Tickers in this Article: CBRL, BH, TXRH, THI, CHUX, RT
Since its founding in 1969, Cracker Barrel Old Country Stores (Nasdaq:CBRL) has specialized in serving home-style meals in a country-themed, family environment. An adjoining retail store also brings additional revenue and profit opportunities, though operating margins tend to lag the industry average. This and a tough end to its fiscal year have caught the attention of an activist investor.

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Full Year Recap
Revenues advanced a modest 1.2% and reached $2.43 billion for the entire year. Comparable store sales increased 0.2% in the restaurant portion of the existing store base and 0.7% on the retail side. Retail sales accounted for 20.6% of total sales. The fourth quarter saw a slight deterioration in trends at existing stores as comps fell 1.4% at the restaurants and 0.7% in retail. Management attributed the nearer-term challenges to "weak summer travel and declines in customer traffic." (For related reading, see The 4 Rs Of Investing In Retail.)

Operating income improved 1.5% to $167.2 million as costs of goods sold rose at a higher rate than sales but general and administrative expenses fell 5%. One-time charges also declined from the previous year. However, higher income taxes negated the improved cost structure and net income declined a very slight 0.1% to $85.2 million. Slightly higher shares outstanding resulted in a penny decrease in earnings per diluted share to $3.61.

For the coming year, Cracker Barrel currently projects sales of $2.55 billion to $2.6 billion, or annual growth of as much as 7%. Its earnings guidance is in a range of $4.05 and $4.20 per diluted share for year-over-year growth of as much as 16.3%. An extra week is expected to account for $0.25 of the increase.

Cracker Barrel's profit trends were flat for the year, but its cash flow trends were much worse. Free cash flow fell nearly 52% to about $68.7 million, or approximately $2.91 per diluted share. The company attributed the marked decline to "higher bonus payments in the current year for the prior year's performance and timing differences in accounts payable and income taxes." (Free cash flow is a great gauge of corporate health, but it's not immune to accounting trickery. For more see Free Cash Flow: Free, But Not Always Easy.)

Down but not Out
Cracker Barrel closed out the year on a slightly difficult note. This combined with the decline in cash flow generation has only given ammunition to activist shareholder Sardar Biglari, Chairman of Biglari Holdings (NYSE:BH) that saw Steak 'N Shake and a number of other restaurant franchises folded into Biglari's control. In a recent letter to Cracker Barrel's shareholders, Biglari pointed out his firm owned 9.3% of Cracker Barrel's common shares and criticized the company for not living up to its potential.

Despite the nearer-term uncertainty, Cracker Barrel remained firmly profitable during the credit crisis, is paying down long-term debt and appears to have positive, albeit modest sales and profit growth prospects. Faster-growing firms in the casual dining space include Texas Roadhouse (Nasdaq:TXRH) and Tim Horton's (NYSE:THI), while rivals that are struggling include Ruby Tuesday (NYSE:RT) and O'Charley's (Nasdaq:CHUX).

The Bottom Line
Operationally, Cracker Barrel lies in between the industry leaders and laggards. Its reasonable forward P/E of below 11 leaves room for upside, should management find a way to boost growth trends a bit going forward and also improve cash flow generation. Biglari will certainly be pushing for such improvements. (For more on the P/E ratio, see Beware False Signals From The P/E Ratio.)

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