Sell Cracker Barrel Ahead of Expected Weak Quarterly Results

May.18.11 | About: Cracker Barrel (CBRL)
Investment Thesis
I expect disappointing FQ3 (April) comparable sales will make Cracker Barrel's (NASDAQ:CBRL) FY 11 EPS guidance ($3.95 - $4.10) vulnerable. Due May 24, the weak quarterly results I anticipate would place further doubt on the company's plans to revive unit growth.
Stock’s Future Returns Must Reconcile Weak Profitability
Investors have mostly ignored the company’s relatively weak performance over the past several years. As seen in the table below, CBRL’s stock has appreciated 65% (before dividends) since FY 2007, the first year following Cracker Barrel’s divestiture of Logan’s Roadhouse. That compares to the group’s average of about 73% over this span. However, FY 11 forecasts indicate CBRL’s operating profits are higher by only 5% since FY 07, below every other restaurant operator that I cover, except Sonic (NASDAQ:SONC) and Red Robin (NASDAQ:RRGB), whose negative returns reflect aggregate profit declines of 39% and 62%.
Stock Return
Operating Profit
From 12/07
FY11E/FY07
FY 11E
FY 07
Chipotle Mexican Grill, Inc. (NYSE:CMG)
88%
221%
$348
$108
Buffalo Wild Wings (NASDAQ:BWLD)
169%
193%
75
26
Panera Bread (NASDAQ:PNRA)
245%
161%
233
89
Papa John's (NASDAQ:PZZA)
45%
77%
94
53
Starbucks (NASDAQ:SBUX)
78%
61%
1,700
1,054
McDonald's (NYSE:MCD)
37%
45%
8,103
5,579
Yum Brands (NYSE:YUM)
43%
41%
1,918
1,357
PF Chang's (NASDAQ:PFCB)
69%
34%
72
53
Tim Hortons (THI)
132%
33%
564
425
Cheesecake Factory (NASDAQ:CAKE)
31%
32%
147
111
Cracker Barrel (CBRL)
65%
5%
177
169
Sonic Corp. (SONC)
-46%
-39%
89
147
Red Robin Gourmet Burgers (RRGB)
-10%
-62%
20
53
Average (ex CBRL)
73%
66%
Click to enlarge
Soft Demand Suggests Comparable Sales Limited by High Menu Prices
Steadily declining guest counts at Cracker Barrel show few signs of reversal in FY 11. Traffic levels, down 12% over the past five years, are in response to an average check that has climbed a similar 12% (to $9.16 from $8.20). Won over by lower priced quick service rivals, a more competitive breakfast day-part industry-wide, and C-stores offering broader lines of prepared meals, much of CBRL’s lost customer base may not return.
FY 11E
FY 10
FY09
FY08
FY07
FY06
Comp Sales - Restaurant
1.3%
0.8%
-1.7%
0.5%
0.7%
-1.1%
Average Check
$9.20
$9.02
$8.84
$8.59
$8.31
$8.20
Change in Avg Check
2.0%
2.0%
2.9%
3.4%
1.4%
2.1%
Change in Traffic
-0.7%
-1.2%
-4.6%
-2.9%
-0.7%
-3.2%
Comp Sales - Retail
1.8%
-0.9%
-5.9%
-0.3%
3.2%
-8.1%
AUVs ($mm) - Restaurant
3,264
3,226
3,209
3,282
3,339
3,248
AUV's ($mm) - Retail
845
832
841
898
917
876
Click to enlarge
Even as CBRL has taken costly measures like the "Seat to Eat" roll-out and limited time offers, lower turnover continues to nullify price increases. Amid discretionary spending that remains weak, fast food rivals like McDonald's and even grocers have for the past 15-18 months absorbed food cost increases.
Retail Continues Slide
Relataive to H1 2010’s greater than 3.5% drop in retail sales, the H1 2011 retail comp increase of less than 1.5% is disappointing. Entering the April quarter, average unit volumes at retail were trending 2 – 3% below FY 2009 levels. Thus, to reach the low end of the company’s guided 2 - 4% like-for-like increase at the stores in FY 2011 requires a 5-6% increase over H209. Without a jump in consumer spending patterns, which I do not expect, this level of rise seems unlikely.
H2 Margin Growth Challenged
Due to accelerating food inflation in H2 2011, and absent the benefit to comparisons from a spike in healthcare costs in H1 2010, the modest (10-20 bp) restaurant margin growth management expects in H2 2011 will be hard to achieve. About one-third of CBRL’s restaurant customers make puchases at retail, which in turn generates considerably higher margins than in the restaurant. Yet the ever-widening price increases needed to offset these cost effects at the restaurant cannot be achieved without compromising traffic into the higher-margin stores. Finally, the recent spike in gas prices should further limit pricing power, since 85% of the company’s restaurants are next to Interstates.
LT Unit Growth Objective Unsupported by Secular Trends
CBRL aims for 1,100 restaurants nationally, versus about 600 today, despite ongoing evidence that consumer demand is insufficient at its existing store base. Total unit volumes, trending around $4 million, are below even recessionary levels (FY 08 and FY 09). Also consider that overall comparable restaurant sales growth since FY 06 (when my records begin) peaked at FY 10’s +0.8%.
Given poor unit economics at today's restaurants, the company’s plan to spend about $115 million this fiscal year (vs. <$70 million in FY 09 and FY 10) to fund new unit growth, seems ill advised. Most of the planned newbuilds are in new markets and located away from highways, a change from its existing footprint.
Valuation
Based on my view for slower long-term unit growth, I apply a 12.5x P/E, slightly below past levels, to my FY 2011 EPS estimate of $3.75. This valuation results in a price target of $47, compared to recent level of $53.
Business Summary

Cracker Barrel is a casual dining restaurant operator with about 600 units, most of which are located east of the Mississippi river. The company projects a down home ambience, offering home-style country food, such as meatloaf and biscuits. In addition to its restaurant, which accounts for about 80% of sales, each unit has a retail store attached, selling items like candy, CDs and clothing. About 85% of the chain is located next to an interstate.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.