Earnings Call Transcript - CBRL Q1 2023

Unidentified Company Representative, Vice President of Investor Relations

Thank you. Good morning, and welcome to Cracker Barrel's first quarter fiscal 2023 conference call and webcast. This morning, we issued a press release announcing our first quarter results. In this press release and on this call, we will refer to non-GAAP financial measures for the first quarter ended October 28, 2022. The non-GAAP financial measures are adjusted to exclude the non-cash amortization of the asset recognized for the gains on our sale and leaseback transactions, and the related tax impact and expenses related to the proxy contest and settlement in connection with the company's 2022 Annual Meeting of Shareholders. The company believes that excluding these items from its financial results provide investors with an enhanced understanding of the company's financial performance. This information is not intended to be considered in isolation or as a substitute for net income or earnings per share information prepared in accordance with GAAP. The last pages of the press release include reconciliations from the non-GAAP information to the GAAP financials. On the call, with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO, Craig Pommells; and Senior Vice President and CMO, Jen Tate. Sandy 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 Jen. On this call, statements may be made by management of their beliefs and expectations regarding the company's future operating results or expected future events. These are known as forward-looking statements, which involve risks and uncertainties that, in many cases, are beyond management's control and may cause actual results to differ materially from expectations. We caution our listeners and readers in considering forward-looking statements and information. Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties found at the end of the press release and are described in detail in our reports that we file or furnish with 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?

Sandy Cochran, CEO

Thank you, and good morning, everyone. This morning, we announced total sales growth of 7%. I was pleased with these results, which included comparable store restaurant sales growth of 7.1% and comparable store retail sales growth of 4.3%. Our adjusted operating income margin of 3.6% was also within our expectations and reflected the persistently high inflation that we were anticipating during the quarter. While we believe commodity costs will improve over the balance of the year, inflation across the P&L is taking longer to abate than we had originally expected and continues to pressure margins. Despite the macroeconomic headwinds, our store operations teams are working to deliver a great guest experience, our menu and retail products are resonating with guests, especially those seeking value, and we're tracking to deliver on our strategic initiatives. I believe these initiatives position us well to navigate the environment and drive improved performance over the rest of the fiscal year and beyond. And now I'd like to speak to some highlights from the first quarter. From a culinary perspective, we saw positive guest response to the breakfast initiative that we launched this summer and we believe our guests are reacting positively to our strong value proposition and our focus on hospitality. Our build-your-own breakfast category and our Strawberry Cheesecake Pancakes performed well as did the signature for our chicken platform that we featured in the quarter. Additionally, we saw favorable check mix driven by increased sales of barrel bites, premium sides, desserts and non-alcoholic beverages, and we're happy with the growth that we're seeing with beer and wine. Our retail teams again delivered strong results, especially considering the performance we were lapping in the prior year. We saw growth in our everyday business and in our decor and apparel and accessories categories and our seasonal themes such as harvest and Halloween performed particularly well. During the quarter, we continued to make progress on key initiatives, and we remain focused on hospitality and the guest experience and I was pleased that we sustained our improvements to our dine-in guest metrics. From a guest visitation perspective, the most recent data which is for July through September showed some improvement in our visitation by guests that are 65 and older. While this was likely buoyed by our wrapping delta in the prior year, we were encouraged by this result and are cautiously optimistic that we will see further improvements with this cohort over the balance of the year. We also saw visitation gains with younger guests who we believe are responding to our culinary and marketing initiatives and with lower income guests who we believe are responding to our strong value proposition as they navigate the financial pressures of the current economic environment. We're gaining traction and strengthening our business model, we remain on track to achieve our $20 million to $25 million cost savings goal in FY '23. Additionally, we expanded the test of our new labor system, which is now in over 140 stores and have been encouraged by the results. Lastly, Maple Street is making progress towards their new unit target. They opened three new locations during Q1, which includes two in Texas and one in Georgia. Craig will now cover our first quarter results in greater detail and share our expectations for the fiscal year. And once he's finished, I'll provide some additional details about upcoming initiatives.

