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Overview

Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) and Bob Evans Farm, Inc. (NASDAQ:BOBE) are very similar companies. Cracker Barrel serves country-style food in its Cracker Barrel restaurant concept along with operating nostalgic gift shops in its restaurants. The average check for fiscal year 2012 was $9.44 per guest and the restaurant portion represents about 80% of Cracker Barrel's revenue with the remainder of revenue coming from retail. Bob Evans operates Bob Evans Restaurants (~55-60% of sales), Mimi's Cafe (~20-25% of sales), and a retail foods segment (~20% of sales). The Bob Evans segment, like Cracker Barrel, serves home-style food for breakfast, lunch, and dinner with an average check of $8.64 per guest in fiscal year 2012. Neither company franchises their stores.

As of the close of Nov. 13, 2012, Cracker Barrel has a slightly lower price to sales ratio of 0.58 vs. 0.62 and a slightly higher dividend yield, 3.17% vs. 3.06%. Cracker Barrel's P/E ratio is 14.31 vs. 14.99 for Bob Evans. Of course, these numbers can change as the stock moves up or down, so for all practical purposes, both companies offer the same dividend yield, trade at the same price to earnings multiple, and trade at the same price to sales ratio.

Starting with the Balance Sheet

Both companies choose to own rather than lease a majority of their restaurants. In its most recent quarter, Bob Evans has used nearly all of its cash on hand to reduce its long-term debt from $97.1 million to $48.6 million. With low debt and book value of $639.0 million, Bob Evans has a very low debt to book value of equity of 0.08. Cracker Barrel has $152.0 million in cash and $525 million with a debt to book value of 1.37. Cracker Barrel's interest coverage ratio of 4.27 in fiscal year 2012 and management's continuation of sale leaseback transactions mollify debt concerns. It's the operating side and same store sales growth that give the edge to Cracker Barrel.

Operations

Margin Analysis

CRACKER BARREL

FY2012

FY2011

FY2010

Gross Margin

31.1%

31.1%

31.2%

Operating Margin

7.40%

6.87%

6.85%

Net Income Margin

4.00%

3.50%

3.55%

BOB EVANS

FY2012

FY2011

FY2010

Gross Margin

36.8%

36.2%

35.4%

Operating Margin

6.52%

5.28%

6.16%

Net Income Margin

4.40%

3.23%

4.07%

Source: EDGAR. Based on fiscal year for each company.

Cracker Barrel's FY2012 has 53 weeks.

Both companies have similar margins. In the gross margin calculation, I have included both food and restaurant operating labor. Bob Evans has a higher gross margin than Cracker Barrel, but higher SG&A per dollar of sale allows for Cracker Barrel to have slightly higher operating income margins. The lower spread between operating margin and net income margin for Bob Evans is expected given Cracker Barrel's higher debt.

Same Store Sales

Cracker Barrel Old Country Store, Inc.

Period Ending

Restaurant

Retail

2011Q4

29-Jul-11

-1.4%

-0.7%

2012Q1

28-Oct-11

-1.6%

-1.3%

2012Q2

27-Jan-12

3.5%

3.4%

2012Q3

27-Apr-12

3.1%

0.3%

2012Q4

3-Aug-12

3.8%

3.1%

Source: Cracker Barrel Investor Relations, 10-Q documents

Bob Evans Farm Inc.

Period Ending

Bob Evans

Mimi's Café

Foods*

2012Q1

29-Jul-11

-1.8%

-4.8%

3.9%

2012Q2

28-Oct-11

-1.5%

-4.8%

-0.8%

2012Q3

27-Jan-12

1.6%

-3.4%

0.1%

2012Q4

27-Apr-12

-0.6%

-3.1%

-9.2%

2013Q1

27-Jul-12

1.0%

-3.3%

4.5%

*Foods segment includes all sales

Source: Bob Evans Investor Relations, 10-Q documents

It's the same store sales that really set these two companies apart. Cracker Barrel did have a strong Q4 in 2012 which management partially attributes to the Fourth of July occurring in the middle of the week and hence having two strong weekends. Nonetheless, Cracker Barrel's has a better track record in the last five quarters. Management attributes the 3.8% increase in comparable store sales in Q4 2012 to a 1.4% increase in restaurant traffic and a 2.4% increase in average check. By contrast, in Bob Evans' most recent quarter, same-store sales at Bob Evans Restaurants increased 1.0% overall and 1.6% is explained by average menu price increases. In other words, customer traffic is declining at Bob Evans. For what it's worth, Bob Evans used stores open for 18-months prior to the start of the year as a comparable store base in Q1 of fiscal year 2013 but in earlier quarters used stores that have been open at least 2 years prior to the start of the year. According to Cracker Barrel's 10-K, the company uses stores that have been open for a minimum 6 full quarters prior to the beginning of the fiscal year in calculating its comparable store base.

In addition, Bob Evans' other segments do not look that appetizing either. The French and Cajun themed Mimi's Cafe continues to struggle with dropping sales. While the food segment saw an increase in sales in the most recent quarter, the food segment is Bob Evans' smallest division and total sales declined overall for fiscal year 2012 in this segment.

Recent Trends and What's Next

In August, Bob Evans acquired Kettle Creations which includes a 100,000 square foot food manufacturing plant in Ohio for about $50 million. Because Bob Evans Foods was Kettle Creations' largest customer, the company does not anticipate high revenue growth from this acquisition in fiscal 2013.

As of November 13, 2012, Cracker Barrel announced that it signed a multi-year licensing agreement with Smithfield Foods to distribute products with the Cracker Barrel name on it. Whether this licensing agreement will bring higher profits and/or higher brand visibility remains to be seen.

Conclusion

While Bob Evans has lower debt, it's essentially a combination of three mediocre businesses. With Cracker Barrel, you get one (yes, one as the food and retail businesses are under one roof) better business trading at similar multiples. Bob Evans' stronger balance sheet might be more appealing to a debt-holder but for an equity-holder that has a stake in the residual value of the firm, the recent positive trends in Cracker Barrel's business make its stock more alluring. Based on same-store sales and growth prospects, I expect Cracker Barrel to outperform Bob Evans over the medium term horizon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Soul Food Showdown: Why Cracker Barrel Edges Bob Evans