Cracker Barrel Old Country Store, Inc Q4 FY2023 Earnings Call

Good day, and welcome to the Cracker Barrel Fiscal 2023 Fourth Quarter Conference Call. All participants will be in 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 Kaleb Johannes. Please go ahead.

Thank you. Good morning and welcome to Cracker Barrel’s fourth quarter fiscal 2023 conference call and webcast. This morning, we issued a press release announcing the fourth quarter results. In the press release and on the call, we will refer to non-GAAP financial measures for the fourth quarter ended July 28, 2023, as well as our expectations for the first quarter. The non-GAAP financial measures are adjusted to exclude the expected non-cash amortization of the assets recognized from the gains on the sale and leaseback transaction, certain expenses related to our CEO transition and a corporate restructuring charge. 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 and earnings per share information prepared in accordance with GAAP. 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; CEO Elect, Julie Felss Masino; and Senior Vice President and CFO, Craig Pommells. Sandy and Craig will provide a review of the business, financials and outlook. We will then open up the call for questions for Sandy, Craig and Julie. On this call, statements may be made by management of their beliefs and expectations regarding the Company’s future operating results and expected future events. These are known as forward-looking statements, which involve risks and uncertainties that, in many cases, are beyond management’s control and may cause actual results to differ materially from expectations. We caution our listeners and readers 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. Good morning, everyone. This morning we reported total quarterly sales of $836.7 million, and an adjusted operating income margin rate of 5.3%, which was approximately a percentage point higher than the prior year fourth quarter. As we said on our last earnings call, our fourth quarter began slowly, while we had expected the traffic would improve in June and July with the onset of the summer travel season. Unfortunately, this didn’t materialize and our restaurant and retail sales performance came in below our expectations. Although, they’ve stabilized, we believe these fourth quarter traffic trends will continue through most of the first quarter as well. We are, of course, taking actions to address them as I’ll get to later in the call. In the face of the top line challenges that we experienced in the fourth quarter, our teams worked hard to control costs. Between their efforts, pricing and inflationary easing, we were able to deliver higher fourth quarter margins than in the prior year, despite our lower traffic levels. Of course, there were other bright spots in the quarter as well, particularly in certain areas likely to help us in the longer term. Our operations teams focused intently on the guest experience, operational excellence, staffing and retention, and we made and continue to make meaningful headway in these areas. We continued our successful deployment of back of the house technology, which will be foundational for us going forward. And despite a very challenging environment, our retail product assortment resonated with our guests and our teams managed inventories exceptionally well, and delivered solid retail margins even in the face of lower traffic. We launched our loyalty program, Cracker Barrel Rewards internally in late July, and I’m excited to announce that it’ll be available to guests across the country by the end of this month. We believe our loyalty program will be a key traffic driver for us over the long term, and I’ll speak in more detail about the program later in the call. From a full year perspective, we achieved our ambitious goal of growing our catering business above $100 million, and we delivered $30 million in sustainable cost savings. We opened a total of 12 new Maple Streets and two new Cracker Barrel locations, and we returned more than $133 million to our shareholders in the form of dividends and share repurchases. Although we believe that the traffic pressures that we’re experiencing reflect a challenged consumer environment, we also believe they were exacerbated by our marketing and media strategy. The volume and substance of our marketing messages in the fourth quarter were not as effective as we’d wanted, particularly against the backdrop of a highly competitive and promotional marketplace. We lowered our advertising spend because we traditionally found advertising to be less impactful in the fourth quarter, and instead invested funds in store staffing and labor, which we think are longer term imperatives. And although we focused our messaging on value, our message did not break through against the highly promotional advertising we saw from our competitors. Finally, we think we still have opportunities with regard to the guest experience. I’d like to turn it over to Craig now for a more detailed look at the quarter from a financial perspective and to discuss our outlook. When Craig is done, I’ll come back and comment on the actions we’re taking to address our traffic situation and position us to change our trajectory in 2024. Craig?

