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Edited Transcript of CBRL earnings conference call or presentation 26-Nov-19 4:00pm GMT

Q1 2020 Cracker Barrel Old Country Store Inc Earnings Call

LEBANON Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Cracker Barrel Old Country Store Inc earnings conference call or presentation Tuesday, November 26, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Hannon

Cracker Barrel Old Country Store, Inc. - Manager of IR

* Jeffrey M. Wilson

Cracker Barrel Old Country Store, Inc. - Principal Accounting Officer, VP & Corporate Controller

* Jill M. Golder

Cracker Barrel Old Country Store, Inc. - Senior VP & CFO

* Sandra Brophy Cochran

Cracker Barrel Old Country Store, Inc. - President, CEO & Director

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Conference Call Participants

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* Alton Kemp Stump

Longbow Research LLC - Senior Research Analyst

* Brett Saul Levy

MKM Partners LLC, Research Division - Executive Director

* Gregory Ryan Francfort

BofA Merrill Lynch, Research Division - Associate

* Jake Rowland Bartlett

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* Jeffrey Daniel Farmer

Gordon Haskett Research Advisors - MD & Senior Analyst of Restaurants

* Jon Michael Tower

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Robert Marshall Derrington

Telsey Advisory Group LLC - MD & Senior Research Analyst

* Stephen Anderson

Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Cracker Barrel Fiscal Year 2020 First Quarter Earnings Conference Call. (Operator Instructions) Please note that today's event is being recorded.

At this time, I would like to turn the conference over to Adam Hannon, Manager of Investor Relations. Please go ahead.

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Adam Hannon, Cracker Barrel Old Country Store, Inc. - Manager of IR [2]

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Thanks, operator. Good morning, and welcome to Cracker Barrel's First Quarter Fiscal 2020 Conference Call and Webcast. This morning, we issued a press release announcing our first quarter results and our outlook for the 2020 fiscal year.

On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO, Jill Golder; and Vice President and Principal Accounting Officer, Jeff Wilson. Sandy will begin with a review of the business, and Jill will review the financials and outlook. We'll then open up the call for questions for Sandy, Jill and Jeff.

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 with or furnish to the SEC. Finally, the information shared on this call is valid as of today's date, and the company undertakes no obligation to update it, except as may be required under applicable law.

I'll now turn the call over to Cracker Barrel's President and CEO, Sandy Cochran. Sandy?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [3]

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Good morning, and thank you, Adam. This morning, we announced positive comparable store restaurant sales, and we delivered GAAP earnings per share of $1.79. While we faced headwinds from the softening trend in industry traffic comparable sales have continued throughout our first quarter, I was pleased that we again solidly outperformed the industry and that we grew operating income by 3%.

Jill will review the financial results for the quarter as well as our updated full year expectations, but before she does, I want to speak to some of the highlights from the quarter and provide an update on our plans for the remainder of the fiscal year. First quarter menu promotion featured our Homestyle Chicken. As a reminder, this popular offering was previously only available on Sundays, but we made it available every day as part of our Signature Fried Chicken platform. The menu promotion also featured our new Homestyle Chicken BLT sandwich, and it was supported by 6 weeks of national TV media with the ad continuing our strategy of more explicitly highlighting our food and value. While traffic in the quarter was softer than expected, I was still pleased with the performance of the menu and marketing promotion.

Moving to off-premise. We again saw solid growth in this business and it was a meaningful contributor to top line results for the quarter. During the quarter, we expanded our third-party delivery coverage and this service is now available in nearly 600 stores. We also expanded our fleet of catering vans, bringing our total to 235, and we hired several catering sales managers as we continue to grow our catering business.

Turning to retail. Our sales in the first quarter were below our expectations, and our apparel merchandise was particularly challenged. We continue to rework our women's apparel category as the guest response remained weaker than last year. Additionally, we believe the unseasonably warm weather contributed to the underperformance of this category, particularly our outerwear offerings. As we look to the second quarter, Christmas seasonal merchandise sales, such as decor, appeared to be strong. But with the holiday gift purchasing season having just begun, we remain cautious regarding the shorter selling season, and our teams are working diligently to address our sales concerns and remain committed to offering holiday products with strong price/value relationships, which we believe may place some pressure on our second quarter margin rate.

Looking ahead, we'll continue to execute our fiscal 2020 business priorities. This includes accelerating our off-premise business, driving top line growth through craveable signature food, enhancing the employee and guest experience, leveraging new long-term growth drivers, such as Maple Street Biscuit Company and Punch Bowl Social. I'm excited about our current holiday menu promotion, which features the return of our Country Fried Turkey topped with pan gravy, served with green bean casserole and cranberry relish. This offering proved to be very popular last year, and we believe the new equipment platform that we installed as part of the Signature Fried Chicken initiative helps to provide improved consistency. The menu promotion is being supported by an integrated marketing campaign that includes national TV.

