Earnings Call Transcript - CBRL Q3 2024

Operator, Operator

Good day and welcome to the Cracker Barrel Fiscal 2024 Third Quarter Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mr. Adam Hanan, Senior Manager of Investor Relations. Please go ahead, sir.

Adam Hanan, Senior Manager of Investor Relations

Thank you. Good morning, and welcome to Cracker Barrel's Third Quarter Fiscal 2024 Conference Call and Webcast. This morning, we issued a press release announcing our third quarter results. In this press release and on this call, we will refer to non-GAAP financial measures such as adjusted EBITDA for the third quarter ended April 26, 2024. Please refer to the footnotes in our press release for further details about these metrics. The company believes that these measures 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 page of the press release includes reconciliations from the non-GAAP information to the GAAP financials. On the call with me 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 about their beliefs and expectations regarding the company's future operating results or expected future events. These are known as forward-looking statements, which involve risks and uncertainties that, in many cases, are beyond management's control and may cause actual results to differ materially from expectations. We caution our listeners and readers in considering forward-looking statements and information. Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties found at the end of the press release and are described in detail in our reports that we file with or furnish to the SEC. Finally, the information shared on this call is valid as of today's date, and the company undertakes no obligation to update it, except as may be required under applicable law. I'll now turn the call over to Cracker Barrel's President and CEO, Julie Masino. Julie?

Julie Masino, President and CEO

Good morning. Given the substantive update we provided 2 weeks ago, today's prepared remarks will be shorter than usual. I encourage everyone to review our comments from the May 16 call for additional details on our transformation plan, if you haven't already. This morning, we reported total revenue of $817.1 million and adjusted EBITDA of $47.9 million or 5.9% of revenue. As we previously noted in our May 16 press release, our results fell below our expectations due to weaker-than-anticipated traffic. Our third quarter traffic challenges underscore the need for our strategic transformation as we discussed on May 16. Of course, as we undertake our longer-term strategic initiatives, we continue to aggressively manage our day-to-day business, and I was encouraged by our performance despite the financial impact of lower traffic. Although our financial performance in the quarter was challenged, our teams managed the business well. We saw solid improvements across the metrics that are most highly correlated with same-store sales growth, guest satisfaction, speed, hourly turnover, and average skill level for key job roles. We believe these are key leading indicators, and we're pleased with the progress we are making. For example, compared to the prior year quarter, our hourly turnover has improved by 10 percentage points. Our seat-to-eat times, a key speed metric, has improved by approximately 8%. Our off-premise missing item scores improved by 18%. The average skill level for the key positions of cook and server increased by 3%, and our Google star rating has increased from 4.1 to 4.2. We are confident that our sustained focus on these operational metrics will deliver further improvements, which will translate to increased visits in time. Additionally, our operators did a good job of managing food waste. I believe this, along with a positive trend in the above metrics, is the result of our organization-wide emphasis on operational discipline and is also indicative of our dual focus on running the day-to-day business while also executing our transformation, and our operators' ability to effectively manage expenses helped mitigate the margin compression from the lower traffic. Next, while retail sales were also challenged as a result of our traffic results and broader retail headwinds, we were encouraged that we saw sequential monthly improvements in retail same-store sales and the performance of our seasonal theme assortments. In closing, our financial performance remains pressured by the challenges we previously described, but we are confident that our focus on our 5 strategic pillars: one, redefining the brand; two, enhancing the menu; three, evolving the store and guest experience; four, winning in digital and off-premise; and five, elevating the employee experience will deliver our imperatives of driving relevancy, delivering food and an experience guests love, growing profitability, and positioning the company for significant value creation over time. I'll now turn the call over to Craig for a more detailed look at the quarter from a financial perspective and to discuss our financial outlook for the rest of the year. Craig?

