Cracker Barrel Old Country Store, Inc.

Good morning, and welcome to the Cracker Barrel Fiscal 2022 Fourth Quarter Earnings Call. All participants will be in a listen-only mode. Should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Jessica Hazel. Please go ahead.

Thank you. Good morning and welcome to Cracker Barrel's fourth quarter fiscal 2022 conference call and webcast. This morning, we issued a press release announcing our fourth quarter and full year results. In this press release and on this call, we will refer to non-GAAP financial measures for the fourth quarter and fiscal year ended July 29, 2022. The 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 and the related tax impacts. The company believes that excluding these items 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 this press release include reconciliations from the non-GAAP information to the GAAP financials. On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran, Senior Vice President and CFO, Craig Pommels, and Senior Vice President and CMO, Jen Tate. Sandy and Craig will provide a review of the business, financials, and outlook. We will then open up the call for questions for Sandy, Craig, and Jen. On this call, statements may be made by management of their beliefs and expectations regarding the company's future operating results or expected future events. These are known as forward-looking statements, which involve risks and uncertainties that in many cases are beyond management's control and may cause actual results to differ materially from expectations. We caution our listeners and readers in considering forward-looking statements and information. Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties found at the end of the press release and are described in detail in our reports that we file 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?

Thank you, Jessica, and good morning, everyone. This morning we announced earnings per share that were above our expectations with an operating income margin of 4.4% that came in within our anticipated range of 4.0 to 4.5% of total revenue despite softer sales than we had predicted and inflation that was at the top end of our range for the quarter. Our teams worked extremely hard and did a good job navigating the headwinds from the third quarter that persisted through the end of our fiscal year. Across the restaurant industry right now, management teams are confronting the challenge of navigating an environment of softer consumer demand and higher costs, coupled with the uncertainty about when either of these dynamics will abate. It puts even more pressure than normal on pricing and menu decisions, as we balance a desire for cost recovery against the potential impact on value perception and guest visitation, which if not properly managed, can lead to more challenging long-term behavioral shifts. While we always manage our business at Cracker Barrel to perform well in whatever environment we find ourselves, we do so while focusing on the longer-term success of the brand. To the extent that we've taken pricing, we've done so deliberately and selectively and preserved the value sections of our menu and maintained attractive entry points. We've also focused on the longer-term initiatives to improve our business model that we outlined back in June and about which I'll share some additional details in a moment. We remain optimistic that this steady perspective is the right one, particularly in this turbulent environment. Looking back at the fourth quarter, the challenging environment I discussed in June continued to impact us through the end of our fiscal year, including a slower than expected summer travel season, fewer visits from guests 65 and older, and high gas prices and other inflationary pressures that weighed most heavily on lower income guests. Due to our unique business model, we felt some of these pressures more acutely than others, particularly in June and July when gas prices and broader inflation were especially elevated and many households abstained from or curtailed summer holiday-related driving. From a cost perspective, food inflation came in at the very high end of what we expected. As we believe this inflation will ease over the back half of fiscal 23, we decided to pass on much but not all of the cost impact in our pricing. We believe this was the right decision to maintain our strong value proposition with our guests, especially in the face of a potential recession. Although we experienced lower visitation from guests over 65 during the fourth quarter, and will continue our efforts to improve in this area, we were pleased that we gained traction with and saw increased visitation from younger guests, particularly millennials between the ages of 25 and 34, and guests between 44 and 55. We also experienced increased visitation from lower income guests generally. All of these trends have continued into our first quarter of fiscal 23, indicating that our efforts to appeal to younger guests and our investments in value are bearing fruit. We saw other positives during the fourth quarter as well. Our off-premise sales remain solid and our retail teams continue their exceptional work in sourcing and supplying our stores with merchandise that resonated with our guests allowed us to top $700 million in annual retail sales for the first time in our history, all while maintaining a disciplined approach to inventory. Finally, we remain bullish on Maple Street, and despite the unexpected construction delays and supply chain issues that kept us from opening the number of stores we had hoped to open in fiscal 22, we remain very confident in the growth potential of this brand. As always, our investment decisions were focused on the longer-term success of Cracker Barrel, and the initiatives we are pursuing in the current environment reflect this. Investing in our operations to ensure a consistent, strong guest experience, investing in menu innovation to enhance check and to appeal to a broader guest base, investing in technology and making sure we maintain our critical competitive advantages so that we are well positioned in an industry when the inflationary pressures eventually ease. That we were able to make these investments while still returning near record levels of capital to our shareholders is a testament to our prudent and thoughtful approach to capital allocation. Through a compelling quarterly dividend and share repurchase program, we were able to return over $246 million to our shareholders in fiscal 22, our second highest level in the last 15 years. Craig will now go into some greater detail about the quarter and provide our expectations for the upcoming year. And once Craig is finished, I'll provide some additional details about our initiatives and our optimism about what's ahead. Craig?

