Good day, and welcome to the Cracker Barrel Second Quarter Fiscal Year 2022 Earnings Conference Call. All participants will be in listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to Jessica Hazel, Head of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Cracker Barrel's second quarter fiscal 2022 conference call and webcast. This morning, we issued a press release announcing our second quarter results. In this press release and on this call, we will refer to non-GAAP financial measures for the second quarter ended January 28, 2022. The second 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 that excluding these items from its financial results provides investors with an enhanced understanding of the Company's financial performance. This information is not intended to be considered in isolation, or as a substitute for net income, or earnings per share information prepared in accordance with GAAP. The last pages of the press release include reconciliations from the non-GAAP information to the GAAP financials. On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO, Craig Pommells; and Senior Vice President and CMO, Jen Tate. Sandy will begin with a review of the business, and Craig will review the financials and outlook. We will then open up the call for questions for Sandy, Craig, and Jen. On this call, statements may be made by management regarding 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?

Thank you, Jessica. And good morning, everyone. This morning, we announced total revenue growth of 6.2% compared to the second quarter of fiscal 2019. Comparable store restaurant sales versus the same period grew by 1.9% and comparable store retail sales grew by 13.7%. I'm pleased with the work of our teams to deliver strong sales growth over pre-COVID levels. I want to start by highlighting what we did to drive our sales recovery in November and early December. Cracker Barrel has always had a strong connection to the holiday season and this quarter we reinforced that connection through our culinary off-premise, retail, and marketing efforts. On the culinary front, our second quarter menu promotion featured our new limited-time offering Cinnamon Roll Pie and our seasonal favorite Country Fried Turkey, which significantly outperformed our seasonal limited-time offers from last year. Our offerings in this business maintained approximately flat sales to the prior year second quarter, when nearly 20% of our stores were operating off-premise only for at least a portion of the quarter. Our Thanksgiving and Christmas heat-and-serve offerings delivered modest year-over-year sales growth on a combined basis and our catering offerings significantly outperformed our expectations. Our retail business delivered its fourth consecutive quarter of double-digit comparable sales growth versus fiscal 2019. We saw strength in our Christmas themes as well as in everyday categories such as candy and toys. We also drove growth in some categories that we expanded during the pandemic, such as our collegiate assortment, which we now sell year-round and in men's apparel categories that we continue to expand. Our retail performance was particularly encouraging in light of the challenging supply environment, and our retail teams did a great job navigating shipping challenges, minimizing delays, and driving sales during the quarter. We're optimistic that the steps we've taken will mitigate any material impact on the supply chain environment during the second half of the year. During the quarter, we reinforced brand equity through various marketing initiatives, including our ongoing music programs such as our Macy's Thanksgiving Day Parade Float, which featured a performance from Grammy nominee Tauren Wells and our Sounds of the Season music program with Grammy Award-winning artists Mickey Guyton and Pentatonix. For those of you who saw Ms. Guyton’s performance of the national anthem during the Super Bowl, you can understand why we are so happy to be connected to such a talented artist. Lastly, Maple Street delivered another strong quarter with over 45% comparable sales growth versus pre-COVID levels and sequential improvement in average weekly sales versus the first quarter. We remain pleased with the performance of Maple Street and look forward to accelerating unit growth for the brand in the second half of this year. Now turning to the impact of the COVID resurgence and our plans for the remainder of the fiscal year. Prior to the emergence of Omicron in late December, our comparable restaurant sales versus 2019 were running in the mid-single digits and our comparable retail sales were running in the mid to high teens. Once Omicron hit, we saw traffic declines in late December throughout January as guests became more cautious about dining indoors and staff called out at historically high levels, which limited our capacity in certain locations. Several unanticipated weather events in January also negatively impacted our traffic results. As the headwind from COVID cases has receded, we're seeing more guests return to our stores and I'm confident that we have the staffing in place to meet the anticipated traffic recovery in the third quarter and that we will be well-positioned in this regard as we head into our busy fourth