PACIFIC MANAGEMENT CONSULTING GROUP chain restaurant analysis and advisory Sardar Biglari (BH) v. Cracker Barrel (CBRL): Battle of Restaurant Analytics by: John A. Gordon, Principal We took a detailed look at the chain restaurant analytical topics raised by the ongoing Sardar Biglari attempt to win a single seat on the Cracker Barrel Board of Directors. Biglari has claimed in the past (1) bad SEC disclosure (2) poor performance by CBRL and former CEO and now senior Chair Michael Woodhouse, among other issues. Monday, CBRL fired back, claiming Biglari used bad analytical benchmarks. Versus our selected peer, CBRL restaurant profitability did underperform, but not by much. One difficulty is that all three companies in this analysis—CBRL, BOBE and BH, don’t disclose restaurant concept profitability well. Selection of the right peer group for benchmarking is critically important for this drill. CBRL is a breakfast, lunch and dinner house, with a more limited highway site profile and a midpriced $9 approximate average check. Comparing CBRL to broader restaurant space indices and the likes of the worldwide behemoth McDonald’s (MCD), and the fast growing, more runway for growth ( and ultra-nosebleed multiple) Chip Ch ipot ip otle ot le ((CM CMG) CM G),, Panera (PNRA) and BJ’s Brewhouse (BJ G) BJRI BJ RI)) do RI does es n not ot ssee eem right. ee Chipotle (CMG), (BJRI) seem CBRL CB RL iis not fa fast st ffoo food, ood, oo d, h has as ssto store tore C CAP CAPEX APEX AP EX iinv investment nves nv estm es tmen tm entt cl en clos close osee to ttha os that hatt of ccas ha casual asua as uall di ua dini dining ning ng ((ap (app. app. ap p. $$2. $2.2 2.22 M pl 2. plus plus), us), us ), b but ut iiss no nott casual dining (no al ca alcoho holi licc se serv rvic ice) ic e). It aals e) lso ls o ha hass at atta tach ta ched ch ed rret etai et aill gi ai gift ft ssho hops ho ps. ps alcoholic service). also attached retail shops. We think that Bo Bob b Evans (BOBE) E), sp E) spec ecifi ec ificcal ally al ly tthe he B Bob ob E Eva vans va ns R Res esta es taur ta uran ur antt co comp mpon mp onen entt is tthe he b bes estt peer. It also es (BOBE), specifi cally Evans Restaurant component best has US Midwester ha ern roots and comp er mpetes iin mp n si simi mila mi lar da la dayp ypar yp arts ar ts.. In ts Incl clus usio us ion io n of D Den enny en ny’s’s ((DE ny DENN DE NN)) an NN and d IH IHOP OP (DINE) is Midwestern competes similar dayparts. Inclusion Denny’s (DENN) not righ right ght sinc since ncee th those are more a 22424-hour 4-ho hour coffee sh shop shop/pancake op/p op /pan /p ancake ke h hou house ouse ou se orien oriented. ented. en d. A And nd tthe they heyy fr he fran franchise. anch an chis ch ise. is e. But ut similar to BH and CBRL, L, B BOB BOBE OBE E do does es n not ot b bre breakout reak re akou ak outt Bo Bob b Ev Evan Evans anss an an and d Mi Mimi Mimi’s mi’s’s p mi pro profi rofi ro fita tabi tability. bili bi lity li ty. ty Looking so Lo sole solely lely le ly at 2000/2 2000/2005/2010 /200 005/ 00 5/2010 110K 5/ 0K rrep reported epor ep orte or ted te d Re Rest Restaurant stau aurant au nt aann annual nnua nn ual av aver average erag er agee vo ag volu volume lume lu me ((AU (AUV) AUV) AU V) aand restaur restaurant uran ur ant level an operatingg ma margin in ((CR (CRM), CRM) CR M), CBRL perce M) percentage cent ce ntag nt agee an ag and d do doll dollar llar ll ar p pro profi rofi ro fita tabi tability bili bi lity ty p per er ssto store tore u to und underperforms nder nd erpe er performs Bob Evans pe ns o on n a 10 compound (CAGR )basis. year ye ar ccom ompo om pound average annual growth rate po te ((CA CAGR CA GR ))ba basi ba sis. si s. CBRL AUV, AUV Restaurant Margin % Margin and $ per unit, vs. Bob Evans Year CBRL AUV ($000s) CBRL Retail only AUV ($000s) CBRL CRM, % BOBE AUV (Bob Evans) $000s) BOBE CRM 2000 $4152 $1005 12.3% $1569K 21.1% 2005 $3291 $876K 13.1% $1731K 19.4% 2010 $3226 $832K 12.9% $1726K 17.6% AUV CAGR. 2010 v. 2000 -2.49% -1.87% NM +.96% NM CAGR CRM Profit $ per unit -2.04% -.88% Source: SEC 10K reporting, with AUV and CRM calculated from text. CBRL FY-00 and BOBE FY-10 CRM estimated. BOBE acquired Mimi’s in 2004 which are not separately broken out in 2005 and 2010. 