Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) Q2 2023 Earnings Call Transcript

Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) Q2 2023 Earnings Call Transcript February 28, 2023

Operator: Good day and welcome to the Cracker Barrel Fiscal 2023 Second Quarter Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Kaleb Johannes, Vice President, Investor Relations and Business Transformation. Please go ahead.

Kaleb Johannes: Thank you. Good morning, and welcome to Cracker Barrel’s second quarter fiscal 2023 conference call and webcast. This morning, we issued a press release announcing our second quarter results. In this press release and on the call, we’ll refer to non-GAAP financial measures for the second quarter ended January 27, 2023. The non-GAAP financial measures are adjusted to exclude the non-cash amortization of the assets recognized from the gain on our sales and leaseback transactions and the related tax impacts. The company believes that excluding these items from the financial results provides investors with an enhanced understanding of the company’s financial performance. This information is not intended to be considered in isolation or as a substitute for net income or earnings per share information prepared in accordance with GAAP.

The last page of the press release include reconciliations from the non-GAAP information to the GAAP financials. On the call with me this morning are Cracker Barrel’s President and CEO, Sandy Cochran; Senior Vice President and CFO, Craig Pommells and Senior Vice President and CMO, Jen Tate. Sandy and Craig will provide a review of the business, financials and outlook. We will then open up the call for questions for Sandy, Craig and Jen. On this call, statements may be made by management of their beliefs and expectations regarding the company’s future operating results or expected future events. These are known as forward-looking statements, which involve risks and uncertainties that, in many cases, are beyond management’s control or may cause actual results to differ materially from expectations.

We caution our listeners and readers in considering forward-looking statements and information. Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties found at the end of the press release and are described in detail in our reports that we filed with or furnished to the SEC. Finally, the information shared on the call is valid as of today’s date and the company undertakes no obligation to update it, except as may be required under applicable law. I’ll now turn the call over to Cracker Barrel’s President and CEO, Sandy Cochran. Sandy?

Sandy Cochran: Thank you, and good morning, everyone. This morning, we announced total sales growth of 8.3% and adjusted operating income margin rate of 4.5%. These results exceeded our expectations, and I was especially pleased with our continued strong retail and off-premise performance. I believe our results underscore the appeal of our brand, menu offerings and merchandise as well as the traction from our initiatives. While we continue to face macroeconomic headwinds and heightened uncertainty, we are making great progress on key initiatives and I believe we’re well positioned to sustain our momentum and deliver further margin improvements in the back half of the year, driven by Q4. I’d now like to speak to some highlights from our second quarter.

As you know, our second quarter is of outsized importance to us due to the Thanksgiving and Christmas holidays. And our teams once again executed at a high level and bolstered our leadership for these occasions, particularly in our off-premise channels. We again saw significant demand for our bundled holiday offerings, meaningfully grew our catering business and offered seasonal culinary promotions, including Country Fried Turkey and Cinnamon Roll Pie that continue to resonate with guests as did the other menu items we introduced such as our new sampler offerings. We saw and are continuing to see our catering channel do well, driven by enhancements we’ve made to our offerings and our optimized marketing support and we’re on track to achieve our target of growing this channel by 25% to $100 million this fiscal year.

Our retail teams continued their streak of delivering strong results, which was especially impressive in light of the challenged retail backdrop and the performance we were lapping in the prior year. Guests responded enthusiastically to our holiday assortments, particularly our nostalgic blow molds, glitter globes and holiday trim. Our retail margins, the well below last year’s historically high levels were in line with our expectations. From an operations standpoint, we remain focused on hospitality and the guest experience. We believe our staffing levels are solid, and we’ve seen improvements in both hourly and manager turnover. We’re encouraged by the test results of our labor system, and we recently implemented it in over 150 stores, bringing the total to approximately 300 and are planning to complete the rollout to the substantial majority of the system by the end of the fiscal year.

We believe this new system will enhance both the guest and employee experience while also delivering productivity improvements. From a guest visitation perspective, we again saw gains with the lower income guests as we believe our strong value proposition continues to appeal to this group who remain pressured by the macroeconomic environment. We saw a moderate improvement in year-over-year visitation from guests 65 and over, which was in part due to lapping Omicron and visitation among younger guests was relatively flat compared to the prior year. Lastly, Maple Street opened two locations during the quarter, both of which were in new markets. Columbus, Ohio and Houston, Texas, and we’re encouraged by the performance of these new locations. The team continues to prepare for successfully scaling and we’re looking forward to accelerating their growth in the back half of the fiscal year and beyond.

