Strategic Planning & Management Assignment Study analysis: Company Analysis of Cracker Barrel Old Country Store Inc
Strategic Planning & Management Assignment Study analysis Review: Brief background of Cracker Barrel Old Country Store Incorporation
Introduction
Cracker Barrel Old Country Store Inc runs the eponymous chain of restaurants and gift stores in United States of America. The restaurants of the company display a southern country theme.
The company opened its first store in Lebanon, Tennessee in 1969. In its initial years the company limited its expansion to only the Southeastern and Midwestern parts of United States. Later on it started expanding to whole of country. Currently it runs more than 600 stores in around 43 of the 50 states of America.
Crack Barrel was founded by Danny “ Dan” Evins. Evins remained Chief Executive Officer of the company from 1969 to 2001, during which period the company posted rapid growth.
The headquarters of Cracker Barrel remain at Lebanon, Tennessee where its first gift-cum-restaurant store came up.
Over the years, Cracker Barrel has used outdoor advertising effectively for successfully marketing and positioning itself. Cracker Barrel also promotes country music through partnerships with country music artists.
Cracker Barrel’s gift-cum-restaurant stores give employment to around 67000 people. In the past Cracker Barrel had also been in the thick of controversies because of the anti-homosexuality stand of its management. However, after an agreement with the US Department of Justice the company stated in its policy statement that it does not discriminate among current and prospective employees on the basis of their sexual orientation or preference.
The incumbent President and Chief Executive Officer of Cracker Barrel old country store is Sandra Cochran. Ms. Cochran has been at the helm of the company since September 2011.
In the fiscal year ended on July 29th, 2011 the restaurant operations generated around 79 per cent of the total revenues of Cracker Barrel. Cracker Barrel restaurants are open between 6.00 a.m. and 10 p.m. every day and serve breakfast, lunch and dinner. The breakfasts are served all day long. The breakfast menu includes juices, eggs, pancakes, grits, sausages, bacon, country ham, and a wide range of biscuit specialties.
Lunch and dinner menu served at Cracker Barrel restaurants includes country ham, chicken and dumplings, country fried steak, pork chops, turnip greens, pinto beans, meatloaf etc.
Ratio Analysis of Cracker Barrel’s financial performance during the past three years:
Current Ratio:
The current ratio is the ratio of current assets to current liabilities of a company. It measures the short term liquidity of a company i.e. whether a company will be able to fulfill its short term obligations or not (Prasanna Chandra, 2010).
The current ratio of Cracker Barrel in 2011 was 0.92; in 2010 was 0.76; and in 2009 was 0.71. The ideal current ratio is 2. Cracker Barrel’s current ratio in all the three years is less than that; the company should therefore aim at increasing it.
Quick Ratio:
The quick ratio is the ratio of quick assets (current assets – inventory ) to current liabilities. The quick ratio of Cracker Barrel in 2011 was 0.27; in 2010 was 0.20 and in 2009 was 0.09.
The quick ratio of Cracker Barrel in all the three years is dismally low.
Average Collection Period:
The average collection period is an indicator of efficiency in collection of receivables and credit sales(Prasanna Chandra, 2010). Average collection period of Cracker Barrel in 2011 was 3.02 days; in 2010 was 2.053 days; and in 2009 was 1.96 days. So, average collection period has deteriorated over these years. The industry average collection period in 2011 was 3 days.
Inventory Turnover Ratio:
The inventory turnover ratio is measured as:
Cost of goods sold / Average Inventory
The inventory turnover ratio of Cracker Barrel in 2011 was 17.2; in 2010 was 16.7 and in 2009 was 17.2. The higher is the inventory turnover ratio, the more efficient is the management of inventories.
Fixed Assets Turnover Ratio:
The fixed assets turnover ratio is given by:
Net sales / Average net fixed assets
The fixed assets turnover ratio of Cracker Barrel in 2011 was 2.41; in 2010 was 2.39 and in 2009 was 2.36. A high turnover ratio is an indicator of higher efficiency in utilization of assets. The industry average fixed assets turnover ratio in 2011 was 2.
Debt Ratio:
The debt ratio is measured as:
Total Debt / Total Equity
The debt to equity ratio of Cracker Barrel in 2011 stood at 65.1 %; in 2010 it stood at 71.2 %; in 2009 it stood at 76.1 %. A high debt-to-ratio means that the company faces the risk of solvency(Prasanna Chandra, 2010). Cracker Barrel has succeeded in steadily reducing its debt-to-equity ratio over the years. The industry average for this ratio is 78 %.
Net profit margin:
The net profit margin measures what is left for shareholders as a per cent of sales. It is calculated as:
Net profit / Sales
Net profit margin of Cracker Barrel in 2011 stood at 3.5 %; in 2010 it stood at 3.6 % and in 2009 it stood at 2.8 %. The industry average is 4 %. The higher the net profit margin more is the operational efficiency.
SWOT Analysis of Cracker Barrel:
Strengths: A great product concept coupled with the core competency in terms of operational management which has been honed over the past four decades of the company’s existence.
Weaknesses: A very low profit margin reflects the company’s inability to increase operational efficiency further. If operational efficiency falls further then it may turn the company into a loss making entity.
Opportunities: Great opportunities lie ahead not only in terms of further expansion in the domestic market, but also in terms of international expansion. Crack Barrel can leverage its brand name for using the franchise model for international expansion.
Threats: The threats arise mainly from the intense competition which Crack Barrel faces. It gets competition from all kinds of restaurants and gift stores. Its main competitors include restaurant chains like McDonald’s, DineEquity Inc, Denny’s Corporation, Texas Roadhouse Inc etc.
My recommendation on the stock of Cracker Barrel based on macroeconomic factors and the assessment of the future of the company:
The stock of Cracker Barrel Inc is currently trading at a very high price-to-earnings ratio of 17.36. Such a high trading ratio can only be justified if the company succeeds in posting very high growth in terms of its earnings in future. Considering its very low profit margin, Cracker Barrel Inc will have to post very strong sales growth, if it wants to achieve the required high earnings growth. International expansion in future may give such a fillip to the revenue growth of the company. However this is still a long shot.
The macroeconomic environment is not very favorable in its domestic market of United States. Economic growth is low, unemployment is still high. In such a scenario consumers cut down on discretionary spending like eating in restaurants or buying gifts. This explains the low revenue growth of the company in the past three years.
At the current valuations, the stock of the company is extremely overvalued. So in spite of Cracker Barrel being a fundamentally very strong company, I would not recommend purchasing the stock at the current price.
MD28
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