CRACKER BARREL OLD CTRY STOR CBRL S
December 04, 2018 - 9:01pm EST by
ci230
2018 2019
Price: 177.49 EPS 9.09 9.51
Shares Out. (in M): 24 P/E 19.52 18.66
Market Cap (in $M): 4,266 P/FCF 0 0
Net Debt (in $M): 300 EBIT 0 0
TEV ($): 4,566 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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  • In Biglari We Trust

Description

This is a timely recommendation to short shares of CBRL as the company's largest shareholder, Sardar Biglari (a highly reputable investor held in high esteem by many*) has begun offloading some of his massive 20% stake in the company, and signalled his view as to the fair value of the stock.  We believe the company is significantly overvalued and will face headwinds in 2019, but this offers an immediate catalyst for the stock's return to normal valuation ranges.

The company has been written up three times on VIC, and many investors are familiar with Biglari via BH (Biglari Holdings) and his ownership of the highly acclaimed newsmagazine, Maxim.  Previous write-ups are below:

https://valueinvestorsclub.com/idea/Cracker_Barrel/1122275625 2008 short
https://valueinvestorsclub.com/idea/Cracker_Barrel_Group/3479030507 2004 long 
https://valueinvestorsclub.com/idea/Cracker_Barrel/8350173493 2000 long

Biglari Ownership

Biglari owns his stake in CBRL through a fund called The Lion Fund.  He acquired 4,737,794 shares in CBRL (19.8% interest) between May 2011 and December 2012, for approximately $241 MM, or $50.87 and has received about $39.17 in dividends-- a home run investment.  Along the way, Sardar was keen to note in annual reports that he has never sold a single share of CBRL.  Meanwhile, he and the board have had an acrimonious relationship, and more recently the company hasn't heard from him in "a few years".

Indeed, Biglari's purchase history for CBRL shows only purchases through December 2012, and then nothing.  Until today.

On December 4th, 2018 Biglari filed the following Form 13D/A:

https://www.sec.gov/Archives/edgar/data/1067294/000092189518003197/sc13da3407428021_12042018.htm

In the form, Biglari discloses the sale of 243,718 shares at approximately $180.  Additionally, Biglari SOLD SHORT call options underlying another 276,000 shares, at a strike of $210 and expiring in June 2019.  

Why is Sardar selling?

Well, most clearly, the stock had run up >30% from its September lows, and trades at 20x next year's earnings, for a casual diner with anemic SSS and unit growth, that probably has hit peak margins and should see significant slowdown in earnings growth, and face multiple compression going forward.

Additionally, look at BH stock.  The Lion Fund at year end 2017 had a $752 MM stake in CBRL and a $282 MM stake in BH, versus only $860 MM in partners capital, with the balance funded by $200 MM borrowed against 3.6 MM of the CBRL shares.  As BH's shares have fallen, The Lion Fund may be seeing pressure, and may need to raise cash.  We do not follow BH, and know there was a (potentially self-dealing?) transaction in April at issue here, so would love to hear experts' views on what is happening.

Regardless, Sardar has tipped his hand about the valuation of the company, and given his ownership of approximately 16 days trading volume, this could be a continued headwind for the stock.

Valuation

CBRL's recent stock move has been driven largely by the significant drop in oil (their on-highway locations are seen as a beneficiary of increased highway travel), a short squeeze given the significant number of shares shorted, and some slightly less bad results. 

But compare CBRL to its peers:

  SSS T4Q EPS gr FCF Yield P/E EV/EBITDA
CBRL 1.1% 5.0%   2.1% 18.7x 11.1x
TXRH 5.3% 16.0%   2.8% 25.5x 13.5x
DRI 2.7% 11.0%   3.9% 17.2x 11.1x
BJRI 4.6% 6.0%    6.1% 21.8x 9.0x
DIN 4.5% 20.0%   7.1% 12.8x 10.9x
BLMN 4.4% 7.0%   8.0% 12.7x 7.0x
EAT -0.1% 8.0%   8.6% 12.6x 8.3x
CAKE 1.1% 8.0%   8.8% 17.5x 8.6x

 

This list is ordered by FCF yield.  As you can see, CBRL is the most expensive casual diner, yet it has the second lowest Same Store Sales, and the absolute lowest predicted EPS growth.  It stands in sharp contrast to "best in class" operators like TXRH or DRI, who trade at premiums for a reason.

CBRL's challenge is that they're not growing units and they're not getting Same Store Sales growth.  In fact, last quarter, restaurant traffic was still down -1.6%, although it was an improvement from the prior quarter's -3.5%.  Absent sales growth, the company needs to contend with higher labor costs that are crimping the entire restaurant industry, plus invest in remodels and delivery.

Catalyst

We believe valuation is the thesis here, as CBRL's stock price has gotten significantly disconnected from its fundamentals.  However, it's often dangerous to short a stock solely because of its valuation.  Here, we have the catalyst of Biglari's first ever sales of CBRL stock, and potential for future sales to depress the stock price.  If you do pair trades, being long BLMN, CAKE, or EAT could be interesting offsets.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Biglari's sales get more attention, or they accelerate.  2019 earnings disappoint.  Analysts rebase valuation frameworks.

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