Shares of Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) dipped below $100 in a post-profit sell-off that amounts to a lot of laughs. Last year’s reopening of restaurant trading pushed the stock above $178 in April 2021.
All things considered, the home-cooked restaurant chain delivered a solid performance in the first quarter. The outlook for the rest of fiscal 2023 and next year isn’t half bad either.
From a technical analysis point of view, a trip below 30 on the Relative Strength Indicator (RSI) also indicates an extreme market reaction. The last two times this has happened, the stock recovered to new heights. Will the third time in six months be the charm?
Maybe. Unlike the chicken dumplings with gravy, Cracker Barrel’s basic ingredients are quite healthy.
How did Cracker Barrel perform in Fiscal Q1?
Cracker Barrel posted mixed results for the first quarter. Sales improved 7% year-over-year and exceeded sales-side expectations. As was an industry-wide trend in 2022, adjusted earnings fell sharply (-35%) and fell short of analysts’ target.
On the upside, more restaurant visits, out-of-home sales and retail sales contributed to the revenue growth. An average menu price increase of about 8% showed that cost inflation can be passed on to hungry consumers.
Costs rose sharply in the negative column. Higher spending on food, raw materials, labour, rent and maintenance caused the operating margin to decline to 3.6% compared to 5.9% a year ago.
For the full year, management forecast comparable store sales growth of 6% to 8%. Though wages and merchandise inflation are expected to continue, we may have seen the worst cost pressures. The expectation for a full year operating margin in the “high 4% range” would represent a substantial improvement from the first quarter.
Overall, it was a mixed bag for Cracker Barrel, but the market chose to view it as half empty. The stock fell on the report en route to an exaggerated four-day sell-off.
What sets Cracker Barrel apart?
In a fiercely competitive restaurant spaceCracker Barrel sets itself apart in a number of ways:
Value – Restaurants are open for breakfast, lunch and dinner. It’s home cooking without the dishes. Even with prices rising, the company is pricing an average check at about $12.
Retail – About one-fifth of the company’s sales are generated from restaurant stores that sell a variety of old country gifts and trinkets. This, together with the affordable meal tabs, makes Cracker Barrel especially popular with seniors.
Location – Cracker Barrel strategically places its stores along major travel routes. As a result, road trippers account for more than a third of annual visits. Come for the toilet break, stay for the meatloaf.
Is Cracker Barrel Stock a Good Investment?
Like its generous portions, Cracker Barrel stock here offers good value. It trades at around 18x this year’s earnings estimate and 15x fiscal 2024 earnings. Stack these multiples against the restaurant industry’s average P/E of about 23x and the valuation becomes easier to digest.
The more savory side dish, however, is the dividend. The company pays a quarterly dividend of $1.30 per share, which translates to a 5.2% upfront payment dividend yield. This is nearly triple the average yield of consumer durables – and the largest yield of the Russell 3000 restaurant stock. The nearest, Darden Restaurants, offers a yield of 3.4%.
While value is the main course, Cracker Barrel also has growth potential. Wall Street expects net growth of 15% in fiscal 2024, assuming cost pressures ease and demand is not derailed by a prolonged recession.
What are the growth engines?
The biggest opportunity is in the off-premise business. In the post-pandemic economy, consumers crave convenience as much as home-cooked meals. Cracker Barrel responds by leaning delivery by third parties, curbside pickup and catering services. Earlier this year, mobile payments were launched with reportedly Apple Pay and Google Pay. Family meal baskets for on-the-go households are another new digital growth opportunity.
In addition, continued menu innovation will be relied upon as leverage for growth, including additions such as Impossible Plant-Based Sausage and Chipotle-esque dinner bowls. Store expansion is also on the menu. Cracker Barrel said it plans to open three to four new flagship locations and 15 to 20 of its Maple Street cookies stores in the current fiscal year.
At its current level, Cracker Barrel is a flavorful combination of value and growth. If broad market weakness pushes the stock back to 1980s pandemic lows, existing shareholders should consider second aid.