Hungry People Are Driving Right Past Cracker Barrel. What's Next for the Business?

Cracker Barrel (NASDAQ: CBRL) has a customer traffic problem. The restaurant chain recently posted a significant sales volume slump in the fiscal fourth quarter, which pushed revenue lower for the period. The decline caught management by surprise and contributed to a weak operating outlook for the new fiscal year, with Cracker Barrel projecting revenue at existing locations to be roughly flat in 2019.

CEO Sandra Cochran and her executive team said in a conference call with analysts that they've spent the last few months poring over sales and survey data to get a better understanding of the traffic downturn. The good news is this process yielded key insights into the chain's challenges.

The bad news is that the problems touch on several aspects of the operations and will likely take more than just a few quarters to resolve. The recovery plan also threatens to lower Cracker Barrel's earnings power at least through the upcoming fiscal year.

Understanding the problem

Cracker Barrel found several factors behind its declining relevance among its customer base. Its recent additions to the Campfire menu flopped, for one, and that problem was compounded by a marketing strategy that didn't make the chain stand out in the competitive dining out market.

The company also found evidence of lower guest satisfaction during meals, suggesting shortfalls in delivering a positive dining experience at good values. Finally, higher gas prices hurt the business in two ways: by reducing guests' discretionary income and by lowering driver traffic around its locations.

The rebound plan

Management can't do much to change national driving trends, but it does have a detailed plan in place to address its other challenges. That strategy starts with improved food quality and value, including a new bone-in fried chicken offering that executives think will resonate with its customers.

Once those more desirable menu items are in place, Cracker Barrel aims to do a better job at communicating their competitive pricing. The chain is taking a hard look at its employee training and payment policies, too, with an eye toward raising service and hospitality levels.

All together, these changes should result in higher guest satisfaction in the quarters to come and investors can expect consistent updates on this metric.

Paying for the rebound

Each of these initiatives involves extra costs. The fried chicken platform, for example, will require the addition of new kitchen equipment. Wages are likely to rise, too, along with marketing spending.

The changes should combine to push operating profit margin down for the second straight year, down to 9.3% of sales from 9.7% in fiscal 2017 and 10.7% the prior year. Management also downgraded their longer-term outlook on cost cuts and earnings to reflect the new spending priorities.

Its understandable that investors sold the stock lower in response to this news. After all, Cracker Barrel's rising expenses are concrete, predictable, and will have an immediate impact on earnings. The projected boost that they'll have on sales trends, on the other hand, is unclear. And, given management's forecast for revenue gains of between 0% and 1% over the next 12 months, it's likely that investors won't have a good picture of the recovery effort for several more quarters.

In my view, that's a good reason to hold off on buying Cracker Barrel shares following its latest stock price slump, at least until management can show progress at improving metrics like customer satisfaction and sales growth.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.