Good morning and welcome to the Cracker Barrel Fiscal 2018 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Adam Hannon. Please go ahead..

Thanks, Chad. Good morning and welcome to Cracker Barrel’s third quarter fiscal 2018 conference call and webcast. This morning, we issued a press release announcing our third quarter results and our outlook for the 2018 fiscal year.

In this press release and on this call, we will refer to non-GAAP financial measures for the current year adjusted to exclude a one-time non-cash reevaluation of the company’s net deferred tax liability which occurred in the second quarter.

The company believes that excluding these tax effects from its financial results provides information that maybe 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 reconciliation 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, 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, statements maybe 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 filed 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 maybe required under applicable law. I now turn the call over to Cracker Barrel’s President and CEO, Sandy Cochran.

Sandy?.

individual To-Go, Heat n’ Serve and catering. We have been pleased with the growth of individual To-Go, which is largely occurred organically and in the coming quarters will be testing third-party delivery as we seek to expand this part of the business.

In the Heat n’ Serve business, we anticipated a significant increase in sales versus prior year for our Easter offering and we were pleased with the performance which continues to grow. Because of the success we have had with our Heat n’ Serve program, we will be expanding it to additional occasions such as Mother’s Day.

We also continue to build our catering business.

For example in the quarter, we introduced Breakfast Bundles, which added new menu offerings that are conveniently bundled with complementary items, such as our Cracker Barrel Classic, which includes our ham, egg and cheese casserole, grits, sawmill gravy and biscuits, along with the choice of breakfast meat and hash brown casserole or fried apples.

During the quarter, we also developed new items that will be exclusive to catering that will begin testing in 2 weeks as we enhance the catering offerings.

Additionally, we will be expanding our in-house delivery program in the coming quarters to further support our off-premise initiatives we have been and will be investing in additional marketing technology and labor.

While we have spoken of this year being a year of investing in our top line initiatives, we have not lost sight of our cost savings initiatives. We continue to make good progress on achieving our targeted cost savings for fiscal 2018 as well as setting the foundation for additional cost savings in the coming years.

Lastly, we continue to expand our footprint by opening new stores both in our core and developing markets. We opened 4 Cracker Barrels in the third quarter, including our first California location. We have opened a total of 8 this year.

Also, we opened a Holler & Dash location in Charlotte, North Carolina last quarter bringing the total number of stores to 7, 3 of which opened this year. And we are proud that last week Holler & Dash was one of five recipients of the 2018 Hot Concept Award from Nation’s Restaurant News.

In closing, we are pleased with the quarter overall and we remain focused on driving top line growth and accelerating our initiatives. We believe that the plans we have in place, along with our continued investments will help us achieve these objectives. And with that, I will turn the call over to Jill..

higher costs related to building and equipment repairs, higher computer and maintenance expenses from the implementation of our previously announced initiatives, higher cost associated with adverse weather such as snow removal, planned depreciation increases related to higher capital expenditures, and higher supply expenses resulting from the growth in our off-premise programs.

Within the other operating expenses line, approximately $1.1 million of favorability versus our previous guidance or about $0.03 of EPS was due to a shift in marketing to support our fourth quarter during the busy summer travel season.

Store operating income was $98.7 million in the third quarter or 13.7% of revenue compared with store operating income of $107.5 million or 15.3% of revenue in the prior year quarter. General and administrative expenses in the quarter were $35.4 million or 4.9% of revenue compared to $36 million in the prior year quarter.

G&A was favorable versus the prior year quarter by 20 basis points. This decrease was primarily driven by lower incentive compensation. Operating income was $63.3 million or 8.8% of revenue compared with operating income of $71.5 million or 10.2% of revenue in the prior year quarter.

Net interest expense for the quarter was $3.6 million compared to $3.4 million in the prior year third quarter. Our effective tax rate for the third quarter was 18.4% compared to an effective tax rate of 31.1% in the prior year quarter.

