CBRL - Our Cracker Barrel Trade Is Setting Up Once More

2023-11-30 15:00:37 ET

Summary

• Cracker Barrel Old Country Store, Inc. shares are taking a hit following disappointing earnings, but valuation is still attractive.
• Comparable sales and earnings dipped, but the company saw sequential monthly improvement and launched a new loyalty program.
• The forward view is still positive, with a maintained dividend and potential for growth in fiscal 2024.
• We outline a trade following a successful play in September.

On September 22nd, we flagged a trade in shares of Cracker Barrel Old Country Store, Inc. ( CBRL ). We set an exit price of $74+ for that trade from the mid $60s. That was a nice near 20% return overall, yet shares are taking a haircut today following the just-reported fiscal Q1 earnings .

The restaurant space is tough. Margins are razor thin, and competition is everywhere. But, people need to eat. We still like this name for income, but think you can get shares lower from here. We still like the income here, but have less conviction than we did on our last trade.

Here is a new trade, in case you missed out on the last play.

The play

Target entry 1: $68.50-$68.75 (25% of position)

Target entry 2: $66.75-$67.00 (35% of position)

Target entry 3: $65.50-$66.00 (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: $62

Target exit: $73.

Discussion

Cracker Barrel Old Country Store valuation has been reset and is still attractive at these levels, as shares have given up over 10% in recent sessions. Risks persist, however, including pressure on consumers, elevated labor and food costs, and a possible recession around the corner. Still, sub $70 this is largely priced in.

The dividend is in our opinion secure, so you can collect a 7% yield to hold shares and wait for a turn. Cracker Barrel enjoys pricing power which has helped keep margins afloat, but price increases can only sustain revenue for so long. Eventually the consumer will yield to the pressure.

We do like that Cracker Barrel has gotten with the times and built out its online ordering infrastructure to boost sales, and we have been monitoring the impact to comparable sales from all of the investments and risks aforementioned. The company just reported fiscal Q1 earnings that underwhelmed, however. Let shares come back to the $60s, then consider a trade.

Cracker Barrel's comparable sales dipped

The key metric we look to in restaurants is comparable sales. Overall sales are have been growing here, but this was a tough print. Cracker Barrel saw total top line revenue of $823.8 million, a dip of 1.9% from a year ago. We had liked how comparable sales were strong here in recent prints, but Cracker Barrel's comparable store restaurant sales dipped surprisingly by 0.5%. However, the company did see a ramp-up as the quarter went on, with sequential monthly improvement through the quarter, a hidden positive that management noted. Comparable store retail sales took it on the chin, falling 8.1% from the prior-year quarter. While menu pricing did offset some of this, a main driver of future business is the new loyalty program that was launched. Management indicates enrollment was better than expected, and this keeps us cautiously bullish especially if shares dip back into a buy range.

Cracker Barrel's earnings dipped

Revenues were a miss against estimates of $4.3 million but operating income was pressured by expenses. GAAP operating income for Q1 was $11.4 million, or just 1.4% of total revenue, a notable drop from $23.6 million, or 2.8% of total revenue, in last year's Q1. If we control for $7.6 million dollars in some impairment charges and store closure related costs as well as leases, adjusted operating income was $19.0 million, or 2.3% of total revenue, but still down from $30.0 million last year. Adjusted EBITDA came in at $45.1 million, or 5.5% of total revenue, a 16.6% decrease compared to the prior year quarter.

This suggests expenses were poorly controlled in the quarter, though management acknowledged the elevated expenses in the release, but noted they expect "improved performance the remainder of the year and beyond." So as we always say, It's not about how they did, it's about how they will do. Shares are down and should be on this because it reduces the overall performance for the year, but the forward view from here is still positive.

Its EPS was just $0.51, almost halved from a year ago. This was a shocking turn from our last coverage and bullish trade when EPS was 14% increase. However, the fiscal Q1 period is usually much weaker than fiscal Q2 and Q4, so some seasonality was expected.

Forward view

So, we are looking to rinse and repeat with this trade. We will admit this quarter was lousy. However, the company just declared another $1.30 quarterly dividend, good for a 7% yield here. The dividend has been maintained, and while EPS was weak, the dividend is covered by cash flow.

However, if weakness persists, and this print does seem to conflict with the "everything is awesome" mentality of the market and the economy, then a cut could be seen in future quarters. That is not seen right now, however. We also acknowledge the shift in targeted customers. This used to be a country store, family type place. It still is, but the selling of alcohol has attracted new clientele, while potentially off-putting formerly loyal customers.

That said, we think the new loyalty program will be a catalyst. But we need to see operational expenses normalize some, because they are crushing EBITDA margin. Shares have also been repurchased too in the past, but share repurchases are on hold for now.

As we look ahead for Cracker Barrel, we believe that fiscal 2024 will still see growth from fiscal 2023. However, one of the bearish points was that just 3 months ago the company guided for commodity deflation of 1% to 2% for the fiscal Q1, but now for the year it sees inflation again in the low single-digits. Wage inflation remains a pressure, and wages will be up mid-single digits for the year. The company is guiding for $3.4-$3.5 billion in revenues and plans to open 2 Cracker Barrel stores and 9 to 11 Maple Street Biscuit Company shops which will add in some growth.

For the fiscal year 2024, we now see $5.00-$5.40 in EPS, which is a reduction from our prior view. This translates to roughly 12.5-13.5X FWD EPS for our buy range.

Let Cracker Barrel Old Country Store, Inc. shares fall, then consider stepping in for another trade from the mid $60s.

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