Sold Cash Secured Put + Investment Thesis – Cracker Barrel Old Country Store, Inc (CBRL) – $150.00 strike – Mar 16 Expiration

This trade was actually executed on Tuesday 02/20/18. I didn’t get a chance to write about it until today.

Please visit the core philosophies article on my investment thesis process for a deeper explanation of the components of this article. Additionally you might find my rules for trading options helpful in understanding the parameters of the trade.

In case you missed it, I’m making it a point to twitter all my trades as they happen and this was no exception.

I have updated the portfolio and income tracker pages to reflect this position.

Dividend Cycle

CBRL went ex-div last month on January 11, so the next opportunity to collect the dividend should be sometime in early April. If this is unassigned, there may be enough time to squeeze in another options contract before that next ex-div date. We’ll have to see.

The current quarterly distribution is $1.20/share, which is where it’s been for 3 consecutive quarters now. I should note that is the “regular” dividend. The company has paid a substantial special dividend in August for the last three years, which gets mixed in with the regular Q3 payment.

Cracker Barrel is currently a dividend contender having raised its annual payout for 15 consecutive years.

The premium earned from this contract is just a bit over the quarterly distribution amount, and is in force for less than a month.

Investment

# contracts

Strike

Expiration

Total Premium

Days in Force

Annualized Return

Closing Price

Downside Protection

1

$150

03/16/18

$128.91

24

13.07%

$161.88

7.3%

The QC (Quantitative Case)

Payout Ratio – EPS, FCF

56.7%, 57.9%

10 Year Revenue CAGR

2.2%

10 Year EPS CAGR (5 Year EPS CAGR)

19.89% (14.16%)

5 Year ave P/E – Current P/E (ttm)

20.07 – 20.98 = -0.91

5 Year ave Yield – Current Yield  

5.03% – 4.77% = +0.26%*

10 year mean DGR (dividend growth rate)

22.9%

Debt/Market Cap

$404.1M / $3.9B (10.36%)

Total Cash

$120.23M

Return on Assets

12.76%

Return on Equity

36.52%

Profit Margin

6.83%

EBITDA/Revenue

$395.7M / $2.93B (13.5%)

Reverse DDM Fair Value DGR at Strike

6.8%

Assumed DGR (DDM valuation 10% disc.)

7.5% ($192)

DGR Margin of Safety

0.7%

Dividend Cushion Ratio (7.03% DGR)

1.089

Cash from Ops “cushion”

-3.74%

Capex “cushion”

+10.91%

DGR “cushion” (delta)

+2.77%

*I get my 5yr average yield data from Morningstar, and something is weird about this. I don’t know if they’re including the special dividends or what, but those aren’t right. Oh well.

SPL (Strike Price Logic)

The robots were giving CBRL the business on Tuesday after management reported earnings. While the implied volatility had come down from the pre-earnings announcement levels, there were still juicy premiums for strikes with substantial downside protection.

$150 is a nice round number. I’ve been watching CBRL for a little while now, and I had been hoping to pick it up for around a 3% yield, which works out to a $160 share price. I could have just bought shares outright for that on Tuesday.

I may end up wishing that I had, but the premiums at the $150 strike were over 12% annualized, so I went for it.

QWaF (Qualitative Warm and Fuzzy)

I love Cracker Barrel. It was one of my favorite restaurants as a kid growing up in Tennessee. When I moved to California in 1998, Cracker Barrel was pretty high on the list of things I missed the most.

For years my wife would roll her eyes any time we were out of state and came across one, because she knew I would insist on going.

It’s a southern thing maybe.

It’s a pretty damn good business too. They turn nostalgia, kitsch and comfort food into cash flow. The retail store is a unique twist on the fast casual restaurant format and it’s great for boosting store sales (~20% of revenue)..

The brand is very unique and their market is far from saturated which makes me optimistic about future growth prospects (they finally opened a location in California, which remains a huge untapped market).

CPR (Cold and Prickly Risks)

The company faces two primary risks (in my opinion).

  1. What if people stop going to the restaurant and or spend less in the retail store?
  2. Margin compression due to competition and rising input costs (food, labor, rent, etc) that can’t be passed on to the customers because of risk #1.

I’m not so worried about Cracker Barrel’s popularity waning. I think they still have a long runway for expansion of their store count while still keeping the seats full. Of course a recession would change that, but any company in the consumer discretionary sector is going to have a tough go of it in a recession.

Margin compression looms larger for me. The restaurant business is really competitive, so the room for error is already thin. The labor market is theoretically tightening, and unlike other fast casual chains that are pivoting towards more of a self-serve model, CB isn’t going to abandon the proven concept of having a waitress named Marge who calls you “hon” and refills your sweet tea every time she passes by the table.

Fortunately management has a proven track record of running a very tight ship. And as shitty as it sounds, I don’t think we’re going to run out of Marges any time soon. Most folks do not have enough of a nest egg saved for retirement and will be working a lot longer in menial jobs.

So in spite of the risks (there are always risks…) I think CBRL has a bright future and I’d be happy to own shares at this strike price.

 

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