Cracker Barrel: A Tasty Treat Or Bad Apple?

Key Points

• Cracker Barrel still has a solid balance sheet
• Cracker Barrel had a decent quarter despite its weakness relative to expectations
• Shares of Cracker Barrel hit a bottom over the summer

The restaurant industry is facing some headwinds and Cracker Barrel (NASDAQ: CBRL) is not immune to them. Rising costs, slower than expected traffic, and the pinch of higher gas prices on the traveler are impacting sales for restaurant operators from Darden Restaurants Inc (NASDAQ: DRI) to Cracker Barrel but there are some positives in the latest reports as well. In the case of Cracker Barrel, while revenue was tepid the margin was better than expected and also forecast to improve over the next fiscal four quarters. The company’s efforts to roll with the punches are helping to offset weaknesses and drive solid cash flows for the company, and there is growth in the forecast too. The takeaway is that Cracker Barrel’s 5.35% dividend yield is a flag for investors to take note of because it’s one income investors with some tolerance for risk can rally around. 

“Despite the high levels of commodity inflation we faced throughout the year, we kept a long-term focus and invested to retain a position of value leadership through a thoughtful combination of pricing strategy and menu design, despite the short-term impact on margin.  Our commitment to value and in delivering a great guest experience helped us weather a weaker than expected summer travel season, gas prices that exceeded expectations, and historic inflationary pressures on the consumer, and we were encouraged by better traffic and sales trends in the final few weeks of the quarter,” says Cracker Barrel CEO and president Sandra B. Cochran. 

Cracker Barrel Is Setting Up For A Long-Term Win

Cracker Barrel had a decent quarter despite its weakness relative to expectations. The company reported $830.4 million in net revenue for a gain of 5.9% over last year and set a quarterly record. The revenue was 80 basis points shy of the consensus which is a slim margin but a weakness nonetheless. The revenue growth was driven by a +6.1% restaurant comp offset by a slower +3.0% comp in retail sales. On the restaurant end of the business, comps were driven by a 7.0% increase in average prices offset by a small decline in traffic. The decline in traffic is a worry but there are already signs of improvement due in part to the decline in gas prices from the peak set over the summer.

In regard to margin, the margin contracted considerably over the past year due in large part to rising costs offset by rising prices. The bad news is that both the GAAP and adjusted EPS fell on a YOY basis but that is mitigated by the outperformance relative to expectations and the guidance. The adjusted EPS came in at $1.57 or down 30% from last year but it beat the Marketbeat.com consensus by $0.19 or 1370 basis points and the outlook for F2023 earnings is healthy as well. The company is expecting to see revenue growth in the range of 7% to 8% over F22 driven by pricing and store count. The company is also expecting inflation to moderate and drive operating income growth of 8% to 10% which is good news for investors. 

Cracker Barrel Returns Capital To Shareholders 

Cracker Barrel is paying a high 5.35% dividend yield which could be a red flag for investors. The company is paying out 68% of its earnings on a quarterly basis which puts it in danger of cutting back on distribution growth if not the payout itself. The offsetting factors are that Cracker Barrel still has a solid balance sheet despite its struggles over the past two years and the outlook for improved profitability is favorable. The balance sheet is showing a marked decline in cash but debt levels are still very low and allow not only a dividend payment but share repurchases as well. The company bought back roughly 2.6% of the pre-release market cap during the quarter and can be expected to continue buying shares in the new fiscal year. 

The Technical Outlook: Cracker Barrel Is Cooking Up A Reversal 

Shares of Cracker Barrel hit a bottom over the summer and are in the process of making a reversal. The question for investors is if the reversal is from down to sideways or down to up and, over the long term, the odds favor down to up. The daily chart is showing a misshapen Head & Shoulders Reversal Pattern that is in the process of retesting for support at the right shoulder. If the market is able to hold support at this level the odds of testing resistance at the neckline are high. A move above the neckline would be a bullish signal for higher prices, a confirmation of resistance at that level would most likely keep the stock range bound until better news comes out.