Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) Q1 2024 Earnings Call Transcript

Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) Q1 2024 Earnings Call Transcript November 30, 2023

Cracker Barrel Old Country Store, Inc. misses on earnings expectations. Reported EPS is $0.51 EPS, expectations were $0.78.

Operator: Good day, and welcome to the Cracker Barrel Fiscal 2024 First Quarter Conference Call. All participants will be in a 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, Vice President, Investor Relations. Please go ahead.

Kaleb Johannes: Thank you. Good morning, and welcome to Cracker Barrel’s first quarter fiscal 2024 conference call and webcast. This morning, we issued a press release announcing our first quarter results. In this press release and on the call, we will refer to non-GAAP financial measures for the first quarter 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.

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 are Cracker Barrel’s President and CEO, Julie Masino, and Senior Vice President and CFO, Craig Pommells. Julie and Craig will provide a review of the business, financials and outlook. We will then open up the call for questions. 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. I’ll now turn the call over to Cracker Barrel’s President and CEO, Julie Masino. Julie?

Julie Masino: Thank you, and good morning, everyone. This morning, we reported total Q1 revenue of $823.8 million 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’m pleased to say has continued into our important second quarter. We have taken numerous actions to drive traffic and deliver the sequential improvement.

I’ll go through them now. First, as we discussed last call, we took several actions to improve the effectiveness of our marketing in the first quarter. 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. Second, from an operational perspective, we remain 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. 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 received 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. 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 some 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.

Looking ahead to Q2. Our second 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 n’ Serve, To-Go and catering and our planning and support systems, including IT, supply chain and guest relations and our retail teams all performed very well. In fact, we set a company record for total sales in a single week during Thanksgiving week with over $110 million in sales, and we served approximately 6 million guests. Our top five stores alone served more than 80,000 guests over Thanksgiving Week.

To put that into perspective, those five stores served more people than attend most NFL games. I want to give a huge shout out to our field teams and leadership for their efforts in these results. 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. 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, particularly with core guests. For example, we recently tested local TV and a saw meaningful traffic lift with solid returns on this investment, 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. I’ll now turn the call over to Craig for a more detailed look at the first quarter 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?

Craig Pommells: Thank you, Julie, and good morning, everyone. As Julie noted, for the first quarter, we reported total revenue of $823.8 million. Restaurant revenue decreased 0.2% to $660.8 million. Retail revenue decreased 8% to $163 million 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% new pricing from fiscal 2024. 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 activities 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% 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 first quarter of the prior year. Although retail sales remain soft, we were pleased with how the team has effectively managed inventory levels. Moving on to our first quarter 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 first quarter was 26.2% of restaurant sales versus 29.1% in the prior year quarter. This 290 basis point decrease was primarily driven by menu pricing. Commodity deflation was approximately 2.3%, driven principally by lower poultry and pork prices.

First quarter retail cost of goods sold was 50.4% of retail sales versus 50.2% in the prior year quarter. Our inventories at quarter-end were $207.3 million compared to $231 million in the prior year. With regard to labor costs, our first 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%. Adjusted other expenses were 24.3% 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 were 5.4% of revenue and exclude the following items.

First, approximately $1.6 million related to our CEO transition. Second, approximately $1.1 million in professional fees related to our strategy transformation initiative which Julie mentioned and about which she will speak more momentarily. And third, an approximately $1.6 million 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 $11.4 million. Adjusted operating income for the quarter was $19 million or 2.3% of revenue. Net interest expense for the quarter was $4.9 million compared to net interest expense of $3.5 million in the prior year quarter. This increase was primarily the result of higher weighted average interest rates.

Our GAAP effective tax rate for the first quarter was 15.7%. On an adjusted basis, our effective tax rate for the quarter was 19.9%. First 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 $45.7 million or 5.5% of total revenue. Now turning to capital allocation and our balance sheet. 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 first quarter, we invested $24.6 million in capital expenditures, and we returned $29.3 million to shareholders in dividends.

