Q3 2022 Cracker Barrel Old Country Store Inc Earnings Call

June 7, 2022

Good morning.

And welcome to the Cracker barrel fiscal 2022 third quarter earnings call.

All participants will be in a 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 to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded.

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

Thank you good morning, and welcome to Cracker barrels third quarter fiscal 2022 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 for the third quarter ended April 29 2022.

The third 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 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 CFO Craig <unk>.

And senior Vice President and CMO, Jennifer Tate.

Sandy and Jan will provide business and initiatives updates and Craig will review, the third quarter financials and outlook.

We will then open up the call for questions for Sandy Craig and yet.

On this call statements may be made by management of their beliefs and expectations regarding the company's future operating results were expected future events.

These are known as forward looking statements, which involve risks and uncertainties.

But 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, particularly in the current environment.

Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties.

And 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 total revenue growth of 10, 8% compared to the prior year and six 8% compared to the third quarter of fiscal 2019.

Although I'm pleased with the work that our teams did to drive our sales above pre COVID-19 levels. Our topline came in below our expectations, while cost pressures and deleveraging continued to challenge our bottom line.

We were seeing encouraging sales trends as February progressed, with the macroeconomic environment and higher inflation.

Load our recovery in March and April below our expectations.

Three things in particular impacted our sales during the quarter.

First over 65 year old guests have been slower to return to in person dining than other demographics and our guest space.

Second the challenging economic environment caused some of our guests to manage frequency and track during the quarter.

Finally, we believe that high gas prices disrupted traditional spring break travel patterns, resulting in lower travel visits.

The positive side, our off premise business continued to meet our expectations and we partially offset our dine in headwinds with continued strong retail performance as we grew comparable store retail sales by nine 7% over the prior year quarter by 21, 6%.

Compared to the third quarter of 2019.

With regard to cost we continue to experience historically high commodity and wage inflation.

Craig will run through.

Although we've taken pricing to help us protect our margins commodity inflation outpaced even our own robust expectations for the quarter.

Craig will now go into some greater detail about the quarter in the current environment as well as how we're thinking about the cost side. Once Craig is finished I'll address the growth in topline initiatives that we're pursuing to position us well going forward.

Greg.

Thank you Sandy and good morning, everyone for the quarter, we reported total revenue of $792 million restaurant revenue increased 11% to $632 2 million retail revenue increased nine 7% to $150 million versus the prior year third quarter.

Sure.

Comparable store total sales, including both restaurant and retail grew by 10, 7% compared to the prior year.

Comparable store restaurant sales grew by 10, 9% over the prior year, driven primarily by Diamond profit growth of five 9% pricing.

Despite the school restaurant sales performance was below expectations.

We're pleased with our continued strong retail sales growth and solid off premise retention levels and the work our teams have done to evolve these businesses to offer our guests increased flexibility and convenience.

Third quarter comparable store off premise sales remains significantly elevated versus pre COVID-19 trends or from a sales were 19% of restaurant sales for the third quarter with strong year over year growth from our catering business and third party delivery with offsets coming from year over year declines.

Individual to go sales as more guests returning to dining.

Comparable store retail sales increased nine 7% compared to the third quarter of the prior year poised the core and food and convenience offerings continue to be the primary drivers of retail sales performance.

Apparel, which was one of the harder hit merchandize categories. During the pandemic has now returned to pre COVID-19 level and we believe there is further growth in this category as diamond profit returns.

Moving to expenses total cost of goods sold in the quarter was 31, 6% of total revenue versus 28, 8% in the prior year quarter.

Restaurant cost of goods sold was 27, 8% of restaurant sales versus 24, 3% in the prior year quarter.

350 basis point increase was primarily driven by commodity inflation up 18% combined with elevated freight costs running ahead of all the pricing.

We experienced higher than anticipated inflation across the protein categories as well as fruits and vegetables.

Retail cost of goods sold was 46, 9% of retail sales versus 46, 5% in the prior year quarter. This 40 basis point increase was primarily driven by higher freight costs.

Third quarter Labor and related expenses were 35, 9% of revenue versus 35, 1% in the prior year quarter.

This 80 basis point increase was primarily driven by wage inflation and increased staffing at both managerial and only levels.

Finally, adjusted other operating expenses were 23, 1% of revenue the same as in the prior year quarter.

Moving beyond store level margins, our general and administrative expenses in the third quarter were down slightly to 5% of revenue versus five 2% in the prior year quarter.

These results culminated in GAAP operating income of $30 $5 million.

Adjusted for the noncash amortization of the asset recognized from the gains on the sale and leaseback transactions adjusted operating income for the quarter was $33 6 million or four.

Four 3% of revenue.

Net interest expense for the quarter was $2 2 million compared to $9 6 million in the prior year quarter. This $7 $4 million decrease is the 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 of fiscal 2021.

Our effective tax rate for the third quarter was two 7%. This tax rate was driven by increased tax credits on lower than expected earnings.

Third quarter GAAP earnings per diluted share were $1 19, and adjusted earnings per diluted share were $1 29.

In the third quarter EBITDA was $59 6 billion a.

A 28, 1% decrease compared to our prior year third quarter EBITDA results.

Turning to capital allocation and our balance sheet.

We remain committed to a balanced approach to capital allocation. Our first priority remains investing in the growth of cracker barrel and Maple Street and beyond that we plan to return capital to our shareholders, while maintaining appropriate flexibility and a conservative balance sheet into.

In the third quarter, we invested $29 million in capital expenditures, which was a significant step up from the approximately $15 million per quarter in the first half of the Europe .

The increase was due to higher maintenance capital spending which has been below normal for multiple quarters as well as increased spending on new unit growth.

Additionally, we returned $69 $5 million to shareholders in the third quarter through a combination of dividends and share repurchases, bringing our year to date total to more than $158 million.

Today is $1 30 quarterly dividend declaration, and new $200 million share repurchase authorization reflects the board's commitment to returning capital to shareholders, whilst investing prudently in our business.

Lastly, we ended the quarter with $373 million in total debt.

<unk> to $615 million at the prior year quarter end.

While we are increasing our share repurchase authorization, we will maintain our conservative approach to managing our balance sheet.

And in general when I speak to many of the initiatives that we believe are positioning us for near term and longer term success.

As we look to our fourth quarter financial expectations, we anticipate the near term pressures, we faced on both our top and bottom lines in the third quarter to persist.

Clearly, we plan to offset some of our cost pressures over the remainder of the calendar year.

While we've seen some guests managing check our plan is to take price increases any staged and thoughtful manner.

We will take an increase in late June followed by another in early August together. These will support an approximately 7% total combined year over year pricing through the end of the calendar year.

We will continue to monitor the consumer and inflationary environment and maintain the flexibility to take additional pricing. If we believe it would be prudent to do so.

As Sandy mentioned at the outset of the quarter, we saw improving sales trends before a spike in gas prices and inflation resulted in increased consumer uncertainty and a decline in ore traffic recovery.

We expect the current traffic trends to continue through the end of our fiscal year.

We anticipate this coupled with our pricing plans will result in fourth quarter total revenue of approximately 8% above the fourth quarter of 2021.

We expect fourth quarter commodity inflation of 16% to 18% and wage inflation of 8% to 10%.

While this level of inflation is more moderate compared to the third quarter. This is higher than we previously anticipated and represents a margin headwind.

Furthermore versus a prior year of fourth quarter, we expect additional inflation in other areas of the P&L, most notably utilities and off premise supplies higher expenses for manager and hourly staffing and training and investments in technology and in Maple Street infrastructure.

Taken all of this into account, we expect fourth quarter operating margin to be in the range of 4% to four 5% of total revenue.

Lastly, as we continue to work on our business model, we're very focused on identifying and pursuing sustainable opportunities to improve margin and long term profitability.

Savings from our new food cost management system are already providing a modest offset to commodity inflation and early results from our labor management system test have been promising.

We believe the labor system, coupled with continued enhancements in our digital infrastructure will drive improved productivity and more cost effective wage administration beginning in the later part of fiscal 2023.

And as we continue to navigate this heightened relation environment, where implemented in both the short term and sustainable long term cost saving options across our food and beverage equipment and supplies categories.

With that I'll hand, it back to sandy.

Thanks, Craig despite the challenges that the third quarter, many of which are likely to continue to one degree or another for the balance of our fiscal year, we're actively pursuing strategies and initiatives that I believe position us well both for the near and longer term.

Obviously their business model and cost saving actions that Craig referenced from a revenue perspective. In addition to pricing we have numerous initiatives to drive check position.

Positioning the brand to drive increased visitation and attract a broader audience of guests, while continuing our retail performance and our thoughtful expansion of Maple Street.

