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Cracker Barrel (CBRL) Research Report: Q1 CY2024 Update


Full Report / May 30, 2024

Restaurant company Cracker Barrel (NASDAQ:CBRL) reported results in line with analysts' expectations in Q1 CY2024, with revenue down 1.9% year on year to $817.1 million. The company's outlook for the full year was also close to analysts' estimates with revenue guided to $3.49 billion at the midpoint. It made a non-GAAP profit of $0.88 per share, down from its profit of $1.21 per share in the same quarter last year.

Cracker Barrel (CBRL) Q1 CY2024 Highlights:

  • Revenue: $817.1 million vs analyst estimates of $820.6 million (small miss)
  • EPS (non-GAAP): $0.88 vs analyst estimates of $0.66 (33.3% beat)
  • The company dropped its revenue guidance for the full year from $3.55 billion to $3.49 billion at the midpoint, a 1.7% decrease
  • Gross Margin (GAAP): 32.2%, down from 32.7% in the same quarter last year
  • Free Cash Flow of $8.58 million, down 83.3% from the previous quarter
  • Locations: 721 at quarter end, in line with the same quarter last year
  • Same-Store Sales fell 1.5% year on year (miss vs. expectations of down 1.0% year on year)
  • Market Capitalization: $1.01 billion

Known for its country-themed food and merchandise, Cracker Barrel (NASDAQ:CBRL) is a beloved American restaurant and retail chain that celebrates the warmth and charm of Southern hospitality.

The company was founded in 1969 when founder Dan Evins envisioned creating a welcoming stop along the highway to provide travelers with a taste of home-cooked Southern meals and a place to rest and relax. This idea led to the first Cracker Barrel Old Country Store in Lebanon, Tennessee.

Today, Cracker Barrel is a nationwide brand and has become a cherished destination for travelers and locals alike. Its extensive menu features classic favorites such as chicken and dumplings, meatloaf, and country-fried steak, served with delectable sides including macaroni and cheese, green beans, and cornbread.

The Cracker Barrel experience, however, is about more than just delicious food; it's a journey back in time. Each restaurant evokes the nostalgic charm of an old country store, complete with wooden rocking chairs on the front porch, vintage memorabilia, and unique decorations that tell a story of American heritage.

To further immerse themselves, guests can also explore the fan-favorite Cracker Barrel gift shop after their meals, offering anything from country-inspired clothing and home décor to old-school toys and classic candies. Just like its meals, Cracker Barrel's retail offerings are carefully curated to reflect the best of country living.

Sit-Down Dining

Sit-down restaurants offer a complete dining experience with table service. These establishments span various cuisines and are renowned for their warm hospitality and welcoming ambiance, making them perfect for family gatherings, special occasions, or simply unwinding. Their extensive menus range from appetizers to indulgent desserts and wines and cocktails. This space is extremely fragmented and competition includes everything from publicly-traded companies owning multiple chains to single-location mom-and-pop restaurants.

Full-service restaurant competitors include Bloomin’ Brands (NASDAQ:BLMN), Darden Restaurants (NYSE:DRI), Dine Brands (NYSE:DIN), and Texas Roadhouse (NASDAQ:TXRH).

Sales Growth

Cracker Barrel is one of the larger restaurant chains in the industry and benefits from a strong brand, giving it customer mindshare and influence over purchasing decisions.

As you can see below, the company's annualized revenue growth rate of 2% over the last five years was weak , but to its credit, it opened new restaurants and grew sales at existing, established dining locations.

Cracker Barrel Total Revenue

This quarter, Cracker Barrel missed Wall Street's estimates and reported a rather uninspiring 1.9% year-on-year revenue decline, generating $817.1 million in revenue. Looking ahead, Wall Street expects sales to grow 2.4% over the next 12 months, an acceleration from this quarter.

Same-Store Sales

Same-store sales growth is a key performance indicator used to measure organic growth and demand for restaurants.

Cracker Barrel's demand within its existing restaurants has generally risen over the last two years but lagged behind the broader sector. On average, the company's same-store sales have grown by 3.8% year on year. With positive same-store sales growth amid an increasing number of restaurants, Cracker Barrel is reaching more diners and growing sales.

Cracker Barrel Year On Year Same Store Sales Growth

In the latest quarter, Cracker Barrel's same-store sales fell 1.5% year on year. This decline was a reversal from the 7.4% year-on-year increase it posted 12 months ago. We'll be keeping a close eye on the company to see if this turns into a longer-term trend.

Number of Stores

When a chain like Cracker Barrel is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. At the end of this quarter, Cracker Barrel operated 721 total locations, in line with its restaurant count 12 months ago.

