Cracker Barrel Old Country Store, Inc (CBRL) Q4 2023 Earnings Call Transcript

Cracker Barrel Old Country Store, Inc  (NASDAQ: CBRL) Q4 2023 Earnings Conference Call dated Sep. 13, 2023

Corporate Participants:

Kaleb Johannes — Vice President of Investor Relations

Sandra B. Cochran — President and Chief Executive Officer

Craig Pommells — Senior Vice President and Chief Financial Officer

Julie Felss Masino — Chief Executive Officer-elect

Analysts:

Jeff Farmer — Gordon Haskett — Analyst

Todd Brooks — The Benchmark Company — Analyst

Kat Griffin — Bank of America — Analyst

Jake Bartlett — Truist Securities — Analyst

Dennis Geiger — UBS — Analyst

Alton Stump — Loop Capital — Analyst

Andrew Wolf — CL King — Analyst

Presentation:

Operator

Good day and welcome to the Cracker Barrel Fiscal 2023 Fourth Quarter Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kaleb Johannes. Please go ahead.

Kaleb Johannes — Vice President of Investor Relations

Thank you. Good morning and welcome to Cracker Barrel’s fourth quarter fiscal 2023 conference call and webcast.

This morning, we issued a press release announcing the fourth quarter results. In the press release and on the call, we will refer to non-GAAP financial measures for the fourth quarter ended July 28, 2023 as well as our expectations for the first-quarter. The non-GAAP financial measures are adjusted to exclude the expected non-cash amortization of the assets recognized from the gains on the sale and leaseback transactions, certain expenses related to our CEO transition and a corporate restructuring charge. 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 and earnings per share information prepared in accordance with GAAP. The last pages 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; CEO-elect, Julie Felss Masino; and Senior Vice President and CFO, Craig Pommells; Sandy and Craig will provide a review of the business, financials and outlook. We will then open up the call for questions for Sandy, Craig and Julie.

On this call, statements may be made by management of their beliefs and expectations regarding the company’s future operating results and 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 file with or furnish 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 will now turn the call over to Cracker Barrel’s President and CEO, Sandy Cochran. Sandy?

Sandra B. Cochran — President and Chief Executive Officer

Thank you. Good morning, everyone. This morning, we reported total quarterly sales of $836.7 million and an adjusted operating income margin rate of 5.3%, which was approximately 1 percentage point higher than the prior year fourth quarter. As we said on our last earnings call, our fourth quarter began slowly, while we had expected the traffic would improve in June and July with the onset of the summer travel season. Unfortunately, this didn’t materialize and our restaurant and retail sales performance came in below our expectations. Although they’ve stabilized, we believe these fourth quarter traffic trends will continue through most of the first quarter as well. We are, of course, taking actions to address them as I’ll get to later in the call.

In the face of the top line challenges that we experienced in the fourth quarter, our teams worked hard to control costs. Between their efforts, pricing and inflationary easing, we were able to deliver higher fourth quarter margins than in the prior year, despite our lower traffic levels. Of course, there were other bright spots in the quarter as well, particularly in certain areas likely to help us in the longer term.

Our operations teams focused intently on the guest experience, operational excellence, staffing and retention, and we made and continue to make meaningful headway in these areas. We continued our successful deployment of back-of-the-house technology, which will be foundational for us going forward. And despite a very challenging environment, our retail product assortment resonated with our guests and our teams managed inventories exceptionally well and delivered solid retail margins even in the face of lower traffic.

We launched our loyalty program, Cracker Barrel Rewards internally in late July, and I’m excited to announce that it’ll be available to guests across the country by the end of this month. We believe our loyalty program will be a key traffic driver for us over the long term, and I’ll speak in more detail about the program later in the call.

From a full year perspective, we achieved our ambitious goal of growing our catering business above $100 million, and we delivered $30 million in sustainable cost savings. We opened a total of 12 new Maple Street and two new Cracker Barrel locations, and we returned more than $133 million to our shareholders in the form of dividends and share repurchases. Although we believe that the traffic pressures that we’re experiencing reflect a challenged consumer environment, we also believe they were exacerbated by our marketing and media strategy. The volume and substance of our marketing messages in the fourth quarter were not as effective as we’d wanted, particularly against the backdrop of a highly competitive and promotional marketplace.

We lowered our advertising spend because we traditionally found advertising to be less impactful in the fourth quarter and instead invested funds in store staffing and labor, which we think are longer-term imperatives. And although we focused our messaging on value, our message did not break through against the highly promotional advertising we saw from our competitors. Finally, we think we still have opportunities with regard to the guest experience. I’d like to turn it over to Craig now for a more detailed look at the quarter from a financial perspective and to discuss our outlook. When Craig is done, I’ll come back and comment on the actions we’re taking to address our traffic situation and position us to change our trajectory in 2024. Craig?

Craig Pommells — Senior Vice President and Chief Financial Officer

Thank you, Sandy, and good morning, everyone. As Sandy noted, for the fourth quarter, we reported total revenue of $836.7 million, an increase of 0.8% over the prior year quarter. Restaurant revenue increased 2.6% to $679.3 million, and retail revenue decreased 6.6% to $157.4 million versus the prior quarter. Comparable store total sales, including both restaurant and retail, grew by 0.5%. Comparable store sales grew by 2.4% over the prior year, driven primarily by approximately 8.7% pricing.