Turning to our balance sheet, we ended the fiscal quarter with $174.3 million of cash and equivalents compared to $183.7 million at the prior year quarter end. Our total debt was $400 million at quarter end.

Before moving to our fiscal 2018 outlook, I would like to note that starting in fiscal 2019 we will no longer provide monthly comparable store sales information in our press release. We are making this change due to the variability in monthly sales results from items such as weather, holiday timing shifts and menu and marketing promotions.

With respect to our fiscal 2018 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 continue to expect total revenue of approximately $3.1 billion.

We continue to anticipate comparable store restaurant sales growth for the full fiscal year in the range of 1% and 2%. We continue to expect comparable store retail sales growth to be approximately flat. We expect to open 8 new Cracker Barrel stores and 3 new Holler & Dash stores in fiscal 2018.

We now expect increased food commodity costs on a constant mix basis to be approximately 3.25% for the fiscal year, reflecting updated expectations for the price increases, primarily within the category that’s eggs and beef, particularly related to the change in market pricing since January for fresh shell eggs as well as the underlying commodity price increases for beef related to exports and strong demand.

We have locked in our pricing on approximately 70% of our commodity requirements for fiscal 2018 compared to 75% at this time last year. We expect depreciation expense of approximately $95 million for the year. We continue to anticipate net interest expense of approximately $15 million to $16 million.

We now expect a GAAP blended effective tax rate for the fiscal year of approximately 11%. We plan to invest approximately $10 million of our tax benefit in fiscal 2018 with the majority of these investments occurring in the fourth quarter.

These investments will be focused on strengthening the brand, supporting our strategic initiatives and enhancing the employee experience. We anticipate that capital expenditures for the year will be approximately $150 million.

Taking these assumptions into account, we now expect full year operating income margin of approximately 9.5% of total revenue and we expect to report full year GAAP earnings per share of between $10.35 and $10.45 and adjusted earnings per share of between $9.30 and $9.40. This guidance is predicated on current expectations.

We anticipate that our fourth quarter sales growth will improve upon our third quarter growth rate and our guidance incorporates a modest improvement in the industry trends. However, the start of May has been slower than our third quarter trends.

We anticipate that sales will accelerate due to our Campfire menu promotion, our marketing efforts and our strategic initiatives. And with that, I will turn the call over to the operator so that we can take your questions. Thank you very much..

Thank you. [Operator Instructions] The first question will come from Alton Stump with Longbow Research. Please go ahead..

Thank you. Good morning.

If I could just ask on the commodity front, obviously, I am sure you don’t want to offer any full year ‘19 guidance just yet, but kind of how you see the commodity basket playing out if you think that the recent pressure could continue over the course of full year ‘19?.

Good morning, Alton. This is Jill. So we will talk more about our current commodities expectations. As we said in our guidance, we saw a step up in commodity inflation in the third quarter. And as we look at the fourth quarter, we are expecting Q4 commodity inflation to be somewhat similar to what we saw in the third quarter.

And as I said the majority of this is really coming from eggs, beef and pork. And I guess just as a reminder with eggs, we – our shell eggs prices are set on a 90-day lag, so our Q4 pricing is largely determined by what we saw in Q3. And again, in our most recent quarter, we saw shell egg prices peak at about $3 per dozen.

So, we believe this increase was due to strong consumer demand, a static flock size and aggressive features on eggs during the retail season, especially around Easter. And then again we have seen some inflation in the beef category, primarily around roast beef and rib eye and that’s been primarily demand driven.

And then what we have seen more recently with pork is we are cycling a favorable fixed price position that expired last year at this time..

Okay, that’s helpful. Thank you, Jill.

And then I guess one quick follow-up, I think you mentioned in your comments that you are thinking that we will see at least a modest uptick in overall category trends over the course of fiscal 4Q here, just kind of curious what’s driving that assumption and are you seeing any evidence of that so far in the quarter?.

Alton, this is Sandy.