Craig Pommells, Senior Vice President and CFO

Thank you, Julie, and good morning, everyone. Before getting into our results and guidance, I want to remind everyone of a few changes we've made as it relates to our financials. First, we are now focused on adjusted EBITDA as a key metric to track our financial performance and are providing guidance on adjusted EBITDA as we believe it is more meaningful to investors to evaluate our performance before the impact of depreciation, which we expect to be higher due to the increased investments related to our strategic transformation plan. Second, we modified our definition of adjusted EBITDA and are no longer adjusting for the noncash amortization of the asset recognized from the gains on sale and leaseback transactions, which is an approximately $3.2 million expense each quarter and is expected to remain at a similar level over the remaining life of these leases. Additionally, we are now including an add-back for share-based compensation expense. We understand there are a few moving pieces here, so we refer you to the reconciliation tables in the press release for additional information. For the third quarter, we reported total revenue of $817.1 million. Restaurant revenue decreased 1.5% to $671.3 million, and retail revenue decreased 3.7% to $145.8 million versus the prior year quarter. Comparable store restaurant sales decreased by 1.5% over the prior year. Pricing was approximately 4%. Our quarterly pricing consisted of approximately 1.5% carry-forward pricing from fiscal 2023 and 2.5% new pricing from fiscal 2024. Off-premise sales were approximately 18.9% of restaurant sales. Comparable store retail sales decreased 3.8% compared to the third quarter of the prior year. Although retail sales remain soft, we were pleased with how the team has effectively managed inventory levels, which remain below prior year. Moving on to our third quarter expenses. Total cost of goods sold in the quarter was 30% of total revenue versus 31.5% in the prior year quarter. Restaurant cost of goods sold in the third quarter was 25.9% of restaurant sales versus 27.3% in the prior year quarter. This 140 basis point decrease was primarily driven by menu pricing. Commodities deflated for the quarter by approximately 0.6%, driven principally by lower oils, poultry, and egg prices. Third quarter retail cost of goods sold was 49% of retail sales versus 50.2% in the prior year quarter. This 120 basis point decrease was primarily driven by higher initial margin. Our inventories at quarter-end were $175.3 million compared to $184.8 million in the prior year. With regard to labor costs, our third quarter labor and related expenses were 37.8% of revenue versus 35.8% in the prior year quarter. This 200 basis point increase was primarily driven by our investments in additional labor hours to support the guest experience and hourly wage inflation of approximately 5.2%, partially offset by pricing. Other operating expenses were 24.5% of revenue versus 23.6% in the prior year quarter. This 90 basis point increase was primarily driven by our investments in advertising and higher depreciation. Adjusted general and administrative expenses for the third quarter were 5.4% of revenue, which was flat to the prior year quarter. The current quarter results exclude approximately $3.5 million in expenses related to the CEO transition and approximately $6.6 million in professional fees related to our strategic transformation initiative. Our GAAP financial results include store impairment charges and closure expenses of $22.9 million. Our top capital allocation priority is investing in the core Cracker Barrel business and in the initiatives we discussed on May 16. Therefore, we have decided to slow down Maple Street's unit growth in the short term while they work on improving that business model and as part of our focus on investing in the Cracker Barrel business. As a result of our decision to slow down Maple Street's growth, we recorded a goodwill impairment of $4.7 million. Net interest expense for the quarter was $5.2 million compared to net interest expense of $4.5 million in the prior year quarter. This increase was primarily the result of higher average interest rates and higher debt levels. Our GAAP income taxes were a $15.3 million credit. Adjusted income taxes were a $6.4 million credit. Both results include the year-to-date impact of lower income tax expectations due primarily to lower expected annual earnings before taxes. Third quarter GAAP earnings loss per diluted share were negative $0.41, and adjusted earnings per diluted share were a positive $0.88. In the third quarter, adjusted EBITDA was $47.9 million or 5.9% of total revenue compared to $59.6 million or 7.2% of total revenue in the prior year quarter. Now turning to capital allocation and our balance sheet. The company's Board of Directors is committed to a balanced capital allocation approach; investing in the business to drive profitable growth continues to be the top priority, followed by returning cash to shareholders through a regular quarterly dividend and share repurchases. In the third quarter, we invested $29 million in capital expenditures. We returned $28.9 million to shareholders in dividends. We ended the quarter with $472.2 million in total debt. With respect to our fiscal 2024 outlook, we now expect total fiscal 2024 revenue of $3.47 billion to $3.51 billion. We continue to anticipate pricing of approximately 5% for the full year. We have completed our 2 planned Cracker Barrel openings, and we now anticipate 8 to 10 new Maple Street openings during the year, including the 6 we've already opened. We now expect commodity inflation to be approximately flat, and we continue to expect hourly wage inflation of approximately 5%. Taking all of the above into account, we anticipate full-year adjusted EBITDA of approximately $200 million to $220 million, which includes the benefit of a 53rd week. This reflects our lower-than-expected results in Q3, as well as our downwardly revised expectations for Q4, which are primarily driven by our lower expectations for traffic. Although we did not previously provide adjusted EBITDA guidance, our current guidance reflects an approximately $20 million reduction relative to our previous expectations. Our adjusted EBITDA guidance contemplates certain excluded expenses. First, approximately $9 million of one-time CEO transition expenses; second, approximately $16 million in consulting fees related to our strategic transformation, which includes additional pricing and menu strategy work; third, approximately $2 million in corporate restructuring charges; and fourth, approximately $5 million of favorability from the change to our benefits policy that occurred during the second quarter. We now expect a full-year GAAP effective tax rate of negative 55% to negative 60% and an adjusted effective tax rate of negative 3% to negative 8%. For the fourth quarter, we expect a GAAP effective tax rate of approximately negative 2% to negative 7% and an adjusted effective tax rate of approximately negative 1% to positive 4%. Lastly, we anticipate capital expenditures of $120 million to $125 million. I'll now turn the call over to the operator for questions.

