Cracker Barrel Old Country Store, Inc.:

Security and Industry Analysis

Overview

The Cracker Barrel Old Country Store is a company valued around making you feel at home

when you’re in each store. The founder Dan Evins did just that when he opened the first location

in Lebanon, Tennessee on September 19, 1969. It was a place to comfort you even when you

weren’t near home, but to do it in an old country way. Since the first location the company has

expanded greatly. In 1981 the company went public with their stock, but still all locations remain

company owed. The company says they never want to franchise, in risk of losing the quality and

consistency they have still to this day have with over 600 locations in over 42 states.

The Cracker Barrel Old Country Store’s line of business is geared around the full-service

restaurant industry. Providing a product they think to be a home cooked meal and serving it in a

family oriented environment. They also incorporated a store attached to the restaurant that

provides customers with all the old country store favorites: candy, cards, knickknacks, gifts,

souvenirs, and much more. All this combined is what makes The Cracker Barrel Old Country

Store such a unique experience and keeps customers coming back.

Macroeconomic Analysis

The Cracker Barrel’s business is exclusively domestic; this section will inform about the current

state of the domestic economy, with special regards to those aspects that affect the full service

restaurant industry. The condition of the United States economy today is one of mixed indicators,

some aspects of the economy seem to indicate growth, while others tend to be more troubling.

Moderate GDP growth, as well as all 12 districts of Federal Reserve reporting growing in

consumer spending are both solid indicators of and upturn in the economy. However, high

commodity inflation, rising costs of oil, unemployment rates that hoover around 8% and

declining real disposable income, overshadow those growth indices. Governmental policy factors

such as the increased cost of labor, health care reform, and the increased taxes, also seem to

dwarf this progress. Overall the state of the United States economy does not favor the full service

restaurant industry, and there does not seem to be a light at that end of the tunnel.

Experts Predict Continued Growth in GDP

With moderate growth from the fourth quarter of 2012 to the first of 2013, expert’s forecasts

have growth rates accelerated through 2014. Gross domestic product has risen 1.7% from the

fourth quarter of 2012 (Value line 2013). This rise has experts high on the current state of the

economy citing low interest rates and increased corporate profits as the reason for the growth.

With this the specialists foresee continued and accelerated growth through 2014, predicting a

2.7% increase for 2013 to 2014. This growth, coupled with the reported increase in consumer

spending by the Federal Reserve, indicate that we are on an upswing (Beige book 2013).

However, other factors more relevant to the full-service restaurant industry seem to indicate

otherwise.

High Commodity and Oil Costs are a Major Concern

The price of commodities has gone up substantially over the year causing a smaller profit margin

for companies. In 2012 commodity inflation reached 4.5%, causing many firms to raise the price

of their products to offset the increase (Cracker Barrel 10k). The cost of oil went up 32% in 2011

reaching $101.8 billion, and although it has not increased substantially from this level, it has not

gone down either (ValueLine 2013). ValueLine predicts by 2017 the price of oil will reach $115

billion, this 15% inflation in 4 years will be very detrimental to the Full-Service food Industry,

especially Cracker Barrel as the majority of their stores are located on the interstate highway

system. Although the cost of oil and commodities will decrease the profit margin of a firm, there

can be no profit if people don’t have money to spend.

High Unemployment and Declines in Real Disposable Income Pose a Serious Problem

With high unemployment and declining disposable income the service industries will suffer. The

Unemployment rate in 2012 was 7.8% and is not predicted to improve anytime soon (ValueLine

2013). Real disposable income is how much money that consumers have after they pay personal

taxes. ValueLine predicts that in the first quarter of 2013 RDI will decrease by 7% and by year’s

end it will have only .3% rate from 2012. This lack of spendable income will hurt cyclical

industries like full-service restaurants a great deal. High Unemployment and a lack of disposable

income are not the only challenges that the restaurant industry faces, there are governmental

policies that could adversely reflect it as well.

Increased Taxes, Cost of Labor and Health Care Legislation are Problematic

Imminent tax increases as well as an increase in minimum wage and the changes that go along

with the Patient Protection and Affordable Care Act (PPACA) provides serious challenges for

business attempting to keep costs down. According to Cracker Barrel’s 10k annual report their

tax rate increased by 3.2% in 2012 to 29.5% and is expected to go up to 33% by 2013. Tax

increases like this adversely affect profits. President Obama has proposed to raise the federal

minimum wage, and if the proposal gets passed through congress the new wage will be set at

$9/hour by the end of 2015 (Lowrey 2013). With the minimum wage increased the cost of labor

will increase, also adversely affecting profits. PPACA provides even further challenges for

businesses. A firm with fifty or more full-time employees is required to supply affordable

coverage for those employees (Standard and Poors 2012). If they do not do so a $2000 fine is

issued for each employee that does not receive coverage (Standard and Poors 2012). Firms will

get around this by cutting hours of their employees so they are not full-time and by not hiring

new workers (Standard and Poors 2012). This again will lower the profitability of the business.