Our average check results include in a favorable menu mix of approximately 1%, which continues to be driven by our culinary strategy of providing guests with upgrade and addon options such as our shareable Barrel Bites, Premium Sides, beverage program and $5 take-home offerings. Anticipating a question you might have, we do not believe our pricing strategy negatively impacted our fourth quarter or our current traffic in any meaningful way.

As we’ve commented before, we have consistently taken and continue to take a very thoughtful and deliberate approach to pricing. While our recent pricing increases have been higher than historical levels, we track guest value perceptions through a variety of means. We closely monitor competitive price points, and we measure the impact of our pricing actions against the control group to ensure we have not triggered adverse guest behaviors. We have not seen a negative impact to traffic from our pricing actions, even in the currently sensitive environment. That said, we believe price increases taken by the entire restaurant industry may be having a cumulative effect on dining behaviors, and we will continue to be mindful of the consumer and competitive environment in the markets we serve as we make pricing decisions going forward.

Off-premise sales were approximately 17.2% of restaurant sales. As Sandy noted, we were especially pleased with the performance of our catering business, which grew over 35% in the quarter, and we achieved our goal of growing it to a $100 million channel this fiscal year. Comparable store retail sales decreased 6.8% compared to the fourth quarter of the prior year. Although retail sales remain soft, we have been pleased with how our team has effectively managed our markdowns and inventory levels.

Moving on to our fourth quarter expenses. Total cost of goods sold in the quarter was 30.8% of total revenue, versus 32.9% in the prior year quarter. Restaurant cost of goods sold in the fourth quarter was 26.6% of restaurant sales, versus 28.7% in the prior year quarter. This 210 basis point decrease was primarily driven by total menu pricing of 8.7%, which is inclusive of carryforward pricing from fiscal 2022 and new pricing from fiscal 2023. Commodity deflation was approximately 0.8%, driven principally by lower pork and poultry prices.

Fourth quarter retail cost of goods sold was 48.8% of retail sales, versus 49.4% in the prior year quarter. This 60 basis point decrease was primarily driven by lower freight and lower markdowns. Our inventories at quarter end were $189 million compared to $213 million in the prior year.

With regard to labor cost, our fourth quarter labor and related expenses were 36.5% of revenue versus 35.5% in the prior year quarter. This 100 basis point increase was primarily driven by our investments in additional labor hours to support the guest experience. Hourly restaurant wage inflation on a constant mix basis was 4.5%.

Adjusted other operating expenses were 23.0% of revenue versus 23.3% in the prior year quarter. This 30 basis point decrease was primarily driven by lower utilities and maintenance expenses. Our general and administrative expenses in the fourth quarter were 4.5% of revenue versus 3.9% in the prior year quarter. This 60 basis point increase primarily resulted from more normalized incentive compensation. All of this culminated in GAAP operating income of $41.2 million. Adjusted for the non-cash amortization of the asset recognized from the gains on the sale and leaseback transactions, operating income for the quarter was $44.4 million, or 5.3% of revenue.

Net interest expense for the quarter was $4.5 million, compared to net interest expense of $2.6 million in the prior year quarter. This increase was a result of higher interest rates. Our GAAP effective tax rate for the fourth quarter was negative 2.1%. The negative tax rate was driven by increased credits on lower-than-expected earnings. On an adjusted basis, our effective tax rate for the quarter was 0%.

Fourth quarter GAAP earnings per diluted share were $1.68 and adjusted earnings per diluted share were $1.79. In the fourth quarter, EBITDA was $72.1 million, or 8.6% of total revenue.

Now, 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. Beyond that, we plan to return capital to our shareholders while maintaining appropriate flexibility and a conservative balance sheet. In the fourth quarter, we invested $36.9 million in capital expenditures. We ended the quarter with $415 million in total debt. Our leverage ratio was 1.5 times, which is within our target range of 1.3 times to 1.7 times.

Lastly, as we announced in our press release, the Board declared a quarterly dividend of $1.30. I would now like to speak to our outlook and provide some additional color on the guidance in this morning’s release. Historically, we have typically provided full year guidance. However, we have decided to only provide Q1 guidance at this time, given the uncertainty in the environment and our CEO transition.

Turning to our guidance. As we’ve mentioned, traffic has remained pressured during Q1, and for Q1, we currently anticipate total revenue of $800 million to $850 million. We anticipate opening one to two new Cracker Barrel stores and four to five new Maple Streets during the quarter. We expect Q1 commodity deflation of approximately 1% to 2% and wage inflation on a constant mix basis of 4% to 5%. We anticipate a Q1 adjusted operating income margin of between 2.25% and 3.25%, and capital expenditures of $27 million to $32 million.

Our adjustments to operating income include expenses related to our sale-leaseback transaction, a corporate restructuring charge, and certain expenses related to our CEO transition, all of which are detailed in the footnotes to our reconciliation table at the end of our earnings release. Sandy will describe our plans to improve our traffic performance momentarily. While delivering improved top line performance is our top priority, it is also imperative that we continue to shore up our business model and improve profitability. We were pleased that we delivered $30 million of sustainable cost savings in fiscal 23, and we anticipate we will deliver approximately $30 million in additional savings again in fiscal 24. Although I do want to note that we expect these savings to be partially offset by investments in labor and loyalty.

I’ll now turn the call back over to Sandy, so she may share additional details around our business plans.

