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Cracker Barrel Gains 11% in 3 Months: Will Growth Continue?

Zacks Equity Research

Shares of Cracker Barrel Old Country Store, Inc. CBRL have gained 10.6% in the past three months compared with the industry’s 10.4% growth. The uptick can be primarily attributed to the company’s robust earnings surprise history, increased focus on menu innovation and consistent unit growth. Even though comps have increased over the past few quarters, weak traffic numbers remain a major concern. Let’s delve deeper.

Key Catalysts

Cracker Barrel delivered better-than-expected earnings in nine of the trailing ten quarters. In the third quarter of fiscal 2019, adjusted earnings came in at $2.09 per share, which surpassed the Zacks Consensus Estimate of $2.05 by 2%. For fiscal 2019, management expects earnings of $8.95-$9.10 compared with $8.87 registered in fiscal 2018. Moreover, estimates for current-year earnings have moved north by 5 cents to $9 over the past 30 days.

These apart, this Zacks Rank #3 (Hold) stock is consistently focusing on rejuvenating its menu, which serves as the backbone of the company’s riveting growth potential. Cracker Barrel’s continuous expansion strategies are also encouraging. In fiscal 2019, the company have opened 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 they 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.

To this end, Cracker Barrel plans to enhance its off-premise platform by introducing catering menu offering and in-store training of hourly employees. In the third quarter of fiscal 2019, off-premise sales (as a percentage of total revenues) increased 110 basis points year over year, following a 200 bps gain in the second quarter.

Further, management will continue to invest in its product line-up for improving guest experience and employee training to support long-term plans within this space. Multiple delivery options will also be tested in this fiscal year.



 

Concerns

Despite cost-saving initiatives, higher labor costs due to increased wages are expected to persistently keep profits under pressure. Also, the company is apprehensive that inflationary costs are likely to be incurred. Meanwhile, management is making significant investments to support the training and launch of several initiatives as well as its value testing.

Although these initiatives are expected to drive Cracker Barrel’s top-line growth during fiscal 2019, initial investments might dent margins. Moreover, expenses for opening units are expected to hurt the company’s margins.

Resultantly, operating margin in the first nine months of fiscal 2019 was 8.9%, down 60 basis points (bps) from 9.5% in the prior-year period. Cost of goods and labor expenses increased 2% and 4%, respectively, from the year-ago level. Cracker Barrel also witnessed a rise in other operating, general and administrative expenses.

Key Picks

Better-ranked stocks worth considering in the same space include Denny's Corp. DENN, Noodles & Company NDLS and Yum China Holdings, Inc. YUMC, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Denny's have gained 16.1% in the past three months.

The long-term earnings growth rate for Noodles & Company and Yum China is 8.8% and 9.4%, respectively.

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