling labor costs. CB Financials_8-14_03.indd 10 9/24/14 6:06 PM • Our risks are heightened because of our single retail • Health concerns, government regulation relating to the distribution facility and our potential inability or failure to execute on a comprehensive business continuity plan following a major national disaster at or near our corporate facility could adversely affect our business. • Our reliance on certain significant vendors, particularly for foreign-sourced retail products, subjects us to numerous risks, including possible interruptions in supply, which could adversely affect our business. consumption of food products and widespread infectious diseases could affect consumer preferences and could negatively affect our results of operations. • Failure to maximize or to successfully assert our intellectual property rights could adversely affect our business and results of operations. • Litigation may adversely affect our business, financial condition and results of operations. • Our ability to manage our retail inventory levels and changes • Unfavorable publicity could harm our business. In addition, in merchandise mix may adversely affect our business. • Our capital structure contains substantial indebtedness, which may decrease our flexibility, increase our borrowing costs and adversely affect our liquidity. In addition, we cannot provide any guaranty of future cash dividend payments or that we will be able to actively repurchase our common stock pursuant to a share repurchase program. • Our advertising is heavily dependent on billboards, which are highly regulated; our evolving marketing strategy involves increased advertising and marketing costs that could adversely affect our results of operations. • A material disruption in our information technology, network infrastructure and telecommunication systems could adversely affect our business and results of operations. • A privacy breach could adversely affect our business. • We outsource certain business processes to third-party vendors that subject us to risks, including disruptions in business and increased costs; our use of third party technologies has increased and if we are unable to maintain our rights to these technologies our business may be harmed. • Our business is somewhat seasonal and also can be affected by extreme weather conditions and natural disasters. • If we fail to execute our business strategy, which includes our ability to find new store locations and open new stores that are profitable, our business could suffer. • Individual store locations are affected by local conditions that could change and adversely affect the carrying value of those locations. our failure to recognize, respond to and effectively manage the impact of social media could materially impact our business. • The loss of key executives or difficulties in recruiting and retaining qualified personnel could jeopardize our future growth and success. • We are subject to a number of risks relating to federal, state and local regulation of our business including the areas of minimum wage increases, health care reform and environmental matters, and an insufficient or ineffective response to government regulation may increase our costs and decrease our profit margins. • Our current insurance programs may expose us to unexpected costs, which could have a material adverse effect on our financial condition and results of operations. • Our reported results can be affected adversely and unexpectedly by the implementation of new, or changes in the interpretation of existing, accounting principles or financial reporting requirements. • Failure of our internal control over financial reporting could adversely affect our business and financial results. • Our annual and quarterly operating results may fluctuate significantly and could fall below the expectations of investors and securities analysts due to a number of factors, some of which are beyond our control, resulting either in volatility or a decline in the price of our securities. • Our business could be negatively affected as a result of actions of activist shareholders. • Provisions in our charter, Tennessee law and our share- holder rights plan may discourage potential acquirers of our company. CB Financials_8-14_03.indd 11 11 9/24/14 6:06 PM CR ACKER BA R R EL OLD COUN TRY STOR E, I NC. Selected Financial Data August 1, 2014(a) (Dollars in thousands except percentages and share data) For each of the fiscal years ended August 3, 2012(c) August 2, 2013(b) July 29, 2011(d) July 30, 2010(e) $ 2,683,677 132,128 $ 2,644,630 117,265 $ 2,580,195 103,081 $ 2,434,435 85,208 $ 2,404,515 85,258 5.55 5.51 3.25 3.00 32.5% 36.0 18.9 12.6 4.8 — 7.8 7.1 4.95 4.90 2.25 1.90 32.3% 36.5 18.2 13.0 5.4 — 7.6 6.3 4.47 4.40 1.15 0.97 32.1% 36.8 18.0 13.1 5.7 — 7.4 5.7 3.70 3.61 0.88 0.86 31.7% 37.1 18.6 12.6 5.7 — 6.9 4.8 3.71 3.62 0.80 0.80 31.0% 37.8 18.2 13.0 6.1 0.1 6.8 4.8 $ (14,789) 1,432,248 4,704 375,000 3,239 123,221 528,641 $ (13,873) 1,388,306 — 400,000 11,644 120,073 484,026 $ 18,249 1,418,992 20,215 525,036 14,166 114,897 382,675 $ (21,188) 1,310,884 — 550,143 51,604 105,661 268,034 $ (73,289) 1,292,067 — 573,744 66,281 93,822 191,617 $ 90,564 12,473 $ 73,961 3,570 $ 80,170 14,923 $ 77,686 33,563 $ 69,891 62,487 23,821,227 631 23,795,327 624 23,473,024 616 22,840,974 603 22,732,781 593 $ 3,415 873 $ 3,390 869 $ $ 3,369 863 3,234 837 $ 3,226 832 0.7% 0.4 609 3.1% 2.9 596 2.2% 1.6 591 0.2% 0.7 583 0.8% (0.9) 569 SELECTED INCOME STATEMENT DATA: Total revenue Net income Net income per share: Basic Diluted Dividends declared per share Dividends paid per share AS PERCENT OF TOTAL REVENUE: Cost of goods sold Labor and related expenses Other store operating expenses Store operating income General and administrative expenses Impairment and store dispositions, net Operating income Income before income taxes SELECTED BALANCE SHEET DATA: Working capital (deficit) Total assets Current interest rate swap liability Long-term debt Long-term interest rate swap liability Other long-term obligations Shareholders’ equity SELECTED CASH FLOW DATA: Purchase of property and equipment, net Share repurchases SELECTED OTHER DATA: Common shares outstanding at end of year Stores open at end of year AVERAGE UNIT VOLUMES (f): Restaurant Retail COMPARABLE STORE SALES (g): Period to period increase (decrease) in comparable store sales: Restaurant Retail Memo: Number of stores in comparable base 12 CB Financials_8-14_03.indd 12 9/24/14 6:06 PM (a) We incurred $4,313 in costs related to the November 2013 proxy contest and April 2014 special shareholders’ meeting, which are included in general and administrative expenses. (b) We incurred $4,111 in costs related to the November 2012 proxy contest, which are included in general and administrative expenses. (c) Fiscal 2012 consisted of 53 weeks while all other periods presented consisted of 52 weeks. The estimated impact of the additional week was to increase consolidated fiscal 2012 results as follows: total revenue, $51,059; store operating income, 0.2% of total revenue; operating income, 0.2% of total revenue; net income, 0.2% of total revenue; and diluted net income per share, $0.27. As part of our restructuring of our field organization in April 2012, we incurred severance charges of $1,660, which are included in general and administrative expenses. We also incurred $5,203 in costs related to the December 2011 proxy contest, which are also included in general and administrative expenses. (d) Includes impairment charges of $3,219 before taxes and pre-tax gains on store dispositions of $4,109. Our debt refinancing in the fourth quarter of fiscal 2011 resulted in additional interest expense of $5,136 related to transaction fees and the write-off of deferred financing costs. During the fourth quarter of fiscal 2011, as part of our cost reduction and organization streamlining initiative, we incurred severance charges of $1,768, which are included in general and administrative expenses. We also incurred $404 in costs related to the December 2011 proxy contest, which are also included in general and administrative expenses. (e) Includes impairment charges for two stores of $2,672 before taxes. (f) Average unit volumes include sales of all stores. Fiscal 2012 includes a 53rd week while all other periods presented consist of 52 weeks. (g) Comparable store sales consist of sales of stores open at least six full quarters at the beginning of the year; and are measured on comparable calendar weeks. MARKET PRICE AND DIVIDEND INFORMATION The following table indicates the high and low sales prices of our common stock, as reported by Nasdaq, and dividends declared and paid for the quarters indicated. First Second Third Fourth s r a l l o D n I $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Fiscal Year 2014 Fiscal Year 2013 Prices High Low Dividends Declared Dividends Paid Prices High Low Dividends Declared Dividends Paid $ 111.70 118.63 103.30 103.32 $ 96.32 96.41 93.59 92.84 $ 0.75 0.75 1.75 — $ 0.75 0.75 0.75 0.75 $ 69.30 65.94 84.41 102.95 $ 62.06 60.07 64.53 83.02 $ 0.50 0.50 0.50 0.75 $ 0.40 0.50 0.50 0.50 Cracker Barrel Old Country Store, Inc. CR ACKER BA R R EL OLD COU N TRY STO R E, I N C. Shareholder Return Performance Graph The graph (left) shows the changes over the past six-year period in the value of $100 invested in Cracker Barrel Old Country Store, Inc. Common Stock, the Standard & Poor’s Small Cap Index, and the Standard & Poor’s 600 Restaurant Index which we believe is an adequate peer composite for the Company. The plotted points represent the closing price on the last day of the fiscal year indicated and assume the reinvestment of dividends. The data set forth in the graph has been provided by FactSet Research Systems, Inc. 2008 2009 2010 2011 2012 2013 2014 Cracker Barrel Old Country Store, Inc. S&P Small Cap S&P 600 Restaurant CB Financials_8-14_03.indd 13 13 9/24/14 6:06 PM CR ACKER BA R R EL OLD COUN TRY STOR E, I NC. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. MD&A should be read in conjunction with the Consolidated Financial Statements and notes thereto. Readers also should carefully review the information presented under the section entitled “Risk Factors” and other cautionary statements in this report. All dollar amounts (other than per share amounts) reported or discussed in this MD&A are shown in thousands. References in MD&A to a year or quarter are to our fiscal year or quarter unless expressly noted or the context clearly indicates otherwise. This overview summarizes the MD&A, which includes the following sections: • Executive Overview – a general description of our business, the restaurant and retail industries, our key performance indicators and the Company’s performance in 2014. • Results of Operations – an analysis of our consolidated statements of income for the three years presented in our Consolidated Financial Statements. • Liquidity and Capital Resources – an analysis of our primary sources of liquidity, capital expenditures and material commitments. • Critical Accounting Estimates – a discussion of accounting policies that require critical judgments and estimates. EXECUTIVE OVERVIEW Cracker Barrel Old Country Store, Inc. (the “Company,” “our” or “we”) is a publicly traded (Nasdaq: CBRL) company that, through its operations and those of certain subsidiaries, is engaged in the operation and development of the Cracker Barrel Old Country Store® (“Cracker Barrel”) concept. Each Cracker Barrel store consists of a restaurant with a gift shop. The restaurants serve breakfast, lunch and dinner. The gift shop area offers a variety of decorative and functional items specializing in rocking chairs, holiday gifts, toys, apparel and foods. As of September 18, 2014, the Company operated 633 Cracker Barrel stores located in 42 states and had 8,473 shareholders of record. 14 Restaurant and Retail Industries Our stores operate in both the restaurant and retail industries in the United States. The restaurant and retail industries are highly competitive with respect to quality, variety and price of the food products and retail merchandise offered. We compete with a significant number of national and regional restaurant and retail chains. Additionally, there are many segments within the restaurant industry, such as family dining, casual dining, fast casual and quick service, which often overlap and provide competition for widely diverse restaurant concepts. We operate in the full-service segment of the restaurant industry. Competition also exists in securing prime real estate locations for new stores, in hiring qualified employees, in advertising, in the attractiveness of facilities and with competitors having similar menu offerings or conve- nience. The restaurant and retail industries are often affected by changes in consumer taste and preference; national, regional or local economic conditions; demographic trends; traffic patterns; the type, number and location of competing restaurants and retailers; and consumers’ discretionary purchasing power. Additionally, economic, seasonal and weather conditions affect the restaurant and retail industries. Adverse economic conditions and unemployment rates affect consumer discre- tionary income and dining and shopping habits. Historically, interstate tourist traffic and the propensity to dine out have been much higher during the summer months, thereby contributing to higher profits in our fourth quarter. Retail sales, which are made substantially to our restaurant guests, are strongest in the second quarter, which includes the Christmas holiday shopping season. Severe weather also affects restaurant and retail sales adversely from time to time. Key Performance Indicators Management uses a number of key performance measures to evaluate our operational and financial performance, including the following: Comparable store restaurant sales and restaurant guest traffic consist of sales and calculated number of guests, respectively, CB Financials_8-14_03.indd 14 9/24/14 6:06 PM of stores open at least six full quarters at the beginning of the year and are measured on comparable calendar weeks. This measure excludes the impact of new store openings. Percentage of retail sales to total sales indicates the relative proportion of spending by guests on retail product at our stores and helps identify overall effectiveness of our retail operations. Management uses this measure to analyze a store’s ability to convert restaurant traffic into retail sales since we believe that the substantial majority of our retail customers are also guests in our restaurants. Average check per guest is an indicator which management uses to analyze the dollars spent per guest in our stores on restaurant purchases. This measure aids management in identifying trends in guest preferences as well as the effective- ness of menu price increases and other menu changes. Store operating margins are defined as total revenue less cost of goods sold, labor and other related expenses and other store operating expenses, all as a percentage of total revenue. Management uses this indicator as a primary measure of operating profitability. Company Performance in 2014 Management believes that the Cracker Barrel brand remains one of the strongest and most differentiated brands in the restaurant industry. During 2014, we focused on five key business priorities which were based on our previously announced long-term strategy. Our long-term strategy includes the following: • Enhancing the core business by increasing our brand’s relevance to customers in order to drive guest traffic and sales in both restaurant and retail, implementing geographic pricing tiers to optimize average check and re-engineering store processes to increase operating margins. • Expanding the footprint through continued use of our proven site selection tools, introducing a new and more efficient building and equipment prototype and the selective entry into new markets. • Extending the brand by building on the initial success of our licensing business, leveraging our brand strengths into a new fast casual concept and growing our retail business into an omni-channel business. Our five priorities for 2014 were to: 1) Focus on better-for-you additions to and reinforce everyday value on our menu. In the first quarter of 2014, we rolled-out a new menu category, Wholesome Fixin’s, to meet our guests’ desire for additional healthy menu items. The Wholesome Fixin’s launch introduced nine complete meals for fewer than 600 calories. We believe that our guests responded positively to the new menu category. Throughout the year, we built upon the Wholesome Fixin’s category through our limited time promotional offerings. We reinforced the affordability of our menu by featuring two new limited time Weekday Lunch Special entrees at $5.99. Additionally, we continued to highlight our Country Dinner Plates at a $7.69 price point, which we believe further enhances the value perception of our menu. 2) Continue messaging with our Handcrafted by Cracker Barrel theme in support of the brand, menu and merchandise. To help build awareness and support of the Wholesome Fixin’s roll-out, we promoted the menu category with new television and radio commercials which ran for five weeks during our first quarter of 2014. During the holiday season, we high- lighted the Cracker Barrel brand and our value message through national cable television advertising. In support of the summer travel season, we again featured our Country Dinner Plate value messaging during a national television commercial campaign. Additionally, we continued to promote the Cracker Barrel brand through our more than 1,600 billboards. During the fourth quarter of 2014, we refreshed approximately one-fourth of our billboards with new price-point messaging around our $5.99 and $7.69 value positions at both lunch and dinner, respectively. 