Sandra B. Cochran — President and Chief Executive Officer

Thank you, Craig. We are aggressively taking steps to recover traffic above industry levels and to adjust our business model to ensure a financial strength while doing so. We are and will be doing this on a number of fronts, both shorter and longer term. In the shorter term, we are focused on marketing the guest experience, retail sales, preparing for the important holiday season which occurs during our second quarter and the launch of our loyalty program. So I’m going to go through each of these with you.

With regard to marketing, we’ve increased our media spend and are focusing our marketing on our core guests of all ages and more pointed value messaging, particularly around lunch and dinner. For example, we’ve added media presence in avenues like college football and NASCAR to drive top of mind awareness. Our advertising around the breakfast day part has been effective at improving traffic and we’ll now increase our emphasis on lunch and dinner where we’ve underperformed by focusing on craveable favorites that appeal to all our guest segments like Southern Fried Chicken. We’ll also be advertising sharper price points such as Brunch All Day starting at $8.99 and continuing to showcase our variety with our Over 20 Under $12 campaign.

Finally, we’re introducing a new physical menu format that tested well and includes imagery that we believe will appeal to our guests and drive check. With regard to the guest experience, we will continue to focus on staffing, retention and hospitality, all of which are linchpins for sustainable traffic.

We’re encouraged by the improvements that we’ve seen in these areas and in our guest experience metrics, which fell below our historically strong levels as we restaffed and retrained coming out of the pandemic, and we will continue to invest in more front-of-the-house hours to deliver the hospitality for which we’re known. We will also continue our investments in training and development, simplifying operations and improving our manager experience by streamlining or eliminating work that draws them away from the dining rooms, their employees and their guests.

As for retail, our retail teams will continue to manage inventories and emphasize sales behaviors that drive conversion. We’re also reworking some of our merchandising displays to be even more effective and impactful than they already are.

With respect to our important second quarter, we believe we are well positioned to have a strong holiday season and deliver continued growth in our already robust catering and occasion channels. From a culinary perspective, we will lean into our core holiday offerings, such as Country Fried Turkey and Cinnamon Roll Pie that we know are strong traffic drivers, and that along with our retail offerings, underpin our holiday season.

Finally, we’re launching our Cracker Barrel Rewards loyalty program that we believe will be a meaningful traffic driver, as well as a key source of guest insight and data, although it’ll take time to build awareness and participation. As I said earlier, the program will be going live by the end of the month, and we believe it has the potential to be the best, most engaging loyalty program in the full-service dining industry and will help us further extend our hospitality into the digital realm. Based off our iconic peg game, participants will earn pegs for each dollar they spend with us, both restaurant and retail, and will be able to use those pegs for rewards at various levels. The program is gamified, allowing guests to earn additional pegs through fun challenges as well as surprise and delight events. We’ve been testing it with positive results among our own employees, who we know will be the best ambassadors for the program and key to its rollout.

To further drive awareness and enrollment, we’ll be launching a multi-channel media campaign, and I’m delighted to announce that we’ll be partnering with Dolly Parton in late October to highlight the program and to promote Dolly’s highly anticipated collaborative album, Rockstar, which will be available in our stores.

Regarding longer term initiatives, we are undertaking extensive research with both current and lapsed guests in partnership with outside firms to further understand the current competitive environment and our place in it, including our strengths, opportunities, brand positioning and to identify actionable strategies to capitalize on our learnings. We’re also conducting a deeper dive review of our store base to better leverage our presence in certain trade areas, and we’ll be considering physical design and refreshment opportunities, which will be informed by the research we’re undertaking.

From a culinary perspective, we’ll remain focused on menu innovation, driven by the needs of our most loyal guests and our desired affinity groups, while at the same time pursuing menu simplification to help our operators and improve efficiency. Finally, as Craig noted, we’ll continue to identify sustainable cost savings and expect an additional $30 million in FY ’24, effectively matching the savings that we delivered in FY ’23.

All of the initiatives I just reviewed will be led by my successor, Julie Felss Masino, who our Board appointed after a multiyear succession planning process. Julie had the chance to spend several days with our entire field leadership at our biannual managers conference in Orlando a month ago, and she has been warmly embraced by the entire Cracker Barrel family. We look forward to Julie’s leadership as we tackle the challenges before us. Before we open things up for your questions, I want to offer Julie a chance to say a few words. Julie?

Julie Felss Masino — Chief Executive Officer-elect

Hello, everyone. It’s a pleasure to be with you all. As you would expect, over the last few weeks, I’ve been busy onboarding, visiting stores and getting to know the brand and our team. Even after this short time, it’s clear to me that the things that drew me to this opportunity, an iconic brand with passionate and loyal guests who love us, great scratch-made food and retail products, a profound mission of pleasing people and talented and passionate people who are deeply committed to delivering on this mission are all right there. Although traffic is challenged, the fact is our absolute traffic numbers would be the envy of many brands. All that to say, I’m confident that we have the core elements to address our current challenges and regain lost ground. I’ll be digging in with Sandy and our teams on both the shorter and longer-term initiatives that she mentioned, and will be solidifying my own views after doing some more listening and observing. I look forward to speaking with you further in November and of course, in subsequent calls when I’ll have more to share with you.

On a personal note, I am grateful not only for the opportunity to lead this great brand, but for both Sandy’s leadership over the last 12 years and our ongoing partnership as I settle into the role. I’ve been around restaurant and retail my whole life, and the chance to be able to leverage my experience for a company with as rich of a history and bright of a future as Cracker Barrel is truly exciting. I’m looking forward to getting to work and interacting with you more over the coming months, and I appreciate the chance to say hello. Sandy?

