Cracker Barrel Old Country Store Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 30, 2023

There are 10 speakers on the call.

Operator

And welcome to the Cracker Barrel Fiscal 20 24 First Quarter Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Caleb Johannes, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to Cracker Barrel's Q1 fiscal 2024 conference call and webcast. This morning, we issued a press release announcing our Q1 results. In this press release and on the call, we will refer to non GAAP financial measures For the Q1 ended October 27, 2023, the non GAAP financial measures are adjusted to exclude the non cash amortization of the asset recognized from the gains on the sale and leaseback transactions expenses related to the company's CEO transition expenses associated with the strategic transformation initiative and a corporate restructuring charge 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.

Speaker 1

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 pages of the press release include reconciliations from the non GAAP information to the GAAP financials. On the call this morning Our Cracker Barrel's President and CEO, Julie Massino and Senior Vice President and CFO, Craig Pammels. Julie and Craig will provide a review of the business, financials and outlook. We will then open up the call for questions.

Speaker 1

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 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. The company undertakes no obligation to update it, except as may be required under applicable law.

Speaker 1

I'll now turn the call over to Cracker Barrel's President and CEO, Julie Messina. Julie?

Speaker 2

Thank you, and good morning, everyone. This morning, we reported total Q1 revenue of $123,800,000 and adjusted operating income margin of 2.3%. Our sales results were in line with our expectations And our operating margin was at the low end of our internal expectations, reflecting certain investments we made to shore up our top line. Although we continue to face challenges, I've been impressed with the team's work to diagnose the key drivers of our traffic headwinds And I'm encouraged by our results as we've delivered sequential monthly improvements in our comparable store traffic performance during the quarter, which I am pleased to say has continued into our important Q2. We have taken numerous actions to drive traffic and deliver the sequential improvement.

Speaker 2

I'll go through them now. 1st, as we discussed last call, we took several actions to improve the effectiveness of our marketing in the Q1. We increased our media spend by approximately 20% and refined our messaging to focus more on our core guests. This included increased advertising in linear TV, including premium sporting events like college football. We also highlighted our compelling value proposition by featuring an $8.99 price point in our breakfast focused messaging, And we continued highlighting our over $20 under $12 in our lunch and dinner focused messaging.

Speaker 2

2nd, from an operational perspective, we remained focused on the guest experience. We invested in the labor hours to deliver great hospitality And we continue to emphasize staffing, retention, training and development. We're encouraged by the improvements we've seen in certain key guest experience metrics. We are happy with our staffing and turnover levels and we are optimistic we can sustain our sales momentum and gain further traction in the coming quarters. Finally, we successfully launched Cracker Barrel Rewards, our new loyalty program.

Speaker 2

The launch was supported by a multichannel media campaign to drive awareness and enrollment. Our operations teams have done a terrific job as ambassadors and champions of the program, and guests have embraced it. We're very pleased with the guest response and the number of enrollments, which have exceeded our expectations thus far. And we've been thrilled with the exposure we've through our partnership with the iconic Dolly Parton. We continue to believe Cracker Barrel Rewards will be one of the best and most engaging loyalty programs in full service dining and are confident it will be a meaningful brand differentiator and traffic driver over the long term.

Speaker 2

Turning to retail. The retail environment remains challenging. Although there were some bright spots during the quarter, such as our harvest assortment, We experienced sales declines across most of our categories. Some of this was due to lower restaurant traffic, but we also believe Price conscious guests may have reduced their retail purchases as a way to manage their overall spend with us. However, The team has done a good job managing inventories and is focused on emphasizing value and optimizing displays to drive sales improvements during this important holiday season.

Speaker 2

Looking ahead to Q2. Our 2nd quarter is an especially important quarter for us due to the seasonally higher volumes. Over Thanksgiving, our teams around the country worked tirelessly to deliver a great holiday experience for millions of guests and did so with extraordinary results. We hit on all cylinders in every aspect of our business: dine in, heat and serve, to go and catering. We set a company record for total sales in a single week during Thanksgiving week with over $110,000,000 in sales and we served approximately 6,000,000 guests.

Speaker 2

Our top 5 stores alone served more than 80,000 guests over Thanksgiving week. To put that into perspective, those 5 stores serve more people than attend most NFL games. I want to give a huge shout out to our field teams and leadership for their As we begin December, we will look to continue our Thanksgiving momentum over the holidays with our off premise offerings and catering. We are leaning into seasonal guest favorites such as our country fried turkey and cinnamon roll pie, which continue to resonate with guests. With regard to catering, we're leveraging our catering sales managers to drive growth, especially with large accounts.