3) Drive retail sales with improved quality and breadth of our merchandise assortment. During 2014, we increased the number of merchandise themes that we feature each year and shortened their time on the floor in order to keep the merchandise assortment fresh and new. CB Financials_8-14_03.indd 15 15 9/24/14 6:06 PM We introduced some eye-catching color themes, with bright décor, home goods, and women’s clothing, which we believe resonated well with our guests. Additionally, our merchandising team broadened the appeal of the brand by sourcing products that have seasonal appeal and reach across the generations and genders. Our women’s apparel and accessories continued to be one of our strongest selling categories. To build upon the strength of this category, we introduced women’s footwear providing depth to the assortment. We believe the successful implementation of these five priorities resulted in our revenue growth during the year, positive comparable store restaurant and retail sales for the year with both comparable store traffic and sales out- performing the Knapp-Track™ Casual Dining Index for the year, and higher operating margin and profit as compared to the prior year. All of these were accomplished despite the pressures from widespread discounting within the restau- rant industry, the challenges from a continuing uncertain consumer environment and severe winter weather. RESULTS OF OPERATIONS The following table highlights operating results over the past three years: Relationship to Total Revenue 2013 2012* 2014 Total revenue Cost of goods sold Gross profit Labor and other related expenses Other store operating expenses Store operating income General and administrative Operating income Interest expense Income before income taxes Provision for income taxes Net income 100.0% 32.5 67.5 100.0% 32.3 67.7 100.0% 32.1 67.9 36.0 36.5 36.8 18.9 12.6 4.8 7.8 0.7 7.1 2.2 4.9 18.2 13.0 5.4 7.6 1.3 6.3 1.9 4.4 18.0 13.1 5.7 7.4 1.7 5.7 1.7 4.0 * 2012 consists of 53 weeks while the other periods presented consist of 52 weeks. 4) Apply technology and process enhancements to improve the employee experience, the guest experience and operating margins. At the beginning of 2014, we held a General Manager’s conference. This conference provided a platform for the introduction and training of several new technology-based programs, including the second phase of our labor management system. We also trained all of our retail managers on improved selling techniques. Other process and technology improvements during the year included an enhancement to our food production system to automate inventory labeling which resulted in increased productivity and through-put which we believe allows us to continue a very strong value platform. Guest survey responses to overall value once again measured a year-over-year increase. 5) Focus on enhancing long-term total shareholder returns. In 2014, we increased our regular quarterly dividend, continued to expand our store footprint, and began extending the brand beyond our existing stores. In the third quarter of 2014, we declared a 33% increase in our regular quarterly dividend to $1.00. This marks the fourth increase in the quarterly dividend since November 2011, generating a total increase of 400% over that time period. We opened seven new Cracker Barrel stores during the year bringing our total store count at the end of 2014 to 631. In the first quarter of 2014, we launched our licensing platform with John Morrell Food Group under our new trademark, CB Old Country Store™. We believe that our licensed products have been well received at the grocery stores, and at the end of 2014 we had 19 products available through our licensing program. 16 CB Financials_8-14_03.indd 16 9/24/14 6:06 PM Total Revenue The following table highlights the key components of revenue for the past three years: 2014 2013 2012 Revenue in dollars: (1) Restaurant Retail Total revenue Total revenue percentage increase (1) $ 2,137,405 546,272 $ 2,683,677 $ 2,104,768 539,862 $ 2,644,630 $ 2,054,127 526,068 $ 2,580,195 1.5% 2.5% 6.0% Total revenue by percentage relationships: Restaurant Retail Comparable number of stores Comparable store averages per store: (2) Restaurant Retail Total Restaurant average weekly sales (3) $ Retail average weekly sales (3) $ $ 79.6% 20.4% 609 79.6% 20.4% 596 79.6% 20.4% 591 $ $ $ 3,422 871 4,293 65.7 16.8 $ $ $ 3,409 871 4,280 65.2 16.7 3,375 861 4,236 63.6 16.3 (1) 2012 consists of 53 weeks while the other periods presented consist of 52 weeks. Our comparable store restaurant sales increased from 2013 to 2014 resulting from a higher average check of 2.6%, including a 2.1% average menu price increase, partially offset by a decrease in guest traffic of 1.9%. Our comparable store restaurant sales increased from 2012 to 2013 resulting from a higher average check of 2.5%, including a 2.2% average menu price increase, and an increase in guest traffic of 0.6%. The comparable store retail sales increase from 2013 to 2014 resulted primarily from strong performance in apparel and accessories and home décor merchandise categories partially offset by a decline in the bed and bath merchandise category and the decrease in guest traffic. The comparable store retail sales increase from 2012 to 2013 resulted primarily from strong performance in apparel and accessories merch- andise category and the increase in guest traffic. Cost of Goods Sold The following table highlights the components of cost of goods sold in dollar amounts for the past three years: 2014 2013 2012* (2) 2012 is calculated on a 53-week basis while the other periods are calculated on a 52-week basis. (3) Average weekly sales are calculated by dividing net sales by operating weeks and include all stores. Cost of Goods Sold: Restaurant Retail Total Cost of Goods Sold $ 589,390 283,368 $ 872,758 $ 571,825 282,859 $ 854,684 $ 553,478 274,006 $ 827,484 Total revenue benefited from the opening of 7, 8 and 13 stores in 2014, 2013 and 2012, respectively. Total revenue in 2012 also benefited from the additional week in 2012, which resulted in an increase in revenues of $51,059. The following table highlights comparable store sales* results over the past two years: * 2012 consists of 53 weeks while all other periods presented consist of 52 weeks. The following table highlights restaurant cost of goods sold as a percentage of restaurant revenue for the past three years: Restaurant Cost of Goods Sold 27.6% 27.2% 2014 2013 2012 26.9% Restaurant Retail Restaurant & Retail Period to Period Increase 2014 vs 2013 2013 vs 2012 (609 Stores) (596 Stores) 0.7% 0.4 0.6 3.1% 2.9 3.0 * Comparable store sales consist of sales of stores open at least six full quarters at the beginning of the year and are measured on comparable calendar weeks. The increase from 2013 to 2014 was primarily the result of food commodity inflation of 1.8%, a shift to higher cost menu items and higher food waste partially offset by our menu price increase referenced above. Higher cost menu items and higher food waste accounted for 0.3% and 0.1%, respectively, in restaurant cost of goods sold as a percentage of restaurant revenue. The increase from 2012 to 2013 was primarily the result of food commodity inflation of 3.4% partially offset by our menu price increase referenced above and a reduction in food waste. The reduction in food waste from 2012 to 2013 CB Financials_8-14_03.indd 17 17 9/24/14 6:06 PM accounted for a 0.2% decrease in restaurant cost of goods sold as a percentage of restaurant revenue. We presently expect the rate of commodity inflation to be approximately 4% to 5% in 2015 as compared to 2014. We expect to partially offset the effects of food commodity inflation through a combination of menu price increases, supply contracts and other cost reduction initiatives. The year-to-year percentage change from 2013 to 2014 resulted from the following: Store bonus expense Employee health care expenses Store hourly labor 2013 to 2014 (Decrease) as a Percentage of Total Revenue (0.3%) (0.1%) (0.1%) The following table highlights retail cost of goods sold as a Lower store bonus expense in 2014 as compared to percentage of retail revenue for the past three years: Retail Cost of Goods Sold 51.9% 52.4% 2014 2013 2013 reflected lower performance against financial objectives in 2014 as compared to the prior year. The decrease in our employee health care expenses as 2012 52.1% The decrease in retail cost of goods sold as a percentage of retail revenue in 2014 as compared to 2013 resulted primarily from lower freight, higher initial markup on retail merchandise, lower shrinkage and a reduction in the obsolescence inventory reserve partially offset by higher markdowns. Freight Higher initial markup on merchandise Retail inventory shrinkage Obsolescence inventory reserve Markdowns 2013 to 2014 (Decrease) Increase as a Percentage of Total Revenue (0.4%) (0.2%) (0.1%) (0.1%) 0.4% The increase in retail cost of goods sold as a percentage of retail revenue in 2013 as compared to 2012 resulted from lower initial markup on retail merchandise partially offset by lower freight and shrinkage. compared to the prior year is primarily the result of the reimbursement of approximately $4,700 for certain health care premiums related to the plan year ending December 31, 2013 partially offset by higher enrollment and higher net premium costs related to the plan year ending December 31, 2014. During 2014, we recorded a receivable of $6,200 for reimbursement of certain health care premiums related to the plan year ending December 31, 2014 of which $3,600 reduced employee health care expenses in 2014. We presently expect to record an additional reimbursement of approxi- mately $2,000 to $4,000 in 2015 related to the plan year ending December 31, 2014. The decrease in store hourly labor costs as a percentage of total revenue from 2013 to 2014 resulted from menu price increases being higher than wage inflation and improved productivity. The year-to-year percentage change from 2012 to 2013 2012 to 2013 Increase (Decrease) as a Percentage of Total Revenue resulted from the following: 0.6% (0.2%) (0.1%) Store hourly labor Store bonus expense 2012 to 2013 (Decrease) Increase as a Percentage of Total Revenue (0.5%) 0.2% Lower initial markup on merchandise Freight Retail inventory shrinkage Labor and Related Expenses Labor and other related expenses include all direct and indirect labor and related costs incurred in store operations. The following table highlights labor and other related expenses as a percentage of total revenue for the past three years: Labor and other related expenses 36.0% 36.5% 36.8% 2014 2013 2012 18 The decrease in store hourly labor costs as a percentage of total revenue from 2012 to 2013 resulted from menu price increases being higher than wage inflation and improved productivity. Higher store bonus expense in 2013 as compared to 2012 reflected better performance against financial objectives in 2013 as compared to the prior year. CB Financials_8-14_03.indd 18 9/24/14 6:06 PM 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. The following table highlights other store operating expenses as a percent- age of total revenue for the past three years: Other store operating expenses 18.9% 18.2% 18.0% 2014 2013 2012 The increase in advertising expense from 2012 to 2013 resulted primarily from higher media spending. Higher mainte- nance expenses resulted primarily from planned increases in nationally managed repair and preventative maintenance programs. Lower utilities expense resulted primarily from lower electricity costs. General and Administrative Expenses The following table highlights general and administrative expenses as a percentage of total revenue for the past three years: 2014 2013 2012 The year-to-year percentage change from 2013 to 2014 General and administrative expenses 4.8% 5.4% 5.7% resulted primarily from the following: Utilities Advertising Store manager conference expense Maintenance 2013 to 2014 Increase as a Percentage of Total Revenue 0.1% 0.1% 0.1% 0.1% The year-to-year percentage change from 2013 to 2014 resulted primarily from lower incentive compensation. Lower incentive compensation in 2014 as compared to 2013 resulted primarily from lower performance against financial objectives as compared to the prior year and a decrease in the price of our common stock in 2014. The increase in utilities expense from 2013 to 2014 resulted The year-to-year percentage change from 2012 to 2013 primarily from higher heating costs due to unseasonably cold weather experienced at many of our store locations during the winter months in 2014. The increase in advertising expense from 2013 to 2014 resulted primarily from higher media spending. We plan to spend approximately 2.5% of our total revenue on advertising in 2015 compared to 2.4% of total revenue in 2014. In the first quarter of 2014, we held a general manager conference which was attended by our store operations manage- ment team. The last such conference was held during the first quarter of 2012 and the next conference is scheduled to be held in the first quarter of 2016. Higher maintenance expenses resulted primarily from increases in lighting replacement costs, snow removal, kitchen equipment repairs and national inspection and repair programs. The year-to-year percentage change from 2012 to 2013 resulted from the following: Advertising Maintenance Litigation settlement received in 2012 Utilities 2012 to 2013 Increase (Decrease) as a Percentage of Total Revenue 0.1% 0.1% 0.1% (0.1%) resulted from the following: Payroll and related expenses Manager conference expense 2012 to 2013 (Decrease) as a Percentage of Total Revenue (0.2%) (0.1%) Lower payroll and related expenses in 2013 as compared to 2012 resulted primarily from fewer store managers in training due to lower turnover and our opening fewer stores in 2013 as compared to 2012. The decrease in general and administrative expenses in 2013 as compared to 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 The following table highlights interest expense for the past three years: Interest expense $ 17,557 $ 35,742 $ 44,687 2014 2013 2012 CB Financials_8-14_03.indd 19 19 9/24/14 6:06 PM The year-to-year decrease from 2013 to 2014 resulted primarily from lower interest rates because of the expiration of our seven-year interest rate swap on May 3, 2013, which had a fixed interest rate of 5.57% plus our credit spread and lower debt outstanding. The year-to-year decrease from 2012 to 2013 resulted primarily from lower debt outstanding and lower interest rates because of a reduction in our credit spread and the expiration of our seven-year interest rate swap on May 3, 2013, which had a fixed interest rate of 5.57% plus our credit spread. Provision for Income Taxes The following table highlights the provision for income taxes as a percentage of income before income taxes (“effective tax rate”) for the past three years: Effective tax rate 2014 2013 2012 30.8% 29.3% 29.5% The increase in our effective tax rate from 2013 to 2014 resulted primarily from the expiration of the Work Opportu- nity Tax Credit (“WOTC”) as of December 31, 2013. The decrease in our effective tax rate from 2012 to 2013 resulted primarily from the retroactive extension by Congress of the WOTC through the end of calendar 2013 partially offset by the increase in pretax income. We presently expect our effective tax rate for 2015 to be between 32% and 33%. This estimate assumes that the WOTC, which expired on December 31, 2013, is not renewed. We estimate that the renewal of the WOTC could reduce our provision for income taxes by $5,000 to $6,000 in 2015. LIQUIDITY AND CAPITAL RESOURCES The following table presents a summary of our cash flows for the last three years: 2014 2013 2012 Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities Net (decrease) increase in cash and cash equivalents $ 177,625 $ 208,499 $ 219,822 (88,815) (73,406) (79,547) (91,167) (165,337) (40,587) $ (2,357) $ (30,244) $ 99,688 Our primary sources of liquidity are cash generated from our operations and our borrowing capacity under our revolving credit facility. Our internally generated cash, along with cash on hand at August 2, 2013, was sufficient to finance all of our growth, dividend payments, working capital needs, share repurchases and other cash payment obligations in 2014. We believe that cash at August 1, 2014, along with cash expected to be generated from our operating activities and the borrowing capacity under our revolving credit facility will be sufficient to finance our continuing operations, our continuing expansion plans and our expected dividend payments for 2015. Cash Generated from Operations The decrease in net cash flow provided by operating activities from 2013 to 2014 reflected the timing of payments for accounts payable and higher retail inventories. Higher retail inventories at the end of 2014 resulted primarily from the early receipt of holiday and other merchandise and lower than anticipated sales in 2014. The decrease in net cash flow provided by operating activities from 2012 to 2013 reflected higher annual and long-term incentive bonus payments and related taxes made in 2013 as a result of the prior year’s performance and the timing of payments for income taxes partially offset by higher net income and the timing of payments for interest and accounts payable. 