Times have been tough because of the COVID-19 pandemic. Some industries have been affected far more than others. One industry hit incredibly hard as of late has been the restaurant space. Social distancing guidelines have pushed many restaurants to either change how they operate or to temporarily shutter. One firm hit awfully hard by this has been Cracker Barrel Old Country Store (CBRL). Fortunately, while times are still difficult for the niche restaurant play, recent data provided by management shows that the business is in a state of recovery. This is excellent news for shareholders, and even though they should anticipate this year to be more or less a wash for the enterprise, there’s no doubt that the company is well-positioned for the long haul.
A lot of pain
There’s no way to describe recent financial performance provided by Cracker Barrel without using the word ‘painful’ or something similar to it. Revenue in the third quarter of the business’s 2020 fiscal year, for instance, came in at only $432.54 million. This is down from $739.60 million the same time last year, which translates to a year-over-year decline of 41.5%. This drop in sales was driven by a number of factors. Comparable restaurant sales, for instance, were down 41.7%, while comparable retail sales were down 45.5%. This brought the average revenue generated per location $644,400 compared to the $1.12 million seen a year earlier.
To put in perspective just how awful this picture is, consider management’s prior guidance for the current fiscal year. On March 18th, management suspended guidance for its 2020 fiscal year in light of the COVID-19 pandemic. That guidance is still suspended. But prior to that point, the company expected for its restaurant comparable store sales to grow by between 2% and 2.5% for the current fiscal year. Retail comparable store sales, meanwhile, were expected to remain approximately flat. For the first three quarters of 2020, restaurant comps are own 11.8%, while retail comps are down 12.7%, so it’s safe to assume that the business should comfortably miss its mark this year.
As sales plummeted, so too did profits. In the latest quarter, the company generated a net loss of $161.93 million. This compared to a gain of $50.41 million in last year’s third quarter. This implies a change from $2.09 to -$6.81 on a per-share basis in the span of just one year. This truly is awful. If there is any sort of consolation, it’s that Cracker Barrel did at least see positive cash flow in the first three quarters this year. According to management, this figure came in at $87.23 million. This is far worse than the $252.59 million. Having said that, even just for the quarter the picture was far worse. In the third quarter, the restaurant’s operating cash flow was -$96.77 million. In the third quarter last year, it was $61.72 million. That’s a year-over-year difference of $158.50 million.
The picture is getting better
If these figures were all there were, I would caution investors to be worried about Cracker Barrel and its prospects moving forward. Fortunately, things aren’t as bad as this data makes it appear. Perhaps more appropriately, things are bad but the firm is built to last and the picture is starting to show real signs of improvement. Consider, first, the firm’s decisions in recent months aimed at coping with the crisis. In addition to focusing on cost-cutting, the business made the decision to pump up its cash reserves. As of the end of its latest quarter, Cracker Barrel’s cash and cash equivalents totaled $363.33 million. This compares to just $167.59 million the firm had on hand a year earlier.
This has, sadly, come at a cost. You see, one great thing about Cracker Barrel has been that the business has remained a low-leverage prospect for investors. Management has done well in recent years to mostly grow within cash flow. That’s why, this time last year, the company had just $400 million in gross debt and $232.42 million in net debt on its books. In order to deal with the crisis, management decided to air on the side of caution and tapped some of its debt capacity.
By the end of the third quarter this year, the firm’s debt had grown to $940 million. This was up from $460 million one quarter earlier. Because of its large cash position, net debt rose at a slower pace, standing at $576.67 million. This is still not bad considering the company’s historic cash flow record. Despite this modest worsening in its leverage situation, management made the decision to pay out assistance to its hourly store employees totaling $17 million. As a note before I go on, management did disclose that subsequent to the latest quarter, the firm had tapped a further $40 million worth of debt, bringing total gross debt up to $980 million.
In addition to battening down the hatches and pumping up its cash reserves, Cracker Barrel had some positive news to share with its investors. The environment for the firm does appear to be improving rather considerably. This can be seen by looking at the image above. In it, you can see that in the week ending May 1st, restaurant comps were down 79% year-over-year. Retail comps, meanwhile, were down 83%. Each week since then, through the week ending May 29th, this picture changed and rather rapidly at that. By the last week recorded, restaurant comps were down just 45%, while retail comps were down 38%.
The big thing that helped improve these numbers was the number of stores the company had open for dine-in service. Over the timeframe covered, the number went from 0 of its 692 stores to 434. This covers stores for the ‘full fiscal period’ covered. The total number of stores open as of the May 29th date totaled 505 and management anticipates that by the end of June all of its stores will be open again. The firm also provided another interesting tidbit of knowledge. They stated that stores with dine-in service available (as of May 29th) had comparable sales declines of just 32% for that week in question. This compared to declines of 76% for those that still offer off-premise dining options only.
Based on the data provided, it looks pretty clear to me that Cracker Barrel has had some pain along the way. More likely than not, some of this pain will flow into its fourth quarter as well, but that doesn’t mean investors should despair. The picture is clearly improving and at a rather rapid pace. Add in that shares look pretty cheap, and it’s hard to say no to the firm. After seeing units plummet from a 52-week high of $180.93 to just $53.61, the firm’s stock rebounded to $107.03. It’s still down 40.8% from its 52-week high, but consider what will happen once the business returns to full health. Yes, the debt picture could change things some, but its market value today of $2.57 billion would work out to a price/operating cash flow multiple of just 7.1 once operating cash flow returns to 2019’s levels. That’s quite a bargain for a healthy firm like Cracker Barrel.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.