Cracker Barrel Old Country Store Inc (CBRL) 2022 Q3 法說會逐字稿

Good morning, and welcome to the Cracker Barrel Fiscal 2022 Third Quarter Earnings Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jessica Hazel, Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Cracker Barrel's Third Quarter Fiscal 2022 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 for the third quarter ended April 29, 2022. The third quarter non-GAAP financial measures are adjusted to exclude the noncash amortization of the asset recognized from the gains on our sale and leaseback transactions and the related tax impacts.

The company believes that excluding these items from its financial results provides investors with an enhanced understanding of the company's financial performance. This information is not intended to be considered in isolation or as a substitute for net income or earnings per share information prepared in accordance with GAAP. The last page of the press release include reconciliations from the non-GAAP information to the GAAP financials.

On the call with me this morning are Cracker Barrel's President and CEO, Sandy Cochran; Senior Vice President and CFO, Craig Pommells; and Senior Vice President and CMO, Jennifer Tate. Sandy and Jen will provide business and initiative updates and Craig will review the third quarter financials and outlook. We will then open up the call for questions for Sandy, Craig and Jen.

On this call, statements may be made by management of their beliefs and expectations regarding the company's future operating results or expected future events. These are known as forward-looking statements, which involve risks and uncertainties that, in many cases, are beyond management's control and may cause actual results to differ materially from expectations.

We caution our listeners and readers in considering forward-looking statements and information, particularly in the current environment. Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties found at the end of the press release and are described in detail in our reports that we file with or furnished to the SEC.

Finally, the information shared on this call is valid as of today's date, and the company undertakes no obligation to update it, except as may be required under applicable law.

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

Thank you, Jessica, and good morning, everyone. This morning, we announced total revenue growth of 10.8% compared to the prior year and 6.8% compared to the third quarter of fiscal 2019. Although I'm pleased with the work that our teams did to drive our sales above pre-COVID levels, our top line came in below our expectations, while cost pressures and deleveraging continued to challenge our bottom line.

We were seeing encouraging sales trends as February progressed, but the macroeconomic environment and higher inflation slowed our recovery in March and April below our expectations. Three things, in particular, impacted our sales during the quarter; first, over 65-year-old guests have been slower to return to in-person dining than other demographics in our guest base; second, the challenging economic environment caused some of our guests to manage frequency and check during the quarter; and finally, we believe that high gas prices disrupted traditional spring break travel patterns, resulting in lower travel visits.

The positive side, our off-premise business continued to meet our expectations, and we partially offset our dine-in headwinds with continued strong retail performance as we grew comparable store retail sales by 9.7% over the prior year quarter by 21.6% compared to the third quarter of 2019.

With regard to cost, we continue to experience historically high commodity and wage inflation as Craig will run through. And although we've taken pricing to help us protect our margins, commodity inflation outpaced even our own robust expectations for the quarter.

Craig will now go into some greater detail about the quarter and the current environment as well as how we're thinking about the cost side. And once Craig is finished, I'll address the growth and top line initiatives that we're pursuing to position us well going forward. Craig?

Thank you, Sandy, and good morning, everyone. For the quarter, we reported total revenue of $790.2 million. Restaurant revenue increased 11% to $632.2 million and retail revenue increased to 9.7% to $158 million versus the prior year third quarter.

Comparable store total sales included in both restaurant and retail grew by 10.7% compared to the prior year. Comparable store restaurant sales grew by 10.9% over the prior year, driven primarily by dine-in traffic growth and 5.9% pricing. Despite this growth, restaurant sales performance was below expectations. We are pleased with our continued strong retail sales growth and solid off-premise retention levels and the work our teams have done to evolve these businesses to offer our guests increased flexibility and convenience.

Third quarter comparable store off-premise sales remained significantly elevated versus pre-COVID trends. Off-premise sales were 19% of restaurant sales for the third quarter with strong year-over-year growth from our catering business and third-party delivery with offsets coming from year-over-year declines in our individual To-Go sales as more guests returned to dine-in.

Comparable store retail sales increased 9.7% compared to the third quarter of the prior year. Toys, decor and food and convenience offerings continue to be the primary drivers of retail sales performance. Apparel, which was one of the harder hit merchandise categories during the pandemic, has now returned to its pre-COVID level, and we believe there is further growth in this category as dine-in traffic returns.

Moving to expenses. Total cost of goods sold in the quarter was 31.6% of total revenue versus 28.8% in the prior year quarter. Restaurant cost of goods sold was 27.8% of restaurant sales versus 24.3% in the prior year quarter. This 350 basis point increase was primarily driven by commodity inflation, up 18% combined with elevated freight costs running ahead of our pricing.

