Earnings Call Transcript - CBRL Q1 2021

Operator, Operator

Good morning and welcome to the Cracker Barrel Fiscal 2021 First Quarter Earnings Call. All participants will be in a listen-only mode. After today's presentation there will be an opportunity to ask questions. Please note that this event is being recorded. I’d like to turn the call over to Mr. Adam Hanan, Manager of Investor Relations. Please go ahead.

Adam Hanan, Manager of Investor Relations

Thank you. Good morning and welcome to Cracker Barrel’s first quarter fiscal 2021 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 30, 2020.

Sandra Cochran, CEO

Thanks, Adam. Good morning, everyone. Thank you for joining us, and I hope everyone is continuing to stay safe and healthy. Today I'm going to begin my prepared remarks by briefly discussing our first quarter performance, and then I'll touch on our Q2 plans, provide an update on our initiatives, and comment on our outlook. As you can see from our press release, we delivered first quarter results that significantly improved upon the previous quarter. Comparable store restaurant sales declined 16.4% in the quarter, improving from down 39.2% in the fourth quarter. I believe our results demonstrate that we have the right strategy in place and underscore the strength of our brand and the trust our guests have to deliver a great dining experience.

Jill Golder, CFO

Good morning. And thank you, Sandy. Today my prepared remarks will focus on our first quarter financial performance, updates on our strategic initiatives, and our liquidity position. Then I will provide an update on recent sales trends and comment on our outlook. I would like to begin by discussing our financial performance for the first quarter of fiscal 2021. For the quarter, we reported total revenue of $646.5 million, a decrease of 13.7% compared to the prior year quarter. Our restaurant revenue decreased 15.1% to $515.2 million, and our retail revenue decreased 7.6% to $131.2 million. We were pleased with the improvement we saw in our comparable store restaurant and retail sales compared to the previous quarter. Comparable store restaurant sales improved from down 39.2% in the fourth quarter to down 16.4% in the first quarter. The sales improvement was broad, both geographically and across day parts. The South was our strongest performing region; dinner remained the strongest day part, and all three day parts saw solid improvement. We believe our first quarter top line results were driven by improvements in dining room capacity, our new lunch and dinner menu, off-premise initiatives, and for a portion of our stores, front porch dining. Our first quarter comparable store restaurant sales consisted of a traffic decline of 18.3% and a 1.9% increase in average check, which included core menu pricing of approximately 1%. Off-premise sales grew 122% compared to the prior year and represented approximately 25% of total restaurant sales. Comparable store retail sales improved from down 32.3% in the fourth quarter to down 8.1% in the first quarter, driven by strength in categories such as decor, personal care, and furniture. Now moving on to expenses. Total cost of goods sold in the quarter was 30.8% of total revenue versus 29.3% in the prior year quarter. Our restaurant cost of goods sold was 25.7% of restaurant sales versus 24.6% in the prior year quarter. This 110 basis point increase was primarily driven by commodity inflation of 1.9%, outpacing our core menu pricing, as well as changes to menu mix.

Operator, Operator

First question is from Alton Stump of Longbow Research. Please go ahead.

Alton Stump, Analyst

Thank you for taking the call. Just coming back to the point that you made, Jill. I wondered about Thanksgiving being a huge week for you guys during the month. I was curious about the interplay between obviously travel, but on the other hand, there were a lot more groups on average that potentially might fit well with your Heat n' Serve platform. I was curious about what the puts and takes were, particularly over the holiday and what that might portend for the upcoming Christmas season as well?

Jill Golder, CFO

Great. Good morning, and thank you, Alton. Yes, overall Thanksgiving from a week standpoint, it's one of our highest volume weeks, and we were pleased with our overall performance, especially in light of the current environment. As we look at our sales, our Heat n' Serve sales were better than we had expected, primarily due to the shift to our off-premise, as well as the introduction of the smaller off-premise offering that Sandy talked about in her prepared remarks; both of those were very popular. We were pleased with the overall demand and believe that underscores how the offerings resonated with our guests. On the travel side, you're right, it's a noisy quarter. It does seem like people were less likely to travel and probably will be less likely to travel during the holiday season, given the resurgence in COVID. That said, even though travel was probably down in the aggregate, we believe that we're poised to benefit from those guests when travel opens back up. So is that helpful, Alton?

