Earnings Call: Q4 2021

Sep 21, 2021

Good day, and welcome to the Cracker Barrel Fiscal 20 21 4th Quarter Earnings Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jessica Hazel, Senior Director, Investor Relations. Please go ahead. Thank you. Good morning, and welcome to Cracker Barrel's 4th Quarter Fiscal 2021 Conference Call and Webcast. This morning, we issued a press release announcing our 4th quarter and full year results. In this press release and on this call, We will refer to non GAAP measures for the Q4 12 months into July 30, 2021. The 4th quarter non GAAP financial measures are adjusted to exclude the non cash Amortization of the asset recognized from the gains on our sale and leaseback transactions Interest expense related to the termination of interest rate swaps and the convertible senior notes offering carried out in the 4th quarter and the related tax impacts. The full fiscal year non GAAP financial measures are adjusted for the items listed above as well as the gain on sale of assets from the sale and leaseback transaction that closed in the Q1, Expenses related to the proxy contest in connection with the company's 2020 Annual Meeting of Shareholders and the related tax impacts of these items. The company believes that excluding these impacts from its financial results provides investors with an enhanced understanding of the company's financial performance. This information is not intended to be considered in isolation or as a substitute for net income or earnings per share information prepared in accordance with GAAP. The last pages of the press release include reconciliations from the non GAAP information to the GAAP financials. On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran Senior Vice President and Interim CFO, Doug Couvillon And Senior Vice President and CMO, Jen Tate. Sandy will begin with a review of the business and Doug will review the financials and outlook. We will then open up the call for questions for Sandy, Doug and Jen. On this call, statements may be made by management of their beliefs and expectations regarding the company's future operating results or expected future events. These are known as forward looking statements, which involve risks and uncertainties, but in many cases are beyond management's control and may cause actual results to differ materially from expectations. We caution our listeners and readers in considering forward looking statements 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 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? Thank you, Jessica, and good morning, everyone. We accomplished a lot in 2021, and I'm proud of how our teams navigated one of the most difficult years in the history of our company and the industry as a whole. We entered the quarter on an upswing as the country cautiously reemerged from the pandemic, And we were poised to see sales and profitability continue to accelerate across our system through the end of our year. We were pleased that profitability continued to trend positively from the 3rd quarter, but disappointed that the pace of sales recovery slowed below our Sales Improvements Through April. However, May sales were softer than we expected, and unfortunately, this softness persisted through most of the Q4. We are pleased, however, that both retail and Maple Street revenues exceeded our expectations that help to offset some of the restaurant declines. We believe there were a number of factors that contributed to our softer expectations. The COVID resurgence, particularly in the areas where our stores are more heavily located That impacted guest visitation patterns and our employees' ability to consistently work, A general consumer preference coming out of the pandemic for more celebratory higher check occasions than we are known for, as well as industry wide staffing challenges to fully satisfy guest demand. I'll comment more about staffing shortly. Despite our softer than expected dine in sales, 4th quarter retail sales once again exceeded our expectations with comparable retail sales 18.2% above fiscal 2019. Our merchants and teams consistently managed our inventory and produced outstanding results, delivering gross margin greater than 51%. Our assortments continue to resonate with guests and we saw particular strength from our toys, apparel and home decor categories during the quarter. Additionally, we've been pleased with the performance of our fall and Halloween seasonal merchandise sales. And while it's still early, our Continue to drive solid retail sales growth during the Q1. Also during the 4th quarter Maple Street again delivered significant sales growth with sequential improvements in average weekly sales for each month. Throughout the fiscal year, Maple Street's business and financial performance further reinforced our confidence in the acquisition and the brand. In the Q4, store AUVs were at an average annualized run rate of over $1,200,000 Additionally, Maple Street has achieved a store level EBITDA margin of approximately 18% for the full fiscal year. We plan to open 15 new Maple Street locations in fiscal 2022 and believe new unit development