Craig Pommells, CFO

Thank you, Sandy, and good morning, everyone. For the first quarter, we delivered top line results in line with our expectations, which included total revenue of $839.5 million, an increase of 7% over the prior year quarter. Restaurant revenue increased 7.6% to $662.2 million and retail revenue increased 4.6% to $177.3 million versus the prior year quarter. Comparable store total sales, including both restaurant and retail grew by 6.5%. Comparable store restaurant sales grew by 7.1% over the prior year, driven primarily by approximately 8% pricing, which consisted of approximately 5% carryforward pricing from fiscal 2022 and approximately 3% new pricing. We are closely monitoring the impact or pricing has happened on traffic and check, and we're pleased that we have not seen any meaningful pushback from our guests in this regard. Off-premise sales were 17.5% of restaurant sales. Comparable store retail sales increased 4.3% compared to the first quarter of the prior year. The core and apparel and accessories delivered the largest increases by category. Moving on to our first quarter expenses. Total cost of goods sold in the quarter was 33.5% of total revenue versus 30.9% in the prior year quarter. Restaurant cost of goods sold in the quarter was 29.1% of restaurant sales versus 26% in the prior year quarter. This 310 basis point increase was primarily driven by commodity inflation of 16.7% and elevated freight costs partially offset by pricing. The commodity inflation we experienced over the quarter was seen across our entire market basket were the primary drivers of the year-over-year increase in Q1 were poultry, dairy and produce. First quarter retail cost of goods sold was 50.2% of retail sales versus 48.7% in the prior year quarter. This 150 basis point increase was primarily driven by increased promotional activity and higher freight costs. Our inventories at quarter end were $231 million, compared to $160 million in the prior year, which as a reminder, were below historical levels. In addition to comping over a lower base, most of this year-over-year increase was in our retail inventories and was driven by several intentional actions on our part, including our investments in merchandise to support higher planned sales, especially in our everyday categories and Christmas themes and our acceleration of purchasing in certain areas to mitigate supply chain challenges and to ensure on-time delivery. With regard to labor cost, our first quarter labor and related expenses were 34.8% of revenue versus 35% in the prior year quarter, a decrease of 20 basis points. Wage inflation for the quarter was 8%. Finally, adjusted other operating expenses were 23.1% of revenue versus 23% in the prior year quarter. And our adjusted general and administrative expenses in the first quarter were 5.1% of revenue versus 5.2% in the prior year quarter. All of this culminated in GAAP operating income of $23.6 million. Adjusted for the non-cash amortization of the asset recognized from the gains on the sale and leaseback transactions and expenses related to the proxy contest and settlements adjusted operating income for the quarter was $30 million or 3.6% of revenue. Net interest expense for the quarter was $3.5 million, compared to net interest expense of $2.6 million in the prior year quarter. This increase is the result of higher interest rates and a higher level of borrowing. Our GAAP effective tax rate for the first quarter was 14.7%. First quarter GAAP earnings per diluted share were $0.77 and adjusted earnings per diluted share were $0.99. In the first quarter, adjusted EBITDA was $54.8 million or 6.5% of total revenue. Turning to capital allocation and our balance sheet. We remain committed to a balanced approach to capital allocation. Our first priority remains invested 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 $21.6 million in capital expenditures, primarily on maintenance of existing stores and we returned $42 million to shareholders in the first quarter through a combination of dividends and share repurchases. Lastly, we ended the quarter with $484 million in total debt. For the full year, we expect our leverage ratio will be within our target range of 1.3 times to 1.7 times. With respect to our fiscal 2023 outlook, I would like to provide some additional color on the guidance provided in this morning's release. Everyone should be mindful of the risks and uncertainties associated with this outlook as described in today's earnings release and in our reports filed with the SEC. We continue to operate in a challenging environment of economic