Although the effects of these policies are yet to be seen, it is a pretty safe bet they will not affect

the full-service restaurant industry in a good way.

The Restaurant Industry

Cracker Barrel operates in the restaurant industry which has developed rapidly over time with

very low barriers to entry coupled with socio-economic trends pushing consumers to dine away

from home. The restaurant industry is cyclical and has above-average sensitivity to the state of

the economy. There is significant competition among the four segments encompassing the

restaurant industry which includes fast food, fast casual, coffee and snack, and full service. The

recent economic recession has given rise to the importance within the industry to adopt

competitive strategies to improve value proposition. The economic recession of the last 5 years

slowed the growth of the restaurant industry, however, a trend towards stabilization and

promising future growth has emerged.

Low barriers to entry have assisted in the proliferation of food and service industry companies,

attributing to the 980,000 restaurants currently operating in the U.S. 1 Within the last 50 years

eating out has become an everyday part of life for many consumers. Most families are either

single-parent or dual-income households; time constraints and a rise in median income for

1 National Restaurant Association. Facts at a Glance. 2012.

http://www.restaurant.org/News-Research/Research/Facts-at-a-Glance.

families has given way to increased household spending on eating out. According to the U.S.

Census Bureau median household income between 1947 and 1998 rose nearly 122%. 2

Restaurants’ growth is tied to the growth of the overall economy and consequently is subject to

the same cyclical volatility. The changes in consumer income that sprouted from the economic

crises of the last 5 years have effectively slowed the growth of the restaurant industry. The major

loss of household income coupled with a large unemployment rate reduced the amount of

consumer disposable income to spend on dining outside of the home. However, with the recent

economic recovery and increased consumer spending, the industry has begun to stabilize and

forecasts slowly increasing growth in the future. According to the Bureau of Labor Statistics the

national unemployment rate average for 2012 was 8.1%, down from the 2009 and 2010 rates of

9.3% and 9.6%.3 Disposable personal income has also seen an upward trend with December

2012 increases of $331.3 billion, or 2.7%, according to the Bureau of Economic Analysis. 4

The restaurant industry is highly competitive and encompasses several different specialized

segments including: fast food, fast casual, coffee/snack, and full service. Fast food chains are

focused on low pricing, economies of scale, and expansion to gain a competitive edge in the

industry. Fast casual restaurants operate on a similar strategy as fast food restaurants but focus on

health-conscious consumers and customization. Coffee/snack restaurant chains specialize in a

few food and beverage items effectively cornering a niche market in the restaurant industry. Full

service restaurants offer higher quality service to consumers but consequently have a higher cost

to the consumer. Cracker Barrel operates in the full service segment and particularly in the

2 U.S. Department of Commerce. September 1998. Measuring 50 Years of Economic Change. United States Census

Bureau. http://www.census.gov/prod/3/98pubs/p60-203.pdf. 3 United States Department of Labor. 2013. Bureau of Labor Statistics Data. U.S. Bureau of Labor Statistics.

http://data.bls.gov/timeseries/LNS14000000. 4 U.S. Department of Commerce. (January 31, 2013). News Release: Personal Income and Outlays. Bureau of

Economic Analysis. http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm.

family restaurant sub-segment. Family restaurants attract customers of all ages and have menus

geared to suit that purpose. Cracker Barrel is currently ranked third in total sales in the family

restaurant sub-segment with $1.93 billion in sales according to S&P Capital IQ. 5

Given the socioeconomic factors of a slow economic recovery and wary consumers, the need to

compete in various ways for increased traffic and revenue has become essential in the industry.

Numerous company strategies have emerged to increase traffic and sales volumes including

technological improvements, expansion, discounting, variety, and improved health standards.

Each segment of the restaurant industry historically leans towards to certain competitive

strategies: fast food focuses on expansion and discounting, fast casual focuses on variety and

improved health standards, coffee/snack relies heavily on expansion and recently is pursuing

increases in variety, and the full service segment encompasses expansion, variety, health

standards, and technological improvements as a means to gain the competitive edge. Cracker

Barrel, for example, over the summer incorporated a new line of salad options in an effort to

increase variety for its customers while pursuing more health-conscious meal choices. According

to Chris Ciavarra, Cracker Barrel senior vice president of marketing, "During summer, people

often eat lighter and are looking for meals that are a bit healthier and fresher. Now more than

ever, there's a great deal of interest in better-for-you offerings."6

5 Standard and Poors. Industry Profile. Net Advantage. 2013.

http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/cp/companyIndustrySurvey.do?task=showIndustrySurveyByTicker. 6 COMPANY SPOTLIGHT: CRACKER BARREL OLD COUNTRY STORE, INC. (2012). MarketWatch: Food, 11(8), 14-17.

