Image Source: Mike Mozart
Dividend Growth Newsletter portfolio holding Cracker Barrel drove average check increases to combat weak traffic that continues to plague the restaurant space.
By Kris Rosemann
Cracker Barrel Old Country Store (CBRL) reported its eleventh consecutive quarter of positive comparable restaurant sales growth in the second quarter of its fiscal 2017 on February 21. We continue to be fans of its dividend growth profile–its Dividend Cushion ratio is a healthy 1.7–and shares are trading in the lower bound of our fair value range. The company’s unique concept is working wonders on its ability to raise prices and offset industry-wide traffic woes that have weighed on the majority of the US restaurant space.
During the quarter, Cracker Barrel’s comparable store restaurant sales advanced 0.6% as average check increases of 2.7%–average menu price growth in the quarter came in at 2.1%–were more than enough to offset traffic declines of 2.1% from the year-ago period. Meanwhile, comparable store retail sales fell 2.2% on a year-over-year basis. Nevertheless, the menu price and average check growth are helping drive material bottom-line expansion, along with food commodity cost deflation. The company’s operating income margin, for example, leapt 1.5 percentage points in the fiscal second quarter, to 10.7%, and earnings per diluted share jumped to $2.19 from $2.01 in the second quarter of fiscal 2016. Its free cash flow nearly doubled through the first six months of fiscal 2017 compared to last year’s period, to nearly $97 million.
Cracker Barrel reiterated its guidance for the full fiscal year 2017 following the quarter, indicating that it expects total revenue to be roughly $2.95 billion and earnings per diluted share to be in a range of $8.10-$8.25. Comparable store restaurant sales growth is projected to be between 0.5% and 1%, while comparable store retail sales are anticipated to decline 2% in the fiscal year. Management has set its operating income margin target at 10%-10.5%, below its reported result through the first half of the year of 10.7%, suggesting upside potential may be in store should the firm be able to maintain recent pricing activity.
All things considered, we would have liked to see better top-line results from Cracker Barrel, but after considering the widespread traffic woes being felt by US restaurant and retail chains, its fiscal second quarter was solid. The company’s bottom-line and free cash flow performance (as well as its nice dividend and valuation opportunity) are enough to keep shares in the Dividend Growth Newsletter portfolio, and we’re hoping for another dividend increase before fiscal 2017 is over. We like Cracker Barrel quite a bit.