Operator, Operator

And the first question will come from Jeff Farmer with Gordon Haskett.

Jeff Farmer, Analyst

I'm just hoping you can provide a little bit more color on some of your near-term top line strategies, especially in the background that we've heard from your peers, which is pointing to sort of both increased advertising weights and a lot more value promotion. So I appreciate your long-term strategy that you outlined a couple of weeks ago, but at least over the next couple of quarters, how are you guys looking to compete in an environment that's been increasingly promotional and a lot more advertising?

Julie Masino, President and CEO

Jeff, thanks for the question. We actually feel very well positioned in this environment because Cracker Barrel is a brand that values value and really understands that value is important to our guests. And remember, value is a multifaceted equation for the guest. It's not only the price that somebody pays, but it's the quality of the food, it's the amount of the food, it's the experience that they receive in our restaurants. We got out of the gate early on thinking about value and how we were going to convey value in new ways to our guests based on the research that we've done that has really underpinned the transformation agenda. Value for us at Cracker Barrel is just one key piece of all of it. We got out of the gate last Q2, you'll remember that I shared on the earnings call that we were launching an early dine program. It was something we believe very strongly in. It features great dinner items at $8.99 from 4 to 6 p.m. Monday through Friday. We love welcoming our guests in at that very sharp price point. We rushed to get that to market so much so that we actually didn't have any planned advertising around it in Q2 or even Q3. What you're seeing right now is that at the beginning of May, we actually started to put some advertising behind that to make guests aware that Cracker Barrel has their back in these times. So we are there for them with this great sharp value price point at dinner. That is a big piece of our overall pricing strategy that I talked about on the call a few weeks ago. We are executing a barbell pricing strategy so that we can be very sharp with key price points, not only with this early dine program, but we also have key price points for breakfast. We've introduced new Sunrise Specials for breakfast at a $7.99 price point, which offers incredible value. I challenge you to eat it all; I personally can't eat it all. It features our signature pancakes and eggs or your choice of meat. And that's a great price point as well. So that's kind of one end of it while we're really evaluating our ability to take price strategically, as I've talked about on the last couple of calls. So we believe that we're very well positioned. We're starting to communicate this through our media channels. But Cracker Barrel has and always will be a great value proposition for our guests, and we're just dedicated to ensuring that they know about it.

Jeff Farmer, Analyst

Okay. I have a couple of follow-up questions regarding the modeling. It seems your guidance suggests that there will be around 200 basis points of adjusted EBITDA margin compression in the fourth quarter. Am I correct in that assessment? Additionally, I may have overlooked it, but could you provide details on the traffic and mix? I believe you mentioned pricing in the press release, but what about traffic and mix for the quarter?