Sandra B. Cochran — President and Chief Executive Officer

Thanks, Julie. As you all know, Julie has a long track record of driving growth and innovation, and I have no doubt that she will bring that experience to bear as we tackle our challenges and position the brand for the future.

Now let’s take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Jeff Farmer with Gordon Haskett. Please go ahead.

Jeff Farmer — Gordon Haskett — Analyst

Great. Thank you. Best of luck, Sandy, and welcome to Julie. With that, a few questions. So can you help me understand the same-store sales expectations that are captured in that Q1 revenue guidance of, I believe, it was $800 million to $850 million?

Sandra B. Cochran — President and Chief Executive Officer

You said a few questions, but then you have one.

Craig Pommells — Senior Vice President and Chief Financial Officer

Well — so Jeff, what I would say there is it’s a fairly wide range and we don’t really have a lot of new units in the plan. So the way we’re thinking about — this is Craig, by the way, good morning. The way we’re thinking about the first quarter is our best thinking is in approximately in the middle of the range. But if the environment were to get tougher, we would probably be at the lower end of the range. At the same time, we’ve taken a number of actions to sort of traffic, in particular, updates to our advertising and messaging and so on. To the degree that those things are highly effective, that would move us to the high end of the range.

Jeff Farmer — Gordon Haskett — Analyst

Okay. Just following up on that, so second question. So expected menu pricing in Q1 and Q2 for you guys?

Craig Pommells — Senior Vice President and Chief Financial Officer

So for — overall, for Q1, the way that we think about pricing, there are a couple of elements. One is the price that we’re wrapping on, and then we also have the new price. So for — our actual net new price that we’re adding for Q1 is relatively low, but the price cumulatively over year-over-year would be somewhere in the 6% to 7% range for Q1 total pricing, including the additional prices from Q1 and the prior year around.

Jeff Farmer — Gordon Haskett — Analyst

So 6% to 7% Q1 cumulative, I got that. And then do you have a cumulative number for Q2 as well? Can we expect that 6% to 7% to sort of hold into Q2?

Craig Pommells — Senior Vice President and Chief Financial Officer

Well, we’re not sharing much beyond a Q1 at this time. I’ll build a little bit more just to help with that question. Because we are moderating our pricing, our incremental pricing as we go through the fiscal year, and we’re comping on higher price. The natural expectation there would be our combined year-over-year price would come down meaningfully over the course of the year, and you would expect it to be at its peak at approximately — in approximately Q1.

Jeff Farmer — Gordon Haskett — Analyst

Okay. That’s helpful. And then final question for me. It looks like the adjusted operating income margin guidance for the Q1 is in that 2.25% to 3.25% range. That’s quite a bit below where you were. A year ago, I believe at 3.6%. So I’m just trying to understand there, in terms of thinking about the restaurant level margin versus G&A, what is basically representing that 100-plus basis point margin headwind for the F 1Q operating margin relative to a year ago? So just key drivers there for — across the restaurant level margin is that much lower, G&A higher? And how should we be thinking about your bits and pieces or the moving pieces to get into that lower operating income margin guidance?

Craig Pommells — Senior Vice President and Chief Financial Officer

I think the big levers are going to be, we see improvements in cost of goods sold. So that will be favorable. But that’s being offset by, to some degree, deleverage to some effect, but also the investments that we’re making in labor. Cracker Barrel, our business model is high traffic, a really good value, great hospitality. And we have — while we’ve made a lot of progress on kind of regaining our historical leadership role in hospitality, we’re not back to peak levels. So we’re investing in labor in order to deliver that. And we think over time, that will be a big tailwind for us. So we have higher labor, lower COGS. We have a bit higher advertising as well because with traffic being softer, we have deployed more advertising on a national basis, but we’re also doing test and learn in different parts of the country. And lastly, as a subcomponent of G&A in Q1, we have higher M&T expense, manager and training expense. And that is in preparation for a quarter or two. As Sandy shared, we’re really proud of the work that we’ve done and the teams have delivered with the catering business. That catering opportunity is greater or even more so in Q2, and we want to ensure we’re fully prepared for that. So we have invested in additional managers to ensure that we are delivering that at 100%.

Jeff Farmer — Gordon Haskett — Analyst

Okay. Thank you very much.

Operator

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

Todd Brooks — The Benchmark Company — Analyst

Hey, good morning and congrats, Sandy, and welcome, Julie as well. A couple of questions for you. One, following on kind of Jeff’s pricing question, but from a more theoretical standpoint. Craig, I know you talked about that the guest value perceptions have been unchanged, even though I think since 2021, menu pricing is up probably between 15% and 17%. How do you measure that their value perceptions aren’t changing as their situation changes? So as things are getting tougher, savings rates are down, energy costs are up, student loan payments restarting again, are there value perception static? Or how are you monitoring those perceptions as you continue to take incremental price with, it seems like each menu opportunity.

Craig Pommells — Senior Vice President and Chief Financial Officer

Good morning, Todd. It’s a good question. The way that we evaluate that is, one, is the absolute value that we’re delivering measured against ourselves. But we also measure our value scores, primarily against the marketplace. Because the market has been very dynamic. It has been a very high inflation period over a number of years. So in terms of value, we measure ourselves against ourselves. We measure ourselves against our competition. We did also note in the prepared remarks that we do believe there is a reaction from consumers to just generally higher prices in casual dine-in and full-service dine-in more broadly. We think we’re well positioned within that. So we think our pricing is good. We think we’re very competitive. We think we are a great value, but I do think there is a factor to prices as a whole in the macroeconomic environment and the amount of full service visits that are available as a result of that.

