Cracker Barrel Old Country Store, Inc Q1 FY2022 Earnings Call

Good day, and welcome to the Cracker Barrel Fiscal 2022 First Quarter Earnings Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jessica Haze, Head of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Cracker Barrel's first quarter fiscal 2022 conference call and webcast. This morning, we issued a press release announcing our first quarter results. In this press release, and on this call, we will refer to non-GAAP finance measures for the first quarter ended October 29, 2021. The first quarter non-GAAP financial measures are adjusted to exclude the non-cash amortization of the asset recognized from the gains on our sale and leaseback transactions and the related tax impacts. The company believes excluding these items from its finance results provides investors with enhanced insight into the company's financial performance. This information is not intended to be considered in isolation or as a substitute for net income or earnings per share information prepared in accordance with GAAP. The last pages of the press release include reconciliations from the non-GAAP information to the GAAP financials. On the call with me this morning are Cracker Barrel President and CEO, Sandy Cochran, Senior Vice President and Interim CFO, Doug Couvillion, and Senior Vice President and CMO, Jen Tate. Sandy will begin with a review of the business, and Doug will review the financials and outlook. We will then open up the call for questions for Sandy, Doug, and Jen. On this call, statements may be made by the management concerning 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 will now turn the call over to Cracker Barrel's President and CEO, Sandy Cochran. Sandy.