In this chart from Yahoo! Finance7, it is clear that over the last 5 years Cracker Barrel has seen

continuous substantial growth in the market compared to both Dine Equity Inc. (operates

International House of Pancakes) and Denny’s Corporation. Despite the recent economic

downturn the future of the restaurant industry is promising. Sales and overall growth in the

industry have begun to stabilize and Cracker Barrel in particular is sitting in a relatively strong

position compared to the other major players in the industry.

Firm Position

Last first quarter of 2013, the entire restaurant industry out performed expectations compared to

previous years, but it lost its dynamism at the beginning of the second quarter. Indeed, during the

first quarter 2013, the full service restaurant’s sales increased by 2.2%, with an increase of

restaurants overall frequentation by 1%8. It was the higher foot frequentation of full-service

7 Yahoo! Finance. (2013). CBRL Basic Chart.

http://finance.yahoo.com/q/bc?s=CBRL&t=5y&l=off&z=l&q=l&c=DIN%2CDENN. 8 S&P “Macroeconomic factors lead to weaker growth” Restaurant industry survey December 2012.

http://www.netadvantage.standardandpoors.com.proxy-tu.researchport.umd.edu/NASApp/NetAdvantage/showIndustrySurvey.do?task=showIndustrySurvey&type=pdf&code=rst

restaurants recorded since spring 20089. To explain these performances, professionals in the

restaurant industry gave credit to the exceptional weather within that same quarter.

Despite their differences, restaurants over the U.S have to fight among themselves to acquire a

larger foot frequentation, in order to increase their sales. Casual and family restaurants are

struggling against fast and quick restaurant services; since 2009, up to now, quick restaurant

services are leading the growth of the industry according to the S&P Restaurant survey

December 2012.

Recently, to strive for their survival, U.S. restaurant operators decided to expand their business

model in Asia and Europe. So far, moving their business models overseas did not reveal itself as

an efficient and definitive strategy. For example: Yum! Brands Inc. China sales growth during

2012 third quarter was 6% in contrast with 19% in the same period last year10

. Restaurant

companies which operate overseas noticed a slowing progression of their overseas sales in

201211

.

Despite a challenging domestic environment, Cracker Barrel is not yet represented outside the

boarders of the United States. In contrast with other restaurant companies of its size, Cracker

Barrel’s management team is more focused on establishing a strong domestic base. Cracker

Barrel’s forces are directed toward domestic expansion. The Cracker Barrel management team

9 S&P “Macroeconomic factors lead to weaker growth” Restaurant industry survey December 2012.

http://www.netadvantage.standardandpoors.com.proxy-tu.researchport.umd.edu/NASApp/NetAdvantage/showIndustrySurvey.do?task=showIndustrySurvey&type=pdf&code=rst 10

S&P “Macroeconomic factors lead to weaker growth” Restaurant industry survey December 2012. http://www.netadvantage.standardandpoors.com.proxy-tu.researchport.umd.edu/NASApp/NetAdvantage/showIndustrySurvey.do?task=showIndustrySurvey&type=pdf&code=rst 11 Cracker Barrel “insight look” Value Line Proxy 10-K December 2012 http://www3.valueline.com.proxy-tu.researchport.umd.edu/secure/vlispdf/stk1700/vlispdf/f2414.pdf

strongly believes that new stores opening with better operation management will pay out in a few

years for Cracker Barrel.

In contrast with its direct competitors, Cracker Barrel is a business model composed of just one

restaurant. To increase their sales, Cracker Barrel’s competitors bought few pre-existent

restaurants or got involved in the system of franchising. For example; DRI operates more than

ten restaurant names which are owned or franchised. DRI’s important size in the industry makes

it one of the big movers in the S&P 500. By owning more than one restaurant name, DRI has

been able to diversify its portfolio, so it decreased its risk to the industry changes. In contrast

with DRI, Cracker Barrel did not diversify yet. However, Cracker Barrel’s employees’ size is

proportional to the industry average. Cracker Barrel is also continuing its expansion project.

Cracker Barrel plans to open 12 new stores in the U.S.A in 2013. BOBE one of Cracker Barrel’s

main competitors also plans to open 10 new stores in 2013. This should be a sign to investors

that the industry is hesitant to develop large numbers of new stores and that the market is still

slightly bearish.

