Cracker Barrel Old Country Store, Inc Q1 FY2020 Earnings Call

Good morning and welcome to the Cracker Barrel Fiscal Year 2020 First Quarter Earnings Conference Call. After today's presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Adam Hanan, Manager of Investor Relations. Please go ahead.

Thanks, operator. Good morning and welcome to Cracker Barrel's first quarter fiscal 2020 conference call and webcast. This morning, we issued a press release announcing our first quarter results and our outlook for the 2020 fiscal year. On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO, Jill Golder; and Vice President and Principal Accounting Officer, Jeff Wilson. Sandy will begin with a review of the business, and Jill will review the financials and outlook. We will then open up the call for questions for Sandy, Jill, and Jeff. On this call, statements may be made by management of their beliefs and expectations regarding the company's future operating results or expected future events. These are known as forward-looking statements, which involve risks and uncertainties that in many cases are beyond management's control and may cause actual results to differ materially from expectations. We caution our listeners and readers in considering forward-looking statements and information as 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?

Good morning, and thank you, Adam. This morning, we announced positive comparable store restaurant sales, and we delivered GAAP earnings per share of $1.79. While we faced headwinds from the softening trend in industry traffic, comparable sales that continued throughout our first quarter, I was pleased that we again solidly outperformed the industry and that we grew operating income by 3%. Jill will review the financial results for the quarter as well as our updated full-year expectations. But before she does I want to speak to some of the highlights from the quarter and provide an update on our plans for the remainder of the fiscal year. First quarter menu promotion featured our homestyle chicken. As a reminder, this popular offering was previously only available on Sundays, but we made it available every day as part of our Signature Fried Chicken platform. The menu promotion also featured our new Homestyle Chicken BLT sandwich and it was supported by six weeks of national TV media, with the ad continuing our strategy of more explicitly highlighting our food and value. While traffic in the quarter was softer than expected, I was still pleased with the performance of the menu and marketing promotion. Moving to off-premise, we again saw solid growth in this business and it was a meaningful contributor to top line results for the quarter. During the quarter, we expanded our third-party delivery coverage and this service is now available in nearly 600 stores. We also expanded our fleet of catering vans, bringing our total to 235, and we hired several catering sales managers as we continue to grow our catering business. Turning to retail, our sales in the first quarter were below our expectations and our apparel merchandise was particularly challenged. We continue to rework our women's apparel category as the guest response remained weaker than last year. Additionally, we believe the unseasonably warm weather contributed to the underperformance of this category, particularly our outerwear offerings. As we look to the second quarter, Christmas seasonal merchandise sales, such as decor, appear to be strong. But with the holiday gift purchasing season having just begun, we remain cautious regarding the shorter selling season and our teams are working diligently to address our sales concerns and remain committed to offering holiday products with strong price-value relationships, which we believe may place some pressure on our second quarter margin rate. Looking ahead, we will continue to execute our fiscal 2020 business priorities. This includes accelerating our off-premise business, driving top line growth through craveable signature food, enhancing the employee and guest experience, leveraging new long-term growth drivers such as Maple Street Biscuit Company and Punch Bowl Social. I'm excited about our current holiday menu promotion, which features the return of our Country Fried Turkey topped with pan gravy, served with green bean casserole and cranberry relish. This offering proved to be very popular last year and we believe the new equipment platform that we installed as part of the Signature Fried Chicken initiative helps to provide improved consistency. The menu promotion is being supported by an integrated marketing campaign that includes national TV. The second quarter is a key period of our off-premise business. We've been pleased with the demand for our Heat n' Serve offerings in recent years and we believe the growth we've seen in this business reflects the trust that guests have in Cracker Barrel to provide a delicious home-cooked meal during these special occasions. We continue to believe that these differentiated offerings, which serve up to 10 people, are good value and provide the ultimate convenience for guests looking to host family and friends in their homes. This year, we also made several enhancements to support an improved guest experience both for our in-store and our off-premise guests during this high-volume period. We continue to be pleased with the demand for third-party delivery and are evaluating how we can further expand our reach and frequency for this occasion. Lastly, we announced our acquisition of Maple Street Biscuit Company. Several years ago, when we were assessing opportunities in the fast-casual space as part of our Extend the Brand Strategy, Maple Street was a concept that stood out and I had the opportunity to meet Scott Moore, the Founder and CEO. Since that time, we've been closely following and admiring Maple Street, which continued to grow. Several months ago, Scott reached out and asked whether Cracker Barrel would be interested in acquiring Maple Street. He had grown Maple Street to 28 company-owned units and five franchised locations since opening in 2012. But he recognized that Maple Street would benefit from additional resources and expertise. While he was prepared to go through a full search process for prospective buyers, he preferred a trusted strategic partner with a long-term perspective. Our brands share many values and similarities, such as made-from-scratch cooking and genuine hospitality. Maple Street will be able to leverage Cracker Barrel's resources and expertise. We're committed to preserving the integrity of the Maple Street brand. Our experience with Holler & Dash has reinforced our belief that the breakfast and lunch-focused fast casual segment is an attractive category. We believe Maple Street will serve as a growth vehicle that complements Cracker Barrel by accelerating our penetration in this segment by providing increased exposure to urban and suburban markets and to the millennial and Gen Z cohorts. After closing the deal in October, we immediately moved into the integration phase and our teams are working diligently to execute our plans, which includes the conversion of Holler & Dash into Maple Street. We expect the integration to last until the spring and we look forward to accelerating growth in the months following the completion of the integration. We believe that Maple Street and Punch Bowl Social are two emerging brands that are positioned to become leaders in their respective categories and will serve as complementary growth vehicles for delivering long-term value to Cracker Barrel shareholders. Our main focus remains the long-term success of the core Cracker Barrel brand. We're very excited about the future for both of these brands and the value creation we believe they'll drive. The Maple Street team will be relocating to Nashville and Punch Bowl Social continues to operate from its Denver headquarters led by Robert Thomson. In closing, despite softness in the industry and in our sales performance compared to Q4, I was pleased with the quarter. We continue to outperform the industry and our team started the year off strongly and executing against our priorities for the fiscal year. Additionally, we completed the acquisition of Maple Street Biscuit Company, which we believe complements our strategic investment in Punch Bowl Social and will drive long-term value creation. Going forward, we will continue to execute our plans to enhance the core, expand the footprint, and extend the brand, as we seek to deliver shareholder returns. Lastly, I'm excited to announce that we will be providing additional detail regarding our long-term strategy at our Analyst Investor Day, which will take place in late June 2020. We'll be sharing more specifics in the coming months. And with that, I'll turn it over to Jill.