I'll run through some of what we're doing and then ask our chief marketing Officer, Jen <unk> to provide additional details about how we're driving check and positioning the brand more generally.

The first place we're focused a store level execution, we believe that the best way to preserve our reputation for strong value in an environment, where we're taking additional pricing is through operational excellence and enhanced cost fatality in service.

Consequently, our biggest initiative is to focus on our operations and make sure that every guests who visit US has an experience that we can be proud of and we will continue to give us high marks for value.

This focus should pay dividends for us and we're seeing excellent recent guests experience scores, including notably on mother's day, which is traditionally one of our highest volume days of the year.

Building on this momentum, we're investing resources to ensure that our managers and our hourly employees have ample support and the development there.

Need to care for our guests like family.

For example, we recently rolled out an in person training and development program focused on operational excellence hospitality and service to all of our district managers around the country.

Of course, great operations begin with ensuring that we're adequately staffed our talent acquisition teams remain focused on making sure we attract and retain employees around the country, particularly servers.

We continue to make solid progress in this regard.

Number of our stores with meaningful staffing challenges is now essentially back to our historic norms and we believe we are and should remain sufficiently staffed to handle continued recovery in guest traffic.

As I noted in my opening comments retail remains a strength for us and our retail teams have done an incredible job keeping our stores filled with unique and the stodgy everyday merchandise that resonates with our guests.

They've managed our supply chain extremely well.

And we're able to avoid any significant disruptions to our retail floors.

To protect our important holiday season, and continue our strong retail performance, we proactively pushed up some of the ordering timelines and we will remain focused on supply chain management.

Finally, we're focused on growing Maple Street, which just opened its 15th location and has continued to perform above our expectations despite dealing with its own inflationary pressures.

We remain very excited about this brand and are seeing it deliver on Rins investment thesis that the fast casual breakfast and lunch space is an attractive one.

We've been focused on and have made great progress ensuring that we've got the right infrastructure in place to grow the brand.

Including honing the Maple Street real estate model.

Developing training and operational programs and hiring key leadership.

In this regard I'm pleased to announce that we added John Maguire as President of Maple Street few weeks ago.

As many of you likely know John has over 30 years of experience in the restaurant industry, including as executive Vice President and Chief operating officer of Panera bread.

He was a key leader in growing <unk> to one of the most successful brands in the fast casual restaurant space.

As I mentioned driving check in positioning our brand for the long term to drive increased frequency and make ourselves even more appealing to a broader audience of guests are all strategic priorities for us.

And I am pleased about where we're headed in this regard.

I've asked Jen <unk> to provide you with more details and walk you through some of the initiatives that we're pursuing.

Ken.

Thanks, Sandy we are very excited about the potential we have to drive check grow the brand with our core guests and to broaden our appeal. We recently concluded a six months segmentation study that has given us a greater level of insight about key groups, we can newly attract or from whom we.

Can increase visitation.

Through this study we know more about who these groups are what they want from us and how bigger prize each group represents.

Although we have a number of guests who are over 65, who have been slower to return to normal dining patterns. We believe they will eventually do so.

That said, we are fortunate to have a multi generational guest base.

Absolutely 30% of our guest base are millennials between the ages of 25% and 44, many of whom also constitute core users of the brand.

This group generally gives us very high marks for our food value and atmosphere.

When we ask those of them, who use us less frequently about the things that they wish we did better.

Many of these relate in one way or another to technology, which we're actively addressing.

Strategically speaking, we are pursuing initiatives, where we lean into our strengths of strong value perception and delicious food to grow check and attract visit while also addressing our opportunities in technology and digital including a new loyalty program.

Some of these initiatives are shorter term in nature, while others are longer term and we believe that the things we're doing should resonate both with our core guests as well as the other groups we're trying to attract.

Let's begin with what we're doing to enhance our strengths of value and food.

Regarding value, we are focused on making sure that our guests feel like the price, they're paying us a great deal in light of their entire experience.

As Craig noted, we will continue to approach pricing aggressively but thoughtfully over the next six months.

Given guest acceptance of the pricing we've taken thus far we believe we can take the pricing Craig mentioned and still maintain high guest perception of value.

Yeah.

Pricing is only one prong of our multi pronged strategy that we're implementing to grow check through the end of the calendar year, while still enhancing guest perception of value.

The other problems or menu related where we will be introducing more sheryl starters.

<unk> alcohol and non alcoholic specialty beverages, and premium size and add ons.

Many guests who are looking for an affordable treat our special indulgent and we want to offer them the opportunity to select into a more premium experience if they so choose.

At the same time, we will continue to offer dishes at compelling price points across all three day part to meet the needs of our more price conscious guests.

In addition to new menu items and limited time offers to enhance check will be leaning into breakfast to increase the attractiveness and profit profitability of this day part.

By launching the first phase of our breakfast menu evolution.

Centered around menu consolidation and the launch of a build your own breakfast adoption or enhanced breakfast menu will allow us to make room for new craveable items to feature in our marketing and make it easier for guests to navigate our menu and individualize their meal.

It should also help us offer some of those premium items that I mentioned to build check while reducing the time it takes for our employees, particularly newer servers to learn our menu and deliver a better guest experience.

Finally, we are continuing to focus on our beer and wine program, which is a program, which is broadly appealing to our key guest segment.

We're making great progress towards our 2% dine in mixed target through enhanced selling in store marketing and new seasonal offerings and we'll be working to drive further awareness and growth in this category in the fourth quarter and beyond with marketing support.

Longer term, we are developing and testing other drink concept to further enhance our appeal to our guests and deliver the additional items are telling us they want.

Those are the areas, where we are leaning into our strengths.

Now, let's talk about the things that guests want us to offer or to do better whether they are guests, who we want to attract or from whom we want to increase visitation.

As I said many of these revolve around technology and digital.

They are looking for us to remove friction and offer a loyalty program.

In April we rolled out mobile pay and later this quarter, we will be adding the convenience of Apple pay and Google pay.

We're also continuing to enhance our digital store and revamping our app to streamline the ordering process provide an even more personalized experience and reduce remaining friction on mobile devices.

With regard to loyalty, we believe this could be particularly impactful for our brand with our strong guest engagement travel guests.

And both restaurant and retail offerings.

Which will allow us to offer creative and unusually appealing reward.

Over and above from your discounting.

Given the investment here, we are approaching it prudently and thoughtfully and we'll have more to share with you about this initiative in the future, but we're optimistic about its potential to drive frequency and check growth.

Then of course, we have our other initiatives to attract new guests and continue to grow our off premise businesses.

Including most notably our virtual brands and our catering.

Our virtual brands continue to generate growing sales, which we believe are incremental to our business.

And catering is growing impressively in both the <unk> and <unk> spaces.

Year to date, our catering sales are up more than 20% over the same period last year and they are projected to continue on this trend line as employees return to the office and companies use special occasions, together remote workers together and as more and more individuals allow us to be part of their personal celebrations and gathering.

Yeah.

To communicate all that we're doing and ensure that our messages resonate we continue to evolve our marketing or making it more personalized and taking more targeted approaches through digital and social channels.

When combined with our loyalty program, we think will be especially well positioned to increased frequency from our core guests and attract new guests to cracker barrel.

Summing it all up we are very bullish that we have a brand that stretches across generations.

And that we have the ability to do what we do well, even better and to offer enhancements that both our core and other key gas groups want with that I'll turn it back over to Sandy.

Thanks Jen.

In the near term, we expect to navigate a uniquely challenging environment, including the sales headwinds I discussed and the cost pressures that Craig reviewed with you.

Despite all of this for all the reasons <unk> shared with you I am confident that our near and long term strategic plans coupled.

Coupled with our unique brand and culture of hospitality will aid our recovery strengthen our business model and position us to deliver long term growth and returns for our shareholders.

By enhancing the things that may cracker barrel, one of the most differentiated and beloved brands in the industry.

And investing in technology to improve our appeal across our guest base. We're pursuing initiatives that we believe will make us a destination of choice for our guests and our employees for years to come.

Of course, none of this would be possible without the extraordinary efforts of our more than 70000 employees, who dedicate themselves everyday to serving our cracker barrel and Maple Street guests.

Challenging environment right now from both the consumer and operational perspective.

And our field leadership store and home office employees are doing a great job navigating these challenges all while bringing to life our mission of pleasing people.

Thank them for their efforts.

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

We will now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone.

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

If at any time. Your question has been addressed or you would like to withdraw your question. Please press Star then two.

Please limit yourself to one question and one follow up.

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

Okay.

Our first question will come from Jeff Farmer with Gordon Haskett. Please go ahead.