Companies

Plan

to

open

new

stores

in

2013

Operation

Style

Store

Units

Number

of

restaurant

owned

Owned

Land

Employees

Operation

location

Company

financial

strength

DRI - Franchise 1994 +10 51% 180,000 International A

BOBE 10 Own 710 2 100% 46,750 Domestic B++

CRACKER

BARREL

12 Own 620 1 50% 70,000 Domestic B+

Restaurant structure report December 2012 from www.valueline.com

Cracker Barrel continues to perform well within the restaurant industry. Cracker Barrel’s sales

went up 2.8% in 2012, during the first period12

, that was in correlation with its stores foot traffic

which also increased by 1%13

. In 2012, Cracker Barrel stores welcome around 6,700 guests each

week. Furthermore, Foot traffic in Cracker Barrel stores is generally inversely related to the U.S

fuel price. Despite the increase of the fuel price in 2012 Cracker Barrel has been able to increase

sales by 6.17%. Indeed, Cracker Barrel’s profit is directly connected to Americans gas

consumption. By driving more Americans are more on the road and tend to stop at Cracker

Barrel stores located near major highways. Thus, a change in Americans’ habits, such as a

decrease of those highways frequentation would automatically decrease sales for Cracker Barrel.

12Cracker Barrel “insight look” Value Line Proxy 10-K December 2012 http://www3.valueline.com.proxy-tu.researchport.umd.edu/secure/vlispdf/stk1700/vlispdf/f2414.pdf 13 Cracker Barrel “insight look” Value Line Proxy 10-K December 2012 http://www3.valueline.com.proxy-tu.researchport.umd.edu/secure/vlispdf/stk1700/vlispdf/f2414.pdf

Oil vs. Cracker Barrel from 20011 to 2013 from www.googlefinance.com

Cracker Barrel has a strong business operation, with a constant revenue growth since 2006.

Cracker Barrel’s closest competitors such as Bob Evans Farms and Darden Restaurants (Olive

Garden, Red Lobster) do not perform as well as Cracker Barrel does from a revenue point of

view. Cracker Barrel’s revenue increased overtime from 2008 to 2012. In 2012, Cracker Barrel’s

revenue increased by 21%, whereas its main challengers were lagging or underperforming. For

instance, in 2012 BOBE growth was just 0.07% and DRI was -0.17%. Those two competitors’

results have been inconsistent over the years. According to the S&P 600 survey report, Cracker

Barrel is performing well, despite the fact it did not beat the market in 2011. Before that period,

the company was always able to outperform the market since 200614

. In 2011, the S&P 600

restaurants’ returns were -4.4% while Cracker Barrel’s returns were even worse at -19.7%.

According to (technomic.com) family dining restaurants account for $35 billion in annual sales.

Thus, Cracker Barrel with its net sales of 2.580 billion in 2011 represents only 7% of the total

14 Cracker Barrel “insight look” Value Line Proxy 10-K December 2012 http://www3.valueline.com.proxy-tu.researchport.umd.edu/secure/vlispdf/stk1700/vlispdf/f2414.pdf

sale in the U.S. Cracker Barrel’s stores’ sales are better than their direct competitors according to

Cracker Barrel 2012 annual report 10-k

Companies

Net income in Millions of $

2012 2011 2010 2009 2008

BOBE 72.85 72.8 54.2 70.3 -5.1

Growth 0.07% 34.32% -22.90% -1478.43%

CRACKER BARREL 103.08 85.2 85.3 66 65.3

Growth 21% -0.12% 29% 1.07%

DRI 475.5 476.3 404.5 372.2 377.2

Growth -0.17% 17.75% 8.68% -1.33%

Revenue Comparison February 20th

2013 from www.Ycharts.com

.

Companies

Sales in Billions of $

2012 2011 2010 2009 2008

DRI 7.99 7.5 7.11 7.21 6.62

Growth 6.53% 5.49% -1.39% 8.91%

BOBE 1.65 1.67 1.727 1.751 1.73

Growth -1.20% -3.30% -1.37% 1.21%

CRACKER

BARREL 2.58 2.43 2.4 2.36 2.38

Growth 6.17% 1.25% 1.69% -0.84%

Annual sales 2008-2012 from www.Ycharts.com

Based on its sales report and customer surveys led by the National Restaurant Association,

Cracker Barrel affirmed its leadership in several categories including menu variety, availability

of healthy options, atmosphere, and kid-friendliness. The “Best Breakfast” Zagat 2011 survey

ranked Cracker Barrel as the third largest family-dining chain in the U.S. just behind IHOP and

Denny’s, and Valueline considered Cracker Barrel as a good momentum play.

Economic Advantages

As the economy continues its slow but progressive recovery, many industries have started to

implement strategies parallel to the economic status. For the restaurant industry, a variety of

adjustments had to be made by companies to insure their survival through the economic

struggles. While it is evident that the economy is recovering, consumers are still cautious on how

they spend their money, in fear of another recession. Cracker Barrel, along with many other full

service restaurants has been forced to make adjustments in order to increase the inflow of

customers.

