Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) Q4 2023 Earnings Call Transcript

Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) Q4 2023 Earnings Call Transcript September 13, 2023

Cracker Barrel Old Country Store, Inc. beats earnings expectations. Reported EPS is $1.79, expectations were $1.61.

Operator: Good day, and welcome to the Cracker Barrel Fiscal 2023 Fourth Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kaleb Johannes. Please go ahead.

Kaleb Johannes: Thank you. Good morning and welcome to Cracker Barrel’s fourth quarter fiscal 2023 conference call and webcast. This morning, we issued a press release announcing the fourth quarter results. In the press release and on the call, we will refer to non-GAAP financial measures for the fourth quarter ended July 28, 2023 as well as our expectations for the first quarter. The non-GAAP financial measures are adjusted to exclude the expected non-cash amortization of the assets recognized from the gains on the sale and leaseback transaction, certain expenses related to our CEO transition and a corporate restructuring charge. The Company believes that excluding these items from its 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 and earnings per share information prepared in accordance with GAAP. Last pages 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; CEO Elect, Julie Felss Masino; and Senior Vice President and CFO, Craig Pommells. 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 Julie. On this call, statements may be made by management of their beliefs and expectations regarding the Company’s future operating results and expected future events.

These are known as forward-looking statements, which involve risks and uncertainties that, in many cases, are beyond management’s control and 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 file with or furnish to the SEC. Finally, the information shared on this 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. Good morning, everyone. This morning we reported total quarterly sales of $836.7 million, and an adjusted operating income margin rate of 5.3%, which was approximately a percentage point higher than the prior year fourth quarter. As we said on our last earnings call, our fourth quarter began slowly, while we had expected the traffic would improve in June and July with the onset of the summer travel season. Unfortunately, this didn’t materialize and our restaurant and retail sales performance came in below our expectations. Although, they’ve stabilized, we believe these fourth quarter traffic trends will continue through most of the first quarter as well. We are of course taking actions to address them as I’ll get to later in the call.

In the face of the top line challenges that we experienced in the fourth quarter, our teams worked hard to control costs. Between their efforts, pricing and inflationary easing, we were able to deliver higher fourth quarter margins than in the prior year, despite our lower traffic levels. Of course, there were other bright spots in the quarter as well, particularly in certain areas likely to help us in the longer term. Our operations teams focused intently on the guest experience, operational excellence, staffing and retention, and we made and continue to make meaningful headway in these areas. We continued our successful deployment of back of the house technology, which will be foundational for us going forward. And despite a very challenging environment, our retail product assortment resonated with our guests and our teams managed inventories exceptionally well, and delivered solid retail margins even in the face of lower traffic.

We launched our loyalty program, Cracker Barrel Rewards internally in late July, and I’m excited to announce that it’ll be available to guests across the country by the end of this month. We believe our loyalty program will be a key traffic driver for us over the long term, and I’ll speak in more detail about the program later in the call. From a full year perspective, we achieved our ambitious goal of growing our catering business above a $100 million, and we delivered $30 million in sustainable cost savings. We opened a total of 12 new Maple Streets and two new Cracker Barrel locations, and we returned more than $133 million to our shareholders in the form of dividends and share repurchases. Although we believe that the traffic pressures that we’re experiencing reflect a challenged consumer environment, we also believe they were exacerbated by our marketing and media strategy.

The volume and substance of our marketing messages in the fourth quarter were not as effective as we’d wanted, particularly against the backdrop of a highly competitive and promotional marketplace. We lowered our advertising spend, because we traditionally found advertising to be less impactful in the fourth quarter, and instead invested funds in store staffing and labor, which we think are longer term imperatives. And although, we focused our messaging on value, our message did not break through against the highly promotional advertising we saw from our competitors. Finally, we think we still have opportunities with regard to the guest experience. I’d like to turn it over to Craig now for a more detailed look at the quarter from a financial perspective and to discuss our outlook.

When Craig is done, I’ll come back and comment on the actions we’re taking to address our traffic situation and position us to change our trajectory in 2024. Craig?

Craig Pommells: Thank you, Sandy, and good morning, everyone. As Sandy noted, for the fourth quarter, we reported total revenue of $836.7 million, an increase of 0.8% over the prior year quarter. Restaurant revenue increased 2.6% to $679.3 million and retail revenue decreased 6.6% to $157.4 million versus the prior year quarter. Comparable store total sales, including both restaurants and retail grew by 0.5%. Comparable store sales grew by 2.4% over the prior year, driven primarily by approximately 8.7% pricing. Our average check results, including a favorable menu mix of approximately 1%, which continues to be driven by our culinary strategy of providing guests with upgrade and add-on options such as our shareable barrel bites, premium sites, beverage program, and $5 take home offerings.