We ended the quarter with $475 million 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. 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. Quarter-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.

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 of $3.4 billion to $3.5 billion. We anticipate pricing of approximately 4.5% to 5.0% for the full year, which includes approximately 2.8% of carryforward pricing from fiscal 2023. As a reminder, we expect our pricing to moderate sequentially each quarter during the year. We anticipate opening two new Cracker Barrel Stores and nine 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 million in consulting fees related to our strategy transformation initiative that Julie will cover in a moment, approximately $10 million in one-time CEO transition costs and approximately $2 million 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 $130 million to $150 million. 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 million to $135 million.

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.

Julie Masino: 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 conviction that Cracker Barrel is an iconic and highly differentiated brand with a large and loyal guest base who love us and talented and dedicated 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.

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 million 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.

First, we need to be a brand that our guests absolutely love. For as many guests as we serve each day, many of them only visit us once or twice a year. The best way to drive growth is by making sure that their visits are truly wonderful so that they will dine with us more often, 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 guests 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 across the organization to do this consistently. 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. Second, we need to improve our relevance. While we need to be our authentic selves and lean into our competitive advantages of hospitality, value and comfort, we must actively work to evolve both the brand and our business model in a brand-appropriate manner to meet an ever-changing consumer need. Among other things, this means improving our speed of service, 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.

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 it 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 a mature brand that has faced many challenges in recent years. And like all companies in full-service dining, we’ll continue to face pressure going forward. 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 the top line.

For this reason, we will continue investing in marketing our everyday value to guests who love us and to do so in the places we know they are, 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 a comprehensive 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 to go after them. We’ve engaged a top-tier consulting firm to give us an impartial, external and expert perspective to identify and appropriately challenge our institutional assumptions and to bolster our internal capabilities.

Our Board and our teams 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 more effective marketing that highlights our everyday value in more relevant channels like college football, investing in front of house labor, particularly during those days and dayparts where we are either busiest or most challenged and leveraging a robust loyalty program are the right ones. 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. 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 three 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.

See also 15 Stocks under $50 to Buy and Hold Forever and 12 Asian Countries with the Best Economy Right Now.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Dennis Geiger with UBS. Please go ahead.

Dennis Geiger: 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, et cetera?

Craig Pommells: Hi, Dennis.

Julie Masino: Hi, Dennis, it’s Julie. I’ll take that one. Thanks so much for the question. I would say the environment out there really continues to be uncertain and mixed. But there have been some positives. It seems that a recession is potentially less likely, inflation continues to moderate and the consumer and labor market have been resilient. 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. 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 had 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.

Dennis Geiger: Appreciate that color, Julie, very helpful. I guess, the 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 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, 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.

Craig Pommells: Hi, Dennis, this is Craig. I’ll dig into that one. The — as we finished up our quarter four last year, we talked about an unexpected 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. 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. The consumer is pressured but they haven’t shut down.

They’re still dining out, they’re 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, and we’ve also focused our communication around what we’re calling kind of the core plus group, 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. 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 adapted and adjusted for it. The other point with that is Cracker Barrel is a particularly experiential brand. We serve a lot of guests, 200 million, three dayparts, breakfast, lunch and dinner. 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, one, we can deliver that hospitality and we are, and two, 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, hey, 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. 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.

Dennis Geiger: Great. Thank you both.

Operator: Our next question comes from Katherine Griffin with Bank of America. Please go ahead.

Katherine Griffin: 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 subsegments you can speak to that you’re seeing?

Julie Masino: Hi, Katherine, 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 caused us, one, to take a look at what they were doing and what we were doing. As Craig just talked about, we really adjusted our messaging to ensure we were playing to our strength and our differentiators at Cracker Barrel because we are an all three daypart brand. So we wanted to make sure that our messaging really resonated with that core and the core plus guests across those three 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.