Good morning, everyone, and thank you, Sandy. I would like to begin by discussing our financial performance for the first quarter of fiscal 2020, and then, our outlook for the 2020 fiscal year. But before we begin, I would like to note that we adopted the new accounting standard for leases at the start of the fiscal year. While this does not have an impact on our income statement or cash flows, it did have a meaningful impact on our balance sheet as our total assets increased approximately $578.3 million with $473.5 million of the increase attributable to the addition of operating leases to the balance sheet. More information on these changes will be provided in the 10-Q that will be filed shortly. In this morning's release, we reported first quarter net income of $43.2 million and GAAP earnings per diluted share of $1.79 compared to prior year earnings per diluted share of $1.96. Our reported earnings per diluted share included an unfavorable impact for the quarter of $0.11 related to transactional and integration expenses associated with the acquisition of Maple Street Biscuit Company and a $0.25 loss from the company's equity-method investment in its unconsolidated subsidiaries, Punch Bowl Social. For the quarter, we reported total revenue of $749 million, an increase of 2.1% when compared to prior year revenue of $733.5 million. Our restaurant revenue increased 2.7% to $607.1 million and our retail revenue decreased 0.4% to $142 million. Our total revenue increase was primarily driven by positive comparable restaurant sales and the net opening of four new Cracker Barrel locations. Cracker Barrel comparable store restaurant sales in the quarter increased 2.1% as average check increased 3.6% and traffic decreased 1.5%. The increase in average check reflected menu price increases of approximately 2.3% and a favorable menu mix of 1.3%. The first quarter mix favorability was driven primarily by our Signature Fried Chicken platform. First quarter comparable store retail sales decreased 0.9%, with decreases coming primarily within our women's apparel and toys categories. Moving on to expenses, total cost of goods sold in the quarter was 29.3% of total revenue versus 30.3% in the prior year quarter. Our restaurant cost of goods sold was 24.6% of restaurant sales, a 60 basis point decrease versus the prior year. This decrease was primarily due to lower levels of commodity inflation and leverage for menu price increases. On a constant mix basis, our food commodity costs were approximately 0.2% higher in the quarter than in the prior year quarter, driven primarily by increases in dairy. Our retail cost of goods sold was 49.6% of retail sales compared to 51.3% in the prior year quarter. This 170 basis point decrease was primarily a result of higher initial margin and lower markdowns. Labor and related expenses were $263.3 million or 35.2% of revenue compared with $258.2 million or 35.2% of revenue in the prior year quarter. Other store operating expenses were $162.9 million in the quarter or 21.7% of revenue compared with other store operating expenses of $152.5 million or 20.8% of revenue in the prior year quarter. This 90 basis point increase was primarily driven by planned depreciation increases related to our investments and strategic initiatives, a higher advertising expense to support our fall menu promotion, and transactional and integration expenses associated with the acquisition of Maple Street Biscuit Company. Store operating income was $103 million in the first quarter or 13.8% of revenue compared with store operating income of $100.6 million or 13.7% of revenue in the prior year quarter. General and administrative expenses were $39.6 million in the quarter or 5.3% of revenue and included transaction and integration expenses associated with the acquisition of Maple Street Biscuit Company. This compared to G&A expenses of $38.9 million or 5.3% of revenue in the prior year quarter. GAAP operating income was $63.4 million or 8.5% of revenue compared with $61.7 million or 8.4% of revenue in the prior year quarter. Net interest expense for the quarter was $3.6 million compared to $4.3 million in the prior year quarter. This decrease was primarily driven by the benefit of interest income resulting from our lending to Punch Bowl Social. Our effective tax rate for the first quarter was 17.7% compared to an effective tax rate of 17.7% in the prior year quarter. In the first