Anticipating a question you might have, we do not believe our pricing strategy negatively impacted our fourth quarter or our current traffic in any meaningful way. As we’ve commented before, we have consistently taken and continue to take a very thoughtful and deliberate approach to pricing. While our recent price increases have been higher than historical levels, we track guest value perceptions through a variety of means. We closely monitor competitive price points and we measure the impact of our pricing actions against the control group to ensure we have not triggered adverse guest behaviors. We have not seen a negative impact to traffic from our pricing actions, even in the currently sensitive environment. That said, we believe price increases taken by the entire restaurant industry may be having a cumulative effect on dining behaviors, and we will continue to be mindful of the consumer and competitive environments in the markets we serve as we make pricing decisions going forward.

Off-premise sales were approximately 17.2% of restaurant sales. As Sandy noted, we were especially pleased with the performance of our catering business, which grew over 35% in the quarter, and we achieved our goal of growing it to a $100 million channel this fiscal year. Comparable store retail sales decreased 6.8% compared to the fourth quarter of the prior year. Although retail sales remain soft, we’ve been pleased with how our team has effectively managed our markdowns and inventory levels. Moving on to our fourth quarter expenses. Total cost of goods sold in the quarter was 30.8% of total revenue versus 32.9% in the prior quarter. Restaurant cost of goods sold in the fourth quarter was 26.6% of restaurant sales versus 28.7% in the prior year quarter.

This 210 basis-point decrease was primarily driven by total menu pricing of 8.7%, which is inclusive of carry-forward pricing from fiscal 2022, and new pricing from fiscal 2023. Commodity deflation was approximately 0.8%, driven principally by lower pork and poultry prices. Fourth quarter retail cost of goods sold was 48.8% of retail sales versus 49.4% in the prior year quarter. This 60 basis-point decrease was primarily driven by lower freight and lower markdowns. Our inventories at quarter-end were $189 million, compared to $213 million in the prior year. With regard to labor costs, our fourth quarter labor and related expenses were 36.5% of revenue versus 35.5% in the prior year quarter. This 100 basis-point increase was primarily driven by our investments in additional labor hours to support the guest experience.

Hourly restaurant wage inflation on a constant mix basis was 4.5%. Adjusted other operating expenses were 23.0% of revenue versus 23.3% in the prior year quarter. This 30 basis-point decrease was primarily driven by lower utilities and maintenance expenses. Our general and administrative expenses in the fourth quarter were 4.5% of revenue versus 3.9% in the prior year quarter. This 60 basis-point increase primarily resulted from more normalized incentive compensation. All of this culminated in GAAP operating income of $41.2 million. Adjusted for the non-cash amortization of the asset recognized from the gains on the sale and leaseback transactions, operating income for the quarter was $44.4 million or 5.3% of revenue. Net interest expense for the quarter was $4.5 million compared to net interest expense of $2.6 million in the prior year quarter.

This increase was a result of higher interest rates. Our GAAP effective tax rate for the fourth quarter was negative 2.1%. The negative tax rate was driven by increased credits on lower than expected earnings. On an adjusted basis our effective tax rate for the quarter was 0%. Fourth quarter GAAP earnings per diluted share were $1.68, and adjusted earnings per diluted share were $1.79. In the fourth quarter, EBITDA was $72.1 million or 8.6% of total revenue. Now, turning to capital allocation and our balance sheets. We remain committed to a balanced approach to capital allocation. Our first priority remains investing 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 fourth quarter, we invested $36.9 million in capital expenditures. We ended the quarter with $415 million in total debt. Our leverage ratio was 1.5 times, which is within our target range of 1.3 times to 1.7 times. Lastly, as we announced in our press release, the Board declared a quarterly dividend of $1.30. I would now like to speak to our outlook and provide some additional color on the guidance in this morning’s release. Historically, we have typically provided full year guidance. However, we have decided to only provide Q1 guidance at this time, given the uncertainty in the environment and our CEO transition. Turning to our guidance, as we’ve mentioned, traffic has remained pressured during Q1 and for Q1, we currently anticipate total revenue of $800 million to $850 million.

