After years of weathering COVID-related disruptions, labor shortages, inflation, and shifting consumer habits, Cracker Barrel (CBRL) is starting to turn a corner. While its recent Q4 and full-year 2024 results were lackluster, and the guidance remains cautious, the situation could have been far worse. There’s a growing expectation that improvements will gain traction in Fiscal 2025.
It might take some time for the market to establish a stronger foundation and sustain a rally, but lower prices seem unlikely, and the company’s dividend is a noteworthy factor. A growing expectation for a dividend cut was a significant driver of the stock’s price movement over the past two years, which was confirmed last quarter. However, with the dividend payment adjusted to reflect the current operational quality, the payout ratio is now a sustainable 30% of the 2025 outlook, yielding a 2.4% return for investors buying near current lows. While investors shouldn’t expect a dividend increase anytime soon, the focus is on sustainability.
Cracker Barrel boasts a fortress balance sheet that can sustain the current dividend payment while it invests in turnaround efforts. These include optimizing menus and pricing, remodeling locations, and enhancing customer experiences to boost revenue growth and widen profit margins.
Despite these positive signs, Cracker Barrel’s struggles aren’t over. Q4 revenue reached $894.4 million, reflecting a nearly 7% increase compared to the previous year. However, this growth is attributed to factors like an extra 53rd week in the year and higher realized prices. Adjusted for the additional week, revenue declined by 0.6%, and the 0.4% increase in same-store sales is entirely due to the 4.2% rise in average menu pricing. Retail sales, the higher-margin segment of the business, contracted by 4.2%, indicating potential weakness in Fiscal 2025. Revenue also fell short of consensus forecasts, but this was offset by the revision trend, which had anticipated a much worse performance.
The margin story is mixed, with the company’s costs rising across all levels on both a GAAP and adjusted basis. Nonetheless, the $0.98 in adjusted earnings is sufficient to sustain the company’s financial health while paying dividends, despite falling short of consensus expectations. Inflation is expected to slow to a low-single-digit pace in Fiscal 2025, continuing to pressure margins until traffic trends improve. The guidance is optimistic, aligning with consensus estimates despite the decline in consensus forecasts over the past year. The takeaway is that analysts had anticipated worse results, and revenue is expected to remain stable in 2025 compared to the past two years, with the possibility of outperformance on both the top and bottom lines.
The sell-side, including analysts and institutions, has indicated a floor for the stock’s price action. While analysts have reduced their price targets this year, the market has outpaced this trend and is currently trading at the lower end of the target range. Analysts rate the stock as “reduce” but see it trading with a low price of $42.00 and a consensus of $54.50, representing a potential gain of 27% when reached. One opportunity for investors lies in the potential for a revision trend as comparisons become easier and improvement efforts gain traction.
Institutions are buying Cracker Barrel. The broader institutional group has been buying on balance every quarter this year, with activity increasing in Q3. Institutional activity has also reached a multi-year high, aligning with bottoming action on the charts and including activist investor Sidar Biglari. Biglari is mounting a second attempt to take control of the restaurant chain and is vying for up to ten seats on the board. Biglari is the chairman and CEO of Biglari Holdings, a conglomerate focused on restaurant chains Steak-n-Shake and Western Sizzlin’.
Cracker Barrel’s shares have moved higher on the news but continue to face resistance. The bottom appears to be in place, and market sentiment is shifting, but a price reversal isn’t evident on the charts yet. The move has pushed the market above the 9- and 30-day EMAs, indicating a bullish crossover and providing a target for significant support that could lead to a reversal later this year. CBRL shares may retest that level soon, potentially providing a buying signal when they do. Short interest is also a factor, hovering near 12%. Short-sellers will continue to put pressure on the stock and provide ample fuel for a short-covering rally or short squeeze, so volatility is expected regardless of the stock price direction.
