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Subject: Cracker Barrel Restaurants--CBRL Date: 2/21/2004 3:08 PM
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The Cracker Barrel(CBRL)
Current price $37.70
Market cap $1.77 billion

The CBRL holding company owns and operates or leases Cracker Barrel Restaurants and Logan's Roadhouse restaurants.

Cracker Barrel Old Country Store, Inc.operates 484 full service "country store" restaurants and gift shops, which are located in 41 states. Stores primarily are located along interstate highways; however, 59 stores are located near "tourist destinations" or are considered "off-interstate" stores. These "off-interstate" stores represent a significant part of Cracker Barrel's expected future efforts to expand the brand. However, in fiscal 2004 Cracker Barrel intends to open up to 75% of its new stores along interstate highways as compared to approximately half in fiscal 2003.

The restaurants serve breakfast, lunch and dinner daily between the hours of 6:00 a.m. and 10:00 p.m. (11:00 p.m. on Fridays and Saturdays) and feature home style country cooking from Cracker Barrel's own recipes using quality ingredients and emphasizing authenticity. Menu items are moderately priced and include country ham, chicken, fish, roast beef, beans, turnip greens, vegetable plates, salads, sandwiches, pancakes, eggs, bacon, sausage and grits among other items. The restaurants do not serve alcoholic beverages. The stores are constructed in a trademarked rustic, old country store design and feature a separate retail area offering a wide variety of decorative and functional items specializing in rocking chairs, holiday and seasonal gifts and toys, apparel, cookware and foods. The Cracker Barrel”s retail sales per square foot are over $425 annually. Cracker Barrel was ranked as the top family dining chain for the thirteenth consecutive year in the 2003 Restaurants & Institutions magazine "Choice in Chains" annual consumer survey. Additionally, Cracker Barrel was named "Chain of the Year" by Restaurant Hospitality magazine
in its August 2003 issue.

The menu consists of: breakfast items juices, eggs, pancakes, bacon, country ham, sausage, grits, and a variety of biscuit specialties, including gravy and biscuits and country ham and biscuits; lunch and dinner items include country ham, chicken and dumplings, chicken fried chicken, meatloaf, country fried steak, pork chops, fish, steak, roast beef, vegetable plates, salads, sandwiches, soups and specialty items such as pinto beans and turnip greens. Lunches and dinners range in price from $2.99 to $12.99.

The average check per customer for fiscal 2003 was $7.54.. A price increase of less than 1% was instituted in November 2002.

The retail operations, which generated approximately 23% of Cracker Barrel's total revenue in fiscal 2003, offer a wide variety of decorative and functional items such as rocking chairs, holiday gifts and toys, apparel, cast iron cookware, old-fashioned crockery, handcrafted figurines, a book-on-audio sale and exchange program and various other gift items. Approximately 25% of Cracker Barrel's retail purchases in fiscal 2003 were directly from the People's Republic of China, and the Company believes that other of its retail merchandise vendors may also make such purchases of items sold to Cracker Barrel.

Logan's Roadhouse in 17 states operates 101 Logan's Roadhouse restaurants and franchises an additional 16 Logan's restaurants. Logan's restaurants feature steaks, ribs, chicken and seafood dishes and combinations among other items served in a distinctive atmosphere reminiscent of an American roadhouse of the 1930s and 1940s. The restaurants are open seven days a week for lunch and dinner and offer full bar service. Sales of alcohol added 9% Logan's net sales in fiscal 2003. Specialty appetizers include hot wings "roadhouse-style", baby back rib baskets and "roadhouse" nachos. The Logan's dinner menu features an assortment of specially seasoned USDA choice steaks, extra-aged, and cut by hand on premises. They also feature slow-cooked baby back ribs, seafood, mesquite grilled shrimp, mesquite grilled pork chops, grilled chicken and an assortment of hamburgers, salads and sandwiches. All dinner entrees include dinner salad, made-from-scratch yeast rolls and a choice of brown sugar and cinnamon sweet potato, baked potato, mashed potatoes, steamed vegetables, fries or rice pilaf.

