Description

Cracker Barrel Group, Inc. (CBRL or “the company”) is a staid, steady company (to the extent that any restaurant can be considered such) that should generate a 20-35% return over the next twelve months or so. While only a “single” in baseball parlance, the investment thesis is predicated on a limited downside with a possibility of additional upside if the company can get its same store sales back on track. The stock is down almost 25% from a high of $40.98 on April 12th. A near-term hiccup could lead to a further slide, but that may create another buying opportunity if you believe that management can continue its historical performance.

Company Description

CBRL owns and operates 501 Cracker Barrel country store restaurants and gift shops (the front of the restaurant) in 41 states as of June 25, 2004. The Company also owns 107 Logan’s Roadhouse restaurants and franchises 20 such restaurants in 17 states. The Company should do approximately $2.4bn in revenues in 2004, with around 66% from Cracker Barrel restaurants, 20% from its front stores, and the balance from Logan’s. It has a strong customer base, with approximately 80% of its sales from 20% of its customers. Its fiscal year ends June 30th.

On May 20th, the Company announced that same store sales at Cracker Barrel had decelerated in the first two weeks of the month by 1.5% at the restaurant and 1.7% at the store. At that time, the Company was unable to give a detailed explanation for the dropoff. (the CEO later indicated that though gas prices were perceived as high by the consumer (which would in theory impact CBRL, as most of its stores are on-interstate), this effected CBRL due to the consumer’s perception of less disposable income, not necessarily reduced travel) The stock dropped from to $31.13 from $34.19, continuing its slide from $40.98 on April 12th.

Subsequently, on June 17th, CBRL said it expects Cracker Barrel FY fourth-quarter same store sales to decline 1 percent to 3 percent. Quarter-to-date same-store sales at its Cracker Barrel restaurants were down 1.5 percent to 2 percent. The Company guided $0.65-$0.68 for the quarter, vs. $0.70 a year ago.

Strategy

The Company intends to grow EPS by 15% annually (the company will give guidance at the end of the fiscal year). This is based on (a) growing the number Logan’s Roadhouse stores by approximately 20% per year (b) growing its more mature Cracker Barrel units by approximately 5% per year and (c) share buybacks, of which the Company has a steady track record. (61mm shares in ’99, 50.4mm ‘04e). At its recent Analyst Day, the Company set forth a plan indicating that it could ultimately double its current Cracker Barrel stores.

The economics of a typical mature Cracker Barrel unit are as follows:

Average sales: $4.1mm
Average CF: $0.8mm

The average investment for a new Cracker Barrel unit is $3.3mm, with $0.9mm as land cost, the rest development cost.

CBRL has recently launched initiatives at its Cracker Barrel restaurants/stores, including pricing increase, menu mix (e.g., low carb), and process flow. Similarly, CBRL has introduced a new store prototype for its Logan’s restaurants (to be launched in ’05 with full rollout in ’06), added new menu items, adopted a new brand, and recently added several new members to its senior management team. Part of the Logan value proposition it is average dinner check of around $12.35, which is significantly lower than two of its main competitors, Lonestar and Outback (approx $18.00-$19.00) and slightly lower than Texas Roadhouse (approximately $13.00)

Valuation

In a steady state, assuming the Company can hit 1% same store sales growth at its Cracker Barrel stores and keep its COGs/Revenues at a reasonable 33.0-33.5%, the Company should achieve b/w $2.50 and $2.65 (post options) in FY 2005.

Historically (last five years), the Company has traded at around 17.0 earnings (before options). Assuming the Company can do $2.60 in EPS (or around $2.50 post options, depending on how you calculate) and applying a 15.0 multiple, would get you to $39.00.

Thesis

Historical Cracker Barrel same store sales are as follows:

Rest Retail Total
SS SS SS
1990 8.0% 13.0% 7.4%
1991 10.9% 14.5% 9.5%
1992 8.4% 13.4% 9.4%
1993 7.1% 12.1% 8.2%
1994 3.7% 7.0% 4.4%
1995 3.5% 4.8% 3.8%
1996 1.8% 1.6% 1.7%
1997 3.3% 7.9% 4.3%
1998 1.6% 2.5% 1.8%
1999 -3.1% 2.4% -1.8%
2000 0.6% -2.3% -0.1%
2001 4.6% 1.1% 3.7%
2002 5.3% 2.3% 4.6%
2003 0.5% -0.4% 0.3%
2004e 1.7% 5.6% 2.6%
Avg/CAGR 3.9% 5.7% 4.0%
Last ten years 2.0% 2.6% 2.1%
Last five years 2.5% 1.3% 2.2%

(note: there is some question re calculation of the company’s SS sales pre-’95 which we are exploring with management)

Put simply, a conservative estimate would yield EPS of around $2.50 (post options) for 2005. Every 1% increase in SS sales should accrete $0.13-$0.17 cents to the bottom line – accordingly, a strong bounce on the back of new initiatives, etc. would give CBRL earnings power closer to the high $2.00’s.

On the cost side (see below), the Company has demonstrated a strong ability to control costs, and has a relatively low exposure to any one commodity due to its diverse menu.

Risk Factors

Commodity cost – CBRL indicated that it has begun to see pressure in several areas. Though theoretically it has a good mix of beef, poultry, eggs and butter, it believes it is in the midst of the perfect storm

Consumer spending

Failure to execute at Logan's or consumers to indentify w/ brand

Catalyst

Return to historical same store sales spurred by recent initiatives, general consumer spend, etc.

Effective pricing

Execution at Logan’s