We are reiterating our HOLD rating on Cracker Barrel Old Country Store Inc. (NGS: CBRL). We expect margins and earnings at Cracker Barrel to face pressure as comp sales remain sluggish and the company adds fewer new stores. We also expect Cracker Barrel to have difficulty cutting costs in the near term due to COVID-19 and to face pressure from rising wages and commodity costs. Based on these challenges, we believe that CBRL shares are fairly valued at 17.8-times our revised FY22 estimate and that a HOLD rating remains appropriate.
On December 3, CBRL reported fiscal 1Q21 revenue of $647 million, down 14% from the prior year but $8 million above consensus. Comp sales at Cracker Barrel restaurants fell 16.4% compared to 39.2% in 4Q20. Comp sales at the company’s retail stores fell 8.1%, versus 32.3% in 4Q20. Off-premise sales (deliveries and takeouts) grew 122% and comprised 25% of revenue.
Other store operating expenses rose 330 basis points as a percentage of revenue, to 25%, while labor and related expenses decreased 10 basis points to 35.1%. The cost of goods sold increased 150 basis points to 30.8% of revenue.
The company posted operating income of $237 million, up from earnings of $63 million a year earlier. The operating margin was 36.7%, compared to 8.4% in the prior-year period. General and administrative expenses rose 80 basis points to 6.1% of revenue. Adjusted earnings were $0.69 per share, nearly doubling the consensus estimate of $0.35 and down from earnings of $1.79 per share in the prior-year period. The share count fell slightly from the prior year to 23.7 million.
However, CBRL did say that it planned to allocate $100 million to capital expenditures and that it expects to open three new Cracker Barrel restaurants and 15 new Maple Street locations.
In FY20, revenue decreased 18% to $2.5 billion and earnings fell to $1.68 from $9.27 per share in FY19.
In October 2019, Cracker Barrel paid $36 million to acquire Maple Street Biscuit Company, a fast casual dining company. Following the transaction, CBRL converted its previously acquired Holler & Dash units into Maple Street Biscuit restaurants, for a total of 35 units.
Cracker Barrel paid $140 million to acquire a minority interest in Punch Bowl Social (PBS). The agreement includes an option to acquire a majority interest or obtain full ownership. Punch Bowl Social is a restaurant and bar chain where customers can bowl, play videogames and sing karaoke, among other activities. Punch Bowl operates 17 restaurants with 11 more expected to be added before the end of 2020. It estimates it can grow to more than 100 locations in the U.S. Punch Bowl’s founder, Robert Thompson, will remain active in the day-to-day management of the business and Cracker Barrel management’s team will serve in an advisory capacity as Punch Bowl adds to its restaurant count.
EARNINGS & GROWTH ANALYSIS
At the end of June, nearly all the company’s dining rooms had reopened to varying extents. Given Cracker Barrel’s attractively priced menu items and growth in its off-premise business, we expect it to come out of the coronavirus pandemic with even greater market share.
FINANCIAL STRENGTH & DIVIDEND
As such, Cracker Barrel should be able to manage through the pandemic. The long-term debt/capitalization ratio increased to 60.6% at the end of fiscal 1Q21 from 44.5% at the end of 1Q20.
The pandemic has caused Cracker Barrel to suspend its quarterly dividend. The May dividend of $1.30 per share was pushed back to September 2, after which no additional payments are scheduled. Our regular dividend estimate is now $1.30 for FY21 and $2.60 for FY22. The company last raised its quarterly payout by 4% to $1.30 in June 2019.
Cracker Barrel is facing substantial revenue and earnings pressure from the coronavirus pandemic. It is also vulnerable to significant increases in gasoline prices, which could hurt traffic at the company’s locations along interstate highways, though it should benefit from lower gas prices in the near term. The company also faces risks related to higher food costs. In addition, increases in the minimum wage could raise the company’s labor costs.
Cracker Barrel Old Country Store, based in Lebanon, Tennessee, operates more than 660 Cracker Barrel restaurants and gift shops in 45 states, primarily in the Southeast and the Midwest. With a market cap of about $3.2 billion, the shares are generally regarded as mid-cap growth.
CBRL shares rose more than 2% on December 3 as investors appeared to recognize sequential improvement in comps and better-than-expected 1Q21 earnings. The shares appear fairly valued at 17.8-times our revised EPS estimate for FY22 (when we see recovery). Based on prospects for only modest comp sales growth and fewer new store openings, we see little room for P/E multiple expansion over the next 12 months. As such, our rating remains HOLD.
On December 4, HOLD-rated CBRL closed at $141.14, down $3.44.