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"The definition of insanity is doing the same thing over and over and expecting a different result.”

-Albert Einstein

Year-to-date, CBRL has underperformed the S&P 500 by 21% and is now trading at 6.2x EV/EBITDA.  Value or value trap?  I think the latter.  I really think CBRL’s management is unwilling to face reality.  I listened to CBRL management team speak at the Goldman conference and I could almost not believe what I was hearing.  I’m convicened this concept is in a secular decline and the only way out will be very painful for shareholders.  Although anything’s possible; Trian might take another run at the company! 

The first step in a 12 step recovery program is admitting you have a problem and I don’t hear that from management.  The Cracker Barrel concept has a traffic problem - the concept is constantly trying to replace lost customers.  This point is made clear in the chart below.  No matter how many times they change the menu or increase the marketing dollars to bring in new consumers, the concept loses customers every quarter.  One of the biggest issues is that the company is consistently raises prices in an attempt to protect margins and driving the core customer away in the process.  The core Cracker Barrel customer skews older with little disposable income and has suffered from the economic malaise of the past few years.

Management is clearly in a state of denial, maintaining that changes are not needed to the core business model.  Really?  At the conference, management stated that one important fact about the company’s “growth and store model is that the concept has been around since 1969 and closed, in that entire period, fewer than 20 stores.”  A very impressive statistic indeed!  But they feel that because they are overwhelmingly located on the interstate system, where the trade areas don't change, they don’t need to face or deal with changing demographics as much as the concepts that are not on the interstate.

Specifically, I found management’s commentary on the need to invest capital and refresh stores particularly disconcerting.  Distinct from casual dining peers, management stated, “we have a very powerful brand that stood the test of time. We have timeless appeal, which is more than just a sentiment. It means that our business model does not require update capital.”   This is highly confusing to me.  A customer that feels like they are in a store from 1969 is going to have a very different experience than a customer that feels like they are in a store that has not been renovated since 1969.

CBRL – THE BRIDGE TO NOWHERE - CBRL 68

Howard Penney

Managing Director