Cracker Barrel Old Country Store Inc (CBRL) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Cracker Barrel Fiscal 2017 Third Quarter Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jessica Hazel, Senior Manager, Investor Relations.

Please go ahead.

Thank you, Laura.

Good morning, and welcome to Cracker Barrel's Third Quarter Fiscal 2017 Conference Call and Webcast.

This morning, we issued a press release announcing our third quarter results and our outlook for the 2017 fiscal year.

On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO, Jill Golder; Senior Vice President of Marketing, Don Hoffman; and Vice President and Principal Accounting Officer, Jeff Wilson.

Sandy will begin with a review of the business, and Jill will review the financials and outlook.

We will then open up the call for questions for Sandy, Jill, Don and Jeff.

On this call, we will refer to non-GAAP financial measures for the prior fiscal year adjusted to exclude the prior year impact of the reduction of provisions for uncertain tax positions.

Excluding these tax effects from financial results provides information that may be more indicative of the company's ongoing operating performance while improving comparability to prior periods.

This information is not intended to be considered in isolation or as a substitute for financial information prepared in accordance with GAAP.

Reconciliations of the non-GAAP information to the GAAP financials are provided on the last page of this morning's press release, which is posted in the Investors section of our website, crackerbarrel.com.

In addition, 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 furnish to the SEC.

I'll now turn the call over to Cracker Barrel's President and CEO, Sandy Cochran.

Sandy?

Thank you, Jessica.

Good morning, everyone.

Thanks for joining us today.

For the third quarter, we posted improvements in our operating income and profit margins and delivered third quarter earnings above our previously stated expectations and consensus estimates.

We believe our earnings feat was a result of our focus on and execution of our cost-reduction initiatives as well as our field leadership team's ability to manage our expense lines through a challenged traffic period.

Our top line results performed below our internal expectations, as we had hoped our marketing programs and additional advertising spend would have driven more incremental traffic and sales, but the macro environment with the consumer and with promotional activity continues to be challenging for us and for the restaurant and retail industries as a whole.

Driven by our solid year-to-date performance, we're raising our earnings guidance for the fiscal year.

We anticipate a continuation of the current macro environment.

However, we're optimistic about our ability to grow fourth quarter earnings.

In this morning's release, we announced an increase in our regular quarterly dividend to $1.20 per share.

Over the last 6 years, we've increased our dividend 8 times or nearly 450%.

Also, this morning, we announced a special dividend of $3.50 per share.

This is the third special dividend declaration in as many years.

The increase in our regular dividend and declaration of a special dividend reflects our commitment to a balanced approach to capital allocation and to returning capital to our shareholders after we have appropriately reinvested in our business.

These decisions reflect our board's ongoing evaluation of our financial performance, capital investment and liquidity needs and on our ability to deliver total shareholder return.

Jill will review the financial results for the quarter as well as our updated full year expectations, but before she does, I'd like to speak to some of our third quarter highlights and what we're planning for the fourth quarter.

Our third quarter in-store menu promotion featured limited-time offerings, including a Multi-Berry Pancake Breakfast, a Grilled Chicken 'n' Strawberry Spinach Salad and a maple jam and bacon burger alongside some of our core menu favorites.

We believe our limited-time menu promotions are well received by our guests, appealing to both regular users and our less frequent guests, and we'll continue to invest in new product news that'll drive visit frequency.

With the introduction of our spring menu promotion, we also implemented system-wide caloric menu labeling.

Our field operations teams did an exceptional job with the rollout, and I'm really pleased with how smoothly our employees executed the changes.

We continue to grow our off-premise platform through our holiday Heat n' Serve program, which offers a family-sized meal for up to 10 guests that's available for pickup during the holiday week and prepared at home.

Our Easter Heat n' Serve program, which rolled system-wide, delivered third quarter traffic and favorable sales mix.

We believe the large-party off-premise category continues to represent an opportunity for incremental traffic and sales, and through platforms like Heat n' Serve and catering, Cracker Barrel can secure more share from off-premise eating occasions.

