Cracker Barrel Old Country Store, Inc Q1 FY2024 Earnings Call

Good day, and welcome to the Cracker Barrel Fiscal 2024 First Quarter Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Kaleb Johannes, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Cracker Barrel's first quarter fiscal 2024 conference call and webcast. This morning, we issued a press release announcing our first quarter results. In this press release and on the call, we will refer to non-GAAP financial measures for the first quarter ended October 27, 2023. The non-GAAP financial measures are adjusted to exclude the non-cash amortization of the asset recognized from the gains on the sale and leaseback transactions, expenses related to the company's CEO transition, expenses associated with the strategic transformation initiative, and a corporate restructuring charge and the related tax impacts. The company believes that excluding these items from the 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 this morning are Cracker Barrel's President and CEO, Julie Masino, and Senior Vice President and CFO, Craig Pommells. Julie and Craig will provide a review of the business, financials and outlook. We will then open up the call for questions. 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 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. 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, Julie Masino. Julie?

Thank you, and good morning, everyone. This morning, we reported total Q1 revenue of $823.8 million and adjusted operating income margin of 2.3%. Our sales results were in line with our expectations, and our operating margin was at the low end of our internal expectations, reflecting certain investments we made to shore up our top line. Although we continue to face challenges, I've been impressed with the team's work to diagnose the key drivers of our traffic headwinds, and I'm encouraged by our results as we've delivered sequential monthly improvements in our comparable store traffic performance during the quarter, which I'm pleased to say has continued into our important second quarter. We have taken numerous actions to drive traffic and deliver the sequential improvement. I'll go through them now. First, as we discussed last call, we took several actions to improve the effectiveness of our marketing in the first quarter. We increased our media spend by approximately 20% and refined our messaging to focus more on our core guests. This included increased advertising in linear TV, including premium sporting events like college football. We also highlighted our compelling value proposition by featuring an $8.99 price point in our breakfast-focused messaging and we continued highlighting our over 20 under $12 in our lunch and dinner focused messaging. Second, from an operational perspective, we remain focused on the guest experience. We invested in the labor hours to deliver great hospitality, and we continue to emphasize staffing, retention, training and development. We're encouraged by the improvements we've seen in certain key guest experience metrics. We are happy with our staffing and turnover levels, and we are optimistic we can sustain our sales momentum and gain further traction in the coming quarters. Finally, we successfully launched Cracker Barrel Rewards, our new loyalty program. The launch was supported by a multichannel media campaign to drive awareness and enrollment. Our operations teams have done a terrific job as ambassadors and champions of the program and guests have embraced it. We're very pleased with the guest response and the number of enrollments, which have exceeded our expectations thus far. And we've been thrilled with the exposure we've received through our partnership with the iconic Dolly Parton. We continue to believe Cracker Barrel Rewards will be one of the best and most engaging loyalty programs in full-service dining and are confident it will be a meaningful brand differentiator and traffic driver over the long term. Turning to retail. The retail environment remains challenging. Although there were some bright spots during the quarter, such as our harvest assortment, we experienced sales declines across most of our categories. Some of this was due to lower restaurant traffic, but we also believe some price-conscious guests may have reduced their retail purchases as a way to manage their overall spend with us. However, the team has done a good job managing inventories and is focused on emphasizing value and optimizing displays to drive sales improvements during this important holiday season. Looking ahead to Q2. Our second quarter is an especially important quarter for us due to the seasonally higher volumes. Over Thanksgiving, our teams around the country worked tirelessly to deliver a great holiday experience for millions of guests and did so with extraordinary results. We hit on all cylinders in every aspect of our business, dine-in, Heat n' Serve, To-Go and catering and our planning and support systems, including IT, supply chain and guest relations and our retail teams all performed very well. In fact, we set a company record for total sales in a single week during Thanksgiving week with over $110 million in sales, and we served approximately 6 million guests. Our top five stores alone served more than 80,000 guests over Thanksgiving Week. To put that into perspective, those five stores served more people than attend most NFL games. I want to give a huge shout out to our field teams and leadership for their efforts in these results. As we begin December, we will look to continue our Thanksgiving momentum over the holidays with our off-premise offerings and catering. We are leaning into seasonal guest favorites such as our Country Fried Turkey and Cinnamon Roll Pie, which continue to resonate with guests. With regard to catering, we're leveraging our catering sales managers to drive growth, especially with large accounts. All of this is being supported by a marketing campaign that is emphasizing our strong all-day value, which we believe is a competitive advantage for us, particularly in the current environment and is something that we will continue to underscore. We are also continuing to optimize our media mix to improve our share of voice, particularly with core guests. For example, we recently tested local TV and saw meaningful traffic lift with solid returns on this investment, and we plan to expand this to other key markets. Our marketing is also focused on promoting Cracker Barrel Rewards to continue driving awareness and enrollment. As I mentioned, we have partnered with Dolly Parton to highlight Cracker Barrel Rewards and promote her collaborative album Rockstar. We've been very pleased with this partnership with Dolly, which has helped deliver a large number of impressions and high engagement rates and has incrementally contributed to the strong levels of enrollment we have seen to date. I'll now turn the call over to Craig for a more detailed look at the first quarter from a financial perspective and to discuss our financial outlook for the rest of the year. After he finishes, I will then comment on our priorities and upcoming initiatives, including a strategic transformation initiative we have undertaken to help us invigorate the brand for long-term success.

