Investment ideas can simply come from your favorite dining establishments such as Cracker Barrel (NASDAQ:CBRL), DineEquity (NYSE:DIN) which operates under the Applebee's and IHOP names , and fast casual chain Noodles & Company (NASDAQ:NDLS). However, legendary investor Peter Lynch once said, "Investing without research is like playing stud poker and never looking at the cards." With that in mind it's important to always research a company to see if it's generating cash otherwise it may be on the edge of the abyss.
Country store and restaurant
Cracker Barrel operates 626 locations in America. It sells a combination of experience, food, and merchandise. In a Cracker Barrel location, customers walk into a waiting area with a country store theme filled with interesting merchandise and candy products. After the wait, Cracker Barrel employees usher customers into the dining room for good food and timely service. Cracker Barrel's revenue and net income increased 1% and 10% respectively so far this year stemming mostly from menu price increases and new store openings. However, its free cash flow declined 52%.
Weather served as a drag on traffic and subsequently on sales growth. Reduced labor, general & administration, and lower interest expenses contributed to the increase in profitability. Cracker Barrel's decline in free cash flow stemmed mostly from the timing of payments to accounts payable and increases in capital expenditures due to capitalized maintenance and store openings.
Cracker Barrel sits on an ok balance sheet. Cash came in at 18% of stockholder's equity in the most recent quarter. Cracker Barrel reduced its long-term debt 4% versus the same time last year bringing its long-term debt to equity ratio from 85% to 80%. Reducing debt means less interest choking out profitability. Cracker Barrel paid out 144% of its free cash flow in dividends so far this year versus 42% for the same time in the previous year. Currently the company pays its shareholders $3 per share per year translating into an annual yield of 3.1%.
Applebee's and IHOP
DineEquity and its franchisees operate 2,011 Applebee's and 1,620 IHOPs. In 2013, DineEquity's revenue and net income declined 25% and 42% respectively. DineEquity's movement toward a 100% franchised chain resulted in less stores owned explaining the stark drop in revenue and net income. This resulted in higher operating margins which came in at 35% in 2013 versus 27% in 2012. Its free cash flow went from $29 million in 2012 to $121 million in 2013 when factoring out sales of equipment and assets held for sale to franchisees. Lower taxes due to the lack of extraordinary gains due to restaurant location sales to franchisees resulted in the huge bump in free cash flow.
DineEquity's balance sheet leaves much to be desired. DineEquity's cash to stockholder's equity came in at 34% at the end of last year. Long-term debt to equity clocked in at 382%. Its operating income only exceeded interest expense by two times. The general rule of thumb for safety resides at five or more. DineEquity paid out 48% of its free cash flow in dividends last year. Currently the company pays $3 per share per year and yields 3.9%.
Noodles and more
Noodles & Company and its franchisees operated 380 restaurants as of the end of last year. The restaurant serves pasta, noodles, salads, soups, and sandwiches. Last year the company grew its revenue and net income 17% and 29% respectively. Increases in customer expenditure, traffic, and new stores contributed to revenue gains. However, the company remains free cash flow negative due to capital expenditures pertaining to heavy expansion. The company possesses cash amounting to less than 1% of stockholder's equity. Noodles & Company went public in July 2013 and used the proceeds to pay down most of its debt, bringing its long-term debt to equity ratio from 901% in 2012 to 5% in 2013. Currently, the company pays no dividend.
Full service restaurant chains such as Cracker Barrel and DineEquity face serious headwinds from fast casual chains such as Noodles & Company. If Cracker Barrel and DineEquity can't find ways to compete with the fast casual concepts then they may underperform over the long-term or go out of business altogether. Noodles & Company will eventually need to generate cash to spruce up its balance sheet and set up a reserve for hard times and to pay a dividend. With that said investors may want to look elsewhere with their investment dollars for now.