The summer menu promotion launched yesterday, bringing with it the anticipated return of our Campfire Chicken and Campfire Beef entrées, and we're already hearing great things from the stores.

This fourth quarter LTO promotion will run through the first week in August and feature strawberry French toast, Peppermill steak and eggs and a new s'mores dessert alongside the Campfire entrées.

We believe this is the right program to feature at a time -- at this time, as it brings a level of excitement to the brand for both our guests and our employees.

Turning now to our marketing efforts.

During the third quarter, we launched a 5-week national cable advertising campaign with incremental weights over the prior year.

Our messaging focus was a Cracker Barrel family-visit occasion, highlighting both our restaurant and retail experience.

To reinforce our value offerings, our TV advertising highlighted our daily lunch price point message at the end of the commercial.

Our summer marketing efforts began with support of the Campfire promotion through a fully integrated campaign that includes 8 weeks of national cable and 5 weeks of national Hispanic advertising.

Our messaging will focus on value and our unique menu offerings, as the Campfire entrées have historically scored very high on both overall satisfaction and value ratings.

We launched national Hispanic advertising following on the success we experienced with local television advertising in the Southwest and in Florida.

This incremental spend is part of our strategic plan to reach a broader demographic of people, and we're excited about this growth opportunity and will remain focused on this important segment in the future.

We recently began a refresh of our billboard program, with plans to update our more than 1,600 boards with new messaging and new creative highlighting our everyday affordability, our product quality and our core menu offerings.

Also, during the fourth quarter, key consumer engagement activity for the brand will be a partnership with the Country Music Association Music Festival.

With our ties to the CMA host city and our successful music and entertainment activation program, we believe we can reach consumers in a way that is unique to the Cracker Barrel brand.

We continue to compete in a highly promotional retail environment, and our third quarter results were below our expectations, driven by less traffic and fewer guests making a retail purchase.

In this environment where the consumer is becoming more accustomed to heavy markdown activity, we have had to be more promotional in our offerings and have modified our retail signage to highlight value on the merchandise floor.

In the fourth quarter, we anticipate a continuation of the challenged retail environment but believe our new summer merchandise will resonate with our guests across all generations, and we will continue to offer quality products, with our operations and field leadership teams focused on conversion-driving initiatives.

Our operations teams made solid progress toward our third quarter cost-saving targets, and as a result, we continued to deliver near the top of our target range of savings.

Unfortunately, wage inflation continues to pressure our labor lines, and we anticipate this headwind to remain in the fourth quarter.

To address consumers' needs for added convenience in their everyday dining experience, we've launched online wait-listing, which is currently available via our website and will launch in a new Cracker Barrel app in June.

This enables guests chain-wide to view the wait time for any Cracker Barrel store in a given market or between 2 points and be added to the wait list for the store of their choosing, providing both additional convenience for the guests and efficiency at the store.

Lastly, I'd like to speak to the success of our recent store openings.

We've had several new store openings over the last year that were in markets well outside our core footprint.

These include 2 stores in Las Vegas, Nevada; and most recently, an opening in Portland, Oregon.

Guests' response in these new markets have been positive, and we plan to open our first store in California next fiscal year.

In conclusion, we remain focused on delivering solid results and creating long-term value for our shareholder.

And with that, I'll turn the call over to Jill to discuss our financials.

Good morning, everyone, and thank you, Sandy.

I would like to begin by discussing our financial performance for the third quarter of fiscal 2017 and then our outlook for the 2017 fiscal year.

In this morning's release, we reported third quarter net income of $46.9 million or $1.95 per diluted share, representing a 7% increase over prior year adjusted earnings per diluted share of $1.82 when adjusting for the prior year impact of the reduction of provisions for uncertain tax positions.

For the quarter, we reported total revenue of $700.4 million compared to prior year revenue of $700.1 million.

Our restaurant revenue increased 0.8% to $575.1 million.