Sandra B. Cochran — President and Chief Executive Officer

I’ll add a little bit to that, too, Todd. I think as Craig pointed to, we use the quantitative control group to see what kind of impact our pricing decisions we make. We continue to look at ourselves versus competitors. We also are spending a lot of time listening to guest reactions, either through conversations with our operators or just the feedback that we get and we manage over monitoring check management tactics. So we are looking very closely at things like beverage attachment, shareable side, premium sides and all of the things that would indicate to us that the consumer situation has changed meaningfully and most importantly, that we need to change our strategy to address it.

Todd Brooks — The Benchmark Company — Analyst

Okay. Very helpful. Thank you both. Just a follow-up on that. You talked about your value relative to competitors and in the current environment, we’re seeing more kind of price promotion activity from some of the full-service operator universe out there. Cracker Barrel has obviously been a brand where value is inherent and it’s lent itself to kind of an everyday value approach to the brand and how you communicate that. If competitors are getting more overly competitive with price points and special offers, what arrows are kind of in Cracker Barrel’s quiver to pull if you do feel like you need to compete a little bit more around the value of the experience?

Sandra B. Cochran — President and Chief Executive Officer

Well, we did see the competitors doing just that. We think the quarter got significantly more promotional than we were anticipating. And many of the competitors are not only getting sharp in the price point, but they also increased their level of advertising sort of with that news. I think what we’re doing now, to your point, everyday value has always been a hallmark of the brand, and we have worked hard to invest in value despite the price increases that we’ve been taking over the last few years, we still think we have ensured that there’s everyday value at every daypart on the menu so that a guest can come in. And whether they’re looking for a low price point or it’s more of a celebratory indulge indication, so they can find that on the menu. So we’re continuing to ensure we have that optionality on the menu. We’re not taking — we’re protecting, for example, Momma’s Pancake Breakfast, which is a phenomenal value at $8.99, pancakes, and meat, eggs and all that. We didn’t raise the price to ensure that we were able to deliver high value, both at the breakfast. A point, of course, breakfast is available all day. But also we’re trying to do a better job of telling that story in our own media and marketing messaging. So what you’ll see as we went through the quarter and now is more of our TV advertising, for example, highlighting both a strong price point like $8.99 breakfast all day as well as great price points and variety at lunch and dinner. So whether it’s chicken and dumplings or country-fried steak or some of these other really great items. But it’s a backdrop as competitors have gotten more promotional and more aggressive in their advertising. We are working hard to do an even better job of ensuring that we remind our guests of the value that we have every day, and I’m sure they don’t forget about that.

Todd Brooks — The Benchmark Company — Analyst

Great. And one more follow-up, and then I’ll jump back in queue. So just when you talk about the elements on the menu that you look at is everyday value elements. If you look at this quarter versus the prior quarter, how is the sales mix of everyday value type of items changed quarter-over-quarter as the consumer has gotten a little bit more challenged? Thanks.

Craig Pommells — Senior Vice President and Chief Financial Officer

Todd, this is Craig. What we — what we’ve seen over the quarter is our breakfast business has done better than our lunch and dinner business. So overall, we’re seeing a higher mix of our breakfast items, the items that Sandy mentioned in particular. So that’s primarily where we’re seeing the shift.

Todd Brooks — The Benchmark Company — Analyst

Okay. Great. Thanks.

Operator

Our next question comes from Kat Griffin with Bank of America. Please go ahead.

Kat Griffin — Bank of America — Analyst

Hi, thanks for taking my question. I wanted to ask sort of a follow-up an earlier question, just on decomposing the traffic trends. I’m curious, how much of the traffic in 4Q, you think was lost to promotional intensity by competitors? And then how much of it do you think could have been recaptured by taking a different marketing tactic? And then sort of how should we think about that in the context of your 1Q expectations?

Craig Pommells — Senior Vice President and Chief Financial Officer

Hi, Katherine, it’s Craig. So we think a meaningful part of our traffic performance in the fourth quarter was really comprised of two things. One is we were really ramping down our messaging — our paid messaging in Q4, while competitors were ramping up. And as we noted, the environment was a bit more promotional. So relative to our total traffic, we think it’s a significant part of that. I don’t know that we’re prepared to call out a specific number, but that is a shift that we saw in the environment that coincided with our shift in performance. So we think there is a bit of a macro component. We think there is a competitive intensity component. We think we also were spending less at the time, others were spending more. But we also believe we’ve got some ground to recover with our historical leadership role in hospitality. So we think those are some of the biggest drivers that impacted our Q4. Some of that is pretty — some of that’s short term and some of that’s longer term.

Kat Griffin — Bank of America — Analyst

Okay. Thank you. And then maybe actually just following up on that. In terms of where you’re seeing promotional intensity, sort of where is that? Is it mostly in maybe your breakfast competitors or in varied menu? I guess I’m trying to understand where the promotional intensity is just because there have been other casual dining concepts that have taken actually a different tact where they’re not discounting as much. So I’m curious kind of what you’re seeing specifically in terms of which of your peers, maybe which dayparts you’re seeing more pressure on promotions?