Thank you, Sandy, and good morning, everyone. For the fourth quarter, we reported total revenue of $830.4 million. Restaurant revenue increased 6.5% to $661.9 million, and retail revenue increased 3.3% to $168.5 million versus the prior year fourth quarter. Comparable store total sales, including both restaurant and retail, grew by 5.5%. Comparable store restaurant sales grew by 6.1% over the prior year, driven primarily by 7% pricing. The fourth quarter's 7% pricing consisted of 3% carry forward from a first quarter price increase and roughly 4% carry forward pricing from actions in the third quarter. Off-premise sales were roughly 18% of restaurant sales, which is in line with our long-term retention expectation of the growth in off-premise sales we experienced during the pandemic. Comparable store retail sales increased 3% compared to the fourth quarter of the prior year. Home decor, toys, and men's apparel offerings delivered the largest increases by category. Like Sandy, I want to thank our team for all their hard work this year. Moving on to our fourth quarter expenses. Total cost of goods sold in the quarter was 32.9% of total revenue versus 30.1% in the prior year quarter. Restaurant cost of goods sold in the fourth quarter was 28.7% of restaurant sales versus 25.1% in the prior year quarter. This 360 basis point increase was primarily driven by commodity inflation of 18%, as well as elevated freight costs, partially offset by pricing. While we experienced inflation across our entire market basket, the primary drivers of the increases were poultry at 35% inflation, oils at 76% inflation, and grains at 27% inflation. Having faced a year with such historically high commodity inflation impacting the fiscal 22 bottom line, it is worth spending a minute on the broader inflation and pricing dynamic. While we do not believe that labor costs will ease in the future substantially, we do believe that food commodity costs will ease. As such, we made the decision, especially in the face of a potential recession, to take moderately less price than we might have to offset this inflation. As Sandy mentioned, we seek a balanced and consistent value proposition for our guests and believe this is important to maintaining long-term brand affinity. Fourth quarter retail cost of goods sold was 49.4 percent of retail sales versus 48.8 percent in the prior year quarter. This 60 basis point increase was primarily driven by modestly increased promotional activity and higher freight costs, but represents terrific performance by our retail team at a time when many retailers have not performed as well. Fourth quarter labor and related expenses were 35.5% of revenue versus 34.2% in the prior year quarter, an increase of 130 basis points. This was primarily driven by the unfavorable impact of wage inflation, net of pricing, and lower short-term productivity levels resulting from an increase in manager and hourly staffing versus the prior year when we were understaffed. Finally, adjusted other operating expenses were 23.3% of revenue versus 22.6% in the prior year quarter. This 70 basis point increase was primarily driven by increased maintenance expense as we spent more on repairs for property and equipment due to shortages of replacement items, as well as double-digit supply and utilities inflation. Moving beyond store-level margins, our general and administrative expenses in the fourth quarter were 3.9% of revenue versus 4.7% in the prior year quarter. This 80 basis point decrease was primarily due to lower incentive compensation. These results culminated in GAAP operating income of $33.0 million, adjusted for the non-cash amortization of the asset recognized from the gains on the sale of the sale and leaseback transactions. Adjusted operating income for the quarter was $36.2 million, or 4.4% of revenues. Net interest expense for the quarter was $2.6 million compared to adjusted net interest expense of $6.1 million in the prior year quarter. This $3.5 million decrease is a result of lower debt levels as well as a lower weighted average interest rate due to the convertible debt offering we completed in the fourth quarter of fiscal 2021. Our effective tax rate for the fourth quarter was negative 9.9%. Compared to our expectation, the lower tax expense was primarily driven by the earlier than expected settlement of a state income tax matter. Fourth quarter gap earnings per diluted share were $1.47, and adjusted earnings per diluted share were $1.57. In the fourth quarter, EBITDA was $62.4 million. Turning to capital allocation and our balance sheet, we remain committed to a balanced approach to capital allocation. Our first priority remains investing in the growth of Cracker Barrel and Maple Street. Beyond that, we plan to return capital to our shareholders while maintaining appropriate flexibility and a conservative balance sheet. In the fourth quarter, we invested $38.3 million in capital expenditures bringing our full year total to $97.1 million for fiscal 2022. Additionally, we returned $88.1 million to shareholders in the fourth quarter through a combination of dividends and share repurchases, bringing our year-to-date total to more than $246 million. Lastly, we ended the quarter with $423.4 million in total debt, representing a 1.4 times net debt to EBITDA ratio. In the near term and midterm, we expect to maintain a net debt to EBITDA ratio in the 1.3 times to 1.7 times range. With respect to our fiscal 2023 outlook, I'd like to provide some additional color to the guidance provided in this morning's release. Everyone should be mindful of the risks and uncertainties associated with this outlook, as described in today's earnings release. and in our reports filed with the SEC. We expect total revenue growth over the prior fiscal year to be in the range of 7% to 8%. In addition to anticipated favorable comparable store total sales growth, this assumes the opening of three to four new Cracker Barrel locations and the opening of 15 to 20 new Maple Street locations. Comparable store sales growth is expected to be primarily driven by approximately 8% total annual pricing. We remain prudent and thoughtful in our approach to pricing by leveraging a test and learn methodology to carefully monitor the guest reaction versus a control group and believe this approach will continue to protect our strong value proposition. We anticipate commodity inflation of approximately 8% for the fiscal year. We anticipate mid-teens commodity inflation will continue in Q1, and by the end of Q4, we anticipate slight deflation. The largest drivers of commodity inflation are expected to be poultry, produce, and dairy, with each category representing approximately 13%, 13%, and 9% of our market basket, respectively. These three categories alone are expected to account for approximately 60% of our overall commodity inflation impact. We expect approximately 5% wage inflation for the fiscal year, with Q1 being the highest inflation quarter until we begin to lap the jump in prior year wage rates, which will result in a lower inflation rate for the second through fourth quarters. We expect to deliver between $20 million and $25 million in cost savings during the fiscal year, ending the year with an annualized run rate savings of approximately $30 million from the work we've done over the last several quarters to systematically identify business opportunities in the company and develop initiatives to support cost improvements. Some initiatives, like our new food cost management system, were introduced company-wide last year but can be further leveraged for more robust savings now that stores are more familiar with the new system. Other initiatives, like the new labor system, are still in test and will likely provide meaningful savings in the later half of the fiscal year. These larger initiatives, which we've spoken to, combined with other actions, including improving hourly productivity, reducing food, supplies, and equipment costs through specification and sourcing changes, and returning toward pre-COVID employee retention levels, which would deliver training and recruitment savings, are all expected to have a favorable impact throughout the P&L. We anticipate restaurant COGS and labor and related to each deliver just under 40% of the annualized savings, with much of the remaining 20% being realized in other operating expenses. We anticipate that capital expenditures for the year will be approximately $125 million, including new store investments of roughly $30 million. We expect to grow operating income by between 8% and 10% over the prior fiscal year. In addition to considering the revenue growth, commodity and wage inflation, and cost savings guidance I just spoke to, This operating income growth expectation contemplates the following assumptions. Continued inflationary pressures in other areas of the P&L, most notably supplies and utilities. Moderation in retail margin compared to the prior year near historic high. And incentive compensation normalization. We anticipate fiscal 2023 first quarter operating income to be meaningfully below the prior year first quarter and below the quarter we just ended. We believe our operating income performance versus the prior year will improve with each quarter as commodity inflation moderates and our cost savings initiatives gain traction. And as a result, we anticipate 2023 fourth quarter operating income to be well above the fourth quarter we just reported. We also believe there is potential upside in our operating income expectation if there were to be further moderation in the commodity environment and potential downside in our operating income expectation if there were a worsening of the consumer environment or if inflation across the P&L fails to moderate or even increases further. I'll turn the call back over to Sandy so she may share additional details around our business plans for fiscal 2023.