Great. Thank you and good morning.

First question, just looking for essentially a high level update on the business model and what I mean by that is.

I'm curious, where you stand right now in terms of your customer base local versus travel so sort of the mixed breakdown local versus trouble and then what does that mix look like as you head into the summer driving season, how much larger does that trouble mix get in the summer.

One additional follow up after that.

Okay.

Jeff.

It's not going to be.

The question to answer because we haven't done that research since the beginning of the pandemic. So historically travel was particularly important to us in the second and the fourth quarter and then spring break period, but we.

We surveyed gas and they are self identified their visits as a travel occasion or local visit.

With with travel coming back we believe that guest is a bigger percentage than it was certainly during the pandemic I'm an almost obviously, but we don't think we have gone back to normal at this point and in fact, we were we believe the spring break travel Pap.

Earn was disrupted due to the issues that we talked about in the prepared remarks.

Okay, and then just one quick follow up so bigger picture longer term as it relates to the operating margin performance of the business pre COVID-19.

I believe youre right at 9% low 9% operating income margin, obviously has fallen below that with sort of the COVID-19 backdrop, and then as we moved into 2022.

I'm pretty.

High levels of both wage and commodity rate inflation or commodity price inflation, but.

Not asking for sort of details here, but as you think about 'twenty three and 'twenty four.

How do you think about the margin the operating income margin.

The cracker barrel business sort of.

Moving forward, how close to 9% do you think you can get in the future or returning to that prior level rather.

Thanks, Jeff and good morning, this is Craig.

<unk>.

I guess, here's what I think we can see now where we've talked about an elevated level off.

You're talking about 7% going through the remainder of the calendar year and then Jen.

Talked about additional menu.

I don't Wanna menu mix opportunities beyond that and so thats a higher level than.

Then we have done.

Meaningfully higher than we've done traditionally and that is in large part.

To get the business model closer.

We are meaningfully below where we started right. So that will help in addition to that.

There was a fair bit of work around a lot of work candidly Rhonda.

Supply chain side of the business and the menu side of the business in terms of product changes specification changes and so on that will also be meaningful and then we've talked over a longer period about things like our PCM food and PCM labor initiatives that are designed to improve productivity.

And reduce.

And our reduced waste.

So there is a fair bit happening there, we do believe we will be making progress.

Progress assume in that inflation does what we think is going to do but that's been tricky.

So I don't have a firm answer as to when do we get back to pre COVID-19 levels, but if our assumptions play out then we do think we will be making meaningful progress.

Okay. Thank you.

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

Great. Thank you and good morning, just wanted to ask which is sort of.

It's a question that it's pretty much everybody.

Ross Retro intrude now not just a cracker barrel, but how do you balance you, obviously need to take pricing to try to offset as much as we can as far as your own inflation versus consumers, obviously, they're also seeing inflation too.

How you sort of balance between putting value, which as you guys have always been known for versus having to take higher pricing.

Two point Craig of 7%.

Okay.

Good morning, Amit.

Great question and it is something that we are spending a lot of time talking about I'll, let John maybe.

Touch on how she how we are thinking about.

Hum.

Our strategy about pricing and churn driving.

I think what we see is there really are more than one type of consumer out there right now for sure. There is a consumer that is pulling back both in terms of visits in terms of managing how much they spend and for that group of consumers.

We are.

Very much committed to protecting our strong everyday value right. We've got great value at breakfast lunch and dinner affordable price points, and we are committed to protecting that.

And continuing to market that for those folks on the other hand, we do see that there are a group of consumers, who they may be cutting back on some more luxury items or trips or vacations and when they come to cracker barrel, they actually want to splurge, a little bit they want to treat an indulgence and that is why we are adding some.

Higher price premium entrees and add on items, so that they can.

And those are a little bit more and I think that will help to grow our check and help the business model. So we're just making sure that we have the right pricing strategy for the various segments in our business.

Great. Thank you Sandy and Jennifer I'll follow up.

I guess, just one quick question and I'll hop back in the queue.

Just on the pricing front the 7%.

No.

As far as our <unk>.

Model.

Should there be any bigger.

You know kind of waiting towards retail versus retro business that 7% what will be pretty similar in both segments.

I'm not sure I understand the question are you, saying does the 7% include retail or some price increase in retail the same yes, yes, yeah that was taking my question.

Look at those two decisions differently and a lot about the retail has to do with.

Whenever the mixes, but no I would say on a constant mix basis.

Retail prices are not increasing at that level.

Okay, great. Thank you.

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

Hey, thanks for the questions.

Obviously.

A difficult operating environment.

You talked about the headwinds on the call I'm just wondering can you lay out maybe some of the thinking behind.

The guidance for 8% revenue growth year over year, maybe talking to.

Assumptions around maybe that's 65 plus customer.

Your assumptions on gas price pressures and just what have you.

Did you come up with that point estimate.

Tough environment forecast in general.

Thank you Tom This is Craig very good question.

The 8% a lot of things well tell you how we're thinking about it.

We have.

Performance trends and we've talked about some deceleration sandy talked about deceleration that we saw really in that kind of March timeframe when gas prices in late February when gas prices initially started to spike and those gas prices impact us directly and indirectly.

It impacts overall inflation consumer confidence and then just given our usage case as a company it impacts us a little bit more.

Directly.

And then it also.

That overall environment.

As well as the other contributor is I've also impacted that 65, plus cohort so in that 8%.

Fills in some of the recent trends when it also assumes and again this is a little bit of a TBD. It also assumes what I would characterize as a reasonable summer travel season.

And that is effectively starting at around around this time.

So a lot there behind that 8%, but I would say big picture. It incorporates a lot of what we're seeing from a macro perspective in the near term in particular gas prices in particular the over 65.

Cohorts and the open item.

That is.

It could be meaningful is what happens with the summer travel season, Sandy anything you'd like to add to that.

No I think to the question we got early about what what has traveled as a percentage of our business. We're building back but it is an important component.

Fourth quarter.

And although I think we're expecting some.

Not as strong as it was pre COVID-19, but some improvement from today and we will just I think our teams are ready for the guests to come back and I think we are optimistic that they will.

That's helpful. Thank you both and then my follow up is.

And John you talked to better segmenting and knowing your customer segments more intimately with the work you've done over the past six months.

Can you speak to maybe.

Identify a performance gap between let's say that millennial cohort.

And the 65, plus cohort and then any qualitative commentary you can give us on.

If there was a gap there if it's closing at all as we're moving further away from the omicron impact that we had at the start of the year. Thanks.

Yeah, I think one of the things that was most interesting about the segmentation learnings with defined that if you look at say the millennial the segments that are heavily millennial versus those that are more of the 65 plus the traditionalist.

They have more in common in terms of the drivers what they what they give us high marks are than you might imagine.

For example.

Just adjourn a genuine love of our food and the welcoming atmosphere and through the quality of the food and the experience. They have is shared across those two cohorts I think the big thing that is very different is that millennials really have high expectations ethic as regards to technology and digital and.

And that is why you hear me talking about things like the new App and the loyalty program in terms of performance. We have seen that the 65 plus guests has been.

I'm reluctant to return to the dining room at the same rate as our younger guests and our data suggests that that's driven by a couple of things one they still have concerns about COVID-19 you know with this recent surge.

All of our data suggests there is still reluctant to socialize in public places and particularly dining out and then also the recent economic concerns.

They are more pessimistic than younger generations, and so they're worried about their financial future and therefore spending less so we're definitely seeing a bigger pullback from a traffic perspective from those 65 plus.

I would say we have every hope that they will return as Covid hits, the rearview mirror and hopefully as these inflationary pressures Duane.

Okay, great. Thanks, Ken.

Mhm.

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

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

My first one I just wanted to ask about G&A, you mentioned some incremental investments in technology.

The Maple Street infrastructure does that imply a step up in G&A in the fourth quarter.

And then I guess, what do you expect for DNA going forward in fiscal year 'twenty three.

Okay.

I would say look in.

I don't think we want to get into too much detail on.

On G&A I think there is clearly some short term short term things.

As we kind of normalize a bit here, but as we think about the longer term G&A view I don't think we would get into that today.

Okay.

Okay Sir.

And then I guess my second question is on the food cost management system.

I think you've finished implementing in April would you be able to quantify what maybe the benefit of that will be in the fourth quarter.

And then I guess will that benefit increase into next year.

More learnings with the system.

Yes, Jack this is Craig again.

So the food cost management system.

As you know.

We've tested that product we've tested that tool.

And we feel pretty confident in what it will do and we would say.

Hey.

Modest improvement it does a number of different things to us, but the actual Cogs improvement.

