Simulated Dividend Growth Newsletter portfolio idea Cracker Barrel reported decent fiscal-third quarter 2018 results and hiked its quarterly payout. The company declared a special dividend in its fiscal third-quarter report, too.
By Kris Rosemann
We’ve been quite pleased with the income generation of Cracker Barrel (CBRL) since highlighting it as an idea in the simulated Dividend Growth Newsletter portfolio, and the unique restaurant operator appears to have made a habit of announcing dividend increases and special payouts, as it did with its fiscal third-quarter 2018 report, released May 22. Fiscal 2018 marked the fourth consecutive such year. The stock reacted favorably to the report, and shares yield ~3.1% after the recent increase in the regular dividend. Cracker Barrel’s yield is much higher considering the special dividends investors have grown accustomed to.
Total revenue advanced 3% on a year-over-year basis at Cracker Barrel during the third quarter of its fiscal 2018 as comparable store restaurant sales increased 1.5%–thanks to a 2.8% increase in average check offsetting a 1.3% decline in traffic–and comparable store retail sales increased 0.9%. Commodity inflation and expenses related to strategic initiatives weighed on the operating line in the quarter as the company’s operating margin fell to 8.8% from 10.2% in the comparable period of fiscal 2017, but diluted earnings per share advanced to $2.03 from $1.95 due to a materially lower tax bill.
Cracker Barrel continues to generate solid levels of free cash flow, which came in at $119 million through three quarters of fiscal 2018, a decline of only 2.4% from the comparable period of fiscal 2017 despite capital spending growing nearly 26%. The company’s financial leverage remains reasonable as it ended the fiscal third quarter with $400 million in long-term debt and $174 million in cash and cash equivalents. At last check, the old country store and restaurant operator has a Dividend Cushion ratio of 1.6. Cash dividends paid through three quarters of fiscal 2018 were $88 million, and this free cash flow coverage gave management the confidence to hike its quarterly payout by 4% to $1.25 per share, as well as declare a special dividend of $3.75.
That said, food commodity inflation is expected to continue weighing on Cracker Barrel’s bottom line, and the company lowered the top end of its earnings guidance range. Food commodity inflation is now expected to be 3.25% for the full year fiscal 2018 (was 2.5%-3.0%), operating income margin is now targeted at 9.5% for the year (was 9.5%-10%), and adjusted earnings per diluted share guidance now comes in a range of $9.30-$9.40 (was $9.30-$9.50). Total revenue is still expected to be roughly $3.1 billion, comparable store restaurant sales growth guidance remains 1%-2%, and roughly flat comparable store retail sales growth is still expected.
All things considered, we’re not changing our position on this robust generator of income. Cracker Barrel may face a challenging operating environment that includes traffic pressures and food commodity cost inflation, but its execution has remained sound. There may be additional upside potential within its Holler & Dash Biscuit House fast-casual concept over the long haul, but we’re not counting on it. We’ll be watching closely for the potential of capital spending related to new restaurant openings to impact free cash flow generation moving forward as ample coverage of its dividends with free cash flow is what makes these income-investor pleasing reports possible.
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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.