Thanks, Craig. As Craig just outlined for you, we expect to see compressed margins in the first half of the year, but believe they will expand significantly in the back half as commodity inflation subsides in the manner we expect. A bigger question is whether we eventually will get back towards pre-pandemic levels of profitability. The answer is yes, over time. Of course, we are taking and will continue to take shorter term actions to drive traffic, reduce costs, and selectively raise pricing in an appropriate manner to help offset high levels of commodity and wage inflation. but our focus is on the sustainable cost savings that Craig referenced and the longer term top line initiatives that we're speaking to today. I've already mentioned our focus and investment in value where we want to maintain our leadership position versus our competitors. I'm pleased to report that this investment is paying off and that our value scores remain excellent even in the face of the elevated price increases we've taken so far. According to TECHNOMIC data, our relative gap versus competitors increased on nearly every value metric compared to the prior year for the most recently published period, including prices relative to other similar concepts and affordability. We will continue to approach pricing in a way that will keep our value perception scores high. While we try to restore visitations from our guests over age 65 to pre-pandemic levels, we will continue to seek increased visitations from younger guests through targeted marketing, culinary innovation and investments in technology. Although it will take time to move from an over-indexed position of visitation by guests who are over 65 to one that is more balanced, We believe the things that we're doing to appeal to younger guests and families are working. Our breakfast menu innovation has been well received. Our new culinary offerings are resonating and beer and wine is progressing well. We will continue these efforts as well as making investments in technology to meet the expectations of our younger guests and further enhance their experience. Now let's talk about some of the other areas of focus for fiscal 23. This year we will invest further in operational excellence, hospitality, and our employee experience in our stores, believing them to be exceptionally important to our brand and our long-term success. Our staffing levels remain strong, and we will continue our efforts in training and development across the system. Culinary innovation continues to be a key focus in our fiscal 23 plans across our core menu and to support the continued growth of our catering business. We've been pleased with the successful introduction of many new menu items during our dinner menu refresh and phase one of our breakfast menu launch. Culinary pipeline is robust with some offerings designed to fill existing menu gaps and others to reduce back of house complexity and increase consistency of execution during peak weekend periods. We will be pulling through many of these new offerings to our catering business, which we believe we can grow by 25% in fiscal 23 to top $100 million. We see real growth opportunity throughout this category, both business to business and business to consumer, as more companies and families look to Cracker Barrel to provide a unique and highly desirable offering to their events. Finally, we'll be highly focused on developing and rolling out our loyalty program. which as Jen Tate explained last quarter, should be particularly impactful for our brand with our strong guest engagement, travel guests, and restaurant and retail offerings. We're taking the time to get it right, as we believe the program needs to be compelling and well-developed before we launch it. The back-end integration and other requirements are critical, and we anticipate an initial launch by the end of the year. With respect to Maple Street, our new president, John McGuire, has hit the ground running and is building an appropriate team to support growth. As I said before, although we didn't open as many units in fiscal 22 as we had expected due to extraneous factors and construction delays, we remain excited about the Maple Street concept and the new units we've opened are performing in line with expectations. We expect to open 15 to 20 units in fiscal 23 before accelerating further in fiscal 24 and 25. And with that, I'll open it up for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. And our first question here will come from Brian Mullen with Deutsche Bank. Please go ahead.