Is modest and that's built into our built into.

Our guidance as we are.

As we're sharing.

Great. Thank you.

Our next question will come from Brett Levy with <unk> partners. Please go ahead great.

Great. Thanks for taking the question.

I guess two separate ones Firstly, just building off of Jack last question. There. When you think about your initiatives what do you see as things that you can either delay or pushed back a little bit what do you think is absolutely necessary right now and where you're seeing the great quantification of.

Any level of improvement and then just the second question. If you could give a little bit more color on in terms of how youre thinking about your commodity landscape and where youre locked where you feel there is.

The best upside risk in terms of what you could see for your basket.

Well, maybe I'll start and then I'll see what color Craig or John wants to add I think in terms of our initiatives gender at a pretty good job of rolling out but.

Would say that our most urgent ones relate to driving our top line, whether they are about menu initiatives that we believe will appeal to core guest the guest space we're in.

To drive either more attraction or more frequency.

Or our.

Technology assets that we think will both be attractive to our guests things like mobile pay where we think that that's a very attractive component of the guest experience and it results in more productivity for our cashiers, so and so.

A double win but those initiatives that are driving top line recovery of all of our guests cohorts is probably the highest priority. So our loyalty program all of the technology the menu programs.

And the operational and guest experience hospitality staffing training all of those things which are embedded in the P&L.

In light of while always but particularly in light of the environment with since sort of the.

This level of inflation in the cost pressures as we are trying to get back to our pre COVID-19.

Profitability and certainly improve on where we are now I would say the second group are those initiatives that result in enhanced productivity and profitability in our stores.

So Craig just touched on one which is the food system, which drives.

As he says a modest improvement in our waste it helps our managers manage their food production and inventories more effectively.

But as we get better at understanding the system and the power of it and I think we'll be able to add functionality.

Which will help us understand how to order more efficiently how do you produce more efficiently because the system will help us do a better job.

Of understanding hold times and how to put the labor against the production that needs to go on with the complicated menu we have.

Then our labor system, which we're still very early on we just rolled into a district, but we're optimistic.

That it will really give our teams a much better tool.

Matching the labor to all the different channels of the business now since COVID-19 and the significant growth in off premise our field teams.

Are challenged to provide labor to match a dine in guest and off premise guests.

Comes on and off premise guests delivery third party catering guests or retail gas so.

This new system, I think will allow us to better match, the labor which on.

Optimistic will allow us to drive sales paid better because we will have a better match and save labor because we're just being more efficient in doing that.

Beyond that and the cost savings I would say it falls sort of everywhere else on the P&L.

Our off premise supplies for the last two years have been it's been difficult to.

Manage the inflation there because there was a lot of shortage in that area, but I am now.

I'm hearing that we are some of the ideas. We have we believe we are more optimistic we'll be able to implement.

In the near term.

Craig I don't know what else you might want to add to this or Jeff, but I think they are.

Hi, Brett this is Craig the other part of the question there I think that sums it up well sandy in terms of.

What we should demand, it's really focused on driving the top line and as we think about the technology initiatives a lot of them.

Deliver basically more for less right. So those are just really good investments.

In terms of commodities I think was the second part of your second part of your question at this point.

<unk> marks we either were either locked or we have visibility to.

Two the pricing so I don't think there is a whole lot more there.

For this fiscal and then for next fiscal.

The thinking is that we've essentially hit peak inflation at about this point in.

And in this calendar year and inflation will remain commodity.

I sure will remain significantly elevated.

But as we start to comp on some of the higher numbers from last year. The rate of increase will will come down. So that's what we're working assumption.

Right now, but I think as we've all experienced over the last two years, that's been a tough one.

To pin down, but we're not anticipating some sharp retrench up commodities, where we go back.

A couple of euros or anything like that we're projecting.

The rate of increase.

<unk> remains high.

And begins to moderate in the second half of the calendar year and work its way down down beyond that.

Yes.

Our next question will come from Sarah Senatore with Bank of America. Please go ahead. Thank you I have a few.

A follow up please.

The first is on just on pricing do you have a sense of what kind of the net flow through on prices, which is to say I think you said youre seeing some trade down but presumably.

Not fully offsetting the increase in price so any kind of.

Ensign on that because as I think about forecasting check and traffic. So so that's one.

And then I also wanted to try to understand a little bit more about what you were saying about the different customer bases.

It does.

Typically for example, retail has been.

Stronger than restaurant comps.

And sort of accelerated versus 2019 in most recent quarter I would've thought that you would have sort of a similar.

Kind of customer base for our retail and restaurants, maybe more pressure on check there because of <unk>.

All lines have inflation pinching budgets that kind of thing so just how do I <unk>.

<unk> kind of a better retail.

And growth in versus restaurants.

Okay.

Well put.

Thank you Sarah good morning, Thanks for the question. So there's a lot in there let me try.

I'll try on the retail and then the pricing flow through I'll, let Craig take a stab at it.

Yeah.

Our retail business I think our merchants have done a really great job of having.

Fun uniqueness stall Jake interesting merchandise great price.

It was really an impulse buy and to some degree I think that our strength in retail.

Has been a little bit of maybe we call sort of an add on for us. So we're whereas some concepts maybe they would be able to sell and dessert or in a way I think some of our guests are using our retail store for that.

It's a affordable indulgence and.

<unk>.

We're seeing for example.

Toys since one of our strongest categories and Theres, just some fun things there and I think when they're there with their kids and their families.

This was something they were able to do in a really affordable way. So I think a little bit of why youre seeing the strength is the way we position the retail shop and the job our merchants have done in our.

Retail teams and then I think it is just resonating with where guests are.

In terms of an affordable luxury.

So all trade down from that do you want to trade.

Trade down absolutely, it's Craig so as it relates to the pricing flow through I'll give some texture on this.

We've been continuing to use a test and learn approach on pricing and we're seeing really good really good flow through in that kind of test and control environment. So typically.

So we are expecting pretty high flow through normally in price and you lose.

For you.

Kind of basis points, so to speak to things like credit card fees and two there are some indirect impacts from tips. For example tips go up in FICA.

Taxes go up as a result.

So I would expect a pretty high flow through and Thats pretty consistent with what we have.

<unk> been seen using our test and learn approach.

Our next question will come from Brian Mullan with Deutsche Bank. Please go ahead.

Okay. Thank you just a question on capital return.

You contemplate the share repurchases you were doing it might do going forward with the new authorization. How are you thinking about stabilized EBITDA with stabilized operating margins.

Our internal underwriting maybe asked another way what do you think about that use of capital and determine it's the right use of capital from a returns perspective.

Take us through what parameters or framework, you are thinking about it and analyze it.

Hi, Brian This is Craig I'll take that one so we were thinking about that is we're going to continue to remain kind of balanced and cautious as it relates to two hour two our leverage ratio.

The the.

Our board increased its authorization.

But we're still continuing and we're still continuing to monitor the environment, we have forecast that go against that.

But our long term approach has been to first fund the investments that we need to make in the business in terms of sustaining and growing it and then returning capital to shareholders and we're doing all of that in context of what's the risk profile of the external.

The environment and over and over internal environment, So I think our.

What I would.

I think what we all view as a balanced kind of a conservative approach.

We will continue.

No.

Thank you.

Our next question comes from Jon Tower of Citi. Please go ahead.

Great. Thanks for taking the question.

Few from me if I may 1st a clarification in terms of the breakdown of price traffic mix in the quarter at the restaurants and then some.

Actual questions after that.

This is John so we we.

<unk> been really focused more on is talking about.

Talking about sales.

So I think we are going to.

Where to get much deeper not much deeper than that at this time.

Okay.

Going to the.

The inventory it looked like they were higher seasonally this quarter at least at quarter end than you would normally have been in the past and I'm curious if that goes back to Sandy your commentary earlier about building well ahead of holidays and securing.

Some supply there or is there anything else going on with respect to inventory levels.

No I think you hit it.

Our teams are being really careful about balancing the supply chain disruption and ensuring particularly our holiday merchandise.

First of all our our harvest Halloween and Christmas seasons are so important to us.

We brought those in early so we would be sure we had them.

Which is which is why youre seeing sort of the most significant reason youre, saying you increased inventory and secondly, there is some inventory increase just to support the sales. This time last year, we actually wished we had more inventory with that being said our teams are being really.

Full about managing sort of not go ditch to ditch, so Detroit too.

Anticipate where the consumers are where the overall retail environment is balance that with the supply chain disruptions as we think about what our inventory level should be.

Got it and that kind of leads to the next question with respect to the retail side of the business.

We've seen in the past several weeks and then again this morning, a fairly large reminder, that.