Speaker 2

All of this is being supported by a marketing campaign that is emphasizing our strong all day value, which we believe is a competitive advantage for us, particularly in the current environment and is something that we will continue to underscore. We are also continuing to optimize our media mix to improve our share of voice, and we plan to expand this to other key markets. Our marketing is also focused on promoting Cracker Barrel Rewards to continue driving awareness and enrollment. As I mentioned, we have partnered with Dolly Parton to highlight Cracker Barrel Rewards and promote her collaborative album Rockstar. We've been very pleased with this partnership with Dolly, which has helped deliver a large number of impressions and high engagement rates and has incrementally contributed to the strong levels of enrollment we have seen to date.

Speaker 2

I'll now turn the call over to Craig for a more detailed look at the Q1 from a financial perspective and to discuss our financial outlook for the rest of the year. After he finishes, I will then comment on our priorities and upcoming initiatives, including a strategic transformation initiative we have undertaken to help us invigorate the brand for long term success. Craig?

Speaker 3

Thank you, Julie, and good morning, everyone. As Julie noted, for the Q1, we reported total revenue of $823,800,000 Restaurant revenue decreased 0.2 percent to $660,800,000 Retail revenue decreased 8% to $163,000,000 versus the prior year quarter. Comparable store sales declined 0.5% over the prior year. Pricing was approximately 6.8%. As we previously shared, we're taking more moderate net new pricing Given the current environment, our quarterly pricing consisted of approximately 5.5% carryforward pricing from fiscal 2023 and 1.3 percent new pricing from fiscal 2024.

Speaker 3

We continue to closely monitor the impact of our pricing actions and we have not seen a negative impact to traffic. However, Given the current environment in which promotional activity is elevated and consumers are generally pressured, We will continue to take a more cautious approach with our pricing for the remainder of the fiscal year. Off premise sales were approximately 17.5 percent of restaurant sales. We continue to be particularly pleased with our catering business, which grew over 50% versus the prior year. Comparable store retail sales decreased 8.1% Compared to the Q1 of the prior year, although retail sales remain soft, we were pleased with how the team has effectively managed inventory levels.

Speaker 3

Moving on to our Q1 expenses. Total cost of goods sold in the quarter was 31% of total revenue versus 33.5% in the prior year quarter. Restaurant cost of goods sold in the Q1 Was 26.2 percent of restaurant sales versus 29.1% in the prior year quarter. This 290 basis point decrease was primarily driven by menu pricing. A modest deflation Was approximately 2.3%, driven principally by lower poultry and pork prices.

Speaker 3

1st quarter retail cost of goods sold was 50.4 percent of retail sales versus 50.2% in the prior year quarter. Our inventories at quarter end were $207,300,000 compared to $231,000,000 In the prior year. With regard to labor costs, our 1st quarter labor and related expenses were 37% of revenue versus 34.8% in the prior year quarter. This 220 basis point increase Was primarily driven by our investments in additional labor hours to support the guest experience. Hourly restaurant wage inflation was approximately 5%.

Speaker 3

Adjusted other expenses were 24.3 percent of revenue versus 23.1% in the prior year quarter. This 120 basis point increase was primarily driven by our investments in advertising as well as higher depreciation. Adjusted general and administrative expenses in the first quarter We're 5.4 percent of revenue and exclude the following items. First, approximately $1,600,000 related to our CEO transition. 2nd, approximately $1,100,000 in professional fees Related to our strategy transformation initiative, which Julie mentioned and above which she will speak more momentarily.

Speaker 3

And third, an approximately $1,600,000 corporate restructuring charge. Compared to the prior year, adjusted general and administrative expenses increased 30 basis points, primarily due to sales deleverage. All of this culminated in GAAP operating income of $11,400,000 Adjusted operating income for the quarter was $19,000,000 or 2.3 percent of revenue. Net interest expense for the quarter was $4,900,000 compared to net interest expense of $3,500,000 in the prior year quarter. This increase was primarily the result of higher weighted average interest rates.

Speaker 3

Our GAAP effective tax rate for the Q1 was 15.7%. On an adjusted basis, our effective tax rate for the quarter was 19.9%. 1st quarter GAAP earnings per diluted share were $0.25 And adjusted earnings per diluted share were $0.51 In the first quarter, Adjusted EBITDA was $45,700,000 or 5.5 percent of total revenue. Now turning to capital allocation and our balance sheet. We remain committed to a balanced approach to capital allocation.

Speaker 3

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 Q1, we invested $24,600,000 in capital expenditures and we returned $29,300,000 to shareholders in dividends. We ended the quarter with $475,000,000 in total debt. Lastly, as we announced in our press release, The Board declared a quarterly dividend of $1.30 per share payable on February 13, 2024 to shareholders of record on January 19, 2024.

