CBRL or BOBE – Which Home-Cooked Stock Is Better?

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A little over a year ago, I suggested that Cracker Barrel (CBRL) was a better buy than Bob Evans Farms (BOBE) because it was the stronger of the two restaurant chains.

BobEvansLogoWith 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.

Cracker Barrel NASDAQ:CBRLPutting aside all of the acrimony surrounding both of these stocks, it’s important for investors to focus on the facts. The numbers don’t lie.

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.

CBRL Strengths

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.

CBRL Weaknesses

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.

BOBE Strengths

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.”

If BEF Foods hadn’t had supplier issues in fiscal 2014, it would have grown revenue by 10% to $383 million. In 2015, BEF expects revenues to grow by at least 16% year-over-year. In terms of operating profits, it expects to generate margins upward of 10% by the end of fiscal 2016.

BEF might only currently generate 26% of overall revenue, but it’s growing and should become a more important piece of the Bob Evans puzzle.

On the restaurant front, Bob Evans completely finished its Farm Fresh Refresh Program in April at all 230 locations. That’s going to be a huge boost to its cash flow generation given each store’s remodel cost approximately $225,000. All the major restaurant chains are upping their presentation, and BOBE is no different. With a new bakery and takeout counter in every location, the revenue from each store is sure to grow.

BOBE’s goal is to generate 25% of its restaurant sales from the bakery and takeout — in 2013, it did about 11.5% of overall revenue. When it started the remodel program in 2011, off-premise sales accounted for less than 8.5% of its overall business.

With 61% of restaurant meals off-premise rather than dine-in, the remodel presents a huge opportunity.

BOBE Weaknesses

Sow costs have increased by 70% over the past four years, impacting BOBE to the tune of $64 million. With sausages accounting for 30% of its overall sales mix (down from 43% in 2009,  this remains an ongoing concern, although hog prices are expected to moderate by the end of 2014.

Sandell Asset Management has been in a proxy battle with BOBE for more than a year. Last September, it sent a letter to the board of directors outlining its opinions regarding BOBE management and its stock. Sandell proposed that BOBE sell or spinoff BEF Foods along with the real estate it owned (sale-leaseback) using the funds from those two transactions to repurchase its shares.

That never went anywhere.

At the time of the letter, Sandell estimated the three moves could justify a stock price between $73 and $84 per share. Today it sits below $50. Sandell wants four board seats (BOBE offering two) and all three changes implemented. Steve Davis and the board want nothing to do with Sandell.

The proxy battle is going to get nasty, and I should think so after Bob Evans blamed a good deal of its 4.1% decline in Q4 2014 same-store sales on the weather.

It’s a terrible excuse that no retail executive should ever use.

Bottom Line

At the end of the day, I don’t think much has changed at the two companies over the past year except that the competition has heated up and restaurant-goers have become far pickier about where they choose to eat given the promotional environment we currently find ourselves.

If I could only pick one stock, I’d go with CBRL. That said, Tom Sandell makes a very compelling argument why BOBE is in need of change.

If you’ve got a speculative streak in you, I’d also place a few bucks on BOBE.

Change is just around the corner.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2014/07/cbrl-bobe-stock-picks/.

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