Shareholders of Cracker Barrel would probably like to forget the past six months even happened. The stock dropped 28.8% and now trades at $29. This might have investors contemplating their next move.

Is there a buying opportunity in Cracker Barrel, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Cracker Barrel Will Underperform?

Even with the cheaper entry price, we're swiping left on Cracker Barrel for now. Here are three reasons we avoid CBRL and a stock we'd rather own.

1. Flat Same-Store Sales Indicate Weak Demand

Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Cracker Barrel’s demand within its existing dining locations has barely increased over the last two years as its same-store sales were flat.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Cracker Barrel, its EPS declined by 33.1% annually over the last six years while its revenue grew by 1.2%. This tells us the company became less profitable on a per-share basis as it expanded.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

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 burned through $19.37 million of cash over the last year, and its $1.06 billion of debt exceeds the $8.57 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Cracker Barrel’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Cracker Barrel until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

Cracker Barrel falls short of our quality standards. After the recent drawdown, the stock trades at 12.7× forward EV-to-EBITDA (or $29 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at one of our top software and edge computing picks.

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