Speaker 3

With respect to our fiscal 2024 outlook, I would like to provide some additional color on the guidance in this morning's release and an update on recent trends. Order to date, We have sustained our momentum recovering traffic. We were particularly pleased with our performance in November, Which continued our trend of sequential monthly improvements in comparable store traffic that began in August. And as Julie mentioned, we delivered strong sales during the Thanksgiving week. However, Looking ahead, we continue to operate in an uncertain environment.

Speaker 3

Although consumers have been resilient, Sentiment remains relatively weak by historical standards, with many consumers feeling economically pressured and more pessimistic, which could pressure discretionary spending. With this in mind, we currently expect fiscal 2024 revenue Off $3,400,000,000 to $3,500,000,000 We anticipate pricing Of approximately 4.5% to 5.0 percent for the full year, which includes approximately 2.8% of carry forward pricing from fiscal 2023. As a reminder, we expect our pricing to moderate sequentially each quarter During the year, we anticipate opening 2 new Cracker Barrel stores and 9 to 11 new Maple Street stores During the year, we expect commodity inflation in the low single digits and hourly restaurant wage inflation in the mid single digits. As noted in the reconciliation table in our press release, our full year outlook also contemplates certain excluded expenses In addition to the non cash amortization of gains from our sale leaseback. These include approximately $10,000,000 in consulting fees related to our strategy transformation initiative that Julie will cover in a moment.

Speaker 3

Approximately $10,000,000 in one time CEO transition costs and approximately $2,000,000 in corporate restructuring charges. Our full year outlook also includes the benefit of a 53rd week this fiscal year. Taking all of this into account, we anticipate full year adjusted operating income of $113,000,000 to $150,000,000 We also expect a full year GAAP effective tax rate of 2% to 5% and an adjusted effective tax rate of 7% to 10% And capital expenditures of $120,000,000 to $135,000,000 I'll now turn the call back over to Julie, so she may share additional details on her perspective and our business plans and areas of focus.

Speaker 2

Thanks, Craig. I now want to provide some perspective on my initial impressions, my pillars for achieving long term success and where we will focus in the coming months. Since joining the company in August, I've been busy meeting with the field and home office teams, understanding our challenges and opportunities, particularly as it relates to the near term and doing deep dives into our initiatives and financial plans. These past few months have reinforced my convictions that Cracker teams who are passionate about our mission of pleasing people. Over the past 90 days, I've traveled the country with our field leadership teams and by myself, Observing and interacting with guests and with team members at all levels, retail and restaurant, front of house and back of house.

Speaker 2

Over and over again, I've been struck by the enthusiasm and genuine affinity so many of our guests have for Cracker Barrel and the love they express for our brand. Multiple times, I've had guests and employees approach me unsolicited to share stories and express adoration about our food, our hospitality and our culture. These interactions were powerful reminders to me that this brand really is special And the foundation with which we have to work, including our traffic, would be the envy of most in casual and family dining. Despite traffic declines on a relative basis, we still serve approximately 200,000,000 guests a year, which offers us an equal number of opportunities to improve and grow. I'd now like to speak to the cornerstones that we will refer back to as we take advantage of these strengths.

Speaker 2

First, we need to be a brand that our guests absolutely love. For as many guests as we serve each day, And we can only do this if we are executing with excellence and doing the small things well every shift day in and day out. This means providing friendly and efficient service and making sure guest orders are correct and come out quickly. Retail product is on the floor and easy to access and the store is immaculately clean. While it may sound easy, it takes relentless focus the organization to do this consistently.

Speaker 2

Our field teams are extraordinary and they have been focused on these very things with a renewed sense of purpose and commitment and their efforts are paying off. I believe with the focused energy and support of the rest of the company, they can continue this trajectory and build on our momentum. 2nd, we need to improve our relevance. While we need to be our authentic selves ensuring our menu features craveable food at all three dayparts, making our physical stores more appealing to guests and employees and reducing friction for our guests and employees through a combination of operational and technological improvements. Our Cracker Barrel Rewards program is an example of this sort of technological investment and offers us a unique platform to maintain and grow our relevance across all guest cohorts.

Speaker 2

We believe the program will help us speak to guests in a more individualized fashion and offer compelling value tailored to their particular behaviors and needs. And that will be a key part of a virtuous cycle of actionable guest data and company response that should drive visitations and grow brand affinity. As I said, the response to this program has exceeded our expectations thus far, and we will continue investing in the program to accelerate the benefits we believe are out there. Finally, we need to deliver compelling shareholder returns. Cracker Barrel is Mature brand that has faced many challenges in recent years and like all companies in full service dining will continue to face pressure going forward.