This was partially offset by a 3.4% decrease in retail revenue to $125.3 million.

Comparable-store restaurant sales in the quarter decreased 0.4% as average check increased 1.7% and traffic decreased 2.1%.

The increase in average check reflected menu price increases of approximately 1.6% and a favorable menu mix impact of 0.1%.

In today's press release, we shared a change in how we are calculating traffic growth.

Historically, we relied upon the servers to enter the number of guests at each table into the POS system and derive the traffic count for To-Go.

The data was then scrubbed using an algorithm to correct for potential inaccuracies from human error.

Beginning in the third quarter, we are calculating traffic based upon entrée counts.

We believe this measurement approach more accurately reflects underlying business growth, both in-store and To-Go, treating each of these dining occasions the same.

We have provided comparable restaurant traffic measured as change in entrées sold for fiscal 2017 by quarter on the supplemental information page of this morning's press release.

Comparable-store retail sales decreased 4.7%, primarily driven by our negative store traffic in addition to fewer guests making a retail purchase.

Total cost of goods sold in the quarter was 29.4% of total revenue, a 90 basis point improvement from the prior year quarter.

Our restaurant cost of goods was 24.8% of restaurant sales compared to 26.2% in the prior year quarter.

This 140 basis point improvement was driven by favorability in our commodity market basket and continued favorability from our food waste initiatives.

On a constant mix basis, our food commodity costs were approximately 3.9% lower in the quarter than in the prior year quarter, primarily driven by favorability from our eggs and beef categories.

Our retail cost of goods sold was 50.6% of retail sales compared to 48.5% in the prior year quarter.

This 210 basis point increase was primarily the result of increased markdown spend.

Our retail inventories at quarter end were $118.2 million compared to $107.6 million at the prior year quarter end.

This increase is primarily the result of the earlier receipt of fourth quarter merchandise.

Labor and related expenses were $250.8 million or 35.8% of revenue compared with $249.3 million or 35.6% of revenue in the prior year quarter.

This 20 basis point increase was primarily the result of higher store management expense and hourly labor due to wage inflation.

Other store operating expenses in the quarter were $136.2 million or 19.5% of revenue compared with other store operating expenses of $135 million or 19.3% of revenue in the prior year quarter.

This 20 basis point increase was primarily driven by planned depreciation and advertising expense increases, partially offset by favorability in our maintenance expense line.

Store operating income was $107.5 million in the third quarter or 15.3% of revenue compared with store operating income of $103.4 million or 14.8% of revenue in the prior year quarter.

General and administrative expenses in the quarter were $36 million compared to $36.4 million in the prior year quarter.

As a percent of revenue, G&A decreased 10 basis points to 5.1% versus 5.2% in the prior year third quarter.

Operating income was $71.5 million or 10.2% of revenue compared with operating income of $67 million or 9.6% of revenue in the prior year quarter, a 60 basis point improvement.

Net interest expense for the quarter was $3.4 million, which is flat to the prior year third quarter.

Our effective tax rate for the third quarter was 31.1% compared to the prior year quarter of 22.7% on a GAAP basis or 31% when adjusted for the reduction of provisions for uncertain tax positions.

Turning to our balance sheet.

We ended the fiscal quarter with $183.7 million of cash and equivalents compared to $176.7 million at the prior year quarter end.

Our total debt was $400 million at quarter end.

In this morning's release, we announced a $0.05 increase in our regular quarterly dividend to $1.20 per share or $4.80 per year.

We also announced the payment of a special dividend of $3.50 per share.

This is our third special dividend payment.

We believe this represents our commitment to delivering shareholder returns.

These dividend payments will use approximately $115 million and will not require any additional borrowing under our revolver.

The remaining cash balance and the unused balance on our revolver will continue to provide substantial liquidity after these dividends are paid.

With respect to our fiscal 2017 outlook, everyone should be mindful of the risks and uncertainties associated with this outlook, as described in today's earnings release and in our reports filed with the SEC.