Craig Pommells, Senior Vice President and CFO

Jeff, it's Craig. Yes, you're in the ballpark as it relates to the margin reduction in Q4 in very rough terms approximately 200 basis points. In terms of traffic for the quarter, traffic for Q3 was a negative 4.9% for the quarter.

Operator, Operator

Your next question will come from Todd Brooks with the Benchmark Company.

Todd Brooks, Analyst

Just following up on Jeff's question, consumer behavior and what you're seeing currently, are you seeing really frequency being the loss from a same-store sales pressure standpoint? Or how about check management? I mean, what are you seeing as far as trade down value resonating, maybe people coming out of other day parts into that early evening daypart? I just would like to get a sense on kind of your consumer and how that developed across the course of the quarter.

Craig Pommells, Senior Vice President and CFO

In terms of the consumer, what we're seeing is the lower-income consumer is more pressured, and we're seeing that particularly with the 160,000 consumer in terms of their visits. I'm not sure if it's frequency necessarily, but that would make sense. Traditionally, Cracker Barrel has been a great value. We've actually held up well over the longer term with the under 60,000 consumer. But more recently, you've seen some pressure there. In terms of the menu mix, there are a couple of moving pieces, so there is a little bit of negative menu mix there, Todd. It's not a large amount. And I would say there are some reductions in add-ons and things like that relative to prior trends. We've really seen it more so on the retail side, where that's a highly discretionary part of the dine-in occasion, and we've seen a little bit of softness on conversion. So maybe more on retail than necessarily in restaurant.

Todd Brooks, Analyst

That's really helpful. Second follow-up, if I may. If we look back to the call from a couple of weeks ago, you talked about 2025 being an investment year and talking about it being in the range of flat to slightly down EBITDA. Should we be thinking about the guidance range for full year '24 and maybe that lower half of the $200 million to $220 million range being attainable in '25, and that would be that flattish outcome? But if you're in the upper half in '24, that leads to kind of the down year-over-year EBITDA. Any sense of how we flow this incremental guidance point you've given us versus the qualitative guidance point around fiscal '25 EBITDA?

Craig Pommells, Senior Vice President and CFO

Yes, we'll add some more texture to that in September. I think we really believe in the 3-year plan; we believe in the roughly 400 basis point improvement in EBITDA. We're looking at all of the work we've got ahead of us. We're kind of looking at the industry headwinds, and that leads us to a point of view that '25 will be a bit challenged, and we still continue to believe in the EBITDA level flat to slightly down relative to '24. Now where we ended '24 is still a bit of an open chapter. So we'll let this kind of play out, and then we'll update you on the next call.

Todd Brooks, Analyst

Okay. And just a final one on the modeling side. Can you remind us the expectation for what the 53rd week is worth from a revenue and EBITDA standpoint?

Craig Pommells, Senior Vice President and CFO

Yes. We haven’t provided an exact number on the 53rd week. Generally, what I would encourage you to do is go back to 2018 and use that as a reference point and generally update that for lower margins. I would say that the 53rd week impact is embedded in our total year EBITDA guidance for this year. As we talk about fiscal 2025, we are comparing the expectation for ‘25 to that total fiscal 2024 guidance that we provided.

Operator, Operator

Next question will come from Jake Bartlett with Truist Securities.

Jake Bartlett, Analyst

Great. I wanted to build on the update call and some of the kind of big changes that you announced. And one question that I had following it was just really what gives you the confidence that reinvesting in the stores is the right way to go here, such a big change to the model? Anything you can share in terms of just more detail of what you heard from consumers and why you think that the remodels, as well as the kind of the increased maintenance, is so important for the turnaround here?