20 CB Financials_8-14_03.indd 20 9/24/14 6:06 PM Capital Expenditures The following table presents our capital expenditures (purchase of property and equipment), net of proceeds from insurance recoveries, for the last three years: Capital expenditures, net of proceeds from insurance recoveries $ 90,564 $ 73,961 $ 80,170 2014 2013 2012 Our capital expenditures consisted primarily of costs of new store locations and capital expenditures for maintenance programs. The increase in capital expenditures from 2013 to 2014 resulted primarily from an increase in the number of new store locations acquired and under construction as compared to the prior year and higher maintenance capital expenditures due to our aging store base. The decrease in capital expenditures from 2012 to 2013 resulted primarily from a decrease in the number of new store locations acquired and under construction as compared to the prior year partially offset by higher capital expenditures for operational initiatives and maintenance programs. We estimate that our capital expenditures during 2015 will be between $100,000 and $110,000. This estimate includes the acquisition of sites and construction costs of approximate- ly six or seven new stores that will open during 2015, as well as acquisition and construction costs for store locations to be opened in 2016. We also expect to increase capital expendi- tures for maintenance programs related to our aging store base and technology and operational improvements, which are intended to improve the guest experience and improve margins. We intend to fund our capital expenditures with cash generated by operations and borrowings under our revolving credit facility, as necessary. Borrowing Capacity and Debt Covenants In July 2011, we entered into a five-year $750,000 credit facility (the “Credit Facility”) consisting of a $250,000 term loan (aggregate principal amount outstanding at both August 1, 2014 and August 2, 2013 was $187,500) and a $500,000 revolving credit facility (“the Revolving Credit Facility”). The Credit Facility expires on July 8, 2016. We currently plan to refinance the Credit Facility before the end of 2015. The following table highlights our borrowing capacity and outstanding borrowings under the Revolving Credit Facility, our standby letters of credit and our borrowing availability under the Revolving Credit Facility as of August 1, 2014: August 1, 2014 Borrowing capacity under the Revolving Credit Facility Less: Outstanding borrowings under the Revolving Credit Facility 212,500 Less: Standby letters of credit* 20,637 Borrowing availability under the Revolving Credit Facility $ 266,863 $ 500,000 * Our standby letters of credit relate to securing reserved claims under workers’ compensation insurance and reduce our borrowing availability under the Revolving Credit Facility. We prepaid our 2014 required principal payments under our term loan in 2013. As a result, we did not make any debt payments under our Credit Facility in 2014. We reduced our borrowings under our Credit Facility by $125,000 and $25,000 in 2013 and 2012, respectively, by making optional prepayments using excess cash generated from operations. See “Material Commitments” below and Note 5 to our Consoli- dated 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 and expect to remain in compliance with the Credit Facility’s financial covenants for the remaining term of the facility. Dividends, Share Repurchases and 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. Provided there is no default existing and the total of our availability under the Revolving CB Financials_8-14_03.indd 21 21 9/24/14 6:06 PM Credit Facility plus our cash and cash equivalents on hand is at least $100,000 (the “liquidity requirements”), we may declare and pay cash dividends on shares of our common stock and repurchase shares of our common stock if the aggregate amount of dividends paid and shares repurchased during any fiscal year is less than the sum of (1) 20% of Consolidated EBITDA from continuing operations (as defined in the Credit Facility) (the “20% limitation”) during the immediately preceding fiscal year and (2) provided our consol- idated 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 three quarters of 2014, we declared a quarterly dividend of $0.75 per share of our common stock. Additionally, during the third quarter of 2014, we increased our quarterly dividend by 33% by declaring a dividend of $1.00 per share payable on August 5, 2014 to shareholders of record on July 18, 2014. The following table highlights the dividends per share we paid for the last three years: Dividends per share paid 2014 $ 3.00 2013 $ 1.90 2012 $ 0.97 Our current criteria for share repurchases are that they be accretive to expected net income per share and are within the limits imposed by our Credit Facility. Under our 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. Subject to the limits imposed by the Credit Facility, in 2014, 2013 and 2012, we were authorized by our Board of Directors to repurchase shares at the discretion of management up to $50,000, $100,000 and $65,000, respectively. The following table highlights our share repurchases for the last three years: Shares of common stock repurchased Cost of shares repurchased 2014 2013 2012 120,000 $ 12,473 44,300 $ 3,570 265,538 $ 14,923 In 2014, related tax withholding payments on certain share-based compensation awards exceeded proceeds received from the exercise of stock options which resulted in a net use of cash of $8,457. In 2013 and 2012, proceeds received from the exercise of share-based compensation awards were $6,454 and $17,602, respectively. Working Capital In the restaurant industry, substantially all sales are either for cash or third-party credit card. Like many other restaurant companies, we are able to, and often do, operate with negative working capital. Restaurant inventories purchased through our principal food distributor are on terms of net zero days, while other restaurant inventories purchased locally are generally financed through trade credit at terms of 30 days or less. Because of our gift shop, which has a lower product turnover than the restaurant, we carry larger inventories than many other companies in the restaurant industry. Retail inventories are generally financed through trade credit at terms of 60 days or less. 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. The following table highlights our working capital: Working capital (deficit) $ (14,789) $ (13,873) $ 18,249 2014 2013 2012 The change in working capital at August 1, 2014 compared to August 2, 2013 primarily reflected our current maturities on our debt, the increase in our dividend payable, an increase in deferred revenue related to the sales of our gift cards and 22 CB Financials_8-14_03.indd 22 9/24/14 6:06 PM the current portion of our interest rate swaps partially offset by higher retail inventory and the timing of payments for accounts payable and estimated income taxes. The change in working capital at August 2, 2013 compared to August 3, 2012 primarily reflected a decrease in cash due to optional debt payments and higher dividend payments in 2013. Off-Balance Sheet Arrangements Other than various operating leases, which are disclosed more fully in “Material Commitments” below and Notes 2 and 9 to our Consolidated Financial Statements, we have no other material off-balance sheet arrangements. Material Commitments Our contractual cash obligations and commitments as of August 1, 2014, are summarized in the tables below: Contractual Obligations (a) Total 2015 Payments due by Year 2016-2017 2018-2019 After 2019 Term loan (b) Revolving Credit Facility (b) Operating leases (c) Purchase obligations (d) Other long-term obligations (e) Total contractual $ 187,500 $ 25,000 $ 162,500 — — 212,500 755,649 — 60,569 — — 212,500 92,800 $ 83,518 $ 518,762 97,991 61,985 24,899 11,107 — 34,308 1,803 5,912 207 26,386 cash obligations $1,287,948 $ 149,357 $ 498,611 $ 94,832 $ 545,148 Total Amount of Commitment Expirations by Year 2016-2017 2018-2019 After 2019 2015 Revolving Credit Facility (b) Standby letters of credit (f) Guarantees (g) Total commitments $ 500,000 — $ 500,000 — 19,567 20,637 $ 1,070 235 111 $ 521,296 $ 1,181 $ 519,802 659 — $ 235 $ 235 — — $ 78 $ 78 (a) At August 1, 2014, the entire liability for uncertain tax positions (including penalties and interest) is classified as a long-term liability. At this time, we are unable to make a reasonably reliable estimate of the amounts and timing of payments in individual years because of uncertainties in the timing of the effective settlement of tax positions. As such, the liability for uncertain tax positions of $31,391 is not included in the contractual cash obligations and commitments table above. (b) Our term loan is payable on or before July 8, 2016 and our Revolving Credit Facility expires on July 8, 2016. Even though our current credit facility expires in 2016, we have the intent and ability to refinance our debt to maintain a sufficient amount of outstanding borrowings during the terms of our interest rate swaps that expire in 2017, 2018 and 2019. Using projected interest rates, we anticipate having interest payments of $14,821, $29,042 and $28,080 in 2015, 2016-2017 and 2018-2019, respectively. The projected interest rates are our fixed rates under our interest rate swaps (see Note 6 to the Consolidated Financial Statements) plus our current credit spread of 1.50%. Based on our outstanding borrowings under our Revolving Credit Facility, our standby letters of credit at August 1, 2014 and our current unused commitment fee as defined in the Credit Facility, our unused commitment fees in 2015 and 2016 would be $668 and $629; however, the actual amount will differ based on actual usage of the Revolving Credit Facility in 2015 and 2016. (c) Includes base lease terms and certain optional renewal periods for which at the inception of the lease, it is reasonably assured that we will exercise. (d) Purchase obligations consist of purchase orders for food and retail merchandise; purchase orders for capital expenditures, supplies, other operating needs and other services; and commitments under contracts for maintenance needs and other services. We have excluded contracts that do not contain minimum purchase obligations. We excluded long-term agreements for services and operating needs that can be cancelled within 60 days without penalty. We included long-term agreements and certain retail purchase orders for services and operating needs that can be cancelled with more than 60 days notice without penalty only through the term of the notice. We included long-term agreements for services and operating needs that only can be cancelled in the event of an uncured material breach or with a penalty through the entire term of the contract. Because of the uncertain- ties of seasonal demands and promotional calendar changes, our best estimate of usage for food, supplies and other operating needs and services is ratably over either the notice period or the remaining life of the contract, as applicable, unless we had better information available at the time related to each contract. (e) Other long-term obligations include our Non-Qualified Savings Plan ($25,322, with a corresponding long-term asset to fund the liability; see Note 12 to the Consolidated Financial Statements), Deferred Compensation Plan ($2,868) and our long-term incentive plans ($6,118). (f) Our standby letters of credit relate to securing reserved claims under workers’ compensation insurance and reduce our borrowing availability under the Revolving Credit Facility. (g) Consists solely of guarantees associated with lease payments for two properties. We are not aware of any non-performance under these arrangements that would result in us having to perform in accordance with the terms of those guarantees. CB Financials_8-14_03.indd 23 23 9/24/14 6:06 PM RECENT ACCOUNTING PRONOUNCEMENTS ADOPTED AND NOT YET ADOPTED See Note 2 to the accompanying Consolidated Financial Statements for a discussion of recent accounting guidance adopted and not yet adopted. None of the accounting guidance adopted and discussed in Note 2 had a significant impact on our consolidated financial statements. The Company is currently evaluating the impact of adopting the accounting guidance discussed in Note 2 which the Company has not yet adopted. 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 differ- ences could be material. Our significant accounting policies are discussed in Note 2 to the Consolidated Financial Statements. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. 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. 24 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 s uch provisions can vary materially from original estimates and management regularly monitors the adequacy of the provisions until final disposition occurs. We have not made any material changes in our methodology for assessing impairments during the past three years and we do not believe that there is a reasonable likelihood that there will be a material change in the estimates or assump- tions used by us to assess impairment of long-lived assets. CB Financials_8-14_03.indd 24 9/24/14 6:06 PM 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 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. We record a reserve for workers’ compensation and general liability for all unresolved claims and for an estimate of incurred but not reported claims (“IBNR”). 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. We also monitor actual claims development, including incurrence or settlement of individual large claims during the interim periods between actuarial studies as another means of estimating the adequacy of our reserves. Our group health plans combine the use of self-insured and fully-insured programs. Benefits for any individual (employee or dependents) in the self-insured group health program are limited. We record a liability for the self-insured portion of our group health program for all unpaid claims based upon a loss development analysis derived from actual group health claims payment experience. We also record a liability for unpaid prescription drug claims based on historical experience. 