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Cracker Barrel Is On, but Issues Loom

Michael Lewis
September 20, 2013

For Cracker Barrel Old Country Store (NASDAQ: CBRL), the recent earnings release was one of beats and misses. For the just-ended quarter, the company was able to deliver top-line results right around analyst consensus, while its bottom line beat significantly. However, looking ahead to the first quarter of the new fiscal year, Cracker Barrel was unable to satisfy the Street's desires, causing shares to trend down a little less than 3%. The ongoing story here involves 20% stakeholder and uber-activist Sardar Biglari, whose Biglari Holdings (NYSE: BH) has been all over management for years in an attempt to improve capital allocation practices. Here's the latest.

Earnings recap
For the fourth quarter of 2013, Cracker Barrel hauled in $674.1 million in revenue, representing a 3.9% increase over the prior year's number, adjusted for the extra week in last year's quarter. On the bottom line, the company earned an adjusted profit of $4.97 per share -- a steep hike from last year's $4.34 per share.

For the seventh consecutive quarter, the interstate icon boosted both its restaurant same-store sales and retail same-store sales, up 2.6% and 1.1%, respectively.

Wall Street had been expecting $0.08 under the actual results.

Looking ahead, Cracker Barrel expects $2.7 billion-$2.75 billion in sales, with diluted earnings per share of $5.60-$5.80. Same-store sales are projected to grow between 2% and 3%, while the company drives top-line sales by opening seven to eight new stores. Management exercised some of its buyback, repurchasing $3.6 million worth of stock. It also paid back more than $125 million in debt.

Overall, the report was relatively strong, especially considering a weak consumer-spending environment, but one major investor remains extremely displeased.

Dear Jim
Biglari recently wrote another public letter to Cracker Barrel management, lamenting its use of capital and alleging significant value destruction in the richly valued stock.

Biglari, whose firm has repeatedly attempted to gain board seats (unsuccessfully) and was offered a "go away" share buyout from Cracker Barrel management (also unsuccessful), believes the company is spending money on three areas that are detrimental to shareholders in the long run.

  1. Cracker Barrel is paying down significant amounts of debt during a time when financing is incredibly cheap and the company has the real estate assets and operating performance to easily maintain, or even increase, its debt load.
  2. Biglari has argued for some time that Cracker Barrel's return on investment for new stores is less than management reports. After consideration of various expenses and limited factual information, Biglari believes the stores