Why the Cracker Barrel Selloff Looks Overcooked

Key Points

• CBRL stock gapped down following a mixed fiscal Q1 report en route to an overdone four-day selloff.
• Cracker Barrel stands out from competitors by focusing on value, retail revenue, and strategic locations.
• The company pays a $1.30 per share quarterly dividend that translates into a 5.2% forward dividend yield. 

Shares of Cracker Barrel Old Country Store, Inc. NASDAQ: CBRL dipped below $100 in a post-earnings selloff that amounts to a barrel of laughs. Last year’s restaurant reopening trade pushed the stock above $178 in April 2021.

All things considered, the home-cooking restaurant chain turned in a hearty first-quarter performance. The outlook for the rest of fiscal 2023 and next year isn’t half bad either.

From a technical analysis standpoint, a trip below 30 on the relative strength indicator (RSI) also points to an extreme market reaction. The last two times this has occurred, the stock rallied to new highs. Will the third time in six months be the charm?

Maybe so. Unlike the chicken n’ dumplings with gravy, Cracker Barrel’s fundamentals are quite healthy.

How Did Cracker Barrel Perform in Fiscal Q1?

Cracker Barrel posted mixed first-quarter results. Revenue improved 7% year-over-year and topped sell-side expectations. As has been an industry-wide trend in 2022, adjusted earnings declined sharply (-35%) and fell short of analysts’ target.

On the plus side, increased diner visits, off-premise sales, and retail sales each contributed to revenue growth. An average menu price increase of approximately 8% demonstrated an ability to pass on cost inflation to hungry consumers. 

In the negative column, costs were up significantly. Higher expenses for food, commodities, labor, rent, and maintenance drove the operating margin down to 3.6% compared to 5.9% a year ago. 

For the full year, management laid out an expectation for similar top-line growth of 6% to 8%. Although wage and commodity inflation are expected to persist, we may have seen the worst of the cost pressures. Guidance for a full-year operating margin in the “high 4% range” would mark a substantial improvement over the first quarter.

Overall, it was a mixed bag for Cracker Barrel, but one the market chose to see as half empty. The stock gapped down on the report en route to an overdone four-day selloff.

What Differentiates Cracker Barrel?

In a fiercely competitive restaurant space, Cracker Barrel stands out in a few ways:

Value - Restaurants are open for breakfast, lunch, and dinner. It’s home cooking without the dishes. Even with prices rising, the company touts an average check of around $12.

Retail - About one-fifth of company revenue is generated by in-restaurant retail shops that sell a variety of old country gifts and knick-knacks. This along with the affordable meal tabs make Cracker Barrel especially popular with seniors.  

Location - Cracker Barrel strategically places its stores alongside major travel corridors. As a result, road-trippers account for more than one-third of annual visits. Come for the restroom break, stay for the meatloaf.

Is Cracker Barrel Stock a Good Investment?

Like its generous portions, Cracker Barrel stock offers good value here. It trades around 18x this year’s earnings estimate and 15x fiscal 2024 earnings. Stack these multiples against the average restaurant industry P/E of around 23x and the valuation gets easier to digest.

The more appetizing side dish, however, is the dividend. The company pays a $1.30 per share quarterly dividend that translates into a 5.2% forward dividend yield. This is nearly triple the average consumer discretionary stock yield — and the largest yield among Russell 3000 restaurant stocks. The next closest, Darden Restaurants, offers a 3.4% yield.

Although value is the main course, Cracker Barrel also comes with growth potential. Wall Street is projecting 15% bottom line growth in fiscal 2024, assuming that cost pressures ease and demand isn’t derailed by a lengthy recession. 

What are the growth drivers?

The biggest opportunity lies in the off-premise business. Consumers are craving convenience as much as they are home-cooked meals in the post-pandemic economy. Cracker Barrel is responding by ramping third-party delivery, curbside pickup, and catering services. Earlier this year, mobile payment was launched with Apple Pay and Google Pay reportedly on the way. Family meal baskets for on-the-go households are another new digital growth opportunity.

In addition, continual menu innovation will be relied upon as a growth lever including additions like Impossible plant-based sausage and Chipotle-esque dinner bowls. Store expansion is also on the menu. Cracker Barrel said it plans to open three to four new flagship locations and 15 to 20 of its Maple Street biscuit brand outlets in the current fiscal year.

At current levels, Cracker Barrel is a flavorful combination of value and growth. If broad market weakness pushes the stock back towards pandemic lows in the $80’s, existing shareholders should consider second helpings.