quarter, we paid $32.1 million in dividends and repurchased shares totaling $14.2 million, which resulted in us returning $46.3 million to shareholders in the quarter. Turning to our balance sheet, we ended the fiscal quarter with $43.2 million of cash and equivalents compared to $101.6 million at the prior year quarter end. Our total debt was $485 million at quarter end. Before providing our fiscal 2020 outlook, I would like to speak to our acquisition of Maple Street Biscuit Company. As we announced in October, we acquired Maple Street in an all-cash transaction for $36 million. Maple Street is a strong brand with attractive unit economics, which include targeted AUVs of over $1 million and targeted store level EBITDA over 17%. Current unit economics are below these levels, but we anticipate achieving the run rate for these targets shortly after we implement a staggered rollout of planned initiatives upon the completion of the integration. We believe Maple Street has strong growth potential. We are working on the site selection strategy and refining our estimate for Maple Street's ultimate build-out and we plan to share additional detail at our Analyst and Investor Day in late June. With respect to our fiscal 2020 outlook, everyone should be mindful of the risks and uncertainties associated with this outlook as described in today's earnings release and in our reports filed with the SEC. Our fiscal 2020 earnings estimate continues to assume total revenue of approximately $3.15 billion to $3.2 billion. We now expect Cracker Barrel comparable store restaurant sales growth of approximately 2%. We continue to anticipate Cracker Barrel comparable store retail sales growth of approximately 1%. We continue to anticipate our fiscal 2020 menu pricing will be approximately 2%. We continue to expect to open six new Cracker Barrel stores and we now expect to open one Maple Street location in fiscal 2020. Additionally, we plan to convert six of the seven Holler & Dash locations to Maple Street in the coming months. We continue to expect increased food commodity costs on a constant mix basis in the range of 2% to 2.5% for the fiscal year. We have locked in our pricing on approximately 45% of our commodity requirements for fiscal 2020 compared to approximately 50% at this time last year. We continue to project that our retail margins as a percent of sales for the full year will be approximately flat compared to the prior year. We continue to anticipate wage inflation on a constant mix basis of approximately 4%. We continue to project $11 million to $13 million in business model improvements resulting from sustainable cost savings. Taking these assumptions into account, we continue to expect full-year operating income margin of approximately 9% of total revenue. We now project net interest expense of approximately $12 million, which includes the benefit of interest income resulting from our lending to Punch Bowl Social and reflects our updated lending schedule to Punch Bowl Social. We now anticipate an effective tax rate for the fiscal year of approximately 16% to 17%, which assumes the renewal of the Work Opportunity Tax Credit. This guidance also includes an expected tax benefit from the estimated loss from our equity-method investment in Punch Bowl Social. We continue to expect capital expenditures for the year of approximately $115 million to $125 million and depreciation of approximately $110 million to $115 million. Our guidance implies an increase in fiscal 2020 EBITDA of approximately 1% to 3% compared to the prior year. Taking these new assumptions into account, we now expect to report GAAP earnings per share of between $8.50 and $8.65. I want to make a few points about this estimate. First, it includes an expected loss from our equity-method investment in Punch Bowl Social of approximately $0.80, which includes the following components: first pre-opening expenses and significant investments in corporate infrastructure to support growth; second, expected unit closure expenses; third, updated business performance expectations. Our GAAP EPS estimate also includes transactional and integration expenses related to the acquisition of Maple Street, which we estimate will unfavorably impact GAAP EPS by approximately $0.15, $0.11 of which occurred during the first quarter. And with that, I will turn the call over to the operator so that we can take your questions. Thank you very much.