Second quarter is a key period of our off-premise business. We've been pleased with the demand for our Heat n' Serve offerings in recent years, and we believe the growth we've seen in this business reflects the trust that guests have in Cracker Barrel to provide a delicious home-cooked meal during these special occasions. Continue to believe that these differentiated offerings, which serve up to 10 people are a good value and provide the ultimate convenience for guests looking to host family and friends in their homes. This year, we also made several enhancements to support an improved guest experience, both for our in-store and our off-premise guests during this high-volume period. We continue to be pleased with the demand for third-party delivery and are evaluating how we can further expand our reach and frequency for this occasion.

Lastly, we announced our acquisition of Maple Street Biscuit Company. Several years ago, when we were assessing opportunities in the fast casual space as part of our Extend the Brand strategy, Maple Street was a concept that stood out, and I had the opportunity to meet with Scott Moore, the founder and CEO. Since that time, we've been closely following and admiring Maple Street, which continued to grow. Several months ago, Scott reached out and asked whether Cracker Barrel would be interested in acquiring Maple Street. He'd grown Maple Street to 28 company-owned units and 5 franchise locations since opening in 2012, but he recognized that Maple Street would benefit from additional resources and expertise. While he was prepared to go through a full search process for prospective buyers, he preferred a trusted strategic partner with a long-term perspective. Our brands share many values and similarities such as made-from-scratch cooking and genuine hospitality. Maple Street will be able to leverage Cracker Barrel's resources and expertise. We're committed to preserving the integrity of the Maple Street brand.

Our experience with Holler and Dash has reinforced our belief that the breakfast and lunch-focused fast casual segment is an attractive category. We believe Maple Street will serve as a growth vehicle that complements Cracker Barrel by accelerating our penetration in this segment, while providing increased exposure to urban and suburban markets and to the millennial and Gen Z cohorts.

After closing the deal in October, we immediately moved into the integration phase, and our teams are working diligently to execute our plans, which includes the conversion of Holler and Dash into Maple Street. We expect the integration to last until the spring, and we look forward to accelerating growth in the months following the completion of the integration.

We believe that Maple Street and Punch Bowl Social are 2 emerging brands that are positioned to become leaders in their respective categories and will serve as complementary growth vehicles for delivering long-term value to Cracker Barrel shareholders. While our main focus remains the long-term success of the core Cracker Barrel brand, we're very excited about the future for both of these brands and the value creation we believe they'll drive. The Maple Street team will be relocating to Nashville and Punch Bowl Social continues to operate from its Denver headquarters, led by Robert Thompson.

In closing, despite softness in the industry and in our sales performance compared to Q4, I was pleased with the quarter. We continue to outperform the industry, and our team started the year off strongly in executing against our priorities for the fiscal year. Additionally, we completed the acquisition of Maple Street Biscuit Company, which, we believe, complements our strategic investment in Punch Bowl Social and will drive long-term value creation. Going forward, we'll continue to execute our plans to enhance the core, expand the footprint and Extend the Brand as we seek to deliver shareholder returns.

Lastly, I'm excited to announce that we'll be providing additional detail regarding our long-term strategy at our Analyst Investor Day, which will take place in late June 2020. We'll be sharing more specifics in the coming months.

And with that, I'll turn it over to Jill.

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [4]

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Good morning, everyone, and thank you, Sandy. I would like to begin by discussing our financial performance for the first quarter of fiscal 2020, and then our outlook for the 2020 fiscal year.

But before we begin, I would like to note that we adopted the new accounting standard for leases at the start of the fiscal year. While this did not have an impact on our income statement or cash flows, it did have a meaningful impact to our balance sheet as our total assets increased approximately $578.3 million, with $473.5 million of the increase attributable to the addition of operating leases to the balance sheet. More information on these changes will be provided in the 10-Q that will be filed shortly.

In this morning's release, we reported first quarter net income of $43.2 million and GAAP earnings per diluted share of $1.79 compared to prior year earnings per diluted share of $1.96. Our reported earnings per diluted share included unfavorable impact for the quarter of $0.11 related to transactional and integration expenses associated with the acquisition of Maple Street Biscuit Company and a $0.25 loss from the company's equity method investment in its unconsolidated subsidiary Punch Bowl Social.

For the quarter, we reported total revenue of $749 million, an increase of 2.1% when compared to prior year revenue of $733.5 million. Our restaurant revenue increased 2.7% to $607.1 million, and our retail revenue decreased 0.4% to $142 million.

Our total revenue increase was primarily driven by positive comparable restaurant sales and the net opening of 4 new Cracker Barrel locations. Cracker Barrel comparable store restaurant sales in the quarter increased 2.1% as average check increased 3.6% and traffic decreased 1.5%. The increase in average check reflected menu price increases of approximately 2.3% and a favorable menu mix of 1.3%. The first quarter mix favorability was driven primarily by our Signature Fried Chicken platform. First quarter comparable store retail sales decreased 0.9%, with decreases coming primarily within our women's apparel and toys categories.

