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Cracker Barrel's Strong Guidance Isn't Actually That Strong


  • CBRL reported earnings recently and they weren't all that great.
  • Guidance was raised, but it was due to the 53rd week and tax reform gains.
  • The stock isn't expensive here, but it isn't cheap either considering that earnings growth is proving difficult to come by.

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Cracker Barrel (NASDAQ:CBRL) was once a comp sales and margin growth machine, posting terrific earnings reports and seeing its share price soar. But the past couple of years have been hard on the casual dining industry, and CBRL is certainly included in that mix. The share price has risen ~10% over the past two years at a time when one of the strongest bull markets in history has been roaring on, so there’s some work to do. The company’s Q2 report and strong guidance look good on the surface, but when we dig a bit deeper, I think CBRL is set up for more sideways action, not new highs.

Traffic is still a concern

Total revenue was up 2% in Q2 as restaurant comps were up 1.1% and retail comps were up 50 bps. Those numbers look fine, but I’m a bit concerned about CBRL’s traffic, which fell 90 bps during the quarter but was more than offset by a 2% gain in average check. Traffic is the single best indicator of demand for a restaurant, so I’d prefer that traffic be higher and average ticket lower than the other way around. If a restaurant cannot get people in the door, it really doesn't matter what other initiatives it has in place, including pricing. Traffic is the single most important metric for any restaurant and CBRL is having a difficult time maintaining its traffic levels. Strong pricing is great and CBRL was able to push through a 2.3% average price increase, but I’ll be watching traffic very closely going forward.

Margins suffered as well

Comps are important not only for revenue generation but also in terms of margins, and unfortunately, despite the tailwind from comps, operating margins were significantly lower in Q2. Lower labor costs – which you’d expect with higher comps – were not enough

This article was written by

Josh Arnold profile picture

I've been covering financial markets for ten years, using a combination of technical and fundamental analysis to identify potential winners (and losers) early, particularly when it comes to growth stocks.

Analyst’s Disclosure: I/we 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.

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Comments (13)

Josh, I hear what you're saying but in your concluding remarks you said that: " while the yield is still nice at 3% and that dividend gurus may want to hold or buy into the stock for that reason", it would have been the perfect place to mention the special dividend paid in July of last year and as a result the effective dividend yield is closer to 4%. I realize that while many readers on this site are "seeking alpha", there are also many not only seeking dividends but better yet those that are seeking dividend growers as well as those that have a history of special dividends which are both true in CBRL's case.
Josh Arnold profile picture
Fair point, thanks for bringing it up.
Josh, yet another negative article from you! Why didn't you mention how the special dividends in each of the last three years sweetens the dividend return.
Josh Arnold profile picture
I'm not trying to be negative; I just call it how I see it. And my primary focus is on the valuation of the stock and how it may perform going forward so special dividends aren't of great concern to me. I get others may place more value on them but for me, I just wanted to evaluate the business. Thanks for reading.
We just visited the new restaurant in Victorville, CA. The place was packed; we waited 90 minutes to be seated on a Saturday at lunchtime. Meanwhile, we browsed the rather unique store, where there was a crowd of shoppers buying, because what else can you do while waiting to dine? I believe they are going to open a restaurant in Oregon next, which could also be very successful. I like the fact that they own their restaurants (rather than franchise) and also own most of their store locations, pay a generous dividend, and have increased the dividend consistently since 2003. Bottom line: its conservatively and efficiently run, profitable and (still) growing. Although it's not a table-pounding buy, it is fairly priced and the recent dip is a welcome buying opportunity. Very long CBRL.
I believe they opened up at least two locations in the Portland area already. It’s clear they are expanding their footprint out West. There will be bumps along the way, but the expansion should further nationalize the brand, and growth will follow. FD: Long CBRL
Baldy2000 profile picture
Josh, CBRL recently announced it is moving into CA. I would think this would help with earnings growth in the long run. Also, Restaurant industry should react to wage inflation by raising prices or implement more automation over time to counter its effects. Cheers
Josh Arnold profile picture
I'm not sure how much automation can be accomplished in a service industry and raising prices would likely put pressure on comps. I do think the battle is uphill but it isn't impossible. Thanks for reading!
Michael Rogus profile picture
Agree on that. I think we just need to adjust for a slightly lower "new norm" on cog and SG&A on these type of companies. When and how that happens is up to the market. Just tough for me to get too excited about Cracker B this far into a bull market - and pressure on both sides of margins. Love eating there on a Sunday morning...
DividendDC profile picture
I will hold my 72 shares, CBRL is competing since 1967, dining business is always challenging, plus they really own their properties. And i like the Dividends.
Michael Rogus profile picture
I curious from a meta sense if the restaurant industry in general is facing an out of balance situation where raising wages are moving along the slider curve a little faster than other industries. This "push for $15" and the like (raising minimum wages) seems to be having a large effect on margins. As they seem to also be getting margin pressure from the COG side, I'd have to avoid the stock here.
Josh Arnold profile picture
Couldn't agree more. This is something I've seen over and over again with the restaurants; lots of downward pressure on both comps and margins so not a good situation at all.
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