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July 15, 1998
Some Pros Ready to Feed on Cracker
Barrel Again
By LISA R. GOLDBAUM
In the culinary world, Cracker Barrel Old Country Stores may not be a
household name on a par with, say, McDonald's. But to investors, it has been
tastier than a Big Mac -- until recently.
In a volatile, fickle and often cutthroat industry, Cracker
Barrel has been a solid performer: Its down-home menu
of country staples like grits and ham hocks helped the
Southern chain post double-digit earnings increases for a
decade. And Cracker Barrel's shares, which had hovered between 20 and
30 for five years, finally broke out of that trading range and hit an all-time high
of 43 in February.
Some analysts began to get nervous, though, and downgraded the stock
because of its high price. Then, company officials mentioned during a
conference call that same-store sales (sales generated by restaurants open at
least a year) had turned negative in May. That news sent the stock price,
which had already corrected from its peak, down to around 26 -- nearly 40%
off its all-time high.
Now, however, some people who follow the company say sluggish
same-store sales may be just a temporary phenomenon rather than an
indication of more serious problems -- and that the stock's big fall is an
overreaction.
For one thing, Cracker Barrel's distinctive strategy should give the company
an edge over many competitors. The Lebanon, TN-based chain has achieved
success by scattering its restaurants along the nation's interstate highways. It
has thereby become an oasis to weary travelers sick of fast food and
greasy-spoon truck-stop fare.
Cracker Barrel does compete with other chains like Applebee's in many
urban and suburban markets, which have been hotbeds of competition in
casual dining. But the company's focus on interstate highways also allows it to
penetrate rural areas its rivals often overlook.
Moreover, Cracker Barrel's
restaurants, unlike those of its
competitors, have gift shops that sell
country goods like woodcrafts and
rocking chairs. The gift shops have been
big hits, generating nearly a quarter of
Cracker Barrel's sales and hedging
some of its exposure to the volatile
restaurant industry. (When same-store
sales for Cracker Barrel's restaurants
turned negative in May, for example,
the company said sales from its retail
stores were still higher.)
And some of the factors that contributed to the softness in Cracker Barrel's
same-store sales may be temporary. Legg Mason analyst Scott Tilghman
projects strong summer travel this year due to low gasoline prices and a
strong economy. This is important for Cracker Barrel, he points out, since
the company generates half its business from interstate travelers. "The south
and east had a very wet spring, which impacted travel," the analyst notes.
If summer travel does turn out to be strong, that could make up for some of
the weak sales that drove the stock price down. Tilghman in fact expects
same-store sales to rise modestly -- about 1% -- in the fourth fiscal quarter of
1998, ending in July.
The company should also benefit from some recent changes in its business.
Tilghman says that Cracker Barrel is finishing a rollout of technology
systems that will integrate its distribution and ordering processes, improving
efficiency.
Analyst Mark Sheridan of Johnson Rice, who upgraded his recommendation
on Cracker Barrel's stock to Buy from Hold on Tuesday, also points out that
the company just named a new vice president of marketing. It also will be
doing more advertising, like radio spots and sponsoring a Nascar racing
event. Previously, Cracker Barrel shied away from big ad campaigns, using
mundane media like roadside billboards instead.
At current prices, the stock does look like a bargain. Selling at 28 1/8, the
shares trade at 14 times the $1.95 per share analysts tracked by Zacks
Investment Research predict Cracker Barrel will earn in the next fiscal year,
ending July 1999. That's a nice discount to its expected annual earnings
growth rate of about 18% for both the 1999 fiscal year and the next five
years. Tilghman of Legg Mason thinks the stock could head back to around
40.
Analyst Sheridan also points out that Outback Steakhouse had a similar
problem last March, when its shares sank on weakness in same-store sales.
But that stock rebounded nicely when investors began to believe that its basic
concept and execution were intact.
The bulls on Cracker Barrel are betting that lightning will strike twice.
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