quarter. Our near-term operations priority for the third quarter is on store level execution. Over the past two years, our managers have done an outstanding job of handling disruptions from COVID restrictions, staffing shortages, and supply chain challenges in both restaurant and retail. As these disruptions continue to moderate, we should be better able to focus on and reinforce key Cracker Barrel operational fundamentals, and offer our guests the consistently outstanding experience that they expect. To achieve these results, we are enhancing our training systems, implementing additional guest recovery behaviors, and further emphasizing our culture of caring and hospitality. I'm optimistic that our focus on operational excellence will drive improvements to employee retention and the guest experience. We also plan to support operational improvement efforts through our third-quarter culinary promotion, which highlights several of our core menu favorites such as chicken and dumplings and our signature pancakes and will enable operators to continue to focus on basics and recovery. It also allows us to emphasize our everyday value proposition across all marketing channels, which is a key point of differentiation in this highly inflationary environment. In addition to focusing on execution, we're making progress on key strategic initiatives to drive additional frequency and attract new guests as we emerge from the volatile pandemic environment. For example, we continue to shift more of our marketing spending from traditional TV into more targeted digital video channels. This shift drives improvement in our marketing ROI and helps our marketing to be more flexible so that we're better able to respond to more sudden shifts in guest behavior like we saw during the recent Omicron surge. I'm also pleased with the progress on our beer and wine platform, which is now in roughly 550 stores. Our beer and wine mix has improved in recent weeks, and we expect to make further progress with additional focus on beer and wine in our in-store merchandising materials and additions to our lineup, including a new seasonal Jack Daniels Lynchburg Lemonade. Regarding off-premise, we continue to focus on improving our guest experience to ensure we retain these sales as dine-in traffic recovers. This includes enhancing our curbside pickup process, improving the integration between our off-premise applications and processes with our back of house technology, and generally streamlining our processes for a more seamless guest experience. As I mentioned earlier, catering sales increased during the quarter, and we believe we have room to drive further growth in that channel. We're now looking at ways to support the growth of this business, including better leveraging our van fleet and introducing more personalization to our marketing. Lastly, on our premise, we're looking forward to the Easter off-premise season, where we expect to see strong demand overall, and in particular for our primary heat-and-serve offering that we introduced last year. Turning to our business model and managing costs, we are focused on initiatives to drive operational efficiency. We expect to have our new point-of-sale system in all stores this quarter, which will support the continued rollout of our new food cost management system to all of our stores by the end of April. I've been encouraged by the initial savings from the system and the approximately 400 stores where it's currently installed, and I anticipate that the completion of the rollout will drive additional savings in the fourth quarter. The POS system also supports a new labor management system that we're planning to roll out in fiscal 2023. Our food and labor management systems are part of a broader strategy to improve our business model to allow us to eventually move toward pre-pandemic levels of profitability despite the high inflationary environment in which we find ourselves. While commodity pricing is historically variable, wage rates are unlikely to recede. And for this reason, in addition to the cost-saving projects on which we're always working such as supply diversification and G&A management, we're tackling larger and longer-term initiatives to simplify our operational environment, including reimagining how we approach and incentivize retail and restaurant responsibilities, as well as leveraging technology to improve operational efficiencies and consistency of execution. While these initiatives are important, improving traffic is even more crucial, which is why we are so focused on ensuring the guest experience in both dine-in and off-premise meets our guests' expectations, and that our employees are supported with great training and systems to deliver it. Now more than ever, we have to leverage and enhance our core competitive advantages, which include an authentic experiential brand, a culture of caring and hospitality, and our home-style food and retail assortment. These core competitive advantages are focused on operational excellence. The progress we've made on our strategic initiatives puts us in a strong position to continue our traffic recovery and improve our business model as we emerge from the unprecedented challenges we're currently facing. And with that, I'll turn the call over to Craig.