We will now begin the question-and-answer session. Today's first question comes from Jake Bartlett of SunTrust. Please proceed.

Thanks for taking the question. Sandy, I want to ask about the lowered same-store sales outlook for 2020 on the restaurant side. And I'm wondering what is driving that, whether it's the industry outlook that you talked about kind of being less and less strong than you expected or whether it's some of your initiatives like maybe the follow-through from the Fried Chicken launch, how the Homestyle Chicken performed in the first quarter, anything you're seeing early on in the Thanksgiving selling season?

All right. Great. Thanks, Jake. I'm actually going to let Jill take that question.

So good morning, Jake. Yes, we did update our comp guidance to 2% from our prior guidance of 2% to 3%. This was primarily driven by the year-to-date industry performance. We continue to be pleased with our off-premise performance and anticipate continued growth in that business. As we said in our prepared remarks, we believe we can still achieve our targeted off-premise performance at 10% of sales at the end of this year. The Signature Fried Chicken platform has been performing well to our expectations and that includes the performance of our Southern Fried Chicken, the Homestyle Chicken, as well as the new Homestyle Chicken BLT. But I do want to point out as we look at the guidance, it does assume that the industry improves from its current trend in the back half.

Got it. And if we could maybe switch to the second quarter and the initiatives that you have and the promotions that you're running, do you expect any difference year-over-year in terms of marketing rates for instance for the Fried Turkey promotion and I believe you're increasing your Heat n' Serve prices pretty sharply this year again as you did last year. I'm just trying to gauge your confidence that that's not going to have some push back in terms of demand?

We anticipated the impact on demand when we made our pricing decision last spring, so any demand changes are reflected in our guidance. This year, we have increased our media presence. Last year, we were concerned about running out of Turkey, but this year we adjusted our Turkey inventory, which has boosted our confidence. We plan to promote our Turkey message more after Thanksgiving as a result. We remain enthusiastic about our Heat n' Serve offerings and celebration meals. Additionally, tomorrow marks our first appearance in the Macy's Thanksgiving Day Parade with our float and our tiny store, which was set up in New York this morning.

Great. For my last question about the margins, your restaurant level margins included the effects of the transaction and integration costs. I was curious about the bi-annual conference you used to hold every other year; was that typically in the first quarter, and would it have accounted for about 30 to 40 basis points, or has it been moved to a different quarter?

So Jake, there are a few points to discuss. Yes, the transaction costs from Maple Street were $0.11 within the margins for Cracker Barrel. Approximately 48% of that was in general and administrative expenses, with the rest in other operating expenses. We did hold our conference during this fiscal year in the first quarter, but it wasn't the most significant impact. We also had additional operating expenses related to our capital investments, as well as an increase in advertising costs during the first quarter.

The next question comes from Alton Stump of Longbow Research. Please proceed.

Good morning Sandy and team. I just want to ask you kind of as you look at the overall competitive environment kind of what you're seeing out there? Is it getting more aggressive in the casual space as you look forward in your view is that going to continue or do you think we'll see things get a bit more rational over the course of fiscal year 2020?

