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Cracker Barrel Changes Its Tune

The old country store 'n' restaurant begins a turnaround


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), 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) 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) and Denny‘s (NASDAQ:DENN). 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 did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.

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