Cracker Barrel Old Country Store, Inc.

Good day and welcome to the Cracker Barrel fiscal 2024 third quarter conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists 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 touchtone phone. And 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 Mr. Adam Hannon, Senior Manager of Investor Relations. Please go ahead, sir.

Thank you. Good morning and welcome to Cracker Barrel's third quarter fiscal 2024 conference call and webcast. This morning, we issued a press release announcing our third quarter results. In this press release and on this call, we will refer to non-GAAP financial measures such as adjusted EBITDA for the third quarter ended April 26, 2024. Please refer to the footnotes in our press release for further details about these metrics. The company believes that these measures provide 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, Julie Massino, and Senior Vice President and CFO, Craig Pimels. Julie and Craig will provide a review of the business, financials, and outlook. We will then open up the call for questions. 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. Any of the factors that could affect results are summarized in the cautionary description of risks and uncertainties found at the end of the press release and are described in detail in our reports that we file with or furnish to the SEC. The information shared on this call is valid as of today's date and the company undertakes no obligation to update it except it may be required under applicable law. I'll now turn the call over to Cracker Barrel's President and CEO, Julie Messina. Julie?

Good morning. Given the substantive update we provided two weeks ago, today's prepared remarks will be shorter than usual. I encourage everyone to review our comments from the May 16th call for additional details on our transformation plan if you haven't already. This morning we reported total revenue of $817.1 million and adjusted EBITDA of $47.9 million or 5.9% of revenue. As we previously noted in our May 16th press release, our results fell below our expectations due to weaker than anticipated traffic. Our third quarter traffic challenges underscore the need for our strategic transformation as we discussed on May 16th. Of course, as we undertake our longer term strategic initiatives, We continued to aggressively manage our day-to-day business, and I was encouraged by our performance despite the financial impact of lower traffic. Although our financial performance in the quarter was challenged, our teams managed the business well. We saw solid improvements across the metrics that are most highly correlated with same-store sales growth. Guest satisfaction, speed, hourly turnover, and average skill level for key job roles. We believe these are key leading indicators and we're pleased with the progress we are making. For example, compared to the prior year quarter, our hourly turnover has improved by 10 percentage points. Our seat-to-eat times, that's a key speed metric, have improved by approximately 8%. Our off-premise missing item scores improved by 18%. The average skill level for the key positions of cook and server increased by 3%. and our Google Star rating has increased from 4.1 to 4.2. We are confident that our sustained focus on these operational metrics will deliver further improvements which will translate to increased visits in time. Additionally, our operators did a good job of managing food waste. I believe this, along with a positive trend in the above metrics, is the result of our organization-wide emphasis on operational discipline and is also indicative of our dual focus of running the day-to-day business while also executing our transformation. And our operators' ability to effectively manage expenses helped mitigate the margin compression from the lower traffic. Next, while retail sales were also challenged as a result of our traffic results and broader retail headwinds, we were encouraged that we saw sequential monthly improvements in retail same-store sales and the performance of our seasonal theme assortments. In closing, our financial performance remains pressured by the challenges we've previously described. But we are confident that our focus on our five strategic pillars, one, refining the brand, two, enhancing the menu, three, evolving the store and guest experience, four, winning in digital and off-premise, and five, elevating the employee experience, will deliver our imperatives of driving relevancy, delivering food and an experienced guest's love, and growing profitability and position the company for significant value creation over time. I'll now turn the call over to Craig for a more detailed look at the quarter from a financial perspective and to discuss our financial outlook for the rest of the year. Craig?