We anticipate opening one to two new Cracker Barrel stores and four to five new Maple Streets during the quarter. We expect Q1 commodity deflation of approximately 1% to 2%, and wage inflation on a constant mix basis of 4% to 5%. We anticipate a Q1 adjusted operating income margin of between 2.25% and 3.25%, and capital expenditures of $27 million to $32 million. Our adjustments to operating income include expenses related to our sale leaseback transaction, a corporate restructuring charge, and certain expenses related to our CEO transition, all of which are detailed in the footnotes to our reconciliation table at the end of our earnings release. Sandy will describe our plans to improve our traffic performance momentarily. While delivering an improved top line performance is our top priority, it is also imperative that we continue to shore up our business model and improve profitability.

We were pleased that we delivered $30 million of sustainable cost savings in fiscal ‘23, and we anticipate we will deliver approximately $13 million in additional savings again in fiscal ‘24. Although I do want to note that we expect these savings to be partially offset by investments in labor and loyalty. I’ll now turn the call back over to Sandy so she may share additional details around our business plans.

Sandy Cochran: Thank you, Craig. We are aggressively taking steps to recover traffic above industry levels and to adjust our business model to ensure a financial strength while doing so. We are and will be doing this on a number of fronts, both shorter and longer term. In the shorter term, we are focused on marketing the guest experience, retail sales, preparing for the important holiday season, which occurs during our second quarter, and the launch of our loyalty program. So, I’m going to go through each of these with you. With regard to marketing, we’ve increased our media spend and are focusing our marketing on our core guests of all ages and more pointed value messaging, particularly around lunch and dinner. For example, we’ve added media presence and avenues like college football and NASCAR to drive top of mind awareness.

Our advertising around the breakfast day part has been effective at improving traffic and we’ll now increase our emphasis on lunch and dinner where we’ve underperformed by focusing on craveable favorites that appeal to all our guest segments like Southern Fried Chicken. We’ll also be advertising sharper price points such as brunch all day, starting at $8.99, and continuing to showcase our variety with our Over 20 Under $12 campaign. Finally, we’re introducing a new physical menu format that tested well and includes imagery that we believe will appeal to our guests and drive check. With regard to the guest experience, we will continue to focus on staffing, retention, and hospitality, all of which are linchpins for sustainable traffic.

We’re encouraged by the improvements that we’ve seen in these areas and in our guest experience metrics, which fell below our historically strong levels as we restaffed and retrained coming out of the pandemic, and we will continue to invest in more front of the house hours to deliver the hospitality for which we’re known. We’ll also continue our investments in training and development, simplifying operations, and improving our manager experience by streamlining or eliminating work that drives them away from the dining rooms, their employees and their guests. As for retail, our retail teams will continue to manage inventories and emphasize sales behaviors that drive conversion. We’re also reworking some of our merchandising displays to be even more effective and impactful than they already are.

With respect to our important second quarter, we believe we are well positioned to have a strong holiday season and deliver continued growth in our already robust catering and occasion channels. From a culinary perspective, we will lean into our core holiday offerings such as Country Fried Turkey and Cinnamon Roll Pie that we know are strong traffic drivers, and that, along with our retail offerings underpin our holiday season. Finally, we’re launching our Cracker Barrel Rewards loyalty program that we believe will be a meaningful traffic driver as well as a key source of guest insight and data. Although, it’ll take time to build awareness and participation. As I said earlier, the program will be going live by the end of the month, and we believe it has the potential to be the best, most engaging loyalty program in the full service dining industry and will help us further extend our hospitality into the digital realm.

Based off our iconic peg game, participants will earn pegs for each dollar they spend with us, both restaurant and retail, and will be able to use those pegs for rewards at various levels. The program is gamified, allowing guests to earn additional pegs through fun challenges as well as surprise and delight events. We’ve been testing it with positive results among our own employees who we know will be the best ambassadors for the program and key to its rollout. To further drive awareness and enrollment, we’ll be launching a multi-channel media campaign, and I’m delighted to announce that we’ll be partnering with Dolly Parton in late October to highlight the program and to promote Dolly’s highly anticipated collaborative album, Rockstar, which will be available in our stores.

Regarding longer term initiatives, we’re undertaking extensive research with both current and lapsed guests in partnership with outside firms to further understand the current competitive environment and our place in it, including our strengths, opportunities, brand positioning, and to identify actionable strategies to capitalize on our learnings. We’re also conducting a deeper dive review of our store base to better leverage our presence in certain trade areas, and we’ll be considering physical design and refreshment opportunities, which will be informed by the research we are undertaking. From a culinary perspective, we will remain focused on menu innovation, driven by the needs of our most loyal guests and our desired affinity groups, while at the same time pursuing menu simplification to help our operators and improve efficiency.