We definitely believe that the competition has intensified. As the industry has slowed down recently, it seems like consumers have started to redirect some of their discretionary spending away from casual dining, which has increased competitive pressure. This has led to a higher level of promotional activities that we observed in the first quarter. I can’t speculate on how long this will last, but as Jill mentioned, we are expecting an improvement in the overall industry trends in the second half of the year.

Got it. Thanks, Sandy. And then kind of small question, which I guess is for Jill. Just you bought back shares of course in the quarter for the first time in a couple of years, but obviously have also done some acquisitions here recently, kind of, how do you view share buybacks as a tool going forward next 18 months to 24 months?

No, that's a great question, Alton. As you know, we now have more flexibility for repurchasing shares, which gives us another option for capital allocation that provides value back to our shareholders. Our overall philosophy regarding capital allocation hasn't really changed. We continue to prioritize investing in the business to enhance sales and earnings while creating long-term value. We are also committed to our regular quarterly dividend. Additionally, we declared a $3 special dividend last fiscal year in June. In the first quarter of this fiscal year, we repurchased about $14.2 million in shares. We are making investments in future growth initiatives, such as our investments in Maple Street and Punch Bowl. The Board will keep evaluating all available options for driving long-term value creation, and share repurchase is now part of that strategy.

Our next question comes from Gregory Francfort of Bank of America. Please proceed.

Maybe just the first one, in terms of Punch Bowl Social, Jill, I think you gave a breakdown of kind of what's the main components of that. But can you maybe talk about what was the delta from the old $0.50 to the current $0.80, is that greater pre-opening that you've had, or is it just what was the driver of that $0.30? Thanks.

Great. Thanks, Greg. So as a reminder to everyone, we have a non-controlling stake in Punch Bowl Social and we continue to believe it's a highly differentiated brand with significant growth potential. So remember when we gave our original guidance of $0.50 loss that included the fact that PBS, Punch Bowl Social has store level positive store level EBITDA, but it's offset by the pre-opening expense that you mentioned, and a G&A infrastructure that supports the future growth. So then, the change was largely due to unit closure expenses that we closed the Fort Worth site, which we believed was a selection site issue and the Cracker Barrel team is partnering with the Punch Bowl team to leverage our expertise to help us improve our site selection process. And then in addition, we did lower a little bit for our current thinking on updated business performance. Again as a reminder, it's a new brand, many of the stores haven't even been open three years. So we're getting a fair amount of learning, specifically around sales trends, but there is a number of sales drivers in this brand, that we are entering new markets. So we're learning about how sales growth in new markets, how we ramp up in group and event dining, as well as the seasonality of the business. So these numbers may move around a little bit but we will provide as much information as we can.

Thank you very much. And maybe just two others, one for Jill and one for Sandy. Jill, just on the retail margins, I know you guys are talking about being flat for the year, but you guys are seeing, I guess, a lot of cost you are able to take out, the margins have been very good. Can you maybe talk about what's been the biggest tailwind or the biggest drivers of that performance year-over-year and why that would be temporary versus ongoing? And then I had one last one for Sandy.

Well, I think on the retail margins, I'll actually start on that. I think the team has done a really good job of trying to protect margin rate and dollars in an environment where we needed to address sort of variety of issues, but probably the biggest one for us this particular quarter was the tariffs. We've done that through designing the assortment, through evaluating alternative suppliers, working with our vendors to share the cost. In some cases, changing our pricing. So our buyers work really hard to continue to deliver unique fun nostalgic, great value items to our guests and to provide the appropriate level of profitability for our shareholders.

Thank you. Could you elaborate on the main differences between Maple Street and Holler & Dash? What are the strengths of Maple Street that Holler & Dash may have lacked, making it a more promising brand for the long term? That would be great. Thank you.

There is significant similarity between them; they both offer biscuit entrees and focus on comfort food. Both are fast-casual establishments serving breakfast and lunch, targeting urban and suburban areas with a millennial and Gen Z audience. Our experience with Holler & Dash confirmed our belief in the attractiveness of the segment. Maple Street has been around longer and has a strong, proven business model, appealing unit economics, and high growth potential. Given their number of units and success, along with our current position with Holler & Dash, we believed that converting Holler & Dash locations to Maple Street would enhance our market presence in this category.