Thank you, Sandy, and good morning, everyone. As Sandy noted, for the fourth quarter, we reported total revenue of $836.7 million, an increase of 0.8% over the prior year quarter. Restaurant revenue increased 2.6% to $679.3 million and retail revenue decreased 6.6% to $157.4 million versus the prior year quarter. Comparable store total sales, including both restaurants and retail, grew by 0.5%. Comparable store sales grew by 2.4% over the prior year, driven primarily by approximately 8.7% pricing. Our average check results, including a favorable menu mix of approximately 1%, which continues to be driven by our culinary strategy of providing guests with upgrade and add-on options such as our shareable barrel bites, premium sites, beverage program, and $5 take home offerings. Anticipating a question you might have, we do not believe our pricing strategy negatively impacted our fourth quarter or our current traffic in any meaningful way. As we’ve commented before, we have consistently taken and continue to take a very thoughtful and deliberate approach to pricing. While our recent price increases have been higher than historical levels, we track guest value perceptions through a variety of means. We closely monitor competitive price points and we measure the impact of our pricing actions against the control group to ensure we have not triggered adverse guest behaviors. We have not seen a negative impact to traffic from our pricing actions, even in the currently sensitive environment. That said, we believe price increases taken by the entire restaurant industry may be having a cumulative effect on dining behaviors, and we will continue to be mindful of the consumer and competitive environments in the markets we serve as we make pricing decisions going forward. Off-premise sales were approximately 17.2% of restaurant sales. As Sandy noted, we were especially pleased with the performance of our catering business, which grew over 35% in the quarter, and we achieved our goal of growing it to a $100 million channel this fiscal year. Comparable store retail sales decreased 6.8% compared to the fourth quarter of the prior year. Although retail sales remain soft, we’ve been pleased with how our team has effectively managed our markdowns and inventory levels. Moving on to our fourth quarter expenses. Total cost of goods sold in the quarter was 30.8% of total revenue versus 32.9% in the prior quarter. Restaurant cost of goods sold in the fourth quarter was 26.6% of restaurant sales versus 28.7% in the prior year quarter. This 210 basis-point decrease was primarily driven by total menu pricing of 8.7%, which is inclusive of carry-forward pricing from fiscal 2022 and new pricing from fiscal 2023. Commodity deflation was approximately 0.8%, driven principally by lower pork and poultry prices. Fourth quarter retail cost of goods sold was 48.8% of retail sales versus 49.4% in the prior year quarter. This 60 basis-point decrease was primarily driven by lower freight and lower markdowns. Our inventories at quarter-end were $189 million, compared to $213 million in the prior year. With regard to labor costs, our fourth quarter labor and related expenses were 36.5% of revenue versus 35.5% in the prior year quarter. This 100 basis-point increase was primarily driven by our investments in additional labor hours to support the guest experience. Hourly restaurant wage inflation on a constant mix basis was 4.5%. Adjusted other operating expenses were 23.0% of revenue versus 23.3% in the prior year quarter. This 30 basis-point decrease was primarily driven by lower utilities and maintenance expenses. Our general and administrative expenses in the fourth quarter were 4.5% of revenue versus 3.9% in the prior year quarter. This 60 basis-point increase primarily resulted from more normalized incentive compensation. All of this culminated in GAAP operating income of $41.2 million. Adjusted for the non-cash amortization of the asset recognized from the gains on the sale and leaseback transactions, operating income for the quarter was $44.4 million or 5.3% of revenue. Net interest expense for the quarter was $4.5 million compared to net interest expense of $2.6 million in the prior year quarter. This increase was a result of higher interest rates. Our GAAP effective tax rate for the fourth quarter was negative 2.1%. The negative tax rate was driven by increased credits on lower than expected earnings. On an adjusted basis, our effective tax rate for the quarter was 0%. Fourth quarter GAAP earnings per diluted share were $1.68, and adjusted earnings per diluted share were $1.79. In the fourth quarter, EBITDA was $72.1 million or 8.6% of total revenue. Now, turning to capital allocation and our balance sheets. We remain committed to a balanced approach to capital allocation. Our first priority remains investing in the growth of Cracker Barrel and Maple Street. Beyond that, we plan to return capital to our shareholders while maintaining appropriate flexibility and a conservative balance sheet. In the fourth quarter, we invested $36.9 million in capital expenditures. We ended the quarter with $415 million in total debt. Our leverage ratio was 1.5 times, which is within our target range of 1.3 times to 1.7 times. Lastly, as we announced in our press release, the Board declared a quarterly dividend of $1.30. I would now like to speak to our outlook and provide some additional color on the guidance in this morning’s release. Historically, we have typically provided full-year guidance. However, we have decided to only provide Q1 guidance at this time, given the uncertainty in the environment and our CEO transition. Turning to our guidance, as we’ve mentioned, traffic has remained pressured during Q1 and for Q1, we currently anticipate total revenue of $800 million to $850 million. We anticipate opening one to two new Cracker Barrel stores and four to five new Maple Streets during the quarter. We expect Q1 commodity deflation of approximately 1% to 2%, and wage inflation on a constant mix basis of 4% to 5%. We anticipate a Q1 adjusted operating income margin of between 2.25% and 3.25%, and capital expenditures of $27 million to $32 million. Our adjustments to operating income include expenses related to our sale leaseback transaction, a corporate restructuring charge, and certain expenses related to our CEO transition, all of which are detailed in the footnotes to our reconciliation table at the end of our earnings release. Sandy will describe our plans to improve our traffic performance momentarily. While delivering an improved top-line performance is our top priority, it is also imperative that we continue to shore up our business model and improve profitability. We were pleased that we delivered $30 million of sustainable cost savings in fiscal '23, and we anticipate we will deliver approximately $13 million in additional savings again in fiscal '24. Although I do want to note that we expect these savings to be partially offset by investments in labor and loyalty. I’ll now turn the call back over to Sandy so she may share additional details around our business plans.