can accelerate meaningfully in the years to As everyone listening well knows, the industry continues to face uncertainty with respect to COVID, Inflation, which Doug will speak to and staffing challenges. While staffing remains an important area of focus for us, we've made significant progress Since we last spoke, particularly with respect to our back of house staffing, our primary focus has shifted to hiring more servers, to training the new employees we have hired, to retaining existing employees and to building our staffing levels in This past year was one of the most challenging in our more than fifty Your history. For years leading up to the pandemic, Cracker Barrel outperformed the industry by leaning into our core competitive advantages, including our authentic experiential brand, our culture of hospitality and our home style food and retail assortments. We remain focused on these core strengths and we believe they'll continue to drive long term success and outperformance of our brand. As we head into fiscal 2022, we plan to leverage our key competitive brand advantages to drive additional frequency from our core guests and attract new customers through new occasions and revenue sources. And I'll now briefly speak to a few of the initiatives that we expect to help us achieve these goals. We continue to evolve our menu to reinforce our core strength of craveable home style food. We completed the final phase of our dinner menu evolution in the Q4. And in fiscal 2022, our focus will shift to the breakfast menu. Similar to dinner, we found that the structure of our breakfast menu is familiar to our core guests, but may be confusing to new or infrequent Through our 2 phase rollout process, the first phase of which is currently in test, We'll streamline our categories of breakfast offerings to alleviate confusion, enable guest customization with a build your own home style breakfast and better highlight our value proposition, while also driving efficiencies in our back of house process And adding new craveable menu items to help drive additional frequency and check growth. With our home style food and strong everyday value proposition, we remain confident that we can retain at least 60% of the growth in off premise sales that we experienced during the pandemic. In fiscal 2022, we plan to drive off premise customer acquisition through awareness building, advertising and partnerships with 3rd party delivery companies. Additionally, our goal is to further enhance the customer experience through ordering and fulfillment improvements and expanding our guest engagement as part of our evolving digital strategy. Furthermore, we expect to attract new customers and drive Sustained growth in our off premise business through our virtual brand, Chicken and Biscuits, which we rolled out to an additional 100 stores at the end of August. We've been pleased with the early performance of the brand and we now expect to expand Chicken and Biscuits to around 500 stores in total by the end of the Q1. We also plan to launch a second breakfast focused virtual brand called The Pancake Kitchen and launch our digital store was foundational not only to our continued growth in off premise, but also to improving the frequency of visits from the core users of the brand. This work provides us with the technological infrastructure and rich guest data to drive additional guest frequency in fiscal 2022, including increased personalization and a customization in our digital marketing and the introduction of a loyalty program. We recently selected a loyalty program implementation partner and anticipate developing the program over the coming months with a pilot test planned for the second half of the fiscal year. Finally, to support ongoing growth in retail sales versus pre pandemic volumes, Our learnings from the last year have been applied to our product purchasing and visual merchandising plans for fiscal 2022. We found during the pandemic that as we scaled back inventory levels out of necessity, our guests responded positively to our more curated collections in our everyday retail assortments such as food and toys. We plan to lean into these changes by Tightly managing our inventory and evolving our floor space to improve the depth of presentation with fewer units. Confident that these plans will enhance our core competitive advantages and improve our performance in the current fiscal year and beyond. Before handing the call over to Doug, I'd like to speak briefly about capital allocation. Despite the impact of the pandemic, we generated strong cash flow in fiscal 21 with cash from operations at approximately 85% of our pre pandemic levels. Reflecting confidence in the strength of our brand and in our future, the Board approved a dividend of $1.30 per share this quarter, which is a 30% increase over our 3rd quarter dividend and the same amount as the dividend we last declared prior to the onset of the pandemic. Our Board remains committed to a prudent and balanced approach to capital allocation by investing to profitably grow the brand, while also returning capital to our shareholders through