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 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 past three years and do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate the insurance reserves. However, changes in these actuarial assumptions or management judgments in the future may produce materially different amounts of expense that would be reported under these insurance programs. Retail Inventory Valuation Cost of goods sold includes the cost of retail merchandise sold at our stores utilizing the retail inventory method (“RIM”). Under RIM, the valuation of our retail inventories is at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of our invento- ries. 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 judgment 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. 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. CB Financials_8-14_03.indd 25 25 9/24/14 6:06 PM We have not made any material changes in the method- ologies, estimates or assumptions related to our merchandise inventories during the past three years and do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions in the future. However, actual obsolescence or shrinkage recorded may produce materially different amounts than we have estimated. 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. Share-Based Compensation Our share-based compensation primarily consists of nonvested stock awards and performance-based market stock units (“MSU Grants”). 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 eligibility 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 and we update the estimated forfeiture rate to actual at each reporting period. Beginning in 2014, our share-based compensation awards accrue dividends. Dividends will be forfeited for any share-based compensation awards that do not vest. 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 perfor- mance 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 award which does not accrue dividends 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. 26 CB Financials_8-14_03.indd 26 9/24/14 6:06 PM Other nonvested stock awards accrue dividends and their fair value is equal to the market price of our stock at the date of grant. In addition to providing the requisite service, MSU Grants contain both a market condition, total shareholder return, and a performance condition. Total shareholder return is defined as the change in our stock price plus dividends paid during the performance period. The number of shares awarded at the end of the performance period will vary in direct proportion to a target number of shares set at the beginning of the period, up to a maximum of 150% of target, based on the change in our cumulative total shareholder return over the 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. We have not made any material changes in our estimates or assumptions used to determine share-based compensation during the past three years. We 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk, such as changes in interest rates and commodity prices. We do not hold or use derivative financial instruments for trading purposes. Interest Rate Risk. We have interest rate risk relative to our outstanding borrowings under our Credit Facility. At both August 1, 2014 and August 2, 2013, our outstanding borrowings under our Credit Facility totaled $400,000 (see Note 5 to our Consolidated Financial Statements). Loans under the Credit Facility bear interest, at our election, either at the prime rate or LIBOR plus a percentage point spread based on certain specified financial ratios. Our policy has been to manage interest cost using a mix of fixed and variable rate debt (see Notes 5, 6 and 9 to our Consolidated Financial Statements). To manage this risk in a cost efficient manner, we have entered into interest rate swaps. A summary of our interest rate swaps at August 1, 2014 is as follows: Trade Date August 10, 2010 July 25, 2011 July 25, 2011 September 19, 2011 September 19, 2011 December 7, 2011 March 18, 2013 April 8, 2013 April 15, 2013 April 22, 2013 April 25, 2013 June 18, 2014 June 24, 2014 July 1, 2014 Effective Date May 3, 2013 May 3, 2013 May 3, 2013 May 3, 2013 May 3, 2013 May 3, 2013 May 3, 2015 May 3, 2015 May 3, 2015 May 3, 2015 May 3, 2015 May 3, 2015 May 3, 2015 May 5, 2015 Term (in Years) Notional Amount 2 2 3 2 2 3 3 2 2 3 3 4 4 4 $200,000 50,000 50,000 25,000 25,000 50,000 50,000 50,000 50,000 25,000 25,000 40,000 30,000 30,000 Fixed Rate 2.73% 2.00% 2.45% 1.05% 1.05% 1.40% 1.51% 1.05% 1.03% 1.30% 1.29% 2.51% 2.51% 2.43% 27 CB Financials_8-14_03.indd 27 9/24/14 6:06 PM The notional amount for the interest rate swap entered into on June 18, 2014 increases by $40,000 each May over the four-year term of the interest rate swap beginning in May 2016 until the notional amount reaches $160,000 in May 2018. The notional amounts for the interest rate swaps entered into on June 24, 2014 and July 1, 2014 increase by $30,000 each May over the four-year terms of the interest rate swaps beginning in May 2016 until the notional amounts each reach $120,000 in May 2018. At both August 1, 2014 and August 2, 2013, our outstand- ing borrowings were swapped at a weighted average interest rate of 3.73%, which is the weighted average fixed rate of our interest rate swaps plus our current credit spread. See Note 6 to our Consolidated Financial Statements for further discussion of our interest rate swaps. Commodity Price Risk. Many of the food products that we purchase are affected by commodity pricing and are, therefore, subject to price volatility caused by market conditions, weather, production problems, delivery difficulties and other factors which are outside our control and which are generally unpredictable. The following table highlights the five food categories which accounted for the largest shares of our food purchases in 2014 and 2013: Percentage of Food Purchases Beef Dairy (including eggs) Fruits and vegetables Poultry Pork 2014 13% 12% 12% 11% 11% 2013 13% 12% 12% 11% 11% Other categories affected by the commodities markets, such as grains and seafood, may each account for as much as 7% of our food purchases. While some of our food items are produced to our proprietary specifications, our food items are based on generally available products, and if any existing suppliers fail, or are unable to deliver in quantities required by us, we believe that there are sufficient other quality suppliers in the marketplace that our sources of supply can be replaced as necessary to allow us to avoid any material adverse effects that could be caused by such unavailability. We also recognize, however, that commodity pricing is extremely volatile and can change unpredictably even over short periods of time. Changes in commodity prices would affect us and our competi- tors generally, and depending on the terms and duration of supply contracts, sometimes simultaneously. We enter into contracts for certain of our products in an effort to minimize volatility of supply and pricing. In many cases, or over the longer term, we believe we will be able to pass through some or much of the increased commodity costs by adjusting our menu pricing. From time to time, competitive circum- stances, or judgments about consumer acceptance of price increases, may limit menu price flexibility, and in those circumstances, increases in commodity prices can result in lower margins. 28 CB Financials_8-14_03.indd 28 9/24/14 6:06 PM CR ACKER BA R R EL OLD COUN TRY STOR E, I NC. Management’s Report on Internal Control over Financial Reporting We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act). We maintain a system of internal controls that is designed to provide reasonable assurance in a cost-effective manner as to the fair and reliable preparation and presen- tation of the consolidated financial statements, as well as to safeguard assets from unauthorized use or disposition. Our control environment is the foundation for our system of internal control over financial reporting and is embodied in our Corporate Governance Guidelines, our Financial Code of Ethics, and our Code of Business Conduct and Ethics, all of which may be viewed on our website. They set the tone for our organization and include factors such as integrity and ethical values. Our internal control over financial reporting is supported by formal policies and procedures, which are reviewed, modified and improved as changes occur in business conditions and operations. Neither our disclosure controls and procedures nor our internal controls, however, can or will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. We have concluded that our internal control over financial reporting was effective as of August 1, 2014, based on these criteria. In addition, Deloitte & Touche LLP, an independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting, which is included herein. Sandra B. Cochran President and Chief Executive Officer Lawrence E. Hyatt Senior Vice President and Chief Financial Officer CB Financials_8-14_03.indd 29 29 9/24/14 6:06 PM CR ACKER BA R R EL OLD COUN TRY STOR E, I NC. Report Of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Cracker Barrel Old Country Store, Inc. Lebanon, Tennessee We have audited the accompanying consolidated balance sheets of Cracker Barrel Old Country Store, Inc. and its subsidiaries (the “Company”) as of August 1, 2014 and August 2, 2013, and the related consolidated statements of income, com- prehensive income, changes in shareholders’ equity, and cash flows for each of the three fiscal years in the period ended August 1, 2014. These financial statements are the responsibil- ity of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstate- ment. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Cracker Barrel Old Country Store, Inc. and its subsidiaries as of August 1, 2014 and August 2, 2013, and the results of their operations and their cash flows for each of the three fiscal years in the period ended August 1, 2014, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over finan- cial reporting as of August 1, 2014, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 25, 2014 expressed an unqualified opinion on the Company’s internal control over financial reporting. Nashville, Tennessee September 25, 2014 30 CB Financials_8-14_03.indd 30 9/24/14 6:06 PM CR ACKER BA R R EL OLD COUN TRY STOR E, I NC. Report Of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Cracker Barrel Old Country Store, Inc. Lebanon, Tennessee We have audited the internal control over financial reporting of Cracker Barrel Old Country Store, Inc. and its subsidiaries (the “Company”) as of August 1, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authoriza- tions of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstate- ments due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 1, 2014, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended August 1, 2014, and our report dated September 25, 2014, expressed an unqualified opinion on those consolidated financial statements. Nashville, Tennessee September 25, 2014 CB Financials_8-14_03.indd 31 31 9/24/14 6:06 PM CR ACKER BA R R EL OLD COUN TRY STOR E, I NC. Consolidated Balance Sheets (In thousands except share data) ASSETS Current Assets: Cash and cash equivalents Property held for sale Accounts receivable Income taxes receivable Inventories Prepaid expenses and other current assets Deferred income taxes Total current assets Property and Equipment: Land Buildings and improvements Buildings under capital leases Restaurant and other equipment Leasehold improvements Construction in progress Total Less: Accumulated depreciation and amortization of capital leases Property and equipment – net Other assets Total LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable Current maturities of long-term debt Taxes withheld and accrued Accrued employee compensation Accrued employee benefits Deferred revenues Dividend payable Current interest rate swap liability Other current liabilities Total current liabilities Long-term debt Long-term interest rate swap liability Other long-term obligations Deferred income taxes Commitments and Contingencies (Notes 9 and 15) 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; 2014 – 23,821,227 shares issued and outstanding; 2013 – 23,795,327 shares issued and outstanding Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total shareholders’ equity Total See Notes to Consolidated Financial Statements. 32 August 1, 2014 August 2, 2013 $ 119,361 — 22,704 2,973 165,426 11,997 7,188 329,649 303,933 767,149 3,289 506,323 271,049 15,378 1,867,121 823,837 1,043,284 59,315 $ 1,432,248 $ 98,477 25,000 36,261 60,933 26,050 49,825 23,838 4,704 19,350 344,438 375,000 3,239 123,221 57,709 $ 121,718 883 15,942 — 146,687 12,648 4,316 302,194 299,995 746,764 3,289 484,013 255,058 8,704 1,797,823 771,454 1,026,369 59,743 $ 1,388,306 $ 110,637 — 35,076 62,780 24,477 44,098 17,847 — 21,152 316,067 400,000 11,644 120,073 56,496 — — 238 39,969 (4,733) 493,167 528,641 $ 1,432,248 237 51,728 (6,612) 438,673 484,026 $ 1,388,306 CB Financials_8-14_03.indd 32 9/24/14 6:06 PM CR ACKER BA R R EL OLD COUN TRY STOR E, I NC. Consolidated Statements of Income (In thousands except share data) Total revenue Cost of goods sold Gross profit Labor and other related expenses Other store operating expenses Store operating income General and administrative expenses Operating income Interest expense Income before income taxes Provision for income taxes Net income Net income per share – basic Net income per share – diluted Basic weighted average shares outstanding Diluted weighted average shares outstanding See Notes to Consolidated Financial Statements. August 1, 2014 $ 2,683,677 872,758 1,810,919 966,593 506,533 337,793 129,387 208,406 17,557 190,849 58,721 $ 132,128 Fiscal years ended August 2, 2013 $ 2,644,630 854,684 1,789,946 962,559 482,601 344,786 143,262 201,524 35,742 165,782 48,517 $ 117,265 $ $ 5.55 5.51 $ $ 4.95 4.90 23,817,768 23,966,015 23,708,875 23,948,321 August 3, 2012 $ 2,580,195 827,484 1,752,711 951,435 464,130 337,146 146,171 190,975 44,687 146,288 43,207 $ 103,081 $ $ 4.47 4.40 23,067,566 23,408,126 Consolidated Statements of Comprehensive Income (In thousands) Net income Other comprehensive income before income tax expense: Change in fair value of interest rate swaps Income tax expense Other comprehensive income, net of tax Comprehensive income See Notes to Consolidated Financial Statements. August 1, 2014 Fiscal years ended August 2, 2013 August 3, 2012 $ 132,128 $ 117,265 $ 103,081 3,058 1,179 1,879 $ 134,007 23,620 9,074 14,546 $ 131,811 17,223 349 16,874 $ 119,955 CB Financials_8-14_03.indd 33 33 9/24/14 6:06 PM CR ACKER BA R R EL OLD COUN TRY STOR E, I NC. Consolidated Statements Of Changes in Shareholders’ Equity (In thousands except share data) Balances at July 29, 2011 Comprehensive Income: Net income Other comprehensive income, net of tax Total comprehensive income Cash dividends declared - $1.15 per share Share-based compensation Issuance of share-based compensation awards, net of shares withheld for employee taxes Tax benefit realized upon exercise of share-based compensation awards Purchases and retirement of common stock Balances at August 3, 2012 Comprehensive Income: Net income Other comprehensive income, net of tax Total comprehensive income Cash dividends declared – $2.25 per share Share-based compensation Issuance of share-based compensation awards, net of shares withheld for employee taxes Tax benefit realized upon exercise of share-based compensation awards Purchases and retirement of common stock Common Stock Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Shareholders’ Equity 22,840,974 $ 228 $ 7,081 $ (38,032) $ 298,757 $ 268,034 — — — — — — — — — — — — — — 14,420 — 16,874 16,874 — — 103,081 — 103,081 (26,915) — 897,588 9 17,593 — (265,538) — (3) 4,502 (14,920) — — — — — — 103,081 16,874 119,955 (26,915) 14,420 17,602 4,502 (14,923) 23,473,024 234 28,676 (21,158) 374,923 382,675 — — — — — — — — — — — — — — 17,839 — 14,546 14,546 — — 117,265 — 117,265 (53,515) — 366,603 4 6,450 — (44,300) — (1) 2,332 (3,569) — — — — — — 117,265 14,546 131,811 (53,515) 17,839 6,454 2,332 (3,570) 23,795,327 237 51,728 (6,612) 438,673 484,026 Balances at August 2, 2013 Comprehensive Income: Net income Other comprehensive income, net of tax Total comprehensive income Cash dividends declared – $3.25 per share Share-based compensation Issuance of share-based compensation awards, net of shares withheld for employee taxes Tax benefit realized upon exercise of share-based compensation awards Purchases and retirement of common stock — — — — — — — — — — — — — — 7,924 145,900 2 (8,459) — (120,000) — (1) 1,248 (12,472) — 1,879 1,879 — — — — — 132,128 — 132,128 (77,634) — — — — 132,128 1,879 134,007 (77,634) 7,924 (8,457) 1,248 (12,473) Balances at August 1, 2014 23,821,227 $ 238 $ 39,969 $ (4,733) $ 493,167 $ 528,641 See Notes to Consolidated Financial Statements. 