Cracker Barrel Old Country Store Inc (CBRL) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to the Cracker Barrel FY14 second-quarter earnings conference call.

Today's conference is being recorded and will be available for replay today from 2 PM Eastern through March 11 at 11.59 Eastern by dialing 888-203-1112 and entering passcode 5033509.

At this time for opening remarks and introductions, I would like to turn the call over to Coco Kyriopoulos, Investor Relations.

Please go ahead.

Thanks, Danielle.

Good morning, and welcome to Cracker Barrel's second-quarter FY14 conference call and webcast.

This morning we issued a press release announcing our second-quarter results and outlook for the 2014 fiscal year.

In this press release, and on this call we will, refer to non-GAAP financial measures for the current quarter, adjusted to exclude proxy contest expenses and the related tax effects.

We will also referred to non-GAAP financial measures for the prior-year quarter, adjusted to exclude charges and tax effects related to severance and the prior-year proxy contest as well as adjustments related to the retroactive reinstatement of the work opportunities tax credit.

The Company believes that excluding these charges and tax effects from its 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.

The last page of the press release includes a reconciliation from the non-GAAP information to the GAAP financials.

The press release can be found in the Investors section of our website, CrackerBarrel.com.

In that press release, and during this call, statements may be made by Management of their beliefs and expectations of the Company's future operating results or expected future events.

These are what are known as forward-looking statements, which involve risks and uncertainties and, in many cases, are beyond Management's control and may cause actual results to differ materially from expectations.

We urge caution to our listeners and readers in considering for looking statements and information.

Many of the factors that could affect results are summarized in the cautionary description of the risks and uncertainties found at the end of this morning's press release and are described in detail in our reports that we filed with, or furnish to, the SEC.

We urge you to read this information carefully.

We also remind you that we do not comment on earnings estimates made by other parties.

In addition, any guidance or outlook we provide, or statements we make, regarding trends speak only as of the day they are given and we do not update or express continuing comfort with our guidance, outlook or trends except in broadly disseminated disclosures such as this morning's press release, filings with the SEC or as otherwise required by law.

On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO, Larry Hyatt; and Senior Vice President of Marketing, Chris Ciavarra.

Sandy will begin with a review of the Business and Larry will review the financials and outlook.

We will then open up the call for questions for Sandy, Larry and Chris.

We ask that you please limit your questions to matters relating to the Company's performance, outlook and plans.

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

Sandy?

Thanks, Coco, and good morning, everyone.

As you can see from today's press release, we increased our operating margins and earnings in the second quarter despite the challenges of extreme winter weather and the continuing uncertain economic environment.

I believe these results reflect the strong performance of our field operating teams, who executed well during this difficult period and remain focused on the initiatives we laid out at the beginning of the year.

Overall, we estimate that weather impacted our traffic, restaurant and retail sales by approximately 2.5%, with the greatest impact during the months of December and January.

Automobile travelers are an important part of our customer base, and they are particularly important to our business during the second-quarter holiday travel season.

As a result, we believe the extreme winter weather had a greater impact on our business than many of our competitors.

Nevertheless, for the ninth consecutive quarter we outperformed the Knapp-Track index for comparable-store traffic and restaurant sales.

We also continued to deliver a great guest experience in the quarter.

Consumer survey results for calendar 2013 from Technomic, a well-recognized industry research firm, indicate that Cracker Barrel ranked first overall across 34 large restaurant chains Technomic tracks.

Some of the attributes and we led in included our food quality, friendly service and value.

This morning, I'll update you on the progress we've made on our long-term strategy to enhance the core business, expand the footprint of our stores and extend the Cracker Barrel brand, and then Larry will review the financial results in detail.

Our long-term strategy is supported by our five business priorities for FY14.

To reiterate, those business priorities include: first, focusing on better-for-you menu alternatives and reinforcing everyday value on our menu; second, continued messaging with our Handcrafted By Cracker Barrel theme in support of the brand menu and merchandise; third, driving retail sales with improved quality and breadth of our merchandise assortment; fourth, improving operations and margins by applying technology and process improvements; and fifth, the on-going focus on enhancing long-term total shareholder returns.

Beyond meeting our guests' desire for healthy options, we believe the addition of Wholesome Fixin's to our core menu in the first quarter increased the appeal of the Cracker Barrel brand to many guests, especially among some of our less frequent users.

For example, during the second quarter we saw year-over-year improvement in survey scores measuring guests' attitudes about the brand like, it is a restaurant I can trust, uses fresh ingredients and good for a variety of occasions.

Throughout the quarter, we highlighted both our better-for-you and our value offerings with menu promotions and marketing strategies.

