CBRL - Needs to Reevaluate its Value Propositiion

CBRL posted June same-store sales results today of down 1.2% and based on current trends lowered its FY08 EPS guidance to $2.77-$2.87 (down from its prior range of $3.02-$3.12 per share). Additionally, the company is now guiding to 60 bps of operating margin contraction from FY07's reported 7.0%.
  • This increased margin pressure is most likely the driving force behind the company's decision to continue to increase its menu prices. Although the company maintains that its average check of $8.70 continues to offer great value in an environment that caters to the entire family, its declining traffic trends would indicate otherwise. CRBL, however, continues to increase its prices further (average check up 3.8% in June), leading to a 5% decline in traffic.
  • CBRL is obviously not alone in terms of weakened traffic trends as the casual dining sector overall has experienced negative traffic every month since February 2006, but CBRL's customers may be more sensitive to rising menu prices as 87% of the company's restaurants are located along interstate highways making the increase in gas prices more relevant to them.
  • SONC recently highlighted that its overly aggressive price increases caused a fall off in traffic, forcing the company to be more conservative with its pricing strategies going forward. We have not heard any such acknowledgement out of CBRL yet and in the meantime, traffic trends continue to fall. During CBRL's recent 3Q08 conference call, management defended its pricing strategy, saying, Our thinking on pricing continues to be geared toward providing a great value to our guest, while covering the dollar cost inflation pressures. We believe this strategy is working for us and although guest traffic declined 3.3% in the quarter, our traffic continues to run ahead of the industry as measured by the Knapp-Track index. I would just add that Knapp-Track is running negative as well.

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