Q1 2022 Cracker Barrel Old Country Store Inc Earnings Call

November 23, 2021

Good day and welcome to the Cracker barrel fiscal 2022 first quarter earnings call.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

Please note this event is being recorded.

I would now like to turn the conference over to Jessica Hazel head of Investor Relations. Please go ahead.

Thank you good morning, and welcome to Cracker barrels first quarter fiscal 2022 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 29 2021.

The first quarter non-GAAP financial measures are adjusted to exclude the noncash amortization of the asset recognized from the gains on our sell and lease back transactions and the related tax impacts.

The company believes that excluding these items from its financial results provides investors with an enhanced understanding of the company's financial performance.

This information is not intended to be considered in isolation or as a substitute for net income or earnings per share information prepared in accordance with GAAP.

The last pages of the press release include reconciliation from the non-GAAP information to the GAAP financials.

On the call with me. This morning are cracker barrels president and CEO Sandy Cochran.

Senior Vice President and interim C S O Doug to be on.

And senior Vice President and C M O Jennifer Tate.

Sandy will begin with a review of the business and Doug will review the financials and outlook. We will then open up the call for questions for Sandy Doug N. Gen.

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 filed with or furnished 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 barrels president and CEO Sandy Cochran.

Sandy.

Thank you Jessica and good morning, everyone.

This morning, we announced comparable store restaurant sales growth of one 4% compared to the first quarter of fiscal 2019.

I'm pleased with the work of our teams to accomplish the sales recovery in spite of the headwinds we faced from the Delta variant and difficult staffing environment as we began our fiscal year.

We believe the improvements we made to staffing levels. During the first quarter played a significant role in driving our sales recovery.

Our recruitment efforts, including a new virtual orientation program that streamlines, our onboarding process and reduces training hours helped us to hire an average of more than 2000 employees per week during the quarter.

And while we still have some challenges with COVID-19 related call outs in pockets of Understaffing, we feel confident that we have the appropriate staffing in place to handle the elevated holiday volumes, we anticipate for Q2.

Pleased to share that we saw almost no year over year decline in off premise sales, even as first quarter dine in volumes further recovered.

And we continue to explore new channels for growth and expansion for off premise business.

And the last week of the quarter, we expanded our virtual brand chicken and biscuits by Cracker barrel to approximately 500 locations total launched a second virtual brand the pancake kitchen by Cracker barrel and we opened our first ever ghost kitchen location, all of which I'll speak to shortly.

First quarter retail sales maintain their strong growth over pre COVID-19 levels with comparable store retail sales up 17, 6% compared to the first quarter of 2019.

We continue to see strength from everyday categories, particularly toys food and home decor.

Actually our holiday themes have resonated strongly with guests this year and our Christmas themes are delivering solid double digit growth over fiscal 2019 to date, despite some headwinds from shipping delays.

Our retail teams have done an excellent job managing the ongoing supply chain challenges and we brought in the majority of our containers at contracted rates during the quarter.

By pushing forward ordering timelines for seasonal merchandise and leaning into our everyday assortments. We are successfully navigating the impact of shipping delays, while providing guests with a unique and appealing retail experience.

People Street maintained its run of strong sales performance during the quarter.

Average weekly sales for the brand were up by more than 50% compared to pre COVID-19 levels, which includes the benefit of being open on Sundays.

We hope to open 15, new units this year, the first of which opens next week.

Our real estate team has done an excellent job of building a strong pipeline to support new unit openings.

Through the remainder of this fiscal year and beyond and given the strong unit economics that have exceeded our expectations I'm optimistic about the long term growth potential for the brand.

Doug will take you through additional financial details for the first quarter and provide current thinking on our outlook before he does I'd like to share with you a little more detail on our second quarter expectations and progress on a few key strategic initiatives.

Many of you know the cracker barrel brand has a deep connection to the holiday season, and our stores typically run higher volumes during the second quarter. This.

This year, especially I believe our guests are embracing cracker barrels unique holiday offerings as they look forward to a more traditional season complete with family gatherings and holiday celebrations with friends.

While we expected Q2 done and traffic will remain below pre COVID-19 levels, we're optimistic that the recent improvements in our restaurant and retail sales trends will continue through the holidays.

We've seen strong demand from our off premise Thanksgiving offerings preorders for our traditional heat and surface that serves eight to 10 guests have remained high compared to pre COVID-19 levels, which is impressive considering our guests now have the additional option of our smaller heat n' serve family.

Dinner. This first four to six guests.

Not only is off premise a key driver in our second quarter, but the week of Thanksgiving is typically our largest sales week of the fiscal year.

While we cannot fully predict what the dine in consumer behavior will look like over the next few days, we expect a strong Thanksgiving sales week that should exceed pre pandemic levels.

While the operating environment remains challenging I'm confident in our stores, we will deliver on our mission of pleasing people this entire holiday season.

Looking longer term I remain excited about the strategic initiatives, we have in place to deliver sales growth and strengthen our business model.

That starts with the launch of a ghost kitchen in the expansion of our virtual brands that I spoke to earlier.

Our ghost kitchen concept cracker barrel kitchen opened in Los Angeles at the end of October Cracker barrel kitchen offers a streamlined version of the cracker barrel menu of our traditional favorites as well as chicken and biscuits and the pancake kitchen offerings.

We've seen positive guest response, so far and we believe this format can be a meaningful revenue driver for us.

We plan to open additional ghost kitchen locations in Los Angeles in the near future and long term I'm very excited about the potential to bring homestyle food of cracker barrel into additional urban areas.

We've also expanded the rollout of virtual brands as an added sales layer to our existing stores are.

Our second virtual brand the pancake kitchen launched in the last week of the quarter and initial sales results are promising.

We believe this brand helps us address unmet demand for breakfast offerings via third party delivery in many geographies.

Additionally, we remain optimistic about the sales potential for the chicken and biscuits brand, which helps us to leverage excess kitchen capacity during underutilized day parts and to target additional users of the brand who might not otherwise visit a cracker barrel restaurant.