We expect to report earnings per diluted share for the fiscal 2017 year of between $8.25 and $8.35.

We expect total revenue of approximately $2.95 billion.

As a result of our year-to-date sales performance, the ongoing challenged environment driving continued soft traffic trends and fourth quarter mix and traffic unfavorability from the later introduction of our Campfire promotion, we anticipate comparable store restaurant sales growth for the full fiscal year to be in the range of flat to 0.5%.

As a reminder, we shifted the timing of our Campfire promotion introduction to better align with the underlying timing of school vacations and travel season.

As we said on our last call, we anticipated that this adjustment to the promotion timing and the media advertising surrounding this to have a negative impact on fiscal May.

As expected, our month-to-date results in May are below prior year and below our expectations for June and July.

We believe this quarter-to-date trend will change, as we launched both the Campfire promotion and the national advertising campaign yesterday.

This restaurant sales guidance anticipates annual pricing in the range of 1.5% to 2%.

We now anticipate comparable-store retail sales of approximately negative 3.5%, reflecting our year-to-date retail sales performance and continued caution regarding our outlook on the retail environment.

During fiscal 2017, we expect to open 6 new Cracker Barrel stores and 3 new Holler & Dash stores.

We now expect decreases in food commodity costs on a constant mix basis of approximately 4.5% for the fiscal year, driven by the favorability we have experienced year-to-date and some moderate favorability in the fourth quarter.

We have locked in our pricing on approximately 90% of our commodity requirements for fiscal 2017, which is equal to the percentage at this time last year.

We continue to expect advertising expenses to be approximately 2.9% of revenue for the full fiscal year.

This would imply fourth quarter advertising expense growth of approximately 50 basis points over the prior year quarter.

This spend will provide incremental Campfire support, increase our media impressions through our CMA Music Festival partnership and complete the refresh of our billboard system.

We continue to expect depreciation expense of between $85 million and $87 million for the year, an increase of approximately 20 basis points over the prior year.

We now expect our operating income margin for the year to be approximately 10.5% of total revenue.

The continued growth in our operating income margin is supported by commodity deflation and the success of our cost savings initiative, with some of this favorability being offset by investments into our business via capital and advertising expenses as well as continued wage pressure.

We anticipate net interest expense of approximately $15 million.

We expect an effective tax rate for the year of approximately 32%.

We anticipate that capital expenditures for the year will be approximately $125 million.

For the fourth quarter of fiscal 2017, we expect to report earnings per diluted share of between $2.10 and $2.20.

This guidance implies an improvement over our May month-to-date top line results and reflects June and July performance that is improved from our third quarter results.

Given this, we anticipate results in the middle of our guidance range.

And with that, I will turn the call over to the operator so that we can take your questions.

Thank you very much.

(Operator Instructions) And our first question will come from Jake Bartlett of SunTrust.

Great.

I'm looking at your quarterly dividend growth for the last 2 years, kind of 4.3% and 4.5%.

What should we read from that?

Given the prior operating income growth of 7% to 8%, is it -- is this kind of an indicator that, that might have slowed?

Or how would you have us think about that?

Jake, this is Jill.

As a reminder, we've increased our dividend 8 times over the last 6 years.

And so as Sandy mentioned, that represents nearly a 450% growth rate.

Our overall dividend yield is among the highest in our peer set as our -- as well as our payout ratio, which is also the top of the group.

And our dividend per share has far outpaced our earnings per share growth since 2011, so we remain confident in our declared dividend amounts.

Okay.

And then looking at the same-store sales outperformance versus casual-dining peers, still positive but it did narrow meaningfully.

And I think you mentioned some discounting from competitors, but help me describe what -- why that narrowed in this quarter.

Was it about what you did in terms of your promotional schedule or more about the competition?

And should we expect that to reaccelerate?

What should reaccelerate that outperformance versus the industry?

Well, Jake, you've touched on several of the points that I would have made, which is that we did continue to see a highly competitive, even an increasingly competitive market among, really, all -- both QSR group, which we do compete with at the breakfast day part and the casual dining, particularly the bar-and-grill guys, and so that was a backdrop that we were operating in.