As far as their position in the full service industry, Cracker Barrel seems to have an upper hand

on their main competition (Denny’s,). While consumers continue to be very reluctant on how

they spend their money, Cracker Barrel has maintained a high acceptance of their brand in the

market. Their marketing perception of a “home away from home”, has kept a high retention of

loyal customers returning for a unique experience. However, although Cracker Barrel has kept

the luxury of keeping their loyal customers, they still have had to make key adjustments in order

to attract those customers who continue to be cautious with their spending. Many restaurants

including Cracker Barrel had to start offering value meals for the first time in order to regain the

amount of customers lost to the recession. Luckily for Cracker Barrel, their ability to maintain

most of their loyal customers has kept them in an economic advantage when comparing them to

their competition. This is a direct effect of their unique atmosphere and high standards of

customer service.

Another huge economic advantage that Cracker Barrel was able to uphold was their strong

purchasing and distribution power. Cracker Barrel negotiates directly with food vendors as to

specification, price, and other material terms of most food purchases. The company has contracts

with an unaffiliated distributor with custom distribution centers in Tennessee, Texas, Florida,

Maryland, Indiana and South Carolina (Market Line 2012).15

This is a great advantage for

Cracker Barrel especially with the recent increase in the prices of corn, beef, pork, poultry and

oil. The increase of these commodities has had a negative effect on many restaurants as they

were forced to increase their operation cost thus decreasing profits. Because Cracker Barrel has

strong purchasing and distributions powers, it also strengthens their bargaining power which

makes them less vulnerable to the risks of relying on just a few suppliers.16

15

Line, Market. Cracker Barrel Swot Analysis. 28 March 2012.

http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=3&sid=110507c5-6d5c-44de-bcda-

1e65d7daff96%40sessionmgr10&hid=19. 25 Jaunuary 2013.

16

Yin, Jim C. Net Advantage. December 2012. http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/showIndustrySurvey.do?code=rst. 25 January 2013.

Company Financial Statements

CRACKER BARREL OLD COUNTRY STORE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands)

8/3/2012 7/29/2011

Assets

Cash and cash

equivalents

151,962 52,274

Property held

for sale

884 950

Accounts

receivable

14,609 12,279

Income taxes

receivable

0 7,898

Inventory 143,267 141,547

Prepaid expenses 11,405 9,000

Deferred income

taxes

15,181 21,967

Property and

equipment, net

1,022,370 1,009,164

Other long-term

assets

59,314 55,805

Total assets 1,418,992 1,310,884

Liabilities and

Shareholders' Equity

Accounts

payable

101,271 99,679

Other current

liabilities

217,788 167,424

Long-term debt 525,036 550,143

Interest rate

swap liability

14,166 51,604

Other long-term

obligations

114,897 105,661

Deferred income

taxes

63,159 68,339

Shareholders'

equity, net

382,675 268,034

Total liabilities and

shareholders'

equity

1,418,992 1,310,884

CRACKER BARREL OLD COUNTRY STORE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands)

7/29/2011 7/30/2010

Assets

Cash and cash

equivalents

52,274 47,700

Inventory 141,547 144,079

Other current

assets

52,094 44,480

Property and

equipment, net

1,009,164 1,004,103

Other long-lived

assets

55,805 51,705

Total assets 1,310,884 1,292,067

Liabilities and

Shareholders'

Equity

Accounts payable 99,680 116,218

Current

maturities

123 6,765

Other current

liabilities

167,301 186,565

Long-term debt 550,142 573,744

Other long-term

obligations

225,604 217,158

Shareholders'

equity

268,034 191,617

Total liabilities

and shareholders'

equity

1,310,884 1,292,067

CRACKER BARREL OLD COUNTRY STORE, INC.

CONDENSED CONSOLIDATED INCOME STATEMENT (In thousands except percentages)

Twelve Months Ended

8/3/2012 %

change 7/29/2011 %

change 7/30/2010

Total revenue $2,580,195.00 6 $2,434,435.00 1 $2,404,515.00

Cost of goods sold $827,484.00 7 $772,471.00 4 $745,818.00

Gross profit $1,752,711.00 5 $1,661,964.00 -- $1,658,697.00

Labor and other related expenses $951,435.00 5 $904,229.00 -- $908,211.00

Other store operating expenses $464,130.00 3 $451,957.00 3 $437,136.00

Store operating income $337,146.00 10 $305,778.00 -2 $313,350.00

General and administrative

expenses

$146,171.00 5 $139,222.00 -5 $145,882.00

Impairment and store dispositions,

net

$0.00 -100 -$625.00 -122 $2,800.00

Operating income $190,975.00 14 $167,181.00 2 $164,668.00

Interest expense $44,687.00 -13 $51,490.00 5 $48,959.00

Pretax income $146,288.00 26 $115,691.00 -- $115,709.00

Provision for income taxes $43,207.00 42 $30,483.00 -- $30,451.00

Net income $103,081.00 21 $85,208.00 -- $85,258.00

CRACKER BARREL OLD COUNTRY STORE, INC.

