CBRL - Cracker Barrel: Quietly Becoming An Income Stock With Concerns

2023-06-06 12:51:31 ET

Summary

• Cracker Barrel Old Country Store, Inc. stock now offers a near 5.5% yield.
• While there is still a lot of pressure on the consumer and the economy, people need to eat.
• Cracker Barrel's comparable sales remain positive, but traffic could be on the decline.
• Cracker Barrel's valuation is becoming more attractive.

Cracker Barrel Old Country Store, Inc. ( CBRL ) is a restaurant and retailer that has a nearly nationwide presence and has been in growth mode. The stock has been under some pressure this year, as have many niche restaurants and other companies that cater to consumer spend. What we know is that, like so many other operators in the space, Cracker Barrel was hit hard 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 Cracker Barrel will likely be hit in a bad recession. We also have to recognize that student loan repayments will begin soon and this is something we have been warning of for months at our BAD BEAT Investing service, specifically the impact they will have on consumer spending on restaurants, apparel, and travel. That said, we like that food and labor inflation seems to be easing, and also the company is investing in its online ordering infrastructure. We love that CBRL is quietly becoming an income stock, but the company just reported fiscal Q3 earnings that were mixed, and shares are under pressure.

Cracker Barrel has positive comparable sales

We still think the key indicator to watch for in restaurants is comparable sales. Growth, or lack thereof, in comparable sales is key. Overall sales are growing here, which we like. Cracker Barrel reported total top line revenue of $832.7 million. This sales figure in fiscal Q3 2023 was an increase of 5.4% compared to the fiscal Q3 2022. Comparable sales are solid. Cracker Barrel's comparable store restaurant sales increased 7.4%. Comparable store retail sales increased 4.6% from the prior-year quarter. This is very positive, but it was actually below management's expectations, and traffic declines were noted of late. This is causing pressure on the stock.

Cracker Barrel registered earnings growth

With the top line sales growing, we want to see it translate to the bottom line. However, with comparable sales, despite being strong, coming in below estimates, the revenue of $832.7 million was a miss against estimates . In fact, this was a miss of $13 million versus consensus.

The company saw decent margins, but GAAP operating income was $16.8 million, or 2.0% of total revenue, compared to $30.5 million, or 3.9% of total revenue, in the prior year quarter. If we back out $13.9 million dollars in impairment charges and store closure costs and charges related to leases, adjusted operating income for the third quarter was $33.9 million, or 4.1% of total revenue, compared to $33.6 million, or 4.3%, of total revenue in the prior year quarter. This was a bit weaker than expected.

Adjusted EBITDA came in at $60.3 million, or 7.2% of total revenue, a 1.2% increase compared to the prior year quarter EBITDA of $59.6 million, or 7.5% of total revenue. This is a bit mixed, as EBITDA was up, but down as a percentage of revenue. At the end of the day, EPS is what most investors focus on for a restaurant business, and EPS hit $1.21, a 6.2% decrease compared to the prior year's $1.29. This also missed by $0.13.

Forward view

Given the fiscal Q3 results, we cannot buy the stock at present, despite the 5.5% dividend yield being offered. We have concerns for the next few quarters as the economy is starting to soften, or at least should, provided the rate hiking campaign from the Fed does its job.

As we look ahead for Cracker Barrel, we believe that fiscal 2023 will still see growth from fiscal 2022. Inflation is still an issue and the company is guiding for commodity inflation of 8.5% to 9.0% for the year. Of course, wage inflation remains a pressure. For the year, we see $5.65-$5.95 in EPS. This translates to less than 17X FWD EPS. This is attractive, and about priced with the market. In Q4, the company expects slow revenue growth of 1-3%, with a handful of new store openings.

Final thoughts

While we wanted to see a weak market pull Cracker Barrel Old Country Store, Inc. stock down, the operating metrics have softened. This is quietly becoming an income name, but looks to head lower. We remain neutral about Cracker Barrel despite improving value and a hefty dividend payout. For the long-term investor, CBRL stock is getting closer to a value buy, but is not there yet.

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