Cracker Barrel Old Country Store, Inc (CBRL) Q3 2020 Earnings Call Transcript

Good day, and welcome to the Cracker Barrel Fiscal 2020 Third 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 today's event is being recorded. I would like to turn the conference over to Adam Hanan, Manager of Investor Relations. Please go ahead.

Good morning and welcome to Cracker Barrel's third quarter fiscal 2020 conference call and webcast. This morning, we issued a press release announcing our third quarter results and providing an update regarding the impact of the COVID-19 pandemic on the company's business. This press release and on this call, we will refer to non-GAAP financial measures for the third quarter and nine months ended May 1st, 2020, adjusted to exclude non-cash asset impairment charges related to store assets, expenses related to COVID-19, impairment charges related to our equity investment in Punch Bowl Social and the related tax impacts of these items. The company believes excluding these items from its financial results provides investors with an enhanced understanding of the company's financial results. This information is not intended to be considered in isolation or as a substitute for net income or earnings per share information prepared in accordance with GAAP. The last page of the press release includes the reconciliation from the non-GAAP information to the GAAP financials. On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO, Jill Golder; and Vice President of FP&A and CFO of Emerging Brands, 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. 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?

Thanks Adam. Good morning everyone and thank you for joining us. I hope you and your families are staying safe and healthy during these trying times. I want to begin by extending a heartfelt thank you to our employees both in the field and at the home office, who throughout this difficult period have done an incredible job responding and adapting to the rapid and significant changes to our industry and our business. In particular, I want to say thank you to our operators who've been tirelessly working to support our employees, our business, and our mission of pleasing people. I've been inspired by their extraordinary work and resilience during this most difficult time. What I've witnessed from our employees gives me confidence that we will not only succeed through this, we will come out of this in an even stronger position. We started the third quarter pleased with the momentum we had coming out of the second quarter, however, in mid-March, we quickly pivoted to address the unprecedented challenges presented by COVID-19 and to bolster liquidity. Fortunately, I believe our existing business priorities such as accelerating off-premise and menu innovation are just as relevant in the current and future environment as they were prior to the pandemic. As our stores began closing their dining rooms in mid-March, we took numerous actions over the following weeks to ensure the health and safety of our guests, to support our employees, and to adapt to the new business realities. We worked closely with health authorities and implemented elevated health and safety measures. In many cases, we took precautions that go above and beyond jurisdictional requirements. Measures we've implemented include providing facemasks for employees and hand sanitizers for both employees and guests, wellness screening for employees including taking their temperatures, sealing packaging for off-premise orders, frequently cleaning high-touchpoint areas, including thoroughly cleaning tables and chairs in between guests, and implementing social distancing measures throughout the entire guest journey. From a menu standpoint, we implemented a limited menu while our dining rooms were closed to reduce the amount of required labor and to reduce food waste, while also introducing new off-premise offerings that proved to be popular such as family meal baskets and a smaller heat-and-serve offering. We also implemented curbside delivery, accelerated the rollout of a new third-party delivery provider, and pivoted our marketing messaging to focus on off-premise. To support our employees during this difficult period, we provided short-term pay to our hourly store employees as their hours were reduced due to dining room closures, and we offered daily free meals to employees. We also continued benefits eligibility for those who previously qualified based on hours and ended the payment windows for benefit premium payments. Additionally, we partnered with other large employers to provide our employees supplemental employment opportunities. We also provided one-on-one assistance for employees applying for unemployment benefits. Not only do we believe these actions align with our people promise, we believe these are worthwhile business investments that will help maintain strong retention and employee engagement. While all of our stores have remained open during the pandemic from late March until late April, all stores were limited to off-premise only. In addition to the closed dining rooms, we believe our sales challenges have been further exacerbated by the fact that the breakfast and lunch dayparts, which account for a significant portion of our sales, were especially impacted. Additionally, travel occasions, which also represent a meaningful part of our business, have been greatly reduced in recent months. Despite the sales challenges, I'm pleased with the progress we've made on business priorities such as accelerating off-premise and introducing menu innovation. Part of our focus on cash conservation, we took numerous actions as outlined in our 8-Ks and which Jill will also speak to. Some of the actions are temporary in nature, such as employee furloughs and the suspension of capital expenditures, and we look forward to welcoming back the furloughed employees and resuming postponed initiatives. Other actions, such as our organizational realignment of the field and home office, strengthened our business model both in the short-term and the long-term. We believe these sustainable business model improvements will result in an annualized ongoing savings of approximately $50 million. As we've reopened dining rooms, we have transitioned stores to menus that include greater variety compared to the limited menu of our off-premise only stores. We are appropriately balancing menu breadth with labor productivity and food waste amid the still depressed traffic levels. Backing our stores with