Do Cracker Barrel's Results Point to a Slowdown?

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Cracker Barrel Old Country Store (NASDAQ: CBRL  ) is an interesting play in the casual restaurant scene. The company has delighted its retail investors with consistent gains over a multiyear period, though it has simultaneously attracted the ire of its largest investor: Sardar Biglari of Biglari Holdings (NYSE: BH  ) . Though Biglari has posted hundreds of millions in gains from Cracker Barrel, the activist investor remains convinced that management is poorly allocating capital and ultimately damaging value to shareholders. In recent earnings, Cracker Barrel does look to have cooled a bit, with figures that came in at or below expectations. While much of this can be attributed to crazy winter weather and a still timid consumer-spending situation, is Cracker Barrel's period of stellar performance settling down?

Absent of the weather
Management claims that the rough weather in December and January caused the company to take a 2.5% hit in traffic as well as restaurant and retail sales. But according to the oft-cited Knapp-Track index, the company still outperformed on traffic and same-store sales figures -- marking the ninth quarter in a row it has done so.

Cracker Barrel is best known for its home-cookin'-style dishes -- biscuits and gravy, steak and eggs, and other calorie-laden items that thrived best before the U.S.'s broad health awakening. But management is prioritizing moves to address the more conscious customer with a Better-For-You menu. Wisely, the menu is not a full-blown Good-For-You one, as that would anger die-hard Cracker Barrel fans who yearn for copious amounts of cholesterol.

Same-store restaurant sales declined 0.6% while retail sales declined 3%. While the numbers are certainly a reversal of prior earnings periods, investors should keep in mind management's comments. Factoring in the weather, comparable restaurant sales supposedly would have risen about 2%. On a traffic basis (excluding the positive benefit of average check increases), December showed a disheartening 4.8% drop.

Tracking down?
Interestingly, management stuck to its prior issued guidance of $5.60 to $5.80 per share, and believed the number would come in around the midpoint. Full-year 2014 same-store sales figures are projected to grow between 1% and 2%.

Seemingly, the company is not seeing an organic drop-off in demand from road-weary travelers. This past quarter, though below analyst expectations, appears to be an aberration.

Biglari's demand for a chunky one-time $20-per-share special dividend (in addition to a couple of board seats) does not appear to be gaining any more traction among the rest of the company's investors. In the meantime, the proxy battles are mounting more and more expenses for Cracker Barrel and pressing on earnings. It's an interesting question for investors. On one hand, Biglari has proven himself to be one of the casual restaurant industry's expert capital allocators, but there isn't much evidence beyond his allegations that suggest Cracker Barrel's existing strategy of new store openings and product innovation is hurting investors.

Investors should not worry about Cracker Barrel's just-ended quarter, as it appears irrelevant in the grand scheme of things. It is worthwhile, though, to consider the dissenting opinion, especially considering the substantial growth (both in operations and stock price) that the company has already booked.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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Related Tickers

9/3/2015 3:59 PM
CBRL $146.44 Up +0.88 +0.60%
Cracker Barrel Old… CAPS Rating: ****
BH $369.99 Down -5.34 -1.42%
Biglari Holdings CAPS Rating: ***