When I exited my position in Cracker Barrel (CBRL) in April of 2010, it was purely a profit-taking move because shares were around $53.
Although I still liked the company and concept, shares had been on a nice run since late 2008 and even longer-term, value-oriented investors need to take some money off the table when the opportunity presents itself. The intention was to re-establish a position in the low $40s. After topping out at $57 last December, shares have drifted back to the low $40s, but I have not pulled the trigger yet.
I was a restaurant bull coming out of the last recession, but the game has changed and I've been more cautious about this sector in 2011, though my caution was, admittedly, premature. I believe rising food costs and skittish consumers will weigh on the sector. If we double dip, or are already there, restaurants should do well in the aftermath. We'll see.
The truth is, although I've not yet taken a new CBRL position, I do have a stake indirectly through my position in Biglari Holdings (BH), which has been building a substantial position in CBRL. As of last week, Biglari owned 9.3% of Cracker Barrel's outstanding shares, making it the largest shareholder. Biglari Holdings Chairman and CEO Sardar Biglari does not usually take such large stakes in companies passively, so this could get interesting.
Last week, Biglari sent a letter to Cracker Barrel that had an overtly activist tone. That won't be much of a surprise to anyone familiar with Sardar Biglari and his way of doing business. In the letter, Biglari faults Cracker Barrel's management for not providing adequate financial disclosure of both the restaurant and retail segments operated by the company. Basically, Biglari wants the company to break out financial data for these segments rather than combine them, and he appears incensed at the response he has received from Cracker Barrel management so far. He goes so far to say that the company is either "not properly measuring the restaurant and retail businesses ... or are measuring/managing them properly but failing to report both operating segments to your owners." Ouch!
I am all for greater disclosure. If Biglari can convince the company to provide it, great. But his letter reads like nails on a chalkboard -- no great surprise -- and you have to wonder what his intentions are. He may believe that Cracker Barrel's retail business, which is connected to the restaurant and serves as a de facto waiting area, is not a good use of the company's capital. I wondered that myself before taking an initial stake in the company, presuming that the retail space might be better utilized as restaurant space. I concluded, however, that the country store, which generated 20.5% of 2010 revenue, is part of the company's allure, part of its culture and part of the whole Cracker Barrel experience.
Hopefully, Biglari gets that. Hopefully, he has visited several Cracker Barrel locations, walked around the country store and taken in some meals. I'd be shocked if he hasn't -- there are more than 40 Cracker Barrel locations in Texas, including three in San Antonio, where Biglari Holdings is headquartered.
Biglari may be looking for another fight or for another company to acquire and fix. I'm not certain Cracker Barrel needs to be fixed beyond improvements that many companies in the very competitive restaurant landscape face.
This situation is well worth watching.