Cracker Barrel - Case study PDF

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1. According to me, Cracker Barrel has been performing well overtime. The Even though the Net Income went down in 2008, it has been able to steadily increase it in the recent year. However, the most notable thing is they were able to increase the revenue y-o-y even during the recession, which shows the potential. The operating income has also been restored to the pre-recession levels which is also a good sign for the company. It will have to make sure to take measures to convert this increase in revenue to the net income of the business. The total assets have also been increasing mainly due to increase in capital expenditure on the expansion of new restaurants. I believe overall Cracker Barrel is performing better over the years.

2. I agree to some aspects of Biglari’s critique of the company’s performance, specifically the point of reduction in the customer traffic in the existing stores. I believe that in focusing to expand the number of restaurants the management has neglected the foot traffic of the existing restaurants, majorly missing out on the earning opportunity and increase in revenue. It needs to evaluate whether the further expansion needs to be halted and the resources should be redirected towards increasing the customer traffic in the existing restaurants. As I believe that if this is not addressed properly, it would eventually lead to the non-performance of many existing restaurants and negating the benefits of new restaurants. I also agree to the critic of having separate financials for both the restaurant and the retail business, as this would help the shareholders evaluate whether the retail business is performing well. The combined financials would result in the non-transparency. It would also help evaluate whether the retail business is eating up any of the revenues generated by the restaurant business due to any losses.

3. No, I do not agree with Biglari’s selection of the peer companies i.e. the S&P 500 Restaurant Index, because as mentioned in the management’s response, it consists of 5 large cap companies namely, McDonald’s, Starbucks, YUM! Brands, Chipotle and Darden. Apart from the fact that these companies are large cap companies and do not compare in size with Cracker Barrel, I also believe that these companies are in a different subsection of the restaurant business. The abovementioned companies are mainly fast-food chains which has major revenues influx from carryout and delivery rather than dining in. These companies also have huge presence in the international markets. Cracker Barrel on the other hand has most of its revenue generated by the in-store dining experience which are all in the US and hence I believe that comparing it with the other fast-food businesses is misleading and uneventful. I would rather take the managements suggestion and compare it with the S&P 600 Restaurant Index, which consists of small-cap businesses primarily focused in the US market. As this index could be a good comparable for the Cracker Barrels business. And as per the analysis, I believe Cracker Barrel is outperforming them which is a good sign for the company.

4. While comparing Cracker Barrel to the companies I have selected, I believe it is performing in line with the other companies. Sometimes even exceeding in certain criteria. It has a ROE of 44.4% which exceeds both the average as well as individual numbers of the comparable companies. It is also in line with the 3, 5, & 7-year return of the comparable companies.

However, it is below the 1, 3 & 5-year growth estimates. The gross, SG&A, EBITDA, EBIT and Net income margins are also as per the companies I have selected. Using the Multiple approach, I was able to value Cracker Barrel at approximately $1100 million.

5. As discussed above, If I were to be appointed as the CEO’s advisor, I would suggest the below changes to the current strategies of the company: a) Halting the capital expenditures made towards the expansion of number of new restaurants until an analysis into the reduction in customer traffic in the existing stores are made. b) Pertaining to the findings of these report, I would suggest the CEO to take appropriate actions in order to improve the customer traffic in the restaurants which has seen a reduction by developing new promotional and advertising strategies. c) I would also suggest the change in the compensation plan for the board and executives by changing the operating income value from $94 million to a more recent, realistic and achievable target of around $175 million for the future fiscal years, which would boost the confidence of the shareholders as well as motivate the members to work in the direction of growth for the company. d) I would also suggest the bifurcation of the financial statements between the restaurant and the retail business which would lead to increase transparency towards the shareholders of the company. It would also enable the management to analyze the revenue generated from these operations and help determine the future steps. e) Depending on what the reports concludes, I would suggest the CEO to phase out the retail business in certain locations which have not been performing well and eating into the profits of the restaurant operations and increasing the costs overall. f) I would also suggest swaying away from the company’s policy of owning the locations and would encourage the option to lease or rent the property, which would significantly decrease the cost and add to the Net income of the business. g) Finally, I would suggest the CEO to explore new opportunities in the market outside US which shows a very promising prospect in the sense of future growth for the company.

6. If the suggestions given above are implemented, I estimate that the operating profit can be increased by $8 million bringing the new operating profit to $175 million and valuing the company at approximately $1150 million.

7. I would have voted against Bilgari’s proxy proposal, as I believe that Bilgari has a conflict of interest due to his holdings in Steak n Shake which is a competitor for Cracker Barrel’s business and it would lead to some major issues in the future, if he was offered a seat at the board. I also believe that Biglari has some alternative motive behind his shake down of the Cracker Barrel board apart from the improvement of Cracker Barrel’s business and benefit of the shareholders. I believe this by looking at the track record he has set so far in hostile takeovers in the past. I believe even if the issues raised by him are valid and the plan he has put forth is good, I still wouldn’t risk the company getting hostilely taken over by a competitor....