CBRL - Cracker Barrel

[NBL0303]

I have followed Cracker Barrel due to Biglari's ownership of it - and it is not a particularly interesting company - and its valuation is not egregious in any direction. But given the filing I'll link to below, I think it is worth commenting on how poorly I think Cracker Barrel is doing. Sardar has sold about half of Biglari's Cracker Barrel stake - and if he keeps selling that will mean there will be 20% additional shares trading in a very short amount of time, at some point I think that will affect the trading in the company. But so far, his sales really haven't moved the price. But who really cares about the short term price action, the more interesting story is just that its core business is struggling, in my opinion, mightily. They have been able to cover over massive customer-traffic losses with years upon years of price increases. I think they have lost customer-traffic in something like 18 out of the last 21 quarters. So they continually are bleeding customers, but in every one of those quarters they are raising prices. So they are continually losing customers but charging those that remain higher prices to make up for the losses. This has allowed them to eek out roughly flat same-store sales. For any investors who follow the restaurant industry, they will have seen this pattern before. Many restaurants have followed this path and it usually leads to obsolesce. Restaurants feel like they are getting away with it because raising prices does not immediately drive away so many customers that it leads to negative SSS - but at some point they have a significantly worse value proposition and they usually haven't addressed any underlying issues and found ways to win customers back - and the weight of all of this usually puts them behind the eight-ball and it can be brutally difficult or impossible to get out from this graveyard spiral in a competitive restaurant industry. I've seen this pattern not infrequently - and I think the reason it is tempting is because in the early part of this cycle - it always feels like the price increases and not addressing the fundamental competitive proposition is working, that they are "getting away with it." And just like the frog being boiled, its too late before they know it.

 

Also, its retail business, roughly 22% of sales - is falling apart. It turns out, even Cracker Barrel's patrons are not buying knick-knacks in their store to the same extent as they were before the Amazon/internet shopping era. And who came blame them - in days of yore, if you were in Cracker Barrel waiting for a table, shopping in their store was an appealing diversion - but now you can shop with the rectangle in your pocket - while sitting in a rocking chair - or you can play Words with Friends with your enemies (or loved ones :) rather than shop in Cracker Barrel's retail store.

 

With all of that in mind, Cracker Barrel's competitive response was to first start a new restaurant chain - actually to start a new restaurant category. "Southern Biscuit House" restaurants - open for just breakfast and lunch. Its called Holler and Dash and has been around for three or four years and is failing completely. Cracker Barrel is close to pulling the plug completely on it.

 

https://holleranddash.com

 

With Holler & Dash - Cracker Barrel's Southern Biscuit House concept not taking off and saving the company, they are now buying an "experiential cuisine company" in Colorado. See the filing below, that was just filed.

 

https://www.sec.gov/Archives/edgar/data/1067294/000119312519199553/d769577dex991.htm

 

For all of these reasons, and some others, (including basic hedging), I am mildly short Cracker Barrel various ways (writing calls, buying puts, some spreads, and possibly shorting shares directly in some circumstances). Not that I think these competitive issues will catch up with Cracker Barrel in the short-run, the stock will probably be fine for a while, but at some point all of these things are going to catch up with them. Perhaps the main issue in the short run is that Biglari flooding the market with Cracker Barrel shares, the special dividend period passing, and the next inevitably bad quarter they announce with poor customer-traffic figures could alter the current market dynamic.

[Foreign Tuffett]

I largely agree with everything you wrote, but why short one of the few truly differentiated restaurant concepts?  There are many, many of people in the American South that continue to enjoy the rustic "meat and three" experience Cracker Barrel provides. My personal experience has been that the restaurants tend to be well run, with higher quality employees than comparably priced chains.

 

 

 

 

 

[DooDiligence]

I largely agree with everything you wrote, but why short one of the few truly differentiated restaurant concepts?  There are many, many of people in the American South that continue to enjoy the rustic "meat and three" experience Cracker Barrel provides. My personal experience has been that the restaurants tend to be well run, with higher quality employees than comparably priced chains.

 

I've looked at this & Ruths Chris for years & never gotten completely comfortable with either because, well, they're restaurants.

 

As an occasional visitor though, Cracker Barrel makes a great burger & onion rings & their breakfast plates are awesome.

 

The exit ramp location strategy presents a familiar stop to travelers & the menu is diverse enough without being Cheesecake Factory confusing.

 

I've never bought anything in the store but always take a browse around & can see how the product mix would appeal to impulse purchases.

 

Has this Bilgari guy tainted things or is the place really falling apart?

[OracleofCarolina]

Biglari is still trying to shake the board up at Cracker Barrel, found this tidbit in one of the filings. Interesting , as I had never heard of a "Section 355 swap transaction".

 

https://www.sec.gov/Archives/edgar/data/1067294/000092189520002436/prec14a07428021_09172020.htm

 

 

On March 4, 2019, Mr. Biglari had a conference call with Sandra Cochran, Cracker Barrel’s President and Chief Executive Officer, and Jill Golder, Senior Vice President and Chief Financial Officer of the Company. Although the conversation covered various topics, Mr. Biglari raised the prospects of Biglari exchanging shares of the Company for some of Cracker Barrel’s real estate locations in a tax-advantageous transaction for both parties (a “Section 355 swap transaction”). An exchange of real estate for shares would result in fewer shares outstanding for the Company. Mr. Biglari conveyed his view that Cracker Barrel could receive more value in the swap transaction because he believed that The Lion Fund II had a higher cost basis on its Cracker Barrel shares, whereas the Company could choose units with much lower cost basis on select real estate properties. The parties agreed to hold additional conversation regarding a potential Section 355 swap transactio

[OracleofCarolina]

https://www.sec.gov/Archives/edgar/data/1067294/000092189520002563/ex991dfan14a07428021_100820.pdf

 

Bigs still trying to get board representation .