Hey, thank you. The release mentioned better traffic and sales trends in the final few weeks of the quarter, which was encouraging to hear. I guess, could you just speak to what you think was behind this improvement? You know, the decline in gas prices is a logical factor, one might guess, but I'm wondering if there's anything going on with that guest behavior with the older demographic. You know, from the prepared remarks, it sounds like maybe that guest is not all the way back to where it was prior to COVID, but I'm just curious if there's been any improvement of late at all, and if you could just describe the mindset of the situation that guest is in right now, that would be really helpful to hear.

Hey, Brian, thanks. This is Craig. Good morning. I'll start us off, and I'll turn it over to Jen. You know, I guess there's a two-parter there. What's driving the acceleration or the improvement in the second half, and then what does it mean in the second part of the quarter, and what does it mean for the first quarter? As it relates to the first quarter, we're not going to disclose much there other than to say that as you think about the comps, as you think about how the comps and how they impact us in particular in A year ago, August, for example, was impacted by Delta. So that has an impact in how we're going to comp versus that. On a month-to-month basis, there are a lot of other factors to consider there. We're lapping on a lot of extraneous activities, things like such as Delta, as I mentioned, things such as the invasion of Ukraine and gas prices and so on. So I think overall, you know, we're pleased with the progress, but it's still lumpy. So if that alternate over to Jen can add some more context.

Yeah, I think as regards to your question about the 65-plus consumer, first of all, we don't have that data sort of by week, but I can speak to how that group performed for us for the quarter as a whole. We still see them holding back visits. I think that's true for the category as a whole, and it's certainly true for our brand, where they represent a really important group. They have a disproportionately large number of boomers and matures, and we are still seeing their visits lower than a year ago. On the flip side, as Sandy said in her prepared remarks, we were pleased to see higher than a year ago visits from our younger millennial guests also the Gen Xers, but in particular the 25- to 34-year-olds, the millennial guests, although those increased frequency is not quite enough to offset the negative headwinds of the fact that our 65-plus guests have not returned to their pre-COVID visit levels.

Bill Walsh Okay. Thank you for that. And then just a follow-up question on the retail business. As you put together the 2023 guidance, I'm wondering if you could just speak to how you thought about retail gross margins and what some of the important factors to consider are, including your current level of inventory. Craig, I think you mentioned an expectation of moderation in the prepared remarks, but if you could just speak to the magnitude or elaborate on that, that would be helpful.

I'll start it off and elaborate. So, first of all, on the On the margins, I was really pleased with what the retail team was able to deliver in the fourth quarter in the face of a very challenged consumer and a very promotional retail environment. I think that speaks to the quality of the product and the value that we have out there. With that being said, though, what we're anticipating as we go into 23 is some return to a more normal kind of markdown cadence which we will manage through the year, as we always do as we exit our theme businesses and just work the product through. What we're seeing is some abatement on the freight side, so our container costs appear to be coming down, and that's helping offset a little bit of that markdown risk that we see elevating in this year. In terms of our inventory level, which was higher at the end of 22 than we saw in the prior year, the majority of that, or the biggest single piece of that, was we accelerated our holiday merchandise, the shipments, so that we would be sure we received them in time. And that ended up in those hitting the fourth quarter instead of the first quarter, or even some of them would have hit last year in the second quarter.

Thank you.

Our next question will come from Alton Stumpf with Loop Capital. Please go ahead.

Great. Thank you. Thanks for taking my question. And, you know, sorry if I missed this, but just on the commodity front for full year 23, did you say how much is covered for the year or, like, you know, any color that you can give us as to, you know, what the spot exposure variability could be, you know, over the course of fiscal 23?

Hi, Alton. I'll start off with that one. So we are about 30% covered for fiscal 23 at this point. And the way that's working is if you think about calendar 22, so through December, our coverage ratio is very high. And for calendar 23, it's very, very low. So we're working through right now exactly how much we're going to lock and when, because we're factoring in a couple of things. One is here's what's happening in the spot market, but to lock for 23, there is a premium for that. So those are conversations that we're having right now. So right now, 30% locked and heavily weighted to calendar 22.