Moving on to expenses. Total cost of goods sold in the quarter was 29.3% of total revenue versus 30.3% in the prior year quarter. Our restaurant cost of goods sold was 24.6% of restaurant sales, a 60 basis point decrease versus the prior year. This decrease was primarily due to lower levels of commodity inflation and leverage from menu price increases. On a constant mix basis, our food commodity costs were approximately 0.2% higher in the quarter than in the prior year quarter, driven primarily by increases in dairy. Our retail cost of goods sold was 49.6% of retail sales compared to 51.3% in the prior year quarter. This 170 basis point decrease was primarily a result of higher initial margin and lower markdowns.

Labor and related expenses were $263.3 million or 35.2% of revenue compared with $258.2 million or 35.2% of revenue in the prior year quarter. Other store operating expenses were $162.9 million in the quarter or 21.7% of revenue compared with other store operating expenses of $152.5 million or 20.8% of revenue in the prior year quarter. This 90 basis point increase was primarily driven by planned depreciation increases related to our investments in strategic initiatives, a higher advertising expense to support our fall menu promotion and transactional and integration expenses associated with the acquisition of Maple Street Biscuit Company.

Store operating income was $103 million in the first quarter or 13.8% of revenue compared with store operating income of $100.6 million or 13.7% of revenue in the prior year quarter. General and administrative expenses were $39.6 million in the quarter or 5.3% of revenue and included transactional and integration expenses associated with the acquisition of Maple Street Biscuit Company. This compared to G&A expenses of $38.9 million or 5.3% of revenue in the prior year quarter. GAAP operating income was $63.4 million or 8.5% of revenue compared with $61.7 million or 8.4% of revenue in the prior year quarter.

Net interest expense for the quarter was $3.6 million compared to $4.3 million in the prior year quarter. This decrease was primarily driven by the benefit of interest income resulting from our lending to Punch Bowl Social. Our effective tax rate for the first quarter was 17.7% compared to an effective tax rate of 17.7% in the prior year quarter. In the first quarter, we paid $32.1 million in dividends and repurchased shares totaling $14.2 million, which resulted in us returning $46.3 million to shareholders in the quarter.

Turning to our balance sheet. We ended the fiscal quarter with $43.2 million of cash and equivalents compared to $101.6 million at the prior year quarter end. Our total debt was $485 million at quarter end.

Before providing our fiscal 2020 outlook, I would like to speak to our acquisition of Maple Street Biscuit Company. As we announced in October, we acquired Maple Street in an all-cash transaction for $36 million. Maple Street is a strong brand with attractive unit economics, which include targeted AUVs of over $1 million and targeted store-level EBITDA over 17%. Current unit economics are below these levels, but we anticipate achieving the run rate for these targets shortly after we implement a staggered rollout of planned initiatives upon the completion of the integration. We believe Maple Street has strong growth potential. We are working on the site selection strategy and are refining our estimate for Maple Street's ultimate build out, and we plan to share additional detail at our Analyst and Investor Day in late June.

With respect to our fiscal 2020 outlook, 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. Our fiscal 2020 earnings estimate continue to assume total revenue of approximately $3.15 billion to $3.2 billion. We now expect Cracker Barrel comparable store restaurant sales growth of approximately 2%. We continue to anticipate Cracker Barrel comparable store retail sales growth of approximately 1%.

We continue to anticipate our fiscal 2020 menu pricing will be approximately 2%. We continue to expect to open 6 new Cracker Barrel stores, and we now expect to open 1 Maple Street location in fiscal 2020. Additionally, we plan to convert 6 of the 7 Holler and Dash locations to Maple Streets in the coming months. We continue to expect increased food commodity cost on a constant mix basis in the range of 2% to 2.5% for the fiscal year. We have locked in our pricing on approximately 45% of our commodity requirements for fiscal 2020 compared to approximately 50% at this time last year. We continue to project that our retail margins as a percent of sales for the full year will be approximately flat compared to the prior year. We continue to anticipate wage inflation on a constant mix basis of approximately 4%. We continue to project $11 million to $13 million in business model improvements resulting from sustainable cost savings.

Taking these assumptions into account, we continue to expect full year operating income margin of approximately 9% of total revenue. We now project net interest expense of approximately $12 million, which includes the benefit of interest income resulting from our lending to Punch Bowl Social and reflect our updated lending schedule to Punch Bowl Social. We now anticipate an effective tax rate for the fiscal year of approximately 16% to 17%, which assumes the renewal of the Work Opportunity Tax Credit. This guidance also includes an expected tax benefit from the estimated loss from our equity method investment in Punch Bowl Social. We continue to expect capital expenditures for the year of approximately $115 million to $125 million, and depreciation of approximately $110 million to $115 million. Our guidance implies an increase in fiscal 2020 EBITDA of approximately 1% to 3% compared to the prior year.

