SHOWDOWN AT CRACKER BARREL
The perspective that will be adopted for the purpose of this case analysis will be that of an institutional shareholder of Cracker Barrel. The final recommendations of this report will focus on the anticipated vote to determine whether or not Sardar Biglari should be allowed to acquire a seat on the board of directors.
The aggressive board challenges by Biglari have resulted in defensive moves by the current directors. Biglari has been vocal in his attempt to leverage his 10% stake in the company and desire to join the board of directors. In reaction to this move the board of directors has appointed additional like-minded directors to help move the company forward into an anticipated period of growth.
Additionally the company moved to block Biglari from buying more stock on the open market. It adopted a shareholder rights plan or poison pill. The poison pill gives existing shareholders the right to buy more shares if anyone acquired more than 10% of the company. Unfortunately this move has the appearance of desperation with the board more concerned with preventing their largest shareholder from gaining control and not addressing his legitimate concerns.
Cracker Barrel’s financial performance has been mediocre in recent years. In the period between 2005 and 2011, their operating income has declined by 0.5% and their customer traffic had been decreasing by an average of 2.2% per year.
However, over this period, they have kept shareholders relatively happy with modest share price growth (with the exception of the 2008 financial crisis), earnings per share growth, and dividend increases. Also, they have managed to open 75 successful new retail locations and pay down some long-term debt.
After Biglari announced his ownership position and intentions in June 2011, Cracker Barrel implemented a series of significant changes. They replaced three existing directors (two of which had tenures in excess of 15 years) with four new directors. In addition, CEO Michael Woodhouse stepped down and was replaced with Sandra Cochran.
Cochran then quickly announced a six-point plan aimed at improving sales and profits and updating their pricing strategy. The market responded favorably to this strategy as the stock price began to rebound from an 18-month low before this announcement. Cracker Barrel’s stock has subsequently increased by over 25% between September and December 2011.
PEER GROUP PERFORMANCE
In determining the investment value of Cracker Barrel, a peer group comparative analysis was completed. Biglari’s comparison of Cracker Barrel to the S&P 500 restaurant index is inaccurate and misleading. The following criteria was used in developing a more accurate peer group for Cracker Barrel:
Only small and mid-cap companies were considered. Cracker barrel is a small-cap restaurant chain with approximately 600 locations, all located within the United States. The S&P 500 Index primarily includes restaurant chains with an international presence, franchised business model, and several thousand locations.
Quick service or fast food restaurants were excluded. Note that although CEC Entertainment and Red Robin were labeled as ‘Quick service’ in the case, we consider these restaurants to be in the ‘casual dining’ and ‘family restaurant’ category and consider them to be quite similar to Cracker Barrel. As such they were included in the peer group.
Small and mid-cap restaurants that were heavily franchised (less than 25% of stores owned by the company) were excluded, as their business model is quite different than Cracker Barrel, which does not franchise.
Only family restaurants without a primary focus on alcohol service were included in the peer analysis. We did not exclude restaurants that had alcohol on the menu, but we wanted to avoid comparing to bar or pub–style establishments, as they catered...
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