Thank you, Sandy. And good morning, everyone. For the second quarter, we reported total revenue of $862.3 million. Restaurant revenue increased 25.9% to $656.1 million, and retail revenue increased 32.2% to $206.2 million versus the prior year second quarter. Compared to the second quarter of fiscal 2019, comparable store restaurant sales increased by 1.9% and comparable store retail sales grew by 13.7%. Our total pricing for the quarter was 5.3%, which reflects slightly over 2% carried pricing for fiscal 2021 and slightly over 3% from our August price increase. We are comfortable with the elevated pricing in this current environment and continue to see minimal impact to traffic and mix from our pricing actions. This pricing partially offset the impact of 8.5% commodity inflation and 10.8% hourly wage inflation during the quarter. Comparable store off-premise sales grew by 123% over the second quarter of 2019 and were 24% of restaurant sales for the quarter. As Sandy mentioned, we also held off-premise sales nearly flat to last year, significantly exceeding our expectations for off-premise retention. Both third-party delivery and catering sales produced meaningful growth over the prior year, which offset modest declines in our individual to-go channel. Moving to expenses. Total cost of goods sold in the quarter was 32.9% of total revenue versus 33.2% in the prior quarter. Restaurant cost of goods sold was 27.4% of restaurant sales versus 26.9% in the prior year quarter. This 50-basis point increase was primarily driven by commodity inflation in excess of pricing during the quarter. Retail cost of goods sold was 50.4% of retail sales versus 54.3% in the prior quarter. This 390-basis point decrease was primarily driven by continued sell-through of inventory at higher levels, which resulted in lower markdowns than we have historically. I've been pleased with the continued guest demand for our merchandise, which we believe has been driven in large part by the quality, uniqueness, and timing of the products our teams have sourced. Second quarter labor-related expenses were 34.4% of revenue versus 35% in the prior quarter. Our labor costs were pressured by significant hourly wage inflation. However, this was more than offset by improved labor productivity and sales leverage on management expense. Adjusted other operating expenses were 21.9% of revenue versus 24.2% in the prior quarter. This 230-basis point decrease was primarily driven by sales leverage, as well as somewhat lower depreciation as a result of reduced capital expenditures throughout the pandemic. Moving beyond store-level margins, our general and administrative expenses in the second quarter were 5% of revenue, which was flat to the prior quarter. Investments in strategic initiatives and the growth of Maple Street, along with temporary costs associated with staffing and recruitment, offset the favorable impact of sales leverage. Net interest expense for the quarter was $2.2 million, compared to $10.8 million in the prior quarter. This $8.6 million decrease is the result of lower debt levels, as well as the lower weighted average interest rate due to the convertible debt offering we completed in the fourth quarter of fiscal 2021. Our effective tax rate for the second quarter was 15.4%. These second-quarter results culminated in GAAP earnings per diluted share of $1.60 and adjusted earnings per diluted share of $1.71 when adjusted for the non-cash amortization of the asset recognized from the gains on the sale and leaseback transactions. In the second quarter, EBITDA was $75.4 million, a 68% increase over the prior year second quarter EBITDA results. Turning to our balance sheet; we ended the quarter with $327 million in total debt, compared to $875 million at the prior year quarter end. We also repurchased $34.2 million in shares during the quarter under the $100 million repurchase authorization announced in September. Lastly, I'll speak to our expectations for the remainder of the fiscal year. With respect to our 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. We have experienced continued headwinds from elevated COVID case counts in early February. But we're starting to see sales recover back to their pre-Omicron trend. Based on our sales recovery expectations, as well as the typical seasonality of lower volumes in the third quarter, we anticipate third quarter total revenue of approximately $800 million. We continue to expect inflation to peak in the third quarter at elevated levels with commodity inflation of approximately 15% and hourly wage inflation in the 11% to 12% range. Accounting for this elevated inflation and lower sales volumes, we expect third quarter adjusted operating margin of approximately 5%. During the third quarter, we're taking substantial actions to offset more of the impact of inflation, which we expect will provide a significant benefit to fourth-quarter margins. We are taking additional price in this quarter and when combined with roughly 3.25% price we're carrying from previous increases, we'll put our third and fourth quarter total price in at just over 6%. We're actively monitoring trends in inflation in the consumer environment and believe we have the ability to take a modest amount of additional price on top of this in the fourth quarter. We also plan to leverage add-ons and drive beer and wine mix to deliver additional check favorability. On the expense side, as Sandy shared, we are aggressively managing controllable costs and anticipate that our operational focus and the continued rollout of our food cost management system will drive improvements in our labor productivity and food waste, as well as supplies expense in the fourth quarter versus the rest of the fiscal year. We expect that absent another wave of elevated COVID cases, we will continue our sales and traffic recovery in the fourth quarter. And we are preparing our stores to capitalize on the benefit of a more normalized summer travel season. In addition, we expect inflation to moderate in the fourth quarter. Combined with growth in average check, the cost savings actions we've taken and an improved consumer environment, we currently expect fourth quarter margins to improve to near the prior year's fourth quarter level. Along with these quarterly estimates, we are providing the following expectations for the second half of the fiscal year. We now expect second half capital expenditures of $60 million, including the opening of two new Cracker Barrel locations and 9 to 11 new Maple Street Biscuit Company locations. This is in addition to the one Maple Street location that opened in the second quarter. Our lowered CapEx and Cracker Barrel unit guidance reflects the impact of supply chain disruptions that have delayed the delivery of equipment and extended new unit development times. Lastly, we expect the second half effective tax rate to be approximately 14%. And with that, I'll turn the call over to the operator for questions.

