Image Source: Cracker Barrel

By Brian Nelson, CFA

Cracker Barrel (CBRL) reported fiscal third-quarter results June 2. While we can go into the numbers, there isn't really much to read into the reported quarterly performance, as the market continues to look forward to better times. Many readers are aware of the dividend cut at Cracker Barrel, “Jobless Claims Spike; Restaurants, REITs in Trouble,” and that it suspended its fiscal 2020 guidance (not unlike many other firms), but what we found to be most encouraging was the company commentary on the conference call.

Cracker Barrel is encouraged by recent top line trends, noting that it has “seen sequential improvements in weekly comparable store sales since (it) began reopening dining rooms,” and it also noted comparable store restaurant sales with open dining rooms were running at comp performance materially better than those limited to off-premise only. Perhaps these trends are expected upon businesses re-opening, but they are nonetheless encouraging, as they speak to the nature of consumers’ willingness to not only spend but also to leave their homes to do so.  

Moreover, CEO Sandy Cochran had the following to say on the call:

I've been encouraged by the recent sales trends as we've reopened dining rooms and welcomed guests into our stores. We've seen steady improvement in our weekly comparable store restaurant sales trends, we've reopened dining rooms, and I'm optimistic that we will sustain this positive momentum. Looking ahead, we'll continue to focus on business priorities such as driving top-line growth by introducing signature crave-able food and accelerating our off-premise business and will continue to enhance the employee and guest experience. We remain focused on conserving cash in the near term, but we'll balance this approach by making select investments to support our business…

…While there continues to be significant uncertainty and we expect our industry will be challenged in the coming months, we're very confident in the future of our company and in our ability to drive long-term value creation. Cracker Barrel remains one of the most differentiated brands and I believe our scratch-made foods, everyday value, genuine hospitality, and the trust guests have in us to deliver on their expectations will continue to make us a preferred dining destination. Additionally, I firmly believe we have the resources and strategies in place to successfully navigate through this environment, strengthen our business, and drive shareholder returns.

These are unprecedented times for the dine-in restaurant space, and while we are disappointed with the dividend cut at Cracker Barrel (a move that was necessary to preserve liquidity in a time of great uncertainty), we think we “played” the stock correctly. For one, had we overreacted and dumped shares at the time of the dividend cut announcement, near the depths of the March swoon, when shares traded as low as the mid-$50s, it would have been an absolute blunder.

By retaining our composure and focusing on what matters (enterprise valuation), we’re now holding shares in the Dividend Growth Newsletter portfolio at nearly $120, with expectations that the company will reinstate its dividend shortly after we get to the other side of this global pandemic. Once again, remaining calm, not panicking, and understanding that stocks have intrinsic worth (and are not just pieces of paper) proved to be the way to go.

Concluding Thoughts

Cracker Barrel has one of the best dining experiences around, and we expect it to make a strong recovery thanks in part to a differentiated brand, loyal guests, and menu pricing power. Despite the dividend cut, we didn’t remove the company from the Dividend Growth Newsletter portfolio as we were expecting a huge bounce in the share price, which has happened.

While it may take some time for Cracker Barrel to reinstate its dividend, we think it will happen sooner than later, and we are leaving the company in the Dividend Growth Newsletter portfolio for the foreseeable future as its share price continues on the path to pre-COVID-19 levels. The high end of our fair value estimate range stands at $119, but there may be meaningful upside in the event consumer willingness to revisit full-service restaurants (coupled with a return to economic “normalcy”) go better than expected.

For investors seeking the best restaurants for capital appreciation in an environment of COVID-19, we point to Domino’s (DPZ) due in part to its huge returns on invested capital and its franchise business model and Chipotle (CMG), whose operations have turned the corner with new CEO Brian Niccol at the helm. Both companies have performed magnificently since we highlighted them as two of the top ideas near the bottom of the March swoon, “Valuentum’s COVID-19 Ideas Have Outperformed Significantly.” 

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Restaurants - Fast Casual & Full Service: BJRI, CAKE, CBRL, CMG, DENN, DIN, DRI, EAT, RRGB, RUTH, TXRH

Restaurants - Fast Food & Coffee/Snack: ARCO, DPZ, DNKN, JACK, MCD, PZZA, SBUX, WEN, YUM

Other: PEY, OUSM, DIVA, XMLV, FLQS

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Brian Nelson owns shares in SPY and SCHG. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.