Thank you, Julie, and good morning, everyone. Before getting into our results and guidance, I want to remind everyone of a few changes we've made as it relates to our financials. First, we're now focused on adjusted EBITDA as a key metric to track our financial performance and are now providing guidance on adjusted EBITDA as we believe it is more meaningful to investors to evaluate our performance before the impact of depreciation, which we expect to be higher due to the increased investments related to our strategic transformation plan. We modified our definition of adjusted EBITDA and are no longer adjusted for the non-cash amortization of the asset recognized from the gains on sale and the leaseback transactions, which is an approximately $3.2 million expense each quarter and is expected to remain at a similar level over the remaining life of these leases. Additionally, we are now including an add-back for share-based compensation expense. We understand there are a few moving pieces here, so we refer you to the reconciliation tables in the press release for additional information. For the third quarter, we reported total revenue of $817.1 million. Restaurant revenue decreased 1.5% to $671.3 million. and retail revenue decreased 3.7% to $145.8 million versus the prior year quarter. Comparable store restaurant sales decreased by 1.5% over the prior year. Pricing was approximately 4%. Our quarterly pricing consisted of approximately 1.5% carried forward pricing from fiscal 2023 and 2.5% new pricing from fiscal 2024. Off-premise sales were approximately 18.9% of restaurant sales. Comparable store retail sales decreased 3.8% compared to the third quarter of the prior year. Although retail sales remain soft, we were pleased with how the team has effectively managed inventory levels which remain below prior year. Moving on to our third quarter expenses. Total cost of goods sold in the quarter was 30% of total revenue versus 31.5% in the prior year quarter. Restaurant cost of goods sold in the third quarter was 25.9% of restaurant sales. versus 27.3% in the prior year quarter. This 140 basis point decrease was primarily driven by menu pricing. Commodities deflated for the quarter by approximately 0.6%, driven principally by lower oils, poultry, and egg prices. Third quarter, retail cost of goods sold was 49% of retail sales. versus 50.2% in the prior year quarter. This 120 basis point decrease was primarily driven by higher initial margin. Our inventories at quarter end were $175.3 million compared to $184.8 million in the prior year. With regard to labor costs, our third quarter labor and related expenses were 37.8% of revenue versus 35.8% in the prior year order. This 200 basis point increase was primarily driven by our investments in additional labor hours to support the guest experience and hourly wage inflation of approximately 5.2%, partially offset by pricing. Other operating expenses were 24.5% of revenue versus 23.6% in the prior year quarter. This 90 basis point increase was primarily driven by our investments in advertising and higher depreciation. Adjusted general and administrative expenses for the third quarter were 5.4% of revenue, which was flat through the prior year quarter. The current quarter results excludes approximately $3.5 million in expenses related to the CEO transition, and approximately $6.6 million in professional fees related to our strategic transformation initiative. Our GAAP financial results include store impairment charges and closure expenses of $22.9 million. Our top capital allocation priority is investing in the core Cracker Barrel business and in the initiatives we discussed on May 16th. Therefore, we have decided to slow down Maple Street's unit growth in the short term while they work on improving that business model and as part of our focus on investing in the core Cracker Barrel business. As a result of our decision to slow down Maple Street's growth, we recorded a goodwill impairment of $4.7 million. Net interest expense for the quarter was $5.2 million compared to net interest expense of $4.5 million in the prior quarter. This increase was primarily the result of higher average interest rates and higher debt levels. Our GAAP income taxes were a $15.3 million credit. Adjusted income taxes were a $6.4 million credit. Both results include the year-to-date impact of lower income tax expectations due primarily to lower expected annual earnings before taxes. Third quarter gap earnings loss per diluted share were negative 41 cents, and adjusted earnings per diluted share were a positive 88 cents. In the third quarter, adjusted EBITDA was $47.9 million, or 5.9% of total revenue, compared to $59.6 million, or 7.2% of total revenue in the prior year quarter. Now, turning to capital allocation and our balance sheet. The company's board of directors is committed to a balanced capital allocation approach. Investing in the business to drive profitable growth continues to be the top priority, followed by returning cash to shareholders through a regular quarterly dividend and share repurchases. In the third quarter, we invested $29 million in capital expenditures. We returned $28.9 million to shareholders in dividends. We ended the quarter with $472.2 million in total debt. With respect to our fiscal 2024 outlook, We now expect total fiscal 2024 revenue of $3.47 billion to $3.51 billion. We continue to anticipate pricing of approximately 5% for the full year. We have completed our two planned Cracker Barrel openings, and we now anticipate eight to 10 new Maple Street openings during the year, including the six we've already opened. We now expect commodity inflation to be approximately flat, and we continue to expect hourly wage inflation of approximately 5%. Taking all of the above into account, we anticipate full year adjusted EBITDA of approximately $200 million to $220 million, which includes the benefits of a 53rd week. This reflects our lower than expected results in Q3. as well as our downwardly revised expectations for Q4, which are primarily driven by our lower expectations for traffic. Although we did not previously provide adjusted EBITDA guidance, our current guidance reflects an approximately $20 million reduction relative to our previous expectations. Our adjusted EBITDA guidance contemplates certain excluded expenses. Approximately $9 million of one-time CEO transition expenses. Second, approximately $16 million in consulting fees related to our strategic transformation, which includes additional pricing and menu strategy work. Third, approximately $2 million in corporate restructuring charges. And fourth, approximately $5 million of favorability from the change to our benefits policy that occurred during the second quarter. We now expect a full year gap effective tax rate of negative 55% to negative 60% and an adjusted effective tax rate of negative 3% to negative 8%. For the fourth quarter, we expect a gap effective tax rate of approximately negative 2% to negative 7% and an adjusted effective tax rate of approximately negative 1% to positive 4%. Lastly, we anticipate capital expenditures of $120 to $125 million. I'll now turn the call over to the operator for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Jeff Farmer with Gordon Haskett. Please go ahead.

Good morning and thank you. I'm just hoping you can provide a little bit more color on some of your near-term top-line strategies, especially in the background that we've heard from your peers, which is pointing to sort of both increased advertising weights, a lot more value promotion. So I appreciate your long-term strategy that you outlined a couple weeks ago, but at least over the next couple of quarters, how are you guys looking to compete in an environment that's been increasingly promotional and a lot more advertising?