Alton Stump, Analyst

Yes. Great. Thanks for that color. And then I guess just one quick follow-up. Has there been a slowdown recently in unit builds because of the surge in COVID cases as far as your plans to build over the course of the next couple of quarters?

Jill Golder, CFO

So Alton, you're talking about building new units?

Alton Stump, Analyst

Yes.

Jill Golder, CFO

Oh, I see. Our unit expectations may be impacted by COVID. For Cracker Barrel, we have a modest number of new units that we're looking at opening this year, so that's still in flux. As we look at Maple Street, I’d say we're being opportunistic and patient because that team is in the process of building the pipeline for opening new units. Right now they're solidifying the pipeline. And frankly, as we get through probably the next quarter, we'll be able to provide more clarity on where we are with that. So that’s an excellent question.

Operator, Operator

Next question comes from Jeff Farmer of Gordon Haskett. Please go ahead.

Jeff Farmer, Analyst

Great. Thanks, and good morning, guys. You did touch on it with that 100 restaurants roughly that are closed currently. I think that’s about 14% of the system. But I'm just curious what type of same-store sales headwind that created for that quarter-to-date same store sales number?

Sandra Cochran, CEO

Hey, Jeff. This is Sandy. What a nice start and maybe set the question up a little bit, at least what I think the question is, and then I'll turn it over to Jill. I assume what you're trying to understand is some granularity behind our second quarter sales trends. As you can probably imagine, we're dealing with groups of stores. The way we're categorizing them is where dining rooms are open greater than 50%, and what our expectation is there now inside that, and that depends on to what degree you might be a tourist location and how that's impacting your business. We've got some dining rooms open but less than 50%. We've got some communities where it's only at 25%, and they've gone backwards. Then we've got off-premise only, but guests are allowed into the retail store, and they can come into the restaurant, and we have expectations there. Then we have curbside only where guests are not even allowed into the building. These categories are changing. They are going in and out of these rules, sometimes with only a couple of days' notice. It's unclear how long they will be in it, which is creating an interesting environment for operators to predict demand relative to labor and our retail teams, as I mentioned in my prepared remarks, those are very different environments. If you were to look under the Q2 sales, you see a conglomerate. Each of those categories has different trends, and we're monitoring each of them. I'll add to Jill's, we were pleased with Thanksgiving, and I was particularly pleased with how the operators delivered the sales, which to her point largely shifted as people either couldn't travel or couldn't be in the dining rooms or weren't comfortable eating in them to Heat n' Serve and off-premise. How the operators navigated through all that chaos, often at the very last minute, is also noteworthy.

Jill Golder, CFO

So I think Jeff, I would remind you, we said in our prepared remarks, in the first quarter, we had about 20 stores that had closed dining rooms. Now, as Sandy said in her prepared remarks, we're running about 100 dining rooms closed currently. That 20 stores had closed in the first quarter that was at the end of the first quarter, so that's definitely had a big impact.

Jeff Farmer, Analyst

That's helpful. And just one more follow-up. If my information is correct, it looks like a state like Kentucky, home to roughly 6% of the system, at some point in the last few weeks, that state did suspend indoor dining. So the question is, how did your off-premise strategy change? How quickly does it change? How adept are you guys at sort of reacting or responding to these mitigation efforts that seem to be picking up speed?

Jill Golder, CFO

Well, the strategy we went into it with assumed that a lot of guests may even if the dining rooms were open, either wouldn't be able to get in or wouldn't be comfortable. That’s why we created this new smaller Heat n' Serve offer, which we thought would be the right offer for our guests’ needs. As the dining rooms closed, the teams worked very hard to move inventory around, so that we had more supplies to support that kind of business. A couple of our Kentucky stores, close to the Tennessee border, were doing some production for stores in Tennessee, allowing the stores in Tennessee to take more business. Our operators were doing everything they could to sell everything they could in whatever way a guest wanted to use us.