Growth

Expansion
 
Cracker Barrel opened the following 23 new stores in fiscal 2003:

Interstate Off-Interstate
---------- --------------
Florida 1 6
Georgia 1 3
Ohio 2 -
Tennessee 1 1
Kentucky 1 -
Michigan 1 -
New Jersey 1 -
North Carolina 1 -
Pennsylvania 1 1
Virginia - 1
West Virginia 1 -

Cracker Barrel plans to open 24 new stores during fiscal 2004, of which
four of those stores are already open as of October 15, 2003:

Logan's opened the following 12 new company-operated restaurants and 4
franchised restaurants in fiscal 2003:

Company-Operated Franchised
---------------- ----------
Indiana 3 -
North Carolina - 2
Tennessee 3 -
Alabama 2 -
Texas 2 -
California - 1
Georgia 1 -
Michigan 1 -
South Carolina - 1



Logan's plans to open 11 new company-operated restaurants and four
franchised restaurants during fiscal 2004, of which five company-operated
restaurants are already open as of October 15, 2003.

Sale Leaseback
It traditionally has been the Company's strategy to own its properties.
However, on July 31, 2000, Cracker Barrel completed a sale-leaseback transaction involving 65 of its owned Cracker Barrel stores, and in recent years it has made greater use of ground leases for real estate acquisitions. The sale-leaseback transaction was for an initial term of 21 years plus options for up to 20
additional years. New leases typically have base terms of ten to fifteen years
with renewal options at pre-determined rates for another fifteen to twenty
years. Of the 484 Cracker Barrel stores open as of October 15, 2003, the company owns 350, while the other 134 properties are either ground leases or ground and building leases.

The following table highlights comparable store sales* results over the past two years:
 


Cracker Barrel Old Country Store Logan's Roadhouse
Period to Period Period to Period
Increase(Decrease) Increase
------------------ --------
2003 vs 2002 2002 vs 2001 2003 vs 2002 2002 vs 2001
430 Stores) (414 Stores) (71 Stores) (59 Stores)

Restaurant 0.5% 5.3% 0.0% 2.4%
Retail (0.4) 2.3 -- --
Restaurant/retail 0.3 4.6 0.0 2.4



Income Statement in thousands

August 1, August 2, August 3,
2003 2002 2001

Total revenue $2,198,182 $2,071,784 $1,967,998
Cost of goods sold 703,915 677,738 664,332

Gross profit 1,494,267 1,394,046 1,303,666

Labor & other related expenses 819,957 777,617 732,419
Other store operating expenses 378,343 351,977 357,640

Store operating income 295,967 264,452 213,607
General and administrative 121,886 115,152 102,541
Amortization of goodwill -- -- 14,370

Operating income 174,081 149,300 96,696
Interest expense 8,892 6,769 12,316
Interest income 73 -- 84

Income before income taxes 165,262 142,531 84,464
Provision for income taxes 58,733 50,742 35,283

Net income $ 106,529 $ 91,789 $ 49,181

Net income per share - basic $2.16 $1.69 $.88
Net income per share - diluted $2.09 $1.64 $.87

Basic weighted average shares
outstanding 49,274,373 54,198,845 56,128,956
Diluted weighted average shares
Outstanding 50,998,339 56,090,940 56,799,124

Ratios for the income statement
 
2003 2002 2001 2000 1999

Gross Profit 71% 70% 69% 69% 68%
Operating Margin 11% 10% 8% 10% 12%
Net Margin 5% 4% 3% 3% 5%
Growth in Revenue 6% 5% 11% 16% --
Growth in Net Income 16% 87% -17% -16% --
Growth in COGS 4% 0% 11% 14% --
Change in Marketing Costs 0.06 0.04 0.15 0.19 --



*Comparable store sales consist of sales of stores open six full quarters at the beginning of the year; and are measured on comparable calendar weeks.

**Cracker Barrel comparable store restaurant sales increased 0.5% for 2003
versus 2002. Comparable store restaurant sales increased 5.3% in 2002 versus the comparable 52-weeks of 2001. The increase in comparable store restaurant sales from 2002 to 2003 was due primarily to an increase in average check of 1.9%, including 1.1% of menu pricing and 0.8% of product mix, and a decrease in guest traffic of 1.4%.

**Cracker Barrel comparable store retail sales decreased 0.4% for 2003 versus
2002. Comparable store retail sales increased 2.3% in 2002 versus the comparable 52-weeks of 2001. The comparable store retail sales decrease from 2002 to 2003 was primarily due to the restaurant guest traffic decrease.

**Logan's comparable store sales were flat for 2003 versus 2002 at an average of $2,915 per store. Comparable store sales increased 2.4% for 2002 versus the comparable 52 weeks of 2001. The unchanged comparable store sales from 2002 to 2003 was primarily due to an increase in average check of 1.7%, including 1.0% of menu pricing and 0.7% of product mix (which reflected lower alcohol mix and increased food and non-alcoholic beverage mix), offset by a decrease in guest traffic of 1.7%.