Speaker 2

While we need to and will control costs and maintain operational discipline to drive bottom line results, I firmly believe that the only way we can sustainably grow is through and investing in labor, particularly on weekends and at dinner, so that our guests have an experience that will make them want to return. As Craig referenced, we kicked off a strategic transformation initiative in late September. This initiative is data driven and multi phased and includes review of our business and a wide ranging assessment of the near term and long term opportunities as well as identification and execution of these strategies and tactics are actively engaged and leaning into this important initiative. We recently completed the initial diagnostic phase of this project And the findings have given us confidence that the actions we've already taken to address near term traffic challenges, more and Initial findings are also helping us evolve and refine our thinking about key parts of our business, including a need to focus on our dinner daypart and deploy additional technology to improve the employee and guest experience. Our strategic transformation project is intended To ensure we continue to evolve the business and play to our strengths and differentiators to drive long term value creation, improve profitability and to win market share.

Speaker 2

This involves refining our brand strategies and positioning, Identifying and prioritizing the most impactful growth drivers, defining required capabilities and enablers and last but not least, Executing with excellence. We are in the early stages of this project, and I anticipate sharing more details with you over the next several months as we develop and begin to implement a longer term plan that delivers on the 3 pillars I outlined earlier: being a brand that our guests love, maintaining and improving our relevance and delivering compelling shareholder returns. More to follow on subsequent calls. I'll now turn it over to the operator for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Dennis Iger with UBS. Please go ahead.

Speaker 4

Great. Thank you. A couple of questions. I guess the first one, Could we talk a little bit more about what you're seeing from your customers? What you saw in the quarter, perhaps even into the month of November From a customer standpoint, anything as it relates to key customer cohorts, other behaviors, worth calling out any notable changes, etcetera?

Speaker 5

Hi, Dennis.

Speaker 2

Hi, Dennis. It's Julie. I'll take that one. Thanks so much for the question. I would say that the environment out there It really continues to be uncertain and mixed, but there have been some positives.

Speaker 2

It seems that a recession is potentially less likely. Inflation continues to moderate and the consumer and labor market have been resilient. So those are the positives. However, there's been some reason for caution as well. The consumer sentiment has been declining in recent months and remains at relatively low levels.

Speaker 2

Labor market is cooling and Savings accumulated during the pandemic are evaporating and debt, burdens from higher interest rates. So With all that behind us and sort of in the landscape out there, we are encouraged by the monthly sequential improvements in our traffic. We believe that the investments that we've made to focus on the guest experience, to emphasize our strong value proposition across our dayparts, That was an important pivot in Q1. It has been accelerating the frequency and enhancing our business model and will continue to help us drive performance and win share In this very, very mixed environment.

Speaker 4

Appreciate that color, Julie, very helpful. I guess second one, just following up on that, As you talk about sort of some of the resiliency out there, little resistance to the pricing to date. But then you and Craig kind of talking about the tough Environment and maybe gets worse from here from a macro perspective. Just wondering if there's any more context you could put around Your expectations over the balance of the year as we think about that macro environment, do you expect the consumer deteriorates from here? Very helpful that you gave the color around pricing for the year, but just anything more on kind of what's embedded in that sales algorithm.

Speaker 4

You've got a bunch of initiatives, but what you're thinking about your consumer From here and maybe related to that, is there any context you can give thinking about last year's trends in recent months Relative to this year and is it sort of our underlying traffic trends improving over these last several months? Is there any kind of year over year dynamic to be thinking about? Thank you very much.

Speaker 3

Hi, Dennis. This is Craig. I'll dig into that one. The As we finished up our quarter 4 last year, we talked about an unexpected No decline in our traffic and then we talked about the things that we were going to be doing to bolster that. And I think we're on a really good path With the actions that we've taken.

Speaker 3

So at the time we talked about, we believe the environment was more promotional. We believe the consumer Was a bit more pressured and at the time we also didn't have a whole lot of messaging. And now we have adjusted we think to the current environment appropriately and that seems to be working for us. The environment is more promotional. That's what we're seeing in our results.

Speaker 3

The consumer is pressured, but they haven't shut down. They're still dining out. They're just making choices. And what was important to us was that We are top of mind. And in order to be top of mind, you have to communicate to folks and we've ramped up our communication.

Speaker 3

And we've also focused our communication around what we're calling Canada's core plus group. It's a lot of our traditional core Plus elements of our growth segments that are closer to that core. You reach those folks in college football, NASCAR, things like that. And that is working for us. We're pleased with that outcome.

Speaker 3

So while the consumer environment may get A little bit better, may get a little bit worse. We don't know, but we do think we're well positioned given the environment That we're in. Now towards the end of the year, we're going to be comping over Q4 that was Particularly soft for us. I don't think we're prepared to say anything else more about that specifically at this time, but we think we learned from that and we adapt The other point with that is, Cracker Barrel is a particularly experiential brand. We serve a lot, I guess, dollars 200,000,000 in 3 dayparts, breakfast, lunch and dinner.