Good morning, Jeff. Thanks for the question. We actually feel very well positioned in this environment because Cracker Barrel is a brand that values value and really understands that value is important to our guests. And remember, value is a multifaceted equation for the guests. It's not only the price that somebody pays, but it's the quality of the food, it's the amount of the food, it's the experience that they receive in our restaurant. We got out of the gate early on thinking about value and how we were going to convey value in new ways to our guests based on the research that we've done that has really underpinned the transformation agenda. Value for us at Cracker Barrel is just one key piece of all of it. We got out of the gate last Q2. You'll remember that I shared on the earnings call that we were launching an early dine program. It was something we believed very, very strongly in. It's got great dinner items at $8.99 from 4 to 6 p.m. Monday through Friday. We love welcoming our guests in at that very, very sharp price point. We rushed to get that to market. so much so that we actually didn't have any planned advertising around it in Q2. What you're seeing right now, or even Q3, what you're seeing right now is that at the beginning of May, we actually started to put some advertising behind that so that making guests aware that Cracker Barrel has their back in these times, that we are there for them with this great, sharp value price point at dinner. That is a big piece of our overall pricing strategy that I talked about on the call two weeks ago. We are really executing a barbell pricing strategy so that we can be very sharp with key price points, not only with this early dine program, but we also have key price points at breakfast. We've introduced a new Sunrise special for breakfast at a $7.99 price point. That's an incredible value. I challenge you to eat it all. I personally can't eat it all. It's such a great breakfast. It features our signature pancakes and eggs or your choice of meat. And that's a great price point as well. So that's kind of one end of it while we're really evaluating our ability to kind of take price strategically as I've talked about on the last couple of calls. So we believe that we're very well positioned. We're starting to actually communicate this through our media channels. But Cracker Barrel has and always will be a great value proposition for our guests, and we're just there to protect it and to ensure that they know about it.

Okay, and then just two more quick follow-ups on the modeling side. So I think your guidance implies for the fourth quarter something like 200 basis points of adjusted EBITDA margin compression. So first question is, am I in the ballpark with that? And then the second one would be, I might have missed it, but can you share the traffic and mix? I think you shared that the pricing was in the press release, but traffic and mix in the quarter? Hi, Jeff. It's Craig.

Yes, you're in the ballpark as it relates to the margin reduction in Q4, you know, in very, very rough terms, approximately 200 basis points. And in terms of traffic for the quarter, traffic for Q3 was a negative 4.9 for the quarter. All right. Thank you.

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

Hey, thanks for taking my question. Just following up on Jeff's question, consumer behavior and what you're seeing currently, are you seeing really frequency being the loss from the same store sales pressure standpoint? Or how about check management? I mean, what are you seeing as far as trade down, value resonating, maybe people coming out of other day parts into that early evening day part? Just like to get a sense on kind of your consumer and how that developed across the course of the quarter.

In terms of the consumer, what we're seeing is the lower income consumer is more pressured, and we're seeing that particularly with the under 60K consumer in terms of their visits. I'm not sure if it's frequency necessarily, but that would make sense. Traditionally, Cracker Barrel has been a great value. We've actually held up well over the longer term with the under 60K consumer, but more recently you've seen some pressure there. In terms of the menu mix, there are a couple of moving pieces. So there is a little bit of negative menu mix there, Todd. It's not a large amount, and I would say there are some reductions in add-ons and things like that relative to prior trends. We've really seen it more so on the retail side, where that's a highly discretionary part of the diamond and we've seen a little bit of softness on conversion. So maybe more on retail than necessarily in restaurants.

That's really helpful. Thanks, Craig. Second follow-up, if I may. If we look back to the call from a couple of weeks ago, you talked about 2025 being an investment year and talking to it being in the range of flat to slightly down EBITDA. Should we be thinking about the guidance range for full year 24 and maybe that lower half of the $200 to $220 million range being attainable in 25? And that would be that flattish outcome. But if you're in the upper half in 24, that leads to kind of the down year over year EBITDA. Any sense of how we flow this incremental guidance point you've given us versus the qualitative guidance point around fiscal 25 EBITDA?

Yeah, we'll add some more texture to that in September. I think we really believe in the three-year plan. We believe in the roughly 400 basis point improvement in EBITDA, and we're looking at all of the work we've got ahead of us. We're kind of looking at the industry headwinds, and that kind of leads us to the point of view that 25 will be a bit challenged, and we still continue to believe in the EBITDA level flat to slightly down relative to 24. Now, where we end at 24 is still a bit of an open chapter, so we'll let this kind of play out, and then we'll update you on the next call.

Okay, thanks. And just a final one on the modeling side. Can you remind us the expectation for what the 53rd week is worth from a revenue and EBITDA standpoint? Thank you.

We haven't provided an exact number on the 53rd week and generally what I would encourage you to do is go back to 2018 and use that as a reference point and generally update that for lower margins. I would say that the 53rd week impact is embedded in our total year EBITDA guidance for this year. And as we talk about fiscal 2025, We're comparing the expectation for 25 to that total fiscal 2024 guidance that we provided.

Okay, great. Thanks, Greg.

The next question will come from Jake Barlett with Truist Securities. Please go ahead.

Great. Thanks for taking the question. I wanted to build on the update call and some of the big changes that you announced. One question that I had following it was just really what gives you the confidence that reinvesting in the stores is the right way to go here, such a big change to the model. Anything you can share in terms of just more detail of what you heard from consumers and why you think that the remodels as well as the increased maintenance is so important for the turnaround here?

Yeah, good morning, Jake. We did extensive research in really putting together the transformation plan. We talked to guests all over the country, all different kind of segments, all kinds of backgrounds, and also listened to our team members and really took great stock in kind of where we find ourselves. And with traffic down almost 20% to 2019, they're telling us they're not choosing us. And so digging into the whys there was really, really important. We heard from them that the experience in Cracker Barrel just isn't as relevant specifically at dinner. Our dinner sales are down when you look at that year over year. It's 35% of our mix and it's an important day part for us. We've held up quite well at breakfast, but what guests have told us is that the Cracker Barrel experience, there are more relevant choices for them in the dinner day part based on the experiential factors. So a lot of that is looking at the comfort of the tables, the lighting, the paint, all of those things. And that really came out in our research that we needed to look at the store experience as well as the other parts of the transformation agenda. The menu also needed some work on relevance. So lots of data is behind that. And then what I would tell you, Jake, is while it's only two stores, they're very much lab stores at the moment. we're seeing great guest feedback on the quick remodels that we did there and just the feeling of lighter, brighter, fresher, cleaner, a place where I do want to have dinner. Remember, we put some baguettes and booths into these stores, and people are really loving those, and it's feeling like a place that feels like their Cracker Barrel and just a better version of Cracker Barrel. So we believe we're on the right track, and that's what 25 is all about, really taking a very disciplined approach approach to the capital deployment around this piece of the strategy. We know that we want to be careful and good stewards of the capital. So we're looking at testing 25 to 30 stores in this next year at a variety of investment levels and frankly at a variety of baselines. So we're looking at stores that are performing well, stores that aren't performing well, looking at whether we put a higher amount of money into it or a lower amount of money in. to really see and find that sweet spot for the right level of investment versus return versus growth rate so that we can be very disciplined about the deployment of capital to really drive that part of the plan for growth for the future.

And I'll follow up with the second part of your question that relates to the maintenance. Some of that comes through general feedback, but I guess they'll give you that specific feedback. However, we have brand standards. So what we do as a normal course of business and maybe fell a little bit behind during COVID is we go through and we audit every store. And we audited the entire portfolio. And as we completed that process, it was clear to us that we fell a bit behind on some guest-based and employee-based maintenance items, things such as parking lots, paints, and floors, and bathrooms. And so that really came through our own standards, anecdotally from guests, but primarily through our own standards. And we have to get caught up on that. That is one of those investments that it pays dividends over time as you think about how you view a business. Does it look fresh? Does it look clean? Does it look up to date?

Got it. Great. That's helpful. My next is a similar question on the cost savings targets that you provided, the $50 to $60 million. I know you're early stages. But I guess my question, if you could help us understand maybe some big buckets. You know, you've talked about the opportunity to maybe have a little bit less scratch cooking, maybe some little more, you know, food coming in the door, a little more, you know, processed, for lack of a better word. But what are the big, is that the majority? I mean, just give us some big kind of buckets of where you think these cost savings are going to be coming from.

Yes, you've kind of started the answer there for us, so thank you. A lot of the work centers around industrial engineering effort that focuses on the back of the house. We're in the early stages of that, but we think there's a win-win opportunity given the breadth and the complexity of our menu to simplify our operations, make it more efficient, make it more consistent. And that will show up in kind of back of the house, in labor in some ways, it will show up in other areas in the back of the house. We think that will be a meaningful part of this $50 to $60 million. And in addition to that, we have an ongoing program that's been quite successful over the years that will generate savings across the full P&L. So I think some of that's going to skew towards the back of the house, which will have a labor component to it over time. And then the other program is an overlay to that. The challenge has been, we've had these programs for a while, Jake, as you know. Candidly, the challenge has been this issue that Julia brought up. It's this relevance issue which we think manifests itself in declining traffic. So saving $50 million, as an example, and then the traffic's down significantly, then that erodes traffic. That's $50 million. So we have both of these things coming together. We're stabilizing the traffic, and it's ultimately starting to grow. Then that allows these cost savings efforts to flow through to a greater degree.

