Cracker Barrel lowers guidance, analysts cautiously optimistic

Stock analysts took a cautiously optimistic view on Cracker Barrel after it issued softer fiscal 2014 guidance on Wednesday, especially after seeing the company’s stock price soar in the past year.
 
Solid earnings and pressure from an activist investor have pushed the company’s stock from $63.20 per share on Sept. 18, 2012, to more than $100 a share recently. However, the company said in its guidance for the first quarter that it anticipated higher commodity costs and training and marketing expenses for the rollout of its new Wholesome Fixin’s menu.

Cracker Barrel Old Country Store Inc. reported a decline in revenue and income for its 13-week fourth quarter ended Aug. 2, due in part to one less week in the reporting period than last year. Net income fell 1.1 percent, to $34.3 million, compared with $34.7 million in the year-earlier period. Revenue in the quarter fell about 3.7 percent, to $674.1 million, from $700 million a year earlier.

Same-store sales rose 2.6 percent at the 624-unit Lebanon, Tenn.-based family-dining and retail chain.

Bryan C. Elliott, an analyst with Raymond James, said in a note that Cracker Barrel’s stock valuation was “stretched” and had already figured in investor expectations of same-store sales and margin gains. He also noted that guidance for fiscal 2014 “indicated management expects more modest margin expansion moving forward.”

Stephen Anderson, an analyst with Miller Tabak + Co. LLC, said investor optimism was tempered by “soft” fiscal 2014 earnings guidance. However, he noted that the guidance seemed to “reflect more on one-time factors rather than broader weaknesses.”

With share price rising nearly 60 percent this year, Anderson said, “we would prefer to wait for a pullback.”

Cracker Barrel had reached nearly $108 a share earlier this month but pulled back Wednesday and Thursday to about $103 a share despite broad increases in the key stock indexes.

Christopher O’Cull of KeyBanc Capital Markets Inc. said Cracker Barrel’s management has done “an excellent job” of tightening its general and administrative expenses, which, excluding stock-based compensation, he said appeared to have been trimmed between $15 million and $16 million since fiscal 2010. KeyBanc still adjusted its fiscal 2014 earnings per share estimate to $5.90 from $6 to reflect a higher tax rate, which was expected to be 31 percent versus a prior estimate of 29 percent.

O’Cull saw momentum in Cracker Barrel’s recently introduced lower-calorie Wholesome Fixin's menu section, which is expected to be supported by increased advertising of $3 million in the first quarter. He also cited the “compelling value proposition” in Cracker Barrel’s $7.69 Country Dinner Plates.
 
While the company is being pressed by its largest shareholder, activist investor Sardar Biglari, to declare a $20 special dividend, O’Cull viewed that as unlikely.

“Although a special dividend is possible,” he wrote in an analyst note, “we expect the more likely outcome may be a stated policy to increase the quarterly cash dividend at a faster pace than earnings, eventually getting to a higher percentage payout of free cash flow.” The anticipated dividend payment is about 75 cents a quarter.

O’Cull noted in his analysis that Cracker Barrel ended fiscal year 2013 with $122 million in cash and $400 million in funded debt. The KeyBanc team projected the company would generate about $150 million in free cash flow in fiscal 2014.

Contact Ron Ruggless at [email protected].
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