Tickers in this Article: CBRL, TXRH, BWLD, CMG, BH
Old-fashioned restaurant and retail operator Cracker Barrel Old (Nasdaq:CBRL) posted fiscal first quarter results on Nov. 21, 2011, that further demonstrated it is struggling to grow its underlying store base. This anemic performance has attracted the interest in an activist shareholder who has ambitions to improve company returns. Prospective shareholders may be better off watching the developments between management and the activist on the sidelines and investing in restaurant concepts with more appealing growth potential, over the long haul. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

First Quarter Recap
Sales were basically flat at $598.4 million. This consisted of negative same-store sales growth of 1.6% and negative comps of 1.3% at the retail portion of each store, both of which were almost entirely offset by the opening of three new restaurants. In the restaurants, average check size increased 2.2%, but was more than offset by a 3.8% decline in restaurant traffic. Restaurant sales accounted for 80.5% of the total top line, with retail making up the remaining 19.5%.

Higher food costs sent gross margins down 2% to $412.1 million, though management was able to reduce labor and other store operating costs, to keep store operating income flat. However, general and administrative costs rose 2% and resulted in a 2% drop in total company operating income, to $44.6 million. Lower interest expense and income tax allowed net income to increase very slightly, to $23.8 million. Share buybacks boosted earnings per diluted share by 2%, to $1.03. (To know more buybacks, read: A Breakdown Of Stock Buybacks.)

For the full year, management projects sales as high as $2.6 billion, which would represent year-over-year growth of roughly 5%. Cracker Barrel expects diluted earnings per share between $4.10 and $4.25, though this excludes 11 cents to 14 cents in costs to fight off the advances of an activist investor.

The Bottom Line
On Nov. 14, 2011, Biglari Holdings (NYSE:BH) issued a press release in which it said Biglari was pushing for a board seat on Cracker Barrel. Chairman and CEO, Sardar Biglari's, stated goal was to improve performance at Cracker Barrel. Specifically, he stated that management "must stop spending capital for growth and start investing it for profit," as well as a four-year track record of reduced customer traffic. Biglari has amassed a 10% position in Cracker Barrel.

A week later, Cracker Barrel issued a press release in which it called Biglari's accusations "misdirected and misinformed." It also responded with its own recipe to improve growth and returns at the company. It remains to be seen if Biglari will be presented with an opportunity to participate in boosting shareholder returns, but the fact remains that Cracker Barrel is a mature restaurant concept, whose best growth days are behind it.

Investors in the restaurant industry are usually better served buying newer concepts, with more compelling new store growth potential. Candidates on this list include Chipotle Mexican Grill (NYSE:CMG), Buffalo Wild Wings (Nasdaq:BWLD) and Texas Roadhouse (Nasdaq:TXRH). Texas Roadhouse even trades at a reasonable forward P/E of 14.4. Cracker Barrel appears more appealingly valued at a forward P/E of 10.4, but is obviously more growth constrained.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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