We experienced higher-than-anticipated inflation across all [protein] categories as well as fruits and vegetables. Retail cost of goods sold was 46.9% of retail sales versus 46.5% in the prior year quarter. This 40 basis point increase was primarily driven by higher freight costs.

Third quarter labor and related expenses were 35.9% of revenue versus 35.1% in the prior year quarter. This 80 basis point increase was primarily driven by wage inflation and increased staffing at both managerial and hourly levels. Finally, adjusted other operating expenses were 23.1% of revenue, the same as in the prior year quarter.

Moving beyond store level margins. Our general and administrative expenses in the third quarter were down slightly to 5% of revenue versus 5.2% in the prior year quarter. These results culminated in GAAP operating income of $30.5 million.

Adjusted for the noncash amortization of the asset recognized from the gains on the sale and leaseback transactions, adjusted operating income for the quarter was $33.6 million or 4.3% of revenue. Net interest expense for the quarter was $2.2 million compared to $9.6 million in the prior year quarter. This $7.4 million decrease is the result of lower debt levels as well as a lower weighted average interest rate due to the convertible debt offering we completed in the fourth quarter of fiscal 2021.

Our effective tax rate for the third quarter was 2.7%. This tax rate was driven by increased tax credits on lower-than-expected earnings. Third quarter GAAP earnings per diluted share were $1.19, and adjusted earnings per diluted share were $1.29. In the third quarter, EBITDA was $59.6 million, a 28.1% decrease compared to our prior year third quarter EBITDA results.

Turning to capital allocation and our balance sheet. We remain committed to a balanced approach to capital allocation. Our first priority remains investing in the growth of Cracker Barrel and Maple Street. And beyond that, we plan to return capital to our shareholders while maintaining appropriate flexibility and a conservative balance sheet.

In the third quarter, we invested $29 million in capital expenditures, which was a significant step-up from the approximately $15 million per quarter in the first half of the year. The increase was due to higher maintenance capital spending, which has been below normal from multiple quarters as well as increased spending on new unit growth.

Additionally, we returned $69.5 million to shareholders in the third quarter through a combination of dividends and share repurchases, bringing our year-to-date total to more than $158 million. Today's $1.30 quarterly dividend declaration and new $200 million share repurchase authorization reflects our Board's commitment to returning capital to shareholders while investing prudently in our business.

Lastly, we ended the quarter with $373 million in total debt compared to $615 million at the prior year quarter end. While we are increasing our share repurchase authorization, we will maintain our conservative approach to managing our balance sheet.

Sandy and Jen are going to speak to many of the initiatives that we believe are positioning us for near-term and longer-term success. But as we look to our fourth quarter financial expectations, we anticipate the near-term pressures we faced on both our top and bottom lines in the third quarter to persist.

Clearly, we plan to offset some of our cost pressures over the remainder of the calendar year. While we've seen some guests managing check, our plan is to take price increases in a staged and thoughtful manner. We will take an increase in late June, followed by another in early August. Together, these will support an approximately 7% total combined year-over-year pricing through the end of the calendar year. We will continue to monitor the consumer and inflationary environment and maintain the flexibility to take additional pricing if we believe it will be prudent to do so.

As Sandy mentioned, at the outset of the quarter, we saw improving sales trends before a spike in gas prices and inflation resulted in increased consumer uncertainty and a decline in our traffic recovery. We expect the current traffic trends to continue through the end of our fiscal year. We anticipate this, coupled with our pricing plans, will result in fourth quarter total revenue of approximately 8% above the fourth quarter of 2021.

We expect fourth quarter commodity inflation of 16% to 18% and wage inflation of 8% to 10%. While this level of inflation is more moderate compared to the third quarter, it is higher than we previously anticipated and represents a margin headwind.

Furthermore, versus the prior year fourth quarter, we expect additional inflation in other areas of the P&L, most notably, utilities and off-premise supplies, higher expenses for manager and hourly staffing and training and investments in technology and in Maple Street infrastructure. Taking all of this into account, we expect fourth quarter operating margin to be in the range of 4% to 4.5% of total revenue.

Lastly, as we continue to work on our business model, we are very focused on identifying and pursuing sustainable opportunities to improve margin and long-term profitability. Savings from our new food cost management system are already providing a modest offset to commodities inflation and early results from our labor management system test has been promising.

We believe the labor system, coupled with continued enhancements in our digital infrastructure, will drive improved productivity and more cost-effective wage administration beginning in the later part of fiscal 2023. And as we continue to navigate this high inflation environment, we are implementing both short-term and sustainable long-term cost saving options across our food and beverage, equipment and supplies categories.