Julie Masino, President and CEO

We conducted extensive research and developed a transformation plan based on feedback from guests across the country, representing diverse backgrounds, as well as input from our team members. It was crucial to understand that traffic has dropped nearly 20% compared to 2019, with guests indicating they are not choosing us. Our analysis revealed that the dining experience at Cracker Barrel is perceived as less relevant, particularly during dinner, where our sales have decreased. Dinner accounts for 35% of our sales mix, which is significant. While we perform relatively well at breakfast, guests feel that the overall experience does not meet their expectations compared to alternatives available during dinner. Issues such as table comfort, lighting, and decor have been highlighted. Our findings showed that we need to improve the store experience as part of our transformation strategy, and the menu also requires revitalization for greater relevance. Currently, we have two stores functioning as prototypes, and the feedback from their recent quick remodels has been positive. They feel lighter, brighter, fresher, and cleaner, creating an inviting atmosphere for dinner. We have introduced some enhancements in these stores that customers are enjoying. We are convinced we are on the right path, focusing on disciplined capital deployment as part of our strategy for 2025. We aim to be careful stewards of our capital, planning to test 25 to 30 stores next year at varying investment levels. We are examining both well-performing and underperforming stores and assessing different investment amounts to determine the best balance between investment, returns, and growth rates, ensuring disciplined capital allocation to foster future growth.

Craig Pommells, Senior Vice President and CFO

I'll follow up with the second part of your question related to maintenance. Some of that comes through general feedback, but guests don't always give specific feedback. However, we have brand standards. We audit every store, and we audited the entire portfolio. Upon completion of that process, it became clear to us that we had fallen behind on some maintenance items that were important to guests and employees, such as parking lots, paint, and floors. This insight came primarily from our own standards, and we need to catch up on that. That is one of those investments that pays dividends over time. The way guests perceive a business—is it fresh, clean, and up to date—drives their overall experience.

Jake Bartlett, Analyst

Got it. Great. That's helpful. My next question relates to the cost savings targets you mentioned, which are in the range of $50 million to $60 million. I understand you're in the early stages, but could you share some major areas where these savings might come from? You've mentioned the potential to reduce scratch cooking and possibly increase the amount of pre-prepared food. Are those the main areas, or could you provide some broad categories where you anticipate these cost savings will be realized?

Craig Pommells, Senior Vice President and CFO

Yes. You've kind of started the answer there for us. A lot of the work centers around industrial engineering efforts that focus on the back of the house. We're in the early stages but think there's a win-win opportunity given the breadth and complexity of our menu to simplify our operations, making it more efficient and consistent. This will show up in the back of the house labor in some ways and will show up in other areas in the back of the house. We think that will be a meaningful part of this $50 million to $60 million. Additionally, we have an ongoing program that's been quite successful over the years—that will generate savings across the full P&L. I think some of that's going to skew towards the back of the house, which will have a labor component over time. The other program is an overlay to that. The challenge has been that we've had these programs for a while. Candidly, the challenge has been this issue that Julie brought up regarding relevance, which we think manifests itself in the decline in traffic. So saving $50 million, as an example, may not help if traffic is down significantly.

Jake Bartlett, Analyst

Okay. And just to that point, there were some cost cuts in the past year—the $30 million to $40 million—but that was being reinvested. I just want to make sure we're clear that the $50 million to $60 million that you expect to save—that's going to flow through to margins. You expect that to be kind of a real net margin saver? Something that you are going to be reinvesting is different from that that would not allow this to flow through?

Craig Pommells, Senior Vice President and CFO

Yes, the $50 million to $60 million is embedded in the 400 basis point improvement. So it's a part of that improvement over the 3-year window.

Operator, Operator

Next question will come from Brian Mullan with Piper Sandler.

Brian Mullan, Analyst

Julie, you mentioned something called seat-to-eat times in the prepared remarks. That seems like an important KPI. Maybe could you just give a little history—was that being tracked before you joined? And then assuming it was, it's nice to hear that there's been some recent progress. Can you just give us a sense of where that stands versus a couple of years ago when the business was in a bit of a better place? Just trying to get a sense of how far you might have to go.

Julie Masino, President and CEO

Sure, Brian. Thanks for the question. One of the early things we did was focus on what I call metrics that matter. We did a correlation study to determine which operational metrics specifically in the stores we could control today that would have the highest impact on same-store sales growth. When we dug into that, we evaluated around 40 to 50 different metrics and focused on the 5 I mentioned in prepared remarks. Our first metric is guest satisfaction. Guest satisfaction is somewhat complex because it's a combination of numerous factors including service level. We are measuring that with a Google Star rating. Secondly, I discussed seat to eat times; we also have another metric known as seat to precheck. The seat to eat time is crucial because guests want their food quickly. We have improved that time by 8%, which is particularly meaningful when considering the average time spent in our restaurant is a little less than an hour, so that was key for us. The other metrics I mentioned include our turnover, tenure in roles, and off-premise missing item scores—all of which are showing improvement. It's huge; I must acknowledge the operations team and our field partners for taking such good care of our guests and for delivering an excellent experience every day. These efforts are part of my 3 imperatives: relevance, quality food, and guest experience, which will ultimately lead to growth.

