Cracker Barrel's fork in the road

Cracker Barrel's fork in the road

Activist investor, chief executive butt heads on chain's future

Sparring has intensified between Cracker Barrel Old Country Store Inc. and activist investor Sardar Biglari, just ahead of the family-dining company’s Dec. 20 shareholders meeting, which will reveal whether Biglari gains a board seat and continues to push for change.

The outcome of the proxy contest could dictate the future for Cracker Barrel, as Biglari is known to garner total control over his investments. He sought, and received, control over Steak ‘n Shake, which he then folded into Biglari Holdings Inc. after merging the burger-and-shake chain with Western Sizzlin. Biglari also was involved with massive corporate changes at Friendly Ice Cream Corp. when he unsuccessfully tried to win control of that brand, well ahead of its recent bankruptcy filing.

In separate letters to shareholders, both Biglari, chief executive of San Antonio-based Biglari Holdings, and Sandra B. Cochran, Cracker Barrel’s president and chief executive, laid out divergent visions for the 608-unit family-dining chain, as both seek to push their agendas.

Both letters preceded the official release of the company’s first-quarter results, in which Cracker Barrel reported net income of $23.8 million, or $1.03 per share, for the three months ended Oct. 28, up slightly from $23.7 million, or $1.01 per share, in the same, year-earlier quarter. Revenue dipped slightly to $598.4 million from $598.7 million.

Cracker Barrel continued to battle slumped traffic during the quarter, with same-store restaurant traffic down 3.8 percent. The chain’s average check improved by 2.2 percent during the first quarter, compared with the same, prior-year’s quarter. 

Although same-store restaurant and retail sales fell 1.6 percent and 1.3 percent, respectively, Cochran pointed to “a sequential improvement in restaurant and retail sales trends during the quarter.” Specifically, Cracker Barrel said that compared to the same months in the year-earlier quarter, the chain’s same-restaurant sales decreased by 2.5 percent in August, 2.4 percent in September and 0.2 percent in October. 

Cochran attributed the improving trends to six strategies laid out in September just after she took Cracker Barrel’s reins from Michael Woodhouse, who remains the company’s chairman. The strategies, intended to help the brand reverse declining traffic and better control costs, include new marketing messages; lower pricing, such as a lunch special for $5.99; faster service; new retail items for sale; continued cost cutting at the corporate level; and prudent new-store growth.

“While we continue to remain cautious about the outlook for consumer spending and commodity costs, we are encouraged by our improving sales trends,” Cochran said in a statement concerning earnings. “We believe our initiatives, aimed at driving restaurant traffic, growing retail sales and controlling costs, are gaining traction, and expect to build on our success as the year progresses.”

The company also said first-quarter results would include a charge of 6 cents per share related to the contentious proxy battle with Biglari, Cracker Barrel’s largest shareholder, with 9.99 percent of its outstanding common stock.

Despite the signs of improvement noted by Cochran, Biglari remains undaunted in his claims that the Lebanon, Tenn.-based company is mismanaged, as exemplified by deteriorating unit-level economics and traffic trends. In a Nov. 14 letter he noted that executives are committing three sins: accepting an eighth consecutive year of declines in customer traffic, as officials projected in September; opening new units instead of addressing the problems in existing ones; and allocating $50 million to open new units “when far more lucrative options exist.”

He noted that former chief executive Woodhouse has overseen 25 out of 28 quarters of declining traffic and operating income per store that has hardly budged — from $164,909 in 1998, to $167,181 in 2011. Further, he charged that Cracker Barrel’s stock price compared to the S&P Restaurant Index has been negative “on both near- and short-term bases.”

Biglari said he believed Cracker Barrel could become a global brand and reach more consumers through licensing deals.

“I would advocate the exploration of ideas to maximize brand value through methods that do not consume significant cash in order to produce it, e.g., international franchising and licensing,” he said. “The retail business of Cracker Barrel should not be restricted to its company-operated stores; rather, selected products could be distributed through other retailers.”

In response, Cochran asserted in her letter to shareholders that Cracker Barrel is “one of the top-performing family-dining companies in America,” which, when compared to smaller-cap companies instead of the S&P 500 Index, which includes such companies as McDonald’s and Starbucks, “our total shareholder returns — stock appreciation plus dividends — significantly outperform our peers over three-, five-, seven- and 10-year horizons.”

She noted that Biglari’s election to the board would pit the board and management team against one another and jeopardize the brand’s fledgling progress. 

“Clearly, we are focused on turning this around, and we are seeing results,” Cochran wrote. “However, what is critical for any restaurant company is the balance between traffic and price. ... As we improve our traffic going forward, we intend to maintain both the excellent value in our pricing and the quality associated with our brand. I believe our focus is on the right operating metrics over the long term.”

Contact Alan J. Liddle at [email protected] [3].
Follow him on Twitter at @AJ_NRN [4].

Contact Robin Lee Allen at [email protected] [5].
Follow her on Twitter at @RobinLeeAllen [6].