Taking these new assumptions into account, we now expect to report GAAP earnings per share between $8.50 and $8.65. I want to make a few points about this estimate. First, it includes an expected loss from our equity method investment in Punch Bowl Social of approximately $0.80, which includes the following components: first, preopening expenses and significant investments in corporate infrastructure to support growth; second, expected unit closure expenses; third, updated business performance expectations.

Our GAAP EPS estimate also includes transactional and integration expenses related to the acquisition of Maple Street, which we estimate will unfavorably impact GAAP EPS by approximately $0.15, $0.11 of which occurred during the first quarter.

And with that, I will turn the call over to the operator so that we can take your questions. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question comes from Jake Bartlett of SunTrust.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [2]

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Sandy, I want to ask about the lowered same-store sales outlook for 2020 on the restaurant side. And I'm wondering what is driving that? Whether it's the industry outlook that you talked about kind of being less than -- less strong than you expected? Or whether it's some of your initiatives, like maybe the follow-through from the fried chicken launch, how the Homestyle Chicken ran -- how it performed in the first quarter? Anything you're seeing early on in the Thanksgiving selling season?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [3]

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All right, great. Thanks, Jake. I'm actually going to let Jill take that question.

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [4]

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So yes, we did update our comp guidance to 2% from our prior guidance of 2% to 3%. This was primarily driven by the year-to-date industry performance. We continue to be pleased with our off-premise performance and anticipate continued growth in that business. As we said in our prepared remarks, we believe we can still achieve our targeted off-premise performance at 10% of sales at the end of this year. The Signature Fried Chicken platform has been performing well to our expectations, and that includes the performance of our Southern Fried Chicken, the Homestyle Chicken as well as the new Homestyle Chicken BLT. But I do want to point out, as we look at the guidance, it does assume that the industry improves from its current trend in the back half.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [5]

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Got it. And if we could maybe switch to the second quarter and the initiatives that you have and the promotions that you're running. Do you expect any difference year-over-year in terms of marketing weights, for instance, for the fried turkey promotion? And I believe you're increasing your Heat n’ Serve prices pretty sharply this year, again, as you did last year. I'm just trying to gauge your confidence that that's not going to have some pushback in terms of demand.

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [6]

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Well, we did anticipate the impact on demand as we made the decision about pricing, which was made last spring. So the impact that's going to be on the demand is built into our guidance. In terms of the media, I would say that we do have some additional media this year. One of the things that happened to us last year, we actually, I think, began to be concerned we were going to run out of turkey. And so this year, we were able to change our turkey inventory, which gave us more confidence. So I think there's some additional media being driven after Thanksgiving with the turkey message on it. But we continue to be excited about the Heat n' Serve as well as our celebration meals. And of course, tomorrow, we're -- our first annual Macy's Thanksgiving Day Parade debut is tomorrow with our float and our Tiny store, which is in New York -- excuse me, Thursday. And our Tiny store, which was in New York this morning.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [7]

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Great. And then just last question on the margins. Your restaurant-level margins, you included the impact of the transaction, I mean, integration costs. I'm wondering, I believe the -- you used to have a conference every other year, biannual conference. Was that in the first quarter here? Typically it's been 30 to 40 basis points. Or has that been pushed into another quarter?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [8]

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So Jake, there's a couple of things there. So yes, the transaction cost from Maple Street of $0.11 was in the margins for Cracker Barrel, about 48% of that or so within G&A, the remaining was in other operating expenses. And yes, we did have our conference this fiscal year and that is in the second quarter. It wasn't the biggest impact in there -- I mean, I'm sorry, in the first quarter, it wasn't the biggest impact though in there. Yes, we did have some other operating expenses around our investment in capital as well as the increase of the 2 weeks in advertising that we had in the first quarter.

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Operator [9]

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The next question comes from Alton Stump of Longbow Research.

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Alton Kemp Stump, Longbow Research LLC - Senior Research Analyst [10]

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I just wanted to ask you kind of -- I look at the overall competitive environment, kind of what you're seeing out there. Is you're getting more aggressive in the casual space? And kind of, as you look forward, in your view, is that going to continue? Or do you think we'll see things get a bit more rational over the course of fiscal year 2020?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [11]

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Well, we certainly believe that it has been more competitive. I think as the industry softened in recent months, the -- and it would appear the consumer shifted some of their discretionary spending away from casual diner. The reaction -- that elevated the competitive pressure, and I think the reaction was a higher level of promotional activity, which we were certainly noticing in the first quarter. To what degree that'll continue, I don't think I can comment on that, Alton. As Jill mentioned, we are assuming an improvement in the underlying industry trend in the second half of the year.

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Alton Kemp Stump, Longbow Research LLC - Senior Research Analyst [12]

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Got it. And then kind of just one question, which I guess is for Jill. Just -- as you bought back shares of course in the quarter for the first time in a couple of years, but obviously have also done some acquisitions here recently. Kind of how do you view share buybacks as a tool kind of going forward next 18, 24 months?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [13]

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No, that's a great question, Alton. As you know, we now have more flexibility for repurchasing shares. So that's another way that as the Board looks at capital allocation, we're able to provide value back to our shareholders. So I think what I'd say is our overall philosophy about capital allocation hasn't really changed. We continue to focus on investing in the business to drive sales and earnings and long-term value creation.