experienced employees has also been a priority during the reopening phase. I believe the employee support actions I referenced earlier combined with our strong culture, and our efforts to stay in touch with employees have facilitated the effective re-staffing of our stores as traffic has improved. I'm pleased that the dining rooms are open; approximately 70% of our PAR IV employees have returned to work. I believe our ability to re-staff with experienced employees will provide an advantage, and we're looking forward to welcoming back many more of our employees. I've been encouraged by the recent sales trends as we've reopened dining rooms and welcomed guests into our stores. We've seen steady improvement in our weekly comparable store restaurant sales trends as we've reopened dining rooms, and I'm optimistic that we will sustain this positive momentum. Looking ahead, we'll continue to focus on business priorities such as driving topline growth by introducing signature craveable food, accelerating our off-premise business, and will continue to enhance the employee and guest experience. We remain focused on conserving cash in the near-term, but we'll balance this approach by making select investments to support our business. Prior to the pandemic, we were in the process of rolling out a major menu evolution initiative that included simplification as well as the introduction of new offerings. As we've reopened dining rooms, we've been migrating stores to the new menu, and we plan for all stores to transition to it in the coming months. In addition to introducing offerings such as a new Chicken Pot Pie and Saturday Fried Pork Chops, we believe the new menu results in increased consistency and execution, and better highlights our signature offerings and abundance value and variety. I've been pleased with the results so far, and both guests and operators have responded positively. Another exciting initiative is the addition of a beer and wine tableside beverage program. We conducted extensive research and found guests had a strong interest in beer and wine options to provide additional variety to enhance their visits and occasions. Additionally, the findings indicated this was a way to reduce the veto vote, especially during weekend dinner. Part of the limited beer and wine selection includes items like mimosas, which have been quite popular. Testing is currently in approximately 20 stores. We've been pleased with the guests' response and look forward to expanding the test. We expect that off-premise demand will remain elevated for the foreseeable future and that we'll continue to see strong growth in this business. We will continue to leverage successful off-premise initiatives such as curbside delivery, third-party delivery, family meal baskets, and will be working to optimize and enhance our off-premise operations. We continue to invest in technology initiatives that enhance the guest experience and serve as enablers for sales drivers and business model improvements. We believe the pandemic and the growth in off-premise has accelerated the adoption and acceptance of digital usage and has further emphasized the importance of convenience. We've been applying recent learnings to our digital strategy and are accelerating our work in this area. For example, we're in the process of rolling out Pay in App, which allows guests the option of convenient contactless payment via their mobile device. In the coming months, we're also preparing to launch what we refer to as the digital store, which is a new digital property that provides an integrated and enhanced user experience for guests ordering food and retail. We believe that investments such as these provide increased convenience and allow us to extend our hospitality in new ways. Our marketing messaging will focus on driving awareness of our reopened dining rooms as well as our curbside and third-party delivery, while also reinforcing our everyday value. We increased our use of social and digital channels, which are more flexible and efficient, and have proven to be more effective in recent months. We continue to believe that billboards and TV are also effective ways to drive awareness and frequency, and our fourth quarter marketing plans include some national TV. Additionally, we'll be updating our creative on our billboards in the coming months. We remain excited about the future of Maple Street Biscuit Company; we believe they experienced less severe declines than Cracker Barrel due to their higher off-premise mix and the fact that the fast-casual segment was less impacted than casual dining. Despite the challenges presented by the pandemic, the integration has progressed well, and I've been impressed with how they've managed through the crisis. Several of the former Holler & Dash locations have been converted to Maple Streets, and while early, I'm pleased with the performance of the converted stores, we'll be completing the remaining conversion in the coming weeks. The resilience they've demonstrated in recent months has reinforced the attractiveness of their brand and their business model, and we look forward to accelerating their growth. Unfortunately, the eatertainment segment and Punch Bowl Social were hit especially hard by the pandemic and the immense challenges it presented, which resulted in the closure of all their locations. After extended discussions, and in keeping with our disciplined approach to capital allocation and our strategy to focus our resources on core brands during the pandemic, we made the difficult decision not to provide additional funding. While there continues to be significant uncertainty, and we expect our industry will be challenged in the coming months, we're very confident in the future of our company and in our ability to drive long-term value creation. Cracker Barrel remains one of the most differentiated brands, and I believe our scratch-made foods, everyday value, genuine hospitality, and the trust guests have in us to deliver on their expectations will continue to make us a preferred dining destination. Additionally, I firmly believe we have the resources and strategies in place to successfully navigate this environment, strengthen our business, and drive shareholder returns. Before turning it over to Jill, I want to once again express my gratitude to our employees. I know this has been a difficult time; there are many challenges remaining. But we will get through this, and we will come out of this even stronger than before. And with that, I'll turn it over to Jill.