34 CB Financials_8-14_03.indd 34 9/24/14 6:06 PM CR ACKER BA R R EL OLD COUN TRY STOR E, I NC. Consolidated Statements Of Cash Flows (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Loss on disposition of property and equipment Share-based compensation Excess tax benefit from share-based compensation Changes in assets and liabilities: Accounts receivable Income taxes receivable Inventories Prepaid expenses and other current assets Other assets Accounts payable Taxes withheld and accrued Accrued employee compensation Accrued employee benefits Deferred revenues Other current liabilities Other long-term obligations Deferred income taxes Net cash provided by operating activities Cash flows from investing activities: Purchase of property and equipment Proceeds from insurance recoveries of property and equipment Proceeds from sale of property and equipment Net cash used in investing activities Cash flows from financing activities: Proceeds from issuance of long-term debt (Taxes withheld) and proceeds from issuance of share-based compensation awards, net Principal payments under long-term debt and other long-term obligations Purchases and retirement of common stock Deferred financing costs Dividends on common stock Excess tax benefit from share-based compensation Net cash used in financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental disclosure of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized Income taxes Supplemental schedule of non-cash investing and financing activities: Capital expenditures accrued in accounts payable Change in fair value of interest rate swaps Change in deferred tax asset for interest rate swaps Dividends declared but not yet paid See Notes to Consolidated Financial Statements. August 1, 2014 Fiscal years ended August 2, 2013 August 3, 2012 $ 132,128 $ 117,265 $ 103,081 68,389 5,163 7,924 (1,248) (6,762) (1,725) (18,739) 651 (1,701) (12,160) 1,185 (1,847) 1,573 5,727 (1,960) 3,865 (2,838) 177,625 (91,646) 1,082 1,749 (88,815) — (8,457) (1) (12,473) — (71,484) 1,248 (91,167) (2,357) 121,718 $ 119,361 66,120 4,057 17,839 (2,332) (1,333) — (3,420) (1,243) (1,033) 9,366 (4,628) (4,143) (2,069) 6,402 6,628 5,895 (4,872) 208,499 (74,417) 456 555 (73,406) — 6,454 (125,153) (3,570) — (45,400) 2,332 (165,337) (30,244) 151,962 $ 121,718 64,467 2,702 14,420 (4,502) (2,330) 7,898 (1,720) (2,405) (4,725) 1,592 7,369 17,729 (2,701) 5,066 2,651 9,973 1,257 219,822 (80,922) 752 623 (79,547) 92,600 17,602 (117,733) (14,923) (263) (22,372) 4,502 (40,587) 99,688 52,274 $ 151,962 $ 15,856 66,444 $ 29,959 47,550 $ 50,357 18,768 $ 5,767 3,058 (1,179) 23,997 $ 6,852 23,620 (9,074) 17,847 $ 5,778 17,223 (349) 9,732 CB Financials_8-14_03.indd 35 35 9/24/14 6:06 PM CR ACKER BA R R EL OLD COUN TRY STOR E, I NC. Notes To Consolidated Financial Statements (In thousands except share data) 1 DESCRIPTION OF THE BUSINESS Cracker Barrel Old Country Store, Inc. and its affiliates (collectively, in the Notes, the “Company”) are principally engaged in the operation and development in the United States (“U.S.”) of the Cracker Barrel Old Country Store® (“Cracker Barrel”) concept. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Approximately 70% to 75% of retail inventories are valued using RIM and the remaining retail inventories are valued using an average cost method. See Note 4 for additional information regarding the components of inventory. Valuation provisions are included for retail inventory obsolescence, retail inventory shrinkage, returns and amortization of certain items. Cost of goods sold includes an estimate of retail inventory shrinkage that is adjusted upon physical inventory counts. Annual physical inventory GAAP – The accompanying Consolidated Financial counts are conducted throughout the third and fourth Statements have been prepared in accordance with generally quarters based upon a cyclical inventory schedule. An estimate accepted accounting principles in the U.S. (“GAAP”). of shrinkage is recorded for the time period between Fiscal year – The Company’s fiscal year ends on the Friday physical inventory counts by using a three-year average of nearest July 31st and each quarter consists of thirteen weeks the physical inventories’ results on a store-by-store basis. unless noted otherwise. The Company’s fiscal year ended Property and equipment – Property and equipment are August 3, 2012 consisted of 53 weeks and the fourth quarter stated at cost. For financial reporting purposes, depre- of 2012 consisted of fourteen weeks. References in these ciation and amortization on these assets are computed by Notes to a year or quarter are to the Company’s fiscal year or use of the straight line and double declining balance quarter unless noted otherwise. methods over the estimated useful lives of the respective Principles of consolidation – The Consolidated Financial assets, as follows: Statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated. Cash and cash equivalents – The Company’s policy is to consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Property held for sale – Property held for sale consists of real estate properties that the Company expects to sell within one year and is reported at the lower of carrying amount Buildings and improvements Buildings under capital leases Restaurant and other equipment Leasehold improvements Years 30-45 15-25 2-10 1-35 Accelerated depreciation methods are generally used for income tax purposes. Total depreciation expense and depreciation expense related to store operations for each of the three years are or fair value less costs to sell. At August 2, 2013, property held as follows: for sale consisted of office space. Accounts receivable – Accounts receivable represent Total depreciation expense Depreciation expense related to 2014 2013 2012 $ 67,620 $ 65,351 $ 63,705 their estimated net realizable value. Accounts receivable are store operations* 62,746 60,574 58,423 * Depreciation expense related to store operations is included in other store operating expenses in the Consolidated Statements of Income. written off when they are deemed uncollectible. Inventories – Inventories are stated at the lower of cost or market. Cost of restaurant inventory is determined by the first in, first out (“FIFO”) method. Retail inventories are valued using the retail inventory method (“RIM”) except at the retail distribution center which uses average cost. 36 CB Financials_8-14_03.indd 36 9/24/14 6:06 PM Gain or loss is recognized upon disposal of property and master netting agreement with that counterparty, its credit equipment. The asset and related accumulated depreciation risk exposure is based on the net exposure under the master and amortization amounts are removed from the accounts. netting agreement. If, on a net basis, the Company owes Maintenance and repairs, including the replacement of the counterparty, the Company regards its credit exposure minor items, are charged to expense and major additions to to the counterparty as being zero. property and equipment are capitalized. The Company does not hold or use derivative instruments Impairment of long-lived assets – The Company assesses for trading purposes. The Company also does not have any the impairment of long-lived assets whenever events or derivatives not designated as hedging instruments and has changes in circumstances indicate that the carrying value of not designated any non-derivatives as hedging instruments. an asset may not be recoverable. Recoverability of assets is See Note 6 for additional information on the Company’s measured by comparing the carrying value of the asset to the derivative and hedging activities. undiscounted future cash flows expected to be generated by Segment reporting – Operating segments are components the asset. If the total expected future cash flows are less than of an enterprise about which separate financial information the carrying value of the asset, the carrying value is written is available that is evaluated regularly by the chief operating down, for an asset to be held and used, to the estimated fair decision maker in deciding how to allocate resources value or, for an asset to be disposed of, to the fair value, and in assessing performance. Utilizing these criteria, the net of estimated costs of disposal. Any loss resulting from Company manages its business on the basis of one reportable impairment is recognized by a charge to income. operating segment (see Note 8 for additional information Derivative instruments and hedging activities – The regarding segment reporting). Company is exposed to market risk, such as changes in interest Revenue recognition – The Company records revenue rates and commodity prices. The Company has interest rate from the sale of products as they are sold. The Company risk relative to its outstanding borrowings, which bear provides for estimated returns based on return history and interest at the Company’s election either at the prime rate or sales levels. The Company’s policy is to present sales in LIBOR plus a percentage point spread based on certain the Consolidated Statements of Income on a net presenta- specified financial ratios under its credit facility (see Note 5). tion basis after deducting sales tax. The Company’s policy has been to manage interest cost Unredeemed gift cards and certificates – Unredeemed gift using a mix of fixed and variable rate debt. To manage this cards and certificates represent a liability of the Company risk in a cost efficient manner, the Company uses derivative related to unearned income and are recorded at their expected instruments, specifically interest rate swaps. redemption value. No revenue is recognized in connection Companies may elect whether or not to offset related assets with the point-of-sale transaction when gift cards or gift and liabilities and report the net amount on their financial certificates are sold. For those states that exempt gift cards and statements if the right of setoff exists. Under a master netting certificates from their escheat laws, the Company makes agreement, the Company has the legal right to offset the estimates of the ultimate unredeemed (“breakage”) gift cards amounts owed to the Company against amounts owed by the and certificates in the period of the original sale and amor- Company under a derivative instrument that exists between tizes this breakage over the redemption period that other gift the Company and a counterparty. When the Company is cards and certificates historically have been redeemed by engaged in more than one outstanding derivative transaction with the same counterparty and also has a legally enforceable CB Financials_8-14_03.indd 37 37 9/24/14 6:06 PM reducing its liability and recording revenue accordingly. For The Company’s group health plans combine the use of those states that do not exempt gift cards and certificates self-insured and fully-insured programs. Benefits for any from their escheat laws, the Company records breakage in the individual (employee or dependents) in the self-insured period that gift cards and certificates are remitted to the program are limited. The Company records a liability state and reduces its liability accordingly. Any amounts remitted for the self-insured portion of its group health program for all to states under escheat or similar laws reduce the Company’s unpaid claims based upon a loss development analysis deferred revenue liability and have no effect on revenue derived from actual group health claims payment experience. or expense while any amounts that the Company is permitted The Company also records a liability for unpaid prescription to retain are recorded as revenue. drug claims based on historical experience. The fully-insured Insurance – The Company self-insures a significant portion portion of the Company’s health insurance program of its workers’ compensation and general liability programs. contains a retrospective feature which could increase or The Company purchases insurance for individual workers’ decrease premiums based on actual claims experience. compensation claims that exceed $250, $500 or $1,000 Store pre-opening costs – Start-up costs of a new store are depending on the state in which the claim originates. The expensed when incurred, with the exception of rent Company purchases insurance for individual general expense under operating leases, in which the straight-line liability claims that exceed $500. rent includes the pre-opening period during construction, The Company records a reserve for workers’ compensation as explained further under the “Leases” section in this Note. and general liability for all unresolved claims and for an Leases – The Company’s leases are classified as either estimate of incurred but not reported claims (“IBNR”). These capital or operating leases. The Company has ground leases reserves and estimates of IBNR claims are based upon a and office space leases that are recorded as operating leases. full scope actuarial study which is performed annually at the The Company also leases its advertising billboards which are end of the Company’s third quarter and is adjusted by the recorded as operating leases. A majority of the Company’s actuarially determined losses and actual claims payments for lease agreements provide renewal options and some of these the fourth quarter. Additionally, the Company performs options contain rent escalation clauses. Additionally, some limited scope actuarial studies on a quarterly basis to verify of the leases have rent holiday and contingent rent provisions. and/or modify the Company’s reserves. The reserves and During rent holiday periods, which include the pre-opening losses in the actuarial study represent a range of possible period during construction, the Company has possession of outcomes within which no given estimate is more likely than and access to the property, but is not obligated to, and any other estimate. As such, the Company records the normally does not, make rent payments. Contingent rent is losses at the lower end of that range and discounts them to determined as a percentage of gross sales in excess of present value using a risk-free interest rate based on projected specified levels. The Company records a contingent rent timing of payments. The Company also monitors actual liability and corresponding rent expense when it is probable claims development, including incurrence or settlement of sales have been achieved in amounts in excess of the speci- individual large claims during the interim periods between fied levels. actuarial studies as another means of estimating the adequacy The liabilities under these leases are recognized on the of its reserves. 