Cracker Barrel Old Country Store, Inc. Q1 2023 Earnings Call Transcript
Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) Q1 2023 Earnings Call Transcript December 2, 2022
Operator: Good day, and welcome to the Cracker Barrel's Fiscal 2023 First Quarter Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask question. Please note, this event is being recorded. I would now like to turn the conference over to Vice President of Investor Relations. Please go ahead.
Unidentified Company Representative: Thank you. Good morning, and welcome to Cracker Barrel's first quarter fiscal 2023 conference call and webcast. This morning, we issued a press release announcing our first quarter results. In this press release and on this call, we will refer to non-GAAP financial measures for the first quarter ended October 28, 2022. The non-GAAP financial measures are adjusted to exclude the non-cash amortization of the asset recognized for the gains on our sale and leaseback transactions, and the related tax impact and expenses related to the proxy contest and settlement in connection with the company's 2022 Annual Meeting of Shareholders. The company believes that excluding these items from its financial results provide investors with an enhanced understanding of the company's financial performance.
This information is not intended to be considered in isolation or as a substitute for net income or earnings per share information prepared in accordance with GAAP. The last pages of the press release include reconciliations from the non-GAAP information to the GAAP financials. On the call, with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO, Craig Pommells; and Senior Vice President and CMO, Jen Tate. Sandy and Craig will provide a review of the business, financials and outlook. We will then open up the call for questions for Sandy, Craig and Jen. On this call, statements may be made by management of their beliefs and expectations regarding the company's future operating results or expected future events.
These are known as forward-looking statements, which involve risks and uncertainties that, in many cases, are beyond management's control and may cause actual results to differ materially from expectations. We caution our listeners and readers in considering forward-looking statements and information. Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties found at the end of the press release and are described in detail in our reports that we file or furnish with the SEC. Finally, the information shared on this call is valid as of today's date, and the company undertakes no obligation to update it, except as may be required under applicable law. I'll now turn the call over to Cracker Barrel's President and CEO, Sandy Cochran.
Sandy Cochran: Thank you, and good morning, everyone. This morning, we announced total sales growth of 7%. I was pleased with these results, which included comparable store restaurant sales growth of 7.1% and comparable store retail sales growth of 4.3%. Our adjusted operating income margin of 3.6% was also within our expectations and reflected the persistently high inflation that we were anticipating during the quarter. While we believe commodity costs will improve over the balance of the year, inflation across the P&L is taking longer to abate than we had originally expected and continues to pressure margins. Despite the macroeconomic headwinds, our store operations teams are working to deliver a great guest experience, our menu and retail products are resonating with guests, especially those seeking value, and we're tracking to deliver on our strategic initiatives.
I believe these initiatives position us well to navigate the environment and drive improved performance over the rest of the fiscal year and beyond. And now I'd like to speak to some highlights from the first quarter. From a culinary perspective, we saw positive guest response to the breakfast initiative that we launched this summer and we believe our guests are reacting positively to our strong value proposition and our focus on hospitality. Our build-your-own breakfast category and our Strawberry Cheesecake Pancakes performed well as did the signature for our chicken platform that we featured in the quarter. Additionally, we saw favorable check mix driven by increased sales of barrel bites, premium sides, desserts and non-alcoholic beverages, and we're happy with the growth that we're seeing with beer and wine.
Our retail teams again delivered strong results, especially considering the performance we were lapping in the prior year. We saw growth in our everyday business and in our decor and apparel and accessories categories and our seasonal themes such as harvest and Halloween performed particularly well. During the quarter, we continued to make progress on key initiatives, and we remain focused on hospitality and the guest experience and I was pleased that we sustained our improvements to our dine-in guest metrics. From a guest visitation perspective, the most recent data which is for July through September showed some improvement in our visitation by guests that are 65 and older. While this was likely buoyed by our wrapping delta in the prior year, we were encouraged by this result and are cautiously optimistic that we will see further improvements with this cohort over the balance of the year.
We also saw visitation gains with younger guests who we believe are responding to our culinary and marketing initiatives and with lower income guests who we believe are responding to our strong value proposition as they navigate the financial pressures of the current economic environment. We're gaining traction and strengthening our business model, we remain on track to achieve our $20 million to $25 million cost savings goal in FY '23. Additionally, we expanded the test of our new labor system, which is now in over 140 stores and have been encouraged by the results. Lastly, Maple Street is making progress towards their new unit target. They opened three new locations during Q1, which includes two in Texas and one in Georgia. Craig will now cover our first quarter results in greater detail and share our expectations for the fiscal year.
And once he's finished, I'll provide some additional details about upcoming initiatives.
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Craig Pommells: Thank you, Sandy, and good morning, everyone. For the first quarter, we delivered top line results in line with our expectations, which included total revenue of $839.5 million, an increase of 7% over the prior year quarter. Restaurant revenue increased 7.6% to $662.2 million and retail revenue increased 4.6% to $177.3 million versus the prior year quarter. Comparable store total sales, including both restaurant and retail grew by 6.5%. Comparable store restaurant sales grew by 7.1% over the prior year, driven primarily by approximately 8% pricing, which consisted of approximately 5% carryforward pricing from fiscal 2022 and approximately 3% new pricing. We are closely monitoring the impact or pricing has happened on traffic and check, and we're pleased that we have not seen any meaningful pushback from our guests in this regard.
