Earnings Call: Q1 2019

Nov 27, 2018

Good morning, and welcome to the Cracker Barrel Fiscal 2019 First Quarter Earnings Conference Call. All participants will be After today's Please note this event is being recorded. I would now like to turn the conference over to Adam Hannon, Manager of Investor Relations. Please go ahead. Thanks, Phil. Good morning, and welcome to Cracker Barrel's first quarter fiscal 2019 conference call and webcast. This morning, we issued a press release announcing our first 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 non cash revaluation of the company's net deferred tax liability that occurred in our second quarter. The company believes that excluding these tax effects from its financial results provides information that may be more indicative of company's ongoing operating performance while improving comparability to prior periods. This information is not intended to be considered in isolation or as a sub to 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 Barrels, 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 for 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 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 furnished to the SEC. Finally, the information shared on this call is valid as of today's date, and the company undertakes no obligation to update it, except as may be required under applicable law. I'll now turn the call over to Cracker Barrel's President and CEO, Sandy Cochran. Sandy? Good morning, and thank you, Adam. This morning, we announced positive comparable store restaurant and retail sales, and we reported earnings per share of $1.96. Our sales trend reflected an improvement versus the prior quarter and we improved our comparable restaurant sales growth versus the industry. While we made progress in addressing recent traffic declines, will still have much work remaining as we seek to improve performance through a heightened focus on the guest experience our menu and everyday value and the continued expansion of our off premise business. She'll review the financial results for the quarter as well as updated full year expectations, but before she does, I want to speak to some of the highlights from the quarter. As I discussed on our on highlighting our everyday value platforms. In addition, this quarter we also introduced new news by featuring our biscuits, which is signature item, our guests love, and extending them in new ways through offerings such as our biscuit French toast, with sweet blackberry topping and biscuit beignet's with butter pecan sauce. Our new biscuit offerings were minded guests of what they love seeing more on unique menu offerings, and I'm placing a greater emphasis on value, price point messaging. The messaging was centered on our everyday value and our limited time only biscuit offerings and we aired national TV media to support the quarter. As part of our integrated marketing campaign, we've cross promoted in our retail shop by highlighting biscuit related product to further build excitement and Moving to off premise, it performed well in the quarter and increased over 100 basis points as a percentage of sales compared to the prior year. We added several catering sales managers to key markets, bringing our total to nearly 15 And we continue to expand our catering delivery coverage. We now have approximately 180 catering vans in over 25 markets. Turning to retail, I'm very pleased with our 1st quarter comparable store retail sales growth of 4.3% over the prior year. Which was above our expectations. Guests responded well to our Harvest and Halloween assortments, which were on the floor for much of the As a result, we're seeing much better sell through and improved inventory levels on seasonal merchandise versus the prior year. Regarding new unit growth, we opened 3 new stores in the first quarter, including our 2nd store in California. We've already opened 2 additional stores in the second quarter, bringing our total store count to 658 across 45 States. In fiscal 2019, we're prioritizing a focus on the guest and employee experience to improve traffic and sales. We've aligned the organization on action steps based around our learnings. We've increased visibility around the guest experience and the driving factors and our operations leadership has developed and begun implementing targeted action plans to drive improvement. Looking ahead, as we and the growth of our off premise business. I'm excited about our current holiday promotion which features the country fried turkey topped with Pan Gravey served with green bean casserole and Cranberry relish. Similar to the first quarter, we're leveraging a guest favorite menu offering and extending it in new ways. This menu promotion was supported by National TV Media The TV spot included new creative and built on the food focus of our ad in the first quarter, while also incorporating elements of our hospitality and brand inventory. We continue to make progress on our signature fried chicken initiative, We're currently in nearly 2 hundred stores and are on schedule to complete the rollout by the summer. We remain encouraged by our early results. The second quarter is a key period for our off premise due to the heat and serve holiday occasions and this year we made several enhanced to support our stores, grow this business and improve the guest experience. We are pleased with the Thanksgiving Heat and Serve performance and work excited about the Christmas occasion. We'll continue to