Craig Pommells — Senior Vice President and Chief Financial Officer

We’ve seen — hi, Katherine, it’s Craig again. We’ve seen that intensity across the — really across a number of different segments. We’ve seen it in family at breakfast, in particular. We’ve also seen it, especially in the bar and grill segment also. So it’s relatively broad-based, certainly not with every competitor. But if you just look back at the last few months on advertised price points, there have been a lot of advertised price points. There have also been a lot of all-you-can-eat type of offers in the marketplace. And not only in family or in one particular segment, we’ve seen it really across the board, at family for breakfast, we’ve seen at the bar and grill. We’ve seen it in other areas also.

Kat Griffin — Bank of America — Analyst

Great. Thank you so much. I’ll get back in the queue.

Operator

Our next question comes from Jake Bartlett with Truist Securities. Please go ahead.

Jake Bartlett — Truist Securities — Analyst

Great. Thanks for taking the questions. My first is on the margin guidance in the first quarter. And I just want to make sure I understood what might be kind of more of a temporary headwind versus ongoing? Maybe if you can kind of quantify how much higher marketing costs in the quarter will be pressuring margins — and a little more detail about how G&A is going to play in. I look at G&A, on an absolute basis, it’s down about 15% versus the third quarter. So if you could help us understand what the right run rate on a quarterly basis just in the first quarter is, just those moving pieces in the first quarter margin guidance. Thank you.

Craig Pommells — Senior Vice President and Chief Financial Officer

Hi, Jake, it’s Craig again. Yes. As it relates to the first quarter, there are, I guess, a couple of data points to think about there. If you kind of go back and look at our OI performance in the prior year, we had a lowest OI in Q1 and then it moved around a bit from there, improved significantly in Q2 and so on. I don’t anticipate that will have a significantly different pattern of OI in fiscal ’24. So that’s one data point. The other data point is in Q1, in G&A, in particular, we will have a higher level — a meaningfully higher level of spending for managers and training than we did in Q4. And we also have additional investments in other areas to support loyalty and so on. So quite a few moving pieces there, but we are investing more in Q1. In the prior year, our OI was the lowest it had been for the year, in Q1 as well. So as we look back to Q4 and why it was so low, a part of that incentive comp, and that’s effectively one time. But a part of that was also we were managing the spending. So to some degree, we’re managing the spending based on how the company is performing. But we do expect a higher level of G&A in Q1, especially as we ramp up for Q2 and get the loyalty program rolled out.

Jake Bartlett — Truist Securities — Analyst

Great. And then my next question is about the balance sheet, about the dividend. Given the margin guidance in the first quarter, it’s very clear that EPS is going to be much less than the $1.30 that you just declared for the dividend. So how should investors be thinking about that dividend as your payout kind of lose at least early year to over 100%? Are you comfortable increasing the leverage? I know you’ve talked about the target of 1.3 to 1.7. Are you comfortable having that go above that range to sustain the dividend? Other questions I’m getting is about your — the balance sheet and kind of your ability to do more sale leasebacks, if that is appropriate. What — how many stores are unencumbered, for instance, just what’s — as you look at the balance sheet, how comfortable are you focusing on that, maintaining that dividend even as EPS is somewhat challenged near term?

Craig Pommells — Senior Vice President and Chief Financial Officer

The capital allocation topic, which I think is broadly, the — your question is a very big one for the Board, and they’ve continued to take a consistent approach there, which is the primary purpose — primary objective is to grow Cracker Barrel and Maple Street. And then beyond that, we’ll return capital to shareholders in the form of a dividend or share repurchase. For the last year or so, that dividend has been really compelling. And you combine that with our kind of stated desire to maintain some flexibility in the balance sheet, maintain a reasonable leverage ratio and so on. So I think it’s a part of a broader — the dividend is a part of a broader capital allocation decision. It’s a very big topic. It’s one that’s at the top of the list for the Board, and they will continue to be incredibly thoughtful about it. But I think the takeaway there is there has not been a shift. That’s probably the most important thing. There has not been a shift in our capital allocation framework.

Jake Bartlett — Truist Securities — Analyst

Okay. Okay. And I know you’re not giving annual guidance here. But hopefully — I mean I’m wondering if there are some pieces that you can that you might have some visibility and even before Julie picks the reigns, things like capex, a rough idea of what we should expect for capex or new units at Maple Street and Cracker Barrel. Maybe some of the kind of the bigger picture items in 24 guidance that hopefully you can provide, even if it’s not specifically on margins and such.

Craig Pommells — Senior Vice President and Chief Financial Officer

We can talk directionally about a couple of the big levers without getting too specific. So for example, I would say, commodity inflation, we expect commodity inflation to be much more modest than it’s been historically. Wage inflation, we expect to moderate a bit from fiscal 23 levels, but we do think wages will likely remain higher than the long-term run rate, but more moderate than what we saw pre-COVID, for example. In terms of new units, given the environment, we are moderating new unit growth to some degree. Q1, we still have a little bit more in there, but we are moderating that. We’re still growing new units, but we’re moderating the level and the amount of spend that we’re putting against that for the time being. In terms of capex, there are other areas that we are constantly evaluating, but we’re thinking about all of that as a part of the broader capital allocation conversation.

Jake Bartlett — Truist Securities — Analyst

Okay, thank you so much.

Operator

Our next question comes from Dennis Geiger with UBS. Please go ahead.