Good morning and thank you Sandy. Given the circumstances, my prepared remarks today will primarily focus on our sales performance, financial impacts related to COVID-19, our liquidity position, and capital allocation. I want to begin by discussing our sales performance. For the quarter, Cracker Barrel comparable store restaurant sales decreased 41.7% as traffic declined 43.6% and average check increased 1.9%. The quarter started strong with February comparable store restaurant sales at positive 2.4% before declining by 36.5% in March and 78.6% in April due to the COVID impact. Comparable store retail sales decreased by 45.5% in the third quarter. We're encouraged by our recent topline trends. We've seen sequential improvements in weekly comparable store sales since we began reopening dining rooms, and comparable store restaurant sales for stores with open dining rooms were down approximately 32% in the most recently completed fiscal week compared to declines of approximately 76% for stores limited to off-premise only. I would now like to speak to some of the P&L impacts related to COVID-19. As Sandy outlined, we took several actions in response to the pandemic to ensure the health and safety of our employees and guests, support our employees, and strengthen our business model. For example, we provided additional pay to our hourly employees as their hours were being reduced due to dining room closures, which totaled approximately $17 million. In addition, as noted in the earnings release, in the third quarter, we incurred approximately $7.1 million in COVID-related expenses, which includes items such as food waste due to dining room closures, severance, meals we provided to our employees, as well as inventory write-down. Additionally, we recorded an impairment charge of $18.3 million in store assets as well as a $132.9 million impairment charge related to our equity investment in Punch Bowl Social. Third quarter GAAP earnings loss per diluted share were $6.81. Excluding those $7.1 million in COVID-related expenses, the impairment related to store assets, and the impairment related to Punch Bowl Social as well as the related tax impacts, adjusted earnings loss per diluted share were $1.81. As Sandy mentioned, we also took decisive actions to strengthen our business model. We believe these initiatives, such as the organizational realignment, will result in sustainable annualized savings of approximately $50 million. Turning to liquidity and capital allocation, we believe that going into the pandemic, the company was well-positioned to deal with liquidity challenges due to the following: first, our consistent profitability and cash flow generation; second, our prudent approach to capital allocation; third, our conservative leverage ratio; fourth, the increase in our credit facility to $950 million in 2018; and lastly, our ownership of a significant portion of our locations. That said, given the unprecedented challenges we are facing, we took additional actions to further bolster liquidity. In addition to what we've already mentioned in our prepared remarks, we suspended our dividend and share repurchase programs, substantially suspended CapEx except for strategic initiatives and essential store maintenance, aggressively managed retail inventories, including canceling orders where feasible, fully drew down on our revolver, and then on May 28th, we exercised an accordion feature to increase our borrowing capacity by an additional $40 million. Lastly, while we were within our covenants during the third quarter, we received covenant relief for the next three quarters, beginning in our current fourth quarter. Taking into account our recent initiatives to strengthen our business model and conserve cash, combined with how well our operators have been managing their costs, we estimate our weekly cash burn rate is neutral at comparable store restaurant sales down approximately 45%. This estimate is at the corporate level and assumes modest investments in key initiatives. We're also pleased that we were able to keep all of our stores open, and that they have consistently generated positive variable cash flow while operating an off-premise-only model. We believe we have a strong liquidity position as we ended the quarter with approximately $363 million of cash on hand, which was further strengthened by drawing down the accordion. However, the environment and outlook remain uncertain, and we believe we have additional options to further increase liquidity should this be warranted. We've been working closely with the Board to appropriately modify our capital allocation strategy in light of the current circumstances. We plan to give additional updates as appropriate, but I want to provide some commentary on how we're currently thinking about capital allocation. Investing in Cracker Barrel will remain a capital allocation priority. Although we are focused on cash conservation in the near-term, we will be making prudent investments in our menu evolution initiatives, our beer and wine program, our digital strategy, and our point of sale system. We plan to increase our investments as our business normalizes and as we generate more cash. We look forward to resuming unit growth for both Cracker Barrel and Maple Street. We are still working to finalize our fiscal 2021 plans and we tentatively expect to open two Cracker Barrels in fiscal 2021. These units were originally planned to open in fiscal 2020, but they were delayed due to the pandemic. We currently expect to open approximately 15 Maple Street units. We believe Maple Street has attractive unit economics with AUVs over $1 million in a normal non-COVID environment and investment costs below $750,000. Regarding our regular dividends, the Board continues to evaluate this and intends to reinstate the dividend as soon as we are in a condition to do so. Lastly, regarding capital allocation, we are currently above our long-term leverage ratio target due to our increased debt and reduced EBITDA, and we plan to balance our investments and the return of cash to shareholders with right-sizing our debt levels. As announced in March, we have withdrawn our previously issued fiscal 2020 outlook, including earnings guidance. However, I would like to provide some comments on our future expectations. As of this weekend, 505 stores had opened dining rooms. The situation remains fluid, but presently, we hope to have substantially all dining rooms open by the end of June. However, it will likely be some time before we are able to completely lift restrictions at all of our dining rooms, and we expect that off-premise sales growth will remain elevated for the next several quarters. Looking ahead, we believe we will potentially benefit from several factors. First, we are a trusted differentiated brand with loyal guests. Second, the geographic concentration of our stores has not been in parts of the country that were most impacted. Third, our interstate locations position us well in the event that families choose to take vacations by car this summer. However, our restaurant outlook is cautious for several reasons. There continues to be quite a bit of uncertainty around consumer willingness to revisit full-service restaurants in general in the near-term. Additionally, our older guests may be more hesitant to return because they are at higher risk for COVID-19. Lastly, there is a lot of uncertainty around the economic impacts of the pandemic. Retail sales for May have been encouraging as we've reopened dining rooms, but our outlook for retail is also cautious. We expect that retail will continue to be pressured by social distancing measures in both the dining room and the retail area. Additionally, we anticipate that our retail business will be further challenged by the broader environment, as our merchandise is highly discretionary. We believe consumer spending will be more restrained. Our teams have done a nice job managing inventories and are focused on the sell-through of our merchandise, especially our seasonal assortments. Due to the highly promotional environment, we do anticipate lower retail margins. Lastly, we are closely monitoring our restaurant supply chain and have been having regular discussions with our vendor partners. To date, we have not seen and do not expect any meaningful disruptions or supply issues for the remainder of our fiscal year. Although we do believe it is likely we will see elevated commodity market volatility in fiscal 2021. Because of the numerous uncertainties surrounding the economy and the restaurant and retail industries, our outlook is cautious, and we anticipate that these industries and our business will be facing pandemic-related challenges for some time. As a result, we expect our earnings performance will likely be somewhat choppy in the coming quarters. Despite this, we believe we are well positioned to successfully deal with these challenges and continue to drive long-term value creation. I will now turn the call over to the operator so that we can take your questions. Thank you.

