Beat the analysts and win a prize.
CBRL Group (NASDAQ:CBRL), operator of the Cracker Barrel and Logan's Roadhouse restaurants, beat analysts' earnings expectations of $0.50 per share for its third quarter of 2006 when it reported before the bell Tuesday. There's a twist, though. It beat expectations only if you ignore stock-based compensation of $0.03 per share and store closings and impairment charges of $0.09 per share. That gives CBRL Group $0.59 per share in earnings for the quarter, instead of the GAAP earnings of $0.47. Shares closed higher by 1.7% and at one time were up 4.6% higher on the day. One analyst upgraded the stock on the news.
Let's dig a little deeper and look at year-over-year comparable sales. Same-store sales at the restaurant chains were down 2.1% for the quarter at the Cracker Barrel Old Country Stores restaurants and up 0.5% at Logan's Roadhouse restaurants. Retail comps at Cracker Barrel Old Country Stores were down 5.4%. The increase at Logan's was only because menu prices went up 2.6%, because foot traffic declined 2%. If menu prices had not risen by 1.8% at Cracker Barrel, comps would have been much worse because foot traffic there dropped 3.3% year over year.
This marks the fifth quarter in a row of declining customer traffic for the soon-to-be-divested Logan's Roadhouse and the eighth quarter in a row for Cracker Barrel brand restaurants. The third quarter of 2004 was the last time CBRL Group reported an increase in guest numbers at those locations. While there were increasing comps in several of those quarters, those usually were because of increased menu prices, something customers will only stand for so long and that could lower traffic. Falling customer numbers or falling same-store sales or both can damage the business, so Cracker Barrel had better do something about this and soon. With competitors like IHOP (NYSE:IHP) and Denny's (NASDAQ:DENN) showing healthy comp increases in their most recent quarters, the need is becoming urgent.
Now let's dig in a slightly different direction and discuss the store closings and impairment charges. In business, not all locations will do well all the time. Sales decline at some sites and rise at others. It's perfectly acceptable that CBRL Group close those locations that don't generate adequate returns. After all, why throw good money after bad? However, it costs the company money to do this, what with ending leases, the possible relocation of employees, etc. It's unfortunate for the closed locations and for the quarter in which it happens, but there it is. If we take the $0.09 expense out as GAAP requires, the company meets estimates at $0.50 (almost; see below). But if we "forgive" the company for closing those underperforming locations, it beats estimates! Woo hoo! Champagne for everyone!
Wait: There's one more expense to recognize -- stock-based compensation. Because of the new reporting rules, CBRL Group reported $0.03 per share, for this, which lowers GAAP earnings to $0.47 for the quarter, 6% less than expectations. Ignore this expense, though, as had been done for so long, and things are just fine.
For a company with declining customer counts in its core and soon to be only restaurant brand, steadily falling same-store sales that go back long before higher gas prices affected consumer discretionary spending, falling cash flow from operations, and lower operating and net margins, things are going to have to really turn around before I would look at CBRL Group as an investment. For you who tendered your shares back to the company at $42 a stub, congratulations. You got what might turn out to be the best price available for quite a while.
Related Fool Takes:
- The end of the last fiscal year raised concerns.
- Not everyone agrees.
- A divesting we will go.
- Is this a stock to avoid?
Fool contributor Jim Mueller does not own shares in any company mentioned. The Fool is investors writing for investors.