Some of the retailers are having a hard time managing their inventories and have decided to go after some markdowns. So I'm curious to know how would your business has performed in the past.

When other large retailers have moved in the direction of increasing discounting.

Well you.

No one operates outside of the.

Broader context of the retail environment is an issue.

So when the environment gets highly promotional we understand that.

We will be competing against that we've been.

Our gas largely buys it's an impulse buy.

And the merchandise there, which is generally unique relatively low priced we believe insulates us to some degree from that.

But those the recent announcements we heard I know have resulted in our retail teams going back through them.

And back through our strategies.

To ensure that we are as well positioned as we can be.

To manage our retail business and.

In this new environment.

Got it and then just the last one for me.

Thinking about your messaging to consumers in this environment I know historically the brand Hasnt really leaned on.

Call to action and limited time offers in the marketplace.

But I'm curious to know if perhaps you guys are reconsidering that now or might pulse it.

Given the macro backdrop that a lot of your core customers are are the pressures you are core customers are facing at the moment.

I'll, let Jim take that one.

Yeah, I think you certainly are not going to see us turned to a lot of couponing and discounting that's never been critical of our brand is <unk>.

I do think we are continuing to advertise and market our everyday great prices that we have on our menu.

So youre going to see us continuing to do that.

We do sometimes do and have planned.

Some food and beverage <unk> news and we will be advertising some of that coming up.

In the late summer and fall on TV, but it's not a deep deep discounted or promotional construct them. So as I mentioned earlier.

Ongoing consistent pressure behind our everyday value price points.

And.

Newsworthy flavor news that we feature in our advertising as well.

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

Thank you.

While there is still a great deal of uncertainty in the near term consumer an inflationary environment, but as we continue to navigate these pressures we look.

For the future and are confident that the strategic plans, we outlined for you today both of those to drive further sales recovery and those that will strengthen our business model are the right plans and will position us well over the long term. We appreciate you joining today's call and look forward to speaking with you again soon.

Yeah.

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

[music].

Good morning, and welcome to the Cracker barrel fiscal 2022 third quarter earnings call.

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

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

Thank you good morning, and welcome to Cracker barrels third quarter fiscal 2022 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 for the third quarter ended April 29 2022.

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.

<unk> 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 CFO Craig <unk>.

And senior Vice President and CMO, Jennifer Tate.

Sandy and Jan will provide business and initiatives updates and Craig will review, the third quarter financials and outlook.

We will then open up the call for questions for Sandy Craig and yet.

On this call statements may be made by management of their beliefs and expectations regarding the company's future operating results were expected future events.

These are known as forward looking statements, which involve risks and uncertainties.

But 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, particularly in the current environment.

Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties.

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 total revenue growth of 10, 8% compared to the prior year and six 8% compared to the third quarter of fiscal 2019.

We were seeing encouraging sales trends as February progressed, with the macroeconomic environment and higher inflation slowed our recovery in March and April below our expectations.

Three things in particular impacted our sales during the quarter.

First over 65 year old gas have been slower to return to in person dining than other demographics and our guest space.

Second the challenging economic environment caused some of our guests to manage frequency and track during the quarter.

Finally, we believe that high gas prices disrupted traditional spring break travel patterns, resulting in lower travel visits.

The positive side, our off premise business continued to meet our expectations and we partially offset our dine in headwinds with continued strong retail performance.

As we grew comparable store retail sales by nine 7% over the prior year quarter by 21, 6% compared to the third quarter of 2019.

With regard to cost we continue to experience historically high commodity and wage inflation is critical run through.

Although we've taken pricing to help us protect our margins commodity inflation outpaced even our own robust expectations for the quarter.

Correct.

<unk>.

Comparable store total sales, including both restaurant and retail grew by 10, 7% compared to the prior year.

Comparable store restaurant sales grew by 10, 9% over the prior year, driven primarily by diamond profit growth and a five 9% pricing.

Despite the school restaurant sales performance was below expectations.

Third quarter comparable store off premise sales remains significantly elevated versus pre COVID-19 trends.

From a sales were 19% of restaurant sales for the third quarter with strong year over year growth from our catering business and third party delivery with offsets coming from year over year declines.

Individual to go sales as more guests returning to dine in.

Comparable store retail sales increased nine 7% compared to the third quarter of the prior year.

<unk>, the core and food and convenience offerings continue to be the primary drivers of retail sales performance.

Apparel, which was one of the harder hit merchandise categories. During the pandemic has now returned to pre COVID-19 levels and we believe there is further growth in this category as dine in traffic returns.

Moving to expenses total cost of goods sold in the quarter was 31, 6% of total revenue versus 28, 8% in the prior year quarter.

Restaurant cost of goods sold was 27, 8% of restaurant sales versus 24, 3% in the prior year quarter.

This 350 basis point increase was primarily driven by commodity inflation up 18% combined with elevated freight costs running ahead of all in pricing.

We experienced higher than anticipated inflation across our reporting categories as well as fruits and vegetables.

Retail cost of goods sold was 46, 9% of retail sales versus 46, 5% in the prior year quarter. This 40 basis point increase was primarily driven by higher freight costs.

Third quarter Labor and related expenses were 35, 9% of revenue versus 35, 1% in the prior year quarter.

This 80 basis point increase was primarily driven by wage inflation and increased staffing at both managerial and only levels.

Finally, adjusted other operating expenses were 23, 1% of revenue the same as in the prior year quarter.

Moving beyond store level margins, our general and administrative expenses in the third quarter were down slightly to 5% of revenue versus five 2% in the prior year quarter.

These results culminated in GAAP operating income of $30 $5 million.

Adjusted for the noncash amortization of the asset and recognized from the gains on the sale and leaseback transactions adjusted operating income for the quarter was $33 6 million or four 3% of revenue.

Net interest expense for the quarter was $2 2 million compared to $9 6 million in the prior year quarter. This $7 $4 million 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 of fiscal 2021.

Our effective tax rate for the third quarter was two 7%. This tax rate was driven by increased tax credits on lower than expected earnings.

Third quarter GAAP earnings per diluted share were $1 19, and adjusted earnings per diluted share were $1 29.

In the third quarter EBITDA was $59 6 billion in.

A 28, 1% decrease compared to our prior year third quarter EBITDA results.

Turning to capital allocation and our balance sheet.

In the third quarter, we invested $29 million in capital expenditures, which was a significant step up from the approximately $15 million per quarter in the first half of the year.

The increase was due to higher maintenance capital spending which has been below normal for multiple quarters as well as increased spending on new unit growth.

Additionally, we returned $69 $5 million to shareholders in the third quarter through a combination of dividends and share repurchases, bringing our year to date total to more than $158 million.

<unk> today is $1 30 quarterly dividend declaration, and new $200 million share repurchase authorization reflects the board's commitment to returning capital to shareholders, while investing prudently in our business.

Lastly, we ended the quarter with $373 million in total debt compared to $615 million at the prior year quarter end.

While we are increasing our share repurchase authorization, we will maintain our conservative approach to managing our balance sheet.

And in general when I speak to many of the initiatives that we believe are positioning us for near term and longer term success.

As we look to our fourth quarter financial expectations, we anticipate the near term pressures, we based on both our top and bottom lines in the third quarter to persist.

Clearly, we plan to offset some of our cost pressures over the remainder of the calendar year.

While we've seen some guests managing check our plan is to take price increases in a staged and thoughtful manner.

We will take an increase in late June followed by another in early August together. These will support an approximately 7% of total combined year over year pricing through the end of the calendar year.

We will continue to monitor the consumer and inflationary environment and maintain the flexibility to take additional pricing. If we believe it would be prudent to do so.

We expect the current traffic trends to continue through the end of our fiscal year.

We anticipate this coupled with our pricing plans will result in fourth quarter total revenue of approximately 8% above the fourth quarter of 2021.

We expect fourth quarter commodity inflation of 16% to 18% and wage inflation of 8% to 10%.

While this level of inflation is more moderate compared to the third quarter.

It's higher than we previously anticipated and represents a margin headwind.

Furthermore versus a prior year of fourth quarter, we expect additional inflation in other areas of the P&L, most notably utilities on off premise supplies higher expenses for manager in early staffing and training and investments in technology and in Maple Street infrastructure.

Can all of this into account.

We expect fourth quarter operating margin to be in the range of 4% to four 5% of total revenue.

Lastly, as we continue to work on our business model, we're very focused on identifying and pursuing sustainable opportunities to improve margin and long term profitability saved.

Savings from our new forecast management system are already providing a modest offset to commodity inflation and early results from our labor management system test have been promising.

We believe the labor system, coupled with continued enhancements in our digital infrastructure.

