With Bob Evans reporting fiscal fourth-quarter earnings Tuesday, it’s time to take another look.
Since my call, CBRL and BOBE have seriously underperformed the S&P 500, and they’ve both failed to keep pace with their restaurant peers. To make matters worse, both continue to face serious criticism from institutional investors, which keeps them from focusing on their businesses.
A year from my buy recommendation, I’ll address both companies’ strengths and weaknesses. By the end you’ll know whether CBRL or BOBE is the better buy — and why.
Cracker Barrel’s Q3 2014 comparable restaurant sales decreased 0.6%, but it still delivered the company’s 10th consecutive quarter of outperforming its casual dining peers. According to the Knapp-Track Casual Dining Index, CBRL has beaten its peers by an average of 320 basis points per quarter since Q2 2012.
Investors surely have noticed this steady performance. Since CEO Sandra Cochran initiated six strategic priorities on Sept. 13, 2011, CBRL has gained 153% compared to 115% for the S&P 600 restaurant index and 68% for the S&P 500.
One of the ways Cracker Barrel intends to grow its business is by introducing market-level pricing across its 627-store chain. Company research suggests that CBRL guests don’t have a problem with tiered pricing. As a result, the company expects to increase prices 2% to 3% annually over the next three years.
Price increases in combination with a total dedication to controlling costs can keep the earnings tap growing despite obvious economic headwinds affecting store traffic.
Speaking of costs, the company’s introduced a new store prototype that saves $50,000 per location on the upfront investment and another $200,000 in annual operating costs once open. In addition, it looks to generate $50 million in annual operating cost savings from the existing 627 stores over the next three years. As a result of finding these efficiencies, the average new unit is generating $5.1 million in revenue, 6% more than it targeted as part of this initiative.
Take care of the pennies, and the pounds will take care of themselves.
Cracker Barrel expects to grow its top line by approximately 4% annually over the next three years based on relatively flat same-store sales traffic and the price increases mentioned earlier. That’s tough sledding, especially if guests don’t take kindly to those price increases and the average guest check goes down rather than up.
It’s a stretch given its core customers are travelers more willing to spend while on the road, but it’s a consideration.
Argus Research recently lowered its rating on CBRL from “buy” to “hold” based on slow growth for family/casual dining stocks, increased competition and rising commodity costs. In terms of commodity costs, CBRL expects about 2% to 3% inflation over the next three years, which will hinder its ability to grow margins. Cracker Barrel’s Q3 2014 adjusted operating margin (excludes special shareholder meeting costs) was 7.2%, and it expects to hit 8% by the end of 2017. If commodity inflation rears its ugly head at the same time some of its guests reject higher pricing, it’s possible that operating margins will decline.
Again, it’s not a sure thing. but it could happen.
As I stated in my article from last year, I like BOBEs vertical integration. The restaurants drive customers to its BEF Foods foodservice division and vice versa. CEO Steve Davis said this about its two operating units in its Q4 earnings release: “Fiscal 2015 is the year we expect to begin reaping the rewards of the recent capital investments we made in Bob Evans Restaurants and BEF Foods.”