The first quarter also marked the one year anniversary of the launch of our digital store. As a reminder, this was a new digital platform that integrated restaurant retail and catering offerings into a unified and convenient user experience.

In its first year of existence, the digital store registered over 43 million session and handled over $3 4 million orders. In addition to supporting the growth in our off premise business. It enhances the dining guest experience through features such as online waitlist and mobile pay.

Our digital investments have created a platform for us to build direct digital relationships with our guests, including email and SMS text marketing personalization through our website and App and the introduction of a loyalty program.

Additionally, we've seen positive results from the shift in our paid media towards digital channels, which allows us to better target our messaging to specific audiences.

Yeah.

We expect to continue to shift more advertising dollars to these channels as we find new ways to leverage our expanding digital capabilities.

Lastly, I'd like to provide an update on our leadership team. So we've previously announced Craig Palmer will be joining us as our new senior Vice President and Chief Financial Officer, starting next month.

Greg brings with him over 20 years of experience in the restaurant industry. Most recently as CFO of Red lobster.

Prior to that Craig served as senior Vice President at Red Lobster for five years and served in various financial and data analytics roles at Darden for over a decade.

Greg's track record of financial leadership, and strategic planning will be a great asset to our leadership team as we continue to explore ways to drive sales growth and strengthen our business model in a post COVID-19 world.

Before I turn the call over to Doug I want to thank him for his outstanding contributions to the company, particularly over the last year.

During his time as interim CFO, he's been an extraordinarily helpful to us as an organization and a wonderful partner to me.

That's a 20 year cracker barrel veteran and he will remain a valuable part of the cracker barrel senior leadership team as he continues his responsibility as senior vice president of sourcing and supply chain.

And helps Craig familiarize himself with our company and our people.

Thank you, Doug and with that I'll turn the call over to you.

Thank you Sandy and good morning, everyone.

For the first quarter, we reported total revenue of $784 $9 million.

Restaurant revenue increased 19, 4% to $615 $4 million and our retail revenue increased 29, 2% to $169 $5 million versus the prior year first quarter.

Air to the first quarter of fiscal 2019 comparable store restaurant sales increased one 4%.

We're providing our comparable sales results back to fiscal <unk> My team. Our most recent clean full fiscal year, which provides a better indication of sales growth and prior year comparisons.

Restaurant sales performance improved sequentially, each month of the quarter and breakfast.

To be our strongest growth big part.

Particularly during the week, we also saw a significant recovery in the weekend breakfast and lunch day parts during the quarter, which we believe is primarily due to the improvements to our staffing levels.

Our comparable store off premise sales were up 168% compared to the first quarter of fiscal 2019.

More impressively, we retained almost all of our off premise sales from last year. When we had a large number of stores operating either off premise only or were significant capacity restrictions.

Our third party delivery channel delivered strong year over year growth during the quarter, which helped to offset the modest decline in our individual to go channel.

Comparable store retail sales were again above our expectations in the fourth quarter and increased 17, 6% over 2019.

While the supply chain environment remains volatile our retail team has done an excellent job of managing inventory and leaning on our everyday assortment to minimize the disruption to our retail shops.

Moving on to expenses, our total cost of goods sold in the quarter was 39% of total revenue versus 38% in the prior year quarter.

Our restaurant cost of goods sold was 26% of restaurant sales versus 25, 7% in the prior year quarter.

Significant increases in pork beef and the world cost drove commodity inflation of seven 3%, which was above our expectations.

We've largely offset the impact of this inflation through five 5% pricing and mix favorability during the quarter.

Retail cost of goods sold was 48, 7% of retail sales versus 56% in the prior year quarter.

This 190 basis point decrease was primarily driven by lower markdowns as we continue to sell through inventory at full price at higher levels than we have historically.

First quarter labor and related expenses were 35% of revenue versus 35, 1% in the prior year quarter, our labor costs were pressured by wage inflation on a constant mix basis, with nine 1%, which increased throughout the fourth quarter and came in above our <unk>.

Expectations as well as elevated overtime views.

Pressures were primarily offset by sales leverage as well as lower manager staffing levels and related incentive compensation.

Adjusted other operating expenses were 23% of revenue versus 24, 5% from the prior year quarter.

This 150 basis point decrease was primarily driven by sales leverage and somewhat lower depreciation as a result of reduced capital expenditures throughout the pandemic.

This favorably was partially offset by a number of factors, including increased maintenance expense as we spent more on repairs for property and equipment that we werent able to secure replacement for due to supply chain issues.

Increased fees as a result of the growth of our third party business at.

And higher supplies expenses due to inflation.

We expect this last factor to be a significant.

The impact on our second quarter other operating expenses well due to our elevated off premise business. In addition to the outside costs associated with our heat n' serve offerings.

Next moving beyond store level margins.

Our general and administrative expenses in the first quarter were $40 $9 million, which is unfavorable to the prior year first quarter adjusted G&A by $6 $5 million.

This increase was driven in large part by expenses related to staffing increases and recruitment, including managers in training at home office support as well as higher travel expense.

Net interest expense for the quarter was $2 $6 million compared to $10 $7 million in the prior year quarter.

This $8 1 million dollar decrease as a result of lower debt levels as well as a lower weighted average interest rate due to the convertible debt offering we completed in the fourth quarter.

Our effective tax rate for the first quarter was 17, 1% compared to an effective tax rate of 24, 6% in the prior year quarter.

As a reminder, our prior year tax rate was elevated as a result of a reduction in tax credits and taxes on the sale and leaseback transaction that took place during the prior year first quarter.

These first quarter results culminated in GAAP earnings per diluted share of $1.41 and adjusted earnings per diluted share of $1 52 sets.

When adjusting for the noncash amortization of the asset recognized from the gains on the sale leaseback transactions.

In the first quarter adjusted EBIT.

EBITDA was $71 $9 million or 32, 9% increase over our prior year fourth quarter adjusted EBITDA results.

Turning to our balance sheet, we ended the.

Quarter with $377 million in total debt.

