Cracker Barrel Old Country Store, Inc. CBRL relies on seasonal promotions, unit growth and extensive marketing to drive revenue growth. Further, the company’s cost-containment efforts are likely to aid in margin expansion, in the upcoming quarters. However, higher labor costs owing to increased wages are anticipated to keep profits under persistent pressure. Moreover, the company is apprehensive regarding incurring inflationary costs.
In the second quarter of fiscal 2019, the company’s earnings declined 7.7% year over year owing to high expenses. However, revenues increased 3% from the prior-year quarter, driven by higher comparable restaurant sales.
Notably, shares of Cracker Barrel have lost 3% over the past year, against the industry’s rally of 13.2%.
Sales-Building Efforts Bode Well
Cracker Barrel is continuously focusing on rejuvenating its menu, which serves as the backbone of the company’s riveting growth potential. 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. Further, Cracker Barrel completed the rollout of crafted coffee last year. The company believes that the platform will complement the strength of its breakfast all day offering, drive check favorability and promote guest perceptions of menu variety.
Another vital growth driver includes the company’s continuous expansion strategies. 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 opened 10 locations. In fiscal 2019, the company plans to open eight restaurants.
Cracker Barrel is heavily dependent on seasonal promotions and limited-time offers to boost its top-line performance as these are appealing to both regular users and 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 off-premise platform by introducing catering menu offering and in-store training of hourly employees. In the second quarter of fiscal 2019, off-premise sales as a percentage of total revenues increased 200 basis points year over year.
Cost-Cutting Efforts Likely to Drive Margins
Cracker Barrel has an effective cost-cutting mechanism in place. For fiscal 2018, it delivered $6.3 million in annual cost savings. Currently, the company is carrying out its cost-saving 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, Cracker Barrel is burdened with high labor costs and other sales-driving initiatives. Though these initiatives are expected to drive the top line during fiscal 2019 initial investments are likely to weigh on margins. Moreover, expenses for opening of units are expected to continue hurting the company’s margins.
Resultantly, operating margin in the first six months of fiscal 2019 was 9%, down 80 basis points (bps) from 9.8% in the prior-year quarter. Cost of goods and labor expenses increased 3% and 5%, respectively, from the year-ago level. Moreover, the company witnessed rise in other operating, general and administrative expenses.
Furthermore, while several other restaurateurs including Yum! Brands YUM, McDonald’s MCD and Domino’s DPZ are capitalizing on the emerging market potential, Cracker Barrel seems to be struggling on this front. We believe that this Zacks Rank #3 (Hold) company needs to spread its presence beyond the United States in order to offset the impact of cut-throat competition in the saturated domestic market. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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