Is Cracker Barrel Slowing Down?

By Ryan C. Fuhrmann | May 25, 2011 AAA

After a decent run of above-average-industry growth and healthy profit gains, home-style food and shopping operator Cracker Barrel (Nasdaq:CBRL) released third quarter earnings to suggest it is slowing down a bit. Sales came in below management's own expectations and profits disappointed analysts, and while the stock fell quite a bit after results were released, a number of competitors look more appetizing at current levels.

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Third Quarter Recap
Sales increased a very modest 0.7% as the opening of four new locations proved enough to offset negative comparable restaurant sales of 0.3% that consisted of a 2.3% increase in the average check size but a 2.6% drop in customer traffic. Same-store sales at the retail store side of the Cracker Barrel locations eked out a 0.1% gain. Management detailed that sales trends were below its forecasts.

Higher food and related costs sent gross profits down 1% to $402.8 million and higher store operating expenses sent store operating income down by 10% to $63.2 million. Management was able to control SG&A costs, which fell 11% and helped temper the total company operating income decline to 2% as operating income fell to $31.2 million. A 15% drop in income tax expense helped net income grow 5% to $15.2 million, or 64 cents per diluted share. This fell below analyst projections.

Outlook
Analysts currently project full-year sales growth just below 3% and total sales of almost $2.5 billion. The company said to expect earnings between $3.80 and $3.90 per diluted share, which represents a decline from previous guidance.



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Bottom Line
Cracker Barrel's stock fell as much as 10% after the disappointing earnings release and now trades at a forward P/E of just over 12, if it hits the high end of its full-year earnings guidance. The dividend yield is also now more compelling at 1.7%, but the company's overall growth prospects aren't very appealing. Over the past three years, it has managed to boost profits around 5% annually as sales fall a couple of percent, and it has outperformed industry casual-dining rivals including Ruby Tuesday (NYSE:RT) and O'Charleys (Nasdaq:CHUX). But down-home rival Bob Evans (Nasdaq:BOBE) has managed double-digit profit growth over this time frame, and Darden (NYSE:DRI) leads the way in being able to keep more mature restaurant concepts fresh in consumer minds. Add it up, and there are more appealing players for investors looking for exposure to the restaurant industry.

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