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Cracker Barrel's Sales Efforts & Cost Cutting Drive Growth

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Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) renewed marketing efforts and cost-cutting initiatives seem encouraging.

However, rising labor costs amid a tepid sales environment along with limited geographical presence remain potent headwinds for this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Recently, Cracker Barrel posted mixed first-quarter fiscal 2018 results, with the bottom line beating the Zacks Consensus Estimate and the top line lagging the same. Notably, the last reported quarter marked the 26th successive earnings beat for the company. However, the company reported lower-than-expected revenues in 10 of the last 11 quarters. 

Key Growth Drivers

In order to mitigate the choppy sales e U.S. restaurant sales environment, Cracker Barrel has been taking up several initiatives to drive top-line growth. The company heavily relies on marketing efforts that include expansion of its long-standing brand’s footprint in new and developing markets. Currently, there are 647 Cracker Barrel locations in the United States and the company expects to add eight or nine more stores in fiscal 2018.

In addition, the company’s flagship fast casual concept, Holler & Dash Biscuit House, continues to gain momentum. Currently, there are eight Holler & Dash Biscuit House outlets in the United States and the company plans to open three more in fiscal 2018.

In order to attract customers and boost the top line, the company relies heavily on seasonal promotions and limited period offers. In fact, in fiscal 2018, the company aims to meet consumers' needs for convenience via growth in off-premise business. Cracker Barrel plans to enhance its off-premise platform through the introduction of a catering menu and in-store training of hourly employees. In October, the company completed a system-wide rollout in all its off-premise platforms. Considering off-premise sales to be the primary component of full-year sales growth target, the company plans to support growth in off-premise through marketing efforts like social and digital messaging, geo-targeted consumer emails and in-store collateral.

Coming to menu innovation, the company recently introduced a coffee platform in approximately 40 stores. Cracker Barrel believes that the platform will complement the strength of its offering, drive check favorability and promote guest perceptions of menu variety. The rollout of the crafted coffee program at all stores is expected to be complete by the end of fiscal third quarter.

Apart from focusing on the top line, Cracker Barrel has adopted various cost-cutting initiatives to drive margins. Through a food management program and efficient cost saving in the utility front, the company has been able to drive cost favorability.

In the beginning of fiscal 2017, the company planned to bring down annual operating costs by $15 million to $20 million. In fact, Cracker Barrel delivered 15% above the high end of its fiscal-year target and achieved its three-year strategic goal of reducing $50 million of annual costs by fiscal 2017-end. In fiscal 2018, the company expects to record $7 million to $8 million in annual cost savings.

Notably, in order to enhance shareholder’s value, Cracker Barrel has been paying dividends since 2003 and has hiked it several times since then. Moreover, in fiscal years 2017, 2016 and 2015, the company declared additional special dividends of $3.50, $3.20 and $3.00 per share, respectively. A continuous increase in quarterly dividends and declaration of a special dividend affirm the company’s optimistic outlook and prospects.

In fact, the company delivered a return on equity (ROE) of 35.1% in the trailing 12 months compared with the industry’s gain of 6.9%. This supports its growth potential and also reinstates our faith in the company’s fundamentals and cash flow position.

Concerns

Despite the company’s efficient cost-saving methods, higher labor costs and expenses related to various sales-boosting initiatives are weighing on margins. Subsequently, Cracker Barrel’s shares have declined 2.8% year to date, against 14.6% growth of the industry it belongs to.This performance is further aggravated by downward estimate revisions. Over the last 30 days, current-year earnings estimates have moved down by 0.2%, reflecting analysts’ pessimism surrounding the stock. 




Notably, despite its substantial domestic presence, Cracker Barrel loses out in terms of international presence. While the other restaurant chains like Yum! Brands, Inc. (YUM - Free Report) , McDonalds Corporation (MCD - Free Report) and Papa John’s International, Inc. (PZZA - Free Report) are pursuing aggressive global expansion strategies, Cracker Barrel seems to be weak on this front.

Furthermore, a soft consumer spending environment in the U.S. restaurant space might continue to affect traffic. Meanwhile, management notes that Cracker Barrel’s retail business has been affected by challenges in the retail industry, as a whole. Thus, given the persistent challenges in the restaurant and retail industry, the company’s top line is likely to remain under pressure.

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