The holiday promotion featured limited-time offerings and on-menu selections, including items from our Wholesome Fixin's category, like our grilled chicken and vegetable salad, items from our weekday lunch specials category, like our special grilled three cheese sandwich and green tomato soup and indulgent of favorites like Fancy Fixin's roast beef and chicken-fried chicken, as well as a limited-time offers of the pecan sticky bun French toast, double meat breakfast and holiday grilled ham and pineapple dinner.

We believe the holiday promotion was positively received by our guests.

Our winter promotion, which began in January, includes comfort food for these cold winter days at a good value, like our beef and mushroom stuffed pot-pie and buttermilk chicken sliders, as well as limited-time offerings from our Wholesome Fixin's platform, including a southwestern chicken Caesar salad for 580 calories and citrus spiced rubbed chicken breast, which is under 500 calories when paired with lighter sides.

Another priority for this year is to build on our successful Handcrafted by Cracker Barrel advertising campaign.

We believe the handcrafted theme has helped to increase brand perception.

Similar to last year, our TV advertising ran our national cable stations for five weeks starting in the middle of December, and covered 100% of our stores.

The commercials highlighted the Cracker Barrel brand and our value message.

During the same time frame, we ran radio spots in 65% of our markets, which highlighted the brand, seasonal menu offerings and our retail assortment.

We continue to direct advertising dollars to programs and stations popular with our media target audience of women ages 25-54.

We also focused our digital marketing efforts during the holiday season on our Thanksgiving menu offerings and retail merchandise.

From a retail perspective, the quarter was challenging since our travel guests on average spend more in our retail stores.

The holiday seasonal themes performed well.

We had little holiday inventory remaining at the end of the season and were able to reduce mark downs of these items compared to prior years.

Our guests responded to our value-driven merchandise, like our women's outerwear and our great gifts for under $19.99, and we saw strength across all apparel lines -- women's, children's and men's.

However, sales for our home decor items, toys and candles were lower than last year.

As in prior years we introduced some of our spring merchandise in January.

However, we believe that this year's extreme cold weather has negatively impacted the guests interest in these new, brightly colored spring themes.

Despite the weather, our retail team was able to manage what was in their control and we saw improvement in our retail margins during the quarter.

In addition, several of our operational initiatives that we rolled out in the first quarter improved results in our second quarter.

For example the second phase of our labor management system includes a tool to better forecast store labor needs, while the food production planning system helps our store managers better match food production with anticipated demand.

Both of these systems are helping us increase productivity and throughput and they contributed to our ability to set an all-time one-day sales record last Thanksgiving Day.

So you can see that even in the midst of a challenging quarter, our operations team continues to deliver a great experience for our guests.

Our guests survey scores for overall satisfaction and overall value improved in every month over last year.

Regarding our extend-the-brand strategy, this quarter marks the first full quarter of our CB Old Country Store licensed product in stores.

We have 11 products in over 14,000 retail locations.

Although the licensing revenue remains immaterial to our P&L, we're pleased with the initial reception for this strategy and the sell through of our licensed product at the grocery stores, especially our CB Old Country spiral ham which sold well during the holiday season and our CB Old Country Store brand bacon and lunch meat products, which are ranked high in sales among other nationally recognized brands in their categories.

We'll introduce more new products this year with five types of deli meats coming in the third quarter.

Looking ahead, Larry will guide you through our guidance for the third quarter and the full fiscal year.

February traffic has continued to be impacted by the severe winter weather which, as you know, has not let up.

We estimate that the negative impact on traffic and sales for February has been in the mid- single digits.

We continue the focus on our business initiatives and to driving shareholder value.

We opened one store after the quarter closed and remain on track with the goal of opening a total of seven stores this fiscal year.

We believe the Cracker Barrel guest continues to face a challenging economic environment, which includes uncertainty around the job market and health care.

All of us remain focused on creating and providing a unique and welcoming experience for our guests.

As a result of our consistent focus on our long-term strategy and the effective execution of our business priorities, I'm very proud that we're able to show a solid quarter of strong operating performance.

We will remain focused on these key priorities through the remainder of the year.

And with that, I'll hand the call over to Larry for more details on the quarter.

Good morning, everyone and thank you, Sandy.

I would like to begin by discussing our financial performance for the second quarter of FY14 and then our outlook for the 2014 fiscal year.

For the second quarter of FY14, we reported net income of $37.1 million, or $1.55 per diluted share.

When adjusted for charges related to the proxy contest, our adjusted net income was $1.56 per diluted share, a 9% increase over adjusted earnings per diluted share in the prior-year quarter.

Our revenue in the quarter was $698.5 million, a 0.6% decrease over the $702.7 million in the prior-year second quarter.

Our restaurant revenues were $528.4 million and retail revenues were $170.1 million.

Our comparable store restaurant sales decreased 0.6% as traffic declined 2.9% and average check increased 2.3%.

The increase in average check reflects menu price increases of approximately 1.8% and a favorable mix impact of 0.5%.