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

(In thousands)

Twelve Months Ended

8/3/2012 7/29/2011 7/30/2010

Cash flows from operating activities:

Net income $103,081.00 $85,208.00 $85,258.00

Depreciation and amortization

$64,467.00 $62,788.00 $61,024.00

Loss (gain) on disposition of property and equipment

$2,702.00 -$1,418.00 $4,697.00

Impairment $0.00 $3,219.00 $2,672.00

Share-based compensation, net of excess tax benefit

$9,918.00 $5,688.00 $8,130.00

(Increase) decrease in inventories

-$1,720.00 $2,532.00 -$6,655.00

Increase (decrease) in accounts payable

$1,592.00 -$16,539.00 $24,050.00

Net changes in other assets and liabilities

$39,782.00 -$3,266.00 $32,930.00

Net cash provided by operating activities

$219,822.00 $138,212.00 $212,106.00

Cash flows from investing activities:

Purchase of property and equipment, net of insurance recoveries

-$80,170.00 -$77,686.00 -$69,891.00

Proceeds from sale of property and equipment

$623.00 $8,197.00 $265.00

Net cash used in investing activities

-$79,547.00 -$69,489.00 -$69,626.00

Cash flows from financing activities:

Net payments for credit facilities and other long-term obligations

-$25,133.00 -$30,263.00 -$64,972.00

Proceeds from exercise of share-based compensation awards

$17,602.00 $20,540.00 $37,460.00

Excess tax benefit from share-based compensation

$4,502.00 $4,108.00 $5,063.00

Purchase and retirement of common stock

-$14,923.00 -$33,563.00 -$62,487.00

Deferred financing costs -$263.00 -$5,125.00 -$2,908.00

Dividends on common stock -$22,372.00 -$19,846.00 -$18,545.00

Net cash used in financing activities

-$40,587.00 -$64,149.00 -$106,389.00

Determining the Required Rate of Return

To determine whether or not Cracker Barrel is valued appropriately, it’s necessary to compare

Cracker Barrel’s Return on Equity to the Expected Return it should generate from the Capital

Asset Pricing Model. For the Expected Return, Cracker Barrel’s beta must be determined. Table

1 presents recently reported values of for Cracker Barrel and its competitors according to

Google Finance.

Beta

Values Google Finance

CBRL 0.85

DIN 2.45

BOBE 0.95

CAKE 1.68

TXRH 0.96

All betas retrieved from Google Finance 04/10/2013

Table 1: Restaurant Industry’s

The Risk Free Rate of Return is assumed to be equal to 1.70%, the current Yield to Maturity of

the 20 Year United States Treasury Bond, and the Market Risk Premium is 6.6%, both reported

on Bloomberg.com on 04/09/2013 to generate Table 2, the Expected Returns of each company

using the Capital Asset Pricing Model.

The expected returns will need to be compared to the Returns on Equity to determine if the

companies are generating sufficient returns to justify the market’s investment of capital in them.

Company

Google

Finance

Beta

Risk Free

Rate

Market

Risk

Premium

Expected

Return ROE

CBRL 0.85 1.70% 6.6% 7.31% 52.10%

DIN 2.45 1.70% 6.6% 17.87% 55.03%

BOBE 0.95 1.70% 6.6% 7.97% 8.18%

CAKE 1.68 1.70% 6.6% 12.79% 17.54%

TXRH 0.96 1.70% 6.6% 8.04% 14.38%

Average 1.38 1.70% 6.6% 10.79% 29.45%

The risk free rate and market risk premium were retrieved from

Bloomberg on 04/09/2013

Table 2: Restaurant Industry Rates of Return and Return on Equity

The entire industry is experiencing strong Returns on Equity, all of which exceed the required

rates of returns. Given the cyclicality of the Restaurant Industry this is not a drastic surprise. The

market has been particularly bullish in the last few years and explains the high returns the

Restaurant Industry is experiencing.

Finally, I can plot the Security Market Line and determine a Required Rate of Return for Cracker

Barrel. Table 3 presents the data used to generate Chart 1, the Security Market Line.