Our first question will come from Brett Levy with MKM Partners.

Great. Thanks. I guess just first clarification, did you say that you expect fourth quarter margin, operating margin to be in line with fiscal fourth quarter from last year? And then if you could give a little bit more color just on what you are seeing across cohorts across regionality, just on the trends that you've seen, and the timing and magnitude of the recovery post-COVID?

Okay, great. Good morning, Brett, I'll start and then let Craig speak to the guidance point. In general, we are seeing some regionality historically or in the past few months, and it has been primarily related to how those regions experienced COVID and Omicron. We've seen some strength in the southeast, in particular Texas and Florida, slightly softer in the Midwest and Northeast, as we've seen it go through.

Yes, thanks, Sandy. And on to the operating income margin or adjusted operating income margin. I think the key there is we expect FY22 Q4 to approach FY21 Q4, so getting into that range, but approaching it, versus necessarily being there.

I think, Brett, to the other issue that we've experienced recently, the weather really had impacts in some parts of the country more than others. So that's also having an impact on the results, although, generally speaking, the recovery has been broad-based.

And then just one quick question on the labor front. You talked about training. Where are you right now in terms of staffing levels? Ease in hiring or challenges in hiring, retention levels, turnover, and things of that nature? And can you parse out what you spent in overtime and training this quarter just as color commentary? Thanks.

I think you asked for every metric of hiring, staffing, and retention there; let me just address it overall. In terms of overall in the labor market, we are seeing increased applicant flow, which has been encouraging, so we're able to be more selective in our hiring decisions. The workforce, sort of does appear to be returning back to the job market, although I suspect the restaurant industry is going to be more challenged in comparison to other sectors. In general, in terms of our performance, I think our operators and our HR team have done an amazing job of getting staffed. We really only have a handful of stores, and I would guess that sort of in the neighborhood of 10 that I would call critically understaffed. As we've mentioned on the last call, we feel really good about our back-of-house staffing, and where we did see a shortage was in the server position. And I suspect that still where it is. So we'd like to add additional servers across the chain. In terms of turnover, it's higher than it has been historically for us at both the manager level and the hourly. But we believe we are still underperforming the turnover that the industry overall is experiencing. I heard a statistic yesterday that I was really encouraged by, which is we've had incredibly high retention of our most tenured employees, which we call our par fours. Those are the employees on our teams that were four stars on their aprons and had been with us for a number of years. And we have been very successful in retaining that core group of really important employees. So I feel confident that our team will be able, now that we can get staffed and we're focused on training and bringing our new employees along that we will be in a position to handle guests wanting to come back with us as we head into our busy period.

And, Brett, I'll build on that a little bit. This is Craig. So Q2 was really interesting. You have November, December, and January, which was a lot of noise because of the call-outs and so on. But I would say we are in a much better staffing position today. Overall, on average for our Q2. So because of that we have more managers, we have more quality employees, and our applicant flow is really good. So all of that really helps. But from a cost perspective, our costs are a little bit higher because we are fully staffed and we were not really close, almost fully staffed than we were not previously.

Our next question will come from Jake Bartlett with Truist Securities.