Today's next question comes from Jeff Farmer of Gordon Haskett. Please proceed.

Thanks. Just a couple more on Punch Bowl. So when do you expect to see the concepts become neutral to EPS?

So this is, Jill. I think what I would say about that is, as we said, we expect the investment in Punch Bowl this year based on equity method of accounting to be an approximate loss of $0.80. We're not providing guidance beyond fiscal '20. We will certainly talk more about it on our Analyst Day in late June. But as we said, right now, given how we're learning about the brand, the team continues to refine their forecast for next year. So we look forward to sharing more in June.

Okay. And then of the Punch Bowl units that are in the comparable store base, is there a same-store sales number that you guys have shared or are willing to share?

No. We're not providing that level of detail around our investment and the performance of the Punch Bowl brand because it's a non-controlling interest that we're just providing the below the line method based on the equity method of accounting.

Okay. And just a couple of quick additional ones. So just following up on the Heat n' Serve questions, that was you guys didn't provide a ton of detail, but it was pretty clear that was a big same-store sales driver last year in the fiscal second quarter. So with the growing popularity of that offering, I have to assume, it gets more popular over years, you will get familiar with it, and the double-digit price increase that was already mentioned, how impactful could that be to your fiscal second quarter same-store sales number this year?

It's definitely going to play a significant role in the Thanksgiving week. We are very enthusiastic about this offer, and our guests share that excitement. We did implement a price increase, and we have some increased expectations for demand factored into our guidance. However, this offer is only available for one week leading up to Thanksgiving. Furthermore, we will have a Christmas Heat n' Serve option before Christmas, making it just one part of our overall strategy for the second quarter. Overall, off-premise sales are a crucial aspect of our second quarter sales expectations. Besides the Heat n' Serve, we anticipate growth in our celebration meals and an increase in individual to-go sales, driven by both third-party delivery and in-person pickups at our restaurants.

That's helpful. Just one last one. So you delivered strong labor cost control, I think for the second consecutive quarter. Just curious sort of looking under the hood a little bit, what's driving that labor cost favorability and how sustainable is that as we move through the balance of the fiscal year?

This is Jill. What I would say is the teams have done a really nice job managing through labor. Our operations team is focused on kind of the back to the basics on how we forecast our sales and then appropriately schedule. So we were pleased with our overall labor performance. We will say, the wage inflation of 3.2% was a modest headwind for us. We expect for the year wage inflation to be 4%. So that will become more of a headwind as we look forward. And then also within the labor line, we did see some favorability across a couple of other lines that help to offset our wage inflation, primarily in pre-opening labor and a little bit in store bonuses.

The next question comes from Stephen Anderson of Maxim Group. Please proceed.

Hey, this is Stephen Anderson. I wanted to discuss the quarter, specifically the effect of Hurricane Dorian. Although it didn't directly hit the United States, there was that weekend in September with many evacuations and possibly some store closures. Can you provide any insights on how this impacted overall sales? Thank you.

Great. No. Thanks, Steve. Hurricane Dorian, even though the actual impact wasn't as much as it was forecasted to be, it was disruptive to our business and certainly had an impact on our traffic, especially as people were concerned that it was going to hit Florida. So what we don't know is how much it impacted people's travel plans. And as you'll recall, it was near an important holiday weekend for us when it hit. So we definitely think that it had an impact. As a reminder, in the first quarter of the prior year, we had two hurricanes. So our best estimate is they relatively offset each other, but it was a little more difficult to analyze.

All right. Thank you. And I want to also take a look at the commodities, you said that by looking at last quarter, the commodity is up 0.2%, but you're still keeping the full year forecast. And I want to see if you see any pressure points across your commodity complex?

Great. So yes, in the commodities basket, in the first quarter, we benefited from ramping on higher egg prices in the prior year. So that's the primary component that brought our commodities flat to the prior year. We have a little bit of that ramp in the second quarter. So we do expect to see commodities step up in the second quarter. And then it'll be slightly above 3% in the back half. The main drivers haven't changed from what we talked about in our previous calls. It's really beef, pork, and dairy that are the largest drivers of our commodity inflation. And as we mentioned, we've got approximately 45% of our commodity pricing is locked.

Our next question comes from Bob Derrington of Telsey Advisory. Please proceed.