5980 Mission Center Road, Unit A | San Diego, CA 92123 | (619) 379-5561 jgordon@pacificmanagementconsultinggroup.com www.pacificmanagementconsultinggroup.com PACIFIC MANAGEMENT CONSULTING GROUP chain restaurant analysis and advisory CBRL1990s-2000s M&A resulted in tangled display When Mr. Biglari and group were researching the CBRL trends, we bet they did have trouble with CBRL displays back in the late 1990s to 2007. CBRL acquired Logan’s Roadhouse in 1999 and sold it at about a $307M profit in 2006 to PE firm Bruckman Rosser. CBRL’s Cracker Barrel and Logan’s separate 10Q/10K segment displays in that time period were difficult, almost impossible to track to separate concept profitability, now. In fact, the face of the displays violated the guideline noted in 1998 by the then CBRL founder and then Chair, Dan Evins, to run Logan’s as a standalone entity. Interestingly, Logan’s was growing rapidly in the early-mid 2000s and had positive same store sales results, which CBRL did not. Biglari claimed tangled CBRL restaurant/retail displays, but we always saw retail and restaurant sales separated, and an inventory dollar breakout. Retail sales (and any profits) were a subset of restaurant profitability. Retail gross profit was not disclosed. Toda To day, da y, the the C CBR BRL BR L we webs bsit bs ite features minimal managem it emen em entt di en disp spla sp lays la ys o oth ther th er ttha han routine SEC disclosu ha sure su re,, pe re perh rhap rh apss in ap Today, CBRL website management displays other than disclosure, perhaps reaction tto re o Mr Mr.. Bi Bigl glar gl ari.i. Its 2201 010/ 01 0/20 0/ 2011 20 11 discl clos cl osur os uree is ccle ur learer le er,, bu butt no now w it h has as o onl nlyy on nl onee co conc ncep nc ept. ep t. Biglari. 2010/2011 disclosure clearer, only concept. BH R Restaurant Ma Margin Dis iscl clos osur uree Al ur Also so P Poo oorr Disclosure Poor Interestingly, BH’ H’ss own 10K (and H’ nd ann nnua uall ma mana nage geme ment me nt let ette ter) r) d dis iscl is clos cl osur os uree fo ur format at h has as the he ssam amee pr am prob oble ob lem as did le BH’s annual management letter) disclosure same problem CBRL RL, gi givi ving ng p poo oor visibility to it oo itss two restaurant nt cconce cept ce pts, pt s, SSte teak te ak N Sha hake ha ke and nd W Wes este es tern te rn SSiz izzl iz zlin zl in. It iss im in impossible CBRL, giving poor concepts, Steak Shake Western Sizzlin. to breakout re rest restaurant stau st aura rant ope operating perating ng m margi margin gin n or E EBITD EBITDA, TDA, TD A, o orr even en ffre free reee ca cash sh flo ow w by ind individual ndiv nd ivid iv idua id uall co ua conc concept. ncep nc ept. ep t. A AUV AUVs UVs are not immediately vi im view viewable, ewab ew able ab le, no norr of ccou course ours ou rsee fr rs franchisee ee rres results esul es ults ul ts o off an anyy ki kind kind. nd. A nd Att ye year ar eend end, nd,, BH o nd ope operated pera pe rate ra ted te d 41 4122 St Stea Steak eakk N Shake ea units, franchises operates Western Sizzlin franchises unit its, s, ffra ranc ra nchi nc hise hi sess 71 se 71, and op oper erates er es 5 W Wes este es tern te rn SSiz izzl iz zlin zl in and fra ranc ra nchi nc hisess 91 hi 91. BH does no not do quarterly earnings calls bu butt ha hass an aann annual nnua nn uall me ua meet meeting etin et ingg an in and d is issu issues sues su es aan n an annual letter to stockho stockholders. hold ho lders. ld More analysis is required: because of the disclosure probl problems, blem bl ems, sep em separation eparation to separate concept CAPEX from CBRL and BOBE is required so that free cash flow for each concept can be calculated. Use of proper benchmarks all areas of the analysis, including stock price, is needed. John A. Gordon Pacific Management Consulting Group Chain restaurant analysis and advisory www.pacificmanagementconsultinggroup.com 5980 Mission Center Road, Unit A | San Diego, CA 92123 | (619) 379-5561 jgordon@pacificmanagementconsultinggroup.com www.pacificmanagementconsultinggroup.com
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