leverage our catering sales managers and our expanded catering delivery and in the second quarter, we'll be expanding our 3rd party delivery. Looking forward to retail, we've been encouraged by the initial performance of this year's Christmas assortments. We're well positioned for the holiday season and we're focusing our merchandising highlight affordability with strong price points assortment, which provides outstanding value with all price points under $20 continues to resonate with our guests and highlights our whimsical approach to this assortment through items such as our top performing oversized plus hedgehog and llama. By enhancing in store assortments with unique decor and gifts for all ages, guests are finding ways to meet all their holiday needs at price points that performance in Q1. I remain confident in our plans to build on our brand strengths and execute our business initiatives to drive sales growth. Our short term outlook remains cautious as we continue to believe it will take some time to fully implement our plans and reverse the traffic trends. With that, I'll first quarter of fiscal 2019 and then our outlook for the 2019 fiscal year. In this morning's release, We reported 1st quarter net income of $47,200,000 or $1.96 per diluted share compared to prior year earnings per diluted share of $1.92. For the quarter, we reported total revenue of $733,500,000, an increase of 3.3 percent when compared to prior year revenue of $710,400,000. Our restaurant revenue increased 2.2 percent to $591,000,000 and our retail revenue increased 7.9% to $142,600,000. Our total revenue increase was driven by positive comparable restaurant and retail sales, and the opening of 11 new Cracker Barrel locations and 1 new Holler and Dash locations since the prior year first quarter. Cracker Barrel comparable store restaurant sales in the quarter increased 1.4% as average check increased 3% and traffic decreased 1.6%. The increase in average check reflected menu price increases of approximately 2% and a favorable menu mix impact of and our off premise business. We were pleased with our off premise business, which grew in the high teens compared to the prior year and contributed to our comparable store sales results. 1st quarter comparable store retail sales increased 4.3% with increases coming primarily within apparel and accessories. Moving onto expenses. Total cost of goods sold in the quarter was 30.3 percent of total revenue versus 29.7% in the prior year quarter. Our restaurant cost of goods sold was 25.2 percent of restaurant sales, a 30 basis point increase versus the prior year. This increase was driven primarily by the commodity costs were approximately 4 fruits and vegetables, and pork. Our retail cost of goods sold was 51.3% of retail sales, compared to 50.6 Our retail inventories at quarter end were $136,000,000 compared to $151,000,000 at the prior year quarter end due to strong $2,000,000 or 35.2 percent of revenue compared with $248,100,000 or 34.9 percent of revenue in the prior year quarter. This 30 basis point increase was driven primarily by wage inflation and higher bonus expense. Other store operating expenses in the quarter were $152,500,000, or 20.8 percent of revenue compared with other store operating expenses of $143,800,000 or 20.2 percent of revenue in the prior year quarter. This 60 basis point increase was the result of planned depreciation increases related to higher capital expenditures, asset write off and higher advertising expense to support our fall menu promotion. Store operating income was $100,600,000 in the first quarter or 13.7 percent of revenue, compared with store operating income of $107,700,000 or 15.2 percent of revenue in the prior year quarter. General and administrative expenses in the quarter were $38,900,000 or 5.3 percent of revenue compared to $36,900,000 or 5.2 percent of revenue in the prior year quarter. Operating income was $61,700,000 or 8.4 percent of revenue compared with operating income of $70,800,000 or 10% of revenue in the prior year quarter. Net interest expense for the quarter was $4,300,000 compared to $3,600,000 in the prior year quarter. Compared to an effective tax We ended the fiscal Our total debt was $400,000,000 at quarterend. With respect to our fiscal 2019 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. We continue to expect total revenue and comparable store restaurant sales growth for the full fiscal We now expect comparable store retail sales growth in the range of stores in fiscal 2019. We continue to expect increased food commodity costs on a constant mix basis of approximately 2% for the We have locked in our pricing on approximately 50% of our commodity requirements for fiscal 2019 compared to 40 $110,000,000 to $115,000,000 We presently expect a GAAP effective tax dollars. $170,000,000. Taking these assumptions into account, we in the range of 9 full year earnings per share of between $8.95 And with that, I'll turn the call over to the operator so that we can take your questions. The first question comes from Michael Gallo with C. L. King. Please go ahead. Just a couple of questions. I guess when I look at, obviously, you had really strong average check-in the quarter. I know some of that mix from not lapping the coffee program from last year. But when I look at the margins, they still were under considerable pressure in the quarter, I know the commodity headwind was a little bit bigger, but I guess when I look at your reduction in the