Cracker Barrel: 3 Things to Listen for on the Earnings Call

Cracker Barrel Old Country Store (NASDAQ: CBRL  ) is reporting its first-quarter 2014 earnings on Nov. 26, and three questions are on the minds of investors: how is the new healthier menu launch shaping up? How are the refreshes and new stores performing under a new strategy? And how is the company's foray into packaged goods panning out? Questions on the company's plan for its free cash flow and how it will keep up its double-digit earnings-per-share growth rate are certain to crop up as well.

Past is prologue
Cracker Barrel owns 625 restaurants and adjacent retail stores in 42 states. Its original concept in 1969 was to offer family style dining at locations along interstate highways, and with 85% of restaurants still located along interstates, the company has mostly adhered to that strategy. Unlike many other chains and definitely against the trend in casual dining and quick-service restaurants, the company does not franchise.

Cracker Barrel has consistently raised the bar with seven consecutive quarters of higher restaurant and retail sales and traffic. It reported a 19.2% year-over-year increase in EPS last quarter. 

The company exceeded its own full-year guidance for 2013 of $4.50-$4.70 EPS by earning $4.90 per share. It also managed to bring down its capital expenditures to $74.4 million from its own estimates of $90 million to $100 million.

The company has been using free cash flow to pay down debt of more than $125 million in fiscal year 2013 and raised the dividend by 50%, which now stands at a yield of 2.7%. The company also bought back 44,300 shares, delivering a total shareholder return of 65% this last year. Its debt load of $400 million has been almost halved since 2008, and the company said during its last earnings call that it is comfortable with the debt at this level.

Source: Cracker Barrel investor fact sheet

What to listen for now
First, investors must know if the advertising spend of last quarter ($3 million) to support the rollout of its Wholesome Fixins' healthier menu is working. The company was somewhat coy about the success of the new menu launched in September. What the company did say was why it rolled out the menu; it is an effort to turn around diners' perception that, "the food is rich, fried, and heavy."  Chief executive Sandra Cochran mentioned this was the first substantive menu change in a decade. Expect analysts to hang on every word about the first real numbers to come out over the new menu.

Source: crackerbarrel.com

Second, although a ruling came out last week that prohibited Cracker Barrel from using the Cracker Barrel name on its seven new meat products for sale in grocery stores, this was anticlimactic. Kraft Foods Group and Cracker Barrel, the company, already came to an agreement. Cracker Barrel could launch its new meat products as the CB Old Country Stores brand, and the line debuted in mid-October.

Last quarter with the litigation still pending CEO Cochran could only say, "In the long term, we believe our shareholders will benefit from our strategy to extend the Cracker Barrel Old Country Store brand outside the walls of our stores." 

Cracker Barrel competitor Bob Evans Farms (NASDAQ: BOBE  ) has been selling its branded meats and sides in grocery stores for years, and it has proved to be a reliable revenue stream. Most recently, Bob Evans reported double-digit growth in these grocery product sales, which comprised 26% of the company's total sales.

Although Cracker Barrel pre-announced that its new launch would have no material effect on FY 2014 earnings, expect much more color on this.

Third, an issue that interested analysts on the last call was the expanding footprint and refreshes of the Cracker Barrel stores. The company has been using a new analytic model to choose new locations. Again, the company declined to release the numbers on some of the new stores' performance, only to say that it was pleased so far.

At its 2012 analyst day the company guided for 2%-3% new-unit growth, but is actually running only ~1%. Expect more questions on new stores and how they are doing.

Like Cracker Barrel, Bob Evans has been refreshing its restaurants. More than 70% of the 560 Bob Evans restaurants in 19 states have been refreshed recently, boosting same-store sales at those locations by 2%, according to Barron's, which predicts 30% upside. 

The remainder of refreshes are expected throughout 2014 and include beefing up catering carryout, bakery, and family meals to-go operations as the company strives for off-premise sales to hit 25% of the restaurant sales mix by fiscal 2018.

However, these refreshes have caused capital expenditures to climb, with net debt now at $193 million. The company is targeting a 3.0x debt/EBITDAR (with R standing for restructuring costs) ratio once refreshes are complete.

Bob Evans is valued at a forward earnings multiple of 17.1 and offers a 2.5% yield. A longer-term catalyst is its new downsized fast-serve concept, Bob Evans Express.The company also expects to open 10 new full-size restaurants annually starting in fiscal year 2015.

Still, Cracker Barrel is the better buy as it more slowly but surely expands its footprint and changes consumer perceptions that down-home cookin' has to be heavy and fattening, all while consistently growing traffic and same-store sales.

CBRL Profit Margin (Quarterly) Chart

Cracker Barrel profit margin (quarterly) data by YCharts

The Foolish takeaway
Cracker Barrel has raised the standard in the casual-dining space with its consistent growth. But with significant new changes in menu, a new real estate policy for stores, and a new revenue stream in packaged goods this is the quarter that management will have to tell a very good and more complete tale to beat already-high expectations.

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