Description

Ticker                     L / S                        Date                                        Name                                      Sector

CBRL                    Short                      12/30/08                                              Cracker Barrel                    Restaurants

CBRL is a heavily debt leveraged restaurant / gift shop operator that appears cheap on P/E. Relative to other 4x Debt to EBITDA consumer discretionary stocks, CBRL’s market cap has held up decently this year, mostly on the belief that it sits on $1B of easily monitizable real estate. 2009 could be a year of reckoning for CBRL as it feels the full impact of consumer spending declines and comes up against covenants in its borrowing agreements it won’t be able to meet. Monitizing the “C” off-highway real estate in this environment will be much more difficult than the market is assuming.

CBRL operates 579 “Cracker Barrel” restaurants, 90% of which are highway exit locations targeted at traveling families. The average location is 12k sq feet and derives 20% of its sales from an in-store retail / souvenir “store in store”. The restaurants are a step above MCD / BK locations with an average per person spend in the $8-9 range and sit-down, waiter service. 

Fixed Charge Covenants at Risk:

·         Fixed charge ratio ratchets up after April 2009. (3.5x before Apr ’09, 3.75x for 4/09-/4/10, and 4x after that). This is based on trailing EBITDA / interest expense. Based on $55M in guidance for interest expense, TTM EBITDA in April ’09 would essentially have to be flat with what they did from a year ago.

·         For the 1^st 3 quarters of this fiscal year, EBITDA is already –12% vs last year.

·         CBRL can try to sell some of its restaurant real estate by April (thereby increasing rent and lowering EBITDA in the process), but it is more likely that the banks will allow the covenant violation in exchange for more interest. This realization of CBRL’s badly levered position and weakness before the banks, however, should be a catalyst to start to compress CBRL’s market cap in line with other “levered zombie” companies.

Relevering Real Estate Again to Meet Debt Maturities:

·         CBRL owns 410 of its 580 locations. The street estimates this value as $2-3 M / location and assumes sale leasebacks could be done to satisfy CBRL’s bank lenders.

·         CBRL used its real estate to borrow heavily ($800M) and repurchase ~$1.2B of stock over the last 4 years. Most of the bank loans mature in 2013.

·         Assuming CBRL could get ~$2M per location (a price of ~ $162 per square foot), and then lease it back from the real estate buyer at an 8% yield ($13 per square foot annually in rent), CBRL would add roughly $64M in rent expense to their income statement.

·         CBRL’s trailing net income is less than $64M. There would be a tax benefit to such a transaction, but adding significant rent expense to their income statement now would significantly eat into CBRL’s $2.50 - $3.00 EPS level.

Insider Selling and Margin Downside

·         Balance sheet aside, from an operational perspective, CBRL has been suffering from margin declines for years (stalling traffic, price wars, and commodity costs). EBITDA margins fell from 10.2% to 8.4% in the last two years, despite management’s margin improvement efforts.

·         Management has indicated that ~2% comp declines below –3% SSS plans could lead to one percentage point of EBITDA loss, or roughly $20M in EBITDA. Given the high fixed costs now from its interest expense, CBRL’s margins are moving low enough so that if calendar 2009’s comp is –9% instead of –3%, EBITDA could be in the $170M range and EPS could be ~$1.25-1.50. At above $20 the stock would no longer appear cheap and would be much further away from its loan covenants.

·         CBRL hasn’t really updated its outlook since the consumer pullback began. Their last reported quarter only included through October. Management has shied away from quantifying an outlook. Traffic in restaurants fell from –5% YoY to –7% YoY from August to October.

·         Insiders sold close to $1M in stock in the last few months after not making significant sales for several quarters.

Catalyst