Thank you, Craig. We are aggressively taking steps to recover traffic above industry levels and to adjust our business model to ensure financial strength while doing so. We are and will be doing this on a number of fronts, both shorter and longer term. In the shorter term, we are focused on marketing the guest experience, retail sales, preparing for the important holiday season, which occurs during our second quarter, and the launch of our loyalty program. So, I’m going to go through each of these with you. With regard to marketing, we’ve increased our media spend and are focusing our marketing on our core guests of all ages and more pointed value messaging, particularly around lunch and dinner. For example, we’ve added media presence and avenues like college football and NASCAR to drive top of mind awareness. Our advertising around the breakfast daypart has been effective at improving traffic and we’ll now increase our emphasis on lunch and dinner where we’ve underperformed by focusing on craveable favorites that appeal to all our guest segments like Southern Fried Chicken. We’ll also be advertising sharper price points such as brunch all day, starting at $8.99, and continuing to showcase our variety with our Over 20 Under $12 campaign. Finally, we’re introducing a new physical menu format that tested well and includes imagery that we believe will appeal to our guests and drive check. With regard to the guest experience, we will continue to focus on staffing, retention, and hospitality, all of which are linchpins for sustainable traffic. We’re encouraged by the improvements that we’ve seen in these areas and in our guest experience metrics, which fell below our historically strong levels as we restaffed and retrained coming out of the pandemic, and we will continue to invest in more front of the house hours to deliver the hospitality for which we’re known. We’ll also continue our investments in training and development, simplifying operations, and improving our manager experience by streamlining or eliminating work that drives them away from the dining rooms, their employees, and their guests. As for retail, our retail teams will continue to manage inventories and emphasize sales behaviors that drive conversion. We’re also reworking some of our merchandising displays to be even more effective and impactful than they already are. With respect to our important second quarter, we believe we are well positioned to have a strong holiday season and deliver continued growth in our already robust catering and occasion channels. From a culinary perspective, we will lean into our core holiday offerings such as Country Fried Turkey and Cinnamon Roll Pie that we know are strong traffic drivers, and that, along with our retail offerings underpin our holiday season. Finally, we’re launching our Cracker Barrel Rewards loyalty program that we believe will be a meaningful traffic driver as well as a key source of guest insight and data. Although, it’ll take time to build awareness and participation. As I said earlier, the program will be going live by the end of the month, and we believe it has the potential to be the best, most engaging loyalty program in the full service dining industry and will help us further extend our hospitality into the digital realm. Based off our iconic peg game, participants will earn pegs for each dollar they spend with us, both restaurant and retail, and will be able to use those pegs for rewards at various levels. The program is gamified, allowing guests to earn additional pegs through fun challenges as well as surprise and delight events. We’ve been testing it with positive results among our own employees who we know will be the best ambassadors for the program and key to its rollout. To further drive awareness and enrollment, we’ll be launching a multi-channel media campaign, and I’m delighted to announce that we’ll be partnering with Dolly Parton in late October to highlight the program and to promote Dolly’s highly anticipated collaborative album, Rockstar, which will be available in our stores. Regarding longer term initiatives, we’re undertaking extensive research with both current and lapsed guests in partnership with outside firms to further understand the current competitive environment and our place in it, including our strengths, opportunities, brand positioning, and to identify actionable strategies to capitalize on our learnings. We’re also conducting a deeper dive review of our store base to better leverage our presence in certain trade areas, and we’ll be considering physical design and refreshment opportunities, which will be informed by the research we are undertaking. From a culinary perspective, we will remain focused on menu innovation, driven by the needs of our most loyal guests and our desired affinity groups, while at the same time pursuing menu simplification to help our operators and improve efficiency. Finally, as Craig noted, we’ll continue to identify sustainable cost savings and expect an additional $30 million in FY24, effectively matching the savings that we delivered in FY23. All of the initiatives I just reviewed will be led by my successor, Julie Felss Masino, who our Board appointed after a multi-year succession planning process. Julie had the chance to spend several days with our entire field leadership at our Biannual Managers Conference in Orlando a month ago, and she has been warmly embraced by the entire Cracker Barrel family. We look forward to Julie’s leadership as we tackle the challenges before us. Before we open things up for your questions, I want to offer Julie a chance to say a few words. Julie?

