Fiscal 2010 was a really strong year for Cracker Barrel.  The company achieved positive restaurant same-store sales growth with two-year average trends improving each quarter.  Retail comparable sales improved to -0.5% from -5.9% in the prior year.  Operating margin grew about 80 bps YOY, helping to drive 25% EPS growth.  The year ended strongly with CBRL positing positive restaurant and retail comparable sales growth during the fourth quarter and a nearly 50 bp improvement in operating margin.  And, restaurant traffic turned positive during the fourth quarter for the first time since fiscal 1Q07.


To that end, Cracker Barrel started fiscal 2011 from a position of strength.  I think FY11 will be another good year, but it will not be a repeat of FY10.  Instead, I would expect the company’s rate of growth to slow in FY11, largely as a result of commodity costs, which are expected to work against the company during the year.  Management guided to a 1.5% to 2.5% increase in its FY11 commodity costs and currently has 61% of its costs locked for the year.  Commodity cost favorability should continue into the first quarter and then reverse during fiscal 2Q11 with management saying that the YOY commodity cost increase should peak during the second quarter and remain higher YOY for the balance of the year.  Specifically, the company highlighted its expectation for higher dairy and pork costs during the year.


Helping to offset these higher commodity costs are the expected lower labor costs through most of 1H11 until the company laps its lower healthcare benefit costs from a program it implemented in January 2010.  Management also expects to benefit from initiatives that should lead to improving productivity and labor competencies, lower incentive payments at both the store level and in the G&A line, improvements on the utilities expense line and from lapping some one-time expense items that hit the maintenance line in FY10 that are not expected to repeat in FY11.  Increased leverage from improving comparable sales should also benefit margins in FY11, but just how unfavorably commodity costs swing during the year is the biggest unknown for now.


Most of management’s fiscal 2011 guidance seems achievable; though the +2% to +4% retail comparable sales growth implies a sharp improvement in two-year average trends and could prove to be a stretch.  Outside of that, the company’s outlook appears within reach.  I would expect the company’s restaurant same-store sales momentum to continue.  I am currently modeling 10% EPS growth and a 30 bp improvement in FY11 operating margin, all within management’s guided ranges.  Again, this implies a slowdown from the 25% EPS growth and 80 bps of margin improvement in FY10.  Fiscal 1Q11 should continue to be strong as the company benefits from another quarter of favorable commodity costs, but operating margin should decline during the second quarter.


CBRL – FY10 WILL BE HARD TO MATCH - cbrl sigma png


Howard Penney

Managing Director

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