uncertainty that makes predicting the balance of the year particularly difficult. Consumer confidence, recessionary risks, inflation and supply chain constraints are some of the things that depended on whether, when and how much they shift, can impact our business positively or negatively for the balance of the year and consequently, when we expect to return to higher margins. Predicting becomes even more challenging when we try to weigh the impact of these drivers on particular groups such as over 65 and lower-income guests and travelers. We've seen this play out month-to-month on the sales side since we began our fiscal year in August. August and September sales were strong, but then we saw softening in October. November sales, however, exceeded our expectations due to a strong holiday performance and increased special occasion catering but a slightly lower dine-in traffic. All of this makes the tea leaves more challenging than normal to read as we project out the balance of the year. This also applies to the cost side as we attempt to predict changes in commodity inflation. We expect commodity inflation to moderate, but the timing and magnitude is complicated by market basket wins. For example, lower chicken and pork prices may be offset by higher than anticipated increases in eggs, dairy and produce. Turning to the numbers. We currently expect total FY '23 revenue growth over the prior year of 6% to 8%. In addition to anticipated favorable comparable store total sales growth, this assumes the opening of three to four new Cracker Barrel locations and the opening of 15 to 20 new Maple Street locations. Comparable store sales growth is expected to be primarily driven by approximately 8% total annual pricing. We remain prudent and thoughtful in our approach to pricing and are utilizing multiple approaches to monitor guest reactions to price increases, including pricing holdback groups, first and third-party guest surveys and monitoring pricing flow through. We now anticipate commodity inflation of approximately 8% to 9% for the fiscal year with low double-digit inflation in Q2 and mid-single digit inflation in Q3 and slight deflation in Q4. We now expect wage inflation of approximately 5% to 6% for the fiscal year. We believe wage inflation peaked in Q1 and anticipate lower inflation rates for the remainder of the year. As I said earlier, we continue to expect to deliver between $20 million to $25 million in cost savings during this fiscal year, ending the year at annualized run rate savings of approximately $13 million from the work we've done over the last several quarters. As a reminder, we anticipate restaurant costs and labor and related to each deliver just under 40% of the annualized savings with much of the remaining 20% being realized in other operating expenses. In addition to the above assumptions for revenue growth, commodity and wage inflation and cost savings, our operating income margin expectation contemplates the following assumptions: continued inflation pressures in other areas of the P&L, most notably supplies, utilities and maintenance. Moderation in retail margin compared to the prior year near historic highs and incentive compensation normalization, which will have a meaningful impact on G&A in Q3 and Q4. We continue to believe what we said last quarter that our costs will gradually improve as we move to the back half of the fiscal year. While the timing has shifted out a bit so that the benefits of the back half are likely more heavily weighted to Q4. As a result, we anticipate that our second quarter adjusted operating income margin will be meaningfully below the prior year quarter. However, we expect our operating income margin rate will improve in the back half of the year as commodity inflation moderates and our cost savings initiatives gain further traction. As a result, we anticipate our Q4 operating income margin will be well above the first quarter we just reported. Taking all of this into account, we expect full year adjusted operating income margin to be in the high 4% range. We also believe there is upside in our operating income expectation if there were to be further moderation in the commodity environment and potential downside if there were to be deterioration of the consumer environment or if inflation fails to moderate or further increases. Lastly, we anticipate that capital expenditures for the year will be approximately $125 million, including new store investments of roughly $30 million. I'll now turn the call back over to Sandy so that she may share additional details around the business plans and outlook for fiscal 2023.