Our comparable store retail sales declined 3% for the quarter.

The Company estimates that the severe winter weather had a negative impact on comparable store traffic, restaurant and retail sales of approximately 250 basis points, with the greatest impact during the months of December and January.

Our total cost of goods sold in the quarter was 34.8% of revenue, which was flat to the prior-year quarter.

Our restaurant cost of goods was 28.1% of restaurant sales, compared to 27.7% in the prior-year quarter.

This 40 basis point increase was a result of the mix shift to higher-cost menu items and increases in food waste.

We believe that the increase in food waste was caused by the severe winter weather, which made it difficult for our stores to accurately forecast food production.

Our commodity costs were up approximately 1.7% in the quarter compared to the prior year quarter, as increases in beef, pork, poultry and seafood costs were partially offset by reductions in most other areas.

Our retail cost of goods was 55.6% of retail sales, an improvement of 50 basis points compared to 56.1% in the prior-year quarter.

This year-over-year improvement was the result of higher initial mark ups, reductions in freight expense due to our transportation management system and reduced shrinkage, offset by higher mark downs.

Our retail inventories at the end of the quarter were $110.9 million, an increase of $7.4 million over the prior-year quarter.

This increase was primarily the result of the earlier receipt of spring merchandise.

Our labor and related expenses were $238.7 million, or 34.2% of sales, a reduction of 60 basis points, compared to 34.8% of sales in the prior-year quarter.

This year-over-year improvement is due primarily to lower incentive compensation and a $3.4 million of favorable premium adjustment related to employee health insurance for the plan year that ended during the second quarter, on December 31.

Our other store operating expenses in the quarter were $128.1 million, or 18.3% of revenue, compared with $122.6 million, or 17.4% of revenue, in the prior-year quarter.

This year-over-year increase of 90 basis points is due primarily to an increase in utilities, supplies and occupancy expenses.

Our store operating income was $88.6 million, or 12.7% of revenue, compared with $91 million, or 13% of revenue, in the prior-year quarter.

On a GAAP basis, our general and administrative expenses in the quarter were $29.9 million, or 4.3% of revenue.

Adjusted to exclude proxy contest expenses, our G&A expenses were $29.5 million, or 4.2% of revenue, compared with adjusted G&A expenses of $32.1 million, or 4.6% of revenue in the prior-year quarter.

This 40 basis point reduction was primarily a result of lower incentive compensation.

On a GAAP basis, operating income was $58.7 million, or 8.4% of revenue.

Adjusted for proxy contest expenses, adjusted operating income was $59.1 million, or 8.5% of revenue, compared with adjusted operating income of $58.9 million, or 8.4% of revenue, in the prior-year quarter.

Our interest expense in the quarter was $4.5 million, compared to $10.3 million in the prior-year quarter.

This reduction in year-over-year interest expense was due primarily to lower interest rates following the expiration of our swaps of the end of last year's third quarter, reduced levels of borrowing and a lower credit spread on our bank facility.

Our effective income tax rate was 31.7% for the quarter, compared to 25% in the prior-year quarter.

The tax rate in the prior-year quarter reflects the retroactive reinstatement of the work opportunity tax credit.

The tax rate for the current quarter, and the anticipated tax rate for the full year, reflect the expiration of the same work opportunity tax credit on December 31, 2013.

Our capital expenditures for the quarter were $21.4 million, compared to $16 million in the prior-year quarter, reflecting higher spending on new stores and store maintenance capital.

Our balance sheet continues to be strong.

We ended the quarter with $91.4 million of cash and equivalents and our total debt is approximately $400 million.

With respect to our 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.

So, bearing that in mind, we reaffirm our previous earnings guidance for the fiscal year of between $5.60 and $5.80.

We now expect total revenue for FY14 of approximately $2.7 billion, reflecting anticipated increases in comparable store restaurant sales of between 1% and 2%, approximately flat comparable store retail sales and the expected opening of 7 new Cracker Barrel stores.

For the third quarter of FY14, we expect to report adjusted earnings per diluted share of between $1.20 and $1.30.

We now expect our earnings for the full year and the third quarter to be close to the midpoints of our guidance ranges.

Our earnings guidance for the quarter and for the full-year assumes normal weather patterns for the balance of the third quarter.

We continue to expect increases in food commodity costs on a constant mix basis of approximately 2% for the fiscal year.

We have locked in our pricing on approximately 70% of our expected commodity requirements for the remaining two quarters of FY14, which is flat with the locked percentage at this time last year.

We expect our adjusted operating margin for the year to be approximately 8% of revenues, depreciation expense of between $68 million and $70 million, net interest expense of between $16 million and $18 million.

We expect an effective tax rate for the year of between 31% and 32% and capital expenditures for the year in the range of $90 million to $100 million.