Thank you, Julie, and good morning, everyone. As Julie noted, for the first quarter, we reported total revenue of $823.8 million. Restaurant revenue decreased 0.2% to $660.8 million. Retail revenue decreased 8% to $163 million versus the prior year quarter. Comparable store sales declined 0.5% over the prior year. Pricing was approximately 6.8%. As we previously shared, we're taking more moderate net new pricing given the current environment. Our quarterly pricing consisted of approximately 5.5% carryforward pricing from fiscal 2023 and 1.3% new pricing from fiscal 2024. We continue to closely monitor the impact of our pricing actions, and we have not seen a negative impact on traffic. However, given the current environment, in which promotional activities are elevated and consumers are generally pressured, we will continue to take a more cautious approach with our pricing for the remainder of the fiscal year. Off-premise sales were approximately 17.5% of restaurant sales. We continue to be particularly pleased with our catering business, which grew over 50% versus the prior year. Comparable store retail sales decreased 8.1% compared to the first quarter of the prior year. Although retail sales remain soft, we were pleased with how the team has effectively managed inventory levels. Moving on to our first quarter expenses. Total cost of goods sold in the quarter was 31% of total revenue versus 33.5% in the prior year quarter. Restaurant cost of goods sold in the first quarter was 26.2% of restaurant sales versus 29.1% in the prior year quarter. This 290 basis point decrease was primarily driven by menu pricing. Commodity deflation was approximately 2.3%, driven principally by lower poultry and pork prices. First quarter retail cost of goods sold was 50.4% of retail sales versus 50.2% in the prior year quarter. Our inventories at quarter-end were $207.3 million compared to $231 million in the prior year. With regard to labor costs, our first quarter labor and related expenses were 37% of revenue versus 34.8% in the prior year quarter. This 220 basis point increase was primarily driven by our investments in additional labor hours to support the guest experience. Hourly restaurant wage inflation was approximately 5%. Adjusted other expenses were 24.3% of revenue versus 23.1% in the prior year quarter. This 120 basis point increase was primarily driven by our investments in advertising as well as higher depreciation. Adjusted general and administrative expenses in the first quarter were 5.4% of revenue and exclude the following items. First, approximately $1.6 million related to our CEO transition. Second, approximately $1.1 million in professional fees related to our strategy transformation initiative which Julie mentioned and about which she will speak more momentarily. And third, an approximately $1.6 million corporate restructuring charge. Compared to the prior year, adjusted general and administrative expenses increased 30 basis points, primarily due to sales deleverage. All of this culminated in GAAP operating income of $11.4 million. Adjusted operating income for the quarter was $19 million or 2.3% of revenue. Net interest expense for the quarter was $4.9 million compared to net interest expense of $3.5 million in the prior year quarter. This increase was primarily the result of higher weighted average interest rates. Our GAAP effective tax rate for the first quarter was 15.7%. On an adjusted basis, our effective tax rate for the quarter was 19.9%. First quarter GAAP earnings per diluted share were $0.25, and adjusted earnings per diluted share were $0.51. In the first quarter, adjusted EBITDA was $45.7 million or 5.5% of total revenue. Now turning to capital allocation and our balance sheet. 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 first quarter, we invested $24.6 million in capital expenditures, and we returned $29.3 million to shareholders in dividends. We ended the quarter with $475 million in total debt. Lastly, as we announced in our press release, the Board declared a quarterly dividend of $1.30 per share payable on February 13, 2024, to shareholders of record on January 19, 2024. With respect to our fiscal 2024 outlook, I would like to provide some additional color on the guidance in this morning's release and an update on recent trends. Quarter-to-date, we have sustained our momentum recovering traffic. We were particularly pleased with our performance in November, which continued our trend of sequential monthly improvements in comparable store traffic that began in August. And as Julie mentioned, we delivered strong sales during the Thanksgiving Week. However, looking ahead, we continue to operate in an uncertain environment. Although consumers have been resilient, sentiment remains relatively weak by historical standards, with many consumers feeling economically pressured and more pessimistic, which could pressure discretionary spending. With this in mind, we currently expect fiscal 2024 revenue of $3.4 billion to $3.5 billion. We anticipate pricing of approximately 4.5% to 5.0% for the full year, which includes approximately 2.8% of carryforward pricing from fiscal 2023. As a reminder, we expect our pricing to moderate sequentially each quarter during the year. We anticipate opening two new Cracker Barrel Stores and nine to 11 new Maple Street stores during the year. We expect commodity inflation in the low single digits, and hourly restaurant wage inflation in the mid-single digits. As noted in the reconciliation table in our press release, our full-year outlook also contemplates certain excluded expenses in addition to the non-cash amortization of gains from our sale leaseback. These include approximately $10 million in consulting fees related to our strategy transformation initiative that Julie will cover in a moment, approximately $10 million in one-time CEO transition costs and approximately $2 million in corporate restructuring charges. Our full-year outlook also includes the benefit of a 53rd week this fiscal year. Taking all of this into account, we anticipate full-year adjusted operating income of $130 million to $150 million. We also expect a full-year GAAP effective tax rate of 2% to 5% and an adjusted effective tax rate of 7% to 10%, and capital expenditures of $120 million to $135 million.