Dennis Geiger — UBS — Analyst

Thank you and congratulations to Sandy and Julie. I have another one, as it relates to 24, at a high level. I think you gave, Craig, which is really helpful, some kind of key points to be thinking about in 24, which is helpful. How about on the CEO transition side of things? And maybe keeping some of that flexibility in guidance, depending on what plans look like for the year, is there anything at a very high level to share on sort of what could move the outlook or numbers for 24? Might it be maybe remodels that you referenced? Other areas of reinvestment, whether it’s technology or otherwise? Recognizing there’s a reason you’re not speaking to it today, but anything high level to share on some things, at least, buckets, etc., that might move the needle as we think about some strategic opportunities this year to help us think through 24?

Craig Pommells — Senior Vice President and Chief Financial Officer

Hi, Dennis, it’s Craig again. I think for now, we would say it’s still early days in that regard. The macro environment is particularly challenging a bit more uncertain. And Julie is off to an outstanding start, but she’s really only been here for a month. So I think it’s still early days and really too early for us to make any comments about that.

Dennis Geiger — UBS — Analyst

Makes sense. One more sort of related to some of that, Craig and team, if I could. Sandy, as you and the Board did the search and saw the opportunity with Julie, based on some of her strengths, thinking about store development, innovation across technology menu, etc., in her prior opportunity. Anything you can speak to? And I know you’re doing some work with some consultants, it sounds like. But kind of on the — on what you think some of the longer-term opportunities that you’ve been working on and maybe remain longer-term opportunities for the brand, again, whether it’s on the tech side, innovation growth, which encompasses a lot of things? Any very high-level comments to speak to as we kind of look out longer term?

Sandra B. Cochran — President and Chief Executive Officer

Well, I think you kind of summarized a lot of the reasons why we thought Julie — or the Board thought Julie would be been a great leader for this sort of next — the next 50 years here at Cracker Barrel. Her experience with brands who have very successfully both evolved — I mean look at Taco Bell, and the kind of thing they’ve done and how successful they’ve been, I think, in remaining relevant despite being around a long time. And then the technology, I think Starbucks has been an amazing example of a brand that has sort of, in my opinion, has got amazing guest-facing technology to make the experience just so simple. You kind of can’t help yourself go more frequently. She’s also got retail experience, which is, for our brand, really important. Our retail segment is strong, it’s profitable, and it is a very key component of the Cracker Barrel experience. It’s also surprisingly for a lot of people complex. And I think Julie’s background on both sides of this really position her to be able to think about how to bring in technology to a brand that’s 54 years old to evolve the brand in a way that will both be familiar and comfortable to our loyal long-term guests, but make it interesting and relevant to our newer guests and maybe people who don’t know us at all and to introduce things like technology, things like our loyalty program, in a really brand appropriate way, which is not easy to do.

Lastly, one of the questions sort of spoke to the idea that you might need to do a refresh. I think that’s been certainly on our list, the thought about how do you — whether you and how do you think about the interiors of our stores and ensuring that those interiors sort of reflect the same level of freshness and modernization to be both appealing but comforting if you’ve been coming for years. So I think Julie is an innovative, flexible leader. She loves the brand, jumped in with both feet. Is that the metaphor, both legs and deep. And I think we’re just really excited to have her here.

Dennis Geiger — UBS — Analyst

That’s helpful, Sandy. One more quick one, and apologies if I missed. Just by cohort, some of the traffic softness, can you speak at all to whether it’s age, demographic income, etc., just what you saw in the quarter from that perspective if you’re providing that?

Sandra B. Cochran — President and Chief Executive Officer

Yes. We — I’ll kind of tell you broadly what we saw, our traffic declines were broad-based. They were against all of the age cohort, which was a bit of a shift. The younger cohort held up better than the over 65, but it had been doing even better in the quarters prior. On the over 65, we just have not yet recovered the visits with that group to the extent we thought we would really, since the pandemic, whether it was in the beginning, health concerns and then the pivot from health to value concerns, as — we’ve kind of talked about here, we’ve got consumers. It’s a mixed picture, right? We’ve got consumers that we think are very value conscious, and we think that group is — the over 65 group is particularly value conscious. And so we just haven’t seen the recovery of that group in the way we would. The income level — our traffic declines were actually larger in the 60,000 to 80,000 and plus cohorts. The lower income cohorts held up better. Maybe that’s not surprising due to the strong value proposition that we have and the — when you are managing your visits, I believe you’ll go to brands you trust where you know you’re going to get value, and you’re going to get an experience that kind of makes it worth you going out. That’s why our — the brand positioning, warm hospitality, plentiful portions, fair price of just good food, I think, will work even if what we’re moving into is a more competitive value conscious consumer.

Dennis Geiger — UBS — Analyst

Thank you very much, Sandy.

Operator

Our next question comes from Alton Stump with Loop Capital. Please go ahead.

Alton Stump — Loop Capital — Analyst

Great. Thank you. Good morning. And I just want to say congrats, Sandy, on your 12 years. We will certainly miss you, but look forward, obviously, to working with the new team soon. I just want to ask quickly — I know what the — close to the top of the hour here. But just I want to ask about your loyalty rollout. How much an opportunity that is, kind of going back to your comments about with younger consumers, that’s always been a group that you guys have tried to expand with, maybe a little older set on average versus some of your peers. And so how much of an opportunity do you think loyalty could be to capture even more of those younger consumers to come to your brand?