Sandy Cochran, CEO

As Craig outlined, the current environment is challenging to navigate and to predict, especially with regard to inflation and recessionary uncertainty. Despite this, we remain confident in our plans and believe we will see improved performance later in the fiscal year. Now I'd like to speak to some of the Q2 highlights. As a reminder, our second quarter is an especially important quarter for us due to seasonally higher volumes and this is particularly true for our off-premise business. As Craig mentioned, we're generally pleased with our performance in November. We again saw strong demand for our Thanksgiving heat-and-serve offerings, which continue to resonate with guests that are looking to provide a delicious convenient home cooked meal at a strong value for their family and friends, and we're looking forward to Christmas. As you may recall, one of our goals for the fiscal year was to grow our catering business 25% to $100 million. Enhancements to our catering offerings and optimized marketing support have driven meaningful growth within this channel and we are on track to achieve our growth target. Given the prevailing environment, we believe preserving our value leadership is critical importance and we'll be leaning further into value messaging in the upcoming months. From a pricing perspective, as Craig emphasized, we remain thoughtful with how we're taking pricing and are being mindful to preserve the value sections of our menu and to maintain attractive entry price points. We believe we're striking an appropriate balance of protecting margins and preserving our value strength, and we're closely monitoring guest reaction. Continue to invest in technology to enhance the guest experience, and I'm particularly excited about our completely new app that we launched at the beginning of November, which greatly improves the user experience and reduces friction to make ordering and reordering much easier. In addition to enhancing the guest experience, the new app also lays the foundation for our loyalty program, which we plan to launch during the fourth quarter. Regarding retail, we've generally been pleased with our Christmas theme performance and our overall results quarter-to-date have been within expectations. However, we continue to monitor the retail environment in the face of potential macroeconomic headwinds and aggressive discounting. And while we believe our unique offerings at strong price points resonate with guests and benefit our retail business, we expect our promotional activity will be higher than the prior year, even though it's still well below historical levels. In conclusion, we delivered Q1 results that were within expectations, and we're making great progress on our initiatives. We remain confident in our strategy and encouraged by our start to Q2. We continue to face headwinds, especially from inflation, but expect to see significant improvements to our performance in the latter portion of the fiscal year as our initiatives gain further traction and the external environment becomes more favorable. Before wrapping up, we're happy to announce that Bill Moreton has joined our Board of Directors. Many of you are likely already familiar with Bill, who's a well-known leader in the restaurant space, most notably with Panera Bread Company, where he served in a variety of senior executive positions over several tenures, including CEO, CFO and Executive Vice Chairman. Like Jody Bilney, who recently joined our Board, we've known Bill for several years and have great respect for him. Our entire Board and management team are looking forward to working with him and with Jody as we tackle the opportunities ahead of us. Lastly, I'd like to thank our employees for their continued resilience and their dedication to our brand and our guests. Thank you. And with that, I'll turn the call over to the operator for your questions.

Operator, Operator

We will now begin the question-and-answer session. The first question today comes from Todd Brooks with Benchmark. Please go ahead.

Todd Brooks, Analyst

Hey. Good morning, everybody. Thanks for taking my questions. I appreciate it.

Sandy Cochran, CEO

Good morning.

Todd Brooks, Analyst

If I could ask a couple of questions. One regarding the inventory side. I know we discussed that the dollars were up about 45%, primarily on the retail side. Craig, I believe you mentioned that timing is still affecting the flow of products this year compared to last year for the holiday season. Could you share some insights on what the unit inventories look like? I expected that we would be closer to the holiday season now and have adjusted for some of the supply chain challenges in the year-over-year comparison. It would be helpful to know what unit inventory increases you are seeing for retail.

Sandy Cochran, CEO

Why don't I take that one, Todd. Good morning.

Todd Brooks, Analyst

Sure.

Sandy Cochran, CEO

This is Sandy. I'll try to give you a little bit of color. So if you were to break down the increase in inventory, a little more than 25% of the increase is just bringing in product earlier than we would have. And no, that won't really work through the system. And still some of it will see the difference by the end of the second quarter, but certainly by the end of the year because we're still bringing in some. We order so far ahead and about a little over 30% of it then is an increase in inventory to support our everyday business. So I don't have the unit counts, but that's food, personal care and business that we actually would have liked to have had more last year, but it supports your every day. I'd say about 5% of the increase has been in cost increase across the board. So yes, the inventories are up. I'm comfortable with where we're positioned at this point. And as we go through the year, I think you'll see normalizing more in the second half of the year.

