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Tickers in this Article: CBRL, EAT, DRI, TXRH, MCD, CMG
With its Cracker Barrel Old Country Stores, CBRL Group (Nasdaq:CBRL) combines a country-themed restaurant with retail operations. The company kicked off the first quarter of its 40th fiscal year in operation with a resounding thud as sales and profits fell from the year earlier period. This performance is not overly surprising given consumers and the domestic economy are also struggling these days, and on further investigation, the company actually has several characteristics that make it an appealing investment candidate.

The Quarter
Total quarterly sales fell 1.2% to $573.9 million on the back of negative same-store sales, falling 3.3% in the restaurant category from the same period one year ago. The 3.3% higher average check size was more than offset by falling customer traffic. This carried over into retail, which experienced a 2.3% drop in comps. Management cited the usual suspects, which are also hurting peers like Brinker (NYSE:EAT), Darden Restaurants (NYSE:DRI), and Texas Roadhouse (Nasdaq:TXRI), namely falling sales, higher commodity prices, and energy inflation that caused higher utility bills and diesel shipping costs.

The hit to CBRL's profit wasn't as severe as it could have been. A decrease in quarterly labor and general & administrative expenses helped offset the impact of large percentage increases in oil, produce, eggs and grain. Total operating profit fell 50 basis points to 5.7% of sales, or $32.6 million, which represented a 10% fall from last year's quarter. Moving down the income statement, net income fell a less severe 8% to $12,832 on smaller interest expense and a lower tax rate. Throw in a 7% decrease in shares outstanding due to repurchases, and continuing diluted earnings per share came in at 57 cents - exactly flat year-over-year. (For more on how this affects investors, check out Assess Shareholder Wealth With EPS.)

The Outlook
Management offered a number of forward projections during the earnings conference call, and while commodity inflation trends have moderated in a big hurry, customer traffic is likely to fall further in sympathy with the overall economy. Restaurant traffic accelerated to a 7.2% fall in October, and management now expects a full-year sales range between a fall of 0.5% and increase up to 1.5%. (To learn more, read Revenue Projections Show Profit Potential and Earnings Forecasts: A Primer.)

It is calling for a mid-single-digit fall in both restaurant and retail same-store sales which are projected to boil down to earnings of $2.65-3.00 per share. This is roughly flat from the $2.80 per share reported last year, suggesting that CBRL is hanging in there in an admittedly difficult climate for casual dining operators. At some point macro conditions will improve, which will serve to boost sales trends. Additionally, management plans to pay down its hefty debt load, which stems from an ill-timed move to repurchase a large block of shares from funds received as part of its divestiture of Logan's Steakhouses back in late 2006. This will help reduce the bite that interest expense is taking out of the bottom line - for the quarter, interest expense was $14.0 million while net income was $12.8 million.

The Bottom Line
Given Cracker Barrel's brighter long-term outlook, it may appeal to value and income investors alike. The stock has quickly moved up from a 52-week low of $10.67 to around $18 since the earnings release and the visibility the recent guidance brought, yet it still trades for a lowly 6 times forward earnings. The dividend yield is also appealing at 5.5%, with management having just increased quarterly payouts by 11% to 20 cents. It did put its share repurchase program on hold and it is hard to imagine significant levels of top-line growth from a maturing restaurant base going forward, but the multiple will likely expand once the economy improves, and investors are getting paid to wait for the eventual upturn in its prospects.

As a final aside, Cracker Barrel just announced on November 26 that it was changing its name to Cracker Barrel Old Country Store, or just "Cracker Barrel", which is comforting as it indicates management plans to stay focused on a single restaurant concept. This ended up working out quite well for another large operator, McDonald's (NYSE:MCD), which has seen steady growth since spinning off Chipotle Mexican Grill (NYSE:CMG) and selling a number of smaller concepts to focus on its core brand.

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