operating margin per advantage going forward, it would seem that your retail environment is strengthened somewhat, it would seem your retail inventories are in pretty good shape with team, your commodity basket outlook hasn't really changed. So I just want to sort of square away why the reduction in the annual operating profit guidance on the margin side for the year given didn't look like the first quarter came in any differently than expectation? Thanks. Great. Michael, this is Jill. Thank you so much for your question. And so as a reminder, at the beginning of the year, we did guide to approximately 9.3% OI margin rates And that took into account the fact that we expected increased depreciation and a more normalized incentive compensation versus prior year. Partially offset by our cost savings initiatives of $10,000,000 to $12,000,000. And so that all remains true So then the movement from saying approximately 9.3% in margin range to given a range between 9% and 9.3% is primarily driven by a couple of expectations. 1, even though we didn't update our wage inflation expectation. Now we're expecting to potentially be at the higher end of that range of 3% to 3.5%. We'd also have some incremental bonus payouts compared to our original assumption. And then we're continuing to invest in key areas We have some training that we're going to invest in in order to focus on both guest experience and employee experience and there may be some other areas of investments to support some initiatives. So those are baked into that number. Great. Thank you. Okay. The next question comes from Gregory Francfort with Bank of America. Please go ahead. Hey, this is actually John Michael on for Greg. And as a follow on to, Michael's question, I know last quarter, You mentioned that you're taking a look at the employee experience and you mentioned some slipping in the guest satisfaction metrics. So just wondering what you've done so far on addressing the employee experience and if that's flowed through to any guest satisfaction metrics and what sort of training you have planned going forward to address those Yes, John Michael, let me take that. First of all, I want to emphasize that these are longer term issues that we're addressing. So although we are trying to do certainly some short term things, we've also are approaching For us, the employee experience, which we believe drives the guest experience, will be a little longer to to point to maybe some things that we particularly were able to address in the first quarter or through year to date. On the employee side, I would say that one of the key areas that our field leadership has done is get staffed. I think they've done a better job this year of staffing the restaurants, which set them up to handle the volume that we've seen and to complete the training as we head into the holiday period. So I feel good about the work they've done there, where we've got a number of plans to improve our training, hourly training and how to better incorporate technology. We'll be rolling that out sort of later in the year after we get through the holidays. How we can do an even better job of leveraging our most senior hourly employees are par fours. So those are sort of the areas we're focused on in the employee experience. On the guest experience side, we really started by aligning the organization around, around the issue and trying to give our field leadership in particular some better reporting and some actionable insight about what was happening. As you might recall, one of the things I pointed to was the inconsistency that we were seeing in our numbers. So that you might not have the same great experience as you were expecting each time you visited in every store on every shift. So what we've started by focusing on our host, that was an area that we had seen some deterioration, potentially some of that was the emphasis on our off prem and the pressure that the off premise business puts on the host position. We focus there and we're seeing improvements there. We shifted towards focusing on the attentiveness of our servers. That's certainly an area that's important and really almost particularly important in the holiday season when you're coming to celebrate maybe with your family. Our field leadership teams are understanding the problem better. They are working through the guest journey to understand And we'll just have to continue to keep you updated as we move along. But I am optimistic, with the plans and the progress that I think we're making. Thank you, Sandy. The next question comes from Jake Bartlett with SunTrust Robinson Humphrey. Please go ahead. Thanks for taking the question. This is Kevin Robinson on for Jake. Things seem like they are improving in the quarter. And if you could elaborate a little bit more on the key drivers, And also, when did you launch the data delights and what has been your experience with it? That's my first question. Well, I'll start and then I'll ask Don Hoffman to give you the flavor on daily delights. I think that as I said in the prepared remarks, a lot of the quarter just reflected, the we had a a solid plan on the culinary side. I think by emphasizing, ah, biscuits and the extensions to biscuits, the focus on reminding people about everyday value through the daily delights. I think the marketing plan to support that, worked. I was happy with the performance of the TD spot, for example. Certainly, the retail performance would say that our buyers were successful in