Brian Mullan, Analyst

Okay. And then just a follow-up question on the off-premise business. You talked about this a bit in the strategic call a few weeks ago. But can you just remind us how you're viewing this business now? Which channels are you happy with? Where do you expect to make some changes? Just related to that, I think the heat and serve business might be a lower margin percentage business, which I think is understood, but I'm curious if that is right? And if that has any impact on operations as well if you were to make changes to that part of it.

Julie Masino, President and CEO

Yes, Brian, it's a really interesting channel because it encompasses a variety of facets. Off-premise today includes our individual to-go and third-party delivery businesses, as well as catering. Each of these segments interacts differently with our staff. The third-party experience sees diners placing orders through our channel, but not directly interacting with staff as they collect their food. Catering involves feeding larger groups, which could place a lot of strain on the kitchen, impacting dine-in operations. We realized in Q2 of last year that some of these businesses created disproportionate pressure on dine-in. We were aggressively trying to grow catering, but in doing so, it took resources away from dine-in, impacting guest satisfaction. Thus, a part of our pillar has been focused on ensuring that these three businesses within off-premise complement rather than detract from our dine-in business, which remains our core focus. We need to execute them with excellence, as our missing item rates indicate, particularly in third-party delivery orders, emphasizing that operational excellence is key as we grow.

Operator, Operator

Next question will come from Jon Tower with Citigroup.

Jon Tower, Analyst

Just curious, pricing is running 4% this year in the context of some deflation on the commodity side. Obviously, labor inflation is still present. I think on that strategic update call a couple of weeks ago, you talked about the opportunity to perhaps get a little bit sharper on pricing across the system, considering the way you're looking at it on a store-by-store basis rather than larger regional markets. How are you thinking about that in the context of your outlook for 2025, given the pressures faced by consumers but the opportunities present across different stores in the system?

Julie Masino, President and CEO

Thanks, Jon. One of the things we identified early on is that there is an opportunity for us to apply pricing more strategically. Pricing is a powerful lever, but it's also something that consumers notice and compare to other experiences. We've become really focused on how to protect value while taking price in a way that sets us up for success. There’s a pricing tier that holds 60% of our stores. Within that tier, there's a store with an average household income of $55,000 and another with an average household income of $90,000. This demonstrates that different locations have various willingness to pay, highlighting the need for a more refined pricing strategy. We're currently testing several pricing adjustments, analyzing the impact of price changes across these tiers and different menu items. We've raised prices by about 3%, most of which is flowing through. Our objective is to devise a multi-year roadmap for pricing, aligning strategies with consumer pressures and menu improvements, thus making deliberate pricing decisions moving forward.

Craig Pommells, Senior Vice President and CFO

I want to reemphasize what Julie said; it's early in this process. We’ve established anchor points around our early dine and breakfast specials starting at $7.99. These offer sharp price points across multiple dayparts while the pricing work will build on top of that foundation.

Jon Tower, Analyst

Got it. Okay. And kind of related—similar vein. You've experienced some nice commodity deflation this most recent quarter. I think for the balance of the year, you're implying roughly flat. However, indices across the restaurant space suggest that many key inputs are starting to rise. I think some of these inputs apply to your business. So how are you considering food costs over the next 12 months? Are there any contracts we should be aware of that might need to be renewed at different rates?

Craig Pommells, Senior Vice President and CFO

Jon, it's Craig again. We'll talk more about it in September. Right now, the underlying dynamic is shifting a bit. We will provide more detail on the September call.

Jon Tower, Analyst

Okay. And then maybe just the last one. You do have a convertible due in June of 2026. Any insights on how you might handle that when it comes due?