Thank you. We will now begin the question-and-answer session. Our first question today will come from Gregory Francfort of Bank of America. Please proceed with your question.

Thank you for the question. I have a couple of inquiries. The first two are about the topline. Clearly, off-premises sales have increased significantly, and as you start opening dine-in services, I'm interested in how sustainable that business has been. Any insights would be appreciated.

Good morning, Greg. Thank you for your question. We've been pleased with the performance of the restaurants as we've reopened our dine-in. So, as we said in our prepared remarks, we've seen the dine-in for restaurants significantly improved, down 32% or so. They've retained much of that off-premise; we haven't seen much decrease there. Overall cannibalization has been little, but I would say it's still early days. So, we'll see how that trends. Again, we've only got about 100 stores that have had their dining room open for three weeks.

Got it. Okay, got it. And then the two other questions I had was maybe, Sandy, you've had a lot of good perspective in the past on the consumer and the stage of the consumer, I'm having trouble kind of getting a read given kind of elevated incomes around unemployment. But that seems to be rolling off in July. I'm curious what your thoughts are on how the industry is going to fare as it happens. And then the other question I had was just on the employee turnover and your comments on the PAR IV employees, and I think you said 70% have returned to work. Can you remind me how much of the employee base that is and kind of if you're having seeing any troubles getting people to return to work in this environment? Thank you for both thoughts.