Craig will now cover our second quarter results in greater detail and provide an update on our expectations for the fiscal year. And once he’s finished, I’ll provide some additional details about upcoming initiatives.

Craig Pommells: Thank you, Sandy, and good morning, everyone. For the second quarter, we delivered top line results that surpassed our expectations for both restaurant and retail. Total revenue was $933.9 million, an increase of 8.3% over the prior year quarter. From a monthly cadence, our performance in November and December was generally in line with our expectations. And January outperformed as we benefited from a larger-than-anticipated benefit from lapping Omicron as well as favorable weather during the month. Restaurant revenue increased 9.4% to $718 million, and Retail revenue increased 4.7% to $215.9 million versus the prior year quarter. Comparable store total sales, including both restaurant and retail grew by 7.4%.

Comparable store restaurant sales grew by 8.4% over the prior year, driven primarily by approximately 9% traffic, roughly half of which was carried forward pricing from fiscal 2022 and half of which was new pricing. Traffic declined 1.7%, which was in line with industry trends. We continue to closely monitor the impact of our pricing has happened on traffic and check, and we remain pleased that we have not seen any meaningful pushback from our guests in this regard. We also saw favorable menu mix of over 1%, driven by increased sales for our shareable Barrel Bites and beverages. Off-premise sales were approximately 23% of restaurant sales. As a reminder, off-premise mix is elevated during the second quarter due to the seasonally high sales for our bundled holiday offerings and catering business.

Comparable store retail sales increased 4.1% compared to the second quarter of the prior year. Apparel, decor and food delivered, the largest increases by category. Moving on to our second quarter expenses. Total cost of goods sold in the quarter was 35% of total revenue versus 32.9% in the prior year quarter. Restaurant cost of goods sold in the second quarter was 29.3% of restaurant sales versus 27.4% in the prior year quarter. This 190 basis point increase was primarily driven by commodity inflation of 12.5% partially offset by pricing and to a lesser extent, by a change in mix of menu items as well as higher freight. We experienced inflation across most of our market basket where the primary drivers of the year-over-year increase in Q2 were poultry, dairy and produce.

Second quarter retail cost of goods sold was in line with our expectations at 54% of retail sales versus 50.4% in the prior quarter, which, as a reminder, was an atypically low COGS rate. This 360 basis point increase was primarily driven by a more normalized promotional activity, although our markdown rates remained favorable when compared to historical levels. Our inventories at quarter end were $187 million compared to $154 million in the prior year. The increase was primarily due to carrying more retail product to support higher sales, and to a lesser extent, a normalization in timing of deliveries. With regard to labor costs, our second quarter labor and related expenses were 33.6% of revenue versus 34.4% in the prior year quarter. This 80 basis point decrease was primarily driven by sales leverage, partially offset by hourly restaurant wage inflation of 7%.

Adjusted other operating expenses were 22% of revenue versus 21.9% in the prior year quarter. This 10 basis point increase was primarily driven by higher maintenance, utilities and supplies expense resulting from inflation, partially offset by lower depreciation and advertising expense resulting from sales leverage. Finally, our general and administrative expenses in the second quarter were 4.8% of revenue versus 5% in the prior year quarter. This 20 basis point decrease primarily resulted from sales leverage. All of this culminated in GAAP operating income of $39 million. Adjusted for the noncash amortization of the asset recognized from the gains on the sale and leaseback transactions, operating income for the quarter was $42.2 million or 4.5% of revenue.

Net interest expense for the quarter was $4.4 million compared to net interest expense of $2.2 million in the prior year quarter. This increase is the result of higher interest rates and a higher level of borrowing. Our GAAP effective tax rate for the second quarter was 11.8%. Second quarter GAAP earnings per diluted share were $1.37 and adjusted earnings per diluted share were $1.48. In the second quarter, EBITDA was $67.7 million or 7.3% of total revenue. Now turning to capital allocation and our balance sheet. We remain committed to a balanced approach to our capital allocation. Our first priority remains invested in the growth of Cracker Barrel and Maple Street. Beyond that, we plan to return capital to our shareholders, while maintaining appropriate flexibility and a conservative balance sheet.