Hello, everyone. It’s a pleasure to be with you all. As you would expect, over the last few weeks, I’ve been busy onboarding, visiting stores and getting to know the brand and our team. Even after this short time, it’s clear to me that the things that drew me to this opportunity, an iconic brand with passionate and loyal guests who love us, great scratch-made food and retail products, a profound mission of pleasing people and talented and passionate people who are deeply committed to delivering on this mission are all right there. Although traffic is challenged, the fact is our absolute traffic numbers would be the envy of many brands. All that to say, I’m confident that we have the core elements to address our current challenges and regain lost ground. I’ll be digging in with Sandy and our teams on both the shorter and longer-term initiatives that she mentioned, and will be solidifying my own views after doing some more listening and observing. I look forward to speaking with you further in November and of course, in subsequent calls when I’ll have more to share with you. On a personal note, I am grateful not only for the opportunity to lead this great brand but for both Sandy’s leadership over the last 12 years and our ongoing partnership as I settle into the role. I’ve been around the restaurant and retail my whole life, and the chance to be able to leverage my experience for a company with as rich of a history and bright of a future as Cracker Barrel is truly exciting. I’m looking forward to getting to work and interacting with you more over the coming months, and I appreciate the chance to say hello. Sandy?

Thanks, Julie. As you all know, Julie has a long track record of driving growth and innovation, and I have no doubt that she will bring that experience to bear as we tackle our challenges and position the brand for the future. Now, let’s take your questions.

Our first question comes from Jeff Farmer with Gordon Haskett. Please go ahead.

Great. Thank you. Best of luck, Sandy, and welcome to Julie. With that, a few questions. So, can you help me understand the same-store sales expectations that are captured in that Q1 revenue guidance of, I believe, it was $800 million to $850 million?

You said a few questions, but then you have one.

Well, Jeff, I would say it's a fairly wide range and we don’t have many new units planned. Our best estimate for the first quarter is approximately in the middle of that range. However, if the environment becomes more challenging, we may find ourselves at the lower end. Meanwhile, we’ve implemented several actions to increase traffic, particularly through updates to our advertising and messaging. If those strategies prove to be very effective, it could push us towards the higher end of the range.

Okay. Just following up on that, so second question. So, expected menu pricing in Q1 and Q2 for you guys?

For Q1, when we consider pricing, there are a few elements to note. One is the existing price we’re using, and the other is the new price we’re implementing. Our actual net new price for Q1 is relatively low, but the total pricing, year-over-year, is expected to fall in the 6% to 7% range for Q1, which includes both the new pricing for this quarter and the prior year's pricing.

So 6% to 7% Q1 cumulative, I got that. And then do you have a cumulative number for Q2 as well? Can we expect that 6% to 7% to sort of hold into Q2?

We’re not providing much information beyond Q1 at this moment. To clarify, as we adjust our pricing throughout the fiscal year and compare it to higher previous prices, we anticipate that our year-over-year combined pricing will decrease significantly over the year, reaching its highest point around Q1.

Okay, that's helpful. And then my final question. It appears that the adjusted operating income margin guidance for Q1 is in the range of 2.25% to 3.25%. This is significantly lower than last year's 3.6%. I'm trying to understand what accounts for the more than 100 basis-point margin headwind for the Q1 operating margin compared to a year ago. Specifically, in terms of the restaurant-level margin versus general and administrative expenses, what factors are contributing to this decline? Is it primarily due to a decrease in the restaurant-level margin or an increase in G&A? How should we interpret the various components leading to the lower operating income margin guidance?