Great, thanks for taking the question. I had a question first on the sales guidance. My rough estimate is and maybe if you could, I'd love you to confirm, but same store sales would be maybe 3.5% to 4% versus ‘19 levels, maybe if you can confirm that, that kind of acceleration from the 1.9. And also just trying to help us understand what that implies for the rest of the quarter? You mentioned that sales have been recovering as Omicron stated, are you back to the level you were pre-COVID or pre-Omicron yet, and just trying to understand that the cadence of the expectation in the third quarter.

Thanks, Jake. This is Craig. Let me start with February. The month began in line with the latter part of January. However, as we’ve progressed into the second half of February, it appears much closer to what we experienced before Omicron. While I can't say we're fully there yet, it does look very similar to that period. Regarding our Q3 comp guidance, we haven't provided an exact comp number, but we have shared a specific revenue figure. We're anticipating a gradual progression, though we expect some fluctuations. As you've pointed out, the first part of February was likely lower. Overall, the $800 million expectation suggests that we will see continued improvement as the quarter moves forward.

Thank you. I would like to ask about the pricing you mentioned. Can you clarify what pricing levels we can expect in the third and fourth quarters? I believe you discussed a combination of both, and I want to ensure I understand the timing of the pricing changes in each quarter. Additionally, my concern is whether your target market, which includes lower-income consumers, might resist if prices increase too much. Can you share your confidence in implementing these price changes and whether you are observing customers upgrading their purchases with minimal resistance? I'm also interested in specifics regarding the pricing in the third quarter compared to the fourth.

So let me start; it sounds like there's a lot in that question, Jake. So it probably I'll start; maybe Jen can add some color to our thinking and confidence behind how we are approaching pricing, and then Craig you can if you're willing to give any additional color. First of all, we continue to be really thoughtful about pricing and how we have made these decisions. But one thing about this quarter - and Jen will explain in a little more detail, instead of doing two big increases, which is historically what we have done, now we're doing more small incremental pricing moves to give ourselves the opportunity to monitor the results of the pricing changes to evaluate where we believe that consumers are in terms of their ability to respond and their reaction to them, and to continue to monitor the consumer as we move forward. So the pricing guidance that was included, I don't know how much you're going to be willing to Craig to break it down, but why don't first Jen, you want to give some additional color on the thinking?

Yes, absolutely. I think just to build on what Sandy said, we are breaking our pricing into several small surgical price increases. And that gives us the ability to continue to very carefully monitor the guests’ reaction versus our control group. That gives us the flexibility to, if at any time we see an adverse impact on traffic or mix, to cancel or change any of those additional pricing actions. So I think that's very important to us. In addition, we have such strong equity in the area of everyday value that we've built over the years, offering high-quality home-style food at a fair price, and we've never relied on limited-time offers or couponing. So that is absolutely something we're committed to, and it gives us confidence that by protecting the everyday value platforms that we have on our menu, every guest in any cohort will be able to walk in any day part and find that outstanding everyday value. Just as an example, if you come in at breakfast, you're still going to see the sunrise specials section, which are breakfast items at $5.99. If you come in at lunch, you're still going to see the weekday lunch features at just $6.99. These are not obscure things. These are classics like meatloaf and chicken and dumplings and broccoli cheddar chicken, lunch, or dinner, Cracker Barrel favorites. These are things like chicken and dumplings for $7.99 or hand-breaded chicken tenders with two sides for $8.99. So they're core favorites, broadly appealing high-mix items that are at these everyday values. We believe this protects our reputation as a destination for everyday value.

And this is Craig, Jake, go ahead.

No, I think you're hopefully you're going to ask the questions I was about to ask.

Yes, I think what is implied in that as well is because there are multiple pricing actions, there will be a little bit below 6% in Q3. And on average, we'll be a little bit above 6% in Q4, but we're also keeping our optionality open as it relates to Q4 as well, just to see how things develop. We're continuing to read our pricing tests, which have done very well. But we're keeping our options open. So a little bit lower in Q3, a little bit higher in Q4.

Thank you. And then real quick. I don't see it in the release. Maybe I'm missing it. But did you provide what transactions were in the quarter just so we can kind of back into the next transaction growth was?

We don't disclose that.

No, I thought we did in the first quarter. But we can follow up. But thanks.

Our next question will come from Alton Stump with Loop Capital.