Okay. And just, I guess, to that point, there are some, you know, you had cost cuts in the past year or 30 to 40 million, but that was being reinvested. So it wasn't kind of really wasn't flowing through to the margins. You know, I just want to make sure we're clear that this the 50 to 60 million that you expect to say that's going to flow to the margins, you expect that to be kind of a real kind of essentially a net margin saver in itself. And so you're not reinvesting that in something else that would not kind of allow this to flow through.

Yeah, the $50 to $60 million is embedded in the 400 basis points improvement. So it's a part of that improvement over the three-year window.

Okay. Thank you very much. Appreciate it.

The next question will come from Brian Mullen with Piper Sandler. Please go ahead.

Thank you. Julie, you mentioned something called seat-to-eat times in the prepared remarks. That seems like an important thing. Maybe could you just give a little history? Was that being tracked before you joined? And then, you know, assuming it was, it's nice to hear that there's been some recent progress. Could you just give a sense of where that stands versus a couple of years ago when the business was in a bit of a better place, just trying to get a sense of how far you might have to go?

Sure, Brian. Thanks for the question. You know, one of the early things we did was, in really dissecting the business and looking at what we could do to improve where we find ourselves was focus on what I call metrics that matter. And so we did a lot of correlation in what are the ops metrics specifically in the stores that we can control today that have the highest impact on same-store sales growth. And when we dug into that, we looked at, I don't even know, we looked at like 40 or 50 different metrics and really landed on these five that I talked about in the prepared remarks. The first one is really guest satisfaction. Now, guest satisfaction is a little bit of a loaded one because it's like value. There's a lot of things in that calculation for our guests. It's everything from the service level to all of those things roll up into guest satisfaction. But we're measuring that with Google Star rating. And so that's number one. Number two, I talked about Seed to Eat, and we also have another metric called Seed to Pre-Check. So that's basically how quickly are you greeted, and then how long does it take for your food to come out. the seat to eat, which is really the big one, because people are hungry. That's why they came to Cracker Barrel. They want to eat. So we want to make sure that we get their food to them in a reasonable amount of time, but that it's made properly. Hot food is hot. Cold food is cold. Made to our wonderful recipe. We've improved that time by 8%, which is actually really, really meaningful when you think about the average time somebody spends with us is a little less than an hour. So that's a key metric in getting your food faster and getting you on your way. We want to be part of your life, but we also know you have other things going on too. So that was a key one. The other ones I talked about are turnover, tenure, and a role. And then we're also looking at off-premise missing item scores, all of which we're showing improvement on. The team is huge. I'll just use this opportunity to really shout out the ops team and all of our field partners every single day and the leaders there because they are so focused on taking care of our guests delivering an experience that guests are going to love and food that guests love. Remember, those are part of my three imperatives, the relevancy, food and experience that guests love, and growing profitability. And that really starts day in, day out, every execution with every guest making it wonderful. We believe that these dividends that we're – not the dividend, dividend, but these efforts that we're really focused on in our restaurants today will pay – We'll pay dividends to the business in the long term because these are really what matter to our guests and what drives things to our sales. So thanks for the question.

Okay, thank you. And then just a follow-up question on the off-premise business. You talked about this a bit in the strategic call a few weeks ago. Can you just remind us how you're viewing this business now? Which channels are you happy with? Where do you expect to make some changes? And just related to that, I think the heat and serve business might be a lower margin business. percentage business, which I think is understood, but I'm curious if that is right. And does that have any impact on operations as well, if you were to make changes to that part of it?

Yeah, Brian. It's a really interesting channel because it's got a lot of stuff going on in it for us. So in off-premise today, we put individual to-go in that, we put third-party delivery in that, and we put catering in our occasion business in that. And they are three really different businesses, actually, when you – When you break them down and kind of think about it, the way the guest interacts with our staff across all of those is really different. The third-party experience, you know, they're not even coming in. It's somebody else grabbing it and taking it to that individual to go. They're placing that order through our channel, but they're coming in to get it. And then catering, that can happen a myriad of ways, all of which, to the last part of your question, is really important, does have impact on our in-store operations. So we've got to make this food just alongside of everything that's happening in our restaurant. So we're running a couple of different businesses all at the same time. What we realized mainly in kind of Q2 of last year was that some of these businesses were putting disproportionate amounts of pressure on the dine-in business. We had been focusing on growing catering a little bit of like at all costs, like grow, grow, grow, grow, grow. And what we realized is that it's not as profitable as other channels. And it was really hurting guest satisfaction in our dine-in business because the amount of energy to put against, you know, think about it. We have orders for, you know, warehouses that we're celebrating, you know, a party or something like that, and it could literally be feeding 100 people. So the kitchen, the same kitchen that's feeding the guests in the restaurant are putting this order together, and it can be a little bit of a distraction. And it was impacting our seat-to-eat times and these things that I've just said are really important to guest satisfaction. So because of this, that's why that part of our pillar four has been about really focusing on how to make these three businesses within off-premise more profitable, to right-size them against our dine-in business, which is our priority business, and to really make sure that we execute them with excellence. I talked about missing item in my prepared remarks because that is one of the key things that we weren't doing well. Our missing item rate was high for the industry in those third-party delivery orders. And so getting that right, executing with excellence across all three of these businesses within that off-premise channel are really, really important as we grow for the future.