We emphasized our value offerings in the quarter and in the fourth quarter, plan to do even more to reinforce that.

And so I'm hopeful that our GAAP to NAAP will improve.

Okay.

And then lastly -- and sorry for the noise here; I'm on the train.

But other contacts have other companies throughout this earnings season have been increasing their commodity inflation guidance for '17.

If you can provide any sort of insight for fiscal '18, it'd be appreciated.

But if not, just the question would be how would you respond to that?

I know you're sensitive about your pricing now, and you've been taking it down, but would you start to switch that around if you did start to see more meaningful food cost inflation?

Yes, Jake, we have not provided fiscal 2018 guidance on commodities, and I will note that our commodity deflation favorability continues to moderate, so we would anticipate at some point the commodity market to return to a level of inflation.

And the next question will come from Gregory Francfort of Bank of America.

This is actually JonMichael on for Greg.

Just a couple of quick ones.

Wondering how you're thinking about leverage going forward and maybe what your current target is.

And I was wondering if you could talk about acquisitions and how you're thinking about the space from that perspective.

I guess from a leverage standpoint, I mean, right now, we're generating the cash that we need in order to invest in the business and then appropriately returning cash back to our shareholders.

And I think that's something that we'll talk more about when we provide guidance in September.

And I'll turn it over to Sandy to discuss any acquisitions or anything in that area.

I think, in general, there's been a lot of recent activity in the sector with acquisitions, and the team would evaluate any opportunity that we were aware of.

We would consider it, we would discuss it with the board, but we don't currently have a strategy that specifically has us targeting to make an acquisition in the near term.

Got you.

And then Jill actually maybe just answered my follow-up, but I was wondering if you're planning to give the 2018 earnings guidance in September at the Investor Day.

It sounded like September?

Yes, that's right.

On our September earnings call, we'll provide fiscal 2018 guidance.

And the next question comes from Michael Gallo of CL King.

It's a question and a follow-up.

My question is just on the potential to roll out wait list.

I was wondering whether you've tested this, and if you've seen any impact on potential retail sales from perhaps people coming in closer to when they sit down.

And then I have a follow-up.

We have had this in test for a number of months and have been pleased with the impact that it's had on both the guest experience and our ability to maximize business on the busy mornings and particularly the weekends.

What we've found is that -- Michael, is that our retail purchases tend to happen at the end of the visit, so that what having this more efficient system for our guests allows them to come in and eat and give them time at the end of the visit to shop in the store.

So we are not seeing a negative impact at this point on our retail purchases related to the online wait list.

Okay.

And then just a question on the -- you actually, I think, increased the commodity deflation target for the year, which is, again, different from what we've seen from others.

So I was wondering what sort of drove that relative to your expectations 3 months ago.

Sure.

Our commodity deflation guidance, we did increase the deceleration from down 4% to down 4.5%.

The primary driver was in the dairy category, from our block cheese and butter.

And then just as a reminder, we've locked in to 90% of our commodities, and that's been built into our guidance.

The next question will come from John Zolidis of Buckingham.

This is Kristin on for John.

So we saw results in the retail business that were more difficult than the restaurant side.

So our question is, is there something going on in the retail business that's distinct from what's happening in the dining room?

And piggybacking off of that, what do you think can be done to drive improved results in retail going forward?

So Kristin, as much as we believe that the discounting in the restaurant business is significant, I'd say it's even more in the retail industry right now.

And I'm sure anybody out there is aware of what's going on with particularly mall-based retailers and the number of store closures and chain bankruptcies and so on.

So I would characterize the environment as even more highly competitive, and it was against that backdrop that we had to operate during the quarter.

In terms of what we did and what we are doing is we're looking across every element of our business.

So first, we are and our buyers are doing an excellent job of evaluating that we are, in fact, offering great value; that we are merchandising in a way that allows the guests to find the value; and that we are signing the merchandise in a way that highlights that.

