Why Investors Should Stay Away From Cracker Barrel Now

Cracker Barrel Old Country Store, Inc. CBRL has been bearing the brunt of reduced guest traffic, increased commodity and wage inflation, along with shifts in consumer discretionary spending.
Recently, the company reported tepid third-quarter fiscal 2023 (ended Apr 28, 2023) results, with earnings and revenues missing the Zacks Consensus Estimate by 9% and 1.5%, respectively. The bottom line also declined 6.2% year over year. The downtrend is attributed to increased general and administrative expenses and the cost of retail goods sold. The company anticipates the near-term environment to remain challenging due to heightened economic uncertainty, lower discretionary spending and weaker consumer confidence.
Shares of CBRL have gained 5.1% in the past year, underperforming the Zacks Retail - Restaurants industry's growth of 28.7%.
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CBRL delivered a trailing four-quarter negative earnings surprise of 1.5%, on average. Earnings estimates for fiscal 2023 have moved south to $5.50 per share from $5.87 per share over the past 30 days. This depicts analysts' concern over the company's growth prospects. The Zacks Consensus Estimate for the company's fiscal 2023 EPS indicates a decline of 9.7% from the previous year's reported levels.
Let us discuss the factors broadly.

Factors Impeding Growth

Cracker Barrel has been persistently witnessing inflationary pressures that are negatively impacting its operational performance and reducing profit margins over the past few quarters.  Despite cost-saving initiatives, the company is experiencing high costs. In third-quarter fiscal 2023, it witnessed below-expectations growth in the comparable store sales due to a decline in the casual dining traffic toward the end of the quarter.
During the fiscal third quarter, the total cost of goods sold (as a percentage of total revenues) was 31.5% compared with 31.6% reported in the prior-year quarter. Although there was a 10 basis points decline, owing to higher revenues from increased menu pricing, the commodity inflation of 4.3% restricted its growth. Also, wage inflation was 5.5% in the quarter.
During the quarter, the adjusted operating margin was 4.1%, down from 4.3% in the prior-year quarter. For the fourth quarter of fiscal 2023, the company anticipates commodity inflation to be flat (with continued inflationary pressures in categories such as produce, eggs, dairy and grains) and wage inflation to be approximately 5% year over year.
Cracker Barrel operates in the retail restaurant space that is highly dependent on consumer discretionary spending. Consumers' propensity to spend largely depends on the overall macroeconomic scenario, which has been uncertain and risky for the past few quarters.
In the third quarter of fiscal 2023, the company's comparable store retail sales and retail revenues declined 4.6% and 4.2%, respectively, year over year. This decline was due to restaurant traffic deceleration and reduced consumer discretionary spending. Also, guest traffic declined 3.2% year over year.

Zacks Rank & Key Picks

Cracker Barrel currently carries a Zacks Rank #4 (Sell).
Some top-ranked stocks from the Zacks Retail-Wholesale sector are Yum China Holdings, Inc. YUMC, Chipotle Mexican Grill, Inc. CMG and Chuy's Holdings, Inc. CHUY.
Yum China currently sports a Zacks Rank #1 (Strong Buy). YUMC has a trailing four-quarter earnings surprise of 301.6%, on average. Shares of the company have gained 43.6% in the past year. 
The Zacks Consensus Estimate for YUMC's 2023 sales and EPS suggests growth of 19.7% and 89.5%, respectively, from the year-ago period's levels.
Chipotle currently sports a Zacks Rank #1. CMG has a trailing four-quarter earnings surprise of 4.7%, on average. Shares of the company have gained 63.1% in the past year.
The Zacks Consensus Estimate for CMG's 2023 sales and EPS suggests growth of 14% and 33.9%, respectively, from the year-ago period's levels.
Chuy's Holdings sports a Zacks Rank #1. CHUY has a trailing four-quarter earnings surprise of 23.4%, on average. Shares of the company have surged 100.1% in the past year.
The Zacks Consensus Estimate for CHUY's 2023 sales and EPS suggests growth of 9.9% and 27%, respectively, from the year-ago period's levels.