Cracker Barrel's Fourth Quarter—A Metaphor For The Industry?


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Roger Lipton

Roger is an investment professional with decades of experience specializing in chain restaurants and retailers, as well as macro-economic monetary developments. He turns his background, as restaurant operator and board member of growing brands, into strategic counsel for operators and perspective for investors.

An archive of his past articles can be found at RogerLipton.com.

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If anybody thinks it is getting any easier out there, Cracker Barrel's report yesterday should provide a dose of reality.

Comp sales declined 0.4% in the fourth quarter ending July 31, but the average check increased by 3.5% (menu price increase was 2.7%), so traffic was down about 3.5%. The trend of the comp sales on a monthly basis was very consistent, down 3.8% in May and July, and down 2.7% in June.

Operating income in the fourth quarter was 10.2% of revenues, down 100 basis points from a year earlier. It was negatively affected by increased labor costs (60 basis points) as well as cost of goods (110 basis points), partially offset by reductions in "other operating expenses" (20 basis points) and G&A (50 basis points). Diluted earnings per share (EPS) was $2.55 versus $2.23, but adjusting for the extra week this year, EPS was down $.04. Importantly, the tax rate was only 21.8% this year, compared to 32.7% last year, which combined with the extra week, provided the increase in EPS. The fourth quarter basically mirrored the full year.

The brief commentary in the company’s release regarding sales trends was this:  "the traffic was challenged, particularly with lighter users and during the dinner daypart, some of which was attributable to our menu and marketing promotion not delivering.....While our results did not meet our expectations, I am confident that our initiatives and plans for 2019 will drive improved performance."

Guidance for 2019 includes comp sales of 0 to 1% positive, for both restaurant and retail segments. Commodity inflation of 2% is expected, which reverses the benefit of recent years. Operating income margin will be about 9.3% of sales (vs. 9.7% in 2018). The tax rate will be 17-18% (vs. 11.1% in '18). EPS will be $8.95-$9.10 (vs.$8.87 in 2018). This is a reduction from the previous Street estimate of $9.69 per share.

This quick update is not intended to analyze CBRL as a stock, but presented as a commentary on how a well-run restaurant company is coping in today's environment.

Bottom line: As a regular customer of Cracker Barrel (when I visit my daughter in Birmingham, AL), the value for the money is extraordinary and the service has always been just fine. I don't think any customer, analyst or investor would argue that Cracker Barrel is dropping the ball from an operating standpoint. Relative to the reported results, it is worth noting that commodity prices have turned higher, a significant change from the help this line item has provided in the last couple of years. Also, the materially lower tax rate this year and next, is not going to be a recurring benefit in future years. This affects all US companies, not just those in the restaurant industry. 

The challenge for all restaurant/retail companies, especially those with a very large footprint, is how to "differentiate your commodity." It continues to be tough out there in restaurant/retail land, in spite of the bullish commentary about how the economy is "booming."

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