With that, I'll hand it back to Sandy.

Thanks, Craig. Despite the challenges of the third quarter, many of which are likely to continue to 1 degree or another for the balance of our fiscal year, we're actively pursuing strategies and initiatives that I believe position us well both for the near and longer term. Obviously, there are business model and cost saving actions that Craig referenced. And from a revenue perspective, in addition to pricing, we have numerous initiatives to drive check, position the brand to drive increased visitations and attract a broader audience of guests while continuing our retail performance and our thoughtful expansion of Maple Street.

I'll run through some of what we're doing and then ask our Chief Marketing Officer, Jen Tate, to provide additional details about how we're driving check and positioning the brand more generally.

The first place we're focused is store level execution. We believe that the best way to preserve our reputation for strong value in an environment where we're taking additional pricing is through operational excellence and enhanced hospitality and service.

Consequently, our biggest initiative is to focus on our operations and make sure that every guest who visits us has an experience that we can be proud of and will continue to give us high marks for value. This focus should pay dividends for us, and we're seeing excellent recent guest experience scores, including notably on Mother's Day, which is traditionally one of our highest volume days of the year.

Building on this momentum, we're investing resources to ensure that our managers and our hourly employees have ample support and the development they need to care for our guests like family. For example, we recently rolled out an in-person training and development program focused on operational excellence, hospitality and service to all of our district and managers around the country. Of course, great operations begin with ensuring that we're adequately staffed. Our talent acquisition teams remain focused on making sure we attract and retain employees around the country, particularly servers, and we continue to make solid progress in this regard.

A number of our stores with meaningful staffing challenges is now essentially back to our historic norms, and we believe we are and should remain sufficiently staffed to handle continued recovery in guest traffic.

As I noted in my opening comments, retail remains a strength for us, and our retail teams have done an incredible job keeping our stores filled with unique and nostalgic everyday merchandise that resonates with our guests. They've managed our supply chain extremely well, and we're able to avoid any significant disruptions to our retail floors. To protect our important holiday season and continue our strong retail performance, we proactively pushed up some of our ordering time lines and will remain focused on supply chain management.

Finally, we're focused on growing Maple Street, which just opened its 50th location and has continued to perform above our expectations despite dealing with its own inflationary pressures. We remain very excited about this brand and are seeing it deliver on our investment thesis that the fast casual breakfast and lunch space is an attractive one.

We've been focused on and have made great progress ensuring that we've got the right infrastructure in place to grow the brand, including honing the Maple Street real estate model, developing training and operational programs and hiring key leadership. In this regard, I'm pleased to announce that we added John Maguire as President of Maple Street a few weeks ago.

As many of you likely know, John has over 30 years of experience in the restaurant industry, including as Executive Vice President and Chief Operating Officer, Panera Bread; where he was a key leader in growing Panera to one of the most successful brands in the fast casual restaurant space.

As I mentioned, driving check and positioning our brands for the long term to drive increased frequency and make ourselves even more appealing to a broader audience of guests [are] all strategic priorities for us, and I'm pleased about where we're headed in this regard.

I've asked Jen Tate to provide you with more details and walk you through some of the initiatives that we're pursuing. Jen?

Thanks, Sandy. We are very excited about the potential we have to drive check, grow the brand with our core guests and to broaden our appeal. We recently concluded a 6-month segmentation study that has given us a greater level of insight about key groups we can newly attract or from whom we can increase visitation. Through this study, we know more about who these groups are, what they want from us and how big a prize each group represents.

Although we have a number of guests who are over 65 who have been slower to return to normal dine-in patterns, we believe they will eventually do so. That said, we are fortunate to have a multigenerational guest base. Approximately 30% of our guest base are millennials between the ages of 25 and 44, many of whom also constitute core users of the brand. This group generally gives us very high marks for our food, value and atmosphere.

When we ask those of them who use us less frequently about the things that they wish we did better, many of these relate in one way or another to technology, which we're actively addressing. Strategically speaking, we're pursuing initiatives where we lean into our strengths of strong value perception and delicious food to grow check and attract visits while also addressing our opportunities in technology and digital, including a new loyalty program. Some of these initiatives are shorter term in nature, while others are longer term. And we believe that the things we're doing should resonate both with our core guests as well as the other groups we were trying to attract.

Let's begin with what we're doing to enhance our strengths of value and food. Regarding value, we are focused on making sure that our guests feel like the price they are paying is a great deal in light of their entire experience. As Craig noted, we will continue to approach pricing aggressively but thoughtfully over the next 6 months.

