Retail sales are declining at the casual dining chain. Are better days ahead?

Viewed against the challenging backdrop of casual dining, Cracker Barrel’s restaurant sales aren’t all that concerning. In the fourth quarter, the iconic brand saw a 0.8 percent drop in comps, punctuated by a rough May where sales fell 2.6 percent. They declined 0.1 percent in June and gained 0.1 percent in July. For fiscal 2017, Cracker Barrel’s sales rose 0.2 percent, year-over-over.

READ MORE: Here’s how Cracker Barrel plans to reignite its restaurants.

But there are two points worth following. For starters, Cracker Barrel’s numbers have trended downward since the second quarter, where comps rose 0.6 percent. Sales decreased 0.4 percent in the third quarter versus the prior-year period and 0.8 percent in the fourth. Cracker Barrel is, however, projecting an increase in restaurant sales of 2.5 to 3.5 percent for the coming year.

The next issue, and really one with more whitespace, is retail. In the fourth quarter, comparable store retail sales fell 4.4 percent. They dropped 4.7 percent in the last quarter and 3.7 percent for fiscal 2017.

Retail is one of Cracker Barrel’s differentiators, but given the alarming climate, especially with malls around the country struggling and internet sales vacuuming sales, is this a trend Cracker Barrel can fix? A report by Credit Suisse predicts that more than 8,600 retail stores will close in 2017 alone.

During a conference call following the earnings it was a subject that came up often. Cracker Barrel president and CEO Sandra B. Cochran said the team was disappointed with sales performance in apparel, accessories, and candle categories, as well as just the overall retail traffic.

“Through the quarter, we worked hard to identify supplemental sales opportunities and to carefully manage markdown spend, maximize vendor support, and manage year-end inventory levels,” she said, adding that Cracker Barrel is making progress on its goal to reduce annual operating cost by $15 million to $20 million.

“We continue to see evidence of the highly pressured restaurant and retail industry. And to address the realities of this environment and respond quickly to consumers’ needs and competitive challenges, we must evolve. And we must do so while remaining committed to our Cracker Barrel brand integrity, which drives affinity for our brand and loyalty from our guests,” she said.

Similar to Cracker Barrel’s menu, the brand’s retail segment is anchored by value and variety. But unlike its food, Cochran said that reality isn’t as clear as it needs to be. She said the company plans to improve how it communicates “not only the affordability of our merchandise offerings but also the quality and exclusivity of our assortments, placing greater emphasis on our price-value relationship” in fiscal 2018.

“To address the realities of this environment and respond quickly to consumers’ needs and competitive challenges, we must evolve.” — Cracker Barrel president and CEO Sandra B. Cochran

An example: Cracker Barrel’s children’s apparel assortment will be priced at $19.99 and below—an attractive deal Cochran believes the chain needs to illustrate.

“In addition, we’re working to refresh our assortments regularly to maintain merchandise at affordable prices, ensuring guests can find compelling products at any price point, and we believe this is the right approach to grow our sales gap and to achieve our long-term business growth,” she said.

From a revenue standpoint, Cracker Barrel reported a 0.3 percent increase to $611.3 million. Retail revenue, however, declined 3 percent to $131.9 million. Retail cost of goods sold was 48.2 percent of retail sales compared to 50.9 percent in the prior-year quarter. Retail inventories at fiscal 2017 year-end were $119.4 million versus $114.6 million in 2016. Cracker Barrel also expects retail sales in the range of flat to 1 percent moving forward, showing confidence in their coming initiatives.

One of the main issues, Cracker Barrel chief financial officer Jill Golder said in the call, is the fact fewer guests are being converted to a retail purchase.

Cochran said she expects Cracker Barrel will have to “really sharpen the pencil on value” and that it could leave margins flat to slightly down depending on the quarter.

The “Amazon Effect,” or essentially the impact of the digital marketplace on traditional retail, is something Cracker Barrel is grappling with.

“You do need to eat but you might not really need to shop for really discretionary purchases. So we’ve got guests coming into our stores in a number of places who are dealing with different issues in their environment,” she said.

And like its food, Cracker Barrel needs its retail to project something deeper.

“One of the probably benefits to our brand and our retail story is that our focus is on fun, unique, nostalgic items and heavy on the unique, fun and at a price point that tends to lend itself to an impulse purchase,” she says. “So although some retailers are finding that their assortment can be easily bought online exactly the same product, and actually it’s more efficient, a lot of ours cannot be found anywhere else. And it’s at a price point that while they’re dining, this is something else for them to do.”

The key, she said, will be making sure Cracker Barrel’s assortment delivers against the customer’s needs. The fact mall traffic is sagging, though, remains another roadblock.

“If consumers are shopping online, they’re not out making a trip to the mall. And to whatever degree that’s preventing them from saying, ‘I’m going to stop for a meal,’ and an opportunity for us to sell them, that’s having an impact,” she said. “If they are not going to the movies. If they’re not to the degree that the shift to e-commerce is impacting consumer behavior in ways that is impacting visits to restaurants. We are having to compete within that environment and are working hard to ensure we can.”

Casual Dining, Chain Restaurants, Feature, Finance, Cracker Barrel