Todd Brooks, Analyst

Thank you, Sandy. I have another question before I rejoin the queue. Your upcoming quarter concludes in January, so you experienced the full impact of Omicron last year. Could you provide a recap of your staffing levels in the second quarter of fiscal '22? What measures did you implement concerning unit closures, reduced operating hours, and limited dining room capacity? Additionally, how is your staffing situation as you approach the holiday quarter, and what opportunities do you foresee for revenue growth? Thank you.

Sandy Cochran, CEO

It feels like a significant amount of time has passed and also just yesterday since dealing with COVID. As we look ahead to the second quarter, we are anticipating the effects of Omicron, which began for us around December 21. This year, we feel very good about our staffing levels. While we still have some stores where we would like additional staff, this was an issue even before COVID. Last year, we faced more significant staffing struggles, especially with front-of-house staff like servers, which also affected call-outs. There were times when, even with sufficient staffing, COVID-related issues prevented some staff from coming to work, leading us to limit dining options in certain locations and, in some cases, only offering off-premise service. All of these factors have been taken into account in our expectations for second-quarter performance. We believe that our 65-year-old guests, who were particularly sensitive to COVID concerns last year, will return, which we are looking forward to in the second quarter.

Todd Brooks, Analyst

Okay. And one quick follow-up just on that last point. If I look at the change in the annual revenue guidance, kind of taking the low end down to up 6% from up 7% prior year coming off a quarter that was in line with expectations. You spoke to potentially returning strength in that 65 plus customer why are we dropping the low end of the guidance from where we were revenue-wise at the end of the fiscal year? Thanks.

Craig Pommells, CFO

It's a very good question. The underlying reason is volatility. This fiscal year, which began in August, started off really strong, particularly in August and September. October showed a decline, but November has exceeded our expectations. Overall, we feel confident in our top line estimates. However, the range of performance has widened. This is due to the varying news that people are receiving and their personal financial experiences. Gas prices have generally decreased, but the news regarding grocery prices is contributing to increased volatility in results. Consequently, we believe the range is broader, even though we maintain confidence in our overall expectations.

Todd Brooks, Analyst

Okay. That’s helpful. Thanks, Craig.

Jake Bartlett, Analyst

Thank you for answering my question. I would like to clarify how November performed, specifically outside of Thanksgiving. I'm curious if November was strong mainly due to Thanksgiving, or if the rest of the month showed some inconsistencies. Any insights on this would be appreciated.

Craig Pommells, CFO

Certainly, Jake. Good question. In November, we observed strong performance overall, particularly in our holiday and catering businesses. Our dining segment was slightly below expectations, although it did show improvement compared to the previous month. This reflects the broader theme of volatility we are experiencing. Overall, we're confident in our top-line numbers, but there are fluctuations beneath the surface. While dine-in remains somewhat below expectations, it has improved from the prior period.

Jake Bartlett, Analyst

Great. I have a question regarding the older demographic, particularly the maturing and baby boomer generation, which seems to be improving slightly. With the social security adjustment increasing by 8.7% in 2023, how much of a benefit do you anticipate that could represent for Cracker Barrel? Additionally, could you provide an update on what percentage of sales comes from that older demographic? My understanding was that it accounted for about 50% historically, so confirming or clarifying that would be appreciated.

