CBRL - Cracker Barrel: Q4 Beat And Raise Stock Unloved

Summary

• As a restaurant, food and labor inflation are headwinds for Cracker Barrel Old Country Store; as a retailer, labor and the consumer are risks.
• Comparable store restaurant sales increased 8.4% in fiscal Q2 2023, while comparable store retail sales increased 4.1%, a strong result.
• Cracker Barrel had a beat on the top and bottom lines.
• The outlook was strong, but Cracker Barrel Old Country Store stock is down. We think it is a buy on weakness.

Cracker Barrel Old Country Store, Inc. ( CBRL ), better known as just Cracker Barrel, is a restaurant and retailer that has a nearly nationwide presence and has been in growth mode. The company prides itself on providing "a caring and friendly home-away-from-home experience while offering guests high-quality homestyle food to enjoy in-store or to-go and unique shopping - all at a fair price."

This company has been around for over 50 years. It was first set up in 1969 in Lebanon, Tennessee. From there, the southern charm of comfort food and a general store broke out. Fast-forward, and today Cracker Barrel has more than 660 company-owned Cracker Barrel Old Country Store locations in 45 states, and it also owns the fast-casual Maple Street Biscuit Company. The company was crushed by COVID but is finally back on its footing, only to contend with high food costs and rampant labor inflation. Recession could be around the corner, and the special experience of Cracker Barrel could take it on the chin if recession is bad. We like that the company has also worked heavily on its online presence and ordering services, and digital sales continue to grow strong. Food costs have been a headwind, as have labor costs.

With that said, we believe the company could be hit in a moderate recession, but a mild recession will not be too bad. What is unique about the recent setup is that although the consumer is likely to weaken this year, it seems to be in the middle and higher income earners thus far. A bad stock market (relatively), high-paying tech job layoffs, and more. This is not exactly Cracker Barrel's target demographic, so we think they are relatively insulated thus far. The company just reported fiscal Q2 earnings that were strong, with a double beat and strong outlook, yet the stock is down mildly. If this stock dips to $100, we think it's a buy.

Strong comparable sales

We think the key indicator to watch for restaurants is comparable sales. Growth in comparable sales is very telling. Overall sales are growing. Cracker Barrel reported total top-line revenue of $933.9 million for its fiscal second quarter of 2023, herein referred to as fiscal Q2 2023.

This sales figure in fiscal Q2 2023 was an increase of 8.3% compared to the fiscal Q2 2022. Now, here is where the strength really lies. Comparable sales are solid. Cracker Barrel comparable store restaurant sales increased 8.4%, including total menu pricing adjustments of approximately 9.0%. Comparable store retail sales increased 4.1% from the prior-year quarter. This is simply quite strong. With inflation, the company was able to raise prices to help preserve profit.

Growth in earnings

Make no mistake, margins faced some pressure from rising food and labor costs, just like all other restaurants. We believe that if the economy does finally start to soften (it is still very strong) after all of the Federal Reserve's actions to weaken things and regain price stability, that food inflation and labor inflation should subside and that will long-term benefit the business. The revenue growing to $933.9 million was a beat against estimates . In fact, this was a beat of $16 million against estimates. That said, margin pressure did not lead to an earnings miss. In fact, they beat estimates.

The company produced EBITDA of $67.7 million. It also saw EPS of $1.48 adjusted, beating by $0.12. Folks, the company valuation is attractive on these numbers. Over the last 12 months, we saw $5.33 in EPS. At $106 per share, we are trading at 19.8X TTM earnings. That is a touch stretched given the growth in EPS, but it is not overly expensive. This is especially true since the company is expanding and offers a near 5% dividend yield. Sure, bonds are pretty attractive for yield right now, but long term, we expect dividend growth.

Looking ahead

As we look ahead for Cracker Barrel, we believe that fiscal 2023 will see growth from fiscal 2022. On top of that, we believe that although there has been margin pressure, much of this can be eroded with pricing power. A weaker consumer will not help if the economy really gets nailed, but for now, the company raised its outlook.

We were pleased with the beat and raise. Folks, the outlook for total revenue growth is now 7.0% to 9.0% compared to the prior fiscal year vs. consensus 6.63%. That is stellar. Some growth will stem from new stores, something we watch for restaurants. They will open another 3 to 4 new Cracker Barrel units and approximately 15 new Maple Street Biscuit Company units.

Inflation is still an issue and the company is guiding for commodity inflation of 8.5% to 9.0%. Now, the good news is that this assumes disinflation. It sees Q3 commodity inflation in the mid-single digits and Q4 commodity inflation in the low-single-digit. Of course, wage inflation remains a pressure. They see wage inflation of approximately 6.5% but plan to offset this with cost savings initiatives and business model improvements that are expected to contribute approximately $25 million to fiscal 2023 profitability. For the year, we see $5.75-$6.05 in EPS. This translates to less than 18X FWD EPS. This is attractive, and about priced with the market. If CBRL stock falls to under $100 again, we think it will be the chance to acquire shares of a quality company at a fair price.

Take-home

We like buying Cracker Barrel Old Country Store, Inc. shares when this market pulls back, which we see as very likely by the spring. This would be a better value and a better dividend yield as well.

For further details see: