Earnings Call: Q2 2019

Feb 26, 2019

Good day, and welcome to the Cracker Barrel Fiscal 2019 Second Quarter Earnings Conference Call. All participants will be in a listen only mode. After today's presentation there will be an opportunity Please note this event is being recorded. I would now like to turn the conference over to Adam Hammond, Investor Relations. Please go ahead, sir. Good morning, and welcome to Cracker Barrel's 2nd quarter fiscal 2019 conference call and webcast. This morning, We issued a press release announcing our 2nd quarter results and our outlook for the 2019 fiscal year. In this press release and on this call, we will refer to non GAAP financial measures for fiscal 2018 adjusted to exclude the impact of the 53rd week that occurred in our fourth quarter and a one time noncash revaluation of the company's net deferred tax liability that occurred in our second quarter. The company believes that excluding these tax benefits from its financial results provides information that may be more indicative of the company's ongoing operating performance while improving comparability to prior periods. This information is not intended to be considered in isolation or as a substitute for financial information prepared in accordance with GAAP. The last page of the press release includes a reconciliation 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, Jill Golder Senior Vice President of Marketing, Don Hoffman 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 will then open up the call questions for Sandy, Jill, Don, 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 communicate are beyond management's control and may cause actual results to differ materially from expectations. We caution statements and information. Many of the factors that could affect results are summarized in the cautionary description of risk 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, Good morning, and thank you, Adam. This morning, we announced positive comparable store restaurant sales and traffic growth, and we reported earnings per share of $2.52. Our restaurant sales and traffic trends reflected improvements over the first quarter, and we outperformed the restaurant industry. We are pleased with the quarter as a whole as we continue to make progress in driving performance through an increased focus on our menu, 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 our highlights for the quarter, and provide an update on and we believe we continue to strengthen our reputation as a go to holiday destination Our 2nd quarter in store menu promotions featured a new limited time only country fried turkey with green bean casserole and Cranberry relish, which was supported by national TV and digital media. The TV advertisement continued our strategy of more explicitly highlighting our food while also incorporating elements of hospitality and warmth to help reinforce the special connection between Cracker Barrel and the holidays. I'm pleased with the menu promotion and the marketing campaign which drove top line growth in line with expectations. Moving to off premise, it performed well in the quarter as we saw growth across all three platforms with particularly large increases in our occasion and catering businesses. As a percent of sales, off premise increased approximately 200 basis points compared to the prior year underscore the trust that guests have in Cracker Barrel to provide a convenient, delicious, home cooked meal during these special occasions. In the catering business, we a large party offering, which proved to be successful. And we're pleased with the growth in our off premise business and we are focused on ensuring that we have the right processes and infrastructure in place to protect the overall guest experience. Turning to retail, sales in the second quarter fell below our expectations. We felt well positioned heading into the second quarter after our solid first quarter results that included strong sales in our holiday merchandise themes. And knowing that we would begin the quarter with lower than planned inventory levels, we supplemented our offerings with additional assortments that unfortunately, performance that was below our expectations. Looking ahead, I'm excited about our third quarter menu promotion. Which will highlight several of includes signature items such as our chicken and dumplings, country fried steak, and Grandma sampler. Featuring these proven guest favorites from our core menu will also simplify our operations to enhance our store's focus on the introduction of our Signature Fried Chicken platform, which we're currently offering in over 400 stores and is on track and we'll be investing in advertising, training, and hourly labor to support this major initiative. For off premise, we're sick about its potential sales growth over the prior years we look to further grow this occasion. We'll also be featuring a Mother's Day offering in a select group of stores offering. We remain focused on our employee experience and our guest experience. A key tenet of our culture is our belief that the guest experience can never exceed the employee experience. As we continue to evolve our hourly team member training and recognition program, we'll be investing in it to support the employee experience. As a reminder, we refer The highest