Thanks, Craig. I now want to provide some perspective on my initial impressions, my pillars for achieving long-term success and where we will focus in the coming months. Since joining the company in August, I've been busy meeting with the field and home office teams, understanding our challenges and opportunities, particularly as it relates to the near term and doing deep dives into our initiatives and financial plans. These past few months have reinforced my conviction that Cracker Barrel is an iconic and highly differentiated brand with a large and loyal guest base who love us and talented and dedicated teams who are passionate about our mission of pleasing people. Over the past 90 days, I've traveled the country with our field leadership teams and by myself, observing and interacting with guests and with team members at all levels, retail and restaurant, front of house and back of house. Over and over again, I've been struck by the enthusiasm and genuine affinity so many of our guests have for Cracker Barrel and the love they express for our brand. Multiple times, I've had guests and employees approach me unsolicited to share stories and express adoration about our food, our hospitality and our culture. These interactions were powerful reminders to me that this brand really is special and the foundation with which we have to work, including our traffic would be the envy of most in casual and family dining. Despite traffic declines on a relative basis, we still serve approximately 200 million guests a year, which offers us an equal number of opportunities to improve and grow. I'd now like to speak to the cornerstones that we will refer back to as we take advantage of these strengths. First, we need to be a brand that our guests absolutely love. For as many guests as we serve each day, many of them only visit us once or twice a year. The best way to drive growth is by making sure that their visits are truly wonderful so that they will dine with us more often, and we can only do this if we are executing with excellence and doing the small things well, every shift, day in and day out. This means providing friendly and efficient service and making sure guests' orders are correct and come out quickly, retail product is on the floor and easy to access and the store is immaculately clean. While it may sound easy, it takes relentless focus across the organization to do this consistently. Our field teams are extraordinary, and they have been focused on these very things with a renewed sense of purpose and commitment and their efforts are paying off. I believe with the focused energy and support of the rest of the company, they can continue this trajectory and build on our momentum. Second, we need to improve our relevance. While we need to be our authentic selves and lean into our competitive advantages of hospitality, value and comfort, we must actively work to evolve both the brand and our business model in a brand-appropriate manner to meet an ever-changing consumer need. Among other things, this means improving our speed of service, ensuring our menu features craveable food at all three dayparts, making our physical stores more appealing to guests and employees and reducing friction for our guests and employees through a combination of operational and technological improvements. Our Cracker Barrel Rewards program is an example of this sort of technological investment and offers us a unique platform to maintain and grow our relevance across all guest cohorts. We believe the program will help us speak to guests in a more individualized fashion and offer compelling value tailored to their particular behaviors and needs and that it will be a key part of a virtuous cycle of actionable guest data and company response that should drive visitations and grow brand affinity. As I said, the response to this program has exceeded our expectations thus far, and we will continue investing in the program to accelerate the benefits we believe are out there. Finally, we need to deliver compelling shareholder returns. Cracker Barrel is a mature brand that has faced many challenges in recent years. And like all companies in full-service dining, we'll continue to face pressure going forward. While we need to and will control costs and maintain operational discipline to drive bottom line results, I firmly believe that the only way we can sustainably grow is through the top line. For this reason, we will continue investing in marketing our everyday value to guests who love us and to do so in the places we know they are, and investing in labor, particularly on weekends and at dinner, so that our guests have an experience that will make them want to return. As Craig referenced, we kicked off a strategic transformation initiative in late September. This initiative is data-driven and multi-phased and includes a comprehensive review of our business and a wide-ranging assessment of the near-term and long-term opportunities as well as identification and execution of these strategies and tactics to go after them. We've engaged a top-tier consulting firm to give us an impartial, external and expert perspective to identify and appropriately challenge our institutional assumptions and to bolster our internal capabilities. Our Board and our teams are actively engaged and leaning into this important initiative. We recently completed the initial diagnostic phase of this project and the findings have given us confidence that the actions we've already taken to address near-term traffic challenges, more and more effective marketing that highlights our everyday value in more relevant channels like college football, investing in front of house labor, particularly during those days and dayparts where we are either busiest or most challenged and leveraging a robust loyalty program are the right ones. Initial findings are also helping us evolve and refine our thinking about key parts of our business, including a need to focus on our dinner daypart and deploy additional technology to improve the employee and guest experience. Our strategic transformation project is intended to ensure we continue to evolve the business and play to our strengths and differentiators to drive long-term value creation, improve profitability and to win market share. This involves refining our brand strategies and positioning, identifying and prioritizing the most impactful growth drivers, defining required capabilities and enablers and last but not least, executing with excellence. We are in the early stages of this project, and I anticipate sharing more details with you over the next several months as we develop and begin to implement a longer-term plan that delivers on the three pillars I outlined earlier, being a brand that our guests love, maintaining and improving our relevance and delivering compelling shareholder returns. More to follow on subsequent calls. I'll now turn it over to the operator for questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Dennis Geiger with UBS. Please go ahead.

