Cracker Barrel Old Country Store, Inc. · NASDAQ:CBRL
Cracker Barrel Old Country Store — Proxy Contest (April 2014)
25 slides from Cracker Barrel Old Country Store's proxy contest presentation, Apr 3, 2014
Slide 1: Cracker Barrel Old Country Store, Inc. (CBRL) Presentation to ISS
Cracker Barrel Old Country Store, Inc. (CBRL) Presentation to ISS April 3, 2014
Slide 2: Consider a sale?
consider a sale? ( The Board and management continue to pursue a failing operating plan as reflected in negative customertraffic and declining store operating income margin. Furthermore, continued focus on new store openings generate dismal return on capital. Cl We believe there is significant downs
Slide 3: The current strategy is not working
a a The current strategy is not working
Slide 4: CBRL Strategic Initiatives
CBRL Strategic Initiatives CBRL Strategic Initiatives f ’ + mphaie unique ad proprietary kes Innovative fF + Marto spend to rcease me i ‘uch as Cae Bare branded fo, New Marketing Coreg, H Tactics Driving tepenal terns, and naw exeve do Messaging + Advertsing to bu ate Cle ie Reinforce Authentic Valu
Slide 5: The Reality — stagnant operating income
The Reality — stagnant operating income - The six-pronged strategy has failed to provide meaningful operating income growth despite new store openings Adjusted operating income’ is stagnant 7° 1 Potmores 616 co os Source: SEC filings. * Adjusted operating income = Store operating Income G&A expense
Slide 6: Failure to attract customers
Failure to attract customers - Since announcement of Strategic Priorities (1QFY12), cumulative traffic has declined by approximately 1%. Importantly, comparable period customer traffic has fallen from 1.1% to -2.9% in 2QFY14, resulting in a net 4% contraction. - Strategic Priorities have failed to d
Slide 7: Decline in customer traffic
Decline in customer traffic - Customer traffic has been negative for the last five months. Comparable Restaurant Traffic (vor) 50x 4am 40x 30% 20% 4.8% 126 sox 01% 03% pred irr = 08% “13% 40% 0% aa 0% Febery Maria Apr13_Mayt9_hun-19,_Juh19,_Aug-13_Sep-19,Oct13 Nowa Dect3 ante | Source: SEC filings
Slide 8: Cracker Barrel is losing customers yet it spends more on advertising
Cracker Barrel is losing customers yet it spends more on advertising Advertising expense $60.0 $562 30 riz ra Source: SEC filings.
Slide 9: Failure to generate traffic is affecting restaurant revenue growth
Failure to generate traffic is affecting restaurant revenue growth -Cracker Barrel has failed to attract new customers and as a result the growth in restaurant revenues has dropped to zero. - Importantly, we believe in the past menu price increases have artificially and unsustainably propped up the
Slide 10: Cost reduction strategy has not worked
Cost reduction strategy has not worked - Not only has Cracker Barrel's growth initiative failed, its cost reduction initiatives have been ineffective as demonstrated by weakening restaurant gross profit margin. Restaurant Gross Profit Margin 780% = Pe nse nox nsx nox xqz012 | 202012 302012 sa7012 10
Slide 11: Overall profitability has declined
Overall profitability has declined - Failed growth and cost reduction strategies, coupled with inability to drive customer traffic, have resulted in stagnant gross profit and store operating income margins. Gross Profit and Store Operating Income Margins om _ om i i Joon i Zizox g 129% 676% on naan
Slide 12: Profitability declines
Profitability declines - Despite the implementation of the Strategic Priorities, 2QFY14 store operating income margin was 100 bps lower than in 1QFY12. - We do not believe the current management has the ability to improve store level profitability. Store operating Income margin Source: FactSet datab
Slide 13: Disconnect between CBRL rhetoric and reality
Disconnect between CBRL rhetoric and reality ~ “We are pleasedio report an increase in eamingsper diluted share this quarter over the prior year, as wellas @ sequential improvement in restaurant and retail sales trends during the quarter. We believe these results demonstrate the early success of the
Slide 14: Decline in Consumer Picks 2014 ratings
Decline in Consumer Picks 2014 ratings Future growth problematic - Cracker Barrel witnessed deterioration in 8 out of the 10 categories surveyed in the Consumer Picks 2014. - Most alarming is the decline in the “Likely to Recommend” and “Likely to Return” categories, which would directly impact cust
Slide 15: Hope is not a strategy
Hope is not a strategy Declining execution at store level Declining customer traffic Declining profits
Slide 16: Implied valuation risk is high
a a Implied valuation risk is high
Slide 17: Cracker Barrel claims it created $1,485.4 million in shareholder value
- In its March 12, 2014 investor presentation, Cracker Barrel claims that it had created $1,485.4 million in shareholder value. - We believe the increase in market capitalization can be largely attributed to: a) multiple expansion and b) the impact of lower interest expense on net incom: - Managemen
Slide 18: Further upside from multiple expansion may be limited
Further upside from multiple expansion may be limited -Cracker Barrel's market value has benefited from significant sector-level and stock specific multiple expansion. - Further upside may be limited as valuation multiples, including Cracker Barrel's, are close to historical (10-year) highs. istorca
Slide 19: Cracker Barrel has already begun to underperform the peer group
Cracker Barrel has already begun to underperform the peer group - The decline in CBRL’s valuation multiple since Aug. 2013 has resulted in its Total Shareholder Return (“TSR”) lagging the peer median. Indexed Total Shareholder Return (2 Aug. 2013 - 1 April 2014) “ane ar ee LPP PPP EPP PL APPA AL? So
Slide 20: Valuation at risk because of diminishing operating income growth
Valuation at risk because of diminishing operating income growth - With core operating metrics under pressure, Cracker Barrel has reduced debt (despite historically low interest rates) in order to maintain income growth. - Since 2012, lower interest expense has been the key driver of income growth.
Slide 21: A sale is the best option
a a Asale is the best option
Slide 22: New Marketing Messaging
New Marketing ‘Messaging = The core value proposition is losing traction as reflected in declining customer traffic. ~ "Everyday Affordability" is impacted by menu price increases in each of the last 10 quarters ~ Between Q1FY12 and Q2FY‘14 the ‘average check’ increased by 2.5% (mean), largely drive
Slide 23: Summary of execution failures and case for a strategic transaction
+ Decline in store-tevel execution as.rflectedin "Consumer Picks 2014" survey + Failure to drive customer traffic + Failure to reduce operating costs and improve margins + New store openings generating subpar retums,;ie,, poor return on invested capital + Failure to define the optimal capital struct
Slide 24: Take action to amend Tennessee Business Corp Act
Take action to amend Tennessee Business Corp Act Cl We do not believe the Board and management are able to maximize the intrinsic business value of the Company. QO We have stated our willingness to enter into discussions to acquire the Company. However, the only way for shareholders to benefit from
Slide 25: Conclusion
Conclusion CO The Board and management continue to pursue a failed operating plan as reflected in negative customer traffic and stagnant store operating margin. Furthermore, continued focus on new store openings generates suboptimal return on capital. Ci We believe there is significant downside risk
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