Shares of casual dining restaurant chain Cracker Barrel (CBRL -2.11%) plunged 16.2% during May, according to data provided by S&P Global Market Intelligence. The company rocked investors on May 16 when it cut its $1.30-per-share quarterly dividend by 80% to just $0.25 per share. At that time, management also gave its thoughts for turning around the business.
Cracker Barrel is a business that needs a turnaround. On May 30, investors were reminded of the situation when the company reported financial results for its fiscal third quarter of 2024. In short, sales are down and the business is losing money.
That said, sales are only marginally off of their all-time highs for Cracker Barrel -- this isn't the biggest issue. The bigger issue is that profits have tumbled, which was partly the motivation for cutting its quarterly dividend payments so dramatically. And looking at the financials, some of the biggest culprits are labor expenses and corporate spending.
Through the first three quarters of its fiscal 2024, Cracker Barrel's earnings per share (EPS) are down 63% year over year. And with profits down so much, it's only natural for the stock to be touching 13-year lows like it is right now.
The growth prospects aren't very appetizing
Cracker Barrel's management already has a pretty detailed long-term vision in place. Over the next three full fiscal years (through fiscal 2027), it plans to spend between $600 million and $700 million updating its stores -- management believes its branding needs a refresh.
Management has also identified ways to improve Cracker Barrel's operations to save money on labor. That's good.
By doing these things, Cracker Barrel believes it can achieve sales of up to $3.9 billion in fiscal 2027. For perspective, it expects roughly $3.5 billion in sales this year. That's only about 11% growth over three years, which isn't terribly inspiring considering how much money it plans to spend. This contributes to why Cracker Barrel stock is down.
A bargain buy?
Cracker Barrel's growth prospects aren't inspiring. That said, if management is successful in fixing its profitability, this could be interesting. In fiscal 2027, it hopes to earn adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of about $400 million. By comparison, its enterprise value is $1.6 billion. That means that the stock only trades at 4 times what it hopes to profit in three years, which is really inexpensive.
Assuming the turnaround plan works, investor confidence for Cracker Barrel would rebound in time. And given the cheap valuation, it's not unreasonable to think the stock could double or more from here.
However, turnarounds are tricky and Cracker Barrel could feel more pain before investors start seeing progress in the business. Therefore, it could be prudent to keep waiting for signs that the plan is working before taking a leap of faith.
