Cracker Barrel Old Country Store, Inc. CBRL is likely to benefit from off-premise business, technological enhancements and sales-building efforts. Also, the emphasis on the Breakfast menu bodes well. However, inflationary pressures and supply chain challenges pose concerns.
Let us discuss the factors that highlight why investors should retain the stock for now.
Growth Catalysts
Cracker Barrel continues to benefit from its robust off-premise sales. During the fiscal second quarter, comparable store off-premise sales remained elevated from 2019 levels. Also, it contributed 23% of the quarterly restaurant sales. The company stated to have benefited from its catering business and third-party delivery.
The company expects to retain at least 60% of the growth through emphasis on order-fulfillment improvements and to expand guest engagement (through its digital platform). To support this, the company continues to enhance its curbside pickup process, improving the integration between off-premise applications and processes (with back-of-house technology) and streamlining processes. The company expects to attract new customers and drive sustained growth in its off-premise business through its virtual brand, Chicken and Biscuits.
To address the challenges of the competitive restaurant industry, Cracker Barrel undertakes extensive marketing efforts, focusing on the brand’s differentiation, menu offering and value. To drive traffic, Cracker Barrel relies heavily on seasonal promotions and limited-time offers to boost its top-line performance, as they are appealing to both regular users and less-frequent guests. During the second quarter of fiscal 2023, the company reported improved guest visitation from older age (65 and more) groups. The company stated gains on account of its culinary and marketing initiatives. Also, it stated benefits from its seasonal culinary promotions, including Country Fried Turkey and Cinnamon Roll Pie. The company emphasizes on seasonal assortments (concerning the Easter occasion) to drive growth.
The company focuses on the Breakfast menu to drive incremental sales. To this end, the company initiated a two-phase rollout process that involves streamlining breakfast offerings, guest customization and a better value proposition. During the second quarter of fiscal 2023, the company stated solid feedback regarding its breakfast category, including Homestyle Chicken and French Toast. Also, it reported increased sales from Barrel Bites and beverages. The company is focused on its culinary pipeline that comprises offerings designed to fill existing menu gaps, reduce complexity and improve consistency of execution during weekend periods.
Concerns
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Shares of Cracker Barrel have declined 7.8% in the past year against the industry’s 9.8% growth. The downside was mainly caused by commodity and wage inflation, supply chain challenges and a challenging macro environment. Although the company reopened most of its restaurants, traffic is still low compared with pre-pandemic levels. The company intends to monitor the situation regularly to gauge the impacts of COVID-19.
The company is persistently shouldering higher expenses, which have been detrimental to margins. During the fiscal second quarter, the total cost of goods sold (as a percentage of total revenues) came in at 35% compared with 32.9% reported in the prior-year quarter. The increase was primarily driven by commodity inflation, higher freight costs and a shift to higher-cost menu items. During the quarter, the adjusted operating margin was 4.5% compared with 5.8% in the prior-year quarter.
The company anticipates inflation and lower consumer confidence to act as a headwind. In fiscal 2023, the company anticipates commodity inflation to be 8.5-9% (with continued inflationary pressures in categories such as produce, eggs, dairy, and grains) and wage inflation of 6.5%.
Zacks Rank & Key Picks
Cracker Barrel currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the Zacks Retail – Restaurants industry are Chuy's Holdings, Inc. CHUY, Arcos Dorados Holdings Inc. ARCO and Brinker International, Inc. EAT.
Chuy’s Holdings currently sports a Zacks Rank #1. CHUY has a trailing four-quarter earnings surprise of 19.1%, on average. Shares of CHUY have increased 26.4% in the past year.
The Zacks Consensus Estimate for Chuy’s Holdings 2023 sales and EPS suggests growth of 10.8% and 16.1%, respectively, from the corresponding year-ago period’s levels.
Arcos Dorados carries a Zacks Rank #2 (Buy). ARCO has a long-term earnings growth of 11.6%. Shares of the company have increased 9.8% in the past year.
The Zacks Consensus Estimate for Arcos Dorados’ 2023 sales and EPS suggests growth of 8.1% and 4.2%, respectively, from the year-ago period’s levels.
Brinker carries a Zacks Rank #2. EAT has a long-term earnings growth rate of 7.1%. The stock has gained 8.4% in the past year.
The Zacks Consensus Estimate for Brinker’s 2024 sales and EPS suggests growth of 3.9% and 36.5%, respectively, from the year-ago period’s reported levels.
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