Drive improved productivity and more cost effective wage administration beginning in the later part of fiscal 2023.

And as we continue to navigate this heightened relation environment, we're implementing both short term and sustainable long term cost savings options across our food and beverage equipment and supplies categories with that I'll hand, it back to sandy.

Obviously their business model and cost saving actions that Craig referenced from a revenue perspective. In addition to pricing we have numerous initiatives to drive check.

Position the brand to drive increased visitation and attract a broader audience of guests, while continuing our retail performance and our thoughtful expansion of Maple Street.

I'll run through some of what we're doing and then ask our chief marketing Officer, Jen <unk> to provide additional details about how we're driving check and positioning the brand more generally.

The first place where focus to store level execution, we believe that the best way to preserve our reputation for strong value in an environment, where we're taking additional pricing is through operational excellence and enhanced hospitality and service.

Consequently, our biggest initiative is to focus on our operations and make sure that every guests to visit SaaS has an experience that we can be proud of and we will continue to give us high marks for value.

This focus should pay dividends for us and we're seeing excellent recent guest experience scores, including notably on mother's day, which is traditionally one of our highest volume days of the year.

Building on this momentum, we're investing resources to ensure that our managers and our hourly employees have ample support and the development they need to care for our guests like family. For example, we recently rolled out an in person training and development program focused on operational excellence hospitality and.

Service to all of our district managers around the country.

They've managed our supply chain extremely well.

And we're able to avoid any significant disruptions to our retail floors.

To protect our important holiday season, and continue our strong retail performance, we proactively pushed up some of our ordering timelines and we will remain focused on supply chain management.

Finally, we're focused on growing Maple Street, which just opened its 50th location and has continued to perform above our expectations despite dealing with its own inflationary pressures.

We remain very excited about this brand and are seeing it deliver on our investment thesis that the fast casual breakfast and lunch space is an attractive one.

We've been focused on and have made great progress ensuring that we've got the right infrastructure in place to grow the brand, including honing that Maple Street real estate model.

Developing training and operational programs and hiring key leadership.

In this regard I'm pleased to announce that we added John Mcguire as President of Maple Street few weeks ago.

As many of you likely know John has over 30 years of experience in the restaurant industry, including as executive Vice President and Chief operating officer of Panera bread.

He was a key leader in growing <unk> to one of the most successful brands in the fast casual restaurant space.

As I mentioned driving check in positioning our brand for the long term to drive increased frequency and make ourselves even more appealing to a broader audience of guests.

Our our strategic priorities for us.

And I am pleased about where we're headed in this regard.

I've asked Jen <unk> to provide you with more details and walk you through some of the initiatives that we're pursuing.

Jen.

Thanks, Sandy we are very excited about the potential we have to drive check grow the brand with our core gas and to broaden our appeal. We recently concluded a six months segmentation study that has given us a greater level of insight about key groups, we can newly attract or.

Whom we can increase visitation.

Through this study we know more about who these groups are what they want from us and how bigger prize each group represents.

Although we have a number of guests who are over 65, who have been slower to return to normal dining patterns. We believe they will eventually do so.

That said, we are fortunate to have a multi generational gas space <unk>.

Approximately 30% of our guest base are millennials between the ages of 25% and 44, many of whom also constitute core users at the brand.

This group generally gives us very high marks for our food value and atmosphere.

When we ask those of them, who use us less frequently about the things that they wish we did better many of these relate in one way or another to technology, which we're actively addressing.

Let's begin with what we're doing to enhance our strengths of value and food.

Regarding value, we are focused on making sure that our guests feel like the price, they're paying us a great deal in light of their entire experience as.

As Craig noted, we will continue to approach pricing aggressively but thoughtfully over the next six months.

Given guest acceptance of the pricing we've taken thus far we believe we can take the pricing Craig mentioned and still maintain high guest perception of value.

Pricing is only one prong of our multi pronged strategy that we're implementing to grow check through the end of the calendar year, while still enhancing guest perception of value.

The other prongs or menu related where we will be introducing more sheryl starters.

Alcoholic and non alcoholic specialty beverages, and premium size and add ons.

We have many guests who are looking for an affordable treat our special indulgence and we want to offer them the opportunity to select into a more premium experience if they so choose.

At the same time, we will continue to offer dishes at compelling price points across all three day part to meet the needs of our more price conscious guests.

Yeah.

In addition to new menu items and limited time offers to enhance check will be leaning into breakfast to increase the attractiveness and profit profitability of this day part by launching the first phase of our breakfast menu evolution.

Centered around menu consolidation and the launch of our build your own Brexit adoption.

Our enhanced breakfast menu will allow us to make room for new craveable items to feature in our marketing and make it easier for guests to navigate our menu and individualize their meals.

Finally, we are continuing to focus on our beer and wine program, which is a program, which is broadly appealing to our key guest segments were.

We're making great progress towards our 2% dine in mixed target through enhanced selling in store marketing and new seasonal offerings, and we will be working to drive further awareness and growth in this category in the fourth quarter and beyond with marketing support.

Longer term, we are developing and testing other drink concept to further enhance our appeal to our guests.

And deliver the additional items they are telling us they want.

Those are the areas, where we are leaning into our strengths now let's talk about the things that guests want us to offer or to do better whether they are guests, who we want to attract or from whom we want to increase visitation.

As Ive said many of these revolve around technology and digital where they are looking for us to remove friction and offer a loyalty program.

In April we rolled out mobile pay and later this quarter, we will be adding the convenience of Apple pay and Google pay.

With regard to loyalty, we believe this could be particularly impactful for our brand with our strong guest engagement travel guests.

And both restaurant and retail offerings.

Which will allow us to offer creative and unusually appealing rewards.

Over and above mere discounting.

Given the investment here, we are approaching it prudently and thoughtfully and we will have more to share with you about this initiative in the future, but we're optimistic about its potential to drive frequency and check growth.

Then of course, we have our other initiatives to attract new guests and continue to grow our off premise businesses.

Most notably our virtual brands and our catering our.

Virtual brands continue to generate growing sales, which we believe are incremental to our business.

In catering is growing impressively in both the <unk> and <unk> spaces.

When combined with our loyalty program, we think will be especially well positioned to increased frequency from our core guests and attract new guests to cracker barrel.

Summing it all up we are very bullish that we have a brand that stretches across generations.

And that we have the ability to do what we do well, even better and to offer enhancements that both our core and other key gas groups want with that I'll turn it back over to Sandy.

Thanks Jen.

In the near term, we expect to navigate a uniquely challenging environment, including the sales headwinds I discussed and the cost pressures that Craig reviewed with you.

Despite all of this for all the reasons <unk> shared with you I am confident that our near and long term strategic plans couple.

Coupled with our unique brand and culture of hospitality will aid our recovery strengthen our business model and position us to deliver long term growth and returns for our shareholders.

By enhancing the things that make cracker barrel one of the most differentiated and beloved brands in the industry.

Of course, none of this would be possible without the extraordinary efforts of our more than 70000 employees, who dedicate themselves everyday to serving our cracker barrel and Maple Street guests.

Challenging environment right now from both the consumer and operational perspective.

And our field leadership store and home office employees are doing a great job navigating these challenges all while bringing to life our mission of pleasing people.

Thank them for their efforts.

And now I'll turn the call over to the operator for questions.

We will now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone.

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

If at any time. Your question has been addressed or you would like to withdraw your question. Please press Star then two.

Please limit yourself to one question and one follow up.

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

Okay.

Our first question will come from Jeff Farmer with Gordon Haskett. Please go ahead.

Great. Thank you and good morning.

First question, just looking for essentially a high level update on the business model and what I mean by that is.

I'm curious, where you stand right now in terms of your customer base local versus travel so sort of the mixed breakdown local versus travel and then what does that mix look like as you head into the summer driving season, how much larger does that trouble mix get in the summer.

One additional follow up after that.

Okay.

Jeff.

It's not going to be an easy question to answer because we haven't done that research since the beginning of the pandemic. So historically travel was particularly important to us in the second and the fourth quarter and then spring break period, but we.

We surveyed gas and they are self identified their visits as a travel occasion or a local visit.

With with travel coming back we believe that guest is a bigger percentage than it was certainly during the pandemic and almost obviously, but we don't think we have gone back to normal at this point and in fact, we were we believe the spring break travel Pap.

Earn was disrupted due to the issues that we talked about.

In the prepared remarks.

Okay, and then just one quick follow up so bigger picture longer term as it relates to the operating margin performance of the business pre COVID-19.

I believe youre right at 9% low 9% operating income margin, obviously has fallen below that with sort of the COVID-19 backdrop, and then as we moved into 2022.