<unk> to $949 million at the end of the first quarter of last year.

Our strong balance sheet and cash flow puts us in a position to continue to invest in the business, while returning capital to shareholders. In this regard we are pleased to announce a quarterly dividend of $1 30 per share, which matches, our pre pandemic dividend level, but on a lower base of earnings and reflects our confidence in the business.

As we progress.

Through 'twenty, two despite the uncertain and challenging business environment.

With respect to our fiscal 'twenty two outlook, everyone should be mindful of the risks and uncertainties associated with this outlook as described in today's earnings release and never reports filed with the SEC.

Given the continued uncertainty around the current inflationary environment, we will be providing only the following updates to our full year expectations.

Both commodity and wage inflation exceeded our expectations in the first quarter.

And now expect full year commodity inflation and constant mix.

Mixed wage inflation in the high single digits.

Continue to expect full year capital expenditures were $120 million, including the opening of three new cracker barrel locations and 15, New Maple Street Biscuit company locations.

Capital expenditures are subject to supply chain disruptions, which could delay the delivery of equipment.

New unit development timelines.

We now expect an effective tax rate of approximately 17%.

Based on our sales trends, we believe November comparable store restaurant sales growth compared to fiscal 2019 will improve versus the first quarter.

We're optimistic that these sales results will continue.

The remainder of the second quarter.

Turning to our margin expectations. We currently expect second quarter adjusted operating margin to be approximately five 5% to 6% of revenue.

This expectation includes the impact of more significant wage commodity and other operating expense inflation in the second quarter compared to the fourth quarter as well as higher expenses associated with the second quarter off premise occasion business.

And with that I will turn the call over to the operator for questions.

Thank you we will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Alton Stump with loop capital. Please go ahead.

Great. Thanks, Hey, good morning, Thank for taking my question.

Just wanted to ask on the commodity front I know, it's very very difficult.

Cool.

On a quarter by quarter basis.

You know to predict.

The environment, but any color as you know.

Is it high single digit number for the full year.

I'd be kind of in a similar range over next few quarters, where it can be higher than that.

Specifically or just any color that you can provide on that would be very helpful.

Allison what I would say is that when we.

We look at the elements of the inflation.

Correct. There is certainly difficult to predict from quarter to quarter I think from a commodity perspective that will be slightly higher in the second half compared to the first half.

And I see that the wage inflation as we're looking at it to be relatively stable and consistent with the guidance. We gave this quarter.

Okay, great. Thanks, Doug and then just my follow up and I'll hop.

Back in queue, but just on the labor front.

You know there have been many of your peers that we're not able to properly staff and the most recent quarter. After you guys.

Certainly seem to have done a good job with that.

Yeah.

Kind of walk through like what were key factors. You think that's why you were able to keep your stores you know for most of our apartment staff during the first quarter.

Oh, well I'll turn the Sandy I'll kind of tune I think first of all in our field teams and our HR teams have done I think a phenomenal job of addressing the staffing concerns that everyone's been dealing with but certainly in our industry and they have tried all sorts of.

Different programs and tactics to.

Not just to recruit them.

New employees, but they've also been very focused on retaining the ones that we have so we commented in the prepared remarks I think this new virtual orientation is an example of a program that got quickly put into place where if.

We hire an employee they can really do the orientation on their own later that day, and then come to the to the restaurant ready to work are really the next day almost.

And we've been able to put that whole program into place really recently and roll it out to the trade through the chain and that has really helped.

I think make us an employer of choice for a lot of potential workers.

Okay.

Great makes sense. Thank you Sandy Doug I'll hop back in the queue.

Yeah.

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

Hey, this is actually Jack on for Jade, Thanks for taking the questions.

I just want to quickly follow up on on the staffing environment.

Maybe you can give some more metrics around where you think your staffing is currently again pre COVID-19 and if there is do you see any more upside to if your staff even better if that can be a further driver to sales going forward.

Yeah. So we as we mentioned we've made significant progress since the last time, we talked to over the course of the first quarter. Our I believe we've largely if not completely close the gap in the back of the house. So we're feeling really good about where we are and grill cooks.

I think in the front of the house, specifically with servers, we would love to have and we're working hard to try.

To hire even more but we do feel good about where we're positioned going into the busy season, and we think that those improvements in staffing is certainly a meaningful part of how we've been able to achieve the sales.

Recovery that we've seen.

Got it.

It's in addition to just having the employees I think there are still pockets of Covid call outs that are impacting our business and once the more that that settles down across the country and in our restaurants, I think that'll be another benefit to our field leaders.

To know that that we can.

Phil the dining rooms completely and take care of the guests that want to come and dine with us.

Okay.

Great that's really helpful.

Sounds like there's still some more room for dine in sales improved.

Levels.

But I guess my next question I wanted to.

That's about kind of the operating margin guidance that you gave for the second quarter and how to think about that.

As we move forward is there anything temporary in there you.

You mentioned recruiting and training costs and they need anything in G&A or how you think commodity pressures we're gonna.

Got it.

The year that might make the second.

Second quarter margin, a little lower than maybe the rest of the year or any way I can think about that as we model it out.

Yeah.

Jack in terms of the question about temporary.

<unk> earlier, you know three to six months ago, we thought some of these.

Inflationary pressures were a little bit more transitory, but as we've seen from our guidance and what you're hearing across the industry. I think that's kind of is it going to stick around a bit longer and I think we will.

You know.

We will continue to monitor the situation, but I think that the until we get through the fiscal year and start to have a little more visibility in the 'twenty three I think you'll continue to see the pressure I think also.

When you start looking at our business in the second quarter.

Remind you of a couple of things that absolutely.

A period of time when we have.

A higher mix of retail sales relative to other quarters in the year. So that gives us a little bit of cost pressure from cost of goods and then the special occasion business in all of our catering business that we've talked about is really strong in the third in the second quarter, especially relative to some prior years and that also puts a little.

A bit of pressure on our margins specifically.

Our feast and in those large meals that we've talked about have a lower margin. We're really pleased with the dollar margins those deliver force, but they don't deliver the same level of percent margins.