Sandra B. Cochran — President and Chief Executive Officer

I don’t think we’re ready to quantify. I’m looking at Craig. I doubt he’s going to give you any numbers. We’ve certainly done a lot of modeling about it. It takes time. So we got to get everybody signed up. They have to visit frequently enough to earn. But what I will say is that a year or at least ago, so after we did a recent segmentation study, we looked at the segments. And one of the interesting findings was really across age cohorts, more than I was expecting to see the existence of a loyalty program was important, both to our loyal guests, older and are younger. Technology in general is more important to a younger guest, but the loyalty program came up surprisingly high on the list. So we are optimistic that this will be something that they’ve hoped we would do and will — we will get great signups, a lot of learnings and so on. This is actually an area that Julie has quite a bit of experience, and she spent quite a bit of time since she’s been here just in understanding what the program is and our rollout plan. Julie, do you have anything you’d like to maybe add to it?

Julie Felss Masino — Chief Executive Officer-elect

Sure. Thanks, Sandy. Hi, Alton. Yes, what I’m excited about with the loyalty program and I think what our guests will enjoy most is that, one, they can earn across restaurant and retail, which, if you think about it, that’s pretty distinctive and a key differentiator for us as a brand because we have both of those experiences available to our guests, allowing them to earn across both. That’s number one. Secondly, every item, whether it’s restaurant or retail, our menu is eligible to earn points in our — or pegs in our highly differentiated scheme here. And you can actually redeem across everything, except for alcohol. So that is really another key point. And then finally, to Sandy’s point, we know technology is important to a lot of our consumers. But even if like you’re not super into technology, we’re allowing you to earn points outside of the app, which is really distinctive in the industry and will allow everybody to participate and let everybody know that we value them and that we value their visits with us and that they can participate in what we believe will be a really exciting program. So the team is excited. It’s rolling out in the next couple of weeks, and we’re optimistic about what it will do for the brand.

Alton Stump — Loop Capital — Analyst

Got it. Great. Thank you so much, Julie and Sandy for that color. That’s all I have. I will hop back in the queue.

Sandra B. Cochran — President and Chief Executive Officer

Thanks Alton.

Operator

Our next question comes from Andrew Wolf with CL King. Please go ahead.

Andrew Wolf — CL King — Analyst

Thank you. I wanted to follow up on the loyalty program question. You asserted that it’s the best-in-class. Is that something you work with consultants and got a third party? Or is that just your sense of doing your own benchmarking you’re looking at your competitors? And beyond that, could you kind of give us kind of give us a sense of, especially if it’s a benchmark number or a third party, what you’re hearing a best-in-class loyalty program? Or what you believe kind of means for the business in terms of eventually boosting the traffic?

Craig Pommells — Senior Vice President and Chief Financial Officer

Hi, Andrew, it’s Craig. I think potentially best-in-class. I think as Julie talked about, we believe the loyalty program is — it has more options. It’s really well branded. You can earn — we earn pegs or what we call points, both for dine in — for in-restaurant as well as retail. You can accrue the points through an app. You can accrue them at the register as well. You earn meals at different levels. So we have different status levels. So as we went through and we did a lot of this internally, but we also have a loyalty expert with a lot of experience who has done this in retail. And we compared elements of different loyalty programs, certainly across the restaurant industry. We really check in all of the boxes, I believe, in the restaurant industry and many of the boxes in broader retail. What we believe is best in class is what we’re seeing when we compare to family dine in and casual dine in.

Andrew Wolf — CL King — Analyst

But would you be willing to give maybe a range of expectation for what it should do for the business ultimately?

Craig Pommells — Senior Vice President and Chief Financial Officer

We’re still in early days on that one. I think it’s going to be a big driver for us, not only in terms of the appeal and it’s kind of short-term ability to drive repeat visits. But in our ability to market the company more broadly using the data that we’ll get from that program, we think that will have a longer-term benefit in better equipping us with our broader marketing communication to make that more targeted and more effective and more efficient.

Andrew Wolf — CL King — Analyst

Got it. Appreciate that. And just — I wanted to ask about the traffic. It was helpful to hear about the different segments and so on in cohorts. But can you give us a sense of how it — the cadence by months? And specifically, did it slow down, get worse? Or did you just not improve as expected throughout the quarter and obviously, into the current quarter?

Craig Pommells — Senior Vice President and Chief Financial Officer

Broadly speaking on that one, on our prior earnings call, we shared that while we had done relatively well in Q3, we were ahead of the industry. We shared that we saw a deceleration in traffic as we move into the fourth quarter. And so far, we’ve said that our first quarter remains pressured. So without getting too prescriptive around it, we would say both at the beginning and where we are today, remains fairly soft without a big trend change one way or another. We are pleased with some of the progress that we’ve made at breakfast with the advertising that we’ve put forward. We’re continuing to be pleased with our catering business which is growing even in spite of a challenging environment.

Sandra B. Cochran — President and Chief Executive Officer

And I think in addition to being pleased with the breakfast, as opposed to the dinner daypart, weekends have been strong, which have been — it’s important for this brand. And so that’s been a trend that we’ve been encouraged by.

Andrew Wolf — CL King — Analyst

Got it. Thank you very much.

Operator

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

Sandra B. Cochran — President and Chief Executive Officer

Okay. Well, before we sign-off, first, I want to thank everyone on this call and for all of your well wishes. And I want to say thank you to our employees and to our shareholders. It’s been a privilege to lead this brand for 12 years. We’ve navigated some challenges, especially in the recent years, and we’re clearly facing some challenges today. But Cracker Barrel is one of the most differentiated brands in the industry. And I have complete confidence that under Julie’s leadership, our teams and our company will continue to thrive. Thank you.

Operator

[Operator Closing Remarks]