Image Source: Mike Mozart
Cracker Barrel’s fiscal 2019 first quarter report revealed improving traffic trends from the previous quarter, and menu price hikes continue to help drive average transaction value higher. Margin performance is worth watching, but we like that management is continuing to invest in its growth initiatives.
By Kris Rosemann
Shares of simulated Dividend Growth Newsletter portfolio idea Cracker Barrel (CBRL) have performed extremely well of late, and our decision to stick with the company following a weaker than expected fiscal 2018 fourth quarter report is paying off. Shares are up ~27% as of this writing since the close of the day of that fourth quarter report and ~37% since we initially highlighted the idea in early 2016. This comes without consideration of the company’s ~2.8% regular dividend yield and its habit of paying hefty special dividends on an annual basis in recent years ($3.00, $3.25, $3.50, and $3.75 per share in 2015-2018, respectively).
Cracker Barrel’s traffic performance could have been better in its fiscal first quarter, results released November 27, but in the context of the broader restaurant space traffic falling 1.43% in the three-month period ending with October, its 1.6% year-over-year traffic decline is not too far out of line. It was also a notable improvement over its fiscal 2018 fourth quarter year-over-year traffic decline of 3.5%. Pricing continues to be the driver of the company’s comparable store restaurant sales growth as an average menu price increase in the quarter of 2% and favorable mix impact of 1% drove a 3% jump in average check from the year-ago period, and Cracker Barrel’s 1.4% comparable store restaurant sales growth in the quarter slightly outpaced the industry as a whole over the same period.
Off-premise sales (catering and to-go options) grew at a high-teens rate from the year-ago period and contributed to the favorable mix impact in comparable store restaurant sales. Off-premise sales as a percentage of total sales advanced more than 1% on a year-over-year basis in the quarter, and the company continues to actively invest for growth in this area. Comparable store retail sales grew 4.3% from the comparable period of fiscal 2018, and total revenue advanced 3.3% on a year-over-year basis.
Operating income faced pressure in Cracker Barrel’s fiscal first quarter as its operating income margin contracted 160 basis points from the year-ago period to 8.4%. Commodity and labor inflation and freight costs played a notable role in the margin contraction, but management also continues to invest in advertising to support menu initiatives. Food commodity inflation is still expected to be ~2% in the full fiscal year but should ease in the back half, and management adjusted its operating margin guidance for fiscal 2019 to a range of 9.0%-9.3% from previous guidance of ~9.3%. Earnings per diluted share grew 2.1% from the year-ago period to $1.96 thanks to a lower tax bill, and free cash flow in the quarter nearly tripled.
Management reiterated its top-line guidance of ~$3.04 billion for fiscal 2019, and comparable store restaurant sales growth is still expected to be between flat to up 1% over fiscal 2018 levels. Comparable store retail sales growth guidance was raised to 1%-2% on a year-over-year basis from flat to up 1% previously, and earnings per diluted share guidance was reiterated in a range of $8.95-$9.10.
We’re continuing to watch traffic trends and margin performance closely at Cracker Barrel, but we’re going to let this winner run in the simulated Dividend Growth Newsletter portfolio as it continues to return cash to shareholders via the dividend. Shares are currently changing hands in the upper half of our fair value range, and the company’s Dividend Cushion ratio is above parity at 1.4 at last check, though this does not consider special dividends. Management points to its off-premise program as one of its biggest opportunities for growth and claims a favorable response thus far to Holler & Dash, its fast casual concept that currently has seven locations across the Southeast US.
However, the company still has work to do in improving traffic trends, which management readily admits, and it plans to attack the challenge by improving the guest and employee experience. Investments in areas such as additional training and other experience-related avenues, in addition to slightly higher expectations for wage inflation in the full fiscal year, were factors in the operating margin guidance adjustment for the fiscal year. We think the company continues to curry favor from consumers for its “uniqueness,” which couples nicely with its strategy of presenting old favorites at attractive value points as it battles the aggressive discounting of some of its casual dining peers.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.