Great. Thank you. A couple of questions. I guess the first one, could we talk a little bit more about what you're seeing from your customers, what you saw in the quarter, perhaps even into the month of November from a customer standpoint. Anything as it relates to key customer cohorts, other behaviors worth calling out any notable changes, et cetera?

Hi, Dennis.

Hi, Dennis, it's Julie. I'll take that one. Thanks so much for the question. I would say the environment out there really continues to be uncertain and mixed. But there have been some positives. It seems that a recession is potentially less likely, inflation continues to moderate and the consumer and labor market have been resilient. Those are the positives. However, there's been some reason for caution as well. The consumer sentiment has been declining in recent months and remains at relatively low levels. Labor market is cooling and savings accumulated during the pandemic are evaporating and debt burdens from higher interest rates. So with all that behind us and sort of in the landscape out there, we are encouraged by the monthly sequential improvements in our traffic. We believe that the investments that we've made to focus on the guest experience, to emphasize our strong value proposition across our dayparts, that was an important pivot in Q1. It had been accelerating the frequency and enhancing our business model and will continue to help us drive performance and win share in this very, very mixed environment.

Appreciate that color, Julie, very helpful. I guess, the second one, just following up on that. As you talk about sort of some of the resiliency out there, little resistance to the pricing to date. But then you and Craig kind of talking about the tough environment and maybe it gets worse from here from a macro perspective. Just wondering if there's any more context you could put around expectations over the balance of the year as we think about that macro environment, do you expect the consumer deteriorates from here? Very helpful that you gave the color around pricing for the year. But just anything more on kind of what's embedded in that sales algorithm, you've got a bunch of initiatives, but what you're thinking about your consumer from here? And maybe related to that, is there any context you can give thinking about last year's trends in recent months relative to this year? And is it sort of our underlying traffic trends improving over these last several months? Is there any kind of year-over-year dynamic to be thinking about? Thank you very much.

Hi, Dennis, this is Craig. I'll address that. As we completed our fourth quarter last year, we noted an unexpected drop in our traffic and discussed our plans to enhance that. I believe we are on the right track with the actions we've taken. At that time, we felt the market was more promotional, and consumers were somewhat pressured. Additionally, we didn't have much messaging in place. Now, we have made the necessary adjustments for the current environment, and it seems to be effective for us. We still see a promotional landscape in our results. Consumers are under pressure, but they haven't completely stopped spending. They are still dining out and making choices. It was crucial for us to remain top of mind, which requires effective communication, and we've increased our outreach, focusing on our core plus segments linked to college football, NASCAR, and other areas. This strategy is yielding positive outcomes. While the consumer environment may fluctuate, we feel well-prepared for the conditions we are facing. Towards the end of the year, we'll be comparing against a particularly weak fourth quarter from last year, and while we can’t share more specifics at this time, we believe we’ve learned from that experience and adapted our approach accordingly. Another point to note is that Cracker Barrel is an experiential brand. We serve about 200 million guests across breakfast, lunch, and dinner, and we are recognized for our hospitality. Hence, we've been increasing our investment in labor to ensure we can provide quality service and meet peak demand. This short-term investment is aimed at enhancing hospitality and is also improving the experience for our employees, leading to a reduction in turnover. As we consider how these investments will evolve over time, one potential outcome is lower turnover, which can enhance our efficiency. We are investing with the future in mind, focusing on bolstering our traffic in the short term, and believe our investments are well-timed for the current environment. Over time, we anticipate these efforts will also support our profitability.