38 straight-line basis over the shorter of the useful life, with a maximum of 35 years, or the related lease life. The Company CB Financials_8-14_03.indd 38 9/24/14 6:06 PM uses a lease life that generally begins on the date that the award immediately before the modification. Incremental Company becomes legally obligated under the lease, compensation expense for vested awards is recognized including the rent holiday periods, and generally extends immediately. For unvested awards, the sum of the incremental through certain renewal periods that can be exercised compensation expense and the remaining unrecognized at the Company’s option, for which at the inception of the compensation expense for the original award on the modifi- lease, it is reasonably assured that the Company will cation date is recognized over the modified service period. exercise those renewal options. This lease period is consis- Additionally, the Company’s policy is to issue shares of tent with the period over which leasehold improvements common stock to satisfy exercises of share-based compensa- are amortized. tion awards. Advertising – The Company expenses the costs of Income taxes – The Company’s provision for income producing advertising the first time the advertising takes taxes includes employer tax credits for FICA taxes paid on place. Other advertising costs are expensed as incurred. employee tip income and other employer tax credits are Advertising expense for each of the three years was as accounted for by the flow-through method. Deferred income follows: Advertising expense $ 63,707 $ 59,957 $ 56,198 2014 2013 2012 Share-based compensation – The Company’s share-based compensation consists of nonvested stock, performance- based market stock units (“MSU Grants”) and stock options. Share-based compensation is recorded in general and administrative expenses in the Consolidated Statements of Income. Share-based compensation expense is recognized based on the grant date fair value and the achievement of performance conditions for certain awards. The Company recognizes share-based compensation expense on a straight- line basis over the requisite service period, which is generally the award’s vesting period, or to the date on which retirement eligibility is achieved, if shorter. Certain nonvested stock awards and the Company’s MSU Grants contain performance conditions. Compensation expense for performance-based awards is recognized when it is probable that the performance criteria will be met. If any performance goals are not met, no compensation expense is ultimately recognized and, to the extent previously recog- nized, compensation expense is reversed. If a share-based compensation award is modified after the grant date, incremental compensation expense is recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company recognizes (or derecog- nizes) 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. The Company recognizes, net of tax, interest and estimated penalties related to uncertain tax positions in its provision for income taxes. See Note 13 for additional information regarding income taxes. Comprehensive income – Comprehensive income includes net income and the effective unrealized portion of the changes in the fair value of the Company’s interest rate swaps. Net income per share – Basic consolidated net income per share is computed by dividing consolidated net income 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 CB Financials_8-14_03.indd 39 39 9/24/14 6:06 PM contracts to issue common stock were exercised or converted guidance which limited these disclosures to derivatives, into common stock and is based upon the weighted average repurchase agreements and securities lending transactions to number of common and common equivalent shares out- the extent that they are offset in the financial statements standing during the year. Common equivalent shares related or subject to an enforceable master netting arrangement or to stock options, nonvested stock awards and MSU Grants similar agreement. These disclosure requirements are issued by the Company are calculated using the treasury effective for fiscal years beginning on or after January 1, 2013 stock method. Outstanding employee and director stock on a retrospective basis. The adoption of these disclosure options, nonvested stock awards and MSU Grants issued requirements in the first quarter of 2014 did not have a by the Company represent the only dilutive effects on diluted significant impact on the Company’s consolidated financial consolidated net income per share. See Note 14 for additional position or results of operations. information regarding net income per share. Use of estimates – Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods to prepare these Consolidated Financial Statements in conformity with GAAP. Management believes that such estimates have been based on reasonable and supportable assumptions and that the resulting estimates are reasonable for use in the preparation of the Consolidated Financial Statements. Actual results, however, could differ from those estimates. 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 compre- hensive income by component. A company is 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 RECENT ACCOUNTING PRONOUNCEMENTS ADOPTED in their entirety to net income, a company is required to cross-reference to other disclosures required under GAAP Disclosures about Offsetting Assets and Liabilities that provide additional detail regarding those amounts. In December 2011, the FASB issued accounting guidance which requires companies to disclose information about This accounting guidance is effective for fiscal years beginning after December 15, 2012 on a prospective basis. Since the the nature of their rights of setoff and related arrangements guidance only affects presentation and disclosure of amounts associated with their financial instruments and derivative reclassified out of accumulated other comprehensive instruments to enable users of financial statements to income, the adoption of this guidance in the first quarter understand the effect of those arrangements on their financial of 2014 did not have a significant impact on the Company’s position. Each company is required to provide both net consolidated financial position or results of operations. 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 40 CB Financials_8-14_03.indd 40 9/24/14 6:06 PM RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED market participants at the measurement date. In determining fair value, a three level hierarchy for inputs is used. These Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity levels are: • Quoted Prices in Active Markets for Identical Assets In April 2014, the FASB issued accounting guidance which (“Level 1”) – quoted prices (unadjusted) for an identical changes the criteria for disposals to qualify as discontinued asset or liability in an active market. operations and requires new disclosures about disposals • Significant Other Observable Inputs (“Level 2”) – quoted of both discontinued operations and certain other disposals prices for a similar asset or liability in an active market that do not meet the new definition. This accounting or model-derived valuations in which all significant inputs guidance is effective for fiscal years beginning on or after are observable for substantially the full term of the asset December 15, 2014 and interim periods within those years or liability. on a prospective basis. The Company is currently evaluating • Significant Unobservable Inputs (“Level 3”) – unobservable the impact of adopting this accounting guidance, but it is not and significant to the fair value measurement of the asset expected to have a significant impact on the Company’s or liability. consolidated financial position or results of operations upon The Company’s assets and liabilities measured at fair value adoption in the first quarter of 2016. on a recurring basis at August 1, 2014 were as follows: Revenue Recognition In May 2014, the FASB issued accounting guidance which clarifies the principles for recognizing revenue and provides a comprehensive model for revenue recognition. Revenue recognition should depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This accounting guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. Early application is not permitted. A company may apply this accounting guidance either retrospectively or using the cumulative effect transition method. The Company is currently evaluating the impact of adopting this accounting guidance in the first quarter of 2018. 3 FAIR VALUE MEASUREMENTS Fair value for certain of the Company’s assets and liabilities is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between Cash equivalents* Interest rate swap asset Level 1 Level 2 Level 3 Fair Value $ 63,068 $ — $ — $ 63,068 (see Note 6) — 240 — 240 Deferred compensation plan assets** Total assets at fair value Interest rate swap liability (see Note 6) Total liabilities at fair value 25,322 $ 88,390 — $ 240 — 25,322 $ — $ 88,630 $ — $ — $ 7,943 $ 7,943 $ — $ 7,943 $ — $ 7,943 The Company’s assets and liabilities measured at fair value on a recurring basis at August 2, 2013 were as follows: Fair Value Cash equivalents* Interest rate swap asset Level 1 Level 2 Level 3 Fair Value $ 57,767 $ — $ — $ 57,767 (see Note 6) — 883 — 883 Deferred compensation plan assets** Total assets at fair value Interest rate swap liability 25,263 $ 83,030 — $ 883 25,263 — $ — $ 83,913 (see Note 6) $ — Total liabilities at fair value $ — $ 11,644 $ 11,644 $ — $ 11,644 $ — $ 11,644 * 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 (see Note 12). CB Financials_8-14_03.indd 41 41 9/24/14 6:06 PM The Company’s money market fund investments and Long term debt consisted of the following at: deferred compensation plan assets are measured at fair value using quoted market prices. The fair values of the Company’s interest rate swap asset and liabilities are determined based on the present value of expected future cash flows. Since the Company’s interest rate swap values 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. Nonperformance risk is reflected in determin- ing 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 nonperfor- mance risk is also considered a Level 2 input. The fair values of accounts receivable and accounts payable at August 1, 2014 and August 2, 2013, approximate their carrying amounts because of their short duration. Revolving Credit Facility expiring on July 8, 2016 Term loan payable on or before July 8, 2016 Current maturities Long-term debt August 1, 2014 August 2, 2013 $ 212,500 187,500 400,000 25,000 $ 375,000 $ 212,500 187,500 400,000 — $ 400,000 The aggregate maturities of long term debt subsequent to August 1, 2014 are as follows: Year 2015 2016 Total $ 25,000 375,000 $ 400,000 At August 1, 2014, the Company had $20,637 of standby letters of credit, which reduce the Company’s borrowing availability under the Revolving Credit Facility (see Note 15). At August 1, 2014, the Company had $266,863 in borrow- The fair value of the Company’s variable rate debt, based on ing availability under the Revolving Credit Facility. quoted market prices, which are considered Level 1 inputs, approximates its carrying amounts at August 1, 2014 and August 2, 2013. 4 INVENTORIES Inventories were comprised of the following at: Retail Restaurant Supplies Total August 1, 2014 August 2, 2013 $ 128,386 22,371 14,669 $ 165,426 $ 112,736 20,214 13,737 $ 146,687 5 DEBT On July 9, 2011, the Company entered into a five-year In accordance with the Credit Facility, outstanding borrow- ings bear interest, at the Company’s election, either at LIBOR or prime plus a percentage point spread based on certain specified financial ratios. At both August 1, 2014 and August 2, 2013, the Company’s outstanding borrowings were swapped at a weighted average interest rate of 3.73% (see Note 6 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 August 1, 2014 and August 2, 2013, the Company was in compliance with all debt covenants. $750,000 credit facility (the “Credit Facility”) consisting of a The Credit Facility also imposes restrictions on the $250,000 term loan and a $500,000 revolving credit facility amount of dividends the Company is permitted to pay and (the “Revolving Credit Facility”). the amount of shares the Company is permitted to repurchase. Provided there is no default existing and the Company’s availability under the Revolving Credit Facility 42 CB Financials_8-14_03.indd 42 9/24/14 6:06 PM plus the Company’s cash and cash equivalents on hand is A summary of the Company’s interest rate swaps at at least $100,000 (the “liquidity requirements”), the August 1, 2014 is as follows: Company may declare and pay cash dividends on shares of its common stock and repurchase shares of its common stock if the aggregate amount of dividends paid and shares repurchased in any fiscal year is less than the sum of (1) 20% of Consolidated EBITDA from continuing operations (as defined in the Credit Facility) (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. 6 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES 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 outstand- ing debt covered by its interest rate swaps is fixed at the rates in the table below plus the Company’s credit spread. The Company’s credit spread at August 1, 2014 and August 2, 2013 was 1.50%. All of the Company’s interest rate swaps are accounted for as cash flow hedges. Trade Date August 10, 2010 July 25, 2011 July 25, 2011 September 19, 2011 September 19, 2011 December 7, 2011 March 18, 2013 April 8, 2013 April 15, 2013 April 22, 2013 April 25, 2013 June 18, 2014 June 24, 2014 July 1, 2014 Effective Date May 3, 2013 May 3, 2013 May 3, 2013 May 3, 2013 May 3, 2013 May 3, 2013 May 3, 2015 May 3, 2015 May 3, 2015 May 3, 2015 May 3, 2015 May 3, 2015 May 3, 2015 May 5, 2015 Term (in Years) Notional Amount 2 2 3 2 2 3 3 2 2 3 3 4 4 4 $200,000 50,000 50,000 25,000 25,000 50,000 50,000 50,000 50,000 25,000 25,000 40,000 30,000 30,000 Fixed Rate 2.73% 2.00% 2.45% 1.05% 1.05% 1.40% 1.51% 1.05% 1.03% 1.30% 1.29% 2.51% 2.51% 2.43% The notional amount for the interest rate swap entered into on June 18, 2014 increases by $40,000 each May over the four-year term of the interest rate swap beginning in May 2016 until the notional amount reaches $160,000 in May 2018. The notional amounts for the interest rate swaps entered into on June 24, 2014 and July 1, 2014 increase by $30,000 each May over the four-year terms of the interest rate swaps beginning in May 2016 until the notional amounts each reach $120,000 in May 2018. The estimated fair values of the Company’s derivative instruments were as follows: (See Note 3) Balance Sheet Location August 1, 2014 August 2, 2013 Interest rate swaps Other assets Interest rate swaps Interest rate swaps Total liabilities Current interest rate swap liability Long-term interest rate swap liability $ 240 $ 4,704 $ 883 $ — 3,239 11,644 $ 7,943 $ 11,644 CB Financials_8-14_03.indd 43 43 9/24/14 6:06 PM The following table summarizes the offsetting of the The following table summarizes the pre-tax effects of Company’s derivative assets in the Consolidated Balance the Company’s derivative instruments on AOCL for each of Sheets at August 1, 2014 and August 2, 2013: the three years: Gross Asset Amounts Liability Amount Offset Net Asset Amount Presented in the Balance Sheets Amount of Income Recognized in AOCL on Derivatives (Effective Portion) 2013 2014 2012 August 1, August 2, August 1, August 2, August 1, August 2, (See Note 3) 2014 2013 2014 2013 2014 2013 Cash flow hedges: Interest rate swaps $ 3,058 $ 23,620 $ 17,223 Interest rate swaps $240 $1,159 $ — $(276) $240 $883 The following table summarizes the offsetting of the Company’s derivative liabilities in the Consolidated Balance Sheets at August 1, 2014 and August 2, 2013: Gross Liability Asset Amounts Amount Offset Net Liability Amount Presented in the Balance Sheets August 1, August 2, August 1, August 2, August 1, August 2, (See Note 3) 2014 2013 2014 2013 2014 2013 Interest rate swaps $8,441 $13,120 $(498) $(1,476) $7,943 $11,644 The following table summarizes the changes in AOCL, net of tax, related to the Company’s interest rate swaps for the year ended August 1, 2014: AOCL balance at August 2, 2013 Other comprehensive income before reclassifications Amounts reclassified from AOCL into earnings Other comprehensive income, net of tax AOCL balance at August 1, 2014 $ (6,612) 6,836 (4,957) 1,879 $ (4,733) The following table summarizes the pre-tax effects of the Company’s derivative instruments on income for each of the The estimated fair values of the Company’s interest rate swap three years: assets and liabilities incorporate the Company’s non- performance risk. The adjustment related to the Company’s non-performance risk at August 1, 2014 and August 2, Cash flow hedges: Location of Loss Reclassified from AOCL into Income AOCL into Income (Effective Portion) (Effective Portion) Amount of Loss Reclassified from 2013 2014 2012 2013 resulted in reductions of $62 and $123, respectively, in Interest rate swaps Interest expense $8,068 $20,773 $35,903 the total fair value of the interest rate swap asset and liabili- ties. The offset to the interest rate swap assets and liabilities is recorded in accumulated other comprehensive loss (“AOCL”), net of the deferred tax assets, and will be reclassi- fied into earnings over the term of the underlying debt. As of August 1, 2014, the estimated pre-tax portion of AOCL that is expected to be reclassified into earnings over the next twelve months is $6,014. Cash flows related to the interest rate swaps are included in interest expense and in operating activities. The following table summarizes the amounts reclassified out of AOCL related to the Company’s interest rate swaps for the year ended August 1, 2014: Details about AOCL Loss on cash flow hedges: Interest rate swaps Tax benefit Affected Line Item in the Consolidated Statement of Income $ (8,068) 3,111 $ (4,957) Net of tax Interest expense Provision for income taxes Any portion of the fair value of the interest rate swaps determined to be ineffective will be recognized currently in earnings. No ineffectiveness has been recorded in 2014, 2013 and 2012. 