Finally, as Craig noted, we’ll continue to identify sustainable cost savings and expect an additional $30 million in FY24, effectively matching the savings that we delivered in FY23. All of the initiatives I just reviewed will be led by my successor, Julie Felss Masino, who our Board appointed after a multi-year succession planning process. Julie had the chance to spend several days with our entire field leadership at our Biannual Managers Conference in Orlando a month ago, and she has been warmly embraced by the entire Cracker Barrel family. We look forward to Julie’s leadership as we tackle the challenges before us. Before we open things up for your questions, I want to offer Julie a chance to say a few words. Julie?

Julie Felss Masino: Hello, everyone. It’s a pleasure to be with you all. As you would expect, over the last few weeks, I’ve been busy onboarding, visiting stores and getting to know the brand and our team. Even after this short time, it’s clear to me that the things that drew me to this opportunity, an iconic brand with passionate and loyal guests who love us, great scratch-made food and retail products, a profound mission of pleasing people and talented and passionate people who are deeply committed to delivering on this mission are all right there. Although traffic is challenged, the fact is our absolute traffic numbers would be the envy of many brands. All that to say, I’m confident that we have the core elements to address our current challenges and regain lost ground.

I’ll be digging in with Sandy and our teams on both the shorter and longer term initiatives that she mentioned, and will be solidifying my own views after doing some more listening and observing. I look forward to speaking with you further in November and of course, in subsequent calls when I’ll have more to share with you. On a personal note, I am grateful not only for the opportunity to lead this great brand, but for both Sandy’s leadership over the last 12 years and our ongoing partnership as I settle into the role. I’ve been around restaurant and retail my whole life, and the chance to be able to leverage my experience for a company with as rich of a history and bright of a future as Cracker Barrel is truly exciting. I’m looking forward to getting to work and interacting with you more over the coming months, and I appreciate the chance to say hello.

Sandy?

Sandy Cochran: Thanks, Julie. As you all know, Julie has a long track record of driving growth and innovation, and I have no doubt that she will bring that experience to bear as we tackle our challenges and position the brand for the future. Now, let’s take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Jeff Farmer with Gordon Haskett. Please go ahead.

Jeff Farmer: Great. Thank you. Best of luck, Sandy, and welcome to Julie. With that, a few questions. So, can you help me understand the same-store sales expectations that are captured in that Q1 revenue guidance of, I believe, it was $800 million to $850 million?

Sandy Cochran: You said a few questions, but then you have one.

Craig Pommells: Well — so Jeff, what I would say there is it’s a fairly wide range and we don’t really have a lot of new units in the plan. So, the way we’re thinking about — this is Craig, by the way. Good morning. The way we’re thinking about the first quarter is our best thinking is in approximately in the middle of the range. But if the environment were to get tougher, we would probably be at the lower end of the range. At the same time, we’ve taken a number of actions to shore up traffic, in particular, updates to our advertising and messaging and so on, to the degree that those things are highly effective, that would move us to the high end of the range.

Jeff Farmer: Okay. Just following up on that, so second question. So, expected menu pricing in Q1 and Q2 for you guys?

Craig Pommells: So for — overall, for Q1, the way that we think about pricing, there are a couple of elements. One is the price that we’re wrapping on, and then we also have the new price. So for — our actual net new price that we’re adding for Q1 is relatively low, but the price cumulatively over — year-over-year would be somewhere in the 6% to 7% range for Q1 total pricing, including the additional pricing from Q1 and the prior year around.

Jeff Farmer: So 6% to 7% Q1 cumulative, I got that. And then do you have a cumulative number for Q2 as well? Can we expect that 6% to 7% to sort of hold into Q2?

Craig Pommells: Well, we’re not sharing much beyond Q1 at this time. I’ll build a little bit more just to help with that question. Because we are moderating our pricing, our incremental pricing, as we go through the fiscal year, and we’re comping on higher price, the natural expectation there would be our combined year-over-year price would come down meaningfully over the course of the year, and you would expect it to be at its peak at approximately — in approximately Q1.