So those are kind of a couple of touch points on how we see things developing in the second quarter and why they are where they are and comparable to Q1.

That's really helpful. And then and then just one last one.

You mentioned the price increase.

You took recently to go to five 5%.

What do you think about another price increase.

And the rest of the year or coming up soon to to kind of offset these elevated costs that you're seeing.

Hey, It's Jan you know as we think about the price increase that we took in August we're continuing to monitor for any effects that may have had on our traffic and so far with about three and a half months worth of data on that we really arent seeing any negative impact on our guest traffic or a menu mix.

<unk>.

So while that increase with a little bit above typical years, where we've taken less than 3%.

We're just looking at this unprecedented inflation and the softening of consumer sensitivity to price and we think we still have an increase.

<unk> power right now in the near term. So we are planning to take another increase in Q3 that will probably also be above that that typical range of 3%. So it will be higher.

Then our normal price increase in Q3.

You know we feel okay about that we've always had a really strong equity in the area of everyday value. We've built out over lots of years of having quality homestyle scratch made food at a fair price.

No we don't do L. T O coupon dealing with everyday value all the time and so we.

We've still got a lot of great. Great offers every day launch features at $6 99 dinner meal starting at 799. So we think we've got plenty of room to take more pricing in Q3.

Great. Thank you.

Our next question comes from Sara Senatore with Bank of America. Please go ahead.

Thank you I had a couple of questions about your digital business. If I may the first is on just thinking about the if you could disaggregate maybe the growth between the core off premise and then the virtual brand I know you said you added chicken and biscuits 500, restaurants, and you've launched a new brand as well, but where are you seeing.

The growth and how should I think about that going forward and the related question is on margins.

And that there are some higher costs associated with the third party delivery, but I guess to the extent that the idea is to leverage existing spare capacity with these.

These virtual brand.

Should they be net positive to margins over time.

Overall volumes recover should they be a bit of that.

Net headwind on a go forward business, obviously with profit dollars growing so just anything color you can give me on that thanks.

Okay. So there's a lot in it and they told me all three of us to address that question.

And then if we don't stay in the queue and we will try more and so first of all the virtual brand.

I think you understand the strategic intent behind it which was to appeal to guests, who would otherwise not be coming into a restaurant who might be shopping for a certain type of food instead of a brand.

<unk>.

And who we believe would be a completely incremental piece of business. So in terms of our margin expectation I don't think we're targeting it as a percentage to be better because these are certainly value offerings or we wanted to ensure that were.

We're delivering the value, but again, we think that it is.

Incremental to the.

To the to the profits of the store.

We rolled that out significantly over the quarter of 500 stores in chicken and biscuits and now 100, but it was late in the quarter. So we are really just getting the learnings.

In addition, we had we had some supply chain issues. It was hard to get chicken tenders during a lot of the quarter.

And some technology.

Integration issues as we were bringing them up so I don't think we have a great clear read to disaggregate them I think I understood. Your question, yet except to say that we're pleased with.

With it at the outset, but both of the brands, we'll look to see whether there's additional stores.

That we can open it and which stores that were already open have strong sales in wine.

And we will continue to look at the offer and the pricing as we go in and I know Gen and I'll, let Dave you may want to add to this churn has got some marketing planned once we're sure. We've got the execution down I think we can think about how to market. This on those channels.

And so I don't know what I Didnt answer Jim why don't you you know do you want to add anything on the brands.

Yeah, I think Sandy said it well in that we are only about three weeks into having expanded chicken and biscuits to the 500.

And the pancake kitchen by Cracker barrels and 100, but again just for a couple of weeks. So our focus right now is on optimizing the menu. We started those with very streamlined menu is very you know just sort of the the smallest and we'll be adding items with a big focus on adding beverages you have to make sure we can match.

Myself maximize margin on those looking at additional stores to add so a lot more growth to come from the virtual brand. We're also really excited about what we're seeing just.

Just in the initial few weeks with our first ever Ghost kitchens. So we've opened a ghost kitchen out in the Los Angeles area and have plans to open a couple more so that again is 100% incremental for us because it gives us a chance to reach guests in urban areas like Los Angeles, where we have no cracker barrels nearby.

So excited to see what that type of business channel can do for us as well and we'll market primarily through the third party apps, because that's where the that's where those guests are so we'll do some marketing there.

Got it. Thank you only took two would be to hit all the answers.

Okay. Good.

Our next question comes from Brett Levy with <unk> partners. Please go ahead.

Great. Thanks for taking the call and Doug don't worry I do have some supply chain questions. You arent entirely left out I guess, if we could start.

Is there anything more you can share in terms of that.

The sales cadence I know you gave some language around what Youre seeing for November for the holiday week, you could share a little bit more increments ality for October exit velocity and what you've seen so far in November.

And then just.

As you think about supply chain I'll ask it two ways, but where are you right now in terms of what's locked in.

On your contracted goods for.

For your basket and then also.

With the tech investments that you've been making.

Not just the digital ones you were talking that but also the equipment related ones for in software related ones for in store are you running into any issues do you see any challenges with that and then also how confident are you now in terms of getting the free CBS and the 15th Maple Street's opened for the year.

Thanks.

Okay, well, let me start trying to tee up.

I think I think I've gotten all the all the separate parts of that Brett. So first off I would comment that during the first quarter, we saw sequential improvement across all day parts throughout the quarter and we have been pleased with how things are shaping up thus far in the month of November and we can.

<unk> that we thought we would be in a better place versus <unk> 19, compared to the first quarter. So.

Looking good so far in Q2 in terms of the.

Locked commodities, we have about 30% of our commodities locked for the balance of fiscal 'twenty, two and the typical year. We're usually at this point of the year around 40% to 50%.

Given the high prices across a number of fronts. We've made conscious decisions not to lock in we're monitoring markets and we will take positions as we see appropriate as we move through the year.

In terms of the point of sale rollout, we have faced some challenges with delays of relating to chips and some other components and we have.