Our guidance does not include any expenses related to last November's proxy contest or the special shareholder meeting scheduled for April, nor any severance or other charges related to any organization changes.

The proxy contest expenses related to the November annual shareholder meeting were $0.09 per diluted share, of which $0.01 was recorded in the second quarter.

We expect that the expenses associated with the special meeting on April 23 will be between $0.03 and $0.05 per diluted share.

And with that, I will turn the call over to the operator and we look forward to your questions.

Thank you very much.

Thank you.

(Operator Instructions)

Jeff Farmer, Wells Fargo.

Thank you.

You did touch on this earlier in the call, but I am curious if the $5.99 daily lunch special, as well as the Country Dinner Plates, are continuing to build mix momentum for you guys, and how important each of those has been in driving some of the pretty impressive market share gains you've seen over the last few years.

Jeff, yes, the daily launch special program does continue to be strong (inaudible), and lunch was actually a good day part -- the strongest day part during the quarter.

We're bringing new news into it so our Stuffed Beef n' Mushroom Pot Pie and the Grilled Cheese and Green Tomato Soup special was very popular in the promotion.

We're bringing new news on the Country Dinner Plate side as well with the sides, so, yes, we think both of those continue to improve, to make the concept sort of more appealing, as we introduced sort of the better-for-you elements of those and, maybe as important or more important, they reinforce our value position in the market, which is very important in the current environment.

And then, unrelated, Larry, for you.

Your big casual dining peers continues to get pressured to possibly pursue a publicly traded REIT structure for some of the real estate.

I'm curious what your thoughts are on the REIT structure just in general for restaurant companies?

Yes, Jeff, a couple of things, and as you know because you participated in these conference calls over a number of years, we occasionally get questions about a potential financing structure for the Company's real estate because we own over 400 of the 626 restaurants that we operate.

Let me talk first about the sale-leasebacks and after that I'll talk about a potential REIT structure.

Sales leasebacks are a form of financing.

In the current market, it is a relatively expensive form of financing as compared to the other forms of financing that would be available for us.

As far as a REIT structure is concerned, what is usually spoken of is a single-tenant triple-net lease REIT.

We have examined that potential structure, as I suspect any restaurant company that has as much real estate as Cracker Barrel has would reasonably do, and I'll offer a couple of observations.

Of the 50 largest publicly traded REITs in the United States, a Cracker Barrel REIT would be somewhere around number 53.

So there is a concern about whether it would be sufficient to generate any investor interest and, therefore, at the end of the day, if this would be creating value for existing shareholders.

Secondly, the best that we could tell, in the entire history of corporate America, I believe that there have been two triple-net single-tenant REITs, and one of those two is in bankruptcy.

And so, it's a structure a lot of people speak about.

It is not a structure that many have been successful yet.

And, third, under the various IRS laws, it would be significant tax recapture since this would be a separate public Company.

It would need its own G&A structure and the value leakage from both of those we believe would more than offset any possible valuation advantage to our shareholders.

Great.

Thank you very much.

(Operator Instructions)

Michael Gallo, CL King.

Hi, good morning.

Morning.

Hi, sorry, just a question on SG&A.

You did a great job again squeezing that down in the quarter.

I know some of that was lower incentive comp, but even in the last couple of years you've done a good job controlling SG&A expenses.

Is that at the point where there's more savings to be had, or are we at a point where you think from here it will be hard to sustain the kind of levels that you had in the second quarter?

Thank you.

Yes, a couple of things.

One is the G&A levels in the second quarter, as I commented on in my remarks, were largely the result of reductions in incentive compensation expenses.

The way our incentive compensation works, one of our stock plans -- the accounting rules require us to mark its value to the market at the end of every quarter.

And so, since from the end of the first quarter, the end of the second quarter, our stock change was about $11 and a change in the stock price of the dollar is about $200,000 on that expense line alone, so that the $11 change was basically a year-over-year G&A change of about 30 basis points of the 40 basis points.

But to answer your larger question, I don't think there is a CFO in America who won't say there is always more cost-savings opportunity and there certainly is more cost-saving opportunity, but probably going forward at a more modest level than the cost savings you've seen in the G&A line over the last few years.

Great.

That's helpful.

Just as a quick follow-up there, did the change in the incentive comp, does that show up or get recaptured at all in the interest expense line or just purely it's G&A?

No, it's purely G&A, Michael.

Thank you.

And, with no further questions in queue, I'll turn the call back to our presenters for any additional or closing remarks.

Thank you all for joining us today.

Like I said, I'm pleased with our ability to manage through a challenging period.

We look forward to warmer weather and continued progress on our business priorities during the second half of the year.

We appreciate your interest and support, and look forward to talking with you next quarter and at our analyst institutional Investor Day on May 1. Thank you.

Ladies and gentlemen, that will conclude today's conference.

Thank you again for your participation.