choosing a lot of things that people wanted to buy. I think our field teams did a really good job Huting, both in the dining room and as I mentioned, we had better than expected growth in our off premise business. Pleased with where we are PumpkinPie latte, which was incredibly popular, in the quarter. So there were a lot of elements that just came together, I think, to, to deliver it. Don, you want to speak to daily delights and how Sure, Kevin. We actually introduced the daily delights program, last fiscal year in a limited number of markets. I believe we started in eight markets during one televised flight. We then progressed to become 10 and 11 markets over 2 more flights. And then we rode the program nationally, this first quarter of our fiscal year with a nationally advertised television support. As well as adding it as a permanent feature on our core menus, including the introduction of a 4.99 Sunrise breakfast specials. Thank you. My final question was just can you help us get a better sense of the impact from the hurricanes on your results? Sure. This is Jill, Kevin. From the Hurricane Florence and Michael were approximately 20 basis points negative impact and same restaurant sales on the first quarter. That is similar to last year's hurricane within the quarter. Okay. Thank you. Okay. The next question comes from Alton Stump with Longbow Research. Please go ahead. Hi, good morning. Good morning. First off, Chris, on the quarter, just wanted to ask about the competitive environment. I know a couple of major casual dining peers have been, of course, pretty aggressive from a price discounting standpoint. Did they continue over the course of first quarter. And if that does continue heading into holiday season, kind of what your plans are, talked about focusing more messaging horse buying value during the first quarter, but just more color on kind of what your plan is if we do see the category stay? What appears to be overly competitive at the moment? Well, we certainly I guess maybe I haven't noticed any reduction in the, level of discounting in the environment. Our competitors are doing, a very aggressive job of trying to both, in some cases, introduce value in some cases, remind people of value bringing back old favorites and doing it with a lot of TV. So we are continuing to operate in an environment that we think is focused on value and highly competitive. In terms of our own emphasis, we pivot in the second quarter away from using the TV to emphasize the everyday value. Our current spot, as I mentioned, is on the country fried turkey. This quarter, tends to be one where our guests maybe spend a little more to a little more indulgent, in terms of what they choose to eat and what we see the mix in the menu. So, I'll let Don speak to how he's going to though continue in other ways to remind our guests about the value that is on the menu with the daily delights, 3 categories. Sure. As we've talked about in our last call, reinforcing everyday value is a significant part of our messaging strategy, both outside and inside of our restaurants. So, the daily delights program specifically is part of a broader program that provides price certainty to our guests during all dining occasions. So We're going to continue to communicate everyday value through in store marketing support, our outdoor program, email, social, as well as periodic television advertising. And we're also going to be, continuing to support or evaluate optimal price point offerings to stay competitive within the category and deliver fair value to the guests. So as an example, we've mentioned in the past, we're going to be introducing a new fried chicken platform, later this fiscal year. And that fried chicken platform based on the rollout and testing we've been doing now, has very strong value scores and great guest feedback on the bountiful portions in the price offering. Thank you, Sandy and Donna. And then I guess just one quick follow-up. I think I haven't talked about this a whole lot over the last couple of trust conference calls, but are the stores doing, sitting out on the West Coast, of course, you're in the California now into Vegas, Westpac Northwest? Just any update on how many stores do you have there now and kind of what your experience has been so far? Well, with that 2 in California, and I think our Oregon count now is 5 or 6 But I'm certainly pleased with the California stores. When I say that I was one of our California stores may have hit the top 3 or 4 of volume for Thanksgiving weeks. So That certainly says there's a lot of people out there who know the brand and are interested in using it. So and we continue to have plans to open, additional stores out there. Great. Thank you. The next question comes from Bob Derrington with Telsey Advisory. Please go ahead. Yes, thank you. Sandy, what are you learning about your customer as you introduce some of these new products that are priced a little bit higher than your check average, for example. I think your signature fried chicken is priced above your check average overall. And I think your the new country fried turkey, which seems to be very well received, also is priced above your overall check average. Are you finding more, consumer interest in more unique foods that they don't mind paying a little bit more? Any kind of color would help. All right. So first of all, I think one of the strengths of the brand is the breadth of the menu and the ability for you to sort of experience the brand