Thank you very much.

The next question will come from John Tower with Citigroup. Please go ahead.

Great. Thanks for taking the question. I'm just curious, you know, pricing is running 4% this year in the context of some deflation on the commodity side. Obviously, labor inflation is still out there. And I think on that strategic update call a couple of weeks ago, you talked about the opportunity to perhaps get a little bit sharper on pricing across the system. given the way that you're looking at it on a store-by-store basis rather than kind of bigger regional markets. I was hoping maybe how you're thinking about that informs your view for 2025 pricing, given the backdrop for the consumer, but at the same time the opportunities that you're seeing across the different stores in the system.

Thanks, John. Look, one of the things we identified early on is that there's an opportunity for us to be more strategic in the way that we actually apply price. Price is a powerful lever, but it's also something that's really recognizable for consumers and comparable to other experiences that they're having out there. So as we talked, we've been really maniacal about thinking about how we protect value while making sure that we take price in a way that better sets us up for success and better flows through. I used the example in the call two weeks ago of today we have a tier that has 60% of our stores in it and in that tier there's literally a store where the average household income is $55,000 a year and a store where the average household income is $90,000 a year. We use that as an example because I think it's pretty powerful that there's different willingness to pay and different competitive sets around each of those stores and that provides an opportunity for us to refine our pricing tier. So we're doing that work. Now, we've got a test running right now. We've got several tests running where we've been taking price across these tiers more strategically across different items in the menu. We're testing and learning quite a few different things. In that, as we talked in the prepared remarks two weeks ago, or on the call two weeks ago, we've taken about 3% of price and most of that's flowing through. One of the goals in putting together this strategic approach to pricing was that we could lay out a multi-year roadmap to pricing and really understand where moves might be, where we have opportunity, and then choicefully apply that to our plan. And that's what we're doing. So while we know that we've got opportunity out there, we're not actually applying all of it when we get into Q1 of 25 and we're laying out a roadmap for what actually is the right thing given the consumer pressures of today, given how we feel about value, given all the other moves we know we're making on the menu. So we believe now we have really a nice roadmap that we can move around if we need to kind of quarter by quarter over the next three years of the plan with some ability to take price. I'll let Craig add some thoughts maybe.

I think the only thing I would add to that, John, is just reemphasize what Julie said earlier on is kind of really early in the process Julie identified this. It's a value issue. It's a big issue in the industry. And we put in place these anchor points around the early dine and breakfast at sunrise starting at $7.99. So we have those anchors. Those are advertizable price points across multiple day parks. And so this pricing work will layer on top of that, but it keeps that foundation out there with a very sharp, communicatable price points.

Got it. Okay. Kind of related, similar vein. You know, you've seen nice commodity deflation this most recent quarter. I think for the balance of the year or for the full year, you're implying roughly flat. But, you know, we're looking at some of the indices across the restaurant space suggesting that a lot of the key inputs are starting to rise for the category. I think some of the ones that you have exposure to are ticking higher. So, How are you thinking about food costs over the next 12 months or so? Are there any contracts we should be aware of that might be coming up for renewal that might have to reset at different rates?

Hi, John. It's Craig again. We'll talk more about it in September. I mean, I do think you have a meaningful insight there is that the underlying dynamic is shifting a bit. So we'll provide more color on the September call.

Okay, and then maybe this last one. You do have a convertible that's due in, I think it's June of 2026. Can you provide any insights on what you're thinking with respect to how you might handle that when it comes due?

Yes, that one is a big one, and we're actually starting to work on that well ahead to ensure that we understand all of our options, we understand... what the best decision is. The good news there is we have a lot of room on our revolver, a large capacity on our revolver. We've continued to keep our leverage at a reasonable level, so that gives us a lot of options as we look to refinance that. So we'll share more about that in the future. We're starting to look at it well ahead of the due date, and we'll make a decision based on kind of the facts on the ground at the time.

Got it. Thanks for taking the questions.

The next question will come from Catherine Griffin with Bank of America. Please go ahead.

Hi. Thanks for the question. I had two modeling questions and then a follow-up. So first, just... If I could ask again kind of about the commodities cost expectations, can you remind me what like some of the largest components of your cost basket are, maybe like specifically as it relates to protein? And then the second is just how we should think about G&A in 4Q. Is 3Q kind of the right runway from here?

Hi, Catherine. It's Craig. I'll take that one. You know, the good news is one of the many good things with Cracker Barrel is we've got a pretty diversified basket, so we're pretty well split across the major categories. Fruits and vegetables is one of the larger ones. Poultry is actually the largest, and then we've got beef and pork, so pretty well diversified group as it relates to commodities. Then in terms of G and A, we do expect that G and A will be a bit higher in Q4 versus where it was in Q3. And then as we move into fiscal 25, you know, G&A may pick up a little bit as well because we're continuing to invest in all of this and all of this work to re-energize the business and get growth going again.

