Investing in Cracker Barrel Old Country Store requires a careful balance between recognizing its current challenges and appreciating its potential for recovery.
The restaurant chain has experienced a significant stock price decline, driven by operational struggles, yet it presents an intriguing opportunity for value and contrarian investors.
Financial Performance and Challenges
Cracker Barrel’s revenue has grown from $2.82 billion in 2021 to $3.44 billion in 2023, an increase driven by both an expansion in the number of locations and comparable store sales growth. The number of locations rose from 701 to 720, while comparable store sales increased by 10.8% in 2021, 15.7% in 2022, and 4.9% in 2023.
However, inflationary pressures, particularly on food costs, have negatively impacted the company’s bottom line. Although Cracker Barrel raised prices, average check sizes grew by 3.1% in 2021, 7% in 2022, and 9.8% in 2023, consumer traffic has declined.
Traffic increased by 5.3% in 2021 and 8% in 2022 but dropped by 3.5% in 2023. The first nine months of fiscal 2024 showed a 1.4% decline in comparable sales, driven by a 5.3% drop in traffic despite a 5.1% increase in average check sizes.
From 2021 to 2023, net profits fell from $254.3 million to $99.1 million. The primary driver of this decline was a rise in the cost of goods sold, reducing the company’s gross profit margin from 69.3% to 67.2%. While this may seem minor, it translated to $72.3 million in reduced pretax profits.
Excluding a one-time gain of $217.7 million from a sale and leaseback transaction in 2021 and a $14 million impairment in 2023, operating income decreased from $148.9 million to $106.6 million.
Other profitability metrics showed similar trends. Operating cash flow decreased from $301.9 million to $250.5 million, though adjusted operating cash flow increased from $227.6 million to $305.1 million. EBITDA fell modestly from $275.4 million to $254.9 million.
Strategic Initiatives and Future Prospects
Despite these challenges, Cracker Barrel’s management has outlined plans to revitalize the brand. The company is working on remodel prototypes to refresh its image, planning 25 to 30 remodels in the next fiscal year. Additionally, Cracker Barrel aims to simplify job tasks, invest in technology, and revamp its menu.
Capital expenditures are expected to rise significantly. For 2025, the company plans to spend between $160 million and $180 million, compared to $120 million to $125 million in 2024.
Over the next three years, ending in 2027, Cracker Barrel intends to invest between $600 million and $700 million in capital projects. If successful, these investments are projected to boost revenue to between $3.8 billion and $3.9 billion by 2027, with EBITDA reaching between $375 million and $425 million.
Valuation and Investment Considerations
Cracker Barrel’s stock appears attractively priced despite its operational struggles. The company’s price-to-earnings ratio might seem high based on 2024 earnings, but its cash flow metrics tell a different story. Using historical results from 2023 and estimates for 2024, Cracker Barrel’s valuation seems reasonable, especially when considering future projections.
Comparatively, Cracker Barrel’s valuation metrics stack up favorably against peers. On a price-to-operating cash flow basis, it is the cheapest among a selected group of similar enterprises.
While three of the five companies in the comparison group were cheaper on a price-to-earnings basis, and one was cheaper based on the EV to EBITDA metric, Cracker Barrel remains competitively priced overall.
Significant Upside Potential
Cracker Barrel faces significant challenges, particularly in maintaining profitability amidst rising costs and declining traffic. However, the company’s strategic initiatives aimed at refreshing the brand, streamlining operations, and expanding its footprint offer a path to recovery.
With the stock currently trading at attractive multiples, there is potential for significant upside if the company’s plans succeed.
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Dean is a freelance content writer who contributes to various Digital Media Companies and independent websites all over the world. He has over 20 years of financial industry experience, so it’s safe to say he’s well informed.