Thank you, Jessica, and good morning, everyone. This morning we announced comparable store restaurant sales growth of 1.4% compared to the first quarter of fiscal 2019. I'm pleased with the work of our teams to accomplish this sales recovery despite the headwinds we faced from the Delta variant and difficult staffing environment as we began our fiscal year. We believe the improvements we made to staffing levels during the first quarter played a significant role in driving our sales recovery. Our recruitment efforts, including a new virtual orientation program that streamlines our onboarding process and reduces training hours, helped us to hire an average of more than 2,000 employees per week during the quarter. And while we still have some challenges with COVID-related call outs and pockets of understaffing, we feel confident that we have the appropriate staffing in place to handle the elevated holiday volumes we anticipate for Q2. I am pleased to share that we saw almost no year-over-year decline in off-premise sales, even as first quarter dine-in volumes further recovered, and we continued to explore new channels for growth and expansion for our off-premise business. In the last week of the quarter, we expanded our virtual brand, Chicken and Biscuits by Cracker Barrel, to approximately 500 locations total. We launched a second virtual brand, The Pancake Kitchen by Cracker Barrel, and we opened our first-ever Ghost Kitchen location, all of which I'll speak to shortly. First quarter retail sales maintained their strong growth over pre-COVID levels, with comparable store retail sales up 17.6% compared to the first quarter of 2019. We continue to see strength from everyday categories, particularly toys, food, and home décor. Additionally, our holiday themes have resonated strongly with guests this year, and our Christmas themes are delivering solid double-digit growth over fiscal 2019 to date, despite some headwinds from shipping delays. Our retail teams have done an excellent job of managing the ongoing supply chain challenges, and we brought in the majority of our containers at contracted rates during the quarter. By pushing forward, ordering timelines for seasonal merchandise and leaning into our everyday assortments, we are successfully navigating the impact of sea shipping delays, while providing guests with a unique and appealing retail experience. Maple Street maintained its run of strong sales performance during the quarter. Average weekly sales for the brand were up by more than 50% compared to pre-COVID levels, which includes the benefit of being open on Sundays. They hope to open 15 new units this year, the first of which opens next week. The real estate team has done an excellent job of building a strong pipeline to support new unit openings in the remainder of this fiscal year and beyond given the strong unit economics that have exceeded our expectations. I'm optimistic about the long-term growth potential for the brand. Doug will take you through additional financial details for the first quarter and provide current thinking on our outlook. Before he does, I'd like to share with you a little more detail on our second quarter expectations and progress on a few key strategic initiatives. Many of you know the Cracker Barrel brand has a deep connection to the holiday season, and our stores typically run higher volumes during the second quarter. This year especially, I believe our guests are embracing Cracker Barrel’s unique holiday offerings as they look forward to a more traditional season, complete with family gatherings and holiday celebrations with friends. While we expect the Q2 dine-in traffic will remain below pre-COVID levels, we're optimistic that the recent improvements in our restaurant and retail sales trends will continue through the holidays. We've seen strong demand from our off-premise Thanksgiving offerings. Pre-orders for our traditional Heat n' Serve Feast that serves eight to ten guests have remained high compared to pre-COVID levels, which is impressive considering our guests now have the additional option of our smaller Heat n' Serve family dinner that serves four to six guests. Not only is off-premise a key driver in our second quarter, but the week of Thanksgiving is typically our largest sales week of the fiscal year. While we cannot fully predict what the dine-in consumer behavior will look like over the next few days, we expect a strong Thanksgiving sales week that should exceed pre-pandemic levels. While the operating environment remains challenging, I'm confident that our stores will deliver on our mission of pleasing people this entire holiday season. Looking longer term, I remain excited about the strategic initiatives we have in place to deliver sales growth and strengthen our business model. That starts with the launch of our Ghost Kitchen and the expansion of our virtual brands that I spoke to earlier. Our Ghost Kitchen concept, Cracker Barrel Kitchen, opened in Los Angeles at the end of October. Cracker Barrel Kitchen offers a streamlined version of the Cracker Barrel menu of our traditional favorites, as well as chicken and biscuits and the pancake kitchen offerings. We've seen a positive guest response so far. And we believe this format can be a meaningful revenue driver for us. The plan to open additional Ghost Kitchen locations in Los Angeles in the near future, and long-term, I'm very excited about the potential to bring home-style food of Cracker Barrel into additional urban areas. We've also expanded the rollout of virtual brands as an added sales layer to our existing stores. Our second virtual brand, the Pancake Kitchen, launched in the last week of the quarter and initial sales results are promising. We believe this brand helps us address unmet demand for breakfast offerings via third-party delivery in many geographies. Additionally, we remain optimistic about the sales potential for the Chicken and Biscuits brand, which helps us to leverage excess kitchen capacity during underutilized day parts and to target additional users of the brand who might not otherwise visit a Cracker Barrel restaurant. The first quarter also marked the one year anniversary of the launch of our digital store. As a reminder, this was a new digital platform that integrated restaurant, retail, and catering offerings into a unified and convenient user experience. In its first year of existence, the digital store registered over 43 million sessions and handled over 3.4 million orders. In addition to supporting the growth in our off-premise business, it enhances the dining guest experience through features such as online waitlist and mobile pay. Our digital investments have created a platform for us to build direct digital relationships with our guests, including email and SMS text marketing, personalization through our website and app, and the introduction of a loyalty program. Additionally, we've seen positive results from the shift in our paid media towards digital channels, which allows us to better target our messaging to specific audiences. We expect to continue to shift more advertising dollars to these channels as we find new ways to leverage our expanding digital capabilities. Lastly, I'd like to provide an update on our leadership team. As we previously announced, Craig Pommells will be joining us as our new Senior Vice President and Chief Financial Officer starting next month. Craig brings with him over 20 years of experience in the restaurant industry, most recently as CFO of Red Lobster. Prior to that, Craig served as Senior Vice President at Red Lobster for five years and served in various financial and data analytics roles at Darden for over a decade. Craig's track record of financial leadership and strategic planning will be a great asset to our leadership team as we continue to explore ways to drive sales growth and strengthen our business model in a post-COVID world. Before I turn the call over to Doug, I want to thank him for his outstanding contributions to the company, particularly over the last year. During his time as interim CFO, he has been extraordinarily helpful to us as an organization and a wonderful partner to me. Doug's a 20-year Cracker Barrel veteran, and he'll remain a valuable part of the Cracker Barrel senior leadership team as he continues his responsibility as Senior Vice President of Sourcing and Supply Chain and help Craig familiarize himself with our company and our people. Thank you, Doug. And with that, I'll turn the call over to you.

