CBRL - Cracker Barrel Stock Is Trading Near COVID Lows With A Monster Yield

2023-09-22 13:01:58 ET

Summary

• Cracker Barrel Old Country Store stock has fallen dramatically and is now trading at levels last seen in March 2020.
• The company's valuation reset seems inappropriate, as earnings are not expected to fall.
• Despite risks such as decreased consumer spending and high labor and food costs, the risk-reward for investing in Cracker Barrel is attractive.
• The stock has a monster dividend yield that is secure by cash flow.

Remember March 2020? As memories fade, three and a half years later, we had a market in absolute chaos. There were global shutdowns. Fear of going out. Mask mandates. Restaurants were ghost towns if not completely shut down. It was probably the closest thing to apocalyptic in nature that any of us have or (hopefully) will ever experience. Restaurants could hardly do business, and the stocks of the companies reflected it. Hardly any sales, major losses.

Fast-forward to today, and now the big risks have been inflation in food and labor costs, as well as stiff competition. New threats to the consumer have emerged with higher consumer credit rates to borrow, as well as the return of student loan payments. One name that we have been neutral on for months but have been watching is the Cracker Barrel Old Country Store, Inc. ( CBRL ). This is a restaurant as well as a general shop-type retailer that has a nearly nationwide presence and has long been in growth mode. The growth has slowed, but the company's cash flow is strong.

This has long been a strong dividend payer, and now, shares have fallen dramatically in recent months and are trading now at levels it was trading at in March 2020. In our estimation, this valuation reset seems to be inappropriate. Is there risk? Sure, but the company is priced now at similar levels to when it could not do business. We have seen a multiple contraction here, though no real sign that earnings are going to fall dramatically. We think shares are approaching levels where the risk-reward is more balanced, and this is evidenced by the just-reported earnings and outlook. We now rate shares a buy, with a suggested play below.

The play

Target entry 1: $67.00-$67.25 (25% of position)

Target entry 2: $65.75-$66.00 (35% of position)

Target entry 3: $64.50-$64.75 (40% of position)

Options considerations: Options plays can be employed for entry and added income, though specific plays are reserved for our investing group members.

Stop loss: $61

Target exit: $74

Discussion

The stock has been under a lot of pressure this year. But Cracker Barrel is not alone. We have seen similar pressures on many specialized restaurants and other companies that cater to consumer spending. Consumer Discretionary names by and large have been crushed in the last few months. Cracker Barrel was hit hard by COVID, and yet now, in relatively good times, valuation has been reset. We believe the risk is now fully priced in here.

So what are the risks? Decreased spend by consumers. Still high labor and food costs, though there are signs of normalization. And, there is still a possible recession that could hit, which might see sales and EPS take a hit. But even if EPS fell 15-20%, shares would still be pretty attractive. We do not see that happening and foresee any recession as mild. Cracker Barrel enjoys pricing power, but that can only go so far. Still, the company is investing in its online ordering infrastructure to boost sales and has advertised effectively. We are keeping a close eye on comparable sales as well as margins. With that said, the income from the stock is attractive, and the dividend enjoys a margin of safety. The company just reported fiscal Q4 earnings that were mixed but overall positive. The outlook is pretty positive as well, and so we like the risk-reward here.

Cracker Barrel's comparable sales

The critical indicator we watch for in restaurants is comparable sales. Overall sales are growing here. Cracker Barrel saw total top-line revenue of $836.7 million. This sales figure in fiscal Q4 2023 was an increase of 0.8% compared to the fiscal Q4 2022 and was up $4 million from the sequential quarter. Comparable sales are strong here. Cracker Barrel's comparable store restaurant sales increased 2.4%. Comparable store retail sales did dip however 6.8% from the prior-year quarter, so overall things are mixed. But as we said above, the company has passed pricing increases onto customers. Menu prices were up 8.7%. Earnings are strong thanks to solid margins

Cracker Barrel's registered earnings growth

With the top line sales growing, we want to see it translate to the bottom line. With mixed comparable sales, the revenue of $832.7 million was a miss against estimates of $4.9 million. The company margins are holding up, GAAP operating income for Q4 was $41.2 million, or 4.9% of total revenue, which was up dramatically compared to $33.0 million, or 4.0% of total revenue, in last year's Q4. If we control for $3.2million dollars in impairment charges and store closure costs and charges related to leases, adjusted operating income was $44.4 million, or 5.3% of total revenue, compared to $36.2 million, or 4.4%, of total revenue in the prior-year quarter. This is strong, folks.

What about EBITDA and EPS? Well, there was strength here too. Adjusted EBITDA came in at $72.1 million, or 8.6% of total revenue, a 15.5% increase compared to the prior year quarter EBITDA of $62.4 million, or 7.5% of total revenue. So EBITDA was up, and it was up as a percentage of revenue. This suggests expenses are well-controlled. It was a good quarter by and large. And so shares are down some 45% this year. Yes, down 45%. So earnings must be falling, right? Well, EPS hit $1.79, a 14% increase compared to the prior year's $1.57. These results beat expectations by $0.18.

Forward view

This selloff is way overdone. Given the fiscal Q4 results and the fact that shares have corrected 45% and offer a 7.5% dividend yield, we see Cracker Barrel shares as a buy. Of course, there is risk as outlined above, but this is priced in. The dividend has been maintained. It is well covered by cash flow. Oh, and shares are being repurchased as well. We have concerns for the entire market and economy for the next few quarters as the economy is starting to soften. That said, we are bullish here for trade and for income.

As we look ahead for Cracker Barrel, we believe that fiscal 2024 will still see growth from fiscal 2023. Inflation has long been an issue in the last 8 quarters, but now the company is guiding for commodity deflation of 1% to 2% for the fiscal Q1. Of course, wage inflation remains a pressure, and wages will be up 4 to 5%. The company is guiding for $800 to $850 million in revenues and plans to open 1 to 2 Cracker Barrel stores and 4 to 5 Maple Street Biscuit Company shops. For Q1, we are looking for $0.75 to $0.85 in EPS, assuming margin strength is maintained. For the fiscal year 2024, we see $5.35-$5.65 in EPS. This translates to roughly 12.3-12.5X FWD EPS. This is attractive and is a significant discount to the market. Coupled with the strong balance sheet and dividend yield, we feel confident in our buy call.

Take home

Cracker Barrel Old Country Store, Inc. shares are in value territory. While there are risks, they are priced in after a 45% decline. Shares offer a 7.5% yield to wait, which we see as secure given cash flow, margins, and earnings power. The growth has slowed, but the stock is pricing for disaster. This is overdone.

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