Jeff Farmer, Analyst

All right. Thank you.

Operator, Operator

Thank you. The next question is from Jake Bartlett, Truist Securities. Please go ahead.

Jake Bartlett, Analyst

Great. Thanks for taking the question. Mine is really about the run rate of the business. I know, a lot has changed from the first half of November to the back half, with the short closings really in the last two weeks. Could you help us understand, it seems, I would think that the trends have decelerated much lower in the back half of the month versus that negative 20%. If any help there would be useful. And also, just to clarify, you said that Thanksgiving had very strong Heat n' Serve. But with Thanksgiving sales did that help or hurt relative to that negative 20%? So potentially, excluding Thanksgiving, maybe the run rate could be a little lower?

Jill Golder, CFO

So, Jake, there's a lot in there. Great question. Let me start on the overall business from a margin standpoint. Clearly in the first quarter, our margins were pressured by the overall lower sales and really the deleverage. We benefited from the cost savings actions that we've put in place, which was partially offset by the P&L impact from the sale leaseback and the investment in some of our initiatives. We mentioned that we had about a million in beer and wine in the first quarter. As we look at the second quarter, we expect margins to be similarly pressured. Clearly, the deceleration in the top line would have an impact, as well as our off-premise offerings. As you think about the Heat n' Serve, although they have a great penny profit, their overall COGS and packaging costs are higher. So from a margin standpoint, they faced more pressure but provided great penny profit. In the second quarter, we expect to see additional investments as we roll out our beer and wine initiative. That's kind of the near-term impact from a margin standpoint. Looking at it broadly, longer-term, we feel confident about the actions taken. Post-COVID, we believe we will be in a good position. The $50 million in cost savings taken out of the business will benefit. Although, that will be offset by the net $20 million impact from the sale leaseback transaction. Overall, those actions were very beneficial. What we don't know is post-COVID, what that mix of sales looks like, not only how much will be off-premise, but the different drivers within off-premise. Modestly lower margins could have an impact, as well as the timing of our initiatives. Overall, we are confident that digital and our other initiatives will create value over the longer term; we think we're going to be in a great spot. Hopefully, that's helpful.

Jake Bartlett, Analyst

That is helpful. I was actually also focused on sales levels, as we've cut it, and think about the run rate of the business. November was negative 20%. Is it fair to assume that it was significantly lower as you exited the month?

Jill Golder, CFO

Yeah, that’s like the $30 million question. There’s just so much noise and change in the regulatory environment and how the consumer is feeling; it's really hard for us to predict what the rest of the quarter will be like. But that's part of the reason we wanted to share what our current trends look like, so you could understand how we ended the first quarter and what it looked like at the start of the second quarter.

Jake Bartlett, Analyst

Right. But could you tell us what the current trends look like with the last two weeks versus the first two weeks of the month, just given how much has changed?

Jill Golder, CFO

Oh, it's just too noisy, especially with the holiday in there. It's just too noisy to parse.

Jake Bartlett, Analyst

Okay. And the holiday was that a plus or a minus in terms of that 20% trend?

Jill Golder, CFO

So…

Jake Bartlett, Analyst

I'm not going to re-enter. But I’ll move on.

Jill Golder, CFO

Good. I’d ask him the same question the same way, and again, it's just - we wanted to be helpful.

Sandra Cochran, CEO

Yeah, we want to provide information that we think is helpful. So we think the quarter-to-date trend is the most helpful for you.

Jake Bartlett, Analyst

Got it. Okay. I appreciate that. Just one question on pricing, 1% menu pricing seems like inflation— I don't think you gave your outlook for labor cost inflation, which would be helpful. But the 2% to 2.5% commodities imply some deleverage. Is that 1%, what you plan for the year? Or is that just a timing issue? And will you take more pricing later in the year?