Let me start with the consumer. It seems everyone is struggling to predict future trends. As Jill mentioned earlier, since we've reopened dining rooms, we've been encouraged by the positive response. Guests are returning to dine in our restaurants and are also purchasing our retail products, possibly more than we anticipated, which reflects well on our retail team and the product selection. However, we recognize that some of this may be influenced by stimulus checks and enhanced unemployment benefits. It's challenging to gauge the impact of these factors and how the consumer will respond once the country fully reopens, especially considering the overall economic situation. As Jill pointed out, we see some positives for the brand. The most significant factor is that we believe we have a strong, trusted brand. Our comfort food resonates with people, reminding them of happier times. Value will be crucial, and we offer an excellent range of everyday value options. We feel well-positioned if consumers decide to travel by car. However, we are mindful of potential challenges, particularly in relation to how comfortable people, especially older guests, will be with full service and the uncertainties surrounding possible outbreaks in the fall and their community impacts. So, while I know you're trying to gauge consumer sentiment, we are also doing the same, and we are satisfied with our current position. Regarding unemployment, we have around 20,000 PAR IV employees. I'm not sure how many are still actively working for us, but we are bringing people back, albeit at reduced levels and with fewer hours than before the pandemic. We are pleased with our ability to retain our experienced employees. Some employees have expressed reluctance to return, often due to personal or family safety concerns. Overall, we feel confident about our approach to bringing employees back.

Thank you for all those thoughts. I appreciate it.

Our next question will come from Brett Levy of MKM Partners. Please proceed with your question.

Thank you for taking my question. I hope everyone is doing well. Could we discuss the sustainable cash savings from both a gross and net perspective? What is being released from the system? What investments remain, particularly in terms of the technology you mentioned? Additionally, could you explain the cash burn and your cash flow generation, focusing not only on the static 45% comp decline but also on the various factors as you reintroduce incremental costs, such as labor at the store level, field level support, or within the corporate structure? I'll pause there.

Good morning, Brett. It's Jill. I'll begin with the cash situation and how we arrived here, along with our future plans. As noted in our prepared remarks, our cash burn is stable for comparable store sales, down about 45%, which includes wise investments. We discussed numerous actions taken to save cash since March. On March 24th, we reported having $400 million in cash. By the end of the quarter on May 1st, that amount decreased to $363 million. During that five and a half to six-week period, we spent less than $7 million per week, which included investments for our employees and health and safety. Our team has effectively managed the business, achieving profitability at the variable level. With the reopening of dining rooms, we’re beginning to see sales that should lead to cash generation. We're currently reassessing our capital allocation strategy and maintaining a balanced and disciplined approach to investments. Our top priority is investing in Cracker Barrel while continuing cash conservation short-term. As mentioned in Sandy's remarks, key investments will focus on menu evolution, our beer and wine program, digital strategy, and point of sale. As more cash becomes available, we will consider new store openings, planning for two Cracker Barrels initially set to open in fiscal 2020, now postponed to 2021, as well as new Maple Street locations, which we are excited about. Additionally, our regular quarterly dividend remains important, and the Board will evaluate when to reinstate it based on conditions. Furthermore, our current debt levels are higher than our long-term targets, so we will balance debt reduction with returning cash to shareholders. Our capital allocation strategy will continue to evolve as we navigate these uncertain times. I hope this addresses your questions.

Just one follow-up on technology. You had been running at about 150 POS systems a year, but now that you've seen the merits of the digitizing world, how quickly do you think you can get both the POS systems fully integrated at the store level, but also elevate your digital ordering app capabilities, and then I'll let it go to the queue.

Okay. So today we've got approximately 170 stores that have our new point of sale. We’ve paused that rollout with the start of the pandemic. The POS does help us both from a guest-facing standpoint as well as the employee standpoint. We're excited about it. So, we're going to balance all of these investments. The digital strategy, as Sandy mentioned, really helps with the guest experience; it's going to make it much easier for our guests to order both food and retail, and it'll streamline their experience. We expect to roll out pay in app in the fall time period. The two are not mutually exclusive, moving down the digital path as well as the POS path. But how quickly we do both of those will depend on where we are from a liquidity standpoint.

Thank you. Our next question will come from Jon Tower with Wells Fargo. Please proceed with your question.

I would like to know more about the decision to test beer and wine, especially why this is happening now and how you are conducting the tests in stores, considering the limited dining room availability. I'm interested in understanding how you are trying to gather the right data to determine if it makes sense to proceed. Additionally, will you be using national brands, or are you considering creating your own beverages? Could this initiative also extend to the retail channel within your stores? I have a follow-up question as well.

