Cracker Barrel Reports Decent Quarter, But Biglari Situation Remains Unsettled

| About: Cracker Barrel (CBRL)
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Country store and restaurant chain Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) reported decent fiscal year 2012 fourth quarter results Wednesday. Revenue increased 14% year-over-year to $700 million, slightly higher than consensus estimates (but aided by an extra week in the calculation). Earnings, on an adjusted basis, increased 19% to $1.20 per share, a bit lower than consensus expectations.

Same-store sales gains were decent, climbing 3.1% at the retail level and 3.8% at the restaurant level. Traffic accounted for 1.4% of the gain, while average check sizes increased 2.4%. Though we'd like to see more people coming into the restaurant, higher pricing certainly never hurts and reflects favorably on the performance of the economy.

Operating margins (on a comparable basis) increased 100 basis points year-over-year, to 7.7%. The company has been under the gun to improve profitability and lower costs, as activist shareholder Sardar Biglari has taken a large stake in the firm and wants to eventually attain control, in our view.

Biglari substantially improved Steak 'n Shake's (Biglari Holdings Inc.: BH-OLD) performance since he took control of the board in 2008, so we think his presence could be very positive for shareholders. However, Cracker Barrel is attempting to adopt a poison pill provision to prevent Biglari from acquiring more than 20% of the firm, making his long-term presence uncertain.

Going forward, the firm expects to earn $4.50-$4.70 per share in fiscal year 2013 on $2.6 billion to $2.65 billion in revenue, a wide-range but in-line with consensus expectations. The company assumes same-store sales growth of 2%-3%. Further, the firm guided to operating margins of 7.3%-7.5%, though input costs will be considerably higher. We think management may be giving a rosy outlook to temper shareholders' interest in Biglari's plan, which includes removing the chairman of the board.

The firm's balance sheet is not great, and we're a little puzzled by its current capital allocation strategy. It continues to return cash to shareholders via buybacks and dividends, but it doesn't have the robust cash flow we'd ideally like to see. We don't think the firm will be able to raise its dividend materially beyond the next couple years, nor do we like the safety of its dividend over the long haul; the necessary cash flows to cover the dividend could come under pressure if operating margins contract.

Regardless, we think shares are fairly valued at current levels. Shares score a 6 on the Valuentum Buying Index (our stock-selection methodology), so we aren't interested in adding the name to our Best Ideas portfolio at this time. However, we're interested to see how the situation with Biglari plays out, as we think he could materially impact the future of the company. For a discussion on how we arrive at our intrinsic value estimate for Cracker Barrel, please click here.

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.