Cracker Barrel Changes Its Tune

by Lawrence Meyers | May 31, 2012 1:15 pm

UPDATE: This article has been updated to correct inaccuracies about Cracker Barrel. Both InvestorPlace and the author apologize for the errors.

I thought my sole exposure to Cracker Barrel Old Country Store (NASDAQ:CBRL[1]), until recently, was the Cracker Barrel cheese blocks my parents purchased from the grocery store when I was a kid.

Only when I hit the road and landed in Texas did I see there are actual restaurants bearing the same name — but as it turns out, those down-home sit-downs had nothing to do with the Kraft (NYSE:KFT[2]) cheese product.

Cracker Barrels are restaurants that also sell various decorative items. Many of them are found along the nation’s highways — just like other breakfast-lunch-and-dinner stops like Bob Evans (NASDAQ:BOBE[3]) and Denny‘s (NASDAQ:DENN[4]). Cracker Barrel is a brand name that many Americans know of — and with 615 stores in 42 states, I might be the only American who never actually set foot in one.

Cracker Barrel reported Q3 earnings on May 22, and revenue increased 4.5% on comp restaurant sales of 3.1%. CBRL reported the kinds of numbers an investor likes to see in a restaurant — a 2.5% increase in average check size, and a small (0.6%) increase in traffic. Combined with these metrics, the company’s organization restructuring resulted in some cost savings — lower hourly labor, advertising and employee benefits.The result was that adjusted earnings per share, after backing out one-time charges, increased 48%.

The company does have its share of struggles. Shareholders beat back a proxy fight from an activist shareholder, which cost the company a pretty penny. Food commodity costs are expected to push expenses up by 5%. Cracker Barrel also is engaged in restructuring to focus its efforts on enhancing its core business, expanding store footprint and extending the brand. CBRL increased guidance to $4.50 to $4.70 for the year, about 8% over last year.

Financially, Cracker Barrel has what it needs to execute on its plan. Free cash flow for the first three quarters was $85 million, and the company carries $127 million in cash. The debt load is heavier than I’d like, at $536 million and costing about 8% annually, wiping out some $44 million in operating income.

CBRL is priced as if management already has succeeded in its plan, given that it trades at $60, which is 14 times this year’s earnings.

Cracker Barrel is the kind of stock I would get involved in using options, rather than buying outright. It’s on solid enough footing but a bit pricey. In these situations, I might purchase the stock, but then sell covered calls anywhere from one to three months out, or perhaps sell naked puts. That way, I make a modest return while the company sorts itself out without necessarily exposing myself to a long position for any great length of time.

As of this writing, Lawrence Meyers[5] did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc.[6], which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com[7]. He also has written two books[8] and blogs about public policy[9], journalistic integrity[10], popular culture[11] and world affairs[12].

Source URL: https://investorplace.com/2012/05/cracker-barrel-changes-its-tune-cbrl/

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