Well. So, first of all, we've been thinking about this for a long time and have for well over a year, and began by doing research to understand the guests' interest in this. We began testing this pre-pandemic. I think it rolled out in January down in Florida, so we did have an opportunity to get some experience prior to our dining room shutting down, and we were pleased with the results. What we found from the research and from the test results that guests were — many of them had already communicated to us a desire for wine and beer to make their visits and occasions more enjoyable. Our current menu includes beer brands like Budweiser, Bud Light, Pabst Blue Ribbon, hard cider, and then our wines are Sutter Home. We've got a white and a red, a very select limited menu, as well as mimosas, which have proven to be surprisingly popular. So, we had some opportunity, we got some learnings before we had to shut down, we were long way through the process. We put that on pause, and then, when we were able to reopen dining rooms again, we opened them with the beer and wine assortment down in Florida. So now we have about 20 stores up and running. We continue to monitor the reaction to it, the sales and so on. So far, we're pleased, and we will just continue to roll it out as we believe that's the right thing to do for the brand.

Good. Do you see this moving into the retail channel and all within the stores over time?

Not. And when you say the retail channel, in some places we've offered it as part of to-go; some communities allowed us to offer, but we didn't see a lot of take up on that. Partly, I don't think people thought of us that way. But now, I don't see it being offered in the retail store.

Okay. And then just thinking about the retail business itself, it looks like it managed very well throughout the trough of the crisis. I'm just curious, if you could talk to I know, I think Jill, you had mentioned earlier, how you're expecting it to be choppy from this point forward, but how are you going to manage inventory over the next several months into this business, there's a lot of seasonal items in there? So how can you manage that knowing that perhaps you're going to have a much choppier demand environment going forward and your business is a little bit more seasonal than others?

I think our retail teams have done a phenomenal job of managing as well as they could. That risk is a combination of knowing what we had, and what we had coming in. We canceled a quite a bit of our inventory where we could. Where we couldn't, we've been promotional where we needed to be, and I have been really pleased with the consumer response to that, and we've modified our assortments going forward to reflect what we thought would be choppy. For example, although there will be a presence of Thanksgiving in the stores as we go, that's a big seasonal assortment for us, it will be very little Halloween; it's a shorter holiday. We weren't sure whether parents would be comfortable with trick or treating and whether there'd be those kinds of gatherings. So, we were very cautious about our investment in inventory on things like that. So we've been navigating through it as best we can. Quite a bit of our inventory has a long seasonal approach, so we were thoughtful about how we can keep it on the floor in an environment where we don't have as much traffic as we would wish. But I think that the assortment, the quality, the way that the assortment is paying off on the fun, uniqueness, nostalgia, and great value at a price that a lot of people can afford somewhat of an impulse has been very encouraging to us. Maybe not surprisingly, it was an elevated amount of retail sales during the pandemic, when people would come to pick up their off-premises, and things like personal care.

Great.

And then let me just add on the inventory. Given the large declines in traffic that we've seen, combined with the fact that we do have some seasonal merchandise, we do have elevated inventory levels. We believe that in the next quarter or so, you'll see additional markdowns and/or pressure on margins.

Okay. The last one for me. On the $50 million of new savings, can you just help us bucket where we expect these in the stores? Is it going to be somewhere in the cogs channel, the store operating expenses labor? If you could help quantify where those are going to settle, that would be helpful.

Sure. Well, first of all, I'm really pleased with the team's quick action and focus on trying to strengthen the business model, both in areas that will benefit us in the short term and the long term. The $50 million in cost savings we think will be longer term. I do want to mention that some of these initiatives were planned. We pulled them forward as a result of the pandemic. So, for example, the realignment was one that was planned. The two key areas where you're going to see the benefit of those will be in restaurant labor, primarily around the management labor side and then in the G&A. As we go through the year, we can give you more around the dollar amounts, but those are the two key categories.

Thank you very much. I appreciate it. Best of luck.

Thank you.

Our next question comes from Jeff Farmer with Gordon Haskett. Please proceed with your question.

Great, thanks. I have a couple of follow-up questions. So the first is in terms of these restaurants that are open, and they're putting up the 32% same-store sales declines and that week ended May 29. I'm curious how consistent that performance was across markets, meaning was there sort of a wide range of Central sales performances? And then I think even more importantly, in terms of thinking about Tennessee and Georgia, some of the markets or states that opened up the earliest theoretically have had Cracker Barrel units in operation for the better part of five weeks. What does their performance look like in the context of about a 32% same-store sales decline number that you guys referenced? And then I have one more follow up.

