Finding itself in a tough spot heading into the important summer travel season, Cracker Barrel is making some changes.
After sales and profits failed to meet expectations in the third fiscal quarter, the family-dining chain is updating its menu to include more premium items and investing further in technology as it looks to broaden its appeal among younger and more free-spending guests.
The changes are expected to help both its top and bottom lines, which have been stung by high gas prices, soaring commodity and labor inflation and the reluctance of older customers to return to its restaurants.
They come as vocal shareholder Sardar Biglari urges the company to replace CEO Sandra Cochran. In a letter published Monday, he criticized the chain for trying and failing to attract younger customers and for being slow to adapt to the post-pandemic environment, among other things.
Cracker Barrel’s same-store sales for the quarter ended April 29 rose 10.7% year over year, though its total revenue, $790 million, fell short of estimates by about $10 million. Operating income, meanwhile, declined to 3.9% of total revenue, from 7.4% last year.
The results triggered a slide in the company's share price, which was down nearly 6% on Tuesday afternoon.
Executives blamed a challenging macroeconomic environment for the sales problems. Some price-sensitive guests pulled back during the quarter, and high gas prices led to a slower spring break season than normal for the travel-dependent concept, Cochran told analysts on Tuesday. In particular, guests over the age of 65 are visiting less often amid worries about COVID-19 and their finances.
To address some of those issues, 660-unit Cracker Barrel is looking to attract higher-spending customers and millennials in hopes of boosting check averages and driving traffic, said CMO Jennifer Tate.
Much of that effort will be centered on the menu. Cracker Barrel is expanding its selection to include more shareable appetizers, premium entrees and add-ons and specialty alcoholic and nonalcoholic beverages designed to get guests to spend more. The value-oriented chain has noticed some customers watching their wallets as prices have risen in recent months, but it believes there’s another subset of patrons willing to pay more for an elevated experience.
“There are a group of consumers who 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,” Tate said.
The chain is also revamping its breakfast menu as part of a renewed emphasis on the morning daypart. A newly consolidated lineup will make room for more premium items as well as a build-your-own-breakfast option, and will be easier for both customers and servers to navigate, Tate said.
It’s also continuing to promote beer and wine, which it began rolling out in September 2020. The chain is “making great progress” toward a 2% dine-in sales mix for alcohol and will continue to put marketing dollars behind the program, Tate said.
Meanwhile, the chain is increasing its focus on millennials (ages 25 to 44), who currently make up about 30% of its customer base. Cracker Barrel wants to grow that number, but one thing giving millennials pause is technology.
“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,” Tate said.
So in April, the chain began allowing dine-in guests to pay from their phones by scanning a QR code at the table. This quarter, it’s adding Apple Pay and Google Pay. It’s also making improvements to its app and website and is working on a new loyalty program that will include “creative and unusually appealing rewards” beyond just discounts, Tate said.
Many of the above changes could also help the chain’s bottom line, which has suffered from higher-than-expected costs for commodities and labor. Cracker Barrel’s commodity inflation for the third fiscal quarter was 18%—3 percentage points higher than forecast—driven largely by elevated prices for protein and produce.
Higher average checks, for instance, could help its margins, while technology like pay-at-the-table could ease the load on staff. The chain is also planning two more menu price increases that will bring its total pricing to 7% year over year, said CFO Craig Pommells.
It’s also looking to cut costs in the supply chain with changes to products and specs and is using a new food cost management system that Pommells said has yielded a “modest improvement.”
The chain believes the initiatives can help it get operating income back to its pre-pandemic levels of roughly 9% of total revenue. It has a long way to go: In the current quarter, it expects that number to be just 4% or 4.5%.
“There is a fair bit happening there,” Pommells said. “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.”
Cracker Barrel’s fortunes will also hinge on whether Americans hit the road this summer. With many of its restaurants located along interstates, travelers make up an important part of its clientele. Cochran said she believes travel is returning but not yet to pre-COVID levels.
“The open item that could be meaningful is what happens with the summer travel season,” Pommells said.
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