Biglari Holdings Believes Cracker Barrel Old Country Store, Inc.'s Purported
Financial Results Distort Economic Reality
SAN ANTONIO, TX, October 31, 2012
SAN ANTONIO, TX, October 31, 2012 /PRNewswire/ --Biglari Holdings Inc. (NYSE:
BH) believes that investor presentation materials filed by Cracker Barrel Old
Country Store, Inc. (NASDAQ: CBRL) with the Securities and Exchange Commission
portray a troubling pattern of artificially inflating financial results.
Biglari Holdings urges shareholders to consider the following data and ask
themselves whether they can trust what the Board and management are saying
about Cracker Barrel's financial performance:
-- In calculating its EBITDAR (earnings before interest, taxes, depreciation,
amortization, and rent) margin, Cracker Barrel aggregated its billboard and
restaurant operating leases in 2012 (deviating from its past practice of
separately reporting these expenses), effectively characterizing nearly half
of its advertising budget as rent expense and, thereby, we believe erroneously
inflating its 2012 EBITDAR margin. EBITDAR should not include billboard
rentals because they are part of advertising expenses. We believe that when
billboard advertising expenditures are segregated from restaurant rent
expenses, Cracker Barrel generated an EBITDAR margin of 11.3% in 2012, as
opposed to the 12.8% margin claimed by Cracker Barrel in its investor
presentation. (11.3% is the lowest of the ISS peer group.) Of course,
Cracker Barrel's Board and management have full access to all the information
required to accurately determine its EBITDAR margin, and we call upon them to
disclose fully to shareholders the relevant data and their method of
-- Cracker Barrel claims its return on investment in fiscal 2011 for its 116
stores opened between 2004 and 2009 was 16.2%. However, despite referencing
as an authority Dr. Aswath Damodaran's calculation on return analyses, Cracker
Barrel failed to follow Dr. Damodaran's definitive calculations by excluding
general and administrative, interest and tax expenses as "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…." Dr. Damodaran was
contacted by the Express-News to "get his take on which was the best
measure." In an article appearing on October 25, 2012, Dr. Damodaran, who
emphasized that he had no connection with either Cracker Barrel or Biglari
Holdings, found Cracker Barrel's logic to be flawed:
"Damodaran, cautioning he had not reviewed the details of Biglari's letter,
said in an email: 'If as Mr. Biglari claims, Cracker Barrel has excluded
depreciation, G&A and taxes to come up with a return on capital, they
'In fact, they are then using a ... (calculation) that actually does not
measure how well you are doing as a business,' Damodaransaid."
Under the Board's erroneous methodology, a 16.2% return is calculated, whereas
the more appropriate measure that factors in, not ignores material and
relevant expenses, produces a paltry return of 3.7%, clearly below Cracker
Barrel's cost of capital.
-- Cracker Barrel's calculations of its return on invested capital (ROIC) are
also fraught with error. Cracker Barrel's ROIC numbers appear better than
actuality because Cracker Barrel does not follow Dr. Damodaran's formula when
it excludes many expenses, modifying both net operating profit after tax (to
boost the numerator) as well as adjusting invested capital (to lower the
denominator). We challenge Cracker Barrel to disclose its computation of ROIC
for the last seven years to track exactly how Cracker Barrel has improved its
numbers in spite of its poor investments. The data, we are certain, would show
a lack of consistency as well as artificial enlargement of its results.
Biglari Holdings believes that when the full facts are presented, the truth
about Cracker Barrel's financial performance stands in stark contrast to the
Board's and management's incomplete and inaccurate presentations to
shareholders. We urge Cracker Barrel shareholders to hold the Board
accountable for what we clearly believe to be misleading financial results.
Cracker Barrel shareholders should demand full and transparent disclosure,
critical to their ability to make an informed decision.
SOURCE Biglari Holdings Inc.
Contact: Bruce Lewis, +1-210-344-3400
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