And approximately 500 stores, so far with the Pos.

<unk> heard recently from the our CIO that the supply chain is kind of breaking loose a little bit and we think that will be complete by March.

Clearly dependent on getting those installed, but we're feeling pretty good about that which will lead us to some other additions.

Additions to our.

Cost of food cost system, we talked about in the previous quarter, we will complete that as well.

And then in terms of our confidence relating to the development schedule.

I think things have been interesting on that front.

Back up a little bit we have seen in our maintenance expense area that we're spending a little more maintenance expense, because we've been having difficulty getting equipment and that kind of flows into the development time lines for both the cracker barrel and the Maple three brands.

Had suppliers that haven't been as willing to commit to delivery schedules in terms of equipment. So we've been thinking about how to manage that.

And similarly, with some of our contractors that are looking for a little bit different expectations in terms of their commitments to timelines. So we feel pretty good about it and we'll keep you posted as that develops over the next couple of quarters.

Okay.

Thank you.

Okay. Good.

Okay.

Again, if you'd like to ask a question. Please press Star then one at this time.

Next question comes from Brian Mullan with Deutsche Bank. Please go ahead.

Alright. Thanks.

Can you just talk about the capital allocation priorities for the balance of this year and beyond in the past. The company has a history of special dividends, you've also repurchased stock in the past. So as you sit here today, just wondering if you might favor one form of shareholder return over the other.

Can you discuss how the uncertain operating environment or perhaps even the prices.

The form those decisions as we move forward.

Yeah, Brian So I think the board continues to take us as they have for years a balanced approach. We first wanted to ensure that we make the investments in our existing assets that we fund our growth initiatives.

<unk>.

Technology and the new units we've thought about.

We plan to take that Doug talked about I think then relative to both the dividend strategy in the share repurchase strategy.

Both of those are.

Are considered by the board as we said, we announced a dividend of $1 34, this quarter, which is reflects a.

Very attractive yield we believe and a.

The payout ratio that although high I think reflects the confidence that the board continues to have in the recovery that we've had in the country will continue to have with the brand and the company.

Okay.

Thank you.

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

Well. Thank you all for joining us today I'm encouraged by our start to the year and remain confident in our plans to further strengthen our performance as the industry continues to recover we appreciate your interest and support and wish you all a safe and happy holiday season.

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

[music].

Good day and welcome to the Cracker barrel fiscal 2022 first quarter earnings call.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions.

Please note this event is being recorded.

I would now like to turn the conference over to Jessica Hazel head of Investor Relations. Please go ahead.

Thank you good morning, and welcome to Cracker barrel first quarter fiscal 2022 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 29 2021.

First quarter non-GAAP financial measures are adjusted to exclude the noncash amortization of the asset recognized from the gains on our sale and leaseback transactions and their related tax impacts.

The company believes that excluding these items from its financial results provides investors with an enhanced understanding of the company's financial performance.

This information is not intended to be considered in isolation or as a substitute for net income or earnings per share information.

Repaired in accordance with GAAP.

The last pages of the press release include reconciliation from the non-GAAP information to the GAAP financials.

On the call with me. This morning are cracker barrels president and CEO Sandy Cochran.

Senior Vice President and interim CFO, Doug could be on <unk>.

And senior Vice President and C M O Jennifer Tate.

Sandy will begin with a review of the business and Doug will review the financials and outlook. We will then open up the call for questions for Sandy Doug Amgen.

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.

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 filed with or furnished 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 barrels president and CEO Sandy Cochran.

Sandy.

Thank you Jessica and good morning, everyone.

This morning, we announced comparable store restaurant sales growth of one 4% compared to the first quarter of fiscal 2019, I am pleased with the work of our teams to accomplish the sales recovery in spite of the headwinds we faced from the Delta variant and difficult staffing environment as we began our fiscal year.

We believe the improvements we made to staffing levels. During the first quarter played a significant role in driving our sales recovery.

Please to share that we saw almost no year over year decline in off premise sales, even as first quarter Don in volumes further recovered.

We continue to explore new channels for growth and expansion for our off premise business.

And the last week of the quarter, we expanded our virtual brand chicken and biscuits by cracker barrel to approximately 500 locations total.

We launched our second virtual brand the pancake kitchen by Cracker barrel and we opened our first ever ghost kitchen location, all of which I will speak to shortly.

First quarter retail sales maintain their strong growth over pre COVID-19 levels with comparable store retail sales up 17, 6% compared to the first quarter of 2019.

We continue to see strength from everyday categories, particularly toys food and home decor.

Additionally, our holiday themes have resonated strongly with guests this year and our Christmas themes are delivering solid double digit growth over fiscal 2019 to date, despite some headwinds from shipping delays.

Our retail teams have done an excellent job managing the ongoing supply chain challenges and we brought in the majority of our containers at contracted rates during the quarter.

While pushing forward ordering timelines for seasonal merchandise and leaning into our everyday assortments. We are successfully navigating the impact of shipping delays, while providing guests with a unique and appealing retail experience.

April St maintained its run of strong sales performance during the quarter.

Average weekly sales for the brand were up by more than 50% compared to pre COVID-19 levels, which includes the benefit of being open on Sundays.

We hope to open 15, new units this year, the first of which opens next week.

Our real estate team has done an excellent job of building a strong pipeline to support new unit openings.

For the remainder of this fiscal year and beyond and given the strong unit economics that have exceeded our expectations I'm optimistic about the long term growth potential for the brand.

Many of you know the cracker barrel brand has a deep connection to the holiday season, and our stores typically run higher volumes during the second quarter. This.

While we expect the Q2 done and traffic will remain below pre COVID-19 levels. We're optimistic that the recent improvements in our restaurant and retail sales trends will continue through the holidays.

Dinner. This serves four to six guests.

Not only is off premise a key driver in our second quarter, but the week of Thanksgiving is typically our largest sales week of the fiscal year.

While we cannot fully predict what the dine in consumer behavior will look like over the next few days, we expect a strong Thanksgiving sales week that should exceed pre pandemic levels.