Secondly, we remain committed to our regular quarterly dividend. And then we also -- this year, we declared a $3 -- last fiscal year, we declared a $3 special in June. And then as you've pointed out, in the first quarter of this fiscal year, we repurchased about $14.2 million in shares. And then we have other investments in future growth driving initiatives like our investment in Maple Street and Punch Bowl. So I think the Board will continue to look at all of our options in front of us in terms of how we drive long-term value creation, but then share repurchase has now become part of that mix.

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Operator [14]

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Our next question comes from Gregory Francfort of Bank of America.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [15]

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Maybe just the first one, in terms of Punch Bowl Social, Jill, I think you gave a breakdown of kind of what's the main components of that. But can you maybe talk about what was the delta from the old $0.50 to the current $0.80? Is that greater preopening that you've had? Or is it just -- what was the driver of that $0.30?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [16]

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Great. Thanks, Greg. So as a reminder to everyone, we have a noncontrolling stake in Punch Bowl Social, and we continue to believe it's a highly differentiated brand with significant growth potential. So remember, when we gave our original guidance of $0.50 loss, that included the fact that PBS, Punch Bowl Social, has store-level -- positive store-level EBITDA, but it's offset by the preopening expense that you mentioned and a G&A infrastructure that supports the future growth. So then the change was largely due to unit closure expenses that -- we closed the Fort Worth site, which we believe was a selection site issue. And the Cracker Barrel team is partnering with the Punch Bowl team to leverage our expertise to help us improve our site selection process.

And then in addition, we did lower it a little bit for our current thinking on updated business performance. Again, as a reminder, it's a new brand. Many of the stores haven't even been open 3 years. So we're getting a fair amount of learning, specifically around sales trends. There's a number of sales drivers in this brand. We're entering new markets, so we're learning about how sales grow in new markets. How we ramp up in group and event dining as well as the seasonality of the business. So these numbers may move around a little bit, but we'll provide as much information as we can.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [17]

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And maybe just 2 others, one for Jill and one for Sandy. Jill, just on the retail margins, I know you guys are talking about being flat for the year, but you guys are seeing, I guess, a lot of costs you're able to take out, the margins have been very good. Can you maybe talk about what's been the biggest tailwinds or biggest drivers of that performance year-over-year? And why that would be temporary versus ongoing? And then I had one last one for Sandy.

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [18]

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Well, I think on the retail margins, I'll actually start on that. I think the team has done a really good job of trying to protect margin rate and dollars in an environment where we needed to address sort of a variety of issues, but probably the biggest one for us this particular quarter was the tariffs. And we've done that through designing the assortment through evaluating alternative suppliers, working with our vendors to share the cost. In some cases, changing our pricing. So our buyers work really hard to continue to deliver unique, fun, nostalgic, great value items to our guests and to provide the appropriate level of profitability for our shareholders.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [19]

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Got it. And maybe just my last one is, can -- I know you talked about a little bit in your prepared remarks, Sandy, but just can you maybe address what are some of the big differences between Maple Street and Holler and Dash? And then what are the things that they're doing right that maybe Holler and Dash wasn't doing right? And why this is kind of a better brand to bet on longer term?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [20]

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So there's a lot of similarity. They are biscuit entrées, a menu that features comfort food. They're both fast casual, open breakfast and lunch. Both sort of focused on an urban suburban locations, targeting millennials and Gen Zs. I think our experience with Holler and Dash reinforced our belief that the segment was attractive. They have had -- Maple Street has been around longer. Their brand is -- we believe, has a strong, proven business model, attractive unit economics, high-growth potential. So given their number of units and success and where we currently were in the Holler and Dash path, we felt that the conversion of Holler and Dash into Maple Street would accelerate our penetration in the category.

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Operator [21]

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Today's next question comes from Jeff Farmer of Gordon Haskett.

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Jeffrey Daniel Farmer, Gordon Haskett Research Advisors - MD & Senior Analyst of Restaurants [22]

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Just a couple more on Punch Bowl. So when do you expect to see the concepts become neutral to EPS?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [23]

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So this is Jill. I think what I would say about that is as we said, we expect the investment in Punch Bowl this year based on equity method of accounting to be an approximate loss of $0.80. We're not providing guidance beyond fiscal '20. We will certainly talk more about it on our Analyst Day in late June. But as we said, right now, given how we're learning about the brand, the team continues to refine their forecasts for next year. So we look forward to sharing more in June.

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Jeffrey Daniel Farmer, Gordon Haskett Research Advisors - MD & Senior Analyst of Restaurants [24]

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Okay. And then of the Punch Bowl units that are in the comparable store base, is there a same-store sales number that you guys have shared or are willing to share?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [25]

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Yes. No, we're not providing that level of detail around our investment or the performance of the Punch Bowl brand because it's a noncontrolling interest and we're just providing the below-the-line method based on the equity method of accounting.

