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Take a Road Trip with Cracker Barrel Old Country Store

|Includes: Cracker Barrel Old Country Store, Inc. (CBRL)
 
Posted by: Dr. Paul Price
Date: Jun 13, 2009 at 7:40 AM

Symbol: CBRL - Jun. 12, 2009 close: $28.08
52-week range: $10.67 (Nov. 21, 2008) - $35.18 (Apr. 22, 2009)
Dividend = $0.20 quarterly = 2.85% current yield


Cracker Barrel Old Country Store, Inc. is principally engaged in the operation and development of the Cracker Barrel Old Country Store restaurant and retail concept (Cracker Barrel). As of September 24, 2008, the Company operated 579 full-service Cracker Barrel restaurants and gift shops in 41 states. Cracker Barrel stores are intended to appeal to both the traveler and the local customer. The format of Cracker Barrel stores consists of a rustic, old country-store design with a separate retail area offering a variety of decorative and functional items featuring rocking chairs, holiday and seasonal gifts and toys, apparel, cookware and foods, including various old fashioned candies and jellies.

• company profile by MSN MoneyCentral

Fiscal 2009 will likely mark the ninth straight year of improved EPS for CBRL despite the poor economic conditions. (FYs end July 31 of the same year). The dividend has been increased significantly in each of the past six years growing from two cents to eighty cents (annually) since 2003.

Since 1998 management has been drastically retiring shares. The latest quarter saw just 23.41 million fully diluted shares versus about 62.5 million at the end of FY 1998. The buybacks have been funded through internal cash flow and debt issuance. CBRL management has been actively taking steps to lessen the debt burden. Sale/leasebacks of company owned units and scaled back expansion plans have been used recently to firm up the balance sheet.

Here are the per share numbers from continuing operations as reported by Value Line:

FY ….… Sales ….. C/F ….. EPS ….... Div ….. Avg. P/E …Avg. Yield
2001 …. 35.69 …..2.52 …. 1.30 ….. 0.02 …… 13.5x …..… 0.1%
2002 …. 41.11 …..3.07 …. 1.64 ….. 0.02 …… 16.6x …..… 0.1%
2003 …. 45.92 …..3.57 …. 2.09 ….. 0.02 …… 14.0x …….. 0.1%%
2004 …. 48.62 …..3.70 …. 2.31 ….. 0.44 …… 15.9x ……&h...
2005 …. 55.07 …..4.16 …. 2.45 ….. 0.48 …… 15.9x ……&h...
2006 …. 85.46 …..6.10 …. 2.50 ….. 0.52 …… 15.3x ……&h...
2007 …. 99.33 …..5.61 …. 2.52 ….. 0.56 …… 17.2x ……&h...
2008 ….106.81 ….5.51 …. 2.79 ….. 0.72 …… 12.0x ……&h...

Zacks sees $2.83 and $3.01 for FY 2009 and 2010 respectively making CBRL’s multiple < 10x this year’s and about 9.3x next year’s expectations.

At today’s quote of $28.08 the P/E is well below historical levels and the current yield is way above typical levels as seen in the chart above.

Even if Cracker Barrel only rebounds back to (a much lower than typical) twelve times calendar year 2009 earnings of $2.88, we’d see a year-end 2009 target price of $34.56 /share or 23% above today’s close.

Is that a reasonable assumption? Sure. CBRL peaked at $42.10, $43.10, $44.60, $47.90, and $50.70 in each year 2003-2004-2005-2006 and 2007. CBRL shares touched highs of $38.90 in the dismal 2008 market and $35.20 just since the start of this year. Sales, earnings and dividends per share are all higher now than ever before.

Here’s a somewhat conservative play with CBRL out to January:

Buy 1000/sh. @$28.08 ……$28,080

Sell 10 Jan. $30 calls @3.40 …....$3,400

Sell 10 Jan. $30 puts @$5.80 ….$5,800
Net Cash Out-of-Pocket …..$18,880

If CBRL rises by 6.9% to at least $30 by Jan. 16, 2010:

The $30 calls will be exercised.
You will sell your shares for $30,000.
The $30 puts will expire worthless – a good thing for you as a seller.
You will likely have collected at least $400 in dividends.
You will have no further option obligations.

You will hold no shares and $30,400 cash.
[I am assuming an early exercise prior to the presumed Jan. 15, 2010
ex-dividend date for the third quarterly dividend during this trade].

That’s a best-case scenario total return of $11,520 / $18,880 = plus 61%
on shares that only needed to rise by 6.9% from trade inception.



What’s the risk?

If CBRL shares stay below $30 through expiration date:

The $30 calls will expire worthless.
The $30 puts will be exercised.
You will be forced to buy an additional 1000 shares and to
lay out another $30,000 cash.
You will likely have collected at least $600 in dividends.
You will have no further option obligations.

You will hold 2000 CBRL shares and $600 cash.
[No early exercise of the $30 calls if the shares are < $30].


What’s the break-even on the whole trade?

On the first 1000 shares it’s the $28.08 purchase price
Less the $3.40 /share call premium = $24.68 /share.

On the ‘put’ shares it’s the $30 strike price less the
$5.80 /share put premium = $24.20 /share.

Your average cost would be:
$24.68 + $24.20 / 2 = $24.44 /share (excluding dividends).

CBRL could drop by up to 12.96% without causing a loss on this trade.

Your break-even price of $24.44 would be lower than the absolute low prices on CBRL for the five years 2003 right through 2007.


Disclosure: Author is long CBRL shares and short CBRL options.