Cracker Barrel Old Country Store, Inc.’s (NASDAQ:CBRL) solid earnings announcement recently didn’t do much to the stock price. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.
For anyone who wants to understand Cracker Barrel Old Country Store’s profit beyond the statutory numbers, it’s important to note that during the last twelve months statutory profit was reduced by US$17m due to unusual items. It’s never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that’s exactly what the accounting terminology implies. Assuming those unusual expenses don’t come up again, we’d therefore expect Cracker Barrel Old Country Store to produce a higher profit next year, all else being equal.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
Just as we noted the unusual items, we must inform you that Cracker Barrel Old Country Store received a tax benefit which contributed US$8.7m to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! The receipt of a tax benefit is obviously a good thing, on its own. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. So while we think it’s great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.
In its last report Cracker Barrel Old Country Store received a tax benefit which might make its profit look better than it really is on a underlying level. But on the other hand, it also saw an unusual item depress its profit. After taking into account all these factors, we think that Cracker Barrel Old Country Store’s statutory results are a decent reflection of its underlying earnings power. So while earnings quality is important, it’s equally important to consider the risks facing Cracker Barrel Old Country Store at this point in time. In terms of investment risks, we’ve identified 3 warning signs with Cracker Barrel Old Country Store, and understanding them should be part of your investment process.