44 CB Financials_8-14_03.indd 44 9/24/14 6:06 PM 7 SHARE REPURCHASES In 2014, 2013 and 2012, subject to a maximum amount as specified in the table below and the limits imposed by the Credit Facility, the Company was authorized to repurchase shares at management’s discretion. The following table summarizes our share repurchases for the last three years: Maximum aggregate purchase price Cost of shares repurchased Shares of common stock repurchased 2014 2013 2012 $ 50,000 $ 12,473 $ 100,000 $ 3,570 $ 65,000 $ 14,923 The following is a schedule by year of the future minimum rental payments required under the Company’s operating leases as of August 1, 2014: Year 2015 2016 2017 2018 2019 Later years Total Sale-Leaseback Transactions Total $ 60,569 48,942 43,858 41,592 41,926 518,762 $ 755,649 120,000 44,300 265,538 In 2009, the Company completed sale-leaseback transactions 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 involving 15 of its owned stores and its retail distribution center. Under the transactions, the land, buildings and improve- ments at the locations were sold and leased back for terms of 20 and 15 years, respectively. Equipment was not included. The leases include specified renewal options for up to 20 lines of a Cracker Barrel store are shared and are indistinguish- additional years. able 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. Total revenue was comprised of the following at: Restaurant Retail Total revenue 2014 2013 2012 $ 2,137,405 546,272 $ 2,683,677 $ 2,104,768 539,862 $ 2,644,630 $ 2,054,127 526,068 $ 2,580,195 The Company leases 65 of its stores pursuant to a sale- leaseback transaction which closed in 2000. Under the transaction, the land, buildings and building improvements at the locations were sold and leased back for a term of 21 years. The leases for these stores include specified renewal options for up to 20 additional years and have certain financial covenants related to fixed charge coverage for the leased stores. At August 1, 2014 and August 2, 2013, the Company was in compliance with these covenants. 9 LEASES As of August 1, 2014, the Company operated 216 stores in 10 SHARE-BASED COMPENSATION Stock Compensation Plans leased facilities and also leased certain land, a retail distribu- The Company’s employee compensation plans are adminis- tion center and advertising billboards. Rent expense under operating leases, including the tered by the Compensation Committee of the Company’s Board of Directors (the “Committee”). The Committee is sale-leaseback transactions discussed below, for each of the authorized to determine, at time periods within its discretion three years was: Year 2014 2013 2012 Minimum Contingent Total $ 71,123 70,095 67,651 $ 242 232 276 $ 71,365 70,327 67,927 and subject to the direction of the Board of Directors, which employees will be granted awards, the number of shares CB Financials_8-14_03.indd 45 45 9/24/14 6:06 PM covered by any awards granted, and within applicable limits, free interest rate. Other nonvested stock awards accrue the terms and provisions relating to the exercise and vesting of dividends and their fair value is equal to the market price of any awards. the Company’s stock at the date of the grant. Dividends The Company has one active compensation plan, the are forfeited for any nonvested stock awards that do not vest. 2010 Omnibus Incentive Compensation Plan (the “2010 The Company’s nonvested stock awards include its Omnibus Plan”), for employees and non-employee directors long-term performance plans which were established by the which authorizes the granting of nonvested stock awards, Committee for the purpose of rewarding certain officers performance-based MSU Grants, stock options and other types with shares of the Company’s common stock if the Company of share-based awards. The Company also has stock options achieved certain performance targets. The stock awards under and nonvested stock outstanding under two other compensa- the long-term performance plans are calculated or estimated tion plans (“Prior Plans”) in which no future grants may based on achievement of financial performance measures. be made. The following table summarizes the performance periods The 2010 Omnibus Plan allows the Committee to grant and vesting periods for the Company’s nonvested stock awards awards for an aggregate of 1,500,000 shares of the Company’s under its long-term performance plans at August 1, 2014: common stock. However, this share reserve is increased by shares awarded under this and Prior Plans which are forfeited, expired, settled for cash and shares withheld by the Company in payment of a tax withholding obligation. Additionally, this share reserve was decreased by shares granted from Prior Plans after July 30, 2010 until December 1, 2010. At Long-Term Performance Plan (“LTPP”) 2013 LTPP 2014 LTPP Performance Period Vesting Period (in Years) 2013 – 2014 2014 – 2015 2 or 3 2 or 3 The following table summarizes the shares that have been accrued under the 2013 LTPP and 2014 LTPP at August 1, 2014, the number of shares authorized for future August 1, 2014: issuance under the Company’s active plan is 1,169,019. The following table summarizes the number of outstand- 2013 LTPP 2014 LTPP ing awards under each plan at August 1, 2014: 62,426 17,441 2010 Omnibus Plan Amended and Restated Stock Option Plan 2002 Omnibus Incentive Compensation Plan Total 254,188 41,184 49,948 345,320 Types of Share-Based Awards Nonvested Stock Nonvested stock awards consist of the Company’s common stock and generally vest over 1–3 years. Generally, the fair value of each nonvested stock award is equal to the market price of the Company’s 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- A summary of the Company’s nonvested stock activity as of August 1, 2014, and changes during 2014 are presented in the following table: Nonvested Stock Unvested at August 2, 2013 Granted Vested Forfeited Unvested at August 1, 2014 Weighted- Average Grant Date Fair Value $ 59.83 101.45 94.29 — $ 68.25 Shares 82,854 165,921 (184,710) — 64,065 The following table summarizes the total fair value of nonvested stock that vested for each of the three years: Total fair value of nonvested stock $ 17,417 $ 7,445 $ 12,981 2014 2013 2012 46 CB Financials_8-14_03.indd 46 9/24/14 6:06 PM Performance-Based Market Stock Units The following assumptions were used in determining the The number of MSU Grants that will ultimately be awarded fair value for the Company’s MSU Grants: and will vest at the end of the applicable three-year performance period for each annual plan is based on total shareholder return, which is defined as the change in the Company’s stock price plus dividends paid during the performance period. The number of shares awarded at the end of the performance period will vary in direct proportion Year Ended August 1, 2014 August 2, 2013 August 3, 2012 Dividend yield*** Expected volatility Risk-free interest rate range — 25% 0.7% - 0.8% 3.0% 27% 0.3% 2.2% 45% 0.3% *** Dividends accrue on the 2014 MSU Grants. Dividends will be forfeited for any 2014 MSU Grants that do not vest. to a target number of shares set at the beginning of the The following table summarizes the shares that have been period, up to a maximum of 150% of target, based on the accrued under the 2012 MSU Grants, the 2013 MSU Grants change in the Company’s cumulative total shareholder return and 2014 MSU Grants at August 1, 2014: over the performance period. The probability of the actual shares expected to be earned is considered in the grant date valuation; therefore, the expense will not be adjusted to reflect the actual units earned. In addition to a service requirement, the vesting of the MSU Grants is also subject to 2012 MSU Grants 2013 MSU Grants 2014 MSU Grants Stock Options Shares 69,438 35,921 8,897 the achievement of a specified level of operating income Prior to 2012, stock options were granted with an exercise during the performance period. If this performance goal is price equal to the market price of the Company’s stock not met, no MSU Grants will be awarded and no compensa- on the grant date; those option awards generally vest at a tion expense will be recorded. cumulative rate of 33% per year beginning on the first The fair value of the MSU Grants is determined using the anniversary of the grant date and expire ten years from the Monte-Carlo simulation model, which simulates a range date of grant. No stock options were granted in 2012, of possible future stock prices and estimates the probabilities 2013 or 2014. of the potential payouts. This model uses the average prices A summary of the Company’s stock option activity as for the 60-consecutive calendar days beginning 30 days prior of August 1, 2014, and changes during 2014 are presented in to and ending 30 days after the first business day of the the following table: performance period. This model also incorporates the follow- ing 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 Fixed Options Shares Weighted- Average Weighted- Remaining Aggregate Intrinsic Average Contractual Value Term Price Outstanding at August 2, 2013 Granted Exercised Forfeited Canceled Outstanding at August 1, 2014 101,138 $ 37.12 — — 36.70 (2,423) — — (11,583) 40.01 87,132 $ 36.75 1.95 $ 5,220 rate assumption commensurate with the three-year Exercisable 87,132 $ 36.75 1.95 $ 5,220 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. CB Financials_8-14_03.indd 47 47 9/24/14 6:06 PM The following table summarizes the total intrinsic values of options exercised during each of the three years: 11 SHAREHOLDER RIGHTS PLAN On April 9, 2012, the Company’s Board of Directors adopted 2014 2013 2012 a shareholder rights plan, as set forth in the Rights Agree- Total intrinsic values of options exercised* $ 169 $ 10,526 $ 14,859 * The intrinsic value for stock options is defined as the difference between the current market value and the grant price. Compensation Expense The following table highlights the components of share- based compensation expense for each of the three years: ment dated as of April 9, 2012 by and between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (the “Rights Agreement”). Pursuant to the terms of the Rights Agreement, the Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.01 per share. The dividend was payable on April 20, 2012 2014 2013 2012 to the shareholders of record as of the close of business on Nonvested stock awards MSU Grants Stock options Total compensation expense $ 5,762 2,162 — $ 7,924 $ 15,416 2,335 88 $ 17,839 $ 11,440 1,690 1,290 $ 14,420 April 20, 2012. The Rights The following table highlights the total unrecognized compensation expense related to nonvested stock and MSU Grants and the weighted-average periods over which the expense is expected to be recognized as of August 1, 2014: Total unrecognized compensation Weighted-average period in years Nonvested Stock $ 1,959 1.69 MSU Grants $ 2,745 1.71 The following table highlights the total income tax benefit recognized in the Consolidated Statements of Income for each of the three years: The Rights initially trade with, and are inseparable from, the Company’s common stock. The Rights are evidenced only by the balances indicated in the book-entry account system of the transfer agent for the Company’s common stock or, in the case of certificated shares, the certificates that represent such shares of common stock. New Rights will accompany any new shares of common stock the Company issues after April 20, 2012 until the earlier of the Distribution Date, redemption of the Rights by the Board of Directors or the final expiration date of the Rights Agreement, each as described below. 2014 2013 2012 Exercise Price Total income tax benefit $ 2,438 $ 5,221 $ 4,254 During 2014, the Company issued 145,900 shares of its common stock resulting from the vesting of share-based compensation awards and stock option exercises. Related tax withholding payments on certain share-based compensation awards exceeded proceeds received from the exercise of stock options which resulted in a net reduction to shareholders’ equity of $8,457. The excess tax benefit realized upon exercise of share-based compensation awards was $1,248. Each Right will allow its holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock (“Preferred Share”) for $200.00, once the Rights become exercisable. This portion of a Preferred Share will give the shareholder approximately the same dividend and liquidation rights as would one share of common stock. Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights. Based on the terms of the Rights Agreement, the Rights will not be exercisable until 10 days after the public announcement that a person or group has become an 48 CB Financials_8-14_03.indd 48 9/24/14 6:06 PM “Acquiring Person” by obtaining beneficial ownership • will entitle holders upon liquidation either to receive of 20% or more of the Company’s outstanding common stock $1.00 per share or an amount equal to the payment made (the “Distribution Date”). Until the Distribution Date, the on one share of common stock, whichever is greater. balances in the book-entry accounting system of the transfer • will have the same voting power as one share of common agent for the Company’s common stock or, in the case of stock. certificated shares, common stock certificates, will evidence • if shares of the Company’s common stock are exchanged the Rights, and any transfer of shares of common stock via merger, consolidation, or a similar transaction, will will constitute a transfer of Rights. After the Distribution entitle holders to a per share payment equal to the payment Date, the Rights will separate from the common stock made on one share of common stock. and will be evidenced by book-entry credits or by Rights The value of one one-hundredth of a Preferred Share will certificates that the Company will mail to all eligible holders generally approximate the value of one share of common stock. of common stock. Any Rights held by an Acquiring Person or any associate or affiliate thereof will be void and may not be exercised. After the Distribution Date, each Right will generally entitle the holder, except the Acquiring Person or any associate or affiliate thereof, to acquire, for the exercise price of $200.00 per Right (subject to adjustment as provided in the Rights Agreement), shares of the Company’s common stock (or, in certain circumstances, Preferred Shares) having a market value equal to twice the Right’s then-current Redemption The Board of Directors may redeem the Rights for $0.01 per Right at any time before any person or group becomes an Acquiring Person. If the Board of Directors redeems any Rights, it must redeem all of the Rights. Once the Rights are redeemed, the only right of the holders of Rights will be to receive the redemption price of $0.01 per Right. The redemption price will be adjusted if the Company has a stock split or stock dividends of its common stock. exercise price. In addition, if the Company is later acquired Qualifying Offer Provision in a merger or similar transaction after the Distribution Date, each Right will generally entitle the holder, except the Acquiring Person or any associate or affiliate thereof, to acquire, for the exercise price of $200.00 per Right (subject to adjustment as provided in the Rights Agreement), shares of the acquiring corporation having a market value equal to twice the Right’s then-current exercise price. At August 1, 2014, none of the Rights were exercisable. Preferred Share Provisions Each one one-hundredth of a Preferred Share, if issued: • will not be redeemable. • will