Thank you, Sandy, and good morning, everyone. For the first quarter, we reported total revenue of $784.9 million. Our restaurant revenue increased 19.4% to $615.4 million, and our retail revenue increased 29.2% to $169.5 million versus the prior year first quarter. Here to the first quarter of fiscal 2019, comparable store restaurant sales increased 1.4%. We're providing our comparable sales results back to fiscal 2019, our most recent clean full fiscal year, which provides a better indication of sales growth than prior year comparisons. Restaurant sales performance improved sequentially each month of the quarter and breakfast continued to be our strongest growth day part, particularly during the week. We also saw significant recovery in the weekend breakfast and lunch day parts during the quarter, which we believe is primarily due to the improvements to our staffing levels. Our comparable store off-premise sales were up 168% compared to the first quarter of fiscal 2019. More impressively, we retained almost all of our off-premise sales from last year when we had a large number of stores operating either off-premise only or with significant capacity restrictions. Our third-party delivery channel delivered strong year-over-year growth during the quarter, which helped to offset the modest decline in our individual to-go channel. Comparable store retail sales were again above our expectations in the first quarter and increased 17.6% over 2019. While the supply chain environment remains volatile, our retail team has done an excellent job of managing inventory and leaning on our everyday assortment to minimize the disruption to our retail shops. Moving on to expenses. Our total cost of goods sold in the quarter was 30.9% of total revenue versus 30.8% in the prior year quarter. Restaurant cost of goods sold was 26% of restaurant sales versus 25.7% in the prior year quarter. Significant increases in pork, beef, and oil costs drove commodity inflation of 7.3%, which was above our expectations, which largely offset the impact of this inflation through 5.5% pricing and mixed favorability during the quarter. Retail cost of goods sold was 48.7% of retail sales, versus 50.6% in the prior year quarter. This 190 basis point decrease was primarily driven by lower markdowns as we continue to sell through inventory at full price at higher levels than we have historically. First quarter labor and related expenses were 35% of revenue versus 35.1% from the prior year quarter. Our labor costs were pressured by wage inflation on a constant mix basis with 9.1%, which increased throughout the first quarter and came in above our expectations, as well as elevated overtime use. These pressures were primarily offset by sales leverage, as well as lower manager staffing levels and related incentive compensation. Adjusted other operating expenses were 23% of revenue versus 24.5% in the prior year quarter. This 150 basis point decrease was primarily driven by sales leverage and somewhat lower depreciation as a result of reduced capital expenditures throughout the pandemic. This favorability was partially offset by a number of factors, including increased maintenance expenses, as we spent more on repairs for property and equipment that we weren't able to secure replacements for due to supply chain issues, increased fees as a result of the growth of our third-party business, and higher supplies expenses due to inflation. We expect this last factor to be a significant impact on our second quarter other operating expense as well due to our elevated off-premise business in addition to the outside costs associated with our Heat n' Serve offerings. Next, moving beyond store level margins. Our general and administrative expenses in the first quarter were $40.9 million, which is unfavorable to the prior year's first quarter adjusted G&A by $6.5 million. This increase is driven in large part by expenses related to staffing increases and recruitment including managers and training and home office support as well as higher travel expenses. Net interest expense for the quarter was $2.6 million, compared to $10.7 million in the prior year quarter. This $8.1 million decrease is a result of lower debt levels as well as a lower weighted average interest rate due to the convertible debt offering we completed in the fourth quarter. Our effective tax rate for the first quarter was 17.1% compared to an effective tax rate of 24.6% in the prior year quarter. As a reminder, our prior year tax rate was elevated as a result of a reduction in tax credits and taxes on the sale and leaseback transaction that took place during the prior year first quarter. These first quarter results culminated in GAAP earnings per diluted share of $1.41 and adjusted earnings per diluted share of $1.52 when adjusting for the non-cash amortization of the asset recognized from the gains on the sale leaseback transactions. In the first quarter, adjusted EBITDA was $71.9 million, a 32.9% increase over our prior year fourth quarter adjusted EBITDA results. Turning to our balance sheet, we ended the fiscal quarter with $377 million in total debt compared to $949 million at the end of the first quarter of last year. Our strong balance sheet and cash flow puts us in a position to continue to invest in the business while returning capital to shareholders. In this regard, we are pleased to announce a quarterly dividend of $1.30 per share, which matches our pre-pandemic dividend level, but on a lower base of earnings, and reflects our confidence in the business as we progress through 2022 despite the uncertain and challenging business environment. With respect to our fiscal 2022 outlook, everyone should be mindful of the risks and uncertainties associated with this outlook, as described in today's earnings release and our reports filed with the SEC. Given the continued uncertainty around the current inflationary environment, we will be providing only the following updates to our full year expectations. Both commodity and wage inflation exceeded our expectations in the first quarter, and we now expect full year commodity inflation and constant mixed wage inflation in the high single digits. We continue to expect full year capital expenditures for $120 million, including the opening of three new Cracker Barrel locations and 15 new Maple Street Biscuit Company locations. Our capital expenditures are subject to supply chain disruptions, which could delay the delivery of equipment and new unit development timelines. We now expect an effective tax rate of approximately 17%. Based on our sales trends, we believe November comparable store restaurant sales growth compared to fiscal 2019 will improve versus the first quarter, and we're optimistic that these sales results will continue through the remainder of the second quarter. Turning to our margin expectations, we currently expect second quarter adjusted operating margin to be approximately 5.5% to 6% of revenue. This expectation includes the impact of more significant wage, commodity, and other operating expense inflation in the second quarter compared to the first quarter, as well as higher expenses associated with the second quarter all premise occasion business. With that, I will turn the call over to the operator for questions.