Craig Pommells, Senior Vice President and CFO

Yes. We are starting to work on that well ahead to ensure we understand all options available. The good news is we have a large capacity in our revolver, and we have continued to maintain reasonable leverage levels, providing us with plenty of options as we approach the deadline. We’ll share more details about that in the future. We're starting to evaluate it well ahead of the due date and will make decisions based on the circumstances at the time.

Operator, Operator

Next question will come from Katherine Griffin with Bank of America.

Katherine Griffin, Analyst

I had 2 modeling questions and then a follow-up. So first, just if I could ask again about the commodities cost expectations. Can you remind me what some of the largest components of your cost basket are, specifically regarding protein? And then the second is just how we should think about G&A in 4Q—is 3Q kind of the right run rate from here?

Craig Pommells, Senior Vice President and CFO

Katherine, it's Craig. One of the good aspects of Cracker Barrel is we've got a diversified cost basket. We're well split across major categories: roots and vegetables is one of the larger categories; poultry is actually the largest; then we have beef and pork. Overall, it's a pretty balanced mix regarding commodities. Regarding G&A, we expect that G&A will be a bit higher in Q4 compared to Q3. As we transition into fiscal '25, G&A may increase slightly as we continue investing in all efforts to reenergize the business and stimulate growth.

Katherine Griffin, Analyst

Got it. Makes sense. And then, Julie, a question for you on some of the additional technology investments that you spoke about a couple of weeks ago. I wanted to understand where the tech stack is today. There have been investments into better food and labor systems over the past couple of years, which may be bearing fruit. I think I'm curious about how you're prioritizing those technology investments. Are you looking to replace some elements of the tech stack that would align with some of the remodel plans or industrial engineering plans? Just trying to get a sense of how incremental some of the changes could be with these additional technology investments. Are there improvements to be made regarding reservation software or things that could even improve some of the metrics that you talked about, such as seat-to-eat or turnover?

Julie Masino, President and CEO

Yes, Katherine, thanks for the question. We have a 3-year tech roadmap that the team has built and is refining as we enter the annual operational planning process for '25 and beyond. This was created as part of the strategic plan and the transformation agenda, knowing that we would need to make some investments. Currently, we are focusing on ramping our ability to monetize the loyalty tech stack and make it an industry-leading program, working on elements such as personalization, CDP, and CRM, which we didn’t possess until now. While we are also considering POS and tech investments, we have both a retail and a restaurant business, and our retail business is a bit behind regarding tech investments. Some areas of that are part of our tech roadmap over the next 3 years. We’ll provide more guidance on that in September as we plan for '25, and we can be more specific about what expectations might be for '25, '26, and '27. The team is very mindful about pacing and sequencing these investments, given the ongoing operational focus.

Operator, Operator

Next question will come from Dennis Geiger with UBS.

Dennis Geiger, Analyst

Wondering if there's anything more that you can share on, I think, the comments around the sequential monthly improvement that you spoke to, which I think related just to the retail business. So if anything more on what was driving that—if it's an underlying improvement? And then I don't know if you were commenting on the restaurant trends specifically, but if there is anything to share there on that sequential trajectory through the quarter.

Julie Masino, President and CEO

Yes. Our retail performance, as you know, Craig talks about it this way: it's discretionary. We have lots of products that we'd love for you to pick up in a Cracker Barrel Country store, and many of these aren't necessarily requirements for guests. As a result, this segment has faced challenges over the past year. However, we have been encouraged by the sequential monthly improvements in comp store sales, driven by the performance of certain theme assortments that performed well. We are unique, and our team does an excellent job on creating this product. Certain theme assortments have resonated with consumers. Additionally, if you need a gift, it’s worth the visit because we have amazing value items that appeal to guests. Both markdowns and the introduction of well-priced items have contributed positively. Given the current macro environment, with a focus on value, and the ongoing pressures surrounding low-income consumers, our mixed offerings have been effective. I’d also like to commend our team for their ability to effectively manage inventory levels while growing margins. Despite headwinds impacting traffic and retail conversion, our inventory levels remain down, which contributes to the growth in same-store sales and margins.