at all different price points. And we want to continue to emphasize that in our things like our daily delights and the fact it's on the core menu. We have introduced the, the Southern Fried Chicken, which is going to be inside the Signature Fried Chicken Platform at a price point that's higher. And as Don mentioned, we are monitoring the value scores and are very happy with how the guests perceive the value to the offering. It is very abundant, and I think they recognize that. In terms of our holiday promotion, we find the 2nd quarter to be a place where consumers are willing to spend a little more our country fried turkey offering is higher. And we are watching to ensure that we don't flip in terms of value scores overall, although with both our crafted coffee and offerings like this, and then some of our biscuit offerings, To your point, what we see is when we offer, something that unique, differentiated, delicious, craveable, our guests are willing to increase their check to get it. That's really helpful. As it relates to your Thanksgiving day business, typically it's a great launch into the holidays for the old country store. What piece of the business around Thanksgiving were you most pleased with? Was it the dine in business, the execution? Was it the catering? Was it the heater meals to go? What part of that was most satisfying? From year over year? Well, 1st of all, we haven't had very much time to analyze everything about Thanksgiving. We'll have a lot more maybe to talk about that. In our next call, I can say, I think our operators did an amazing job of managing the volume that we always have during this time of year through all the various channels. So, our dine in, we don't wanna ever sacrifice the experience of the guests that come to eat with us in the dining room, but our heat and serve business has been growing. It can tend to grow this year. We did do some enhancements to try to make it easier to execute. A lot of stores had the ability to take payment at the back door. We expanded the, the use of Polar King. So the refrigeration to give the stores the ability to manage more volume. We improved our technology surrounding our ordering and a variety of things. So I'm very pleased with the results from that. We also focused this year on catering through to, maybe a business that wanted to do a holiday meal for its employees and catering service managers and our vans got used an awful lot for that kind of business, which I think fits with the Cracker Barrel brand, it fits with the tough season it fits with, the type of meal that people, you know, very comfort, hot party meal for their employees. So I'm pleased with how they were able to execute at that. It really is, a testament to our field teams that they were able to do so much in so many different areas. And we have plans to continue that through the holiday season, actually through the rest of the year, as we grow this off premise business. One last question, if I may. On the signature fried chicken rollout, one thing that it sounds we've heard is that the the signature of our chicken is available through catering, and it seems to be popular from what we've heard. Any kind of color around that, what your perspective? Other than we agree. 1 of the I think there's a reason lots of people like things like that in a bucket and a whole chain has built and then built on the idea that bone in fried chicken is a terrific, protein to for to go. So in addition to the offering and the popularity that it's having with our dining guests, we anticipated also being a very popular offering on the off premise side and are looking at how to design offers and containers Terry, the fried chicken and highlight it. So, it's one of the reasons that we're excited about The next question comes from Stephen Anderson with Maxim Group. Please go ahead. Yes, good morning. Just wanted to ask, it's really a follow-up. Yes, just answered most of my questions, but do I have a follow-up on the comment that you made last quarter about higher gasoline prices hurrying the consumer. Now we're seeing the opposite impact. I just want to ask if you've, to date, noticed anything about the consumer? Maybe there's if they're starting to come back now that many of your markets, gasoline's approaching maybe in the low $2 range. I just wanted to ask a lot of comment about that. Great. Thanks, Steven. As we're looking at the consumer, we saw it from an industry standpoint as well as our trends that the consumer was stronger in our first quarter. And some of that might have been benefited from the effect of gas prices. So that would have an impact on discretionary income. We've talked about the fact that there's been lower unemployment and higher wages, which could make the consumer happy. So These are all things that we think has contributed to that. So as we look out, we're not sure how much of that continue because then there's some minuses that add a little bit of uncertainty from the consumers seat on the bus, potentially increased interest rates could have an impact, and then potentially tariffs that's added a little bit of uncertainty out there with the consumer as well. All right. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Sandy Cochran for any closing remarks. Well, thank you all for joining us today. I'm encouraged by our start to the year and remain confident in our plans to continue to drive performance. We appreciate your The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.