Off-premise sales were 17.5% of restaurant sales. Comparable store retail sales increased 4.3% compared to the first quarter of the prior year. The core and apparel and accessories delivered the largest increases by category. Moving on to our first quarter expenses. Total cost of goods sold in the quarter was 33.5% of total revenue versus 30.9% in the prior year quarter. Restaurant cost of goods sold in the quarter was 29.1% of restaurant sales versus 26% in the prior year quarter. This 310 basis point increase was primarily driven by commodity inflation of 16.7% and elevated freight costs partially offset by pricing. The commodity inflation we experienced over the quarter was seen across our entire market basket were the primary drivers of the year-over-year increase in Q1 were poultry, dairy and produce.
First quarter retail cost of goods sold was 50.2% of retail sales versus 48.7% in the prior year quarter. This 150 basis point increase was primarily driven by increased promotional activity and higher freight costs. Our inventories at quarter end were $231 million, compared to $160 million in the prior year, which as a reminder, were below historical levels. In addition to comping over a lower base, most of this year-over-year increase was in our retail inventories and was driven by several intentional actions on our part, including our investments in merchandise to support higher planned sales, especially in our everyday categories and Christmas themes and our acceleration of purchasing in certain areas to mitigate supply chain challenges and to ensure on-time delivery.
With regard to labor cost, our first quarter labor and related expenses were 34.8% of revenue versus 35% in the prior year quarter, a decrease of 20 basis points. Wage inflation for the quarter was 8%. Finally, adjusted other operating expenses were 23.1% of revenue versus 23% in the prior year quarter. And our adjusted general and administrative expenses in the first quarter were 5.1% of revenue versus 5.2% in the prior year quarter. All of this culminated in GAAP operating income of $23.6 million. Adjusted for the non-cash amortization of the asset recognized from the gains on the sale and leaseback transactions and expenses related to the proxy contest and settlements adjusted operating income for the quarter was $30 million or 3.6% of revenue.
Net interest expense for the quarter was $3.5 million, compared to net interest expense of $2.6 million in the prior year quarter. This increase is the result of higher interest rates and a higher level of borrowing. Our GAAP effective tax rate for the first quarter was 14.7%. First quarter GAAP earnings per diluted share were $0.77 and adjusted earnings per diluted share were $0.99. In the first quarter, adjusted EBITDA was $54.8 million or 6.5% of total revenue. Turning to capital allocation and our balance sheet. We remain committed to a balanced approach to capital allocation. Our first priority remains invested in the growth of Cracker Barrel and Maple Street. Beyond that, we plan to return capital to our shareholders while maintaining appropriate flexibility and a conservative balance sheet.
In the first quarter, we invested $21.6 million in capital expenditures, primarily on maintenance of existing stores and we returned $42 million to shareholders in the first quarter through a combination of dividends and share repurchases. Lastly, we ended the quarter with $484 million in total debt. For the full year, we expect our leverage ratio will be within our target range of 1.3 times to 1.7 times. With respect to our fiscal 2023 outlook, I would like to provide some additional color on the guidance provided in this morning's release. Everyone should be mindful of the risks and uncertainties associated with this outlook as described in today's earnings release and in our reports filed with the SEC. We continue to operate in a challenging environment of economic uncertainty that makes predicting the balance of the year are particularly difficult.
Consumer confidence, recessionary risks, inflation and supply chain constraints are some of the things that depended on whether, when and how much they shift, can impact our business positively or negatively for the balance of the year and consequently, when we expect to return to higher margins. Predicting becomes even more challenging when we try to weigh the impact of these drivers on particular groups such as over 65 and lower-income guests and travelers. We've seen this play out month-to-month on the sales side since we began our fiscal year in August. August and September sales were strong, but then we saw softening in October. November sales, however, exceeded our expectations due to a strong holiday performance and increased special occasion catering but a slightly lower dine-in traffic.
All of this makes the tea leaves more challenging than normal to read as we project out the balance of the year. This also applies to the cost side as we attempt to predict changes in commodity inflation. We expect commodity inflation to moderate, but the timing and magnitude is complicated by market basket wins. For example, lower chicken and pork prices may be offset by higher than anticipated increases in eggs, dairy and produce. Turning to the numbers. We currently expect total FY '23 revenue growth over the prior year of 6% to 8%. In addition to anticipated favorable comparable store total sales growth, this assumes the opening of three to four new Cracker Barrel locations and the opening of 15 to 20 new Maple Street locations. Comparable store sales growth is expected to be primarily driven by approximately 8% total annual pricing.