Jennifer Tate, CMO

Hey, Jake. It's Jen. In general, we are still seeing all-time lows or near all-time lows in sentiment among our guests aged 65 and older, despite the increase in social security. The pressures from rising food, gas, and rent costs are significant. Food inflation at grocery stores is up 20%, and while gas prices are low right now, they have been extremely volatile. Their sentiment is very negative, and their outlook for the future shows high financial insecurity. Although there has been some improvement in trends with our 65-plus guests, there is still a lot of recovery needed for that group. I won’t go into specific percentages, but they are lower than you might think. On the other hand, we are observing a noticeable increase among the younger generation. Over the past several quarters, we have seen greater engagement from younger guests, particularly those aged 18 to 34. We believe this is largely due to our strategic initiatives, including updates to our culinary and beverage offerings, a stronger focus on targeted digital marketing, and technology enhancements tailored for them. We are seeing sustained improvement with that demographic as well.

Jake Bartlett, Analyst

Great. I think a few years back, you mentioned in a presentation that about a third of the traffic comes from a specific source, which had a higher frequency. That’s where I got that number, and it's encouraging to see it decrease. Also, Craig, regarding food costs, I want to clarify the current situation. How much of it is contracted and what visibility do you have on commodity inflation now? Last time, you mentioned being largely contracted through December. Have you continued to contract, and do you have better visibility? Additionally, I noticed that COGS has been rising more than what the inflation and pricing figures would indicate. With inflation at 16.7% and pricing at 8%, the math would suggest around 200 basis points, but you're at 300 basis points. There's a negative mix impact that seems to have been affecting this for several quarters now, and I’m trying to understand it better since it appears to be a significant factor. Clarifying this and the visibility of commodity inflation would be helpful.

Craig Pommells, CFO

Absolutely. There are a few components to consider. Regarding the potential for inflation in the cost of goods sold to exceed our calculations, some of this relates to freight, which we can discuss in more detail later. Currently, we are about 40% to 45% covered and are negotiating for our 2023 calendar. We believe that the situation with commodity inflation will play a critical role in our margin improvement expectations. We have enough insight to feel confident that commodity inflation, in particular, is easing. We're all aware of the decreases in chicken and bacon prices. However, we are seeing increases in prices for items like eggs, dairy, and some produce. Overall, we anticipate that produce prices will decrease. While current developments are meeting our expectations, they are taking a bit longer than we initially anticipated. Therefore, we foresee our cost of goods sold, which will significantly contribute to our margin and profitability improvements, to start benefiting us in the fourth quarter. At that time, we expect to perform well above last year. By then, we will see some commodity deflation and fully realize the benefits from the pricing actions we've taken throughout the year. In summary, our overall expectations remain similar; they may have shifted slightly, but they are not drastically different from where we started the fiscal year.

Jake Bartlett, Analyst

Great. Thank you so much. I appreciate it.

Craig Pommells, CFO

You’re welcome.

Jon Tower, Analyst

Thank you for your time. I have a few questions if that's okay. First, regarding the inventory on the retail side, are you expecting to implement greater markdowns as we head into the holiday season? Will you need to be more aggressive with those markdowns to manage inventory, rather than holding onto it for next year's holiday season? I have a couple more questions after that.

Sandy Cochran, CEO

I believe that, as mentioned in our prepared remarks, we are expecting higher promotional activity compared to last year, but still lower than our historical averages. The team has effectively managed our inventory, allocating it to stores that demonstrate momentum and demand, while keeping markdowns under tight control. Overall, I feel confident about our performance against our plan. That said, we are closely monitoring the retail environment since we are affected by broader discounting trends. I am optimistic about our inventory; it offers great value and seems to resonate well with our customers. Each week, we focus on managing the sell-through, especially for our seasonal items and last-minute gift assortments, ensuring we maintain strict control over any markdown expenditure.

Jon Tower, Analyst

Okay. I want to delve deeper into the guidance for this year, specifically regarding the fiscal second quarter. Last quarter, you provided a revenue forecast that indicated it was within the targeted range based on the current quarter's performance. Can you update us on its current status as we move past November? Additionally, regarding the margins for the second quarter being significantly lower than last year, are we expecting results similar to what was reported in the first quarter, either in comparison to last year or at an absolute level? I'm trying to understand the overall picture here.