Cracker Barrel Operating Retail Locations

Over the last two years, Cracker Barrel has generally opened new restaurants and averaged 1.4% annual growth in new locations, which is on par with the broader sector. Comparisons, however, should be taken with a grain of salt as the industry is quite mature. Analyzing a restaurant's location growth is important because expansion means Cracker Barrel has more opportunities to feed customers and generate sales.

Gross Margin & Pricing Power

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate pricing power and differentiation, whether it be the dining experience or quality and taste of food.

In Q1, Cracker Barrel's gross profit margin was 32.2%. in line with the same quarter last year. This means the company makes $0.32 for every $1 in revenue before accounting for its operating expenses.

Cracker Barrel Gross Margin (GAAP)

Cracker Barrel has good unit economics for a restaurant company, giving it the opportunity to invest in areas such as marketing and talent to stay competitive. As you can see above, it's averaged a healthy 32% gross margin over the last two years. Its margin has also been trending up over the last 12 months, averaging 1.1% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more stable input costs (such as ingredients and transportation expenses).

Operating Margin

Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

In Q1, Cracker Barrel generated an operating profit margin of negative 2.4%, down 4.4 percentage points year on year. Because Cracker Barrel's operating margin decreased more than its gross margin, we can infer the company was less efficient with its expenses or had lower leverage on its fixed costs.

Cracker Barrel Operating Margin (GAAP)

Zooming out, Cracker Barrel was profitable over the last two years but held back by its large expense base. Its average operating margin of 2.6% has been paltry for a restaurant business. On top of that, Cracker Barrel's margin has declined, on average, by 1.4 percentage points each year. This shows the company is heading in the wrong direction, and investors are likely hoping for better results in the future.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Cracker Barrel, its EPS declined by 13% annually over the last five years while its revenue grew by 2%. This tells us its incremental sales were unprofitable.

Cracker Barrel EPS (Adjusted)

We can take an even deeper look into Cracker Barrel's earnings performance. Cracker Barrel's operating margin has declined 11.2 percentage points over the last five years. This was the most relevant factor (aside from revenue) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.

In Q1, Cracker Barrel reported EPS at $0.88, down from $1.21 in the same quarter last year. Despite falling year on year, this print beat analysts' estimates by 33.3%. Over the next 12 months, Wall Street expects Cracker Barrel to perform poorly. Analysts are projecting its EPS of $4.55 in the last year to shrink by 15.5% to $3.84.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Cracker Barrel's free cash flow came in at $8.58 million in Q1, down 27.8% year on year. This result represents a 1% margin.

Cracker Barrel Free Cash Flow Margin

Over the last eight quarters, Cracker Barrel has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 3%, subpar for a restaurant business. Furthermore, its margin has averaged year-on-year declines of 1.3 percentage points.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money it has raised (debt and equity).

Cracker Barrel's five-year average ROIC was 10.2%, slightly better than the broader sector. Just as you’d like your investment dollars to generate returns, Cracker Barrel's invested capital has produced decent profits.

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Unfortunately, Cracker Barrel's ROIC averaged 8.5 percentage point decreases each year over the last few years. We like what management has done in the past but are concerned its ROIC is declining, perhaps a symptom of fewer profitable business opportunities.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

Cracker Barrel reported $11.85 million of cash and $1.15 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $229.4 million of EBITDA over the last 12 months, we view Cracker Barrel's 5.0x net-debt-to-EBITDA ratio as safe. We also see its $9.35 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Cracker Barrel's Q1 Results

We were impressed by how significantly Cracker Barrel blew past analysts' gross margin expectations this quarter. We were also excited its EPS outperformed Wall Street's estimates. On the other hand, its revenue unfortunately missed analysts' expectations. Overall, we think this was a mixed quarter. The stock is up 2.1% after reporting and currently trades at $46.26 per share.

Is Now The Time?

Cracker Barrel may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Cracker Barrel, we'll be cheering from the sidelines. Its revenue growth has been weak over the last five years, but at least growth is expected to increase in the short term. And while its well-known reputation makes consumers more likely to eat at its restaurants, the downside is its declining EPS over the last five years makes it hard to trust over the long term. On top of that, its projected EPS for the next year is lacking.

Cracker Barrel's price-to-earnings ratio based on the next 12 months is 11.8x. While there are some things to like about Cracker Barrel and its valuation is reasonable, we think there are better opportunities elsewhere in the market right now.

Wall Street analysts covering the company had a one-year price target of $56.75 per share right before these results (compared to the current share price of $46.26).

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