Thank you, Sandy. Regarding Punch Bowl Social, in the last conference call, you expressed excitement about the potential experiential benefits it could offer alongside Cracker Barrel. At that time, you mentioned the smaller prototype that opened in Fort Worth, which has since closed. I'm curious about what has influenced the shift in perception regarding that store location since the initial enthusiasm for the prototype.

So we're disappointed that Fort Worth wasn't successful. In this particular case, we believe it was a site selection issue more than a small box issue and we're partnering with the team at Punch Bowl to understand better all of the situation and to improve that process. But as Jill said, it's a young brand, there's going to be learnings. We will continue to learn, continue to update the guidance but we continue to believe that PBS has significant growth potential. And I think it's positioned to become a leader in the segment.

Are you thinking that you may provide a little bit more participation in some of the key decision-making processes within Punch Bowl based on that experience?

I’m not sure if it will exceed our initial expectations. The team in Denver had always planned to enhance our capabilities in areas such as real estate and purchasing, which is part of our reasoning for making the investment. We have made strides, and on the real estate front, we focused on understanding the lessons learned from all locations, including Fort Worth.

Got you. Okay. And to shift gears back to the Old Country Store, you also talked on the last conference call about the new menu that you've introduced there. And I think this menu now offers both essentially both breakfast and all-day dining, is there something about the contribution from the impact of that menu that has affected the sales guidance or just if you could help us with your initial impression of how that's being received at store level?

The dinner menu initiative is currently in 70 stores. I'm not sure what you meant by breaking all day dining, but what you're likely referring to is that the dinner menu includes a small section where we indicate that breakfast is available all day. We actually offer our most popular breakfast items on the dinner menu and highlight that the full breakfast menu is available upon request. This makes it easier for guests who want to order breakfast and simplifies things for our servers, who now only need to handle one menu during lunch and dinner unless customers ask otherwise. We are encouraged by the insights gained from the dinner test and are continuing to learn and adapt. We expect to launch the first changes from the initiative chain-wide sometime next spring. As we gain insights, we have been making modifications. We have one change going into the test stores next week and another round planned after the holiday. However, the learnings from the dinner menu haven't impacted our sales forecast. I'll now turn it over to Jill to discuss any potential effects on the sales forecast.

Yes, So, yes, Bob, this is Jill. On the sales forecast, really the big change has been the industry expectations. You might remember from when we originally gave guidance, we expected the industry to perform overall as it had performed in the prior fiscal year, which was better than our recent current trends. On the new food introductions specifically under this Signature Fried Chicken platform, we've been very pleased that certainly driving the mix favorability that you've seen and they've been featured in our advertising and we've been pleased with that performance as well, specifically around the Southern Fried Chicken, the Homestyle Chicken and the Homestyle Chicken BLT that were featured.

Okay. That's helpful. What I was curious about is whether adding the breakfast to the all day, that dinner menu Sandy has hurt the check average as consumers shopped maybe at more lower-priced possibly the breakfast items as opposed to the regular dinner features?

We are not currently seeing that.

Okay. All right. That's good. And then last question if I could. On the depreciation, with the first quarter it was up about 15% year-over-year, yet the midpoint of the guidance, Jill, I think only targets D&A up about 5%. So should we anticipate that the essentially $28.7 million in the first quarter is expected to be a reasonable run rate for the other quarters, that's kind of what your guidance implies?

Yes, just a second Bob, we're taking a look, but I think we feel comfortable with our guidance. Some of that is where the Maple Street integration costs kind of fell, but overall we feel pretty comfortable with our guidance. We've stepped down a little bit on our capital spending, so you're going to see some of that will start to roll off towards the back half.

Yes. We had some accelerated depreciation related to the acquisition of Maple Street, which is impacting our depreciation number in the first quarter as well.

The next question comes from Brett Levy of MKM Partners. Please proceed.

Great. Thank you. Good morning. Couple of clarifications and then just some bigger picture. You've talked about the continued growth on Punch Bowl Social, and now you had a closure. Should we still assume that the roughly 100 unit target you had in place still exists and how should we think about the makeup of willingness to revisit the smaller prototypes?

I think for now, you should assume that the guidance for that 100 store expectation still exists and we'll update you more at the Analyst Day in the summer.