Given guest acceptance of the pricing we've taken thus far, we believe we can take the pricing Craig mentioned and still maintain high guest perception of value. Pricing is only one prong of a multipronged strategy that we are implementing to grow check through the end of the calendar year, while still enhancing guest perception of value. The other prongs are menu related where we will be introducing more shareable starters, alcoholic and nonalcoholic specialty beverages in premium size and add-ons.

We have many guests who are looking for an affordable treat for special indulgence, and we want to offer them the opportunity to select into a more premium experience if they so choose. At the same time, we will continue to offer dishes at compelling price points across all 3 dayparts to meet the needs of our more price conscious guests.

In addition to new menu items and limited time offers to enhance check, we will be leaning into breakfast to increase the attractiveness and profitability of this daypart by launching the first phase of our breakfast menu evolution, centered around menu consolidation and the launch of a build-your-own breakfast option, our enhanced breakfast menu will allow us to make room for new craveable items to feature in our marketing and make it easier for guests to navigate our menu and individualize their meals. It should also help us offer some of those premium items that I mentioned to build check while reducing the time it takes for our employees, particularly newer servers, to learn our menu and deliver a better guest experience.

Finally, we are continuing to focus on our beer and wine program, which is a program which is broadly appealing to our key guest segments. We're making great progress towards our 2% dine-in mix target through enhanced selling, in-store marketing and new seasonal offerings, and we'll be working to drive further awareness and growth in this category in the fourth quarter and beyond with marketing support. Longer term, we are developing and testing other drink concepts to further enhance our appeal to our guests and deliver the additional items they're telling us they want.

Those are the areas where we are leaning into our strengths. Now let's talk about the things that guests want us to offer or to do better, whether they are guests who we want to attract or from whom we want to increase visitation. As I said, many of these revolve around technology and digital, where they are looking for us to remove friction and offer a loyalty program.

In April, we rolled out Mobile Pay. And later this quarter, we will be adding the convenience of Apple Pay and Google Pay. We're also continuing to enhance our digital store and revamping our app to streamline the ordering process, provide an even more personalized experience and reduce remaining friction on mobile devices.

With regard to loyalty, we believe this could be particularly impactful for our brand with our strong guest engagement, travel guest and both restaurant and retail offerings, which will allow us to offer creative and unusually appealing rewards over and above mere discounting. Given the investment here, we are approaching it prudently and thoughtfully. And we'll have more to share with you about this initiative in the future, but we're optimistic about its potential to drive frequency and check growth.

Then, of course, we have our other initiatives to attract new guests and continue to grow our off-premise businesses, including most notably our virtual brands and our catering. Our virtual brands continue to generate growing sales, which we believe are incremental to our business and catering is growing impressively in both the B2B and B2C spaces. Year-to-date, our catering sales are up more than 20% over the same period last year, and they are projected to continue on this trend line as employees return to the office and companies use special occasions to gather remote workers together and as more and more individuals allow us to be part of their personal celebrations and gathering.

To communicate all that we're doing and ensure that our messages resonate, we continue to evolve our marketing by making it more personalized and taking more targeted approaches through digital and social channels. When combined with the loyalty program, we think we'll be especially well positioned to increase frequency from our core guests and attract new guests to Cracker Barrel.

Summing it all up, we are very bullish that we have a brand that stretches across generations and that we have the ability to do what we do well, even better and to offer enhancements that both our core and other key guest groups want.

With that, I'll turn it back over to Sandy.

Thanks, Jen. In the near term, we expect to navigate a uniquely challenging environment, including the sales headwinds I discussed and the cost pressures that Craig reviewed with you. Despite all this, for all the reasons Jen shared with you, I'm confident that our near- and long-term strategic plans, coupled with our unique brand and culture of hospitality will aid our recovery, strengthen our business model and position us to deliver long-term growth and returns for our shareholders.

By enhancing the things that make Cracker Barrel one the most differentiated and beloved brands in the industry and investing in technology to improve our appeal across our guest base, we're pursuing initiatives that we believe will make us a destination of choice for our guests and our employees for years to come. Of course, none of this would be possible without the extraordinary efforts of our more than 70,000 employees who dedicate themselves every day to serving our Cracker Barrel and Maple Street guests.

Challenging environment right now from both a consumer and operational perspective and our field leadership, store and home office employees are doing a great job navigating these challenges all while bringing to life our mission of pleasing people. I thank them for their efforts.

And now I'll turn the call over to the operator for questions.

(Operator Instructions) Our first question will come from Jeff Farmer with Gordon Haskett.

First question, just licking for essentially a high-level update on the business model. And what I mean by that is I'm curious where you stand right now in terms of your customer base, local versus travel, so sort of the mix breakdown, local versus travel? And then what does that mix look like as you head into the summer driving season, how much larger does that travel mix get in the summer? And then I have one additional follow-up after that.