In the second quarter, we invested $27 million in capital expenditures and we returned $34 million to shareholders in the second quarter through a combination of dividends and share repurchases. Lastly, we ended the quarter with $454 million in total debt. With respect to our 2023 outlook, I would like to provide some additional color on the guidance in this morning’s release. We are pleased with our Q2 results, and we’re confident we will sustain our momentum in the second half of the year. That said, I want to remind everyone, we continue to operate in an environment with heightened uncertainty that makes predicting the balance of the year even more challenging than normal. Turning to the guidance. We currently expect total fiscal 2023 revenue growth over the prior year of 7% to 9%.

This is primarily driven by pricing, which we now anticipate will be approximately 8.5% for the full year. As previously mentioned, we remain prudent and thoughtful in our approach to pricing and continue to utilize multiple approaches to monitor guest reactions to price increases. We anticipate the opening of three to four new Cracker Barrel locations and approximately 15 new Maple Street locations. Our updated expectations from Maple Street reflects the possibility that some units that were planned to open late in fiscal ’23 may slip into early fiscal ’24, primarily as a result of construction delays. We now anticipate commodity inflation of approximately 8.5% to 9% for the fiscal year. This assumes mid-single-digit inflation in Q3 and low single-digit inflation in Q4.

Our current outlook for commodity inflation reflects updated expectations for Q4. While we now expect lower inflation in some protein categories compared to our previous outlook, this favorability is being more than offset by higher anticipated inflation in eggs and produce. We now expect restaurant-only inflation of 6.5% for the fiscal year. The labor market for restaurants and hospitality remains relatively tight, which has resulted in a slower than anticipated moderation of wage inflation. We now expect to deliver approximately $25 million in cost savings during this fiscal year. In addition to the above assumptions for revenue growth, commodity and wage inflation and cost savings, our operating income margin expectation continues to contemplate the following assumptions: continued inflationary pressures in other areas of the P&L, most notably supplies, utilities and maintenance, moderation in retail margin compared to the prior year near historic high and incentive compensation normalization, which will have a meaningful impact on G&A in Q3 and Q4.

Taking all of this into account, we expect full year adjusted operating income margin in the high 4% range, including 4.3% to 4.7% in Q3 and 6.5% to 7% in Q4. We also believe there is upside in our operating income expectation if there were to be further moderation in the commodity environment and potential downside if there were to be a deterioration of the consumer environment or if inflation fails to moderate or further increases. Lastly, we expect a GAAP effective tax rate of 10% to 12% and an adjusted effective tax rate of 11% to 13%. And we anticipate that capital expenditures for the full year will be approximately $110 million to $120 million. I’ll now turn the call back over to Sandy so she may share additional details around our business plans and outlook for fiscal 2023.

Sandy Cochran: As Craig outlined, while we continue to operate in an uncertain environment and faced some headwinds, our outlook is optimistic. Despite this backdrop, we’re confident that we’ll deliver further margin improvements in the back half of the year, primarily driven by margin gains in Q4. I’d now like to speak to some Q3 highlights. I’m excited about several menu initiatives that we believe will further reinforce our value leadership which we think is critical in the current environment while also introducing new craveable offerings. Our current menu promotion and advertising campaign is focused on value and variety reminding guests that we have over 20 meals for under $12, including several hearty signature favorites.

Additionally, we’ve recently introduced new $5 take home offerings. With the purchase of any entree, guests have the choice to add one of three additional entrees, which includes a protein inside for just $5. It’s early, but we’ve been encouraged by what we’ve seen so far and believe this is yet another way we can provide value to and build affinity with our guests. We remain thoughtful and deliberate on how we’re taking pricing, and we’re being mindful to maintain the value sections of our menu and attractive entry price points. We continue to closely monitor the effects of our pricing actions and believe our strategy is appropriately balancing, protecting margins while also preserving our value strength. In addition to focusing on value, we continue to enhance our menu, currently featuring a new Cheesy Bacon Homestyle Chicken, which is part of the 20 under $12.