Jill Golder, CFO

Yeah. So you might remember that at the end of the last quarter, we talked about being cautious on pricing. We went in with more modest pricing at the beginning of the year. We do believe that we will approach that 2% for the total year. We mentioned that we saw a step-up in commodities inflation, and we expect wage inflation in the 2.5% to 3% range.

Jake Bartlett, Analyst

Great. Thank you very much. I appreciate it.

Jill Golder, CFO

You're welcome.

Sandra Cochran, CEO

Thanks, Jake.

Operator, Operator

Next question is from Brett Levy of MKM Partners. Please go ahead.

Brett Levy, Analyst

Great, thanks. Just following up on Jeff and Jake's question and then a couple of others. Are you able to quantify just what the drag is from those 20 stores in the first quarter and the 100 stores? I just think that's the simplest way to ask it. And then also, when you think about off-premise, especially in those 20 and the 100 stores that have closed the dining rooms, what have you seen in terms of retention of off-premise? How has that compared to the peak in those markets when you were off-premise only or how they've been running when you have the dining rooms open? And then I'll change the act on another question.

Sandra Cochran, CEO

Maybe I will start and turn it over to give you a break, Jill. Yes, we would be able to quantify each category, but we're not going to get into each category except to say that the best performing stores are the ones where the dining rooms are open at very high capacity. We continue to have lots of guests that want to come and dine with us on all three day parts. The worst performing stores are at the other end. As they shift and the number shifts, it naturally changes. I'm explaining something that probably didn’t need explanation. It's just so much noise over the next and particularly as we look for the rest of the quarter with the holiday trends and what we expect for travel and vacation and people celebrating. We just are not comfortable offering any more granular guidance.

Jill Golder, CFO

I would just add, on your question about how much of the off-premise sales have we retained, it's again, that is noisy, because if you think about it, we started opening up dining rooms in May. They opened up to different levels and in some areas, they stepped back down. Overall, it's hard to just give you a number and we've retained X percent. What you can see clearly is our first quarter performance with off-premise sales growing 122% and representing about 25% of our restaurant sales; we were pleased with that overall performance. Clearly, some of that is driven by the closures, and we are just not sure what that level is going to look like post-COVID. Our goal is to retain a large portion of our off-premise sales as dining rooms reopen, but we're just not sure at this point.

Brett Levy, Analyst

And then just one last technical question on sales, have any of your units returned to positive comp territory? If so, any willingness to share? Is it handfuls, is it percentages, is it 5%? Something like that? Thanks.

Sandra Cochran, CEO

Yeah. Actually, some have; it’s been terrific. Our operators are doing everything, even outdoors and other methods to capture all of the demand. It's been really impressive. Yes, we have a handful of stores that have gotten to positive comps. Jill, unless you want to add more, it's probably much that.

Brett Levy, Analyst

And I guess then just turning in a different direction. Just on the technology front, what have you seen in terms of your ability to integrate the POS systems? Are you seeing any productivity enhancement? And what progress are you making on your mobile and digital initiative?

Jill Golder, CFO

Great. So this is Jill. Currently, we've got about 250 stores with the new POS system. We're hopeful that will roll out another couple hundred through the end of the fiscal year. From a team member standpoint, it's just easier for the team to use and train on. This sets the foundation for some of our other technology, like some of the pieces that digital will use and tablets. Tablets have been very beneficial in the stores that have them for our curbside and some of the off-premise pieces. I can turn it over to Sandy to comment on digital, which we're very early in that story.

Sandra Cochran, CEO

Yeah, so we rolled that out in Q1. It's a pretty big milestone, and I was pleased with the early results. It was an important component of our Thanksgiving performance. We did see improvements in conversion rates. People who went online to order were able to do so efficiently. Overall, we are pleased with the start of it, looking forward to the planned initiatives, and we will be able to add to it as we go forward. There were some hiccups; we saw so much traffic that it was more than expected. We learned as we stressed the system for that day, and I'm pleased with the progress we're making.

Operator, Operator

Next question is from Jon Tower of Wells Fargo. Please go ahead.