Thank you and good morning. Congrats on the quarter, and it was obviously a very challenging environment. Just wanted to ask, on the labor front, there was a lot of news industry-wide, heading into the holiday season that there were pretty massive shortages. That's obviously a big time of the year for you guys during fiscal Q2. How were you able, if you were able, to manage through that process, particularly during the holiday season?

Yes, it was challenging. More, let me back up, Alton. We went into the quarter; I think I said on our last call, feeling really good about the progress that our operators and HR teams were able to do in staffing and had really gotten down to a relatively small number of stores that we thought were critically understaffed. Probably the bigger issue that we had to contend with, particularly as we got into December and January, were the COVID call-outs, which is when you staffed but you are not able to schedule the employees to meet the demand. So it's difficult to precisely measure that since we don't have a direct measure; it's really we estimated from something we call a missed shift percentage. But we know that it impacted stores in some cases quite meaningfully and resulted in some cases where we had to close early, in some cases, we had to close dining rooms, and in some cases, we actually had to go to off-premise only for a brief period of time while that particular store recovered. It's a little bit hard to measure too because in a lot of cases, where that was happening in the store, it was also happening in the community. So there was an impact on consumer demand. The good news is that we have seen a market decrease in the level of call-outs in the second half. Moving into February, as Craig mentioned, we are seeing our sales performance improve, which we believe is partly because consumers are more comfortable going out and it is also because I believe our stores are in a better position to staff to accommodate the demand.

Understood. Thank you for that information; it was very helpful. Regarding the weather, while November and December were unusually warm in the eastern half of the country, it has since become very cold. Can you provide any estimates on how much of an effect this might have had on your January and February sales compared to what you experienced in the first two months of fiscal Q2?

We do look at it internally and obviously the stores that are closed we can pretty easily measure because we can isolate those and to your point, we had several severe storms in our core markets in January. The harder thing to measure, though, are the secondary implications. We've found in the past, or we suspected in the past that when it gets really cold, that actually chills out; it's a bad word; that impacts the consumer feeling. And older guests’ willingness to go out, we know that it might impact travel. So although we can measure a store that's closed in Dallas, we can't necessarily measure the store that they were heading to if they'd made their trip and would have dined with us along the way. So we do believe that the storms had the biggest impact on us in January, in terms of the whole quarter. But beyond that, I don't think we're putting a number to it.

Yes. I think I agree, Sandy, it's definitely January; multiple impacts in January kind of combined with COVID, call out and all these things. So we've just decided not to really put a number to January.

Our next question will come from Todd Brooks with Benchmark Company.

Hey, good morning, everybody. And congratulations on fighting through what I'm sure was a brutal quarter operational here. So well done. A couple quick questions, if I may. One, Craig, for you. The concept of moving back to kind of the 8% operating margin seen in Q4 last year; I guess how much do we have line of sight visibility on? So if we can talk about maybe the improvement that's being seen from food cost management and what that piece is or what the better labor efficiency is anticipated to be, versus what still has to happen as far as you need to be right on the inflationary outlook and looking for some easing there in Q4. Just would like to get some surety on the visibility of getting back towards that operating margin.

Absolutely. So good question, Todd. On, so there are a few pieces; the food cost is known. The inflation while not 100% is approximately 40% locked for the second half and it's just closer in. We have a number of other solvers around productivity and so on that we think are reasonable. So we're not necessarily betting the farm, so to speak, on these things. And then pricing is something that while there is a little bit of optionality there, it's mostly known. So we feel confident; now what could happen is the biggest variable as we think about Q4 and our confidence in it.

Okay, great. And then summer travel season returning to normal, I guess, how are you guys thinking about the impact of high fuel prices? And especially with some of the global tensions if those spike higher, is that a delta point to the potential outlook or getting back towards that profitability in Q4?

Gas prices, as we've said quite often, it's probably less about miles driven as it is about the impact they have on discretionary income. So the kind of inflation that consumers are experiencing now in a lot of places, including gas prices, is something we're keeping an eye on. That's the type of inflation consumers are experiencing though many of them are experiencing higher wages; those are being more than offset on their everyday expenses like fuel, rent, and all the other things that we're monitoring. We believe that consumers still have a significant interest and excitement about getting out and seeing people they haven't seen and taking the family vacation. That all of that will offset these other pressures as they work through high inflation and an absence of stimulus money.