Craig Pommells, CFO

Yeah, without giving the exact number on Q2, I would say first quarter was meaningfully below the prior year and second quarter meaningfully below. So both in terms of order of magnitude, similar explanation there. Okay. And what was the other part of the question, Jon?

Jon Tower, Analyst

The revenue piece we just got into, whether or not in the...

Craig Pommells, CFO

Our performance in November was in line with our expectations, and we were pleased with that. It contributes to our overall guidance of 6% to 8%. Overall, we met our expectations and performed slightly better than anticipated for November.

Jon Tower, Analyst

Okay. With inflation continuing and the expectation of deflation in the fourth quarter regarding food costs, how are you approaching your pricing strategy? It appears that overall inflation for the year is likely to be somewhat higher for both food and labor, along with some other operating expenses. Currently, you're implementing an 8% price increase. Are you considering further price adjustments to help mitigate these costs?

Craig Pommells, CFO

It's an ongoing conversation. By our fourth quarter, we expect to improve our margins significantly, assuming everything unfolds as anticipated. Over the years, our pricing strategy has focused on being a value leader, which we believe is especially important in today’s environment. We’ve been willing to stay slightly behind on pricing to avoid losing customer traffic, and our analysis shows that this strategy is effective. We will continue to find a balance between adjusting prices now for margin improvement and taking more time to recover those margins. We anticipate that we will see progress in this area by Q4. Could we raise prices further? Yes, it's a possibility. We're carefully observing the consumer landscape, especially given the current unusual mix of recessionary and inflationary pressures, but we are seeing some easing in certain inflationary components. Therefore, we’re cautious about implementing price increases. In summary, we are being very strategic about this, and we expect our margin improvements will materialize by Q4.

Jon Tower, Analyst

I appreciate that. Just one last question for me. You've recently had some new board members join, so I'm interested in whether discussions about capital allocation policies have evolved with their addition. I know one just joined today, but do you have any updated thoughts on capital allocation policies?

Sandy Cochran, CEO

The Board is engaging in ongoing discussions about capital allocation at each meeting. Our new Board members, including Bill, who just joined today, and Jodi, who attended her first meeting about a week ago, haven't yet had the chance to contribute significantly. Overall, the Board is maintaining a balanced approach, prioritizing growth in Cracker Barrel and Maple Street. Additionally, we aim to return capital to shareholders through dividends and buybacks. They are committed to continually assessing these opportunities and making what they believe are the best decisions at the time.

Jon Tower, Analyst

Got it. I'm sorry, one last one for me. I apologize. When thinking about G&A for the year, how should we think about from a dollar basis where that should settle out?

Craig Pommells, CFO

No, we haven't provided that level of guidance. For general and administrative expenses, I want to keep a couple of things in mind. G&A has been impacted by inflation, including wages, which affect everything in the profit and loss statement. One additional consideration is that in the fourth quarter, we expect our margins to improve significantly. At the same time, we anticipate that incentive compensation will normalize somewhat compared to the previous year, and a large part of that will be reflected in G&A. We are also making additional investments to support our digital initiatives, like loyalty programs and so on. There are many moving parts in G&A, and we expect to gain some leverage from our investments, along with some normalization expected in the third and fourth quarters, particularly in Q4.

Brian Mullan, Analyst

Thank you for your remarks. Earlier, you mentioned that the labor system test is being expanded to more stores and that you are pleased with the progress so far. Could you share some examples of the benefits these stores are seeing from the test? Additionally, how quickly do you anticipate rolling this out to the rest of the system, and do you still expect to achieve significant savings in this fiscal year?