dividend and share repurchases. Today's announcement of a quarterly dividend at a pre pandemic level and a modest share repurchase authorization demonstrate that commitment. And with that, I'll hand the call over to Doug. Doug? Thank you, Sandy, and good morning, everyone. For the Q4, we reported total revenue of $784,400,000 Our restaurant revenue increased 54.8 percent and our retail revenue increased 74.3% versus the prior year Q4. Compared to the Q4 of fiscal 2019, comparable store restaurant sales decreased 6.8%, which was mostly offset by our stronger retail and our Maple Street Biscuit Company sales. We saw a return in guest demand during the Q4 and Our average weekly dine in sales increased from approximately $54,000 in April to $59,000 in July. Our off premise sales remain elevated in the Q4 and were more than double our sales from the Q4 of 2019. We retained approximately 75% of the peak off premise growth from pre COVID levels. As expected, We did experience modest declines in sales from our individual to go channel compared to the Q3 as our core guests shifted back to in store dining after having been limited to off premise during the pandemic. Meanwhile, our 3rd party delivery and catering channels As Sandy shared, our lower than anticipated in store restaurant sales We're the result of several factors, including disrupted travel patterns, consumer preference for more celebratory higher check options, The resurgence of the pandemic and staffing headwinds. We felt these staffing challenges most acutely on the weekends, where we occasionally didn't have enough staff to service elevated guest counts, particularly in the breakfast and lunch dayparts. Happily, our sales during the week were stronger and weekday breakfast sales were positive compared to 2019, which was a favorable trend change compared to the pressured weekday breakfast results we experienced throughout the pandemic. Comparable store retail sales were above our expectations in the 4th quarter and increased 18.2% over 2019. Supporting these sales results were improvements in virtually all retail operational metrics versus 2019. Moving to expenses. Our total cost of goods sold in the quarter was 30.1% of total revenue, which was favorable to the prior year, but unfavorable to the fiscal 2019 Q4. 4th quarter restaurant cost of goods sold was pressured by commodity inflation of 5.1% running ahead of 4th quarter pricing of 3.1%. Retail cost of goods sold was 48.8%, which is approximately flat as a percentage of sales compared to 2019. 4th quarter labor and related expenses at 34.2 percent of revenue were also favorable to both prior year in fiscal 2019. Our labor expenses for the quarter compared to 2019 were pressured By wage inflation on a constant mix basis of 6.8% and increased overtime usage. These pressures were more than offset by higher productivity, decreases in incentive and other compensation And the $7,500,000 in labor related cost savings associated with the actions we took in the Q3 of fiscal 2020. Adjusted other operating expenses was 22.6 percent of revenue, which was favorable to the prior year, but unfavorable compared to 2019. Primary drivers of this unfavorability continue to be higher supplies expense And 3rd party fees associated with our elevated off premise sales, along with incremental rent expense as a result of the sale leaseback we completed in the Q1 of fiscal 2021. Next, moving beyond store level margins, Our general and administrative expenses in the 4th quarter were $36,900,000 which is favorable to the Q4 of 2019 $3,600,000 primarily as a result of the cost savings actions we took in the Q3 of fiscal 2020. Net interest expense for the quarter was $25,000,000 which includes $18,900,000 in non recurring expenses related to the termination of our interest rate swaps and other charges associated with our convertible debt offering during the Q4. On an adjusted basis, net interest expense was $6,100,000 compared to 3,900,000 in the Q4 of 2019. Our effective tax rate for the Q4 was 3.6%, primarily as the result of the termination of our interest rate swaps. As a reminder, the change in our quarterly effective tax rates during was a result of the gain in the sale leaseback in the Q1 and the impact of the loss carrybacks from the prior year. Despite the variability in our tax rates from quarter to quarter driven by these events, our overall tax rate for the entire year Came in at the expected level of approximately 18%. These 4th quarter results Culminated in GAAP earnings per diluted share of $1.53 per share and adjusted earnings per diluted share of $2.25 when adjusting for the non cash amortization of the asset recognized from the gain on the sale leaseback transactions and the non recurring interest expense previously noted. In the 4th quarter, EBITDA was $93,500,000 A 12.9% increase over our Q3 EBITDA results. Lastly, during the quarter, we raised approximately $300,000,000 through the offering of convertible senior notes with a 0.625% coupon rate, which we primarily use to pay down our revolving credit facility. As a result of this move to further optimize our capital structure, We