Welcome!

News Feed Item

Biglari Holdings Comments On Institutional Shareholder Services, Inc.'s Erroneous Analysis Of Cracker Barrel Old Country Store, Inc. Return On Investment

SAN ANTONIO, Nov. 9, 2012 /PRNewswire/ -- Biglari Holdings Inc. (NYSE: BH) today announced that the analysis conducted by Institutional Shareholder Services, Inc., a proxy advisory firm ("ISS"), on a critical financial metric for Cracker Barrel Old Country Store, Inc. (NASDAQ: CBRL) is fundamentally flawed and inaccurate.

It is incontrovertible that ISS' calculations of Cracker Barrel's return on investment on its 116 new stores opened between 2004 and 2009 simply do not add up.

Background

Cracker Barrel has been telling its shareholders that its return on investment on these 116 new stores is 16.2%.  But Cracker Barrel failed to include relevant expenses. Cracker Barrel CFO Lawrence Hyatt has stated in an SEC filing that "the Company believes that making an allocation of general and administrative, interest and tax expenses to these [116] stores is not material to an investor's understanding of the results for these stores or the Company's decision-making in determining to build new stores." Biglari Holdings and ISS both disagree with Mr. Hyatt on excluding such expenses; in fact, both Biglari Holdings and ISS believe that general and administrative ("G&A") expenses must be factored into the determination of return on new store investment.  ISS states, "The real calculation from a shareholder perspective should be whether the incremental investment, including all incremental costs such as taxes, returned incremental net income at greater than the cost of capital.  Depreciation and G&A expense, therefore, should be included as expenses in the calculation to the extent they are incremental." 

Cracker Barrel does disclose incremental depreciation even though it fails to factor it into its computation of return on investment. Mr. Hyatt discloses 'Store EBITDA' and depreciation for the 116 stores to be $61.8 million and $14.7 million, respectively. The only piece of data he does not disclose, nor apparently believes is important, are G&A expenses for these stores.

The key question is therefore the correct number to use for G&A expenses. We factored in $235,000 per store for it is Cracker Barrel's actual G&A per store for fiscal 2012. In our October 25, 2012 letter we also provided shareholders with per-store G&A expenses for the last 15 years; these data allow each shareholder to choose a different figure based on what he or she believes would be most appropriate. Nevertheless, ISS makes the following statement (referring to return on new store investment as ROIC):

"From 2005 through 2012 total G&A grew by $31.3 million, or an average of $270,000 incremental G&A for each of the 116 new stores opened in that period. If this were the true incremental G&A expense—and even assuming no further adjustments to [Biglari's] assumptions about depreciation and tax expense were necessary to get to true incremental numbers—the calculated ROIC rises from 3.7% to 10.7%."

ISS' above statement is factually wrong. An estimate of $270,000 per store of incremental G&A expense rather than $235,000 per store in our analysis would reduce return on investment. Yet ISS concludes that return increased from 3.7% to 10.7% — a mathematical impossibility! We urge shareholders to do their own analysis.

Even if we factor a zero for incremental G&A expense, the return becomes 8.7%. The following table sets forth the facts:

Calculation of Cracker Barrel's Return on Store Investment Analysis

($ in thousands)






Damodaran

Cracker Barrel


Zero G&A

ISS Analysis

'Store EBITDA'...................................

$                  61,800

$                  61,800

$                  61,800

$                  61,800

     Depreciation.................................

$                  14,700

$                           0

$                  14,700

$                  14,700

     G&A.............................................

$                  27,300

$                           0

$                           0

$                  31,300

Operating income..............................

$                  19,800

$                  47,100

$                  15,800

     Taxes...........................................

$                    5,800

$                           0

$                  13,900

$                    4,700

NOPAT..............................................

$                  14,000

$                  33,200

$                  11,100

Invested capital................................

$                382,000

$                382,000

$                382,000

$                382,000






Return

3.7%

16.2%

8.7%

2.9%






Source: As Reported in SEC Filings.

Note: Taxes based on an effective tax rate of 30% based on Cracker Barrel's 2012 provision for income taxes of $40,575 divided by its 2012 pre-tax income of $137,376 (each, excluding the impact of the 53rd week).