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

Great and good morning. I wanted to ask, I know it's very difficult on a quarter-by-quarter basis to predict in this unprecedented environment, but any color on whether the high single-digit inflation number throughout the full year should be in a similar range over the next three quarters or if you think it will be higher specifically in Q2? Any color you can provide would be very helpful.

Alton, what I would say is that when we look at the elements of the inflation you’re correct, there isn’t certainly difficult to predict from quarter-to-quarter. I think from a commodity perspective, that will be slightly higher in the second half compared to the first half and I see that the wage inflation, as we’re looking at it, to be relatively stable consistent with the guidance we gave this quarter.

Okay, great, thanks. And just one follow-up before I hop back in the queue. Certainly, there have been many peers that we are not able to properly staff in the most recent quarter; obviously, you guys seem to have done a good job with that. Can you walk through the key factors why you were able to keep your stores properly staffed here in the first quarter?

I think, first of all, our field teams and our HR teams have done a phenomenal job of addressing the staffing concerns that everyone has been dealing with, particularly in our industry. They have tried all sorts of different programs and tactics not just to recruit new employees, but they've also been very focused on retaining the ones that we have. I think this new virtual orientation is an example of a program that got quickly put into place where if we hire an employee, they can really do the orientation on their own later that day and then come to the restaurant ready to work the next day almost. We've been able to implement that whole program really recently and roll it out throughout the chain. And that has really helped make us an employer of choice for many potential workers.

Great, makes sense. Thank you, Sandy and Doug. I'll hop back in the queue.

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

Hey. This is actually Jack on for Jake. Thanks for taking the questions. I just want to quickly follow up on the staffing environment and maybe you can give some more metrics around where you think your staffing is currently against pre-COVID and if you see any more upside to being better staffed if that can drive sales going forward.

So, as we mentioned, we've made significant progress since the last time we talked, and over the course of the first quarter, I believe we've largely, if not completely closed the gap in the back of the house. So we're feeling really good about where we are in Grill Cooks. I think in the front of the house specifically with servers, we would love to have, and we're working hard to hire even more. But we do feel good about where we're positioned going into the busy season, and we think that those improvements in staffing are certainly a meaningful part of how we've been able to achieve the sales recovery that we've seen. It's in addition to just having the employees; I think there are still pockets of COVID-related call outs that are impacting our business. The more that settles down across the country and in our restaurants, I think that'll be another benefit to our field leaders to know that we can fill the dining rooms completely and take care of the guests that want to come and dine with us.