I'm pretty.

High levels of both wage and commodity rate inflation or commodity price inflation, but.

Not asking for sort of details here, but as you think about 'twenty three and 'twenty four.

How do you think about the margin the operating income margin of the <unk>.

Cracker barrel business.

Sort of.

Moving forward, how close to 9% do you think you can get.

In the future for returning to that prior level rather.

Thanks, Jeff and good morning, this is Craig.

Yes.

I guess, here's what I think we can see now where we've talked about an elevated level off.

You're talking about 7% going through the remainder of the calendar year and then Jen you.

You talked about additional kind of menu.

I don't Wanna menu mix opportunities beyond that and so thats a higher level then.

Then we have done.

Meaningfully higher than we've done traditionally and that is in large part.

To get the business model closer.

We are meaningfully below where we started right. So that will help in addition to that.

There was a fair bit of work around a lot of work candidly Rhonda.

Supply chain side of the business on the menu side of the business in terms of product changes specification changes and so on that will also be meaningful and then we've talked over a longer period about things like our PCM food and PCM labor initiatives that are designed to improve productivity.

And reduce.

And our reduced waste.

So there is a fair bit happening there, we do believe we will be making progress.

Progress assume in that inflation does what we think is going to do but that's been tricky.

So I don't have a firm answer as to when do we get back to pre COVID-19 levels, but if our assumptions play out then we do think we will be making meaningful progress.

Okay. Thank you.

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

Great. Thank you and good morning, just wanted to ask which is sort of.

It's a question that is pretty much everybody.

Sure.

Record barrel, but how do you balance the need to take pricing to try to offset as much as we can as far as your own inflation versus consumers, obviously, they're also seeing inflation too.

How you sort of balance between you know like pitching value, which obviously you guys have always been known for versus having to take higher pricing.

Two point Craig of 7%.

Okay.

Good morning, Amit great.

Great question and it is something that we are spending a lot of time talking about I'll, let John maybe.

Touch on how she how we are thinking about.

Our strategy about pricing and churn driving.

I think what we see is there really are more than one type of consumer out there right now for sure. There is a consumer that is pulling back both in terms of visits and in terms of managing how much they spend and for that group of consumers.

We are.

Very much committed to protecting our strong everyday value right. We've got great value at breakfast lunch and dinner affordable price points, and we are committed to protecting that and continuing to market that for those folks on the other hand, we do see that there are a group of consumers, who they may be cutting back on some.

More luxury items or trips or vacations, and when they come to cracker barrel, they actually want to splurge, a little bit they want to treat an indulgence and that is why we are adding some some higher price premium entrees and add on items so that they can.

Great. Thank you Sandy and Jennifer that follow up I guess, just one quick question and I'll hop back in the queue.

Just on the pricing front the 7%.

You know as far as our.

Model.

Should there be any bigger.

You know kind of waiting towards retail versus restaurant business, that's 7%, where it will be pretty similar in both segments.

I'm not sure I understand the question are you, saying does the 7% include retail or some price increase in retail the same yes.

Yeah that was taking my questions.

Look at those two decisions differently and a lot about the retail has to do with.

The mix is but no I would say on a constant mix basis, I don't retail prices are not increasing at that level.

Okay, great. Thank you.

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

Hey, thanks for the questions.

Obviously differ.

A difficult operating environment.

You talked about the headwinds on the call I'm just wondering can you lay out maybe some of the thinking behind.

The guidance for 8% revenue growth year over year, maybe talking to.

Assumptions around maybe that's 65 plus customer.

Your assumptions on gas price pressures and just what have you.

Can you come up with that point estimate.

Really tough environment forecast in general.

Thank you Tom This is Craig very good question.

The 8% a lot of things well tell you how we're thinking about it.

We have.

Gas prices impact us directly and indirectly because it impacts overall inflation consumer confidence and then just given our usage case as a company it impacts us a little bit more.

Directly.

And then it also.

That overall environment.

As well as the other contributor is I've also impacted that 65, plus cohort so in that 8%.

Fills in some of them are recent trends what it also assumes that again this is a little bit of a TBD. It also assumes what I would characterize as a reasonable summer travel season.

And that is effectively starting at around around this time.

So a lot a lot there behind that 8%, but I would say big picture that incorporates a lot of what we're seeing from a macro perspective.

In the near term in particular gas prices in particular the over 65.

Cohort and the open item.

That is.

It could be meaningful is what happens with the summer travel season, Sandy anything you'd like to add to that.

No I think to the question we got early about what what has traveled as a percentage of our business. We're building back but it is an important component.

Fourth quarter.

And although I think we're expecting some.

Not as strong as it was pre Townsend, but some improvement from today and we will just I think our teams are ready for the guests to come back and.

We are optimistic that they will.

That's helpful. Thank you both and then my follow up is <unk>.

And you talked to better segmenting and knowing your customer segments more intimately with the work you've done over the past six months can.

Can you speak to maybe.

Identifier performance gap between let's say that millennial cohort and the 65 plus cohort and then any qualitative commentary you can give us on.

If there was a gap there if it's closing at all as we're moving further away from the omicron impact that we had at the start of the year.

Yes, I think one of the things that was most interesting about the segmentation learnings with to find that if you look at say the millennial the segments that are heavily millennial versus those that are more of the 65 plus the traditionalist.

They have more in common in terms of the drivers what they what they give us high marks are than you might imagine.

For example.

Adjusted Jen a genuine love of our food and the welcoming atmosphere and through the quality of the food and the experience. They have is shared across the two cohorts I think the big thing that is very different is that millennials really have high expectations ethic as regards to technology and digital and.

That is why you hear me talking about things like the new App and the loyalty program in terms of performance. We have seen that the 65 plus guests has been.

All of our data suggests there is still reluctant to socialize in public places and particularly dining out and then also the recent economic concerns. They they are more pessimistic than younger generations, and so they're worried about their financial future and therefore spending less so we're definitely.

Seeing a bigger pullback from a traffic perspective from those 65, plus I would say we have every hope that they will return as Covid hits, the rearview mirror and hopefully as these inflationary pressures and Wayne.

Okay, great. Thanks, Tim I appreciate it.

Mhm.

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

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

My first one I just wanted to ask about <unk>.

G&A you mentioned some incremental investments in technology.

And then the Maple Street infrastructure.

Does that imply a step up in G&A in the fourth quarter.

And then I guess, what do you expect for G&A going forward into fiscal year 'twenty three.

Yeah.

Okay.

I would say look in.

I don't think we want to get into too much detail on.

On G&A I think there is clearly some short term short term things.

As we kind of normalize a bit here, but as we think about the longer term G&A view I don't think we would get into that today.

Okay.

Okay Sir.

And then I guess my second question is on the food cost management system.

I think you've finished implementing in April would you be able to quantify what maybe the benefit of that will be in the fourth quarter.

And then I guess will that benefit increase into next year.

More learnings with the system.

Yes, Jack this is Craig again.

So the food cost management system.

As you.

We've tested that product, we've tested that tool and we feel pretty confident in what it will do and we would say.

<unk>.

Modest improvement it does a number of different things to us, but the actual Cogs improvement is modest and that's built into our built into.

Our guidance as we are.

As we're sharing.

Great. Thank you.

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

Great. Thanks for taking the question.

Well I guess two separate ones. Firstly, just building off of Jack last question. There. When you think about your initiatives what do you see as things that you can either delay or pushed back a little bit what do you think is absolutely necessary right now and where you're seeing the great quantification.

The best upside risk in terms of what you could see for your basket.

Well, maybe I'll start and then I'll see what color Craig or John wants to add I think in terms of our initiatives.

Jen did a pretty good job of rolling out but.

I would say that our most urgent ones relate to driving our top line.

There they are about menu initiatives that we believe will appeal to core guest the guest space, we're trying to drive either more attraction or more frequency.

Or our.

Is that are driving top line recovery of all of our guests cohorts is probably the highest priority. So our loyalty program all of the technology the menu programs.

And the operational and guest experience hospitality staffing training all of those things which are embedded in the P&L.

Yes.

In light of while always but particularly in light of the environment with this sort of.

This level of inflation in the cost pressures as we are trying to get back to our pre COVID-19.

Profitability and certainly improve on where we are now I'd say the second group are those initiatives that result in enhanced productivity and profitability in our stores.

So Craig just touched on one which is the food system, which drives.

He says a modest improvement in our waste it helps our managers manage their food production and inventories more effectively.

But as we get better at understanding the system and the power of it I think we'll be able to add functionality.

Which will help us understand.

How to order more efficiently how do produce more efficiently because the system will help us do a better job of understanding hold times and how to put the labor against the production that needs to go on with the complicated menu we have.