expect to realize annual interest rate savings of nearly $10,000,000 compared to our pre COVID capital structure. Due to our strong balance sheet and improving cash flows, we are well positioned to continue to invest in the growth of our business while returning capital to shareholders. The dividend increase to $1.30 per share brings our quarterly dividend back up to pre COVID levels And our Board approved a modest $100,000,000 share repurchase authorization to allow us another avenue to return capital to shareholders and optimize our capital allocations over the course of the year. Turning to our expectations for the next fiscal year. With respect to our fiscal 2022 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. Given the continued uncertainty around the COVID-nineteen pandemic and the current operating and staffing environment, We'll not be providing our customary annual guidance at this time, but we do expect the following full year results. Commodity and wage inflation in the mid to high single digits, capital expenditures of approximately $120,000,000 An effective tax rate of approximately 18%, the opening of 3 new Cracker Barrel locations in 15 Maple Street Biscuit locations. For the Q1, we believe that our sales continue to be negatively impacted Our rising COVID cases, particularly in our core markets, which has had an impact on both guest visitation patterns and the availability of our employees. Despite this headwind and despite the impact of several episodes of severe weather, Our sales have improved from the Q4. Comparable store restaurant sales are currently approximately flat Versus the Q1, the fiscal 2019 and comparable retail sales are up in the mid teens. We currently expect these sales levels to continue through the end of the quarter. And for the 1st full quarter, we expect our adjusted operating margin to be 5.5% to 6% of revenue. And with that, I will turn the call over to the operator for questions. We will now begin the question and answer session. Our first question will come from Jake Bartlett with Truist Securities. Please go ahead. Great. Thanks for taking the questions. My first, Doug, just on just what you mentioned about the quarter to date same store Sales at the restaurant and in retail, but restaurant in particular, it looks like a pretty significant improvement from what you're running In the Q4, you've also described the COVID cases as being a pressure. So maybe if you could help us Understand the cadence of Sandstrom sales throughout the quarter and then just confirm whether you're seeing improved seeing some improved trends More recently versus as you exited the Q4, that'd be helpful. Sure. Thanks. Glad the help there, Jake. In terms of the cadence during the quarter, we saw a slight improvement as we moved over the course of the summer And coming out of the quarter into this year, we have seen the trend turn positive not positive, but improve from a Same store sales perspective and we expect these trends to continue on through the end of the quarter. Great. And do you have any sense of what's driving that improvement? Perhaps you're moving past this summer driving season, which had been A drag for you, are you seeing any incremental improvement in those markets where the COVID cases have been You've discerned an impact. What do you think is driving the improvement in quarter to date? Jake, this is Sandy. I'll take I think the biggest single thing is we've made a lot of progress on getting staffed. And in those restaurants where we've been able to So, get staffed and have had an opportunity to train new staff. I think We're seeing that we are better able to take care of the guest demand when it comes. I do think that we're seeing in some communities Some normalization of routines as we've now gone back to the back to school session and so on. So, we're pleased That we've seen the improvement and are hopeful that we will see continued recovery as we head into the 2nd quarter. Great. And then you've described the cost pressures that you're expecting in inflation. Could you go into some of the potential offsets? For instance, what kind of pricing you expect to take in 2022? And also touch on Any cost savings efforts? I think you've run through your last round of costs cutting and cost savings. Is there any current program going on? Do you expect X $1,000,000 of savings in 2022, for instance? Why don't I start? I'll ask maybe Jen to jump in on pricing and Doug Ken, add some more color. First of all, we always have a program. We've had a very consistent focus over the years On improving profitability and productivity through sort of a variety of savings initiatives, we have not announced Our most current objectives specifically on this, but in addition To what we believe is some pricing power, I think there's a number of tech enabled initiatives that we've been talking about and We Recently installed POS in all but about 160 stores in the chain, those that are not installed, it's Because we weren't able to get the hardware with the shortages going on. And as you know, from listening over the years, Jake, that POS 2 days ago