I believe the main factors will include improvements in the cost of goods sold, which will have a positive impact. However, this is somewhat countered by deleverage and the investments we are making in labor. Our business model at Cracker Barrel focuses on high traffic, delivering great value and hospitality. While we have made significant strides in regaining our historical leadership in hospitality, we have not yet returned to our peak levels. Therefore, we are investing in labor to achieve this. Over time, we anticipate this will be a strong advantage for us. We are seeing higher labor costs and lower COGS, along with increased advertising as we respond to softer traffic through more national advertising and testing in various regions. Additionally, in the first quarter, we are experiencing higher manager and training expenses as we prepare for the second quarter. We are proud of the work our team has done with the catering business, which we expect to grow even more in Q2, and we want to ensure that we are fully prepared for it. Hence, we are hiring more managers to ensure we can deliver at full capacity.

Our next question comes from Todd Brooks with The Benchmark Company. Please go ahead.

Hey. Good morning and congrats, Sandy, and welcome, Julie as well. A couple of questions for you. One, following on kind of Jeff’s pricing question, but from a more theoretical standpoint. Craig, I know you talked about that the guest value perceptions have been unchanged, even though I think since 2021 menu pricing is up probably between 15% and 17%. How do you measure that their value perceptions aren’t changing as their situation changes? So, as things are getting tougher, savings rates are down, energy costs are up, student loan payments restarting again, are there value perception static, or how are you monitoring those perceptions as you continue to take incremental price with, it seems like each menu opportunity?

Good morning, Todd. It’s a good question. The way that we evaluate that is, one, is the absolute value that we’re delivering measured against ourselves. But we also measure our value scores, primarily against the marketplace. Because the market has been very dynamic. It has been a very high inflation period over a number of years. So, in terms of value, we measure ourselves against ourselves. We measure ourselves against our competition. We did also note in the prepared remarks that we do believe there is a reaction from consumers to just generally higher prices in casual dine-in and full-service dine-in more broadly. We think we’re well positioned within that. So, we think our pricing is good. We think we’re very competitive. We think we are a great value, but I do think there is a factor to prices as a whole in the macroeconomic environment and the amount of full-service visits that are available as a result of that.

I’ll add a little bit to that, too, Todd. I think as Craig’s pointed to, we use the quantitative control group to see what kind of impact our pricing decisions we make. We continue to look at ourselves versus competitors. We also are spending a lot of time listening to guest reactions, either through conversations with our operators or just the feedback that we get and we manage our monitoring check management tactics. So we are looking very closely at things like beverage attachment, shareable sites, premium sites and all of the things that would indicate to us that the consumer situation has changed meaningfully and most importantly, that we need to change our strategy to address it.

Okay. Very helpful. Thanks to both. Just a follow-up on that. You talked about your value relative to competitors. And in the current environment, we’re seeing more kind of price promotion activity from some of the full-service operator universe out there. Cracker Barrel has obviously been a brand where value is inherent and it’s lent itself to kind of an everyday value approach to the brand and how you communicate that. If competitors are getting more overtly competitive with price points and special offers, what arrows are kind of in Cracker Barrel’s quiver to pull if you do feel like you need to compete a little bit more around the value of the experience?

We noticed that our competitors have become more aggressive in their pricing strategies, and the quarter turned out to be more promotional than expected. Many competitors have not only sharpened their price points but also ramped up their advertising efforts in response. In line with this, we are committed to providing everyday value, which has always been a key aspect of our brand. Despite our own price increases over the past few years, we have maintained value across our menu to cater to different guest preferences, whether they seek low-cost options or something more indulgent. We continue to offer a variety of choices, ensuring items like Momma’s Pancake Breakfast remain at a price of $8.99, allowing us to deliver exceptional value, especially during breakfast, which is available all day. We are also focused on enhancing our communication through our advertising, showcasing strong price points like the $8.99 breakfast, along with appealing offerings for lunch and dinner, including meals like chicken and dumplings or country fried steak. In light of the competitive landscape's increased promotional activity, we are dedicated to better highlighting the everyday value we provide, ensuring our guests are reminded of it.

Great. And one more follow-up, and I’ll jump back in queue. So just when you talk about the elements on the menu that you look at as everyday value items, if you look at this quarter versus the prior quarter, how is the sales mix of everyday value type of items changed quarter-over-quarter as the consumer has gotten a little bit more challenged? Thanks.

This is Craig. Over the quarter, our breakfast business has performed better than our lunch and dinner segments. Overall, we are observing an increased demand for our breakfast items, especially the ones Sandy highlighted. That’s mainly where we’re seeing the change.