Got it. Thanks for that, Collin. And then just as, you know, a quick follow-up, I'll hop back in the queue, but I think I heard you mention, Craig, that you expect your menu pricing to be up 8% this year. Obviously, that would imply additional, you know, increases being taken than what you, you know, are going to have flowed through from what you've taken over the last 12 months. But, you know, just the timing of, you know, when you expect that pricing to go through over the course of the full year 23.

Yeah, I don't think there is. And so, as we're, just to make sure I'm super clear on this point, so the 8% is total, right? So that includes anything new and anything that we're comping on. And there is some movement by quarter, but nothing dramatic. So I won't really drill down much further than there.

Okay, Guy, thank you so much. Our next question will come from Jeff Farmer with Gordon Haskett. Please go ahead.

Great, thanks. A handful of guidance follow-ups. You guys provided the revenue growth and operating income growth guidance for 23, but what does that suggest or mean for what you're looking for for an operating income margin for the year?

Jeff, I'll take that one. I would just really, candidly, I would just extrapolate from the OI growth, the 8% to 10%, and I think I think that will get you what you need when you combine that with the revenue of seven to eight.

Okay. Okay. I'll move on from that one. So then sticking with the guidance here, you guided the seven to eight percent revenue growth, the eight percent menu pricing. There's some small single-digit percent unit growth contribution to that revenue growth. So then the question I have for you and the components that we don't have, would be traffic and average checks. I'm just curious in terms of your expectation for 7% to 8% revenue growth, knowing, again, the guidance for 8% menu pricing and what equates to low single-digit unit growth, what does that mean or what's implied for both traffic and average check in that?

And we've got another component, which is retail. Jeff, I'll let Craig take the question, but that's another line in our calculation.

Yeah, so we'll drill down from there a little bit, building on Sandy's point. So the unit growth between Cracker Barrel and Maple Street is about 100 basis points. So, again, just to make sure I'm super clear on this, the 7 to 8 is total corporate revenue growth. And embedded in that, there is about 100 basis points of unit growth between Maple Street and Cracker Barrel. And then we can lay out the 8% and figure out what that contributes. And obviously, that's going to impact the restaurant side of the business, not the retail side. So it doesn't flow through. You don't get an 8% contribution from that. You get something closer to in the 6% range or 600 basis point range. And we continue to be pleased with the retail business. And we expect that to be a contributor as well. Then in terms of In terms of traffic, without providing an exact number, I think what we would say there is we are contemplating that as we comp on some of these unusual items, for example, Omicron, gas prices that were in the $4 to $5 range, and those things impacted our business, we anticipate that there will be a positive traffic comp from that comparison.

Okay, that's helpful. And final one for me, I apologize for being long-winded here. So it sounds like you guys might not be giving too much detail or I might have missed it, but in terms of thinking about a year ago at this time, you did provide us with quarter to date, I believe it was Samson Sales Metrics versus 2019. That was helpful in terms of establishing a baseline off of which we were gonna work with for the balance of the year. You guys are nine weeks into the quarter. Again, I apologize if I missed it, but is there anything you can share in terms of either AWS or quarter-to-date AWS or same-store sales versus either a year ago or 2019 in terms of helping us better understand where both restaurant and retail numbers stand Again, nine weeks through the quarter where we are right now.

Good question, Jeff. We'll try to add a little bit more texture without disclosing the quarter to date. So a couple things there is quarter to date can be a little tricky, again, because we talked about all of these unusual things that we're wrapping on, and it's particularly impactful for Cracker Barrel, for example, that dealt away from last year. But what I would say is that we do anticipate our first quarter to sales to be relatively in line with our fiscal year fiscal year guidance um so the last one is when you say sales you mean same for sales or the revenue number the revenue number total revenue okay all right appreciate that thank you our next question will come from Catherine Griffin with Bank of America please go ahead

Hi, thank you for taking my question. I was wondering just about some of the trends that you saw with the younger customer base. I understand that some of that is reflective of I guess some return on targeted marketing. I think I'm also just curious how sticky do you expect that customer base to be going forward? I just wonder if there are any differences, you know, if there's less summer travel, do you then get customers perhaps that aren't traveling, and how can we compare that, you know, between, you know, what you're seeing right now and next year, which perhaps contemplates some normalization of summer travel?

Thanks, Catherine. I'll let Jen speak to the specifics, but just in general, first, as we've already said, we were really pleased to see the data that indicated that we were seeing an increase in that guest, and I think it's a result of a number of things, as you mentioned. The marketing, both the content of it and the way we're delivering the marketing, Jen will speak to that, as well as some of our menu initiatives. I'll let Jen get more specific, but We had a number of check driving initiatives and innovation that we think particularly appealed to that group. Certainly our beer and wine efforts, we were targeting that group in particular, which we thought would have an interest. And then some of our technology that we've been working on, whether it's mobile pay and things like that, we think are particularly important to that group. Jen, do you want to speak to how sticky you hope it is or believe it is?