Okay. Jeff, it's not going to be an easy question to answer because we haven't done that research since the beginning of the pandemic. So historically, travel was particularly important to us in the second and the fourth quarter and then spring break period, but we surveyed guests and they self-identify their visits as a travel occasion, or a local visit. With travel coming back, we believe that guest is a bigger percentage than it was certainly during the pandemic, I mean almost obviously, but we don't think we have gone back to normal at this point. And in fact, we were -- we believe the spring break travel pattern was disrupted due to the issues that we talked about in the prepared remarks.

Okay. And then just one quick follow-up. So bigger picture, longer term as it relates to the operating margin performance of the business pre-COVID, I believe you're right at 9%, low 9% operating income margin. Obviously, it's fallen below that with sort of the COVID backdrop. And then as we moved into 2022, some pretty high levels of both wage and commodity rate inflation or commodity price inflation.

But not asking for sort of details here, but as you think about '23 and '24, how do you think about the margin, the operating income margin of the Cracker Barrel business sort of moving forward? How close to 9% do you think you can get in the future or returning to that prior level, rather?

Thanks, Jeff. This is Craig. The -- I guess, here's what I think we can say now. We're -- we talked about an elevated level of pricing. We talked about 7% going through the remainder of the calendar year. And then, Jen, you talked about additional kind of menu -- add-on and menu mix opportunities beyond that. And so that's a higher level than we've done meaningfully higher than we've done traditionally. And that is in large part to get the business model closer. We are meaningfully below where we started, right? So that will help.

In addition to that, there is a fair bit of work around -- a lot of work, candidly, around the supply chain side of the business and the menu side of the business in terms of product changes, specification changes and so on that will also be meaningful. And then we've talked over a longer period about things like our PCM Food and PCM labor initiatives that are designed to improve productivity and reduce and reduce waste. So there is a fair bit happening there. We do believe we will be making progress assuming that inflation does what we think it's going to do, but that's been tricky.

So I don't have a firm answer as to when do we get back to pre-COVID levels. But if our assumptions play out, then we do think we'll be making meaningful progress.

Our next question comes from Alton Stump with Loop Capital.

I just wanted to ask which is certainly a question that is facing pretty much everybody across the restaurant industry, not just Cracker Barrel. But how do you balance obviously, the need to take pricing to try to offset as much as you can as far as your own inflation versus consumers. Obviously, they're also seeing inflation, too. And so how you sort of balance between like pitching value, which obviously you guys have always been known for versus having to take higher pricing, to your point, Craig, of 7%?

It's a great question, and it is something that we are spending a lot of time talking about. I'll let Jen maybe touch on how she -- how we are thinking about our strategy about pricing and check driving.

I think what we see is there really are more than one type of consumer out there right now. For sure, there is a consumer that is pulling back, both in terms of visits and in terms of managing how much they spend. And for that group of consumers, we are very much committed to protecting our strong everyday value, right? We've got great value at breakfast, lunch and dinner, affordable price points, and we are committed to protecting that and continuing to market that for those folks.

On the other hand, we do see that there are a group of consumers who they may be cutting back on some more luxury items or trips or vacations. And when they come to Cracker Barrel, they actually want to splurge a little bit. They [want to treat an] indulgence. And that is why we are adding some higher-priced, more premium entrees and add-on items so that they can indulge a little bit more. And I think that will help to grow our check and help the business model. So we are just making sure that we have the right pricing strategy for the various segments in our business.

Great. Thank you, Sandy and Jen, [for that] follow-up. I guess just one quick question, I'll hop back in the queue. Just on the pricing front, the 7%, should I -- as far as our model, should there be any bigger kind of weighting towards retail versus restaurant business of that 7% or will be pretty similar in both segments?

I'm not sure I understand the question. Are you saying, does the 7% include retail? Or is the price increase in retail the same?

Yes, yes. Yes, that was my question, sorry.

We look at those 2 decisions differently, and a lot about the retail has to do with whatever the mix is. But no, I would say on a constant mix basis, I don't -- retail prices are not increasing at that level.

Our next question comes from Todd Brooks with The Benchmark Company.

Obviously, a difficult operating environment, and you talked about the headwinds on the call. I'm just wondering, can you lay out maybe some of the thinking behind the guidance for 8% revenue growth year-over-year. Maybe talking to assumptions around maybe that 65-plus customer, your assumptions on gas price pressures? And just what -- how did you come up with that point estimate and what's a really tough environment to forecasting in general?