While the operating environment remains challenging I'm confident that our stores will deliver on our mission of pleasing people this entire holiday season.

Looking longer term I remain excited about the strategic initiatives, we have in place to deliver sales growth and strengthen our business model.

That starts with the launch of a ghost kitchen in the expansion of our virtual brands that I spoke to earlier.

We've seen positive guest response, so far and we believe this format can be a meaningful revenue driver for us.

The plan to open additional ghost kitchen locations in Los Angeles in the near future and long term I'm very excited about the potential to bring homestyle food of cracker barrel into additional urban areas.

We've also expanded the rollout of virtual brands as an added sales layer to our existing stores are.

Our second virtual brand the pancake kitchen launched in the last week of the quarter and initial sales results are promising.

We believe this brand helps us address unmet demand for breakfast offerings via third party delivery in many geographies. Additionally, we remain optimistic about the sales potential for the chicken and biscuits brand, which helps us to leverage excess kitchen capacity during underutilized day parts.

And to target additional users of the brand who might not otherwise visit a cracker barrel restaurant.

The first quarter also marked the one year anniversary of the launch of our digital store as a reminder, this was our new digital platform that integrated restaurant retail and catering offerings into a unified and convenient user experience.

Additionally, we've seen positive results from the shift in our paid media towards digital channels, which allows us to better target our messaging to specific audiences.

We.

To continue to shift more advertising dollars to these channels as we find new ways to leverage our expanding digital capabilities.

Lastly, I'd like to provide an update on our leadership team. So we previously announced Craig Palmer will be joining us as our new senior Vice President and Chief Financial Officer, starting next month.

Greg brings with him over 20 years of experience in the restaurant industry. Most recently as CFO of Red lobster prior.

Prior to that Craig served as senior Vice President at Red Lobster for five years and served in various financial and data analytics roles at Darden for over a decade.

<unk> track record of financial leadership, and strategic planning will be a great asset to our leadership team as we continue to explore ways to drive sales growth and strengthen our business model in a post COVID-19 world.

Before I turn the call over to Doug I want to thank him for his outstanding contributions to the company, particularly over the last year.

During his time as interim CFO, it's been an extraordinarily helpful to us as an organization and a wonderful partner to me.

And helps Craig familiarize himself with our company and our people.

Thank you, Doug and with that I'll turn the call over to you.

Thank you Sandy and good morning, everyone.

For the first quarter, we reported total revenue of $784 $9 million.

Our restaurant revenue increased 19, 4% to $615 $4 million and our retail revenue increased 29, 2% to $169 $5 million versus the prior year first quarter.

Air to the first quarter of fiscal 2019 comparable store restaurant sales increased one 4%.

We're providing our comparable sales results back to fiscal <unk> My team. Our most recent clean full fiscal year, which provides a better indication of sales growth and prior year comparisons.

Restaurant sales performance improved sequentially each month of the quarter and breakfast continued to be our strongest growth day part, particularly during the week. We also saw a significant recovery in the weekend breakfast and lunch day parts during the quarter, which we believe is primarily due to the improvements to our staff.

Thing levels.

Our comparable store off premise sales were up 168% compared to the first quarter of fiscal 2019.

More impressively, we retained almost all of our off premise sales from last year. When we had a large number of stores operating either off premise only or were significant capacity restrictions are.

Our third party delivery channels delivered strong year over year growth during the quarter, which helped to offset the modest decline in our individual to go channel.

Comparable store retail sales were again above our expectations in the first quarter and increased 17, 6% over 2019.

Moving on to expenses, our total cost of goods sold in the quarter was 39% of total revenue versus 38% in the prior year quarter.

Our restaurant cost of goods sold was 26% of restaurant sales versus 25, 7% in the prior year quarter.

Significant increases in pork beef and a world costs drove commodity inflation of seven 3%, which was above our expectations.

Which largely offset the impact of this inflation through five 5% pricing and mix favorability during the quarter.

Retail cost of goods sold was 48, 7% of retail sales versus 56% in the prior year quarter.

This 190 basis point decrease was primarily driven by lower markdowns as we continue to sell through inventory at full price at higher levels than we have historically.

Expectations as well as elevated overtime use.

These pressures were primarily offset by sales leverage as well as lower manager staffing levels and related incentive compensation.

Adjusted other operating expenses were 23% of revenue versus 24, 5% in the prior year quarter.

This 150 basis point decrease was primarily driven by sales leverage and somewhat lower depreciation as a result of reduced capital expenditures throughout the pandemic.

This favorability was partially offset by a number of factors, including increased maintenance expense as we spent more on repairs for property and equipment that we weren't able to secure replacements for due to supply chain issues.

Increased fees as a result of the growth of our third party business and.

And higher supplies expenses due to inflation.

We expect this last factor to be a significant impact on our second quarter other operating expenses well due to our elevated off premise business. In addition to the outside costs associated with our heat n' serve offerings.

Next moving beyond store level margins.

Our general and administrative expenses in the first quarter were $40 $9 million, which is unfavorable to the prior year first quarter adjusted G&A by $6 $5 million. This increase was driven in large part by expenses related to staffing increases and recruitment including managers in training.

At home office support as well as higher travel expense.

Net interest expense for the quarter was $2 $6 million compared to $10 $7 million in the prior year quarter.

This $8 1 million dollar decrease as a result of lower debt levels as well as a lower weighted average interest rates due to the convertible debt offering we completed in the fourth quarter.

Our effective tax rate for the first quarter was 17, 1% compared to an effective tax rate of 24, 6% in the prior year quarter.

As a reminder, our prior year tax rate was elevated as a result of a reduction in tax credits and taxes on the sale and leaseback transaction that took place during the prior year first quarter.

These first quarter results culminated in GAAP earnings per diluted share of $1 41, and adjusted earnings per diluted share of $1 52 says.

When adjusting for the noncash amortization of the asset recognized from the gains on the sale leaseback transactions.

In the first quarter adjusted EBITDA.