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

I wanted to ask sort of a follow-up to an earlier question, just on decomposing the traffic trends. I’m curious, how much of the traffic in 4Q you think was lost to promotional intensity by competitors? And then, how much of it do you think could have been recaptured by taking a different marketing tactic? And then, sort of how should we think about that in the context of your 1Q expectations?

Hi Katherine, it’s Craig. We believe a significant part of our traffic performance in the fourth quarter was driven by two main factors. First, we reduced our paid messaging during Q4, while competitors increased theirs. Additionally, the environment became more promotional. Relative to our total traffic, this shift was considerable. While we can't specify an exact number, it aligns with the changes we observed in performance. We think there's both a macroeconomic component and increased competitive intensity at play. We also spent less during that period, while others spent more. Furthermore, we recognize there's ground to regain in our historical leadership in hospitality. These are some of the primary factors that influenced Q4, with some being short-term and others long-term.

Okay. Thank you. And then maybe actually just following up on that. In terms of where you’re seeing promotional intensity, sort of where is that? Is it mostly in maybe your breakfast competitors or in varied menu? I guess, I’m trying to understand where the promotional intensity is just because there have been other casual dining concepts that have taken actually a different tact where they’re not discounting as much. So, I’m curious kind of what you’re seeing specifically in terms of which of your peers, maybe which dayparts you’re seeing more pressure on promotions?

We've noticed a significant level of promotional activity across various segments, particularly in family dining during breakfast and the bar and grill category. While it's not universal among all competitors, there has been a notable increase in advertised price points and all-you-can-eat offers in the market. This trend spans multiple areas, including family breakfast and bar and grill dining, indicating a widespread promotional intensity.

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

My first question is about the margin guidance for the first quarter. I want to clarify what might be a temporary headwind versus what could be ongoing. Can you quantify how much the increased marketing costs in the quarter will impact margins and provide more detail on the role of G&A? I see that G&A is down about 15% compared to the third quarter. Could you help us understand the appropriate run rate on a quarterly basis for the first quarter, considering these moving pieces in the margin guidance? Thank you.

Hi Jake, it’s Craig again. As we consider the first quarter, there are a couple of important factors to note. Looking back at our operating income performance from the previous year, we experienced the lowest operating income in Q1, which then showed improvement in Q2 and beyond. I don't expect a significantly different trend in fiscal '24. Furthermore, in Q1, we will see a notably higher level of spending on managers and training compared to Q4. We are also making additional investments to support our loyalty program. There are several factors at play, but we are increasing our investment in Q1. Last year, our operating income was also the lowest during Q1. When reflecting on Q4 and its low numbers, part of it was due to incentive compensation, which is essentially a one-time expense, as well as our efforts to manage spending. We are managing expenses based on the company’s performance; however, we do anticipate higher G&A in Q1, particularly as we prepare for Q2 and launch the loyalty program.

Great. My next question is about the balance sheet and dividends. Considering the margin guidance for the first quarter, it's clear that EPS will fall significantly below the $1.30 recently declared for the dividend. How should investors view that dividend given that your payout might exceed 100% in the early part of the year? Are you open to increasing leverage? I know you've mentioned a target range of 1.3 to 1.7. Would you be comfortable allowing that to rise above that range to maintain the dividend? Additionally, I’ve received inquiries regarding your balance sheet and the potential for more sale leasebacks, if appropriate. How many stores are currently unencumbered? Looking at your balance sheet, how confident are you in sustaining the dividend despite the near-term challenges with EPS?

The capital allocation topic is very significant for the Board, and they have maintained a consistent approach. The primary objective is to grow Cracker Barrel and Maple Street, and beyond that, we will return capital to shareholders through dividends or share repurchases. Over the past year, the dividend has been quite attractive. When you consider our desire to maintain flexibility in the balance sheet and a reasonable leverage ratio, the dividend is part of a broader capital allocation strategy. It’s a major topic and is a top priority for the Board, and they will remain very thoughtful about it. Importantly, there has not been a shift in our capital allocation framework.

I understand you’re not providing annual guidance at this time. However, I'm curious if there are any details you can share, even before Julie takes over, regarding expectations for CapEx or new units at Maple Street and Cracker Barrel. It would be helpful to know about some of the broader aspects of the 2024 guidance, even if you can't give specific details on margins.

