CRACKER BARREL (CBRL) WRITE-UP

Download PDF

Key Economic Metrics Summary (from 10K – August 13, 2019)

CONCLUSION – Selling at just over 16x Adjusted EPS estimates for the year ending 7/31/20 and a little under 10x trailing twelve month EBITDA,  we consider that CBRL has more upside potential than downside risk. Punch Bowl Social is small relative to the size of CBRL, Maple Street Biscuit even more, so neither will move the EPS needle by much any time soon, but both could be intriguing to investors and allow for multiple expansion. Cracker Barrel’s Board of Directors has done a credible job of “returning cash to shareholders”, by way of stock buybacks, the regular dividend that equates to a current yield of 3.4% and special dividends of $3.75 and $3.00 in 2018 and 2019. Cracker Barrel is most accurately described as a cash cow rather than a growth vehicle at this point in their maturity cycle, but the cash flow is well managed, and two new concepts can allow for an attractive return on incremental invested capital.

THE COMPANY: Cracker Barrel Old Country Store, Inc. (CBRL) is principally engaged in the operations and development of the Cracker Barrel Old Country Store concept. Founded in 1969, they are headquartered in Lebanon, TN. As of September 18, 2019, there were 660 Cracker Barrel stores in 45 states. The format consists of rustic, old country store design which features a full-service dining room and a menu that focuses on home-style country foods. The entryway functions as a general store offering a wide variety of decorative and functional items such as rocking chairs, seasonal gifts, toys, apparel and foods. All locations are freestanding buildings with approximately 20% of the space dedicated to retail. The front porch features a row of rocking chairs that are utilized by guests during long waiting periods.  Cracker Barrel’s restaurants represent 80% of the revenue and their retail represents 20%. On July 18, 2019, the Company purchased about 58.6% of the “economic ownership interest” and 49.7% of the voting interest of PBS HoldCo., LLC, operator of Punch Bowl Social. As of 11/1/19, CBRL’s investment in PBS was $89.1M. Punch Bowl Social, with 19 locations averaging about $7.5M, can best described as an adult oriented Dave & Buster’s (but with a lot better food). On October 10, 2019, the Company purchased 100% ownership of Maple Street Biscuit Company, a breakfast and lunch fast casual concept (with 28 company owned and 5 franchised units), for $36M.

STORE LEVEL UNIT LEVEL ECONOMICS (Source: 10K):

UNIT LEVEL ECONOMICS COMMENTARY: AUV – Restaurant Average Unit Volume increased from $3,724,000 in fiscal 2018 to $3,735,000 in fiscal 2019; an increase of 2.6%. This was due to the increase in average check by 3.3%. The retail AUV decreased from $902,000 in fiscal 2018 to $887,000 in 2019 due primarily to a decrease in retail traffic and price markdowns on slower moving merchandise. COGS – Total Cost of Goods Sold decreased in 2019 to 30.3% of sales compared to 30.9% for fiscal 2018. The decrease was primarily due to the menu price increase, lower food waste and a shift to lower cost menu items partially offset by food commodity inflation of 1.6% for the restaurant side. For the retail side, the contribution to the decrease resulted from lower markdowns and a decrease in the provisions for obsolete inventories. Labor and Other Related Costs – increased to 35.1% of sales in fiscal 2019 compared to 34.8% of sales in fiscal 2018. This increase was primarily due to an increase in store hourly labor costs (wage inflation that exceeded menu price increase) and an increase in store-level bonus expense in 2019. Other Operating Costs – increased from $601,889,000 in fiscal 2018 to $626,453,000 in fiscal 2019. The increase was primarily a result from an increase in maintenance of 0.3%, depreciation of 0.2%, supplies of 0.2%, store manager conference expense of 0.1% all due to higher costs associated with wage increases and for depreciation resulted from a higher capital expenditure. (Cracker Barrel combines multiple costs into this category which includes: utilities, operating supplies, repairs and maintenance, depreciation and amortization, advertising, rent, credit card and gift card fees, real and personal property taxes, general insurance and costs associated with their bi-annual Manager’s Conference and training events.) Store Level EBITDA – decreased from $666,144 in fiscal 2018 to $656,324 in 2019. The decline was a result of the increase in labor costs and other operating expenses partially offset by the savings from lower COGS.

At newly acquired Maple Street Biscuits, targeted AUV is over $1M and targeted store level EBITDA is over 17%. Punch Bowl Social has AUVs approximating $7.5M.

DEVELOPMENT COMMENTARY: For fiscal 2019 the company opened 8 new locations and closed 1 underperforming location for a fiscal year-end total of 667 locations. Expansion plans for fiscal 2020 include six new Cracker Barrels and one new Maple Street. Additionally, six of the seven unit Holler & Dash chain that has been incubating within CBRL will be converted to MSB. PBS is on hold for the moment, as a new smaller prototype is being developed. Longer term expansion plans for both MSB and PBS have not been established, no doubt to be discussed at length during the analyst meeting scheduled for June’20.

SAME STORE SALES COMMENTARY: Comparable same store sales consist of sales of units open at least six full quarters at the beginning of the year and measured on comparable calendar weeks.

RECENT DEVELOPMENTS: Per Q1 Earnings Release and Conference Call

The closing of Maple Street Biscuit took place in Q1, and $14.2M worth of stock was purchased as well. The decline of $$0.17 per share included $0.11 related to transactional and integration expenses related to MSB and $0.25 loss from the equity method of investment in PBS. The overall negative comp included an increase of 2.1% in restaurant sales included a 3.6% check increase and 1.5% traffic decline. Retail retail sales decreased 0.9% in Q1.

The income statement line by line: Total Cost of Goods Sold was down 100bp to 29.3%. Restaurant Cost of Goods was down 60bp to 24.6%. Retail CGS was down 170bp to 49.6%. Labor and Related Expenses was flat at 35.2%. Other Store Operating expenses was up 90bp to 21.7%. Store Operating Income (after depreciation) was up 10 bp to 13.8%. G&A was flat at 5.3%. Operating Income was up 10bp to 8.5%. Pretax Income was up 20bp to 8.0%. Provision for Taxes was flat at 1.4%. Net Income, after 80bp loss from unconsolidated subsidiary, was down 60 bp to 5.8%.

For fiscal 2020, ending 7/31, the Company guided to GAAP EPS of $8.50-$8.65, driven by: comp restaurant growth of about 2.0%, retail growth of about 1.0%, Operating Income margin of about 9.0% of sales (versus 8.5% in Q1), capex of $115-125M, an effective tax rate of 16-17%. This also includes an equity method loss of $0.80 from Bunch Bowl Social, as well as $0.15 loss from integration of MSB ($0.11 of which has already been recognized). MSB management is relocating to Nashville and PBS is staying in Denver, still to be led by CEO Robert Thomson.

Product emphasis during Q1 included a heavy emphasis on the Signature Fried Chicken Platform. Homestyle chicken is now available all week long, not just on Sunday, and a new Homestyle Chicken BLT sandwich was supported by six weeks of national TV.  Off premise sales are expanding by way of third party delivery available in nearly 600 stores, as well as 235 catering vans and several new catering sales managers.

Conclusion: Provided at Beginning of Article

 

Download PDF