Cracker Barrel Guides Higher But Traders Are Cautious

Cracker Barrel A Near Flawless Report

I first became interested in Cracker Barrel (CBRL) in the spring of 2019. My reasons included its revenue/EPS growth outlook, its dividend, the outlook for dividend growth, and its exposure to China (doesn’t have one), and the strength of the U.S. labor market/consumer. The company just released its 2nd quarter 2020 EPS report and fulfilled all my hopes and more.

Comp-store sales for the holiday quarter were up 3.80% over the prior year. This reflects a 4.0% increase in average check price offset by a small decline in foot traffic. This is important to note for two reasons. The first is the analysts had been expecting a much larger decline in foot traffic and total comps of 2.2%. The second is that the company’s attempts to increase prices and pass-through costs to the consumer are working.

The Numbers Are Good, Guidance Is Raised

Cracker Barrel’s revenue topped $838.6 million in the calendar 4th quarter of 2019. This beats the consensus estimate by nearly 1.0% and is a 4.2% increase over the last year. The adjusted-EPS of $2.70, accounting for the impact of the cash purchase of Punchbowl Social, is nearly 6% above consensus and flat to the previous year.

The only negative I can turn up is that margins shrank but I take that with a grain of salt. The company has been managing price increases on the commodity and labor fronts with incremental price increases that are proving to work. The net decline in operating income as a percentage of revenue is a mere 0.1% and that is offset by the growth of income, about 3.0%.

Management sees these trends continuing through 2020 and raised the guidance because of it. The company did not give a revenue target but expects GAAP earnings in the range of $8.55 to $8.65 for the full year or $9.60 to $9.65 adjusted for acquisitions. The new guidance is well above the analyst’s consensus of $9.39 and opens the door for future upgrades.

The average analyst’s rating is neutral so there is plenty of fuel to fire a rally should the sell-side community begin to change its mind. Out of 11 analysts actively following the stock fully 8 of them are rating a hold, equal weight, or neutral positioning.

Dividend Growth Is In The Forecast

Cracker Barrel is on track to hike its dividend for the 18th year later in 2020. The company has been upping the payment regularly for the last 17 years and there is no indication that will change. With revenue and earnings growth in the forecast, operating income on the rise, and an already low payout ratio of 54% (forward) the odds are high we’ll see another increase in the range of 20%.

The Technical Outlook

The company delivered a near-flawless report and yet the market remains cautious. The reason is likely linked to the coronavirus and its impact on the global economy but let’s remember, Cracker Barrel has 0% exposure to China short of food products that may come from overseas. Today’s action shows some investors, at least, are bullish although many have chosen to take profits in this stock.

My suggestion is to use market weakness as an entry opportunity into this near-Dividend Aristocrat. Support appears to be strong just above $166 so this would be my first target;  if support confirms at this level I’d take that as a cautious buy signal. If prices moved up afterward I’d get a little more bullish, especially if the upward movement is accompanied by a round of analysts upgrades. If the $166 support target fails the next target is $163 and then $161/the short-term moving average.

The risk to this trade is viral spillover into the U.S. economy. There is a chance that U.S. economic activity could slow because of disruptions to the global supply chain and/or international demand. There is another chance the virus could take hold in the U.S. and shackle economic activity here as it has done in China.