Activist Investor Targets Cracker Barrel: Is Management Incompetent, or Keeping Secrets?

With more than 600 locations in 42 states, it's hard to drive down the highway and not see a Cracker Barrel (CBRL). The ubiquitous road stop is basically the same everywhere -- it has a restaurant on one side and a gift area on the other. Stop for food, pick up a tchotchke, and you're on your way. Pretty straightforward, right?

Apparently, not to the company. That's why one investor activist wants Cracker Barrel to own up to running two distinct businesses.

Dear Management: You Are Incompetent

Sardar Biglari, the 34-year-old CEO of Biglari Holdings, is one of Cracker Barrel's largest shareholders. On Aug. 23, he sent a nastygram to Cracker Barrel laden with fighting words, accusing the management of behavior that was "shocking," "unimaginable," and "unconscionable."

What is the "grave managerial blunder" and "bad judgment, bad business, and bad accounting" of which Biglari accuses Cracker Barrel? Biglari says management knows it has two businesses: food and gifts. But for some strange reason, it doesn't want shareholders to know how each is actually performing.

Why the Big Brouhaha?

Biglari likes to find companies that aren't performing up to their potential, invest in them, and then work for improvements that benefit the company and investors. At Friendly's, Western Sizzlin', Steak n Shake, and other companies before them, management has initially greeted him in a cooperative spirit.

But if those managers stonewall him -- or worse -- he doesn't hesitate to go nuclear.

Granted, activist investors must employ strong language to draw other shareholders to their side. Delicate niceties bring yawns. And using harsh words doesn't make Biglari wrong. Until they're called out, many management teams run companies for their own benefit.

Biglari only has one goal when he buys shares to go after a company: to make money. If management can improve the business, then the stock price will follow. If execs can't or won't, then he will agitate for changes, board seats, and, as a last resort (as at Steak n Shake), take control.

He has a proven record of making money buying shares in and improving casual restaurant chains. But sometimes he has to take the gloves off to get it done.

What's the Big Secret?

Biglari says Cracker Barrel shareholders have a right to know whether part of the business they own is doing badly, so that something can be done. That "something" may include booting management.

Biglari points out that in its SEC filings, the company calls the restaurants and gift shops two different segments, says it has separate management chains for each, and moves the cash around between them according to needs.

So why won't managers break out each segment's full operations? Apparently, they walk like two segments, quack like two segments, but don't get reported as two segments.

Cracker Barrel's Response

The day after Biglari aired his grievances, Cracker Barrel issued a press release. It views the "restaurant and retail operations as two related and substantially integrated product lines."

Wait. The company breaks out sales, purchasing, and inventory management between the two segments in SEC filings, yet they're substantially integrated? The release implies that Cracker Barrel's separate management teams are not evaluated on how they manage the profits and loss for their segment alone. Does that mean that diners eat stuffed animals, and gift shops sell plates of hot hash browns?

Even more questionable is this statement from the company: "Given the integrated nature of our operations, as we have discussed with Mr. Biglari on several occasions, our management and Board of Directors have carefully considered and have concluded that separate segment disclosure of our restaurant and retail businesses is neither required nor appropriate."

As in politics, this is a case where it isn't the transgression that gets you, but the cover-up.

Offering Biglari a confidential inside look was a big mistake. The offer suggests that information exists to clear up or defend the accusations. Management knows something, but it isn't telling everyone.

Biglari declined the private show-and-tell, saying there should be equal treatment for all shareholders or none. If one side of the business is ailing, and the other flourishing, why shouldn't everyone know? Shareholders own the company. They have a right to management that acts well and transparently.

Your Chance to Get in on the Activism

Biglari is deadly serious here, with his biggest target yet. Cracker Barrel's $960 million market value is almost double Biglari Holdings' $490 million.

As an investor, you can join him and, if it succeeds, make money, too. At today's valuations, and given Biglari's track record, Cracker Barrel and Biglari Holdings look like excellent opportunities.