Hi, Katherine. I think we believe it will be sticky. In fact, we think this represents steady progress. We also saw some increases in the third quarter. The fourth quarter increases were actually building upon some good progress in the third quarter. And in fact, we have had this multigenerational guest base for some time. What we're now seeing is increased frequency, especially among these 24 to 34-year-olds. We rate really high in terms of food, value, and just the environment. I think a lot of these folks are in that stage of their life where they're starting to have families, and so what Cracker Barrel represents is very appealing for them. Our menu innovation, our breakfast news, build your own breakfast, strawberry cheesecake pancakes, a lot of the items that we launched in the fourth quarter were particularly intended for this group. And then, of course, as Sandy said, we did put a sharp focus on our targeted digital behind these younger families. And we are seeing that continue to come to fruition. So we believe this is part of our continued progress against growing frequency with this group.

I'll add one more thing, Catherine, just on the retail side. As Craig mentioned, one of our biggest categories in the fourth quarter were toys, which we think also was a reflection of the visitation we were getting from these young families.

Okay, yeah, no, I appreciate that color because actually one of the follow-ups I wanted to ask was, yeah, just if you have a sense of how, I guess, the demographic that is supporting the retail business versus dine-in. I mean, it sounds like if you got higher visitation from a millennial customer base, they're likely to shop at the store as well. But, you know, so am I right in terms of, I guess, making that assumption that it's pretty much one-to-one in terms of the types of customers that are likely to shop in the retail store? And then I have one more question to ask after that.

Well, let me say one of the things that I think is incredibly impressive about our retail team is how hard they work. to be sure that our assortment sort of has broad appeal. You know, no guests left behind is sometimes what they'll use to be sure that, you know, somewhere in the store there's something for everyone. The areas that we saw the most strength were really varied. Home decor, which Craig pointed out, a lot of that was our seasonal assortment. So our Halloween assortment assortment, which has some of the most amazing costumes, for example, I think, in the industry. And some items was incredibly popular, our toy assortment that I've already mentioned. And then third, men's apparel, which I think reflects the retail team trying to be sure we had something for that guest. You know, it was probably a bigger percent increase than dollar, but that's a relatively new area of focus. It's things like waxed vests and camp shirts and some of our licensed men's product, but it was very successful at broad appeal. So just generally I think we were on trend, we were on brand, we had attractive price points, and we had a lot of variety for everyone.

Catherine, I think this is maybe more anecdotal, but what you see in a restaurant is there are, in a lot of ways, different use cases. For example, you see the kids, they go out and they get their Sunday breakfast or Saturday breakfast, and they get a treat on their way out, right? And then you've got mom and dad, they pick something up, and then you have grandma and grandpa, and they're shopping for something as well. I think what's interesting is What if a job the team does with covering the bases with appealing to different cohorts?

Okay, thank you. I can get back in the queue for that third question. Thank you.

Our next question will come from Jake Bartlett with Truist Securities. Please go ahead.

Great, thanks for taking the questions. I want to start just back on the sales growth guidance for 2023. And Craig, I think you just had made a comment that you expect the first quarter to be the same as the full year. So do you mean you expect the first quarter revenue to grow 6% to 8% similar to the full year? Just want to make sure I understood that.

Jake, yes, in line. So the 7% to 8%, total company, total sales growth, I think in very rough terms, what we would say is we expect Q1 to be in line with that annual guidance.

Okay, great, great. And then you mentioned, and Sandy, you chimed in just to remind us that retail is a component of this growth. So are you expecting retail to grow faster, to be a positive growth? driver of that 6% to 8%, meaning it would be growing faster than that. Obviously, you're growing up with a really strong result in 2022. And then just on a kind of a year-over-year growth in the fourth quarter, it was up, what, 3.3%. So basically, the question is, is retail growth going to help drive that 6% to 8% essentially be greater than that?

Yeah, I think retail will be a contributor. But as you noted, the retail business has been a very strong performer since 2019. So it's going to be a contributor, but as a component, we do not expect that it will be above that total. We do expect that it will grow and contribute to the total 7% to 8%, but we're not expecting above 8%.

I guess said otherwise, do you expect restaurant sales to grow faster than 7% to 8%?

I mean, I would say the in-line, I guess, is where I would land with that one. Restaurant sales, we think, are in that general range. Now, we have the price of 8%. and that's going to be the biggest contributor kind of one-to-one on restaurant sales.

Great. And then, you know, I had a question on the pricing. Sandy, in your comments about kind of being careful and wanting to maintain the value proposition for consumers, I was anticipating that the commentary about menu pricing was going to be that it would be kind of rolling off, especially given your expectation for commodity costs to start rolling off. But I think what I'm hearing is that you expect 7%, you know, 8% for the whole year. So that I think would imply that, you know, as price rolls off over the next, you know, through the whole fiscal year, then you're going to be adding price in. So Craig, I think your comment was that we should kind of expect, you know, roughly 8% for each quarter. So I just want to make sure I got that right. And, you know, I guess, you know, how comfortable, if that is true, you know, how comfortable that that would be maintaining the right value. You know, I think we're probably going to be seeing grocery store coming off pretty sharply, doing that narrative of grocery being more expensive than restaurants will likely slip if commodities come down. So, you know, one, am I right? I mean, is it right that you expect about 8% incremental pricing throughout the year and then our total pricing? And then how comfortable are you with that?

