Activist investor Sardar Biglari, CEO of Biglari Holdings (NYSE:BH) and the operator of both the Steak 'n Shake and Western Sizzlin restaurant chains, picked up another 2% stake in rival Cracker Barrel Old (Nasdaq:CBRL), according to the latest regulatory filing. Biglari now owns 13.3% of a company he believes is poorly run and lacking accountability to shareholders. In December, Cracker Barrel shareholders blocked Biglari's bid to gain a seat on its board. While it's impossible to know whether Biglari could do a better job running Cracker Barrel, investors need to realize that Biglari wouldn't be after Cracker Barrel if it didn't see value in the Tennessee chain. For this reason and several others, I suggest you look beyond the trees to see the forest; Cracker Barrel's not so bad after all.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Long-Time Owner

Are you familiar with the Homestead Small Company Stock Fund? Morningstar gives it a five-star rating and it's easy to see why. With 47 stocks and an annual turnover of just 4%, it knows its holdings are inside out. Take Cracker Barrel, for instance. The fund's held the stock for more than a decade, increasing the number of shares held from 21,500 at the end of 2001 to 131,600 at the end of September 2011. It represents the third largest holding for the fund behind iShares' Russell 2000 Value Index ETF (ARCA:IWN) and the Triumph Group (NYSE:TGI). Since its stock hasn't split since 2001, the 110,100 additional shares were all purchased on the open market, 78,500 of them in 2011 alone. When one of the best small-cap funds available increases its holdings by almost 150% in the past year, you have to think the three managers that run the fund see Cracker Barrel's potential. I'd go as far as to suggest they probably know more about the company than Mr. Biglari.

The Truth About Cracker Barrel

Sardar Biglari's 10-page opus written for Cracker Barrel shareholders in November 2011, was an incredibly lengthy treatise outlining the many so-called weaknesses of its current management. While it's been hashed about a fair bit in the press, I thought I'd look at some of Biglari's concerns.

Why Seven Years?

According to Biglari, Cracker Barrel hasn't been the same since its late founder, Danny Evins, retired as chairman in 2004. He puts the blame squarely on the shoulders of the current chairman, Michael Woodhouse. What's interesting about Biglari's argument is that Woodhouse was CEO from August 2001, meaning Woodhouse and Evins worked together in the C-Suite for a three-year stretch before Evins moved aside. Woodhouse, however, gets no recognition from Biglari for those three years in charge, as if Evins was holding his hand the whole time. Furthermore, Woodhouse actually joined the company in December 1995 as chief financial officer, and would have been an important part of any success or failure the company achieved in the years between 1995 and 2001. Conveniently placing all the success of Cracker Barrel with the founder is an easy way to curry favor with long-time shareholders, but it just isn't accurate. (For more, see Earning Forecasts: A Primer.)

Return on Capital Expenditures

Biglari makes a big deal about Cracker Barrel's capital allocation record between 2005 and 2011. He suggests that Cracker Barrel's cumulative capital expenditures over this seven-year period were $615 million, while operating income shrank by $1.6 million to $167.2 million. He then goes on to show what a great job he's done since leading Steak 'n Shake's turnaround in 2009. While it's true its customer traffic, revenues and profits have all improved, it's unfair to compare his relatively short three-year record to Woodhouse's seven years.

If you take the last seven years for both companies, you will see that for every dollar in capital expenditures, Cracker Barrel generated $26.67 in revenue, while Biglari Holdings (formerly Steak 'n Shake) generated just $14.34. In terms of operating income, Biglari generated 60 cents in operating income per $1 in capital expenditures compared to $1.83 for Cracker Barrel. Mr. Biglari can argue all he wants about the lack of growth, but from where I sit, Cracker Barrel, not Biglari, seems to be the better allocator of capital. Cracker Barrel might not be growing by leaps and bounds, but I can definitely see why Homestead has owned its stock for more than a decade. Cracker Barrel's revenues and earnings over the long haul have been extremely consistent. Let's see where Biglari is in another four years.

Operating Income Per Store

Biglari points out in his letter to shareholders that since 2005, Cracker Barrel's operating income per store has declined from $319,000 in 2005 to $277,000 in 2011. Worse still, its operating profit per store in 1998 was a whopping $462,000, which is mismanagement of the highest order he contends. Go ask Starbucks (Nasdaq:SBUX) or McDonald's (NYSE:MCD) what happens to operating income per store when you increase the number of locations by 70% over a 13-year period. Chances are good both average revenues per store and profits per store will drop slightly as geographical areas get saturated. It's an inevitable part of expansion.

The Bottom Line

Biglari spends about half his letter discussing share repurchases and why they are a better capital investment at this time than building new restaurant units. He's probably correct to suggest that Cracker Barrel is better off abstaining from store openings, when it clearly is in need of some operational tweaking. However, to suggest those savings should be piled into share repurchases might be self-serving. In my opinion, share repurchases rarely affect the price movement of stocks, up or down. Secondly, the repurchase of shares beyond $65 million, as set by the board, would simply make it easier for Biglari to take control of the company. Fewer shares outstanding equals a larger piece of the pie. In the end, Cracker Barrel's not perfect, but it's a stronger company than Biglari would have you believe. Its stock will do just fine without him. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: Vanguard Total World Stock

    Learn about the Vanguard Total World Stock exchange-traded fund, which invests in stocks located in numerous countries with a high level of diversification.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  3. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Products

    Learn more about the BioShares Biotechnology Products fund, an exchange-traded fund that is focused on producers of FDA-approved drugs.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR EURO STOXX 50

    Learn about FEZ, the Euro Stoxx 50 ETF. FEZ tracks the 50 largest companies in Europe, making it the Dow Jones Industrial Average of Europe.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraShort Nasdaq Biotech

    Learn more about an innovative inverse-leveraged sector exchange-traded fund, or ETF, the ProShares UltraShort Nasdaq Biotechnology fund.
  6. Chart Advisor

    Value Stocks Offer Stability in a Volatile Market

    With volatility on the rise, investors are turning to segments of strength such as value stocks. We'll take a look at several ETFs that could be worth a closer look.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: First Trust Tactical High Yield

    Find out more about the First Trust Tactical High Yield fund, a debt security-focused ETF designed to produce high income.
  10. Mutual Funds & ETFs

    ETF Analysis: Market Vectors EM High Yield Bd

    Learn more about the Market Vectors Emerging Markets High Yield Bond ETF, a fund dedicated to subinvestment grade foreign debt issues.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. Lion economies

    A nickname given to Africa's growing economies.
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!