Great. That's really helpful. And it sounds like there's still some more room for dine-in sales to improve with those staff levels. Great. But I guess my next question is about the operating margin guidance that you provided for the second quarter and how to think about that as we move forward. Is there anything temporary in there related to recruiting and training costs, or G&A, or how you think commodity pressures are going to go throughout the year that might make the second quarter margin lower than perhaps the rest of the year?

Yeah, Jack. In terms of the question about temporary, I think earlier, three to six months ago, we thought some of these inflationary pressures were a little bit more transitory. But as you've seen from our guidance and what you're hearing across the industry, I think these pressures are going to stick around a bit longer. I think we will continue to monitor the situation, but I think that until we get through the fiscal year and start to have a little more visibility in 2023, you will likely continue to see the pressure. I think also when you start looking at our business in the second quarter, remind you of a couple of things: that's a period of time when we have a higher mix of retail sales relative to other quarters in the year. So that gives us a little bit of cost pressure from cost of goods. Additionally, the special occasion business and all of our catering business that we've discussed is really strong in the second quarter, especially relative to some prior years, and that puts a little bit of pressure on margins. Specifically, our feast and those large meals that we've talked about have lower margins. We're really pleased with the dollar margins those deliver for us, but they don't deliver the same level of percent margins. Those are some touch points on how we see things developing in the second quarter.

Thanks. That's really helpful. Lastly, you mentioned the price increase you took recently to get to 5.5%, but are you thinking about another price increase for the rest of the year to offset the elevated costs you're seeing?

Hey, it’s Jen. As we think about the price increase that we took in August, we're continuing to monitor for any effects that may have had on our traffic. So far, with about three-and-a-half months worth of data, we really aren't seeing any negative impact on our guest traffic or menu mix. While that increase was a little bit above typical years, where we've taken less than 3%, you know, we're just looking at this unprecedented inflation and the softening of consumer sensitivity to price. We think we still have increased pricing power right now in the near term. So, we are planning to take another increase in Q3 that will probably also be above that typical range of 3%. It will be higher than our normal price increase in Q3, but we feel okay about that. We've always had a strong equity in the area of everyday value, and we still believe we offer quality home-style, scratch made food at a fair price. We don't do limited-time offers, coupons, or deals; it's all about everyday value.

Great. Thank you.

Our next question comes from Sara Senatore with Bank of America. Please go ahead.

Thank you. I had a couple of questions about your digital business if I may. The first is regarding the growth between the core off-premise and the virtual brand. I know you said you added Chicken 'n Biscuits to 500 restaurants and launched a new brand as well. But where are you seeing the growth, and how should I think about that going forward? The related question is on margins; I understand that there is some higher costs associated with third-party delivery, but to the extent that the idea is to leverage existing spare capacity with these virtual brands, should they be net positive to margins over time? Should they be a bit of a net headwind on a go-forward business, but with profit dollars growing? Just any color you can give me on that. Thanks.

Okay. So, Sara, that's a lot to address, and I may call on all three of us to answer that question. First of all, the virtual brand, I think you understand the strategic intent behind it, which was to appeal to guests who would otherwise not be coming into a restaurant, who might be shopping for a certain type of food instead of a brand, and who we believe would be a completely incremental piece of business. So in terms of our margin expectation, I don't think we're targeting it as a higher percentage because these are certainly value offerings; we want to ensure that we're delivering value. But again, we think that it's incremental to the profits of the store. We rolled that out significantly over the quarter: 500 stores in Chicken 'n Biscuits and now 100 stores with the Pancake Kitchen. However, as it was late in the quarter, we’re really just getting the learnings. Additionally, we encountered some supply chain issues; it was hard to get chicken tenders in a lot of the quarter and faced some technology integration issues as we were bringing them up. Therefore, I don't think we have a great clear way to segregate it. But we are pleased with it at the outset. Both brands will help us see whether there are additional stores that we can open and which stores that were already open have strong sales and why. We will continue to look at the offer and pricing as we proceed. Jen, do you want to add anything on the brands?

