Wells Fargo sees long road ahead for Cracker Barrel

After an ill-fated rebranding effort sparked backlash, Cracker Barrel Old Country Store (NASDAQ:CBRL) faces a slow road to recovery as it works to reconnect with its nostalgic identity, says Wells Fargo’s Anthony Trainor, assigning an Equal Weight rating to the stock.

Valuation precludes Trainor from giving Cracker Barrel (NASDAQ:CBRL) an Underweight rating, as the 45% drop in the stock since July prices it at a discount to peers like Bloomin’ Brands (BLMN), Red Robin Gourmet Burgers (RRGB), and BJ’s Restaurants (BJRI). But given the challenges the company faces, the stock is still not cheap enough to defend.

“Fundamentals have deteriorated, the consumer is resisting changes, and there is considerable uncertainty around both near-term trends, as well as the path forward to stabilize traffic and reshape brand imaging,” Trainor says in his recent note on the company.

Cracker Barrel’s (NASDAQ:CBRL) missteps began with a new, sleeker logo that removed its iconic barrel and old timer, remodeling its stores to a more modern aesthetic, and updating its menu, all of which was an attempt to “celebrate the diversity of all our guests.”

The backlash forced the company to suspend store remodels, revert to its old logo, and admit “it could have done a better job” understanding the sensibilities of the loyal guests who define its brand.

However, Wells Fargo sees the problem as more than just a poor choice of logo, but the negative coverage around food, service, and experience “altering consumer brand preferences and having a lingering impact.”

“It will take time for consumers to forget, marketing effectiveness to improve, and business to recover…while the industry remains pressured and competitors are ramping discounts,” Trainor says. Meanwhile, Cracker Barrel (CBRL) is raising its prices in an attempt to “price its way to recovery.”

To right the ship, Trainor thinks Cracker Barrel (CBRL) needs to improve its menu and create more value initiatives, both of which will drive down margins, but steps the company must take to restore traffic.

“While thin margins leave little wiggle room, Cracker Barrel’s (CBRL) pricing strategy needs to evolve and include more aggressive value as it looks to recover.”

In conjunction with an Equal Weight rating on the stock, Trainor assigns a $42 price target, representing only 5% upside from Thursday’s closing price.

Seeking Alpha authors and Wall Street analysts largely share Trainor’s neutral outlook for Cracker Barrel, while Seeking Alpha’s Quant rating views the stock much more bearishly, assigning a Strong Sell rating and Quant score of just 1.22 out of 5 to reflect negative growth and momentum outlook.