So, Jake, I'll start, and then Sandy will build on it, and Jen can jump in as well. So, again, we've got the total revenue growth of seven to eight for the year, and Q1, we've said, is kind of generally in line, and we'll kind of leave the guidance part of it there. I think the other factor here is the cumulative pricing. you know, over the last few years. And, you know, over really through our 22-year, if you take, you know, 20, 21, and 22, we've had, in very rough terms, about 10% price. And we've had inflation that's well in excess of that, right? So as we think about the overall business model as it relates to inflation and, you know, cost-saves, and then price to ensure that we are delivering and maintaining a great value. I think with that lens, you know, we think there is room there and, you know, we're comfortable at that level. So I'll turn it over to Sandy and she can add a little bit more.

Yeah, I guess what I'll reiterate is the thoughtfulness that goes into our pricing strategy. We've We've moved away from really too big increases a year, too modest increases a year, to more frequent, smaller increases that we monitor. We always have a holdout group, so we try to assess the impact that's having on menu mix and, to the degree we can, frequency. So we're being very thoughtful about it, and I think Jen and her team are being very careful to ensure that even after the price increase that guests can find value on the menu in all day parts, sort of throughout the menu. We'll be doing the increases through, I guess there's about four or five planned for the year, but we'll monitor each one. and adjust as we see either the commodity environment changing significantly or the guest reaction to the price changing.

Yeah, I would just add one thing, which is that we've already taken our August pricing action, right, which was likely to be the largest of the year. Now we will carefully monitor that across our holdout group, our guest satisfaction surveys, We monitor Sprinklr. We check our guest relations. So we have four or five different sources that we're monitoring every week to see if there's any trade down risk or traffic risk. And then we hold the option to not take those back half price increases. Should we see some of those trends that you mentioned in your question, we can always hold off.

Great. That's very helpful. Thank you so much.

Our next question comes from John Tower with Citi. Please go ahead.

Great, thanks. Thanks for taking the questions. Just a few, if I may. On the G&A outlook, can you just remind us of what the incentive comp reset was and how that's kind of factored into the guidance for fiscal 23?

Hi, John. What I would say, again, that's one without getting too specific there. what I would do is kind of look at what a typical GNA number has been for Cracker Barrel and then look at Q4. And I think that, you know, that could give you a pretty good sense of normalization.

Okay. So no savings embedded in that. It's essentially, I think you alluded earlier to the call that most of that's coming at the restaurant level, the 20 to 25 million. Is that a gross or a net number on the cost savings? Yeah. Can you elaborate a little bit on gross versus net just to make sure we're defining it the same? Are there any offsets on the inflationary side that might be offsetting some of the outright cost savings that you would think in a basic or non-inflationary environment?

There are – so on an ongoing basis, right, we're doing – We have cost-save initiatives. We have a bigger one now, and then we have investments that we're making at the same time to support the growth of the company, a lot of things in technology, supporting the loyalty program, and so on. So I think big picture there, there are investments that we haven't necessarily called out, but I would focus on if you can take the pieces that we've given and the overall OI growth, I think... there are other components in there that are smaller in between the guidance components that we've provided.

Okay. And then just getting to the Kind of following up on the questions earlier regarding the customer base and some increased visitation with the millennial cohort. I'm just curious if you could provide some color on where you think you're sourcing these customers from and frankly how these customers may be using the menu differently than say the older customer base. It sounds like they're responding to some of the promotions. and new menu items that you've added, but are you seeing, say, greater alcohol attach or different day part usage, and are you seeing higher average checks with this consumer group versus the older demographic?

Yeah, I'll take that one to start. It's Jen. I think that they are enjoying the breakfast launch that we introduced a whole new breakfast menu on June 21st, and younger guests tend to like customization, and we brought them that with the build your own home style breakfast section. We not only see that mixing above our expectations and above our test, but we see these younger families being able to get breakfast just the way they want it, and so we see them mixing into that with a high percentage. We also see them loving the news we've brought to the beer and wine category and also to our NAB categories, which are In spite of tough economic environment, we're seeing really strong retention of our overall beverage incidents, which I think is a testament to a lot of those new items that we launched performing above our expectations. And then finally, these groups tend to have a high incidence with what we call barrel bites, which are shareable, sort of snackable items, such as the new ones we put on our menu in the first quarter, which are fried pickles, and what you might call cheese curds. So they seem to enjoy disproportionately our beer and wine and then also our barrel bites and so that's contributing favorably to our check. Was there a second part of your question?