Got it. Makes sense. And then, Julie, a question for you on some of the additional technology investments that you spoke about a couple weeks ago. So I wanted to kind of understand where the tech stack is today. I think for the last couple of years, there have been investments into better food and labor systems, and some of that may be bearing fruit. But I think I'm curious about, I guess, how you are prioritizing those technology investments. Are you looking to replace some elements of the tech stack that are you know, that would align with some of the remodel plans or industrial engineering plans. Just trying to get a sense, I guess, of how incremental some of the changes could be with these additional, you know, technology investments. You know, is there improvement to be made in terms of whether it's like reservation software or, you know, things that could even increase some of the metrics that you talked about, whether it's, you know, CTE or turnover?

Yeah, Catherine, thanks for the question. Look, we have a three-year tech roadmap that the team has worked to build and that we're continuing to refine as we go into the AOP process for 25 and beyond. We built that as part of the strategic plan and the transformation agenda. knowing that we would need to make some investments. What I would tell you is the near term ones that we're really evaluating and looking at are still around the loyalty tech stack and making sure that we are ramping our ability to monetize that program and make it the industry leading program that we know it can be. So things around personalization, around CDP, CRM, those things we didn't have today and those are the nearer term closer in things that we're looking at. We are always looking at kind of POS and technology. And remember, we've got a retail business and a restaurant business. And our retail business is also a little bit behind in some of the tech investments there. So some of those are on our tech roadmap over the next three years. So we'll give you more guidance on that in the September call as we look at 25. And we can be more specific about what those might look like in 25 and 26 and 27. But know that we have a three-year roadmap teams working against that, making sure that we can pace and sequence in a way that we can actually get the work done, the field can absorb that work, you know, with everything else that we have going on. So we're being really, really mindful about how we pace and sequence some of these investments, not only from the investment perspective, but also from the absorption perspective.

Okay. Thank you both.

The next question will come from Dennis Geiger with UBS. Please go ahead.

Great.

Thanks, guys.

Wondering if there's anything more that you can share on, I think, the comments around the sequential monthly improvement that you spoke to, which I think related just to the retail business. So if anything more on kind of what was driving that, if it's an underlying improvement. And then I don't know if you were commenting on the restaurant trend specifically, but if there is anything to share there on that sequential trajectory to the quarter.

Yeah, our retail performance, as you know, Craig talks about it this way quite a bit. It's discretionary, right? I mean, we have lots of things we'd love for you to pick up in a Cracker Barrel Country store and lots of things that I think will catch your eye, but you probably don't need most of them. So it tends to be a little bit discretionary. The performance has been challenged for the last year or so, but what we have been encouraged by is the sequential monthly improvement in comp store sales there. A lot of that's been driven by some of the theme assortments that have been performing really well. We are so unique, and the team does such a great job on that product, and some of those theme assortments have really been resonating with people. The other thing is, you know, if you need a gift, swing by because we have some great value items in that store, and that is also really resonating with guests. So those things that we have put on markdown, the things that are out there that come in that the team does really at sharp price points, Again, given everything that's going on in the macros with value being important and lots of the press around low income consumers, there's a lot of good value in our mix there and that's really what's working well. Finally, I want to give a shout out to that team because they've done a wonderful job managing inventory levels and growing margins. So while we've had some headwinds to traffic and the retail conversion, our inventory levels are down. So that same store sales is up on a lower inventory level and margins are up. So it continues to be a nice business for us.

Appreciate that, Julie. Just on loyalty maybe then, anything more to talk about in the quarter observations from that program, what it's done for you and maybe how that helps you think about your expectations for the program going forward perhaps?

I'll start with that one, and maybe Julie can give some more. We are really excited about the loyalty program. We're in the 5 million member neighborhood at this point, which is huge. We're excited about that. It's still early, and there's more work to do. But actually, I'll turn it over to Julie to give a little bit more about what's coming next in terms of what information we're going to share and so on about the program.

Yeah, thanks for the question. We are excited about this program. You've heard me talk about it from my very first call to where we are today and where we were two weeks ago. It's an anchor for what we're doing. It's a key program in our pillars because we believe this is how guests want to interact with us. It's also a very great way for us to deliver value. So don't forget that, right? This is a great program that helps us deliver value to guests who are really seeking value from us. But reminder, it's still the early days of this program. We just launched it in September of last year, so we're not even at our one-year anniversary. What we're planning to do is actually spend some more time on our September call, digging in a little bit deeper, helping you understand how we're thinking about the program in 25 and beyond and how we're using it to drive key levers in the plan. So more to come in the September call. Know that we continue to be super optimistic about it. And I think it's also important to remember it's a key way for us to deliver value to our guests.