Great. Thank you both.

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

Hi, thanks so much for the questions. First, I wanted to dive a little deeper into the promotional intensity that you mentioned. Is there any kind of differences in geographies or in specific subsegments you can speak to that you're seeing?

Hi, Katherine, it's Julie. I'll take that one. Yes. As we discussed in September on our last call, it's been really promotional out there from the competitors. So that really caused us, one, to take a look at what they were doing and what we were doing. As Craig just talked about, we really adjusted our messaging to ensure we were playing to our strength and our differentiators at Cracker Barrel because we are an all three daypart brand. So we wanted to make sure that our messaging really resonated with that core and the core plus guests across those three dayparts. Value messaging of our daypart messaging, value messaging around breakfast starting at $8.99, all of those things are really resonating well with our guests. The other thing that I spoke about in my prepared remarks that we're very heartened by is that, we made additional investments in testing some different marketing strategies throughout the quarter, one of which was college football, Craig talked about NASCAR. Those additional investments have returned quite well for us, both from a traffic and investment perspective. Additionally, we've invested in some local television advertising in some key markets. That has also provided a really strong return on investment and return on traffic that we've been pleased with. And we'll be constantly evaluating our marketing mix. The team has done a great job of digging in and looking at that to really drive efficiency as well as effectiveness with that core and core plus segment. So we remain optimistic about our ability to continue to evaluate and ramp effectiveness in that space as we move through the year.

Okay. Thank you. And then just following up on an earlier question, can you just help us frame sort of what the comps were by month in your fiscal second quarter of last year?

I don't have that information at the moment, but we will follow up with you. We will provide any details we can regarding the comparisons for last year.

Okay. Understood. Thank you.

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

I’d ask first off, on the commodity inflation guidance, obviously, Craig, you mentioned that you were down 2.3% in the first quarter, but you are looking for a low single-digit increase for the full year. I guess, one, what are the key drivers behind that increase as far as inputs? And then any sort of color on kind of what the pace may be over the next few quarters of the year?

Hi, Alton. In the first quarter, we experienced deflation, which gives us confidence about peak inflation from the previous year, so that’s positive news. We anticipate that the commodity environment will remain favorable for the remainder of the year, though we don't expect it to turn deflationary. For example, we expect bacon prices to begin increasing again. Therefore, we are projecting a much more modest commodity inflation for the rest of the year. As you're aware, beef prices have been high, and while beef constitutes a significant part of our mix, it’s not at the top. Consequently, we expect mild commodity inflation moving forward, but not deflation, partly due to the anticipated changes in bacon pricing.

