Activist Investor Targets Cracker Barrel: Is Management Incompetent, or Keeping Secrets?


With more than 600 locations in 42 states, it's hard to drive down the highway and not see a Cracker Barrel (CBRL). The ubiquitous road stop is basically the same everywhere -- it has a restaurant on one side and a gift area on the other. Stop for food, pick up a tchotchke, and you're on your way. Pretty straightforward, right?

Apparently, not to the company. That's why one investor activist wants Cracker Barrel to own up to running two distinct businesses.

Dear Management: You Are Incompetent

Sardar Biglari, the 34-year-old CEO of Biglari Holdings, is one of Cracker Barrel's largest shareholders. On Aug. 23, he sent a nastygram to Cracker Barrel laden with fighting words, accusing the management of behavior that was "shocking," "unimaginable," and "unconscionable."

What is the "grave managerial blunder" and "bad judgment, bad business, and bad accounting" of which Biglari accuses Cracker Barrel? Biglari says management knows it has two businesses: food and gifts. But for some strange reason, it doesn't want shareholders to know how each is actually performing.

Why the Big Brouhaha?

Biglari likes to find companies that aren't performing up to their potential, invest in them, and then work for improvements that benefit the company and investors. At Friendly's, Western Sizzlin', Steak n Shake, and other companies before them, management has initially greeted him in a cooperative spirit.

But if those managers stonewall him -- or worse -- he doesn't hesitate to go nuclear.

Granted, activist investors must employ strong language to draw other shareholders to their side. Delicate niceties bring yawns. And using harsh words doesn't make Biglari wrong. Until they're called out, many management teams run companies for their own benefit.

Biglari only has one goal when he buys shares to go after a company: to make money. If management can improve the business, then the stock price will follow. If execs can't or won't, then he will agitate for changes, board seats, and, as a last resort (as at Steak n Shake), take control.

He has a proven record of making money buying shares in and improving casual restaurant chains. But sometimes he has to take the gloves off to get it done.

What's the Big Secret?

Biglari says Cracker Barrel shareholders have a right to know whether part of the business they own is doing badly, so that something can be done. That "something" may include booting management.

Biglari points out that in its SEC filings, the company calls the restaurants and gift shops two different segments, says it has separate management chains for each, and moves the cash around between them according to needs.

So why won't managers break out each segment's full operations? Apparently, they walk like two segments, quack like two segments, but don't get reported as two segments.

Cracker Barrel's Response

The day after Biglari aired his grievances, Cracker Barrel issued a press release. It views the "restaurant and retail operations as two related and substantially integrated product lines."

Wait. The company breaks out sales, purchasing, and inventory management between the two segments in SEC filings, yet they're substantially integrated? The release implies that Cracker Barrel's separate management teams are not evaluated on how they manage the profits and loss for their segment alone. Does that mean that diners eat stuffed animals, and gift shops sell plates of hot hash browns?

Even more questionable is this statement from the company: "Given the integrated nature of our operations, as we have discussed with Mr. Biglari on several occasions, our management and Board of Directors have carefully considered and have concluded that separate segment disclosure of our restaurant and retail businesses is neither required nor appropriate."

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As in politics, this is a case where it isn't the transgression that gets you, but the cover-up.

Offering Biglari a confidential inside look was a big mistake. The offer suggests that information exists to clear up or defend the accusations. Management knows something, but it isn't telling everyone.

Biglari declined the private show-and-tell, saying there should be equal treatment for all shareholders or none. If one side of the business is ailing, and the other flourishing, why shouldn't everyone know? Shareholders own the company. They have a right to management that acts well and transparently.

Your Chance to Get in on the Activism

Biglari is deadly serious here, with his biggest target yet. Cracker Barrel's $960 million market value is almost double Biglari Holdings' $490 million.

As an investor, you can join him and, if it succeeds, make money, too. At today's valuations, and given Biglari's track record, Cracker Barrel and Biglari Holdings look like excellent opportunities.

Cracker Barrel may know that if it's forced to break out the gift shops and restaurants fully, it will reveal that all is not well. The longer it stonewalls, the worse that revelation may be. The emperor may not only have no clothes -- he may also be out in the street, with nothing more than a barrel.

Tom Jacobs is the advisor for Motley Fool Special Ops, a special situations and opportunistic value service. You can follow him on Twitter @TomJacobsInvest. Both he and the Motley Fool own shares of Biglari Holdings.

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