Speaker 3

And we're known for a lot of things, but one of them is hospitality. And because of that, we have been investing more in labor to ensure that, 1, we can deliver that hospitality, and we are And 2, that we can really serve that kind of peak demand. So that's an investment that we're making in the short term for sure. Now one of the other benefits that you get from that is that's also a better experience for the employees and we're seeing turnover comes down. So as we think about how do all of these investments play out over time, one of the ways that it plays out is Your turnover comes down and you actually get more efficient over time.

Speaker 3

So we're investing for the future. We're investing to grow our traffic in the short term. We think our investments Are well timed for the environment and we think over a period of time that will also help our profitability.

Speaker 4

Great. Thank you both.

Operator

Our next question comes from Kathryn Griffin with Bank of America. Please go ahead.

Speaker 6

Hi, thanks so much for the questions. First, I wanted to dive a little deeper into the promotional intensity that You mentioned, is there any kind of differences in geographies or in specific sub segments You can speak to that you're seeing.

Speaker 2

Hi, Catherine, it's Julie. I'll take that one. Yes. As we discussed in September, on our last call, it's been really promotional out there from the competitors. So that really To ensure we were playing to our strengths and our differentiators at Cracker Barrel because we are an all three Daypart brand.

Speaker 2

So we wanted to make sure that our messaging really resonated with that core and the core plus guest across those 3 dayparts. Value messaging Of our daypart messaging, value messaging around breakfast starting at $8.99 all of those things are really resonating well with our guests. The other thing that I spoke about in my prepared remarks that we're very heartened by is that we made additional investments in testing some different Marketing strategies throughout the quarter, one of which was college football. Craig talked about NASCAR. Those additional investments have returned quite well for us, both from a traffic and investment perspective.

Speaker 2

Additionally, we've invested in some local television advertising in some key markets. That has also provided a really strong return on investment and return on traffic that we've been pleased with. And we'll be constantly evaluating our marketing mix. The team has done a great job Digging in and looking at that to really drive efficiency as well as effectiveness with that core and core plus segment. So we remain optimistic about our ability to continue to evaluate and ramp effectiveness in that space as we move through the year.

Speaker 6

Okay. Thank you. And then just following up on an earlier question, can you just help us Frame sort of what the comps were by month in your fiscal Q2 of last year?

Speaker 3

Actually, I don't have we will follow-up with you on that one and we'll provide whatever detail we any details we can as it relates To what the conference for last year.

Speaker 6

Okay, understood. Thank you.

Operator

Our next question comes from Alton Stump with Loop Capital. Please go ahead.

Speaker 7

I want to ask first off on the commodity inflation guidance. I'll ask Craig, you mentioned that you're down 2.3% in the Q1, but you're looking for a low single digit increase for the full year. I guess, one, what are the key drivers behind that increase as far as inputs? And then any sort of color on kind of what the pace may be over the next few quarters of the year?

Speaker 3

Hi, Alton. So Q1, we had deflation. We're kind of confident of peak inflation From the prior year, so that was good news. We do expect the commodity environment to be Pretty good for the rest of the year. We don't expect it to be deflationary though.

Speaker 3

I believe we've got some expectations out there for bacon As an example, to start to move back up. So we expect a much more modest Commodity inflation through the rest of the year. You all know about beef. Beef has been Hi. We are we are relatively high in our mix, but not towards the top.

Speaker 3

So as a result of that, We do expect mild commodity inflation for the rest of the year, but not deflation in part because of the changes to bacon.

Speaker 7

Understood. Thanks for that color. And then, I guess, one quick, additional question. Just on the retail side of your business, obviously, a disappointing comp I'm sure for you here in the Q1, you're heading now into, of course, what's a huge time of the year for that business. I guess, how are you feeling heading into the holiday On the retail

Speaker 3

side, thanks. It's Craig again. We feel so let me just give a little bit of background on retail, if we think about retail or retail business over the longer term since 2019, The retail business has outperformed pretty consistently both in terms of sales and profit. So we're really proud of that business. We're proud of the work that the team has done.

Speaker 3

More recently, it's been softer. Now keep in mind that there's The retail it's completely discretionary. We are not selling essentials and the retail environment has kind of shifted From to the things that are more everyday essentials and that's not really an area that's core to us. So I think considering the environment, the retail business Is holding up well. And so the team has made adjustments in terms of inventory.

Speaker 3

We've made those adjustments early. We've continued to make them to ensure that we have an appropriate level of profitability In the retail business as we move forward. So I think we're managing what we can manage there given That consumers are shifting a bit more to what appears to be essentials And largely what we have are things that people want to have, but you don't necessarily need them on a day to day basis.

Speaker 7

Sure, Ashu. Thanks for that color. I appreciate it. I'll hop back in the queue.