level, which is achieved through a combination of tenure and testing is par 4. We're enhancing our par program to better leverage our par force and their leadership and role as mentors. We believe these changes will drive improvements to the employee experience which will in turn lead For retail, I'm optimistic about several of our upcoming assortments. Our Easter merchandise offers fun, value priced accessories to decorate the table, as well as festive children's apparel, and our coastal assortment with its soft color palette playful ocean theme merchandise is an easy way for our guests to bring the feel of the beach into their wardrobe or home decor. So in closing, I'm pleased with the improvement in our sales and traffic performance in the second quarter, I remain confident in our plans to leverage our brand strengths and to execute our business initiatives to drive top line growth. And with that, I'll turn the call over to Good morning, everyone, and thank you Sandy. I would like to begin by discussing our financial performance the second quarter of fiscal 2019 and then our outlook for the 2019 fiscal year. In this morning's release, we reported 2nd quarter net income of $60,800,000 or $2.52 per diluted share compared to prior year adjusted earnings per diluted share of $2.73. For the quarter, we reported total revenue of $811,700,000, an increase of 3% when compared to prior year revenue of $787,800,000. Our restaurant revenue increased 4.6% to $631,200,000 and our retail revenue decreased 2.2 percent to $180,500,000. Our total revenue increase was driven by positive comparable restaurant sales and the net opening of 10 new Cracker Barrel locations and one new Holler and Dash location since the prior year second quarter. Cracker Barrel Comparable Store restaurant sales the quarter increased 3.8% as average check increased 3.7% and traffic increased 0.1%. We estimate that unfavorable weather impacted comparable store shift in the timing of the Christmas New Year's holidays. Of approximately 2 point The 2nd quarter mix favorability was driven primarily by our Crafted Coffee Program, the growth of our off premise business, and our second quarter menu promotion. We were again pleased with our off premise business, which grew over 20% compared to 2nd quarter comparable store retail sales decreased 1.4% with decreases coming primarily within our holiday to core food and collegiate categories. Moving on to expenses. Total cost of goods sold in the quarter was 32.7 percent of 3% of restaurant sales, a 20 basis point increase versus the prior year. This increase was primarily due to menu mix On a constant mix basis, our food commodity costs were approximately 2 vegetables and eggs. 0.2% in the prior year quarter. This decrease was primarily Our retail inventories at quarter end were $111,100,000 compared to $120,900,000 the prior year quarter end. Labor and related expenses were $276,800,000, or 34.1 0.5% of revenue in the prior year quarter. This 60 basis point increase was primarily driven by wage inflation exceeding menu price increases and investments to support training initiatives and our off premise business. Other store operating expenses in the quarter were $156,800,000 or 19.3 percent of revenue, compared to other store operating expenses of $150,400,000 This 20 basis point increase was the result of planned depreciation increases related to higher capital expenditures and increased supplies quarter or 13.9 percent of revenue compared to store operating income of $112,700,000 or 14.3 $6,200,000 or 4.4 percent of revenue compared to $36,000,000 or 4.6 percent of revenue in the prior year quarter. Operating income was $76,700,000 or 9.5 percent of revenue compared to operating income of 76 $700,000 or 9.7 percent of revenue in the prior year quarter. Our EBITDA for the quarter was 102 0.9 for the quarter was Our effective tax rate 9% in the 2017, which lowered the federal corporate income tax rate to 21% and resulted in us recording a provisional tax benefit for the re measurement of deferred tax liabilities due to this rate change of approximately $25,000,000 Turning to our balance sheet. Compared to $168,800,000 at the prior year quarter end. Our total debt was $400,000,000 at quarter end. With respect to our as described in today's earnings release and in our reports filed with the SEC. We now expect total revenue of approximately $3,050,000,000 and comparable store restaurant sales growth for the full fiscal year in the range of 1% to 2%. We now expect comparable store retail sales growth of approximately We continue to expect increased food commodity costs on a constant mix We have locked in our pricing on approximately 55 percent of our commodity requirements for fiscal 2019 compared $110,000,000 for the year. We continue to anticipate net interest expense of approximately $17,000,000, We currently expect a GAAP effective tax rate for the fiscal We now anticipate that This reduction in CapEx guidance reflects updated expectations for the timing of our Signature Fried Chicken Initiative as well as the timing of new unit openings. We now project approximately We plan to invest higher marketing spend in the back half of the year compared to the first half. We also anticipate higher depreciation expense in the back half of the year driven by the rollout of this initiative. Taking these assumptions into account, we continue to expect full year operating income margin of between $8.95 $9.10. Lastly, I would like to point assumes normalized winter weather activity in the third quarter. And with that, I will turn the call over to the operator so that we can take your questions. Thank you very much session. And our first question comes from Alton Stump with Longbow Research. Please go ahead. Hey, good morning. Good morning. Just wanted to ask, obviously, was it quite impressive comparable sales result on both a 1 and 2 year stack basis sequentially. And we've talked about some of the drivers of that, but can you just give me a picture of how the competitive environment fared and if there's something else out there that enabled you guys to drive such a strong comp number in the quarter? Walton, you cut out a little. I think your question was, is there anything else, that we can point to that helped us deliver the comps? Yes. Well, I think it's what we talked about. I was pleased in the quarter with this success of our promotion that, country fried turkey really resonated with our guest. It was unique. It was delicious. It had strong both brand appeal and value scores. I think our off premise business which is particularly strong continue to grow it that I touched on, the Heat n' Serve, we grew these holiday celebration meals. We're very successful and we had strong growth in the individual to go. So I think we were able to capitalize on, the momentum in off premise dining as well as to have some offers that fit both in need, especially of the holiday season, fit with our in and fit with our type of food. The crafted coffee initiative, I think that works particularly well in, in the cold months. So we just we had a number of things that I think contributed to our performance over the quarter. That's helpful. Thanks for the color, Sandy. And then one quick follow-up and I'll hop back in the queue. Obviously, you had a sizable mix benefit fit here to comps in the quarter. Is that something that we should expect could continue over the rest of the year? Or was there something in 2Q that is that sustainable over the next two quarters? Good morning, Alton. This is Jill. What I would say about the I know we called out the components in my prepared remarks, but we clearly benefited in the second quarter from the growth in off premise associated with catering and some of the side orders or add ons that helped with that. We also continue to benefit from the Craft coffee program, which was up about 50 basis points over prior year. So I would say as you're looking out to the back half, as a reminder, we will wrap on the full year rollout of the Crafted Coffee program at the end of April. So you'll see that incrementality start to dissipate. And although we project to see off premise grow in the back half, probably not to that same rate, That said, we're excited about the introduction of our bone in fried chicken, which should help increase the mix as well. Great. Thank you, Joel Sandy. And our next question comes from Jake Bartlett with SunTrust. Please go ahead. Great. Thanks for taking the question. I'm trying to understand, the 2019 same store sales guidance for the rest It implies a pretty sharp deceleration in the back half. I think just at the midpoint of guidance about just slightly positive But I'm trying to understand why that is given the bone in chicken rollout, given the momentum you're having with off premise, And maybe in the context of that, if you could kind of give us what the cadence of same store sales were throughout the second quarter, maybe that would help us kind of understand your kind of entry point into the back half. Great, Jake. This is Jill. I'll start with your first question. So as you look at our updated guidance for restaurant sales for the back half of 1.2% Certainly, that incorporates the strong second quarter that we had. As you look to the back half, we wouldn't expect off premise to have as strong of an impact, although, we're very excited about our bone in fried chicken initiative that'll be launching And so what might help you going to your second question, which is kind of the cadence of the quarter, So as we looked at the quarter, November was our strongest month that was driven both by our off premise business and our in restaurant, experience, which was driven by the fried turkey that Sandy talked about As you look at December January, we certainly we had a little bit of holiday shifting and some weather timing between those 2 months. But when you adjust those 2 months, they were relatively in line with each other and we were pleased with their performance. Got it. And then in terms of your cost cutting, I think you're you've lowered a little bit here to $10,000,000 from from 10 to 12. How much have you realized in the first half of the year on your cost cutting plans and how much, I guess, that would tell us how much we should expect in the back half? Okay. So from the cost cutting initiative, yes, we said that we expect this year approximately $10,000,000 We brought that down a little bit because we've delayed a couple of initiatives, the timing of the introduction of of those initiatives to make more room for the launch of our bone in fried chicken. So for example, the timing of the POS and the tablets has been pushed out. That's also part of the lower capital that we talked about And so then from a cadence standpoint, the first half and the second half, our relatively similar, but we have slightly more in the back half. Okay. And then lastly, just touching on your on the kind of your your value initiative, the daily delights, that helped in the first quarter. Do you plan on running that again, promoting that nationally or across the system on television in the back half at some point? Or if not kind of maybe if you can describe why? Sure. I'll take that, Jake. Thanks for the question. Yeah, we were very happy with, the program in Q1. Where we focus on our big biscuit products. And every day value continues to be a core focus for our brand. We consider the importance of providing value in the design of all of our marketing and culinary and operational programs. And, part of our marketing strategy is to reinforce price certainty to our guests by communicating those everyday price points that we feel is an appropriate approach We want to highlight not only price, but quality and abundance of our meats, our menu and retail offerings focus on the differentiated guest experience. So, we'll continue to, to when appropriate, apply those elements in the future. Great. Thank you very much. And our next question comes from Bob Derrington with Telsey Advisory. Please go ahead with your question. Yes, thank you. Gio, can you help us understand for a second? I think you mentioned that your sales guidance, a soon for the year, for the second half, assumes a normal weather pattern. How would you describe the February pattern at this point, relative to that, I think most of us know that we've had record rains and ice and snow in various parts of the is that considered to be normal or what's your perspective there? Good morning, Bob. Yes, that's a great question. So as we've looked at the quarter, the 3rd quarter and the back half, as I said, we've assumed what we're calling a more normal weather. What I would say is clearly February has seen more severe weather than what we would have seen in a more normalized weather. So our assumption assumes that the balance of the quarter will be better from a weather standpoint versus what we've seeing and help make up some of this near term impact that we've experienced in February. Got you. Thank you. Sandy, could you give us some update on your view of how the rollout of, I think it's called, is it Southern Fried Chicken or Signature Fried Chicken? The program and kind of your perspective on that? Sure. And it's the platform is signature, but the particular offering bone in fried chicken is Southern fried chicken to differentiate it from our home style, which is a boneless offering, which we currently which we currently serve only on Sundays. Some people call it our Sunday chicken. So, I'm pleased with it. We've got about 5 100 stores installed, about 4 a little over 400 that are currently offering it. I'm pleased with the enthusiasm of our field teams as they've gone through the training and implementation. I'm really pleased with manage the installation of a very significant amount of equipment across the country, a lot of which had some challenging weather to operate in. I'm real I'm pleased with the guest response, even initially, without, any marketing against it with that With that said, we'll be having the national launch here in May, and we'll be supporting it with some additional labor, some marketing. And, so there'll be a lot of focus on it, but overall, I'm pleased with where we are at this point. I think on a per store basis, it's a fairly substantial investment. Not only in the equipment, but also in the training. Is there other ways to leverage that investment beyond just bone in chicken are there other dimensions to it that we could expect over time? Oh, yes, that's why. That's why the platform is, we'd have a different name The signature will be adding homestyle chicken. The current offering we do only on Sundays with our new equipment, we'll be able to offer that 7 days a week. So we'll be rolling that into the field. It's currently being offered 7 days a week in about 45 stores. That's a very popular offering, and we're pleased to be able to do it. We'll be able to offer things like sandwiches, Eventually, we can do a hand ready dipped tenders with some rubs or flavoring. So the culinary team has got some, ideas and thoughts about how do it to build on this And our next question comes from Gregory Francfort with Bank of America. Please go ahead with your question. Hey, guys. I had two questions. The first is just on labor and margins. And I guess I would have thought on the comp, you might have levered that or maybe delevered it less. And I think you talked about some new training and investments there. How big of an investment is that and what's the time of those investments that you're making? Great. Good morning, Greg. This is Jill. So as you look at second quarter, operating margins. I'll give you some color, just kind of some puts and takes on the quarter. So first of all, on cost of goods sold, That was slightly higher due to some of the items that we were selling country fried chicken and some of the off premise around the heat and serve occasion. Particularly on labor, we have seen wage inflation creep up a little bit within the quarter. It was 3 0.3%, which was a little bit higher than it had been in the first quarter. And we would expect some of that to continue But we have invested premise. We've talked about a number of the different drivers for off premise that we've begun to ramp up, some of those investments specifically around, delivery, some delivery drivers. We have our catering sales managers. So there's been some invest in that area. Along with off premise, we saw an increase in our supplies. Given the high level of sales versus prior year. And then we had our planned increase in depreciation from the higher CapEx. There were a couple of things that helped offset some of those investments in the second quarter. Retail cost of goods sold were lower due to markdown usage. We continue to see lower claims activity in our employee benefits which was great news. And then we talked about the fact that we have shifted some of our advertising. So advertising was lower in the second quarter. And we'll see some of that spending in the back half, specifically in the fourth quarter, with the launch of our bone in fried chicken. Understood. Thank you for the color. And then a separate topic, just I think part of the reason you guys have been doing a big special dividend for the last few years is because a large shareholder of yours was right at the poison pill level. Clearly, that is changing or has changed. And I'm curious what your thoughts are now that you may have more flexibility on your ability to buy back stock rather than use a dividend and your thoughts on the pushes and pulls between the 2 ways to return cash to shareholders? All right. I'll take that one. So Our board continues to have a balanced approach to capital allocation and just to review first, reinvesting in the business is the number one priority. 2nd is a commitment to a competitive dainable regular dividend. 3rd is share repurchases, which to your point, have not really been available other than to cover dilution over the past few years. And then 4th, a special dividend is considered on a case by case basis. I think the board regularly thinks about the subject of capital allocation it will, the board will now have some new facts and to, that were not previously, and some options that were not previously available. They'll consider all of that as they make their decisions about when and if we should do share buybacks and how and whether that will impact the special dividend, program we've had. And our next question comes from Stephen Anderson with Maxim Group. Please go ahead with your question. Yes, good morning. Most of my questions have answered, but I wanted to talk about some of the delay in the cost savings you contemplate. Will that additional $2,000,000 be allocated toward fiscal 2019? And as a result, do you see any pushing out of your originally scheduled $40,000,000 in cost savings over the 3 year period? Good morning, Steve. That's a great question. So as we look at our 40,000,000 target. We still have confidence that we'll achieve that target. And as we've talked about on previous calls, we've said that originally, we thought we'd get it over the 3 year time horizon, which would have gone through fiscal 2020. Now we think it may take an additional year or 2, but yes, we do believe that we will achieve the $40,000,000 in cost savings. Okay. Thank you. And our next question comes from Jeff Farmer with Gordon Haskett. Please go ahead. Thank you. Just a follow-up on off premise. I think you said you grew this channel by 20% in the second quarter. I think you mentioned that the growth rate would slow in the back half of the year, but I'm just curious, to what degree will it slow? Could this be cut in half just any color there would be helpful. Yes, good morning, Jeff. Yes, that's a great question. So in the second quarter, overall off premise grew 200 basis points. Last year for the annual, we were at about 7.5% of sales And this year, our hope is to approach 9% of sales. Okay, but specific to the second half, I mean, as you guys move past the holiday heat and serve, could that growth rate quarter over quarter slow pretty materially? You alluded to that trying to get a sense as to the order of magnitude. Yes. So we would expect it to slow 50 to 100 basis points in terms of growth over prior year. Okay. And then last question, just further drilling down on Heat And Serve. And the impact that had on the same store sales number specifically in the context. I think you guys had a 10% price increase on both the Thanksgiving and the Christmas menu items. So any color you can provide on the benefit to same store sales in the quarter provided by Heat And SIR Yes. I guess as we look at off premise, so all three channels grew, So individual to go grew over 10% and catering and our occasion grew 50%. So they all, relatively equally contributed to that overall growth. Welcome. And our next question is a follow-up with Bob Derrington from Telsey Advisory. Please go ahead. Sandy, there have been some chatter at one time about, the company's review of 3rd party delivery. What's your perspective on that? And can you give us any kind of color whether the company continues to test that and any kind of future contribution from that? We are. We