The breakfast chain witnessed a 'meaningful' decline in traffic, particularly from younger consumers.
Because of tougher economic times, consumers are pulling restaurant visits and tightening wallets—Cracker Barrel knows this firsthand.
The breakfast chain began Q3 as it anticipated, with momentum through February and most of March. But then the chain ran into a "meaningful" traffic decrease in April, which led to sales and profits coming in below expectations. Softer trends have continued into Cracker Barrel's Q4. CEO Sandy Cochran attributed the sluggish stretch to "weaker consumer sentiment and economic pressures."
The company prefers not to use weather as an excuse, but Cochran did note that coolness may have had an impact on travel—an aspect Cracker Barrel is more sensitive to because of its vicinity to interstates and highways—and the purchasing of summer closing. Cochran doesn't believe weather had a material effect, but she admits there could have been "on the margin some impact on the timing with our consumers."
Same-store restaurant sales rose 7.4 percent year-over-year, driven by 8.8 percent total pricing—one-fourth of that was carry-forward from fiscal 2022 and three-fourths was new from fiscal 2023. Net income was $14 million and adjusted EBITDA was $60.3 million, compared to $27.5 million and $59.6 million, respectively, during the prior year. Operating income was $16.8 million compared to $30.5 million in 2022.
"I think clearly, the backdrop is more challenging. It's more dynamic," CFO Craig Pommells said during the chain's Q3 earnings call. "And I think the good news is we're not seeing things get worse and we're not seeing things get materially better."
Restaurant revenue increased 7.8 percent to $681.3 million, but retail revenue dropped 4.2 percent to $151.4 million. Pommells said retail sales decreased because of a deceleration in restaurant traffic and shifts in consumer discretionary spending. Cracker Barrel thinks price-conscious guests are cutting retail purchases to manage their overall spend when dining at the restaurant.
"We continue to closely monitor the impact our pricing is having on traffic and check, and we believe our pricing strategy is effectively balancing margin protection and maintaining our strong value," Pommels said. "We believe that the softer restaurant traffic trend and reductions in retail purchases are primarily driven by macroeconomic factors as opposed to our restaurant pricing increases."
Last year around this time, Cracker Barrel was concerned with spikes in gas prices and older guests pulling back, but 2023 has proven to be a different story. There's been a solid rebound in visitation from baby boomers, however that's been paired with a "sharp downturn" in sentiment from younger cohorts.
Cracker Barrel's strategic response to slower traffic starts with the guest experience. The brand is prioritizing staffing for the high-volume summer months and is seeing improvements in turnover and retention. Secondly, the company is emphasizing its value proposition. Cracker Barrel is currently using TV messaging to remind guests that it offers 20 meals for under $12, including newer items like the Cheesy Bacon Homestyle Chicken and Homestyle Chicken and French Toast. The breakfast chain also introduced $5 take-home meals.
A third measure is focusing on customer frequency. Cracker Barrel is not only doing this through menu innovation (Steak 'n Egg Hash Casserole and Biscuit Benny) but also with an upcoming loyalty program. The tech initiative—aimed at driving traffic, increasing loyalty and customer lifetime value, and providing robust consumer data—is scheduled for a beta test in July. Keep in mind that off-premises is still mixing nearly 20 percent at Cracker Barrel.
"Everybody is really interested in this new rewards program that will be very differentiated for us because it encompasses all of our channels, including retail, which is a real differentiator for us," said CMO Jen Tate. "Our guests are going to be able to earn points, whether they're in the restaurant or shopping in our retail, and of course, be able to redeem points across both sides of our business, which I think makes it very unique in the restaurant space."
In addition, the brand anticipates cost savings and business model improvements that will contribute $30 million to fiscal 2023 profitability, with further gains in fiscal 2024.
"We are literally looking at every single line item," said Pommells, describing where Cracker Barrel is cutting expenses. "And as with every other company, we’re constantly looking in the food area, and we’ve made quite a few changes where the cost goes down and our guest satisfaction or guest research shows an improvement in their perceptions. So there are a lot of those, and that continues on. There are other indirects. It’s really a long list of things, banking fees, supplies, different components of labor that are a little bit more indirect in nature."
Cracker Barrel ended Q3 with 661 restaurants. A net of four stores closed in the quarter. Pommells described it as a function of timing as opposed to a strategic shift. Coming out of COVID, Cracker Barrel had a handful of low performers that were working toward recovery. Then at some point throughout this year, Pommells said the company concluded that these locations couldn't operate profitably.
In terms of openings, escalating construction costs and higher interest rates have forced Cracker Barrel to pass on more opportunities than it might have a year ago.
"Now we do anticipate that as the environment normalizes and the real estate world adjusts for the current environment that we'll be able to resume, Pommells said. " ... You're also always working to optimize your real estate model in the form of cost and we're going through that. That's going to take some more work. And there have been a lot of shifts over the last few years in a whole host of ways. So we're actually going through an update in our site opportunity model where we think we can have sites and how has that shifted."
As for Maple Street Biscuit Company, the fast casual finished Q3 with 56 locations, an increase from 41 in the prior year. Three stores opened in the quarter, and they are pulling some of the strongest opening-week sales the brand has seen in recent years, Cochran said.
Cracker Barrel projects 1-3 percent revenue growth in Q4, flat commodity inflation, and 5 percent wage inflation. It also expects to open one Cracker Barrel store and five to seven Maple Street locations. The company noted that some Maple Street units may slip into early fiscal 2024 due to permitting or equipment delays.
"We are cautiously optimistic that as the summer travel season unfolds, we will see some improvement to trends in June and July," Cochran said. " ... Although we expect continued pressures and choppiness in the short term, we feel good about our positioning over the medium and longer term."