Makes sense. Thanks, guys. Last one for me, if I could. Craig, on the longer-term DNA front, still too early there to, other than I think the up significantly or whatever the comment is exactly, anything more concrete there as far as how to think about that, or is it still too early at this juncture?

It's just to confirm. You said depreciation, animalization, or DNA? DNA.

DNA.

General and administrative.

No, sorry, depreciation.

Okay, yes, got it. Yes, well, depreciation is clearly going to be increasing. We're spending a fair bit of capital to reinvigorate the business, and we're seeing our capital spend go up. So that will be an increased expense as you think about net income or EPS going forward. So that will start to ramp up. Even this year, you can see a bit of ramp up. You'll see a bit of a ramp up next year as well. Now, as we shared earlier on the strategy call, we're going through this three-year window, specifically on the deferred maintenance side of the spend, that will kind of get us caught up. So I don't think it's a forever topic. It's an issue that we have to go back and address. and that's a three-year investment that will drive some capital spending. The capital spending will drive depreciation, which will be around for a bit longer than that, but it is not a long-term part of the business model. It's something that we have to get caught up on. Now, as we make other capital investments, and to the degree that those things have compelling returns, we may increase our capital spending And that will drive depreciation in the future. For example, as we develop a new prototype and we're able to start growing again over the longer term, that will be value created, but it will have higher depreciation and amortization. So the short answer is depreciation and amortization will most certainly be up in the near term. But longer term, we think the overall business model, the way we would think about it is we're going to improve the EBITDA level by about 400 basis points.

Very helpful. Thanks, guys.

The next question will come from Andrew Wool with CL King. Please go ahead.

Thanks. Julie, the five key metrics you're sharing with us and focusing on as lead indicators for same-store sales and really guest traffic, could you give us a sense, based either on your experience or your internal plan, what are the lead time here? you know, I'm sure it's cumulative and so forth, but when does it start to move the needle meaningfully? And, you know, obviously related to that is kind of what inning, maybe you can blend them all together as a group, you know, what inning is it in so that we can start to think about how guest traffic is, you at least think guest traffic might just start to improve?

Yeah, Andrew, thanks for the question. You know, Performance in traffic, like value, is a multivariate equation. So there's a lot of things that go into it. We know that our ops metrics and our performance and our ability to execute is a key driver of that. Another key driver of that is our ability to drive guests in, right? When you think about upper funnel and awareness and making sure that we have food, that is really relevant. It's really why the three imperatives are the three imperatives of the plan, right? and reignite relevancy, and then we have to have food and an experience that guests crave and guests love. So they kind of work together to fuel the momentum of flywheel of traffic, if you will. I would say we are further along in the ops metrics than where we are in some of the marketing pieces. We continue to test and learn our way through all of that. I've talked about some of that in the past, some of the tests we've done in local We're learning through that. We're testing different things like NASCAR, like college football to find these key things that resonate with driving traffic. All of these things cumulatively will get there. That's why you see our performance continue to kind of get better in the back half of 26 because we're going to continue investing in these in 25 so that we can actually get there in 26. More to come on that, but know that the team is focused on the improvements there. We're seeing it in the metrics, and guests are commenting on it, which is also a key thing for us to note.

Okay, and you brought up, obviously, the foundational aspect of brand identity and food quality and things to really drive traffic that are more foundational than even the operations stats. Could you give us sort of a qualitative sense of where you believe the business is, and is that going to be able to improve in concert time-wise with the operational metrics?

Yeah, absolutely, is the short answer. We did a lot of research, again, to really underpin the strategic plan and the transformation agenda. And in a lot of that, we talked to guests about why they weren't coming, why they were coming, and a lot of the feedback was around just the relevancy of the menu, of the brand, where we are, and all of those things. So we are actively tearing that all down, getting into it, working on the menu, working on innovation. As I mentioned on the call two weeks ago, we've got a lot of items in test in our Texas test, and we've expanded that test. You'll see those things starting to hit the menu as early as this fall. I talked about that. We have some innovation that we even hit this summer that we're talking about right now that's resonating with guests. So we believe we can do all of these things at the same time and that they're the right things to do, which is the most important thing. The guests in the research said that being more relevant with the food, being more relevant with the experience are the things that will drive them back in, and that's what we're working to write.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Ms. Julie Mathina for any closing remarks. Please go ahead.

Thank you all for joining us today. We remain intently focused on driving relevancy, delivering food and an experience that guests love, and growing profitability through the execution of our five pillars. As we execute our transformation, we are simultaneously focused on managing our day-to-day business and on operational excellence every shift, every day. I want to thank our team members and leaders for their hard work taking care of our guests and executing with excellence day in and day out. Their dedication and commitment to bringing our brand to life gives me further confidence that we will be successful as we transform our business and position it for long-term growth. Thank you for your interest, and we look forward to updating you on our progress at our next earnings call.

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