So for example, in some cases, we might have had a spinner of jewelry that we decided to put all at one price point, a very attractive price point, and to sign it that way so that the guests could very clearly see that we -- they were able to find great bargains in our store.

I think the team has been aggressively looking at their inventory levels and, where they could, trimming them.

I think we're talking a lot to our vendors about how they can support our promotional activities and what they can do to help us through this.

And I think they're doing a good job of looking at our assortment to understand to what degree we just didn't have the right product for either the trend or the time or the current guest.

So you never want to think that you aren't doing anything to contribute to the problem, but I think that Laura and her team are very focused on the things that we can do to operate effectively in this environment over the next -- what probably will be the next few quarters as the overall retail industry continues to shake out.

The next question is from Brittany Whitman of Longbow Research.

Just quickly, I wanted to know if there was any impact on either your traffic and/or sales from the timing shift of the Easter holiday.

Brittany, from the Easter holiday, I mean, there was timing within the quarter.

Easter shifted from March into April, but overall for the quarter, it's always in that quarter.

Okay.

And then just quickly, if I may.

I know you said you're getting ready to ramp up your store expansion in California with your first store in fiscal '18.

I wanted to see if you have any other expectations or could give any more color for your store builds in 2018, if we should expect to see that ramp up?

At this point, we're not giving any guidance on our 2018 unit growth.

Okay.

Any guidance on 2018 commodity costs, given some of the recent movements that you guys have been seeing?

No.

As I said earlier, I mean, we've seen, and the industry has seen, some significant commodity deflation over the last number of quarters, so we would expect at some point to see an inflationary environment return.

And the next question comes from Steve Anderson of Maxim Group.

Just I wanted to ask about your -- about the labor cost.

I see you're still seeing a little bit of deleverage, but I noticed that the amount of deleverage actually had improved somewhat.

I think it was like 60 basis points last quarter; it was less than that this quarter.

But I wanted to see if -- what you can attribute that to, if you saw -- if there was any incremental improvement from the $50 million cost savings during -- that were achieved in this particular quarter.

Steve, yes, there's really 2 primary impacts on the labor lines.

So we continue to see wage inflation, and that's been more at the upper end of our 2.5% to 3% guidance range.

We've been able to offset some of that with our focus on our cost savings.

We talked about on the last call the fact that we initiated one of our cost savings impacts with the cross-training initiative during low peak hours for the cashier and retail associates.

So that cost savings initiative benefit benefits the overall labor lines.

And then just as we think about the 2017 cost savings target, our guidance is $18 million to $20 million.

And at this point, we would expect to be at the upper end of that guidance.

(Operator Instructions) And our next question will come from Bob Derrington of Telsey Advisory Group.

This is Ben Flox on for Bob Derrington.

I'm just curious, as you look at the retail business and you look kind of how the product mix was last year and how you envision that being this year, with all the new summer items rolling out, if you could just kind of comment on the direction that's headed that'd be great.

Ben, I'm not sure I understood the question.

Our -- as we head into the summer season, as I mentioned in the scripted remarks, I think we're excited about our assortment.

Apparel and accessories continues to be both one of our largest categories, and it has been one of the ones that has -- we've had to do some of the most discounting.

But I am excited about what we have on the floor right now.

Food is always an important category for us in the summer.

It's a great pickup item for families traveling and for summer road trips and so on.

So I don't think -- I'm not anticipating a significant category shift this summer versus last summer.

And this concludes our question-and-answer session.

I would like to turn the conference back over to Sandy Cochran for any closing remarks.

Thank you all for joining us today.

As we head into the final quarter of the year, our management teams and over 70,000 employees remain focused on providing the great guest experience that differentiates the brand.

I remain confident that we have the right strategy and the right leadership in place to move the brand forward and create shareholder value.

We appreciate your interest and your support.

Thank you.

The conference has now concluded.

Thank you for attending today's [presentation].

You may now disconnect.