Jeff Farmer: Okay. That’s helpful. And then final question for me. It looks like the adjusted operating income margin guidance for the Q1 is in that 2.25% to 3.25% range. That’s quite a bit below where you were a year ago I believe at 3.6%. So I’m just trying to understand there, in terms of thinking about the restaurant level margin versus G&A, what is basically representing that 100-plus basis-point margin headwind for the F1Q operating margin relative to a year ago? So just key drivers there for — across the restaurant level margin, is that much lower, G&A higher? How should we be thinking about your bits and pieces or the moving pieces to get into that lower operating income margin guidance?

Craig Pommells: I think the big levers are going to be, we see improvements in cost of goods sold. So, that will be favorable. But that’s being offset by, to some degree, deleverage to some effect, but also the investments that we’re making in labor. Cracker Barrel, our business model is high traffic, a really good value, great hospitality. And we have — while we’ve made a lot of progress on kind of regaining our historical leadership role in hospitality, we’re not back to peak levels. So, we’re investing in labor in order to deliver that. And we think over time that will be a big tailwind for us. So, we have higher labor, lower COGS. We have a bit higher advertising as well because with traffic being softer, we have deployed more advertising on a national basis, but we’re also doing test and learn in different parts of the country.

And lastly, as a subcomponent of G&A in Q1, we have higher MAT expense, manager and training expense. And that is in preparation for our quarter two. As Sandy shared, we’re really proud of the work that we’ve done and the team has delivered with the catering business. That catering opportunity is greater even more so in Q2, and we want to ensure we’re fully prepared for that. So, we have invested in additional managers to ensure that we are delivering that at 100%.

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

Todd Brooks: Hey. Good morning and congrats, Sandy, and welcome, Julie as well. A couple of questions for you. One, following on kind of Jeff’s pricing question, but from a more theoretical standpoint. Craig, I know you talked about that the guest value perceptions have been unchanged, even though I think since 2021 menu pricing is up probably between 15% and 17%. How do you measure that their value perceptions aren’t changing as their situation changes? So, as things are getting tougher, savings rates are down, energy costs are up, student loan payments restarting again, are there value perception static, or how are you monitoring those perceptions as you continue to take incremental price with, it seems like each menu opportunity?

Craig Pommells: Good morning, Todd. It’s a good question. The way that we evaluate that is, one, is the absolute value that we’re delivering measured against ourselves. But we also measure our value scores, primarily against the marketplace. Because the market has been very dynamic. It has been a very high inflation period over a number of years. So, in terms of value, we measure ourselves against ourselves. We measure ourselves against our competition. We did also note in the prepared remarks that we do believe there is a reaction from consumers to just generally higher prices in casual dine-in and full-service dine-in more broadly. We think we’re well positioned within that. So, we think our pricing is good. We think we’re very competitive. We think we are a great value, but I do think there is a factor to prices as a whole in the macroeconomic environment and the amount of full-service visits that are available as a result of that.

Sandy Cochran: I’ll add a little bit to that, too, Todd. I think as Craig’s pointed to, we use the quantitative control group to see what kind of impact our pricing decisions we make. We continue to look at ourselves versus competitors. We also are spending a lot of time listening to guest reactions, either through conversations with our operators or just the feedback that we get and we manage our monitoring check management tactics. So we are looking very closely at things like beverage attachment, shareable sites, premium sites and all of the things that would indicate to us that the consumer situation has changed meaningfully and most importantly, that we need to change our strategy to address it.

Todd Brooks: Okay. Very helpful. Thanks to both. Just a follow-up on that. You talked about your value relative to competitors. And in the current environment, we’re seeing more kind of price promotion activity from some of the full-service operator universe out there. Cracker Barrel has obviously been a brand where value is inherent and it’s lent itself to kind of an everyday value approach to the brand and how you communicate that. If competitors are getting more overtly competitive with price points and special offers, what arrows are kind of in Cracker Barrel’s quiver to pull if you do feel like you need to compete a little bit more around the value of the experience?

Sandy Cochran: Well, we did see the competitors doing just that. We think the quarter got significantly more promotional than we were anticipating. And many of the competitors are not only getting sharp in the price point, but they also increased their level of advertising sort of with that news. I think what we’re doing now, to your point, everyday value has always been a hallmark of the brand, and we have worked hard to invest in value, despite the price increases that we’ve been taking over the last few years, we still think we have ensured that there’s everyday value at every day part on the menu so that a guest can come in. And whether they’re looking for a low price point or it’s more of a celebratory indulge indication, so they can find that on the menu.