Then our labor system, which we're still very early on we just rolled into a district, but we're optimistic.

It will really give our teams a much better tool about matching the labor to all the different channels of the business now since COVID-19.

And the significant growth in off premise our field teams.

Are challenged to provide labor to match it dine in guest and off premise guests.

Comes on and off premise guests that delivery third party catering guests or retail gas so.

This new system, I think will allow us to better match, the labor which arm.

Optimistic will allow us to drive sales base better because we will have a better match and save labor because we're just being more efficient in doing that.

Beyond that and the cost savings I would say it falls sort of everywhere else on the P&L.

Our off premise supplies for the last two years have been it's been difficult to match.

Manage the inflation there because there was a lot of shortage in that area, but I am now.

I'm hearing that we are some of the ideas. We have we believe we are more optimistic we'll be able to implement in.

In the near term.

Craig I don't know what else you might want to add to this or Josh well I think.

Hi, Brett this is Craig the other part of the question there I think that sums it up well sandy in terms of.

What we should demand, it's really focused on driving the top line and as we think about the technology initiatives a lot of them.

Deliver basically more or less right. So those are just really good investments.

In terms of commodities I think was the second part of your second part of your question at this point.

<unk> marks we either were either locked or we have visibility to.

Two the pricing so I don't think there is a whole lot more there.

For this fiscal and then for next fiscal.

The thinking is that we have essentially.

Peak inflation at about this point in.

And in this calendar year and inflation will remain commodities.

I sure will remain significantly elevated.

But as we start to comp on some of the higher numbers from last year the rate of increase.

<unk> will come down so that's what we're working assumption.

Right now, but I think as we've all experienced over the last two years, that's been a tough one.

To pin down, but we're not anticipating some sharp retrench up commodities, where we go back.

A couple of years or anything like that we're projecting.

The rate of increase.

<unk> remains high.

And begins to moderate in the second half of the calendar year and work its way down down beyond that.

Yes.

Our next question will come from Sarah Senatore with Bank of America. Please go ahead. Thank you I have a few.

Follow ups. Please.

The first is on just on pricing do you have a sense of what kind of the net flow through on prices, which is to say. Thank you said youre seeing some trade down but presumably it.

Not fully offsetting the increase in price so any kind of new.

Ensign on that just as I think about forecasting check and traffic. So so that's one.

And then I also wanted to try to understand a little bit more about what youre thinking about the different customer basis.

Specifically for example, retail has been.

Stronger than restaurant comps.

And sort of accelerated versus 2019 in most recent quarter I would've thought that you would have sort of a similar.

Kind of customer base for our retail and restaurants, maybe more pressure on check there because of <unk>.

Feelings of inflation pinching budgets that kind of thing so just how do I reconcile kind of a better retail.

Demand and growth in versus restaurants.

Okay.

Well put.

I don't think it's Sarah good morning. Thanks for the question. So there's a lot in there let me try.

I'll try on the retail and then the pricing flow through I'll, let Craig take a stab at.

Our retail business I think our merchants have done a really great job of half.

<unk>.

Fun uniqueness to all Jake interesting merchandise great price.

It was really an impulse buy and to some degree I think that our strength in retail.

Has been a little bit of maybe we call it sort of an add on for us. So we're whereas some concepts maybe they would be able to sell and dessert or in a way I think some of our guests are using our retail store for that.

It's a affordable indulgence.

And.

We're seeing for example.

Toys since one of our strongest categories and Theres, just some fun things there and I think when they're there with their kids and their families.

Our retail teams and then I think it is just resonating with where guests are.

In terms of an affordable luxury.

So all trade down from that do you want to I don't want to.

Trade down absolutely right, it's Craig so as it relates to the pricing flow through I will give some texture on this.

We've been continuing to use a test and learn approach on pricing and we're seeing really good really good flow through in that kind of test and control environment. So typically.

So we are expecting pretty high flow through normally in price and you lose.

A few.

Kind of basis points, so to speak to things like credit card fees and two there are some indirect impacts from tips. For example tips go up in FICA.

Taxes go up as a result.

So I would expect a pretty high flow through and Thats pretty consistent with what we have.

<unk> seen using our test and learn approach.

Our next question will come from Brian Mullan with Deutsche Bank. Please go ahead.

Okay. Thank you just a question on capital return.

You contemplate the share repurchases you were doing it might do going forward with the new authorization. How are you thinking about stabilized EBITDA stabilized operating margins.

Our internal underwriting maybe asked another way when you think about that use of capital and determine it's the right use of capital from a returns perspective.

Take us through what parameters or framework, you are thinking about it and analyze it.

Hi, Brian This is Craig I'll take that one so we were thinking about that is we're going to continue to remain kind of balanced and cautious as it relates to two hour two our leverage ratio.

The.

The board increased its authorization.

But we're still continuing and we're still continuing to monitor the environment, we have forecast that go against that.

Our long term approach has been to first fund the investments that we need to make in the business in terms of sustaining and growing it and then returning capital to shareholders and we're doing all of that in context of what's the risk profile of the external environment.

<unk> and our internal environment, So I think our.

What I would.

USA I think what we all view as a balanced kind of a conservative approach.

We will continue.

No.

Thank you.

Our next question comes from Jon Tower of Citi. Please go ahead.

Great. Thanks for taking the question.

Few from me if I may 1st a clarification in terms of the breakdown of price traffic mix in the quarter at the restaurants and then some.

Actual questions after that.

This is John so we we.

<unk> been really focused more on is talking about.

Talking about sales.

So I think we're going to.

Youre not going to get much deeper not much deeper than that at this time.

Okay.

Going to the.

The inventories it looks like they were higher seasonally this quarter at least at quarter end than you would normally have been in the past and I'm curious if that goes back to Sandy your commentary earlier about building well ahead of holidays and securing.

Some supply there or is there anything else going on with respect to inventory levels.

No I think you hit it.

Our teams are being really careful about balancing the supply chain disruption and ensuring particularly our holiday merchandise.

First of all our our harvest Halloween and Christmas seasons are so important to us.

We brought those in early so we would be sure we had them.

Which is which is why youre seeing sort of the most significant reason youre, saying the increased inventory and secondly, there is some inventory increase just to support the sales. This time last year, we actually wished we had more inventory, but with that being said our teams are being released.

Full about managing sort of not go ditch to ditch, so Detroit too.

Anticipate where the consumers are where the overall retail environment is balance that with the supply chain disruptions as we think about what our inventory level should be.

Got it and that kind of leads to the next question with respect to the retail side of the business.

We've seen in the past several weeks and then again this morning, a fairly large reminder, that.

Some of the retailers are having a hard time managing their inventories and have decided to go after some markdowns. So I'm curious to know how your business has performed in the past.

When other large retailers have moved in the direction of increasing discounting.

Well you.

No one operates outside at the broader context of the retail environment is an issue and so when the environment gets highly promotional.

We understand that.

We will be competing against that we've been.

Our gas largely buys it's an impulse buy.

And the merchandise there, which is generally unique relatively low priced we believe insulates us to some degree from that.

But those the recent announcements we heard I know have resulted in our retail teams going back through them.

Im back through our strategies.

To ensure that we are as well positioned as we can be.

To manage our retail business.

In this new environment.

Got it and then just the last one for me.

Thinking about your messaging to consumers in this environment I know historically the brand Hasnt really leaned on.

Call to action and limited time offers in the marketplace.

But I'm curious to know if perhaps you guys are reconsidering that now or might pulses.

Given the macro backdrop has got a lot of your core customers are the pressures your core customers are facing at the moment.

Now I'll, let Jim take that one.

Yes, I think you certainly are not going to see us turned to a lot of couponing and discounting that's never been critical of our brand is <unk>.

I do think we are continuing to advertise and market. Our every day great prices that we have on our menu.

So youre going to see us continuing to do that.

We do sometimes do and have planned some some food and beverage <unk> news and we will be amortizing some of that coming up.

In the late summer and fall on TV, but it's not a deep deep discounted or promotional construct.

So as I mentioned earlier.

Ongoing consistent pressure behind our everyday value price points.

And.

Newsworthy flavor news that we feature in our advertising as well.

This.

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

Thank you.

While there is still a great deal of uncertainty in the near term consumer an inflationary environment, but as we continue to navigate these pressures we look.

To the future and are confident that the strategic plans, we outlined for you today both of those to drive further sales recovery and those that will strengthen our business model are the right plans and will position us well over the long term. We appreciate you joining today's call and look forward to speaking with you again soon.

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

Q3 2022 Cracker Barrel Old Country Store Inc Earnings Call

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