investingfromtheright

I am retired and take educated guesses on all things financial.

October 11, 2009

October 12, 2009: CRACKER BARREL OLD COUNTRY STORE - Y'ALL LOOK AT THIS ONE, HONEY

Ordinarily, I examine only three things about a restaurant: the cleanliness rating, the menu (including the specials of the day, which are usually to be avoided from bitter experience), and the price. I haven't eaten at a Cracker Barrel for some time. Per chance, I was driving the family by a Cracker Barrel around brunch time Sunday after church and we agreed to eat there.

I was very impressed by the clean, friendly atmosphere at Cracker Barrel. The menu was refreshed a bit from what I remembered, especially the non-breakfast items. Prices were well within the reach of a family on a budget and the staff was not overly attentive (you know, the "Is everything all right?" every thirty seconds). The gift shop was generating sales and the merchandise did not appear stale and dusty as I recalled on a previous visit many months before. And the food was substantial, properly plated and served quickly.

But this is not supposed to be a restaurant review.

Cracker Barrel (CBRL) is trading at $36.00/share and has a 2.23% yield. The stock goes ex-dividend October 14th. The 52-week price range is $10.67-36.00. CBRL is trading at a 52 week high for two reasons: several analyst upgrades, likely a result of a successful investor's conference in September, and a management team that appears to "get it" with the country casual dining experience, providing exceptional value for the money in a tough economic environment.

CBRL has a ROE of 52%, a net margin of 2.8% with revenues of $2.37b. It's market cap is $755m with five year earnings forecasted around 11%/yr. Institutions own a big chunck of the common stock.

Looking at the company and the sector, I think that lower commodity and utility costs will probably benefit CBRL's margins. This restaurant chain actually has an under priced menu compared with peers so there appears to be room to nudge up the entree prices and still retain a wide customer base. The astute management team is also likely to continue to massage both menu and service. Debt will likely be reduced from ongoing sale-leaseback transactions, the proceeds perhaps going towards a share buyback or dividend increase. New IT systems are being introduced system-wide to ultimately lower labor and food costs.

Yes, there is risk in any restaurant stock. Fuel prices may spike which will hurt both customer traffic, store operating expenses and the cost of procuring foodstuffs. The government may stifle the sector with higher taxes, minimum wage hikes and insurance expectations. And, specifically, Cracker Barrel management must continue to be mindful of never again experiencing widely reported racial slights that cost the company dearly a few years ago.

In total, CRBL is an investment worth exploring, perhaps on a modest pullback in share price. If all cylinders are hitting,this tasty company will earn you more than grits.

The author does not presently own a position in this stock.

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