Company Beta Risk

Free

Rate

Market

Risk

Premium

Expected

Return

ROE

Industry

Average

1.38 1.70% 6.6% 10.79% 29.45%

CBRL 0.85 1.70% 6.6% 7.31% 55.03%

Risk Free 0.00 1.70% 6.6% 1.70%

Market 1.00 1.70% 6.6% 8.30%

Beta=2 2.00 1.70% 6.6% 14.90%

Table 3: Security Market Line

Chart 1: Security Market Line

The Security Market Line confirms that Cracker Barrel’s Return on Equity is drastically above

its own Required Rate of Return, the industry’s Required Rate of Return, and the industry’s

Return on Equity. This solidifies the argument that Cracker Barrel is outperforming in the

industry and remains in a significantly good position in comparison with its competitors. The

industry as a whole is performing very well, which is likely attributed to the bullish market we

are currently experiencing and the cyclicality of the industry.

Valuation with Discounted Dividend Method and Price-to-Earnings

We concluded that the most appropriate method for Cracker Barrel’s valuation was the

discounted dividend method. Our firm is not in a zero growth stage yet as is seen by the drastic

growth in Return on Equity and its difference from the expected return value. Table 4 shows the

dividend growth, sales per share growth, and earnings per share growth for Cracker Barrel.

Industry K

CBRL K = 7.31% Rf Market K

B = 2 K

Industry ROE 29.45%

Cracker Barrel ROE 55.03%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

0 0.5 1 1.5 2

Average Beta

Security Market Line

Series1

ROE

Linear (Series1)

Year Dividend/

Share

Dividend

YOY

Growth

Sales/

Share

Sales/

Share

YOY

Growth

Earnings/

Share

EPS

YOY

Growth

POR =

DPS/EPS

b =

PBR =

(1-

POR)

1997 0.02 0.00% $18.40 0.00% $1.41 0.00% 1.42% 98.58%

1998 0.02 0.00% $21.08 14.57% $1.65 17.02% 1.21% 98.79%

1999 0.02 0.00% $26.12 23.91% $1.16 -

29.70% 1.72% 98.28%

2000 0.01 -50.00% $31.28 19.75% $1.11 -4.31% 0.90% 99.10%

2001 0.02 100.00% $35.69 14.10% $1.30 17.12% 1.54% 98.46%

2002 0.02 0.00% $41.11 15.19% $1.64 26.15% 1.22% 98.78%

2003 0.02 0.00% $45.92 11.70% $2.09 27.44% 0.96% 99.04%

2004 0.44 2200.00% $48.82 6.32% $2.31 10.53% 19.05% 80.95%

2005 0.48 9.09% $55.07 12.80% $2.45 6.06% 19.59% 80.41%

2006 0.52 8.33% $85.46 55.18% $2.50 2.04% 20.80% 79.20%

2007 0.56 7.69% $99.33 16.23% $2.52 0.80% 22.22% 77.78%

2008 0.72 28.57% $106.81 7.53% $2.79 10.71% 25.81% 74.19%

2009 0.8 11.11% $104.18 -2.46% $2.89 3.58% 27.68% 72.32%

2010 0.8 0.00% $105.77 1.53% $3.62 25.26% 22.10% 77.90%

2011 0.88 10.00% $106.58 0.77% $3.85 6.35% 22.86% 77.14%

2012 1.15 30.68% $109.92 3.13% $4.61 19.74% 24.95% 75.05%

Mean 13.19% 12.51% 9.25% 13.38% 86.62%

Table 4 % Growth Cracker Barrel from Value Line

To determine the intrinsic value of Cracker Barrel we estimated a high growth stage rate and the

long term growth rate. As shown in Table 4, 13% would appear to be a reasonable estimate for

the high growth stage. We estimated the long term growth rate to be 4%. The high level of

growth will continue for a given time period and then will eventually reach the long term growth

rate. Table 5 shows the calculation of the intrinsic value of Cracker Barrel’s stock given the

information derived.

Year Growth EPS PoR Div PV

1 13.0% $4.61 23% $1.05 $0.98

2 11.0% $5.21 23% $1.19 $1.04

3 11.0% $5.78 23% $1.32 $1.07

4 11.0% $6.42 23% $1.46 $1.11

5 11.0% $7.12 24% $1.70 $1.21

6 11.0% $7.91 24% $1.88 $1.25

7 11.0% $8.78 24% $2.09 $1.30

8 11.0% $9.74 26% $2.51 $1.46

9 11.0% $10.82 26% $2.79 $1.51

10 11.0% $12.01 26% $3.10 $1.57

11 10.0% $13.33 26% $3.44 $1.62

12 9.0% $14.66 26% $3.78 $1.67

13 8.5% $15.98 26% $4.12 $1.70

14 7.0% $17.34 26% $4.47 $1.72

15 6.5% $18.55 27% $4.97 $1.79

16 5.5% $19.75 27% $5.30 $1.78

17 5.0% $20.84 27% $5.59 $1.75

18 4.5% $21.88 27% $5.87 $1.72

19 4.0% $22.87 27% $6.13 $57.13

Vo $83.38

Table 5 Dividend Discount Model

We can see that with the high stage growth rate of 13% and the gradual decline to a constant

long term growth rate of 4% the intrinsic value of the stock would be $83.38. Our model is

particularly sensitive to the gradual decline rate of the growth. Having a high rate growth through

11 years has our intrinsic value higher than the current market price of $82.98 according to

Yahoo Finance.