Operator

Our next question comes from Jake Bartlett with TIRUS Securities. Please go ahead.

Speaker 8

Great. Thank you so much for My first one is also on the kind of the near term trends. And I think Craig and Julie, you both mentioned improving traffic Throughout the quarter and into November, can you share what the traffic was in the Q1? I know it comes out with the Q, but if you could provide Your traffic and mix and just so we can see

Speaker 3

what the trajectory is there? Absolutely, Jake. I'll take the numbers and then we can go from there. Overall traffic for Q1 was restaurant traffic negative 7.1%. Check overall plus 6.6 including price of 6.8 and mix of negative 0.2.

Speaker 8

Okay, got it. And just reading into the commentary of improving traffic by month and into November, It feels pretty safe to say that same store sales moved to decently positive quarter to date. And this goes back to let me ask it one more time about last year's trends. But at ICR last year, you gave preliminary Quarter revenue growth guidance of 6% and then you reported 8.3%. So I believe that that implies I said January was much stronger than expected, so very difficult compared this year.

Speaker 8

So just we're trying to kind of judge How much we should read the current trends, which seem to be pretty distantly positive on same store sales for the restaurants for the whole quarter? So any help there that would be helpful. And then That's a longer term question.

Speaker 3

Yes. This is Craig again, Jay. The kind of reflecting on Q2 from last year, there were really two parts So that if I remember correctly, December closed out a little bit softer. I believe there was some weather at the end of December. And then January had 2 kind of benefit components.

Speaker 3

1 was A robust kind of wrap on Omicron. So some of the January beat was Omicron related. It was also, I believe, a warmer than normal January. So there were some weather tailwind. It's always risky to try to forecast the weather.

Speaker 3

But I think to the degree that Weather was a little bit of a tailwind last year in January. I do recall that December towards the 2nd part of December was a bit challenged by weather As well.

Speaker 8

Okay. Okay. And then my other question is on margins. And In the quarter itself, as you mentioned, your sales were in line with expectations internally, but you're at the lower end of guidance for margins. My question is What drove that?

Speaker 8

What surprised you to the downside there on the margins? And as we look forward, you didn't explicitly give Restaurant level margins or G and A guidance, but can you help us in terms of what is driving the expected kind of margin compression That's implied in guidance in 2024, is it the margin side or is it G and A deleverage that you think is going to drive that?

Speaker 3

For this quarter, for quarter 1, the as we were we had some hypotheses, it was data As we went into the quarter, but we weren't certain. So we were we started out With some additional advertising, we had largely committed to that and we added some labor as well. We were seeing really good results from the advertising. We're seeing Gave us more confidence in November. So as a result, we invested a bit more in labor than we had originally expected.

Speaker 3

We had that out there as an option, but we went ahead and we did some more and that we think played out well. Now the things that were unexpected or kind of came in on the unfavorable side of our internal expectations, there were a couple of them. Wage rates came in a little bit higher. Maintenance expenses came in a little bit higher. Public liability, general liability came in A little bit higher.

Speaker 3

So we had a couple of things that kind of didn't that were on the high end of the cost range. But the primary driver was We were making a bet it was working and we just continued down that path because we were seeing a lot of good impacts from that. So what does that mean then for the rest of the year? I won't go into a whole lot of detail there. I will say it's directionally.

Speaker 3

We the things that we've been doing that are working probably to continue to do those. So we're advertising has been working And we do some test and learn and as long as the ROI in that remains compelling, I would expect that we're going to continue to do that. The labor investment has also been working out well, not only in terms of the short term Traffic and our ability to really execute at peak periods, but you see a benefit to guest satisfaction. You see a benefit to turnover, Which pays a dividend in the future. So we'll continue to invest in those things as we go throughout the year.

Speaker 8

Okay. Thank you very much. Appreciate it.

Operator

Our next question comes from Andrew Wolf with C. L. King. Please go ahead.

Speaker 9

Good morning. My question is also guidance related, actually 2. First on earnings, The implication of your guidance is better margins going forward for the next 3 quarters. So you called out that the advertising increase is going to continue as well as labor because it's driving traffic. But I might have missed this, but could you go through the if you're still expecting $30,000,000 cost net cost saving gross cost savings this year To help defray some of that cost.

Speaker 9

And if that's the case, what the cadence of those cost savings would be The increased spend that's helping with the traffic.

Speaker 3

Hi, Andrew, it's Craig. I'll start with the cost saves. We talked about $30,000,000 of the cost saves last fiscal and we delivered on that. I think we started at $25,000,000 and that We increased it to 30 over the course of the year. We actually have an internal target for cost saves in fiscal 2024 That's consistent, if not higher than that.