Todd, this is Craig. Very good question. So the 8%, a lot of things, we'll tell you how we're thinking about it. Well, we have performance trends. And we've talked about some deceleration. Sandy talked about deceleration that we saw really in that kind of March time frame when gas prices -- in late February when gas prices initially started to spike and those gas prices impact us kind of directly and indirectly because it impacts overall inflation, consumer confidence and then just given our usage case as a company, it impacts us a little bit more directly.

And then it also -- that overall environment as well as other contributors have also impacted that 65-plus cohort. So in that 8%, builds in some of our more recent trends. What it also assumes -- and again, this is a little bit of a TBD. It also assumes what I would characterize as a reasonable summer travel season. And that is effectively starting around this time. So a lot there behind that 8%, but I would say a big picture, it incorporates a lot of what we're seeing from a macro perspective in the near term, in particular, gas prices, in particular, the over 65 cohort and the open item that is -- could be meaningful is what happens with the summer travel season. Sandy, anything you'd like to add to that?

No. I think to the question we got earlier about what is travel as a percentage of our business, we're building back. But it is an important component of the fourth quarter. And although I think we're expecting some not as strong as it was pre-COVID, but some improvement from today. And we'll just -- I think our teams are ready for the guests to come back, and I think we are optimistic that they will.

That's helpful. And then my follow-up is, and Jen, you talked to better segmenting and knowing your customer segments more intimately with the work you've done over the past 6 months. Can you speak to maybe or identify our performance gap between, let's say, that millennial cohort and the 65-plus cohort? And then any qualitative commentary you can give us on if there was a gap there, if it's closing at all as we're moving further away from the Omicron impact that we had at the start of the year?

Yes. I think one of the things that was most interesting about the segmentation learnings was to find that if you look at, say, the millennial -- the segments that are heavily millennial versus those that are more the 65-plus, the traditionalist, they have more in common in terms of the drivers, what they give us high marks are than you might imagine. For example, just a genuine love of our food and the welcoming atmosphere and for the quality of the food and the experience they have is shared across those 2 cohorts. I think the big thing that is very different is that millennials really have high expectations as regards to technology and digital. And that is why you hear me talking about things like the new app and the loyalty program.

In terms of performance, we have seen that the 65-plus guest has been reluctant to return to the dining room at the same rate as our younger guests. And our data suggests that that's driven by a couple of things. One, they still have concerns about COVID. With this recent surge, all of our data suggests they're still reluctant to socialize in public places and particularly dining out. And then also the recent economic concerns, they are more pessimistic than younger generations. And so they're worried about their financial future and therefore, spending less. So we're definitely seeing a bigger pullback from a traffic perspective from those 65 plus. I would say we have every hope that they will return as COVID hits the rearview mirror and hopefully, as these inflationary pressures wane.

Our next question comes from Jake Bartlett with Truist.

This is actually Jack on for Jake. My first one, I just wanted to ask about G&A. You mentioned some incremental investments in technology and in the Maple Street infrastructure. Does that imply a step-up in G&A in the fourth quarter? And then, I guess, what do you expect for G&A going forward into fiscal year '23?

I would say, look, in -- I don't think we want to get into too much detail on G&A. I think there's clearly some short-term things as we kind of normalize a bit here. But as we think about the longer-term G&A view, I don't think we would get into that today.

Okay. That's fair. And then I guess my second question is on the food cost management system that I think you've finished implementing in April. Would you be able to quantify what maybe the benefit of that will be in the fourth quarter? And then, I guess, will that benefit increase into next year as you have more learnings with the system?

Yes, Jack. This is Craig again. The -- so the food cost management system is -- we've tested that product. We've tested that tool. And we feel pretty confident in what it will do. And we would say, it's a modest improvement. It does a number of different things to us, but the actual COGS improvement is modest, and that's built into our -- built into our guidance as we're sharing.

Our next question will come from Brett Levy with MKM Partners.

I guess just 2 separate ones. First is just building off of Jack's last question there. When you think about your initiatives, what do you see as things that you can either delay or push back a little bit? What do you think is absolutely necessary right now? And where are you seeing the great quantification of any level of improvement?

And then just the second question. Can you give a little bit more color in terms of how you're thinking about your commodity landscape and where you're locked, where you feel there's the best upside risk in terms of what you could see for your basket?

Well, maybe I'll start, and then I'll see what color Craig or Jen wants to add. I think in terms of our initiatives, Jen did a pretty good job of rolling out. But I would say that our most urgent ones relate to driving our top line, whether they are about menu initiatives that we believe will appeal to core guest or the guest space, we're trying to drive either more attraction or more frequency or our technology assets that we think will both be attractive to our guests, things like Mobile Pay, where we think that's a very attractive component of the guest experience, and it results in more productivity for our cashiers, so it's a double win.