It is clear to us that the correct return for Cracker Barrel's 116 new stores is between 3.7% and 8.7%.  It is certainly not 16.2% as Cracker Barrel contends or even 10.7% as ISS erroneously computes.  Clearly, any return on investment between 3.7%-8.7% is inadequate.

Cracker Barrel has referenced as an authority Aswath Damodaran's calculation on return analyses. However, Cracker Barrel has failed to follow Dr. Damodaran's definitive calculations, which stipulate that net operating profit after tax (NOPAT) divided by investment would be the appropriate formula.

One point on which we do agree with ISS is that Cracker Barrel's return on new store investment is, as ISS emphasizes, "an important consideration for shareholders:  what is at issue is whether the board is adding or destroying value through its expansion strategy." (Emphasis added)  It is clear to us that ISS' incorrect calculations led it to draw the wrong conclusion on this fundamental point in its analysis.

Cracker Barrel is going to continue to spend $155 million to open new stores based on a faulty assessment of return. It is clear this capital allocation will destroy value based on the aforementioned analysis.  We are also concerned about new stores cannibalizing old stores. Furthermore, we demand that Cracker Barrel disclose relevant data on the 116 stores based on vintage so we see the performance of those stores.  ISS also called upon Cracker Barrel to disclose this critical information to shareholders:

"[T]he management … presentations, however, have [not] broken out the view that would be most useful to shareholders considering this aspect of the board's stewardship: the trend in performance by vintage. If stores opened in 2009 are performing substantially better than those opened in 2005, for example, it may indicate that the company has substantially improved the process by which it targets new opportunities—or, if 2009 was substantially worse than 2005, that the strategy is veering wildly off track."

We believe our analysis is sound and we urge shareholders to base their decisions on such facts. Biglari Holdings firmly believes that if a shareholder of Cracker Barrel is seeking to maximize the value of his or her investment, electing the nominees of a near 18% shareholder to the Board of Directors is the clear pathway to value creation.

SOURCE Biglari Holdings Inc.

More Stories By PR Newswire

Copyright © 2007 PR Newswire. All rights reserved. Republication or redistribution of PRNewswire content is expressly prohibited without the prior written consent of PRNewswire. PRNewswire shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

