Monday, February 20, 2006

CBRL Group
Ticker: CBRL
Mkt Cap: 2.06 billion
Price: $44.23
Enterprise Value: $2.284 billion
Dvd Yield: 1.8 %
Total Restaurants: 661
Owned Restaurants: 447 (includes property)

As I noted a few months back, one area we’ve started to research is retail, or in this case restaurants, that actually own their locations. These days, many lease their stores. In light of the recent Sears-Kmart deal, which was largely real-estate focused, and similar chatter about Toys R Us and even McDonald’s, we’ve got our eyes open for similar situations, albeit on a much smaller, “Cheap Stocks” kind of scale. Our first report on the subject featured Bob Evans Farms. This report focuses on CBRL Group, well-known for its Cracker Barrel Old Country Store Restaurants.

You’ve probably heard of Cracker Barrel, maybe even eaten there a time or two, a casual dining chain and country store that owns and operates 534 Cracker Barrel Restaurants in 40 states, and 127 Logan’s Roadhouse restaurants in 16 states. And like Bob Evans, Cracker Barrel owns many—447 as of September 2005—of its location. Those that I’ve seen have been in very desirable locations as far as commercial real estate is concerned.

Better Late Than Never?
I know this will sound cliché, and hopefully readers know that honesty is important to us here at Cheap Stocks, but when we started this research, CBRL was trading in the $35 range. It gapped up sharply in January a report that suggested the company was stepping up efforts to maximize shareholder value. And yes, I was disappointed. My plan was to perhaps swap out of McDonald’s and into CBRL, or even hang onto MCD, and increase exposure to the restaurant sector, but I was too “late”. Irrational as it may seem, $45 CBRL just is not appealing as $35 CBRL. Anyway……

I’ve been to several Cracker Barrels in 3 or 4 different states. Every meal that I’ve ever had there has been excellent. It’s about as close as you can come to real country food from a chain restaurant. Part of the chains appeal is in the country store associated with each location. They sell a variety of goods, from old fashioned candy, to rocking chairs, to collectibles and some clothing items. I must admit, the stores are fun to wander through, but can’t imagine buying much of anything there (except for candy).

I’ve never been to a Cracker Barrel that was not packed with people, and there are often people waiting to be seated. This undoubtedly gives them the opportunity to shop in the Cracker Barrel store. While information on profitability of the retail side is not available, we do know that in 2005, it represented $494 million, or nearly 25 percent of total sales of $2.565 billion. Evidently, someone is buying merchandise, to the tune of an average $925,000 per store/per year, or $2500 per day.

What we don’t have a good feel for is how profitable the retail segment is., but according to a 1/25/06 research report from JP Morgan analyst Steven Rees, comparable same store sales for retail were down 10 of 12 months in 2005, and are projected negative for the first five months of 2006 ( as far out as projections went). Rees claims that despite the negative same store retail sales data, margins have actually improved due to better inventory management, higher markups, and a new sourcing partner.

Still, we wonder whether Cracker Barrel would be better served by reducing the space allotted to retail, in favor of a larger dining area, or perhaps doing away with retail altogether. While we understand the country store motif is part of the brand recognition, we at least have to raise the issue.

The Real Estate

Of course one of the reasons we are interested in CBRL is because of the company owned real estate. As of September, the company owned 384 Cracker Barrels and 63 Logan’s. Now, we don’t claim to know where each owned restaurant property is located, but do have a sense that they are typically in prime commercial real estate locations, in close proximity to major highways. With a current enterprise value of around $2.3 billion, EV/owned restaurant is about $5 million. We are certainly not suggesting that each owned location is worth $5 million. In fact, Rees puts forth a hypothetical analysis which values a spin-off of Logan’s at $385 million, and a land value of $1 million per owned CBRL location ($384 million). We don’t know if a Logan’s spin-off is in the works, CBRL acquired the company in 1999.

CBRL has pretty sound fundamentals. The company has cut back on expansion, so cap ex is falling, and the company generates a nice amount of cashflow. 2005 sales grew 7.8 percent to $2.568 billion in 2005, from $2.381 billion in 2004. Net income grew 13 percent from $111.9 million to $126.6 million. Cash from operations jumped 40 percent in 2005 from $200 billion to $280 billion. Free cash flow (Our definition is Cash from operations minus cap ex- dividends) jumped from $40 million in 2004 to $86 million in 2005. Net profit margin was 4.9 percent in 2005, up from 2004s 4.7 percent. While CBRL’s profit margins are not all that impressive compared to some others in the restaurant segment, they certainly aren’t bad either. We wonder whether the retail segment is a drag on these margins?


A great dining concept, good food, real assets, nice cashflow. We like this company, but don’t currently own it. The recent 20+ percent run-up has us on the sidelines, for now.
Still, we wonder, would the company be better off if it were out of the retail business?

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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