But those initiatives that are driving top line recovery of all of our guest cohorts is probably the highest priority. So our loyalty program, all the technology, the menu programs, and the operational guest experience, hospitality, staffing, training, all of those things, which are embedded in the P&L.

In light of -- well, always, but particularly in light of the environment with this sort of -- this level of inflation and the cost pressures as we're trying to get back to our pre-COVID profitability and certainly improve on where we are now.

I'd say the second group are those initiatives that result in enhanced productivity and profitability in our stores. So Craig just touched on one, which is the food system, which drives as he says a modest improvement in our waste. It helps our managers manage their food production and inventories more effectively.

But as we get better at understanding the system and the power of it, I think we'll be able to add functionality, which will help us understand how to order more efficiently, how to produce more efficiently because this system will help us do a better job of understanding hold times and how to put the labor against the production that needs to go on with the complicated menu we have.

Then our labor system, which we're still very early on, we just rolled it to a district, but we're optimistic that it will really give our teams a much better tool about matching the labor to all the different channels of the business now. Since COVID and the significant growth in off-premise, our field teams are challenged to provide labor to match a dine-in guest, an off-premise guest that comes on off-premise guests the delivery, third-party, a catering guest or retail guest.

So this new system, I think, will allow us to better match the labor, which I optimistic will allow us to drive sales better because we will have a better match and save labor because we'll just be more efficient in doing that. Beyond that, in the cost savings, I would say it falls sort of everywhere else on the P&L. Our off-premise supplies for the last 2 years have been difficult to manage the inflation there because there was a lot of shortage in that area, but I am now -- I'm hearing that we are -- some of the ideas we have, we believe we're more optimistic we'll be able to implement in the near term. Craig, I don't know what else you might want to add to this or Jen?

Well, I think the -- Brett, this is Craig. The other part of the question there. I think that sums it up well, Sandy, in terms of what we should delay, and it's really focused on driving the top line. And as we think about the technology initiatives, a lot of them deliver basically more for less, right? So those are just really good investments.

In terms of commodities, I think was the second part of your question. At this point, we're effectively locked, right? We're either locked or we have visibility to the pricing. So I don't think there is a whole lot more there for this fiscal. And then for next fiscal, the thinking is that we have essentially hit peak inflation at about this point in this calendar year and the inflation will remain -- commodity inflation will remain significantly elevated. But as we start to comp on some of the higher numbers from last year, the rate of increase will come down.

So that's the working assumption right now. But I think as we've all experienced over the last 2 years, that's been a tough one to pin down, but we're not anticipating some sharp retrench of commodities where we go back a couple of years or anything like that. We're projecting that the rate of increase remains high and begins to moderate in the second half of the calendar year and work its way down beyond that.

Our next question will come from Sara Senatore with Bank of America.

I have a few follow-ups, please. The first is on -- just on pricing. Do you have a sense of what kind of the net flow-through on prices, which is to say, I think you said you're seeing some trade down, but presumably, it's not fully offsetting the increase in price? So any kind of insight on that, just as I think about forecasting, check and traffic. So that's one.

And then I also wanted to try to understand a little bit more about what you're saying about the different customer bases. Specifically, for example, retail has been stronger than restaurant comps and sort of accelerated versus 2019 in the most recent quarter, I would have thought that you'd have sort of a similar kind of customer base for retail and restaurants, maybe more pressure on check there because of feelings of inflation pinching budgets, that kind of thing. So just how do I reconcile kind of a better retail demand and growth versus restaurants?

Sara, thanks for the questions. So there's a lot in there. Let me try -- I'll try on the retail. And then the pricing flow-through, I'll let Craig take a stab at. Our retail business, I think our merchants have done a really great job of having a fun, unique, nostalgic, [sort of] interesting merchandise, great price that was really an impulse buy. And to some degree, I think that our -- the strength in our retail has been a little bit of, maybe we call it sort of an add-on for us. So whereas some concepts, maybe they would be able to (inaudible) or in a way, I think some of our guests are using a retail store for that. It's an affordable indulgence. And we're seeing, for example, toys is one of our strongest categories. And there's just some fun things there. And I think when they're there with their kids and their families, this was something they were able to do in a really affordable way. So I think a little bit of why you're seeing the strength is the way we position the retail shop and the job our merchants have done and our retail teams. And then I think it's just resonating with where guests are in terms of an affordable luxury. So I'll [trade down] from that. Do you want to [talk about] the trade down?