Understood. Thanks for that color. And then, I guess just one quick additional question. Just on the retail side of your business, obviously, a disappointing comp performance, I'm sure for you here in the first quarter. You're heading now into, of course, what’s the huge time of the year for that business. I guess, how are you feeling heading into the holiday season on the retail side of things?

It's Craig again. Let me provide some background on retail. Since 2019, our retail business has consistently outperformed in sales and profit, which we are very proud of. However, recently, it has softened. It's important to remember that retail is completely discretionary; we don't sell essentials, and the retail environment has shifted towards everyday necessities, which isn't our main focus. Considering the current environment, I believe our retail business is holding up well. Our team has proactively adjusted inventory levels to maintain profitability as we move forward. We are doing our best to manage the situation as consumer preferences lean more towards essentials, while our offerings are typically desired items that are not daily necessities.

Sure. Thanks for that color. I appreciate it. I’ll hop back in the queue.

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

Great. Thank you so much for taking the question. My first one is also on the kind of near-term trends. And I think Craig and Julie, you both mentioned improving traffic throughout the quarter and into November. Can you share what the traffic was in the first quarter? I know it comes out with the Q, but if you could provide your traffic and mix and just so we can see what the trajectory is there.

Sure, Jake. I'll start with the numbers and then we can continue from there. For Q1, restaurant traffic was down 7.1%. The overall check was up 6.6%, driven by a price increase of 6.8% and a mix decline of 0.2%.

Okay. I understand. Based on the commentary about traffic improving each month and into November, it seems reasonable to conclude that same-store sales are trending positively for the quarter to date. This brings me back to last year's trends. At the ICR conference last year, you provided a preliminary revenue growth guidance of 6% for the second quarter, but you ended up reporting 8.3%. This suggests that January was stronger than anticipated, making comparisons with this year quite challenging. We're trying to assess how much we should interpret the current trends, which appear to be contributing positively to same-store sales for the restaurants throughout the quarter. Any insights on this would be appreciated. Additionally, I have a longer-term question.

Yeah. This is Craig again, Jake. Reflecting on Q2 from last year, there are really two parts to that. If I remember correctly, December ended on a softer note, largely due to some weather issues at the end of the month. Then January benefited from two main factors. One was the strong impact from Omicron, so part of the January success was related to that. Additionally, I think January was warmer than usual, providing some weather advantages. It's always tricky to predict the weather, but it seems like such conditions helped last January, while I recall that the latter part of December faced some weather challenges.

Okay. Okay. And then my other question is on margins. In the quarter itself, as you mentioned, your sales were in line with expectations internally. But you're at the lower end of guidance for margins. My question is, what drove that? What surprised you to the downside there on the margins. And as we look forward, you didn't explicitly give restaurant level margins or G&A guidance. But can you help us in terms of what is driving the expected kind of margin compression that's implied in guidance in '24. Is it the margin sign? Or is it G&A deleverage that you think is going to drive that?

For this quarter, we approached the first quarter with some data-driven hypotheses, but we were not completely sure. We began with additional advertising and increased our labor commitments, which led to really positive results from both initiatives. This gave us more confidence moving into November, prompting us to invest more in labor than we initially planned. While we did encounter some unexpected higher costs, such as increased wage rates and maintenance expenses, we felt that our strategy was paying off, so we continued along that path. As for the rest of the year, we will likely continue with the initiatives that have been effective, particularly advertising, as long as the return on investment remains attractive. The labor investment has been beneficial not just for immediate traffic but also for guest satisfaction and reducing turnover, which will provide long-term benefits. Therefore, we will keep investing in these areas as the year progresses.

Okay. Thank you very much. Appreciate it.

Our next question comes from Andrew Wolf with CL King. Please go ahead.

Good morning. My question is about guidance, specifically two aspects. First, regarding earnings, your guidance suggests improved margins for the next three quarters. You mentioned that the increase in advertising will persist, along with labor costs, as they are contributing to increased traffic. However, I might have overlooked it, so could you clarify whether you are still anticipating $30 million in gross cost savings this year to offset some of those expenses? If so, what will be the timing of those cost savings in relation to the increased spending that is driving the traffic?

