- 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.
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 to offset increases in cost of goods sold, G&A and store operating expenses. That sent operating margins tumbling from 10.7% in last year’s Q2 to 9.7% in this year’s Q2, a meaningful reduction to be sure. CBRL guided for 2.5% to 3% food cost inflation for the full year, so it looks like margins will continue to be under pressure. This is a big reason why I’m not bullish here despite the valuation that looks pretty reasonable.
Operating guidance is OK, not great
In addition to food cost inflation, CBRL reckons it will see 11 or 12 new stores between Holler & Dash and Cracker Barrel as well as comps in the 1% to 2% range. Operating income is projected to be between 9.5% and 10.5%, and that’s a very wide range; we’re getting some ambiguous signals on just how profitable CBRL will be this year. I suspect a lot of the ambiguity stems from just how much food cost inflation there is, but we’ll have to wait and see. The point is that margins aren’t likely to be a source of significant earnings growth this year and indeed, may be the reason why earnings growth lags.
Guidance includes a 53rd week and tax reform
Earnings are supposed to rise from $8.37 last year to CBRL’s guided range of $10.35 to $10.55 on a GAAP basis and $9.30 to $9.50 on an adjusted basis, which would represent a very significant increase in earnings. However, this fiscal year has an extra week that CBRL estimates is adding 35 cents. CBRL also said it would reap a total Tax Reform benefit – net of additional investments – of $33M to $40M this year. With 24M shares outstanding, that’s right around $1.50 per share. What the final benefit ends up being is yet to be seen, but given the 53rd week and the benefits from tax reform, it looks to me like CBRL is still struggling to grow earnings on an operating basis. That makes sense given that revenue growth is in the low single digits and margins are struggling to move higher, but it is easy to be blinded by hot guidance. The problem is that, in CBRL’s case, the gains are driven pretty much entirely by one-time events that cannot be repeated next year.
That said, the stock is trading for about 16 times CBRL’s guided EPS number for this year, so it isn’t like it is expensive. However, I wouldn’t necessarily call it cheap, either, considering that its operating earnings growth is low to nonexistent at this point. Until we get some clarity on margins – specifically with respect to food costs – I think CBRL is going to continue to trade in its range. The yield is still nice at 3%, so dividend gurus may still want to hold CBRL for that reason, but if you’re looking for capital appreciation, you’ll need to look elsewhere.
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This article was written by
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.
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