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September 01, 2020 1:37pm
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Cracker Barrel Old Country Store Gets a New Look

Cracker Barrel Old Country store

Cracker Barrel Old Country Store (NASDAQ: CBRL) hits fresh long-term lows weekly, unlike virtually every other restaurant stock. After the pandemic, the brand fell out of favor, and the business was slow to respond, leaving investors little choice but to flee. The market is trading at the lowest levels since before the pandemic, which is saying quite a lot, given the depths of the sell-off in 2020, but a turnaround is in sight.

Cracker Barrel shocked the market by cutting its dividend by 80% weeks before the FQ3 earnings report was released. The cut was not completely unexpected but still a surprise, given the size. The upshot is that the cut is a preemptive move by management that will preserve the balance sheet and provide cash flow for the next phase of business. That phase includes refining the brand, remodeling stores, and narrowing the menu to focus on profitable growth while maintaining customer satisfaction.

The impact on the cash flow and balance sheet will be meaningful. The 80% reduction in quarterly payout is sufficient to offset the cash burn reported in Q3 and provide positive cash flow for reinvestment. The balance sheet is a fortress with leverage near 1.0X equity and will likely remain so despite increased CAPEX. Plans for 2025 include twenty-five store remodels based on research this year and a lean into CRM-focused service, including loyalty rewards.

Cracker Barrel Struggles in Q3 but Profits Top Estimates

Cracker Barrel struggled in Q3, with revenue of $817.1 million falling nearly 2.0% compared to last year and missing the consensus by $3.5 million. Due to the mix, the miss is slim but telling; restaurant sales are down 1.5% and outpaced many in the industry, but retail is down by 3.8% as consumers pull back on spending. 

Margin news is mixed. The company margins narrowed on all levels due to deleveraging and costs, but less than expected. The 130-basis-point contraction in adjusted EBITDA margin and 60-basis-point contraction in net adjusted net margin left the earnings down 20.7%, but $0.88 is better than expected. The adjusted EPS outpaced the consensus by $0.22, or more than 3000 basis points.

Guidance is favorable. The company reiterated its guidance for the year, suggesting that Q4 will be better than the analysts' forecasts, sequentially better than Q3, and up compared to last year. It is more than sufficient to sustain the dividend at its new rate of about 2.0% to investors buying at $46.

Cracker Barrel Is In Deep-Value Territory

Shares of Cracker Barrel entered deep-value territory when they fell below $48. That is the low end of the analysts' target range, suggesting there is nowhere for the market to go but higher. Analysts rate CBRL at a consensus Hold, which is unlikely to change. However, the latest activity, which came after the dividend cut, is leading the market to the ranges’ low end. So, the upside may be limited until later in the year when and if turnaround efforts positively impact the results. 

The technical action suggests CBRL stock could be at a bottom and even rebound, but the odds of a strong rebound are low. The market has overextended and appears ready for a relief rally but may not sustain a complete reversal until the turnaround gains traction. The more likely scenario is that this stock will become range-bound at the new lows until there is evidence of improving business. Until then, there is a risk the market could hit a new low. In that event, this stock could fall another 20% to the $38 level before hitting solid support. 

Cracker Barrel stock chart

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