entitle holders to quarterly dividend payments of $0.01 per share, or an amount equal to the dividend paid on one share of common stock, whichever is greater. The Rights would also not interfere with all-cash, fully financed tender offers for all shares of common stock that remain open for a minimum of 60 business days, are subject to a minimum condition of a majority of the outstanding shares and provide for a 20 business day “subsequent offering period” after consummation (such offers are referred to as “qualifying offers”). In the event the Company receives a qualifying offer and the Board of Directors has not redeemed the Rights prior to the consummation of such offer, the consummation of the qualifying offer shall not cause the offeror or its affiliates or associates to become an Acquiring Person, and the Rights will immediately expire upon consummation of the qualifying offer. CB Financials_8-14_03.indd 49 49 9/24/14 6:06 PM Exchange After a person or group becomes an Acquiring Person, but before an Acquiring Person owns 50% or more of the Contributions under both plans may be invested in various investment funds at the employee’s discretion. Such contri- butions, including the Company’s matching contributions Company’s outstanding common stock, the Board of Directors described below, may not be invested in the Company’s may extinguish the Rights by exchanging one share of common stock. In 2014, 2013 and 2012, the Company common stock or an equivalent security for each Right, other matched 25% of employee contributions for each participant than Rights held by the Acquiring Person. Anti-Dilution Provisions The Board of Directors may adjust the purchase price of the Preferred Shares, the number of Preferred Shares issuable and the number of outstanding Rights to prevent dilution that may occur from a stock dividend, a stock split, a reclassifica- tion of the Preferred Shares or common stock. Amendments The terms of the Rights Agreement may be amended by the Board of Directors without the consent of the holders of the Rights. After a person or group becomes an Acquiring Person, the Board of Directors may not amend the agreement in a way that adversely affects holders of the Rights. in either plan up to a total of 6% of the employee’s compen- sation. Employee contributions vest immediately while Company contributions vest 20% annually beginning on the first anniversary of a contribution date and are vested 100% on the fifth anniversary of such contribution date. At the inception of the Non-Qualified Savings Plan, the Company established a Rabbi Trust to fund the plan’s obligations. The market value of the trust assets for the Non-Qualified Savings Plan of $25,322 is included in other assets and the related liability to the participants of $25,322 is included in other long-term obligations in the Consoli- dated Balance Sheets. Company contributions under both plans are recorded as either labor and other related expenses or general and administrative expenses in the Consolidated Statements of Income. Expiration The following table summarizes the Company’s contribu- The Rights Agreement will expire on April 9, 2015. tions for each plan for each of the three years: 12 EMPLOYEE SAVINGS PLANS The Company sponsors a qualified defined contribution retirement plan (“401(k) Savings Plan”) covering salaried and hourly employees who have completed ninety days of service and have attained the age of twenty-one. This plan 401(k) Savings Plan Non-Qualified Savings Plan 2014 2013 $ 2,167 253 $ 2,180 241 2012 $ 2,026 283 13 INCOME TAXES The components of the provision for income taxes for each allows eligible employees to defer receipt of up to 50% of the three years were as follows: of their compensation, as defined in the plan. The Company also sponsors a non-qualified defined contribution retire- ment plan (“Non-Qualified Savings Plan”) covering highly compensated employees, as defined in the plan. This plan allows eligible employees to defer receipt of up to 50% of their base compensation and 100% of their eligible bonuses, as defined in the plan. 2014 2013 2012 Current: Federal State Deferred: Federal State Total provision for income taxes $ 53,713 4,597 $ 44,853 4,375 $ 34,074 7,928 (2,863) 3,274 $ 58,721 (4,365) 3,654 $ 48,517 886 319 $ 43,207 50 CB Financials_8-14_03.indd 50 9/24/14 6:06 PM A reconciliation of the Company’s provision for income Summarized below is a tabular reconciliation of the beginning taxes and income taxes based on the statutory U.S. federal and ending balance of the Company’s total gross liability rate of 35% was as follows: for uncertain tax positions exclusive of interest and penalties: Provision computed at federal statutory income tax rate State and local income taxes, net of federal benefit Employer tax credits for FICA taxes paid on employee tip income Other employer tax credits Other-net Total provision for income taxes 2014 2013 2012 $ 66,797 $ 58,024 $ 51,201 5,029 5,698 6,424 (9,962) (3,781) 638 $ 58,721 (9,635) (5,927) 357 $ 48,517 (9,114) (4,938) (366) $ 43,207 Significant components of the Company’s net deferred tax liability consisted of the following at: August 1, 2014 August 2, 2013 August 3, 2012 $ 20,972 $ 18,098 $ 14,167 Balance at beginning of year Tax positions related to the current year: 3,989 — Additions Reductions Tax positions related to the prior year: 1,400 Additions (1,630) Reductions Settlements (755) Expiration of statute of limitations (1,144) $ 22,832 Balance at end of year 3,731 — 3,326 — 191 (280) — (768) $ 20,972 2,556 (1,043) — (908) $ 18,098 August 1, 2014 August 2, 2013 If the Company were to prevail on all uncertain tax Deferred tax assets: Compensation and employee benefits Deferred rent Accrued liabilities Insurance reserves Inventory Other Deferred tax assets Deferred tax liabilities: Property and equipment Inventory Other Deferred tax liabilities Net deferred tax liability $ 10,858 14,900 13,942 11,944 6,212 3,172 $ 61,028 $ 88,543 13,415 9,591 111,549 $ 50,521 $ 16,750 13,535 12,766 12,091 5,669 4,437 $ 65,248 $ 94,179 13,700 9,550 117,429 $ 52,181 The Company believes that adequate amounts of tax, interest and penalties have been provided for potential tax uncertainties; these amounts are included in other long- term liabilities in the Consolidated Balance Sheets. As of August 1, 2014 and August 2, 2013, the Company’s gross liability for uncertain tax positions, exclusive of interest and penalties, was $22,832 and $20,972, respectively. positions, the reversal of this accrual would be a tax benefit to the Company and impact the effective tax rate. The following table highlights the amount of uncertain tax positions, exclusive of interest and penalties, which, if recognized, would affect the effective tax rate for each of the three years: Uncertain tax positions $ 14,840 $ 13,631 $ 11,764 2014 2013 2012 The Company had $8,559, $7,869 and $6,605 in interest and penalties accrued as of August 1, 2014, August 2, 2013, and August 3, 2012, respectively. The Company recognized accrued interest and penalties related to unrecognized tax benefits of $691, $1,264 and $1,225 in its provision for income taxes in August 1, 2014, August 2, 2013 and August 3, 2012, respectively. In many cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities. Based on the outcome of these examinations or as a result of the expiration of the statutes of limitations for specific taxing jurisdictions, it is reasonably possible that the related uncertain tax positions taken regarding previously filed tax returns could decrease from those recorded as liabilities for uncertain tax positions in the Company’s financial statements at August 1, 2014 by approximately $2,000 to $4,000 within the next twelve CB Financials_8-14_03.indd 51 51 9/24/14 6:06 PM months. At August 1, 2014, the Company was subject to ultimate liability with respect to these proceedings and income tax examinations for its U.S. federal income taxes claims will not materially affect the Company’s consolidated after 2010 and for state and local income taxes generally results of operations or financial position. after 2010. 14 NET INCOME PER SHARE AND WEIGHTED AVERAGE SHARES The following table reconciles the components of diluted earnings per share computations: 2014 2013 2012 The Company maintains insurance coverage for various aspects of its business and operations. The Company has elected, however, to retain all or a portion of losses that occur through the use of various deductibles, limits and retentions under its insurance programs. This situation may subject the Company to some future liability for which it is only partially insured, or completely uninsured. The Company intends $ 132,128 $ 117,265 $ 103,081 to mitigate any such future liability by continuing to exercise shares outstanding 23,817,768 23,708,875 23,067,566 Net income per share numerator Net income per share denominator: Basic weighted average Add potential dilution: Stock options, nonvested stock awards and MSU Grants Diluted weighted average shares outstanding prudent business judgment in negotiating the terms and conditions of its contracts. See Note 2 for a further discussion of insurance and insurance reserves. Related to its insurance coverage, the Company is contin- gently liable pursuant to standby letters of credit as credit guarantees to certain insurers. As of August 1, 2014, the 148,247 239,446 340,560 Company had $20,637 of standby letters of credit related to 23,966,015 23,948,321 23,408,126 securing reserved claims under workers’ compensation 15 COMMITMENTS AND CONTINGENCIES During 2014 and through September 25, 2014, the Company was served with several claims filed as a putative collective action alleging violations of the Fair Labor Standards Act (“FLSA”). The Company believes these claims are without merit and intends to vigorously defend these lawsuits. These proceedings remain in the early stages. At this time, the Company cannot reasonably estimate the likely results of these lawsuits or the economic effects of these lawsuits on the Company, though an adverse outcome could be material to the Company’s results of operations or financial position. See “Item 3. Legal Proceedings” of Part I of this Annual Report on Form 10-K for further information related to these claims. 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 manage- ment, based upon information currently available, the 52 insurance. All standby letters of credit are renewable annually and reduce the Company’s borrowing availability under its Revolving Credit facility (see Note 5). As of August 1, 2014, 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 Consolidated Balance Sheets for amounts to be paid in case of non-performance by the third parties by the primary obligors under such lease agreements. The Company enters into certain indemnification agree- ments in favor of third parties in the ordinary course of business. At August 1, 2014, the Company recorded a liability of $252 in the Consolidated Balance Sheet related to legal costs. The Company believes that the probability of incurring an actual liability under other indemnification agreements is sufficiently remote so that no additional liability has been recorded in the Consolidated Balance Sheets. CB Financials_8-14_03.indd 52 9/24/14 6:06 PM 16 QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for 2014 and 2013 are summarized as follows: 2014 Total revenue Gross profit Income before income taxes Net income Net income per share – basic Net income per share – diluted 2013 Total revenue Gross profit Income before income taxes Net income Net income per share – basic Net income per share – diluted 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter $ 649,141 $ 698,491 $ 643,298 $ 692,747 470,440 443,212 441,791 455,476 39,830 27,160 54,235 37,055 40,886 28,728 55,898 39,185 $ $ 1.14 $ 1.56 $ 1.21 $ 1.65 1.14 $ 1.55 $ 1.20 $ 1.63 $ 627,451 $ 702,671 $ 640,407 $ 674,101 463,444 429,593 438,425 458,484 34,596 23,192 46,904 35,168 33,978 24,602 50,304 34,303 $ $ 0.98 $ 1.48 $ 1.04 $ 1.44 0.97 $ 1.47 $ 1.02 $ 1.43 CB Financials_8-14_03.indd 53 53 9/24/14 6:06 PM CR ACKER BA R R EL OLD COUN TRY STOR E, I NC. Corporate Officers Sandra B. Cochran President and Chief Executive Officer Beverly K. Carmichael Senior Vice President and Chief People Officer Christopher A. Ciavarra Senior Vice President, Marketing Laura A. Daily Senior Vice President, Retail Anthony P. Guadagno Vice President, Restaurant Operations Michael T. Hackney Regional Vice President, Restaurant Operations Kathleen A. Hansen Vice President, Retail Operations Sandra K. Hayes Regional Vice President, Retail Operations Nicholas V. Flanagan Senior Vice President, Restaurant and Retail Operations Ray Johnson Regional Vice President, Restaurant Operations Edward A. Greene Senior Vice President, Strategic Initiatives Lawrence E. Hyatt Senior Vice President and Chief Financial Officer Charlie E. Austin Regional Vice President, Restaurant Operations Robert E. Bowman, Jr. Vice President, Internal Audit Michael W. Mott Vice President, Human Resources Thomas R. Pate Vice President, Training and Management Development William M. Prentice Regional Vice President, Restaurant Operations Beth J. Quinn Regional Vice President, Retail Operations Michael J. Chissler Vice President, Restaurant and Retail Operations Support Mark W. Romanko Regional Vice President, Restaurant Operations Brenda L. Cool Regional Vice President, Retail Operations Cindy M. Sasse Regional Vice President, Retail Operations P. Doug Couvillion Vice President, Corporate Controller and Principal Accounting Officer Michelle R. Scott-Ramirez Regional Vice President, Retail Operations Leon De Wet Vice President, Information Services and CIO Robert F. Doyle Vice President, Product Development and Quality Assurance Alan L. Emery Regional Vice President, Restaurant Operations Deborah A. Fratrik Regional Vice President, Restaurant Operations Scott A. Gardner Vice President, Distribution and Logistics Drew A. Germain Vice President, Merchandise Planning and Allocation Joshua L. Greear Vice President, Financial and Strategic Analysis David R. Swartling Regional Vice President, Restaurant Operations Walter W. Tyree Regional Vice President, Restaurant Operations Bart F. Vig Regional Vice President, Restaurant Operations Bradley G. Wahl Vice President, Marketing Jeffrey M. Wilson Vice President, Operations Analysis Michael J. Zylstra Vice President, General Counsel and Corporate Secretary 54 CB Financials_8-14_03.indd 54 9/24/14 6:06 PM CR ACKER BA R R EL OLD COU N TRY STOR E, I NC. Corporate Information Corporate Offices Cracker Barrel Old Country Store, Inc. P.O. Box 787 305 Hartmann Drive Lebanon, TN 37088-0787 Phone: 615-444-5533 crackerbarrel.com Transfer Agent American Stock Transfer & Trust Company 59 Maiden Lane Plaza Level New York, NY 10038 Independent Registered Public Accounting Firm Deloitte & Touche LLP Nashville, Tennessee 10-K Report A copy of the Cracker Barrel Old Country Store, Inc. Form 10-K Annual Report for Fiscal 2014 filed with the Securities and Exchange Commission, may be obtained without charge through our Internet website, located at crackerbarrel.com and (without exhibits) by writing to the Company, attention: Investor Relations. If requested in writing, exhibits to the Form 10-K Annual Report are available for a reasonable fee. Annual Meeting The annual meeting of shareholders will be held at 10:00 a.m. Thursday, November 13, 2014, at the Cracker Barrel Old Country Store home office on Hartmann Drive, Lebanon, Tennessee. Dividend Reinvestment and Direct Stock Purchase Plan Although our company does not sponsor a dividend reinvest- ment or direct stock purchase plan, our transfer agent, American Stock Transfer & Trust Company, LLC (“AST”), sponsors and administers such programs. You may call AST at 800-485-1883 or 718-921-8124 to obtain enrollment forms. Unless specifically noted otherwise, references in this annual report to “CBRL,” “Cracker Barrel” or “The Company” refer to Cracker Barrel Old Country Store, Inc. and its subsidiaries; or its Cracker Barrel Old Country Store® concept. “Cracker Barrel Old Country Store” name and logo, “Cracker Barrel”, “Pleasing People”, “Wholesome Fixin’s”,“Homestyle Meals with a Lighter Twist” and “CB Old Country Store” are trademarks of CBOCS Properties, Inc. ©2014 CBOCS Properties, Inc.  

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