Jon Tower, Analyst

Some follow-ups to earlier comments. First, on the comment earlier in the script, the idea of doubling the beer and wine mix within the dining rooms. I think it's 1% in the 250 stores today. In terms of thinking about that going forward, will that include greater merchandising within the stores? Because it sounds like, to your point earlier, that's not necessarily happening today?

Jill Golder, CFO

Yes, and it's part of the plan. We don't really have anything on our tables in our dining rooms in the COVID environment. We don’t have oil lamps, dessert cards, or table tents, which would be great to indicate our new beverage program. A lot of our guests know the menu so well they don’t actually look at it. We're using posters as you walk into the dining room, but as we return to a more normal environment, we’ll have more opportunities for effective promotion, and I think, as we get more experience, we can better promote our offerings. I believe we can double the beer and wine mix as we get better at this.

Jon Tower, Analyst

Okay. So just to clarify, that does not - the 2% number does not really include merchandising on the tables, but just broader awareness growing?

Jill Golder, CFO

I think it's both. It's going to take some merchandising on tables or a better job. We have places that had it for a while that are close to that now. I think sometimes guests just have to find it as they visit us, especially during occasions. It will take a variety of things to achieve it, but I'm optimistic that we can get there.

Jon Tower, Analyst

Okay. And then just switching gears a little bit, obviously, your off-premise business has been very successful during the pandemic, hitting a 25% mix in the most recent quarters. I'm curious how you're thinking about the off-premise business, and how that might be evolving your in-store menu as well. Today, a lot of your off-premise is bulkier, larger size orders, family packs; does it make sense to have some handheld sandwiches that aren't necessarily featured for the off-premise today?

Jill Golder, CFO

First of all, despite that in the month of November, individual to-go is the overwhelming majority of the off-premise business — it's over 60%. Most of our to-go orders still come from guests that order online, call the store, or walk in for one or two entrees. For holidays in particular, we found that family meal baskets have been a great solution for certain needs, and we hope they continue beyond holidays. The Heat n' Serve, we typically do for Thanksgiving, Christmas, and Easter. The culinary team is working on what can supplement the menu to meet off-premise needs. Handheld lunches are one example, and we designed some interesting options from our meatloaf to create a delicious sandwich that could go in a box. We are looking forward to testing some of those things in the latter half of this year.

Jon Tower, Analyst

Got it. Thank you. Appreciate that. And pivoting to the retail business, obviously, I've been struck by how strong the business has trended throughout the crisis. I'm curious if you've learned anything while scrambling to manage through this crisis that will stick on the inventory management side into the future? And perhaps how this digital platform you just rolled out will help manage inventory?

Jill Golder, CFO

We've learned a lot about inventory management. Laura and her team did an excellent job heading into the pandemic by cutting inventories. We had great sell-through and probably could do ourselves through with less. Fewer visual merchandising impacts allowed guests to see the product more effectively. They've had to scramble and add things since Q1 was phenomenal for sell-through. Themes that we will be bringing in soon reflect some new demand that we’re recognizing. The digital side allows us a better opportunity for inventory attachment. The digital store will prompt customers when they go online to order, and that may give us some learnings.

Jon Tower, Analyst

Okay, great. Thank you very much. Appreciate the time.

Operator, Operator

Next question comes from Todd Brooks of C.L. King. Please go ahead.

Todd Brooks, Analyst

Good morning, everybody. Just a few questions for you. First, if we can look back to the first quarter, could you share with us if you're looking at the three months of the quarter what the strongest same-store sales performance might have been? We’re just trying to gauge how good the business got before we had the COVID flares here?

Jill Golder, CFO

Great question. You'll remember when we were going into the quarter, we were down approximately 15%, 20%. So there was some improvement as the quarter went on. We don’t want to get into specifics on particular months, but the improvement within the first quarter was broad. Apart from capacity restrictions, we improved across all day parts. Dinner day part continued to be the strongest. The weekend dinner is where we tend to run into more capacity restraints, as well as brunch time breakfast and lunch on Sundays. The South was our strongest performance region, but that might have been more aligned with capacity restrictions.

Sandra Cochran, CEO

Front porch dining and things like that helped us.