Dennis Geiger, Analyst

I appreciate that, Julie. Just touching on loyalty, could you share any additional observations from that program, what it's done for you, and how that helps you project expectations for the program going forward?

Craig Pommells, Senior Vice President and CFO

Sure. I'll start with that one, and maybe Julie can provide some additional thoughts. We are really excited about our loyalty program. We're at the 5 million member mark, which is huge. We're thrilled about that; it's still early, and we’ve a lot more work to do. But actually, I'll turn it over to Julie to provide more detail about upcoming information we plan to share on the program.

Julie Masino, President and CEO

Yes, thanks for the question. We remain excited about this program. You've heard me speak about it since our very first call to where we stand now and what we announced two weeks ago. It's a core program within our pillars because we believe this is how guests want to interact with us and a great way to deliver value too. Don’t forget that; this program provides value to guests who are actively seeking it. However, it's essential to emphasize that we are still in the early phases. We just launched it in September, so we're not even at our one-year anniversary. In our September call, we plan to delve deeper into how we envision the program evolving in '25 and beyond and how we will leverage it to drive key levers within our growth strategy. More details to follow in September, but know that we remain optimistic about it, and it helps us deliver value to our guests.

Dennis Geiger, Analyst

That makes sense. Last one for me, if I could. Craig, on the longer-term depreciation and amortization front, is there anything more tangible you can provide at this point? Or is it still too early?

Craig Pommells, Senior Vice President and CFO

It's increasingly clear that depreciation will rise. We're making significant capital investments to reinvigorate the business, and our capital spending is increasing. This will naturally lead to higher depreciation expenses in the upcoming years. Even this year, you can see a slight uptick. Next year will likely witness further increases. We shared previously on the strategy call that we're engaged in a 3-year plan focused on addressing deferred maintenance, which will require investment, and this will drive depreciation in the near term. This isn't a permanent aspect of our business model; rather, we need to address these issues. Additionally, as we make further capital allocations that present compelling returns, a greater capital spend will drive equivalent depreciation. For instance, if we develop new prototypes in pursuit of growth, though these initiatives will generate greater depreciation, the overall expectation is to improve EBITDA by approximately 400 basis points.

Operator, Operator

The next question will come from Andrew Wolf with CL King.

Andrew Wolf, Analyst

Julie, the 5 key metrics you're sharing with us and focusing on are lead indicators for same-store sales and really guest traffic. Could you provide a sense, based on either your experience or your internal plan, of the time frame for when these metrics start to move the needle meaningfully? I realize this is cumulative, but when do you anticipate that we will start to see an uptick in guest traffic? Also, could you blend this into an assessment of what portion of the overall process you're currently on?

Julie Masino, President and CEO

Yes, Andrew, thanks for the question. Performance in traffic, like value, is a multifaceted equation, so there are many factors at play. We know that our operational metrics and our ability to execute significantly impact traffic. Another driving factor is our ability to attract guests by enhancing top-of-mind awareness and ensuring that we provide food that resonates. Ultimately, it comes down to our three imperatives, which are to inspire relevance, deliver desirable food and experiences, and build lasting customer relationships. I would say we are progressing further in terms of operational metrics compared to our marketing efforts currently. We continue to experiment and learn, from local tests to national campaigns around various themes such as NASCAR or college football, to find what resonates best with guests. The cumulative effect of these efforts will build over time, and we expect to see performance improvement in the upcoming months as we continue investing in these areas into '25 to achieve growth in '26 and beyond. More to come, but trust that the team remains focused on improvements that we believe matter to our guests.

Operator, Operator

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

Julie Masino, President and CEO

Thank you all for joining us today. We remain intently focused on driving relevancy, delivering food and experience to guests love, and growing profitability through the execution of our 5 pillars. As we execute our transformation, we are simultaneously focused on managing our day-to-day business and on operational excellence every shift, every day. I want to thank our team members and leaders for their hard work taking care of our guests and executing with excellence day in and day out. Their dedication and commitment to bringing our brand to life gives me further confidence that we will be successful as we transform our business and position it for long-term growth. Thank you for your interest, and we look forward to updating you on our progress at our next earnings call.

Operator, Operator

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