I agree, Sandy, to some degree. We believe that folks have gotten more used to generally higher inflation right now. We think that will mitigate what we would normally see at these types of gas price levels. Now, if gas prices go up significantly from here, that could change the outlook. But I think our thinking is in the context of broader inflation; those two things will mostly mitigate each other, but we'll see.

Okay, great. And the final one for me, and I'll pass it along. If we look to the second half of this fiscal year, Craig, just can you give us some color guidance around the level of G&A needed to support what you're trying to do in the business? And what I'm just trying to parse out is, I think you called out even in your comments that there were some temporary staffing and recruitment costs in the January quarter. I imagine there was some friction in Q2 as well, as you guys were trying to ramp staffing efforts back up; what sort of G&A do we need in the second half to support the business?

Yes, so it's a good question. I would say there continue to be a number of these kind of puts and takes here. And there are a number of short-term pressures on G&A, including the staffing because while we are staffed, you have turnover, for example, that still applies some pressure. We're still not at 100% in terms of beer and wine, meaning there are some costs there. Also, our technology enablers for productivity and other initiatives. Those remain investments that we think are very value-creating. We believe G&A numbers still need some investments in it. Sandy, anything you would add to that?

No, and the only other point is that we're ramping up Maple Street's infrastructure to support their growth, which is also kind of a new number versus 2019, and additional G&A. But we think that is important to support the longer-term growth initiatives.

Our next question will come from Brian Mullan with Deutsche Bank.

Hey, thank you. Just a big picture question on your margins. If we were to say that fiscal ‘23 was a truly normalized year from a staffing perspective, also consumer demand perspective, how much of those fiscal 2019 sort of little margins do you think could be recaptured at this point? I know, in the prepared remarks, you spoke to some cost initiatives. I'm curious, is there a specific targets you have in mind or that you will even attempt to manage the business to as you implement those initiatives or future pricing decisions? Just any kind of framework would be great.

Yes, I think we're not really, as it relates to FY23, we're certainly doing a lot of work on it. But we're not really in a position to disclose our targets yet publicly. Needless to say, there is a lot going on behind the scenes to prepare us for that.

Okay, understood, thank you for that. And then just a question on developments between Maple Street; Sandy, you just referenced it. It sounds like you're going to open between 9 and 11 in the back half of this year. I guess, two-part, one, is 15 still the right number to expect for next year? And two, what we'd be watching over these next 18 months with the openings that could influence how many units you want to open over the long term? I ask it that way because a lot of the units you have today were purchased as opposed to built by Cracker Barrel. So this will be a new pace of growth.

Yes, we are planning to open between 9 and 11 locations. We have the capacity to open more than that, as our original target for the year was 15. However, construction delays have affected our timeline. We haven't set a number for next year yet, but we plan to open the remaining locations we intended to launch this year. If all goes well, we expect to match or exceed that number next year. Since we acquired them, we have had few openings due to the pandemic affecting our operations right after the acquisition. We will provide updates on our sales performance, average unit volumes, and margins. We are confident in our site selection and operating models, and we are making progress on the infrastructure needed to support our growth. We hope to accelerate our growth in the future and will keep you informed.

Our next question will come from Sara Senatore with Bank of America.

Thank you very much. I have two follow-up questions. The first is regarding inflation expectations, which seem to be a bit higher than last quarter based on the current inflation outlook. Is that the correct interpretation? Also, regarding labor inflation, it appears that there is more normalization in the labor market, yet you still anticipate very high wage inflation in the upcoming year. How can those two views be reconciled? As we look beyond 2022, do you think high single digits is a reasonable run rate, or should we expect something closer to mid-single digits?