Cracker Barrel may know that if it's forced to break out the gift shops and restaurants fully, it will reveal that all is not well. The longer it stonewalls, the worse that revelation may be. The emperor may not only have no clothes -- he may also be out in the street, with nothing more than a barrel.

Tom Jacobs is the advisor for Motley Fool Special Ops, a special situations and opportunistic value service. You can follow him on Twitter @TomJacobsInvest. Both he and the Motley Fool own shares of Biglari Holdings.

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Is the company meeting its financial targets or not? If not he might be on the right track, but if the numbers are being met he could be fomenting a tempest in a teapot. Folks stop at Cracker Barrel because they offer a homey ambiance, consistantly good food, reasonable prices and well trained employees. Gifts or food, it makes no difference. People are buying the "package." When customers are number one, employees number two and stockholders third in line, companies tend to thrive. When they manipulate the business strategy to focus solely on return to the stockholders, more times than not any success is usually short-lived. How do I know? I am a retired CEO who very successfully specialized in turning around failing organizations.

September 01 2011 at 2:13 PM Report abuse rate up rate down Reply
Scott & Mary

Let's see he wants to "improve" Cracker Barrel the same as Steak and Shake...terrible idea! Cracker Barrel does a great job in both their gift shop and resturant do not mess with a good thing. In the beginning we use to love Steak and Shake too but not anymore, now they are subpar at best and now we know what happened there. Let's hope Cracker Barrel management does not get distracted by this guy. Go Cracker Barrel we love you just the way you are and could care less about breaking out sales numbers between gift shop and resturant!

September 01 2011 at 8:01 AM Report abuse rate up rate down Reply

This say's it all "Both he and the Motley Fool own shares of Biglari Holdings."

September 01 2011 at 7:18 AM Report abuse +1 rate up rate down Reply

Mr. Biglari...stay in Iran..and stop trying to kill american cuisine..and your hamburgers are tasteless..Cracker Barrel rules!!!...Go Away..take the next plane OUT!!

September 01 2011 at 6:51 AM Report abuse +2 rate up rate down Reply

If this guy took control of Steak n Shake he should finish the job there before he moves on to another conquest. The food there is average at best. (Probably how Cracker Barrel will end up after he's done also.)

September 01 2011 at 6:48 AM Report abuse +1 rate up rate down Reply

At one time this chain was known for the great food. It has been my experiance during my last 3 visits ( hard headed)
that the food is substandard, and I am not giving them another try. I think the problem is cutting cost the easy way, usually by changing food suppliers, recipes, procedures all of which affect the taste and quality of the food served.I bet all upper management recieved compensation for cutting cost. What a shame!

September 01 2011 at 6:10 AM Report abuse -1 rate up rate down Reply
Donna Lynn

Well, heck, is nothing sacred? Leave Cracker Barrel alone. My favorite place up and down US route 95 going from Pittsburgh to Florida ever so often. Lots of good old fashioned food and I love the gift shop.

September 01 2011 at 4:53 AM Report abuse +2 rate up rate down Reply

Very poor run company ! Thats why my stock has is worth 4 times as much since I bought it not to mention they own Logans Roadhouse as well ! Another very well run restuarant . Sell your stock then !

September 01 2011 at 4:20 AM Report abuse +1 rate up rate down Reply

A few months ago we had dinner there. I usually never call in or whatever to do a questionaire however this time I did. It was so stupid. There was not one question about our food or service. It all had to do with the gift store that we did not use. Case closed!

September 01 2011 at 12:37 AM Report abuse -1 rate up rate down Reply

I'm not commenting on this non-story and hope that one day there will be an APP that filters out negativity, sensationalistic journalism and anything that mentions the Kardashions. Cracker Barrel is a great company with consistent food at affordable prices. Find another battle.

September 01 2011 at 12:12 AM Report abuse +2 rate up rate down Reply