Shares of Cracker Barrel Old Country Store, Inc. CBRL are riding high on unit growth and increased focus on retail business and menu innovation. In the past three months, the stock has increased 23.5% compared with the industry’s 10.8% rally. However, high costs of operations and a competitive environment continue to hurt the company’s margins.
Catalysts Driving Growth
Cracker Barrel is continuously focusing on rejuvenating its menu, which primarily drives its growth. In fiscal 2018, the company’s in-store menu featured Fried Chicken Benedict bowl, a Ham n' Maple Bacon bowl and a Sausage, Grits Cakes and Green Tomato Gravy bowl.
The company’s expansion strategies also aid growth. In fiscal 2018, Cracker Barrel unveiled its first California location. Further, the company opened one Holler & Dash location in Charlotte, NC. In a year’s time, Cracker Barrel has opened 11 locations. For fiscal 2019, the company plans to open eight restaurants.
In order to drive traffic, Cracker Barrel relies heavily on seasonal promotions and limited-time offers to boost its top-line performance as these appeal to regular as well as less-frequent guests. In fiscal 2019, the company aims to meet consumers' need for convenience via growth in its off-premise business. In fact, it plans to enhance its off-premise platform by introducing catering menu offering and the in-store training of hourly employees.
Further, management will continue to invest in its product line-up for improving guest experience and employee training to support its long-term plans. Multiple delivery options will also be tested this fiscal year.
This Zacks Rank #3 (Hold) company has an effective cost-cutting mechanism in place. The company undertakes various measures to keep costs under control. In fiscal 2018, it delivered $6.3 million in annual cost savings. Currently, the company is carrying out its cost-savings plan through its two prime initiatives — food waste and labor management. For fiscal 2019, Cracker Barrel expects cost savings synergies of $10 million to $12 million. Over the long run, the same is targeted at $40 million.
Despite cost-saving initiatives, higher labor costs due to increased wages are likely to keep profits under pressure. Moreover, operating margin woes linger. Operating margin in the fiscal first quarter was 8.4%, down 160 basis points (bps) from 10% in the prior-year quarter. As a percentage of total revenues, the cost of goods and labor expenses increased 60 bps and 30 bps, respectively. Moreover, the company witnessed a rise in other operating, and general and administrative expenses.
Some better-ranked stocks in the same space are Dunkin' Brands Group, Inc. DNKN, Dave & Buster's Entertainment, Inc. PLAY and Darden Restaurants, Inc. DRI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Dunkin' Brands Group has an impressive long-term earnings growth rate of 12.4%.
Dave & Buster's Entertainment delivered positive earnings surprise in each of the trailing four quarters, the average positive surprise being 13.7%.
Darden Restaurants reported better-than-expected earnings over the preceding four quarters, the average positive surprise being 5.1%.
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