Hi Andrew, it's Craig. I'll begin with the cost savings. We discussed achieving $30 million in cost savings last fiscal year, and we met that target. We initially aimed for $25 million and raised it to $30 million throughout the year. For fiscal '24, we have an internal goal for cost savings that remains steady and isn't higher than that. However, we recognize that we're making substantial investments, which makes it somewhat contradictory to emphasize cost savings while we are also significantly spending on labor and marketing. Our internal perspective is that we are saving costs more than we did last year, and we are reinvesting those savings to support our initiatives focused on driving guest engagement and enhancing the business in the long term.

Okay. That's good. Can you speak to the cadence? I mean, have you realized in first quarter like a pro rata amount? Or is it going to build more proportionately later in the year, the amount of cost savings?

The cost savings, I don't have the exact quarterly breakdown in front of me, but because we have a program that is a sustained program, a number of the cost savings that we started in fiscal '23, we didn't get 12 months of those cost saves in '23. So there's quite a bit that was carried through into fiscal '24. And then we have additional cost savings queued up in '24 as well.

Okay. Regarding the sales guidance, I want to clarify my numbers in relation to your possible scenarios. The sales guidance for the year is quite broad. I see potential for improvement, assuming things go as planned, but there’s also a chance that conditions could worsen, possibly even more than the recent quarter. Is this due to the need to factor in a more pessimistic scenario, despite Julie mentioning that the likelihood of a recession is lower? Given the uncertain consumer behavior and that we are not fully recovered in the economy, did you feel it necessary to include that in your sales guidance range?

I think that's a reasonable point of view. The economy is uncertain. So who knows what's going to happen. And I think to the extent that things continue to play out the way that we're seeing them, we would be towards the high end of the range. But to the degree that they don't, either from an external perspective or something happens internally would be on the low end of the range. The macro environment, it's still volatile and the overall economy has been doing well. But if you can dig below that, there are some concerning elements there. So we'll just need to kind of see how it goes and as a result, we're still pretty early in the year. As a result of that, we think that leads to that type of a range.

Thank you. Julie, it's encouraging to hear that the launch of the loyalty program is progressing well. I understand that you have a partnership with Dolly Parton running through early December involving the rocking chair giveaway. Will that mark the end of your collaboration with her, or are there plans to extend the partnership? Additionally, what strategies do you have in place to maintain the momentum of sign-ups at a rate above your expectations? Looking ahead, based on your experiences and insights from your consultants, when do you anticipate seeing a significant increase in traffic driven by targeted promotions and the overall benefits of the loyalty program?

Hi, Andrew, it's Julie. As I mentioned in my prepared remarks, we are really pleased with the launch of the program. We initiated the program without Dolly initially, and even then, guests embraced it and signed up, expressing excitement about what Cracker Barrel is offering. Once we added Dolly, as I noted, it became even more successful. We are delighted with that partnership; her status as an icon aligns perfectly with Cracker Barrel. The program has started strong, exceeding our expectations, and we have been integrating its benefits into our plans for this year and beyond. Our team continues to do an excellent job of delivering the benefits of the program, as we are ahead of our targets. We remain enthusiastic about it; while it’s still early days, we believe it will differentiate us moving forward and become an exciting aspect of our brand.

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

Hey, good morning. Thanks for taking my questions. First question, if I may. You were talking in regards to the retail segment, well-managed inventories and really trying to operate as much for protection of gross profit dollars than you are to drive top line. Can you spend a minute talking about the inventory positioning and how we should think about if that's a potential constraint on retail same-store sales as we're going into the holiday quarter here? And just trying to get some color around how to model retail same-store sales performance given where the inventories lie?

Hi Todd, it's Craig. I believe we are in a strong position. We offer a wide range of products, so if demand exceeds our forecasts, it could affect our discount strategy and allow us to increase our margins. Conversely, if demand remains lower, we will also manage our margins accordingly. Additionally, we have various promotional offers that change throughout the year. If one campaign performs better than expected, we can introduce another one sooner. We have options available due to our extensive product assortment. I feel confident about our approach to managing inventory in this segment of retail, helping us avoid excessive inventory and the need for large markdowns. However, if we do encounter such a situation, I would consider it a good problem to have, as increased demand would allow us to redirect customers to alternative items.

