Cracker Barrel May Be Running Out Of Headroom

Roadside staple Cracker Barrel Old Country Store  reported a double-digit increase in profit for its fiscal 2014 first quarter last week, but the market took little comfort as current quarter guidance failed to impress. Nearly all metrics showed positive growth for the chain, though much of the gains could be attributed to higher prices instead of higher customer counts. Still, Cracker Barrel has been on a multiyear tear -- up more than 120% in two years and 430% in five. Meanwhile, the stock trades near 17 times its forward earnings, a number that would normally preclude it from value investor interest. The latter is of particular interest, considering that one of the world's more legendary value investors continues to hold a substantial position in the company.

Earnings recap
For the eighth quarter in a row, Cracker Barrel posted positive same-store sales. The company grew existing sales by 2.8% -- impressive given the current climate and the fact that the quarter included the government shutdown (which management believes accounted for a decrease of 20 to 30 basis points). Investors should note, though, that store traffic actually decreased 0.1% year-over-year, while the average check climbed just under 3%.

Sales grew 3.5% to $649.1 million -- a couple million ahead of analyst estimates. Net income also outperformed, as the company earned $1.22 per share. Analysts were expecting $0.09 less.

Despite the solid gains across the board, analysts and investors expressed caution as management guided for just $1.50 to $1.60 per share. The Street had wanted around $1.65 per share for the second quarter. For the full year, the company guided relatively in line with analyst estimates at $5.60 to $5.80 per share on $2.7 billion to $2.75 billion in sales.

In Wednesday's trading, the stock fell nearly 7%.

Still embattled
Three times now, activist investor Sardar Biglari has campaigned to obtain board seats and enact changes at Cracker Barrel. As of mid-November, he has failed in his attempt. With the significant stock price gains and seemingly solid performance, other investors clearly don't want Biglari messing with what they consider to be a winning formula.

Biglari's essential argument with Cracker Barrel management is capital allocation practices. The investor, who owns other casual restaurant chains including Steak 'n Shake (a chain that he inarguably saved from ruin), is disappointed in the ROI on new stores and has long asked for a special dividend.

After three failed attempts at a board seat, Biglari may be preparing to exit his position, which has netted the investor more than $100 million since he initiated it a few years ago. His holding company's stock has far lagged the performance of his largest position (Cracker Barrel accounts for three-quarters of Biglari Holdings' market cap), and this could be a great time to monetize those paper gains and send his own company's stock soaring. If that ends up to be the case, Cracker Barrel stock will most certainly take a hit.

The bottom line is that the company has done very well for its investors over the past few years, and at its current valuation there isn't much room for a slowdown. Consider taking profits in Cracker Barrel, or look closer at Biglari Holdings for double exposure.

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