CRACKER BARREL (CBRL) REPORTS Q4 – A METAPHOR FOR THE INDUSTRY

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CRACKER BARREL REPORTS Q4 – A METAPHOR FOR THE INDUSTRY

If anybody thinks it is getting any easier out there, Cracker Barrel’s report this morning should provide a dose of reality.

The conference call doesn’t take place for a couple of hours, but we know enough to comment. Comp sales declined 0.4% in Q4, ending 7/31, but the average check increased by 3.5% (menu price increase was 2.7%) , so traffic was down about 3.5%. The trend of the comps, on a monthly basis was very consistent: -3.8% in May and July, -2.7% in June.

Operating income in Q4 was 10.2% of revenues, down 100 bp from a year earlier, negatively affected by increased labor (60 bp) as well as cost of goods (110 bp) , partially offset by reductions in “other operating expenses” (20 bp) and G&A (50 bp).  Diluted EPS  was $2.55 vs $2.23, but adjusting for the extra week this year, EPS was down $.04 Importantly, the tax rate was only 21.8% this year, compared to 32.7% last year, which, combined with the extra week, provided the increase in EPS. The fourth quarter basically mirrored the full year, ending 7/31.

The brief commentary in this morning release, regarding sales trends, said “”the traffic was challenged, particularly with light er users and during the dinner daypart, some of which was attributable to our menu and marketing promotion not delivering…..While our results did not meet our expectations, I am confident that our initiatives and plans for ‘2019 will drive improved performance.”

Guidance for ’19 includes comp sales of 0 to 1% positive, for both restaurant and retail segments.  Commodity inflation of 2% is expected (which reverses the benefit of recent years). Operating income margin will be about 9.3% of sales (vs. 9.7% in ’18). The tax rate will be 17-18% (vs. 11.1% in ’18). EPS will be $8.95-$9.10 (vs.$8.87 in ’18). This is a reduction from the previous Street estimate of $9.69.

This quick update is not intended to analyze CBRL as a stock, but presented as a commentary on how a well run restaurant company is coping with today’s environment.

Bottom line: As a regular customer of Cracker Barrel, when I have visited my daughter in Birmingham, ALA, the value for the money is extraordinary and the service has always been just fine.  I don’t think any customer, analyst, or investor would argue that Cracker Barrel is dropping the ball from an operating standpoint.   Relative to the reported results, it is worth noting that commodity prices have turned higher, a significant change from the help this line item has provided in the last couple of years. Also, the materially lower tax rate this year, and next at CBRL, is not going to be a recurring benefit in future years. This affects all US companies, not just those in the restaurant industry. The challenge for all restaurant/retail companies, especially those with a very large footprint,  is how to “differentiate your commodity”.  It continues to be tough out there in restaurant/retail land, in spite of the bullish commentary about how the economy is “booming”.

Roger Lipton

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