Great question, Jeff. I'm going to answer it more broadly. First of all, during the pandemic, we saw that the performance has been relatively similar. There was only one significant differentiator where the stores that are right off the interstate were modestly more impacted than those that are in more suburban areas. That's the biggest differentiator. Now fast forward to more recent times; when we've had some of the restaurants reopening for dine-in, I have to note that we don't have a lot of experience for that. The variability really flows more with the capacity restrictions versus anything else.

Okay. Excellent. In terms of thinking about just Tennessee and Georgia to those four states that opened, as we mentioned, is it safe to assume that they're probably doing at least a little bit better than down 32%, considering they've been open for five weeks, or is that not the way to think about it?

I think it's a little early to talk about it. We just don't have as much data on it.

Okay. And then following up on John's question, so the $50 million in cost-saving opportunities. You alluded to it, but really, the question is, how much of that is incremental or above and beyond some of the cost-saving opportunities that you've identified in the past? So in terms of thinking about a $50 million number, is that $20 million, $30 million, $40 million more than you were considering in a pre-pandemic environment? How should we think about that?

So, as a reminder, we had a number of initiatives that we were working towards to take out low-value-added costs to strengthen the business model. This fiscal year, pre-pandemic, we were tracking to delivering $11 million in savings. The initiatives that are in this $50 million are in addition to the initiatives that were in that $11 million, so much of those are new.

Okay. And then that's very helpful. Just last one. So, seniors, did you notice that you're putting words in your mouth that are "optimistic" that you will continue to deliver top-line recovery momentum?

With that said, I'm curious, and again, you did touch on it, but are there two or three things that you see having the largest impact on driving incremental sales recovery as we move forward over, let's call it the month of June?

I believe the key factors are whether communities reopen and lift capacity restrictions, which are interconnected. Additionally, it depends on whether consumers feel comfortable moving around, dining out, and going on vacations. If that occurs, I am optimistic that we will be ready to welcome them with our hospitality and retail offerings. However, the biggest concern is if some communities remain apprehensive due to potential outbreaks, as this could affect people's comfort levels and hinder our progress. Furthermore, if the economic situation post-pandemic leads to a hesitation in consumer spending, that would present another challenge for us. Nevertheless, as both Jill and I have mentioned, we are confident that our brand is well-positioned for success based on the reasons I’ve outlined.

Right. Thank you.

Our next question comes from Jake Bartlett with SunTrust. Please proceed with your question.

Great. Thanks for taking the questions. My first one is just on the weekly cash burn, and if you could help us just maybe decompose that a little bit. I want to make sure I understand whether it's including any CapEx, whether it's including any changes in working capital. And I think also the implication is that you'd have positive unit level margins at negative 45%. We didn't see that in the first quarter. So I just want to confirm you expect fairly meaningfully positive margins at negative 45% at the unit level. And any help you could give on just kind of what the right run rate is for G&A as we try to work this all out?

Okay, great. We're still working this out, but I think the teams have done a commendable job. Looking back at our cash burn rate during the COVID experience, it was about $7 million over that five to six-week period. When we mention being cash neutral at 45%, that figure accounts for all cash outflows, including general and administrative expenses, capital expenditures, and total cash changes in working capital. As we move beyond that number and start generating cash, the team will concentrate on finding a balance between cash generation and reinvesting in the business. It's challenging to quantify that, as it will be a journey for us.

Our next question will come from Alton Stump with Longbow Research. Please proceed with your question.

Great. Thank you. And good morning, and thanks for taking the question. I had two questions. One, how do you see, Sandy, the overall competitive environment playing out here over the next quarter or two? Obviously, your own stores are positioned a lot better than, of course, most of your peers in the casual space that are seeing a bigger impact from COVID than you are. Presumably, it will be a competitive environment. You've already got a very strong everyday value platform, of course. But how do you see your overall promotional strategy? Is it going to be different than what it would have been if we had not had COVID as you look out over the next quarter or two?

I believe we're currently focused on the evolving consumer mindset, which will prioritize value moving forward. We are reevaluating every aspect of our menu, including our new dinner offerings, to ensure they provide the necessary value. Additionally, we're adjusting our pricing strategy to avoid being overly ambitious in our pricing decisions. Our goal is to make sure that consumers dining with us can discover value in various areas of our menu. This value-driven environment is likely to persist for some time, and within this competitive landscape, I expect there will be significant promotional activity, as many will try to attract customers through deals and competitive pricing strategies. While there will be intense competition for market share, I feel that we are positioned as well as we can be.