**Total revenue increased approximately 6% and 5% in 2003 and 2002, respectively, benefiting from the opening of 23, 20 and 15 new Cracker Barrel stores in 2003, 2002 and 2001, respectively, and the opening of 12, 9 and 13 new company-operated Logan's restaurants in 2003, 2002 and 2001,respectively.

**Additionally, 2001 revenues benefited from a 53rd week, which accounted for
approximately 2% of total revenue.

**Average unit volumes, based on weeks of operation, were approximately $60.9 per week for Cracker Barrel restaurants in 2003 (compared with $60.6 in 2002 and $57.5 in 2001), $18.2 for Cracker Barrel retail (compared with $18.3 for 2002 and $17.9 for 2001), and $57.0 for Logan's (compared with $56.6 for 2002 and $54.9 for 2001).


**Total revenue, which increased approximately 6% and 5% in 2003 and 2002,
respectively, benefited from the opening of 23, 20 and 15 new Cracker Barrel
stores in 2003, 2002 and 2001, respectively, and the opening of 12, 9 and 13 new company-operated Logan's restaurants in 2003, 2002 and 2001, respectively.

If they only open another 24 restaurants this year, how much are they going to grow? 23 openings last year only generated 6% increase in revenue.

**Additionally, 2001 revenues benefited from a 53rd week, which accounted for
approximately 2% of total revenue. Average unit volumes, based on weeks of
operation, were approximately $60.9 per week for Cracker Barrel restaurants in
2003 (compared with $60.6 in 2002 and $57.5 in 2001), $18.2 for Cracker Barrel retail (compared with $18.3 for 2002 and $17.9 for 2001), and $57.0 for Logan's (compared with $56.6 for 2002 and $54.9 for 2001).

** Cost of goods sold as a percentage of total revenue decreased in 2003 to
32.0% from 32.7% in 2002. Cracker Barrel has had various focused initiatives
aimed at improving cost of product from vendors. This decrease was due primarily to lower commodity costs for orange juice and certain pork and dairy products versus the prior year, higher menu pricing, higher initial mark-ons of retail merchandise, lower retail shrink and in-store damages, a lower mix of retail sales as a percent of total revenues (retail has a higher product cost than
restaurant) and improvements in restaurant-level execution.

** Food cost as a percentage of net restaurant sales in 2003 decreased from 2002 primarily for the reasons applied to 2001-2002
.
**General and administrative expenses as a percentage of total revenue
were 5.6%, 5.6% and 5.2% in 2003, 2002 and 2001, respectively. Higher
professional fees, higher costs for store manager conferences and higher
corporate bonuses reflective of performance improvements versus a year ago were offset by higher revenues from menu pricing and new stores versus the prior year. I question bonuses for performance when customer counts were down and same store sales were either flat or barely rising. The only thing contributing to revenue growth was new store openings. This kind of growth is much less satisfactory than increasing same store sales and increasing customer counts.
**Decreasing number of share--share buybacks
**Good net margins increasing slightly
**Good control of COGS

**Growth took a nosedive in 2000 and 2001 and came back in 2002 but slowed again in 2003. Is the family farm fare out of favor? Or can CBRL bring customers back without changing the concept and the menu?

Balance Sheet in thousands
                                                                                      

August 1, August 2,
Assets 2003 2002

Current Assets:
Cash and cash equivalents $ 14,389 $ 15,074
Receivables 9,013 8,161
Inventories 136,020 124,693
Prepaid expenses 9,069 12,022
Deferred income taxes 7,568 11,632
Total current assets 176,059 171,582

Property and Equipment:
Land 273,831 261,857
Buildings and improvements 625,541 603,381
Buildings under capital leases 3,289 3,289
Restaurant and other equipment 331,065 321,544
Leasehold improvements 164,937 122,869
Construction in progress 19,268 16,106

Total 1,417,931 1,329,046
Less: Accumulated depreciation and
amortization of capital leases 377,616 344,229

Property and equipment - net 1,040,315 984,817

Goodwill 92,882 92,882

Total $1,326,323 $1,263,831

Current Liabilities:
Accounts payable $ 82,172 $ 73,806
Current maturities of long-term debt
and other long-term obligations 100 87
Taxes withheld and accrued 32,103 28,681
Income taxes payable 11,952 18,519
Accrued employee compensation 50,153 43,462
Accrued employee benefits 38,782 33,421

Total current liabilities 246,714 225,827

Long-term Debt 186,730 194,476

Retained earnings 794,417 782,491


Total shareholders' equity 794,896 782,994

Total $1,326,323 $1,263,831


**Taxes:Provision for income taxes as a percent of pretax income was 35.5%
for 2003, 35.6% for 2002 and 41.8% for 2001. The primary reason for the decrease in the tax rate from 2002 to 2003 was a decrease in effective state tax rates.