And we’re also seeing success with recent innovation in the Breakfast Day part with offerings such as our Homestyle Chicken and French Toast. Both of these offerings are examples of how we continue to leverage our signature fried chicken and innovate our menu. For off-premise, we’re looking forward to the Easter occasion and expect we’ll see strong demand for our Easter bundled offerings. We’re continuing to enhance our catering menu as well. Regarding retail, we believe the strong value and uniqueness of our merchandise will continue to have cross-generational appeal. Our Easter assortments are off to a good start, and we’re excited about other seasonal assortments that we believe will also resonate with guests. In closing, we had a solid quarter.

We delivered quarterly results that exceeded our expectations. Our initiatives are gaining traction and we’re making progress on our margin recovery. We remain confident in our strategies, and believe we’re well positioned to drive continued performance through our strategic initiatives and our focus on operational excellence, menu innovation, value, technology and the guest experience. Finally, I want to thank our employees for their strong efforts and continued dedication. And with that, I’ll turn the call over to the operator for your questions.

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Q&A Session

Operator: The first question comes from Jeff Farmer with Gordon Haskett. Please go ahead.

Jeff Farmer: Hi, thank you and good morning. You touched on it, but you’re looking for $25 million of cost savings from — and business model improvements, I should say. So I guess the question is, what drove that increase in the guidance in terms of flow through? How much of that do you expect to flow through versus being reinvested?

Craig Pommells: Good morning, Jeff, this is Craig. The increase in the guidance is we’ve continued to — a function of — we’ve continued to add projects to our cost save list. I mean as you think about how to address inflation, Obviously, there’s a price component, you constantly are looking for ways to make the business more efficient, and that’s an ongoing process. So as more of those projects have gone from idea to confidence — high confidence that we’ll implement them successfully, we have increased the cost saves as a result. And the — in terms of the skew of the cost saves, it’s more — it’s heavily weighted towards the second half of the year versus the first half of the year. Now having said that, what I would say is the cost saves, some of that’s being used to partially mitigate inflation in terms of commodity and in terms of wage.

So we have a gross cost save number. Some of that’s being invested to drive things like different technology initiatives and some of it’s being used to partially mitigate cost increases in areas like maintenance and commodities and so on.

Jeff Farmer: Okay. But it sounds like you’re probably not going to be a little bit more specific than that. So if it’s $25 million gross, is half of it being reinvested? Or is there some sort of market level you can provide for us?

Craig Pommells: Yes. The inflation numbers that we’ve shared, for example, has the benefit of the cost saves in them already. So if I — so if I were to say how much is it flowing through net-net, I think there’s a risk of some double counting because we’ve already included it in some of our other guidance amounts.

Jeff Farmer: Okay. And then just one more quick one. I apologize if I missed this, but just in terms of February trends sort of moving through the Omicron favorability, anything you guys offered. Again, I apologize if I missed it on February trends, anything you can offer there?

Craig Pommells: So clearly, January on a year-over-year basis was a big positive in large part because of Omicron, but also weather was quite favorable. It was warmer than normal. And February, has been much more consistent with our overall expectations. So clearly, a moderation from January, but that was an unusual time period and February is in line with expectations.

Jeff Farmer: All right. Thank you.

Operator: Our next question comes from Todd Brooks with The Benchmark Company. Please go ahead.

Todd Brooks: Hi, thanks for taking my questions. Appreciate it. First, if I can explore dine-in performance. Sandy, you talked about the buckets of strength at holiday being off-premise, being catering but what are we seeing as far as dine-in performance either if you want to compare traffic levels to pre-pandemic or compare sequentially to what you were seeing in fiscal Q1, that would be helpful.

Craig Pommells: Hi. Good morning, Todd, this is Craig. I’ll start us off. On a 1-year basis — look, the consumer has shifted in a lot of ways, okay? So on a 1-year basis, we have continued to see some improvements in dine-in on a 1-year basis. Dine-in is clearly still down versus pre-COVID. Yes, so I think those are the highlights. Dine-in is growing certainly within sales and also traffic. Relative to pre-COVID, we’re still down, but we’ve seen tremendous gains in off-premise or individual to go third party and catering has been a particularly strong bright spot that we have made a focus area that’s also driving our off-premise business.