So, you are referring to the fourth quarter sales sort of macro environment, is that correct?.

Yes..

Well, so just broadly speaking a number of consumer health metrics as everyone knows are strong and would appear the fundamentals of the economy have improved, certainly unemployment is low, consumer confidence high, wages are picking up, in some sectors at least spending is picking up, it looks like there may have been some pent-up demand after the holidays as we saw the industry improve in Q3.

However, the competition remains very tough. We still have a lot of overcapacity and in the casual dining segment although improved the traffic trend is still negative. So, it’s a little too early to tell if the trend with the consumer will be sustained.

As Jill mentioned in her comments, the start of May has been softer than the trend in Q3, which could reflect some choppiness with the consumer. We are watching the trends. We are focusing on executing initiatives.

We feel we have got a number of sales driving initiatives in the fourth quarter and do anticipate that there will be some improvement in the industry in the fourth quarter..

Great. Thank you, Sandy and Joe..

The next question will be from Jeff Farmer with Wells Fargo. Please go ahead..

catering, individual To-Go or Heat n’ Serve, I am just curious where you think the greatest opportunity is there and could you update us on where your off-premise mix currently stands as a percent of your sales?.

Well, I will start Jeff. So, the three categories I would say the biggest category is individual, where I think we have the biggest opportunity though to grow and to position where we are not currently and where I believe will be less incremental is in our catering side.

And so but that’s where we are focused on the offering, on delivery we put in a number of programs to support that, including sales managers in certain markets and that sort of things. So, each category, we are seeing growth in though and I will let Jill speak to any of the other metrics that she is providing..

Great. Yes, good morning Jeff. As a reminder, as we shared in our Investor Day, we are targeting growing our off-premise from just below 7% last year, 7% of sales to 10% over the next 3 years. Year-to-date, our off-premise is approximately 7.5% of sales and total off-premise sales are up double-digit versus year ago.

And we are seeing growth in each of the three categories that Sandy talked about. So, we are seeing growth in our individual To-Go business, our special occasion business which is Heat n’ Serve as well as our catering business. And currently, we are early in some of our off-premise initiatives, but we are pleased with the progress..

Okay.

And then I apologize if I missed this, but did you guys provide any color on the FY ‘19 tax rate, how we should be modeling the tax rate as we get into next year?.

We haven’t provided guidance on our FY ‘19 tax rate, but Jeff, do you want to just address where we are expecting tax rate for the year and the pieces to get there..

Sure. In the current year, because of the tax reform we are expecting the current year rate to be about 11%. I will remind everybody that at the midpoint of the year due to tax reform we were at about 2% and we guided to the back half being approximately 20%.

So the current year getting to 11% that’s what how the math works and then I would expect it to be similar in FY ‘19 to where it is at the close of fiscal year ‘18..

Our next question will be from Jake Bartlett with SunTrust..

Great. Thanks for taking the question.

My first is around the Easter shift, I am trying to understand whether that did impact your March versus April results, so we can kind of understand the real run-rate?.

Okay. Yes, hey, Jake, this is Jill. Let me just talk about the monthly cadence and traffic. So, just as a reminder as I said in our prepared remarks we thought that we had weather impact in February, which was about 40 basis points on the quarter.

From an Easter standpoint, Easter was earlier in April than last year that was in the same month in both fiscal years although it was earlier. We do typically see a benefit from an earlier Easter holiday, because it often aligns with spring break and vacation. So there may have been some lift in April associated with that change..

Okay, great. And then, if you can help us understand the drivers to the improvement in April specifically from average check and I believe it’s March when you do take some incremental menu pricing or you kind of rollover your old pricing, add some new, whether that had an outside effect in April.

I am trying to – if you could just aggregate the impact of the bowls versus the coffee given the bowls are not continuing and the coffee is, so we can understand the impact from that?.