We are currently in test and are pleased with the results. We are, and I'm not sure the timing. I know we're rolling it out to over the next few months to about 170 stores more. With the idea of getting it to not quite 400, I think, by the end of the year. But overall, it will third party delivery will be one component of the way that we offer off premise dining to our guests. Is the, does that tie in or play into the roll out of the chicken product? Is that expected to be a nice contributor to that? Well, we see that, fried chicken kind of lends itself to off premise consumption. And we've been thinking about the offer, whether it's a picnic basket type offer for a family meal or a catering offer, do think it'll be popular as an individual to go item. So but if that doesn't necessarily play into the 3rd party delivery in any unusual way. And we have another follow-up question from Jake Bartlett with SunTrust. Please go ahead. I did just a follow-up. This is usually around the time where we start talking about the Camp Fire promotion in the fourth quarter and whether anything is different, are you going to do anything different this year than the years past in terms of the length of advertising, the timing Any commentary on that would be helpful. Well, this year, we're not doing Campfire. We're rolling. That's, our Southern Fried Chicken launch. So we will be we're going to start the promotion a little bit sooner than we would have started, Campfire. We'll be supporting it with TV and it'll really go through the whole summer. But so there's no Campfire this year. Got it. And then I had a question about, about CapEx. And so you've pushed off, I believe, really, the difference here in the lowering pushing out the POS rollout. But if we think about the $450,000,000 to $500,000,000 guidance that we'd had from the Analyst Day and 18 2020. Has that just been compressed? What I'm really trying to get at is, is does the spend that was expected in 2019 really just go into into 'twenty, if any sense you can give us as to what CapEx is in kind of the out years and in terms of that kind of longer term guidance? Great. Thank you, Jake. So as we're looking at the CapEx for this year, lowered it somewhat due to the initiatives, as you mentioned, kind of pushing those out, Another piece of it was the timing of our fiscal 2020 new restaurants for next year. So Originally in our plan, we had some of those opening sooner in next fiscal year. So we had more of the capital in this year. So some of it is just the timing of that capital. So, I don't want to speak specifically to fiscal 2020 in terms of timing from a capital standpoint, but that 3 year capital guidance of $450,000,000 to $500,000,000 over the 3 years is probably still in the appropriate range. Great. Thanks very much. And our next question is another follow-up from Gregory Francfort with Bank of America. Please go ahead. Hey, guys. I just had 2 quick follow ups. 1 was, in terms of February and where we're trending, how much of the maybe pressure on the business think is due to tax refunds being down and, as you've looked at kind of what you've seen, it seems like a lot of the tax credit for at least the child tax credit is going to come later in tax season. Do you expect that to maybe, sort of flip those refunds positively and impact your business positively? And then I have a separate question. Well, that the tax refund question has been, kind of complicated and confusing. And I'm not sure we know where it's going to end up for all of our guests, because I think for some of our guests, that the refunds are coming later And we hope when they eventually come, that'll help. For some of our guests, I think they're going to be lower, whether that's because they were the withholdings were changed and they were getting more income during the year and didn't notice. And to what degree, that's going to be a surprise and how that may may not impact their spending. I think it's not clear to us yet, but just generally, I think we are, not looking for the tax refunds to be a big positive. To our business at this point. Understood. I appreciate that because I've been as confused as anybody in trying to figure this all the stuff So, and then my other question was just on the coffee business. I think you were talking about the contribution mix this quarter. Can you just talk about how that's how that rollouts kind of gone and what you're seeing in terms of customer adoption and how customers are using it? Anything I'd like that would be helpful. So I can start just to recap the financial mix. So we've been pleased with the Crafted Coffee promotion. So since we've rolled it out, it's consistently delivered approximately 50 basis points in mix. So we believe those sales have been incremental to our overall coffee program and, the consumer feedback on the different offerings has been very positive. And this concludes our question and answer session. I would like to turn the conference back over to Sandy Cochran for any closing remarks. Well, thank you all for joining us today. Cracker Barrel remains one of the strongest and most differentiated brands in the industry, and I'm confident that our strategy and business initiatives will continue to drive shareholder returns. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.