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<DAILY TROUBLE>
Tuesday, December 22, 1998
CBRL Group Inc.
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Phone: 615-444-5533
Price (12/21/98): $21
HOW DID IT FIND TROUBLE?
If you have ever traveled the roadways of the Southeast, odds are you have eaten at a Cracker Barrel. The homestyle cooking and country charm serve as a motorist magnet set apart from the greasy spoon diners that line the highways. It used to be shareholders could watch the sea of rocking chairs going back and forth on the front porch and be able to feel the same way about his or her investment.
Steady, predictable motion. As the chain grew, so did the top and bottom lines, with the share price eventually hopping along for the ride. But facing a possible slowdown earlier this year, the company tried to think up a way to keep the chairs rocking. To compensate for what appeared to be a shortfall on the horizon, the company got aggressive. It scaled back management compensation and retail operations.
While most moves to improve margins by managing costs more effectively pan out, this time CBRL dropped the plate of chicken and dumplings. Disgruntled employees quit, forcing the company to cope with higher training costs. Patrons also tendered their resignations. In both the July and October quarters, same-store sales, which were typically positive for the company, turned negative.
Investors soon became the Daily Trouble Special -- and Wall Street just didn't have the stomach for it.
BUSINESS DESCRIPTION
Tennessee-based CBRL Group is the holding company for the 357-unit Cracker Barrel Old Country Store chain. The country kitchen-themed restaurant also features an attached gift shop. Plans call for 50 new stores this fiscal year, which ends in July.
Earlier this year the company acquired Carmine's Prime Meats, which owns a pair of Gourmet Markets in Florida. This month the company announced it would be buying out Logan's Roadhouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDHS)") else Response.Write("(Nasdaq: RDHS)") end if %> for $24 a share in cash.
FINANCIAL FACTS
Income Statement
12-month sales: $1355.8 million
12-month income: $106.5 million
12-month EPS: $1.69
Profit Margin: 7.9%
Market Cap: $1316.7 million (on 62.7 million shares)
Balance Sheet
Cash: $24.9 million
Current Assets: $145.9 million
Current Liabilities: $110.2 million
Long-term Debt: $59.5 million
Ratios
Price-to-earnings: 12.4
Price-to-sales: 0.97
HOW COULD YOU HAVE SEEN IT COMING?
Back in March, shares of the eatery had hit all-time highs. At the time, comparable store sales were up. However, the impact of a stingier payroll had begun to take its toll. Morale was thrown for a loop. If past performance was solid, why were compensation packages being compromised?
Nobody likes uncertainty, and it's often the employees who get the empty feeling before shareholders do. A year ago, when Avado Brands <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVDO)") else Response.Write("(Nasdaq: AVDO)") end if %> decided it was going to sell off its then lucrative Applebee's franchises, the company had to deal with a good deal of managerial defection.
Nobody enjoys toiling in a work environment in flux. Cracker Barrel's foot soldiers had to be truly perplexed at the corporate actions. While the company was looking ahead, that makes it all too easy to stumble in the present.
In July, same-store sales fell 0.8%. For October that deficiency widened to show a 1.6% decline. The trend was established, and those who could logically imagine the negative repercussions stemming from the new policies may have been able to drive past this debacle.
Another more obvious tip-off was the Carmine's buyout. The company had already tried, and failed, to enter the home meal replacement market just two years earlier. While this wasn't a serious deviation in terms of diversification, it was a niche that CBRL had already botched. Buying a two-unit concept wasn't going to provide complete enlightenment.
WHERE TO FROM HERE?
Cracker Barrel still shouts quality. For the eighth year in a row, Restaurants & Institutions has awarded the company with its Best Family Dining distinction. For the fifth consecutive year, Destinations, a bus industry trade publication, has named the company the Best Restaurant Chain.
Dessert? Pass. Earnings are on a diet here. The company has had to guide down analyst earnings estimates to the $1.65-$1.75 a share level this year, in line with last year's showing but far short of the $1.89 a share showing the experts were expecting at the time.
But let's not roll out the barrel just yet. CBRL is doing a lot of good things right now. The first was a 3 million share buyback announcement that, when completed, will wipe out 5% of the shares outstanding and help earnings per share.
But the real winning move lies in the Logan's Roadhouse acquisition. Logan's is as obscure as its origins as an O'Charley's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHUX)") else Response.Write("(Nasdaq: CHUX)") end if %> spin-off. However, it is a casual steakhouse chain with more attractive unit economics than Outback Steakhouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OSSI)") else Response.Write("(Nasdaq: OSSI)") end if %> and Lone Star Steakhouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STAR)") else Response.Write("(Nasdaq: STAR)") end if %>.
Right now, CBRL is trading at half the earnings multiple that Outback is fetching. Logan's Roadhouse has a lot more room to grow than the Aussie-themed chain and now finds itself with CBRL's deep pockets to help finance that expansion.
While the Carmine's deal is a bit of a head-scratcher, the Logan's buyout is brilliant. Given the low P/E multiple for a company that even today sports healthy net margins above 7%, the bargain-priced shares make for an easy bargain. It's like shooting fish in a barrel, a Cracker Barrel.
-Rick Aristotle Munarriz
([email protected])
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