Ratios for the balance sheet

2003 2002 2001 2000 1999

Current ratio 0.71 0.74 0.79 0.83 0.96
Quick Ratio 0.06 0.06 0.06 0.08 0.13
Accounts receivable growth(AR) 9.76% -19.61% -12.07% 30.34 --
DSO 1.49 1.45 1.90 2.39 2.12
Days Inventory on hand 77.62 74.01 69.34 70.86 75.40
Day Payable Outstanding 46.92 50.74 38.59 41.17 50.49
ROA 8.03% 7.26% 4.06% 4.42% 5.49%
ROE 13.40% 11.72% 5.81% 7.12% 8.87%
ROIC 17.73% 15.26% 9.96% 10.60% 2.08%
Fixed asset turnover 2.11 2.10 2.06 1.65 --
Debt to equity 23.50% 24.85% 14.80% 35.46% 39.90%
Debt to capitalization 19.03% 19.91% 12.89% 26.18% 28.52%
Book value 16.59 15.57 15.38 14.62 13.50
Cash per share 0.30 0.30 0.21 0.25 0.31
Working capital -70.6 -61.6 -42 -29.6 -5.8
Non Cash Working Capital -84.9 -76.6 -53.6 -43.3 -21.4
Cash Conversion Cycle 32.20 24.71 32.64 32.08 27.03



**The Company had negative working capital of $70,655 at August 1, 2003
versus negative working capital of $54,245 at August 2, 2002. In the restaurant industry, substantially all sales are either for cash or credit card. Like many other restaurant companies, the Company is able to, and may from time to time, operate with negative working capital. In spite of the tendency for cash for sales businesses to run on negative working capital, CBRL is increasing liabilities yearly faster than it increases assets. Can this go on forever?

**Current and quick ratios reflect the negative working capital. They are
low
**AR under good control
**Decreasing cash
****Decreasing shares provide some shareholder value.
**Debt not out of line except the
**ROE and ROIC are not high, but are improving
**Higher than typical cash conversion cycle in a cash business is due to the retail sales division. Likely the days inventory on hand is a reflection of this also.

**Restaurant inventories purchased through the Company's principal food distributor are on terms of net zero days, while restaurant inventories purchased locally generally are financed from normal trade credit.

**Retail inventories purchased domestically generally are financed from normal trade credit, while imported retail inventories generally are purchased through letters of credit and wire transfers. These various trade terms are aided by rapid turnover of the restaurant inventory.

**Employees generally are paid on weekly, bi-weekly or semi-monthly
schedules in arrears for hours worked, and certain expenses such as certain taxes and some benefits are deferred for longer periods of time.

**Debt:In April 2002, the Company issued $422,050 face value at maturity of
zero coupon convertible senior notes (, maturing on April 2, 2032, and received proceeds totaling approximately $172,756 prior to debt issuance costs. The Notes require no cash interest payments and were issued at a discount representing a yield to maturity of 3.00% per annum. Each $1 Note is convertible into 10.8584 shares of the Company's common stock (approximately 4.6 million shares in the aggregate)

Cash Flow Statement in thousands

August 1, August 2, August 3,
2003 2002 2001

Cash flows from operating activities:

Net income $ 106,529 $ 91,789 $ 49,181
Depreciation and amortization 64,376 62,759 64,902
Loss (gain) on disposition of property
and equipment 903 (781) 671
Impairment loss -- -- 24,431
Accretion on zero-coupon contingently
convertible senior notes 5,254 1,720 --
Tax benefit realized upon
exercise of stock options 13,399 9,991 431

Net cash provided by
operating activities 240,586 196,277 147,859

Cash flows from investing activities:
Purchase of property and
equipment (120,921) (96,692) (91,439)
Proceeds from sale of property and
equipment 1,968 5,813 141,283

Net cash (used in) provided by investing
activities (118,953) (90,879) 49,844

Cash flows from financing activities:

Proceeds from issuance of
long-term debt 353,200 591,756 355,600
Proceeds from exercise of
stock options 59,649 53,103 5,155
Principal payments under
long-term debt and other
long-term obligations (366,287) (524,140) (522,790)
Purchases and retirement of common stock (166,632) (216,834) (36,444)

Dividends on common stock (1,043) (1,163) (1,185)



