Cracker Barrel’s 17.7% return over the past six months has outpaced the S&P 500 by 12.1%, and its stock price has climbed to $64.64 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Cracker Barrel, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Cracker Barrel Will Underperform?

We’re happy investors have made money, but we're swiping left on Cracker Barrel for now. Here are three reasons why CBRL doesn't excite us and a stock we'd rather own.

1. Same-Store Sales Falling Behind Peers

Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.

Cracker Barrel’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.3% per year.

2. Projected Revenue Growth Shows Limited Upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Cracker Barrel’s revenue to stall, a slight deceleration versus This projection is underwhelming and indicates its menu offerings will face some demand challenges.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Cracker Barrel’s $1.20 billion of debt exceeds the $9.81 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $225.9 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Cracker Barrel could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Cracker Barrel can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Cracker Barrel falls short of our quality standards. With its shares beating the market recently, the stock trades at 22.8× forward P/E (or $64.64 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.

Stocks We Would Buy Instead of Cracker Barrel

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