Revamping And Digital Initiatives Poised To Elevate Guest Experience And Profitability

Key Takeaways

• Menu optimizations and strategic pricing are set to increase revenue through larger average checks while preserving a strong value image.
  
• Renewed store designs and operational efficiencies aim to enhance guest experience and net margins through increased traffic and cost savings.
  
• Strategic shifts and investments may pose risks to customer experience, net margins, and earnings, with potential long-term benefits if executed properly.

Catalysts

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

• Implementation of optimized pricing strategy and menu refinements will likely lead to improved revenue from increased average check sizes and maintained strong value perception among guests.
  
• Expansion and effectiveness of the loyalty program are anticipated to drive higher guest frequency and ticket size, impacting revenue positively.
  
• Enhancements in the menu and the introduction of new offerings are expected to attract more guests, leading to increased sales and profitability.
  
• Strategic investments in remodeling stores and refreshing store designs aim to improve the guest experience, potentially boosting traffic and sales.
  
• Efficiency improvements in back-of-house operations and labor model optimization are expected to lead to significant cost savings and improved net margins.

Assumptions

• Analysts are assuming Cracker Barrel Old Country Store's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 2.7% in 3 years time.
• Analysts expect earnings to reach $95.7 million (and earnings per share of $3.37) by about September 2027, up from $40.9 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 12.2x on those 2027 earnings, down from 25.1x today. This future PE is lower than the current PE for the US Hospitality industry at 23.5x.
• Analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.41%, as per the Simply Wall St company report.

Risks

• The strategic transformation and remodel program, while promising, pose execution risk and may temporarily distract from day-to-day operations, potentially affecting customer experience and revenue.
  
• Implementing an optimized pricing strategy could impact customer perception of value and deter price-sensitive customers, potentially reducing traffic and revenue.
  
• Investments in strategic initiatives, including the remodeling program and IT initiatives, are expected to result in elevated expenses, which may impact net margins in the short term.
  
• The focus on enhancing the menu and adding higher priced items, despite being part of a barbell pricing strategy, risks alienating traditional customer base if not perceived as value for money, possibly affecting revenue.
  
• The push towards digital and off-premise sales channels, while necessary for long-term growth, could face operational challenges and require significant investment before realizing measurable returns, affecting earnings.

Valuation

• The analysts have a consensus price target of $41.57 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 $45.0, 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 2027, revenues will be $3.5 billion, earnings will come to $95.7 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 8.4%.
• Given the current share price of $46.35, the analyst's price target of $41.57 is 11.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.