in about half of our chain as well as in the second half of the year, we hope to begin piloting a labor initiative, all of which will be Supported with this new POS system, Pay and App has been another initiative, which we've been Excited about the impact that that could have on the labor demands in the store as well as the work on the digital store and how that helps To streamline the experience both for our customers and for our employees, there's a lot of Cost of goods sold work being done on both the restaurant side and the retail side to offset the commodity pressures and the Inflationary pressures on the retail side. So I'm really pleased that we've got a lot of work going on to offset these and to improve business model. In terms of specifically pricing, why don't I I'll let Jen speak to how we're looking at that subject now. Great. Historically, our approach to pricing has been pretty conservative as we've steadfastly guarded our strong competitive advantage as an everyday value leader. But right now, I think both the consumer data and trends and also what's happening in category indicate to us that we have some considerable pricing power both in recent months, but also we think that's 1, our pricing actions resulted in pricing of 3.1% in Q4. And this August, based on our continuing The inflationary pressures that Sandy and Doug spoke about and also industry dynamics, we took a more aggressive increase we typically do in Q1. So that results in Q1 carried pricing of approximately 5.5%, which It's more than we normally take, but we think is very appropriate given the current environment. And we think that we're going to be watching how that flows through and we think we may have an opportunity to take additional pricing in January. Great. So 5.5 percent pricing in the Q1 of 'twenty two, just to make just to be clear? Yes. Great. Thank you very much. I appreciate it. Yes, that's the carried pricing. So that's a combination This carryover from Q4 and what we took in Q1, which was approximately 3%. Perfect. Thanks. Our next question will come from Brett Levi with MKM Partners. Please go ahead. Great. Thank you. Appreciate taking the call. Just going back to labor, you talked about your Productivity and the challenges you're having in terms of finding and retaining people, where are you right now in terms of staffing levels? How many stores do you think are what you would call pressured on that front? Where are you in terms of turnover? And then just on the supply chain on the COGS side, how are you looking at the ability to contract? What are you seeing on the supply chain side? Where are you seeing the greatest pressure points within both retail and restaurants? All right. Brett, I'll start on the staffing and then I'll let Doug take the commodities. So first of all, our operators have made Very impressive progress over the last couple of months, in particular, addressing the Staffing challenges broadly and in particular those locations that we had identified as the most Critical. And as a result of sort of a lot of just really sort of grassroots efforts, We've reduced the number of critical or concerning stores to half of what it was as we entered into the 4th quarter. What we're really focused on now is, on boarding all the new employees that we have and getting them trained, So that we get the kind of productivity that we both need and are looking for and can deliver the guest experience we need To be sure we're focused on retention, to your point, our turnover, it is elevated than what it's been Historically, at really both the hourly and the manager level, but it is still, we believe, below what the industry is. And I think we will be able to get that under control as we focus on that in the first and second quarter this year. And then, finally, just ensuring that we are staffed up to the volume that we are expecting and hoping to get as we head into the Q2. So in particular, we feel really good about the back of the house In terms of grill cooks and positions like that, what we are very focused is on ensuring we have the servers that we need. Okay. On the supply chain front, I'll start with Letting you know that similar to the restaurant industry, a lot of the suppliers we do business with are having labor challenges as well, which largely affects processing costs, which in turn causes is causing some problems in term of several of our proteins. So we're seeing cost pressures there and disruptions from time to time related to some of our proteins. Nothing major that we're not able to deal with, but It's causing there to be just a lot more interaction between our teams and our suppliers. In terms of the areas where we're seeing the pressure, We one of the largest areas that we're experiencing cost inflation is in the area of fry oil, Particularly the soybean markets are trading at rates that we haven't seen in many, many years as well as Within our pork category, bacon has been running quite high as well. On the retail side, We have similar pressures there and those are more in terms of some of the shipping costs and container costs. As many of you have probably