Cracker Barrel Counter Challenges With Initiatives, Cost Cuts

On Sep 14, we issued an updated research report on Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) .

Notably, Cracker Barrel’s distinctiveness in the retail-restaurant space lies in the fact that apart from serving food, its restaurant establishments have old-country feel along with unique gift shops.

This week, the company posted mixed fourth-quarter fiscal 2017 results wherein the bottom line beat the Zacks Consensus Estimate, while the top line lagged the same.

Key Growth Drivers

In fourth-quarter fiscal 2016, Cracker Barrel had launched its new fast casual concept, Holler & Dash Biscuit House, with operating hours limited to breakfast and lunch time. This new concept is expected to add considerably to the top line and boost shareholder value over the long term.

Also, the company plans to expand its long-standing brand’s footprint in new and developing markets. In fact, continuous expansion plans of the company reinstate our belief in the brand’s demand across the country.

We note that Cracker Barrel relies heavily on seasonal promotions and limited time offers to boost its top-line performance because they are appealing to both regular users and less-frequent guests. Going forward, the company aims to continue investing in new product news that will drive business frequency.

In fiscal 2018, the company aims to meet consumers' need for convenience via growth in its off-premise business. Moreover, it has also been testing an enhanced everybody value platform at breakfast, lunch and dinner to further engage as a value player in the restaurant space. Coming to menu innovation, Cracker Barrel plans to introduce a new coffee platform this year, which should further boost check averages.

On the retail side, the company is likely to increase its emphasis on value to better compete in a very promotional environment, grow its sales gap and achieve its long-term business growth. Thus, in fiscal 2018, along with the affordability of its merchandise offerings, the company will also be working on the quality and exclusivity of its assortments, placing greater emphasis on price value relationship.

Meanwhile, in a bid to address the challenges of the competitive restaurant industry, Cracker Barrel is undertaking extensive marketing efforts, mainly focused on the brand’s differentiation, menu offering and its value. In fact, the company expects its extensive advertising and marketing efforts to favor sales mix in the near term.

This apart, Cracker Barrel also has an effective cost-cutting mechanism in place and undertakes various measures to keep costs under control. All these efforts coupled with ongoing commodity cost deflation helped it to achieve its target of removing $50 million in annual cost from the business by fiscal 2017-end as outlined in fiscal 2014. These initiatives are expected to aid the company in combating some of the wage inflation pressures as well. Consequently, Cracker Barrel expects to deliver between $7 million and $8 million in annual cost savings for fiscal 2018.

Challenges

Currently, the company operates 645 Cracker Barrel outlets and five Holler & Dash Biscuit House locations across 44 states in the United States. In fiscal 2018, it expects to open eight or nine new Cracker Barrel stores and three or four new Holler & Dash Biscuit House restaurants.

However, Cracker Barrel loses out in terms of international presence. While the other restaurant chains like Yum! Brands, Inc. (NYSE:YUM) , McDonalds Corporation (NYSE:MCD) and Papa John’s International, Inc. (NASDAQ:PZZA) are following aggressive global expansion policies, 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 the challenges faced by the retail industry, as a whole. Thus, given the continued challenges facing the restaurant and retail industry, the company’s top line is likely to remain under pressure.

Additionally, higher labor costs along with expenses related to various sales boosting initiatives as well as opening of new units are anticipated to continue hurting margins.

Resultantly, Cracker Barrel’s shares have declined 10.7% year to date, as against 6.5% growth of the industry it belongs to.

Bottom Line

Going forward, we expect the company’s enhanced focus on convenience, value and menu innovation along with cost-cutting initiatives to help fight revenue and cost woes.

Cracker Barrel carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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