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Jeffrey Daniel Farmer, Gordon Haskett Research Advisors - MD & Senior Analyst of Restaurants [26]

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Okay. Just a couple of quick additional ones. So just following up on the Heat n' Serve questions. That was -- you guys didn't provide a ton of detail, but it was pretty clear that was a big same-store sales driver last year in the fiscal second quarter. So with the growing popularity of that offering, I have to assume it gets more popular every year as people get familiar with it and the double-digit price increase that was already mentioned. How impactful could that be to your fiscal second quarter same-store sales number this year?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [27]

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Well, it's certainly going to be an important component of the Thanksgiving week. It's an offer, we're very excited about, our guests are excited about it. We did have the price increase and some demand -- an increase in demand expectations built into our guidance. But it is only an offer that's available for 1 week before Thanksgiving. And then we do offer a Christmas Heat n' Serve before Christmas. So it is just one component of the overall mix for the second quarter. So we'll say off-premise, in general, though, is an important part of our second quarter sales expectations. And so in addition to the Heat n' Serve, we're looking forward to growth in our celebration meals as well as individual to go grow through both third-party delivery and just people coming into the restaurant and to pick up their meal.

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Jeffrey Daniel Farmer, Gordon Haskett Research Advisors - MD & Senior Analyst of Restaurants [28]

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That's helpful. And just one last one. So you delivered strong labor cost control, I think, for the second consecutive quarter. Just curious sort of looking under the hood a little bit, what's driving that labor cost favorability? And how sustainable is that as we move through the balance of the fiscal year?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [29]

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This is Jill. What I would say is, the teams have done a really nice job managing through labor. Our operations team is focused on kind of the back to the basics on how we forecast our sales and then appropriately schedule. So we were pleased with our overall labor performance. I will say the wage inflation of 3.2% was a modest headwind for us. We expect for the year wage inflation to be 4%, so that'll become more of a headwind as we look forward. And then also within the labor line, we did see some favorability across a couple of other lines that helped offset our wage inflation, primarily in preopening labor and a little bit in store bonuses.

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Operator [30]

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The next question comes from Stephen Anderson of Maxim Group.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [31]

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That's Stephen Anderson. Just I wanted to talk about the quarter specifically. I wanted to get into the impact from Hurricane Dorian. Although there was not really a direct hit to the United States, there was a weekend in September where there were a lot of evaluations, maybe even some store closures. I wanted to see if you're able to get any color on the impact on overall sales.

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [32]

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Great. No. Thanks, Steve. Hurricane Dorian, even though the actual impact wasn't as much as it was forecasted to be, it was disruptive to our business and certainly had impact on our traffic, especially as people were concerned that it was going to hit Florida. So what we don't know is how much it impacted people's travel plans. And as you'll recall, it was near an important holiday weekend for us when it hit. So we definitely think that it had an impact. As a reminder, in the first quarter of the prior year, we had 2 hurricanes. So our best estimate is they relatively offset each other, but it was a little more difficult to analyze.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [33]

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And I wanted to also take a look at the commodities. You said that -- looking at last quarter commodity's up 0.2%, but you're still keeping the full year forecast. And I wanted to see if you see any pressure points across your commodity complex.

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [34]

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Great. So yes, in the commodities basket, in the first quarter, we benefited from ramping on higher egg prices in the prior year. So that's the primary component that brought our commodities flat to the prior year. We have a little bit of that ramp in the second quarter. So we do expect to see commodities step-up in the second quarter and then be slightly above 3% in the back half. The main drivers haven't changed from what we talked about in our previous calls, it's really beef, pork and dairy that are the largest drivers of our commodity inflation. And as we mentioned, we've got approximately 45% of our commodity pricing is locked.

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Operator [35]

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Our next question comes from Bob Derrington of Telsey Advisory.

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [36]

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Sandy, as it relates to Punch Bowl Social, I think on the last conference call, you talked about the business, and you were fairly excited about, ultimately, the experiential contribution that it could bring along with Cracker Barrel. And at the time you were talking about the smaller prototype that opened in Fort Worth, which ultimately has been closed. So what -- I'm just curious, what was it that has changed within the perception of that store location from the initial enthusiasm about that smaller prototype?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [37]

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So we're disappointed that Fort Worth wasn't successful. In this particular case, we believe it was a site selection issue more than a small box issue. And we're partnering with the team at Punch Bowl to understand better all of the situation and to improve that process. But as Jill said, it's a young brand. There's going to be learnings, we will continue to learn, continue to update the guidance. But we continue to believe that PBS has significant growth potential, and I think it's positioned to become a leader in the segment.