Sure. So you are right we take – we generally introduce a new menu in March and then August or September and that’s usually when we would take some pricing. So, in April, our pricing was approximately 2.5% relatively similar to the quarter, but that coupled with the full rollout of Crafted Coffee.

Crafted Coffee increase did increase overall check and mix and then plus our bowls promotion within April also helps support the check growth..

So, would you say that the coffee was of a greater impact than the bowls, for instance?.

It was..

Okay. And the last question on the Campfire Meal, I believe last year you rated for 11 weeks and the year before that, I think it was 15 weeks and this year it’s going to be 8 weeks, I believe is what I heard.

So I am trying to understand how much – whether that will be more incremental this year and whether just your level of confidence that’s going to drive you – it’s going to increase results from the current deceleration just in the last few weeks?.

So, I will just start on Q4.

So as I said in our prepared remarks, our Q4 guidance on sales contemplates a modest increase in industry improvement and that we have started off a little slower, but we are confident in our Campfire promotion, which started yesterday and Don, do you want to talk a little bit about our marketing plans in the fourth quarter?.

Sure. As it relates to Campfire, we have tightened up the full duration of the program in store a little bit to maximize the return on that program. In terms of television support and marketing support, we are at comparable levels to a year ago.

We are continuing the strategy that we talked about in the last call about being more concentrated on the weeks that we are on air for greater impacts and getting greater attention from our guest space and then we of course this year will continue to have a fully integrated marketing program.

It will support not only on television, but out-of-home digital and other in-store materials that will support the event for the full duration. We have also added a program at the backside of Campfire this year that we think is going to continue to sustain sales momentum for the balance of the summer..

And Jake, this is Jill.

Just to add a little more color on the fourth quarter guidance as you are kind of working through your numbers, we do expect Campfire to help support overall mix or checks similar to what we saw with Southern Bowls in the most recent quarter and then we will have – since we are now fully rolled out with specialty beverage we would also expect to have a mix lift associated with incremental sales of our specialty beverage coffees..

The next question will be from Michael Gallo with CLK. Please go ahead..

Hi, good morning. I just want to dive in a little bit on the other operating expenses, which I think were up 90 or so basis points in the quarter.

Just to understand from the various components of that, what you see recurring going forward obviously some of the technology and other costs and depreciation will be there, but also you spoke to some incremental strategic reinvestments you plan to make around tax savings in the fourth quarter.

So, I was wondering as we think about that other line, how we should think about the kind of year-over-year pressure going forward? Should we expect it will stay in the 90 to 100 basis point range, all things being equal on comps or are there other puts and takes that will sort of dial-up or dial back? Thanks..

Yes, good morning. We don’t want to give guidance into ‘19 but let me talk about some of the puts and takes as you said in our other operating expenses. So we have invested in our top line initiatives, which are pressuring margins that Sandy mentioned in her comments and many of those expenses you see in other operating expenses.

So for example, our investment in our new POS system, which we believe will help support some cost savings initiatives in the future, has some maintenance expense which you would see in other operating expenses and as we roll that system out, we would expect that to be ongoing.

There is depreciation associated both with the rollout of our Crafted Coffee as well as some equipment that we put in for our off-premise.

And then we have also seen some supplies impact in off-premise as we set the restaurants up for success to make sure that they had initial supplies that they needed, but again as that business grows, we see supply expense continue along with it. So those are the big items within other operating expense that are being driven by our initiatives..

And then in terms of again just to come back and so other than snow removal, was there anything in the third quarter that you would see kind of not recurring going forward that would have hit that line?.

I mean, as you mentioned we did see just some higher repair and maintenance expense within the quarter, some of that we did have some snow removal with the late winter and that tends to ebb and flow a little bit by quarter depending on when things break and when we need to fix them..

Okay, great. And then just a follow-up to Jake’s question, for the fourth quarter, obviously you have started a little slower than the trend, but you anticipate a reacceleration yet, Campfire you actually have running for three fewer weeks and I think if I heard you right, 2 fewer weeks of TV advertising that you had last year.