Okay, great. Thanks, Craig. And then two others, if I can. On the occupancy and other costs, you pointed out on a year-over-year basis, the incremental advertising and some incremental D&A and you pointed to the advertising, working, driving a return, layering in some local TV. What's the right way to think about that line item going forward? Is the spend that we saw in the first quarter kind of that just above mid 24% of sales level. Is that the right way to model this line and what we could call an investment year or maybe some more offensive spending around marketing?

I think it's fair to say that the advertising line item is going to be a bit higher. I'm not going to assure an exact number, candidly, in part because we're going to continue to flex that based on our findings, but I would expect it to be higher. There is also a part of the loyalty program. It's not dramatic, but there is a part of the loyalty expense for the loyalty program that goes through marketing. So that will cause that line item to be a bit higher. And then we're going to continue to optimize our profitability of our normal media to the degree that, that's working really well as we're getting a compelling return. We'll do more to the degree that we are not seen as compelling of a return, not as profitable, then we may do less. But in general, I would expect marketing to be higher than it's been traditionally for the coming quarters.

To clarify, when we look at year-over-year data and see an increase of 130 basis points, are you suggesting, Craig, that due to the success you've experienced, you anticipate that marketing will actually increase as we move through the year?

No, I'll just mention that of the 130 basis points in Q1, around 80 basis points were related to marketing. I'm not suggesting that we'll be investing significantly more than that. We might, but it would be modest. It could be a little more or a little less, but I don't expect our marketing spend as a percentage of sales to reach the levels seen in 2023. It will be higher as a percentage of sales as we move into 2024 compared to 2023.

Okay. Perfect. And then it looks like ex the one-time expenditures in the quarter, the G&A came in a little bit more efficiently than I expected. Would you encourage us to budget that type of mid-5s percentage of sales? And then what's the cadence of the CEO transition cost and the strategic initiative costs, how do those come in over the balance of the year? Thanks.

I don't anticipate any significant changes regarding general and administrative expenses, and I won't go into too much detail on that. I do believe that the one-time costs will increase in Q2 due to the CEO transition, specifically related to retirement benefits earned by Sandy, the former CEO, who officially retired early in Q2. Consequently, I expect this to lead to higher expenses in that quarter. I foresee consultant costs remaining relatively steady from Q2 through Q4, as we began at the midpoint in Q1. Therefore, I expect Q3 and Q4 to show little variation in that area.

Okay, great. Thanks, Craig.

Our next question comes from Aisling Grueninger with Piper Sandler. Please go ahead.

Hi, good morning. My question is on Maple Street. On the last earnings call, it was mentioned that Maple Street weekdays were still challenged. We're just wondering you've seen any improvements in that and how you're thinking about the growth of Maple Street over the course of the year?

Hi, Aisling, this is Craig. Over the past quarter, we've observed significant traffic improvements at Maple Street. Weekdays remain somewhat soft, but we've focused on enhancing our weekend performance by extending our operating hours due to high demand, especially during weekend lunch. Looking ahead, we're optimistic about the business as it offers a unique proposition and aligns well with our location strategy, complementing Cracker Barrel. We did experience delays in our opening this quarter due to construction, but we're growing the business at a moderate pace. However, we recognize there is still more work needed, particularly to improve performance on weekdays. While we've seen some advancements during the week, the weekend improvements have been more pronounced, which is encouraging. Nonetheless, we need to continue addressing weekday performance.

That’s great to hear. Thanks, I’ll pass it back.

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

Thank you all for joining us today. We're encouraged by our improved traffic trend and our start to Q2. And while we are mindful of the competitive and uncertain environment in which we continue to operate, we are cautiously optimistic that we will sustain this momentum and drive improved performance over the balance of the year. We have a lot of work ahead of us to achieve our objectives, but we have a strong foundation in place, and I'm confident that our talented teams are up for the challenge. Before we sign off, I'd like to wish you all a happy holiday season and express my sincere appreciation to our more than 70,000 employees not only for their hard work over Thanksgiving last week, but for the warm welcome they have extended to me since joining the Cracker Barrel family and for all they do every day, every shift to delight our guests and to bring this great brand to life. Thank you all and happy holidays.

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