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [38]

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Are you, I guess, based on that experience, thinking that you may provide a little bit more participation in some of the key decision-making processes within Punch Bowl?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [39]

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Well, I don't know if it'll be more than we had originally planned. The team out in Denver had -- we'd always anticipated in areas like real estate, purchasing, some things like that, that we would be able to add expertise, and that's one of the reasons we made the investment. So I think that we've -- but we've certainly dug in quickly on the real estate issue just to ensure that we understood what the learnings were in all the sites, including Fort Worth.

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [40]

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Got you. Okay. And to shift gears back to the Old Country store. You also talked on the last conference call about the new menu that you've introduced there. And I think this menu now offers both -- essentially both breakfast and all-day dining. Is there something about the contribution from the impact of that menu that has affected the sales guidance? Or just if you could help us with your initial impression of how that's being received at the store level?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [41]

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Yes. The dinner menu initiative is currently only in 70 stores, and it doesn't -- I'm not sure what -- you said all-day dining. What you might be referring to is that the dinner menu now has a small category where we call out on the dinner menu that breakfast is available all day, and we actually offer on the dinner menu our most popular breakfast items. And we highlight that you -- the full breakfast menu is available if you ask a server. So that largely made it just easier for our guests that wanted to order breakfast as well as easier for our servers who now don't have to put 2 menus down for the lunch dinner time and only 1, unless asked.

We continue to be encouraged by the learnings we have in the dinner test, but we are continuing to test and learn. The first changes from the initiative we'll probably launch or we're expecting to launch sometime next spring, chain-wide. So as we learn, we've been making modifications. I think we've got one going in next week to the test stores. We'll have another round then after the holiday, and we'll modify the dinner menu. But no, I don't -- the learnings from the dinner menu didn't impact. I'll turn actually over to Jill on how that might have impacted the sales forecast.

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [42]

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Yes. So yes, Bob, this is Jill. On the sales forecast, really, the big change has been the industry expectations. You might remember from when we originally gave guidance, we expected the industry to perform overall as it had performed in the prior fiscal year, which was better than our recent current trends. On the new food introduction, specifically under the Signature Fried Chicken platform, we've been very pleased. That's certainly driving the mix favorability that you've seen, and they've been featured in our advertising, and we've been pleased with that performance as well, specifically around the Southern Fried Chicken, the Homestyle Chicken and the Homestyle Chicken BLT that were featured.

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [43]

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Okay. That's helpful. But what I was curious about is whether adding the breakfast to the all day, that dinner menu, Sandy, had hurt the check average as consumers shopped maybe at more lower price, possibly the breakfast items, as opposed to the regular dinner features.

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [44]

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We're not currently seeing that.

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Robert Marshall Derrington, Telsey Advisory Group LLC - MD & Senior Research Analyst [45]

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Okay. All right. That's good. And then last question, if I could. On the depreciation. In the first quarter, it was up about 15% year-over-year, yet the midpoint of the guidance, Jill, I think only targets D&A up about 5%. So should we anticipate that the -- essentially $28.7 million in the first quarter is expected to be a reasonable run rate for the other quarters? That's kind of what your guidance implies.

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [46]

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Yes. Just a second, Bob, we're taking a look. But I think we feel comfortable with our guidance. Some of that is where the Maple Street integration costs kind of fell. But overall, we feel pretty comfortable with our guidance. We've stepped down a little bit on our capital spending, so you're going to see some of that will start to roll off towards the back half. But...

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Jeffrey M. Wilson, Cracker Barrel Old Country Store, Inc. - Principal Accounting Officer, VP & Corporate Controller [47]

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Yes. And we did -- Bob, this is Jeff. We did have some accelerated depreciation associated with the acquisition of Maple Street that is affecting our depreciation number in the first quarter as well.

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Operator [48]

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The next question comes from Brett Levy of MKM Partners.

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Brett Saul Levy, MKM Partners LLC, Research Division - Executive Director [49]

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A couple of clarifications and then just some bigger picture. You talked about the continued growth on Punch Bowl Social and now you had a closure. Should we still assume that the roughly 100-unit target you had in place still exists? And how should we think about the makeup of a willingness to revisit the smaller prototypes?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [50]

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I think for now, you should assume that the guidance for that 100-store expectations still exists, and we'll update you more at the Analyst Day in the summer.

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Brett Saul Levy, MKM Partners LLC, Research Division - Executive Director [51]

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Got you. You talked about continued growth of To-Go in off-premise. Care to quantify what it was, the growth this quarter?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [52]

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Yes, we are verifying. I think we said it was up over 150 basis points. We'll verify that, but it was a significant contributor in the first quarter. 180 basis points, excuse me.

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Brett Saul Levy, MKM Partners LLC, Research Division - Executive Director [53]

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It grew as a percentage of the mix?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [54]

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Yes, it contributed that to same-restaurant sales growth.

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Brett Saul Levy, MKM Partners LLC, Research Division - Executive Director [55]

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That's the contribution to comps. Okay.

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [56]

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There you go.