We remain prudent and thoughtful in our approach to pricing and are utilizing multiple approaches to monitor guest reactions to price increases, including pricing holdback groups, first and third-party guest surveys and monitoring pricing flow through. We now anticipate commodity inflation of approximately 8% to 9% for the fiscal year with low double-digit inflation in Q2 and mid-single digit inflation in Q3 and slight deflation in Q4. We now expect wage inflation of approximately 5% to 6% for the fiscal year. We believe wage inflation peaked in Q1 and anticipate lower inflation rates for the remainder of the year. As I said earlier, we continue to expect to deliver between $20 million to $25 million in cost savings during this fiscal year, ending the year at annualized run rate savings of approximately $13 million from the work we've done over the last several quarters.
As a reminder, we anticipate restaurant costs and labor and related to each deliver just under 40% of the annualized savings with much of the remaining 20% being realized in other operating expenses. In addition to the above assumptions for revenue growth, commodity and wage inflation and cost savings, our operating income margin expectation contemplates the following assumptions, continued inflation pressures in other areas of the P&L, most notably supplies, utilities and maintenance. Moderation in retail margin compared to the prior year near historic high and incentive compensation normalization, which will have a meaningful impact on G&A in Q3 and Q4. We continue to believe what we said last quarter that our costs will gradually improve as we move to the back half of the fiscal year.
While the timing has shifted out a bit so that the benefits of the back half are likely more heavily weighted to Q4. As a result, we anticipate that our second quarter adjusted operating income margin will be meaningfully below the prior year quarter. However, we expect our operating income margin rate will improve in the back half of the year as commodity inflation moderates and our cost savings initiatives gained further traction. As a result, we anticipate our Q4 operating income margin will be well above the first quarter we just reported. Taking all of this into account, we expect full year adjusted operating income margin to be in the high 4% range. We also believe there is upside in our operating income expectation if there were to be further moderation in the commodity environment and potential downside if there were to be deterioration of the consumer environment or if inflation fails to moderate or further increases.
Lastly, we anticipate that capital expenditures for the year will be approximately $125 million, including new store investments of roughly $30 million. I'll now turn the call back over to Sandy so that she may share additional details around the business plans and outlook for fiscal 2023.
Sandy Cochran: As Craig outlined, the current environment is challenging to navigate and to predict, especially with regard to inflation and recessionary uncertainty. Despite this, we remain confident in our plans and believe we will see improved performance later in the fiscal year. Now I'd like to speak to some of the Q2 highlights. As a reminder, our second quarter is an especially important quarter for us due to seasonally higher volumes and this is particularly true for our off-premise business. As Craig mentioned, we're generally pleased with our performance in November. We again saw strong demand for our Thanksgiving heat-and-serve offerings, which continue to resonate with guests that are looking to provide a delicious convenient home cooked meal at a strong value for their family and friends, and we're looking forward to Christmas.
As you may recall, one of our goals for the fiscal year was to grow our catering business 25% to $100 million. Enhancements to our catering offerings and optimized marketing support have driven meaningful growth within this channel and we are on track to achieve our growth target. Given the prevailing environment, we believe preserving our value leadership is a critical importance and we'll be leaning further into value messaging in the upcoming months. From a pricing perspective, as Craig emphasized, we remain thoughtful with how we're taking pricing and are being mindful to preserve the value sections of our menu and to maintain attractive entry price points. We believe we're striking an appropriate balance of protecting margins and preserving our value strength, and we're closely monitoring guest reaction.
Continue to invest in technology to enhance the guest experience, and I'm particularly excited about our completely new app that we launched at the beginning of November, which greatly improves the user experience and reduces friction to make ordering and reordering much easier. In addition to enhancing the guest experience, the new app also lays the foundation for our loyalty program, which we plan to launch during the fourth quarter. Regarding retail, we've generally been pleased with our Christmas theme performance and our overall results quarter-to-date have been within expectations. However, we continue to monitor the retail environment in the face of potential macroeconomic headwinds and aggressive discounting. And while we believe our unique offerings at strong price points resonate with guest and benefits our retail business, we expect our promotional activity will be higher than the prior year, even though it's still well below historical levels.
In conclusion, we delivered Q1 results that were within expectations, and we're making great progress on our initiatives. We remain confident in our strategy and encouraged by our start to Q2. We continue to face headwinds, especially from inflation, but expect to see significant improvements to our performance in the latter portion of the fiscal year as our initiatives gain further traction and the external environment becomes more favorable. Before wrapping up, we're happy to announce that Bill Moreton has joined our Board of Directors. Many of you are likely already familiar with Bill, who's a well-known leader in the restaurant space, most notably with Panera Bread Company, where he served in a variety of senior executive positions over several tenures, including CEO, CFO and Executive Vice Chairman.
Like Jody Bilney, who recently joined our Board, we've known Bill for several years and have great respect for him. Our entire Board and management team are looking forward to working with him and with Jody as we tackle the opportunities ahead of us. Lastly, I'd like to thank our employees for their continued resilience and their dedication to our brand and our guests. Thank you. And with that, I'll turn the call over to the operator for your questions.
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