EBITDA was $71 $9 million or 32, 9% increase over our prior year fourth quarter adjusted EBITDA results.

Turning to our balance sheet, we ended the quarter with $377 million in total debt compared to $949 million at the end of the first quarter of last year.

Our strong balance sheet and cash flow puts us in a position to continue to invest in the business, while returning capital to shareholders. In this regard we are pleased to announce a quarterly dividend of $1 30 per share, which matches, our pre pandemic dividend level, but at a lower base of earnings and reflects our confidence in the business.

As we progress through.

Through 'twenty, two despite the uncertain and challenging business environment.

Given the continued uncertainty around the current inflationary environment, we will be providing only the following updates to our full year expectations.

Both commodity and wage inflation exceeded our expectations in the first quarter and.

And we now expect full year commodity inflation and constant mix.

Mix wage inflation in the high single digits.

Continue to expect full year capital expenditures were $120 million, including the opening of three new cracker barrel locations and 15, New Maple Street Biscuit company locations.

Our capital expenditures are subject to supply chain disruptions, which could delay the delivery of equipment and new unit development timelines.

We now expect an effective tax rate of approximately 17%.

Based on our sales trends, we believe November comparable store restaurant sales growth compared to fiscal 2019 will improve versus the first quarter and we're optimistic that these sales results will continue.

The remainder of the second quarter.

Turning to our margin expectations. We currently expect second quarter adjusted operating margin to be approximately five 5% to 6% of revenue.

This expectation includes the impact of more significant wage commodity and other operating expense inflation in the second quarter compared to the first quarter as well as higher expenses associated with the second quarter off premise occasion business.

And with that I will turn the call over to the operator for questions.

Thank you we will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Alton Stump with loop capital. Please go ahead.

Great. Thank you Hey, good morning. Thanks, taking my question just wanted to ask on the commodity front I know, it's very very difficult you know.

At quarter to quarter basis.

You know to predict in this unprecedented environment, but you know any color as you know.

As far as the high single digit number for the full year should that be kind of you know in a similar range over next few quarters or it can be higher than that do you think <unk>, specifically or just any color that you can't provide on that would be very helpful.

Allison what I would say is that.

When we look at the elements of the inflation Youre correct. There is certainly difficult to predict from quarter to quarter I think from a commodity perspective that will be slightly higher in the second half compared to the first half and I see that the.

Wage inflation as we're looking at it to be relatively stable and consistent with the guidance. We gave this quarter.

Okay, great. Thanks, Doug and then just my follow up and I'll hop back in queue, but just on the labor front. You know certainly you know there have been many of your peers that we're not able to properly staff at the most recent quarter. After you guys.

Certainly seem to have done a good job with that.

You can walk through like Wuxi factory do you think that's why you were able to keep your stores you know for most part Parkman staff during the first quarter.

Oh, well I'll turn the Sandy I'll kind of pause I think first of all our field teams and our HR teams have done I think a phenomenal job of addressing the staffing concerns that everyone's been dealing with but certainly yet in our industry and they have tried all sorts of.

Different programs and tactics to.

Not just to.

Recruit new.

New employees, but there have also been very focused on retaining the ones that we have so we commented in the prepared remarks I think this new virtual orientation is an example of a program that got quickly put into place where.

If we hire an employee they can really do the orientation on their own later that day, and then come to the to the restaurant ready to work are really the next day almost and.

And we've been able to put that whole program into place really recently and roll it out to the chain through the chain and that has really helped I think make us an employer of choice for a lot of potential workers.

Yeah.

Great makes sense. Thank you Sandy Doug I'll hop back in the queue.

Yeah.

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

Hey, this is actually Jack on for Jade, Thanks for taking the questions.

Just want to quickly follow up on on the staffing environment and maybe you can give some more metrics around where you think your staffing is currently against pre Covid and if there's do you see any more upside to if your staff even better if that can be a further driver to sales going forward.

Yes, so we as we mentioned we've made significant progress since the last time, we talked to over the course of the first quarter.

I believe we've largely if not completely close the gap in the back of the house. So we're feeling really good about where we are in gorilla Cogs.

I think in the front of the house, specifically with servers, we would love to have and we're working hard to do.

Recovery that we've seen Oh it is.

It's in addition to just having the employees I think there are still pockets of Covid call outs that are impacting our business and once the.

The more that that settles down across the country and in our restaurants, I think that'll be another benefit to our field leaders to know that that we can you know.

Phil the dining rooms completely and take care of the guests that want to come and dine with us.

Okay.

Great that's really helpful and it sounds like there's still some more room for dine in sales to improve.

At levels.

But I guess my next question I wanted to.

That's about kind of the operating margin guidance that you gave for the second quarter and how to think about that.

As we move forward is there anything temporary in there yes.

You mentioned recruiting and training costs and they made anything in G&A or how you think commodity pressures are going to.

Go throughout the year that that might make the.

Second quarter margin, a little lower than maybe the rest of the year or any way I can think about that as we model it out.

Yeah.

Jack in terms of the question about temporary.

Earlier, you know three to six months ago, we thought some of these.

Inflationary pressures were a little bit more transitory, but as you've seen from our guidance and what you're hearing across the industry. I think that's kind of is going to stick around a bit longer and I think we will.

You know.

We will continue to.

Monitor the situation, but I think that the until we get through the fiscal year and start to have a little more visibility in the 'twenty three I think you'll continue to see the pressure I think also.

When you start looking at our business in the second quarter.

Remind you of a couple of things that.

A period of time when we have.

A bit of pressure on our margins specifically.

So those are a kind of a couple of touch points on how we see things developing in the second quarter and why they are where they are and comparable to Q1.

That's really helpful. And then and then just one last one.

You mentioned the price increase.

You took recently to go to five 5%.

Would you think about another price increase.

The rest of the year or coming up soon to to kind of offset these elevated costs that you are saying.

Yeah.

So while that increase with a little bit above typical years, where we've taken less than 3%. Yeah. We're just looking at this unprecedented inflation and the softening of consumer sensitivity to price and we think we still have an increased pricing power right now in the near term. So we are planning to take another increase in Q3.