Latest Stories
In the rush to compete in the digital age, a successful digital transformation is essential, but many organizations are setting themselves up for failure. There’s a common misconception that the process is just about technology, but it’s not. It’s about your business. It shouldn’t be treated as an isolated IT project; it should be driven by business needs with the committed involvement of a range of stakeholders.
SYS-CON Events announced today that AppNeta, the leader in performance insight for business-critical web applications, will exhibit and present at SYS-CON's @DevOpsSummit at Cloud Expo New York, which will take place on June 7-9, 2016, at the Javits Center in New York City, NY. AppNeta is the only application performance monitoring (APM) company to provide solutions for all applications – applications you develop internally, business-critical SaaS applications you use and the networks that deli...
SYS-CON Events announced today that ContentMX, the marketing technology and services company with a singular mission to increase engagement and drive more conversations for enterprise, channel and SMB technology marketers, has been named “Sponsor & Exhibitor Lounge Sponsor” of SYS-CON's 18th Cloud Expo, which will take place on June 7-9, 2016, at the Javits Center in New York City, New York. “CloudExpo is a great opportunity to start a conversation with new prospects, but what happens after the...
The IoTs will challenge the status quo of how IT and development organizations operate. Or will it? Certainly the fog layer of IoT requires special insights about data ontology, security and transactional integrity. But the developmental challenges are the same: People, Process and Platform. In his session at @ThingsExpo, Craig Sproule, CEO of Metavine, will demonstrate how to move beyond today's coding paradigm and share the must-have mindsets for removing complexity from the development proc...
SYS-CON Events announced today BZ Media LLC has been named “Media Sponsor” of SYS-CON's 19th International Cloud Expo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. BZ Media LLC is a high-tech media company that produces technical conferences and expositions, and publishes a magazine, newsletters and websites in the software development, SharePoint, mobile development and Commercial Drone markets.
SYS-CON Events announced today that Alert Logic, Inc., the leading provider of Security-as-a-Service solutions for the cloud, will exhibit at SYS-CON's 18th International Cloud Expo®, which will take place on June 7-9, 2016, at the Javits Center in New York City, NY. Alert Logic, Inc., provides Security-as-a-Service for on-premises, cloud, and hybrid infrastructures, delivering deep security insight and continuous protection for customers at a lower cost than traditional security solutions. Ful...
Cloud computing changed data analytics for good. It enabled companies to drastically decrease resources and architecture previously assigned with business intelligence departments. It also enabled laymen to run advanced business analytics. Cloud was also the architecture of choice for storing and processing big data. Data piling is a continuous process, which is going to explode with emerging Internet of Things concept. Answer to this issue developers found in new concept called fog computing. ...
SYS-CON Events announced today that MangoApps will exhibit at SYS-CON's 18th International Cloud Expo®, which will take place on June 7-9, 2016, at the Javits Center in New York City, NY. MangoApps provides modern company intranets and team collaboration software, allowing workers to stay connected and productive from anywhere in the world and from any device. For more information, please visit https://www.mangoapps.com/.
The cloud market growth today is largely in public clouds. While there is a lot of spend in IT departments in virtualization, these aren’t yet translating into a true “cloud” experience within the enterprise. What is stopping the growth of the “private cloud” market? In his general session at 18th Cloud Expo, Nara Rajagopalan, CEO of Accelerite, will explore the challenges in deploying, managing, and getting adoption for a private cloud within an enterprise. What are the key differences betwee...
WebRTC is bringing significant change to the communications landscape that will bridge the worlds of web and telephony, making the Internet the new standard for communications. Cloud9 took the road less traveled and used WebRTC to create a downloadable enterprise-grade communications platform that is changing the communication dynamic in the financial sector. In his session at @ThingsExpo, Leo Papadopoulos, CTO of Cloud9, will discuss the importance of WebRTC and how it enables companies to fo...
As machines are increasingly connected to the internet, it’s becoming easier to discover the numerous ways Industrial IoT (IIoT) is helping to shape the business world. This is exactly why we have decided to take a closer look at this pervasive movement and to examine the desire to connect more things! Now if you need a refresher on IIoT and how it is changing the world, take a moment and listen to Greg Gorbach with ARC Advisory Group. Gorbach believes, "IIoT will significantly change the worl...
SYS-CON Events announced today that Super Micro Computer, Inc., a global leader in Embedded and IoT solutions, will exhibit at SYS-CON's 18th International Cloud Expo®, which will take place on June 7-9, 2016, at the Javits Center in New York City, NY. Supermicro (NASDAQ: SMCI), the leading innovator in high-performance, high-efficiency server technology, is a premier provider of advanced server Building Block Solutions® for Data Center, Cloud Computing, Enterprise IT, Hadoop/Big Data, HPC and ...
The IoT is changing the way enterprises conduct business. In his session at @ThingsExpo, Eric Hoffman, Vice President at EastBanc Technologies, discuss how businesses can gain an edge over competitors by empowering consumers to take control through IoT. We'll cite examples such as a Washington, D.C.-based sports club that leveraged IoT and the cloud to develop a comprehensive booking system. He'll also highlight how IoT can revitalize and restore outdated business models, making them profitable...
In his session at 18th Cloud Expo, Bruce Swann, Senior Product Marketing Manager at Adobe, will discuss how the Adobe Marketing Cloud can help marketers embrace opportunities for personalized, relevant and real-time customer engagement across offline (direct mail, point of sale, call center) and digital (email, website, SMS, mobile apps, social networks, connected objects). Bruce Swann has more than 15 years of experience working with digital marketing disciplines like web analytics, social med...
IoT generates lots of temporal data. But how do you unlock its value? How do you coordinate the diverse moving parts that must come together when developing your IoT product? What are the key challenges addressed by Data as a Service? How does cloud computing underlie and connect the notions of Digital and DevOps What is the impact of the API economy? What is the business imperative for Cognitive Computing? Get all these questions and hundreds more like them answered at the 18th Cloud Expo...