Speaker 3

However, we also realized that we're making a lot of investments. So it felt a little odd for us to be talking about a cost save. At the same time, we're spending a lot of money in labor, spending a lot of money In marketing, so the way that we are thinking about it internally is we're saving costs more than we did last year. We're reinvesting those cost saves as a way to support these guest drive in Initiatives and overall long term business strengthening, business strengthening initiatives.

Speaker 9

Okay. That's good. Can you speak to the cadence? I mean, have you realized in Q1 like a pro rata amount? Or

Speaker 3

I have the exact quarterly breakdown in front of me, but because we have a program that is a sustained program, a Number of the cost savings that we started in fiscal 2023, we didn't get 12 months of those cost savings in 2023. So there's quite a bit that just carries through into fiscal 2024 and then we have additional cost savings queued up In 2024 as well.

Speaker 9

Okay. And on the sales guidance, I just want to test the way My numbers sort of back into what I think your scenarios could be. It's a pretty broad sales guidance for the year from here. So I think you're anywhere from things could continue to get better as I assume is your Hopefully, your well, one of your plans at least. But then there's a scenario where it looks like things would actually get worse and perhaps even worse than the quarter you Just announced, is that because you have to bake in the even though I think Julie mentioned the recessionary odds are lower That given consumer behavior and we're not out of the woods in the economy that you just have to put in a pessimistic scenario and you decided to Also include that in your sales guidance range?

Speaker 3

I think that's a A reasonable point of view, the economy is uncertain. So who knows what's going to happen. And I think to the extent that things Continue to play out the way that we're seeing them. We would be towards the high end of the range. But to the degree that They don't either from an external perspective or something happens internally would be on the low end of the range.

Speaker 3

The macro environment, it's still volatile. I mean, the overall economy has been doing well, but if you can dig below that, There are some concerning elements there. So we'll just need to kind of see how it goes. And as a result, we're still Pretty early in the year as a result of that we think that this leads to that type of a range.

Speaker 9

Thank you. And maybe just more for Julie on the loyalty program, it's good to hear the launch as well, going well. And I think You've got it tied into Dolly Parton through early December with Rock and Share giveaway. But is there any way to continue to Or is that sort of when the relationship with Dolly kind of Peter ends and do you have more things To keep the or you got to keep it going with her, like to keep these getting the sign ups You know, at a pretty good clip above your plan. And I guess longer term based on your experience and what you're hearing from your people to help you with the program, When do you really expect to really see increased traffic through promotion, really targeted promotions and other things that can come out of loyalty program.

Speaker 2

Hi, Andrew. It's Julie. As I mentioned in My prepared remarks, we are really pleased with the launch of the program. We launched the program actually Without DALL E, right? And so even when we launched it, guests embraced the program, signed up, really told us that this is They're excited about seeing from Cracker Barrel.

Speaker 2

So then when we added on Dolly that as I said in my comments, it's been incremental. And of course, we're very pleased with the partnership there. She's an icon and it's great to have an icon, paired with an icon of Cracker Barrel. So the program is off to a great start. It's exceeding our expectations, but we've been modeling in the benefit of that program into this year and Into the future, and we can the team continues to do a great job to actually bring benefits of the program forward given the fact that we are ahead of our So we continue to be excited about it.

Speaker 2

It's the early days of it, but we know it's going to be a differentiator for us going forward and an exciting part of the brand

Operator

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

Speaker 5

Hey, good morning. Thanks for taking my questions. First question, if I may. You were talking in regards The retail segment, well managed inventories and really trying to operate as much for protection of gross profit dollars than you are to Drive top line. Can you spend a minute talking about the inventory positioning and how we should think about if that's a potential constraint on retail same store sales as we're going into the holiday quarter here and just trying to get some color around how to model retail Same store sales performance given where the inventories lie.

Speaker 3

Hi, Todd. It's Craig. I think we're really well positioned there. We have we carry a very wide assortment. So to the degree that demand is higher Then we projected that would impact our kind of discount cadence and we'd be able to, I think, make more margin through that approach.

Speaker 3

And to the degree that demand stays a bit softer, we would also be managing margins as well. And keep in mind, we also have a lot of different offers. We go through Quite a few themes throughout the year. So if one of them is selling at a higher rate than we projected, We can bring in another one earlier. There are different things that we can do to fill in just given the breadth of the assortment that we have.

Speaker 3

I think the macro picture on this part of retail really gives us confidence that we're Making the right decision to manage the inventory and not end up very long and then having to do A significant amount of markdowns. But that would be a problem candidly that We would love to have that problem because to the degree that we have the demand, I think we can redirect folks to other items. Okay, great.

Speaker 5

Thanks, Craig. And then, 2 others, if I can. On the occupancy and other costs, you pointed out On a year over year basis, the incremental advertising and some incremental DNA. And you pointed to the advertising Working, driving a return, layering in some local TV. What's a fair way to think about that line item going forward?