seen in a lot of articles, you see ocean freight containers are up at times from 200% to 300 over kind of contracted rates and our teams are doing a really good job of managing our costs. We've been able to secure the majority of our containers so far at our contracted rates, which were slightly elevated over the prior year, But we're having to turn to the spot market to move some products and that is putting a little bit of pressure on us. We believe that we can largely offset that Through some pricing actions and through some of the success we've had with seeing rapid move Through of our products and our new themes that are moving really well. And just on the sales front, Would you care to go into any more detail in terms of where you're seeing the greatest successes and challenges on a regional basis? I know you talked about Impacted by COVID and traffic and transportation, visitations and things of that and staffing levels. Could you be a little bit more specific in terms of regions that you've seen strengths or weaknesses in the Q4 and the Q1? Thank you. I don't know that it's a regional story. We've got a number of our regions That are making really great progress in the recovery. There's probably a few communities in particular as they Deal with, maybe COVID resurgence or a store that maybe is particularly Tied to travel, maybe international travel or a destination that might be Disproportionally impacted. I said one of the things that you heard about, we're pleased with the performance we've seen at the breakfast daypart And in the weekday breakfast in particular, which says we've got a lot of our Our guests want to get back to normal. And so it really is a state where many of our customers are just anxious to recover and get back With the delta variant and we're just going to have to deal with that as it moves through in the next few months. Thank you. Our next question will come from Brian Mullen with Deutsche Bank. Please go ahead. Thank you. Sandy, you mentioned the summer travel season that did not follow normal patterns. I'm just wondering if you could elaborate on what you meant by that Specifically, I think some broad metrics like miles driven or highway car counts, they're pretty healthy this summer. So just any colors or example Color or examples would be great how this season was different and how that impacted the business. And did that show up in the performance of the interstate stores versus the off interstate It would be helpful to understand too. Yes. The summer travel season, It was strong. We just expected it to be even stronger, given that we assume that the consumers were really looking forward to getting out And making their summer vacations and doing the trips. So although we did see an increase in the volumes versus Q3, 3, we had hoped to see more of it. As we look, at pockets, one of the assumptions we're making is Particularly those guests that are more vulnerable and they're a little bit over indexed with elderly guests and families with small children Might have been more reluctant to travel than we had expected, But road travel, our statistics show that road travel despite its improvement versus Q3 was still down I do hear from some of the stores that were depending on a lot of tourism And especially international travel that they did not feel that the volumes recovered to the degrees that they were hoping and expecting. Okay. Thank you. And then just as a follow-up, just any update you can provide on the beer and wine initiatives? Is that something you still expect to have rolled out completely by the end of the Q1? And is the 2% mix of dine in sales, is that still the right way That you're or is that still the way that you were thinking about the potential here for that initiative? I'd like to ask Jen to give you an update, but Punch line is we're very excited about it and do continue to roll it out. Yes, I mean we've got we have 501 Stores live as of today and by the end of the Q1, we expect to have 527. And our goal is still to get to the vast majority of the system by the end of Q3. So around 600 by the end of Q3. And we do think that 2% mix is absolutely attainable, in particular because Most of the 75 stores that we've added in this last period have been higher mix than the original stores. So as we are adding Stores that are expanding out west and into the northeast, they all tend to have a higher mix and so we're pleased with those results And we're starting to find that with some of the LTOs and seasonal items that's also having a positive impact on mix. So we feel very Good about the trends, in terms of your annoying mix. 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. Great. Thank you for joining us today. Cracker Barrel continues to be one of the strongest and most differentiated brands in the industry. Looking forward to the new fiscal year, I remain confident in our strategy and initiatives, and I believe we're well positioned to drive strong performance when the industry normalizes. We appreciate your support and look forward to speaking with you again soon. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.