The other method we used to calculate the intrinsic value for Cracker Barrel was the Price to

Earnings method. Using the Damodaran regression technique we determined that the price of

Cracker Barrel’s stock to be $86.32, as can be seen in table 6.

Earnings Growth Rate 13.13%

Payout Ratio 25%

Beta 0.85

Damodaran P/E Regression

PE = 7.95 + 57.72 gEPS + 11.48 Payout - 3.60 Beta 15.33

Table 6 Damodaran Regression

If the Price to Earnings ratio determined here is multiplied by the forecasted 2014 Earnings per

Share (according to Bloomberg) we can determine the estimated price with the equation:

Price to Earnings Ratio * Forecasted 2014 EPS = Price

(15.34) * $5.630(2014) = $86.32

This shows that the market regression for P/E ratios in the U.S. finds Cracker Barrel’s current

price to be slightly undervalued, however, since we decided to use the forecasted 2014 earnings

per share as a basis the numbers are actually significantly equally valued.

The second price-earnings ratio method we used to estimate the intrinsic value of Cracker

Barrel’s stock was to compare Cracker Barrel’s P/E to the market regression. The formulae used

to determine the intrinsic value of Cracker Barrel was:

PE = 13.48 + 40.84 gEPS + 2.88 Payout -2.01 Beta

After plugging in Cracker Barrel’s respective variable values for gEPS, payout, and beta, we

determined that the expected P/E ratio for the company was 16.6. When multiplied by the 2012

earnings per share value the intrinsic value of Cracker Barrel is estimated to be $76.58.

Compared to the actual price of $80.35 our determination is that compared to the market

regression Cracker Barrel’s stock price is overvalued by about 4.7%.

The third price-earnings ratio method we used to estimate the intrinsic value of Cracker Barrel’s

stock was to compare Cracker Barrel’s P/E to the market P/E. Table 7 shows the comparison

between Cracker Barrel’s stock price, earnings per share, and price-earnings ratio, and that of the

S&P 500.

CBRL EPS-

END Stock-END CBRL P/E S&P P/E

CBRL vs

S&P

2008 2.79 22.05 7.90 60.7 0.130

2009 2.89 37.99 13.15 21.9 0.601

2010 3.62 54.77 15.13 16.3 0.930

2011 3.85 50.41 13.09 14.46 0.905

2012 4.61 64.26 13.94 16.49 0.845

TODAY 4.72 83.65 17.72 17.3

S&P P/E 17.3

Average 0.68

Exp. P/E 11.81

Exp. Price $54.43

Actual Price $80.35

Table 7 P/E Compared to Market

Cracker Barrel’s P/E ratio is relatively weak compared to the S&P 500 over the last 5 years. This

explains why this valuation method is so stratified. Here the expected price for Cracker Barrel is

at a meager $54.43 when the actual price is $80.35. This is an overvaluation of 32.26%. We

determined that this valuation is not an accurate description of the company’s intrinsic value. If

the S&P 500 data is carefully observed we can see that in 2008 and 2009 the market experienced

significantly abnormal price-earnings ratios. In 2008 the S&P 500 had an average P/E of 60.7.

This is an anomaly given the fact that the average of the other 4 years combined was only 17.29.

Valuation

After conducting the Dividend Discount Model and using three different techniques to calculate

the intrinsic value of Cracker Barrel we determined that the damodaran regression technique

provided the best estimate of the firm. Using the 2014 estimated earnings per share for the

company, we determined that the estimated intrinsic value of Cracker Barrel was $86.32. The

stock price of Cracker Barrel at the beginning of this analysis was $80.35, today 05/08/2013 it is

currently $84.52. This shows that Cracker Barrel is currently undervalued, however, looking

forward to 2014 it is actually significantly valued and that the price in 2014 is likely to match up

with our estimate values. Given the cyclicality of the industry and Cracker Barrel’s beta being

close to 1, it is not surprising that our estimate intrinsic value is mirrored by the market.

Return

According to our estimates, if Cracker Barrel’s stock price does reach $86.32, then an investment

in the company would provide a 2.09% return. Table 8 shows this return versus the expected

return on the market and the required rate of return.

Return (%)

Difference from Cracker

Barrel

Cracker Barrel 2.09

K 7.06 -4.97

E(Rm) 8.4 -6.31

Table 8 Cracker Barrel’s Return, Required Rate of Return, and Expected Market Return

It would appear that Cracker Barrel is a relatively safe investment,