So I guess sort of that towards the end of the quarter we would have had the promotion, but not is there something else that’s going to come into place or are we simply going to have fewer weeks at TV this year versus last? Thanks..

I will let Don sort of add to it, but we have got a number of sales initiatives. So, we have got the Campfire promotion which although has been short and we believe it’s the right duration to avoid fatigue and the marketing support plan, I think will be more effective in the way it’s being concentrated.

We have got the Crafted Coffee fully rolled out and we will be able to do a more effective job of marketing that as well as we are getting some traction in our off-premise business, especially the catering side. We have got some other tests we are doing that we are excited about.

We have got a bone-in fried chicken and a family size meals and tests, but Don alluded to at the end of Campfire to fill the gap we will be running it’s about a 3-week program.

Don, you want to speak for that?.

Sure. Couple of points. Thank you, Sandy.

First, I just want to clarify that our television wait levels are actually slightly above where they were last year, although shorter on duration, greater impact for the time that we are on and just in terms of the way television builds reach and frequency with our audience, we think it’s prudent to get more people earlier on in the program for visiting the stores.

So the wait level is actually higher than it was a year ago. The duration is more concentrated as Sandy just mentioned. The other types of things we are investing in, in the fourth quarter is we are doing more in terms of what I would call off-premise media things to take advantage of our traveling guests.

We are using some newer platforms for our media mix, such as gas stations, television, some mapping programs for mobile phones and so on. We have got other programs that are going to be introduced in-store as Sandy mentioned.

Especially the last 3 weeks of our fiscal year, we are going to be driving some retail programs to take advantage of conversion and hopefully create some additional guest appeal for the summer travel occasion..

The next question will come from Gregory Francfort with Bank of America. Please go ahead..

Thanks.

It’s actually [indiscernible] on for Greg, I wanted to ask on the labor line, you seem to continue getting leverage despite the tight labor environment in relatively modest comps, just wondering what you are doing there to achieve that?.

Well, thank you. It’s a couple of things. One is our wage inflation is in line with our pricing levels, so it’s about the 2.5% and then you will remember of our $8 million to $9 million in cost savings that are impacting the business this year, a portion of that is on the labor line. So, we are improving on our labor productivity.

So, those are probably the two biggest pieces in there..

Got it. Thank you..

Next question comes from Stephen Anderson with Maxim Group..

Yes, good morning. I have a follow-up question regarding same restaurant sales and you mentioned at the beginning of the call that you saw the May piece of comp growth was maybe running slightly below what you saw in the third quarter.

What I want to ask is you have seen gas prices, you saw it to climb up on getting close, if not slightly over the $3 per gallon margin.

Given that you have high exposure to the Interstate Highway system so as if you have seen yet any kind of slackening demand particularly as maybe the marginal consumer might decide to put that extra $10 in the gas other than spend on restaurant meals as well as get your thoughts on that?.

Yes, it’s a great question. So gas prices have moved up and if you listen to some folks, they are projected to rise kind of over the summer months. So the way we think about gas prices is to the degree that gas prices negatively impact discretionary income from the consumer, then that could create a headwind for us.

And so it’s certainly something that we are taking a look at, but when we – I think we have talked about this in the past for it to really have an impact usually have to see a step change and that we have not seen yet in terms of gas prices..

Alright, thank you..

[Operator Instructions] The next question comes from Bob Derrington with Telsey Advisory Group..

Hi, good morning. This is Ben Flox on for Bob. Sandy, I guess, first one for you, to your comments on testing new items in catering, last quarter we heard about the biscuit bar, now it sounds like we are hearing about new items that kind of skew more towards lunch and dinner.

Just trying to get a better handle on how this continues to evolve, what you are hearing from guests and what exactly is driving the tweaks in your testing? Is this about tweaking the mix across dayparts just broadening the menu, how should we think about this?.

