Should You Consider an Investment in Cracker Barrel?

The driving boom -- a six decade-long period of steady increases in per-capita driving in the United States -- is over . This also implies a negative impact on interstate highway driving. Throw in the impact of a hibernating economy and cash-strapped consumers, and the situation gets tougher for restaurants along highways. The industrywide weakness in sales and traffic is reflected in the September 2013 report of Blackbox Intelligence for three out of the last four quarters.

However, Cracker Barrel Old Country Store (NASDAQ: CBRL  ) continues to brave the negativity surrounding the restaurant industry by and large. Cracker Barrel is also competing well with peers like Denny's (NASDAQ: DENN  ) and Bob Evans Farms (NASDAQ: BOBE  ) . Cracker Barrel has the advantage of diversity on its side because it is a restaurant with a gift shop too, whereas Denny's is only a diner.

Looking back
Cracker Barrel banks on its country image and reasonably priced meals, and it has significantly outperformed its peers as is evident from the year-to-date gains on the Street.

CBRL Chart

CBRL data by YCharts

Cracker Barrel was voted number one in the 2013 Consumer Picks survey Family Dining category conducted by Nation's Restaurant News, and ranked first in nine of the 10 categories. It also won first place for the Food and Beverage category in Technomic's inaugural Chain Restaurants Consumers' Choice Award .

In every quarter of the year, Cracker Barrel achieved positive traffic, grew restaurant and retail sales, and beat the Knapp-Track casual dining index . This is despite the strong headwinds that I mentioned right in the beginning.

During Cracker Barrel's fourth quarter, comps increased by 2.6% due to a 0.6% increase in traffic. In addition, due to revised menu pricing, average check increased by 2%. On the retail store side, comps increased by 1.1% during the quarter.

As a result of positive comps, and an increase in traffic and average check, Cracker Barrel reported fourth-quarter revenue of $674.1 million. This was 3.9% more than the adjusted revenue of $649 million in the prior year quarter. Restaurant revenue soared 4.3% and retail revenue increased 2% as compared to the prior-year quarter.

Cracker Barrel was pinched by the industrywide phenomenon of increasing food commodity costs. For the quarter, food commodity costs were approximately 4.7% higher than in the prior year quarter. However, higher input costs were partly offset by a decrease of 110 basis points in store payroll and related expenses. Cracker Barrel reported net income of $34.3 million, or $1.43 per diluted share, representing a 19.2% increase over the prior year.

Looking ahead
Going forward, for fiscal 2014, Cracker Barrel expects revenue to be between $2.70 billion and $2.75 billion. This reflects anticipated increases in comparable store, restaurant, and retail sales in the range of 2% to 3% in addition to the positive impact of the expected opening of seven or eight new Cracker Barrel stores. Earnings are expected to be in the range of $5.60 to $5.80 per diluted share .

More than opening new stores, the company is focusing on higher per-store productivity through an expanded retail product mix and the introduction of licensed products. Also, it is venturing outside the doors of its restaurants through licensing arrangements.

Looking around
Cracker Barrel's diversity is an advantage, and peers such as Denny's also seem to be following suit. Denny's heavily franchised business model helps limit risk and capital requirements. Denny's operates around 1,686 franchised , licensed and company restaurants in the family style restaurant market space. The company is also targeting international markets for growth and expansion and it opened restaurants in three international locations during the third quarter.

Going forward, Denny's is aiming to expand its business internationally. It recently added restaurants to its Latin American portfolio by opening a unit each in El Salvador and Chile. Its restaurant count outside the U.S. is around 100. Denny's expects the number of openings to be at the lower end of its previous guidance of 40-45 franchised restaurants in 2013.

The restaurateur also intends to shut down 35-40 restaurants in 2013. Hence, by closing unprofitable locations and expanding internationally, Denny's is moving in the right direction.

Bob Evans Farms, another full-service restaurant, is following a different strategy to attain growth. With over half of its 560 locations situated in Michigan, Indiana, and its home state of Ohio, the company suffers from a high level of store concentration. In order to increase traffic, it is resorting to promotions and providing "farm fresh" meals at affordable prices. Bob Evans is also expanding its brand into the packaged food segment.

Bob Evans has many locations undergoing a change in format and this has resulted in a lower number of sales days for the company, as a result of which its profitability has been affected. Bob Evans, however, reiterated its full year earnings guidance of $2.60 to $2.67 per share after having reported earnings of $0.58 a share for its first quarter of fiscal 2014 . This suggests that the company is quite confident about the transformation in its business and promotional strategies.

Bottom line
Bob Evans' concentration in a couple of states takes away its differentiation advantage. Denny's is closing certain stores, which means that its real estate department might not be as efficient as Cracker Barrel, which is focused on opening more productive stores. Also, Cracker Barrel is slightly cheaper than Denny's with a P/E ratio of 22.6, and it also has a dividend yield of 2.70%.

All in all, Cracker Barrel is relatively cheap and also pays a good dividend. Consumers are flocking to this award winning restaurant and it is looking to spread its goodness by opening more sites, making it a good place to both dine and invest in.


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