We can talk directionally about a couple of the big levers without getting too specific. So, for example, I would say, commodity inflation, we expect commodity inflation to be much more modest than it’s been historically. Wage inflation, we expect to moderate a bit from fiscal '23 levels, but we do think wages will likely remain higher than the long-term run rate, but more moderate than what we saw pre-COVID, for example. In terms of new units, given the environment, we are moderating new unit growth to some degree. Q1, we still have a little bit more in there, but we are moderating that. We’re still growing new units, but we’re moderating the level and the amount of spend that we’re putting against that for the time being. In terms of CapEx, there are other areas that we are constantly evaluating, but we’re thinking about all of that as a part of the broader capital allocation conversation.

Our next question comes from Dennis Geiger with UBS. Please go ahead.

Thank you. And congratulations to Sandy and Julie. I have another one as it relates to ‘24, at a high level. I think you gave, Craig, which is really helpful, some kind of key points to be thinking about in ‘24, which is helpful. How about on the CEO transition side of things? And maybe keeping some of that flexibility in guidance, depending on what plans look like for the year, is there anything at a very high level to share on sort of what could move the outlook or numbers for ‘24? Might it be maybe remodels that you referenced? Other areas of reinvestment, whether it’s technology or otherwise? Recognizing there’s a reason you’re not speaking to it today, but anything high level to share on some things, at least, buckets, et cetera, that might move the needle as we think about some strategic opportunities this year to help us think through ‘24?

Hi Dennis, it’s Craig again. I think for now, we would say it’s still early days in that regard. The macro environment is particularly challenging a bit more uncertain. And Julie is off to an outstanding start, but she’s really only been here for a month. So, I think it’s still early days and really too early for us to make any comments about that.

That makes sense. I have a question related to that, Craig and team. Sandy, during your search and in considering the opportunity with Julie, you identified her strengths in areas like store development and technology innovation from her previous role. Can you share any insights on this? I understand you are collaborating with some consultants. What are your thoughts on the long-term opportunities you’ve been exploring, particularly in technology and innovation? Any high-level comments on what we might expect in the longer term would be appreciated.

I believe you have captured many of the reasons why the Board believes Julie would be an excellent leader for the next 50 years at Cracker Barrel. Her experience with successful brands that have evolved, like Taco Bell, demonstrates her ability to maintain relevance over time. Additionally, Starbucks serves as a strong example of how effective guest-facing technology can enhance the customer experience and encourage frequent visits. Julie also brings valuable retail experience, which is crucial for our brand. Our retail segment is robust, profitable, and an essential part of the Cracker Barrel experience, and it can be surprisingly complex. Julie's background equips her to integrate technology into our 54-year-old brand in a way that remains familiar and comfortable for our loyal guests while also appealing to newer customers, including those unfamiliar with us. This includes introducing elements like technology and our loyalty program in a brand-appropriate manner, which is a challenging task. Lastly, regarding the notion of a refresh, it is certainly something we are considering. We are exploring how to modernize our store interiors to ensure they convey freshness while still being comforting for longtime visitors. Overall, Julie is an innovative and adaptable leader who is passionate about the brand and has fully committed to her role. We are truly excited to have her on board.

That’s helpful, Sandy. One more quick one, and apologies if I missed. Just by cohort, some of the traffic softness, can you speak at all to whether it’s age, demographic income, et cetera? Just what you saw in the quarter from that perspective if you’re providing that?

Yes. I’ll give you a general overview of what we observed. Our traffic declines were widespread across all age groups, which was somewhat of a change. The younger group performed better than those over 65, but had previously been doing even better in the past quarters. For those over 65, we still haven’t seen a recovery in visits to the degree we anticipated, really since the pandemic, initially due to health concerns, and then shifting to value concerns as we've discussed. We find that consumers are quite value-oriented, especially in the over 65 group. Therefore, we have not seen a recovery in that demographic as we would have hoped. The declines in traffic were notably larger among those with income levels between 60,000 and 80,000 and above. In contrast, the lower income groups held up better. This may not be surprising given our strong value proposition. When managing their visits, consumers tend to choose brands they trust, where they know they will receive value and a worthwhile experience. That’s why our brand positioning—emphasizing warm hospitality, generous portions, and fair pricing for quality food—should remain effective, even as we adapt to a more competitive landscape focused on value-conscious consumers.

