Image Source: Eli Christman
Well, how do you like that?
Our favorite dividend growth restaurant idea, Cracker Barrel (CBRL), which was recently added to the Dividend Growth Newsletter portfolio February 1, 2016, announced an impressive $3.25 per-share special dividend June 1, as it increased its quarterly payout 4.5%, to $1.15 per share ($4.60 on an annual basis, implying a forward dividend yield of 2.8%). Though many investors have pointed to McDonald’s (MCD) resurgence as the “story in retail,” we’re mighty pleased with what we’ve been seeing at the “old country store” and believe it to be a more resilient idea than the Golden Arches. Shares of Cracker Barrel surged June 1, breaching new all-time highs, and we’re expecting bigger things ahead. Cracker Barrel’s $3.25 per-share special dividend will be paid on July 29 to shareholders of record July 15. Nice! The company paid out a special $3 per-share dividend last year.
Our thesis on Cracker Barrel continues to play out. The recent drop in crude oil and gasoline prices continues to free up an increasing portion of consumer budgets, helping customers eat out more often, but also spend more while doing so. Cracker Barrel restaurants, which are located just off the exits of major highways or next to hotel establishments, are in a perfect location to capture the need for drivers to eat while vacationing or traveling wherever they are going (now that gas prices are more reasonable). Its unique combination of a home-cooking restaurant and old country store offers patrons an experience found in few other places, if truly at all, and the company’s classic wooden rocking chairs have become a staple of its brand. The retail portion of its restaurant remains integral to the “Cracker Barrel experience,” producing sales-per-square foot of approximately $400 and boasting gross margins of ~50%, offering considerable value to a “guest waiting area” – a dynamic unmatched by any other, in our view.
Cracker Barrel’s third quarter fiscal 2016 results, released June 1, were exactly what we were looking for. Comparable store restaurant sales and comparable store retail sales advanced 2.3% and 2.2%, respectively in the period, outperforming the pace of expansion of the overall casual dining industry. The company’s menu price increases are sticking, and consumers aren’t balking – the average menu price increase for the quarter was a solid ~2.8%. The duo of falling commodity costs and management’s commitment to cost savings drove a nearly 20% increase in operating income in the period, with the firm’s operating margin leaping 150 basis points, to 9.6% of total revenue. On a GAAP basis, earnings per share came in at $2.04 versus $1.47 in the prior year period. Management said it is encouraged by sales trends in May (the current quarter) and raised its outlook for fiscal 2016 earnings to the range of $7.75-$7.85 per share from $7.45-$7.55 previously.
A strong balance sheet and solid future free cash flow generation are the building blocks of any company’s dividend health, and Cracker Barrel has both. Though the company sports a modest net debt position of ~$225 million, we’re not concerned about it, given the strength of its traditional free cash flow, which came in at nearly $150 million through the first nine months of fiscal 2016, ending April 29. Cracker Barrel’s Dividend Cushion ratio remains a solid 1.8 and its dividend payout ratio is a modest ~60%, and how can we forget how willing management is to return gobs of cash in the form of dividends! The special dividends are simply great, and for fiscal 2016 will translate into an effective dividend yield of nearly 5%. Other income ideas in the restaurant space including McDonald’s and Yum! Brands (YUM) yield less than 3% by comparison. We think our top dividend growth pick in the restaurant space continues to deliver, and we hope you’re pleased. Our updated fair value estimate of Cracker Barrel is north of $170 per share.