Yeah, do you happen to know where you're sourcing some of these customers from? Are they people who wouldn't be going out and getting you know, food away from home normally, and they see your advertising, they're responding to a promotion or something you're hitting them with over digital channels, or are you pulling in from other full-service restaurants or perhaps even limited-service locations?

I think that, in general, I would say we're seeing increased frequency among our millennial guest base, but I don't have information to share about where they're not going, if you will.

Got it. And then just a follow-up on the development side, obviously it's a call for a faster development this year versus 22. And I believe, Sandy, you had mentioned obviously there were some supply chain issues in 22 in particular that kind of delayed the openings of particularly Maple Street. So I was wondering if you could provide some color on what signs you're seeing to suggest that the guidance for 23 is more attainable than last year. Maybe you're seeing permitting delays improve or even just the ability to source equipment has gotten better relative to what it was six months ago.

Well, I think all of that's the case. The pandemic impacted the numbers we've opened for a whole variety of reasons. Supply chain was a lot of it. The I guess the labor to get the construction done was another piece of supply chain. There were times we just couldn't get the equipment we needed to open. But it was also just on getting real clarity about real estate. So in each of those areas, I think it's improved for both Maple Street and for Cracker Barrel. So I am more optimistic about the Maple Street hitting their opening schedule for the fiscal this year than I was how we ended in the fourth quarter. We were only able to get three of the ones done, and we had hoped to do, I think, six. as well as I think what we'll see in the Cracker Barrel side is more ability to get higher new unit growth, modestly higher new unit growth in fiscal 24 than what we've just announced.

Thank you for taking the question.

Our next question will come from Todd Brooks with the Benchmark Company. Please go ahead.

Hey, thanks for squeezing me in. I just have a couple of quick follow-ups here. Craig, You've given fairly specific guidance for where operating income is expected to come in for fiscal 23. The one component of that, maybe if we can just boil it up to maybe a full year thought, where do you expect G&A to come in relative to that guidance of kind of $165 to $168 million in operating income for the full year?

I think with G&A, you know what, without getting, again, too specific there beyond the beyond the guidance is to look at the history and recognizing that Q4 had some incentive compensation adjustments and we do have some investments that we're making as well in Maple Street and technology and things of that nature. but without kind of getting, you know, an exact number out of trying to provide some direction.

Okay, great. And then secondly, getting back to the inventory levels, Sandy, you pointed out the fact that some of the elevation that we may have seen kind of coming out of Q4 was related to landing products earlier for holiday, year over year. Can we boil this down to maybe retail units, how much they're up year over year in inventory at the end of July, but then as you come to a more apples to apples by the end of October, what you would expect the unit inventories to be up year over year for retail? Thanks.

Let's see. I probably can't answer exactly that way, but let me try to give you a little more color. The increase in inventory versus per year, I'd say about 10% of it is price increase. So that's what's embedded just from across the board price increases. Again, then about 40% of it is probably the holiday acceleration. And then another big component of it, maybe $20 million or so, is the inventory invested in supporting our everyday business. which we have seen very good growth. That would be like our food, and our chocolate candy right now is doing really well. Some of that product, we were under-inventoried before that due to a lot of the supply chains, so we've been able to get into stock with that. So those are probably the three biggest components of the increase.

Okay, great. So when we're talking about inventories and potential markdowns picking up in maybe the first half of the year, it's just picking up relative to historically strong full price selling performance last year versus kind of a discomfort with the inventory levels on the retail side, just given the environment.

Yes, thanks for letting me clarify. So What we're anticipating is a markdown rate being higher than last year but lower than pre-pandemic, meaningfully lower than the pre-pandemic. And that, though, is something we are monitoring every day. We understand that the environment with the consumer can change. And as we head particularly into the Christmas season, which is, of course, a very big and important season for retail teams in particular, We're monitoring it, and then we're monitoring the macro retail environment. As it gets more and more promotional, we understand we have to operate with that backdrop. So our expectation is that we are going to have a strong retail selling season through the holiday. Our seasonal businesses I mentioned in Halloween and harvest were very strong. And I am optimistic that our Christmas seasonal system performance will be also that way.

Okay, great. Thank you both.

Our next question is a follow-up from Catherine Griffin with Bank of America. Please go ahead.

Hi, thank you. Sorry to continue to ask about this, but just again, on the younger customer base, one thing I wanted to drill down into is, are there differences? I mean, John asked about day part, but I'm also curious about weekday versus weekend. Can you give us a sense of just like the differences, I guess, and the types of frequency in that cohort?

I would say based on the pretty thorough and detailed learnings we have from our segmentation study that we completed about nine months ago, we don't see any major difference in terms of which days of the week they're coming or day part. They're not markedly or meaningfully different from our other guests.

Okay, great. Thanks for squeezing me in.

This will conclude our question and answer session. I would now like to turn the conference back over to Sandy Cochran for any closing remarks.

Well, thank you, everyone. I look forward to building on our efforts from last year and executing on our fiscal 23 priorities between our sustainable cost savings and investments in critical areas like value, guest experience, and broader guest appeal. I believe we're well positioned to drive strong performance this year and beyond.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.