Craig Pommells, CFO

Yes, absolutely, Brian. This is part of our cost savings, the $20 million to $25 million, and it's included in the $30 million run rate for the end of the year. We are pleased with the labor system performance. We've observed solid results both in productivity and across several other key performance indicators. It’s simply a better way to run the business, providing the team with more detailed visibility than before. We are being thoughtful about this process. I don't believe we will be fully rolled out by the end of the fiscal year, but we will be close. Consequently, this is a factor in achieving that $20 million to $25 million to $30 million by the end of the year.

Brian Mullan, Analyst

Okay. Thank you. And then just a follow-up. On the Maple Street development pipeline, I think the guidance implies you're going to open anywhere from 12 to 17 more units this fiscal year. Can you just give us a sense into the visibility at this point, how many are under construction right now? And then just related to that, what are kind of the key metrics you're watching as you go down this path? I think you want to accelerate in '24 and '25. But building these yourself is new for the company since it was an acquisition. So just an update on all that.

Sandy Cochran, CEO

Right now, I feel confident that we will open within the expected range, but there is still a lot of uncertainty regarding construction and equipment. We could experience some delays due to construction issues. I am satisfied with the openings we've had, particularly in Florida and Texas, and we recently opened one in Georgia. Overall, I am comfortable with our progress. We are opening in various real estate locations to better understand what works and what doesn’t as we develop our model. I’m also looking forward to John MacGuire expanding his team. One of the challenges to growth will be ensuring we have the necessary resources and infrastructure, particularly in terms of management, which I’m pleased to see the team is addressing effectively.

Katherine Griffin, Analyst

Hi. Thank you. First, I was curious to hear a bit more about sort of what you mentioned earlier about leaning into digital and expanding loyalty program. I'm curious if you can just kind of put some more context to that, whether what the sort of objectives are? Is it getting the younger cohorts into the stores more frequently? Is it having access to customer data that you can leverage in some way. I think just more color on sort of the reason behind leaning into digital would be helpful.

Jennifer Tate, CMO

Sure. Hey, Katherine. It's Jen. This year, we've observed strong results from our targeted digital marketing efforts aimed at younger demographics. We've been utilizing insights from our segmentation study to improve both the amount and quality of our digital marketing initiatives with these groups, and this strategy appears to be paying off as we see an increase in engagement among them. Our loyalty objectives are threefold. First, we aim to increase frequency and traffic across all our customer segments, particularly since our research shows that younger guests are very interested in a loyalty rewards program. Second, we want to enhance guest satisfaction and build long-term loyalty with a unique program, leveraging our distinct brand that combines both a restaurant and a special retail experience. Finally, and perhaps most crucially, we aim to harness the power of our data to support our innovation efforts, marketing strategies, and overall operations. These are the core objectives of our loyalty program.

Katherine Griffin, Analyst

Thank you for your insights. I'm interested to know if Cracker Barrel is targeting a newer, younger demographic that differs significantly from the 65 and older group regarding their purchasing habits and brand preferences, especially around the concept of value. I wonder if there's an opportunity to increase prices for this younger customer segment, as their financial pressures might differ from those of older customers. Additionally, I would like to understand how you perceive the importance of value for this newer customer mix.

Jennifer Tate, CMO

Well, first, I'd say, whether you're 65 or 25, the things that really attract people to their brand are very similar. They love the experiential nature of the brand. They live our food, they love the welcome. They just love the experiential part of the brand. When it comes to value, I think everybody loves getting a great deal. But what we are able to see is those younger guests are very open to the mix driving initiatives we've done. So they are very likely to try a crafted coffee like a latte or if they're over we can interest them in a Mimosa or one of our signature alcoholic beverages they opt into Barrel Bites, which are Shareables category, our premium size or desserts. So we have been able to entice them into those voluntary check builders. And so they are very likely to opt in to trying new things, higher priced entrees and of course, add-ons.

Operator, Operator

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

Sandy Cochran, CEO

Thank you all for joining us today. I'm encouraged by our start of the year and remain confident in our plans to drive improved performance over the balance of the year. We appreciate your interest and support and wish you all a safe and happy holiday season.

Operator, Operator

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