Got you. You talked about continued growth of to-go in off-premise care to quantify what it was the growth this quarter?

Yes. We are verifying, I think we said it was up over 150 basis points. We'll verify that, but it was a significant contributor in the first quarter, 180 basis points.

It grew as a percentage of the mix?

Yes. They contributed that, the same restaurant sales growth.

Regarding November, I understand you haven't provided guidance on the cadence, but could you share any insights on how you concluded the first quarter and began the second quarter?

No, I don't have any additional information to add to what we've already disclosed.

Got you. And then I guess a strategic question. You've talked about upgrading the POS systems. How many units do you have it in now? And theoretically, why did you decide to spend $14 million on buybacks as opposed to use that free cash that you have in play to maybe accelerate the integration now that you've already gotten past the equipment integration from last year? Thank you.

Yes. That's a fair question. So as we've looked at the POS rollout, so first of all, we're currently in 130 stores. We expect to add an additional 40 in fiscal '20. We're still really pleased with the new POS. It's an easier system to use for the team members. The technology we believe enhances the employee experience. And then, we think it will be a foundation for some future cost savings, but I guess what I would say is, it's not that easy to flip the switch in terms of rollout. So we will talk about at Analyst Day more about what our rollout plan looks like, but it wasn't capital risk constraints that came from increasing the rollout, it's more a logistics. Is that helpful?

That is. Thank you very much.

Our next question comes from Jon Tower of Wells Fargo. Please proceed.

Great. Thanks. Just a quick clarification, first, if I may. The $0.80 EPS headwind that you had mentioned related to Punch Bowl Social does not include the interest income from the loan. Is that correct?

That is correct. So the $0.80 represents our investment using the equity method accounting. So the other two areas on the financial statement where you will see an impact from Punch Bowl Social, one is on the interest income, which benefits from our loan to Punch Bowl. The other is in the tax rate, which benefits from the loss.

Okay. And the tax rate doesn't include, this is just a straight up one line, it's a headwind type of loss, okay.

Yes.

Great. Perfect. And then could you quantify what the size of the loan is to Punch Bowl right now?

We had stated that we planned to loan up to $50 million in the near term. So far, we have loaned $30 million, with about $15 million in the last fiscal year and $16 million to date. Our guidance indicates that we will loan the remaining $20 million within this fiscal year.

Great. Thank you for that. And then just going back to the Signature Fried Chicken platform. Can you give us a little bit more in terms of what you're seeing around customer usage of this perhaps just simply percentage of mix of sales today or more importantly what you're seeing around frequency of use of this platform? Are you actually seeing customers come in more frequently to use this then what you've seen in other platforms in the past?

We are pleased with the results, as they align with our expectations regarding the mix. To provide some background, we began our Signature Fried Chicken platform with the introduction of Southern Fried Chicken, which consisted of four pieces of bone-in fried chicken. Following that, we launched our Homestyle Chicken, a boneless option that was previously offered only on Sundays, making it available every day during the summer. We also introduced the Fried Chicken BLT, and we are satisfied with its performance. For the holiday season, we are offering the Fried Turkey as our holiday special and are happy with its performance as well. Next, we plan to add hand-batter breaded tenders, likely by next fall at the earliest. The investment in this platform was designed as a multi-year initiative, and we are continually pleased with the outcomes.

Okay. Thank you. And then, yes, anything else on outside of the Signature Chicken platform for the balance of the year either on the new product side that we should be thinking about or importantly also around advertising, is there any significant changes in the advertising spend planned for the balance of 2020 and obviously 2019, you had a certain amount of spend in that fourth quarter tied this launch. How should we think about advertising for the balance of '20?

Yes. I know, it's a good question, Jon. So the advertising as we talked about and we've added some advertising in the first half more in the second quarter, which kind of came out of the fourth quarter. So it will be close to parity within the third quarter, expected to be lower in the fourth quarter. And then we haven't talked about what our advertising will feature yet kind of beyond what we're on air with right now.

Okay. Thank you.

Thank you.

This concludes the question-and-answer session. At this time, I would like to turn the conference back over to Sandy Cochran for any closing remarks.

Well, thank you for joining us today. I'm encouraged by the start to the year and remain confident in our plans to drive continued performance. We appreciate your interest and support and wish you all a safe and happy holiday season.