Speaker 5

Is the spend that we saw in the Q1 kind of that Just above mid-twenty 4 percent of sales level, is that the right way to model this line and what we could call an investment Maybe some more offensive spending around marketing?

Speaker 3

I think it's fair to say that the advertising line item is going to be A bit higher. Not going to share an exact number candidly in part because we're going to continue to flex that based on our findings, But I would expect it to be higher. There is also a part of the loyalty program. It's not dramatic, but there is a part of the loyalty Expense for the loyalty program that goes through marketing. So that will cause that line item to be a bit higher.

Speaker 3

And We're going to continue to optimize our profitability of our normal media to the degree that That's working really well as we're getting a compelling return. We'll do more to the degree that we are not seeing as compelling of a return, not as profitable, Then we may do less. But in general, I would expect marketing to be higher than it's been traditionally for the coming quarters.

Speaker 5

So to just clarify on that, if we're looking year over year up 130 basis points, are you saying, Craig, that Because of the success you've seen, you expect marketing to actually be higher as we progress through the year? As far as the

Speaker 3

No, just Okay. So of the 130 basis points in Q1, I believe marketing was something like 80 basis points, something like that, after Q1. So I'm not suggesting That we're going to be investing incrementally more than that. Maybe we do, but it will be modest. So it Could be a little bit more than that, could be a little bit less.

Speaker 3

But I don't think our marketing spend will be as a percent of sales at the levels it was at in Then it was in 2023.

Speaker 5

Okay, perfect. And then, it looks like ex the one time Expenditures in the quarter, the G and A came in a little bit more efficiently than I expected. Would you Encourage us to budget that type of mid-5s percentage of sales? And then what's the cadence of the CEO transition cost and The strategic initiative costs, how do those come in over the balance of the year? Thanks.

Speaker 3

I don't expect anything dramatic as it relates to G and A, so I probably wouldn't get into a lot of detail there. In terms of the cadence of the one time cost, I do expect that there will be more of that Expense related to the CEO transition in Q2 because of the accounting for really Sandy, the prior CEO's earned retirement benefits. She officially retired as a CEO early in Q2. And as a result of that, I think that will drive some more expense in Q2. I expect the consulting costs to be fairly Flat going forward from Q2 through Q4.

Speaker 3

We didn't we started at midpoint at about the midpoint in Q1. So I would expect Q3, Q3 and Q4 to be relatively flat for that line item.

Speaker 5

Okay, great. Thanks Craig.

Operator

Our next question comes from Ashling Gurrenjena with Piper Sandler. Please go ahead.

Speaker 2

Hi, good morning. My question is on Maple Street. On the last earnings call, it was mentioned that The Maple Street weekdays were still challenged. We're just wondering, have you seen any improvements in that and how you're thinking about the growth at Maple Street over the course of the year?

Speaker 3

Hi, Ashley. This is Craig. The Maple Street, interestingly, over the course of the quarter, we have seen Really solid traffic improvements at Maple Street. The weekdays do continue to be softer. But instead, we've actually doubled down on the weekends.

Speaker 3

We've extended our operating hours on the weekends because the demand It's so high and we're seeing really good progress there, particularly for weekend lunch. As we think about the long term, we're really excited about the business. It's a differentiated business. We like the location strategy. It's complementary So Cracker Barrel and at the same time and we're continuing to grow it.

Speaker 3

We were a bit behind at openings this quarter. That was more a function of construction delays Than anything else and we're continuing to grow the business at a moderate pace, but we also realize that there is more work to do on the business model, In particular, on the weekdays. So we've seen some improvement on the weekdays, but we've actually seen more improvement over the weekend, Which is a positive, but we still need to do some more on the weekdays.

Speaker 2

That's great to hear. Thanks. I'll pass it back.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Julie Messina for any closing remarks.

Speaker 2

Thank you all for joining us today. We're encouraged by our improved traffic trend and our start to Q2. And while we are mindful of the competitive and uncertain environment in which we continue to operate, We are cautiously optimistic that we will sustain this momentum and drive improved performance over the balance of the year. We have a lot of work ahead of us to achieve our objectives, We have a strong foundation in place and I'm confident that our talented teams are up for the challenge. Before we sign off, I'd like to wish you all a happy holiday season and express my sincere appreciation to our more than 70,000 employees, not only for their hard work over Thanksgiving last week, And for the warm welcome they have extended to me since joining the Cracker Barrel family and for all they do every day, every shift to delight our guests and to bring this great brand to life.

Speaker 2

Thank you all and happy holidays.

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Earnings Conference Call
Cracker Barrel Old Country Store Q1 2024
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