Jill Golder, CFO

Yes, we benefitted in stores with front porch dining that picked up about a point in overall sales which, again, was during the capacity restricted time periods.

Todd Brooks, Analyst

Okay, great. And then not looking for specifics on the quarter-to-date trends, but you talked about the four buckets of stores and how fluid things are with stores moving between the buckets. If you look at one bucket that has stayed in dining rooms over 50%, how variable has that performance been relative to the performance that you saw in Q1? Are consumer attitudes changing across all the different opening statuses of the store, or are sales consistent, and it's more the number of stores moving between the four buckets that's caused the decline in same-store sales?

Sandra Cochran, CEO

There's so much. I know it would be so helpful for us to offer more clarity, but it really is both. We've got some communities where the concerns about the issue are reducing interest in dining in, while others are not impacted by the resurgences. We've got some stores that are more travel related, and the absence of travel is impacting them. It’s difficult to tear it apart, but generally, the stores with as much capacity as they can get in the dining room and off-premise continue to perform well.

Todd Brooks, Analyst

That's helpful. Thank you. And then the final question on beer and wine. You talked about the progression from 1% of dining room sales to 2% over hopefully in the coming year. Are the assumptions, and if you could talk about the assumptions, how much of that relates to ticket growth with customers versus attributed to more frequency with the availability of beer and wine?

Sandra Cochran, CEO

The 1% we referenced was the same restaurant sales impact from a check standpoint, which is considered mix. We’re reading traffic patterns, and if we're able to grow traffic, we just have not read that.

Todd Brooks, Analyst

Okay. So the eventual move to 1% to 2%, we're attributing that to check impact. If there is a frequency benefit, it could be an incremental tailwind then?

Sandra Cochran, CEO

That's right. Thank you for clarifying that.

Gregory Francfort, Analyst

Hey. Thanks for the question. I had two. How have you managed labor costs and employee turnover, keeping employees in the stores that have had to shut down? Just curious how you managed that?

Sandra Cochran, CEO

Thank you for the question. They've done an excellent job, but it's been tough. Each store is spending time understanding the state store and predicting how demand is going, which impacts labor. Off-premise utilizes different needs. The good news is our off-premise business has been strong, allowing us to keep many people working. The teams are focused on cross-training, providing flexibility. They're managing well, but it is difficult and requires quick pivots for the changes.

Gregory Francfort, Analyst

Got it. That’s helpful. Sandy, I had one question, just as you look out, there's much talk about sales this week or next week in off-premise. But looking out nine months or 12 months, as this situation is resolved, what are your expectations for what has changed? Do you think consumer wallets will be under pressure, and how do you think Cracker Barrel fares in that environment?

Sandra Cochran, CEO

That's a big and important question that probably everyone is thinking about. We went into this expecting a difficult economic environment. The recent resurgences have increased uncertainty about the duration and magnitude of the economic impact. Unemployment rates have improved but are still high. Enhanced unemployment and stimulus provided some insulation, but it’s unclear how long that will continue. We expect the consumer to be challenged for some time. However, we believe our brand is well-positioned to perform well in that environment. Our loyal guests trust us. We're highly differentiated with everyday value, high-quality food — all the reasons people love us will help when it’s all over. From a cost standpoint, I'll ask Jill to touch on that.

Jill Golder, CFO

We talked about the fact that even in the near term, we've seen an acceleration in commodity costs. Some is due to the wildfires. On the beef side, we see acceleration due to demand because herds have been culled. As businesses rebound, there might be pressure on that front. Wage inflation is expected in the 2.5% to 3% range. We're going to see inflationary pressures that will continue to impact the overall business.

Operator, Operator

This time we have no further questions. I’d like to turn the conference over to Sandy Cochran for closing remarks. Please go ahead.

Sandra Cochran, CEO

Thank you all for joining us today. We continue to face the disruptions and challenges from this, but I remain highly confident in our brand and our ability to navigate through this uncertain environment. We appreciate your interest and support, and we hope everyone has a safe and happy holiday.

Operator, Operator

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