Menu Innovation, Loyalty Program And Digital Growth Will Boost Revenues And Strengthen Net Margins

Key Takeaways

• Menu innovation, strategic pricing, and operational efficiencies are enhancing revenue, net margins, and profitability through increased check sizes and reduced costs.
  
• Loyalty programs, store remodeling, and off-premise initiatives are driving customer engagement, sales growth, and market share, supporting long-term earnings growth.
  
• Cracker Barrel faces risks from declining retail sales, increased expenses, and inflation pressures, potentially impacting profitability and growth amid a challenging consumer spending environment.

Catalysts

Develops and operates the Cracker Barrel Old Country Store concept in the United States.

• Cracker Barrel's focus on driving dinner traffic through menu innovation and strategic pricing seems to be improving revenue from increased customer check sizes and attracting more dinner guests, which is a higher-margin meal period. This should positively impact both revenue and net margins.
  
• The loyalty program, boasting over 6 million members, is enhancing customer engagement and spending, creating potential for increased repeat sales and average checks. This could lead to growth in revenues and improved earnings over time.
  
• The remodeling and refresh initiatives for stores, which have shown early success in enhancing sales and traffic, are expected to inform a larger renovation rollout, possibly boosting location appeal and sales. This initiative is likely to drive revenues and improve the return on investment, positively impacting earnings.
  
• Improvements in operational efficiencies, including menu optimization and back-of-house process enhancements, aim to reduce labor costs and food waste, which may lead to better net margins and enhanced profitability over the long term.
  
• Digital growth and the off-premise initiatives, including improved marketing strategies and enhanced guest experiences, are designed to expand Cracker Barrel's market share and drive higher traffic both in-store and for takeout orders. This strategy is likely to boost revenues and strengthen Cracker Barrel's market position, which could support earnings growth.

Cracker Barrel Old Country Store Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cracker Barrel Old Country Store's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 2.6% in 3 years time.
• Analysts expect earnings to reach $90.7 million (and earnings per share of $3.51) by about January 2028, up from $40.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, down from 31.1x today. This future PE is lower than the current PE for the US Hospitality industry at 22.4x.
• Analysts expect the number of shares outstanding to grow by 5.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.69%, as per the Simply Wall St company report.

Cracker Barrel Old Country Store Future Earnings Per Share Growth

Risks

• Declining retail sales and challenges in the broader retail industry could negatively impact Cracker Barrel's revenue and profit margins, particularly given retail's role as a brand differentiator.
  
• Expected elevated G&A expenses related to strategic transformations and other atypical costs could pressure net margins in fiscal 2025, impacting near-term profitability.
  
• Commodity inflation, particularly in dairy, beef, and pork, combined with potential increases in interest expenses due to refinancing, could adversely affect operating expenses, thereby reducing earnings.
  
• Dependence on achieving successful remodels and the efficacy of transformation initiatives in delivering anticipated profitable growth presents risk; unsuccessful outcomes could weigh on net margins and future earnings.
  
• The consumer discretionary spending environment remains challenging, particularly affecting the retail segment and certain dining occasions, which could pose risks to sustaining traffic growth and overall company revenues.

Valuation

• The analysts have a consensus price target of $51.71 for Cracker Barrel Old Country Store based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $36.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $90.7 million, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 8.7%.
• Given the current share price of $56.26, the analyst's price target of $51.71 is 8.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.