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Brett Saul Levy, MKM Partners LLC, Research Division - Executive Director [57]

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With respect to November, I know you haven't given a guidance, a cadence, but could you care to -- do you care share any color in terms of how you exited F 1Q and started off F 2Q?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [58]

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No, I guess, I would not. I don't have any additional color to add to what we've already disclosed.

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Brett Saul Levy, MKM Partners LLC, Research Division - Executive Director [59]

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Got you. And then, I guess, a strategic question. You've talked about upgrading the POS systems, how many units do you have that in now? And theoretically, why did you decide to spend $14 million on buybacks as opposed to use that free cash that you have in play to maybe accelerate the integration now that you've already gotten past the equipment integration from last year?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [60]

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Yes. That's a fair question. So as we've looked at the POS rollout, so first of all, we're currently in a [130] stores. We expect to add an additional 40 in fiscal '20. We're still really pleased with the new POS. It's an easier system to use for the team members. The technology, we believe, enhances the employee experience. And then we think it will be a foundation for some future cost savings. But I guess what I would say is it's not that easy to flip the switch in terms of rollouts. So we will talk about at Analyst Day more about what our rollout plans look like. But it wasn't a capital constraint that kept us from increasing the rollout, it's more a logistics. Is that helpful?

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Brett Saul Levy, MKM Partners LLC, Research Division - Executive Director [61]

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That is.

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Operator [62]

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Our next question comes from Jon Tower of Wells Fargo.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [63]

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Just a quick clarification first, if I may. The $0.80 EPS headwind that you had mentioned related to Punch Bowl Social, that does not include the interest income from the loan, is that correct?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [64]

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That is correct. So the $0.80 represents our investment using the equity method accounting. So the other 2 areas on the financial statement where you will see an impact from Punch Bowl Social, one is on the interest income, which benefits from our loan to Punch Bowl. The other is in the tax rate, which benefits from the loss.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [65]

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Okay. And the tax rate doesn't include -- this is just a straight up one line $0.80 headwind tied to the loss. Okay.

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [66]

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Yes.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [67]

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Okay. Great, perfect. And then could you quantify what the size of the loan is to Punch Bowl right now?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [68]

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So what we had said -- do you want to answer? Or I can answer it.

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Jeffrey M. Wilson, Cracker Barrel Old Country Store, Inc. - Principal Accounting Officer, VP & Corporate Controller [69]

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Go ahead.

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [70]

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So what we had said is we were going to loan up to $50 million in the near term. To date, we've loaned $30 million, about $15 million of that was last fiscal year, $16 million to date so far. And our guidance contemplates that we'll loan the remaining $20 million the rest of the -- in this fiscal year.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [71]

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Great. And then just going back to the Signature Fried Chicken platform. Can you give us a little bit more in terms of what you're seeing around customer usage of this, perhaps just a simple percentage of mix of sales today? Or more importantly, what you're seeing around frequency of use of this platform? Are you actually seeing customers come in more frequently to use this than what you've seen in other platforms in the past?

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [72]

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Well, what I can say is that it's in line with our expectations that we are pleased with the mix. Let me back up, though, so when we put our Signature Fried Chicken platform in we started with the offer of Southern Fried Chicken, and that was the bone-in offer, 4 pieces of bone-in fried chicken, then we rolled our Homestyle Chicken, which is a boneless offering that used to be available only on Sunday. So we rolled that out as an everyday offer in the summer, and we added to that our fried chicken BLT, which we are pleased with that performance. Then in the holiday season, we are offering the fried chicken -- excuse me, the fried turkey offer as our holiday offer, and we're pleased with the performance of that. We'll next be adding hand battered breaded tenders. That'll probably be next fall at the earliest. So the investment in the platform was always intended to be a multiyear initiative, and we continue to be pleased with the results.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [73]

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Okay. And then, yes, anything else on -- outside of the Signature Chicken Platform for the balance of the year, either on the new product side that we should be thinking about? Or importantly, also around advertising. Is there any significant changes in the advertising spend planned for the balance of 2020? I know, obviously, in 2019, you had a significant amount of spend in that fourth quarter tied to this launch. How should we think about advertising for the balance of '20?

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Jill M. Golder, Cracker Barrel Old Country Store, Inc. - Senior VP & CFO [74]

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Yes. No, that's a good question, John. So the advertising, as we talked about, we've added some advertising in the first half, more in the second quarter as that kind of came out of the fourth quarter. So it'll be close to parity within the third quarter, expected to be lower in the fourth quarter. And then we haven't talked about what our advertising will feature yet kind of beyond what we're on air with right now.

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Operator [75]

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This concludes the question-and-answer session. At this time, I would like to turn the conference back over to Sandy Cochran for any closing remarks.

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Sandra Brophy Cochran, Cracker Barrel Old Country Store, Inc. - President, CEO & Director [76]

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Well, thank you for joining us today. I'm encouraged by the start to the year and remain confident in our plans to drive continued performance. We appreciate your interest and support, and wish you all a safe and happy holiday season.