Biglari May Get His Chance With Cracker Barrel

In contrast to Apple CEO Tim Cook's statement that hedge fund manager David Einhorn's proxy fight against the company is a "silly sideshow," Cracker Barrel (NASDAQ: CBRL  ) doesn't seem to be laughing at the continued presence of Sardar Biglari of Biglari Holdings (NYSE: BH  ) . Coming around the bend and headed toward corporate elections for the third time now, Biglari may have his biggest chance yet of a major upheaval at the roadside country store and eatery.

Mover 'n' shaker
For those unfamiliar with Sardar Biglari, he is a self-proclaimed Buffett enthusiast who has followed a similar path -- running a holding company to manage a quasi-hedge fund. He also runs a real hedge fund: the Lion Fund. Biglari is certainly different from Warren Buffett, though, in practice. He is known for pushing management's buttons and taking an adversarial approach to ownership. The investor took over Steak 'n Shake and Western Sizzlin' -- two companies that were drastically underperforming before Biglari took hold and have since improved dramatically. Biglari attempted to take over a Michigan insurer but was blocked by the state legislature. What may be most interesting, though, about the investor and CEO is that he's just 35 years old. With that in mind, some believe Biglari Holdings could be a young Berkshire Hathaway.

While many management teams will dismiss activist investors and downplay their roles in determining the direction of a company, Biglari's latest target is still nervous about the investor's power. Cracker Barrel showed its hand recently by offering to buy Biglari's 20% stake in the company to allow him "an efficient exit." This move, would, in turn, remove Biglari and allow the company to operate outside his purview. The company gave him until Feb. 20 to respond, but he chose instead to immediately say no.

Why does Cracker Barrel want Biglari gone? In my opinion, because he raises valid points regarding the company (which is trading at multiyear highs) and may finally persuade fellow common shareholders to put him on the company's board.

The pitch
Why mess with a company that seems to be performing so well? Biglari believes the company may be misrepresenting its strong performance. In Cracker Barrel's last earnings statement (the next one is due out Feb. 26), the company cited new restaurant ROI of 16.2%. Biglari found that to be glaringly inaccurate, saying that he had done his own calculations and came up with 3.7% after depreciation and general expenses. Using a drastically inflated ROI as support for opening new stores would obviously destroy shareholder value.

Cracker Barrel rejected the notion of faulty accounting, and Biglari has yet to win his board seat. But with the not-so-subtle "please leave us alone" gesture that management just pulled, the activist may have just gotten his biggest piece of ammo yet. It would be one thing if the company initiated a large buyback plan open to all shareholders, but this was just a little special one for Biglari's shares only. It is clear that Cracker Barrel management is afraid. You certainly wouldn't hear Tim Cook offering to buy Einhorn's shares (though they should do something similar).

Current Cracker Barrel investors need to think long and hard about what happened this week. Shareholders do not want to get caught in the middle of possible corporate wrongdoing -- that's a one-way ticket to epic losses.

What to expect
It will be interesting to see what Cracker Barrel management has to say next week regarding ROI on new stores and other accounting practices. Even more interesting will be if Biglari responds.

As far as earnings go, analysts are looking for an average of $1.25 in EPS for the quarter ended in January. That would come in $0.05 higher than the year-ago quarter, in which analysts were expecting just $1.14 in earnings. I will make no prediction as to whether Cracker Barrel will meet, exceed, or miss earnings.

I mentioned in previous articles that investors should exercise caution in looking at Cracker Barrel. Even though it's had a very impressive rise and the earnings forecast looks like solid growth, if it turns out that the company has had some reporting issues, the stock price could suffer. On the flip side, if Biglari is successful in gaining a board seat, it could cause the stock to go through the roof based on the investor's previous success in influencing quick-service restaurant operations and, of course, profits.

As always, invest only in that which you are comfortable with.

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