Ratios for the cash flow statement
 
2003 2002 2001 2000 1999

Total shares 47.9 50.3 55 56.7 58.6
Growth in Capex 25.03% 5.80% -33.77% -60.24% --
Capex to operating cash flow 50.25% 50.52% 61.84% 86.14% 246.34%
Free cash flow 119.7 94.7 56.4 22.2 -207.2
Free cash flow per share 2.50 1.88 1.03 0.39 -3.54
Operating cash/Revenue 0.11 0.09 0.08 0.09 0.09
Growth in Cash Flow 26.40% 67.91% 154.05% 110.71% --


**Positive free cash flow
**Initiated a small dividend
**Positive operating cash flow sufficient to pay capex

**The Company's cash generated from operating activities was $240,586 in
2003. Most of this cash was provided by net income adjusted by depreciation and amortization, accretion on zero-coupon contingently convertible senior notes and the tax benefit realized upon exercise of stock options.

**Decreases in prepaid expenses and increases in accounts payable, taxes withheld and accrued, accrued employee compensation, accrued employee benefits, other accrued expenses, other long-term obligations and deferred income taxes were partially offset by increases in receivables, inventories and other assets and decreases in income taxes payable.

**The sale-leaseback transaction that the Company entered into at the
beginning of 2001 generated cash of $138,280 from the sale of 65 Cracker Barrel units that was used to reduce the Company's borrowings under its revolving credit facility.

**CBRL completed acquisition of 5 million shares of treasury stock in the first three repurchase authorizations and 338,700 shares of the fourth repurchase authorization during 2003 for total consideration of $166,632 or $31.21 per share.

** On September 25, 2003 the Company's Board of Directors approved a new
quarterly dividend policy, declaring the first such quarterly dividend of $0.11

**The Company estimates that its capital expenditures (purchase of property and equipment) for 2004 will be approximately $140,000 to $145,000,
substantially all of which will be related to the construction of 24 new Cracker Barrel stores and 11 new Logan's restaurants.

**CBRL intends to use excess cash along with proceeds from the exercise of stock options in 2004 to apply toward completing its remaining 661,300 share repurchase authorization, possible future share repurchase authorizations, dividend payments, and possible debt reduction or other purposes.



Options

(Shares in thousands) 2003 2002 2001

Weighted- Weighted- Weighted-
Average Average Average
Fixed Options Shares Price Shares Price Shares Price


Outstanding at
beginning of year 9,504 $20.23 10,504 $19.77 9,630 $20.89
Granted 1,907 23.85 2,506 20.13 2,481 14.76
Exercised (2,922) 20.90 (2,869) 18.67 (357) 14.23
Forfeited or canceled (890) 21.54 (637) 19.33 (1,250) 20.03
------ ------ ------
Outstanding at
end of year 7,599 20.73 9,504 20.23 10,504 19.77
====== ====== ======
Options exercisable
at year-end 3,696 20.69 5,148 22.58 5,919 23.16
Weighted-average fair
value per share of
options granted
during the year $10.20 $ 9.46 $ 7.16

Options outstanding 7.6M
Value per share $10.20
Total value $77.5M
Common shares 47.9
Dilution 15.9% high
Value per share $1.62 not shareholder friendly

Discussion

The Cracker Barrel was a restaurant that used to have lines to get in and a wait for a table. Lately, customer counts are declining and sales are sluggish. Has the novelty worn off? Is the concept of country farm fare out of favor? It would appear so. Trends in dining change and CBRL seems to be unable to hold its own.

Opening 23 or 24 restaurants per year is not going to turn this company around. Maybe they need a fundamental shift in concept, or perhaps they can just wait it out until their menu generates more interest. I wouldn't buy into this chain now.

they do return some value to the shareholder with stock buybacks and dividends, but they take it away with generous amounts of stock options. And the stock is trading at high numbers recently. Last March it was in the mid 20's and now it's touching $40. Why so high with such lackluster growth?

A DCF giving them 10% growth for 5 years and 3% stable growth puts the value at $37.89. This is a little skewed as they don't get penalized on free cash flow for positive increases im working capital. I don't know how long a restaurant can continue decreasing working capital every year as CBRL is doing. The 10% growth was a nod to the 6% they are likely to achieve and 4% for increasing same store sales, which seem to be improving in 2004.Growth in EPS to match 2003 would depend on stock buybacks which are not guaranteed, although some are authorized. To be na investor, I would require at least a 30% discount to compensate for the risk that declining same store sales represent. They have not announced any plans to change the business model or the menu.

>^..^<
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