Yeah, I think Sandy said it well in that we're only about three weeks into having expanded Chicken 'n Biscuits to the 500 and the Pancake Kitchen by Cracker Barrel in 100, but again just for a couple of weeks. Our focus right now is on optimizing the menu. We started those with very streamlined menus, and we're looking at adding items with a big focus on beverages to maximize sales and margin. There's a lot more growth to come from the virtual brands. We're also really excited about what we've seen in the initial few weeks with our first-ever Ghost Kitchen. We have opened a Ghost Kitchen out in the Los Angeles area and have plans to open a couple more. That again is 100% incremental for us because it gives us the chance to reach guests in urban areas like Los Angeles where we have no Cracker Barrel nearby. We're excited to see what that type of business channel can do for us as well, and we will market primarily through the third-party apps because that's where those guests are.

Got it. Thank you. It only took two of you to hit all of the answers.

Our next question comes from Brett Levy with MKM Partners. Please go ahead.

Great. Thanks for taking the call. And Doug, don't worry, I do have some supply chain questions, so you aren't entirely left out.

Okay, thanks.

Is there anything more you can share in terms of the sales cadence? I know you gave some language around what you're seeing for November for the holiday week. Could you share a bit more regarding October’s exit velocity and what you've seen so far in November? And then just regarding supply chain, where are you right now in terms of what's locked in on your contracted goods? Also with the tech investments you've been making, are you running into any issues? And how confident are you in terms of getting the three Cracker Barrel locations and the 15 Maple Streets open for the year? Thanks.

Let me start by commenting during the first quarter, we saw sequential improvement across all day parts throughout the quarter, and we have been pleased with how things are shaping up thus far in the month of November. We commented that we would be in a better place versus 2019 compared to the first quarter, so looking good so far in Q2. In terms of the locked commodities, we have about 30% of our commodities locked for the balance of fiscal 2022. In a typical year, we're usually at this point around 40% to 50%. We've made conscious decisions not to lock everything in due to high prices on various fronts, monitoring markets and will take positions as we see fit through the year. In terms of the point-of-sale rollout, we have faced challenges with delays related to chips and other components. We're at approximately 500 stores currently with the POS, and recently our CIO communicated that the supply chain is beginning to ease a bit. We think that will be complete by March, which is clearly dependent on getting those installed, but we’re feeling optimistic, and that will lead us to some other enhancements to our food cost systems that we talked about in previous quarters. Lastly, in terms of our confidence in our development schedule, we have witnessed an increase in maintenance expenses due to difficulty getting equipment, which affects our timeline for both Cracker Barrel and Maple Street brands. Suppliers have been less willing to commit to delivery schedules, so we've been managing that closely. We feel good about it and will keep you posted as that develops over the next few quarters.

Thank you. That clears the plate.

Good.

Our next question comes from Brian Mullan with Deutsche Bank. Please go ahead.

Hi, thanks. Can you just talk about the capital allocation priorities for the balance of this year and beyond? In the past, the company has had a history of special dividends. You've also repurchased stock in the past. So, as you sit here today, just wondering if you might favor one form of shareholder return over the other? Can you discuss how the uncertain operating environment or even the price of the stock might influence those decisions moving forward?

Yeah, Brian. So I think the board continues to take, as they have for years, a balanced approach. We first want to ensure that we make the necessary investments in our existing assets and fund our growth initiatives, including both technology and new units we've planned. Then relative to the dividend strategy and the share repurchase, both of those are considered by the board. As we said, we announced the dividend at $1.30 this quarter, which reflects a very attractive yield, we believe, and the payout ratio reflects the confidence that the board continues to have in the recovery that we've had and continues to have with the brand and the company.

This concludes our question-and-answer session. I would like to turn the conference back over to Sandy Cochran for any closing remarks. End of Q&A.

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

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