Thanks. That's helpful. And I just want to follow-up. As I think about off-premise and store footprint, off-premise was growing nicely heading into COVID. Now it's, to your point, at elevated levels, and will probably be for some time to come. As I think about, over the next three to five-year period, is there an opportunity for you to potentially open up smaller locations on average that would have a bigger curbside, off-premise and not as big of a dining room? Or is that not something that you're thinking about currently?

Well, certainly, the shift to off-prem with the consumer has accelerated behavior in a very short time that was coming over several years anyway. Our off-premise team has reopened and is rethinking the off-premise strategy. Whatever we thought was going to be important. We're reassessing in light of the consumers, competitors, and where the technology is now. Everything is on the table. So, including things like what you're talking about is some version of a ghost kitchen or something similar. We've thought about all of those things; however, we’re not ready to discuss yet.

Our next question comes from Todd Brooks with C.L. King. Please proceed with your question.

Hey, good morning everyone. Thanks for taking my questions. Just two quick ones. One, if we can talk about capacity, and just as you're reopening, are you seeing any kind of peak-ish periods where the restaurants have been capacity constrained? And then can we also spill the capacity discussion over to the retail side of the house, what you're finding and how you're controlling the flow of customers moving through the retail sales space and how that's impacting the retail business?

Okay. Todd, thank you for the question. So, I guess, as we think through it, there is a bit of variability, and we don’t have a lot of experience with the days opened here. Where we really hit peak capacity is more at dinner and more on the weekend. That's really more when we have a governor on the sales that we can do. Then kind of flowing through to the retail side, I mean, again, we've been pleased with their trends and the attachment rate we've been generating for both the dine-in sales that we delivered as well as off-premise sales.

Great, thanks. I have a couple of follow-up questions. The first is in terms of these restaurants that are open and they're putting up the 32% same-store sales declines and that week ended May 29. I'm curious how consistent that performance was across markets, meaning was there sort of a wide range of Central sales performances? And then I think even more importantly, in terms of thinking about Tennessee and Georgia, some of the markets or states that opened up the earliest theoretically have had Cracker Barrel units in operation for the better part of five weeks. What does their performance look like in the context of about a 32% same-store sales decline number that you guys referenced? And then I have one more follow up.

Great question, Jeff. I'm going to answer it more broadly. So, overall, during the pandemic, we saw relatively similar performance. There was only one significant differentiator, where stores that are right off the interstate were modestly more impacted than those that are in more suburban areas. That's the biggest differentiator. Now fast forward to more recent times; when we've had some of the restaurants reopening for dine-in, I have to note that we don't have a lot of experience for that. The variability really flows more with the capacity restrictions versus anything else.

Okay. Excellent. In terms of thinking about just Tennessee and Georgia to those four states that opened, as we mentioned, is it safe to assume that they're probably doing at least a little bit better than down 32% considering they've been open for five weeks or is that not the way to think about it?

I think it's a little early to talk about it. We just don't have as much data on it.

Okay. And then following up on John's question, so the $50 million in cost-saving opportunities. You alluded to it, but the question is, how much of that is incremental or above and beyond some of the cost-saving opportunities that you've identified in the past? So in terms of thinking about $50 million, is that $20 million, $30 million, $40 million more than you were considering in a pre-pandemic environment? How should we think about that?

So, as a reminder, we had a number of initiatives that we were working towards to take out low-value-added costs to strengthen the business model. This fiscal year, pre-pandemic, we were tracking to deliver $11 million in savings. The initiatives that are in this $50 million are in addition to the initiatives that were in that $11 million, so much of those are new.

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Sandy Cochran for any closing remarks.

I'm going to close this call with a summary of the key points that I hope you got out of this. The pandemic created unprecedented challenges and disruptions. We quickly took actions. Our operators did a fantastic job of dealing with the environment. We were able to keep all of our locations open, although, all of our dining rooms were closed. We navigated, I think, the crisis well and have gained a lot of learnings. As a result, we're strengthening our business model. I think we're well positioned for the future. We're encouraged by what we've seen with the reopenings. We are near-term cautious, but confidently positioned to drive long-term value creation. I appreciate you being on the call. I hope everyone stays safe, and we're looking forward to speaking with you again in September.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.