Well, we're certainly, so first of all, we did increase our guidance in terms of inflation expectations. I think we actually put something out in January around the ICR. As we were seeing inflation exceed even what we were expecting in November, some of the biggest places we're seeing the inflation was driven by minimum wage increases; for example, in Florida, we have a number of stores and a lot of employees. And that then puts pressure on all of your employees, not just your new hires. Some amount of the inflation has been driven by that, and I think it's just as the market has been super competitive. We hope to be able to reduce our turnover and improve our par levels. So yes, I would hope that inflation environments are going to moderate the rate; the rate of inflation will moderate as we go into next year. What we don't believe is that labor rates are going to go down the way we're hoping actually commodities will in some areas.

Exactly. I'll expand on that, because when considering year-over-year inflation, what we see in Q4 is a decrease from Q3 to Q4 regarding wages, as we finish up on wages that started to rise last year. I'm not sure how this compares to week-over-week or month-over-month inflation. Taking the current wage level and wrapping it up with lower wages gives you one perspective on inflation. However, this does not imply that in the midterm, as we move away from the current levels, high wage rates will persist. As long as we don't see a decline in absolute wage levels, which is not happening, wage deflation will not occur. But I also don't believe that we will see high single-digit wages sustained over a long period.

Great, that's very helpful. Thank you. Yes, wage disinflation, not deflation is sort of how I am thinking about it, sounds like you are too. And then just the second point is as a follow-up on, you mentioned your catering business was stronger than expected. So are you seeing some of your customers come back to you for these celebratory occasions? I know that for a while they were kind of trading up to higher price point concepts. Is that normalizing, you think, and is it as they have left stimulus, is that what's happening? Just trying to understand that dynamic. Thank you.

I think there are a lot of factors driving our catering business up. We've been really pleased with where that has come out, especially in Q2. One, I think just the receding of COVID has enabled a lot of both personal family gatherings and especially B2B or office or other large business gatherings; that structural change has helped. But we have made some changes to our catering offering in terms of sizes to better meet consumer demand; we've made it easier for our guests, or customers to calculate the per person pricing, which removes friction from the ordering process. And last year, we rolled out the individually boxed catering meals, which I think is really fitting and filling an unmet need. We've been pleased with how customers have responded to that. We continue to look at ways to better leverage our van fleet, which is a unique thing that we have approximately 230 catering vans out there that help us meet that. Our operators have done a great job stepping up and working out in their communities to sell catering because our catering is fabulous, our food travels well, broadly appealing, and offers a lot of variety at good price points. We believe catering is going to continue to grow as this year closes out and well into next year.

And our last question is a follow-up from Jake Bartlett with Truist Securities.

Great. Thanks for taking the follow-up. My question was on the efficiency gain that you expect from the food cost management system and the labor management system on top of the POS. Going back to 2017 Analyst Day, those two things were a big part of I believe were a big part of the savings you expected over the next three years at the time, I think with the $40 million of savings. So maybe if you could just help us understand how big a deal these are in terms of what kind of cost savings you might expect? And then should we expect some impact in the fourth quarter, but then much greater impact in 2023? Maybe how these initiatives rolled out into the sudden improvement in savings, or is it gradual over time for each of those two components?

Okay, Jake, I'll take that one. So as you accurately remember, we started our POS rollout a few years ago. That platform allowed us to then install both a food management system and a labor system that we believe and continue to believe will help us drive productivity and efficiency in our restaurants. So in the food system, which is now in I think it was 400, but we'll have that completely installed in the system and by March or April. We're seeing actually more than I had hoped improvement in food waste; we haven't quantified it specifically, so I'm not going to give you the exact number. But what this new food system allows our operators to do is to more granularly and accurately manage their food waste. We've seen that result in lower waste, which has become even more important, as the inflation impacts have increased the cost of our waste. I'm also optimistic as we integrate that food system with our new labor system, which we are testing now but don't plan to install until 2023, that the integration of those will help simplify for our operators the management of our restaurants, so the sales forecasting, the production, and the food and taking into account, the demand, the whole times, and all the things they now have to sort of do more manually. We believe these will allow us to drive improved productivity and profitability in the restaurants. We haven't provided yet, and probably not in a position today to quantify exactly what those are.

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

All right, well, thank you for joining us today. Cracker Barrel continues to be one of the strongest and most differentiated brands in the industry. I remain confident in our strategy and initiatives and believe we're well-positioned to drive solid long-term results. We appreciate your support and look forward to speaking to you again in a few months.

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