<unk> that will probably also be above that that typical range of 3%. So it will be higher than.

And then our normal price increase in Q3.

You know we feel okay about that we've always had a really strong equity in the area of everyday value itself out over lots of years of having quality homestyle scratch made food at a fair price.

No we don't do L. T O coupon dealing it's everyday value all the time and so.

We've still got a lot of great. Great offers every day launch features at $6 99 dinner meal starting at 799. So we think we've got plenty of room to take more pricing in Q3.

Great. Thank you.

Our next question comes from Sara Senatore with Bank of America. Please go ahead.

The growth and how should I think about that going forward and the related question is on margins you know I understand that there are some higher cost associated with the third party delivery, but I guess to the extent that the idea is to leverage existing spare capacity with these original brand.

Should they be net positive to margins over time.

Well volumes recover should they be.

The net headwind on a go forward business, obviously with profit dollars growing so just anything color you can give me on on that thanks.

Okay. So Sara Theres a lot in it and they told me all three of us to address that question.

And then if we don't stay in the queue I will try it more.

Hum.

First of all the virtual brand.

<unk>.

And who we believe would be a completely incremental piece of business. So in terms of our margin expectation I don't think we're targeting and as a percentage to be better because these are certainly.

Value offerings, or we wanted to ensure that we're delivering the value, but again, we think that is it.

Incremental to the.

To the to the profits of the store, we rolled that out significantly over the quarter 500 stores in chicken and biscuits and now a 100, but it was late in the quarter. So we are really just getting the learnings.

In addition, we had we had some supply chain issues. It was hard to get chicken tenders during a lot of the quarter.

And some technology.

Integration issues as we were bringing them up so I don't think we have a great clear read to disaggregate them I think I understood. Your question, yet except to say that you know we're pleased with.

With it at the outset, but both of the brands, we'll look to see whether there's additional stores.

We can open it and which stores that were already open have strong sales and why.

And we will continue to look at the offer and the pricing as we go in and I know Gen and I'll, let Dave you may want to add to this China has got some marketing planned once we're sure. We've got the execution down I think we can think about how to market. This on those channels.

And so I don't know what I Didnt answer Jim why don't you you know do you want to add anything on the brand.

Yeah, I think Sandy said it well in that we are only about three weeks into having expanded chicken and biscuits to the 500.

Myself maximize margin on those looking at additional stores to add so a lot more growth to come from the virtual brands. We're also really excited about what we're seeing just.

Just in the initial few weeks with our first ever Ghost kitchens. So we've open the ghost kitchen out in the Los Angeles area and have plans to open a couple more so that again is is 100% incremental for us because it gives us a chance to reach guests in urban areas like Los Angeles, where we have no cracker barrels nearby.

Got it. Thank you only took two would be to hit all the answers.

Okay. Good.

Our next question comes from Brett Levy with <unk> partners. Please go ahead.

Great. Thanks for taking the call Doug don't worry I do have some supply chain question, you arent entirely left out I.

I guess, if we could start.

Is there anything more you can share in terms of that.

The sales pace I know you gave some language around what Youre seeing for November for the holiday week, you could share a little bit more incrementally for octobers exit velocity and what you've seen so far in November.

And then just.

As you think about supply chain I'll ask it two ways, but where are you right now in terms of what's locked in.

On your contracted goods for for your basket and then also.

With the tech investments that you've been making a bleak.

Not just the digital ones you were talking about but also be equipment related ones for in software related ones for in store are you running into any issues do you see any challenges with that and then also how confident are you now in terms of getting the three Cds and the 15th Maple Street's opened for the year.

Thanks.

Okay, well, let me start.

Yeah.

I think I've got all the all the separate parts of that Brett. So first off I would comment that during the first quarter, we saw sequential improvement across all day parts throughout the quarter and we have been pleased with how things are shaping up thus far in the month of November and we call them.

And at that we thought we would be in a better place versus 19 compared to the first quarter. So.

Looking good so far in Q2 in terms of the.

Locked commodities, we have about 30% of our commodities locked for the balance of fiscal 'twenty, two and the typical year. We're usually at this point of the year around 40% to 50%.

Given the high prices across a number of fronts. We've made conscious decisions is not locked in we're monitoring markets and we will take positions as we see appropriate as we move through the year.

In terms of the point of sale rollout, we have faced some challenges with delays of relating to chips and some other components and we have.

And approximately 500 stores, so far with the Pos.

Yes recently from the our CIO that the supply chain is kind of breaking loose a little bit and we think that will be complete by March.

Clearly dependent on getting those installed, but we're feeling pretty good about that which will lead us to some other.

Additions to our.

Cost of food cost system, we talked about in the previous quarter, we will complete that as well.

And then in terms of our confidence relating to the development schedule.

I think things have been interesting on that front.

Had suppliers that haven't been as willing to commit to delivery schedules in terms of equipment. So we've been thinking about how to manage that.

Okay.

Thank you.

Okay. Good.

Okay.

Again, if you'd like to ask a question. Please press Star then one at this time.

Next question comes from Brian Mullan with Deutsche Bank. Please go ahead.

Alright. Thanks.

Could you just talk about the capital allocation priorities for the balance of this year and beyond you know in the past the company has a history of special dividends, you've also repurchased stock in the past. So as you sit here today, just wondering if you might favor one form of shareholder return over the other and can you discuss how the uncertainty.

Operating environment or perhaps even the prices are.

The form those decisions as we move forward.

It is both.

Technology and the new units, we've thought about or.

We've planned to take that Doug talked about I think then relative to both the dividend strategy on the share repurchase strategy.

Both of those are.

Are considered by the board as we said, we announced a dividend of $1 34, this quarter, which is reflects a.

Very attractive yield we believe and a.

The payout ratio that although high I think reflects the confidence that the board continues to have in the recovery that we've had in the company will continue to have with the brand and the company.

Thank you.

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

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

Q1 2022 Cracker Barrel Old Country Store Inc Earnings Call

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