Absolutely. Sara, it's Craig. So as it relates to the price and flow-through, I'll give some texture on this. We've been continuing to use a test and learn approach on pricing. And we're seeing really good flow-through in that kind of test and control environment. So typically -- so we are expecting pretty high flow-through. Normally in pricing, you lose a few kind of basis points, so to speak, to things like new credit card fees. And to -- there are some indirect impacts from Tips, for example, Tips go up and FICA taxes go up as a result. So I would expect a pretty high flow-through, and that's pretty consistent with what we've been seeing using our test and learn approach.

Our next question will come from Brian Mullan with Deutsche Bank.

Just a question on capital return. As you contemplate the share repurchases you were doing and might do going forward with the new authorization. How are you thinking about stabilized EBITDA or stabilized operating margins in your internal underwriting? Maybe asked another way, what do you think about that use of capital and determine it's the right use of capital from a return's perspective. Can you just take us through what parameters or framework you are thinking about and analyzing?

Brian, this is Craig. I'll take that one. So where we're thinking about that is we're going to continue to remain kind of balanced and cautious as it relates to our leverage ratio. So the Board increased its authorization, but we're still continuing -- and we're still continuing to monitor the environment. We have forecast that go against that. But I think our long-term approach has been to first, fund the investments that we need to make in the business in terms of sustaining and growing it and then returning capital to shareholders. And we're doing all of that in context stuff, what's the risk profile of the external environment and our internal environment.

So I think our -- what I view as a -- I think what we all view as a balanced kind of conservative approach will continue.

Our next question comes from Jon Tower of Citi.

Just a few for me, if I may. First, a clarification in terms of the breakdown of price traffic mix in the quarter at the restaurants and then an actual question after that.

It's -- John, so we have been really focused more on talking about sales. So I think we're going to -- not going to get much deeper, not much deeper than that at this time.

Okay. Going to the inventories, it looked like they were higher seasonally this quarter, at least at quarter end than you normally have been in the past. And I'm curious if that goes back to Sandy, your commentary earlier about building well ahead of holidays and securing some supply there? Or is there anything else going on with respect to inventory levels?

No, I think you hit it. Our teams are being really careful about balancing the supply chain disruption and ensuring, particularly our holiday merchandise that's -- first of all, our harvest, Halloween and Christmas seasons are so important to us that we brought those in early. So we would be sure we had them, which is why you're seeing -- sort of the most significant reason you're seeing the increased inventory.

And secondly, there is some inventory increase just to support the sales this time last year. We actually wished we had more inventory. But with that being said, our teams are being really thoughtful about managing sort of not go ditch to ditch and so to try to anticipate where the consumers are, where the overall retail environment is, balance that with the supply chain disruptions as we think about what our inventory level should be.

Got it. And that kind of leads to the next question with respect to the retail side of the business. We've seen in the past several weeks and then again, this morning, a fairly large reminder that some of the retailers are having a hard time managing their inventories and have decided to go after some markdowns. So I'm curious to know how your business has performed in the past when other large retailers have moved in the direction of increasing discounting?

Yes. Well, you -- no one operates outside -- the broader context of the retail environment is an issue. And so when the environment gets highly promotional, we understand that we'll be competing against that. We've been -- our guests largely buys -- it's an impulse buy. And the merchandise there, which is generally unique, relatively low priced, we believe insulates us to some degree from that. But those -- the recent announcements we heard, I know, have resulted in our retail teams going back through our (inaudible) and back through our strategies to ensure that we are as well positioned as we can be to manage our retail business in this new environment.

Got it. And then just the last one for me. Kind of thinking about your messaging to consumers in this environment. I know historically, the brand hasn't really leaned on call-to-action limited time offers in the marketplace. But I'm curious to know if perhaps you guys are reconsidering that now or might pulse it given the macro backdrop that a lot of your core customers -- are the pressures your core customers are facing at the moment?

I'll let Jen take that one.

Yes. I think you certainly are not going to see us turn to a lot of couponing and discounting, that's never been part of who our brand is. I do think we are continuing to advertise and market our everyday great prices that we have on our menu. So you're going to see us continue to do that. We do sometimes do and have planned some food and beverage LTO news, and we will be advertising some of that coming up in the late summer and fall on television, but it's not a discounted or promotional construct.

So as I mentioned earlier, ongoing consistent pressure behind our everyday value price points and newsworthy flavor news that we feature in our advertising as well.

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

Thank you. Well, there's still a great deal of uncertainty in the near-term consumer and inflationary environment, but as we continue to navigate these pressures, we look to the future and are confident that the strategic plans we outlined for you today, both those to drive further sales recovery and those that will strengthen our business model are the right plans and will position us well over the long term. We appreciate you joining today's call and look forward to speaking with you again soon.

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