Well, the Cracker Barrel Classic combo that I mentioned in my prepared remarks is actually a breakfast combination with the ham, egg and cheese casserole and then complementary items around it. So, that is designed to address the hot hearty breakfast for consumers and we find that it’s been very favorably received with our guests.

I also mentioned we were going to be testing some things in the next 2 weeks. So I think it’s actually next week and that’s when we will be putting in the biscuit bar that I announced on the last call and which is assorted biscuit flavors and then different spreads to go with that as well as some additional flavors of breakfast casseroles.

So, really the majority of our testing and menu development up to now has been focused on the breakfast daypart and in particular, the hearty hot breakfast..

Got it. Okay, I must have misunderstood something you had said previous.

And then on the timing of your POS rollout, is this part of I should say is part of the rollout the new labor module, is this something we should expect to come later, just trying to get a handle on maybe when we will see some marginal benefit to the labor line from that?.

Yes, that’s a great question. There is a number of things that we are testing to help with future cost savings and certainly the POS is foundational to all of that. So, as a reminder, the new POS system we think will enable other productivity tools like tablets is one of the thing that we have talked about which would help with labor.

And so we are early in the development testing and implementation of POS that based on that being successful then we would begin a rollout kind of post fiscal 2018. Separately, there are some other cost savings initiatives that we are working on currently. Our prime cost management would have two pieces to it.

One of it is a food waste management focus and the other is a labor management focused. We are currently working on and testing the food waste management module.

Is that helpful?.

The next question comes from Jake Bartlett, a follow-up from SunTrust. Thank you..

Great, thanks. I just had a question about the value test that was going on with the sunrise surprise and the daily delights.

I don’t believe it’s rolled out much more to the system, maybe 150 stores or so from my count from 120 last quarter, so I am wondering where that stands, what the learnings have been? Is it kind of – is this how the pace you had expected to rollout, what are the kind of moving pieces as to why it might not be going a little faster?.

our Breakfast $4.99 offerings; our Weekday Lunch Specials at $5.99; and then our Country Dinner Plates, which is a dinner offering at $7.99 and the daily delights program that you are referring to and I will let Don gave you an update on was really designed to reinforce those three platforms and to bring a little bit of new news to that.

So, Don you want to give an update on where we are on that?.

Sure. Thanks, Jake. As Sandy mentioned, there is a number of things that we are doing. We know that the brand continues to deliver great value to the guests. Our research shows we are maintaining and growing that strength.

Our culinary and marketing teams continue to look at a range of strategies and program tactics to reinforce the value that we offer to the guests. As an example, we are looking at family size meal offers, different bundling options, some new product news within our breakfast, lunch and dinner dayparts.

As it relates to daily delights specifically, that program has been interesting as we have been rolling it out over the year, we have actually been looking at the analytics and we know we are driving incremental traffic in sales during the advertising sales time periods and we know that through our usage and attitude study we are growing overall brand ratings, including brand awareness, visit intent and value rating.

So from that perspective, it’s been good.

As we continue these ratings show to build over time but there is also some things we are doing to evolve and build upon the program in and around things like operational simplicity, some of the profitability and making sure that the programs and products we are offering have the guest appeal that we are seeking.

So as Sandy just mentioned, one of the things we are going to be doing in August as part of the daily delights program is we are going to be rolling out $4.99 sunrise special systemwide and that breakfast value selection.

And we are also starting to look how to incorporate other elements of daily delights in the ongoing menu and how to improve the program over time. We will be assessing continuation of daily delights specifically for advertising in fiscal ‘19 and making a decision on that in the coming weeks..

Ladies and gentlemen, this concludes our question-and-answer session. I would like to return the conference back over to Sandy Cochran for any closing remarks..

Thank you all for joining us today. We look forward to building on the progress we are making as we continue to execute our long-term strategy. I remain confident that we have the right strategy and the right leadership in place to move the brand forward and drive shareholder value. We appreciate your interest and support..

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