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

Great. Thank you. Good morning. I just wanted to congratulate Sandy on her 12 years. We will certainly miss you, but we look forward to working with the new team soon. I have a quick question regarding your loyalty rollout. How significant do you believe this opportunity is, especially in relation to younger consumers? This has always been a demographic you aimed to connect with, possibly skewing a bit older on average compared to some of your competitors. How much do you think the loyalty program could help you attract even more younger consumers to your brand?

I don’t think we’re ready to quantify. I’m looking at Craig. I doubt he’s going to give you any numbers. We’ve certainly done a lot of modeling about it. It takes time, so we got to get everybody signed up. They have to visit frequently enough to earn. But what I will say is that a year or at least ago, so after we did a recent segmentation study, we looked at the segments. And one of the interesting findings was really across age cohorts, more than I was expecting to see the existence of a loyalty program was important, both to our loyal guests, older and younger. Technology in general is more important to a younger guest, but the loyalty program came up surprisingly high on the list. So, we are optimistic that this will be something that they’ve hoped we would do and we will get great sign-ups, a lot of learnings and so on. This is actually an area that Julie has quite a bit of experience, and she spent quite a bit of time since she’s been here just in understanding what the program is and our rollout plan. Julie, do you have anything you’d like to maybe add to it?

Sure. I’m really excited about the loyalty program, and I believe our guests will appreciate the fact that they can earn rewards across both restaurant and retail. This is a unique aspect that sets us apart as a brand since we offer these dual experiences. Furthermore, every item on our menu, whether from the restaurant or retail, will allow guests to earn points in our distinct rewards scheme. They can redeem points on everything except alcohol, which is another significant highlight. Additionally, we recognize that technology is important to many consumers. However, we are also accommodating those who may not be as tech-savvy by enabling them to earn points outside of the app. This is a distinctive feature in our industry that ensures everyone can engage with the program, showing that we appreciate their visits. The team is enthusiastic about the rollout happening in the coming weeks, and we are hopeful about the positive impact it will have on our brand.

Thank you. I wanted to follow up on the loyalty program question. You mentioned that it’s best-in-class. Have you collaborated with consultants or a third party, or is this just your impression based on your own benchmarking against competitors? Additionally, could you provide us with a sense of what makes a loyalty program best-in-class, particularly if it’s based on benchmark data or third-party insights, and how you believe it will impact traffic for the business?

Hi Andrew, it’s Craig. We believe our loyalty program is potentially best-in-class, as Julie mentioned. It offers more options and is well-branded. You can earn points both in-restaurant and at retail locations, either through an app or at the register. Points can lead to meal rewards at different status levels. We've conducted extensive internal assessments and also worked with a loyalty expert with retail experience. We compared various loyalty programs in the restaurant industry and feel we meet all the necessary criteria, as well as many from broader retail. We are confident that what we offer is best in class when compared to family dine-in and casual dining options.

But would you be willing to give maybe a range of expectation for what it should do for the business ultimately?

We’re still in early days on that one. I think it’s going to be a big driver for us, not only in terms of the appeal and its kind of short-term ability to drive repeat visits, but our ability to market the Company more broadly using the data that we’ll get from that program. We think that will have a longer-term benefit in better equipping us with our broader marketing communication to make that more targeted and more active and more efficient.

I appreciate that. I wanted to ask about the traffic. It was helpful to learn about the different segments and cohorts. Can you give us an idea of the monthly trends? Specifically, did it slow down or worsen, or did you simply not see the improvement expected throughout the quarter and into the current quarter?

Broadly speaking on that one, on our prior earnings call, we shared that while we had done relatively well in Q3, we were ahead of the industry. We shared that we saw a deceleration in traffic as we moved into the fourth quarter. And so far, we’ve said that our first quarter remains pressured. So, without getting too prescriptive around it, we would say both at the beginning and where we are today, remains fairly soft without a big trend change, one way or another. We are pleased with some of the progress that we’ve made at breakfast with the advertising that we’ve put forward. We’re continuing to be pleased with our catering business, which is growing even in spite of a challenging environment.

I think we are pleased with breakfast, especially compared to dinner. Weekends have been strong, which is important for this brand, and that has been a trend that we find encouraging.

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

Okay. Well, before we sign off, first, I want to thank everyone on this call and for all of your well wishes. And I want to say thank you to our employees and to our shareholders. It’s been a privilege to lead this brand for 12 years. We’ve navigated some challenges, especially in the recent years, and we’re clearly facing some challenges today. But Cracker Barrel is one of the most differentiated brands in the industry. And I have complete confidence that under Julie’s leadership, our teams and our company will continue to thrive. Thank you.

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